Sunday, August 21, 2016

Analysis of Hua Yang



Please read the disclaimer here:http://greedydragoninvestment.blogspot.com/p/about-greedy-dragon.html. Enjoy the article, bitches!




What’s crackin’ fam? The markets seem to be getting better, so that’s pretty awesome. The Olympics is going on, so that’s kinda cool if you’re into some of the sports. I watched some of the swimming events mainly because of Michael Phelps. And while Phelps was amazing as expected, Katie Ledecky absolutely blown my mind. I got teary eyed when I watched Ledecky finish the race at least half a lap ahead of her competitors to win a gold medal and break her own world record. It was just inspiring to watch the payoff for all the time and effort that she dedicated to becoming great at what she does. Anyway, in this article I will be analyzing Hua Yang. The group is engaged in property development in Malaysia. According to Bloomberg, the group had a market cap of RM480 million at market close on August 19, 2016. If memory serves me right, I bought the stock a few months back at RM 1.87 per share. This is my first time investing in a property developer, so there is a significant risk that I might screw up and make at least some mistakes in my analysis.


Update on the Greedy Dragon portfolio: I recently sold all my shares in First Republic Bank and 75 shares in Natural Resource Partners for USD 71.26 per share and USD 27.5 per share respectively. I added to my position in Oasis Petroleum, Northern Oil & Gas, and Maybank for USD 6.82 per share, USD 3.43 per share and RM 8.02 per share respectively.


The ability of a property developer to sustain its business is dependent on its landbank. According to Hua Yang’s financial year 2016 annual report, the company’s available landbank could potentially generate a total estimated gross development value (GDV) of RM3.8 billion. Klang Valley make up 45% of the total potential GDV; Johor, Perak and mainland Penang accounts for the rest of estimated potential GDV in almost equal proportion. I couldn’t find out how long this could keep the group busy in the 2016 annual report. However, it was mentioned in the 2015 annual report that a potential RM3.3 billion GDV could sustain the group’s development activities for 6-8 years. Of course Hua Yang should be able to continue developing properties for significantly longer than 8 years as it can acquire more land. A property developer’s estimated GDV shouldn’t be thought of as the company’s lifespan. It should be thought of more as a margin of safety for the developer to maintain a healthy pipeline of new projects.


Landbank & GDV is only one part of the equation. Investors should be able to make an educated guess as to how much profits a property developer can make on its estimated potential GDV. As this is my first analysis of a property developer, my method may seem like something you would come up with over a roti telur double at a mamak shop at 2 in the morning. Here is how I estimated the potential profits Hua Yang could earn on its estimated potential GDV:


Disclaimer: The potential profit is just an estimate, and can vary significantly from actual profits. My model also doesn’t include some items such as other income, under provision of development expenditure on projects completed in prior years, and etc.


Figures in millions of Ringgit
Estimated potential GDV as at March 31 2016
3,800


Development expenditure
2269
Selling & marketing expenses
177
General & administrative expenses
261
Finance costs
108
Potential profit before taxes
984
Corporate taxes
236
Potential profit
748

Development expenditure was estimated by taking the 3-year average ratio of development expenditure/revenue which came to approximately 0.60 and multiplying that figure by 3,800. I used development expenditure instead of property development costs as I assume that the group would have already made the investment for its current available landbank. Development expenditure also made up a much larger percentage of property development costs than freehold and long-term leasehold land. Selling & marketing expenses was estimated by taking the 3-year average ratio of selling & marketing expenses/new sales which came to approximately 0.046 and multiplying that figure by estimated potential GDV. General & administrative expenses was estimated by multiplying financial year 2016’s general & administrative expenses by 8. As estimated potential GDV as at March 31, 2016 was higher than potential GDV as at March 31, 2015, I will assume that it will keep Hua Yang busy for 8 years. General & administrative expenses will also be higher if you take a longer time frame, and I prefer to be a little bit more stringent with my models. Finance costs was estimated by multiplying 8 by financial year 2016’s finance costs including amount capitalized in land held for property development and property development costs. I’m probably double counting at least some of the finance costs as a significant portion of it could be accounted for in development expenditure due to capitalization, but I like to be stringent to have a built-in margin of safety in my estimates. The corporate taxes estimate is simply 24% (which is Malaysia’s corporate tax rate) of potential profit before taxes. Actual corporate taxes could be lower than my estimate as I didn’t take into account tax shields such as stuff like depreciation.


Of course the potential profit in my model is only for current estimated potential GDV as at March 31, 2016. Hua Yang can keep adding to their landbank so that they keep launching new projects, and therefore sustain their business for the long-term. For instance, in financial year 2016 Hua Yang acquired land in Penang for RM45 million which it has earmarked for a RM311 million project. Before I invested in Hua Yang, I was afraid to touch property developers because I was always worried that land prices will soar and eat into their profits. I mean I always hear stories about some old dude who bought a few acres of land for a few thousand ringgit when he was young, and now his land is worth millions of Ringgit. But after looking into the numbers, the main expense under property development costs was development expenditure. Development expenditure made up an average of 91.14% of property development costs over the past 3 financial years. I ain’t saying that the cost of replenishing the landbank isn’t something to think about, because it’s indeed important. I’m just saying that it’s useful to look at the big picture as well.


Hua Yang has been able to generate good returns on capital. In the period of financial year 2012-2016, the group achieved returns on equity of between 20%-24%, and returns on assets of between 10%-12%. Hua Yang has net assets of RM 2.05 per share which is higher than the stock’s Friday closing price of RM 1.82 per share which indicates that the stock could be undervalued. According to Bloomberg, Hua Yang has a Price/Earnings ratio of 4.62 based on the stock’s closing price on August 19, 2016 which is another indication that the stock might be undervalued. However, I think that part of the reason the stock is trading at such a low multiple of earnings is that the market is pricing in the risk that property developers’ earnings might take a hit due to the soft housing market. The group only has a net gearing ratio of 0.34. So, unless there is a severe downturn in the housing market, Hua Yang should be able to comfortably meet its financial obligations. The board did not recommend a final dividend as they wanted to strengthen their cash reserves. I agree with their decision as the current operating environment is more challenging than the past few years, and more cash will give the group greater flexibility. I would also like to point out that the board has demonstrated their willingness to reward shareholders with healthy dividends in the past. This gives me confidence that the board could raise the dividend once the housing market recovers.


Aight guys, I think I will end the article here. I hope my first investment in a property developer delivers attractive returns in the long-term. I’m sure I still have a lot to learn about the property development industry. As always, thank you for reading. Take care and stay rational.

Tuesday, July 26, 2016

Investment screw ups (as in my screw ups) part III



Hey guys, welcome back to the “Investment Screw Ups” series where I talk about the times I violated sound investing principles and went full retard. In this article, I will be talking about my disastrous investment in Mongolia Growth Group.
 
Note on Mongolia Growth Group: While I definitely think I made a mistake investing in the company, I don’t want to give the impression that things are hopeless for Mongolia Growth Group. The company probably has some time to turn things around as it doesn’t have much liabilities.
 
Update on the Greedy Dragon Portfolio: Picked up an additional 250 shares in Barclays after the stock was destroyed when investors freaked out that the UK actually decided to leave the EU.
 
Lesson number 1: Is the company making that paper?

Benjamin Graham warned against investing in companies that have reported an annual loss over the past 10 years. I believe that most investors should follow this rule. I definitely deserved to lose money for not heeding the knowledge dropped by an Original Gangsta of value investing. Yes, an experienced investor may not need to strictly adhere to this rule. However, if an investor chooses to invest in a company that’s currently making losses, he needs to be confident that the company can quickly return to being cash flow positive even without an overly optimistic future scenario. Just to clarify, achieving positive cash flow by messing around with working capital accounts doesn’t count.

 

I obviously wasn’t thinking about this rule when I invested in Mongolia Growth Group as the company had negative operating cash flow before net change in non-cash working capital balances over the past 3 years. I invested in the stock because I thought that the company would continue to experience strong rental income growth, and its rental income will eventually exceed its operating expenses. Looking back, I think I was being too optimistic.
 
Lesson number 2: Do the correlations check out?

When I talk about correlation risk in this article, I ain’t talking about the bullshit finance students learn in university. The fucking course material teaches them that they can look at past stock price movements to predict how the price of 2 stocks would move together in the future. For example, “if stock A goes down, stock B would go up because the 2 stocks have a negative correlation.” I guess that’s what happens when someone tries to compensate for a lack of business knowledge with fancy mathematics.

 

When I talk about correlation risk, I’m talking about risks events that can negatively impact the actual business performance of companies across different industries. In the case of Mongolia Growth Group, its ability to raise the rent on its properties was at risk as Mongolia’s economy was dependant on commodities that were trading at depressed levels back then.
 
Lesson number 3: Don’t chase returns

One of the reasons I invested in Mongolia Growth Group was that I was frustrated as many stocks were either overvalued or close to fair value at the time. The correct thing to do was to just leave my cash holdings alone, play some video games, and wait for the easy opportunities to emerge as they always do (I believe Buffett calls them fat pitches, but I don’t know shit about baseball). Instead, I went around reading about exciting investments on the internet. That’s how I came to know about Mongolia Growth Group. Of course I don’t blame the article that introduced me to the company, as at the end of the day only I can make the decision to buy. I chose to believe in the exciting story of the company, and it was that believe that caused me to make errors in my analysis.


The moral of the story is to be skeptical of growth stories. More often than not, a company in the growth phase could see their growth rates fall significantly in a short period of time and/or see their growth in expenses significantly outpace their growth in revenue. While unrelated to my failed investment in Mongolia Growth Group, investors should also be skeptical of companies trading at low valuations as a lot of the time, there is a good reason why a company appears “cheap.” Always, always conduct your own thorough research before investing in anything.



This concludes part III of the investment screw ups series. I hope I don’t ever have to write a part IV. However, even if I never make a mind-numbingly stupid investment again, I’m sure that I will still continue to make mistakes here and there. And I might share my experiences with you guys on this blog. So, please check back every once in a while. After all, you profit by learning from the mistakes of others. I want to give a shout-out to all my value investing homies that have been following this series. Take care and stay rational.

Sunday, June 19, 2016

Analysis of Barclays


Please read the disclaimer here:http://greedydragoninvestment.blogspot.com/p/about-greedy-dragon.html. Enjoy the article, bitches!

 


Whaddup guys, how have y’all been holding up? I wasn’t active the past 2 months because I recently got myself a PS4 and I have been playing video games non-stop. I couldn’t hold off buying a PS4 any longer because Dark Souls 3 came out, and my life would feel utterly empty if I knew that Dark Souls 3 was out there and I wasn’t playing it. Anyway, this article will take a look at Barclays, one of the newer additions to the Greedy Dragon portfolio. I bought the ADR instead of the shares listed on the London Stock Exchange because I don’t know how to read a stock’s price in pence or whatever. I guess I’m just stupid like that. Like other UK stocks, Barclays has been hit hard recently by Brexit fears. Them skittish mofos selling out of their UK stocks are acting like the UK is going to suddenly become some fucking third world country once it leaves the EU. I will talk a little bit about this Brexit later in the article. Some other factors which I presume contributed to the stock’s weakness are the dividend cut and losses associated with the group’s non-core division which is tasked with exiting non-strategic businesses.  

Update on the Greedy Dragon portfolio: Other than buying 200 shares in Barclays, I recently sold 300 shares in Northern Oil & Gas, sold 100 shares in Natural Resource Partners, bought 500 shares in Kerry Properties, and bought back 300 shares in Northern Oil & Gas

Barclays is a bank with global operations. As at December 31, 2015, the group’s on-balance sheet credit risk concentrations by geography were as follows: UK 40%, Americas 28%, Europe 23%, Africa & Middle East 5%, Asia 4.5%. Barclays’ adjusted profit attributable to shareholders was £2.69 billion in 2015. According to google finance, the group had a market cap of £28 billion as at market close on June 17. This would give the stock a Price/Earnings ratio of around 10.4. This is attractive especially if you consider that profits are weighed down by a loss before tax of £1.46 billion from the group’s non-core division. The losses from the non-core division should go down over time as the group continues to wind down its non-core businesses and assets. Barclays’ core division generated £4.21 billion in profits attributable to shareholders and achieved a decent return on average tangible equity of 10.9%.

Excluding other equity instruments, other reserves and non-controlling interests, the group had equity of £52.6 billion as at December 31, 2015. With Barclays’ current market cap of £28 billion, it’s like buying a dollar for like 53 cents right? Well, not exactly. There is always the risk that the group’s assets could drop in value and wipe out the equity. The assets don’t even need to drop by £50 billion for shareholders to get wiped out. If Barclays’ capital ratios drop below a certain level, the group could be considered insolvent and shareholders could lose most if not all of their investment. That’s why it’s important to pay attention to shit like asset quality and capital ratios.

As at December 31, 2015, problem loans made up 1.8% of total loans (the annual report calls these loans credit risk loans, but I’m going to refrain from calling it that in this article so people don’t confuse it with credit risk exposure). The group’s problem loans coverage ratio was 63.0%. If you include potential problem loans in the equation, the coverage ratio goes down to 49.9%. Debt securities made up roughly 13% of the group’s exposure to credit risk as at December 31, 2015. Approximately 70% of the group’s debt securities consist of government securities. Barclays has very little net on-balance sheet exposure to Cyprus and Greece. The group’s fully loaded common equity tier 1(CET1) ratio stood at 11.4% as at December 31, 2015. Barclays need to have a CET1 ratio of 9% plus a Pillar 2A add-on by 2019. For 2016, Barclay’s pillar 2A requirement is 3.9%, 56% of which will need to be met in CET1 form. Assuming the requirements stay the way they are, Barclays would need a CET1 ratio of around 11.2% (which it already has) by 2019. Overall, I think Barclays has done alright managing the risks of its loans and securities portfolios. I also think that the group has an adequate capital cushion to absorb losses.

So, what do I think about this Brexit? I think that the UK would be way better off over the long-term if it left the socialist hell hole which is the EU. Sure, the stock market might go down in the short-term. The economy might even take a hit if the EU imposed tariffs on UK goods, and some companies reallocated some of their UK operations. But over the long-term, I think the UK will have a significantly stronger economy without the EU anchor dragging them down. Shieeet, the UK could experience an economic renaissance if it actually started deregulating its industries, lowering taxes and cutting government spending on shit that has nothing to do with protecting individual rights. But who the fuck am I kidding? That’s just a pipe dream right now.

I didn’t know Brexit was going to be as big as it is for the equity markets. Hey, I mostly watch Bloomberg because I find Alix Steel hot. That gal is cute, smart, and I like how excited she gets when talking about oil. So, forgive me for not noticing something like Brexit. Aight guys, thanks for sticking with me till the end of this article. Take care and stay rational.