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Saturday, June 22, 2019

Tong's Value Investing Portfolio as of June 20, 2019

Tong Kooi Ong

Malaysian stocks not performing due to serious structural impediments

It was another good week for US stocks. President Trump tweeted that he will meet with President Xi in Japan next week to revive stalled trade talks, giving investors one more reason to push stock prices higher. Earlier this month, stocks rallied on expectations that the US Federal Reserve will cut interest rates imminently. Both the Dow Jones Industrial Average and S&P500 index are within a stone’s throw from their all-time record highs.

Stock markets around the world too gained on the improved sentiment. Relevant bellwether indices in the region including Singapore, Thailand, Indonesia, Hong Kong, China and Japan are all sitting on gains for the year-to-date. The one standout is the Bursa Malaysia’s FBM KLCI, which is down 0.9% so far this year.

This lackluster performance for the Bursa has triggered some politically motivated rhetoric in recent days. But the fact is that stocks have fared poorly for far longer – well before the change in government. Case in point, the FBM KLCI has fallen in four of the last five years. So, if not politically related, why has the Malaysian stock market done so badly?

One of the biggest reasons has got to be about underlying earnings, which is the main driver for stock prices over the longer-term.

We tabulated the net profit for all companies listed on the Bursa throughout the past five years, from 2014 to 2018. There are 855 companies. We also categorised these companies into their respective sectors, to determine the profit trend and compounded annual growth rates (CAGR) for each sector. The results are shown in Table 1.

Table 2 shows the annual year-on-year growth/decline for each sector over the same five-year period while Table 3 shows the sector net margin for each year.

Table 1: Total net profits and CAGR by sector

Table 2: Y-Y change for net profits by sector

Table 3: Net margins by sector

Table 1-3 show total net profit for all companies fell in 2015, 2016 and 2018 – the CAGR of the decline was -6.8% per annum. Net profit margin too has contracted sharply over the past five years, from an average of 11.3% in 2014 to 7.7% in 2018.

Not surprisingly, the years where total profits fell are also the years where the FBM KLCI and broader-based FBM Emas index ended in the red. See Table 4.

Notably, even though share prices have been declining, the size of the drop is lesser than that for earnings. There may be a few reasons for the limited share price volatility on both upside and downside. Surely one of them has to be the huge impact of local funds like the EPF and PNB. While there may be benefits, there are also long-term consequences to the integrity of the Malaysian capital market.

Regardless, the result is that PE valuations are higher now than they were back in 2014. And this is why the stock market is under performing – valuations are not attractive even though share prices are lower. It also means a turnaround is unlikely until there is broad-based earnings recovery.

Table 4: Performance for Bursa benchmark indices

Unsurprisingly, the energy (oil & gas) sector fared the worst in terms of profits, given the sharp fall in crude oil prices and resulting collapse in global exploration and production activities. Brent crude fell from well over US$110 per barrel at its 2014 peak to below US$30 during the lows in 2016. Oil prices are now hovering around US$60 per barrel.

Profits for plantation companies too were affected by commodities prices, falling 15.6% annually, on average, since 2014. In this case, crude palm oil (CPO) dropped from an average price of about RM2,400 per tonne in 2014 to RM2,170 per tonne in 2015. CPO prices recovered to RM2,630 and RM2,800 in 2016-2017, respectively before dropping back to RM2,240 per tonne last year.

Construction, consumer products & services, properties, transport & logistics, utilities, telecommunications & media and even real estate investment trusts (REIT) all reported negative profit growth between 2014 and 2018.

Healthcare, the best-performing sector with cagr of 5.7%, has only 15 companies. Financial services, with 34 companies, grew at a CAGR of 4.3% while technology (81 companies) expanded just about 2% p.a.

Profits for the biggest sector by number of companies, industrial product & services (239 companies) were up by only 0.4% p.a. while that for consumer products & services (183 companies) fell 2.2%, annually, on average. Net profits for property companies declined at an average clip of 3% annually for the past four years.

Suffice to say that even setting aside the energy and plantation sectors that are heavily influenced by external factors, the average Malaysian company have not fared well at all. Net profit margin for all sectors declined through the five-year period.

In other words, the causes are years in the making and structural in nature.

Increasingly market-dominating GLCs and GLICs – with explicit and/or implicit unfair advantages – led to the crowding out of the private sector. Fewer number of banks – after rounds of consolidation – resulted in lesser diversity in terms of lending strategies, practices and appetite for risks.

Together with falling corporate profits, they translated into chronic under-investment in productive assets, technology, research & development and innovation. The quality of our education system has been in a long-term decline.

Companies that relied heavily on cheap, low-skill foreign labour and failed to move up the value chain were, increasingly, faced with pricing pressure from digitalisation and technology disruption.

Those that have, in the past, flourished under government subsidies were by and large, unable to fully pass on rising costs, leading to narrowing of margins. Unfortunately, many Malaysian companies remain simply rent seekers.

The issue of corporate governance may be another reason. As I wrote recently, if controlling shareholders can pay themselves half of the company’s profits as annual compensation, that represents some 4-5% of the market capitalisation, with no dividend paid to shareholders, surely it must be clear that this amounts to a blatant transfer of wealth of a public company to its controlling shareholders.

The above are some of the more obvious reasons for the chronic underperformance, in terms of corporate earnings and the stock market. They must be addressed urgently and within a holistic framework if we want to see a sustainable turnaround.

But despite all the gloom, investors can still profit by investing wisely and rationally. I will discuss this next week.

My Global Portfolio continued to fare well in the week ended Thursday, gaining another 1.7% and lifting total portfolio returns to 7.1% since inception. The portfolio is outperforming the MSCI World Net Return Index, which is up 5.9% over the same period.
The FBM KLCI gained 1.9% for the week, bolstered by improved sentiment in global equity markets. That said, there was no notable increase in trading volume.

Total returns for the Malaysian Portfolio now stand at 50.2% since inception. This portfolio continues to outperform the benchmark index, FBM KLCI, which is down 8.4% over the same period, by a long way.

Performance Comparison Since Inception (%)
  • Tong's Value Investing Portfolio
SCGM BHD11,0661.72919,190.70.92010,180.7(9,010.0)(47.0%)
AJINOMOTO (M) BHD1,50011.81317,720.017.46026,190.08,470.047.8%
Y.S.P.SOUTHEAST ASIA HOLDING10,5002.41325,340.02.60027,300.01,960.07.7%
FORMOSA PROSONIC INDUSTRIES18,0001.44025,920.01.70030,600.04,680.018.1%
POH HUAT RESOURCES HOLDINGS13,0001.47019,110.01.58020,540.01,430.07.5%
SUPERLON HOLDINGS BHD15,0001.28919,327.51.00015,000.0(4,327.5)(22.4%)
CIMB GROUP HOLDINGS BERHAD6,0005.14030,840.05.23031,380.0540.01.8%
JHM CONSOLIDATION BHD26,0001.14529,770.01.22031,720.01,950.06.6%
PRESTARIANG BERHAD73,0000.41029,930.00.43531,755.01,825.06.1%
Total  217,148.2 224,665.77,517.53.5%
Shares bought       
No transaction.       
Total shares held  217,148.2 224,665.77,517.53.5%
Shares sold       
No transaction.       
Cash Balance    75,753.4  
Realised Profits / (Losses)    92,901.6  
Change since last update Jun 13, 2019       
Portfolio      (0.4%)
FBMKLCI      1.9%
Portfolio Returns Since Inception  200,000.00 300,419.1100,419.150.2%
Portfolio Returns (Annualised)      10.7%
Portfolio Beta      1.035
Risk Adjusted Returns Since Inception      48.5%
Performance ComparisonAt Portfolio StartCurrentChangeRelative Portfolio Outperformance
FBM KLCI1,829.71,675.4(8.4%)58.6%
FBM Emas12,700.411,786.3(7.2%)57.4%
*Current price is as at June 20, 2019. 
*Portfolio started on Oct 10, 2014 with MYR200,000. 
*This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks.

THONG GUAN INDUSTRIES BHD12-Dec-1608-Dec-175,0004.24321,215.04.10020,500.0(715.0)(3.4%)
KERJAYA PROSPEK GROUP BERHAD12-Jan-1715-Mar-1811,0001.02511,280.01.54016,940.05,660.050.2%
KERJAYA PROSPEK GROUP BERHAD - WARRANTS B 2018/202308-Mar-1815-Mar-183,0000.0000.00.330990.0990.0-
LUXCHEM CORPORATION BHD30-Aug-1715-Mar-1816,5000.73212,072.50.72011,880.0(192.5)(1.6%)
WILLOWGLEN MSC BHD14-Dec-1722-Mar-1820,0001.01020,200.01.26025,200.05,000.024.8%
MUAR BAN LEE GROUP BERHAD26-Oct-1722-Mar-1813,5001.24016,740.01.17015,795.0(945.0)(5.6%)
CHOO BEE METAL INDUSTRIES BHD07-Sep-1716-May-188,0002.19017,520.02.44019,520.02,000.011.4%
CHOO BEE METAL INDUSTRIES BHD07-Sep-1721-May-188,0002.19017,520.02.30018,400.0880.05.0%
SUPERLON HOLDINGS BHD01-Dec-1721-May-186,0001.1757,050.01.5509,300.02,250.031.9%
OKA CORPORATION BHD14-Dec-1728-Jun-1812,0001.54118,488.01.27015,240.0(3,248.0)(17.6%)
SUPERLON HOLDINGS BHD01-Dec-1728-Jun-186,0001.1757,050.01.2107,260.0210.03.0%
WILLOWGLEN MSC BHD14-Dec-1728-Jun-181000.50050.00.54054.04.08.0%
PANTECH GROUP HOLDINGS BHD17-May-1802-Aug-1843,0000.58024,940.00.56024,080.0(860.0)(3.4%)
KERJAYA PROSPEK GROUP BERHAD10-Jan-1706-Sep-1811,0001.02011,225.01.40015,400.04,175.037.2%
LUXCHEM CORPORATION BHD25-Aug-1706-Sep-1816,5000.71711,825.00.65510,807.5(1,017.5)(8.6%)
HOCK SENG LEE BHD19-Apr-1806-Sep-1814,5001.52022,033.01.37019,865.0(2,168.0)(9.8%)
GENTING MALAYSIA BERHAD06-Sep-1828-Nov-183,8005.07019,266.03.06011,628.0(7,638.0)(39.6%)
TOP GLOVE CORPORATION BHD06-Sep-1806-Dec-183,6005.50019,800.06.03021,708.01,908.09.6%
MAH SING GROUP BHD28-Jun-1814-Jan-1919,0001.00519,095.00.93017,670.0(1,425.0)(7.5%)
WILLOWGLEN MSC BHD14-Dec-1714-Feb-1919,9000.5009,900.00.4649,236.0(714.0)(7.2%)
SAM ENGINEERING & EQUIPMENT14-Jan-1914-Mar-193,0007.38022,140.07.90023,700.01,560.07.0%
PANASONIC MANUFACTURING MSIA16-May-1818-Apr-1960026.15717,182.037.87022,722.05,540.032.2%
HONG LEONG INDUSTRIES BHD14-Dec-1718-Apr-192,0009.12618,251.010.64021,280.03,029.016.6%
MALAYAN BANKING BHD16-May-1818-Apr-193,00010.25030,750.09.13027,390.0(3,360.0)(10.9%)
ECO WORLD DEVELOPMENT GROUP BERHAD28-Jun-1818-Apr-1915,2001.23518,772.00.92013,984.0(4,788.0)(25.5%)
DIALOG GROUP BHD06-Sep-1818-Apr-195,7003.45219,676.43.11017,727.0(1,949.4)(9.9%)
HARTALEGA HOLDINGS BHD28-Mar-1818-Apr-1911,0004.61050,710.04.75052,250.01,540.03.0%

A Note to Readers

It is my pleasure to share with you my Value Investing Portfolio. However, I must emphasize that it is by no means a recommendation or a solicitation or expression of views to influence you to buy or sell any stocks. I am just sharing openly on what I am doing with my stock portfolio.

Further, I like to remind all investors that investing is not just about the profits or returns. You will inevitably suffer stock losses too. You need to understand your own investment objective, risk appetite and the amount of loss you can afford to bear. So, while many investors talk only about absolute returns, I am also sharing the computed risk-weighted returns of my portfolio.

Tong Kooi Ong

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