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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.

Saturday, January 29, 2011

A Prosperous CNY To All

My year is almost up, Tiger year that is. You can say that it has been a tumultuous one with its Yang Metal Year Element, bursting conflicts and creating headlines especially with the currency wars and the global economy still recovering in a fragile but gradual pace.
Year of the Golden Rabbit, which begins on February 3, 2011 (technically 4th following the lunar calender) and ends on January 22, 2012. In accordance to Chinese tradition, the rabbit year signifies rest and respite; a year to calm your nerves and catch some breath. Things should be done in a more laid-back, easygoing and relaxed manner.

For those looking for fabulous CNY gifts here are some thoughts: money plant, pineapple or pineapple tarts or peach blossoms for loved ones. Hope your business/wealth will prosper, health in good shape and happiness will flourish like never before!! Wishing you an early Happy Chinese New Year, Xin Nian Kuai Le and Gung Hay Fat Choy.

Sunday, January 23, 2011

Some Recent Thoughts

Been rather busy couple of weeks and will be until after CNY, it would be timely that I address some of my thoughts as I start the year 2011 and soon the year of the rabbit. 

Malaysia's (developing nation) inflation rate is reportedly at a 2.x% level. Most intriguing considering that Great Britian (a developed country) has a CPI of 3.7% in December. 2.x% level is a blatant lie, if you ask me it is somewhere near 10%, I'll pick 8% since I am Chinese. God knows how they calculate it, even if they do. A more sound method to compute a near accurate CPI is to use the average income earner expenditure, break down their expenses by categories (food, transport, entertainment, education...etc), measure the increase in terms of % and weight them accordingly into a single CPI %. But sorry I am not in the PM's economic team so everyone in the country should continue being conned.

Market sentiment for 2011. Tricky to say the least, Feng Shui masters and analyst repeatedly say that 2011 will be a bullish year; testing new highs and set new financial records. Some idiots say that KLCI can reach 2,200, yea right, they just failed their maths. My personal opinion would put KLCI at 1,700-1,750 points. Considering that they is no big bubble in sight, (stress in sight), 2011 is still a bullish year but returns will never be as good as 2010. Hot money will continue to flow in Asia, developed countries still trying to clean up the debt mess. I would personally hold more cash than securities for 2011, it is getting very hard to do value investing in such time. You can go ahead with trading buy but please note the risks involved.

Climate change will have a more profound effect, more natural disasters that will inevitably push commodity prices higher, sigh. I hope more people will hop into the green bandwagon. As we enter the new decade, I would also believe a new pandemic will spread, possibly early in this decade. History has shown that in each and every decade, there will always be one. The industry to look at is glove markets and Malaysia is the world's biggest player.

I have stated that I will jump into the US market in 2011. Why? There is great money to be made in the US financial market for a number of reasons. No other financial market comes close to its size, and liquidity. The US market capitalization is x3 to x4 the size of its nearest rival: Tokyo stock exchange. U.S. markets are still the biggest in terms of turnover as well as value which implies that it is easy to find buyers and sellers. Greatest diversification, giving me the ability to invest in major companies and brands from all over the world (>7000) who list their shares on U.S. financial markets. My good investing friend has started ahead of me and well I have some catching up to do. I will continue to invest in Malaysia equities but for the US I will go for stock options.

For entertainment purposes I did a Joey Yap's Bazi Profiling Chart and found out that my two most influential elements are Day Master: Yang Wood (3) and Yang Earth (2) with the two Yang Earth's at indirect wealth column (properties, equities..those stuffs that doesn't come from ya own sweat and blood), wow! The key words of my success is through diversification (Yang Wood) and observation (Yang Earth). That explains a whole lot of me (for those who know me well). The only problem I have is procrastination err some days I feel very lazy to do anything. Nevertheless it has sort of build a little of the already big confidence that I have towards building my wealth. Though I am not an absolute believer, I do not discredit it since it is so popular they must be some beyond science truth in it.

Some say I'm pessimistic or always in the negative thinking. I vehemently believe that you can both criticize things and be happy at the same time. You have to give credit these people for they communicate better, think more clearly & could be more attentive to their surroundings. I am not saying that negative thinking is superior to positive thinking, but neither is positive thinking the god of all thinking. Want to lose weight? No need to eat right; just think about being skinny! That doesn't really work. Criticism at its best leads to improvements, you think I like to always be negative solely for the sake of being negative? You condemn the government so they can improve. If you continuously praise them and be content or fully optimistic, you think anything would change? Strike a balance between both and call it critical thinking. Be positive in what you like to see or want but be negative on things that don't look right at all.

Sunday, January 9, 2011

Malaysia's Inflation Rate is Bogus

Inflation rate refers to a general rise in prices measured against a standard level of purchasing power. In Malaysia it is measured through consumer price index (CPI).
Our government has again and again restated and hold firm to the fact that the index is still hovering at 2%. Their worst case scenario include a figure only as high as 5%. How did they get those figures? Pluck from the air? Pull it from a magician's hat? Whatever it is, someone must have massaged the figures before it went live on our newspapers. And today's newspapers finally made me to write it out.

New sugar price for F&B manufacturers to impact consumers. F&N CEO Datuk Ng Jui Sia said he was confused, adding that the government normally announced any increase before such a notification from suppliers. Referring to the price for coarse grain sugar is now RM2540 per tonne up from RM1940 while that of fine grain sugar has risen to RM2620 per tonne from RM2020.

Coffee shops increase drink prices. It is difficult to find kopi-O below 80 sen any more. Those who were charging 70 sen before have increased the price by 10 sen or 20 sen. "Many raw materials like sugar, curry powder, evaporated milk and even plastic bags have gone up in price in the last few months.

Let's just take a look at the recent hikes:
Petrol prices: RON95, RM1.90 per litre up 5 sen (2.7%), RON97, RM2.40 per litre up 25 sen (11.6%)
Kerosene: RM2.50 per litre up 10 sen (4.16%)
Sugar: RM2.10 per kg, up 20 sen (10.5%)
LPG a.k.a cooking gas: RM1.90 per kg up 5 sen (2.7%)
From market: Kuih bulu 10 pcs RM1.50, now RM2.00 (33%), pork min RM2.00 now RM3.00 (50%), swiss corn used to be 70 sen, now RM1.00 (42.8%) 

Look at the figures, you call that a 2%? TNS u govt, get your facts right first. While it is true that we are the cheapest in the region in most items and subsidy rationalisation has to take effect, how do you plan to stop leakages and corruption? Oh ya by catching "small fishes" these days as have been published in newspapers recently. A few hundred thousands missing is nothing compared the billion you have ninja-ed from taxpayers.

If the argument bought forward by the govt saying that the increase by hawkers and sellers are not in tandem with the rise in raw materials then it is an invalid argument. CPI is supposed to be measured from the end-consumer perspective not from your own damn reference. Did the govt conduct any surveys before the price hike? No, so how do they come about the 2%. Of course ting tong tiang la (guesswork).

Our oil and gas (O&G) including automotive pricing mechanism is even more absurd. You can read it BN = Barang Naik! Premium Fuel RON97 Goes Up. Sooner or later you will see that cooking oil and electricity will go up, I have 95% confidence in this. What the govt needs to do is to show the people the real facts & figures, there is no point in lying as we can feel the effect at a much greater magnitude.

So the questions is, will I get a big salary increase as well? The answer is probably no, because most companies measure inflation rate from the figures given by the govt and well you do know now that the rate is bogus! There's many things to change in the country, including a simple thing as a percentage.

Monday, January 3, 2011

Industrial Products: Supermax Corporation Bhd

It is principally involved in the manufacturing and marketing of latex gloves. The group was founded by Thai Kim Sim (still present as Executive Chairman) together with his spouse. It has 8 factories manufacturing various types of latex gloves, primarily natural rubber and nitrile gloves.

The total production capacity of the group is approximately 17.6 billion pieces of gloves per year, capturing 12% of the world's demand for latex examination gloves. It is also the second largest rubber glove manufacturer in Malaysia after Top Glove Corporation Bhd which produces around 33 billion pieces of gloves per year with a 23% global market share.

Not forgetting the competitors, Top Glove (33bil pcs), Kossan (14bil pcs), Hartalega (7.6bil pcs) and Latexx (5.5bil pcs). These top 5 alone accounts for 78% of total rubber glove exports in Malaysia for 2010. Will be looking at their financial ratios comparatively in later sections.
1. Does the company have an identifiable durable competitive advantage?
Economies of scale is already a big advantage for being second largest manufacturer and differing itself from Top Glove's more focused mass production of powder free gloves while Supermax's has 35% of its sales in nitrile gloves - the highest in the industry and exports it to the biggest demand - the United States. 

2. Do you understand how the product/service works?
Predominantly used in health care which is resilient. Other purposes will include food and services industry for hygienic reasons.

3. What is the chance that it will become obsolete (KO) in the next 20 years?
Not a chance. There is no substantial substitute material for rubber in the world yet. 

4. Does the company allocate capital exclusively in the realm of its expertise?
The most significant project under its belt is the new Glove City Project in Bukit Kapar, Klang - new factories starting in 2011 with plans to progressively transfer all its rubber glove production to this area for enhanced operating efficiency. The long term project is slated to be completed in 10 years' time to double existing total capacity to 30bil pieces of gloves p.a.  That is a 7% growth in terms of volume per year.

5. What is the company's financial history and status?
2003 saw the outbreak of SARS and spurred worldwide demand for examination gloves which boosted sales. Ever since it has been falling to its bottom during the subprime crisis in 2009. For 2010 and towards 2011-2012, I am forecasting a sensible 7% to 10% growth in demand volume thanks to emerging markets as this new decade we will see 1 billion people enter the middle class who can afford better healthcare.

Pre-tax profit margin has held its ground at 12%-13% for 5-year and 10-year average. Revenue growth rate has slowed down from 33.47% 10-year avg to 28.52% 5-year avg due to 2009 crisis. Meanwhile we see ROE going up from 17.74% 10-year avg to 20.34% 5-year avg. As a sanity check, they look healthy enough for me.

Below is the 5-year average for the company. Sector is more broadly categorised like Industrial Products while industry is much more specific; for SUPERMX is it Rubber Products

  • Net Profit Margin: 10.63% vs 10.23% (Industry), 3.72% (Sector)
  • Pre-Tax Profit Margin: 12.15% vs 15.38% (Industry), 8.49% (Sector)
  • ROE: 19.17% vs 13.71% (Industry), 14.58% (Sector)
  • Revenue Growth Rate: 29.64% vs 7.30%, 13.11% (compounded annual growth rate)
ROCE is another view point of the returns to shareholder equity without accounting debt being used as leverage. SUPERMX has been leveraging debt for many years but they do keep it at a reasonable level of not going over DE ratio 1. So far their leveraging has done its job of keeping the company profitable.
Nice growth in EPS which is exponential. On the other hand, its DPS lags a lot as SUPERMX does not have any dividend policy and they have only been dishing out a 15%-17% dividend payout ratio. For current financial year that would roughly be a 3% yield. 

6. Is the company conservatively financed?
Yes, with RM118mil in cash and bank balances in 2009, it gives the company sufficient funds to deal with rising commodity prices like latex and for inventory & receivables. Unlike TOPGLOV they do not have that nice balance sheet with a DE ratio of 0.5 or a capital structure of 30% debt and 70% equity though over the last 3 years they have parred it down from a high of nearly ratio 1. That's half! and they did it during the subprime crisis, not a lot of companies have the will do so especially during bad times. 

7. Is the company actively buying back its shares?
Yes in 2008 they bought back nearly 2mil shares for RM1 million. SUPERMX also granted 1/3 bonus in 2003, 1/4 bonus in 2006 and a 1 to 2 share split in 2007. Most recent a 1/4 bonus in 2010.

8. Is the company free to raise prices with inflation?
Yes and most glove makers have started raising prices but they are able to pass on only a part of increased costs due to normalization of demand. This explains why their margins are falling and is expected to be in the 11% to 13% range as 65% (used to be 55% - latex prices have surged) of the cost of producing gloves come from rubber prices. Furthermore we have the weakening of the dollar which is still expected to further decline in the long run.

9. Are large capital expenditures required to update plant and equipment?
Not really, the only project SUPERMX is undertaking right now will cost RM400 million in Bukit Kapar, Klang a.k.a Glove City over a 10 year period. At the back of an expected revenue of RM1 billion (a first time for the company) for 2010 and decent profit margin, good cash flow & working towards operational efficiency, I see no issues here.

Discounted Cash Flow Analysis
This is tough as revenue growth for such industry varies in a big range. I either take the average revenue growth rate or second guess the rate for year 2011-2013.

Revenue Growth Rate: 25% (historical) or 15% (second guess)
Operating Costs: 88%
Corporate Tax: 25%
Capital Expenditures: RM45 million +2.5%/year
Depreciation: RM30 million +2.5%/year
Working Capital Cost: 0% (receivables turnover of 2.14 months - fast enough to cover)
Discounted Rate: 12%, 11% & 10%
Supermax Corporation has a fair value of anything between RM4.89(12%), RM5.58(11%), RM6.42(10%). The current trading price of RM3.98 is cheap based on my valuation. The share price has recently took some beating due to being overbought and went far ahead of their 2010 earnings. Supermax also announced a drop in Q3 pre-tax profit from weakening US dollars and higher latex prices. It is a correction taking place.

Competitors & Risks
Hartalega differentiates itself from the others by its focus on nitrile gloves 70% in its production while the other 30% for latex gloves. Nitrile gloves command better margin and this is why it has the highest among all at 21.10%. But 75% of its revenue comes from the US where Microflex Corp and Medline Industries alone 50% is derived. This exposes Harta to a major risk in the even of a loss of a major customer. Too scary for me.

TopGlov commands the highest ROE and ROI as it is debt free while Adventa is on the other end. Supermax's appalling ROI is due to its failure in turning around APLI's losses and decided to make a full impairment for its investment and stop its production since Dec 2008. The company has ended this episode and looking forward on its factory expansion plans.

As high-end or premium gloves commands better margin, most manufacturers have been shifting production line to accommodate nitrile gloves. Supermax is charging ahead to have 35% of its line in nitrile & 15% surgical gloves by 2012. Kossan will focus on nitrile and surgical gloves as well. TopGlove will continue to play the volume game as it focuses on producing latex gloves which is roughly 76% of their line, 10% vinyl gloves, 7% nitrile and 5% surgical only. TopGlov is rumoured to be eyeing a takeover of Latexx Partners Bhd. The biggest risk in TopGlov is oversupply which will hit it the hardest since it has the biggest capacity of all the players.

The fact remains clear, the demand is in nitrile gloves. The biggest reason why many and most medical personel uses nitrile is because many people are allergic to latex. Nitrile gloves are also more resistant to puncture making it more suitable for other professions too like food and services. Although nitrile are less comfortable than latex gloves, new production techniques have improved this aspect e.g. Kossan's new gen nitrile gloves. I do not believe there is a lot of difference between what each company is offering, they only defer in their network, production strategy & competitive pricing as you can see the demand is there on all companies, inventories are coming in and out and receivables are still at their historical levels.

It is in my opinion that the risk of oversupply should not be focused, a bigger and more concerning risk is from higher latex prices. Higher commodity price will eat into net margins and together with the weakening of the US dollar (trade currency) it could have an eroding combo effect. I see both to come into fruition 2011 therefore bigger players like TopGlov and Supermax will have better protection due to better economies of scale (Supermax is better as they have more production towards nitrile-synthetic rubber). Niche players who focuses on premium or niche market could also have some protection like Harta and Adventa. 

Malaysia is the world leader in rubber gloves, with a market share of 60%. There were too many players in the 1980s and 1990s and what is left of the them is what I call the big six. The environment still remains competitive as firms in Australia and Indonesia have begun to look into the manufacturing of rubber gloves as well.

The demand for rubber gloves is expected to grow around 7% to 10% per annum backed by better health awareness and standards and the good new is that the demand is relatively recession-proof (2009 crisis as exception as it as the biggest dip since the great depression) because it is predominantly used in the healthcare sector.

Is SUPERMX a good deal right now? The shares have fallen more than 30% since July and heading for a double bottom soon. There is one thing that makes SUPERMX a unique target. They are finalising an American depositary receipt (ADR) programme under which it will list 50 mil shares as over-the-counter (OTC) securities in the US meaning it will be under the visibility of US and international investors without dealing with currency conversions or other cross border transaction costs. Supermax has received approval on 21 Dec 2010. Other companies with ADR programmes are KLK, TopGlove, Sime Darby, Genting and Maybank.

Due to many macrofactors that could impact glove makers' revenue, a trading buy for such a counter like SUPERMX should suffice. Having said so, any investor has to be careful when to enter and when to exit. Investing in rubber glove makers is not for the fainthearted. I have made my fortunes in TopGlov before, could I do it again for Supermax this time? Only time will tell. This time I believe Supermax has more upside unless TopGlov changes its strategy to go more into nitrile. It is risky though, further compounded by the fact I have to time it nicely for the correction taking place now. At least the price has fallen to a more appropriate level.

Sunday, January 2, 2011

All About iCap Part 2

Side track for a moment as I criticize the govt for declaring yet another public holiday, this time for winning the AFF Suzuki Cup 2010. This is mind boggling. How come no public holiday when Nicol David won the world title? Seems to me that this move is to exploit an opportunity to earn some brownies from the "rakyat". Hell yeah, not from ME. Declaring a sudden holiday is decremental to businesses and work schedules. How do we expect to pull more investments in when we have to pay workers twice the salary to work on that day in order to meet delivery deadlines. Win AFF get one day holiday, win the world cup and we will get one week holiday? Feel happy that you got time off for personal things but do feel sorry as our country again shows that this is truly Bolehland. 

Now back into business, if you missed out Part 1, you can read it here. If not, I will jump straight into the investments by iCap fund ( Berhad). For simplicity sake I will take the market value of holdings of iCap dated on 16th June 2010 and back track it from present date. 

By order from largest to smallest in value: 
Estimate cash at hand: RM116mil (32.5%) 
Parkson Holdings RM49mil (13.7%)
F&N Holdings RM37.5mil (10.5%)
Boustead RM35.2mil (9.85%)
Petronas Dagangan RM31.6mil (8.85%)
Padini Holdings Bhd RM24.7mil (6.9%)
Suria Capital RM16.1mil (4.5%)
Integrax RM15mil (4.2%)
PIE RM13.5mil (3.7%)
Tong Herr Resources RM9mil (2.5%)
Malaysia Smelting Corp RM8.5mil (2.4%)
Mieco Chipboard RM900k (0.4%)
Grand total or also known as total NAV: RM357mil 

It disposed off:
Astro All Asia Networks Plc
Kuala Lumper Kepong Berhad
Lion Diversified Holdings Bhd
Poh Kong Holdings Bhd
Swee Joo Berhad
Hai-O Enterprise
A handsome gain of RM32mil with a cost of RM53mil.

It is not surprising that iCap is holding a lot of cash (32.5%) as valuations are getting increasingly expensive against good returns or upside potential. iCap usually buys when the market is low (I remember their cash level at that time was in the 15% range) and sells it before they peak well sometimes I feel that they exit too early. Much of the strength in the portfolio comes from the top 5 holdings (49.8%), anything less than 3% is off little importance to me as they barely shake the total NAV even if the share price goes rock bottom. I buy and monitor iCap from their strategy with special attention on their top 5 holdings as well as the potential upside they have.
Below are my views on their top 5 holdings:
Parkson Holdings RM49mil (13.7%)
-Covered previously here. Even with the share price trading sideways in recent months, I am optimistic and believed it has the most upside potential in the long run. iCap will hold this long term.

F&N Holdings RM37.5mil (10.5%)
-Covered previously here. Robust consumer stock that has shown its capability to change and rewards shareholders. My views have not changed on F&N, I can't find a good value to load up on it sigh. iCap will hold this long term.

Boustead RM35.2mil (9.85%)
-This choice by Mr.Tan would probably be because of the anticipation of government patrol vessel deal at that time as Bstead is the only company having the expertise in this area. And recently it added two more govt land deals together with a RM1bil MTN programme. A trading buy move from iCap.

Petronas Dagangan RM31.6mil (8.85%)
-Covered previously here. A fairly good stock to own, has good dividend yield and always in an expansion mode. iCap will hold this long term.

Padini Holdings Bhd RM24.7mil (6.9%)
-Planning to cover this counter soon, was already in my short list. Padini's share price has grown three fold from its bottom during the subprime crisis. Padini basically does what I call "ladies industry" which is resilient during bad times. iCap will hold this long term.

It is not wrong to criticize iCap for holding some terrible shares at times, even I don't understand why they load those. But it is not right to say that each investment will turn out fruitful. There has never been a successful investor that never ends up with some rubbish holding and make mistakes. Even Warren Buffett made a recent mistake loading up on ConocoPhilips shares for Berkshire near the top of its run. It happens. The key thing is to gain more than you lose, call it a 80/20 rule. 2 bad counters is nothing compared to 8 good counters, you still gain from the other 6 counters and probably learn a lesson or two.

I bought iCap at RM1.76 and not even a year it has surge to RM2.09 a nice 18.76% return. My take is simple, do not treat iCap as a trading buy, it must be held long term, literally 3-5 years or more. Rest assured your money is well invested with the likes of Mr.Tan Teng Boo and his investment team.

"Investing is most intelligent when it is most business-like" - Benjamin Graham