Friday, December 29, 2017

C'mon Hengyuan is no Nestle, Dutch Lady

Don't be misled, Hengyuan is no Nestle, Dutch Lady, BAT. Not even Oldtown. It is not even Top Glove or Hartalega or Airasia. Hengyuan is Not near.

In investment, the most popular word as provided by Warren Buffett is the "moat" - which means certain strength - being special i.e. in another words think of it as a brand cult aka Nike, Nestle (Milo, Nescafe), Starbucks, Google, Facebook. In those companies, we do not even look at NTA value.

What is Hengyuan? Before the rapid share rise - less than 10% in Malaysia I guarantee would not even heard of the name. It has a 10 year supply contract with Shell. Luckily, at this moment due to global oil supply constraint, margins for refineries (oil processing) has gone sky high. That is in playing cyclical stocks, and one gets lucky or may not through luck but perhaps some level of manipulation these stocks goes up. Sometimes certain companies may see profit performance goes up but the share price does not rise the same.

A Nestle or Dutch Lady has sustainability. They can control their own destiny. They can control supply i.e. in Nestle's case milk, coffee beans, cocoa and put back the price control into the market i.e. consumers like you and I. Companies like Nike for example may price their products much higher than a much lesser branded goods, but they still sell. There are still people who buys.

Hence, companies like Hengyuan will not get the 30x PE. This is crazily manipulative. Nike, Nestle, Dutch Lady, Maxis can get the 30x PE.

30x PE means one is preparing to pay the price now and profits stays the same for 30 years, we will get back our money from this investment. As much as oil and gas refineries are a decent business, imagine this! By 2040, many cars will be much much more fuel efficient or even using electric. This is a clear and present danger in investing in refineries although I have put my money into Petron. This is probably why Shell sold off its refineries - so that they can reuse the funds to focus onto areas which they think it better for their growth. If it is 30x PE, they would not sell.

Hengyuan is not Shell. It is part of the oil and gas value chain and happens to be at this time refineries are doing well. Cyclical and it does not last.

A person who claims to have build IJM should understand that concept.

Why acquisition of IWCITY is a good move for Ekovest

As always in my investment philosophy, I have put importance onto what certain decision can bring towards the value addition of a company or whether it demerits the company as a whole.

We know that Ekovest has just decided to offer to purchase IWCITY for RM1.50 per share. One can read the detailed proposal from here and we can also digest the reason for the purchase in this well written announcement. The proposed purchase translates to valuing the assets of IWCITY at RM1.256 billion. We also know that the proposed purchase values IWCITY's assets at less than 50% of its market value, based on the announcement and valuations made by respected valuers. For that itself is a good beginning point to purchase a certain assets.

However, many investors are concerned over Ekovest's exposure to properties over the long run as unlike concession from toll business, property is cyclical especially is this down cycle. However, let me put into perspective what I see.

We know that Ekovest has 3 main line of business i.e. concession from highway tolls, construction and properties. Toll concession is its crown jewel as I see it, due to the sustainable growth as well as the location of its highway - right in the middle of the city. Last year alone, EPF has valued the DUKE 1 and 2 at RM2.825 billion through its 40% purchase of the highway. Besides the 2 highways, Ekovest has also another longer highway which is in its early completion stage called Setiawangsa-Pantai Expressway. If one looks at highways, technology cannot really replace the need to travel and move around. One real threat for these 3 highways is MRTs and I think we as a country does not build fast enough to cause real threat to Ekovest's assets.

Another business is its construction business. Unlike more established contractors like IJM and Gamuda, Ekovest usually complete its own projects but do not focus (as much) on getting external projects for obvious reasons. They are not in the mould of IJM and Gamuda in terms of construction, civil engineering but its own projects is enough for them to be kept busy. Hence, you do not see a Gadang, Advancecon (which focuses more on external projects constructions) as much in Ekovest. On the other hand, construction business has one major weakness, it has to continue to bid for projects and usually these projects are in a 2 - 5 years cycle. After one project, it has to obtain next projects to keep itself busy. Otherwise there could have idling manpower and machineries. This actually happens now to China, as this is the reason why Xi Jinping is helping its own state construction companies by pledging Belt and Road Initiatives in the name of helping neighbors, but in essence it is more to help its idling companies which have been building China at a furious pace years ago.

The third business for Ekovest naturally is the property business. As compared to toll and construction, this third business is the weakest among the three for Ekovest and in my opinion, it does not mean that Ekovest is in the mould of building like what Ecoworld is building. This is because Ekovest does not have the DNA of Ecoworld or SP Setia or even Sunway. In this respect, Ekovest is rather beginners. It has managed to secure prime land of 60 acres through acquisitions and exchanges from the Blue River project. Further to several other pieces such as the one in Cheras which is just opposite to Leisure Mall, Ekovest does not have much landbanks. To be a strong or prominent developer, first one must have land and these land must be in a place where one can sell properties. The ones in Cheras and Titiwangsa are good starts but they are not substantial.

Hence, they move to Johor. Happens to be, IWCITY another company controlled by Lim Kang Hoo has good landbank (1000 acres) in Johor and they are the most prime of landbanks. In this period of property slow growth, to be a successful property company - either one have to be Ecoworld which can still outsell others despite not in prime location or one must have the financial wherewithals to withstand slow growths. As an example, TA Global (a boutique developer) has that. It has I do not know postponed its projects in TA3 and 4 for I do not know how many times as it has the financial muscle to do that and wait for the right timing to launch. Ekovest, in times like this and with it being kept busy by so many projects at this moment has that as well. This, I think is the main reason the acquisition of IWCITY is an opportunist time as it can wait. And to top that of, it has signed a contract with Greenland group from Shanghai (one of the Top 5 largest developer in China - and when it comes to China it is really big) where that contract will bring strong cashflow for the next 3 years towards the Ekovest-IWCITY group. How is this deal not positive towards the acquisition for Ekovest?

I however fully agree that among the 3 more developed states - KL/Selangor, Penang and Johor, it does look like Johor is the worse off in this bad times for property. Why? Johor has large landbanks and it does not help that so many of the developers such as UEM, Sunway, SP Setia, Ecoworld, Forest City - all of them have massive landbanks in that area. The foreigners are not buying as what they would have wanted - and more so a country cannot be dependent on foreigners to purchase our properties for growth. In this respect, sustainability is the name of the game.

Come 2024, there is however one game changer. What I do not foresee will really happen is happening. What is that?

There is an MRT link between Johor and Singapore, and it is to be ready by then. Why is this important? It means Singapore is willing to open up more (slightly). For so long, the causeway is the clog point for Johor to develop fast. It is a joke if an affluent or white collar worker to say that they are ok with staying in Johor and work in Singapore as the commuting is so bad that it deters them from doing that. With the new MRT connecting Johor at the checkpoint towards Singapore, that unbearable commuting is made more bearable. With that, the real property buyers (to stay) will consider buying, as compared to those who are only investing and not stay as at now.

The game changer is especially important to the landbanks surrounding that area. Who in your guess has the most landbanks and one that overlooks Singapore as well? IWCITY.

As one can see, the landbank for IWCITY or reclaimation rights for land are very close to the causeway - the main connecting point for anybody between Johor and Singapore.

Hence, I am guessing the acquisition of IWCITY by early 2018 pace the planning made by Ekovest very well. Between 2017 to 2020, there are enough highway construction projects to sustain its growth and operating cashflow. Post 2020, they will be more busy with property projects down south. And with the collection from tolls continuing to grow, the planning made by Ekovest could be very sweet for investors.

As it is, now Ekovest is trading at RM2 billion valuation. The toll business alone is worth more that. It is buying landbanks at good value. How is that not good?

Happy New Year to all readers.

Wednesday, December 6, 2017

The CRRC-Ireka deal looks interesting

If one is to look at some of the tie-ups between Chinese large organizations and Malaysian companies, they are not between a giant and the largest of Malaysia construction or material companies.

Just recently, CRRC signed an MoU (yet to be confirmed) with Ireka (a smallish construction, property company with market capitalisation of just above RM100 million but with experience of 50 years) for the following.

Looking at CRRC which is the largest manufacturer of trains, it seems that it is not a just-for-show MoU. (There are some MoUs which are created just for announcements.) The fact that the size of CRRC which is a RMB224 billion revenue company, I do not think they will sign an agreement just like that.

Besides that, CRRC is putting in around RM9.2 million for a 8.48% equity stake which shows their seriousness in getting the deal to be done.

What is interesting is that with many rail projects in the plan in Malaysia and CRRC already having its foothold here, this deal could be an impetus for Ireka after being a non-covered company for a long long time.

One can find the announcements here, or for the press coverage here.

But these are very early days still.

Monday, December 4, 2017

Airasia: Analysts have been chasing updates than giving us directions

If an investor is to look over here and perhaps here, we can see that over the last 2 years, analysts have been upgrading their valuation on Airasia. To me, Airasia was already worth more (back in 2016) than what the most optimistic valuation given by any analysts in town, be it MacQuarie or MIDF.

Let me tell you why this is the case, besides you can also read this most written stock in my blog. Since, 2015 or even before that, analysts have been chasing after the the results and they forgot about the forest where Airasia is preparing itself to be the king of the airlines (in Asia). They have been dwelling into the numbers and let me quote what the latest from TA, whom have just upgraded Airasia's valuation from RM3.76 to RM3.83 based on Airasia's latest 3rd quarter numbers.

First paragraph, "AirAsia’s 9M17 core profit of RM1.34bn beat expectations, accounting for 91% of our full-year forecast and 103% of consensus estimates. The variance was mainly due to higher-than-expected RPK of AAB and TAA operations."

And this comes from Public Bank's analyst, "For 9MFY17, AirAsia core net profit was RM1.27bn, which came in above our and consensus full year expectations, accounting for 86% and 97% respectively. The discrepancy from our forecast is mainly due to better-than expected improvements in subsidiary and associate contributions. We raise our associate contribution estimate which, as a result, increases our earnings for FY17-19F by an average of 18%. We upgrade our call on AirAsia to Outperform, given an upside of 16.5% to our revised target price of RM3.69 (previously RM3.19) pegged on 8x FY18F EPS."

As I have mentioned, the analysts have been dwelling still on 2017 and 2018 numbers i.e. the furthest they have looked. What they have forgotten is that Airasia is positioning itself to take market share from MAS and Malindo in Malaysia, Cebu Air in Philippines, Nok in Thailand and several more markets. This strategy is taking time, and the results will be seen right up to beyond 2020s as they build their portfolios of routes.

Beyond the market share gain, one must also remember that tourism business is growing well exceeding the normal growth of a country i.e. between 4% - 5%. One can check that air travel is growing by double digit percentage. You can just check around - especially this month. There is literally no middle-income individuals that are NOT travelling.

Why is this?

Because of lifestyles change and technologies, people are travelling more than ever, but spending much less than ever on a single trip. They take Uber, Grab, Didi - they stay in Airbnb's lodging. They take the subway, MRTs.
This also means that people are travelling more trips. Who are the clear winners? Low costs airlines and to some certain extent, the full fledged airlines.

For airline analysts, they should look beyond an airline business, but look at the travel business. What has changed and what has not. Besides airline, Airasia is in the business of (digital) travel.

Even with the above range of RM1.27b to RM1.34b of core net profit for Airasia for the first 9 months, we can almost predict that its core net profit for the year is going to be RM1.8b or more as the final last quarter is typically a huge quarter for travel in this region. Profits and revenue are typically going to be more than 35% of the full year number. With the projected future, we can actually give a decent premium for Airasia - which is not 10x PE projections as provided by the TA analyst. So let's say for the fastest growth market operated by one of the fastest airline, should it not be in the range of 16x to 20x PE? What is a 16x PE for a core net profit of RM1.8b? RM28.8 billion valuation over at the more conservative side - which I am afraid to think, as Airasia's current market value is RM10.6 billion (RM3.17). On the more optimistic side it can be RM40 billion! Why not? A 20x PE for an above average growth company in a fantastic market space and current core net profit is almost RM2 billion.

The Airasia's management has actually done a lot in addressing the analysts - and in fact they are one of the few which has quarterly briefings. They in fact had an Investor's Day for Analysts only in October this year, and what do I get from the updates? Tony Fernandes talked more about its digital roadmaps. Can't they see, they are actually looking at a much dynamic company (still with profits to show) rather than our typical Malaysian companies.

I am not surprise that Tony Fernandes is frustrated with its valuation but I can only say he has targeted the wrong group and not provided the true messages. He has been talking to the group of guys who are taking quarterly reports and making assumptions from that results. They are the ones who dwell more on the deferred taxes and hedging policies than the business.

(I know because I listened to all the analysts briefings I can get hold of, watched the entire session of Investor's Day except the performance by David Foster, attended one of the sessions presented by its Chief Digital Officer in an event which excites me.)

All I can say is to the research firms, provide more budget for your airline analysts get them more exposed to the business than just the financial numbers. Attend beyond analysts briefings. With that, I am hoping that they provide me with more directions than updates.

To me on Airasia, what its tagline which was created when it started, "Now Everyone Can Fly" is even more than ever!