My Investment Record (11) - 31st July 2014

Market Overview

On my last post,  i mention what is probably the consensus view now, that BNM hike of OPR is a signal for the change of wind. Latest US GDP growth data (here) and FOMC meeting minutes (here) just confirm the view. Now left for guess will be the second question, when is the crash? 

My bet will be in 3 to 5 years, and it depends on how eager the central bank from both side (Malaysia and US), in cooling off the current market. It took at least three years for the sign of crash to be seen after US Fed raised policy rate starting June 2004. And we are still waiting for Fed to make its first move in raising the policy rate now, which will directly increase the borrowing costs and start slowing the economy (and housing market) down. 

Current Return and performance

The holding period return for KLCI in the past period (1st July 2014 - 31st July 2014) is -0.35% (with dividend included). Holding Period return for my portfolio, is 2.39%. Total holding period return for my portfolio since the inception is 23.90%, annualized to be 11.93%, this is the first time it passed KLCI return of 21.35% (annualized, 10.62%). 

The reason for the over-performance can be mainly attributed to one stock. 

Msport  (5150), without any significance announcement that will impact the stock price, sudden buying interest sent its price jumped by about 20% in a single month. 

Trading Activities

i. Disposal of Tecnic (9741).  Sudden large buying interest sent the stock to its one year peak at RM 4.00. Where i took the opportunity to liquidate the stock for cash. 

ii. Addition of RHB Capital (1066). This could be one of the mistake. The buying decision was simply based on the news that CIMB, RHB and MBSB in talk of building a mega islamic bank. If they were to merged, under same P/B basis RHB shareholders will be the most likely benefactor among the threes. However, the price surge of RHB was short -lived, and it seems only a confirm deal with high valuation price could save the investment. 

Change of the wind? On BNM Policy Rate Hike

Bank Negara Malaysia recently raised its overnight policy rate (OPR) by 0.25% to 3.25%. 

At the same time, US Federal Reserve had been on track to end Quantitative Easing (QE) program on October (source)

It might be the signal that an era of cheap credit to support quick recovery of the economy following world financial crisis at 2008 will end soon. This also mean that, a period of inflated properties and shares price may end soon, where the growth of properties price and share price will likely return to normal level. 

It could be an pre-emptive measure by BNM to contain the Malaysia's Household Debt which had reached 86.8% of GDP in 2013 (source). Rising OPR will increase cost of borrowing for existing fixed-rate mortgage taker and new mortgage taker. This might prompt a de-leverage exercise for some of the heavily in-debt house owners, thus depressing the property price down for a while. 

Depending on how serious BNM is in raising OPR further, the economy might be slow down for one year or two, before picking up its normal pace again after the adjustment period for the OPR hike effect. 

Which mean, the wiser actions for now seem to be

i. Sell gold

ii. Stay from properties and stock markets unless there is good bargain

iii. Keep cash. 

My Q&A on Malaysia Electricity Supply Market

Cost vs Reliability

Malaysian Consumers had to realize that two of their main demands regarding electricity supply are conflicting with each other. If you want to reduce the reserve margin （price pay for excess capacity) to make electricity cheap, you will risk facing the black out of 1992 again. To ensure the system as reliable as possible and avoid any black out at all, you need to keep vast amount of spare capacity which came at huge maintenance cost. 

Why Privatized? 

I can see two compelling reasons why we need to privatized the power generation business. 

The first,  we need a benchmark to see if the player(s) in the market is under/over performing. In previous state owned Lembaga Letrik Negara (LLN) era, you won't know if we are over/under performing until massive black out occured. 

The second, if a particular organization had state financial in back-up, the main drive for efficiency will be solely relying on those in controlling position for the organization. More specifically, we will rely on the good faith of the peoples in the organization, or the moral principal that they hold, to ensure we keep going to the direction of generating cheap but yet reliable electricity. Given the fact that the state-owned enterprise don't usually attracting the best talents given its lackluster remuneration structure, i wouldn't count my bet on that. 

Are we benefiting from the latest PPA tender exercise?

The answer is yes and no. 

We need to aware that any savings from latest Power Purchase Agreement (PPA) tender exercises does not directly pass to consumers.  The client for all Independent Power Producers (IPP) and even TNB generation is still TNB transmission & distribution arm. Hence, TNB transmission and distribution will enjoy the savings from PPA exercises first, before deciding whether to pass on to the ultimate customers - the consumers. 

And here is the catch. Competition for new PPA is becoming more intense between players like TNB, 1MDB, Malakoff, and other IPPs(currently left only YTL) where cut throat price war resulting in cheaper electricity generated. However, there is no competition in the electricity distribution and transmission business. TNB monopolized the market, and eventhough it is regulated, with TNB a private corporation in nature government still need to make sure TNB are making profit. 

Thus, any saving from lower cost of electricity generation can be pass on to the consumers only if TNB already making enough profit. Which to many outsider, it seems natural to try to squeeze more efficiency out of TNB transmission and distribution business. 

How can we squeezing more out of TNB transmission and distribution business?

so that end consumers will benefit more？

Well, with current structures it will be very hard, totally relying on the good faith of the managers in TNB transmission and distribution business to ensure the organization transmit and distribute the electricity at lowest cost possible. As the business is regulated but need to cater for the profit demand for a private organization, it will be more easier for TNB to come to the regulator crying for tariff hike, instead of squeezing more productivity out of its current practise. 

There are several ways to change the landscape, 

One, since the market of transmission and distribution is  monopolized, it matter less whether it is operated by government or private sectors. We could just nationalize TNB transmission and distribution business and let the generation units competing in generating cheapest electricity. 

Second, Liberalized the market by allowing IPPs to enter into the transmission and distribution market. We might not have the market size necessary to ensure efficiency of scale achieved by major players in the market (like UK). But in a industry with huge capital expenditure layout (thus high fixed cost), there is a higher chance to see price cut throat competition which ultimately benefit the consumers （think of the steel industry, aviation industry, or automobile industry, where overcapacity leads to lower price for consumers). 

Whats Wrong with 1MDB Entering the Market?

Currently it seems they are doing more benefit than harm. They are buying out 1st and 2nd generation PPAs from privates, they are among the lowest price bidder for latest PPA tender exercise (track 3B). However here is the catch, they can do so as they have a license to fail. And if they do failed, government will likely needed to bailed them out, as 

1)  They are owned by Ministry of Finance, a fail without rescue will put all other GLCs debt in doubt. 

2）Electricity generation is a matter of national interest, it dont seem likely that the government will allow the operation of the business fall into the hand of foreign bond holders. 

Now when you have the license to fail, it will be likely that you will be more aggressive, thus making more mistakes. And the mistakes will more likely to be tolerated. 

Already, 1MDB is reportedly overpaying for the power asset they acquired (read here and here). 

Then, the recent acquired of theirs, Jimah Power Plant, is a highly leveraged investment with frequent failure history this year. 

And the main reason why they want to listed their power assets, is to get enough equity to replace the costly debt financing. 

I am guessing KWSP and other government related funds (such as Lembaga Tabung Haji and Amanah Saham Malaysia)  will be directed to buy the shares of 1MDB. If it does so, it will be like consumers are subsidizing cheap electricity (track 3B for example) from their own pockets (KWSP and all other funds), probably in a less efficient way. Where in the process , Ananda Krishnan (previous major shareholder of Powertek), Genting Shareholders and Negeri Sembilan Royal Family (major shareholder of Jimah Power Plant) just get richer. 

So?

If we are to ensure 1MDB don't abuse its license to fail, and if we do view electricity generation business as a matter of national interest, that the companies operating them need to have sound financial situation to avoid any bailout request to government, we might need to regulate their financials like the way we regulate the banks. 

Few of the measures could be, 

1) prohibited companies with not enough equity to participate in any PPA tender exercises, 

2) prohibited any highly leveraged buyout for power plant assets. 

Warning : The author of this article do work in Electricity Generation Industry and hence his view could be very bias. Becareful when reading.

My Stocks Buying Guide

The reason why i started investing on my own is that, 

The fee currently charged by average mutual fund in Malaysia is quite high compared with the results they delivered. 

Mutual fund in Malaysia typically charged 6% entrance fee and 1.5% annual fee for asset under management. In return, their performance are hardly differ from the benchmark (KLCI) index. The few rationales why i think people still buying mutual funds are

i. They lack the time & energy to learn to buy stock

ii. Their investment size don't allow them to have the same diversification benefit as the mutual fund. 

I admit that full replication of KLCI index will indeed need a large investment size. However, a half-replication (ie, with stocks holding and weightage slightly deviate from KLCI) will generally cost less and little pre-requisite knowledge is required to replicate. If you are brave enough to venture into investment universe outside the thirty stocks listed in KLCI, you might be able to find a few rare gems which reward you substantially compared to KLCI. 

Hence, below are my few tips on how to profit in the stock market. If you do profit from following my advice, do treat me for a good meal in one of the fine restaurant. 

Tips 1. Avoid Company where controlling shareholder (with close to 50%) is the CEO / Chairman of the company.They usually paid ecessively huge remuneration package to themselves, and award themselves with big employee share option scheme (ESOS). 

Tips 2. Be careful when the company is diluting the interest of existing party. Either via selling cheaper than Net Asset Value per share (NAV) to other party through private placement, or through ESOS with exercise price lower than NAV.

Tips 3. Focus on return on invested capital instead of revenue
Screening out those management who talk only about expansion instead of profitability

Tips 4. Avoid company with huge fluctuation of income

Tips 5. Avoid company with huge capital expenditure
Huge fixed cost => Easily lead to overcapacity and cut throat competition. One of the reason why i am not particularly fond of manufacturing company is that, they need to keep investing to keep earning the same amount of profit.

Tips 6. Adopt buy and hold strategy. Learn to be patient.
Sell the stocks only if
i. The long term prospect is bleak
ii. You realize the stock you bought is not worthy
iii. The stock price rose to a point where you feel greatly over-priced.

My Investment Record (10) - 30th June 2014

Market Overview

The general theory is that stock market (KLCI) performance are determined by three major factors, 

A. The dividend paid out rate, which in the past average about 3% for KLCI stocks

B. The earning growth potential, general believe to be nominal rate of GDP growth (ie, real rate of GDP growth plus inflation)

C. Changed in evaluation level (PE ratio), or in other words, change in the rate of return (r) required by investor. 

The current consensus is that Malaysia's GDP will grow at 5%-5.5% per year (here)

The inflation in Malaysia for the first five month currently stood at 3.4% (here)

This mean, if all things go smoothly , we should see KLCI breaking 2,000 at the end of year. 

A few major things that will affect growth in the short term include

i. slowing down in domestic property & construction sector, due to cooling measures introduced by BNM and government

ii. Tightening of credit or more specifically, raising of interest rate by BNM

iii. How the importers for Malaysia goods like China, US and Europe are performing. For China, a slowing down in property and construction sector may lead to a credit event in their shadow banking system, causing doubt on growth this year. For Europe, deflation and stagnant economy still a big concern. For US, how fast Fed tapering their QE program will be the key. 

iv. Subsidy rationalization & GST which will cause inflation and might dampened consumer spending. 

For the change in evaluation level, in general

During crisis, investors will look for safe haven (like bonds), hence PE ratio tends to be lower

When economy is booming, investors tend to be optimistic about the future, hence PE ratio tends to be higher. 

One way to see if market is currently overheated is to compare the ratio of stock market capitalization vs national GDP. 

Currently my measures showing the ratio is slighly above 15-year historical average, however it still haven't reach level in 2000 or 2007. Hence, the safe conclusion is that, the market is currently overheated a bit, but a crash is not imminent yet. 

Current Return and performance

The holding period return for KLCI in the past period (1st June 2014 - 30th June 2014) is 0.76% (with dividend included). Holding Period return for my portfolio, is 4.18%. Total holding period return for my portfolio since the inception is 21.00%, annualized to be 10.96%, this is just slightly below  KLCI return of 21.77% (annualized, 11.34%). 

The reason for the over-performance was simply , lucky. 

As the stock that i heavily own - MNRB  (6459), had a better than expected last quarter earning, which sent its price jumped by about 20% in a single month.  I do not expect such out-performance will continue in near future, as most of the stocks i own is currently fairly valued now. 

Trading Activities

i. Addition of MFCB (3069). 

ii. Addition of Public Bank (1295). The price of Public Bank took a dive this month, as EPF is selling most of the new shares they acquired through the recent rights offering by Public Bank. This present a rare opportunity for me to add this one of the best performing stock for KLCI for the past. 

iii. Addition of Symphony Life (1538). I don't particularly fond of property stocks as their earning tend to be volatile in nature. However, if i believe a particular stock is underpriced i wont mind to made a bet.