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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.

Tuesday, August 31, 2010

Trading/Services: Parkson Holdings Bhd

Formerly known as Amalgamated Containers (ACB) but exited from the dry cargo container manufacturing in 2002 after 12 years of trying. Following the exit, it ventured into three core activities which are motorcycle/automotive, steel services and international trading businesses. Again except for East Crest International Limited, whose principal activity is investment holding, the activities of all other subsidiaries and its associate were discontinued upon the completion of the disposals of the subsidiaries and associate on September 19, 2007.

Eventually the company changed its name into Parkson after acquiring the brand from Lion Diversified its retail assets. The Company acquired new subsidiaries whose principal activities are in the operations of department stores. On June 11, 2008, the Company acquired Prime Yield Holdings Limited. On June 11, 2008, the Company’s subsidiary, Parkson Corporation Sdn Bhd, also acquired Kiara Innovasi Sdn Bhd. In October 2008, the Company acquired a 30% interest in Nanning Brilliant Parkson Commercial Co., Ltd and the list goes on.

Lion Group boss Tan Sri Wiiliam Cheng holds a 21.9% direct equity stake and 32.5% indirect stake in Parkson Holdings Bhd. Amstell Mills Sdn Bhd also a Lion Group's steel product unit holds a 14.88% direct stake. Meanwhile Parkson Holdings owns a 51.5% stake of Parkson Retail Group which is listed in Hong Kong Stock Exchange and provides exposure to China market.
Now Parkson is a pure regional retail player and operates as you know the "Parkson" brand in China, Malaysia and Vietnam. It has 35 stores in Malaysia. In China, it is the largest department store chain with 43 stores across 26 major cities. The China retail operations are listed on the Hong Kong Stock Exchange via Parkson Retail Group in which its investment arm, East Crest International holds a 55% equity interest. In Vietnam it has 6 Parkson department stores (Ho Chi Minh City, Hai Phong and Hanoi). 

1. Does the company have an identifiable durable competitive advantage?
Being no.1 in China, Malaysia and Vietnam as the largest department store chain is something to boast about. Competition in China is nevertheless heating up with foreign retail players like Wal-Mart Stores Inc and Carrefour SA but they are less than half Parkson's size and operate in quite a different market segment. China also has many many small retail players. In Vietnam, Parkson is dominant while in Malaysia it faces off Isetan, Metrojaya and Tangs in which both are not as big as Parkson either.

2. Do you understand how the product/service works?
Parkson's business model is one that not many people are familiar with. Its focus is on asset-light strategy where it does not own many properties but letting out space to branded names with long term leases and gets commission from sales (called concessionaires). Parkson does not tie up its cash with unsold inventories therefore not an operating expense to worry. The inventory is handled by the manufacturers of the brands instead. 

3. What is the chance that it will become obsolete (KO) in the next twenty years?
Not through my eagle eyes haha. Retailing has been an ever increasing business line since the days shopping malls started. As long as you have a growing population or a big base of population with improving income levels, retailing will always survive as people need somewhere to dispose their hard earned cash.

4. Does the company allocate capital exclusively in the realm of its expertise?
Yes. Ever since it has gone into pure retail in late 2007, it only has plans to expand in its expertise which is retailing. Long gone are the days it tried to venture into different fields. Their said natural expansion will be into the Indochina retail market namely Cambodia (Phnom Penh) in 2012 and also to strengthen their grip in China, Malaysia and Vietnam with 12 additional stores by end of 2010 spending around RM250 million in the process.

5. What is the company's financial history and status?
Financial Chart 1 [Updated]
Net profit margin after taxation and return of equity trends well. I took off the 2007 growth rate as it was 400% after divesting old businesses and go into pure retail.  Also I had to use the 3-year average for the company vs 5-year average of the industry (I have no idea how to get the 3-year average of the industry) is as:
  • Net Profit Margin: 23.40% vs 1.29% (Industry), 12.04% (S&P 500)
  • Gross Profit Margin: 62.59% vs 22.72% (Industry), 28.88% (S&P 500)
  • ROE: 25.76% vs 6.65% (Industry), 10.16% (S&P 500)
  • Revenue Growth Rate: 10.34% vs 8.31%, 9.93% (compounded annual growth rate or CAGR)
[Updated] ROCE the true returns to shareholder equity is half of the ROE. If you read on later you will know that Parkson has debts and a lots of them. This big gap between ROE and ROCE simply means Parkson has been able to create so much value to shareholders because it is leveraging a lot from debts. Nevertheless, they have been paying it off as scheduled and you can see that a convergence could very well happen in 2010 or 2011 assuming they continue to par down the debts. With so much cash in hand, they could also close the gap in just one year.
Ignore the pre-retail years (<2007). Earnings Per Share has been on the rise in post-retail years (>2007) with a growth rate of 10.69% thanks to strong retailing income and the divestment of non-profitable business lines. 
Parkson does not have a dividend policy yet but it has been paying out almost half their earnings as dividends to shareholders. Thus there is no clear financial number to show how strong their dividend payout is. A 50% payout ratio is probably a good estimate.

6. Is the company conservatively financed?
Parkson does have a lot of cash in hand with RM2 billion as of 2009. BUT they do leverage on debt as well also around RM2 billion. DE ratio has been at 1.67 (2007), 1.53 (2008) and 1.16 (2009), it is on the downtrend. A ratio greater than 1 indicates that a company has more debt than assets but don't forget Parkson runs on asset light strategy. They managed to par down the ratio by acquiring new assets (new department stores) & improve shareholder equity. If they really do want to pay off they can just do it with that big pile of cash in hand.

7. Is the company actively buying back its shares?
There were many buybacks since 2008 until now. Buybacks turn shares into treasury so in 2009 there was a 1:100 treasury share distribution to each investor.

8. Is the company free to raise prices with inflation?
Parkson does long term leases and profit sharing with their brand partners. As far as Parkson is concerned, it can only raise the price of leasing and have no control on product selling price.

9. Are large capital expenditures required to update plant and equipment?
Reasonable large as Parkson is targeting a 15%-20% retail space growth annually or 9-12 new stores, China (5-6), Malaysia (2-3) and Vietnam (2-3). Parkson also needs cash for potential merger and acquisition opportunities and retail property acquisition. This is why they do not want to simply use they big horde of RM2 billion cash in hand to pay of debts unless absolutely necessary. 

Discounted Cash Flow Analysis
I only have 3 years worth of historical results of Parkson to try and project the revenue for Parkson in the next 5 years. Instead of using 10% revenue growth rate, I will use 7% to be slightly conservative.

Operating Costs: 70% of revenue
Corporate Tax: 25%
Capital Expenditures: RM300 million growing 10% each year
Depreciation: RM125 million growing 10% also each year
Working Capital Cost: 5% each year as asset light model does not require a lot
Discounted Rate: 10%

Parkson Holdings Bhd is fairly valued at RM6.60. Yes you heard me :) The current trading price of RM5.48 puts it at a big discount. The P/E ratio of Parkson is at 21.07 with S&P 500 at 16.10. It shows you high multiple which an investor is willing to pay RM21 for RM1 of current earnings for the stock. The China retail industry PE is 20.9. A high P/E ratio could also indicate that the market has high hopes for this stock's future and bid up the price. It could also mean it is an overpriced stock. With DCF saying otherwise and other retailers in China with the same PE valuation, Parkson's PE is normal in such industry in my humble opinion as investors remain upbeat with high expectations in this sector.
The stock came crashing down hard before the 2009 meltdown after restructuring of ACB selling off its steel service and electronics business. During the meltdown instead of going down it gradually increase to date. 

One reason why Parkson has not been trading at its fair value is because there is lingering concern of the state of other companies under the stable of the Lion Group. Lion Crop, Lion Diversified, Lion Industries are all in net debt positions. Amsteel Corp Bhd and Silverstone Corp Bhd were also removed from Bursa Malaysia before due to debt problems. The Parkson stock does not command the premium it should because investors are concerned with the health of the other companies though not related directly except for having the same major shareholder, Tan Sri William Cheng.

Parkson is the single one company in Malaysia with tremendously large exposure to China consumer market. China having recently just taken over Japan as the world's second largest economy will see China consumer spending taking off as the government is switching growth from expansionism to sustainable growth via domestic spending. Similar to the model in the United States which resulted in the world's biggest consumer market to date. Although it is already the largest department store chain in China the scope for expansion is still tremendous.
I like Parkson so does Tan Teng Boo, fund manger of iCap because it provides a cheaper alternative to the robust China retail consumer industry at undemanding valuations. RM5.50 vs Parkson Retail Group of ~RM6.80. With operations in Malaysia providing consistent profitability & the already profitable but small Vietnam operations, prospects for Parkson looks good. Vietnam with a population of 80 million people is in a current economic state which is quite similar to China 20 years ago which will undoubtedly grow as a powerhouse in the Indochina region. Vietnam will one day surpass the earnings of Parkson Malaysia.

If you are one that has tried to invest in China equities via funds I am quite sure to say that they are not performing well as you expected right haha. This is mainly due to China stock market that is speculative in nature and the performance of its index does not correlate very well with the economic growth. Why not go with Parkson Holdings? I also foresee that Parkson Holdings will have a dividend policy in order to maintain its status as a cash-generating jewel or cash cow. Almost all companies that generate a lot of income sooner or later will begin rewarding shareholders via good dividend payouts (Panamy, DutchLady, GenM to some extend and etc).

If you are like me holding some shares in ICAP, then you already have exposure to Parkson Holdings. At RM5.50 I would still choose to go into Parkson Holdings directly and hold it long-term 5, 10 or maybe 15 years until you see China overtakes US as the world's largest economy estimated to be in the year 2030-2035. I need to say this: Buying into Parkson is an aggressive investment perhaps one of my most because:
  • The Lion Group does not have a good track record but Parkson is totally a different entity just the same boss.
  • Parkson has debts and the ratio is more than 1. I would normally not invest in companies with more than ratio 1 but I have said before there are exceptions, very few.
  • Little data only 3 years since it went into pure retail although Parkson brand started in 1985 but there was no accounting records I could find.
  • China arena is nevertheless competitive. The country is simply too big for just one player to dominate unlike Malaysia.
If you have the appetite to eat such calculated risks & be as optimistic as me then you are OK la if not I would recommend ICAP instead of Parkson directly. I still can find something cheap at such bullish times. This is my Merdeka present for all my readers :) Happy 53 years old Malaysia!

Sunday, August 29, 2010

Consumer: Panasonic Manufacturing Malaysia Bhd

Panamy previously known as Matsushita Electric Co (M) Bhd was formed in 1965 to manufacture household products under license from Matsushita Electric Industrial Co Ltd, Japan. Since then its focus has mainly involved in the manufacturing and distribution of electrical products which consists of consumer electronics, home appliances, batteries, office automation, project systems and room air-conditioners under the well known brand name of Panasonic.

The corporate structure of Panamy remains simple just like DutchLady structure. Panamy has a simple 47.45% owned associate which is Panasonic Malaysia Sdn Bhd (PMSB). Malaysia's Employees Provident Fund Board (EPF) also has a 6% stake in Panamy.

Export sales contribute about 50% of Panamy's turnover. Destination countries are Japan, Thailand, Singapore, Hong Kong, Vietnam, North America, Latin America, Europe, Africa and the Middle East. As you can see very diversified globally. Locally, Panamy has about 20% to 25% of the market share. The competition in the electrical sector is very intense which you probably can observe easily when shopping.

1. Does the company have an identifiable durable competitive advantage?
A mixed bag here. They are no.1 in terms of sales for air-conditioners. Panasonic's front loaders enjoy a 28.5% market share in Malaysia. Others include a 40% to 50% share of the fan market, 60% share of the rice-cooker market and 67% of the phone products market. Not so well include audio-visual products such as plasma TVs/flat screens and their Lumix range of digital cameras. There is a big list of items. Though it is a extremely well known brand for many years the industry is competitive but has an advantage as the brand is firmly entrenched in Asia.

2. Do you understand how the product/service works?
Every household needs appliances and they usually have a lifespan of 5 to 10 years before either get broken or be replaced with newer models. A growing population and increasing home sales will see demand on CE products at the same pace. What impresses me is that Panamy has incredibly high inventory and receivable turnover ratios. This simply means it sells it goods very quickly & gets money back quickly without holding them in warehouse for too long, thus inventory has almost no lost value.
  • Inventory Turnover (days): 10 days to 15 days
  • Receivables Turnover (days): 25 days to 35 days
  • Industry Inventory TO avg: 5.17 months
  • Industry Receivable TO avg: 6.42 months
3. What is the chance that it will become obsolete (KO) in the next twenty years?
No. It is an essential to have these kind of products at home in this age.

4. Does the company allocate capital exclusively in the realm of its expertise?
Absolutely. It has no expansion plans in the near future. Panamy now operates two plants in Shah Alam which produces electrical goods for both the domestic and export markets.

5. What is the company's financial history and status?
Net profit margin after taxation and return of equity trends well. The 5-year average for the company vs industry is as:
  • Net Profit Margin: 8.13% vs 2.98%
  • Gross Profit Margin: 60.19% vs 27.75%
  • ROE: 8.10% vs 10.49%
  • Revenue Growth Rate: -1.43% vs 6.22% (compounded annual growth rate or CAGR)
Year 2005 was where Panamy dispose Bangi plant, land and building for RM35.9 million in their non-profitable business of washing machines & refrigerators at that time. At the same time completed the retrenchment scheme with total compensation of RM19.4 million.

Year 2007 saw the escalating raw material and fuel costs and no more sales contribution from the disposed business line of washing machines and refrigerators.
Earnings Per Share has its share of ups and downs while Dividend Per Share is at a 5-year growth rate of -24.03% (Industry's avg is 7.06%) as shown in the chart above. While I applaud Panamy for trying to maintain a high payout ratio for dividends to earnings it cannot sustain itself by paying higher than their earnings every year unless it eats into their cash reserve.

6. Is the company conservatively financed?
Yes. Panamy has a very impressive balance sheet boasting a total of RM477.4 million cash in hand as of 31.12.2009. This is the reason why most analyst predict that Panamy is going to continue to pay high dividends to investors. Since it has no debts to service, I won't go into liquidity ratios.

7. Is the company actively buying back its shares?
The only reward came once in the year 2002 where it issued a 7 to 10 bonus. Panamy looks like it prefers to reward shareholder with higher than average dividend rates as compared to buying back shares or issuing bonus.

8. Is the company free to raise prices with inflation?
No data obtained. If you know let me know thanks. With intense competition, I only foresee prices of goods at competitive prices and less concern with inflationary effects.

9. Are large capital expenditures required to update plant and equipment?
Not for the time being, with sales at saturation point given the data obtained and Panamy's announcement that it has no plans to have a major expansion in the near future.
Discounted Cash Flow Analysis
It is difficult to project the revenue for Panamy in the next 5 years as the data shows that it has not been able to grow at all for the pass 5 years registering a growth rate of -1.43%. While the Industry average is 6.22%, I will use 1% to be on the safe side.

Operating Costs: 90% of revenue
Corporate Tax: 25%
Capital Expenditures: RM25 million considering no new facilities in the near term
Depreciation: RM17 million
Working Capital Cost: In tandem with revenue growth of 1%
Discounted Rate: 10%

Panasonic Manufacturing Malaysia Bhd is fairly valued at RM12.52. This is quite an optimistic valuation as compared to the current share trading price at RM19.90 which would put it at a discounted rate of nearly 6.5%. It is too risky to buy at that bloated price. Another indicator is the P/E Ratio which is at 18.64 vs Industry 14.03 and S&P 500 at 16.10. Avoid paying for a stock with too high multiple and Panamy is an example of that. Even if it is projected to grow sales by 5% Panamy's share price is only valued at RM15.16.

The stock has been rising steadily over the last 10 years until in 2010 where the price spiked up to an all time high of RM19.90. This happen in early 2010 which I believed is due to speculation as fundamentally I cannot justify the price. I am 90% sure that Panamy's stock price will go into correction once the momentum stops and comes profit taking. Everything that goes up must come down at one point. Gravity ma.

The only reason to hold a Panamy stock is for its dividend though we do see capital growth from year 2005 to late 2009 because it has offloaded a non-profitable business of washing machines and refrigerators and recovered through consistent efforts to strengthen its products and improve operational efficiency.

Panamy does export and it accounts 50% of their revenue which is a good thing as the Malaysian market is at saturation point. Panamy has over 200 representative offices and branches spanning the American continent, Europe, Asia, Africa and the Middle East and Oceania. BUT the catch is that this industry remains very intense as you know there are many well known brands out there as well. Whether Panamy succeeds in expanding or eat more market share is something none of us can foresee and thus is a risk.

Going back to dividends, Panamy is very cash rich with fast inventory and receivable turnover rates. In order to profit from dividend is to buy at lower share price. Buying at fair value or less would translate into a dividend yield rate of 10% or more which is very drooling! Buying now would only result in a 5% dividend yield rate and most probably a loss in capital invested as the share might go into a correction.

It would take a couple of more years to see how Panamy's revenue growth rate is heading. It has successfully turned around after the year 2005 disposal of non-profitable business but revenue levels have not yet recovered to the levels seen in the early 2000s. With its export strategy seeing success things looks reasonable fine for the company.

Investing in Panamy is quite tricky. You need to monitor the competitive business landscape and buy at the right time at right price. With that you might profit from both the nice dividend yield & some capital appreciation. For now I wouldn't place my reserves into Panamy as it is just too risky and expensive.

Saturday, August 28, 2010

Tech Talk Bursa Malaysia WW35

Let's recall back previous week's tech talk which was my first attempt.
  1. RSI shows appearance of overbought signal. 40-50 support line is still unbroken; no swing test expected. Possible new divergence to bearish again as RSI is now at above 70 region.
  2. MACD project performance far away from the centerline. A crossover is not imminent. Indicator tells us that investors are still bullish, no signs of bearish activity.
  3. Resistance level is at 1400 points while support level at 1350 points. 
KLCI broke the psychological 1400 barrier this week WW34, bravo! This is thanks to good announcement of quarterly results by some heavyweight counters such as banks, Celcom Axiata and Sime Darby (where investors think the worst is over for the conglomerate).

Relative Strength Indicator (RSI)
Chart Setting: SMA 1, RSI (14, 20), Feb'10 to Aug'10

High area of overbought signal which is greater than previous week WW34. Strong bullish activities. No swing test and no divergence signal.

Moving Average Convergence Divergence (MACD)
Chart Setting: EMA 12, EMA 26, MACD (26, 12, 9), Feb'10 to Aug'10
Once again high signal level of overbought. This is higher than in mid March and mid April in which both resulted in some minor correction. KLCI not performing anywhere near centerline and thus crossover again is not expected for the coming week.

Resistance and Support Level
Chart Setting: Feb'10 to Aug'10 (6 months)
New resistance now set at 1430-1450 points while support level is now at 1390-1370 points in tandem with the rise of the index. I have changed to a +/- 20-40 points tolerance after finding out that there is a range of resistance/support level.

So What?
I maintain my stand that valuations are expensive at this point. It gets increasingly hard if not almost impossible to get a value buy on fundamentally strong listed equities especially blue chips. A very good time for profit taking, hold liquidity and wait to pounce. There is weak external economic data particularly in the US last week and Bursa should be poised for some correction in the coming week if it does react to such news which it usually does.

Wednesday, August 25, 2010

The Blue Machine: Intel Corporation

Some may have known that I have shared on Intel early in 2010 through email way before I decided to start this blog. Basically I am porting those info over here, updating them slightly with recent turn of events. What I shared at that time still hold true and I stand by my opinions.
  • Intel is in a competitive business, it is sustaining itself not a growth company though it is trying to grow.
  • Intel's future is uncertain in >3 years time frame as does all tech companies including Intel's competitors.
  • Intel's share price is overvalued and overbought by investors.

Company Profile
Technology company and is the world's largest semiconductor chip maker based on revenue figures. It was founded back in 1968 as Integrated Electronics Corporation and is based in Santa Clara, California. The brand name Intel is synonymous with processors but Intel also makes motherboard chipsets, network interface controllers, integrated circuits, flash memory, embedded processors and other devices related to communications and computing. Intel has a long history so I won't bother to continue a grandmother story. 

Financial Charts
  • Gross Profit is definitely good, boasting figures within 50% to 60%. With Intel being in a monopoly state for the processor industry this figure is to be expected just like Genting Malaysia.
  • Return of Equity trends well with Gross Profit. ROE is the measure of how much shareholders get in return of their investment. It is by no means a measure of what you get in return in hand but at the perspective of the money already invested by owners for Intel to use.
  • Revenue Growth Rate. Practically a zigzag over the last 10 years. If I were to compute average 10-year it is at 3.34% growth rate and the average 5-year is only a minuscule 0.90%! Don't believe? Below chart CAGR directly from Intel website from here. This is CAGR (red circle), a slightly different calculation compared to my average formula.

  • Earnings Per Share another zigzag trend. Even an entrenched tech company like Intel does not hold a sustaining EPS. This is one reason why I shun away from investing in tech related companies. Again the same data from Intel Investor Relations site (pink circle), you can clearly seen EPS is in a downtrend over the last 5 years.
  • Dividend Per Share is on the rising trend but what worries me is how Intel planning to sustain it when their EPS is not growing? Use their cash reserve?
  • Data at this point is enough for me to identify a growth company or a sustaining company. I wouldn't want to go into more financial ratios. 

Intel's core revenue comes from the sales of microprocessors. As much as 75% from microprocessors, chipsets designed for notebook, netbook and desktop computing market segments. The other ~18% comes from the server market or data centers segment. The remaining ones are from communication products, ultra-mobility segments and digital home.

Intel's Geographic Breakdown of Revenue

As you can see Intel is dependent on two things as their source of income: the continuous sales of their microprocessors in the consumer realm which is majorly in 50% Asia Pacific and 25% America. It doesn't matter what they do on the others (dan lain-lain) as they contribute very little to the overall picture. Intel's share performance will ultimately be determined by investor's sentiment towards their main source of income. 

Truth to be told, Intel has many competitors but I am looking at their main rivals, easier. In fact Intel also competes with Texas Instruments and Samsung Electronics if you don't know.
  1. AMD-ATI is a solid partnership. They have given up the fight for the halo processor crown but now trying to move the market by promoting a complete set of processing & graphical power. This is an attempt to hit Intel technically where they are weakest. So far it has been quite successful in eating Intel's laptop market share. AMD is doing very well in the graphic segment as well by punching Nvidia right in the face where ATI released new graphics line up 6 months ahead of Nvidia. AMD is playing a different ball game by introducing Fusion lineup in 2011 to OEMs. They call it APU (accelerated processing unit), CPU + iGPU. It could well out-do whatever Intel has in 2011. Intel is infamous for the poor quality of its integrated graphics processors (IGPs). Being a person who customizes PC for people I can testify that.
  2. Nvidia. Apart from graphics which they are fighting ATI is NVIDIA's upcoming x86 CPU + GPU combination. That device is still just a secret project which almost nothing is known or publicly announced. The idea is that all you need is a basic x86 processor to make an interface to standard software then push heavy calulations to the GPU. Again this is an area of software and graphics which Intel does not have any advantage.

DCF Valuation
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 DCF Analysis and spend some time understanding it.

I have estimated that Intel's revenue growth rate is at 1% per annum in the next 5 years, with 75% operating cost margin, 31% US corporate tax, capital expenditure of USD5 billion per year (based on historical figures) for the next 5 years. Having computed all these factor in, Intel is valued at USD18.25 taking into account a 10% discounted rate (safety of margin). Even if Intel has a revenue growth rate of 10% it is valued at only USD22.90. Nevertheless I still hold firm to my valuation that Intel is not worth more than USD20 simply because it is not growing fast enough, look at the data. Then why does Intel trade at over USD20 when times are reasonable good?

This is my theory...
It is quite true at least in the Malaysian market. I have limited know this and that in US market I will admit that. Intel's free float is only 35% and most of the holdings are being held by financial institutions and mutual funds in the United States (65%). These institutions are still clinging on to Intel thus supporting the share price from further weakening or more appropriately trading at its fair value. The only reason why I see them holding is because Intel pays dividends and their payout has been steady throughout the last 10 years. A fund that boast that it has Intel shares that pays reasonable dividend each year will make most people who owns the fund go WOW. And why would they let go if Intel continues to pay decent dividends for a tech company.
Intel Corp Major Holders
Another thing to note, insider transactions reported over the last two years @ Intel Insider Transactions. Look carefully and you can ascertain that officers and directors of Intel Corp are disposing their shares more than exercising them. If Intel is doing as great as reported by them why are they disposing them most of the time? Think about that.

What Do I Think?
No doubt Intel is enjoying a honeymoon & a commanding period now with their Nehalem family of processors but that will not last long. Competition will heat up in 2011 when AMD-ATI launches their Fusion lineup (Bulldozer and Bobcat). Graphics has been an important component in the PC industry and one that Intel in my opinion is underestimating it severely. Intel knows that graphic performance is their Achilles heel but they do not seem to invest much in that realm even though they have such a strong balance sheet.

Gods know what they are thinking. Back during AMD Athlon years early 2000s, AMD was pursuing throughput performance while Intel was still advocating the Gigahertz factor. In the end, AMD was proven right as their lower freq processors consistently outperformed Intel's red hot high frequency processors and thus gained more market share from Intel. Is Intel making another mistake by overlooking this new fusion innovation by AMD?

It could also very well be Deja Vu. Back in the early 2000s when then-CEO Craig Barrett attempted to diversify Intel beyond semiconductors but proved ultimately unsuccessful. CEO Paul then reorganized the company to refocus its core processor and chipset business on platforms but right now we see the same thing happening again, an attempt to diversify beyond just a chip maker. Will it work? Intel seems to know nuts about software division but is extremely good at hardware and manufacturing.
Intel's Diversification Business Model
The recent announcement to buy McAfee at USD7.68 billion, a 60% premium to the share was chosen on the expensive side. Buying at USD44 per McAfee share is outrageous! That share price hasn't approached that level except during the tech bubble in 1999. Intel has about $18 billion in cash and short-term investments but to waste it on a business that has no synergy with Intel baffles investors. As mentioned before, investors will punish Intel share and they did. Makes me wonder whether buying McAfee will benefit Intel in the long run. A company like Microsoft, IBM or Oracle would be a better choice for McAfee.
Intel Share Price Historical Performance, Year 2000 tech bubble burst

Other Fun Facts
  1. Headcount at 80,000 (55% employed in the US). Intel has reduced it from a high of 100,000 five years ago. Intel is improving efficiency and productivity to improve their margins.
  2. HP and Dell are Intel's biggest customers accounting a combined 30% of yearly revenue. If you see them reporting sluggish sales expect Intel to be in the same condition.
  3. Apple will not drive Intel's sales by a big portion as it only accounts 5% of world PC market share.
  4. Intel's likes to show off their high gross profit margin >50% but their net profit is below <20% thanks to big budgets in R&D and sales & marketing.
  5. Intel spends as much in R&D as with sales & marketing except in 2009 where R&D is $5.6 billion while marketing is $7.9 billion.
  6. Intel admits that they operate in intensely competitive industries, and failure to respond quickly to technological developments and incorporate new features into their products could harm our ability to compete (from 2009 annual report pg22).
The PE is low at 11 but I do not value Intel solely on this valuation. I will continuously sell off INTC shares and put the capital in other stakes which generate better returns and more predictable business model. My previous sell offs were at USD20.70 and USD24.15.
The blue machine is no longer a mean one but still is a force to be reckon with for their size and monopolization of the chip business. It has the financial strength and resources to turn things around if only they use it wisely.

Monday, August 23, 2010

World Vision 30 Hour Famine

It was a memorable experience to be part of a family of stomach-too-full people attending 30 Hour Famine held in Penang at Chew Si Kee San Tong (周氏岐山堂), 33 Kimberly Street. Though the event was primarily conducted in Chinese Mandarin I was still able to weed through the technicalities because I have a great translator :)

Deborah Priya Henry, Miss Malaysia 2007,
World Vision Malaysia Children’s Right Advocate and 30-Hour Famine 2008 Angel

World Vision Organization
Funded in the USA in 1950, it is an international relief and development organization whose stated goal is "to follow our Lord and Saviour Jesus Christ in working with the poor and oppressed to promote human transformation, seek justice and bear witness to the good news of the Kingdom of God." Working on six continents in over 97 countries, World Vision is one of the largest relief and development organizations in the world. Its revenue in 2008 is at a staggering US$2.6 billion with approximately 26,000 employees worldwide.

World Vision gets their funding from various sources. 40% of which comes from privates sources, including individuals. Another 30% from governments and multilateral aid agencies such as USAID and Department for International Development in the UK. The remaining 30% comes from other World Vision programs (such as 30 Hour Famine) and nonprofit organizations. World Vision's expenditure includes 87% on programs, 8% on fundraising and the other 5% on management and general overhead.

The focus of the organization can be divided into five major areas:
  • Emergency Relief: disasters or conflict and who need immediate assistance.
  • Education: schools and communities teaching values-based life skills.
  • Healthcare: improving health and nutrition, responding to HIV in children.
  • Economic Development: debt relief for poor nations, argiculture, water and sanitation.
  • Promotion of Justice: speak out on child labor and use of children as combatants in armed conflict.

30 Hour Famine Program
Local event of voluntary fasting or hunger! for 30 hours to raise money and create awareness for world hunger. It is a worldwide event held simultaneously, read this news highlight from TheStar: 12,000 fast 30 hours to help the poor. In my camp, there was about 65 people.

We had fun networking, a lot lot lot of games, some break time, a night concert, qigong walao, time to sleep BUT no food le. From my experience the key learning comes from the experiential learning of being hungry. Never take life too complacent and help others when you have the opportunity to create wealth or earn a good living. To cut it short check out the video below (8:06 minutes long so grab a Durian)

Famine 30 Aug 21/22 2010 Penang fromshu shan tan on Vimeo

For those who are reading and never attended this program I strongly encourage you to go and be enlightened.
After the camp we headed straight for Kochabi haha to have some delicious irresistable Taiwanese Delight. That was nearly 5pm on Sunday. Then I decided to take the Rapid Penang home as it has been nearly 5 years since I last sat in one. Hehe let me tell you that the service has improved tremendously: bus is clean, not stinky, comfortable and brightly lit. Have to say that since the Ministry of Finance has funded the Rapid project it has been flying off pretty well. The one thing that was unsatisfactory was the schedule and timing of the buses, perhaps that is hard to control since traffic is notoriously unpredictable in Malaysia. I would sit the bus again if chance permit me. Anyway it is thumbs up from me~! Visit Rapid Penang for details.

Friday, August 20, 2010

First Attempt on Tech Analysis (Part 2)

Moving Average Convergence-Divergence (MACD)
MACD turns two trend-following indicators, moving averages, into a momentum oscillator by subtracting the longer moving average from the shorter moving average. Thus MACD offers the best of both worlds: trend following and momentum. Traders often look for signal line crossovers, centerline crossovers and divergences to generate signals.

To cut technicalities short, MACD is all about the convergence and divergence of the two moving averages. One called shorter moving average (12-day) is faster and responsible for most MACD movement. The longer moving average (26-day) is slower and less reactive to price changes in the underlying security.
  • Positive MACD indicates that the 12-day EMA is above the 26-day EMA. Positive values increase as the shorter EMA diverges further from the longer EMA. This means upside momentum is increasing. 
  • Negative MACD indicates that the 12-day EMA is below the 26-day EMA. Negative values increase as the shorter EMA diverges further below the longer EMA. This means downside momentum is increasing.

Signal Line Crossovers
A bullish crossover occurs when MACD turns up and crosses above the signal line. A bearish crossover occurs when MACD turns down and crosses below the signal line. Look at the KLCI chart below, 11 crossovers in a just a span of 6 months! 
Chart Setting: EMA 12, EMA 26, MACD (26, 12, 9), Feb'10 to Aug'10
Our stock market is very volatile (many ups and downs). Because signal crossovers are common it is difficult to use this indicator as a long term indicator for a trend because you can see so many mixed signals. It takes a strong move in the underlying security to push momentum to an extreme just like what it happened at end of May. Note that MACD surged below to nearly 20. To me this chart is just a FYI, not useful unless you play the risky short-term game. So how? Read on..

CenterLine Crossovers
A bullish centerline crossover occurs when MACD moves above the zero line to turn positive. This happens when the 12-day EMA of the underlying security moves above the 26-day EMA. A bearish centerline crossover occurs when MACD moves below the zero line to turn negative. This happens when the 12-day EMA moves below the 26-day EMA.
Chart Setting: EMA 12, EMA 26, MACD (26, 12, 9), Feb'10 to Aug'10
Looking at the centerline crossovers minimizes volatility and able to show us a better picture of bullish and bearish activity (correction). Centerline crossovers does not work well when there is high volatility such as in the case when a stock moves up and down quickly like a zig zag within days or one-two weeks. In my opinion it works really well on KLCI index. Our bears and bulls run for a long duration and our correction are usually a month or so period.

Can be seen clearly that KLCI is now performing far away from the centerline. A crossover is not imminent. But it does show that it is at its peak. Just like RSI, this indicator tells us that investors are still bullish, no signs of bearish activity. Speculation driving momentum do you think so? I can tell you fundamentally a lot of stocks, well most of them are either fairly valued or overvalued.

Stochastic Oscillator "doesn't follow price, it doesn't follow volume or anything like that. It follows the speed or the momentum of price. As a rule, the momentum changes direction before price." As such, the Stochastic Oscillator can be used to identify bullish and bearish divergences to foreshadow reversals. This oscillator can also identify bull and bear set-ups to anticipate a future reversal. If you mind, you can go ahead and read about it but Stochastic to me is too volatile. I prefer to keep investing simple and avoid indicators that show a lot of mixed and false signals.
Chart Setting: SMA 1, Slow Stochastic (14, 3), Aug'09 to Aug'10
Support and Resistance 
One key skill is to know how to identify support and resistance levels. They represent key junctures where the forces of supply and demand meet. In the financial markets, prices are driven by excessive supply (down) and demand (up). As demand increases, prices advance and as supply increases, prices decline. When supply and demand are equal, prices move sideways as bulls and bears slug it out for control.

Support Level
Technically support is the price level at which demand is thought to be strong enough to prevent the price from declining further. There is always a new support level once the current one is broken. Support breaks and new lows signal that sellers have reduced their expectations (to a new support level lower) and are willing sell at even lower prices.

Resistance Level
Resistance is the price level at which selling is thought to be strong enough to prevent the price from rising further. Once resistance is broken, another resistance level will have to be established at a higher level. Resistance breaks and new highs indicate buyers have increased their expectations and are willing to buy at even higher prices.

Chart Setting: Feb'10 to Aug'10 (6 months)

The red circle is to show that old resistance has become the new support. The breakout above resistance proves that the forces of demand have overwhelmed the forces of supply. This is why I chose it as the current support line. Resistance is just a guess by buffering 10 points. I think that's a pretty good estimate :)

The truth is there is no exact science to tell where the support and resistance level is but being aware of their existence and location can greatly enhance one's analysis and forecasting abilities. A resistance breakout signals that demand (bulls) has gained the upper hand and a support break signals that supply (bears) has won the battle. You can go and browse mags and I guarantee there will be different support and resistance levels given by various analysts. Just like Warren says, I rather be approximately right than be precisely wrong.

Wednesday, August 18, 2010

First Attempt on Tech Analysis (Part 1)

I have been talking fundamental all the while, actually since I started 2 years ago but a recent visit to iCap investor day in KLCC on 14th August 2010 made me think twice. Should I embrace value investing which is not only fundamental but takes into account the technical side? and to look into economic indicators. Putting aside economic indicators as out of this scope, I am going to show my first attempts into technical analysis.

Like financial ratios used in fundamental analysis, technical has its many various forms of indicators but only a handful are needed to paint a relatively good picture. You can get the charting tool here from TradeSignum. It took me 4 hours to learn plus writing this down so let's get down to the first indicator of the series. Not difficult, I bet you can do it too.

Relative Strength Indicator (RSI)
A momentum oscillator between zero and 100 that measures the speed and change of price movements. RSI is considered overbought when above 70 and oversold when below 30. Signals or trends can also be generated by looking for divergences, failure swings and centerline crossovers. RSI has weakness too as shown below example.

Overbought-oversold and Trend Identification
Chart Setting: SMA 1, RSI (14, 20), Jan'09 to Aug'10
A momentum oscillator like RSI can be misleading during strong trends, as you can see it shows many overbought signals when market is actually bullish and going up higher and higher. How do I counter-validate it, is by using the RSI itself looking at the 40-50 barrier as the support line. You can see there were 2 overshoots also. These are known as pullbacks that offer lower risk entry points during bullish times. Now you would ask me how do I know the overshoot might be signaling a reverse trend or just mere correction?

Failure swings
Is a strong indication of an impending reversal. Failure swings are independent of price action and the swings purely focus on RSI for signals and ignore the concept of divergences (I will explain this further down). Example below shows that it needs to fulfill these four criteria in order meet a bullish failure swing. In short the market is still being supported from falling down. (I know is small but I had to use KLCI as a good example).
Chart Setting: SMA 1, RSI (14, 20), Jan'10 to Aug'10
I will ignore the first overshoot and consider as minor correction. You can see a mini tiny swing so it is too small to show an impending reversal and just breached a small portion below 30. No concern there.

Divergence signal is a potential reversal point because directional momentum which the the bottom one does not confirm price which is higher high. Just picture a car going uphill when there is no more momentum. How far can it go? Pretty common sense, this is why there was a correction at that time. With the help of the previous bullish failure signal and renewed momentum price is still supported moving forward after correction.
Chart Setting: SMA 1, RSI (14, 20), Jan'10 to Aug'10
So what about the current KLCI? It is trending up or down? From RSI alone it shows a few things.
  1. Overbought signal still appearing but at levels nearer and nearer to 70 telling me lack of momentum to go higher at faster speeds.
  2. 40-50 support line is still unbroken. Until it is broken it is not assumed to undergo another swing test.
  3. Possible new divergence to bearish again as RSI is now at above 70 region. Perhaps another correction in sight.
KLCI is going to be boring unless there is a break in support line to keep investors on the edges of a correction or a full swing bear attack. In my opinion there is no more momentum to go up more. A speculated driven momentum will drive it higher only to see it go into correction very soon.

Need to sleep lio
The key in using technical indicators is to know how to use it, when to use it and how to interpret the meaning of the chart. I wouldn't want to use technical indicators for individual stocks yet but it looks worthwhile to further explore it by applying it on the KLCI. A value investor should be in my renewed understanding haha 80% fundamental, 20% technical. There are still two more tech indicators (stochastic and MACD) which I am studying and they are also widely used in the many analyst reports, mags and new cuts. Leave that for Part 2.

I am sure you would want to know if the KLCI can peak further or start to have some correction or even worse....I din say ah.

Friday, August 13, 2010

MREIT: Al-Hadharah Boustead

UOA Real Estate Investment Trust
There was a mistake in my Part 2 where I was looking at UOA Holdings instead of the REIT :( Was a big mistake but luckily I caught it. After dwelling some thoughts, Boustead remains my only choice. I have updated Part 2 with corrected ratios for UOA, do read it again. 

Bear with the corporate structure. UOA REIT sponsor is UOA Holdings Group which is involved in commercial and residential property development, construction and investment. And then you UOA Holdings who is a subsidiary of UOA which is incorporated in Australia and listed on ASX (aussie stock exchange). The UOA group itself has vast experience & expertise in Malaysia real estate since 1991.

Botanica.CT, Balik Pulau, Penang

Al-Hadharah Boustead
From the name above we know that the sponsor is Boustead Group and the Al-Hadharah makes it an Islamic REIT. It is a strong dividend yielding REIT (~8%) whose primary source of revenue and profitability is driven by plantation assets and CPO prices. How? 

The major revenue source ~75%. BSDReit assets are leased back to Boustead Group for 3-year renewable tenancy with a cumulative period of up to 30 years! Fixed rental of RM41.3 million is locked for the 1st tenancy and can be adjusted upward as applicable with injection of new assets. The fixed rental review is based on historical, prevailing and expected future CPO prices, cost of production, extraction rates and yield per hectare. Boustead group has 97,700 ha of which 16,400 ha is being held by BSDReit. Boustead if not mistaken is the 5th largest plantation company by land size. It is also a government-linked company. Unco Tan's iCap holds Boustead shares as well due to his stand that their assets are severely undervalued & have much potential to grow.

Another 25% comes from the second portion which is CPO price. BSDReit enjoys a 50:50 annual profit sharing of actual CPO (crude palm oil) and FFB (fresh fruit bunch) prices realised during the year which is above the reference price of CPO. BSDReit has 10 estates in which 8 has a reference price of RM1500/MT and the other 2 at reference price of RM2000/MT. With prices of palm oil in the uptrend for the last 25 years because there is increasing demand, there is minimal downside risk I would say. Right now Aug'10 it stands at RM2650/MT.

The closest competitor of palm oil is soybean oil which has not been picking up as fast given palm oil's discounted price to other edible oils and is highly sought for biodiesel. Palm oil has other advantages as well: (1) Highest yield per hectare and (2) Lowest cost of production for vegetable oils. Demand for CPO is driven by health preferences related to transfats, renewable fuel and energy source and for food in emerging markets like China and India with huge population base.

What are the risks (by order)?
Malaysia is no longer world's number one CPO producer & exporter. It has recently lost to Indonesia. Indon could very well be future CPO price benchmarker by setting up new CPO contracts to rival our Bursa Derivatives Exchange CPO (FCPO) which is currently the world price benchmark for CPO. This means we might lose out in attractiveness among international investors and fund managers.
Another problem is scarcity of suitable land in Malaysia. We are running out of land unless Sabah and Sarawak is more developed. Research now is focused on producing better yielding clones such as Sime Darby and Genting Plantations on cutting-edge genome research which may hopefully provide our industry with new breakthroughs.

The Plantation sector in Malaysia is estimated to employ as much as 570,000 workers. With the local workforce demanding higher wages compared to foreign workers there is a problem of inadequate manpower. Further more, they are certain quarters who want to limit the number of cheap foreign labour into Malaysia. Things are quite uncertain in this area particularly the government's long term strategy.

Adverse weather can impact CPO production such as the La Nina wet weather causing floods in plantations, hampering collection activities and wet conditions impede growth of palm flowers. La Nina happens during November and December where stock can be affected and probably see price soaring slightly. There is also the El Nino.

Overall over the long-term, palm oil consumption is sure to grow hence good prospects but the question is who will hold the crown, Indonesia or Malaysia?

In a Nutshell
BSDReit has very good financial health, lowly geared and has a lot of room to leverage up for future asset expansions perhaps from the Group and to increase its future earnings. Palm oil industry is relatively recession proof as 80% of the oil are used as basic food needs and is something i looked upon as sustainable business.

One major drawback of REITs is their inability to benefit greatly from capital gain, unlike real estate. Investors can do without taking on the risk of mortgage payments, unscrupulous tenants and rising tax rates. However, less risk obviously comes with less reward. Again I would like to stress that REIT and real estate is a totally different playing field.
  • For someone who wants to have more control of their assets and is willing to improve their value, investing in residential real estate can be a good choice.
  • For someone looking for passive real estate investment, with the added benefits of portfolio diversification and liquidity, a REIT is a good option to consider.
For me, I will purchase REITs as part of a balanced portfolio (10% of my total portfolio). It is important to purchase a REIT at a discounted price as a lower invested price will translate into higher dividend yield automatically. Note that BSDReit stakeholders are Boustead Properties (60%), LTAT (14%), Tabung Haji (10%), thus only 16% free float. It would be hard to get a lot of discount on its fair value unless there is another big meltdown like the 2009 one. Too bad I missed the boat in 2009. BSDReit currently trading at 3% premium to its NAV/share.
Until I have enough capital to enter the real estate market till next time... for now it is just learning and observing other people's mistake :) This ends my REIT research since it started in late June. I am still eye-ing news on Starhill very closely. Also there is no education based REIT yet in Malaysia, perhaps we will see one in future.