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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.

Sunday, July 25, 2010

Malaysian REITs (Part 1)

Remember that I mentioned we first need to ask ourselves what is your investment strategy, financial goals and the risk we are willing to take for mREITs. You can recap it here: Investing in Real Estate: Real Estate Investment Trusts.


The concept of REIT is similar to Unit Trusts, they will invest, manage and distribute rental as dividends back to the investors, like you and me. REITs are traded in Bursa Malaysia so it makes it easy to buy and sell just like a normal equity. REITs are not new to the world for they have been in many other developed countries for decades providing steady fixed income.

The average returns for REIT in a developed market is around 3%-5% yield BUT in Malaysia it is still in the infant stages as our nation's property values are still a gap behind those of developed countries. Perhaps it will take 15 years to become mature. Let's compare our REIT market capitalization to other nations:
  • Malaysia REITs: USD$4.6 billion (year 2010)
  • Hong Kong REITs: USD$8.8 billion (year 2007)
  • Singapore REITs: USD$22 billiob (year 2007)

You can say that we are in a transition period from a developing country to be a developed country and this happens to be an opportunity with attractive yield rates of 6.5% to 8.5%. REITs do offer a good platform for long term investment, properties are hard tangible assets which their values will never go down to absolute zero. People like to see returns vs risks so let me put it in a simple flow chart from highest to lowest:

Returns: Equity > mREITs > Bonds > Fixed Deposit
Risks: Equity > Bonds > mREITs > Fixed Deposit
*This is strictly my opinion & solely on Malaysian REITs

Before putting our hard earned money to work, there is a screening process to be performed. One thing to be learn is that during the financial crisis in the US there were a lot of US and Australian REITs that have lost a lot of their value due to the buying of over of inflated assets using cheap loans. Using this key lesson I must say that a REIT has to be both income-safe and also capital value-safe.

Below is a summary of all fourteen mREITs listed in Bursa Malaysia. Note that I have screened out five for further analysis in Part 2.

REIT Specialization & Example
REIT Portfolio Composition
REIT DY & Debt Ratio

Sunway REIT www.sunwayreit.com Being the biggest matters as its large size will give it greater transparency to local and foreign investors from large funds. It has the second highest free float amongst all other mREITs of ~48% offering liquidity for investors which can spur interest. Bandar Sunway township is still growing with high population traffic flow from crowd puller Sunway Pyramid. Looking at its books, it has low gearing ratio with sufficient liquidity. Read here for more info (very in depth analysis by another blogger). 

CapitaMalls Malaysia Trust www.capitamallsmalaysia.com Largest pure-play shopping mall REIT in Malaysia which is sponsored by CapitaMalls Asia, the leading integrated shopping mall owner, developer and manager in the region and is a subsidiary of Singapore-listed CapitaLand. It is able to leverage upon the parent company who has a good track record in managing REITs. It has highest free float amongst all ~58%. Among two REIT giants, CapitaMalls books don't look that good & already thinking of more acquisitions. 

Starhill REIT http://www.starhillreit.com/ People call it the six-star REIT having efficiently run their assets and ensure they are well maintained. It is a property trust controlled by diversified firm YTL Corp Bhd and has a free float of 49%. It is to be repositioned as a global hospitality REIT with proposed disposal of Lot 10 & Starhill to SG counterpart while it will be injected with world-renowned luxury Pangkor Laut, Tanjong Jara and Cameron Highland resorts plus heritage hotels such as The Majestic Malacca and business hotels known as Vistana chains in KL, Kuantan & PG. Its low gearing and ample assets does provide capability for more acquisitions. 

AmFIRST REIT http://www.amfirstreit.com.my/ Performance driven mainly by expansion of major tenant AmBank Group while it has recently tried to diversify through retail via The Summit Subang USJ & into hospitality via Summit Hotel. This REIT does not offer anything spectacular & has some amount of gearing. 

AL-AQAR KPJ REIT http://www.alaqarkpjreit.com.my/ The KPJ hospital group has a niche market and is outside the normal REIT portfolio. It gets net rent from hospital operators which are run by dedicated professionals with as large as 19 hospitals under its belt. They will need to balance dividend yields to keep investor's interest depending on market conditions. I for one, is not attracted due to its current gearing ratio. 

AXIS REIT http://www.axis-reit.com.my/ Islamic compliant REIT focusing on office & industrial estates. Looking for the acquisitions of new logistics warehouses & retail warehousing in Johor plus a new venture into office building in Cyberjaya. Fresh capital will be raised from proposed placement of new units instead of further borrowings. 

AL-HADHARAH BOUSTEAD REIT http://www.al-hadharahboustead.com.my/ First in the world to raise funds for plantation. Malaysia offers world-class palm oil companies & infrastructure and is a bee hive for the plantation sector. Plantations have a life span of 25 years before replanting, thus acquisition of new land is key (though Malaysia is running out of plantable land) to maintain future dividend yields and investor interest. With low gearing, raising finance is not a problem. I have always favoured plantation related investments. 

QUILL CAPITA TRUST http://www.qct.com.my/ Run by a joint venture between Quill, a Malaysian project developer and CapitaLand Singapore. It has 100% tenancy and occupancy of its buildings. Like CapitaMalls, it is able to leverage upon its partner who has a good track record in managing REITs. Its gearing is much better than CapitaMalls but has a free float of only 40%. I like it because it has a well balanced portfolio distribution combined with a good mix of local and foreign tenants & still allow room for more acquisitions. 

HEKTAR REIT http://www.hektarreit.com/ Retail-centric REIT and has a strategic partner named Fraser Centrepoint, a Singapore-based REIT manager who is an aggressive investor. Has the highest gearing among all REITs and I see nothing outstanding in their future pipeline. 

AMANAHRAYA REIT http://www.arrm.com.my/ Trust listed by Amanah Raya Berhad, a corporation wholly owned by the government of Malaysia. Well diversified throughout industrial, educational, commercial and hospitality sectors. Being Malaysia's premier trustee company they would be looking at sustaining competitive dividends for investors and avoid riskier opportunities. Just a decent & stable REIT. 

TOWER REIT http://www.tower-reit.com.my/ Has some similarity to AmFIRST REIT, performance is mainly driven by retention of major tenants; HP and ING & to perform asset enhancement. This REIT does not offer anything spectacular except that it has low gearing. 

UOA REIT http://www.uoareit.com.my/ Has a status of being a pre-eminent developer & commercial landlord in Malaysia. It is extremely good at what it does best which is to put focus on modern & pleasant looking office buildings with standard designs. It has a mega project known as Bangsar South City (MSC status granted) & has plans to further develop the area depending on market sentiment. The bulk of revenue comes from sales & but they also have rental income. 

ATRIUM REIT http://www.atriumreit.com.my/ Focused portfolio on logistics for industrial estates and its portfolio is 100% leased to multi-national corporations which I find lacking in diversification. 

AMANAH HARTA TANAH PNB http://www.pnb.com.my/ Don't bother, it is the most boring. They are currently seeking RM65 million in revolving credit to upgrade and refurbish Plaza VADS, that's all really. I rather park my money in AmanahRaya REIT than this.


Now you would ask me why I pick those 5 only. It comes back to the three questions & well, everyone has their own answers. What is yours? 
  • What is my investment strategy? Income (dividend) and growth (capital gain). mREITs offer exposure to commercial assets with huge potential and a suitable time now as interest rates are low and high yields. Opportunity! 
  • Financial goals? Fixed income allocation to provide 6% to 8% returns per annum. REITs fit perfectly. My fixed income portfolio could do some diversification apart from just investing in mixed assets fund (70% bonds & 30% equity). 
  • The risk I am willing to take? REIT to have low or reasonable gearing, the call to buy when share price is at a discount to its NAV. REIT also must have or developing what I call trophy assets (Boustead is an exception here) and have a clear & focused strategy. 
Should you invest in REITs? 
Certainly Yes! (unless you are a short term investor & have appetite for higher returns). REITs are not stocks, they are traded just like stocks but they have a totally different risk profile. With REITs your income comes from rental streams where tenants are locked into long leases. This is different than owning a stock like IOI Corp where you are exposed to business risks because it is trying to run a palm oil plantation (Boustead REIT is an exception here). I'm sure everyone prefers to collect rent over operating a business. I am looking to select two REITs for my portfolio so the "Finals" we will held in Part 2 :) Until then sayonara till we meet again...





Saturday, July 24, 2010

Potong, Potong, Potong!

Subsidy cuts, here they come. It is an important initial step towards structural reforms in our country as outlined in the New Economic Model (NEM). It does look like the government is looking at a three to five year time frame to gradually phase out bad subsidies & this should provide ample time for the rakyat to "ubah gaya hidup" :)

If you don't know, the quantum of our subsidy cuts are actually recommended by a task force known as PEMANDU, short for Performance Management and Delivery Unit. Under their recommendation subsidies this year should be cut to a point that it will save the government RM1.3 billion. But the recent announcement in price hikes will only result in a saving of RM750 million. Now there maybe another price hike still lurking within this year.

Price Increase on July 15 2010
PEMANDU has earlier suggested that the price of fuel be raised to 15 sen instead of 5 sen, which is to be followed by a 10 sen adjustment every six months until Dec 2012. Walao kenot le so expensive, then carpool la. Take some time and observe awhile during traffic. Most of the cars have only the driver, true right? The initial 5 sen increase in fuel was a more gentle approach by the government which I feel not bold enough. Look at Indonesia's bold approach in economic reforms taken by their leaders.

What other bad subsidies do we have? It is actually a matter of time before we will see the removal of subsidies on electricity, flour and gas. So far the govt has pledged a 40% reduction by 2013, and total removal a year later. Now will be a good time to invest in solar products. I say only ah.

This is the full picture. Govt debt has now ballooned to RM362 billion in 2009 which is approximately 54% of our GDP. Halfway to becoming Greece. It is imperative that we make changes in order to save money. Well I'm not saying only the rakyat plays a part, the government has to do something as well.

Some 97% of subsidies given by government benefits everyone regardless of income. Certainly the govt has to amend this issue and only provide subsidies to the needy only. Our independent power producers (IPP) are being subsidised RM13 billion a year. For what?! Do they really can't live without it? The government also needs to plug other leakages from corruption and inefficiency. Open tender basis must be embraced. Just look at the MRT mega project being awarded straight to UEM for RM30 billion. Does it make sense? There should also be a reform in our civil service which is now packed with 1 million workers that is one civil worker for every 25 Malaysian. It is still growing and this is a good example of inefficiency in the making.

There shouldn't be anymore white elephant projects and over bloated allocations to towards some projects. If the current govt fails in doing that, you know what to do :) Prudent, wise and productive spending is key for our nation to survive in the next 10 years. Love your country, it is still not too late.
 

Thursday, July 22, 2010

Starting Out in Stock Investment


For stock market, I will recommend you the following books as starters which can be directly applied to Malaysian market. By order of difficulty.


Your Guide to Profitable Trading (Who Says Stock Investing is Difficult?) (Fourth Edition)
Author: Pauline Yong
MPHOnline.com::I Love Stocks

How to Make Money from Your Stock Investment Even in a Falling Market
Author: Ho Kok Mun
MPHOnline.com::How to Make From Your Stock Investment

Essential Stock Investment Strategies to Make Money Even in a Falling Market (Revised Edition)
Author: Ho Kok Mun
MPHOnline.com::Essential Stock Investment Strategies

Dividends Don't Lie: Finding Value in Bursa Malaysia Blue Chip Stocks
Author: Wermine, Bill

MPHOnline.com::Dividends Don't Lie

Supercharge: Your Investing Approach For Big Profits
Author: Martin Wong
MPHOnline.com::Supercharge




Here are some advanced levels of learning:

Warren Buffett and the Interpretation of Financial Statements: The Search for the Company with a Durable Competitive Advantage
Author: Mary Buffett and David Clark 
MPHOnline.com::Warren Buffett



The Intelligent Investor: The Definitive Book of Value Investing
Author: Graham, Benjamin
MPHOnline.com::The Intelligent Investor
*Must read*




The above books have shaped how I view stock market as an investment vehicle and how it has helped me in wealth creation. I currently have a basket of books pertaining to volume spread analysis, network marketing & internet marketing, residential & commercial property, bionutrition, nutritional supplements exposed and a learning chinese book haha. So much to read, I will post them like I did if I find out they are good reads.

Through Inspiration & Motivation

To share a few of the best wealth & financial quotes which has had an impact in my life and serving as a source of inspiration. 


Wealth is the number of days you can survive forward with the same lifestyle when you stop working tomorrow
- Robert Kiyosaki -
**To make this personally profound, ask yourself: how many days do you have?**
**You could be rich in possessions but not wealthy at all**

The gratification of wealth is not found in mere possession or in lavish expenditure, but in its wise application.
- Miguel de Cervantes -

Never buy what you do not want, because it is cheap; it will be dear to you.
- Thomas Jefferson -

Once you experience being in control of your financial future, it really is addictive.
- Hazzard -

Also some songs to keep listening whenever the going gets tough. If you observed carefully I have now placed my financial goals for 2nd half of 2010 on front page to remind myself constantly everyday on what I need to achieve.




 
"The mind is the most powerful tool in wealth creation" 
**If you can create new standards in your work, why can't you do that with your financial?**
 
 


 
"Never give up on your dreams & goals" 
**The first attempt is always hard but it gets easier as you learn** 




 
"Malaysia's govt maybe hopeless, but it is you who will make the difference" 
**Help the needy, give & you will receive, love your country this is your true home**
 
 

Tuesday, July 13, 2010

World Cup 2010 Review


How quickly time flies and World Cup 2010 comes to an end, now I have to wait another 4 years :( Before jumping into the review section, let's do some facts check. The FIFA World Cup is the most widely viewed sporting event surpassing even the Summer Olympics. It is expected to be viewed by nearly 1 billion people worldwide for the 19th FIFA World Cup in South Africa. This is also the first time an African nation is to host the finals. 

That cute official mascot is called Zakumi, a leopard with green hair. ZA the international abbreviation for South Africa and the term kumi which means 10 various African languages. The colour yellow and green is also the host nation's playing strip. The match ball is named Jabulani which means "bringing joy to everyone" in Zulu. 

32 teams were selected for participation from a worldwide qualification tournament of 204 countries in which Malaysia was in but did not go through as expected. By history, the titles winners are as below. As you can see only South American and European countries. Kudos to their football standards! I hope I will one day see an Asian team win before I leave this world.

Brazil: 5, Italy: 4, Germany: 3, Uruguay: 2, Argentina: 2, England: 1, France: 1, Spain: 1 (2010)

The official song is "Waka Waka" which is performed by Shakira and the band Freshlyground from South Africa. Watch it below together with another great song by K'naan & David Bisbal "Wavin'Flag" a mix of English & Spanish. No wonder they win la.





Ah we must also never forget about the vuvuzela, a long horn blown by fans and spectators throughout matches :) If you have Astro HD I am sure you will complain about the ambient audio feed from the stadium which only has sounds of vuvuzela.



The most amazing of all in this world cup must have been Paul the Octopus who correctly predicted the winners of each of the seven 2010 World Cup matches that involve the Germany team and is also correct for the Finals. See Paul_the_Octopus for details.




And finally aboi's performance for the entire world cup for every single match. I did not achieve my ultimate target but nevertheless still delighted. Is there a secret to my success? YES, Ask me haha! My success only applies to big tourneys not leagues, I have no written prove on my successful campaigns of World Cup 2006 & Euro 2008 but my friends can testify LOL so this will be my first and certainly not the last =p.

Let's look forward for Euro 2012 Poland-Ukraine & World Cup 2014 Brazil. Wanna join me?

Remarks: /2 denotes half, *x where x is the multiplier of the usual stake. Above odds are asian handicap odds. Because I am Asian ma. I hope Google doesn't ban my account for posting this :)

On a side note to those that totally opposed gambling, let me share with you my thoughts in a few simple points:
  1. Gambling with no strategy nor any exit limit is quite BAD.
  2. Gambling with borrowed money when you're in a net loss is very BAD.
  3. Gambling your retirement with poor financial intelligent is extremely BAD.
  4. Gambling your health & safety without insurance is well the WORST.
Yes! Did it register into your mind? Gambling does not come in the form of sports or numbers, you could be risking your future life and health as well. Do you see my point now? Gambling or speculating is always exciting but do it cautiously and for mere entertainment purpose. Hence, you must remember to gamble with a clear enter & exit strategy and always bet within your limits. The same goes to investing though investing with proper knowledge has fantastic gains and less heart attacks.


I just remembered to add these nice videos with my picks. Enjoy! What is World Cup without nice scoring goals :)

0:58 Miroslav Klose (Germany)
1:56 Maicon (Brazil)

0:39 Diego Forlan (Uruguay)
1:14 Gonzalo Higuain (Argentina)

1:15 Luis Fabiano (Brazil)
2:17 David Villa (Spain)

0:52 Lukas Podolski (Germany)
3:16 Carlos Tevez (Argentina)

2:16 Giovanni Van Bronckhorst (Holland)
2:58 Maxi Pereira (Uruguay)

Monday, July 12, 2010

Consumer: Ajinomoto Malaysia Berhad


Introduction
Ajinomoto has been producing AJI-NO-MOTO monosodium glutamate since 1964 and was subsequently listed in 1970. It is also one of the very first japanese joint-venture companies to be set up in Malaysia. Its parent company owns a 50.05% stake while Amanahraya Trustees Bhd owns 11.95%.

Aji has successfully diversified into production of other flavour enhancers but also into seasoning mixes, low calorie sweeteners and organic fertilizer. However, the group remains well known for its flagship flavour enhancer; Aji-No-Moto which is believed to command a overwhelming 85%-95% of the MSG market in Malaysia. The business model of Aji is relatively simple just like Dutch Lady, no subsidiaries nor associates.
They have other brand products which you might have heard such as Tencho (industrial food seasoning), Aji-Shio (flavoured salt and pepper), Seri-Aji (fried rice seasoning powder) & Pal Sweet (low calorie sweetener).

Fundamental
1. Does the company have an identifiable durable competitive advantage?
Having almost dominate the entire MSG market in Malaysia and is an indispensable item in almost every Malaysian home, it has a sustainable competitive advantage as a dynamic food seasoning manufacturer brand name that is trusted by Malaysians for decades.
2. Do you understand how the product/service works?
Aji's product is based entirely on umani which was recognised globally as the 5th taste, different from the other four basic taste (salty, sweet, bitter and sour). It is this new taste that Aji relies on for its business. Aji-no-moto if you don't know stands for essence of taste.
3. What is the chance that it will become obsolete (KO) in the next twenty years?
The answer is simple: NO. Though MSG has been hit by some quarters saying that it is bad for health, every concerned public body that has ever investigated it has given a clean bill of health. Maybe except Consumer Association of Penang (which I find BS as they list almost every food bad, then what am I to eat le?) The only concern in the near future would be MSG-phobia folks on the rise and that could slow down growth.

4. Does the company allocate capital exclusively in the realm of its expertise?
Yes, and it has low diversification policy therefore able to utilise existing plants and equipments with little hassle.

5. What is the company's financial history and status?
  • Net Profit Margin is in the 8-10% range. This quite similar to Dutch Lady, also a consumer stock albeit different market segment.
  • Return of Equity which means how much shareholders get in return of investment is in the 10-14% range over the last 10 years.
  • Revenue Growth Rate saw a tumble in 2006 & 2007. This is due to increase on global fuel oil prices that had a big impact in operation cost. This tumble is even greater than in the 2009 meltdown which suggests that Aji's Achilles heel for better revenue figure is crude oil price.


  • Note that there is a change in financial year in 2001 therefore excluded.
  • Earnings Per Share & Dividend Per Share is on the rising trend over the past 10 years with the exception of 2006 and 2007 (very high global oil prices if you remember it was usd120++). 
  • I like the fact that they increase dividend payouts in tandem with their earnings. Kudos to Aji here!
6. Is the company conservatively financed?
Yes and with no debts. Aji has RM43mil in cash and bank balances enabling the company to deal with future high oil prices. What is amazing is that Aji has been debt-free from 1985 to present. I got this piece of Info from Dynaquest.

7. Is the company actively buying back its shares?
The only time the company has issued a bonus of 1:2 is in 2002. With little capex required for expansion or upgrades I don't see they have a need for more capital funding. They could probably issue a bonus within the next 5 years time-frame to dilute the share price to make it more trade-able for investors. This is just a wild guess :)
8. Is the company free to raise prices with inflation?
I have no such data. Aji is quite low profile with little news going around. BUT being the dominant player for MSG in Malaysia, they can easily adjust the selling prices of its product to protect its margins.

9. Are large capital expenditures required to update plant and equipment?
No, considering its relatively stable food operations which require minimal capital expenditure and low diversification policy.

Discounted Cash Flow Analysis
DCF treats a company as a business rather than just a ticker symbol and a stock price which most blind people think that price only matters. It requires you to think through all the factors that will affect the company's performance and gives you an appreciation for what drives stock values. Go to Investopedia.com and learn.

I have estimated that AJI's revenue growth rate is at 11% for the next 2 years and 9% for the last remaining 3 years because I think oil prices will bounce back higher owing to lack of supply. 91% operating cost margin, 25% corporate tax, 2% re-investment for the next 5 years. Having computed all these in my opinion it is fair to buy..


AJI at RM3.16 to RM3.86 for ~15-13% discount rate.
If you would have bought at the start of the bull run in 2001 (say RM2) after the dotcom crisis, the stock would have given you a 10% per annum gain not accounting dividend reinvestment which would give you more. Below will show you AJI's stock price historical performance.

What Do I Think? 
Currently it is overpriced based on my estimates. Having said so it could still be worth to purchase for a 10% discount rate since I would expect the share price to grow only by around 10% per annum.


The only problem is global fuel prices because energy and water are used in large quantities in the manufacturing process in Aji's products. As oil becomes more scarce which will happen in my lifetime, it will inevitably lead to higher oil prices. What will Aji do then, use a different source of energy?


On the bright side, Aji is doing extremely well at what it does best. Though a large portion of its products is for domestic consumption (~70%), they do export to other Asian countries (~23%) and to the Middle East countries (~7%). Sales from export is important as the local market becomes saturated and Aji is heading on the right direction.


I do not deny that Aji is a good stock to own as the dividend yield is ~4.5% plus reasonable capital gain. Between Aji and Dutch Lady, I will still choose Dutch Lady which has a higher dividend yield :) Gogo baby~!






The Question of What Is A Stock?

This became a topic of sharing coincidentally when someone asked me, what is a stock? Does it go up and down, because of certain factors? In reality many people do not have a proper understanding of the stock market. What they really know is just about the price and that piece of news. These people are what we call speculators, people who take financial action (buying or selling) in a manner that has not been given thorough analysis OR have thoughts on their margin of safety (no investment strategy).

Investing in stocks is not the same as gambling! I need to repeat this many times. Certainly there are risks involved in nearly all financial investments that include fixed deposits as well. It differs from gambling because the shareholder has purchased a fraction of a company. Gambling faces the situation of win or lose, you are against the odds. I would also agree that gambling has their own winning strategies but this is a separate topic but just to point out that investing in stocks is not gambling unless you speculate like most people do with little knowledge.

So What Is A Stock or Share?
It represents part ownership of a company, I call it a piece (you) of the big pie (the company). You invest a part of your money into a business and the result is you are a stockholder or shareholder of the company. I will use shareholder from now onwards.

With that, you are entitled to dividends, bonus issues, right issues and be invited to their Annual General Meeting (AGM). Given the total amount of money invested in a business, a share has a certain declared value which is known as par value of a share. This par value of a share was the share price upon initial public offering (when the pie was first presented and distributed for others to grab). Pie presented would mean the company goes public and listed in the stock exchange. This is called Initial Public Offering (IPO).


Referring to the above diagram, Aboi is the major shareholder because I hold 33% of the units, followed by Ahmad. The rest could be considered minor shareholders. You need to know that major shareholders play a BIG role when decisions to be made for the company that requires voting.

Now How Does it Go Up and Down? (Emotionally)
There are two common quotes that are misleading in stock exchange and those are being quoted many times again with little knowledge even by the so called experts and sadly a lot of people accept them immediately at face value.
  • "For every buyer there has to be a seller"
  • "All that is needed is when two traders are willing to trade at the correct price"
It is true that when you buy, somebody may be willing to sell to you. BUT when you are willing to buy, you are only buying a small portion of large blocks of sell orders that have been placed on the market-makers' books long before you took your actions. These sell orders are stock waiting to be distributed at a certain price levels and never lower. Who are these market-maker's? Professional private syndicate traders that work to sell or buy large blocks of stocks.

Say the company is promising, the lower prices at RM1 looks attractive. Not all issued stock can be accumulated by the market-makers, some are tied up like to aboi who is the major shareholder. Hence they look for the floating supply, the remaining 3000 units of the total 30k issued stock. Once there is no more supply, only demand to buy at higher prices will we see share price increase. So now you have the making of a bull run!

Now let's coin that Ahbeng wants to sell all his 3000 units at RM1.2 and Ahlian her 2000 units at RM1.1, these are sell orders and the market price will be supported until these are exercised. Once sold will weaken the market. Any selling has to be absorbed by the market-makers so some of it will be executed immediately while some will go into their books, again accumulating floating supply. If selling happens to be so great that prices fall fast, the market-makers will usually stop the selling by buying so the price will be supported. They will then very sneakily take the chance to sell more stock on the next wave up for short profit taking. This process takes time to slowly complete.

GENM is a good example especially the last selldown, very high sell volume but the price did not went down as hard as the previous selldown. WHY? There are market-makers who are buying to support it and they are buying at extremely large blocks, this is done behind the scenes.

Once these market-makers and other professionals like fund traders have sold all their holdings, we will see what we call a bear run because there is no professional money supporting the high price. This will happen when they think that there is no more demand to "char a.k.a fry" for higher prices. 

If you like to speculate, I call it gamble, this is the game you will be playing against, tough ugh? Now do you see the reason why so many people lose money in the stock exchange, become discourage and then spread news saying that you can't make money there. Stock market is simply a tool where rich people designed it to take money from not-so-rich people. So please learn, think like them and have an investment strategy. It's not just all about price. Think about the volume, the news going around and economic conditions!

So let's recall the earlier two quotes:
  • "For every buyer there has to be a seller" - partially correct but it's never a one buyer one seller scenario. You can be buying a part of the large blocks being ready to be sold at a certain price and vice versa.
  • "All that is needed is when two traders are willing to trade at the correct price" - wrong, the market is not a balancing scale. If so you won't be able to see a bull or a bear run. Prices are real time and they fluctuate based on volume either being executed immediately or still floating around.
Now How Does it Go Up and Down? (Rationally)
Now we look at the fundamental side. The keyword here is called shareholders' equity which represents the amount a company is financed and is defined by the following formula.
  • Shareholders' Equity = Total Assets - Total Liabilities OR
  • Shareholders' Equity = Share Capital + Retained Earnings - Treasury Shares (ignore this for simplification)
  • **Share Price = Shareholders' Equity / Outstanding No. of Shares**
As you can see, the equity comes from two main sources. The first being the original source of money that was invested in the company during IPO plus some additional investments made thereafter. The second comes from retained earnings where the company is able to accumulate wealth over time through its successful operations or ventures. 

The most important factor that affects the value of a company is its earnings (the second source). It is crucial to pick a fundamentally strong company with a sustainable business model. This also brings back to my earlier post in Dutch Lady which mentions that a boring stock (little trade volume activity), can grow in price as long as the company is growing shareholder equity through retained earnings. If the company makes money you are certain to see share price increase, if the company has net losses you are also certain to see a drop in share price.


Bonus and rights exercise also affects the share price. In example, say a bonus of 1:1, this means you are given one share for every one share you own right now. You will say WOW but think again, you have the same pie just that the pieces are now being broken even smaller. Thus, the value is the still same, we call this share price has been diluted by bonus issue. 

Why do companies do this then? Issue bonus shares convert part of the reserves into capital where the company can use for various reasons such as expansion or etc & also to make the share more trade-able to more people because the share price has diluted. Again this can entice people to invest and the company gets more capital funding.



Bonus issues are taken as a sign of the good health of the company and is a part of my criteria of a fundamentally strong company unless there is a good exception. That's because the stock is now more liquid, more shares, easy to buy and sell. By issuing bonus a company is in a position to service its larger equity now. Company is confident of being able to increase its profits and maybe distribute dividends in the future.

Conclusion
Having said so much, of course it is not just earnings that can change the sentiment towards a stock and its price. It is also affected by investors' attitude and expectations of the future value of the company. Many times we see hot stocks go up and down fast, mainly driven by speculators. This is the emotional side of investing and market-makers take such advantage of the conditions. Some times we see less of that in other stocks and they quietly grow in value in the long term.

Someone even told me that in year 2000 tech companies were doing so well but let me tell you that the prices are not justified by their earnings as you can see below. The prices of these hot stocks were fried up so high by speculators and guess who made money? The market-makers. If you were one who did not sell your tech stocks at that time, well too bad you won't be able to see it again not until the next generation assuming history repeats itself.



So the key is to estimate the actual value of the company (I use DCF as you know in my previous posts) instead of looking at the perceived value (share price). This is what I call investing with knowledge. I hope I answered your question of what is a stock :)

Thursday, July 8, 2010

RON95 vs RON97, My Experience

 We have seen numbers like RON95 and RON97 in petrol stations. At the time of writing, fuel with a RON97 rating is priced more expensive at RM2.05 per liter while RON95 is going for RM1.80. I do not blame the govt for higher fuel prices in future. If we want to grow into a developed country things have to get more expensive, common economic sense. Ubahla gaya hidup a.k.a Change your lifestyle. The question is which is better? Why is RON97 more expensive than RON95? What is the difference? Should I opt for the cheaper fuel? Let's tackle these questions one by one.


What is this RON rating?
It stands for Research Octane Number, a rating or measure of the knocking resistance of petrol in spark-ignition internal combustion engines. Mumbo-jumbo explanation? Well, knocking refers to parts or all of the air-fuel mixture prematurely ignites before the flame from the spark plug can reach it. Thus causes a decrease in performance and could to a certain extent damage the pistons of the engine.
Lower octane can handle less amount of compression before igniting. Imagine being compressed halfway and the fuel kabooms which implies that knocking can happen easier when using lower octane fuel such as RON95.


Why is RON97 more expensive than RON95?
With a fuel that is able to handle higher compression before ignition certainly means a better fuel quality. Therefore it is fair to say that quality commands a better price. As simple as that.


So which is better?
Basically the compression ratio of your engine determines the octane rating of the gas you must use in the car. It is a big misunderstanding to think that RON97 fuel produces more power than RON95 but in reality higher rating means less fuel burns less easily (reduction in premature ignition). Engines are designed to have a minimum RON rating for its fuel. There are three official ways to check:
  1. Check your service manual or booklet for the minimum RON rating that it requires. 
  2. Check if there is a min octane number rating at the back of the fuel lid cover.
  3. Ask the car manufacturer or the salesman. If he/she can't answer better not buy the car from that sohai person.
  4. Or, refer to the reference table below (not a complete list though). The effects of using lower RON then the min requirement means knocking will happen!
 
Note: The reference table is just for guide purposes only, for confirmation please contact your nearest car manufacture service center. 

BUT...hear aboi out first :)
I have tested both RON95 (Shell Fuel-Save) and RON97 (Shell V-Power) on my Myvi (AT) 1300 cc. Before showing the results, it is good to know what are the variables I am trying to fixed during my trial run.
  • No additional weight in my car (no extra things/burdens in my boot)
  • Average driving speeds of 60kmph-80kmph. I follow speed limits after some hard learnt lessons.
  • I do not rev or "lap" above 2500 revolutions per minute. No more ah beng style.
  • I always inflate my tires to optimum pressure each time I refill my tank.
  • 90% of my driving mileage is from home to office and vice versa.
With RM50 I will get 27.78liters of RON95 and 24.39liters of RON97. The results are 350km for RON95 and 310km for RON97. It was higher last time because my tires are quite worn out after 3 years (I will change soon). This translates into:
  • RON95: 12.60km/liter
  • RON97: 12.70km/liter (RON97 fuel is marginally better!, I guess also more green as I use less fuel)
The performance of RON97 is the thing that made me go WOW! in comparison to RON95 where I feel there is not much pick up & makes my car feel underpowered. RON97 indirectly delivered more power from less knocking. I can testify that using RON97 will make your driving more pleasurable & enjoyable.


Should I opt for cheaper fuel?
My answer is NO, I will be using RON97 now onwards. Results have shown that using RON97 has comparable mileage to RON95 while using less fuel at the same time, this only means I have avoided a chunk of knocking happening inside the engine. 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).

My monthly fuel spending equates to RM200, I drive almost 1400km each month. A 160km setback while on RON97 means an additional RM26 on top of RM200. I could offset by changing my driving style as I start to get familiar with RON97 or I just pump it. If the latter, RM26*7years*12months = ~RM2200. That is still hell a lot cheaper than buying a damn new car!

I would conclude that RON95 is applicable in highways or cruising mode but RON97 is more suited for city driving where performance matters at low gears because we tend to stop a lot more often. Try it, experiment with it, I highly recommend RON97.

Sunday, July 4, 2010

Day 3: Off to Wuxi

Our aggressive bus driver slapped himself with a nice "bak kua" ticket for illegally parking in front of the hotel in a no parking zone LOL. That is how we started our day. We are off on a journey to Wuxi city, population of about 4.5 million residents. This is also the place where Sunzi or more famously known as Suntzu wrote "the Art of War" when he helped the king in military affairs.


The entire complex is enormous forcing us to take the cabbie surprisingly in yellow colour too instead of walking. We arrived at Lingshan Brahma Palace as our first pit stop for the day. The grandeur structure is made partly from gold and is very majestic with intricate & mesmerizing craftsmanship. See for yourself, if you think Penang Keloksi is grand what till you see this :)


Sprawling colourful neon illuminating and bringing life to the dome.

I certainly won't miss this out. The hottest photographed chick we have seen to-date since arriving in China. (of course got better ones but no photos, no evidence)

This has got to be the biggest hand I have seen in my life. The bright surface is where people have been circling the hand for good fortunes, some form of blessing apparently. Beat that Hand of God Mr. Maradona! Yours too small la.

We made this discovery "Chinaman English". Can the bus run? Stable? If only I could sit using part of my butt only. Don't worry there is no way to go up, go where up ah? how to do that when bus is running le.

We then head over to Lake Taihu (2,250km²), the third largest freshwater lake in China and is about averagely 2 metres in depth. The lake was formed as a result of a meteor impact 70 million years ago. Here we are the shooting site of "Red Cliff".

Wuxi/TV Base is the first large scaled base for movie and TV shooting and for tourism built in China constructed back in 1987. It is given the title of "Oriental Hollywood". There was even an eye-catching performance of cavalry combat, a set from the 3 kingdom movie. Pure delight for action photography.

Had dinner somewhere in town but it wasn't really nice, no pics. Signing off at night in a shopping mall in Wuxi city before heading to a new hotel. You gotta love the Haiboa(s), they are everywhere!

Genting Malaysia UK Acquisition Move [Updated]

Genting Malaysia was one of the top losers during last trading week, slumping as much as 10% in value during intra-day trading. What happened? GENM has proposed to acquire Genting Singapore PLC's operations in Britian (Genting UK) and many viewed the investment as pricey in a risky market. Is it really that bad? Read thestar.biz for analysts comments & come to your own conclusions.
Well for me I think it is too soon to tell, it will most probably take two-three years at least to find out if that investment pays off. Given the tough regulatory environment in the UK; higher gaming duties, smoking ban & removal of some category of games & 2008 financial meltdown, it will take years & many efforts by GENM to improve Genting UK. It is therefore important to keep track of Genting Malaysia's financial performance each year by scrutinizing their annual reports. 

Second, GENM is still in surplus cash even if the acquisition goes through. They would still be in a healthy ~RM3 billion and would still be looking out for other investing opportunities. This is another assurance that I can say which makes GENM still a stable company. 

BUT I do agree that they could have utilize that cash in a better way than to buy a "old man" casino in the UK where competition is strive, it's pretty much a red ocean there. Expansion I believed has to come from Asia where the world's economic growth can be clearly seen shifting from western countries to more modern Asia countries like China, Indonesia & Vietnam.

[Updates] Malaysia Finance comment on GENM's move


GENM share slump is a classic example of people reacting negatively & unnecessarily on bad news which is further amplified by most analysts who says that it is a wrong move. It is not a wrong move, just a bad one. GENM has the cash and is utilizing it for the good of the group and to help their sister company Genting Singapore. Fundamentally Genting Malaysia is still fine, this is why if you are a fundamental investor you need to hold your breath and ride through such volatility which is all very common in the stock market playing field.

There is another type of investor who profits using incremental trading strategy. The caveat? You need time, much more time than being a pure fundamental investor. This means selecting the optimum point in time to make a transcation: either to buy or to sell. The "buy-and-hold" strategy is similar with the exception that you buy when time is bad AND usually this strategy has a longer timeframe (buy at bear market or when it is undervalued).


The incremental trading strategy uses fundamental + technical analysis and uses both together as complement one another. Fundamental tells you which companies are sound and worth to invest where else technical would tell you when to invest or divest by looking at volume and price. In other words this form of technical analysis is called volume spread analysis (VSA). VSA is something I look forward to invest my time in the near future. Once you have the basics of fundamental knowledge I reckon that VSA will be the next step in becoming a more successful & adept investor. I will certainly share my thoughts once I feel than I am capable in that area. A very good book to start would be "Master the Markets" By Tom Williams. You can download it here.