Monday, June 8, 2020

Why is the stock market doing fairly well, while we expect economy to go into recession

There is no doubt the economy globally is getting into a recession. Technically, recession is when an economy faces a decline in two consecutive quarters. Most economies are facing lockdowns situation between the end of first quarter and second quarter of 2020. That by itself would have caused a technical recession for the 2 quarters. For some economies that are dependent on foreign purchases of our services, goods (such as Malaysia, Singapore, Thailand), even if we do well for our local economy, lower demand from overseas would cause a recession nevertheless. What is in most economists and government would be not to allow prolonged recession which is what we termed as depression. In short today, the argument is to whether we are moving into a depression or not and how to prevent it.

This time around people have been shocked by the so-called disconnect between the general economy (which we called Main Street) and stock market. In US, while technical unemployment is registering close to 20%, its Wall Street (stock market) is actually registering record numbers (Nasday which is mainly for technology stocks). Many stock markets although have not been registering as good numbers as Wall Streets, it nevertheless has rebounded and seemed to be doing well. KLCI which is the main blue chips stocks in Malaysia, is not at 1,556 points after touching a low of 1,219 on 19 March 2020, days after the Movement Control was announced. Our peak was about 1,878 points, the period when oil price was still registering above USD100. Hence, I would call it that the market is now at midpoint. However, the economy is seemingly going to suffer beyond the mid-point level for the stock market as we suffered a what I would call a double whammy - COVID-19 pandemic and low oil price (our economy is dependent to a large extent on oil).

Now the question is why is the stock market holding up? Here are a few explanations.

Emergence of retail investors

I have been investing in the market for a while. The last time I have seen the huge participation from retail was 1997 - prior to the last major Asian financial crisis. During then, we were trading at what we called T+7, which was we only pay 7 days after we made our trade. Today it is T+2. Hence, during then a lot of people were playing contra - where we do not have to pay for the trade until many days later. Hence, during the trade, if the stock rises, we do not need to pay any money for the purchase. Since the crisis, with EPF (a very large fund) started to come into the stock market, retail players started to dwindle. The market has been largely determined by how EPF and several smaller others wanted the market to be (together with smallish foreign institutional funds).

The emergence of the retail investors seemingly is appearing from the lockdowns. I have started to hear doctors, lawyers, young professionals, executives started exploring the market. I call this healthy as it is obviously a financial lesson for many of them whether they made money or not. (I am not worried of rich doctors losing money in the market and started learning about fundamentals - they can learn fast)

One of the stockbroking license holder which focuses on retail (Rakuten) for the first time experience profits. Now, whether post COVID-19 these retail investors remain. I hope so, as the market is starved of new groups of investors. Imagine, how eager for us to hope for this group while these new investors whom have been looking at other asset classes such as bitcoins, forex are now putting some attentions on stocks. The focus now is for them to make money over the long term rather than losing and leave.

Stocks as alternatives for other investment assets

As mentioned above, while the younger generations have gone into other kinds of investments, this time around those alternatives are not doing well. Those includes commodities mainly and to a smaller extent bonds.

It helps when in US, the largest of the stocks such as Amazon, Microsoft, Netflix are expected to report record numbers. In Malaysia, those are the rubber gloves companies. It does help to spur the stock market economy as there are no substitutes for investing into rubber gloves companies if not investing into the stock market. Similarly, there is no other way to invest into Amazon.

Flush with liquidities

The Federal Reserve of US is throwing $4 trillion or more into the economy. We are far, but we will get some as well. In Malaysia, we are getting hundreds of billions of stimulus cash or other forms. Imagine if the banks tell us we do not have to pay our loans for 6 months, we suddenly have extra cash. That is probably where money will flow into the stock market. At the same time, when we cannot spend outside of our homes, we may buy some goods online, the remaining some would probably go into the stock market. Profits feed more liquidity into the market and this time around the liquidity is into the hands of the small guys rather than the institutionals - which is good.

In addition, when the system is flush with liquidity with the Feds printing money, it also means the cash we hold has come down in value. This encourages even with the complex investment thoughts not to hold cash in the long term as the money they hold would lose value.

I have been chasing where the money has flowed to - however I have missed out that it actually moved from the banks (system) to the hands of the consumers but some of it ended up in the market. I have originally thought that the institutional guys (such as funds) would be keeping funds to pick up the debt instruments. It has yet to really happen.

Market valuation is a not a fix situation

One of the reason I have never put a price onto a stock - although I generally think what a price would be for me to be interested. When interest rates go to zero in US and in Malaysia, dropped by more than 1%, that investments or savings would tend to move somewhere else. The opportunity investments from bonds or fixed deposits would be other asset classes. In finance, we call this risk free rates. So now risk free rates has dropped, so when we do a discounted cashflows, the other alternative asset would increase in price. Example for this, risk free rate drop to 2% - generally this means I am willing to take risk of a straight line PE (better still DY) of 50x (not encouraging the thinking that a 50x PE is a fair value but just as example). In the past, when risk free rate was 4%, that PE I was willing to tolerate was 25x. That is a 1 single X factor increase.

Will this trend last?

I hope it does last long enough. Nothing beats the need to rekindle or beefing up the Main Streets. However, the market itself can play a role as happy investors will translate into happy consumers. This is the way generally the poorer income group (here we call them B40) can get helped besides giving cash alone.

The financial economy (includes capital markets) is also a part of the economy, and we need to get this to be more active.

Saturday, June 6, 2020

Why some highways are less profitable

I do not quite agree when we put it that it is very difficult to project the cashflow projections of highways. Unless we are talking of flying cars and changing habits over transportation over the next 30 - 40 years, this business will be more consistent than many businesses. Yes, we do not know what the future entails but so are many other businesses. As long as cars, trucks and buses are not replaced roads will still be used.

I have been asked on why then some of the highways are not profitable or rather seemed to be not or less profitable. Take a read over this news - PLUS Expressway's profits for FY2016 was RM288 million i.e. not great for a company this size.

For FY2010, let me show what the number was. FY2010, it was already doing RM1.3 billion PAT. What happened then?


Did the traffic dropped. It obviously did not drop. By 2019, PLUS was already doing RM4 billion revenue. Let's look at this news. Post delisting, PLUS raised a RM30 billion debt. Much of the money went back to the short term funds raised and for repaying to EPF.

I provide a simple P&L calculation as below. Let's assume a project in middle of its concession and the P&L is as provided below. If the cashflow is consistent, I do not need to do much, many Investment Bankers will be approaching the company.



With good ratings, the funding rate would allow the owner of the business to take money upfront and use the funds to venture into other projects. So, when people like Warren Buffett says he has $130 billion cash, it does not mean he has no debt, he has carved out his good assets such as the utilities and made available funds for his other acquisitions. So is YTL.

Let's say the highway has 20+ years to run (and revenue is growing), when approached, the company would raise a RM20 billion debt at probably 5% and the P&L would look like below.

Now, immediately the profits is now 0. Of course, overtime the profitability would increase as it is needed to pay principal for the debt instrument but we usual investors are probably being misrepresented if we do not know the actual exercised behind it. Usually, this kind of projects may be candidates for delisting and then relisting.

The similar situation was probably seen for MTD Capital (which went delisting as well in 2011), the owner for East Coast and KL-Karak Highway.


Today, as provided to me, ECE and KL-Karak Highway together are not making much profits which is not true in actual cashflow per se.

This the reason why I mentioned of cashflow rather than profits for concessions such as highways.

Thursday, June 4, 2020

Challenging the Gloves valuation - Top Glove as example

This article is going to be hugely unpopular. But let me put it, I am a supporter of Malaysian gloves business, you can do a search on my write-ups. The recent events on increasing valuation for gloves not just by retail investors but analysts' recommendations really surprised me. Let me take the largest of the gloves maker - Top Glove which is the largest maker by far. I have no doubt that the demand-supply had gone out of whack. However, how is it that the valuation can be this high.

Two analysts put it at around RM20, another put it at RM23. Today, Top Glove's price is around RM15.60. That translates to RM52.6 billion, RM60.5 billion and RM41 billion valuation respectively. Numbers are just numbers. I am taking those numbers and try to present where it is based on that valuation and what are the risks by picking those prices, especially at RM23 and RM20.

Below are the most aggressive numbers based on a RM23 valuation. The analyst presented the numbers for the subsequent 3 years between 2020 to 2023 and went silent on numbers further down the road. It is obvious the next 2 years will be period where numbers are going to be very high - I do not dispute. I am thinking even at 2022/23 (PAT RM836.6 million), if the profits is going to double the numbers for the normal period of 2019/20 - that is a stretch.


However, let us just say I am going to be hugely bullish i.e. after the period 2022/23, it will still grow at 10% per year for the next 6 years. Based on the above situation, I have put up 3 situations i.e. at what average PE would the company be given their price of RM23, RM20 and RM15.60. The average PEs for 10 years would be very high indeed - 64x (at RM23), 55.5x (RM20) and 43.3x (RM15.60)

To go for a more humble situation, I would not challenge the numbers for the next 3 years but let us put the 2023/24 PAT at a more realistic number. Post 2023, the PAT will drop by 20% - even then its number would be 84% higher from its normal year i.e. 2019/20. Subsequently, the profit numbers would grow 5%. That translates to 80.51x PE for price of RM23, 70x PE (RM20) and even a very high 54.61x PE for its current price of RM15.60.


Even, at a price of RM10 (which is not something we can expect given it is now RM15.60, the average PE would have been 35x, given the scenario above. See below's table. That is still high.


Now, let's look at the economics of rubber gloves.

Remember, rubber gloves while at today's situation it is difficult to create enough supply to meet demand, however are we saying that the demand-supply will still be abnormal after COVID-19. In fact, with the creation of extra capacity at large quantities, it is possible that there could be oversupply situation by then i.e. 3 years after this pandemic started in Jan 20.

Rubber gloves business is not a monopolistic business, although there are situations where certain companies such as Top Glove, Kossan and Hartalega are the larger of the manufacturers. Are we saying that with COVID-19 assuming to be still around after this 2 years, there will not be ramp up of supplies by these guys who would act as check and balance of each other in terms of competition? What about the other players?

How long does it take to create new factories and new lines? More than a year?

I cannot see the economics of it as this business is not in a situation where barriers of entry is very high. No player has huge advantage over the other except for some extra efficiencies and economies of scale. Given the huge margins today, many new companies will not even bother with scale. There could even be new entrants - have any of the analysts thought of this given it is so lucrative?

There are just too much unknowns and many of these are not put into considerations. For many businesses, by putting a overly high price, they run into risks of being shun when situation becomes normal. Typically for this business, it is about long term relationships. I understand that some of them had created a new idea by putting a percentage of their supplies on the spot market (meaning let it be done through bids). However, business like this is not done in such manner. It is not our typical commodities.

Tuesday, June 2, 2020

Why there're flaws in the most extensive written piece on WCE

I must say I am impressed with a fellow blogger on the piece about WCE titled "Why Highways are gruesome industry - WCE Holdings Berhad". This article has been pointed to me, and I feel that since I have been a promoter of this asset and stock, I do have a duty to write and provide my opinion.

In his article, he pointed out that WCE is worth 25 sen which is around the pricing it is trading at currently.

Let me go point by point but I try to be brief:

- assumptions and cashflow projections - I would like to thank him for providing a brief on RAM's base numbers for the calculation of the highway's rating and cashflow. It is highlighted as below that the base case scenario for the cashflow provided by RAM is RM461 million on average for the first 5 years of its full operations. That I assume will be for year of 2022/2023 where this project has been delayed to. I have done my own cashflow (extensive) and it is very difficult to share it and I have to say that the numbers which I have is very close.

My basis for the first full year of operation is based on PLUS's numbers as well as the traffic that the west coast is able to generate by itself. Choivo puts it that the first full year of revenue will be RM200 million which I do not think is right. At the moment (prior to the 18% discount), PLUS is doing about RM4 billion a year. About 78% of that comes from North-South Expressway (NSE). Hence, on that basis, we can project some numbers for WCE. NSE has 772km whereas WCE has 233km (actual length is 316km as some portion are free). Lets assume that with the opening of WCE, it will take about 35% of the traffic from PLUS. The numbers will hence be something like this:

Total PLUS revenue x NSE portion x 35% x total WCE's length compared to PLUS x 233 (i.e. the tolled portion) / 316
= RM4,000 million x 78% x 35% x 316 / 772 x 233 / 316
= RM329 million a year

Besides that I am sure that WCE is generating its own traffic as the path that it passes through has its own base which is from Klang to Lumut and right up to Penang port. That to me should be around 20% of additional traffic. So let's say

RM329 million x extra 20% = RM394.8 million

The first few years, the growth should be high, hence let's put a 7% onto the growth of the revenue.
So we should be able to get numbers like RM395m, RM422m, RM452m, RM484m, RM517m. So let's say my calculation provides a revenue of RM454 million for the first 5 years on average. This is pretty close to the ones provided by RAM. RAM as in its usual practice will put a sensitised case where it provides RM275 million. That in our language is the worst case scenario. One must note that RAM looks at whether the bond is payable while I look at the investability of the project (which margins of safety) See below.

This beginning number is very important as it is a basis for subsequent years. In cashflow projections, only few things are important: inflow, growth, costs. Once we have the first full year inflow right, the next thing which is important is growth. Highways will have high growth in first few years and as we know for WCE, many developers are already preparing themselves for the completion of this highway as the project act as nucleus for growth from the west coast to southern Selangor. Remember Abdul Wahid (ex TM, Maybank CEO)  was very keen for the growth of southern Selangor through Klang and Port Klang when he was the EPU Minister.

- The project is 50 + 10 years. The writer only uses 50 years for his cashflow projection. The PLUS10 is when WCE does not meet the minimum required IRR (which I assume is at around 9%). As we know, there is a huge difference between total 50 years vs if we are able to collect another 10 more years. Remember, the last 10 years are the best 10 years. Obviously, if WCE is able to achieve the minimum IRR, then the toll collection should end at year 50, then we should be not debate about how profitable the highway is.

- The writer mentioned highway is rarely profitable. It is not true, many highways in Malaysia are profitable. Some highly. He puts in the numbers for PLUS. That is not right and misleading. PLUS was built at a costs of RM5 billion. How did it have RM30 billion debt today. This is because the owners were taking money upfront and used the cashflow to sell debt. That I believe had been done various times. Basically, PLUS is about using the cashflow to increase the debt. When the debt is high, obviously the interests is proportionately high as well - hence the losses, which coincidentally reduces the tax rates. So, for the profitable highway guys, it is about increasing the debt with low interests and reducing the taxes. I believe the restructuring for KL-Karak and ECE are pretty much the same. Let me put it this way, why is it that even less than a year ago several parties were keen on PLUS and they were putting a price of up to RM39 billion on PLUS. One must know that some of the bidders have been advised by the same group of people whom are advising for the WCE project.

Although SPRINT is not profitable, this is because it is part of the continuous project from LDP. The strategy is SPRINT feeds the traffic to LDP, where the latter is the most profitable highway in Malaysia. Such is the cleverness of Gamuda. Yes!, The Storm water project is not supposed to make money as Gamuda-MMC already took the money from the difficult construction project. Although some highways are not profitable, they have been poorly studied and are usually built by PNB or some contractors whom did not do enough study. I do not want to name them.

- IJM's track record - The company is second to Gamuda at studying, building and managing highways through its subsidiary Road Builder. Such highways are NPE, Besraya and eventually LEKAS will be profitable as well. IJM will not want to depend on traffic consultant to provide the numbers or projection as their skin is in the game. Why would IJM be negotiating hard on the contract when it knows it would have been losing money on the project.

- WCE is not really northern region - in fact WCE is taking away the more profitable portion of PLUS's NSE - which is why it stops at Banting and Taiping.

- The meat is not for the highway owners but rather the contractors and maintenance companies, as mentioned. NOT TRUE. In the case of PLUS - yes. Why? PLUS is owned partially by us (through EPF) while UEM's subsidiary - Edgenta - maintains the highway. Let me put it this way, if I am owner and contractor, I have liberty of allocating the profits. In the case of WCE, IJM is not making much profits as it is putting attention at keeping the costs within the budget - as it has also been overrun. Talking about PLUS, if the maintenance is given to another company, and WCE is from within, how much savings would WCE be having?

In the case of WCE, the listed company will be the owner (80%) and maintenance company as well.

Generally my mistakes is by putting much early thoughts into a very long term project, as I put myself into a position where if provided an opportunity to buy a highway like this, at what price would I commit. That obviously is not in the mind of many investors as they would rather see the money now - hence the difference between greenfield and brownfield projects.

To me, it is not even meaningful to put WCE at a price of around RM700 million which is the value the market provides for it today. If it is a loss making highway, it would be zero value for the highway (without including the 40% property owned at Rimbayu). Anyway, the highway and property division is clearly demarcated and the liabilities are not intertwined. Why is RM700 million an unimaginable valuation then? There are mainly few probabilities -

1) what is the probability of the project not completed - well it is now about 70% completed.
2) what is the probability of it being loss making which makes the project not meaningful - think of the additional 10 years assuming it does not achieve the targeted IRR.
3) what is the delay on the portion which is free and build by the government

Hence, when looking at it, it is about the probabilities as RM700 million is about 2 of initial years of collection for a project which has 50 or more years to receive its cashflows. The latter years, what the inflow will be I do not even need to share as in highway, it is about continuous growth albeit at lower growth for latter years. Think through this carefully.

Saturday, May 30, 2020

Where do we look for Malaysia in the new normal

I started my career at almost the similar timeframe as September of 2019 in this crisis, but 22+ years past. During then, the market was really hot especially among the second boards (then there was a second board which later was merged into the Main Board). Back then, I was tasked to maintain a group of 40+ loan accounts and look for new ones. I remembered the 2 earlier business accounts that I met up with which was my first time to Batu Pahat and Muar, situated in southern Malaysia were furniture makers. Both of them were doing relatively well. One whose business was selling to the entire country with lorries delivering furniture comprising from simplest of low costs RM30 furniture to sofas. The other was doing purely exports, run by a Taiwanese family.

Of course, 6 months later the Asian financial crisis hit Malaysia. We knew about it but my lack of experience caused me to not know what to do and expect as it was my first real experience of what a crisis was. In a matter of hours Malaysian Ringgit was devalued by easily double digit percentage. The business community whom were caught did not know what to do. So was the entire nation. I can vouched however, there is a huge difference though during then compared to today. During then, the banks would have pulled back the banking lines that were unutilised as they feared of facing more exposures. (Today, quickly BNM imposed a 6 months moratorium on payment for the businesses - This would have given some breather although we have yet to see the impact after that 6 months)

Of course, when RM plunged - it was a tale of two stories for the furniture makers. The one that was selling within the country saw its sales plunged (and later went under receivership) while the one that was doing exports later on became very big and it subsequently got listed and has a huge operations in Vietnam today. We know the main reasons as sales was in USD through exports to US and Europe while the local one was holding a combined foreign and local costs while sales was a mere fraction of what it used to be when the crisis hit.

Today, that situation we faced 21 years ago has its similarities. BNM and the Finance Ministry this time would not have the challenge of defending the Ringgit but we have an economy that was almost on standstill for 2-1/2 months - especially on buying the non-essential items (furniture is one of them). We are going to face worse as time passed when people are now more careful on their spending. That spiralling effect of less-spending would cause local domestic economy to suffer. This time around though, the sales to US for some goods will not enjoy a similar profile as the US, UK, Japan, China's Main Streets are also suffering the same.

However, as one can vouched, this crisis (as people call it will turn to a new normal - and that new normal does not look good for Malaysia) is going to change the business landscape. What is the new normal then? It is going to be more of the digital normal - which means usage of services, purchases of goods are almost borderless. Today, I am sitting at home working using cloud services provided by Google and Amazon. My company is buying more servers with components and equipment made by Intel, AMD, Cisco just to address this period. There is this imagination that the new normal would also mean many globally would subscribe to services and products that are provided by just a handful - Amazon, Google, Microsoft, Facebook, Netflix, Alibaba, Tencent, ByteDance. Many people are buying goods direct from China through Lazada and Shopee - I am not sure our government realise this but the retail market share is more and more getting away from Malaysian companies.

Where do we go then? It is going to be late if we want to compete against the Amazon(s) and Alibaba(s). Rubber glove is a good situation for Malaysia but it is not the new normal. It is the current normal and it may go away. We as a country has to build and encourage up a group of businesses that will be trading globally. Rubber gloves gave us some business safety net. We have a country which geographically and infrastructure-ly built for international trade. The Trade War which is back after 3 months of hiatus - we Malaysia is going to take advantage of it. We are going to use Klang, Johor's ports as an advantage.

Already some of the businesses that are resilient - we can see is made out of this infra and positioning. Those names are Scientex, Dialog, Guan Chong (maybe even MSM) - mainly comprise of producers, traders and manufacturers of essential and daily used items. We have to get Malaysian companies to be strong with digital exposures.

What we have tried to do through our digital initiatives did not really bear much fruits. We were followers. If in US or China a digital business model is successful, we tried to copy them. This is not taking advantage of what we are strong in. Malaysia is a nation which is exposed to the world. US and China, when they built on an idea - they have a huge internal consumption to test on those ideas. We do not have that. I am sure when Spotify was created it was not meant for the Swedish market.

So where do we go in terms of the stock market? All things are not lost. We have enough of these companies and entrepreneurs. When I was exposed to the rubber gloves makers back in 2000, those companies were nowhere near what we imagine they are today. We can recreate many of these similar companies in many different industries. Scientex is one huge example. So was Press Metal. Back 18 years ago, I was not impress with the company - again I am mistaken.

I think this crisis, which is yet to show its true-devil self, would still present opportunities and the way to look for it is less of the inward looking ones but search for the ones that would go outward of this country.

Saturday, May 23, 2020

The rise of the retail traders

What the movement control has managed to give rise is the emergence of the retail traders in Malaysia a number which we have not seen in the past decade. This is a welcome situation on the perspective of balancing the trades as in the past Malaysia's trade have been dominated by the very large pension or savings funds in Malaysia. I have never liked the situation in Malaysia as we were overly heavy on EPF, KWAP, PNB where decisions were focused on a few individuals rather than the masses.

Despite the CMCO, we have seen the largest trade volume in Malaysia on 18 May 2020. Although the Trade value was not the highest, the volume were high. These are probably due to 2 factors, emergence of the new retailers and very active participation from the syndicates. We need both to achieve that.

As an example how much were retailers in the market, see the volume below:

Trade on 16 March 2020 (before MCO)
 
As below, we would see retail participation has increased almost 2x of previous. The institutionals whom would be taking advantage assuming they are better fund managers would also be participating. So, we actually see more liquidity in the market despite the downturn where people are losing their jobs.
Trade on 18 May 2020 (during CMCO)
The numbers on 16 March was already on the highside. On a normal day, prior to COVID-19, the trades were usually about in the realm of RM1 billion.

During MCO and CMCO, things that never happened, this time around is rather unusual. I hear over the radio, a doctor whom was staying at home during the MCO, who usually would not have the time to do trading, started his stock market activities during then. I have friends whom I was convincing them to invest - many of them successful business person asking for contacts to opening of trading account.

While these people are rich and pretty successful, they are usually small business owners or professionals, whom would not know much about stock market valuations but they are people whom are smart and understand what looks good and what is not. They have some good sense or risk management. They are not that much of gamblers.

Now in this MCO, they are emerging. Question is how long they will stay. At least for now, they have created an account and have their money in the trading account.

If the market really experience downturns, some of these people would leave while some might even stay for a long while. For a while, Bursa Malaysia has been experiencing many delisting exercises as small companies which are not much of an interest to the large funds such as EPF, have seen their share prices being low comparatively to the international markets. These are the ones which retail should have participated but they did not. It remains to be seen whether these retailers would remain.

I am for it. At the end of the day, although there is an opportunity for trades and speculation, I still think investing over a longer horizon prevails. When I mentioned longer term, it means over few years - not over few months like some older person is trying to promote.

Sunday, May 17, 2020

Reach me through telegram - @intellecpoint

I realise that for any speedy as well as more secure and not-flooded with unnecessary spams, you can now reach me at

https://t.me/intellecpoint

 or

username : @intellecpoint

I have created a group called Intellectpoint
join by going into the below link

https://t.me/joinchat/OJNKyh1lBOHBXZdSPNdqAQ

You can talk to me on current economic and market trends, simple investing concepts (or maybe even complex), Bursa Malaysia especially, where does Malaysia stands as an example. In the past I have not been able to attend to questions or may be too slow as I was inundated with jobs as well as engagements. I hope through telegram, I am able to speed that up.

I am not an expert user on telegram, but will work on my knowledge.

Do share with others as well.

Do join!

Wednesday, May 13, 2020

Not surprising that Yee Lee is doing a quick takeover exercise

Wilmar which part of its business is selling cooking oil in China, just announced a good result considering the huge impact from COVID-19 in China. This is what it reads for Wilmar which sells flour, cooking oil in China largely.

"Being a producer of essential products for both food and non-food categories, the Group’s operations were not significantly impacted by the various stages of lockdowns globally. Demand for the Group’s consumer products grew amidst the COVID-19 pandemic as household consumption increased due to the implementation of movement restriction measures globally. Sales volume for consumer products grew by 34.8% to 2.9 million MT in 1Q2020, mainly from increased demand for the Group’s consumer staples such as rice, flour and cooking oil."

Back here in Malaysia, Yee Lee which just announced a takeover offer after a failed in 2019, this time offering at a lower price of RM2.06.

One of Yee Lee's larger business is cooking oil under the brand "Helang". At the first time of offering, its offered price was deemed "not fair but reasonable" - which is common for Malaysian companies in Bursa nowadays.

Wednesday, May 6, 2020

We are just too optimistic

For much of the COVID-19 period between February to now (May 4), we have been largely tracking the S&P500. This rebound is good for the market given the sharp drop that many stock markets have experienced especially in March 2020.


Comparison between S&P 500 and KLCI (3 months between 5 February to 4 May)

I however think, we are just too optimistic. US is pumping USD3 trillion into their economy with Federal Reserve acting as the biggest bailout machine. EU and Japan will take similar actions. However, here in South East Asia, we can't just print money like what they do. Anything that we need from in terms of booster in the economy is just like picking up the crumbs from whatever is left out from the economic stimulus that are provided by these superpowers. US will come out the fastest as they have the luxury of having its currency as the reserve currency, China will be the dark horse, while the developing economies will be left hungry.

If anything, post COVID-19, let's look at what we can buy from the stock market. Retail will be dominated by Lazada and Shopee, both China's supported companies. Food and goods delivery would be controlled by foreign companies as well.  Anything digital would be largely controlled by foreign companies. What do we have? Perhaps we have a small little company that does e-government services aka MYEG in the digital space. That's all.

We of course have our export industries but they are not as competitive as Vietnam anymore and we are largely dependent on foreign companies whom may not be interested at Malaysia as much as before. We in fact should not be dependent on them as much as we are not able to compete in terms of price. We should not compete in this area. Technically, many of the countries are catching up.

Let's pull out the companies in Malaysia that we think can be one which we can be proud of regionally. Even at one point of time, the government probably felt that Axiata is best being managed by the regional Telenor (Digi).

If anything this COVID-19 will expose our weakness economically - although the Ministry of Health had done a wonderful job. The economic revival is left to a group of people whom had just been in office for 2 months. Do we expect miracle?

They will have the standard statement. Let's go digital - Industry 4.0, go for FDIs. The local retailers whom many of them have yet to reach maturity, would probably fall by the wayside. The poor support that is given to our industries comprising many of small and medium sized is bad so much so many would suffer and may not be around. Those spaces would be filled by the new entrants and in the name of FDIs, we would be happy to open up to these guys to take over the economic spaces.

We can call that free market competition at a time when many countries are looking inward - and globalization is dwindling.

Why is then our KLCI trending similarly to the US. One has to bear in mind, within S&P500, the top 5 companies (Apple, Amazon, Microsoft, Alphabet, Facebook), their future looks good given the current situation. They will be better off now and in the latter part when things are back to normal. We are not.

Tuesday, May 5, 2020

Sold almost all Airasia - Why

I have sold almost all (16700 @ RM0.81) of Airasia par 200 units on 23 April 2020. Well, the rationale is almost similar to Warren Buffett's idea of selling all his holdings but it is different. Let me put the reasons.

For Berkshire Hathaway, he basically owned the Big 4 airlines - United, Delta, Southwest, American Airlines. When he bought the airlines I believe, it was due to the industry was facing reduced or managed competition, and the number of seats was much more controlled. One notice that Berkshire  did not own a particular company but instead owned the Big 4. There was a reason to this, he did not want to make a picking on a company but rather made an industry call. COVID-19 pandemic however, changed that landscape much due to unforeseen oversupply even after the lockdown is over. The government of US was in fact putting $25 billion to support its airline industry during this trying times.

How the airline industry is going to change? The way people travel is going to be different and there are various thoughts - such as foregoing the middle seats for a single aisle, more sanitation and control etc. These are going to reduce the revenue for the airline companies but instead increased their costs. Nowhere in the world would be dissimilar when comes to this issue. 

Malaysia or our region which includes China and India's situation is somewhat different although there are much similarities. These airlines be it Singapore Airlines, Thai Airways, MAS, Airasia, Lion Air - they are operating off different bases and registered as airlines businesses operating off a specific country. We know that Singapore government gave a rescue package of around $13 billion to SIA. Emirates and Qatar Airways which are representing much richer countries would have done the same - if not already done. We hear of Australia - at the moment - would allow Richard Branson's Virgin Australia to go under although airline industry plays a pivotal role in providing strength for the business and tourism industry - which is unforeseen in my opinion. I think China, would the same in rescuing its airlines as they are pretty much state-owned anyway.

What about Airasia? Well, the only thing we have heard is that the government may consider the amalgamation of Airasia-MAS and maybe including the much affected AAX. I however think that it is going to be very hard - depending on how hard Airasia or MAS are being hit. MAS would have been hit harder as it was not in any situation to survive, unless Khazanah continues to pump in cash. One must notice that at this moment, Khazanah would also be needed to perform its call of duty to support government's financial need.

Airasia was being lucky that it sold more than 110 planes over the last 2 years. It was holding cash as it managed to secure more than RM11 billion of sale. We also have gotten some of the cash in the form of dividends (about RM1.35 per share) from that results, and I have heard of analysts mentioning that the cash situation would have been better if it was not distributed. Well, let's put it that some of the cash may have remained in the hands of the largest shareholders and when in need, there would possibly be a cash call exercise. So I think, Airasia would be saved despite it being a private company.

Why would I then sell Airasia? First of all, it is probably the hardest hit industry and no one can predict the outcome. No matter how our modelling is done, it is hard to predict. Let's say the worst case scenario - what if no vaccine is found even after 2 years? People may not be able to fly inter-country for months or quarters. I still think at this moment the fittest will survive and given the balance sheet of Airasia, it is the fitter one. HOWEVER, where Airasia is operating from i.e. Malaysia, Thailand, Philippines, Indonesia - these countries are not the fit ones.

These countries would have enough trouble supporting their economies whatever the outcome may be from COVID-19 and they would not have the financial power to support their airlines. Malaysia is hit by the virus, political uncertainties, oil. Thailand is hit as well and it is probably thrashed by the automotive industry situation.

Post COVID-19, the ones with the balance sheet will survive and prosper. The same is onto a particular company - and the similar situation would be for countries.

What I am afraid is - the SIAs, Scoot, Qatar, Emirates would be outrunning the air space. There would be oversupply of seats for a while. The situation is people would be still hungry to travel but not for the shorter term. I know I have heard of behavior will change but I think certain behavior like wanting to travel will stay, but the bigger thing I fear is that the poorer countries may not be able to support their own industries and airline industry needs support no matter what the outcome would be in future.

Sunday, April 26, 2020

The Malaysian stock market does not look bright

COVID-19 really takes many by surprise. It is very different from other economic downturn. This downturn is global and it impacts basically every major country especially the very large developed countries. No country it seems would be spared and the largest of economy currently are busy fighting the virus. When this fight is partially or fully over, only then the economic activities would be fully restored. The problem with this time is, we do not know when. It is feared that by the time we reopen our economic activities fully, many companies would not have the ability to survive.

Although this crisis feels like it had happened over a long period, in actual fact the real effect has only been felt for less than 3 months - since February when it really started in China. In most economies and stock markets especially the recent ones, there were most often hope and people traditionally had thought that it would have recovered. This crisis will recover but it may take a long time for that to reach its full economic activities let alone growth. The fact of the matter is that this is just the beginning of a long war.

To compare, one should not compare 2021 or 2020 against its immediate previous year. It should not be year on year although it is good to get an indication of growth. The base year for any of this should be 2019.

For 2020, it is a given that the world is to face a recession, and we may even get to a depression if the crisis persist for a longer period. For economy to return, many countries are using debt. Companies that are hugely affected will need rescue and government will use the debt that they issue to fund those rescue - if it is of any major assistance. The ability for any government to issue debt would depend on each country's capacity.

US government is talking of up to $4 trillion in terms of additional budget. For Japan, it is in excess of $1 trillion. Malaysia? we do not have much fiscal ability. By my count, after the several stimulus that have been announced, Malaysian government is possibly raising additional RM35 billion at the moment. I believe that amount will touch RM50 billion, but we do not have much tools to raise further funds through debt.

Why?

The world's government are now raising debts. Basically every country. To pick up those, they need someone to buy. In US, they would have it easier to do that as US Dollar is the world's currency. Many countries, business companies would want to hold Dollar as a reserve. To do that, they are going to pick up the government bonds. Europe's EU will have some ability of the same. So is Japan. What about Malaysia? We will have challenges to raise bonds unless we offer attractive terms. What are those terms - good rates but would anyone be buying our bonds if the rates are attractive but the currencies may deteriorate?

So what does our government do? We grapple for our own funds to pick up those - organizations such as EPF, KWAP, Petronas, PNB. Many of these GLCs and statutory bodies would be needed to pick up a substantial portion of the country's bond issuance. However...

Once they pick up these instruments, they would forgo the other - which would be - they would be selling stocks and other assets. (Stocks is the most liquid though) In the case of EPF, it may look at selling its overseas stocks and patch them back into our MGS. They will be needed to defend our market as well.

Now do we know why despite the challenges faced by companies, EPF does not move an inch (except for the 7% contribution option given to employees) on requiring employers to reduce their contribution. This is because that net inflow of around RM3 billion a month into EPF is a necessary instrument to defend the country's trouble.

What should investors in Malaysia do then. Given the uncertain and tight monetary situation, one should wait. For the first time, one should hold safe assets - it may not be cash but some defensive companies or assets - really defensive ones.

Monday, February 10, 2020

Sold Gamuda-WE

I have sold Gamuda-WE. Obviously it was at a loss as the construction sector has changed fundamentally since the change of government.


Overall, the total portfolio has to be re-visited at not much due to the corona virus as this is an uncontrollable event but because of the change of government - which is a controllable event. Hence, the danger in Malaysia is not an event which is not controllable but the biggest danger in Malaysia is people.

Anyway, Genting and Genting Malaysia (despite whatever it is) now seem interesting as it has dropped because of much fear rather than true fundamentals.

Sunday, February 2, 2020

Airasia: The bigger issue is from China, not Europe!

To me the bigger issue for Airasia is AAX and the coronavirus situation in China. The Airbus situation is something which is not totally unexpected. Let me put through my thoughts on this.

Firstly, China is a big market for Airasia and other airlines in this region. We do not know how worse the situation can be as air travel or any other mode of travel can be affected for the short term. Many countries have barred Chinese travellers be it from Hebei province (Wuhan especially) or the entire China. Economy will be affected because of this, not just China but other countries that trade with China.

Airasia has mentioned, SARS was bad for the company and today, it is having much more flights in and out of China. To me, the one which is affected even more is AAX - already it is not in good financial situation but because AAX's flights are the ones with more than 4 hours flight hours, they fly to more Chinese cities than Airasia. For Airasia, if I am not mistaken at the most, the flights that uses the A320s are to Hong Kong, Shenzhen, Macau and perhaps Kunming. AAX's routes fly right up to Tianjin (close to Beijing).

What is beneficial to Airasia now is the price of fuel has dropped significantly since the Wuhan virus outbreak was deemed to be worse than initially thought.

What about the penalty on Airbus?

Well, I am not surprise. This is not that I am supporting the way it was done. I am NOT. The issue seems to be the sponsorship for Caterham (which was a big mistake by the founders).


The article by Focus Malaysia made it sounds like the arranger pocketed the money from the purchase deal. I believe it is not, the deal probably was a sponsorship deal towards Caterham. I have searched for a connection between Airbus and QPR, but could not find any.

In any case, we should be mindful of how the EU works. This is opportune time to really penalise a huge organization such as Airbus given the 737MAX issues that Boeing face. As the aircraft business is a duopoly, what Boeing faces is benefiting Airbus - hence probably the EU and now UK (which is officially no longer part of EU) takes this opportunity to put a huge fine on Airbus. How come they did not penalise Airbus earlier and does this kind of case need 5 years to be taken action upon?

Airbus is not just a plane manufacturer but also a designer and producer of military equipment, planes to many countries (especially EU countries). Do we really believe that EU is serious on penalising a company that it supports and relies on. Airbus is a company created through the European Union's initiative. They probably subsidize the company many times the penalty. This is politics. During good times, fine can be part of the tax initiatives. During bad times, they will provide subsidies.

At the moment, Airbus is in a leading position, hence it will not give that much incentives to companies to purchase its planes as Boeing now is "injured". As a perspective, do we now see Airasia doing deals (in the last 2 years) with Airbus? None besides the upgrades from A320 to A321. Tony is a dealmaker - and sometimes he overdid it.

In my mind, Airasia is a company that negotiates the purchase of planes to the benefits of the company. When the deal is not so sweet, they backed off. Remember that the founders put in another RM1 billion into the company by buying more shares. Their wealth is tied down to Airasia more than the USD50 million behind the scene deal.

MACC is pinning down on the deal, which is not surprising. However, as I believe with Europe trying to be seen as leading on curtailing corruption, their version of what is corrupt may be different to what is in Malaysia for example. To Airasia, as long as the sponsorship deal is above board and given the approval by its Board, it should be acceptable. That is not in EU's playbook. But remember, in bad times, they support their companies all the same.

I believe this is the same issue among many faced by our palm oil companies and seafood producers.

To the authorities here, while Europe or US give us the direction on what is corrupt and what is not, not everything that they do is for our benefits. The size and strength of EU put them on the advantage to define certain issues. But if we play by their book, we are not moving much forward.

This is what is faced by China on the trade war and we should do the same with our companies. I do Not encourage unscrupulous deals by our companies but there are much worse ones that I have seen.