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Wednesday, 21 April 2021

Tradeview Commentaries - Journalism & Extraordinary Individuals


Source : NYFA.edu

Today I am writing on a topic somewhat unrelated to stocks. It just came to me after reading a column in The Star by Datuk Seri Cheah Cheng Hye, Penang born billionaire fund manager and founder of Value Partners listed in HKEX. 


If you happen to read his column today, it tells of his rags to riches story which captured how he spent some years as journalist in The Star early days before venturing out on his own. What captivated me after reading the story was how I realise the interlink of journalism & extraordinary individuals. He is the not the first person I have come to know who started as a journalist and reached the upper echelons of society. 



Wu Yajun, the most famous woman billionaire in China who was at a time the richest self made woman in the world also had a 5 years stint as a journalist. She was formerly an editor with China Shirong News Agency. She focused her coverage on property market. Subsequently, she co-founded Longfor Properties which is a leading real estate developer in China listed in HK. She was also known to be an early investor in Uber and Evernote. Her net worth is estimated to be at US 19 billion. From humble origins working in factory in post communist China for US 16 a month, she made it to the top of the wealth list of Forbes.


Locally back in Malaysia, apart from Datuk Seri Cheah Cheng Hye, the notable investor Cold Eyes (Mr Fong Siling) was a Chief Editor of Nanyang overseeing the business, finance and economics section of the paper and happen to be a well known rags to riches story in the investment community of Malaysia. Interestingly, Cold Eyes is more widely known for his prowess as an amazing investor who built substantial of his wealth from the stock market over the years. He is also highly respected for propagating fundamental and value investing in Malaysia over the years through his column in Nanyang and multiple best selling books. 


Another amazing story would be that of Riverstone Holdings Limited founder, Mr Wong Teek Son who is also one of the glove billionaires of Malaysia. Riverstone is the world leader in Class 10 and Class 100 Nitrile Cleanroom Gloves with a market share of 60% globally. His glove quality is top class and along with Hartalega and YTY, belonged to Tier 1 nitrile gloves in the world. Mr Wong who came from hardship was also a former journalist with China Press. Albeit a short stint and earning meagre salary as a cub reporter, ultimately, Mr Wong rose through society  as his company grew. When we talk about Malaysia glove industry, Riverstone which is listed in SGX, is a household name.


Sharing these stories with all is because I had the realisation that journalism have produced exceptional individuals of the society. Growing up, I was told the journalist like nurses and teachers are the most underpaid and under appreciated profession of the society. Yet, it is amongst the most selfless, essential and important job. A good journalist is objective, factual and often write without fear or favour for the betterment of the society. I have utmost respect to journalist who possess top class ethics and independence. Coming back, as I connect the dots, I found a common denominator on why journalism produces extraordinary individuals. That would be the access to knowledge / information. Wu Yajun was a journalist covering the property sector, Datuk Seri Cheah Cheng Hye and Cold Eyes were financial / economics journalist.

If you all know any journalist, take them out for coffee and you will have the most fruitful afternoon. They are highly knowledgeable and possess great insights. I believe every industry there are talents too. However, I have noticed a high propensity of journalist scaling the heights of the political and business world. In my view, it all comes down to making full use of the access to knowledge, information and being resourceful. Hats off to all journalist.



Thursday, 8 April 2021

. Tradeview Commentaries - The Glove Surge, A Mirage or A Path To Oasis?



Readers know I am a believer in glove companies, I always have been and until now I believe that glove companies especially Hartalega & Riverstone are undervalued. My view remains consistent and transparent. There is no flip flop just because the glove sector faced a weaker sentiment in the past few months. This is because as a long term investor, I cannot decide solely based on sentiments. However, my opinion does not matter as the stock market is a collection of diverse views, opinions and investment thesis. 

I am writing this short commentary today as I received many  enquiries today from retail investors asking the following questions (more or less): 


1. Is the glove rally today a technical rebound? 

2. Should I re-enter now? 

3. I am still holding, should I sell and take profit / cut loss? 


One of the more important signal I have been waiting for was local funds flow. For 16 weeks in a row, local funds have been net sellers. From my channel checks, many local funds (except EPF) have been selling gloves since the start of the year. In a large part, the selloff in glove stocks was contributed by local funds. Of course, this triggered some panic selling from retail investors. Foreign funds is a mixture. There are a combination of bottom picking which showed they were net buyers at times, there were also cases of short covering (covering RSS). As the selling momentum outweigh the buying momentum, naturally, share price of glove stocks trend downwards. Today, from the preliminary data, local funds are strong net buyers. It remains to be seen if local funds were the buyers for glove stocks and this will need further data  to be out in a few days.

As a fundamentalist, I hold firm to the investment philosophy that for every stock, there is a company behind the stock and for every company, there is an underlying value or intrinsic value. Value investors look to buy a stock when the share price goes below the underlying value. Back to the 3 questions above, 


1. I believe if local funds are net buyers of glove, this surge in glove stocks is not a one day show due to "technical rebound". 

2. I dont believe in chasing stocks, neither do I believe in going in and out with a short term horizon. Invest in glove stocks if you believe in the fundamentals of the company. Otherwise, just stay away. 

3. One should hold for the long term if one have a long term investment horizon and the ability to hold without pressure (no margin / no leverage). One should sell on strength if one is overexposed to the glove sector without sufficient cash on hand or a balance portfolio. One should cut losses if one do not believe in the glove sector.


Lastly, in investing, it is always about buying into good companies with wonderful management and strong fundamentals. It is not about the "theme of the day" or what everyone else is doing now. With that in mind, if you are keen to invest in glove companies, please stick to the good names, avoid the dodgy ones. Back on 2nd March, I wrote a detailed article on whether investors should take off their gloves? My focus in the article is about the underlying value of the company which particularly focuses on "retained earnings" portion of the company. 

Whether investing in glove stocks is a mirage or a path to oasis, it is fully dependant on your individual belief and investment horizon.

___________________________________________________________

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Food for thought: 







Tuesday, 23 March 2021

(Tradeview 2021) - iSinar EPF Withdrawals For The Stock Market, One Should Err On The Side of Caution

   



Retail investors was the unsung hero of Bursa in 2020. As we are now coming towards the end of March 2021, retail investors participation remains very high. Local institutions have been selling non stop since the start of the year which in my honest view was quite surprising. Considering how bullish research houses are on the Bursa KLCI year end target, it would appear that optimism and bullishness have not spilled over to local funds.

Year End Bursa KLCI 2021 Target

Maybank                1830

MIDF                      1700

Rakuten                  1870  

Affin Hwang          1730

AmInvest                1695

UOB Kay Hian       1680 

It is possible the year has just begun, so there is potential for stronger catch up in later part of the year as vaccination roll out continues and potentially economic reopening. Although I hold a different view (more conservative in terms of outlook due to political instability and lower consumer, investor & business confidence), that is a story for another day.

Back to the topic on hand, I would like to draw readers attention towards the iSinar EPF Withdrawal scheme. Based on the news headlines on 27th February, 'Leaving just RM100' - 30 per cent of EPF members withdraw almost all of Account 1 savings , it goes without saying I am deeply concern. I strongly believe there is some level of manifestation of these withdrawals appearing in Bursa KLCI. The reason I am concern is because the "original intent" of the iSinar EPF withdrawal scheme is to assist those who are facing dire situation to cope with the current hardship caused by Covid-19 pandemic towards their daily lives. These hard earned future savings were not not supposed to be utilised for discretionary spending, luxury goods consumption or speculating the stock market. I personally do not believe in borrowing from the future for present gratification. It goes against every sound financial logic. However what one does with their money, is one's right and business which I am in no position to meddle or comment. I would like to point out though, the dangerous mindset of withdrawing EPF money to speculate or punt the stock market.

Most readers know I am a strong fundamentalist in terms of investing philosophy. I believe in this notion strongly and rarely waver. Speculating and punting with excess cash to me, is highly risky activity. Imagine, speculating and punting the stock market with EPF savings. It is akin to walking a tightrope blind folded on a windy day.



With regards to 
new retail investors in the stock market, let me highlight some of the dangers of investing your EPF money recklessly : 

1. Majority of new retail investors enjoy speculating and punting penny stocks without fundamentals, logic or sound investment thesis except for "hearsay,  rumours or tips". This can be seen that although retailers are net buyers of the market, mostly the ADV is high but value is low.

2. New retail investors do not invest or build a diversified all weather portfolio, but rather concentrate their funds into several "hot" stocks. This would be dangerous especially when using future savings with an aggressive investment strategy. 

3. A go big or go home mindset is not the right way to handle your EPF money. The stock market is not a casino

4. EPF long term investment strategy allows your EPF savings to grow over time through boom and bust cycles. However, once you take it out and invest in the stock market, very few retail investors have the long term investment horizon of more than 5 years, not to mention 30 years. 

5. There is no guarantee one will succeed in making money from the stock market. EPF on the other hand is guaranteed by law to provide a minimum return of 2.5% per annum. (Under Section 27 of the EPF Act 1991, the guaranteed minimum dividend rate is 2.5% per year on members' savings.)


The current market condition is as such : 

When everyone is talking about the stock market, it is usually a sign of a vibrant market. 

When everyone is justifying future earnings of companies with lofty valuations, that is a sign of the market overheating. 

When everyone is talking about loss making penny stocks and justifying speculating it on the basis that “I know it is not a bad company, but I will get out first”, the market is fleshing red signal. 


Safety Net

EPF savings are your safety net. When all else fails, you still have the EPF to fall back on in your golden years. Taking it all out now, and if you are not able to preserve or grow it, worst, if you lose it all, how and where are you going to turn to? 

I have always believe investing should be enjoyable, utilising excess cash, free from the stress of leverage (margin) and to grow over time, not overnight. Unless and until absolutely necessary, it is my view that withdrawing EPF savings to invest in the stock market is unwise.  
___________________________________________________________

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Food for thought: 







Wednesday, 17 March 2021

(Tradeview 2021) - Are Research Analysts’ Reports Worth Their Salt?

  



Before I start off, let me qualify that I have a lot of respect for equity research analysts especially who have substantial experience, competency and professional work ethics. They are far and few between. In addition, I would like to state that I am in no position to criticise or condemn research analysts' reports. Many of the research analysts in our country have strong qualification such as CFA, ACCA, CPA, ACA, CFP and others. All of which also passed the Securities Commission licensing examination specifically on Module 12 & 19. In short, every research reports that were published by licensed institutions are professional opinions permitted by regulators. 

Recently due to the wave of downgrades by research analysts covering glove stocks be it in terms of target price or market weightage, it have drawn a lot of "feedback" from the retail investing community. It has come to my understanding that quite a number of retail investors even went as far as to lodge an official complaint to Securities Commission. Market rumour is that Securities Commission also acted on the complaints to commence some level of investigation to ascertain the authenticity and merits of the complaints by retail investors. 


Source : WallStreetMojo


The reason I am writing this article today is to merely share my objective viewpoints as a fellow retail investor. Nothing more, nothing less. There is no specific agenda but to somewhat diffuse the negative emotions or sentiment towards research analysts in the current investment climate where retail investors dominate the market participation rate. I think with the large influx of new retail investors in the local stock market since 2020, specifically "Millennial" investors, it is important to have a proper perception and right investment mindset or it may deter or impact future retail investors participation rate. To put it bluntly, if new retail investors feels that the system is rigged and skewed against them in favour of big banks and institutional funds, they would shun the local stock market altogether and that will be bad for the markets. I personally, do not want to see that happening. Thus, it is paramount for us to understand the role, function and structure of research analysts in the full spectrum of the investment banking structure. 



There is a China Wall supposedly between the investment banking divisions and the research division. This is to prevent conflict of interests, sharing of material information to safeguard independence and objectivity of the research division. This structure have long been in placed. To understand better, it important to know the role research analysts plays in generating income for the organisation (be it banks or brokerage). 




Source :WallStreetMojo

Research division as a standalone cannot make money. However, with their research reports, they generate trade ideas for their clients which in turns bring in revenue for their organisation via the brokerage firm or bank. So who are the clients in which they serve? Traditionally, it have always been the large institutional funds such as asset management companies, hedge fund, pension fund, mutual fund, insurance funds etc. Retail investors play a very insignificant role as the market participation is largely skewed towards institutional clients. Of course, this have changed significantly over the course of the past 2 years in part due to the rise in lower cost of participation for retail investors and also low interest rate environment. Locally, we can see some brokerage firms or banks do particularly well as their focus is towards retail investors. Immediately that comes to mind is Kenanga / Rakuten, CGS-CIMB amongsts others. It is important to know this to understand the role of research analysts and who are their "main clients". Their "main clients" were never retail investors but big institutional funds.



After understanding their role and their clients, it is important to understand the organisation chart with the research division. The most senior person would be the head of research. He is the captain and final approval level before the research reports goes out to public. Then it would be the senior analysts who are usually seasoned and experience analysts who may even be known as "sector specialist". Example : a senior analysts covering banking stocks may be even more experienced than the head of research as a sector specialist probably due to the years of experience covering the sector. This sector specialist research analysts also have good network with the companies in the sector they are covering. 

Then the lower levels would be associates and junior analysts who are mostly "generalist" where they cover whichever sector or companies allocated to them by the head of research. As a junior in the organisation, they would have to do most of the grunt work and across sectors subject also to availability. Sometimes, fortunate "junior analysts or associates" is given the chance to be "sector specialist" if they show a knack or potential for their particular role. The interesting thing about the research division is that mostly anyone who is qualified, licensed by Securities Commission and approved by the head of research can issue a research report with their name on it. Most research analysts take pride in their name being printed. Just like an author of a book.

To the main focus of the article, are research analysts' reports worth their salt? 

In my view, it all comes down to the individual analyst. It is extremely hard to be a research analyst. It is not just about being objective and analysing the companies fundamentals. Textbook theory may be so, but in reality it is far from the truth. This is because no matter what is written, there will be different or opposing view. These are not only views from clients, but also views from management within the organisation outside of the research division whose interest are involved, views of stakeholders, views of regulators, views of retail investors (who may or may not be the client) even views of politicians or government agencies. With many interests at stake, the individual analyst will need to juggle and make all considerations. All is well and good if the organisation has an understanding and respected head of research. What is bad is when the organisation's head of research is a "yes man" or "lalang". To make it simpler for readers to understand the complexity of being a research analysts, I shall segregate the considerations into the following :


1. Competency, Experience & Diligence

In my view, this is the baseline for being a good research analysts whose report is worthy of us  relying upon. Most research analysts have qualifications like CFA or accountancy or finance related qualifications on top of their degree. So it goes without saying that analysts are intelligent individuals. Competency is a must in their line of work. Competency involves the ability to derive logical fair value, projecting reasonable future forecast and justifying their forecast with sound rationale. Whether to adopt DCF valuation method, EV/EBITDA or PER multiples with historical and peer comparison, it is the research analysts weapon of choice. The important thing is to make sense. Experience on the other hand have to be acquired. Experience means going through market cycles including bull and bear markets as well as seeing a full cycle of a companies boom and bust. Diligence is the attention to detail, looking at perspective not considered by others and separating wheat from chaff. 

2. Integrity or Honesty 

This is probably a compulsory qualitative quality that must be a part of a good research analysts. To be honest and objective with their analysis without vested interests or personal agenda such as working with insiders of companies, front running with syndicates or writing reports based on their "key clients" needs, is paramount to being a respected research analysts in the industry. Some analysts who are very intelligent choose to be "intellectually dishonest" by relying on weird or outrageous justification masked in an "eloquent presentation format" to justify their calls be it for the purposes of jacking up the stock price or plunging the stock price. This is in fact the worst thing a research analyst can do as it is unethical and morally wrong to distort truth. To write without fear or favour is hard, but in a way, research analysts are like professional financial journalist who should report the truth based on their analysis of companies without any vested interest.

3. Stakeholder Management

This is one of the more tricky part about being a research analyst. Most people do not know the hardship they face in their line of work. A research report is powerful by nature because it can move the stocks up or down, which means it can increase of decrease the value of companies. Even the most powerful billionaire tycoon are careful when communicating with sell side research analysts. That is why there is a special division called the Investors Relations (IR) within all listed companies. Research analysts when writing reports need to consider the repercussion of their reports. If the companies covered by the research analysts is not happy with the report, they can always block access. 

Also, other stakeholders include "key clients". "Key clients" are the one that drives revenue for the organisation. This makes the "key clients" very important. When research analysts reports does not favour the "key clients" position, example : such as a sudden downgrade, it will impact the balance sheet of the "key clients". This is where sometimes, it gets ugly when the sales division interferes with research analysts reports. It is known within the industry that sales always try to please their client and make them happy. So some unethical sales will try to influence research side to tailor made reports to the interests of their key clients. This is where the head of research will need to step in to ensure objectivity. 

Lastly, it is internal management stakeholders. Sometimes, the higher ups such as CEO or directors may not be pleased with the research analysts reports which may run afoul of their personal or organisation interest, example : clients they bank or do deals with, imagine the research analyst downgrades or present a less than favourable report of these clients. A research analyst will always be in a difficult position where they have to manage stakeholders while ensuring objective analysis.

4. Economic or Market Environment

Research reports have a pre-determined timeline. Usually it is 12 months. It is not like research analysts can be Warren Buffet and call a hold or buy forever. This means within a tight timeline, research analysts would want to see their stocks perform. This would help them build their reputation, deliver earnings for their "key clients" and draw following from potential new clients. We all know economic or market environment plays an important role. Sentiment especially affects the stock price of a company or particular sector. So with this, what I am trying to get at is that research analysts would likely avoid calling a buy on stocks or sectors which are not the theme of the day. Similarly, if the sector or stock is popular with investors, they would put more focus to it. This is one of the rationale behind how research reports are crafted. It is neither wrong or right, but from a professional capacity, it is what they need to do for the organisation's goals. 

Ranking of Analysts

Unknown to many, analysts are ranked annually by their clients. It is important to them especially if they ranked higher. It justifies promotion and increment for them. For clients to rank them higher, the most important criteria is getting their calls right and service level. In fact, for years now, The Edge also gives out best call awards to analysts to recognise their efforts. You can see the awards in 2020 and 2019. The awards are not all encompassing but it shows some of the analysts who did very well for the year. Of course, one or two good calls doesn't mean anything. Many good analysts actually fly under the radar and consistently churn out high quality reports. Even if the stocks don't perform, a hold or a downgrade call is equally important. What matters most is about giving an informed judgment which is reasonable, the outcome is not within anyone's control especially when the timeframe is merely 12 months. 

Conclusion

The industry is very small, some even call it a "musical chair" industry. This means that because there is limited positions in this sector, many research analysts move around from organisation to organisation. As it is small, it is hard to get in. Newcomers have the opportunity only when the old timers leave. I believe there are many good research analysts in the stock market. As investors or readers, we should be discerning of the reports and seek out the good ones to follow closely. Many like to follow stock market "Gurus", of which plenty are charlatans and fraudsters. Those you see on advertisements or sponsored videos, majority are fake. Following good research analysts reports is much better than "fake Gurus". At the very least, they are regulated and they have a professional risk of losing their license if they violate regulations.

I hope retail investors especially new ones do not disregards research analysts over the gloves downgrades because sometimes, it is at no fault of theirs. As long as you filter out the good ones from the "intellectually dishonest" ones, I believe research analysts' reports have great value especially their access to management and deeper insights which normal retail investors wouldn't have. In addition, for research analysts who are "sector specialist", they have very sharp observations that we retail investors would otherwise miss due to our more generalist approach in investing across sectors.
_______________________________________________________________

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Food for thought: 










Saturday, 13 March 2021

(Tradeview 2021) - Where Do Retail Investors Go From Here?

  


For a large part of 2021, the net buyers of the local stock market have been retail investors. Foreign funds are mostly net sellers with some net buying spree on occasions. Local institutions on the other hand have been a consistent net seller for almost every day since the start of the year. There is a transfer of shareholdings from local institutions to retailers and I am particularly concern with this phenomenon. It goes without saying for the stock market to go up, retail investors strong buying momentum alone is not able to push the index upwards. There must be complementary support by local institutions or foreign funds. 



Into the 3rd month of 2021, retail investors participation are still very high although last year many analysts have reckon that post loan moratorium, the stock market would see retail investors participation dwindling. Even in the shortened month of February 2021, in terms of value, local retail investors dominate 36.5% against other categories whilst the volume stands at a whopping 45%. This essentially means out of 10 trades, 4-5 of the trades are conducted by retail investors. I believe there are many reasons why this is happening amongst which :

1. ISinar EPF withdrawal (30% of members withdrew)

2. Investors who enjoyed good returns from the stock market in 2020 is bullish that 2021 would be the same

3. Record opening of accounts in 2020 spilled over to 2021

4. Proliferation of social media and “Gurus” advocating the ease of making money from the stock market

5. Low interest rate environment

6. New breed of investors - fearless millennials 

When everyone is talking about the stock market, it is usually a sign of a vibrant & "hot" market. 

When everyone is justifying future earnings of companies with lofty valuations, that is a sign of the market overheating. 

When everyone is talking about loss making penny stocks and justifying speculating it on the basis that “I know it is not a weak company, but I will get out first”, the market is fleshing red signal. 



There are two views which are polar opposite today in the stock market :

One side is bullish, believing this is the potential start to a super bull cycle as it was in 1920s - know as the roaring 20s. This side of of the aisle believe that the current financial system is flushed with liquidity from central banks’ monetary policies, new growth phase is in the horizon due to recovery & reopening from Covid-19’s economic damage in a 2020 and advancement of technology such as 5G, AI, IoT, EV & RE would be the engine for growth for the next decade. 

Another side believes that the “bull” is tired, it has overran its lifespan since 2009 and despite multiple steroids (QE, rate cuts) the market is long overdue for correction. Those on this side of the aisle do not think 2020 Covid-19’s Great Lockdown, is remotely considered a crash because the stock market made a quick V-shaped recovery. 







It is very hard forecasting the stock market overall direction. Macroeconomics is complex and there are confluence of factors that shapes the direction of global economy. Time spent on studying or predicting market crash in my humble view is an exercise of futility. There is no point being obsessed over it as no one can make a call with certainty. However, there are various indicators in the stock market which we as investors should take cognisance of. 

1. Is the index trading at reasonable valuation levels ?

2. How are the corporate earnings?

3. Who are the main participants in the stock market?

4. Is it easy to find good companies to invest in at a reasonable valuation?

5. Would the liquidity or ease of credit starts to tighten?

From my observations based on the 5 questions above, unlike this time last year 2020 where I made a confident call to deploy cash to enter the stock market, I am far from confident today. On the contrary, I am worried and am taking a prudent approach. Although I do not believe there will be market crash in the near term, I believe a correction is in the horizon. A crash and a correction is vastly different. In addition, my view is more skewed towards the KLCI Bursa. The recent corporate earnings actually provides much needed insight and for those who actually studied the results in detail, they would realise many companies especially small and mid cap stock share price have far exceeded its earnings or value. 

In addition, many private placements are related to these penny stock rallies where majority are loss making but somehow private placement were done for the purposes of new venture or business expansion. This is probably in part due to Bursa increasing the private placement mandate from 1o% to 20% of issued share of the listed company. A deeper analysis would tell you that majority of th companies are doing badly require capital injection but doing it via private placement due to the "hot retail sentiment". This is a faster, quicker more efficient fund raising method than a rights issue or loan or raising bond. Share price are played up prior to announcement of private placement to make it enticing for private placement subscribers. 

There are many more reasons behind why penny stocks are being manipulated but if anyone, retail investors are the most susceptible to these syndicates and operators play. Retail investors with their hard earned money should avoid getting caught up with the penny stock frenzy before it is too late.

_______________________________________________________________

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Food for thought: 







Tuesday, 2 March 2021

(Tradeview 2021) - Should Investors Take Off Their Gloves?

            



2020 came and went. Whilst it is a watershed year, it is nonetheless a year that investors in the stock market will never forget. Apart from myself, many have studied, analysed and commented on the glove sector including specific glove companies. Amongst all sectors, the glove sector is the most crowded in terms of analysis and scrutiny. After all, it is a uniquely Malaysian Cinderella story. I have read many wonderful observations & analysis, am thankful for the sharing. I can tell from the articles, voluminous amount of work have been done by fellow writers. There is one author I particularly fancy, Ben Tan. The amount of detail and work done is impressive.


As per my past writing, my favourite Glove stocks which I deemed are long term value stocks would be Riverstone Holdings Ltd, Hartalega Holdings Berhad and Sri Trang Agro. Each of these stocks are listed respectively on SGX, Bursa and SGX / SET (dual listed). Rest assure, this article is not about their wonderful results and record breaking earnings or cash position. Instead, I will spent this article mostly showing readers the performance of the stock price in the past 1 year since the start of the pandemic, towards its peak and its selldown.

1. Riverstone (Adjusted for 1 for 1 bonus)


2. Hartalega



3. Sri Trang Agro Industry PCL



For ease of reference, I took the stock price of each glove companies from mid April to today's closing market price. 

  • Riverstone rose from SGD 62 sens to SGD 1.31 - An increase of 111%
  • Hartalega rose from RM 7.25 to RM 9.41 - An increase of 30%
  • Sri Trang Agro rose from THB 11.70 to THB 48 - An increase of 310%
How about the profits and cash position increment for each of this company?

  • Riverstone revenue rose 85%, net profit rose 396%, dividend rose 6X and cash position rose 398%
  • Hartalega revenue rose 123%, net profit 536%, dividend rose 6X and cash position rose 1211% (conservative estimate using similar revenue (RM6.5 billion), net profit (RM 2.76 billion), dividend (48 sens) and cash position (RM 4 billion) based on Q3 FY 21
  • Sri Trang Agro revenue rose 25%, net profit rose (loss of THB 149 million to THB 9.5 billion), dividend rose 5x and cash position rose 1010%.

Because the companies have different reporting timeline, so it is hard to compute full year results as comparison. However, based on what I provided above, record results (best have yet to come, likely the next quarter), you can use it as a gauge to compare the valuation vs the current share price. Well, surely seasoned analysts or those with contradicting view will surely argue, 2020/2021 is a one off event due to the century pandemic. Hence, must discount it and not factor the calculation in such manner. Also must compute it against 2022 or even 2023. This is where I would like to point out an important distinction which some failed to appreciate. 

Every stock has a company behind it, and every company has an intrinsic value. The intrinsic value is what determine what the company is worth. In essence, the stock price is a manifestation of the intrinsic value. The argument then lies with how to compute the intrinsic value. Of course, it is somewhat a mixture of science and art. One thing is for sure and most would agree, an important metric to look at is earnings. For me, to know the intrinsic value, it is important to value the company based on (Assets - Liabilities = Equity) + Ability to earn / grow profits + Ability to sustain profits + Ability to pay dividends. Apart from that, Retained Earnings which is part of Equity is an aspect that is overlooked by investors. In short, we can conclude the higher the company's retained earnings, the more valuable the company is. This is in fact, highlighted not by me, but by Warren Buffet in his recent Annual Letter to Berkshire Shareholders 2021. You can read this passage here -

So this is where I would like to draw your attention. Whenever I read articles saying "gloves are overvalued", I am often bemused by the ignorance of individuals who make such shallow comments. The value of a company does not diminish or gets eradicated once supernormal profits disappears. This is simply because when a company makes profits, the profits translate to retained earnings and of course the retained earnings can then be used for other things like paying dividend, investments or future capital expenditure. The supernormal profits may reduce like how Covid-19 reduces but the value of the company does not reduce unless it starts making losses overnight. The higher the profit, the higher the retained earnings, the higher the value of the company. In essence, the company's value holds itself and that is why share price maintains at a certain level. Even if next year or following year the earnings fall, the value built and accumulated do not get wiped out unless the retained earnings are deployed egregiously resulting in losses to the company. It is absolutely wrong to equate the share price chart of gloves, to the Covid pandemic infection & death rate chart in direct correlation and absolute terms. 

 




Owens & Minors is one of the notable PPE maker and supplier in US. It has a history of over 100 years. Despite the vaccine roll out and all the talks of pandemic being over, the share price continue to perform and sustain in tandem with the earnings. This is due to the structural change and hygiene behaviour pattern following Covid-19. Investors are knows the importance of such company now and appreciates its retained earnings, future earnings visibility and accord it higher value compared to before. None is rushing to take profit the way it is happening in Bursa. In fact, the performance of Owen & Minors shows the major flaw in the thesis of a Foreign IB research report.




Mercator Medical, the superstar polish glove maker that rose to fame on the back of the pandemic is still 7X its stock price back in April 2020 and sustaining well even after falling from the peak of PLN 770 to what it is today. We must remember, Mercator unlike our Big 4 did not even enjoy the same level of global reputation and standing yet it is sustaining much better than the price action of our local glove makers.




Intco Medical needs no introduction anymore. It is one of the top two glove players in China which have recently came on the news touting to build 190 billion glove capacity factory in the coming years. As a background, Intco traditionally is a vinyl glove maker and one of the largest in the world. Vinyl gloves are also known as "poison plastic". Seeing the demand and value paid for nitrile gloves, Intco is venturing big and even raising US 1 Billion on a secondary listing in Hong Kong to achieve this. Although its capacity is only 20+ billion now with more than 60% production in Vinyl gloves, the stock price have continue to risen and sustained very well. To put things into perspective, Intco Medical market cap today is bigger than Top Glove and Hartalega. It is also bigger than Supermax + Kossan + Riverstone + Comfort + Careplus + UG healthcare combined. Is Intco medical such a good glove player and ours so inferior to China’s glove maker? Does this make sense?




Looking at the stock price performance of other glove makers which have been through a superb record shattering 2020, for the stock price to revert almost back to where it was despite the profits, cash and balance sheet strength defies logic. The irrationality and emotions flooding the market is not only retail investors. In fact, I think the retail investors in Malaysia have done very well and held on to the conviction in the face of huge RSS selling, institutional selling. I take my hats off to them as it is extremely tough to go up against such adversity. The age old adage which states, "the market can stay irrational longer than you can stay solvent" is absolutely true.







Zoom was one of the hottest tech stock which captured everyone attention due to the pandemic too. It was the poster boy of pandemic so much so the stock itself went up 7 times to a peak of US 588 with a market cap US 172 billion. It even helped Li Ka-Shing recapture his title of Hong Kong's richest despite the impact that rampage through his notable companies CK Hutchinson, CK Assets and others. Why I am sharing this is to show you even though Zoom was regarded as the face of Covid-19 beneficiaries due to the work for home need for video conferencing, it still managed to stave off the plunge when the vaccine was developed and funds rotated towards recovery plays. Even outside of the sector, stocks like this can retain its value due to the "new normal" and "value of the company" which was brought to light resulting from the pandemic. Otherwise, Zoom may still take its time to jostle for attention of major funds and investors. 



 
One of my favourite boxing movie is Cinderella Man, by Russell Crowe. It is based on the real life story of James Bradock who was injured and had to work in the docks during the Great Depression just to survive. He returned to competitive boxing in order to make a living for the family during the most challenging time and despite being an underdog, he rose to the occasion to dethrone the incumbent and became the heavyweight champion. His nickname was the "Cinderella Man". The glove makers in Malaysia are tales of Cinderella, rags to riches and underdogs to world domination. It took 30 years to get to where they are. When the time came for them to rise to the occasion, they performed and delivered extraordinarily. 

History have shown, whenever the glove sector retraces, it has never gone back to previous low and it forms a higher low each time. However, most people painted doomsday scenario such as price war and oversupply yet in the end the sector prove them time and time again they were wrong. Indeed, China capacity may be scary but ultimately they don't have the expertise. In terms of efficiency, our glove makers still have at the upper hand. Glove making especially Tier 1 quality is not as simple as making mask. As for the US wanting to build their capacity, at the first place back in the days, their manufacturers chose to disposed all these assets as they they find it low value in nature and could not compete hence adopting the OEM model. 

I believe investors need to ask themselves what is their investment horizon, ability to hold (no margin, no leverage) and stomach the emotional rollercoaster. I do not deny sentiment plays a part in investing. Herd mentality, fear and greed swings share price. However, as  a true fundamentalist, I invest based on the value I see in the company. I have great faith in Riverstone and Hartalega for the reasons I have shared before and have a long investment horizon. Ultimately, investors must know the value of the company behind the stock price in order to determine the best course of action. 
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Friday, 26 February 2021

(Tradeview 2021) - Long Term Value Stock 1 : Oriental Food Industries Holdings Berhad (7107) Gong Xi Fa Chai!

        



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Source : OFI website

In a blink of an eye, 2020 have passed and now we are on to the second month of 2021. Many seniors I know in their golden years have lamented to me how the Covid-19 pandemic have stolen the time of their life for enjoyment, simply joys and peace of mind. In fact, majority worried about contracting the virus (elderlies have higher propensity to contract the virus) that they even reduced to staying at home fully, not even going for morning walks or evening strolls anymore. The young ones on the other hand would live through 2020 deprived of their proper education, socialising with school mates and examination. 

When it comes to the economy, the number of companies especially SME which have shuttered have reached levels unseen since the 1997 Asian Financial Crisis. During times of uncertainty, volatility and distress, the Government and agencies plays an important role to assist the people to get through the darkest hours. We have to admit, like Covid-19 patients, beating the virus is only the first stage. What comes after, long term effects are what patients will need to battle with in the years to come. Hence, if anything, investing in the midst of a pandemic driven economic crisis has taught me the importance of investing in quality business which can sustained over a long duration of time. There are many companies listed in Bursa but not many companies are like that. To be a good investor, we must do the necessary work to scour through the stock exchange to find these hidden gems. It is not easy but when you do find it, it is all worth it. 

As we are approaching the end of Chinese New Year 2021, I would like to share a  company which fits the frame of my expectation, namely Oriental Food Industries Holdings Berhad (OFI). Please do not confuse this company with Oriental Holdings Berhad which was a conglomerate I have written about in 2020. OFI is a consumer FMCG company with many years of track record and own brands under its stable. I like the stock for a variety of reasons based on a set metrics. To give a little background, OFI is the manufacturer of these familiar food products :



Pic Source :  OFI website



1. This is a confectionary products manufacturer and exporter. I like the company because it is rebounding from multi-year lows and returning back to steady consistent profitability. This provides some level of earnings visibility. The products I have tried myself, it is really quite good. Well, the best way to know if a company is worth investing is if you try the product yourself. Additionally, despite MCO and lockdown, they have done very well for themselves in 2020 with the latest quarterly results with strong growth on Revenue and Profit YoY. The first 3 quarterly results profit alone have exceeded last full year results FY2020. Based on the trajectory of the recent quarterly results, it would appear that OFI will likely deliver all time high revenue and much improved earnings since 2018 despite the onslaught of the pandemic. It shows the resilience in earnings for the FMCG sector despite the weak economic climate. In comparison, its peers apart from Kawan have all been somewhat affected by the pandemic including Hupseng, Poweroot to name a few. Kawan remains to be growing and OFI is making new highs in terms of revenue and profits.
 




2. Management to me is very important when considering investing in companies. OFI was founded by Dato Son and with decades of experience under his belt, he has built OFI to be a household names with brands like Jackers, Rota, Super Ring, Zess. Each of this brands are up against Fortune 500 MNC products which caters a value alternative to local and mass market consumers. Until today, Dato Son at 74 years old still personally lead and take charge of the R&D of the business. This is what I value most in a business. Strong management running a quality business.



3. The expansion plan are in place. The loans used previously were for expansion of facility and new production line for further increased which will kick in soon. As of March 2020, they were finishing the balance production line pending delivery of the equipment and machineries. With the new expansion and facility in place, it would raise their revenue and provide the growth trajectory which this conservatively managed company requires. There is no point buying a company purely because it is undervalued without any growth potential. This will serve as a catalyst to the upward revision of the stock price in line with growth rate.


4. Importantly, it is net cash company with good balance to of local and export markets. It is currently RM 18 million net cash and cash position stands at 12.5% of total market cap. For many years, the company have always maintain healthy cash position and this allows consistent dividend payout ratio policy of 35% for shareholders. Also, indication of stronger earnings is from their increased in dividend payouts which also is consistent every quarter. Based on the past year dividend trend, the conservative estimate this year at current price of 86 sens would be a yield of 2.3% assuming they continue the payout of 0.5 sens per quarter (full year 2 sens). The only downside is the low liquidity. 


5. Prominent substantial shareholders including EPF, KWAP and Fidelity. As per the latest list of 30 largest shareholders in the 2020 annual report, we can spot notable names which to me is rather surprising considering the company is a small cap stock with low liquidity. So this would give confidence to investors that the company while not a major cap stock, it still have the ability to draw institutional investors.


6.  The most significant reason I like OFI is because they have their own brand and market standing in the country (or overseas). Having your own brand with a dominant position in the market can lead to valuation premium just as what Munchy's happened back in 2018 where the company was bought by CVC Capital, a renown Private Equity fund at RM 1.1 Billion. According to Nielsen, Munchy's had a 21.5% share of Peninsular Malaysia's RM1.044 billion biscuit market in 2017. Based on this estimation, Munchy's revenue would be about RM 200 million. OFI currently for the past 5 years have a revenue ranging from RM 226-288 million. I believe OFI with their wide range of products should have comparable market value being offered as Munchy's as OFI have a wider range of snacks and confectionary products. To put things into perspective, OFI current market cap is only RM 211 million less than 5x valuation offered for Munchy's. This reminds me the arbitrage value difference example when I highlighted QL few years ago when they started their venture into Family Mart. Back then, I highlighted that QL will likely have a possible valuation rerating due to Jaya Grocer's valuation paid by the acquisition of PE fund then as new benchmark. For those who missed that article in 2018, feel free to read here :


Munchy's news :



7. Regardless, I believe this is a mid to long term stock that has strong share price growth potential. My calculation shows the long term Fair Value of OFI would be around RM 1.25 at a 20x PER of latest QR compared to peers which are more expensive like Hupseng, Power Root and Kawan. Once the new production goes full force, there is a further potential for rerating and to me, there is a solid grounds for the stock to be a multibagger. Lastly, the Price to sales ratio (P/S ratio) is 0.79x, less than 1 which is rather attractive. But using P/S ratio must be considered sparingly and in tandem with other metrics, like net cash position. This brings to the conclusion that OFI is attractive.


Of course, there is the argument that FMCG companies having specific client base due to the price point of their products will limit its potential reach. What I like about OFI products is the wide range it caters to, not only the lower middle class but even the elites. Our former Prime Minister is a big endorser of their product. Assuming you can't recall, let me refresh your memory :




Whenever I write about Long Term Value Stocks, the most frequent questions I receive from readers are, how Long is "Long" ? I can understand the frustration of waiting and sitting compared to active trading. Investing in fundamental stocks require very different set of skillset but most importantly, the difference is in the mindset. Active trading gives you a faux sense that you are doing something, working on making money. Investing in long term stocks feels boring. However, if your goal is to invest large sum of money and build wealth, then there is only one real way to do it, investing long term. Hence, long term can be anything more than years to decades so long as structurally and fundamentally, nothing has changed. 


Again, when choosing long term stocks to be in your portfolio for many years, it must meet my 5 metrics :

1. Strong, honest and capable management team / owner
2. Consistent Growth, Earnings & Dividend payout
3. Strong balance sheet & cash position / cash flow
4.Can hold across decades / generations without risk of delisting or bankruptcy
5. Undervalued & lack of appreciation from investors

At this juncture, OFI is beginning to meet the metrics. 

To those who are celebrating Chinese New Year, Happy Chap Goh Meh. May the new year usher in prosperity, good healthy and plenty of joy. For those who aren't celebrating, happy holidays. Let us looking forward to a better year ahead for all.






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