Wednesday, January 28, 2015

Analysis of Hong Leong Industries Berhad



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


Hey guys, the “Greedy fucking Dragon” is back and ready to tear shit up! I won’t be surprised if some of you thought that I’ve jumped off a high building or something as everything I’ve touched recently seems to have turned to fucking disasters (at least that’s how most people would see it anyway). But I’m not worried about the investments I made unless there’s a permanent impairment to their businesses. In fact, I had a feeling that the natural resource stocks I invested in would drop some more. But I still took some positions anyway as I didn’t want to miss out in case natural resources suddenly turned around. I’m in no way defeated by these paper losses. In the words of Vic Mackey, “I don’t step aside, I step up.” However, I’m not adding to my natural resource positions right now because I’m looking for a further correction and/or other resource stocks with decent balance sheets and cost structures. Unlike a Coca-Cola, the riskiness of a resource stock can change quickly as the company can take on a lot of debt or burn through a lot of cash to develop its reserves. That’s why I think it’s important to own a few companies instead of just doubling down on a single company in the resource space. The Greedy Dragon portfolio also doesn’t have much cash left (only about 10%-15% of the portfolio is in cash), so I need to bring up the cash balance of the portfolio before making any significant new investments. Now that we’re done catching up, let me get down to business and analyze Hong Leong Industries which I took a small position in earlier today at RM 4.4 a share.        


The company’s activities consist of the manufacturing and sale of ceramic tiles, manufacturing and sale of fibre cement and concrete roofing products, and the assembly and distribution of motorcycles, scooters and related parts. For the quarter ended December 31, 2014, the company achieved annualized returns on equity and assets of 18.03% and 12.77% respectively which is actually quite good. The company has a pretty strong balance sheet with RM 323 million in cash and cash equivalents and only RM 160.59 million in borrowings.


Adjusted net profit note: The return on equity and return on assets figures in this article are arrived at by using an annualized adjusted net profit (which I calculated on my own) as input. I calculated the adjusted net profit by excluding other operating income and income from discontinued operations. I also used the Malaysian Statutory tax rate to calculate the company’s tax expense instead of using the tax expense reported in the quarterly report.


Other than the solid balance sheet and returns on capital, what attracted me to Hong Leong Industries was its low valuation and healthy dividend yield. Based on the company’s common shares outstanding of 308.356 million as at December 31, 2014, and its annualized adjusted net profit attributable to common shareholders of RM 168.92 million (which I calculated by myself), the company would have earnings per share of RM 0.547. Taking today’s closing price of RM 4.4 a share, the stock would have a P/E ratio of 8.04. It’s possible that the results for the quarter ended December 31, 2014 is better than average and annualizing it would therefore result in the P/E ratio I calculated being lower than what it actually is. There’s also a chance that my calculation of adjusted net profit attributable to common shareholders is overly optimistic. But I’m not really worried as I think there’s enough of a margin of error. In 2014, Hong Leong Industries paid out RM 0.27 a share in dividends. At the stock’s closing price of RM 4.4 per share, it would have a dividend yield of 6.13%.


Adjusted net profit attributable to common shares note: I calculated adjusted net profit attributable to common shareholders the same way I calculated adjusted net profit except I deducted 25.6% for profit attributable to non-controlling interests. I arrived at 25.6% by dividing the reported profit attributable to non-controlling interests by the reported profit for the period in the income statement for the quarter ended December 31, 2014.


One risk I see with owning shares in this company is a slowdown in the property market affecting some of the company’s businesses. I have no idea when a slowdown in construction will happen or what its impact would be on the company’s profitability. But unless a drastic crisis occurs, I think the company has the financial strength to survive. Thank you for reading. Take care and stay rational.

Wednesday, December 24, 2014

Mistakes of 2014 and year-end portfolio tinkering



Hey guys, there has been a few changes to my portfolio recently. I increased my position in Biostime International and Alpha Natural Resources (a coal company). I took a new position in SandRidge Energy (an oil & gas company). I also sold my shares in Boardroom Limited and EBay to raise cash. Both Alpha Natural Resources and SandRidge Energy are in cyclical industries and could still drop significantly as we may not have hit a bottom in the cycle yet. But I don’t need to use the money I set aside for my investments for many decades to come, so I’m not really worried about price volatility (I’m only afraid if a permanent impairment to the business happens). You haven’t seen articles about my newer positions as I can’t seem to find the mood to write lately, and a lot of you don’t give a shit about my non-Malaysian investments anyway. I hope to finish articles on my newer positions in the not too distant future, but I think I might want to write about a few Malaysian companies before that to get back some interest in my blog. That’s assuming I can find some more Malaysian stocks that I would like to invest in. If any of you know of potentially lucrative Malaysian investments, please do give me a heads up.      

I certainly made a few mistakes since I started writing about the “Greedy Dragon Portfolio.” I made a number of investments in average companies at just reasonable prices. While this isn’t really a mistake, it’s not how I’m going to really make the big money. You can make a lot of money investing in either great companies at average prices or average companies at significant discounts. When you invest in average companies at average prices, odds are you will be earning average returns. Average returns aren’t really bad at all (it’s sure as fuck better than what a lot of “investors” out there earn). But average isn’t going to cut it for me as I’m aiming for fucking greatness when all is said and done.

Another mistake I made was not having enough patience. I always felt that I needed to put more money to work right now or miss out on opportunities. This led me to pouncing on a few stocks that just barely met my criteria in terms of business quality and/or valuation. Of course the market eventually served up better opportunities and I was forced to sell some of my existing holdings to get the cash to make other more attractive investments. This has led me to incurring unnecessary transaction costs and even taking small losses once or twice. If you think that my first and second mistake sounds related, it’s because they are indeed related. But I’m too lazy to go back and edit stuff. The moral of the story is to have high standards when it comes to investing and to never compromise on them. Eventually Mr. Market will go full retard and you’ll get your chance to put your money to work.

Thank you for following my blog and listening to what I have to say. Have a merry Christmas and a happy New Year! Hopefully the New Year brings us more opportunities to profit. Take care and stay rational.                     
 

Sunday, November 30, 2014

Hallmarks of a great business



Hey guys, how are y’all doing? I’ve recently been chillaxing, researching companies and pondering really important stuff like which fictional character I would want to be my girl. Right now I’m stuck between Elsa from Once Upon a Time and Caroline Channing from 2 Broke Girls. Anyway, I think that it’s good to take a step back every once in a while and get back to basics. That’s why I decided to come up with a list of things that make a business great. A business might not need all of these things to be great, but it definitely needs at least one or more of them.

Update on the Greedy Dragon portfolio: I recently bought shares in Alpha Natural Resources (a coal miner). But knowing my fucking luck, the stock went ahead and dropped another 7% from the price I bought it the very next day. I obviously think that the company is able to survive this period of depressed coal prices. But I could be wrong. The stock may still drop significantly in price or maybe even go bankrupt. Do your own research before investing in anything.

Asset-light: A great business doesn’t require a lot of capital to be tied up in stuff like inventory, accounts receivable and property, plant & equipment. The asset-light business is able to expand rapidly as each dollar reinvested in it goes much further than it would for a capital intensive business. Asset-light businesses also do not have to incur large capital expenditures to maintain their operations, which results in them generating more free cash flow that they can return to shareholders or use for expansion. Finding an undervalued, asset-light company with lots of free cash flow makes me about as happy as when I discovered the KFC Double Down.           

Pricing power: A great business is able to increase the price of its products at a rate that’s higher than the inflation rate over the long-term (with little to no loss in sales volume). One example of a business with pricing power is See’s Candies (which was bought a long time ago by el jefe of value investing, Warren Buffett). The ability to consistently increase prices at a higher rate than inflation allowed See’s Candies to grow profits at a very satisfactory pace (despite its low volume growth) and turn into an awesome cash cow.

Revenue growth from simply increasing the price of its products comes at a lower cost to the business as compared to growth from increased sales volume. This is the case as the business doesn’t have to invest in inventory or capacity expansion to enjoy the extra revenue from price increases. Pricing power is especially important for a mature business to grow its profits at a healthy rate as the contribution to growth from sales volume increases would be lesser.

Sustainable competitive advantage: A business is considered great for the obvious reason that it is a shit ton more profitable than most of its competitors. To achieve superior profitability, a business needs to have a durable competitive advantage. A few examples of a competitive advantage are a strong brand, patents, licenses, unique assets (example: a very popular shopping mall in the middle of the country’s main shopping street), specialized capabilities and a low cost structure (this can come from stuff like economies of scale, efficient systems and/or industry-related advantages such as a large low-cost deposit base for a bank).

Scalable: A great business is able to quickly expand its operations with a lower corresponding increase in costs and capital employed. A popular restaurant franchisor is able to grow rapidly as its franchisees are responsible for putting up the capital and incurring the costs to open and operate new restaurants. Another example of a scalable business is a software developer where it takes a lot of time and money to develop the software, but the marginal cost of selling the software to customers is very low.

A lot of great companies have already grown into large blue chips. And I’m pretty sure that those mature great companies should still deliver decent long-term returns if bought at reasonable prices. But if you want to make “fuck everybody” money, you need to find a great company (or a potential great company) that still has a lot of room to grow.




Oil stocks sure took a beating on Friday. That certainly motivated me to finally start learning more about the oil industry and researching oil companies. As always, thank you for reading. Take care and stay rational.  

Saturday, November 15, 2014

Analysis of Mongolia Growth Group



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




Greeting and salutations value investors. In this article, I’ll try to explain my rationale for investing in Mongolia Growth Group (MGG). MGG is a property investment and development company in Ulaanbaatar, Mongolia. The stock trades in Canada (stock code: YAK) and in the U.S. (stock code: MNGGF). I’m investing in this stock with the knowledge that I may have to hold it for a long period of time before being able to reap the rewards (if any). Mongolia is also a very young emerging economy, so there might be additional risks associated with investing in stocks with exposure to the country. The stock price can be very volatile, but I’ve eaten a lot of spicy curries in my life so I’m pretty sure that my stomach can handle a little volatility (I don’t consider volatility to be a risk, but a lot of people do. Whatevs..). The stock has declined significantly since I bought it. When I invested in the stock it was trading at Canadian Dollar (CAD) 1.60 per share. It closed Friday at CAD 1.25 per share.


I want to get exposure to Mongolia because there’s potential for Mongolians to get a lot richer as the country has large natural resource reserves. In fact, there are already enough rich Mongolians to attract luxury brands such as Louis Vuitton and Burberry to set up shop in Mongolia. Don’t get me wrong, there are still a lot of poor people in Mongolia. The potential for growth resides in the poor people getting more job opportunities to lift themselves out of poverty; this can only be achieved in a significant way if the government moves towards being a free economy that respects property rights. Central Ulaanbaatar’s retail space is also concentrated in a small area. According to MGG Properties’ Q1 2014 Central Ulaanbaatar Retail Space report, “In central Ulaanbaatar, retail space is concentrated: there are only 5 km of active retail streets.” According to the report, the most valuable street is Fountain Street with market price per square meter of between USD 4,200-4,600. You can read more about the market prices and rental rates of the various retail streets in Central Ulaanbaatar in the report.


For the 6 months ended June 30, 2014, MGG had a net profit of CAD 5.24 million or CAD 0.15 per diluted share. Excluding unrealized gain on fair value adjustment on investment properties and gain on disposal of investment properties, the company experienced a loss before tax of CAD 2.29 million or CAD 0.06404 per diluted share for the 6 months ended June 30, 2014. In terms of the company’s ability to continue as a going concern, the loss isn’t as bad as it seems as there was $0.95 million in share based payment which is a non-cash expense. Management is also trying to reduce costs. According to this press release, “the Company has identified annual expenses of approximately CDN $500,000 that will be reduced or deferred until the Company shows positive cash flow.” Apart from cutting costs, the company can try to reduce its losses by generating more revenue (#basic stuff you can learn from running a lemonade stand #trolling). About 35% of MGG’s investment properties portfolio consists of land and redevelopment assets that should start contributing to rental revenue once redevelopment is complete. Also, according to the Management Discussion & Analysis for the quarter ended June 30, 2014, recent lease renewals have seen sizable increases in lease rates. So, rental revenue could increase if the company is able to renew expiring leases at significantly higher rates. “In terms of our core commercial portfolio rents on a same ‐ property basis on properties owned 12 months or longer, we reported revenue growth of 36.8%, 28.8% and 32.3% in April, May and June compared to 2013’s results in Mongolian Tögrög” (source: Management Discussion & Analysis for the quarter ended June 30, 2014). But because Mongolia has experienced high inflation and a plunge in FDI recently, the Mongolian Tögrög has weakened significantly against the Canadian Dollar. Therefore, the increases in rental in CAD terms are nowhere near as significant as the increases in rental in the local currency. 


Note: I’m well aware that in terms of profitability, share based payment is just as much an expense as any cash expense as it ultimately results in less money for existing shareholders. But as I said, I made this investment for the super long-term and I accept that the company may lose money for some time. 


MGG targets shorter lease durations to reduce its exposure to inflation. As at June 30, 2014, the weighted average remaining lease term was 19.0 months. The company’s commercial property portfolio has healthy occupancy rates of between 93.7-95.2%. At CAD 1.60 per share, the company would be valued at 1.17 times book value based on the balance sheet data as at June 30, 2014 (after taking into account the dilutive effect of stock options). I think that is an alright price to pay for a company that has a lot of potential to grow in the long-term. At the current price of CAD 1.25 per share, MGG would be valued at 0.91 times book value. 79.01% of the company’s CAD 54.96 million in total assets consists of investment properties and 7.86% consists of cash and cash equivalents. The company only had CAD 6.30 million in liabilities.


I like MGG’s goal of eventually establishing property funds that it co-invests in. This will increase the amount of capital the company has access to and hopefully allow it to leverage that additional capital from other investors to earn higher returns for shareholders. The risk that I worry the most about is that the government might expropriate the company’s assets. Political risk is a very real risk in Mongolia. You can read this article here about some of the things that have negatively affected foreign investor confidence in Mongolia. While I think that real estate has less political risk involved than a sector like mining, I accept that there’s a possibility that MGG might get its assets expropriated without adequate compensation. Thank you for reading. Take care and stay rational.

Thursday, November 6, 2014

Risk management series: Country Risk



Hey, how are you doing? I’m quite happy that the Republicans took control of the senate as they generally fuck up less when it comes to the economy as compared to the democrats. In this article I will talk about things I look at when investing in foreign countries. To be honest, there are not many things I look at when evaluating country risk. However, I still think country risk is very important and that an investor can lose a lot of money if he doesn’t pay attention to this risk (speaking from personal experience here).

Update on the Greedy Dragon portfolio: I recently bought shares in Mongolia Growth Group (stock code: YAK). The company owns real estate in Mongolia.

Government debt-to-GDP ratio and budget deficits: I try to avoid developing countries with high government debt-to-GDP ratios and/or large budget deficits. A high debt country might default on its debt which will probably result in it entering an economic crisis. I’m more tolerant of developed countries with a high debt-to-GDP ratio as those countries have an easier time rolling over their debts and investors are less likely to pull out their investments from developed countries. However, investors should still try to avoid investing in developed countries with too much debt and wide budget deficits as those countries might still experience a debt crisis; the European sovereign debt crisis is evidence of that. Since a lot of developed countries have high government debt-to-GDP ratios, investors need to use their judgment to decide whether a specific developed country is able to service its debts or if it will turn out to be a deadbeat.

Other than government debt, investors might also want to look at a country’s consumer debt and corporate debt.     

Inflation: Investors should be cautious of countries with high inflation. Companies operating in countries with high inflation face rising input costs which they might not be able to pass on to the customers. A company’s profits will be affected if it can’t pass on its higher input costs to customers. It’s also not enough for businesses operating in a high inflation environment to just maintain its profits; those businesses need to grow their profits in-line with the rate of inflation or risk impairment to their value in real terms.

Note: Whether a company is operating in a country with high inflation or a country with low inflation, I generally look for companies which I think can grow profits faster than inflation over the long-term.

Political risk: Expropriation of assets and a lack of property rights, disastrous government policies, capital controls and wars are some of the political risks investors need to watch out for. I don’t have a system to analyze political risk. I basically just Google stuff and visit the Heritage Foundation website when I’m trying to get a better picture of a country’s political risk or economic freedom.

While country risk is important to consider, I do invest in stocks from countries with problems if I think the expected returns will compensate me for the risks I’m taking. However, there comes a point where you just say fuck it and walk away because a country is so messed up, regardless of how cheap assets in that country appear to be. Thank you for reading. Take care and stay rational.