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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.

Thursday, September 30, 2010

Dear Parents, "The Best Lesson 4 Your Child"

I am going to share how you can educate kids on money smart habits. What? Aboi teaching me? Sibo? Pretty common sense after you read it all actually. Anyway back to the topic, I am not a parent to any kids so why bother to write this? Roughly two weeks ago, I found out that more than 50% of bankrupts in our country are ages less than 30. Sad? Not really. Surprising? Yes. Bother about it? Most probably no, we read newspaper for fun because people are kaypo (busy body). We like to watch dramas because our life is not interesting, look at accidents & hog the road especially Malaysians, ask people How R U? but never ask How Am I. Point being picking on other stuffs comes in our mind first but have you ever thought deeply of one of the most important skill in life which is to master your money.

Where do most of us learn money from? Very subjective I know, it could be from friends, the idiot box called tv, our own mistakes but not from teachers certainly. Teachers don't teach us money in school and certainly knowledge does not create wealth. It compliments wealth. If knowledge creates wealth, all the teachers, lecturers and professors in the world would be very rich but the truth is they are....I din say anything ah. The first place kids learn about money is from their parents unless you are an orphan lor.

I will confess that I did not learn that from my parents nor from my family, I actually grew from making my own mistakes, also from reading which is why I say that it is important, lucky enough to have friends who are like minded (it is hard to do it yourself in life) & lucky enough that I realised it before I grow old and senile like Mahathir. Lastly from hearing stories from people because I am kaypo and a true Malaysian. So what are the things that parents commonly tell their kids about money that the parents think they know "so well or act like a pro"?

Money is the root of all evil. What the heck! I don't know where some parents get this idea from, money in fact is just an object which is neutral. What you do to earn that money makes it good or evil. Never tell your kids this.

Money does not grow on trees. True but there's another meaning to it, that money is very hard to earn. I would rephrase it to money does grow on trees with the correct soil & some watering. Money is attainable by working hard on the right strategy & focus. I will explain this more later.

Money does not buy happiness. I can say that without money you would probably be unhappy in this world we are living now. It might not buy 100% happiness but it certainly does buy a lot of it. Don't give kids such negative perceptions about money.

What's the use of making so much $$ but you can't take it when you die. My brain was like !!!!!!?????? Another jackass statement. Then why are you working in the first place? You are going to die right in the end. Seen Chinese folks burn paper money to the afterlife? Just joking on that portion. 

Sometimes the actions that parents take also indirectly inject money thoughts into their kids. In such a rapidly changing world, parents especially those husband and wife who both are working full time jobs, spend less and less time with their kids. Instead they put that idiot box called tv for them. It's quite OK if they are watching cartoons but a normal TV channel has many ads. What do ads constantly stream to our kids? Spend, spend and spend right. So better to buy more pirated DVDs hor, luckily we are blessed with that in this country.

Spend_Spend_Spend: A Story from Riches to Rags
Not only by exposing them to those ads about spending, many parents actually reinforce their child's beliefs on spending by buying stuffs for them. Mum I want that toy, buy for me now! You buy ma because you feel guilty that you did not spend enough time by substituting it with money. You succumb to that pressure from your child. In addition, when you actually have the time you take your child and go to a shopping mall during weekends where you show even more the power of $$$ by spend, spend and spend. Got the entire picture now? Heard of Buddha's teaching? The teaching of Buddha – one sentence in 12 years of education in primary and secondary school.

Manusia sengsara kerana nafsu.
Human suffer because of desire/greed.

What is desire? What is greed? They are simply “wanting”. Want more, more and more, MORE and MORE! MORE AND MORE!!! like CHIPSMORE
Want bicycle, want motorcycle, want Proton, want BMW, want Ferrari, want sailboat, want private plane, want rocket …
DESIRE = never ending of wanting. That causes spending and more spending that is also never ending.

Apply that teaching in your money habits & think carefully on how you really want to educate your children. Do you want them to be part of that 50% that goes bankrupt or on the way to become one before they even reach the age of 30? So how can we help children develop good financial habits? I really don't know at what age they can start because I am not a parent, maybe you can advise me but...these are a few ways.

Piggy bank the old school style. Nothing beats this by inculcating the idea of saving some money. Tell them to save for a goal, give them a target or a reward for saving. People don't just save for the sake of saving. Imagine this, if a child is able to save RM8 per week starting at age 5 investing in something that gives 10% returns per annum, he/she will get RM500,000 at the age of 55 with just a total savings of RM20,000 for 50 years. Starting it as young as possible maximises the power of compound interest.

Ask them to use a cash book to track spending. Need not to be elaborate or detail, just simply how much money in and money out. You, as a responsible parents must check on the cash book from time to time. The accuracy of the accounts is not important, what is, is that they develop the habit of tracking.

Teach budgeting. Teach them that budgeting is not a seen as a type of restriction, self sacrifice or not to spend but merely delay gratification. Having said that, give them allowance by month not week. Stimulate real world case where you actually get your paycheck once per month which is the usual scenario.

If you have time, play monopoly instead of going to a shopping mall. Monopoly is a good game where kids at a young age learn to make financial decisions. From there they will learn about borrowing, mortgaging, paying expenses, fines & earning income. This game also opens their mind into making multiple choice decisions rather than binary which is BUY or NO BUY like most of adults do when doing shopping. They don't look at alternatives first, they buy and regret later.

Don't buy things immediately for them. If they want something use the ringgit for ringgit strategy. Want a toy that cost RM50? You save RM25 and I will fork out the other RM25. In that way, they save for a reason, a goal or target which they can reward themselves later. Make kids work for it because in the real world this is the truth. Don't buffer them, in fact expose them when they are young like a sponge, still able to absorb concepts easily. If they end up not knowing this young, that shift in adulthood will be very hard. And guess what, they will overspend, incur debts and higher likelihood to go into financial problems or worst bankruptcy. That time you don't even want to recognise him/her as your own child. It happens.

Should they have a lit candle? Daredevils, eh?
The other crucial thing which I myself believe is true, at least for me it is that money does grow on trees with proper soil & watering. Kids really need to know that job is not the only answer in this modern, fast changing world. Long gone is the word "loyalty" to a company, it is now "performance". Performance simply means working harder and harder. Contrary to many people who think that a job is safe, I find that having just a job is actually more risky if you have no other source of income. Consider this, my overall plan in paying the house comes from 4 sources of income.

Profit sharing from two online boutique RM500 each. First RM1000/mth my mum and sis will take it, each following RM1, RM0.50 is mine. I don't do the actual job of parceling & postage, I just market them, improve site, put ads or postings online and that's all. It takes me about 4-6 hours each week just to do that. When it goes big enough (site traffic), there's no need to do anything anymore. 

Rental income from old house RM750. Again do nothing except collect rental.

Salary only RM750. If I lose my job, I'm not so pressured because I have different sources of income. Can you achieve that? Of course, first by throwing away your job mentality & the work hard thinking. Kids need to know this. You should try to avoid negative influences and information to your kids as much as you can.

Every child is in fact creative, don't skew their thoughts with your own idealism. Their era is no longer the same as yours when you were brought up. Kids should really not suffer because of their upbringing by parents. Many times I feel quite helpless to people that I know who care less about their finances because it is hard to change someone's mindset when they are an adult so sharing to adults in hope that their kids will benefit is at least in my ability :)

So good luck and have fun raising kids! If they become wealthy, ask them to come treat unco boi when they grow up. I want buffet style ok not Char Koay Teow.

Related Posts:
Getting Your Finances Straight
Everyone Must Be A Millionaire

Saturday, September 25, 2010

Tech Talk Bursa Malaysia WW39

Technical indicators are lagging indicators and therefore I always look back at the previous week for recent market direction into the coming week. In this case I am using WW39 for this week's WW40. I hope this clears the air. For those who find it hard to follow I suggest reading through my previous posting on how I am using technical indicators as a trend seeker.
  1. First Attempt on Tech Analysis Part 1
  2. First Attempt on Tech Analysis Part 2 

Relative Strength Indicator (RSI)
Chart Setting: SMA 1, RSI (14, 20), Mar'10 to Sep'10
We see much profit taking activities happening. The degree of price drop has similarity like what happened in mid-May. Are we looking at a something bigger like a minor correction next week? One thing to note, as long as the 40-50 support line has not been broken it is still not assumed to be in full correction mode.

Moving Average Convergence Divergence (MACD)
Chart Setting: EMA 12, EMA 26, MACD (26, 12, 9), Mar'10 to Sep'10
MACD line just touching 20 though KLCI still far from the centerline and no crossover, it is difficult to know the trend just yet. The government has just unveiled the Economic Transformation Plan (ETP) but investors don't look like buying into any of the plans considering the market's performance. Click HERE to understand more.

Resistance and Support Level
Chart Setting: Mar'10 to Sep'10 (6 months)
New resistance now set at 1480-1500 points while support level is now at 1440-1420 points (previous lower high still unbroken).

In a Nutshell
Finally I have been vindicated after many weeks. Correction looks plausible unless there are good news to support the points. I would seriously stay on sidelines for now, watching first before pouncing on certain counters that are deemed fairly valued or under valued like PARKSON, BSDREIT or JOBST. I also hope there is opportunity to get F&N but that seems slim until an actual bear takes place.

One Month Trend Chart *Tech indicators are lagging charts

Monday, September 20, 2010

Tech Talk Bursa Malaysia WW38

Technical indicators are lagging indicators and therefore I always look back at the previous week for recent market direction into the coming week. In this case I am using WW38 for this week's WW39. I hope this clears off some confusion dear readers :)

For those who find it hard to follow I suggest reading through my previous posting on how I am using technical indicators as a trend seeker. I have two posts detailing each indicator that is to be used in this weekly sharing.
  1. First Attempt on Tech Analysis Part 1
  2. First Attempt on Tech Analysis Part 2 

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

Last week we see investors trading at sidelines with gainers as much as losers at the end of the week. It still continues to this Monday. Nevertheless no swing test or divergence signal is expected for this week but investors holding back until the announced plans for Economic Transformation Plan (ETP) and Entry Point Projects (EPP) by the government this week.

Moving Average Convergence Divergence (MACD)
Chart Setting: EMA 12, EMA 26, MACD (26, 12, 9), Mar'10 to Sep'10

Mixed momentum as MACD line hovering above 20. KLCI still far from the centerline and thus crossover is not expected for this week. Same as RSI, investors are holding back for announcement by the government.

Resistance and Support Level
Chart Setting: Mar'10 to Sep'10 (6 months)
New resistance now set at 1490-1500 points while support level is now at 1440-1420 points (as the previous high has been broken through higher).

In a Nutshell
Market could go higher if there is positive news from the key announcement by the government which will detail the Economic Transformation Programme (ETP) and the Entry Point Projects (EPPs). If the ETP and EPP were not up to expectations, there could be some pull back from investors because people react kindly to good news only during speculative times.

Besides the EPPs, the Performance Management and Delivery Unit (Pemandu) is also expected to reveal on September 21, 2010 the business opportunities available. There is also 2011 Budget on October 15, 2010, which may come up with more goodies but that is still a month away. Other positive impetus were the strengthening of the ringgit and the announcement of the Basel III guidelines for the banking sector.

I have been trying to say that the overall market is overvalued but conditions are still bullish, perhaps because there is not enough nor strong enough bad news to turn the market upside down just yet. I also realised that Asian markets are beginning to react at a lesser extent towards the market sentiments of the exchange markets in the US and European countries. This could be due to China's growing economy as a world powerhouse.

5-Week Trend Chart *Tech indicators are lagging charts

Utilities: YTL Power International Bhd

Seri Tanjung Pinang by E&O Property
*I am writing this for a dear friend of mine who has been holding YTLPOWR for quite some time. As requested, I hope my opinions will be of some use to you.
YTL Power International Bhd was used as a vehicle to take over all power generation interests of YTL Corporation Bhd in Malaysia. It was then subsequently listed on the Main Board of Bursa Malaysia as an Infrastructure Project Company (IPC) in 1997, I just call it Utilities, copied from Monopoly.

YTLPOWR core business lies in power generation, retailing electricity, power transmission and water & sewerage services. In Malaysia, under its wholly-owned subsidiary, YTL Power Generation; the first independent power producer (IPP) in the country to be granted a license to generate electricity for a period of 21 years which expires on Sept 2015. YTLPOWR sells it electricity to Tenaga (TNB) at between 12.4 and 15.5 sen per unit on a "Take or Pay" basis. YTLPOWR has operations overseas as well, as explained below:

In Malaysia: Two gas-fuelled combined-cycle power plants, one each at Paka, Terengganu and Pasir Gudang, Johor with total capacity of 1,212MW. Largest IPP in the country.

In Singapore: Owns PowerSeraya Limited which has a licensed generation capacity of 3,100MW which makes up about 25% of SG's total licensed capacity. PowerSeraya is a diversified energy company dealing with electricity, steam and water, oil trading and oil tank leasing and water production via Reverse Osmosis Desalination Plant. Concession period is 30 years.

In Indonesia: 35% stake in PT Jawa Power generating 1,220MW via coal-fired power plant in East Java, Indonesia. It is the 2nd largest IPP in Indonesia and has a 30 year agreement to supply power to PT PLN (Persero).

In Australia: 33.5% stake in ElectraNet, South Australia's major electricity transmission company which owns and operates the state's power grid under a 200-year concession! ElectraNet transmission network provides current to over 99% of South Australia's population!

In England: Owns Wessex Water that supplies 350 million litres of water to 1.3 million customers and treats 490 million litres of sewage from 2.6 million customers daily. Concession period is 25 years which expires in Aug 2014. It is recognised as one of the most efficient water and sewerage companies in England and Wales and also once received The Queen's Awards for Enterprise in 2008.


1. Does the company have an identifiable durable competitive advantage?
Hard to answer. I would say it is still the best utilities company in Malaysia even beating Tanjung PLC in terms of revenue for the utilities segment. Locally all IPPs have an equal share pie while overseas they don't compete with each other.
2. Do you understand how the product/service works?
Utilities are bounded by licensed and has a term on the concession. It is wise to keep track on renewals of the concessions as losing one will impact revenue.

3. What is the chance that it will become obsolete (KO) in the next twenty years?
Energy and water will always be needed by humans and as the population grows so will the demand. For a company like YTLPOWR which has some concessions over 20 years, it will not go obsolete.

4. Does the company allocate capital exclusively in the realm of its expertise?
Yes. It has been acquiring and maintaining utilities related assets as such is allocating capital in its realm of expertise.
5. What is the company's financial history and status?
Financial Chart 1
Net profit margin (PM) after taxation correlates with return of equity (ROE). The spike in Revenue Growth Rate seen in financial year 2003 is due to consolidation of full year results of Wessex Water Limited, the water and sewerage company in UK. Where else in financial year 2009, it has the results of ~four months from PowerSeraya, its operations in Singapore. Below is the 5-year average for the company. Sector is more broadly categorised like IPC while industry is much more specific; for YTLPOWR is it Utilities-Power/Water. 
  • Net Profit Margin: 15.65% vs 8.28% (Industry), 12.34% (Sector)
  • Gross Profit Margin: 32.95% vs 25.90% (Industry), 11.20% (Sector)
  • ROE: 16.23% vs 9.63% (Industry), 8.73% (Sector)
  • Revenue Growth Rate: 29.64% vs 8.49%, 8.76% (compounded annual growth rate)
ROCE is another view point of the returns to shareholder equity without accounting debt being used as leverage. Since financial year 2003, YTLPOWR has been loading up debts to finance their aggressive expansion overseas. As such there is a huge gap between ROE and ROCE until present time. ROCE is around 3%-4% every year. A big gap indeed, using debt to create value for shareholders hmmmph.

Revenue growth rate does not reflect true rate because in year 2009 it acquired PowerSeraya which boosted its revenues for the 2009 annual report. Optimistically it should be 8% but to me more realistic I will project a 5% revenue growth rate instead.
Financial Chart 2
This chart looks nice with consistent growth on both EPS and DPS though we need to remember that value was created using debts, a lot of debts. YTLPOWR offers an attractive dividend yield of approximately 5% and is considered as one member in the high dividend yield stocks camp which includes the likes of PANAMY, DIGI, TANJUNG PLC and mREITS.

6. Is the company conservatively financed?
It has RM6 billion in cash and deposits but the bad news is that it also has about RM22bil in debts. Of that amount, RM9.3bil are bonds and another RM12.7 bil are borrowings. Together with shareholder equity of RM6.1 bil DE ratio is 3.6. This ratio is the highest I have seen in my stock market research to date. While YTLPOWR is able to generate more than RM1 bil in net profit per year, it will still take an extraordinary 15 years to repay them all :(

7. Is the company actively buying back its shares?
Over 2008 and 2009 there were five buybacks of 927,300 shares which is not a lot from its total 7.25 billion units. YTLPOWR offers dividends to its investors by regular distribution of treasury shares in which it has a lot, almost the same amount of its share capital.

8. Is the company free to raise prices with inflation?
No. It is locked into signed agreements. An example is in Australia, ElectraNet's revenue cap is set by Australian Energy Regulator which can be adjusted every 5 years.
9. Are large capital expenditures required to update plant and equipment?
Yes. YTLPOWR has to spend a capital expenditure of more than RM1 billion just to maintain its current fleet of operations.

Discounted Cash Flow Analysis
Instead of using the 29.64% revenue growth rate, I will either use the optimistic rate of 8% or realistic rate of 5%. I am going to use 5%.

Operating Costs: 80% of revenue instead of 70% (I add servicing debt of 10%)
Corporate Tax: 25%
Capital Expenditures: RM1.2 billion +5%/year (not factoring addition of subsidiaries)
Depreciation: RM600 million +5%/year
Working Capital Cost: +2%/year as assets grow as much as liabilities
Discounted Rate: 5% (with so much debts I cannot get a 10% rate with reasonable risk premium added in)

YTL Power International Bhd is fairly valued at RM2.25. The current trading price of RM2.39 put it slightly an expensive purchase. If I put the optimistic 8% revenue growth rate it is valued at RM2.92. The P/E ratio of YTLPOWER is at 14.30 with Industry at 14.11 while sector at 8.94. In my opinion still fairly valued at time of writing.
Not bad performance but still subject to economic cycles
The only problem with YTLPOWR is its debts. Because of its aggressive expansions it will take a lot of time to repay them all. But looking back at its expansions, they have good track record with all their purchases that has been able to give absolutely good returns. In the case of Wessex Water which is now the largest profit contributor and also the recent purchase of PowerSeraya in Singapore.

With another RM6 bil in cash and deposit, I wonder if YTLPOWR will still be looking out for more acquisition of utility assets. Are they truly that aggressive? I have less thoughts of its competition because they operate mainly overseas and that makes it more difficult for me to analyse the others.

Nevertheless there are others IPPs in Malaysia such as Sime Darby, Tanjong PLC and MRCB which are also big in size except for MRCB. The common problem between all IPPs is not competition but windfall tax from the Malaysian government & for the govt's plans to renegotiate Tenaga's power-buying contracts with IPPs to reduce TNB's financial strain. Currently TNB has to purchase all the power produced by all the IPPs regardless of demand.

As we all know that our govt is very famous of their U-turn driving style, saying one thing today and changing 180 the next day. This could be the reason why YTLPOWR pays less attention to its local operations and focuses more overseas. I also do not fancy such stuffs from our government, problem la.

The only way I see it, YTLPOWR has to continue to acquire more assets to improve revenue rates but as a heavy debt laden company I do not foresee a day when its DE ratio will ever be less than 0.5. There is no question that YTLPOWR share performance & high dividend yield has been on the uptrend since it ventured more into overseas. If you can handle the heat from the debts it has, then go ahead click purchase haha. For me, it is not my cup of tea :)

Saturday, September 18, 2010

Do Malaysians Know How to Value a Car?

Mitsubishi Lancer Evo
I have no intention of stirring any shit when I am writing this nor is it directed to anyone. The reason of writing this at 1am on Saturday is because I feel like it and couldn't sleep. No party tonight ma write something lo. Anyway we should all already know the ridiculously high car prices in Malaysia. The fact is that Malaysia is the only country in the world where the price of a car is equivalent to buying a house. We also go into the world record books for having the highest car prices in the world! Aiyo where all this mumbo jumbo originated from?

Mahathir bin Mohamed on the pretext of developing a local automotive company imposed a 300% duty import tax on all foreign cars. As a result the tax collected by the government on the imports are approximately RM2 billion to RM4 billion per year. That is a lot of money to the govt's coffers! Now do you see why the government won't even think of reducing the taxes on imported car brands even if they decide to let Proton or Perodua si ka bo chi teh (die with nothing left).

Feel like vomiting blood? Read on.
Toyota Altis sells in Indonesia for roughly RM46,000. The same car sells in Malaysia for about RM112,250. That is 3x times more expensive (300% tax)

Consider this Honda Jazz selling at ~RM36,000 in Indonesia. Same car sells here for around RM109,800. Also 3x times more expensive. (300% tax)

BMW 535i sells in the US for RM178,000 while we have to pay a hefty price tag of RM450,000! With RM178,000 the best is that we could get a Toyota Camry 2.4L in Malaysia :(

We are paying the highest car prices in the world just to support Proton or Perodua and not to mention the stupiak AP policy to cronies, yet Proton is still struggling overseas while Perodua doing slightly better in the domestic front. Back to the question, do Malaysians know how to value a car after so many years of manipulation? Give you some comparisons:
  • Buying a Toyota Altis for RM112,250 while he/she lives in a decent condominium of about RM350,000. Is a house worth only 3x times a car? Most families will settle down on a house only once but many will change car every 10 years on average. If he/she continues the same buying spree, the house is worth the same as the cars in 30 years. Tak masuk akal (makes no sense) to me.
  • If you have only RM20 (50% disposable income RM40000/yr salary). Will you choose to eat Char Koay Teow for RM3.50 (Perodua Viva RM36,500) or say Western Food for RM10 (Toyota Altis RM112,250)? With 2/3 of the Malaysian population surviving with less than RM4,000 a month, it takes like RM1000/mth to pay off the Altis for a 9 years loan alone with 20% downpayment. 25% of income is used to buy a car? This also makes no sense lo.

Financial planners often say that your car loan payment should ideally constitute <20% of your net income while the house should be ~35%. It is in my opinion that a house is worth a zillion times more than paying for a car. A car does not appreciate in value, a property such as house does. Having a shelter is a long term good commitment while a car is a repeating medium term liability.  

I'm writing this because I am lucky enough to made a right decision to buy a Char Keoy Teow instead, my 1.3cc Perodua Myvi back in April 2007 during college years and I want to share my experience with others. Currently it only setbacks me 18% of my net income and I will get rid of this burden in April 2012, just a shy 1.5 years away. I gladly pay my current landed residence in Penang which also houses 2 more CKTs; Perodua Kancil and Kenari which means I am more than happy to live in a nice spacious place than to weave through traffic using a big car.

Will we ever see corrected car prices in Malaysia? The answer is NO. Here is a news clip from our dear DPM Tan Sri Muhyudin Yassin about our nation's car policy. Muhyiddin assures govt support for automotive parts and component sector.
  1. KUALA LUMPUR, May 26 – The deputy prime minister said special focus
    will be given to “facilitate and encourage” the development of the
    automotive parts and component sector despite the current global and
    regional economic downturn.
  2. He pointed out that . .. . the motor vehicle sub sector in Malaysia
    will not be directly impacted because of its heavy dependence on the
    domestic market
  3. “The Malaysian government recognises the contribution of the
    domestic automotive industry towards the development of the country.”
Point 2 and 3 basically says that the Malaysian motor car industry will continue to be protected. This means we will continue paying the highest car prices in the world for automobiles. Our local automobile players are not national assets, they are national liabilities! I can see that a large proportion of Malaysian income is spent on car installment. The government just knows to protect car manufacturers’ profit, but who is to protect consumers’ pocket? No choice la, you have to DIY by knowing how to value a car properly. For a rough car price guide, check it out at TheStarMotoring.

The bottom line is that Malaysians will have to work harder than the rest of the world in order to purchase the same luxury vehicles. No wonder all wanna buy lottery ticket la. I understand that some families do buy for safety reasons for their child while some do have the financial means but the message to convey here is remember to think thoroughly first before you sign it. To be wise in your finance is not just about making a binary decision (BUY or NO BUY), it is to be able to make multiple decisions by asking questions or seek alternatives; What If I buy something cheaper instead? Can I buy 2nd hand car instead? Why foreign and not local? and etc...

How to get first car for FREE (credits to KC Lau)
Before making a down payment for a new car purchase, please consider getting a used vehicle. The secret is to take advantage of the no-claim discount or NCD. The tactic here is to use a very cheap old car and pay low insurance premium for the first five years. When you've reach the maximum no claim discount, only then would you pursue your dream car.
NCD for Private Car
Buying a 15 year old proton sage 1.5l (automatic, power steering)
Cost: RM5,000 (pay cash)
Insurance: RM277.50 (comprehensive) or 3rd party which is cheaper.
Maintenance cost for an old car is much lower than the interest payment for a new car. After 5 years, buy your dream car.

Buying a new Honda Civic 1.8 iVtec
Cost: RM113,800
Insurance: RM3,225.90
After a NCD, you get a 55% discount. This means you only need to pay RM1,451.65 and you save RM1,774.25 every year onwards for car insurance premium alone!

RM1,774.25 x 3 = RM5,322.75. With only three years, you already save that much assuming you did not kiss other people's car and enjoy the full NCD, and did not make a claim. So you can consider your 1st car FREE!

Thursday, September 16, 2010

What About Investing in Property?

There only two ways to get income from property: Capital appreciation gain or passive income stream via rental. Which is better? The answer is at an individual's level. Personally I would prefer a steady cash flow from the latter because at the same time the property being rented will also have appreciation gain over the years. Not everyone makes $$ or invest correctly from venturing into property, the same goes to every investment option available.

Consider a person who buys an apartment from loaning RM250,000 for 30 years loan has to pay approximately RM800/month to the bank. He/she decides to rent it out at RM650/month only. Most people will think that this is investing since you have an apartment that is rented to people BUT you do not technically own the apartment until you have settled all outstanding amount in the loan. In addition you are sapping RM150/month just to top up the payment, this becomes a liability instead.

He/she could sell for capital gain but with RPGT it is only wise to do it after the 5th year onwards. A prudent way is to generate rental income with a positive cash flow which is the main deciding factor before you say buy. A positive cash flow means rental received exceeds mortgage payments. If he/she managed to rent our RM1000/month, there will be a surplus of RM200/month. Within a year it could accumulate into RM2400 and if used to offset loan, could save 3-4 years in the 30 years loan.

Tremendous leverage capability, in simple words means making money from money you did not have but which is borrowed. If you made the right choice, rental would help pay off installments and capital gain from value appreciation in the long run. This is the single most advantageous benefit over investing in the stock market.

Because you can leverage OPM (other people's money) a.k.a bank, the banker would be glad to take your property as collateral. This is also something that cannot be achieved in the world of stock market. If you borrow money for stock trading and lose it, you will need to dig more money out to pay it off.

Certainty of growing urban population in cities. With more people being brought into this world, cities will continue to grow creating demand. This has commonality with consumer stocks which are my favourites as many of you know.

Other lesser benefits:
Property will always have value. Well the same goes to stock if you choose a right company. I agree that a property might lose value but zero value, the question is; Will someone buy it from you? Unlike shares you can sell it easier.

Hedge against inflation. As long as the returns are better than FD you can say it is a good hedge. Same goes to stocks, 15% compounded growth rate is more or less an ideal percentage in property as well. Though people will say they earn more than 20%-30% in the case of buy before launch and sell later, I really think people are jumping into greed without knowing the consequences. See what happened in the US housing market. This is exactly why our government imposed RPGT back again and why Bank Negara is mulling over 80:20 LVR and disallow 100% or 95:5 financing. Kudos to them!

Real Property Gain Tax (RPGT)
Announced during 2010 Budget, RPGT will only be applicable to properties that are sold within five years of their purchase. This is an attempt to curb speculation activities in Malaysia. RPGT will only take effect if you make a profit from disposing your properties within five years of purchase. The tax is on the profit made after deducting allowable expenses such as legal fees and stamp duty paid.
RPGT Tax Structure
But if the property loses value, tax relief is provided for the allowable loss if disposal price is equal or less than acquisition price. There are also exceptions from being taxed which includes:
  • Transfer of ownership from husband or wive & vice versa.
  • Transfer of ownership from individual to company if you hold shares in the company.
  • Transfer of property as collateral to loaner.
  • Inheritance of the property.
  • Disposal of assets as charity.
  • Acquition of property by government under any law.
Citizens and permanent residents also enjoy an exemption of RM5,000 or 10% of the gains whichever is the greater, besides a one-time tax exemption on the gains arising from the disposal of one private residence. This one-time tax exemption is most useful to us and can only be used for one residential property but with a catch. Husband and wife can only be exempted only once jointly. This means that upon ROM, the wife will automatically lose her individual right for exemption if she had not exercised it yet. So for those not yet married but considering to go into property for the 1st time please so do before you go off a anxiously signing your cert as you will lose one right!

Having explained RPGT, tax rates and exemptions might change from year to year especially during budget announcements so keep an ear to it. The next budget for 2011 will be tabled on 15th October 2010.

Is there a bubble brewing? 
Unlike stock market, it is difficult to comprehend whether there is a bubble in making for the real estate market. Thus we need to be on the lookout for signs or clues that gives us possible hints on the current market condition. One of them is from NAPIC (National Property Information Centre). There is a wealth of information in its website, do check the publications section.
Property Overhang Statistics by Quarter
The other clues are the government's reintroduction of RPGT and BNM proposed move to enforce a 80:20 loan-to-value ratio for house financing. From NAPIC, checks on developments completed this year also show that vacancy rates remain at 50 per cent or higher. Such high vacancy rates tells me possibly two things: foreigners buying our property and leaving it empty & Malaysian abroad who have higher purchasing power due to foreign currency. The second is quite possibly as we have as much as 350,000 working abroad and they might buy for retirement which explains the higher vacancy rates as well.

What I do know is that most of the units are taken up by employees of the developer hoping to sell for a profit when the development is completed. Act of greed and greed fuels speculation which in turn results in a bubble. With 2/3 of the Malaysian population surviving with less than RM4,000 a month with another 1/3 earning less than RM700 per month how long can the prices be sustainable in the long run? Asians in general have the habit of family helping other members even in their financials. Ask the current generation of young families and some will tell you their house is not entirely financed by them but helped by parents. Again how long can this go on?

A good chart to show whether bubble is forming would be to compare three things: country GDP growth, house property price appreciation and salary increment in a single index chart. As you can see China's property market is still in good shape with property appreciation in line with household income. I really like the Chinese govt's actions in taming speculative activities. Sadly I have not yet finish on getting US and Malaysia's chart. I will post them as soon as possible.
China property vs GDP vs household income
With that in mind, it would be most wise to keep in touch with the property news, perform meticulous research and not follow the herd or listen to rumours. Always buy within your means and don't buy first and regret later. We all know that the rich or to be rich do things differently than the not so rich people. The same goes to investing. In due time I will develop my own strategies just like how I trade in the stock market.

*I did once say that to borrow money to invest is bad but I would like to expand it further by saying that leveraging is ONLY good provided it has a positive cash flow instead of becoming a liability. Don't borrow if it saps your cash flow for other investments or your savings.

Monday, September 13, 2010

Tech Talk Bursa Malaysia WW37

I totally forgot that I am still on holiday where else Bursa already resume trading haha. First, recap on the previous week's tech talk.
  1. RSI continues to trend at overbought signals but seeing some profit taking at the end of the week. Still no swing test and no divergence signal. 40-50 support line still unbroken. 
  2. MACD start to show profit taking but not big enough to constitute a correction. KLCI not performing anywhere near centerline & no crossover expected.
  3. Resistance set at 1450-1470 points while support level is at 1410-1400 points.
Relative Strength Indicator (RSI)
Chart Setting: SMA 1, RSI (14, 20), Mar'10 to Sep'10

Last week we see investors trading at sidelines with gainers as much as losers. Nevertheless no swing test or divergence signal is expected in coming week but investors are beginning to unwind just before the long Raya holidays.

Moving Average Convergence Divergence (MACD)
Chart Setting: EMA 12, EMA 26, MACD (26, 12, 9), Mar'10 to Sep'10
Losing momentum as MACD line is trending towards 20. KLCI still far from the centerline and thus crossover is not expected for the coming week.

Resistance and Support Level
Chart Setting: Mar'10 to Sep'10 (6 months)
New resistance now set at 1460-1480 points while support level is now at 1420-1400 points (the KLCI psychological barrier).

In a Nutshell
Market did not consolidate a lot but KLCI did encounter resistance to go up one notch like in the previous three weeks. From time of writing I know Bursa is now at 1457 points up by 20 points in a single trading day with blue chips soaring higher & our dear Najib's announcement that ringgit might be made tradable offshore again. Nevermind that, my resistance and support levels still stand as above.

My technical skills sucks? Maybe, perhaps, you be the judge but I am only using technical to observe key events such as crossovers and swing tests to see how the overall market is heading. Technical still shows bullish signs but my fundamental calculations in some of the blue chip stocks show the word 'expensive' well except Parkson.

Getting Your Finances Straight

Some Facts First
40% of Malaysian household earn less than RM2,000 per month. 2/3 of the Malaysian population are surviving with less than RM4,000 a month with another 1/3 earning less than RM700 per month. Adding to that our salaries only increased by 2.6% from 2007 to 2009 while Indonesia is at 10%. If you still think we are superior, reality is that Indonesia is doing much better than Malaysia in many areas but I'll leave that in another story.

There are 7.9 million credit cards in circulation in Malaysia with a total of RM25.73 billion outstanding balances (debts!). Though only 3% default their loans, I really wonder how many people only pay the minimum amount because debt has been increasing year by year. It was only RM23.30 billion in 2008 plus the fact that 50% of bankrupts are those lower than age 30. Surprising isn't it?

Above sources are from statistics released by Bank Negara Malaysia. Luckily BNM has taken notice and is mulling on stricter credit card rules like min RM24,000 annual income to get a card instead of current RM18,000. Two cards per holder if salary is less than RM30,000 annually. Also coming could be loan to value ratio (LVR) for housing loan to 80:20 and disallow 100% and 95:5 financing. I will also post something about property prices in due time. 

Why people can go into debt? Probably because they overspend and do not know how to manage or save some money. My personal view is that:
  1. A new grad with no commitments (house and car) can easily save >50% of salary.
  2. A experienced worker with decent house and car can still save 30% of his/her salary.
  3. A young family with decent house and car can still save 15% of his/her salary.
  4. 10% is not really a challenge so please save as much as possible but ensure it is >10%.
Find it hard to save? Here are some of my previous ideas: 8 Simple Ways To Save Money

Delay Gratification
Giving an example of two persons: Amanda and Christy. Amanda at age 18 started to save RM1,000 each year and invest with 10% returns pa until she stops saving at 28 but still continue to invest will have RM230,000 at the age of 55 with just initial capital of RM10,000 from saving just 10 years.

Christy chose to enjoy life at her young age and only start to save RM1,000 each year at the age of 28 to 55 with investment of 10% returns pa as well. Christy only managed to have RM134,000 at the age of 55 despite saving for 27 years with a capital of RM27,000.

This gap of RM230,000 minus RM134,000 of ~RM100,000 comes from deferring spending or prudent financial management. When you get your paycheck, do you spend it now or save it for investments? Amanda deferred her spending for 10 years while Christy deferred for 27 years and still fail to catch up LOL. The question to you is how much can you delay gratification (happiness or satisfaction)?

To invest is risky, true I won't deny it but everything that you do is risky too if you do it WRONG. Drive a car but at reckless speeds, go hiking but not with proper shoes, put money in FD but in a shaky bank, invest in stocks but chose wrong company. What it implies is that whatever you do without prior knowledge is deemed taking unnecessary RISKS with no view of the consequences.

If you don't think how to put your money into good use, will it be enough for retirement? Plan to work part time even after retiring? Depend on your children? (I wouldn't if I do have my own family). Think about it. Starting it young is great, starting it now is still okay but starting it later will only delay your retirement and as you know it, time is limited and scarce.

You could also read my previous post on: Everyone Must Be A Millionaire

Budgeting Tool
With that, it is important to set our financial straight. Formerly I have been using pen and paper quite old school, don't laugh la. But as I have moved my research into the digital world of blog so have I moved my budget into an online tool named MoneyStrands. Click the few pictures below to see how the interface is. If you want to toy with it, I have a dummy account:

Username: nicktest
Password: test100586
Overview (top page)
Overview (bottom page)
Credit Card Details
Expense Analysis
The tool is really neat and I can upload my credit card statement via csv files, tag my expenses into categories, set monthly/annual budget, determine my personal cash flow, observe my debt-to-income ratio and personal networth. What really makes it strong and truly useful is that you commit to check and update your expenses and review them accordingly. For me I simply do it every Sunday night which is why I am writing this now coincidentally.

Budgeting is not being stingy, it is the foundation of a sound financial plan. Some people will say you are stingy because you don't treat them enough or that you don't know how to enjoy life. Let them say what they like, when you are financially strong and generating lots of wealth, that is the time you can treat people without stress & also tell them it is not just about present life, it is on having a secure future. This is what you don't learn in school :)

Saturday, September 11, 2010

Consumer: Fraser & Neave Holdings Bhd

2 Permai, Tanjung Bungah, Penang by BSG Property
F&N is mainly involved in the manufacturing of soft drinks (carbonated), dairy products and glass bottles and containers. It is the second largest F&B (food and beverage) company in Malaysia losing no.1 spot to Nestle Malaysia Bhd. The group has decided to exit from the glass business to unlock the value of its investment in Malaya Glass Products and fully focus on being a regional F&B enterprise. F&N completed the sale of MGP in July'2010 for RM710 million cash.

The group has also just sealed an agreement for the sales and distribution of Red Bull energy drink (all 3 Red Bull products) in Malaysia in April'2010. Red Bull has a very good presence within Malaysia as it is the leading energy drink with a 40% market share. With that, revenue loss from MGP disposal ~8% is being offset by the gains from Red Bull ~10% of revenue to F&N.

Not known to many, F&N also has a property division which has its focus on the development of Fraser Business Park with a gross development value (GDV) of RM350 million. Phase one has 80 shop/office units all sold out. Phase two is an ICT hub with HELP university college with hostel complex, services apartments, e-Hotel, retail entertainment space, hypermarket, food court and outlets with 1,800 parking lots. F&N has a signed lease agreement with HELP for a 15-year period.

Still ~98% of F&N's revenue comes from its core F&B line. With about RM1 billion in cash, F&N purchased a 23.08% stake in Cocoaland Holdings Bhd for only RM54.6 million in Aug'2010. With that F&N has just entered the snack food market in Malaysia. Cocoaland is the sole manufacturer of coco pie in Malaysia and a leading manufacturer for gummies in ASEAN region & also exports. This is in line with F&N's strategy and the synergistic deal is a win-win for both parties.

1. Does the company have an identifiable durable competitive advantage?
Being Malaysia's largest soft drink company it has a very established portfolio. 100PLUS, F&N Fun Flavours (like Sarsi & Orange that we always see at Chinese weddings), SEASONS and Fruit Tree & Coca-Cola products (to end in Sept'2011). Though not dominant, its dairy products hold a big punch with F&N Sweetened Condensed Milk, Teapot & Carnation (mamak stall favourite), Farmhouse and Magnolia brands. See below for portfolio pictures:

2. Do you understand how the product/service works?
It's a consumer product no need for further explanation.

3. What is the chance that it will become obsolete (KO) in the next twenty years?
With brands that will continue to provide stellar performance for the company, answer is NO.

4. Does the company allocate capital exclusively in the realm of its expertise?
Yes & No. It previously has the glass division and now still with a property division. Though F&N is good at unlocking the values for both, in the end they realised it is best to focus on what they do best which is F&B and recent activities shows they are doing it.

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 except after 2007 to present due to increasing retained earnings after obtaining Nestle's liquid milk business. The 5-year average for the company vs industry vs sector is as below. Sector is more broadly categorised like Consumer while industry is much more specific; for F&N is it Prepared Foods.
  • Net Profit Margin: 6.22% vs 5.80% (Industry), 6.07% (Sector)
  • Gross Profit Margin: 27.50% vs 48.92% (Industry), 36.76% (Sector)
  • ROE: 14.34% vs 12.27% (Industry), 14.33% (Sector)
  • Revenue Growth Rate: 16.68% vs 6.32%, 9.99% (compounded annual growth rate)
[Updated] ROCE is the true return to shareholder equity without accounting debt being used as leverage. Because F&N used debts to finance their expansion on two new plants there is some gap to be filled between its ROE and ROCE since 2007. At the meantime it is fine as the ROCE is hovering at near industry levels meaning F&N is taking just a nice level of debt to create value for shareholders.

Gross margin is far from average. Cost of goods sold is high. Revenue GR of 16.68% is due to the 200% revenue increase of the group's liquid milk business it acquired from Nestle. I computed that the annualised average over 10 years is 7% which is more appropriate. Also this % is in line with the revenue growth rate of the industry and sector.
Financial Chart 2

Very nice chart showing consistent growth on both EPS and DPS. F&N has maintained a good ~70% dividend payout ratio to its earnings per share since 2005 and ~50% for the years before it.
6. Is the company conservatively financed?
With RM1 billion cash in hand, liquidity is not an issue but F&N has debts of about RM563 million which amounts to a DE ratio of 0.4 as of financial year 2009. Well it still below my threshold limit of 0.5. The bulk of the borrowings came during 2007 of RM330 million and subsequently another RM90 mil in 2008 and RM200 mil in 2009. All of these were needed for the liquid milk business it obtained from Nestle in the year 2007 & also for the two new plants in Pulau Indah, Malaysia and Rojana, Thailand.

Inventory turnover at 2.5 months is at a healthy level over the last 5 years, this simply implies that F&N is able to sell its good every 2.5 months and replace inventory with new goods. Receivable turnover is at 3.5 months on average of the last 5 years. This figure is okay too.  

7. Is the company actively buying back its shares?
Over 2008 and 2009 there were five buybacks of 12,500 shares which is not a lot. But F&N has treasury shares of 237,100 for use but not likely to be utilised given their abundant cash.

8. Is the company free to raise prices with inflation?
Yes and the group always has a habit of openly announcing price hike before it takes effect. Sugar is an important element for the manufacturing of dairies and soft drinks for F&N.
9. Are large capital expenditures required to update plant and equipment?
Oh yes. Started in Oct'2009 the RM350 million canned milk plant in Pulau Indah will be the largest in Southeast Asia when it is completed in early 2012. F&N also opened its dairy plant at Rojana, Thailand in Sept'2009 tagged at RM250 million price tag.

Discounted Cash Flow Analysis
Instead of using the 16.88% revenue growth rate, I will use my own computed annualised rate of 7%. To be really save I can also opt for 5% which was the rate before F&N acquired the liquid milk business from Nestle in 2007.

Operating Costs: 91% of revenue (distribution & marketing expense ~17%)
Corporate Tax: 25%
Capital Expenditures: RM150 million +7.5% each year (not factoring cost of new plants as 1 time only)
Depreciation: RM120 million +7.5% each year
Working Capital Cost: +5% each year in line with revenue growth rate
Discounted Rate: 10%

Fraser & Neave Holdings Bhd is fairly valued at RM11.18. The current trading price of RM14.28 is expensive and at a premium for purchase. The P/E ratio of F&N is at 22.78 with Industry at 26.95 while sector at 15.24. In my opinion overvalued at time of writing. 

If I were to put 7% revenue rate and working capital growth it is only fairly valued at RM11.93. To be frank the figures I put in my valuations for DCF are very conservatives so put some flexibility in there and I will still not overpay >RM12.50 for F&N.

Looking at the chart below, I am able to see a sharp spike followed by minor correction very recently. If I apply VSA (volume spread analysis) it is smart money toying with greedy investors as a higher high price together with lower low volume shows absence of momentum and pressure to sell which resulted in minor correction. Best not to jump into F&N now.
The very resilient share performance of F&N over the last 10 years
Let's start with competitors. In the soft drinks segment, F&N has to battle with: 
  1. The Coca-Cola Company (TCCC) which is setting up a bottling plant in Negeri Sembilan to be ready by end of 2011 when F&N loses its right to sell Coca Cola products in Sept'2011. TCCC has no track record in Malaysia so it remains to be seen how well they can perform.
  2. CI Holdings which has exclusive rights to bottle and distribute Pepsi and 7UP in Malaysia. CI launched Tropicana Twister an orange juice product which proved to be very successful. CI Holdings' financial record hasn't be nice either until Tropicana product made the figures better since 2008.
  3. Yeo Hiap Seng with Brands like Yeo & Justea and is market leader in soya bean and tea (herbal and chrysanthemum) drinks. YHS is in the blues with continuous falling share price after losing rights to sell Red Bull to F&N and lower sales in Indon due to cancellation of 15/31 of Yeo's product pending new registration.
To counter the loss of Coca Cola, F&N has earmarked up to 50 drink variations to be launched in 2010-2011. F&N also has plans to expand market reach of its drinks as exports particularly Indonesia which is evident on its new plant in Pulau Indah to support that. F&N lost Coca Cola rights because they were unhappy that F&N did not improve the sales as much as it did on other line of products. According to CEO Ng Jui Sia, Asians have preference of fruits juices over carbonated soft drinks. TCCC was established because it thinks it can do better than F&N.

Now we take a look at dairy segment which contributes more revenue than soft drinks to F&N.
  1. Dutch Lady Milk a solid company which I wrote before. F&N Carnation has the largest market share 60% in condensed milk but the liquid milk business belongs to DLady. Financial record is good for DLady so F&N will need to maintain its lead on condensed milk.
  2. Malaysia Milk Sdn Bhd but is not listed. Sellers of Vitagen, Marigold products including the Peel Fresh line, mlik, yogurts, jelly and condensed milk. Vitagen is quite untouchable and Peel Fresh providing a lot of rivalry to F&N's juice products.
  3. Nestle Malaysia the biggest F&B player by market capitalisation. It is generally dominant in powdered milk products and fortified drinks such as Milo, Nestum etc. Nestle does many things with a portfolio of over 300 products under several brand names. Though size matters it does not rule the liquid milk business nor fruit juices nor soft drinks.
Overall F&N has many work to do here and is keen to expand through exports and the new dairy plant in Pulau Indah slated to be ready in early 2012 is going to be a regional hub for F&N's export activities to Indonesia and to serve the local market. Whereas the new plant in Rojana, Thailand will be used as a staging point for the group's eventual entry into the Indochina region that has about a population of 220 million people (Cambodia, Laos, Myanmar and Vietnam).
F&N the Lion King?
With still a lot of cash in hand, F&N is still looking for more M&A (merger & acquisitions) opportunities. Cocoaland is just the beginning and it was a good deal buying at a discount and a win-win for both parties. Market is tough and intense as seen in the net profit margins of less than <10% across most F&B companies. With focus fully shifted on soft drinks and dairy products, F&N is on the right track at least.

I am not so worried about the debts being used as leverage because it is needed and has the financial power to pay it off in less than 3 years. F&N has been managed very well for many years and is expected to continue to do so. With good ROE figures, consistent capital appreciation & decent dividend payouts, F&N is a buy for me on this good blue chip stock. F&N do exports to more than 20 countries and that fits my criteria.

Buying into F&N at the right time might be difficult as the major shareholders consist of parent company Fraser and Neave Ltd at 57.33% and Permodalan Nasional Bhd at 24.24% thus leaving little room for free float. Swapping DLady for F&N is a viable choice as DLady does not export. Will wait and see if any news could rock the share price down a little or at least put it at a fairly valued price. Btw this is my Raya goodie though one day late haha. Happy Aidilfitri to all my readers :)