Intel To Be Underdogs?

Introduction

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

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

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

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

Financial for YR2009

Sales for AMD comes in at $5.4bil while Intel has $35bil with gross margin at 42% vs 55%. With AMD spending $1.7bil in R&D and another $1bil for marketing, general admin stuffs they have minus net profit but turns positive after Intel paid $1.25bil in settlement agreement for malpractices. On the contrary, Intel spends $5.6bil on R&D and another $7.9bil on marketing and, general admin stuffs leaving only 16% net profit margin ($5.74bil).

Implication: Clearly Intel earning x7 as much as AMD though the latter is still able to compete with the big bully for many years since its establishment.

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

Implication: The mainstream market is the most profitable & biggest market of all as it accounts 75% for Intel and probably 60% for AMD.

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

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

Current Developments

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

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

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

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

G3D Rating (higher is better) | Rank (lower is better)

GeForce9400M (Ion2) 139 | 504

Radeon HD5450 (Zacate & SandyBridge) 300 | 290

Radeon HD5570 (Llano) 752 | 110

Implication: Atom is as good as dead. If Intel's mainstream SNB can only offer gpu performance (as shown in preview benchmarks) near AMD's Zacate meant for Atom/CULV market then Intel is lagging behind a lot in the GPU realm.  

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

 

 

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

 

Perspectives

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

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

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

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

Conclusion

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

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

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

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

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

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

Trading/Services: Petronas Dagangan Bhd

Petronas Station with "Mesra" convenient store

Introduction

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

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

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

Fundamental

1. Does the company have an identifiable durable competitive advantage?

With parent Petronas having being the 13th most profitable company in the world and the most profitable in Asia, its resources stand at a very respectable level. Also the corporation is vested with the entire oil and gas resources in Malaysia including the responsibility to develop and add value to them.

2. Do you understand how the product/service works?

Dig, refine, distribute and sell. How complex can it be :)

3. What is the chance that it will become obsolete (KO) in the next 20 years?

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

4. Does the company allocate capital exclusively in the realm of its expertise?

Yes. It has always done so. With an announced capex of RM500 million for financial year 2010/2011, more capital will be poured into expanding their retail segment (their main focus) as well as infrastructure plans to support it.

5. What is the company's financial history and status?

Financial Chart 1 (PM, ROE and Revenue GR)

Net profit margin (PM) has been relatively stable at less than 4%. However the return of equity (ROE) is commendable as PETDAG has been able to hold it in between 10% to 20% range on average which shows management fiscal adeptness. Revenue GR on the other hand has shown much volatility which is attributed to global oil  & gas prices and demand. Oil and gas are considered a commodity and as all commodities, they have their share of bubbles and burst.

 

Below is the 5-year average for the company. Sector is more broadly categorised like Trading/Services while industry is much more specific; for PETDAG is it Petroleum Products. 

• Net Profit Margin: 3.06% vs 9.20% (Industry), 10.11% (Sector)
• Gross Profit Margin: 8.35% vs 16.24% (Industry), 27.16% (Sector)
• ROE: 17.25% vs 18.49% (Industry), 16.61% (Sector)
• Revenue Growth Rate: 10.69% vs 22.19%, 14.62% (compounded annual growth rate)

Net profit margin for PETDAG is rather healthy considering the others in Malaysia such as SHELL (2.47%) and ESSO (-0.05%). The revenue growth rate is pretty tricky to estimate as such I will use the average of 5-years (17.19%) and 10-years (17.66%) as a reference to project the revenue growth rate for the DCF computation later.

Financial Chart 2 (EPS and DPS)

With revenue levels affected by global oil prices and demand, the EPS is also expected not to be in linear-like trend. Nevertheless the dividend payouts never exceeded their earnings and is on the rising trend thanks to the management who values shareholder's interest. The dividend yield for PETDAG is astonishingly good at 3.9% as compared to the industry of 1.23% and sector of 1.62%.

RK20011 black RM28 @ LovelyClo

6. Is the company conservatively financed?

PETDAG has been profitable ever since it has been listed and has never incurred debt. All financing are generated and funded internally. As of AR2010, their cash and cash equivalents stands at RM912 million and this figure is growing over the last 10 years.

7. Is the company actively buying back its shares?

No but PETDAG is doing its best by rewarding shareholders in terms of good dividend yield.

8. Is the company free to raise prices with inflation?

Yes. They raise their price in accordance to demand and supply factor. As for kedai 'Mesra' this I am not too sure but with their main focus on this segment I think they will make their price competitive and at the same time profitable.

 

9. Are large capital expenditures required to update plant and equipment?

Yes. PETDAG has announced that it will spend a capital expenditure of RM500 mil for financial year 2010/2011. In previous years they have also spend that much within the vicinity of RM300 mil to as high as ~RM700 mil in certain years.

Discounted Cash Flow Analysis

Revenue Growth Rate: History 17%, Optimistic 15%, Realistic 12%
Operating Costs: 96% (very high I know)

Corporate Tax: 25%

Capital Expenditures: RM500 million +3%/year

Depreciation: RM320 million +3%/year

Working Capital Cost: in tandem with growth rate

Discounted Rate: 10%

Drum roll please....Petronas Dagangan Berhad is fairly valued at RM11.23. The current trading price of RM11.58 put it slightly above fair value. It is hard to gauge how the revenue will perform year by year therefore I have also computed the fair value for respective growth rates: 10% (RM10.50), 15% (RM12.39) and 17% (RM13.20). It comes to no surprise that some research houses have a buy call while some have a sell call on PETDAG, because it is difficult to see how the revenue growth rate will be, you just need to take your best guess.

Conclusion

I have mixed feelings towards this counter. First, it is a government linked company though it is a really good world class parent company PETRONAS. It can be a bigger and better company if not for the streams of dividends being given to the government in which not all are being used in the correct manner. A total of RM410 billion has been paid to the govt. That is a lot of money!

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

What I do like about PETDAG is the generous dividend payout even for such a company that requires high capital expenditure year after year. PETDAG is also taking their petrol stations to a higher level by adding more value to customers by providing convenient services such as ATMs, Touch n' Go facilities, e-pay terminals and express bus counters. The company also team up with local food and beverage players, banks and transportation players to provide better services at their petrol stations. These players include MCD, KFC, Dunkin Donuts, Konsortium Transnasional Berhad, Maybank and CIMB Bank.

They are also spearheading the bio-diesel B5 implementation which will provide more volume growth in this segment. With its financial prowess, PETDAG has the means to take leadership in the markets that they want to focus on. With many years of profitability, I am sure they will continue to be the same at least before the world's oil and gas runs out.

Will it be in my list of smart pickings? If only I had extra capital and with the criteria that my other pickings are not at a good buy. Trading on PETDAG has to be done wisely as the volatile share is not something to be overlooked. If it is bought at a wrong time, you could be holding it for some time before you get to see some real returns. The question is, can you continue to hold it when the tough gets going? I will not refute that it is still a company whose share is worth a look.

8372 White Top RM34 @ LovelyClo

Time 4 Revaluation!

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

EA2478 blue with belt RM36 @ LovelyClo

MAMEE RM3.48 fairly valued, aboi's fair value RM3.45
1. DCF of 13-15% discount rate change to 10%. (less discount for sound businesses as risk component is not high)

2. Revise revenue growth rate; GR from 7.5% to 8% (contributed to growing export market)

3. Profit before tax; PBT trending >10% (economies of scale & favourable agreement with key raw material suppliers)

4. Operating cost change from 92% to 90% (better margins seen in 2009 and 2010 from quarterly)

5. Risk come in bottom line impacting exports due to stronger ringgit.

6. Check out: 1H10 Results & Corporate Update Investors' Briefing

7. Other useful analyst reports: Analyst Reports by Investment House(s)

TOPGLOV RM5.77 above fair value, aboi's fair value RM5.10

1. DCF added in 2010 results. 2010 revenue previously estimated at rm1.7bil but 2010 report shows it reached the rm2bil mark.

2. Revise revenue GR from 10% to 12%. (still conservative)

3. Working capital now in tandem with revenue GR. (added in for better valuation)

4. Change operating costs margin from 90% to 87%. (operating efficiency)

5. Risks: Crude oil prices & stronger ringgit will impact its huge global export market, thus I am less optimistic about it's revenue for future.

5. Check out: Investor Presentation Dated 28 Oct 2010

GENTING RM10.68 undervalued, aboi's fair value RM12.25

1. Resorts World Sentosa is doing very well for its first year of operation, stock is undervalued as the financial gains have yet to be published officially.

2. Genting's financial year end is 31 Dec, stock is a good buy for appreciation until after CNY 2011 (March-April timeframe).

ICAP RM2.06 undervalued, aboi's fair value RM2.50

1. Tan Teng Boo's bigger holdings of Integrax, Parkson, Suria Capital, Boustead and Padini have all risen in share prices.

2. Net asset value as such has also increased thanks to bullish sentiments on these counters especially Boustead and Padini which are not exactly too overvalued.

JOBST RM2.90 above fair value, aboi's fair value RM2.70

1. Share soaring, boosted by the Government's Transformation Plan on 26.10.10 which promises to create more jobs.

2. Revise revenue GR from 10% to 12%. (more job creation & hunting)

3. Though 2009 has lower profit than 2008, for 2010 quarter-to-quarter it is doing better on all fronts.

4. Check out: Company Overview Dated June 2010

FREIGHT RM0.98 undervalued, aboi's fair value RM1.70

1. Consolidated results from annual report 2010.

2. 15% revenue growth is in line with previous estimates.

3. Check out: FY10 ResultsReview by OSK Research House

PARKSON RM5.96 undervalued, aboi's fair value RM6.60

1.  Previously covered just recently. For risk management: 15% discount would value it at RM6.00, at 10% discount valuing it at RM6.60.

2. It can be said that Parkson is between fairly valued to undervalued depending on your risk tolerance.

F&N RM14.30 overvalued, aboi's fair value RM12.85

1. Cumulative 2010 3rd quarter revenue GR of 7% is exactly the same as my previous estimate.

2. Nothing major except for more product launches, dairies and soft drinks.

3. Good night milk (new product) is amazing, you should try it :)

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