EPF new basic savings - Its actually not that bad...

EPF announced new figure for basic saving requirement before withdrawal which will be effective next year.
A quick comparison, this is the old rate.

Below is the new rate,

The revised figure represent an 25%- 60% increase of the old rate. Some critics say that, the effective new rate is actually locking up the members capital, hence preventing them for realizing higher potential for the savings. One of the critique even says that, if Nobel Foundation was to act as EPF, they will ceased to be exist today. (See here) or picture below. 

But is it true to their claim? I'm afraid not. 

First , we can try to check the performance of Nobel Foundations. 

Their annual report can be viewed here, In 2012, they earned a total of SEK 30.456 million for total equity of SEK 2860.9, this represent a return of........1.1%! 

Incontrast, EPF declared a dividend of 6.15% for 2012, which is comparable to Amanah Saham National Berhad's  fund distribution between 6.00%- 6.70%. And their return is less volatile than some of ASNB's fund. For example, in year 2008 during World financial crisis, EPF declared distribution of 4.5% while Amanah Saham National Scheme Fund report a return of -34% (source, ASNB annual report 2012). 

We need to understand that, 

1. There is no free lunch in the world, higher return came with higher risk. Especially when we invest in equity. 

2. The main objective of EPF is to safeguard the member's saving for retirement. Growing the fund within the risk constraints, is their second objective. Hence, chasing higher return by taking much higher risk, is against their principal. 

3. With roughly 40% invested in equity, 20% invested in overseas (see here) , EPF holds a much balanced and diversified portfolio than any other unit trust in Malaysia can provide. In investment world, a balanced and diversified portfolio is much safer, while have a potential of earning return near equity level. 

4. And not to mention, EPF overhead expense is less than 0.2% of total assests, where most of the private unit trust in malaysia charged around 1.5% for assest management fees. 

5. Last but not least, even if the members can withdraw earlier, how many of them, have the skill of Warren Buffets to outrun the investment professional in the long term? How many of them , will actually loose their savings in stock market frenzy? 

As conclusion, 

The above measure is not that bad, after all. 

My Stock Analysis Principle

Just to outline the key principle when i try to analysis the company.

1. Type of company determine evaluation method

As explain below:

" Evaluate the company by treating it as stable business. In this way, the performance of the company: the Return On Invested Capital (ROIC) will be pretty predictable through reading past financial statement. Any change of ROIC will not be sudden and can be detected through trend analysis. 

Evaluate the company by treating it as a fast growing business. In this case, very large CAPEX is expected during the first few years of growing phase, where higher depreciation will results later. This type of company cannot be evaluate through studying the past financial statement. They can only be evaluated, by understanding the industry environment the company operated at for the next five to ten years, then predict if they can recoup from their initial Capital Investment. "

2. Return on Invested Capital (ROIC) in future is what matter to me. 

(See here for a discussion on important of ROIC)

Return on Investment Capital (ROIC) which is Owner Earning/Invested capital. 

owner earnings = (a) reported earnings 

 + (b) depreciation, depletion, amortization, 

 - ( c) the average annual amount of capitalized expenditures for plant and equipment *

 - (d) change in working capital (Inventory)

- (e) cost of Stock Option **

Note: 

* Net CAPEX (CAPEX - Depreaciation) reduced by addition of new equity capital. 

** Cost of stock option includes issuance of new share below current NAV which results in dilution of interest to existing shareholder, reduces by sharebuyback at price below NAV. 

My ROIC concept will be different from Warren Buffet's or some of the text book as

1. I will treat receivables as fairly convertible to cash. 

  Although increase in receivables will means additional capital requirement from owner, that increase is much easier to recoup in cash form than inventory or Property , Plant and Equipment. 

3. Present Value (PV) per share for the company formula

PV = NAV * ROIC / Required Rate of Return

Where Required Rate of Return = Average dividend yield of KLCI company + Real GDP growth rate + Inflation rate

Note that the PV calculation will ignore the different risks for different company. 

4. Classification of Valuation Ranking

If i said a company is

a. Fairy Underpriced, current share price  below 50% of PV

b.  Underpriced, current share price between 50% - 75% of PV

c. Slighly  Underpriced, current share price  between 75%-90% of PV.

d. Fairy priced, price  between 90% - 110% of PV.

e. Slighly Overpriced, current share price between 110% - 130% of PV. 

f. Overpriced, current share price between 130% - 200% of PV. 

g. Fairly Overpriced, current share price above 200% of PV. 

5. Safety Margin for Investing 


I will further discount the PV with some safety factors which depends on, 


i. Debt to Equity ratio
ii. Net profit to interest cost ratio
iii. Whether ROIC is trending low
iv. Industry specific
v. whether director is major shareholder and hold controlling shares
vii. Others


Again, the disclaimer, 


Disclaimer
The data used will be  taken and calculated according to information supply from the company's quartery report and annual report available at the Bursa Saham website.
The author bear no responsibilities of any buying/selling action of the investor, and any profit/loss incur by the investor.

7060 New Hoong Fatt Holdings (Overpriced)

Preface Discussion
There are two ways to evaluate a company.

1. Evaluate the company by treating it as stable business. In this way, the performance of the company: the Return On Invested Capital (ROIC) will be pretty predictable through reading past financial statement. Any change of ROIC will not be sudden and can be detected through trend analysis. 

(See here for a discussion on important of ROIC)

2. Evaluate the company by treating it as a fast growing business. In this case, very large CAPEX is expected during the first few years of growing phase, where higher depreciation will results later. This type of company cannot be evaluate through studying the past financial statement. They can only be evaluated, by understanding the industry environment the company operated at for the next five to ten years, then predict if they can recoup from their initial Capital Investment. 

Earning for some types of the company , such as utilities, are fairly predictable. Just that some of the key information like Power Purchase Agreement, Detail CAPEX amount, future financial interest, quality of management to ensure reliable operation, long term issue affecting probability of the company are not generally available to public investors. 

Earning for the others, like Hotel & Leisure (such as Genting adventure in Singapore and Las Vegas), are however highly unpredictable. Which their share price should reflect a discount to compensate  for uncertainty that investor faced. 

Key Information For Analysis

Additional Info: Chairman and CEO are major shareholder. This is a typical family business company. 

Discussion

Major business activities by New Hoong Fatt Holding is in trading and manufacturing autovehicle parts. The company had expand its operation to oversea (like Thailand, China, Indonesia). However as revenue and profit trend stable, i will analyse it by treating it as stable business. 

Positive

1. Growing autovehicle market means growing demand for its part. 

2. Stable dividend payout. 

Negative

1. Stagnant Revenue trend despite high CAPEX. 

2. Fluctuation in profit

3. ROIC trending lower. 

Conclusion

Dividend rate of 4.2% is better than Fixed Deposit. But given the stagnant revenue, near negative ROIC for now, the company is overpriced. 

Disclaimer
The data above was taken and calculated according to information supply from the company's quartery report and annual report available at the Bursa Saham website.
The author bear no responsibilities of any buying/selling action of the investor, and any profit/loss incur by the investor.

New Hoong Fatt Holdings Bursa Website

How much should gold price be?

Watching the price of this "precious" metal tumbled 28% in 2013, its first drop in price during last 13 years, one would easily wondered, what should be the price for this metal, where its active function is for decoration and industry use? 

There are several ways to estimate the price of gold, i will try present two of the most prominent one. 

Case 1: If gold is considered inflation-hedge, gold price should change according to inflation rate. 

We can start with year 1945, where Bretton Wood Monetary System officially fixed price of one troy ounce gold to be $35. And inflate/deflate the price of gold according to Consumer Price Index (CPI) in US every year. US CPI data can be extracted from United States Department of Labour Bureau of Labour Statistics. The results are as follow: 

Year 1970-71 is the year where US suspended the convertibility of Dollar to Gold. Note that the price of gold should already raised to a level, where defending the fixed conversion rate of $35 per troy ounce is no longer sustainable. For year 2013, the price of gold according to inflation hedge would be $460. This should be the bottom line for the gold. 

Case 2: If we are returning to a system where all circulating currency (M-0) is to be backed up by gold, price of gold will be sum of circulating currency divided by total amount of gold stock above ground. 

Mike Hewitt at DollarDaze had done an analysis on the potential price of gold using the above method in this  post. We just need to update the figure into 2013. Assuming paper money growth at 6.6% per year, and above ground gold stocks growth at 2.1 % per year, we will have $ 5.23 trillion of M-0 money, and 178570 metric tonnes (5741 million troy ounces) of gold stocks above ground. This translate to price per ounce of $911.1. 

James Turk from Gold Money Foundation argued that the total amount of gold stocks above ground is smaller than GFMS estimate (which used by Mike Hewitt analysis). The revise amount translate into 161500 metric tonnes (5193 million troy ounces) of gold at 2013, resulted in price per ounce of $1007. 

Two Year gold price chart- source: Goldprice.org

Conclusion?

The actual transaction price of gold depends on the supply and demand in the market.
According to uncited word at wikipedia, 50% of gold is consumed as Jewelry, 40% "consumed" as investment and the remaining 10% consumed in industry.
Jewelry consumption is expected to remain strong considering strong buying attitude from India and China due to cultural influence.
However, investment "consumption" would remain weak for the foreseeable future, due to Fed start tappering their QE which will reduce fuel for inflation.
Hence, bearing unforeseeable geopolitical risk events/financial disruptions,  i shall predict the price of gold to continue fall into $1050 level for year 2014.

Disclaimer: The above statement shall not be taken as formal investment advice and i shall bear no responsibility of any loss resulted from investment action based on the statement.

Why the proposed Real Properties Gain Taxes in Malaysia might not curb the rising of house price?

As titled.

The price of the properties in the market are determined by supply and demand.

Depending on whether the demand is more inelastic (due to real need of people to live) or more elastic (due to speculative money)，the price of the properties can go two different way.

One thing for sure, RPGT will reduce the supply of second hand properties into the market (no one will like to sale when RPGT take away a large chunk of profit), making the properties market more illiquid.

An illiquid market will exaggerated any upward price distortion (unless the price raise enough that the property owners gain the same with/without RPGT).