Friday, January 31, 2020

Quarterly Reporting Must Stay

The Edge:

The Singapore exchange is about to make life easier for listed companies -- the safer ones, at least.

The bourse’s regulatory arm plans to end quarterly earnings reporting requirements that currently apply to all companies with a market capitalization of at least S$75 million ($56 million), according to Tan Boon Gin, the chief executive officer of Singapore Exchange Regulation.

When the rule change takes effect on Feb. 7, only riskier companies will need to report earnings every three months, Tan said at a press briefing. SGX RegCo will also tighten other disclosure rules and introduce a new whistleblowing policy as part of efforts to protect investors, Tan added.

Other global exchanges have moved away from mandating quarterly reporting for all their companies. The European Union ended its requirement in 2013, while Hong Kong only applies the rule to companies on its small-cap exchange. The U.S. Securities and Exchange Commission is currently reviewing the issue.
”Internationally, there’s a shift away from quarterly reporting and this is to allow companies to focus on the long term,” said Tan. About 75% of the local market currently reports on a quarterly basis, according to SGX RegCo.
Under Singapore’s new policy, a listed company will have to report each quarter in circumstances including when it receives a qualified report from its auditors, or when they express concern about the company as a going concern. The requirement can also be imposed if SGX RegCo has regulatory concerns about a company regarding disclosure breaches, for instance.
Additional disclosure requirements will be introduced for rights issues
    Acquisitions that reduce net profit or net asset value by 20% or more, or where the target is loss-making or in a net liability position, will be subject to listing rules.
    Companies will need to appoint an independent valuer for significant asset disposals.
    Firms will be asked to disclose material price- and trade-sensitive information, and any changes to near-term earnings prospects.

(Sept 19): AirAsia Group Bhd chief executive officer Tan Sri Tony Fernandes said he agrees with US President Donald Trump's call for companies to issue financial reports just twice a year, rather than four times, as it drives analysts to make short-term decisions.

"One of the few things I agree with Donald Trump is quarterly reporting is null and void. Should be six months. Analysts driving to much short-term decision," he said via Twitter today.

My View:

a) QR should stay. Any listed company, big or small, should have the discipline of being able to look at their financial status at ANY TIME, be it monthly or quarterly at the bare minimum. Half-yearly leaves too much room for things to happen. A company's management should have the desire to be able to close their books at a week's notice. Financial discipline is paramount to any company that rides on sound management and have a close eye on deviations. If a company needs to have that, investors should be just as eagle-eyed.

b) QR may be lighter in its requirements. Just the basic financials BS/CF/IS, plus commentary on substantive changes to Debtors and Creditors, or any revaluations/disposals of significance. Keep it to the bare minimum.

c) QR does not and should not add much financial burden on listed companies. As mentioned, all companies should be able to close their books within a week. Are you to tell me monthly meetings obtain figures for discussion that are 6 months past? These are things all listed companies should be doing already.

d) QR would also "help to reduce the leeway" for the massaging of earnings. Enough said.

e) There is already insufficient information pertaining to the company's fundamentals. The sector's prospects and outlook are not being highlighted sufficiently by basic financial media. Only the top 40 stocks in Malaysia get any form of decent analyst coverage, what about the other 900? There is a dearth of "credible information" for local investors on local stocks. If The Edge can find a willing audience on a daily basis, shouldn't that tell you investors need better information flow?

f) Half-yearly reporting also gives rise to "insider knowledge". The longer the reporting period, the higher the "value" that is accrued to insiders. Owners, board members, CFOs, accountants, corporate lawyers, industry followers, insider share movements, etc... all will benefit more from Half-Yearlies than QR.

g) If you were a substantive shareholder, would you be happy to only get a half-yearly update on your invested company? No. Why should normal investors be deprived of that information?

h) Does QR limits a company's long range planning? No. Why should short term price gyrations affect your company if your fundamentals are strong. Eventually all QRs will even out positively if your long term fundamentals are good. Yes, stocks will react to QRs, but these are the norm of a market, a daily market place that tries to forward discount a company's prospects. 

If you argue for long term reporting, why not report all earnings in one month and then close the market for one year, then report again... that is as preposterous as eliminating QRs.

Tuesday, January 28, 2020

Coronavirus Impact On Local Stocks

How should one play the "coronavirus" as an investor? Should we even invest at all? Isn't there something "not quite right" about making money out of certain people's sufferings? If you bought certain stocks which jumped owing to the coronavirus, is it evil to think in your heart that the longer the virus spreads, the better my returns?

So what is ethical investing anyway? Do these funds shy away from these healthcare-related counters? Do you buy and hold fire extinguisher companies that benefited enormously from the unrelenting Aussie bushfire??? Where do you draw the line? Do you even bother in the first place?

Hence, my views here are not an indication of my values barometer. I assess these stocks as an investment option. How the situation develops is part of the fundamentals' story. So, please, leave your principles, values, morality and political correctness behind.

Momentum Investing

You can try to rationalize why you shouldn't jump in, but you cannot block a momentum rally owing to a significant perk in "substantive factors" in a stock's earnings prospects. 

 Demand yet to surge, but this could happen anytime soon. MQ Research’s checks show glove manufacturers have not yet seen a surge in glove demand on the back of the virus outbreak. MQ Research believes Chinese buyers have increased demand for cheaper vinyl gloves in the first instance. If the outbreak is prolonged, there could be a spillover to rubber gloves. The upcoming travel period around the Lunar New Year holiday could spark an acceleration of the outbreak and spur global glove demand.

Who will be the biggest beneficiary? Glove manufacturers are running close to an optimal utilization rate of 85%. Thus, any spike in demand could tilt the pricing power back to the manufacturers. MQ Research believes manufacturers with the highest exposure to the Asia market and with the highest capacity additions could be the biggest beneficiaries in terms of sales volume from this virus outbreak. Among glove manufacturers, Top Glove has the highest capacity additions, while Supermax and Sri Trang have strong exposure to the Asia market.

Biggest Consideration: Utilisation Capacity, Product Mix & Clientele's Region Exposure

MQ Research believes manufacturers with the highest exposure to the Asia market and with the highest capacity additions could be the biggest beneficiaries in terms of sales volume from this virus outbreak. Among glove manufacturers, Top Glove has the highest capacity additions, while Supermax and Sri Trang have strong exposure to the Asia market.

Of MQ Research’s covered stocks, MQ Research prefers Top Glove over Hartalega due to its wider product mix, diversified market exposure as well as the potential benefit it could see from this virus outbreak. Nonetheless, Hartalega could also benefit if customers in developed countries (Europe and United States) start stocking up on rubber gloves as a preventive measure. 

Is It Too Late To Get Into The Big 4?

The Big 4 Heavenly Stars: Top Glove, Hartalega, Supermax, and Kossan. Yes, it is late if you get in NOW and you are a trader (i.e. window period of less than a week). No, if you planned to hold. Just look at the long long term charts (2003-now) of some of the Big 4.

You cannot fully anticipate the outbreak of each epidemic, but rest assured epidemics or health scares will be the norm moving forward owing to the mutation abilities of viruses. As long as you buy and keep, EVERYBODY makes money from glove makers. You are even more "secured now" as the Big 4 have reinvested heavily and now carries a huge moat around their business that will be hard to knock off from their perch.

Even the "political collateral damaged" Supermax maintained its long term outperformance since 2003 till now.

Just look at the lovely rise over the years for these stocks. These are stocks you can keep and keep and reinvest.

What About the Newer Players?

You mean Careplus and Comfort. well, just look at these two tables:

Capital expenditure can do a lot of things for the same companies in the same industry. But when the bigger players have the bulge bracket, it is very hard to even be competitive in terms of margin. Even if demand jumped 3x, they do not have the capital to take advantage of the situation.

Cost To Income ration, again in almost any other industry, there will be niches you can explore. However, the overwhelming size of the Big 4 will make it inevitable that every single resource will cost the small guys more. The Big 4 have economies of scale in almost everything.

OCNCASH, Only Small Player I Like

Oceacash is involved in wide ranges of hygiene manufacturing of diapers, sanitary napkins, wet wipes, surgical apparel, caps, masks and gowns.

Today was only the first day it jumped. Even so, its market cap is still just RM180m on just 245m shares. The hygiene business should dominate proceedings. I think RM1.00 is around fair for a company that happens to be in the right sector, plus with a fantastic correlation to supplying Malaysia's best selling car. 

We remain positive on Oceancash’s (OCP) business outlook after our recent meeting with management. We continue to like OCP, considering the i) favourable growth prospects in the hygiene’s nonwoven segment, ii) steady contribution of foreign felt sales from Thailand and Indonesia, as well as iii) strong management team with in-depth technical know-how. At 10x 2020E PER on the back of a projected EPS growth of 33% for 2020E, OCP’s valuation looks appealing. We reiterate our BUY call with an unchanged price target of RM0.61. This note marks a transfer of coverage.

Foreign Felt Sales to Drive Insulation Segment Growth
Profitability of the insulation segment was flat in 9M19 despite higher felt sales (+6% yoy) as this was largely offset by weaker PBT margins (-1ppt to 18.7%, exacerbated by adverse forex movement in 1H19). Prospects wise, we believe the increasing contribution from Thailand and Indonesia (foreign felt sales accounted for c. 61% of 9M19 insulation revenue) should be more than sufficient to cover for the expected shortfall in local felt sales (est. 2020 TIV forecasts lower by 1% to 590k units).

Insulation Felt Plant in Thailand Should be Ready for Action by 2H20
Elsewhere, construction of the felt production facility in Thailand remains on track to be completed by 2H20, and OCP is planning to relocate one of its two existing Malaysian production lines to tap into 1) the strong demand for resinated felt and 2) increase utilisation of excess capacity (current utilisation rates: est.50%). Locally, we understand OCP has been supplying felt to Proton refreshed models (ie. Saga, Iriz and Persona), and with this track record, the company is hopeful to participate in the Proton Complete Knocked-Down (CKD) X50 supply chain moving forward. We think OCP may give the CKD X70 contract a miss due to unfavourable pricing, similar to our observation of other auto-parts players.

Hygiene Segment’s Margins to Benefit From Cheaper Resin Cost, …
Outlook for the hygiene segment still looks promising - 9M19 PBT rose by 10% yoy to RM2.5m, on higher revenue (+1% yoy) and improvement in PBT margins (+0.5ppt to 6.1%). We believe the cheaper resin cost (est. 80% of hygiene’s raw material costs) will likely see an uptick in hygiene’s margins in the coming quarters.

Source: Affin Hwang Research - 3 Jan 2020

Well managed, look at the steady earnings. Now what if PBT jumps by 100% over the next 2 years. Is RM180m market cap still valid???

Thursday, January 23, 2020

Talking About ICON

ICON went limit up for the wrong reasons. Some are saying its because the terms were so convoluted and that not many know how to calculate the capital reduction.

PLEASE, this is not your first rodeo, this is not the first capital reduction exercise. You are all supposed to be professional investors or advisors.

The limit up was obviously caused by the 50 into one capital reduction. A simple calculation showed that ICON had 2.377bn shares. Divide that by 50 = 47.5 million shares. That must be close to the fewest number of shares listed by a company on Bursa.

The complaining parties ARE those who SOLD SHORT unwittingly. Imagine you had 100,000 prior to the ex date. It was trading at 4 sen, you value was RM4,000, and as with 99.9999% of ICON investors, you had lost money already big time.

Then you woke up and saw the price going limit up.

(0.035 x 50) + (100 × 0.105) ÷ 101 = 0.12 

Add the 30 sen limit up, you have 42 sen, today add another 30 sen you have 72 sen.

As you can see even at 72 sen, with just 47.5m shares its market cap is just RM34.2m. Of course, there are still other derivatives to cater to but let's forget that for now.

The main reason for the double limit up... OVERSOLD SHORT. Imagine that same guy with 100,000 shares (value RM4,000) and seeing it going limit up at 42 sen. Sell first lar... Trouble is he sold 100,000 consolidated shares when in reality he had only 100,000/50 = 2,000 shares.

Imagine you have to buy back the 98,000 ... say at an average of 62 sen ... you would have lost 62-42 = 20 sen x 98,000 =RM19,600

Bearing in mind your value was just RM4,000 to start with. The figures will multiply if you had shorted 1,000,000 ...

Bursa has done no wrong. This has been the same process for the longest time. Even our online accounts have default settings that do not allow investors to short sell stocks, i.e. selling what you don't have in your portfolio.

The ONLY people who can short sell are DAY TRADERS or proprietary traders or company dealers... though some bigshots do deal through company dealers' accounts first. Hence if you kena short sell... you get very little sympathy from all.

Things To Do During Lockdown

All local councils, utility companies, construction firms (those with permission) and city planners in Malaysia should take the opportunity...