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Thursday, December 24, 2020

[转贴] 投資這件事,為什麼是一個人熵減的旅程?

2020 年 12 月 23 日
文章來源
股感選文

作者
Wei




投資,尤其是正道上的價值投資,其實就是一個人熵減的旅程。— 李彔 《文明、現代化、價值投資與中國》

最近在閱讀李彔的著作《文明、現代化、價值投資與中國》,看到這樣的一句話莫名地觸動到我,於是我花了許多時間反覆思考這句話。今天想為各位帶來一道分子料理,透過解構這句話的每個元素,來詮釋我對這句話的理解,以及其帶給我的意義。


「投資」是什麼?

對我來說投資的定義是「經過透徹的分析,在確保本金的安全下,獲取適當的報酬。」這是葛拉漢先生在《智慧型股票投資人》這本書中所提到投資的三個要素;對公司深入且透徹地分析是長期的功課,也是我正在努力學習的技能,期許自己能夠透過長期的投入與累積培養出對於商業、經濟、投資世界的深刻洞察;確保本金的安全則是風險控管的能力,對我來說好的風控來自於對自我財務狀況的誠實、對投資標的與企業的正確理解、良好的資產配置…等;最後,獲取適當的報酬對我來說則是一種勇氣,勇於不賺不屬於自己的錢,不管這個「不屬於」是因為是道德誠信的原則,或是因為這筆投資處在我的能力圈以外。
「正道」是什麼?

這是我思考最久的問題,甚至到現在我好像也還沒有確定的答案。如果在投資上有正道,那是否就有所謂的「邪門歪道」?這不經讓我想起許多經典的武俠故事,在這些故事中都有正邪門派之分,而自幼學習正道的主角,最後常常都會踏入所謂的”邪魔歪道”,然而我們都清楚正邪之分從來就不是由其所使用的術法來區分,而是由習武之人的「心性」來辨別。經過反覆地思考,我發現投資也是這樣,所謂的正道並非是指某種投資的流派,不是只有價值投資(或其它某種投資門派)才是正道,其它都是邪魔歪道,真正決定是否走在正道上的是投資者的心性,而對我來說這份心性是一顆追求「長期成長」的心,追求個人財富與自我長期成長的決心,以及等待投資企業與總體人類社會長期成長的耐心,這正是我目前對於「正道」的淺解。


「價值投資」是什麼?

塞斯・克拉曼說:「價值投資是購買一支價格低於價值的股票,並且在價格高於價值時賣出的投資策略。」

這是對價值投資最基本的認識,在這其中最重要的兩個概念就是「價格」與「價值」。價格是什麼?簡單,打開電視、電腦或看盤軟體就可以看到;價值是什麼?對我來說確認企業內涵價值就像藝術創造一樣,充滿了各種主觀的思維,每個人都有自己獨特的藝術眼光來辨別價值,而我也正在學習判斷價值的這條路上努力奔跑,如果硬要擠出內涵價值概略的意義,我會引用葛拉漢先生在《證券分析》的論述:「內含價值是一個抽象的概念,一般來說是透過資產、盈餘、股利、明確的前景等事實來估算的價值。」

然而,相較於傳統的價值投資,最近我對「價值」有新的體悟,這份體悟是來自於高瓴資本的張磊先生,他在新書《價值》中提到:「世界上只有一條護城河,就是瘋狂地創造長期價值。」這讓我對投資有新一層的理解,原來投資並非僅僅是個人財富的增長,透過尋找能夠瘋狂地為社會創造長期價值的公司,並且有效地將資源配置給這些能夠為人類社會帶來正面影響力的公司,我不僅能參與企業長期的成長,也間接地參與社會長期價值的創造,而這樣的思維為我的投資賦予更深一層的意義與使命。



「一個人」是什麼?記得在上一篇談后翼棄兵的文章中我提到:「我認為在投資這條路上『一群人其實可以走得更快更遠』。」一群志同道合的夥伴確實會讓我們成長得更快,然而回到最根本,我們依舊躲不掉一個人關起門來、坐在書桌前的時刻。一個人的學習和一群人的學習很不一樣,一群人的學習是與他人的對話,而一個人的學習是與自己的對話,這樣的對話幫助我們形塑個人的投資哲學與框架,而每一次的自我對話都是重新審視自我的機會,對於期盼在投資上有所成長的我們來說,應該珍惜並擁抱這樣的時刻,而非選擇逃避或忽略。
「熵減」是什麼?

熵的概念最早起源於物理學,用於度量一個熱力學系統的無序程度,基本上我們身處的世界,萬物都傾向朝最大熵前進,熵狀態永遠只會增加(熵增),不會減少,混亂的程度也會越來越大。而熵減卻是要「從無序到有序」,李彔先生說投資正是這樣的過程,所有的投資者一開始接觸投資時都會經歷混亂且雜亂無章的時期,就像我現在正經歷的一樣,但成熟的投資者並不會滿足於這樣「無序」的狀態,其將透過長期大量的閱讀、觀察、思考,並參與經濟與市場脈動,逐漸地往「有序」的狀態邁進,而從無序到有序的這整個過程更是投資者必須花一輩子去經歷的,我相信連像巴菲特、李彔這樣的投資大師,也持續地在投資領域追尋著「熵減」的步伐,堅定地朝「有序」的狀態走去。我們處在熵增的世界,世間萬物隨著時間的推移將越來越混亂,但身為投資者的我們卻要朝著反方向走,隨著年歲與經驗的增長,我們將越清楚我們所擁有與所相信的投資價值。

「旅程」是什麼?對我來說旅程的關鍵字是「享受」,我很喜歡李錄先生在這裡使用旅程這個詞,而非過程。一趟旅程最重要的就是享受途中所有的風景,在這趟旅程中的風景有時候會讓你美到哭,但有時候也會醜到讓你想罵髒話,然而不管沿途風景是美是醜,作為一位旅人最重要的就是去感受與享受這一切。最近,我和實習公司的老闆還有前輩們一起去吃飯的時候,我問我老闆說:「巴菲特不是很推ETF嗎?那我要怎麼在主動選股和被動投資之間權衡?如果我主動選股的成績很糟,是不是換成被動投資會比較好?」我老闆就問我說:「如果你研究投資十年,最後到頭來發現自己的績效輸大盤,你還會繼續研究投資嗎?」我猶豫地回答:「可能不會。」我老闆馬上堅定地回我一個震懾我三觀的回答,他說:「我會。」當下我傻住了,我腦中沒有想過會聽到這樣的回答。後來我想這件事想了好久,原來一個堅定熱愛投資的人在踏上這個旅程後,在意的從來就不是旅程的目的地,而是沿途的經歷與自我成長,在投資路上的旅人會發自內心地享受一個人、享受熵減、享受正道、享受投資。



https://www.stockfeel.com.tw/投資-一個人-熵減/

Monday, December 21, 2020

UOB Kay Hian cites BRC Asia, Food Empire, Frencken and InnoTek as small-mid cap picks

Broker's Calls

Felicia Tan Published on Mon, Dec 21, 2020 / 6:49 PM GMT+8 / Updated 20 minutes ago

UOB Kay Hian analyst John Cheong and the Singapore research team have highlighted BRC Asia, Food Empire, Frencken and InnoTek as its top buy picks among the small-mid cap sector.

He has given all three “buy” calls with target prices of $1.88, 88 cents and 82 cents respectively.

The brokerage has highlighted stocks based on laggards that are backed by solid earnings and a healthy balance sheet, along with stocks that have benefitted from China’s recovery. It has also highlighted stocks with the ability to recover quickly post-Covid-19, says Cheong.

For stocks such as Food Empire, Frencken and InnoTek, which are categorized as stocks that are of “laggard quality small-mid cap backed by solid earnings”, the companies have reported decent 9MFY2020 core net profit.

The way Cheong sees it, Food Empire is trading at an undemanding valuation of 8.5x 2021F price-to-earnings (P/E), which is a “significant discount to peers’ average of approximately 20x 2021F P/E despite its growing presence in the Vietnam market and leading position in its core markets in Eastern Europe”.

“In spite of the challenges in 2020 including the Ruble depreciation and the lockdown in key markets in 2QFY2020, the group has reported decent 9MFY2020 core net profit (excluding forex losses) of $23 million,” he adds.

“This represents an 11.2% y-o-y growth on the back of better cost control and higher ASPs which mitigated the decline in revenue (-5.6% y-o-y).”

Frencken’s 3QFY2020 earnings of $13.3 million brought its 9MFY2020 net profit to 83% of the brokerage’s full-year estimates.

“The business update reflected earlier- and stronger-than expected operating leverage, buoyed mainly by a better sales mix and greater cost control efforts. We expect the semiconductor segment to continue driving growth going forward, driven by the accelerating development of 5G technology,” notes Cheong.

InnoTek looks set to benefit from China’s recovery in auto sales and the social distancing measures arising from Covid-19, which have boosted demand for large screen TVs.

“We expect [InnoTek’s] earnings per share (EPS) to grow by 229% h-o-h in 2H20 and 19.4% y-o-y in 2021. InnoTek has a net cash position of $73 million. At current prices, the stock trades at an undemanding valuation of 6.4x 2021F P/E, a discount to peers’ average mean of 11.0x,” he says.

Jiutian Chemical, China Sunsine and Sunpower are those that will be able to leverage off China’s recovery, says Cheong.

For Jiutian Chemical, China’s recovery has led to enhanced demand for raw materials used to manufacture consumer end products, including fine chemicals produced by Jiutian Chemical.

“These factors were apparent in 3QFY2020 results which beat our expectations due to higher-than-expected average selling prices (ASPs). We expect better demand to drive further earnings growth. The recent retracement in share price (- 41% from its recent high of 12 cents) presents a buying opportunity as the stock trades at an attractive valuation of 3.8x 2020F P/E and 2.2x 2021F P/E,” he says.

“Current dimethylformamide (DMF) ASP of around Rmb8,000/tonne is still way above our expectation of Rmb7,200/tonne for 2021. Also, earnings surprise could come from higher volume of dimethylamine (DMA), which is the feedstock of DMF,” he adds.

On the back of a rise in automobile sales in China as the domestic economy recovers, selling prices of rubber accelerators – the main earnings for China Sunsine – are showing signs of recovery.

“In 2021, we expect net profit to grow by 46% y-o-y on the back of China Sunsine’s expanded production capacity. Furthermore, higher vehicle sales in China are expected to drive increased demand for tyres, hence leading to a potential 10% rise in the ASP of rubber accelerators from a low base in 2020,” notes Cheong.

Sunpower’s plants have resumed full work amid China’s economic recovery, which, according to Cheong, was apparent in its robust set of results for 3QFY2020.

“The green investment (GI) segment is on track to post a double-digit y-o-y growth for 2020 while the manufacturing and services (M&S) orderbook maintained its record-high orderbook of RMB2.8 billion as of end 3QFY2020. Management has earmarked the GI segment as the key driver for the group,” he says.

“We expect: a) full-year contributions from newly-acquired GI plants; b) anticipated additional contributions from Phase 2 of the Shantou Project and the new Xintai Zhengda plant; c) continuous acquisition of new customers following mandatory closures of “small dirty boilers” and/or mandatory relocations into industrial parks; d) organic growth from existing customers and industrial parks served by the group’s GI plants; and e) record-high M&S orderbook of Rmb2.8b to help drive earnings for the rest of 2020 and beyond,” he adds.

Stocks that are expected to benefit from a normalised recovery post Covid-19, include names in the construction and F&B services sectors such as BRC Asia, Kimly and Koufu.


For BRC Asia, build-to-order (BTO) projects continue to be favourable for the company with recent new HDB project launches in Tengah, Bishan and Toa Payoh being oversubscribed.

“We opine that the construction industry is still a laggard and new construction contracts awarded will likely recover off the low seen in Aug 2020, with Sep 2020 contracts awarded amounting to $840 million (+102% m-o-m),” says Cheong.

“With the gradual normalisation of construction activities and sustained margins, we are optimistic of BRC Asia’s recovery and expect earnings to rebound strongly in FY21 at 88% y-o-y. BRC Asia currently trades at 8.8x FY21F earnings, below its long-term average (excluding outliers).”

Kimly, which is the largest coffeeshop operator in Singapore, should benefit from Covid-19, as consumers become increasingly price-sensitive.

The group has a high net cash balance of $43.9 million, a higher dividend yield compared to its peers and strong future earnings growth from its newly-acquired and refurbished coffee shops.

“We expect a strong net profit compound annual growth rate (CAGR) of 9.3% for FY21-23. At current valuations, Kimly is trading at 12.5x FY21F P/E, well below its average 3-year mean P/E of 15.0x, and Singapore peers’ 2021F P/E of 22.5x.”

While same-store sales have declined by 20% y-o-y in July to October 2020, sales at outlets in the heartlands and full-service restaurants have improved significantly, says Cheong.

“We expect a gradual recovery for outlets located at tertiary education and downtown area (where sales have been hampered by work-from-home measures) in 2021 as Covid-19 cases come under control in Singapore… Apart from gradual resumption of activities, future growth drivers are contributions from Deli Asia (which has resilient earnings), new outlets, and its new Integrated Facility. Key share price catalyst for the stock is the opening of Singapore and Macau borders,” he adds.

Shares in BRC Asia, Food Empire, Frencken and InnoTek closed $1.46, 60 cents, $1.25 and 55 cents respectively on Dec 21.

Healthcare equipment and glove makers enjoy a stellar year, drawing in new competitors

Lim Hui Jie Published on Fri, Dec 18, 2020 / 7:00 AM GMT+8 / Updated 3 days ago

The healthcare manufacturing industry has proven to be resilient to economic shocks, but it is now seeing an unprecedented boom on the back of a health crisis not seen since the 1918 Spanish Flu outbreak.

The most notable gainer was Singapore-listed Taiwanese company Medtecs International Corporation. Before the pandemic, it was one of the largest distributors of personal protective equipment (PPE) — albeit one that was hardly noticed.

But when demand for its products surged, its earnings skyrocketed in tandem. From US$41,000 in 3QFY2019, Medtecs’s net profit went to US$45.7 million ($61.05 million) in its 3QFY2020 ending Sept 30. Revenue, in the same period, was up 636% y-o-y to US$124 million. For the nine months ended Sept 30, Medtecs’s net profit surged 198 times to US$84.6 million, on the back of a 474% increase in revenue to US$287.2 million.

Medtecs’s record earnings helped drive up its share price from just four cents at the start of the year to an all-time-high of $1.85 on Aug 19, although it has since corrected to around $0.95 as at Dec 14. To share some spoils with its shareholders, the company also distributed its first dividend since 2007, with US$0.0085 per share paid following its 1HFY2020 earnings, versus just US$0.001 per share paid in 2007.

It was clear that for the healthcare workers, lab technicians and various other professions who are working round the clock to care for Covid-19 patients while working on a cure for the disease, they will need a lot of PPE in their jobs, especially rubber gloves.

Among the players entering the market to meet the demand include established names such as Top Glove, UG Healthcare and Riverstone Holdings. New entrants such as Aspen (Group) Holdings are also entering the fray.

Skyrocketing demand

In a broker’s note on the sector dated Nov 20, CGS-CIMB analyst Ong Khang Chuen said the Malaysian Rubber Glove Manufacturers Association (MARGMA) “remains upbeat” on prospects for the sector, and expects global rubber glove demand to reach 360 billion pieces in 2020.

This will be followed by a further 15% to 20% growth to about 440 billion pieces in 2021. And even with the Covid-19 pandemic fully under control, MARGMA sees “sustained growth in the coming years”, as there is a need to replenish inventory especially in neglected sectors such as F&B and electronics, amid overall increase in hygiene requirement.

Phillip Securities’s head of research Paul Chew expects demand to rise by about 90 billion pieces in 2020 and 2021, while production capacity is expected to increase by 70 billion pieces.

MARGMA said that due to the supply shortage situation, current order lead times for gloves have risen to eight to 10 months, compared to one and a half to two months pre-Covid-19.

MARGMA believes that capacity growth will take time to catch up, as setting up a production line takes between one and one and a half years. In the meantime, glove makers will continue to enjoy higher selling prices, which is now at around US$70 to US$80 per thousand pieces of gloves, versus US$25 pre-Covid-19. When supply catches up, selling prices might still hover at 50% to 60% above pre-Covid-19 levels by 2023.

Even news of the vaccine will not stop the upward run that glove makers have experienced in recent months. “The vaccine in the medium term will not stop the pandemic. The pandemic is still raging globally and new daily cases doubled in just two months to almost 600,000 cases per day,” says Chew.

As the vaccine is deployed, Chew expects an improvement in demand from other sectors that were affected by lockdown or weaker economic growth such as food and beverage, retail, airlines and manufacturing.

Ong has a stronger preference for Riverstone Holdings, given its “relatively cheaper valuation and our expectations of higher normalised profits backed by a 59% y-o-y manufacturing capacity expansion in 2021.”

Riverstone Holdings reported a revenue of about RM626.7 million ($205.5 million) for its 1HFY2020 ended June 30, a jump from the RM480.2 million from the same period last year. Most notably, profit before tax more than doubled from RM74.1 million to RM175.7 million. More recently, in a business update, Riverstone Holdings has reported 3QFY2020 revenue of RM482.3 million, a y-o-y jump of 92%, and gross profit of RM251.6 million, up 389.6% y-o-y.

Looking ahead, the company’s adding more lines and is on track to raise total production capacity by 1.5 billion pieces to 10.5 billion pieces of gloves annually by end 2020 and 12 billion pieces by end 2021. Riverstone also says that the additional output from the new capacity has been spoken for.

It is a largely similar story over at UG Healthcare. For its 1QFY2021 ended Sept 30, attributable profit shot up by 74 times y-o-y to $22.7 million, while revenue in the same period increased by 2.7 times to $71.2 million. To reward shareholders, UG Healthcare has declared a final dividend of $0.00238 per share for FY2020. The company did a one-to-three share split on Oct 2. This means shareholders are getting nearly three times as much as that paid for FY2019, when $0.00259 per share was paid.

The company has also brought forward its expansion plans, raising a planned increase of 300 million gloves in March 2021 to 500 million gloves, giving it an annual capacity of 3.4 billion gloves.

Top Glove under scrutiny

As the world’s largest glove maker, Top Glove has enjoyed a stellar year. Revenue for its FY2020 ended Sep 30 surged 51% to RM7.2 billion compared with the previous financial year, and net profit for the full year jumped from RM367.5 million in FY2019 to RM1.79 billion.

4QFY2020 revenue jumped to RM3.1 billion from 4QFY2019’s figure of RM1.18 billion, while profit after tax for the same period skyrocketed almost 18 times y-o-y, from RM74 million to RM1.32 billion.

Dividends have also swelled accordingly. Top Glove declared a dividend of 8.5 sen per share in 4QFY2020, bringing the total dividend payout for FY2020 to 11.8 sen per share, almost five times the 2.5 sen dividend paid in FY2019.

Investors chased Top Glove’s share price to a record high of $3.13 on Oct 19, although it has since eased to $2.19 as at Dec 14.

More recently, in its 1QFY2021 results, the company announced a record dividend of 16.5 sen for this quarter alone, far exceeding the full year dividend for FY2020. The total dividend payout stands at 56% of profit, which exceeds its established dividend payout policy of 50% and includes a 6% special dividend.

For 1QFY2021, Top Glove achieved a revenue of RM4.8 billion, up 294% y-o-y, and up 53% quarter-on-quarter. Attributable profit surged by 20 times to RM2.4 billion y-o-y, and doubled against 4QFY2020.

However, the stellar financial performance was marred by news that many of its own workers were infected by the virus recently. This forced the company to halt work at 28 of its plants so as to stem the spread of the virus. As of Dec 8, the company has a total of 5,147 workers testing positive for Covid-19, although it added that about 90% of them have been released from hospital and are fit for work.

The company also found itself under scrutiny after Malaysian authorities said in December that it would file charges against Top Glove because of poor worker accommodation. Earlier, the US had added rubber gloves produced in Malaysia to a list of products produced by forced labour. In response, Top Glove said it was working to address those concerns by improving existing worker accommodation. This is expected to be completed by Dec 31, the company added.

With the sky high profits earned by existing glove makers, it is no surprise that new players want to join in and carve out a slice of the enlarged pie.

New challengers

Aspen — which is better known for its property developments in Penang — has set up a glove-making joint venture, targeting an initial capacity of 1.6 to 1.8 million gloves per annum, before growing to 6.5 to 7.1 billion gloves by the end of 2022.

In a presentation on Oct 14, the company said it will first focus on manufacturing medical examination gloves, before moving into surgical and speciality gloves. Eventually, it projects its annual capacity to be 26.4 to 28.1 billion gloves per annum in 2025.

And as with most glove makers, the news of Aspen expanding into this sector sent its share prices to record highs. Aspen listed back in July 2017, but from the IPO price of $0.23, its share price dropped to as low as four cents earlier this year. News of its planned diversification in August, however, sent it surging to as high as $0.335 on Aug 24, before closing at $0.22 on Dec 14.

For its 1HFY2020 ended June 30, the company reported losses of RM13.8 million, compared to a RM9.2 million profit in the year earlier, as the movement control order in Malaysia delayed progress of its projects.

Still, Aspen’s president and group CEO Murly Manokharan remains optimistic. In an earlier interview with The Edge Singapore, he said: “We have never been in the red [for our full financial year] in our entire history, and we manage our cash flow and operating costs very stringently. So, we are intervening and putting a lot of effort to be in the black for FY2020.”








https://www.theedgesingapore.com/news/2020-review/healthcare-equipment-and-glove-makers-enjoy-stellar-year-drawing-new-competitors

Saturday, December 19, 2020

(CHOIVO CAPITAL) MYNEWS (5275) – Dr CU in da house. 66% Upside

Author: Choivo Capital | Publish date: Wed, 9 Dec 2020, 2:27 PM

For a the original copy with high resolution pictures, better formatting and additional details.

Go here.
(CHOIVO CAPITAL) MYNEWS (5275) – Dr CU in da house. 66% Upside


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“The best thing that happens to us is when a great company gets into temporary trouble. We want to buy them when they’re on the operating table.”

Warren Buffett

MyNEWS Berhad - A Background

MyNEWS was started back in 25 December 1996 as a single news stand called “MAGBIT” by Mr Dang Tai Luk, together with his wife, Ling Chao and his family on the ground floor of 1 Utama. In 1997 he opened a second outlet in Jejantas Sungai Buloh, and just one year later, he expanded and opened his first magazine and convenience store called “myNEWS.com” the precursor to the company today.

By 1999, he had 10 outlets. 2007, 100 Outlets and so on.





And on 29 March 2016, MYNEWS’s IPO’ed with the purpose of raising money to open more outlets, and more importantly, to bring their stores up to the level of overseas convenient stores, by opening a Food Processing Centre (“FPC”).

MyNEWS needed to own their own Food Processing Centre, as there are very few businesses in Malaysia that can supply to all their current stores, much less the future ones. Especially since they also require their own types of products etc (And one thing MyNEWS have learnt this year, is that it’s extremely to start up a food processing center without prior experience.)

To open their Food Processing Centre, in 2017, they teamed up with two Japanese Companies,

1) Gourmet Kineya Co. Limited (Ready to Eat Meals)

2) Ryoyu Baking Co. Ltd. (Bakery)

to produce the meals in their FPC, and by the 2018, the FPC was finally operational.

They had the idea of doing what QL Resources is doing today via Family Mart, before QL even opened one store.

However, MYNEWS was a touch more ambitious than QL and 7/11, and instead of going at it via the franchise route where the franchisor already has in place certain SOP’s regarding

1) What kind of food products are more popular?

2) What is the typical sales volume and sales mix given certain demographics?

3) Storage/Manufacturing of Food?

4) Logistics etc etc

This was in exchange for the ability to do what the Franchisor of Family Mart, 7/11, CU, Circle K, Lawson can. Which was the ability to franchise out the name and business model and earn what basically amounts to free money.

This gave rise to a certain gestation period, where they had to optimize all these things via trial and error, resulting in start-up losses from the FPC’s that was larger and longer than expected, and this masked strongly increasing revenue and profit.



If not for taking their shot at making their own complete franchise brand by offering Ready-To Eat, and experiencing what Jeff Bezos would call an experimental failure.

myNEWS would have recorded their best year in 2019.

However, their troubles with the FPC, also came alongside the meteoric rise of QL Resources’ “Family Mart” (who went with the franchisee model under Family Mart), which is hugely popular among the Malaysian public.

This magnified their FPC struggles, reduced the level of patience investors are willing to give MyNEWS to go at it their own way, and slowly turned investing sentiment against them.

And then in 2020, the COVID 19 pandemic hit. And for the first time since the start of the company, did their number of stores fall. This has caused the share price to fall back close to their IPO price of RM0.55 after a 1:1 split (It IPO’ed at RM1.1), despite 2019 earnings (excluding FPC start-up costs) being 67% higher than of 2016.

A wonderful company have gotten into temporary trouble and is currently on the operating table.

I think they will be getting off that operating table very soon (but as usual, the price does not reflect that).

The Convenience Market & Convenience Store Industry

Now, the Convenience Market consist of the below three main categories.





myNEWS is in the “Retail Convenience Stores” category. They have also recently expanded into Grocery Convenience Stores (think KK Mart), with the “Super Saver” brand, and have two outlets opened in Alor Setar and Melaka



One a very fundamental level, the Convenience Store industry Globally and especially in Malaysia is a fast-growing industry with good margins.









And the reason for it is simple and, its in the name. “Convenience”.

As population density increases, this increases traffic jams, difficulty in finding parking spaces, increases parking costs and increases the length of time needed to access your vehicle (Condominiums versus Landed Property). It is so much more convenient and saves much more time, to just walk to the nearest convenience store.

As we can see this in the chart above, the more developed a country, the higher the population density, and land size with high population density, the higher the number of convenience stores.

Of course, they are exceptions such as Hong Kong and Singapore. This is because in those countries, they fully integrate shopping malls, hypermarkets, train stations and condominiums all in one package. In which case, there isn’t much need for convenience stores.

And as we can see here in this table comprising of the 3 largest retail convenience stores in terms of store number and EBITDA % (Earnings Before Interest, Tax, Depreciation & Amortization).





As we can see here, despite all 3 parties opening new outlets at a very fast pace, EBITDA margins remain constant for all 3.

This is an industry with very strong structural tailwinds and long-term growth and profit potential and can therefore sustain a few large players.

And why is this important? Because you cannot spin gold out of straw.

“When a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact.” Warren Buffet

And with only a density of 9,000 per convenience store, versus Thailand, Japan and Taiwan who have urban population densities of 2,226 per store, 2,171 per store and 1,653 per store. There is a long runway left for Malaysia to go.

Barbarians at the Gate – The Rise of Family Mart

On 11 November 2016, QL Resources opened the very first Family Mart outlet in Wisma Lim Foo Yong, and with this company primarily run by their very competent son, Mr Chia Lik Khai, an ex-Shanghai Mckinsey who also spent a number of years at Agilent and Avago Technologies, it took off like a rocket.

They expanded very quickly, and soon, new outlets started popping up like Mushrooms (pun intended) in Klang Valley, and sights below where outlets were constantly full of people queuing became very common.







For a very long time, the convenience retail store industry in Malaysia was very static. As this was such a good industry with great margins.

Companies like 7-Eleven were more than happy to just continue selling their little tidbits and Slurpee’s and just create more stores, instead of hitting the levels of services and products offered by convenience stores in Thailand, Korea, Japan or Taiwan.

As for myNEWS, they evolved as their capabilities and capital grew. Starting from a single news stand, to opening a magazine shop, then convenience stores, while being far more efficient than 7-Eleven and then raising via an IPO the approximately RM100 million needed to open a food processing center and the required logistic system, to evolve to the next level of offering Ready-To-Eat meals (QL Resources also spent around RM100 million on their food processing centre).

However, their choice to start without their franchisor (as well as QL’s deep experience in Ready to Eat Meals and Processed Food) meant that QL beat them to the punch when it comes to offering the “Konbini” experience.

Comparing the numbers of Family Mart, 7-Eleven & myNEWS.

So, what does this mean in terms of the numbers?

Before we continue, there is a few things to note.

The year-end of Family Mart, 7-Eleven & myNEWS is as follows, 31 March, 31 December & 31 October. Therefore, for the year 2020, Family Mart’s financials does not include the impact of COVID-19 and the detailed financial statements are available.

As for myNEWS and 7-Eleven, as their year end results of not been obtained, this is just a Year-To-Date figure, and unlike Family Mart, their 2020 contains the full impact of the COVID-19 pandemic.

Additionally, as Family Mart has only been operational for 3-4 years, their numbers is not fully stabilized. However, I think it is more than enough to give a good estimate in terms of their long-term margins etc.

As for myNEWS, their Food Processing Centre (“FPC”) first started in November 2019.

In order to make it comparable to 7-Eleven, as well as to illustrate their incredible performance, if not for the temporary troubles with the FPC, we have illustrated the numbers when FPC is include and when it is excluded.

Lastly, in November 2019, 7-Eleven purchased Caring Pharmacy and consolidated their numbers in the financial statements. As there is no detailed breakdown, we are unable to separate them out.

Revenue Per Outlet



One of the key metrics used when looking at a store, is the amount of Revenue generated by Each Store.

As we can see here, QL/Family Mart by virtue of selling higher ticket value items, knocks it out of the park when compared against 7-Eleven and myNEWS.

Higher revenue, assuming all other things are equal, result in better economy of scale, and higher profitability (hopefully).

Is this the case?

EBITDA (Earnings Before Interest, Tax, Depreciation & Amortization) & Profit Before Tax as a Percentage of Revenue



As we can see from above, this is not really the case.

On average before including the temporary losses of the Food Processing Centre, myNEWS records close to triple the EBITDA margin of 7-Eleven and Family Mart, and in terms of Profit Before Tax Margin, myNEWS is close to double that of 7-Eleven and Family Mart.

And to give on idea on why this is the case, we need to look at the more detailed numbers.

Detailed Cost Breakdown as a percentage of Revenue



Cost of Goods

In terms of Cost of Goods, the prices obtained by myNEWS have typically been significantly lower than that obtained by 7-Eleven. And much of this is likely due to the significantly longer credit terms obtained by 7-Eleven versus myNEWS, which likely results in higher prices.

As for Family Mart, leveraging on the bankability of QL when it comes to sourcing goods, as well as being able to purchase directly from QL any raw materials, they can obtain significantly lower prices than both. Much of myNEWS Cost of Goods increase in 2020 is due to higher wastage from the COVID 19 pandemic.

Staff Costs

Staff Costs is another aspect where myNEWS really shine. myNEWS (the ones without Maru Café) typically have smaller sized stores in Shopping Malls, and because of this, myNEWS can man the store with significantly fewer staff, and this reduces staff costs significantly.

As for whether more foreign workers in the mix having contributes to this. According to Mr Dang, foreign workers actually cost the same of local employees as you need to bear the cost of housing them, flying them over, settling their visa’s etc.

Rental Costs

However, because myNEWS store composition usually consist of smaller shops in shopping malls (around 80%), this results in higher than usual Rental Costs. As for why 7-Eleven’s is so low, its due to their much wider reach, resulting in a very large portion of the stores, being in rural areas, or city outskirts, when compared against myNEWS and Family Mart.

Administration, Selling, Distribution & Others Costs

As for Administration, Selling, Distribution & Others costs, this is where myNEWS really shines. myNEWS had by far the lowest when compared to the other two. By running smaller store which focuses mainly on dried goods etc, they needed to pay significantly less when it comes to utilities, logistics, food wastages etc.

As for Family Mart, due to their model where they started directly with the “Konbini” model and served Ready-To-Eat Meals from the beginning, they had significantly higher costs, in some cases almost doubling that of myNEWS’s.

All these gains in (Costs of Goods, Staff Costs & Administration, Selling & Other Costs) which more than offset their higher rental costs, are the reason for myNEWS’s higher profitability versus the other two before the onset of the temporary troubles with the FPC’s.

Having said that, how does this translate to the numbers of the Company as a whole?

Profit Before Tax (%), Return on Asset (%) & Return on Equity (%)



Despite having far better Profit Before Tax and Return on Asset Margins, their return on Equity have been significantly lower than that of 7-Eleven and Family Mart, a company that have only started for 3 – 4 years.

Why is this the case?

Inventory Turnover Days, Trade & Other Receivable Turnover Days, Trade & Other Payable Turnover Days and Debt/Equity Ratio




Well, one thing about 7-Eleven is that they employ significant leverage in their business, which both Family Mart and myNEWS do not.

But the main reason for this, is the ability of Family Mart and 7-Eleven to obtain run negative Working Capital Business Models, which basically mean that their suppliers are the ones providing the cash/working capital needed to run the business.

And they do so by keeping Inventory and Receivables Days Turnover Days as short as possible (which mean they keep less inventory as a percentage of their Revenue, and give very little credit to their Debtors), while keeping Payables Days Turnover long (which means they require a lot of credit from their suppliers).

Why are Family Mart & 7-Eleven able to do so, when compared against MyNEWS? It is largely due to two reasons.
QL Resources Berhad/Family Mart and 7-Eleven, are far bigger companies when compared against MyNEWS, this means that more people want to do business with them, and therefore they have to ability to extract longer credit terms. In addition, currently Family Mart is also funded by significant number of advances by its holding company QL Resources.

Both 7-Eleven and Family Mart have significant amount of franchisee’s who bear the costs of stocks & inventory and are required to pay this upfront with no credit terms (while they keep the credit terms given by the suppliers). This take a certain amount of inventory out of their books and provides them with additional cashflow.

A large of amount of the revenue (and therefore inventory) of myNEWS consist of tobacco products around 34%. Tobacco companies don’t usually provide long credit terms.

Net Working Capital and Working Capital/Equity Ratio

Translated into numbers, those Inventory, Receivables and Payable Turnover Days mean that,



For companies like 7-Eleven & Family Mart, in addition to the capital they have put into the business “Equity”, on a net basis, the suppliers of these companies, provided them with an additional 154% and 58% of capital to fund or expand their existing businesses.

While for myNEWS, in addition to their Equity, they also need to fork out, on average 15% of additional capital to fund their supplier’s businesses.

The thing about running negative working capital business models, is that it is especially advantageous when the company is expanding very quickly.

For a company without an expansion plan running a negative working capital business model, this business model only provides additional returns on the initial phase, before going on as normal.

But for a fast-growing business, like myNEWS and Family Mart, running a negative working capital business model give rise to situations like below.



As you can see above, this means that your suppliers can now fund your expansion plans.

The more stores you open, the larger the amount of funding provided by your suppliers, which reduces the amount of cash you need to open new stores.

And unlike 7-Eleven and Family Mart who have already fully optimized this, there is still significant room for myNEWS to optimize their working capital structure to obtain superior Return on Equity and supercharge their growth, while maintaining their superior Net Profit Margin and Return on Asset.

A full breakdown of the numbers will be attached as appendixes at the back.

The Turnaround – The Evolution of Retail Convenience Stores

With the advent of Family Mart, the current convenience store model used in many locations (particularly in Klang Valley) by myNEWS are no longer viable.

Because the moment Family Mart opens a store near you, the number of customers your get to come into your shop to buy the snacks and little knick knacks plummet.

To understand why, we need to think in terms of how retail convenience stores evolved.

For a long time, these stores started as newsstands and cigarette shops. Why?

Because at that point, the fact that you sold newspapers and magazines (for people to also peruse) is enough reason for people to come in, entertain themselves by taking a quick flip through the papers etc (I know I did this a lot back when I was younger, when my parents are paying for the groceries at Tesco) and then pick up their paper/magazine, along with any other stuff.

With the advent of the internet, smart phones etc. This suddenly created a vacuum in terms of a reason for people to enter these stores.

Now, for the overseas stores, because their stores have already evolved long enough and offer many different products from food and dessert (extremely good ones in fact) and pharmaceuticals, to even every-day grocery items like eggs, some vegetables and even meat and fish (along with them already being in high density areas and fulfilling the convenience factor), they could just continue moving along.

But for convenience stores like myNEWS who are still in the early phase of the evolution, they need to take the second step, and give customers a reason to come to their stores again.

Sugar (and then food). One of the three most addictive things in the world, with the other two being carbohydrates and a steady salary.

And, this was why myNEWS IPO’ed to raise the RM100m to fund their FPC’s.

However, Family Mart (QL) beat them to the punch and released that incredible ice cream (we don’t even need to mention 7-Eleven here. Who on earth still drinks slurpees?), along with their range of food products.

And now the moment a customer walks by a Family Mart, the memory of the taste of that ice cream instantly triggers, and they can’t help but walk in, and buy one (along with whatever catches their eye then). I know I am one of these people.

In addition, unlike myNEWS or 7-Eleven, Family Mart started with “Food & Desert” as their Main Selling Proposition, and therefore unlike the other two, does not have legacy items/relationships regarding of them

And so, how does myNEWS plan to turn things around?



Catalyst 1 : The opening of the first CU Store in 2021 Q1

This is where their new partner CU comes in, and myNEWS intends to open the first CU stores by Q1 2020, with a target for 30-50 CU stores opened in 2021, and a 500 stores target in five years. All of it will be funded via internal finances.

In my opinion, there are two main reasons for myNEWS being unable to fulfil their ambition of opening their own branded franchise, and the problems faced by the FPC.

Inconsistent and Subpar Branding

For one, the experience across myNEWS Stores are inconsistent, unlike Family Mart, where I know if I walk in now, I can 100% get my Sofuto ice cream.

As there is no clear and obvious segregation between the outlets with the ice cream, and those without the ice cream.

In addition, the name, “myNEWS”.

It is a legacy of their earlier days and the early days of retail convenience stores, where Newspapers and the Magazines are the reason why people walk in the store.

There is a quote from the movie “The Founder” (a movie about the Ray Kroc & the early days of McDonalds). This was directly after Ray Kroc essentially forced/buys out the McDonalds Brothers from the company.

One of the brothers, Richard McDonalds asked him, why did you want our company, why not open your own with the system you learned from us, and Ray Kroc replied,


“Its not just the system Dick, it’s the name, that glorious name Mcdonalds, it could be anything you want it to be, its limitless, its wide open, it sounds uh, it sounds like , sounds like America. As compared to “Kroc”. Why Kroc? What a load of Kroc. All over the Kroc. Would you eat at a place name Krocs. Krocs has that one Slavic sound. Krocs. But Mcdonalds, oh boy, it’s a beauty.”

I think the name “MyNEWS” is no longer suitable today when people no longer think about News, Newspapers, or Magazine when walking into a convenience store.

Inability to provide the right product mix and the “Taste” needed.

As QL was the franchisee of Family Mart, they obtained the right product mix and the required recipe’s and beat myNEWS to the punch in releasing the ice cream and Japanese food.

This meant that, even if myNEWS copied the product mix used by Family Mart, they may always be seen as Johnny-come-lately and an inferior copycat.


And with the above in mind, myNEWS needs a restart button when it comes to their RTE focused stores, and this is what CU provides.

CU is owned by BGF Retail who used to be the biggest Family Mart operator in Korea.

In 2014, they took what they knew from Family Mart, and started their own brand CU. From there, BGF converted all their stores in Korea to CU stores.

Today, CU are the biggest convenience store operator in Korea with 15,000 outlets. Their products in Korea are so good, that today, Family Mart is non-existent in Korea. This despite the non-compete agreement signed in 2014 having expired in 2016, and Family Mart is able to re-enter the market via another player.

With CU as their partner, MyNEWS now can offer another completely different type of food, “Korean”, that is equally popular as Japanese food in Malaysia, and have access to CU’s product mix and recipes.





By having CU come in, it solves most of their problems in one go.
The opening of the CU stores means that myNEWS now have a new identity and would be able to be able to provide a consistent experience across the board for their customers.
The CU stores, like Family Mart, will be built with Ready-To-Eat food as its core, and this means the Food Processing Centre, can now be run at a much higher capacity (75%) and enable it to breakeven (before COVID 19, it was operating at 50% capacity). In addition, materials used for both RTE segments are interchangable.

In addition, as of today, myNEWS still has a RM100m credit line, that lies mostly unused, which can be utilized to open the new stores.



Catalyst 2: COVID 19 and the Formula 1 Safety Car Mental Model.

In Formula 1, whenever an accident happens, a Safety Car will come out and all the cars must follow behind them.

When this happens, this is very bad for the leaders of the race, as because the safety car limits everyone to a slower speed (by virtue of it being a much slower car than a Formula 1 car), this meant that all the hard won gains by the leader is lost, and the competition becomes much closer.

When the COVID-19 pandemic hit, both myNEWS & Family Mart had to slow down their expansion. In addition, lower footfalls, meant that both myNEWS & Family Mart had both reduced their RTE offerings volume.

If you were to go into a Family Mart store today, it’s Ready to Eat shelves are actually quite empty and comparable to that of myNEWS previously.

However, unlike Family Mart/QL whose main route of improvement consist of opening new stores (which has been put on hold).

During this COVID 19 period, MyNEWS had been able to take advantage of the lower footfalls and revamp their current MyNEWS outlets to include more machineries that is needed to convert an outlet to be RTE focused.

At the start of the 2020, during an analyst meeting, the management have indicated the following.



And the benefits of this is very clear, the store on the left with the new layout, is clearly much better than the one on the right.



Have myNEWS taken advantage of this COVID 19 pandemic and revamped the existing outlets?





For the 9 months YTD 2020, MyNEWS have spent Rm23.3mil in purchase of property, plant & equipment.

As the number of outlet in 2020 on a net basis have actually reduced slightly, this means that the management have followed through on the revamp of existing stores, and most of the RM23.3m spent have been done on the store revamps to enable them to catch up to Family Mart’s offerings.



Catalyst 3: COVID 19 and the Safety Car leaving

However, unlike Formula 1, the retail convenience market is not purely a race. It is a business, where the pie is expanding for everyone.

As long as COVID 19 and the government’s policy (safety car) regarding it is around, everybody can only drive slowly and make less money or losses.

However today, despite COVID 19 Cases still being above 1,000 per day, we see the jams starting around the roads, queues outside of restaurants, and business reopening. Sunway Pyramid today is packed like usual.

As for our government, they have also done the following.
Allowed Travel Between States and Districts Starting 7 Dec;
No more limit on number of pax per table for dine in Starting 7 Dec; and
No more 3 pax limit for travelling in cars Starting 7 Dec.

Its clear that many people, including our government think we may have somewhat overreacted in relation to this COVID-19 pandemic, and/or, that our hospitals and other medical businesses have had more than enough time to build up capacity, and/or, the consequence of not doing business or going about your own day is worse than the COVID-19 virus.

And as we can see here from 7-Eleven’s financial results for Q3, which run from (July 2020 – September 2020),



7-Eleven’s profits have largely recovered.

myNEWS’s Q3, which run from (August – October 2020), and should therefore contain a larger recovery as its further from that (March to July), and I think myNEWS has a good chance to breakeven this quarter as well.




Risks 1: Execution.

With all investments, especially turnaround ones like this, the main risks have always been in terms of the execution.

On a personal level, having studied MyNEWS since its inception as a business 20 plus years ago, and how the management runs it.

So far, I’ve always mostly agreed with the actions taken by management.

Of course, one could always say that they should have just worked with CU from the get-go, instead of trying to do things from scratch. However, it’s always easier to criticize and suggest the correct choice, with the benefit for hindsight.

One thing I like about this family run business, is the lack of Ego and especially Wah Lai Toi drama that typically comes with family businesses.



On September 2019, they have hired Madam Low Chooi Hoon who has deep experience in marketing and operating FMCG goods across South East Asia. And on October 2020, after proving herself, the co-founder and brother, Mr Dang Tai Wen himself, steps aside to allow her to take the reins as Chief Executive Office – Retail, a role he had help since the start of the company without drama, proving that they can work together and focus on the bigger picture.



And at the end of the day, this management is still one that turned 1 News-stand into 531 Convenience stores.



I think they will execute it fine.




Valuation.

The thing about great businesses, is that they are rare, and its something that must be proven over time.

And if they do end up being great and turnaround from their temporary troubles, whatever your target price initially then, you would likely be severely undervaluing it. And if it turned out to not be great and the turnaround fails, whatever price you previously bought it for, is likely to be overvalued (like Parkson).

And so, for MyNEWS, my focus when it comes to this investment, is not so much on the share price, but keeping track on this business in terms of,

How the revamp is going?
How are the CU stores going?
How is the Food Processing Centre Utilization Rate and Wastages?
How does the drinks, food and snacks taste like?

Having said that I have a high conviction that within the next 3-6 months, MyNEWS would be able to revert their Pre-COVID 19 mean, and so we will use that as a basis for determining an initial valuation.



A higher PER is used to account for the fact it is a very fast-growing business, with great industry economics and good management.

Do note, before their problems with the Food Processing Centre, MyNEWS used to trade at around 35 times earnings, at RM1.3. In addition, with most convenience stores players around the world trading at 40PE-50PE (QL is around 60PE).

I think the current PER applied is quite conservative.


And, One Last Thing

Is it priced in?



Other than the brief pop back in April-May 2020, which affected all stocks, it has only gone down since then and is way below its Dec 2020 closing price of RM1.13.

It has since increased somewhat as people notice the gradual reopening of businesses around Malaysia.

However, I don’t think the market has priced in,
Breakeven for Q3 2020 for MyNEWS
Start of the first CU stores in Q1 2021 and
Turnaround of the Food Processing Centres, and
The long-term prospects of the venture as a franchisee of CU in Malaysia.



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Disclaimers: Refer here.

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(CHOIVO CAPITAL) LIONIND (4235) - Budget 2021, Rising Steel Prices

Author: Choivo Capital | Publish date: Mon, 9 Nov 2020, 12:42 PM

Overview

When thinking about the companies affected positively by the budget, we naturally look for companies whose valuations are also currently very attractive.

And I think Lion Industries Corp Berhad fits the bill, especially since they are among the top 3 largest steel rebar players in Malaysia.

Budget 2021 - Construction

For Budget 2021, the government have allocated quite a large amount towards construction and infrastructure development. The main ones being,


RM 15 billion will be allocated to fund the Pan Borneo Highway, Gemas-Johor Bahru Electrified Double-Tracking Electrified Project and Klang Valley Double Tracking Project Phase One. In addition, several key projects will also be continued such as Rapid Transit System Link from Johor Bahru to Woodlands, Singapore and MRT3 in Klang Valley.


RM3.8 billion to fund new projects such as,
Construction of the Second Phase of the Klang Third Bridge in Selangor
Continuing the Central Spine Project with the new alignment from Kelantan to Pahang;
Upgrading the bridge across Sungai Marang, Terengganu;
Upgrading of Federal Road connecting Gerik, Perak to Kulim, Kedah
To continue building and upgrading Phase of the Pulau Indah, Klang Ringroad Phase 3, Selangor
Construction of the Pan Borneo Highway Sabah from Serusop to Pituru; and
Construction of the Cameron Highlands Bypass road, Pahang with emphasis on preserving the environment.

RM780 million to fund regional projects such as,
Rapid Transit Bus Transport System at 3 High Capacity Routes and construction of busway at IRDA in Johor;
Construction of the Palekbang Bridge to Kota Bahru, Kelantan under ECER;
Construction of infrastructure and related components of the Special Development Zone project in Yan and Baling, Kedah under NCER;
Infrastructure Project in the Samalaju Industrial Area, Sarawak under SCORE; and
Continuation of the Sapangar Bay Container Port Expansion Project, Sabah under SDC.

EPF will continue the development of Kwasa Damansara with an estimated Gross Development Value of RM50 billion. It will consist of commercial, residential and more than 25 thousand houses (including 10,000 affordable homes) to be built.

Sabah and Sarawak will receive Development Expenditure allocation of RM5.1 billion and RM4.5 billion respectively. These allocation among others are for building and upgrading water, electricity, and road infrastructure, health and education facilities.

Additional funding of Low-cost housing amounting to RM1.2 billion.

RM 500 million to build 14 thousand low cost housing units under the Program Perumahan Rakyat;
RM 315 million for the construction of 3,000 units of Rumah Mesra Rakyat by Syarikat Perumahan Nasional Berhad;
RM 125 million for the maintenance of low cost and medium-low stratified housing as well as assistance to repair dilapidated houses and those damaged by natural disasters; and
RM 310 million for the Malaysia Civil Servants Housing Programme (PPAM)

And many more smaller development projects, including initiatives to promote and ease homeownership for the citizes

Rising Steel Prices

And even before all these are happening, steel prices have been steadily marching upwards.





Per Statista.



LME Steel Rebar Prices

In the major steel producing countries China and India, steel prices have been increasing very strong, and this is similar globally as recovery and demand picks up pace, faster than the reopening of supply.

This is also corroborated by various news articles around the world.

“Steel Prices In Asia expected to increase strongly in the second half of 2020”

“US Rebar prices hold steady in November, after rising strongly in September and October”

"In China underlying demand remains exceptionally strong,…,The rest of the world is picking up after a horrendous Q2 and Q3, and now we're seeing steel prices recovering pretty strongly across all regions,..., I think they will continue to rise.

Prices of hot rolled coil steel, used in the manufacturing sector, have shot up 37% since April in China, the world's biggest steel market and the first country to recover from the pandemic.”

Domestic steel companies have increased prices by Rs 2,700-3,000 per tonne in August — the third time since the start of the pandemic — as demand improves and input costs remain high due to shortage of iron ore. The uptick is in line with an increase in the international price of steel.

While both primary and secondary steel players increased benchmark prices of hot-rolled coils by Rs 700-750 per tonne on an average from July 2020, for cold-rolled coils, prices have gone up by Rs 500-550 per tonne. Those of pig iron and steel have gone up by Rs 3,000 per tonne in the local market in August, industry sources said.

A key factor is international steel prices, which have improved by almost $500 per tonne, according to a top official of a state-owned steel major.

Domestic steel companies have increased prices by Rs 2,700-3,000 per tonne in August — the third time since the start of the pandemic — as demand improves and input costs remain high due to shortage of iron ore. The uptick is in line with an increase in the international price of steel.

While both primary and secondary steel players increased benchmark prices of hot-rolled coils by Rs 700-750 per tonne on an average from July 2020, for cold-rolled coils, prices have gone up by Rs 500-550 per tonne. Those of pig iron and steel have gone up by Rs 3,000 per tonne in the local market in August, industry sources said.

A key factor is international steel prices, which have improved by almost $500 per tonne, according to a top official of a state-owned steel major.


China’s national price of HRB400 20mm dia rebar, an indicator of the domestic steel market development, continued to increase for the third working day on October 30 to Yuan 3,860/tonne ($577/t) including the 13% VAT. It was up by Yuan 22/t on day, the steepest rise among the three days.





And these steel prices are also increasing in Malaysia, as shown by YKGI’s (a Malaysian Steel Manufacturer’s) most recent quarterly result, where they recorded a net profit of RM2.3 million after 9 quarters of losses

Net Cash & Additional Disposals



Unlike other steel companies, LIONIND is in a strongly net cash position. As of today, they have net cash totalling RM255m, this is higher than their current market capitalization of RM 193m.




In addition, they are also in the process of disposing Antara Steel Mills Sdn Bhd for a cash consideration of RM546.56 million (USD 128 million)

Bringing their total cash balances to RM806 million.

Target Price



Given the imminent closing of the disposal, the 2021 Budget which is expected to strongly increase the demand for rebar steel for construction in Malaysia, as well as rising steel prices around the world, I think there should be enough factors in line which should positively impact LIONIND’s share price.

One last thing,

Is it priced in?



Well, does not look like this is the case at all.



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Disclaimers: Refer here.

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(CHOIVO CAPITAL) MBMR (5983) - 10% Projected Dividend Yield, All Time High Revenue and Earnings (SUMMARY)

For a copy with better formatting, go here, its alot easier on the eyes.
(CHOIVO CAPITAL) MBMR (5983) - 10% Projected Dividend Yield, All Time High Revenue and Earnings (SUMMARY)

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10% Projected Dividend Yield, Record Earnings.

Overview

This pandemic has changed the way people travel and their modes of transportation.

With the virus around, people who previously used public transport, now much prefer using their own vehicles which have resulted in increased demand for vehicles.

Due to the ongoing pandemic, there is a much stronger focus on vehicles that are, cheap and have value for money. As a result, the three main beneficiaries are as follows.

Perodua (Monthly Sales have broken their 27 year record for 2 consecutive months)
Proton (Sales have recorded 5 consecutive months of Y-o-Y Growth)
Second-Hand Cars (Sales have soared with Myvi being the most popular vehicle)

In addition, the government have also announced SST exemption (100% on locally assembled cars, 50% on imported cars) till 31 December 2020 to spur sales.

Why MBMR Resources Berhad

(“MBMR”)?

In the Malaysian vehicle market, Perusahaan Otomobil Kedua Sdn. Bhd. (“Perodua”) is the industry leader.





Despite declining number in vehicles sold in Malaysia from 2015 (666,677 cars) to 2019 (604,287 cars.) The number of vehicles sold by Perodua have increased from 213,307 cars in 2015 to 240,341 cars in 2019. Increasing market share from 32% in 2015 to 39.8% in 2019. Its market share in 2020 have further increased to 42.5%.

Why is this the case? This is due to income levels in the M40 and B40 rising slower than in previous years, resulting in a stronger focus on cheaper and value for money cars. This pandemic has further strengthened this focus.

Currently, the cheapest (all-in ownership cost) and most fuel-efficient car in Malaysia is the Perodua Bezza 1.0 G (A Proton Saga 1.3 Base is cheaper by about RM2k but is 30-40% less fuel efficient). The release of this car also resulted in a strong increase in revenue and profit for Perodua.



Now, Perodua is owned by, UMW Corporation (38%), Daihatsu Motor Co. (20%), Daihatsu (Malaysia) (5%), MBM Resources Berhad (22.6%), PNB Equity Resource Corporation (10%) and Mitsui & Co. (4.4%). The fact that no one holds a controlling stake also means that Perodua’s earnings are usually paid out as dividends.

Unlike companies like DRB-HICOM, who has many other businesses, many of which are loss making during this COVID period, and thus mask the increased earnings from PROTON. The earnings and dividends contributed by Perodua is usually around 75% of MBMR’s earnings and cashflow.

However, despite being expected to record explosive earnings in Q3 and Q4, MBMR is currently selling at RM2.85, far below its Pre-covid valuations of RM4.0 and is selling at just 4 PE today.

Earnings Versus Dividend Payout

Despite large dividends by Perodua to the MBMR, the dividends paid by MBMR is usually lower, why is this the case?





As we can see here, this is mainly due to a large loan taken out in 2011. Since then, the reduction in dividend pay-out was mainly due to cashflow being diverted to pay off this loan. When the MBMR turned strongly net-cash in 2019, dividends payment tripled. In addition, as we can see here, the other segments of MBMR usually generate additional cash as well. So why was the loan taken out in 2011?

Why was the loan taken out in 2011?

In 2011,a loan of RM370m was taken out by MBMR for the privatization of Hirotoku Holdings Berhad which cost a total of RM410 million (to this day, this company is run by the Japanese Partner). This company is primarily in the business of manufacturing Acoustic and Safety Products for vehicles.

In addition, in 2012 the company also started OMI Alloy (M) Sdn Bhd, an alloy wheel manufacturing company. Both companies are under the Auto Parts Manufacturing Segment.

How has these companies performed over the years?




For Hirotako Berhad, earnings have fallen somewhat since the glory days of 2009-2013, however it is still quite profitable. However, the lower profitability did require a write off on goodwill in 2017.

But for their alloy wheel manufacturing company OMI Alloy (M) Sdn Bhd, it performed badly due to China flooding the market. This loss-making division have been shut down in 2019 and would no longer result in losses for the company.

What about their other division, the Motor Trading Division?



Its profitability fell during the 2013-2017 period but have since risen again to all time highs due to the release of the Perodua Bezza. The contribution by Perodua have also increased to record highs.

Both segments are likely to contribute positively to the record earnings to be recorded by Perodua for Q3 and Q4, as well as in the future.

How has Perodua performed during

the pandemic?





As we can see here, in the month of April and May, sales have naturally fallen due to the controlled movement order. However, since then, Perodua’s has soared far above its 2019 sales numbers.

For the other carmakers, there is a slight purchase backlog factor, which have result in sales increasing in the subsequent months, but they have since fallen back down.

Perodua on the other hand, have increase continued to record increasing sales numbers, Perodua’s monthly sales for September and October have broken their 27 year record for 2 consecutive months.

This is due to the change in traveling methods, where people no prefer to travel in their own cars, and the strong focus on a cheap and value for money vehicles, for which the Perodua Bezza ticks every box.

Q3, Q4 and Full Year Profit Projection

Given what we know about the company, we first get some baseline assumptions using the 2019 numbers.





As we can see here, on average, Perodua contributes RM 781 of profit to MBMR per unit of vehicle sold in 2019. (There is various product mixes etc)

And on average, the non Perodua segments contribute about RM 3.471m in net profit per quarter. (As associate contributions and dividends is not taxed, we can just deduct the Perodua Contribution from the Net Profit of MBMR)

With these assumptions in mind,



As we have Q3-2020 sales unit numbers, there was no need for additional projection. As for Q4, sales in October is 26,852 units. As maximum production capacity is only 25,000 units per month. We will only project 76,852 units (26,852+25,000+25,000).

It appears that MBMR is going to post record operating earnings for the Q3 2020 (RM55.3m) and Q4 2020 (RM60m). As of today, they are still producing vehicles at maximum capacity (appoximately 25k per month) to be sold.

Dividend Payout?

The question now is this.

Will most of these profits be paid out as dividends, or used to purchase other companies or PPE?

There are a few things to note.

With the borrowings being fully paid off, it would be reasonable to think that a significant part of the additional cashflow will be used to pay dividends, as they have shown in tripling the dividend payout in 2019. In addition

Back when they acquired Hirotoku Berhad, the car parts manufacturing business was a good one, this was before china came into the picture. Given the economics today, this industry is not very attractive anymore, and this is why PPE purchases by MBMR have been quite low over the years. After the OMI Alloy fiasco, I don’t think they will want to try that again.

The 50.2% owner of MBMR is Med-Bumikar Mara Sdn Bhd. Like Perodua, there is no controlling owner. 70% of the shares are controlled by 6 different families who have entrepreneurial/business background. Given that no one has control over the company, historically, any additional income would likely be distributed out, so the respective families can do whatever they want with it.





With these in mind, I think that for the FY2020, at minimum RM100m (70% of earnings) would be distributed as dividends by MBMR, this translates to 10% dividend yield.

Target Price?





For the purpose of calculating and initial target price, I will use my projected 2020 full year profit of RM137m.

This is extremely conservative, considering their normalized profit in 2019 and 2018 is RM184m and Rm166.8m

In addition, there is the release of the highly anticipated new SUV, the DL55, which is based off the Daihatsu Rocky, and expected to again focus on value for money, like the Bezza

Given the conservative assumptions, only a small discount in relation to margin of safety is needed. Target price is dynamic, however I think this works well as a mid-term investment as well.

And, One Last Thing.



It appears we are not alone, in the last few months, there have been very strong institutional buying. Much of it likely due to the factors explained above.

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Disclaimers: Refer here.

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