Sunday, December 29, 2013

Valuing Public Bank, Malaysia’s best bank

Please read the disclaimer here: Enjoy the article, bitches!

Many investors regard Public Bank as the best performing bank in Malaysia, a blue chip that everyone should have in their portfolio. Public Bank is listed on the Bursa Malaysia with the stock code 1295. The company is currently trading at Ringgit Malaysia (RM) 19.00 per share (approximately USD 5.78).  Looking at Public Bank’s track record, I can’t help but agree that the company is as awesome as having a Häagen-Dazs date with a hot girl on a hot day. In the 5-year period of 2008-2012, Public Bank achieved net return on equity of between 24.5%-30.4%. The company defines net return on equity as “equity attributable to equity holders of the Bank, adjusted for dividend declared subsequent to year end.”


However, a good company doesn’t automatically translate into a good investment, the price you pay for the stock must also be reasonable.  Instead of using the price-to-book ratio many analysts use to gauge the value of banks, I’m going to calculate Public Bank’s true earnings power and discount it to the present. If you’re interested, I will be talking shit about why the price-to-book ratio isn’t the best ratio to tell if a bank is undervalued in my bullshit financial theories series sometime soon. Alright bitches, let’s start valuing this bank!

The following income statement data is taken from Public Bank’s third quarter 2013 report.

For the nine months ended September 30, 2013


Operating revenue                                          11,345,627
Interest income                                                 8,458,428
Interest expense                                              (4,301,452)
Net interest income                                           4,156,976
Net income from Islamic banking business        633,204
Net fee and commission income                         941,002
Net gains and losses on financial
instruments                                                        133,613
Other operating income                                     233,048
Net income                                                        6,097,843
Other operating expenses                                (1,873,242)
Operating profit                                                 4,224,601
Allowance for impairment on loans,
advances and financing                                      (260,969)
(Impairment) / writeback of impairment
on other assets                                                      (1,064)
Share of profit / (loss) after tax of equity
accounted associated companies                          6,130
Profit before tax expense and zakat                  3,968,698
Tax expense and zakat                                       (898,127)
Profit for the period                                           3,070,571

To get to Public Bank’s true earnings, I will adjust allowance for impairment on loans up from RM 260.969 million to RM 545.325 million. The adjusted allowance for impairment on loans is based on Public Bank’s average loan charge-off rate of 0.34% for the 5-year period of 2008-2012. It’s important to use the average charge-off rate over a period that includes some stress instead of a current charge-off rate that’s low. This is to prevent over optimistic estimates of a bank’s earning during the good times when loan charge-off rates are low and girls at least pretend to be interested in what I say. There are also various items that I would like to subtract from profit for the period as I’m not sure of their sustainability. But those items add up to a negligible amount, so I don’t think it’s necessary to adjust for them.

After taking into account the higher adjusted allowance for impairment on loans, my estimate of Public Bank’s true earnings would be RM 2.763 billion or RM 3.684 billion after being annualized. This would result in the company having annualized true earnings per share of RM 1.052.

My required rate of return for Public Bank is 10%. I will assume that Public Bank will grow earnings by 6% over the next 7 years and by 3% after that. I think my assumptions for growth is reasonable as the company managed to grow deposits from customers by a compounded annual rate of 10.15% for the 5-year period of 2008-2012. Growth in deposits from customers remained healthy at 12.32% year-on-year for the quarter ended September 30, 2013. As established earlier, Public Bank’s annualized true earnings per share is RM1.052. Plug these variables into the formula and you will get an intrinsic value of RM 18.3 per share for Public Bank. To be prudent, I will require a margin of safety of 20%. That would mean I can only invest in Public Bank’s stock if it was RM 14.64 or below. Here’s the formula:

RM1.052*1.06*(1- (1.06)7/(1.10)7) = RM 6.36
                    0.1- 0.06

RM1.052*(1.06)7*1.03 =  RM 23.27

RM 6.36 + RM 23.27 = RM 18.3

It’s possible that someone with a deep understanding of the Malaysian banking sector could come up with a higher true earnings figure or higher growth rate for Public Bank than I did. But I don’t think I was overly conservative. I personally won’t invest in Public Bank as I think it’s a bit overvalued and I’m able to find better opportunities out there. However, I can’t really fault people who invest in Public Bank at intrinsic value or even a little bit over intrinsic value as it’s a really good company.

If y’all are interested, I wrote a little about Public Bank’s business performance in a guest post here. Please let me know if you want me to do a write up of Public Bank’s risk management. Thank you for reading. I hope you had an awesome and prosperous 2013! Take care and stay rational!

Wednesday, December 25, 2013

Bullshit financial theories part 2: Volatility is risk

For anyone who has taken an investments & portfolio management course in university, you would remember being taught that risk is fluctuations in stock prices. Well, I’m here to tell you that standard deviation, Sharpe ratio, beta and other measures that treat stock price volatility as risk is fucking bullshit. Don’t get me wrong, I think that my banking & finance degree was worth the money. I found subjects like treasury management, lending decisions and money & capital markets extremely useful.

I agree that stock prices are volatile. Stock prices fluctuate all the time as there are a lot of jackasses that invest based on chart patterns, Fed announcements or other such nonsense. You have people (who think they’re geniuses) who believe idiotic stuff like “now is not a good time to buy stocks because the index is facing resistance at 3,000 so it should drop back to 2,980.” Yes, there also are times when sharp price swings are rational (like finding out that a company’s recent initiative is a success or finding out that a company has been cooking its books).

My point is that there will always be volatility. But if you invest in a good quality company at a reasonable price for the long-term, then you shouldn’t give a damn about what the stock price does in the short-term (except if it gives you an opportunity to buy more at a lower price). I generally invest in a company only if I’ll still be comfortable if the stock market suddenly shuts down and I have no choice but to hold the stock for many years. That’s because I’m buying an interest in a fucking business, as long as the company is financially stable, its business fundamentals are alright and it keeps paying me dividends, then there’s nothing for me to worry about. The reason Charles Koch or Robert Kuok establish a business is to get income from it for the long-term, not to sell it for a profit in a few months. The same principle applies to stocks. Sure, if Mr Market comes along and offers me a good price for my stocks, then I might take it. But that’s a bonus and I don’t think too much about it.

Some people might say stuff like “what if the stock price drops and my ass get a margin call’ or “I can’t afford to pay my mortgage next month because Coca-Cola dropped 5%.” Well, maybe you won’t get into debt troubles if you only used a conservative amount of leverage and used a bank deposit as collateral instead of shares.  Maybe you shouldn’t be using debt at all if you don’t know how to manage your cash flow, there’s absolutely no shame in that. And for those short-term investors out there, you’re just gambling and deserve to lose money.

What if you lose money even if you hold a stock for the long-term? Well, sometimes you do lose money because you made mistakes in your analysis or competitive forces change unfavourably for the company you invested in. That’s the risk you take with investing. That’s why you need to diversify your portfolio so that mistakes don’t cost you so much. If you adequately diversified your portfolio and still experienced losses over the long-term, then it could be a sign that you’re not cut out to be an investor and should just invest in mutual funds. There’s no shame in that.

There are many real risks that you need to worry about. Liquidity risk, concentration risk, financial risk, credit risk and country risk are some of the real risks you need to take into account. But if you structure your portfolio right, stock price volatility is not something you need to worry about. Thank you for reading. Stay rational and take care!

Saturday, December 21, 2013

Analysis of Singapore-based Overseas Education Limited

Please read the disclaimer here: Enjoy the article, bitches!

Today, I’m going to do an analysis of Singapore-based Overseas Education Limited which I think is as awesome as a Bosnian model (which is very awesome).  The company operates a leading private foreign system school in Singapore. The company trades on the Singapore stock exchange with the stock code RQ1. Overseas Education earns tremendous returns on capital, has a strong balance sheet and is reasonably valued. The company’s stock price is currently at Singapore Dollar (S$) 0.81. I personally intend to pick up some shares in Overseas Education in the near future.

Based on trailing twelve months net profit of S$23.207 million, Overseas Education achieved return on assets and return on equity of 13.29% and 16.44% respectively. These are spectacular returns on capital considering that the company has large cash holdings. As at September 30, 2013, the company had S$113.908 million in cash and fixed deposits but it only had S$33.451 million in total liabilities. I understand that the company has recently awarded a contract with a contract sum of S$233.508 million for the building of the new school campus. However, with the company’s solid balance sheet and steady profits, I don’t think that the company will end up with significant financial risk.

The hallmark of a good business is its ability to raise prices, just ask my main man Warren Buffett. Overseas Education managed to increase tuition fees by 8% to 15% across the school for the academic year that commenced in August 2012. The company increased tuition fees by approximately 8.5% on average across the school for the academic year commencing August 2013. Overseas Education is almost at full capacity at its current campus. I think that one of the main reasons for the company’s strong performance is its ability to help its students achieve good results. According to Overseas Education’s 2012 annual report: “Over the past three academic years, the percentage of our High School students who obtained 35+ points (which would generally require the students to have obtained a majority of at least six ‘A-’ grades and above), was consistently above the world-wide percentages of DP students.” 36.7% of the company’s Diploma Programme candidates achieved 35+ points in academic year 2010/2011, compared to 22.6% of candidates worldwide.

I think that Overseas Education’s future prospects are pretty good. I assume that the company would no longer have to pay school lease rental when it moves to the new campus. School lease rental was S$6.827 million in 2012. The new campus will also have increased student capacity which could result in the company generating higher revenue and profits if it can get more students to enrol at its school. The main risk I see for the company is that it might issue new shares at a significant discount to market value to partly fund the new campus; such an action will of course cause dilution to existing shareholders. Another risk I see for Overseas Education is that the development of the new campus might not be completed on time. From my understanding, the company would have to pay a project completion period extension premium if it can’t complete development of the new campus within a certain period (you can read more about it here, it’s only 2 pages). The company would also have to find somewhere to rent temporarily which would result in rental expenses being incurred.  I’m not saying that any of the risks discussed will materialize. The potential risk events are just something that could happen, but investors should still think about them before investing in the stock.

Based on Overseas Education’s 415.364 million shares outstanding, the company’s trailing twelve months earnings per share would be around S$ 0.055. This would result in the company currently having a price-to-earnings ratio of 14.72 which I think is reasonable considering that the company generates high returns on capital and has low financial risk.

As usual, thank you for reading my article. I wish you a very merry Christmas. I hope I get a Bosnian model in Victoria Secret’s lingerie for Christmas, but I think that would be illegal (at least in Malaysia). Anyway, take care and stay rational! 

Tuesday, December 17, 2013

Gold and other insurance from getting fucked

Disclaimer: I’m not advising anyone to follow my opinions in this article. It’s your money. Do whatever you think is best for you. I also do not guarantee the accuracy of any of the information presented in this article.

I don’t exactly know when it will happen, but it’s likely the world will enter a deep recession somewhere down the road that will make the 2008-09 great financial crisis look like a coffee date at Starbucks. It could happen 5-years from now or maybe 20-years from now. I don’t fucking know when it’s coming, but it will come if the largest economies in the world continue fucking around with the money supply and pursuing idiotic socialist policies. Just to highlight how dire the situation is, I will briefly discuss the economic position of the U.S. and Japan. China and Europe are also in terrible economic shape, but I will skip talking about them as the main point of this article is to discuss how to protect your portfolio.

United States

According to this article in the Wall Street Journal: “The actual liabilities of the federal government—including Social Security, Medicare, and federal employees' future retirement benefits—already exceed $86.8 trillion, or 550% of GDP.” It’s impossible to tax or print (without experiencing hyperinflation) your way out of shit like this.


According to Trading Economics, Japan has a government debt-to-GDP ratio of 211.7% in 2012. With such a high debt load, Japan could go bankrupt if interest rates increased by a few percentage points. According to this article on Forbes, the interest expense on government debt would take up 80% of government revenue if interest rates rose to 2%.


I’ve never invested in gold or silver in my life. But seeing how depressing things are, I think it may be prudent to allocate a small percentage of your portfolio to precious metals or investments related to precious metals (I personally plan to invest 5% of my portfolio in precious metals companies). That’s why I’m planning to invest in companies that acquire and manage gold royalties and/or silver streaming companies. These types of companies have high margins and unlike mining companies, they don’t have to keep incurring capital expenditures to maintain production. You can invest in silver and gold commodities as well. If you think that there’s a risk that your government might start confiscating assets, then you might consider investing in physical gold/silver instead of gold/silver futures, gold/silver investment accounts or other gold/silver related investments. Just make sure you have a safe place to store your precious metals. I personally do not plan to invest in physical gold as I think that the Malaysian government is stable and the risk of them confiscating assets is low in the foreseeable future. Investors shouldn’t look at their precious metals related investments as a way to make money, but rather as an insurance policy in case shit hits the fan.

I’m also keeping a significant percentage of my portfolio in cash so I can take advantage of any opportunities that may arise if an economic powerhouse enters a deep recession. If you think that your local currency is at risk of significant deterioration, then you might consider having some of your cash holdings in more stable currencies such as the Singapore Dollar and the Swiss Franc. I’m not recommending that you keep a significant percentage of your portfolio in cash, but that’s what I’m personally doing. I’m also dedicating a significant part of my portfolio to high quality dividend stocks so that I can keep building my cash hoard. I might even go into real estate if Malaysian property prices ever experiences a pull back.

I’m sure some of you are thinking: “Hey jackass, if you think the world is so fucked up, why are you still investing in stocks?” While I don’t know when the music will stop, I don’t think it’s going to happen anytime soon, at least not in the United States. Don’t get me wrong, the U.S. may enter a recession (I don’t know), but I don’t think it will experience a depression anytime soon. It’s China and Japan that people should worry about (I have minimal to no exposure to these 2 countries), I think those economies will collapse before the U.S. does. I’m also investing in high quality companies, and there should still be demand for their products and services when the dust settles. Stocks are also a much better hedge against inflation than cash as good companies can eventually raise prices, and I’m almost certain that inflation will accelerate as central banks will try to print their way out of this mess. Also, it could be a long time before the U.S. collapses. And while countries like Malaysia and Singapore might enter a recession if China or Japan has a crisis, over the long-term countries like Malaysia and Singapore should do ok. So, I can’t just stop investing and miss out on making money. As the old saying goes, make hay while the sun shines (even if the sun is getting a little dimmer everyday).

Whether or not the economic powerhouses of the world will experience an economic crisis is not certain. I sure as hell hope everything remains fine. If the world economy does collapse, my portfolio will still get screwed. But I hope that the precautions I take will allow my portfolio to at least afford to go out for dinner and wine before being involuntarily ravaged in bed by a global economic crisis. Thank you for reading. Take care and stay rational!    

Friday, December 13, 2013

Analysis of Prestariang Berhad

Please read the disclaimer here: Enjoy the article, bitches!

Before I begin analysing Prestariang, I would like to give a shout out to Bsngpg (a reader of this blog) for bringing this stock to my attention. Bsngpg, you’re the man! Prestariang is involved in ICT training & certification, education, and software license distribution & management. The company trades on the Bursa Malaysia with the stock code 5204. The stock closed yesterday at RM 2.81 per share (approximately USD 0.87). The company earns mind blowing returns on capital, has high margins and has a solid balance sheet. The only problem is that the stock is a bit too expensive for my liking. Come on stock market, crash already!! All I want is to buy quality companies for less than 5 times earnings and for girls to actually reply my messages on Facebook, is that too much to ask?

Based on my own calculations of adjusted net profit, Prestariang achieved insanely awesome trailing twelve months (ttm) return on average assets and return on average equity of 33.59% and 40.53% respectively. According to my calculations, Prestariang earned ttm adjusted net profit of Ringgit Malaysia (RM) 34.699 million. To arrive at adjusted net income, I added back losses from the education division as it has only started operations this year and it would take some time to become profitable. I also calculated income taxes for the company. The company’s ttm income tax expense was almost non-existent as its main subsidiary is currently exempted from income tax on its statutory income from pioneer activities till the middle of 2015. However, I’m a long-term investor and I have to take into account taxes when assessing the company’s profitability as the company’s tax incentives will eventually expire.

For the 9 months ended September 30, 2013, revenue grew by only 3.61% year-on-year to reach RM88.97 million. While revenue growth was slow, profit before tax (PBT) grew by an impressive 17.78% (PBT is up 36.22% if you exclude the education division) year-on-year to reach RM 31.42 million. If you exclude losses from the education division, Prestariang had a PBT margin of 40.80% for the 9 months ended September 30, 2013.

The reason PBT experienced such strong growth despite revenue being flat is because of higher revenue from the ICT training and certification division which has higher margins. I personally think that it’s more important to look at growth in the ICT training and certification revenue than growth in total revenue. For the 9 months ended September 30, 2013, the company grew revenue from the ICT training and certification division by 65%.

Prestariang has a very strong balance sheet. As at September 30, 2013, the company had RM 52.18 million in cash and short-term investments and only RM 12.34 million in total liabilities. Even if the company set aside RM 12.34 million in cash to cover all its liabilities, the company would still have excess cash of RM 39.84 million. I love excess cash on a company’s balance sheet just about as much as I love extra cheese on KFC’s cheesy wedges, which is a lot!

A significant amount of the company’s revenue is generated from government contracts. There is always the risk that the company’s government contracts won’t be renewed when they expire. According to this article on The Star, government accounts for 60% of Prestariang’s sales today. I truly have no idea as to how high or how low this risk is, but it’s something investors have to think about before investing in the company. I will give credit where credit is due. The company has done well in diversifying its customer base as almost all of the company’s sales were made to the government in 2009. I hope the company can further reduce the percentage of its revenue from government contracts.

The company has adjusted ttm net income (as I discussed earlier) of RM 0.157 per share. Based on yesterday’s closing price, the company would have a P/E ratio of 17.89. If you take into account the company’s excess cash, the P/E ratio goes down to 16.73 which is still a bit expensive. However, Prestariang is a really good quality stock and I guess it’s ok to pay a bit extra for it. I will probably take a small position in the stock next week, if the stock experiences a significant pullback I will buy more. Right now I have other more attractive opportunities that I want to pursue. I also want to maintain my cash holdings at above 25% of my portfolio as I have a feeling that Asian equity markets could get really fucked up in the next few years. Three potential developments could drive the company’s earnings to new heights: 1) the company’s education division could turn a profit in the near future 2) revenue from the ICT training and certification division could continue growing strongly 3) revenue from providing training for the oil & gas sector could increase significantly. I don’t count on these developments happening, but it would be awesome if they do happen.

Thank you for reading. I hope you found my analysis of Prestariang useful. To all the bitches out there, just because some guy messages you on Facebook asking stuff like “hi, how was your sem break?” or “have you studied for this exam, yet?” doesn’t mean he wants to fuck you (although in my case, I probably do). A simple reply with a smiley would be cool. Glad I’m done with university, met too many bitches in academia. I would like to clarify that I don’t think all girls are bitches, most of them are alright. In fact, one of my top heroes is a woman (Ayn Rand in case any of you were wondering). Well, I think I will stop writing now as I’m sure I exceeded the “bitch” limit I set for my articles. See you around, bitches!  

Tuesday, December 10, 2013

International investing: The risks and benefits

Disclaimer: I’m not advising anyone to follow my opinions in this article. It’s your money. Do whatever you think is best for you. I also do not guarantee the accuracy of any of the information presented in this article.

Whenever I meet a hot chick, I try to bring up the fact that I’m an international investor in the hopes of impressing her. It never really worked before, probably because it makes me sound like an arrogant douchebag. But the point of this article is not about my love life, but the additional risks and benefits of investing in foreign stocks.  Quite a lot of people feel that investing internationally is very risky. Yes, there are more sources of risks when it comes to owning foreign stocks, but foreign investments can also reduce other sources of risk. Overall, I don’t think investing overseas is any more risky than investing locally.  

The following are the additional risks of investing internationally:

Country risks: These are the risks inherent in the country the company operates in. There may be political instability and constant riots or a civil war might break out. Property rights might be weak in that country and the government might cancel the company’s license to operate or expropriate the company’s assets with little or no compensation. The country may have a lot of debt and/or run large budget deficits; this could lead to the country defaulting on its debt and going into a deep recession that could permanently impair the profitability of companies operating in the country. An asset bubble in the country could also lead to a deep recession. A history of high inflation is something to be cautious about as well.

Investors can significantly reduce country risks by investing in countries that are both financially and politically stable with a history of respecting property rights. You should also avoid countries that you think have a large asset bubble.

Foreign exchange risk: The currency in which a foreign company does business may weaken relative to your home country’s currency over the long-term and this could negatively impact your returns or even cause you to lose money on your investment in that foreign company. I will discuss what I think about this risk in the benefits segment of this article. Just know that it can’t be more risky than young Malaysians trading FOREX on their laptops while sipping coffee in some hipster café. Especially if you consider the fact that many of these “FOREX players” don’t know shit about finance.   

Not understanding tax laws: Some countries impose withholding taxes on dividends paid to foreign investors. Investors that do not take withholding taxes into account risk overpaying for overseas stocks. A U.S. stock with a P/E ratio of 10 or an earnings yield of 10% may seem reasonable, but a Malaysian investor’s effective earnings yield on the stock would only be 7% after taking into account withholding taxes of 30% on dividends. I’m taking a long-term view here and assume that all earnings will eventually be paid out as dividends.

Different accounting rules: There may be differences in how a foreign company accounts for items on its financial statements. Investors should go through the notes to the financial statements to ensure that the accounting is sound.  

Higher fees: Your broker might charge you higher fees to purchase and sell foreign equities. Make sure you take the higher fees into account when analysing the potential returns of a foreign company.

The following are the benefits of investing internationally:

Diversification: By having investments in multiple countries, you reduce the risk of adverse events in one country wiping out a very large amount of your capital. I live in Malaysia, and the country is both politically and financially stable. But even if there’s a 1% chance of the Malaysian economy crashing, I want to make sure that my portfolio doesn’t get absolutely destroyed if it actually happens.

Sure, I may be exposed to foreign exchange risk, but I think of my investments as generating profits in a basket of currencies. In my book, a basket of currencies is just as awesome as a basket of Japanese pastries. If one currency in my basket weakens against the Malaysian Ringgit, another currency in the basket might strengthen against the Ringgit. The countries I invest in are also politically and financially stable. So, the risk of all the other currencies in the basket weakening significantly against my home currency over the long-term isn’t really high.

By earning profits in multiple currencies, I’m also somewhat protected if Malaysia ever experiences a period of high inflation. Over time, a country with high inflation should see its currency weaken relative to currencies of countries with lower inflation. So, if Malaysia ever experiences a period of high inflation, the dividends I get from my foreign investments might buy me a larger amount of Ringgit. That means I might not need to cut down on fancy Italian dinners during periods of high inflation. International investing, BITCHES! That’s how I roll!

Take advantage of opportunities: As an international investor, you can take advantage of opportunities around the whole fucking world. If you just focus on your own country, you may be limited in the number of good companies you can invest in. Your local equities may also be overvalued and you can’t get a good long-term return investing in them. If you invest internationally, you increase the chances of putting together a portfolio of high quality companies at a reasonable price.

Over the long-term, Malaysian stocks have done well. Just 2 years ago or even early this year, you could find a lot of fantastic opportunities. But right now I’m really frustrated with Malaysian equities. The top quality stocks like Nestle and British American Tobacco are expensive. Malaysian business executives apparently have a fetish for palm oil estates and property development as a lot of Malaysian companies are involved in those sectors. I don’t like palm oil estates as it’s a commodity business and these type of businesses generally earn thin margins and below average returns on capital in the long-term.  For property development, who knows how long that party will last. Sometimes long-term investing doesn’t even pay off as the founders might decide to take the company private if the stock experiences a significant decline.

Well, thank you for staying till the end in this rather long article. I hope I addressed some of the doubts you might have about international investing. To the ladies reading this article, please drop me an email if you think international investing is hot. Take care and stay rational. 

Sunday, December 8, 2013

Invested in eBay Inc

Please read the disclaimer here: Enjoy the article, bitches!

I invested in eBay Inc quite some time back at USD 50.32 per share. The company has 3 business segments: payments (eBay owns PayPal), online marketplace and enterprise solutions. I invested in eBay as I think that the company has good profitability, attractive growth prospects and trading at a reasonable valuation. When I was younger, I always dreamed of being a PowerSeller on eBay. While that dream is shattered along with my dream of being a pokemon master, I can still make money off eBay by being a shareholder.

EBay achieved trailing twelve months (ttm) return on average equity and return on average assets of 12.63% and 7.15% respectively. While these returns on capital seem average, you need to take into account the fact that eBay has a large amount of goodwill and cash, cash equivalents and non-equity investments on its balance sheet. After setting aside $5.76 billion in cash, cash equivalents and non-equity investments to maintain the quick ratio at above 1.5, eBay would still have excess cash of $7.26 billion. The company’s ttm return on assets shoots up to a respectable 11.37% after deducting the $8.56 billion in goodwill and $7.26 billion in excess cash from total assets. I deducted goodwill from total assets as it just represents investments made in the past and is not employed in the day-to-day operations.  

EBay grew revenue and operating profits year-on-year (y/y) by 14% and 19.79% respectively in the third quarter of 2013. The company generated $3.89 billion and $799 million in net revenue and operating profits respectively. The following discusses the growth of eBay’s business segments:

Payments: Revenue and operating profits from this segment increased by 19% and 19.09% y/y to $1.62 billion and $368 million respectively in the third quarter of 2013. EBay’s payments business had 137.4 million global active accounts, an increase of 17% y/y. The payments business’ total payment volume reached $43.83 billion a 25% y/y increase.

Online marketplace: Revenue and operating profits grew by 12% and 11.91% y/y to $2.02 billion and $ 789 million respectively in the third quarter of 2013. Global active users grew by 14% y/y to reach 123.6 million in the third quarter of 2013. Non-vehicle gross merchandise volume reached $18.36 billion, a 13% y/y increase.

Enterprise: Revenue from this segment experienced y/y growth of 5% to reach $238 million in the third quarter of 2013. Operating profits dropped to $12 million a 14.28% y/y decline.

I estimate eBay’s owner earnings to be at $2.80 billion or $2.14 per diluted share. I bought the stock at $50.32, giving me a price-to-owner earnings ratio of 23.51 which is reasonable considering that the company is still growing at a healthy pace. EBay’s excess cash and investments make this stock even more reasonable. If you assume that all of eBay’s $7.26 billion in excess cash and investments are held offshore, the company still will have $4.72 billion (after deducting Uncle Sam’s 35% cut on foreign profits brought home) that it can pay out to shareholders.  The tax rate is actually lower due to foreign tax credits, but let’s be conservative (it’s more of me being lazy to perform more calculations).

Unlike the world of pokemon, you don’t have to catch ‘em all in investing. You just need to catch a few good stocks and hold them long-term, and I think eBay is a pretty good catch for me. Thank you for reading. Take care and stay rational

Tuesday, December 3, 2013

Malaysia’s best MLM stocks: Zhulian and Amway

Please read the disclaimer here: Enjoy the article, bitches!

In this article, I will be analysing the fundamentals of 2 of Malaysia’s best multi-level marketing (MLM) companies: Zhulian and Amway. Most of my friends have some story about some douchebag involved in MLM. I myself have joked at the expense of multi-level marketers (or salesman as I call them). However, deep down I really respect the multi-level marketer that hustled hard to build a network of down-lines that generate good income for him every month. I personally won’t ever consider getting involved in MLM as a distributor because I don’t have the best people skills and it just doesn’t interest me. But I certainly wouldn’t mind investing in a MLM company if I think it will make me money.

Year-to-date annualized return on assets (ROA)
Year-to-date annualized return on equity (ROE)
Compounded annual revenue growth for 2008-2012
Compounded annual PBT growth for 2008-2012

As you can see from the table, both Zhulian and Amway earn really awesome ROE and ROA. I don’t think you can find more than a handful of companies in Malaysia that generate the same level of returns on capital as Amway and Zhulian.

Zhulain has been growing revenue and PBT really well over the 5-year period of 2008-2012. Amway’s revenue growth has been pretty average over the same period. Amway’s PBT growth has been sluggish.

Both Amway and Zhulain have fortress balance sheets.  As at August 31, 2013, Zhulian had RM 124,828 in cash and equivalents and only RM 64,686 in total liabilities. As at September 30, 2013, Amway had RM 180,936 in cash and equivalents and only RM 129,693 in total liabilities.

Zhulian has a price-to-earnings ratio (P/E ratio) of 16.12 which is quite reasonable; Zhulian has a dividend yield of 2.47%. Amway has a P/E ratio of 18.83 which is a bit high; Amway has a dividend yield of 3.28%. Note: P/E ratio and dividend yield data is taken from

Based on financial statement analysis alone, I see 2 really excellent companies. If Amway and Zhulian were chicks, I would say that they are on the same level of awesomeness as Max Black and Caroline Channing from the sitcom “2 Broke Girls.” But that’s based on financial statement analysis alone. I haven’t really delved into the annual reports or performed comprehensive research to find out if Amway and Zhulian are really great. Investing based on financial statements alone is like committing to someone just based on looks, it could turn out good or it could really suck if he/she turns out to be a jackass/bitch.

Before I can conclude whether or not I think Zhulian or Amway are really top tier, I need to know the percentage of sales made to non-distributor end-users. If I can’t find this information, I at least need to do some due diligence to make sure that new distributors don’t have to pay large fees or purchase inventory. I also need to make sure that existing distributors are not required to maintain a certain level of inventory. Stability (and preferably growth) in the number of distributors over the long-term is also important.  Amway and Zhulian have long track records and they’re very likely the real deal. However, investing in a stock is a long-term commitment for me and I need to make sure my bases are covered.

From the e-mails I’ve received and comments left on my blog, I can tell that quite a number of competent investors are reading my blog. The MLM industry is new to me, so if any of you guys have knowledge about analysing MLM companies, please drop a comment or e-mail me if there’s something I’m missing out. Thank you for reading. Take care.

Sunday, December 1, 2013

Bullshit financial theories part 1: Dollar-cost averaging

Disclaimer: I’m not advising anyone to follow my opinions in this article. It’s your money. Do whatever you think is best for you.

In this article, I will try to destroy the myth that’s dollar-cost averaging. I’m sure many of you have heard some mofo talk about how awesome dollar-cost averaging is. And while I think it’s alright to dollar-cost average a lot of the time, it’s pretty dumb to do it all the time regardless of the broader market’s valuation.

If the broader market has a reasonable average price-to-earnings (P/E) ratio of 17 or below, then there’s absolutely nothing wrong with dollar-cost averaging. But what if the broader market has an average P/E ratio of 25? I would feel a little uncomfortable investing then, but I guess over the long-term it should work out.

How about dollar-cost averaging when the broader market has an average P/E ratio of 35? I certainly don’t think it’s smart then as it would mean that the average earnings yield of the broader market is only 2.85%. You can invest in government bonds and earn more than 2.85% risk-free (risk-free is bullshit as well, but we’ll get into that another time). Investors that dollar-cost average regardless of valuation could be throwing a lot of good money after bad as the market can be irrational for a long-time. In the period of 1987-1991, the Nikkei 225 was over 20,000 (it even went up to over 35,000 for a while). Today, the Nikkei is at 15,661. Imagine the damage you would have done if you practiced dollar-cost averaging during that period. I couldn’t do more damage to my regular McDonald’s restaurant even if double cheeseburgers were free.

Look, the purpose of dollar-cost averaging is to reduce the average cost of your investment over the long-term. So, shouldn’t the best way to reduce the average cost of your investment be to simply not fucking invest when the market is blatantly overvalued.

Note: After a crash and during a recession, the market might still have a high average P/E ratio as companies could still be losing money or earning very low profits. This is where you have to calculate (or get someone to calculate) the average P/E ratio of the broader market based on profits in normal times to see if it makes sense to invest.

This is how I would invest my money if I didn’t know shit about investing:
1)      Invest in the broader market of a few solid countries through exchange traded funds or unit trusts. This way my exposure to country risk will be reduced.
2)      Make sure to select investment vehicles with low fees as fees could take a large chunk out of my profits over the long-term.
3)       I will invest regularly (perhaps once every month), but only if the national markets my exchange traded funds or unit trusts are tracking have average P/E ratios of below 20. I guess the threshold could be a bit higher, but I get uncomfortable once the average P/E ratio is above 25.
4)      If there are no opportunities to invest my money, I will just build up cash for when the markets get cheaper. I think I would start investing the cash I built up when the markets’ average P/E ratios drop below 15.

Thank you for reading. Take care and stay rational!

Saturday, November 30, 2013

Kawan Food Berhad: One delicious Malaysian stock?

Please read the disclaimer here: Enjoy the article, bitches!

In this article, I will be analysing Kawan Food Berhad. Kawan Food Berhad trades on the Bursa Malaysia with the stock code 7216. The stock closed at RM 1.28 (around USD 0.40) this Friday. I’m a kind of guy that lives to eat and nothing will make me happier than being able to invest in a great food company. Kawan Food manufactures frozen Asian food delicacies such as paratha, samosa, curry puff, oriental buns and etc. For foreign readers who don’t know what a paratha or curry puff is, try to score some of it in your countries as they’re fucking awesome.  Is Kawan Food that great food stock that I’ve been dying to find? Let’s find out.

Kawan Food has trailing twelve months (TTM) return on assets (ROA) and return on equity (ROE) of 10.75% and 12.63% respectively. While not on the level of Nestle, the company’s returns on capital are not bad at all. For the 5-year period of 2008-12, the company’s ROA was between 9.60% and 12.44%. This indicates that Kawan Food has consistently been achieving this level of profitability and that it wasn’t the strong performance for the 9 months ended September 30, 2013 that pushed up ROA.

For the 9 months ended September 30, 2013 Kawan Food grew its revenue and profit before tax by 14.67% and 34.79% respectively which is really good. The problem I have is that the company’s growth rate has slowed down over the 3-year period of 2010-12. Revenue grew at a compounded annual rate of 7.95% which is still alright. However, profit before tax actually declined marginally because of stuff like higher raw material costs. The company’s profits also fluctuate with movements in the USD. Higher USD equals more expensive products for customers not living in the U.S. and therefore lower demand for the company’s products. Macroeconomics 101, bitches! According to the company’s 2011 annual report, 50% of the company’s revenue was billed in USD.

As at September 30, 2013, Kawan Food had a rock solid balance sheet. The company had RM 32.45 million in cash with only RM 22.81 million in total liabilities. So, the risk of debt crushing the company is minimal.  

In my opinion, the main risks to Kawan Food’s profitability are a strengthening of the U.S. Dollar, rising costs of raw materials and increased competition. However, even based on 2012 earnings, the company has a P/E ratio of 11.34 which is really reasonable these days for a business with the quality of Kawan Food. So, I guess the current price of the stock makes accepting the risks worth it.

One of my irrational reservations about the stock is that it had a large run up this year and that I should wait for the price to come down a bit. But it was this mentality that caused me to miss out on a ton of money in the past. Right now I’m just wondering why the fuck I didn’t know about this stock when it was trading below RM 1. Probably watching e-sports… Oh, well…

Kawan Food may not be able to replace my true love that got away (Nestle during the financial crisis), but it will make me feel a little less lonely. I plan to take a small position in Kawan Food next week. If Kawan Food does pull back significantly after I buy it, I would chuck more of the stock into my account the same way I chuck down “roti telur” in a mamak restaurant (assuming that business fundamentals stay intact). Thank you for reading. Take care and stay rational  

Side note for my foreign readers: If you ever visit Malaysia or Singapore, do try to visit a mamak (Indian Muslim) restaurant and sample “roti telur”, “mee goreng” and “nasi lemak ayam.” When it comes to food, once you go mamak you never go back. The food is a bit spicy though, so be careful if you have a weak stomach.