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).

My Investment Record (5) - 01 November 2013

Market Overview

The general market in last 2 month was dominated by two events, one is worry about US Fed may start tapering their quantitative easing program, another is on the congress debt ceiling deadlock that forced the US government to be shut down for 16 days. However, when both event duely passed, KLCI first recovered back to 1800 level after domestic fund buying activities cushioned off the effect of capital outflow, then hovered around at 1770 level, before breaking through 1800 level after US passed its debt ceiling problems. 

Last few months, there are several published articles warned that Malaysia economy may have entered into a bubble. See here , here and here. However, through a glimpse of graph i believe the trend produce make economic sense. It would be natural that, as malaysia real GDP is growing at 5% (nominal GDP = 7%) for last decade, coupled with more advance financial system, we would have higher house price, higher aggregate money (M3) and higher KLCI level. In fact, this article from Economic Malaysia  explains why the bubble isn't that big. 

The conclusion, i believe the property market and stock market is slighly overheating. However, the bubble is not big enough that warrant action by Bank Negara to pop it soon, or that the collapse of the bubble has catastrophic effect cascade down to the markets.

Current Return and performance

The holding period return for KLCI in the past period ( 1st September - 1st November 2013)

is 5.37% (with dividend included). Holding Period return for my portfolio, is 6.99%. Total holding period return since the start of investing is 5.58%, annualized to be 4.77%, this beat the Fixed Deposit rate of 3.2-3.8%, but still far below KLCI return of 14.62% (annualized, 12.41%)

In theory, my performance should track KLCI return although i currently hold non of the KLCI composite stock. In practice, my performance would lag behind KLCI return by 0.5% - 1.0% due to 

1) Trading cost (currently average 0.3%-0.5% per trade)

2) Portion of cash that earn only risk free rate. 

The objective of this investment program remain the same. I will try if i can track the market overcome trading cost and requirement to have cash position, if i can beat the market, that shows i can survive in the investment management business. 

Highlight

MNRB(6459) and YOCB(5159) performed particularly well during last period. 

Position in Cheetah (7209) , UMS-NEIKEN (7227) and XDL(5156) are sold due to uncertain company future. Cheetah is discontinuing stable dividend policy, XDL is splitting stock (to increase paid up capital) again, UMS has high CAPEX this year.  Unfortunately, all three stocks were sold before the end of fiscal cliff in US to preserve cash for any potential opportunity when market overeact and oversold. The opportunity didnt realized, and the selling decision cost around RM 3,000 in lost profit opportunity. 

  

New member add, TWR REIT (5111). Real Estate Investment Trusts(REIT) have high and stable dividend payout. TWR REIT has dividend rate higher than other REIT. 

My Investment Record (4) - 30 August 2013

Market Overview

Between Last holding until now, KLCI once reached its height at 1810 pt on 24th July 2013. However, worrying that US Federal reserve may tap Quantitative Easing (QE) soon, foreign capital start flowing out of emerging market, thus bringing KLCI back to 1720++ level. News of possible military action by US against Syria Assad Government further sent the market down to 1660++ level, where the market recovered only these few days. 

The fluctuation of stock price is emotionally driven rather than fundamentally driven. Thus, when investor's fear prevail, it would be a good time to enter the market and pick some good stock. However, this opportunity window is very short, where local fund will keen on exploiting it hence providing support to price level. 

Current Return and performance

The holding period return for KLCI in the past period ( 1st July - 31st August 2013) is -2.03% (with dividend included). Holding Period return for my portfolio, is -2.37%. Total holding period return for my first year of investing is -1.34%. Which is way below the Fixed Deposit rate of 3.2-3.8%, or KLCI return of 8.77%. 

The bad performance could be attributed to few of the bad picks at the beginning of my investment.  They are Jewellry Company's (Pohkong and Tomei) which suffered badly when gold price drop significantly during the year, non-performing company like RCE-Capital, "red chips" like Maxwell, Msport, XDL that saw their price depressed even though their P/E ratio （less than 3), cash level （higher than current market capitalization) remain attractives.  

Things should get better as my current portfolio is more diversify now, holding some potential stocks like YOCB, MNRB, MFCB and Harrison. Figure below listed a summary of stocks that i currently hold. 

New Members

Cheetah & UMSNGB have the same characteristics, their earning remain stable, ROE and ROIC around 10%, but price is below NAV per share. I believe this kind of stocks have the good chance to track/beat the market while enjoying lower downside risk. However, as general market still in fairly price/overprice region, it become increasingly rare to find the potential picks at bargain price. 

Market Watch - 4th August 2013

Question 1: Recent Fitch downgrading Malaysia's public debt sent KLCI to its first largest decline since GE13, which prompt a question, is KLCI overheat? 

I say no. We are far from overheat. Although KLCI had risen to all time high of 1800 compared to 1400 reached 6 years ago, just before the world financial crisis erupted, Our national GDP in nominal term also expand 1.5 times during the period, which make the KLCI market capitalization to national GDP ratio still significantly lower than what we are 6 years ago. The quick rebound in last two trading day after the sharp decline can confirm that market still confidence in the short and long term outlook of our economy.

However, we might already be at the brink of overheating. A quick scan through majority of stocks in Bursa Saham main market can tell you that there are no more undervalue stocks left to be hunted by value investor. 

Question 2: Talk about recent trend in property market, especially in KL area? 

First, property market rarely collapse unless there is market madness occurring. 

Second, the loan structure that triggered massive rate of default of housing mortgage, which in turn triggered the further collapse of property market, don't exist in Malaysia. I haven't heard of loan with teaser rate, where the borrower pay only 1-2% interest rate at the first few year, then subject to Base Lending Rate at 6-7% been offer in the market yet. With majority of the loan made are in fixed rate, you can be sure of the loan paying ability of the borrower. 

Third, with the latest MRT project coming online, KL will have more extensive transportation network that can cater more population. Property price in this area could hardly go down, when demand still outweight supply , or when people still expecting price to increase in the future. 

Question 3: The long term stability of Malaysia economy? 

I have a theory, which i shall elaborate more if i have the time to do research. 

Malaysia government had done a brilliant thing in creating the Employment Provident Fund (EPF). 

With the total asset of EPF amounting to RM 537 billion, which is about 60% of our national GDP. 

We have the financial capacity to fulfill government borrowing's need, pumping liquidity into private bond market, investing in stock market supporting prices, and even diversify out by investing in foreign equities, bonds and properties. 

A nation economy will start to collapse if investors realize the government might not be able to repay the national debt, which caused the market to charge extremely high interest rate to newly issue government securities, thus forcing the national debt cannot be finance in sustainable way anymore. 

In Malaysia, with EPF fund growing faster than increment of government debt, we wont see problem in near term future. 

However, with huge amount of EPF asset in government's liabilities form, the government is effectively funding our retirement, through collection of tax to pay the interest of the debt. The different between us and the western countries is, western countries like UK and Europe are lived on define benefit plan, while we are living on define contribution plan. The former is more prompt to collapse of the system. 

Question 4: Is China Growth Myth Over? 

I'm afraid the answer is yes. 

Failure to relax the birth control earlier had forced China to enter an Old folk society sooner than expected. The newly implemented retirement scheme and medical care requirement, will put the government financial at strain. 

There is other thing to worry about, 

Civil society required highly educated civilian to sustain. A society where its elite/talent group isnt producing enough offspring, will face the decline of populace cultivation when its education system cant replace the loss.

 It wasnt about the gene that can be inherit from the  parents, but is more about the education environment that the family can provide to the children. 

My Investment Record (3)

Overview

It was a very long time since i last posted on this blog, Debating, CFA exam and outstation to Indonesia ate up all my leisure time. However, there shouldn't be an excused as time could be squezzed as long as you want to. The problem that plaguing me, is how to define my investment philosophy, that ultimately bring me to my destination. 

Between 1st March and 30 June, lots of thing happened to KLCI and general stock market. First, there is a price drop/stagnation prior to Malaysia General Election due to the political uncertainty. Next, KLCI breaks record high when BN win comfortably. Later on, news of US Fed hint on reducing QE at later time of the year, plus economy slowing down in China, caused the KLCI to slowly drop. However, recovery sign from USA lead KLCI regained its foothold, and raised to 1773.54 point. 

The future prospect of KLCI and General Stock Market depends on the general economy and company profit data for Malaysia. However, judging from historical perspective (which i shall write about later on another post), KLCI and General Stock Market is fairly value/Slightly overvalue now. These means, 

a) Bargain stocks are hard to find, b) Direction of where stock market go later, will largely depends on sentimental of market participant, not underlying fundamental. The KLCI might climb to hotly overprice region, or stay at its current level until end of the year. 

Current Return and performance

Total Holding Period return measured the return on investment in one particular period. This concept is extremely useful when you have new round of capital infusion at particular date. Thus it will measure how much the manager earned you if you invest one ringgit from the start of fund until first capital addition, and how much after first capital addition. However, the base figure for calculation of next period performance is not the total amount of capital invest before, but the total value of investment at the end of last period. 

Hence, Total Holding Period Return for my fund from 1st of September 2012 to 28 February 2013, is -8.661% Compared with  +1.37% for KLCI (including dividend yield of 3.6%).However, if you are lucky enough to invest money with me from 1st March onward, a Total Holding Period Return of 10.36% is realized, compare with 9.52% for KLCI (including dividend yield of 3.67%). First time i beat the market. 

The win is meaningless unless you can beat the market for the whole period. The overall holding period  return since the start of investing (Counting both period) is 0.8% compared to 11.02% for KLCI. That is, one ringgit any investor placed with me from the start will have a return of 0.8 sen only compared to 11.02 sen for KLCI. The good news is, i believed my investing skills are improving, the bad news is, it probably takes many year for me to outbeat the market in overall time horizon. 

A summary of current stock that i hold. 

Detail Movement Analysis

The raise of general stock market after Malaysia GE 13 was a good opportunity for me to unload few of the stocks with less bright prospect. Among them are, 
1) RCE capital, a company who supposedly doing well by lending to government servant, but nevertheless performed badly after bonus issues, 

2) Pohkong and Tomei, both will be heavily affected by the current sharp drop in gold price (from around $1600 per ounce to $1200 per ounce and still falling). As both company unwisely increase their inventory during period of high gold price (who knows gold will drop?), and their inventory accounted for  one year revenue, i believe their performance will deteriorated for the next 12 months until they finished off their accumulated inventory, and only turn around earliest at Q2 2014 if the gold price stabilize at current price. You will hope that, the management have the wits to buy enough put option to hedge again fall of value for their huge inventory. 

Other Stock Analysis

The Red Chip

Shoe and Sports ware Industry in China is maturing faster than i previously thought. Low cost of entry, overcapacity, slowing demand and harsher bank lending lead to highly competitive environment. Some company have already abandoned their business, other stay but saw their output crippled. However, most of the red chip i hold have one common characteristic, their Net cash per share is higher than their current share price (Net cash = total cash - total liabilities). 

Hence, buying red chips now is like placing a bet. Some of them will survive the intense competition, some of them will continue making profit, some may stop their production and yet, management refused to return the excess capital to shareholder. Out of the four stock, Xinquan seemed to be more likely to survive, but i feel uncomfortable holding small stake (thus i sold it with 20% profit). XDL and MSPORTS are both likely to continue making money, but MSPORTS is holding the excess capital (which might not be  a good sign). Maxwell just announced aggressive expansion plan recently. Their current stock prices make exit an unthinkable option, guess i need to wait until the reckoning day to see the odd of the bet. 

The Potential

YOCB, a leading home and bed liner manufacturer and saler in the region, with growing middle class population, the prospect is good, But yet the stock constantly beating my expectation. 

The undervalue

Harisson, MNRB are trading low to their intrinsic value at one time due to various reason respectively. But they are fairly value now. High dividend yield, high cash reserve (ability to pay dividend), low P/E and growth prospect make these stock an attractive investment. 

MFCB is another stable business conglomerate as potential "cash cow".