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3: Malaysia REITs - Looking For My 2nd Durian Runtuh
4: Is Insurance Really Necessary?
5: Everyone Must be A Millionaire

Head to the watch list on the above tab to see my what's on my radar and foreseeable future postings =)

Decided to make adjustments on the way I blog & share due to time constraints and other commitments. In the coming weeks you should see them. Short updates but more frequent & concise.

Saturday, December 25, 2010

Don't Be One Of Them!

I just blazed through the book "Financially Stupid People Are Everywhere: Don't Be One Of Them" in just a matter of hours and found it to be both gratifying and a timely reminder as I head into yet another year full with global economic uncertainty and the usual political mess.

A recommended book for reading nevertheless, if you haven't had RM1000 for tax rebate next year buy it now, if not do it for next year. Written in a straightforward, simple and accessible style, it reveals how modern society as we call it is rigged towards a debt-ridden economy and outlines simple ways to resist this. Below are some excerpts from the book:

First Rule of Finance: Not to spend more than 80% of your take-home pay.
Credit cards: Never carry a balance.
Cars: Pay cash for vehicles. No financing.
Castles: 20% down payment, maximum of 40% of take-home pay as financing payment.
The only rule I did not adhere is the third one. God I wished I could reverse time and bought myself a used car instead of a new one. A lesson has been learned.

Financial freedom is not about how much networth you have, it is on smart money management. If you drive up in a brand new luxury car and tell me that you borrowed a pile of money from a bank, I am not impressed. That's nothing special. Any idiot with a pen can do that.
Cars are a form of liability as I mentioned before as do other items that depreciate in value over time. Well I could not buy my car in full with cash, at least I made a cheaper choice and one more year to go in financing. 

Living within your means freeing you from the job you don't like. Having enough cash to go about presents a path to wherever you want to go, because you know how to decide what you want and put away the money needed to get it. Smart money management will make it possible, not tying you to a job that you dislike for years.
A healthy reserve of cash in savings or assets (fd, equities, bonds, property) minimizes the impact of losing or changing jobs. I can quit now and still stay jobless with my current spending for almost 2 years. There is no use waiting for the paycheck every month's end just to clear off debts and borrowing. You are going to be tied down forever. 

If you can't handle paying off your credit card each month in full, you can't handle stocks. Get the management of money part down first as the stakes are low and easy before climbing up the ladder to investing. If you can't control your finances before striking it rich on the stock exchange, what makes you think you will afterwards?
Indeed, if you can't control would mean losing patience. Investing in stock requires patience, if not you would be considered a speculator who has no clear investing strategy and might probably borrow to invest when you are actually gambling with luck.

The thing that made this book interesting for me is it touches upon the society of America where the government is of the corporations, by the corporations for the corporations. It takes you deep as to why health care is expensive, why oil dependency continues and why military spending remains high. It reveals the coordinated effort at work to suck dollars out of every taxpayers. It is not an American Dream.

Most people, your neighbours, friends, colleagues could have fell into this trap of borrowing and mindless spending. Don't be one of them and do yourself a favour by getting this book. If you ask me nicely, I might be Santa Claus and give you one for free :) Happy merry Christmas everyone, HoHoHo!!

Tuesday, December 21, 2010

Carlsberg Malaysia Reignited? Not So

Back in May 2010, I have mentioned that the only piece of good news for Carlsberg Malaysia is the acquisition of Carlsberg Singapore to turn things around before it is too late. At least things did become better for the company. Here is the consolidated earnings for nine months ended 30 September for the following years:

2009: RM745,000 (Malaysia 99% + Others)
2010: RM1,042,000 (Malaysia 80%, Singapore 19% + Others)

Profit before tax has risen 93% and revenue up by 43% by half year. Other notables are reduction in cash in hand from RM118 mil to RM28 mil while incurring an additional RM 55 mil borrowings. With such optimism and continuous stream of good news, no wonder the share price has soared to a year high of RM 6.52 while trading at RM6.40.
Some people have said that I missed the boat back in my May 2010 writeup but I have my own views and you have yours as well. I am a value investor, playing the long term waiting game, I rarely do trading buys unless I am very confident. Because I am the value invester, here are my takes on the long run.

1. If I plug in 50% revenue increase into DCF model, the fair value of Carlsberg Malaysia went up from RM3.70-RM4.50 to RM5.30-RM6.50 (15% to 13% discount). Normal price soar from better revenue generation.

2. The big upside for Carlsberg is from Singapore not Malaysia, Malaysia will only be able to achieve a single digit growth. They need to gain more market share in Singapore which they only have 20% and their marketing team will have to work hard on this.

3. Fantastic growth and revenues in 2010 can be attributed to the World Cup event and thus is by no means sustainable.

4. The last excise duty placed on brewery was in 2005-RM7.40 per liter. There is risk from unexpected increase in excise duty in the future. In fact Malaysia's excise duty is the 2nd highest in the world before Norway (but they have almost x10 our income level), thanks to our spendthrift government bleeding us dry.

5. Dividend payout will no longer be 100%, they have announced a 5-year dividend policy of only 50% payout for year 2009 to year 2013 a roughly 2.5% to 4% yield. We will no longer see the 4% to 6% range in the last 10 years, Carlsberg just left the high dividend yield camp.

6. No shares have been repurchased (buy back schemes) since September 1999. Will they restart it? Highly unlikely until they clear debts, restore reserves and improve decreasing gross profit margins.

For a trading buy, yes it would make sense for Carlsberg back in May but as a long term investment it is a no no. In fact if you want to make a profitable trading buy during recession almost any blue chips can earn you good money, why should I go with Carlsberg nia, as if there is nothing else to buy. As a value investor, I have major problems with the company's decreasing gross profit margins and potential excise duty hikes. A small shift in these digits will cause the fair value to tumble like dominoes.

Monday, December 20, 2010

Is Malaysia Going To War?

Even if we did we are probably going to get trashed because of our flimsy "state of the art" weaponry. By Colin Archer, in 2009 global military spending is at an all time high of US$1.53 trillion which translates to $224 for every human being on the planet! It could have been better used for eradicating poverty, save mother earth or better health care systems.

In our Bolehland, we also try to spend our way like the world is doing. Our Defence Ministry happily announced that we have signed a RM10 billion contract at the KL Defence Fair in April 2010 and for the 10th Malaysian Plan we are allocating RM23 billion for defence and security. At what cost? We are already in deep shit with debts of around RM400 billion. Furthermore you are trying to justify yourself to raise another RM1 billion through the GST mechanism while withdrawing subsidies to get another RM700 million from there. All done at the expense of the rakyat!
Little do most people know that Malaysia has a growing military-industrial complex. Many retired generals and top ranking military officials are in the directorship positions in our local aerospace industry. This is a sector where contracts are awarded directly without competition and more often via direct negotiations. These people have the power and privilege of easy access to the defence budget and using simple justifications such a "national security". What security? Are we going to war?

A good example would be Pekan constituency, as you know is our PM's stronghold simply because it has an extensive military automotive complex with its layers of contractors, sub-contractors, servicemen and other gainfully employed. We manufacture air-frame components, cannons, ammunitions, tyres and etc mainly through arms deal. We spend more on defence than in education and health. Why?

Yet with all the spending, we have lost 73 lives from Nuri helicopter crashes, another 17 from De Havilland Caribou helicopters, the Super Puma crash that was going to fetch then DPM DSAI (Anwar Ibrahim), 5 deaths from Pilatus PC-7 training aircraft and many others. In short, we have more deaths through accidents than from action in war combat. What else? We lost two jet engines amazingly and recently our defective submarine which failed to submerge during its exercise run. Discrepancies in deals, maintenance and poor accountability is all we have.
If we examine closely at the wars in Afghanistan, Iraq and Vietnam, we can learn a great deal about them and generate alternative defence policy which can be extremely effective at minimal cost. This policy is known as a "people's war", decentralised army in many small units armed with decent infantry weaponry, anti-tank, anti-air missiles, urban and jungle warfare tactics. In those 3 wars, tactical weaponry has shown its limitation with the aggressor's army having to fight a protracted war with the locals for many years e.g. 10 years and still with no favourable end in sight. Malaysia can make full use of the National Service linking them with our conventional army together with our Silat Association or other martial arts association to form a strong militia force that is multi racial. Promoting unity and with a sizable of our young population of 10 million strong people will make an insurmountable deterrence to any would be aggressor. You can easily spend RM2.3 billion on this rather than the RM23 billion price tag. Does our government have the political will to do this? No lo because through this they cannot earn a lot of commissions & kickbacks.

I have high respects for the men and women in the army, they are a tough breed indeed. Our army is not useless, we can do a lot of things we our current arsenal such as humanitarian causes, peacekeeping role, disaster relieve by establishing law and order. What I don't truly DON'T respect is how our government is messing things upside down inside out.


I decided to write this following the comments and articles in Arms purchases: Who are our enemies?

Sunday, December 19, 2010

All About iCap Part 1

iCap stands for icapital.biz Berhad is the only closed-end fund in Malaysia. It is listed on the main board of Bursa Malaysia. All mutual funds in Malaysia are open-end funds which offers their holders the right to cash in their shares at each day's valuation of the respective portfolio. A closed-end fund however does not issue new shares directly to anyone who wants to buy them. An investor has to buy the shares not from the fund itself but from another shareholder who is willing to part with them. Just like a normal equity stock, the price of the share fluctuates above and below their net asset value (NAV) depending on two things: supply and demand.

The fund is managed by Mr.Tan Teng Boo who is the CEO of Capital Dynamics. He is a true believer of value investing, a method founded by Benjamin Graham but made popular after being modified by Warren E.Buffett. I have met the awesome man during my visit to Investor Day in KLCC. Like me, I am also using value investing and that means we invest in undervalued companies in Malaysia. The fund has a RM140 million paid-up capital with a fixed number of shares at any given time.

Below is the fund's philosophy: To allow long-term shareholders to benefit from value investing. Investing in the fund allows the power of compounding work for you to offer superior returns. I will leave the fund's investment portfolio for another day as it is quite extensive to cover in one posting. Instead, we take a look at the fund's performance, track record and current valuation.
Since inception at 19 October 2005, iCap has an annualised return of 20% and cummulative return of 156% comparing to KLCI 10% and 64% respectively. Bare in mind that the fund managed to hold the ground even through the tough subprime US crisis that lead to world financial meltdown, this is value investing at its best.

The way the fund is valued is via Net Asset Value or commonly known as NAV like all other funds. Unlike them, iCap is being traded as it listed in the main board of Bursa Malaysia and thus you have two prices: market price and fund's NAV. The more people value the fund, the higher the price it commands, this is much like a supply and demand thingy which dictates the market price. The true performance of the fund comes from its net assets and we derived it using the term NAV.

At the current market price of RM2.09/share, iCap has a shareholder equity of RM292 million. As stated earlier, the paid-up capital for iCap is RM140 million. With RM292mil-RM140mil we have RM152 million of retained profits from Mr Tan's successful investments to date.
If we look at the fund's NAV (I call this true performance as it takes into account all current underlying securities) we have RM2.54 which is RM355 million. Taking RM355mil-RM292mil you get RM63 million. This figure represents the surplus of market value over carrying value of quoted investments. Say you bought Genting share at RM10.33, while current price is RM10.50, the difference is the surplus of market value. I think you understand now :)

To sum this up as the below charts. It is clear that there is a shift of fund premium to discount region. The current discount rate of -18% of the market price to fund's NAV is a big boon for investors. Never has it been so cheap to load up on iCap since its inception. Why the shift if you ask me? My guess is that people was spooked back then during the peaks of 2007 before the crash. On the back of recovery, people have not put faith as they did once leading to a very boring counter. It will be some time before people start to realise how powerful value investing is and finally bring demand in to squeeze supply leading to higher market price for iCap.

Monday, December 13, 2010

The Spirit Of Marathon


Spritzer-Kelab RoadRunners Ipoh Annual Run (12.12.2010)
Race Distance: 12km on macadamized road surfaces on undulating terrain of up to more 250 meters above sea level.
Clocking Time: 1:29:23
Average Speed: 8.09km/hr
Award: Top 600 Finisher T-Shirt & Finisher Medal (within 2.5hrs)
Good: Spectacular scenic view at Bukit Kinding, good trail for cross country run.
Bad: I find the slope very steep at some parts, steeper than stairwell!, my legs just refuse to run me up, that's just me.

Penang Bridge International Marathon (21.11.2010)
Race: 21km on tarred surfaces.
Clocking Time: 2:49:38
Average Speed: 7.45km/hr
Award: Finisher Medal (within 3.5hrs)
Good: Amazing that you are looking at island while running instead of driving on the bridge, a rare chance.
Bad: It was raining cats and dogs, wet and heavier to run. Difficult to find car park.

Kebun Bunga Charity Run (24.10.2010)
Race: 6km on tarred surfaces & pavements.
Cloking Time: 38:44
Average Speed: 9.47km/hr
Award: Top 500 Finisher Medal
Good: Easy and fun run, it's for charity anyway. Treat it as a practice run.
Bad: Have to take care of traffic e.g. cars, pavement running is not comfortable which is especially true in Malaysia due to its quality.

Next? Am looking for easy practice runs such as 6km or 10km and better prepare for a run like Malakoff 26km challenge: 2010's route. Will be a nice race as it takes you through lush greenery, seaside view, city centre and historical sites. I need to boost my running speed and stamina to 9km/hr-10km/hr pace for continuous 3 hours. If there is any event especially in Penang let me know! For now it's back to the training ground.
Marathon (Korean 2005 film) based on the true story of Bae-Hyeong-jin, a runner who happens to have autism.

Not forgetting the top 5 marathon songs I have on my playlist while running.
  1. Survivor - Eye Of The Tiger
  2. Bill Conti - Gonna Fly Now
  3. Europe - The Final Countdown
  4. Queen - We Are The Champions
  5. Delta Goodrem - Together We Are One

Friday, December 10, 2010

Flying Above The Rest AirAsia

Before I dwell deeper into AirAsia's financial performance, why not take a snip at its strategy. AirAsia is quite well known to be a "blue ocean" company as their concept is similar to Southwest Airline's model. The below strategic profile illustrates how both these low budget airline company's effective strategy in reinventing the airline industry via value innovation.


Key lesson that every great strategy must have a focus and the above value curve clearly shows it. AirAsia has untapped uncontested market space and making competition irrelevant as the average airline can't compete as they invest in all airline industry competitive factors. AirAsia like Southwest Airline focuses on three core factors: service, speed and flight frequency.

I would think CEO Dato' Tony Fernandez actually copied the model (though he established the company before the book was published) but took a step further by modifying it to stand apart. Four actions of eliminating, reducing, raising and creating, he managed to differentiate AirAsia's profile from the industry's usual profile.


Eliminate
Over the counter booking system, Free F&B on the flight

Reduce
Seat quality & less on flight attendant


Raise
Flight frequency to popular destinations & speed of air travel

Create
Online booking system
Point-to-point travel between cities instead of hubs

But like all blue ocean businesses it will become a bloody red one after more players copy the model (e.g. SIA's Tiger Airways & FireFly) and thus change is imperative. Right now AirAsia is looking good as recently it far exceeded market expectations when its core net profit increased 10-fold to RM270 million in 3Q'10 beating all analysts estimates by RM146 million to RM200 million. It is also the cheapest low-cost carrier (LCC) stock based solely on its PER of 7x while Tiger's PER is 17x and Ryanair (Europe's LCC) at over 15x. More about its financial next round.

How will AirAsia evolve to fend off competition? It comes in the form of free. Ryanair is already starting to draft creative ideas by actually making air travel absolutely free! Instead they derive their earnings from ancillary income (Money earned by an organisation through an activity that lies outside its normal core activity and purpose). Such as baggage check in, food & beverage on flight, advertising and have even mooted out the idea of having in-flight gambling. Free is become a trend nowadays and in 2009, "Freemium" was the word of the year and also hold the record of being the second most notorious word after "Fuck". See how big companies make money from free? Facebook, Google, Skype & Pandora (Internet based but we should see other industries follow suit one day).


Is MAS doing any better? Oh please, this is another retarded GLC. MAS is taking delivery of three Boeing 737-800 (US$80mil/each) end of this year with another 32 more in the next four years. This is in addition to another 15 more Airbus A330-300s (US$200mil/each) plus 6 units of A380-800 Super Jumbos (US$330mil/each) within the 2011-2015 timeframe. Spending model does not translate into revenue earning capabilities especially when there is no clear marketing strategy (btw MAS is an average airline on the strategy canvas). Perhaps like Syabas, MAS will be coming around to the government with a bowl in hand to ask for bailout. This is according to Sakmongkol AK47 in which I believe is credible source. 

Let me put some numbers into perspective. The cost of buying these new aircrafts will be approximately RM23bil spread over 5 years (RM4.5 bil/year), MAS has RM2bil in borrowings but only RM2.2bil of cash. For the last 5 years, MAS's profit minus loss after tax is -RM500mil. Now you tell me how to save MAS? Just die la, like Proton and most GLCs you are a national liability not an asset.

Thursday, December 9, 2010

Still Bullish Towards Genting Berhad

Genting made an announcement that it's Q3 net profit doubled following better earnings from Resorts World Sentosa in Singapore which commenced this year. For the nine months ended Sept 30, Genting's net profit swelled to RM1.74bil, or 125% compared with RM798.94mil in the previous corresponding period. Revenue rose 69% to RM11.1bil from RM6.6bil before. With 3 more months to go and with the best quarter for the year I am now positive that it will break the RM14 billion mark I have set previously.

Singapore expects a record 12 million visitors to the Republic Island for 2010 helped by the success of the city-state's two multi-billion-dollar casinos, a remark made by the Prime Minister Lee Hsien Loong last week. This translates into a 24% rise from last year's 9.68 million. It was actually Singapore's overall plan double visitor arrivals to 17 million by 2015. Economists have estimated that tourism currently accounts for about 5-7 percent of Singapore's economy but could grow to as much as 12 percent by 2015 based on government projections on visitor spending.
There was a one-off net gain of RM413.6mil from the oil and gas division. The payment was from BP Global Investment (BPGIL). Genting should be using this cash proceeds as working capital.

Genting Malaysia had poorer performance due to lower business volume, weaker luck factor in the premium business and expenses from start-up costs for its video lottery facility in New York. Revenue slipped 7.7% to RM1.2bil from RM1.3bil. Revenue and profit from the UK casino operations also decreased mainly due to poor luck factor (high payout) and the weaker sterling. Both of these are not a major concern for me as the plantation division improved on the back of higher palm product prices and increase in fresh fruit bunches production.

Surprisingly Genting Malaysia has also publicly said it expected its performance in Malaysia to be affected by regional competition and increase its marketing activities to address the growing competition. I have expected such competition to arise but with Malaysia and Singapore arguably best developed countries in ASEAN will continue to hold their appeal. Thus overall performance would not be significantly affected.
Genting continues to be a good BUY at current price for its casino exposure in Malaysia, Singapore, UK and recently US. I have loaded Genting as part of my assets at RM10.33 earlier on with the long term view that it has the most upside potential from earnings via Resorts World Sentosa. 1H'2011 will be an interesting year for Genting, let's look forward to it.

Thursday, December 2, 2010

BN = Barang Naik! Premium Fuel RON97 Goes Up

Here comes the next increase in fuel price as dictated by the Malaysian government, little do people remember that this is only the beginning as the government is planning on an increase every 6 months until end of year 2012. The problem? Malaysia’s total subsidy for 2009 is at a staggering RM74 billion which is equivalent to RM12,900 per household. Most Malaysians know that we have a fuel subsidy, but many of us don’t know that essential items such as cooking oil, flour, sugar, education, toll, healthcare and electricity are all subsidized as well.

Do I think such reduction in subsidy is warrant? As citizens of Malaysia, we too have to play a role in helping the nation but there will be another multiple choice question: To reduce subsidies, improve the financial management level or to eliminate wastage and corruption first? If they focus only on subsidy reductions without a proper planning for the savings, I am afraid that the money may be wasted due to financial mismanagement, wastage and corruption. As a result, the people's "sacrifice" will be wasted.

The government must show a greater effort in plugging the leakage and moot out corruption, until I see this really happening I do not warrant such reduction in subsidy. After all we are just lining even more money to the pockets of the corrupted. In addition to this, we are already in the world's history books for having the highest car prices in the world due to our automotive protectionism policies. If the government is looking to reduce fuel subsidy it should also look into reducing the base price of our cars. The only parties the government is protecting are only the profit makers. Also please channel the unsubsidized money into building good public transportation.

Nevertheless, I am mixed towards fuel subsidy reduction. Sometimes, it is hard to retrieve something that you have given away. It is the same case for subsidies! People will inevitable make noise including opposition parties taking advantage of such bad news, that's the brutal truth of politics. Fuel increase has a multiplier effect on inflation as prices of goods and services will go up and this will hurt the lower income group the most. As an oil producing nation, we should be enjoying very cheap fuel so please DO NOT listen to the government when they compare it with countries like Singapore!

Countries- in Ringgit Malaysia (RM) per Litre
Malaysia 1.85
UAE 1.16
Egypt 1.02
Bahrain 0.85
Qatar 0.66
Kuwait 0.64
Saudi Arabia 0.35
Iran 0.32
Nigeria 0.30
Turkemenistan 0.23
Venezuela 0.13

Sadly Malaysia's current running deficit of ~RM400 billion means that the government cannot afford to do this or will it ever do it considering our ever growing civil service, leakages, corruption and spendthrift ways. Aboi can only provide some tips to save on gas.

1. Pump your tyres. I do this almost every time I fill up my gas. According to some just 1 tyre deflated by 2 psi will result in a 1% increase in fuel consumption.

2. Drive at moderate speed. Drag and thus fuel consumption increases rapidly at speeds above 90km/h.

3. Don't let your engine go idle. Idling more than a minute consumes much more fuel than restarting the engine.

4. Use the air-con sparingly. Air conditioners can use about 10 per cent extra fuel when operating but I will use it when it is hazy.

5. Anticipate traffic ahead. A driver can reduce fuel consumption by up to 10% by anticipating traffic conditions ahead and adjusting the speed accordingly, and avoiding tailgating and thus unnecessary braking and acceleration.

6. Travel light. Avoid carrying any unnecessary weight in your car. On the average, every 50kg added load in your car will increase fuel consumption by 2%.

7. Drive in high gear (overdrive). The engine runs most efficiently between around 1,500 and 2,500 rpm. To maintain these low revs you should change up through the gears as soon as practical and before the revs reach 2500 rpm. This can be done easily with MyVi.

 8. Clean the air-filter regularly. Clogged air filters increase fuel consumption by restricting airflow to the engine, and thus should be cleaned/replaced when necessary. Clogged air filters can increase fuel consumption by up to 10%.

9.  Park far away in parking lots. It’s easier to get head-in parking here anyway but you also save on gas because you’re not idling at the front of the store waiting for everyone else that’s up there to get out of the way. No need to go round and round in search of car park, use your legs.

10. Other ways include carpooling, filling up gas at night, take routes with less traffic lights, use car less, get a hybrid car if cash flow permits, have good motor oil, reduce air drag behind heavy vehicles but not entirely safe & the use of petrol rebate credit cards.
I used to ride roughly 320km on RON97 with RM50 (RM2.15/litre) which is 13.76km/litre. With the increase of fuel price I am anticipating only 300km. If I use RON95 which is less preferred to due knocking and under performance, it will be 340km for RM50.

I am a believer of quality and I am planning to keep my car until it is at least 10 years old so I have to preserve the engine for as long as possible. This is unless I can justify my earnings vs spending (because car is a liability not an asset). I drive about 1400km each month. A 200km setback while on RON97 means an additional RM33.33 on top of RM200. RM33*7years*6months = ~RM2970. Previously it is ~RM2200 when RON97 is still RM2.05. That is still a lot cheaper than buying a new car.

See my previous post on why RON97 beats RON95 (not cost wise)

And also why I do not value car especially in Malaysia.

Saturday, November 27, 2010

Intel To Be Underdogs?

Introduction
The article is mainly about how AMD is going to make headlines for the year 2011 and 2012, more or less being critical to Intel though I feel Intel warrants such comments. If you are really an Intel fanboy I suggest you stop here.

While Intel is basking in its glory from the success of its Nehalem architecture processors, AMD is not quite ready to throw the towel. To those that do not know that AMD did kick Intel's butt once during the days of the Pentium4 vs old Athlon processors. Intel was advocating the Gigahertz factor with breakneck speeds while AMD decided to go with IMC (Integrated Memory Controller) to boost throughput. In the end, AMD finally won the design and snatched as much as 25% market share from Intel (a high at that point of time). 

Long gone are the days as Intel crawled back with their Core micro-architecture after copying AMD's innovation as usual...we see the same trend now as AMD with their acquisition of ATI 4 years ago mooted the idea of having CPU+GPU, hence the name Fusion lineup. Intel once again copied the idea for their SandyBridge product. AMD knew that they needed something that Intel does not have which is graphics thus they revised their strategy to compete. Though it was a heavy financial strain on AMD's part to obtain ATI, it has finally paid off as both companies are now integrated, going well and making profit after two years of being red.

In my opinion, Intel's glory days are gone as we head into 2011 and 2012 where AMD is poised to make a full comeback if not a grand one. Curious to know? Read on...first a little background check on financial.

Financial for YR2009
Sales for AMD comes in at $5.4bil while Intel has $35bil with gross margin at 42% vs 55%. With AMD spending $1.7bil in R&D and another $1bil for marketing, general admin stuffs they have minus net profit but turns positive after Intel paid $1.25bil in settlement agreement for malpractices. On the contrary, Intel spends $5.6bil on R&D and another $7.9bil on marketing and, general admin stuffs leaving only 16% net profit margin ($5.74bil).
Implication: Clearly Intel earning x7 as much as AMD though the latter is still able to compete with the big bully for many years since its establishment.

Intel sales can be broken into two main categories: PCG (PC Client Group) $20bil on processors and $6.2bil on chipset and mobos which totals in 75%. DCG (Data Client Group) with $5.3bil processors and chipset and mobos with $1.1bil amounting to the other 18%. International sales account for 80% of the sales with remaining 20% in America. Of that 80% international sales, 55% alone in Asia region. AMD on the other hand has Computing Solutions $4.1bil (76%) and Graphics $1.2bil (22%).
Implication: The mainstream market is the most profitable & biggest market of all as it accounts 75% for Intel and probably 60% for AMD.

Intel has said continuously that by capturing the top performance crown it will translate into capturing the low-end market but time and time again AMD has proven this wrong. Intel's strategy of embedding people's mind that they have the latest and greatest will spur the low end market in thinking that Intel is still more favourable is nothing more than a marketing gimmick. AMD has always been providing consumers with compelling performance/price ratio product and is still surviving these many years. Don't bluff us la Intel.

Thus for AMD to gain market share from Intel is by hurting them in the mainstream market whilst providing stiffer competition in the server market to keep Intel in check. Graphics is AMD's bonus as Intel has nothing to offer in this category.

Current Developments
AMD-ATI with their Fusion lineup has been doing a lot of PR campaign recently with their just recently concluded Analyst day. AMD's seed on APU (a combination of CPU+GPU) will bear fruit in 2011-2012 as their roadmap suggests product lineups across all segments of notebook, desktop and server. Their priority: simple at best: GPU > APU > CPU. Intel can only do CPU?

AMD will launch their low-end parts first in 2011, 9w Ontario single core & 18w Zacate dual core which are designed to compete with Intel's Atom and can even compete with Intel's mobile Core i3 and i5 parts in some cases. Obviously it made the Atom look smaller than an atom as the benchmarks will show you: AMD Fusion: Brazos Gets Previewed: Part 2, Performance

Some may argue that Intel will release something new to compete as their current Pineview products are out for quite some time. Do note that Pineview needs to pair with nVidia's Ion2 just to come close to AMD's offering. Intel with Pineview alone can't do it, more or less talk about their future offerings in this market category. AMD on the other hand has a complete platform to offer users.

To make the comparison easier I used a relative benchmark which is the PassMark Software. It is a benchmark that has delved into the thousands of benchmark results that PerformanceTest users have posted to its web site and produced four charts to help compare the relative performance of different video cards.

G3D Rating (higher is better) | Rank (lower is better)
GeForce9400M (Ion2) 139 | 504
Radeon HD5450 (Zacate & SandyBridge) 300 | 290
Radeon HD5570 (Llano) 752 | 110
Implication: Atom is as good as dead. If Intel's mainstream SNB can only offer gpu performance (as shown in preview benchmarks) near AMD's Zacate meant for Atom/CULV market then Intel is lagging behind a lot in the GPU realm.  

Llano is AMD's answer to the mainstream market. Intel's answer to that is SandyBridge but early benchmark shows that Intel's SNB graphics performance can only beat Zacate's Radeon HD5450 a little which surprisingly is for AMD's offering to compete in the Atom and CULV realm. There is still no preview benchmarks for Llano as of now but the graphics performance has been dubbed as being at the HD5570 region, awesome to say the least.

 

Now let's take a peek at the high-end market. I have doubts that Zambezi pure CPU cores can fight head to head with Intel's SNB as Intel has remained strong in the CPU realm for quite some time, but AMD is not putting focus to capture the halo like Intel. Heading to server side, AMD believes that customers are demanding more core counts, essentially more throughput per watt or throughput per dollar. Intel's SNB is currently reported to be in 8core/16thread region. Still early to say anything but AMD with the 6200-series (Interlagos), we are finally going to see AMD try and take the top spot for the server market in 2011. Interesting battle lies ahead.

 
Perspectives
Since my last sharing on The Blue Machine: Intel Corporation I have stated my less optimistic views on the world's biggest electronics company. Everybody knows that Intel has one of their best years in 2010 with record profits and beating AMD to their knees BUT did that translate into investor sentiment in share price performance?

Investor's Outlook: Investors are not stupid, one or two years of remarkable gains does not means it is something sustainable especially when future product lineups are not good enough to continue the momentum. Competition is heating up, after all AMD is offering features that Intel does not have expertise in for the first time: graphics. Thus this is why I think the share price has been subdued even with good news for Intel year long in 2010. Share price is not even bullish, it is stagnant ever since the tech bubble burst in 2000.

Consumer's Outlook: Wonderful! Product offering has never been this good. For the first time we will actually see discrete GPU performance in a single-chip CPU/GPU package. Expect to see price drops especially Atom parts as Intel can only fight with reduced prices. If AMD's APU proves to be successful do expect competitive prices for mainstream CPUs.

Employee's Outlook: Time to work your asses off LOL. AMD with x7 less headcount and money compared to Intel has fended off critics for years as they continue to offer products that can compete with Intel. Intel's focus right now seems to be on adjacent markets and trying to become a giant conglomeration like it tried during then-CEO Craig Barrett but failed miserably. I also expect bonus payouts not to be as much as year 2010.

Conclusion
These are my personal views, Intel's 2010 record profits are not surprising given two things. One they have monopolized the market while AMD is trying to play catch up after acquiring ATI. With their monopolization, they control pricing and did so to consumer's disadvantage. Intel's processors are damn expensive. Second, they force consumers to adopt new hardware famously done by them for many years through socket incompatibility. SNB is no different as they opt for LGA1156 vs the current Nehalem LGA1155 for mainstream. WTF just one pin!! They earn billions from this single modification via chipset and mobo sales.

I am not all critical to Intel as I still think they will have superior CPU processing as compared to AMD even though it has become a force to be reckoned with in GPU technology. There is a difference when AMD edge Intel last time with their Athlons. This time AMD is holding something which Intel is not competent nor has express great interest in striving for improvements. I am talking about graphics. If you don't believe me, be my guest to google it. Intel's integrated graphics processors thus far have been far from stellar performers since day 1 and the worse is that they are quite ignorant about it. My Atom netbook is doing nothing except downloading torrents because it simply sucks, slow as hell (even playing flash video) and regret purchasing it in the first place, nothing but a hyped product.

So who will pull off the APU upset?  The CPU champion, or the GPU grandmaster? I see the battle to be bloody in which it will boil down to marketing. AMD is going to need to convince system builders that good graphics performance is better than having an overabundance of processor horsepower. I am a part time PC Solutions Consultant where I have built 15 PCs this year alone and almost all have a need for a discrete GFX card for mediocre graphical performance to play 1080p HD movies like Avatar.

My views are that Intel is very much profit centric before customers. AMD on the other hand has been very friendly to consumers providing them with backward compatibility for their processors on old sockets and this time going to provide very good integrated GPU + CPU features with DirectX 11 as we head into 2011 and 2012. Intel is not going to support that until their next gen processors after SNB is out, very poor move Intel.

Top management in Intel has got it wrong. Controlling leadership does not mean you can win mainstream. Do you think that Ferrari can do good in mainstream if they got leadership in performance? With their headcount and $$, they should be investing in software development and GPU hardware. Google and Apple did it right because their apps are great (end-user experience) even though their hardware is just decent. Intel is the other way round, offering spectacular hardware with very little end-user experience. AMD drivers and GPU capabilities offers much compelling experience for users. How many times have you seen people say this.."aiyo my microsoft office is so slow, zip file takes too long, WMP loads my playlist too long?" Almost next to none. The usual is "Damn my PC can't play HD, my firefox lags, Facebook is slow". This is where GPU matters more than CPU.

I might be too harsh on Intel, some say too optimistic on AMD and pessimistic on Intel but to be honest I am trying to be realistic. You should already know that I am an avid investor, a PC system builder and also a consumer. Thus I truly believed that I am able to provide my readers with good views from all perspectives. Intel is as simple as whether you love it or hate it. To me I have more hates than love about it. AMD share has more upside potential. I will always continue to sell my Intel shares as I have been and continue to do so going ahead in 2011 and 2012.

Sunday, November 7, 2010

Trading/Services: Petronas Dagangan Bhd

Petronas Station with "Mesra" convenient store
Introduction
Formed in 1982 and listed in 1994, PDB or better known as PETDAG is the principal domestic marketing arm of PETRONAS (our dear national oil corporation; a world class company) which holds 70% of its equity.

Its business line can be segmented into four key areas by order of importance; retail, commercial, lpg (liquified petroleum gas) and lubricants. Its retail division holds a 32% market share and contributes more than 50% of the company's profitability. This comes in the form of 970 Petronas stations nationwide together with nearly 550 "Mesra" convenience stores located at its service stations.

Commercially it has the largest market share of 64% through the sales of diesel, jet fuel and bitumen. As of 2009, Petronas is now Malaysia's no.1 selling cooking gas after capturing the leadership at 52%. It is also the only local company to market NGV (natural gas vehicle). Lubricant wise, it has a 17% market share.

Fundamental

1. Does the company have an identifiable durable competitive advantage?
With parent Petronas having being the 13th most profitable company in the world and the most profitable in Asia, its resources stand at a very respectable level. Also the corporation is vested with the entire oil and gas resources in Malaysia including the responsibility to develop and add value to them.
2. Do you understand how the product/service works?
Dig, refine, distribute and sell. How complex can it be :)

3. What is the chance that it will become obsolete (KO) in the next 20 years?
As with all petroleum companies, their resources are exhaustible. At our current production rate, Malaysia will run out of oil in 18 years and gas in 35 years. Though it is hard if not impossible to take a crystal ball and imagine how the petroleum giants will be in the future, I think Petronas will grow to become something else perhaps an alternative energy company since this is an area of their expertise.

4. Does the company allocate capital exclusively in the realm of its expertise?
Yes. It has always done so. With an announced capex of RM500 million for financial year 2010/2011, more capital will be poured into expanding their retail segment (their main focus) as well as infrastructure plans to support it.

5. What is the company's financial history and status?
Financial Chart 1 (PM, ROE and Revenue GR)
Net profit margin (PM) has been relatively stable at less than 4%. However the return of equity (ROE) is commendable as PETDAG has been able to hold it in between 10% to 20% range on average which shows management fiscal adeptness. Revenue GR on the other hand has shown much volatility which is attributed to global oil  & gas prices and demand. Oil and gas are considered a commodity and as all commodities, they have their share of bubbles and burst.
 
Below is the 5-year average for the company. Sector is more broadly categorised like Trading/Services while industry is much more specific; for PETDAG is it Petroleum Products. 

  • Net Profit Margin: 3.06% vs 9.20% (Industry), 10.11% (Sector)
  • Gross Profit Margin: 8.35% vs 16.24% (Industry), 27.16% (Sector)
  • ROE: 17.25% vs 18.49% (Industry), 16.61% (Sector)
  • Revenue Growth Rate: 10.69% vs 22.19%, 14.62% (compounded annual growth rate)
Net profit margin for PETDAG is rather healthy considering the others in Malaysia such as SHELL (2.47%) and ESSO (-0.05%). The revenue growth rate is pretty tricky to estimate as such I will use the average of 5-years (17.19%) and 10-years (17.66%) as a reference to project the revenue growth rate for the DCF computation later.
Financial Chart 2 (EPS and DPS)
With revenue levels affected by global oil prices and demand, the EPS is also expected not to be in linear-like trend. Nevertheless the dividend payouts never exceeded their earnings and is on the rising trend thanks to the management who values shareholder's interest. The dividend yield for PETDAG is astonishingly good at 3.9% as compared to the industry of 1.23% and sector of 1.62%.
RK20011 black RM28 @ LovelyClo
6. Is the company conservatively financed?
PETDAG has been profitable ever since it has been listed and has never incurred debt. All financing are generated and funded internally. As of AR2010, their cash and cash equivalents stands at RM912 million and this figure is growing over the last 10 years.

7. Is the company actively buying back its shares?
No but PETDAG is doing its best by rewarding shareholders in terms of good dividend yield.

8. Is the company free to raise prices with inflation?
Yes. They raise their price in accordance to demand and supply factor. As for kedai 'Mesra' this I am not too sure but with their main focus on this segment I think they will make their price competitive and at the same time profitable.
 
9. Are large capital expenditures required to update plant and equipment?
Yes. PETDAG has announced that it will spend a capital expenditure of RM500 mil for financial year 2010/2011. In previous years they have also spend that much within the vicinity of RM300 mil to as high as ~RM700 mil in certain years.

Discounted Cash Flow Analysis
Revenue Growth Rate: History 17%, Optimistic 15%, Realistic 12%
Operating Costs: 96% (very high I know)
Corporate Tax: 25%
Capital Expenditures: RM500 million +3%/year
Depreciation: RM320 million +3%/year
Working Capital Cost: in tandem with growth rate
Discounted Rate: 10%

Drum roll please....Petronas Dagangan Berhad is fairly valued at RM11.23. The current trading price of RM11.58 put it slightly above fair value. It is hard to gauge how the revenue will perform year by year therefore I have also computed the fair value for respective growth rates: 10% (RM10.50), 15% (RM12.39) and 17% (RM13.20). It comes to no surprise that some research houses have a buy call while some have a sell call on PETDAG, because it is difficult to see how the revenue growth rate will be, you just need to take your best guess.
Conclusion
I have mixed feelings towards this counter. First, it is a government linked company though it is a really good world class parent company PETRONAS. It can be a bigger and better company if not for the streams of dividends being given to the government in which not all are being used in the correct manner. A total of RM410 billion has been paid to the govt. That is a lot of money!

Second, the net profit margin is rather thin. Even the gross margin is only ~8%. This pales in comparison to the sector as a whole even though domestically PETDAG is the best. This is perhaps because we do not produce as much oil and gas as other giants do like those in the middle eastern countries. We suffer from economies of scale. 

What I do like about PETDAG is the generous dividend payout even for such a company that requires high capital expenditure year after year. PETDAG is also taking their petrol stations to a higher level by adding more value to customers by providing convenient services such as ATMs, Touch n' Go facilities, e-pay terminals and express bus counters. The company also team up with local food and beverage players, banks and transportation players to provide better services at their petrol stations. These players include MCD, KFC, Dunkin Donuts, Konsortium Transnasional Berhad, Maybank and CIMB Bank.
They are also spearheading the bio-diesel B5 implementation which will provide more volume growth in this segment. With its financial prowess, PETDAG has the means to take leadership in the markets that they want to focus on. With many years of profitability, I am sure they will continue to be the same at least before the world's oil and gas runs out.
Will it be in my list of smart pickings? If only I had extra capital and with the criteria that my other pickings are not at a good buy. Trading on PETDAG has to be done wisely as the volatile share is not something to be overlooked. If it is bought at a wrong time, you could be holding it for some time before you get to see some real returns. The question is, can you continue to hold it when the tough gets going? I will not refute that it is still a company whose share is worth a look.
8372 White Top RM34 @ LovelyClo

Friday, November 5, 2010

Time 4 Revaluation!

It has been roughly 6 months since I have reevaluated some of my pickings. Most of them are using DCF and as such the input parameters in some of these values have changed in accordance to recent financial figures and economic conditions. The price you see are as of 04.11.10 trading at close.
EA2478 blue with belt RM36 @ LovelyClo

MAMEE RM3.48 fairly valued, aboi's fair value RM3.45
1. DCF of 13-15% discount rate change to 10%. (less discount for sound businesses as risk component is not high)
2. Revise revenue growth rate; GR from 7.5% to 8% (contributed to growing export market)
3. Profit before tax; PBT trending >10% (economies of scale & favourable agreement with key raw material suppliers)
4. Operating cost change from 92% to 90% (better margins seen in 2009 and 2010 from quarterly)
5. Risk come in bottom line impacting exports due to stronger ringgit.
7. Other useful analyst reports: Analyst Reports by Investment House(s)

TOPGLOV RM5.77 above fair value, aboi's fair value RM5.10
1. DCF added in 2010 results. 2010 revenue previously estimated at rm1.7bil but 2010 report shows it reached the rm2bil mark.
2. Revise revenue GR from 10% to 12%. (still conservative)
3. Working capital now in tandem with revenue GR. (added in for better valuation)
4. Change operating costs margin from 90% to 87%. (operating efficiency)
5. Risks: Crude oil prices & stronger ringgit will impact its huge global export market, thus I am less optimistic about it's revenue for future.

GENTING RM10.68 undervalued, aboi's fair value RM12.25
1. Resorts World Sentosa is doing very well for its first year of operation, stock is undervalued as the financial gains have yet to be published officially.
2. Genting's financial year end is 31 Dec, stock is a good buy for appreciation until after CNY 2011 (March-April timeframe).

ICAP RM2.06 undervalued, aboi's fair value RM2.50
1. Tan Teng Boo's bigger holdings of Integrax, Parkson, Suria Capital, Boustead and Padini have all risen in share prices.
2. Net asset value as such has also increased thanks to bullish sentiments on these counters especially Boustead and Padini which are not exactly too overvalued.

JOBST RM2.90 above fair value, aboi's fair value RM2.70
1. Share soaring, boosted by the Government's Transformation Plan on 26.10.10 which promises to create more jobs.
2. Revise revenue GR from 10% to 12%. (more job creation & hunting)
3. Though 2009 has lower profit than 2008, for 2010 quarter-to-quarter it is doing better on all fronts.

FREIGHT RM0.98 undervalued, aboi's fair value RM1.70
1. Consolidated results from annual report 2010.
2. 15% revenue growth is in line with previous estimates.

PARKSON RM5.96 undervalued, aboi's fair value RM6.60
1.  Previously covered just recently. For risk management: 15% discount would value it at RM6.00, at 10% discount valuing it at RM6.60.
2. It can be said that Parkson is between fairly valued to undervalued depending on your risk tolerance.

F&N RM14.30 overvalued, aboi's fair value RM12.85
1. Cumulative 2010 3rd quarter revenue GR of 7% is exactly the same as my previous estimate.
2. Nothing major except for more product launches, dairies and soft drinks.
3. Good night milk (new product) is amazing, you should try it :)
ZK1350 white RM37 @ LovelyClo