Tuesday, May 28, 2013

Guidance on supporting sector to the US property market

The news that just came in where US March's home prices rose in the 12 months through March 2013 is the highest since 2006, just would provide positive signs for the furniture companies that supply to US.

You can read the news from here as well as on any main pages of the financial sites in US. When homes are selling, people may want to furnish their houses with new furniture. For those whom do not follow the US housing sector, despite the house of cards (which means poor structure that collapsed the housing sector) few years ago, the demand has outstripped supplies and in some places the developers are struggling to meet the sudden surge in demand.

During the financial crisis, in fact the percentage of Americans who do not own a home has increased and it is imperative that the data would reverse once situation becomes more stable. Currently, that situation is stabilizing, interest rates are extremely low, banks are still finding hard to lend out their excess money (due to the printing money policy by Bernanke) and young Americans are starting to shop for homes again. Yes, America is still a young population.

I have mentioned of some furniture companies which are supplying to the US market here, and these are probably missed out by investors due to the difficulties in connecting the link between US housing market and some of these furniture companies in Malaysia. Not many analysts or even the financial news would cover these companies due to their sizes, where most of them are sub-RM100 million market capitalization. I do foresee these cyclical sector especially the ones that supply to US to do well, and although it is cyclical, it could be still on the uptrend stage. It may not be a long term play, but for cyclicals, you do not need to play long term.


Sunny said...

The hope of getting investment return on these furniture stocks is built on price appreciation as speculators spur the demand based on good business outlook rather than real benefits (dividend) received from the company.

In general, these companies have something in common: no dividend policy, corporate governance as good as companies like GAB, Nestle, Public Bank, etc. In short, it is not perceived to be really rewarding minor shareholders.

Now, anything made from wood is getting much more expensive. I have ever compared the price of DIY book shelves sold in Jusco recently and found the price to have been a few times more expensive probably 5 years ago. If input material cost is escalating, it is going to be challenging for the bottom line. Especially this industry is labor intensive and therefore may expose to the impact of recent minimum wages policy. Also, the stronger RM is not in favor of this export business.

I hope I'm wrong, perhaps there is prejudice here.

felicity said...

Hi Sunny

I do not think there is a prejudice and what your fear is very rightly so.

On corporate governance, several things we can look at. Firstly, I have put importance on the auditor which I have highlighted in the article. Secondly, the track record. If you have noticed, some of the companies, they have been around for more than 10 years. Their dividend track record is seen. Few other things, remuneration that the management and directors take etc.

On pricing of goods, since this is a global business, high input prices happens all over the world. If it happens to just one company or one country, then we should worry. The fact that China is getting much more expensive in terms of labor costs and faster than countries like Malaysia and Vietnam is good for this industry in fact. With that, I think over time the transfer price to the buyer / retailer will be naturally higher as well.
Which is why I am much more comfortable today when comes to the furniture industry as compared to many years ago. Those days, the competition came from China and these Malaysian companies that used to do well were caught. Now China is no longer a cheap country and I think the producers themselves could probably be consolidating due to situation that caused them to be.

alwayswin111 said...

With all the adverse news on PARKSON , do you plan to cut loss on your purchase.?

felicity said...

Don't think so. Probably average down if go down further

alwayswin111 said...

I should think all the negatives are priced in already.

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