Wednesday, December 30, 2015

Confusion on VS Industry

On 21 February 2015, one JXX (not real name) claimed that he (and wife) purchased 15 million shares of VS Industry due to its fantastic latest quarterly performance (Table 1 below).

Table 1 (Blog on 21 Feb 2015)

At that point of time if one was to have around 15 million shares, it would have triggered disclosure to Bursa as the number of shares would have exceeded the 5% threshold. Total number of shares for VS Industry at that time was 205.3 million shares - 15 million / 205.3 million = 7.3%.

1 April 2015, VS Industry announced that it planned to issue around 10% shares via private placement. I would say this is a good move as if it raised them at a good (high) price, would be beneficial to the company. If however, it was issued at below what its value should be, then a bad move. 10% comes to about 20 million shares.

That private placement was completed sometime around June 2015 with 20.58 million shares issued (as below Table 2). (It was issued at RM3.83. Recently, the stock was split into 5 shares hence the placement by today's price should be RM0.69. At its latest trading price of RM1.55, the buyer should stand to earn a handsome 1.25x. Not bad but to sell some 10% or more assuming the largest shareholders would like to sell as well is not an easy task. It will need small shareholders to believe in the stock.)

Table 2. Private placement of VS Industry
Around the same time, JXX (again not the real name) announced that he bought 20.446 million shares (Table 3 below) through a single transaction (I think). Could this be purchased through the private placement? If yes, could he be purchasing almost all the shares offered through the placement?

Table 3

Now my confusion is, if the same person claimed that he and wife bought 15 million shares prior to 21 February 2015, then why the 29A submission tells otherwise? He should have declared prior. Were these bought through proxies?

The same JXX also has been promoting the shares since February 2015 but did he owned any or could some of those shares be bought by the wife?

Note that the claim of purchase was done in February 2015 while the private placement was done in June 2015. I refuse to think that something is not right here, but these are things that does not seem right.

I stand to be corrected. If however the placement was made to JXX, then it is definitely not right or ethical.

Some questions to ponder for 2016 and beyond

It is easy to think that all companies that sells overseas (exports) their goods or services will do well in 2016. Nobody if I were to ask 12 months ago would think that our Ringgit would have dropped to 4.30 against USD. Nobody would expect the unusual exposure of the supposedly wrongdoings of our government would happen in 2015 - true or not many still think that it is true.

Same things may happen again for 2016 - I don't know. If one is to look at now, companies that mainly depend on local input cost and sells overseas would be an easy pick. They are of course all the companies such as the rubber gloves - Top Glove, Hartalega, Supermax, Kossan - or companies like Wellcall, Chin Well or the furniture companies like Latitude, Homeritz - or those in the electronics exports - Inari, Vitrox or even the new kid on the block, Aemulus etc.

Would they continue to perform. All these companies have already done well and their shares have reflected that - some have increased many folds. Of course, the companies claimed that they are better in costs control, manage the companies better (Hey, nobody would say that they are not good) but in actual fact it is the Ringgit vs Dollar - STUPID! It is the low oil price and price collapse in almost all other commodities - copper, gold, palm oil, iron ore, cotton. That's the story of 2015.

Now, if oil can drop to USD36 from USD100 a year ago, can it go back to USD60 in a year? What if Ringgit improves to 3.70 or 3.80 - let's not be too optimistic that it would go back to the level we see 18 months ago i.e. 3.3. What would happen to all those super performing companies in 2015? Would they look like an Average Joe again? Let's not forget their extra margins for 2015 was the currencies. Nothing else!

Hence a company that usually makes profits of RM100 million back in 2013, 2014 - for 2015 alone they could make RM300 - RM400 million. An example, an exporter that typically makes 10% net margin, just because Ringgit dropped 30% in one financial year suddenly stands to make that extra 30% margin without being extra smart. Hence, if the revenue is RM1 billion and typically the company would make RM100 million profit, they stand the chance to make RM400 million just for 2015 (see the change). There's no strategy involved. That's luck and they were at the right place at the right time. (Nothing wrong with that, but we think that they suddenly will continue to make the same)

But all of a sudden we think these companies are superstars. They are not. They are good but not extraordinary. One if looked further will know that the owners are not stupid and they have been selling. They know that this unusual situation does not come all the time and will not last. But we are that stupid to chase for them to sell.

So when things go back to normal, they will perform normal. But the share price at the moment is not normal. It is expensive if we average out the performance in the last 5 years. Only for 2015, they look cheap.

On commodities

There are so many theories of what would happen to oil price next year and I am not sure which is right. Nobody knows. The main story is that Saudi wants to kill off all the fracking companies in US and Iran since the embargo is to be lifted early next year.

Of course the other story is that China is slowing down - on purpose or due the actions and policies of Xi Jinping. Suddenly, they do not need that many iron ores. China does not think they will consume that much steel, oil as expected. China was overbuilt and they do not want to continue to be the low costs producer for the world. They want their people to start consuming what they produce not helping the world to live a better life while they slog 14 hours a day. They do not want their people to have 2 jobs anymore, unlike Malaysia.

What's for 2016?

No predictions as 2015 was not normal. I am not sure how abnormal 2016 would be. However, what I can say is that let's identify companies that are cheap, fundamentally remain unchanged despite the setback of 2015. The companies that would continue to be managed well. Companies that will consistently pull through and when the times are right they will be back to normal.

But I am not going to buy any companies that are just plain expensive but just because they did extremely well for 2015 we think they will be good for 2016 and beyond.

Happy New Year!

Wednesday, December 2, 2015

Why I bought Airasia and intend to buy more

When I bought this low costs airline at RM1.12, many thought I was crazy. It is  a difficult sector - I agree. Warren Buffett said no, where many American airline companies went bankrupt before. Many Asian airlines went bankrupt as well and needed rescue by their government. Among them Japan Airlines, Thai Airways, Qantas (in trouble) and of course every now and then MAS had that problem and it may not just end.

Why? Because these are national airline companies and (as I have mentioned before), no country would allow their national airlines to be taken off the sky. That was how it was deemed before. Today, many countries still support their national airline, but that thought of supporting the national airline company - at all costs - is being less considered or shall I say is less important.

I would consider having an airline company to a country as like a country having a football team. No country that is able, would not NOT have a national football team - and believe me except for several very strong national teams, for most countries, these are a costly affair. One cannot however say due to this, we should not have a national football team. This is also why the current suspended FIFA president, Sepp Blatter has been in power for 5 terms. He knows what a poor country needs and through FIFA's financial strength, he supports them albeit the many corruption scandals as well.

Back to airline
So when all these countries fight, in a competitive world, most cases there is 1, 2 or at best 3 winners while all the rests would lose - badly. Until 10 years ago, in this region these winners were SIA, to some extent Cathay. The rest were losers that went bankrupt and relived through government rescue. Then came airlines from oil rich countries whom have nothing else to do but to continue throwing oil revenues into their own airlines. These countries supported Emirates, Qatar, Etihad and had seemingly unlimited cash so much so it seems that they are the one until today whom are supporting the Airbus 380 initiative. Without them and originally SIA, A380 would never had gone off the tarmac.

About 20 to 30 years ago, it was also the time where low costs airlines just about were getting traction. First, it was Southwest (in US), in the process killing several full-service airlines in US indirectly. Then of course were Ryanair and Easyjet in Europe. These airlines thrive on deregulation of the air passenger business in their own country (for Southwest) and continent (for Ryanair and Easyjet). If you study, how would an Irish based company (Ryanair) and a Texas based company (Southwest) thrive against competition which are based from higher traffic cities such as New York, Los Angeles, London, Rome, Paris etc? Where they are operated from, these are not the most high traffic places.

These low costs airlines do not follow the usual (past) airline business convention. To be able to compete on price and other means such as efficiency is their business model, with the main intention to carry people point to point - at very affordable price. Prices which were unimaginable, are now possible for mass public to be transported. It is not that we are better off that we are able to fly more often. Our ability to fly is due to there is a big shift in how this sector has changed. Flying should not be a luxury anymore.

Back to Airasia
Where Airasia is operating and competing and driving, it is the same as where Ryanair has been so controversially despised by many of their customers, partners etc. But think about it, they revived many of the smaller or older airports, making commuting easier and faster. Of course, at the same time, making themselves very rich. (Micheal O'Leary, Ryanair's brash CEO is one of the richest person in Ireland). You can also see that Airasia sort of made Malaysia Airport what it is today - that's why Tony Fernandes is furious with KLIA2 and KKIA more recently.

Companies such as Airasia and Ryanair of course changed the landscape of the airline business, pushing hard for deregulation - an area where they will thrive. Of course, Airasia is still fighting hard against MAS in Malaysia, Thai Airways in Thailand, Garuda in Indonesia and many other countries. But their business model is different, so much so that sometimes these airlines do not know how to react - to a low costs competitor. For MAS (where they had done), it cannot afford to compete on prices relying on the operational platform they are in. When it competed on prices, it lost more than RM1 billion in 2014, injuring Airasia as well. In the end, it was MAS whom surrendered first, although Airasia was also badly hurt. Think about it, should it not be a private company that is more seriously hurt competing against a government behemoth?

Ironically from there, Khazanah appointed Christoph Muller. In his resume, he was acclaimed as the turnaround specialist whom made it happened for Aer Lingus, the national Irish airline. He is expected to do the same for MAS.

No article in Malaysia carries his work in Ireland and mentioned whom he was up against. The fact is, he was against Ryanair. He did not really try to compete head-on with Ryanair as I would think he knows he would have lost. As in what we have seen in Malaysia where has been trying to do onto MAS, he made Aer Lingus more agile and smaller - and focus on what a full-service airline would do.

As in most turnaround stories, a person is considered successful if he is able to do complete the turning around, but in most cases, the winner is still your competitor - Ryanair in his case. He did not make Aer Lingus very profitable. Aer Lingus stopped bleeding - and that's success. I am expecting the same to happen in Malaysia. MAS would go smaller, while Airasia will be the one transporting more Malaysians. In Ireland that is the same, so much so that Micheal O'Leary would argue that Ryanair should be the national airline of Ireland rather than Aer Lingus as they transport more Irish than the flag carrier.

Where Airasia has gone regional

We have also seen Airasia is not just a carrier whom are operating off Malaysia. It is going after the regional business, much more difficult but needed. Why?

Flying in most part of Asia, it is not about inter cities within the same country but also between countries. In this sense, Airasia should seek to expand (as it already does) as it does not carry the baggage of a national airline where in Asia especially is a no no for one country's airline to be doing well in other people's country. It is much harder for SIA to propose holding stakes in another country's airline company as compared to Airasia, I would think - although SIA does own stakes in some other Asian countries. For SIA I would think, it is their national duty to bring more traffic into their own country rather than making strategic investments in another country's airline. That is also probably why SIA has offered Tiger Airways shareholders and making the Singapore based low costs airline go private. There must be strategic reasons from this and I am speculating that, the future growth of the business is low costs.

For Airasia, as it is going into many other countries such as Thailand at first, Indonesia, Japan, Philippines, India - it is not without challenges. In each of these countries there are already their incumbent. These are Lion Air, CebuAir, Indigo etc. and they are probably given preference by their own government. This is also why Airasia, as you have seen are facing countless challenges - but these are challenges it must overcome and learn from mistakes.

What investors today is expecting is Airasia to be profitable immediately from these ventures - so much so that there are negative valuations provided for these overseas investments. In actual fact, it should not be. If Airasia's venture is to be valued individually in their respective countries, there would be different value provided added up for Airasia as a group.

The fact is the international investments is pulling Airasia's value down as a whole. Are we saying that Airasia should stop holding stakes beyond Malaysia? Is we say no, that's what today's valuation is however telling us. (as an analyst, we are taught sum of parts - where we break up individual business or investment and value them separately. After that, we will tally them up into one valuation for the group. No analyst has done that for Airasia. If I were to ask to have the exercise differently, just value Airasia's Malaysian operation, what should be the value?)

Today, Airasia is being priced at below RM4 billion - i.e. not even USD1 billion. For the first ever low costs airline in Asia and how much it has done to achieve to where it is today, do you think it is worth less than USD1 billion? Of course, no PE ratio or dividend yield or even NTA would have provided a good valuation threshold. This is because Airasia is continuing to invest in overseas where it will create negative valuation to the group as a whole. People is putting huge value on hope and based on aggressive investments into Amazon and Alibaba (and Lazada, Snapdeal) - all e-commerce - for example but not on hope for a low costs airline business where there is also tremendous growth opportunities as well.

What Airasia needs to do is continue to push and survive during bad times while it grows in times - like now - where low oil price is beneficial for all airlines. If it wins in Asia (that means largest low costs airline in Asia), I am sure it will be a USD10 billion company in 10 or 20 years time - where I see a more open Asian skies.