My Investment Record (14) - 31st Oct 2014

Market Overview

The markets (both KLCI and US S&P) experienced a wild swing in October, with KLCI dropping to as low as 1767.77 in mid of October while climbing back to level higher then October opening of 1855.15. Reason for the swing could be due to strong sentiments as i highlighted in previous post. 

The absolute magnitude of current swing is still within 6% - 7% variation range. In fact, that is the range of change that KLCI had been experienced within this year. Thus my guess is that while emotional sentiments will send the index up & down more often in wider range, uncertainty of the future (positive & negative) will keep the KLCI within the range bound of 1765 - 1890 recorded this year. 

Current Return and performance

Obviously, the most profitable way to operate within this KLCI range bound is to sell when KLCI near peak (1860-1890) and start buying when KLCI near low (1760-1790). However, due to wrong bet on market reaction on CIMB-RHB merger trade, I end up with no enough cash when some of the stock's price drop to attractive level. 

The estimated holding period return for KLCI in the past period (1st October 2014 - 31st  October 2014) is 0.74% (with dividend included). Holding Period return for my portfolio, is -3.71%. Total holding period return for my portfolio since the inception is 19.98%, annualized to be 8.77%, this lag behind KLCI total return of 21.25% (annualized, 9.30%). 


Trading Activities

1. Selling of Maybank (1155) and addition back, pure operating technique in anticipation of wild swing, netting me about RM 150 in the process, but the cash obtain during the period is not utilized wise. 

2. Selling of Harrison (5008). Its FY 2014 account is expected to end in red despite healthy core operation due to recent tax issues with Custom. Hence limited upside potential until mid of next year. However, my valuation and market valuation are differ. 

3. Addition of Public Bank (1295), Symphony Life (1538) , MNRB (6459). Typical actions of buying low. just that the low is not low enough. 

4. Addition of MSports (5150). 

Recent development of the stock is puzzling, 

Underlying operation remain profitable, cash level remain high. Company is giving out free warrant to current shareholders. But, 

The major shareholder (Lim Huo Zhi) is trimming his stock holding down from near 45% level to 34% level.

There could be three possible explanations

 a) The company is a fraud, soon accounting scandal like CSL will break out thus  making share of company worth nothing. Thus major shareholder is cashing out now even though shareprice is trading below NAV. 

b) The company is fine, but major shareholder need cash. A less likely explanation as the easier way to go will be just declare of 4/5 sen dividend which will give the major shareholder enough cash. 

c) The company is fine, and major shareholder is selling to those close to him. For example, to loyal employees, or to the govt officer for bribery purpose. (Unlikely to his daughter Lim Li Ying as she also a director, change in director holding will need to be disclose). 

The fact that most of the selling is done outside dealing period to parties not disclosed, add possibility to third explanation. 

Unfortunately until next financial year auditing results coming out, we wouldn't know which explanation is actually happening. 

Msport Holding 5150 ( buy with caution ）

Key Summary

The price looks like a bargain to the point where one would wonder, why did anyone not seeing the 100 dollar notes lay on the floor. Even if the performance of the group turn out lower than expectation, a Ncash per share of RM 0.41 provide a safeguard to the investor's money, as long as the company dont start loosing money. 


Before the analysis 

1. Why did a PRC company opts to enlist on foreign stock market? 

The first is branding purposed. Having the company enlisted on public stock market, will give assurance to their business partner, while bringing better management practise and stricter internal control to the company. 

The second, enlisting is another way to acquire working capital in a reasonable cost. Especially useful in a time when obtaining bank loan for a non-GLC company is hard in China. 


2. Why did PRC companies usually retained large portion of earning after tax, despite low level (in term of ratio) of capital expenditure requirement, and high reserve capital? 

As i mentioned before, unlike other company in developed country, obtaining large amount of bank loan   is a much harder task for non-GLC companies in China. Taking an excerpt from my past article: 

This leaves the People’s bank of China, only one choice, control the total amount of credit. Unlike the western counterparts, china central bank can directly setting the amount of credit, instead of control it indirectly by regulating the money base. The China banking regulator commission will ‘suggest’ the total amount of credit that can be increase by the commercial banks, when the bank exceed the limit, the particular bank will be ‘punish’ by raising its deposit reserve ratio. The ‘target’ for total increment of credit this year is set to be 7.5 trillion RMB. [11] Since massive government infrastructure projects are still on going, the majority of the increment will likely flow to local governments or state-owned company.[12]  This will force the SMEs turn into private loans which bear interest rate as high as 100%. [13] Thus, view from the outside will see China still enjoying growth of 10% of GDP, but closer examination will reveal a worsening environment for SMEs that hire majority of the workforces. 

Hence, retaining a large portion of earning after tax has become a common practise for many PRC company. When market outlook remain positive, no corporate manager will want to pass on the expanding opportunity simply due to inadequate capital issues. 


3. Why are PRC companies are usually undervalued, even if their P/E ratio can go as low as 2 to 3? 

First, as mentioned above, the dividend payout ratio for majority of PRC companies are quite low. Hence, investor dont feel secured investing in company that wont give you anything in return for the first few year. 

Second, due to past bad reputation of PRC companies, either,some have revenue dropped shortly after their public listing activities, or, some even involve in fraudelant activities which costs investor their hard earned money. For more details , see here 

Thirdly, there have been past experience in Malaysia, and for PRC companies enlisted on foreign market, to delist the company when share price is vastly undervalued. The delisted price ( or share buyback price) were much lower than the intrinsic value of the company. Investors who, buying in anticipating share price will ultimately match the intrinsic value, end up like placing  money in a deposit box, receiving no or little dividend (due to low payout ratio practised by PRC).  No investor who emphasized on cash flow after reading " Rich Dad Poor Dad" will park their money into this company. 


The Financial part
All Figure below are in unit of RMB, computed based on closing price at 7th September 2012. 

Price	0.693
	1 year	3 year	7 year(all time)
net profit margin	0.1713	0.1950	0.2200
EPS	0.2554	0.3073	0.2368
dividend per share	0.0000	0.0577	0.0577
NAV	1.4879	1.4879	1.4879
NAV(cash)	0.8274	0.2758	0.1182
ROE	0.1716	0.2227	0.7547
PER	2.7140	2.2551	2.9269