Thursday, January 31, 2019

What's dangerous for 2019

The first month for 2019 is almost going to see its close. While very few of Malaysian companies have reported earnings, US companies are midway through their reporting. From my daily watching and reading, I would say it has been a mix bag. Seldom do I really follow through and be tied down to quarterly earnings. This time though, it has a sizeable threat.

CHINA! and semiconductors.

Several of the companies that are largely dependent on business from China is seeing deterioration. Companies like Nvidia, Intel, Apple, Caterpillar - they have reported earnings or guidance that seems to show that China is slowing down. All of them has indicated that their business has slowed in China. Whether this is wide spread i.e. over the entire China's economy or certain particular economy i.e. semiconductor, construction is unknown. One other factor is also because of the trade conflict between China and US, the Chinese are now being patriotic and they are preferring Chinese brands. This is seen from the market share growth of Huawei's phones as against Apple's IPhones.

However, the other two companies being Intel and Nvidia, despite the trade friction, if the demand is still there, the Chinese companies will still be buying as there are very little alternatives. Intel as we know is largely providing CPUs for PCs, servers and modem chips for Iphones. Nvidia is another chip company whose business supplies to the gamers, data centers, autonomous mobility market.

It is still hard to read how bad the Chinese economy is going to affect the world this year. There are already signals as provided by Alibaba's VP, Micheal Evans a month ago, where he indicated that volume growth has slowed. In China, many economists and businessman are already expecting slowing growth - but to how much? Will there be a recession. Official data from the Chinese government still shows growth of 6% to 7%. Is this true?

What is the impact to Malaysia

Malaysia is a huge trading partner to China especially when it comes to exporting semiconductor components to China, for them to assemble them into full product. Among the companies that exports to China via Malaysia are companies like Intel, Broadcom, Infineon. Malaysian listed companies such as Inari Amertron is a supplier to Broadcom especially for the RF filters. As we have seen, Inari has already been affected somewhat, but not massive.

What about the automation companies like Vitrox, Pentamaster? I presume as we see the trend affecting Intel and Nvidia, there is a possibility that China may see under utilisation of its capacity. With that, there are good chance that these Malaysian companies may see slower growth as well. With the threat of the trade war, many companies are also looking for alternative manufacturing sites. Vietnam, Malaysia, Indonesia, Thailand would definitely be explored. I do not see it to be immediate though as China is working on its under utilisation.

Palm Oil is in danger

The trade war also sees China offering to purchase a vast quantity of soy bean oil to make up for the trade imbalance. As it is, the details are still very vague but considering that if some agreements are to be materialised, soybean will be used as a trading commodity. What's good for soybean farmer in US will not be good for palm oil as they are substitutes. I am very wary of palm as China has not many traded goods to show to the American exporters to make up the imbalance besides cars, Boeing planes, beefs.

A slowing down China towards Malaysia

As it is, at the moment it will be hard to figure out the actual impact. I fear though that the initiatives by Malaysia government to reduce debt will not be able to materialise unless we start to sell national assets especially those held through Khazanah. The government is adamant on reducing debt. Hence, medium term i.e. for the next 3 - 5 years, we will see corporate exercise happening where these assets will be privatised.

Saturday, January 26, 2019

First Wing Tai, then MWE this year Suiwah

2017 it was Wing Tai Malaysia.
2018 MWE.
This year 2019, it is Suiwah.

Let me tell you they use the same formula i.e. little trading. Why little trading? It is because they have no intention to expose themselves to the shareholders. These are companies that treat the company as their private company anyway. Remember, where Jho Low comes from. What is the background of his family. Where his father, Larry Low was attached to as a director before? MWE. And coincidentally, all these companies have background from Penang.

They learned from each other.

I can bet you that Suiwah is buying from public very very cheap. High chance, it is going to use Mercury as advisor, or maybe M&A Securities. At the point of writing the Net Asset Value of Suiwah was RM3.30 per share and, it is offering RM2.80. It probably did not do revaluation for a long while.

Be careful on these type of companies. They are not keen to treat the shareholders well at all. At AGMs, they are hoping that the AGMs end fast so that we do not ask questions. They do not think of WIN - Win. The good ones in their business, they pass to their family business. For us investors, we do not mind if our win is smaller but at least they treat us a partners.

In their case, they are using us as like their gambling playground.

Note: I am NOT particularly referring the scenario towards Wing Tai, MWE or Suiwah but these are certainly true for some companies that are listed in Malaysia.

Friday, January 18, 2019

Fear on Bumi Armada is probably overdone

Imagine this! A global company which does business on almost all parts of the world supplying to the large oil and gas companies, top 5 largest FPSO valued for less than RM1 billion or USD250 million that is.

As we see here from a diagram picked from BW Offshore, Armada is one of the largest players in this space

One can say that it  is now largely in debt (about RM11 billion) and huge portion of it is in short term debt hence its liquidity is an issue. With that we can probably put a discount because of the risks but those that fear over it defaulting in its debt probably is worrying too much.

Bumi Armada, as we know is controlled by one of the richest man in South East Asia, Ananda Krishnan and in himself, there is a certain level of ethics which he has shown and practiced towards the investment community in the past few decades from what we know.

We know that he has taken some companies private before and put them back again in the public. (All his major holdings Maxis, Astro, Bumi Armada have gone through that route) Through that route, which I was critical of them, he had actually not let many of his investors down as those holdings were profitably for most of the shareholders. This is unlike some of the companies that have gone private where the party who is privatising the shareholders have taken investors for a ride buying them way below intrinsic value.

This time around Bumi Armada has gone into a little bit of trouble largely due to the poor oil price since 2015.

Bumi Armada has two main core, the first which is OSV or Offshore Service Vessel and the other FPSO which stands for Floating Production Service Offloading. Because of the poor oil price, OSV has largely been impacted and because the OSV's business has less barrier of entry, it is hugely competitive in times where activities on exploration, offshore production is kept low. Many companies in the OSV space are not able to be kept afloat.

FPSO on other hand is a more complex business. It is a partner to the oil companies which is extracting out the commodity from the sea. There are not that many companies which are capable of getting into this business. As mentioned above, Bumi Armada is one of the largest. Yinson from Malaysia is the other. Bumi Armada as we see it is less preferred than Yinson - mainly because of its balance sheet, not its capability. Yinson in fact, is a lesser size player. FPSO is not a dying business and it has much less competitors.

When as outside investors see that the company is in liquidity crunch, the two things that comes in mind is additional injection - which means more capital and the other being liquidation which is the worst of the two. Either one however, during times like this is less preferable. Bumi Armada has come out on record to say that it is not looking at raising funds through additional injection. Coming from them, I would say I trust what they are doing. Instead, it is looking at restructuring its short term debt - which is still a problem - and trying to renegotiate the rates. The CEO of Armada, in its letter to its employees, has written and advice to keep the level of new business development low as they are going to restructure the loans. From this perspective, I take it that it is trying to be careful rather than being in serious condition until it defaults.

Why do I say this? As a start, the level of business operations activities for Armada for the last 1 year is at its highest for the last 5 years. It has just gotten acceptances for 2 of its largest FPSO projects through Armada Kraken and Armada Olombendo. These are the 2 projects which are more complex than its earlier projects - and the key is that it has gotten acceptances, where from here the contractual work should be more smooth flowing. All in all, Armada has over RM20 billion of contracts in hand and another RM10 billion of extension options.

I would also like to highlight that the high gearing over the last few years is also because of mainly the 2 large projects. From 2014 to 2017 as shown below, it has been investing into these business.

What Armada has gotten into trouble is from the OSV business and the termination (Armada Claire) and bankruptcy of one of its client in Nigeria. These largely caused them to be sunk into some liquidity issue.

I do not think these are issues which cannot be solved especially given that it has solved the larger operational issue from Armada Kraken. Looking forward, I would like to think that despite oil price being lower than the best years between 2012 - 2014, many of the oil producing countries have gotten hold of the shock better than what they experienced in 2015. Oil price may not go as high as USD90 or USD100 anymore as it is now having shale as a competitor but they are better prepared.

In analysing Bumi Armada, it is not easy as it is going into chartering and there are different degree of complexities in its business. One of the better explained analysis is coming from CIMB here (page 52 to 57). Its analysis is extensive and I think it looks at it objectively especially on individual projects. Today, we hear that it is keeping its call unchanged. I feel it is right as to me fundamentally it has not changed much.

What the analyst as usual has not taken into account yet is the strength of the brand, relationship, customer exposure, processes that the company has built over the years. With that, it should be worth more.

I do not think the risk of defaulting is high. It may face high interest costs but it should also not be worth just around RM1 billion for a company this level.

Monday, January 14, 2019

Should we be fearful or fearless

Seriously, this is one of the better times to buy Malaysian stocks unless we are very sure that 2019 or early 2020 will be recession year(s). 2 years ago, I was short of stocks to pick, this time around it is a different way round.

World Recession

Let me get to a brief discussion on recession (or will there be one) before identifying whether we should buy and what type of stocks to pick. Will the next 12 to 15 months be recession period? US indicators does not seem so, and in fact there is this "grumble by you know who" about the Fed raising interest rates in December. The Fed will not raise interest rates when the economy is tumbling, and in fact they were worried over inflation - and they have mentioned of normalising interest rates (a number where nobody knows what is the optimal). The 10% drop in US stocks last month were largely due to few reasons - fear that the Fed will continue to raise interest rates, program trading and holiday period.

That fear especially where the Fed is going to be "hawkish" has been laid to rest when Powell, the Fed Chairman mentioned that they will delay their plan to raise rates if there is an indication of economic slowdown or more importantly recession.

Now, if US seems to be pretty safe except that the economy is not going to be as expansionary as 2018, what about other countries - such as China and Europe?

Europe and UK have been facing slowdown  in growth largely similar to the Japan syndrome for a long time now. Its economy while significant in size has sort of cooled and as such it is not a shock anymore if anything untoward happens to Europe. The larger worry is the second largest economy i.e. China.

China, this time is the biggest unknown. There are a lot of indications that China is slowing down - but to how much? Every economic indicators show that it is going below 7% growth, a territory that has not been seen for more than a decade. Well, what is more worrying about China is whether it is facing credit problem among its industries and property sectors.

We know that China has strong reserves but what we do not know is whether there is the "House of Cards" symptoms facing the industrial sector especially when the Trade War is on the doorstep.

Trade War

While the Chinese government has realised that they cannot depend on capital pushed growth since few years ago, they did see the pushback from US coming so soon.

US under Trump in his 2nd year in office has tried to hit China hard and that has sort of shaken the Chinese - at least among its export industries.

The trade war is a term but in effect, what US wanted to reign on China is towards its technology sector which can be worrying for US' dominance in the future. Today, we are already seeing many of Chinese companies have shown their appetite to grow and invest heavily into technologies. US knows this is a threat and what is mentioned as Trade War is more of a Technology War. As such, through the use of tariffs US is trying to slow the Chinese down. The effort then is for US - at its strongest for within the last decade - to pushback the Chinese businesses.

But sometimes when someone is trying to cause ripples, tsunami may happen. That is the one worrying. In many scenarios, we could not see the tsunamis that is being stirred.

While, the worry is plenty, I foresee that both countries may come to some agreement in the short term as they are interdependent on each other. A much weakened China economically will not be good for Trump who is running for his reelection in 2020.

Malaysia's economy, politics and stocks

The Malaysian stock market is an awkward one as we had just went through a massive government change - first time ever in the history of Malaysia. Many counters which have been providing services and where their businesses depended on government budget will continue to see uncertainties.

A theme that I have continuously trump on is look for quality companies that are run by quality management. More often than not, when there is quality, Malaysian government cannot ignore. (This is the reason why I invested into Gamuda, a company where the Penang state government when DAP was the opposition at the federal side was even willing to award a multi billion contract)

I can understand when a new government (especially after claiming that the country is in very weak financial situation when they take over) is trying to work on its finances.

Imagine this. On its first few weeks, a new management - especially after announcing elimination of GST which will reduce its revenue by RM20 - 25 billion, what will they do? CUT for sure. RM25 billion is significant - for someone who cannot imagine, that is about 7% of the government's expenditure.

Only after they have gotten a better hold of the financial situation, the government can look at its development expenditures. This is because, more often than not operating expenditures are the one harder to get the "snips" as it involves the people's rice-bowl.

While the bulk of the "SNIPPING" have been done last year, this year will continue to be the discovery period i.e. who are the cronies and who are the ones really can deliver based on their capabilities. No government in their right frame of mind would want to create downfall to well-managed Malaysian companies, not when as a country we do not have that many to claim for. A government in its right frame of mind will understand that they need the companies to continue to help build the country whether they are from construction, manufacturing or even plantations.

As a country, we will still need to grow through careful "development initiatives". And that means spending on development. While operating is the one keeping the engine running, development is the one pushing us forward.

For stocks, my take is that while the government is still at discovery mode and learning, we should continue to put money into companies that have delivered and have put effort to learn and grow. Many of these companies are great companies but because of investors' fear their stock price have suffered. We should however know whether some of these companies can be caught by "disruptive" trends.

What about the stocks in which they are not so related to government contracts?

At the same time, due to global economic pressures as well as internal trends, several companies have seen years low. These companies have very little to do with the government - whether it is governed by PH or BN. I could name a few i.e. DKSH, Bumi Armada, Freight Management, Hibiscus, P.I.E. These are companies as we know have dropped because they are part of the "fear factor" in the latest global economic trend. Some of them are more defensive than others but what I noticed is that the 2017 or 2016 stories did not differ much from the 2018 and 2019 stories.

Then why did they drop?

A big part of it is because of us, human being - we are inconsistent in our feeling.

Friday, January 11, 2019

The politics of insuring the people

First of all, I have not really been agreeable to the concept of forcing the foreign insurance companies to part with 30% of their shares to locals. Think of it, usually the local organizations that can afford to take up sizeable stakes are those like EPF, KWAP, LTAT. The price for insurers the size of Great Eastern Life, AIG would be high when they sell these 30% stake to our locals. Perhaps the good part is EPF will have additional options to invest into. When we put up conditions like this, it often scares companies from doing business in Malaysia as we now can put up conditions as and when we sees fit.

Pushing these insurance to sell with a dateline is even harder as valuation where both parties can come to agreement is not going to be easy. Anyway, when the government tells us that in Malaysia 80% of the insurance business is controlled by foreign companies, that is also a cause for concern. Besides banks, size matters even more in insurance business. Many large risks are not able to be taken up by smaller business as they sometimes cannot swallow the risks.

However, I am concerned over government working with the insurance companies to cover the B40 group for some level of coverage. First question is, what about M40 and the rests?

Insurance thrives on scale and masses. I would like to think that government is of enough scale to provide the coverage. The taxes and revenues that it collects is supposed to provide the coverage to a target group be it the less  able etc. This public private partnership concept may sound good for the B40s but if we look at it through a larger picture, there are many questions than answers. Always when you get something, you forgo something else. This does not sound like win-win.

The question is when Great Eastern (GE) is willing to allocate RM2 billion for coverage for the B40s, is that the price it is willing to pay for it not to dilute its stake. This means that there is a price one can pay to opt out for something. Great Eastern is the largest life insurer in Malaysia. What is the price Prudential Malaysia is willing to pay to get itself off the hook assuming it is smaller than GE, for example?

What about Tokio Marine, AIG, MSIGs of Malaysia assuming they have not met the 30% local ownership threshold?

Then, my other question is whether is this another form of votes buying? We had concerns over BRIMs before as it only targets certain groups. Previously, I thought the message was that focus is more towards the handicaps, less able group while we are going to teach the "able" B40s how to fish rather than giving them the fish. That has been partly what we have been voting for - now there seems there is a change in approach but similar in style.

Monday, January 7, 2019

Why does a Rubber Research Institute need RM2.28 billion?

By now, we would have already read on an issue regarding the Kwasa Land where EPF have bought a 2,330 acre land at RM2.28 billion from Aset Tanah Nasional Berhad (ATNB) whom have presumably acted as a middle man after it has bought them from Rubber Research Institute for RM1.5 billion.

That transaction has become a big "hoohah" as it seems to be that RRI has sold the land at below market valuation. The issue now here is whether - ATNB, a wholly owned subsidiary of MoF - did it shortchange RRI, another wholly owned entity of the government?

Despite we have been hearing of 1MDB, Tabung Haji, I think this issue may not be that big as compared to those (unless the auditors have found mismanagement with the usage of funds from the profit made by ATNB).

I would like to make my thoughts in a different manner.

From the proceeds, what would RRI be needing a RM2.28 billion for? I think during then, even if RRI is to have sold the land for exactly RM2.28 billion, the government would have asked RRI to remit a portion of that money to government's coffer as it does not makes sense for a research institute to hold such an amount of money.

I have tried to find out about RRI. It does not even have a website and when I tried to click on RRI, it linked me to Malaysian Rubber Board. Today, rubber is a very small portion of Malaysia's economy and I do not think the research institute despite its previous contributions will need that kind of amount. Today, the biggest contribution probably from RRI is towards the rubber gloves industry, and perhaps condoms as well.

The bigger question now is that how is the ATNB's money being utilised. I think it is best for the audit be made public as we do not want every shuffling of funds be made an issue!

Frankly, I am more concerned over the low rubber and palm oil price today. Should we, as a nation be less dependent on Palm Oil and what are the efforts to be done to educate us on what to do as it seems palm oil may not come back to its good old days in the near to medium term.