Sunday, January 26, 2014

Liquidity risk Part II: The individual investor

I don’t really have much to say on this topic, but I guess the liquidity risk series won’t be complete if I didn’t at least talk about liquidity risk in relation to the individual investor. Since I don’t have any lame sex jokes to lighten things up, we’ll just jump straight to business.

Before you start investing in stuff, please make sure that you have set some cash aside for emergencies. I personally think that everyone should try to set aside cash amounting to 6-8 months of their total expenses (including taxes, insurance expenses, etc.), but everyone have different circumstances and some people may need to set aside more cash than that. Some of you may probably be thinking that this is so basic that any aunty or uncle on the street can tell you that (in Malaysia we usually refer to any middle-aged or old person as auntie or uncle).  Yes, what I said is simply common sense that any auntie or uncle can tell you. But a lot of aunties and uncles still get financially destroyed because emergency struck and they didn’t have enough reserve cash because they invested it in “hot stocks” (which are now worthless) recommended by some technical analysis bullshitter. Make sure you have an emergency cash reserve and only invest in stocks when you have extra money that you don’t intend to use in the foreseeable future. That way you minimize the risk of ending up as a financial jerk-off.

I’m a long-term investor, so I don’t really mind investing in stocks that are a little bit illiquid. However, I try to make sure that the stocks I invest in have enough daily trading volume so that I can exit my position in a day if the company’s business fundamentals get impaired.    

If debt is employed in your investment portfolio, you need to make sure that the portfolio both maintains a healthy cash balance and generates enough dividends to comfortably service its debts. A certain percentage of the portfolio should be allocated to cash to act as a buffer so that the portfolio can service its debts in rough times when dividends might get cut. Another reason to maintain a cash balance is that debt instalments are generally due every month while dividends are received much less frequently. Investors can dip into the cash balance to pay the debt instalments first and replenish the cash balance once they receive their dividends.

If I were to use debt in my portfolio, I might require that the dividends from my portfolio be twice the size of my debt instalments, and that there’s enough cash to service the debt for 18 months (this is just an example, please don’t blindly follow it).  While I’ve never used debt before, I won’t be a fucking pussy like some financial bloggers and tell you that you should avoid using debt at all costs. Using debt conservatively can create value. However, debt can also ruin you if you don’t have a deep enough understanding of finance to intelligently employ debt.  The same goes for driving and weird sex positions; you can get a lot of benefits if you know what you’re doing, or you can get hurt real bad if you don’t know shit. If I were to use debt, I would also avoid using shares as collateral as they can be volatile and I don’t want to get my ass margin called. I would use real estate or bank deposits as collateral instead. I would also make sure that I could easily service the portfolio’s debts with my other sources of income and liquid assets that are independent of the portfolio. Even if you don’t use debt, you should still put together a portfolio that generates some dividend income and have some cash on hand to take advantage of market downturns.

Thank you for reading. Sorry if my analysis of stocks has slowed down. It takes time to find interesting companies. I’ve also been busy reading up on the insurance industry and playing pokemon (seriously).  Take care and stay rational!

Sunday, January 19, 2014

Analysis of Thailand-based KASIKORNBANK

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

So far, I have covered stocks from 3 Southeast Asian countries: Malaysia, Indonesia and Singapore. Unfortunately I’ve not analysed any companies from Thailand, the land of good food, sweet chicks, weird commercials and hopefully good investment opportunities. This changes today as I’m going to look into KASIKORNBANK, a Thailand-based bank. The stock closed at 168 Thai Baht on Friday. As I will explain in this article, I think that the stock is about as good as a tom yam and pad thai lunch (which is pretty good). Anyway, let’s get down to business.

The bank earns good returns on capital. In 2013, the bank achieved return on average equity and return on average assets of 20.45% and 1.89% respectively. Management runs the bank efficiently. In 2013, KASIKORNBANK achieved an efficiency ratio of 43.74% which is really good.

KASIKORNBANK is expanding at a healthy pace as evidenced by its deposit growth. The bank managed to grow its deposits at a compounded annual rate of 9.59% over the 5-year period of 2009-2013. Deposits experienced a year-on-year growth of 9.95% in 2013. The bank also grew revenue from fees and services at a compounded annual rate of 17.02% over the 5-year period of 2009-2013. Revenue from fees and services grew by 18.51% in 2013.

For the year ended 2013, KASIKORNBANK had a net interest margin of 3.55%. If you take into account the bank’s impairment loss on loans, the bank’s net interest margin is decent enough but not great. The bank’s impairment loss on loans as a percentage of total average loans has been between 0.64%- 1.02% or an average of 0.76% in the 5-year period of 2009-2013.

As at December 31, 2013, the bank had a gross non-performing loans ratio of 2.11% which is manageable if you consider the fact that it has a coverage ratio of 134.52%. In other words, the amount of reserves the bank has set aside for loan losses is 34.52% larger than the size of its current non-performing loans.

The bank has a large deposit base to fund its loans and investments. As at December 31, 2013, the bank has a loans-to-deposits ratio of only 94.06%. KASIKORNBANK is also well-capitalized. As at December 31, 2013, KASIKORNBANK had a total capital ratio and a tier 1 capital ratio of 15.78% and 12.57% respectively. This is significantly above the minimum total capital ratio and tier 1 capital ratio of 8.50% and 6.00% respectively that’s required by the Bank of Thailand.

According to Bloomberg, KASIKORNBANK currently has a price/earnings ratio of 9.73 which I think is a fair deal considering the above average performance and stability of the bank. I know that there have been protests taking place in Thailand recently. But I think this is a short-term challenge, and that Thailand should still be a stable country over the long-term. I plan to take a small position in the stock sometime in the near future.

Before I wrap this up, I want to share an irrelevant thought of mine. I read an article earlier today that said people over 20 should stop saying YOLO (you only live once). Well, I think that YOLO is an awesome word and the dude that wrote the article is wrong. You only live once, and you should aim to live the best life that you can. Thank you for reading. Take care and stay rational. YOLO BITCHES!!!

Thursday, January 16, 2014

Sorry about Perusahaan Gas Negara

I would like to take the time to apologize to all of you for not doing my due diligence in my previous analysis of Perusahaan Gas Negara." One of my readers brought to my attention the fact that Pertamina got the approval to takeover Perusahaan Gas Negara. This article here from Upstream confirms what my reader told me.  I should have Googled something like "Perusahaan Gas Negara acquisition" or Perusahaan Gas Negara merger" before publishing my article. Instead, I just wasted your time. The time you took to read my analysis that's not even relevant. 

I don't have an opinion on how the deal will turn out as I don't know the decision making process of the people behind the deal nor do I know the terms of the deal. According to the article in Upstream, Pertamina is looking to carry out a merger between PGN and its own subsidiay, Pertagas. Hopefully this will result in an interesting company as I'm really interested to invest more money in Indonesia over the long-term. But i seriously don't what will happen. At this point, your guess is just as good as mine as to what will happen with this M&A deal.

I'm truly sorry for wasting your time. I will try harder to be more thorough when analysing companies in the future. Take care and stay rational.

Monday, January 13, 2014

Analysis of Indonesia-based Perusahaan Gas Negara

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

This article is no longer relevant as it came to my attention today that Perusahaan Gas Negara is being taken over. Please accept my sincerest apology for wasting your time. Full apology here.

If you paid attention to financial news, you would have heard that Wall Street is advising its clients to reduce their exposure to emerging markets. I usually ignore what Wall Street has to say as they often have a very short-term outlook and can sometimes give advice that’s just fucking stupid. To be fair, I can’t really fault Wall Street this time as quite a number of emerging markets could have asset bubbles. However, I think that emerging markets are a good bet long-term if you can enter at reasonable prices. Since I don’t have quants and fortune tellers helping me to predict emerging market stock prices, all I can do is simply invest in good companies that I think are reasonably valued. And I think the recent weakness in the Indonesian stock market and Indonesian Rupiah has resulted in Perusahaan Gas Negara becoming quite reasonably priced indeed.

Perusahaan Gas Negara trades on the Indonesia stock exchange. The stock closed at 4,435 Indonesian Rupiah (approximately USD 0.37) per share yesterday. Based on my annualized estimate of the company’s true earnings for the 9 months ended September 30, 2013, the stock would have a Price/Earnings ratio of 14.23 which I think is reasonable. The main adjustments I made in arriving at my estimate of true earnings were subtracting foreign exchange gains and gains from derivatives. According to, the stock has a gross dividend yield of 4.59%. According to Deloitte’s list of withholding tax rates for 2013, Indonesia has a withholding tax rate of 20% on dividends. Non-Indonesian investors should take the withholding tax rate into account before investing in the stock. Please consult a tax expert before making a decision to invest in foreign stocks.

Perusahaan Gas Negara earns excellent returns on capital. For the 9 months ended September 30, 2013, the company achieved annualized return on equity (ROE) and return on assets (ROA) of approximately 25.75% and 16.29% respectively. The ROE and ROA figures are based on my estimate of true earnings. The company is also financially strong with cash and cash equivalents totalling approximately $1.567 billion and total liabilities of only $1.553 billion (the figures in the company’s 2013 third quarter report are expressed in U.S. Dollars).

Gas distribution (not to be confused with gas transmission) made up approximately 92.32% of the company’s revenue for the 9 months ended September 30, 2013.To tell if the company’s distribution business is growing, we need to look at distribution volume growth. According to Perusahaan Gas Negara’s 2012 annual report, distribution volume grew at a compounded annual rate of 8.71% in the 5-year period of 2008-2012. However, the company’s distribution volume growth has slowed down recently. In 2012, the company’s distribution volume increased by a modest 1.49% from 795.28 MMScfd in 2011 to 807.16 MMScfd in 2012. Maybe the company’s ongoing projects will give earnings a boost once completed. However, I’m perfectly alright if profits just kept up with inflation over the long-term as I see Perusahaan Gas Negara as more of a stable cash generator instead of a hot growth stock.

I’m definitely interested in investing in Perusahaan Gas Negara. Sure, the stock price could come under further pressure if money keeps flowing out of emerging markets. But the way I see it, any decline in price is an opportunity to add to my position (as long as the business fundamentals remain intact). Unfortunately, the “Greedy Dragon Portfolio” already has quite a significant exposure to Indonesian equities. Maybe I will pick up some shares for my personal portfolio instead or sell some of the Indonesian shares in the Greedy Dragon Portfolio and buy Perusahaan Gas Negara. However, I can’t promise that I will buy shares of Perusahaan Gas Negara in the near future. Thank you for reading. Take care and stay rational!

Thursday, January 9, 2014

Risk Management: Liquidity Risk Part 1

Liquidity risk is simply the risk of not being able to prepare enough cash in time to meet obligations when they fall due. Just like a compulsive gambler who can’t pay the loan sharks when they come to collect, companies or investors will get fucked up if they can’t meet their obligations on time. In part 1 of the liquidity risk series, I will be discussing liquidity risk in relation to the company. I will be discussing the individual investor’s liquidity risk in part 2 of this series.

A company with high liquidity risk could be forced to borrow at high rates or issue shares at depressed prices to raise the cash necessary to keep its business running. In the really bad cases, companies can go bankrupt if they don’t have adequate liquidity. One way to test if a company has adequate liquidity is to calculate its quick ratio. The quick ratio is simply:

 (cash and equivalents + marketable securities + accounts receivable)
                                Current Liabilities

Inventories and other current assets are not included in the calculations of the quick ratio as it takes a longer time to convert them into cash. There is also a higher risk of having to take a loss on current assets such as inventories when you try to sell them off quickly. A company with a higher quick ratio is in a better position to meet its short-term obligations as it has a higher margin of safety; the company may still be able to pay its short-term liabilities even if it can’t convert some of its current assets into cash on time. I generally would require a company to have a quick ratio of at least 1.5 before I invest in it. That way my dreams of Victoria’s Secret models won’t be replaced by nightmares of bankruptcy.

Of course we shouldn’t just take the quick ratio at face value. We need to dig deeper and look at the company’s short-term investments portfolio to see if it consists of securities that can quickly and reliably be sold at no or minimal losses. A company with a portfolio mainly consisting of stocks or other volatile securities may not have as much liquidity as its quick ratio indicates. This is the case as the volatile securities may drop in price in the future which reduces the amount of cash the company can raise from selling those securities. The company will also take a permanent hit to its equity capital if it had to realize losses and sell its volatile securities at depressed prices to raise cash to meet its obligations. This of course weakens the company’s financial position and destroys shareholder value.

Don’t worry my fellow value investors. I haven’t gone full retard like some academics. When I say that stocks and other securities such as lower grade corporate bonds are volatile, it’s simply an observation. Unlike some dumb sons of bitches, I don’t believe I can control or estimate the volatility of these securities using volatility measures such as Beta and correlation coefficient. I just make sure to factor in a haircut on these securities when including them in my liquidity calculations.

We also need to calculate the “days sales outstanding” figure which is the number of days it takes for a company to collect on its accounts receivable.  A company with a significantly higher “days sales outstanding” figure as compared to its peers indicates that the company is in a worse position liquidity-wise than what its quick ratio tells us. This is the case as a days sales outstanding figure that’s higher than average could mean that the company is having difficulties in getting customers to pay up. Such a company runs a higher risk of not being able to convert its accounts receivable into cash as planned and could find itself being short on cash when its liabilities fall due.

Companies often rely on credit facilities to help them with their liquidity. Investors should look through the annual report to find out how secure a company’s credit facilities are. Will the banks leave the company with its dick in its hands when things get rough?   

Sometimes a company may have a low quick ratio but still have adequate liquidity because it has a negative cash conversion cycle. In other words, the company is able to sell its products and collect on its accounts receivable long before it needs to pay its suppliers. Keep a look out for these companies as they are generally of really high quality.  

For companies with a lot of borrowings (bonds, bank loans & other debt securities), I would also look at when its debts mature. If there’s a large chunk of its borrowings maturing within the next few years, I need to be reasonably confident that the company can raise enough cash to pay them off. I will look at the company’s current cash & marketable securities holdings and its free cash flow to estimate its ability to pay off its debts that are maturing in the next few years. Yes, I know that companies usually refinance their debts. But I need to be confident that the company can still pay its maturing debts if banks stop lending and the debt markets can’t be tapped.  It’s just like how a middle-aged man always makes sure that he has some Viagra stocked up. That way the dude can be reasonably confident of getting some action even if his dick doesn’t get hard naturally.   Investors should also find out if the company has any significant obligations such as large contracted capital expenditures in the short to medium term.    

Well, this concludes part 1 of the liquidity risk series. Thanks for sticking with me till the end. Take care and stay rational! 

Saturday, January 4, 2014

A tale of 2 British American Tobaccos

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

In this article, I will be comparing British American Tobacco (BAT) Malaysia against BAT PLC to see which should make the better investment. BAT PLC trades on the London Stock Exchange; the stock closed at 3,200 Pence or 32 Pounds on Friday. BAT Malaysia trades on the Bursa Malaysia; the stock closed at Ringgit Malaysia 63.88 on Friday. Both companies make tobacco products which include Dunhill cigarettes. While BAT Malaysia mainly engages in making tobacco products for the domestic market, it also engages in contract manufacturing for the export market. BAT PLC has operations worldwide. The companies will be judged based on the following criteria: profitability, valuation, returning capital to shareholders and “other stuff”.  I personally don’t smoke or drink. Cheeseburgers, video games and being a badass investment analyst are enough to make me high on life. Anyway, enough of the small talk, let’s get down to business.


BAT PLC managed to increase prices to offset decline in product volume. BAT PLC’s revenue (excluding duty, excise and other taxes) and operating profit for the 6 months ended June 30, 2013 grew by 1.61% and 3.12% year-on-year respectively.

BAT Malaysia managed to increase prices and increase its contract manufacturing volume to offset decline in domestic product volume. BAT Malaysia’s gross profit and operating profit grew year-on-year by 0.64% and 4.55% respectively for the 9 months ended September 30, 2013. For BAT Malaysia, I calculated gross profit growth instead of revenue growth as I think the third quarter report presents the gross revenue figure (which includes excise payment). 

Both companies earn amazing returns on capital. BAT Malaysia generated annualized return on equity (ROE) and return on assets (ROA) of 165.01% and 56.15% respectively for the 9 months ended September 30, 2013. For the 6 months ended June 30, 2013, BAT PLC earned annualized ROE and ROA of 60.23% and 15.70% respectively. I seriously got a hard-on calculating the ROE and ROA for both companies. Unfortunately, both companies are at the stage where they’re returning most of their earnings to shareholders as there aren’t many opportunities to reinvest profits. Overall, I would say that both companies are on even footing when it comes to profitability.


If you annualize BAT PLC’s diluted earnings per share of 106.1 Pence for the 6 months ended June 30, 2013, the stock would have a Price/Earnings ratio of 15.08. After you annualize BAT Malaysia’s earnings per share of Ringgit Malaysia 2.222 for the 9 months ended September 30, 2013, the stock would have a Price/Earnings ratio of 21.56. So in terms of valuation, BAT PLC is more attractive than BAT Malaysia.

Yes, I know that it’s better to use owners’ earnings/true earnings than reported earnings when determining whether a company is overvalued or undervalued. But both companies are in the maturity stage, so their reported earnings are close enough to their true earnings power.  Looking at the financial statements, I think true earnings would be plus-minus 5-10% of reported earnings if you used maintenance capex instead of depreciation and accounted for one-time items. I didn’t do the calculations for true earnings as I don’t think it would change the fact that BAT PLC is the cheaper stock (I was also busy watching people battle pokemon on YouTube).

Returning capital to shareholders

In the past 12 months, BAT PLC paid out/declared a total of 137.7 Pence per share in dividends which give the stock a dividend yield of 4.30%. BAT PLC also spent 641 million Pounds buying back stock. As BAT PLC’s shares are trading at a reasonable valuation, I think the company creates value for shareholders when it buys back its shares. If you count share buybacks as a form of dividends and assume that the company bought back 1.25 billion Pounds worth of shares in 2013 (the same amount it spent buying back shares in 2012), then BAT PLC’s effective dividend yield would be 6.33%.

BAT Malaysia paid out/declared Ringgit Malaysia 2.81 per share in dividends in the past 12 months which gives it a 4.40% dividend yield. Both BAT Malaysia and BAT PLC return almost all of their profits to shareholders, so they both score well in this criterion. However, BAT PLC returns more capital to shareholders as a percentage of its share price due to its lower valuation.

Other stuff

BAT PLC has lower geographic concentration risk than BAT Malaysia. BAT PLC’s profits are well-diversified geographically. The following is the geographical breakdown of BAT PLC’s operating profits:

Asia Pacific
Western Europe
Eastern Europe, Middle East & Africa

While BAT Malaysia has experienced healthy growth in its contract manufacturing business, it still heavily relies on Malaysia for its revenue. Geographical diversification is especially important for the tobacco industry. This is the case as a country’s government might increase excise on tobacco products by a large amount and unintentionally drive smokers to buy illicit cigarettes to get their fix. Now, I think the environment in Malaysia is still ok for tobacco companies to make good profits. But if all other things were equal, I think BAT PLC with its global operations is a safer bet than BAT Malaysia.     

According to Deloitte’s list of withholding tax rates for 2013, both Malaysia and the U.K. do not levy withholding taxes on dividends. You can view the list here. I’m not a tax expert, and I don’t know how your respective governments might treat foreign dividends.

Overall I think BAT PLC would make the better investment. I have no intention of investing in either stock. But if a family member asked me to construct a retirement portfolio for her, I would probably allocate a small part of the portfolio to BAT PLC. I think BAT Malaysia is a bit overvalued. Thank you for staying with me throughout this article. If you’re a smoker, do light one of those sons of bitches up if you liked this article. If you’re a non-smoker, then don’t fucking smoke as it’s bad for health (I guess that’s the responsible thing to say). Take care and stay rational!

Wednesday, January 1, 2014

Sold my stake in DeNA Co.

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

Before I start this article, there’s something I want to get off my chest. Feel free to skip this paragraph. I didn’t party on New Year’s Eve as it’s not my thing and I’m a lone wolf (or social outcast) so I don’t really have a crew of bitches and sons of bitches to go out with. But I have nothing against people celebrating. What piss me off are assholes that get upset with people celebrating on New Year’s Eve. There’s one dude on my Facebook who had 12 status updates on New Year’s Eve, bitching how 2013 sucked and how people celebrating were scum. Honestly, I think jackasses like him are crying for attention. A piece of advice, getting pissed at people for being superficially happy doesn’t make you cool. It just makes you look like a dick.

If you guys remember, I briefly mentioned that I invested in Japan-based DeNA Co a while back. The company generates most of its profits from its mobile games platform. Anyway, I sold the stock a few days ago; I think I barely made enough to cover my transaction costs (maybe even made a small loss as the yen could have weakened since the time I bought the stock). It’s not because I thought DeNA was a bad company (I personally think that the company is very good at making games). I just realized I didn’t have enough knowledge of the mobile games industry to come up with a reasonable valuation for mobile gaming companies.

Right now DeNA is doing really well in terms of returns on capital. The company achieved returns on average equity and returns on average assets of 30.05% and 20.01% respectively for the quarter ended September 30, 2013. The company has lots of cash and a low Price/Earnings ratio of below 7 (I think it was around 6.5 when I bought it). The only problem is that revenue is declining as the company hasn’t released a hit game for some time. I thought that despite falling revenue, the company’s current portfolio of games could still maintain a high level of profitability as the company can keep creating new content (an example is World of Warcraft) or release new versions to get people excited again (an example is the Pokemon series). However, I recently realized that I do not have enough knowledge and data to be reasonably confident of that happening. Maybe someone with a deep understanding of the mobile gaming industry might find that DeNA is a really awesome company and make lots of money investing in the stock. That would be great for him.

There are many industries that I don’t understand. And I just won’t invest in them as the biggest risk of all is doing something that you don’t understand. I will take Warren Buffett’s advice and stay within my circle of competence. So, I sold my stake in DeNA and bought shares in Overseas Education Limited which I discussed in a previous article.

Anyway thank you for reading and happy new year to all of you! I fully intend to make 2014 my bitch. I aim to find some investment gems, build a larger audience and land an awesome job when I enter the job market in about a month. I think I have chillaxed enough since graduation, I just hope the wound under my foot closes up by then.

Watch out 2014, it’s clobbering time!!!