Choivo Capital

Author: Choivo Capital   |   Latest post: Tue, 1 Dec 2020, 2:29 PM


(CHOIVO CAPITAL) MASTER (7029) – Packaging Boom, All Time Low Pulp Costs, Record Revenue by Major Customer

Author: Choivo Capital   |  Publish date: Tue, 1 Dec 2020, 2:29 PM

Packaging Boom, All Time Low Pulp Costs,

Record Revenue by Major Customer




This pandemic resulted in a packaging booms for both Paper and Plastic based packaging, due to the online delivery boom, as demand for online delivery of goods increases drastically.

And we see this reflected in the share prices of plastic and paper packaging companies in Malaysia and Globally.


However, Master-Pack Group Berhad is a major laggard, despite also being the most direct beneficiary of the Solar Boom, with their major customer US’s First Solar Q3 sales rising by 70%.

The solar industry makes up 67% of Master’s revenue, with the rest being the Food & Beverage as well as Medical, both of which have also seen a boom this year.




Master Pack Berhad -  A Background

MASTER is primarily engaged in the business of manufacturing corrugated packaging products, wooden packaging and providing one stop packaging solution, warehousing as well as Vendor Managed Inventory with 28 years of history.


Over the years, they have built up their reputation as the key packaging player in the solar industry, starting with First Solar (one of the largest American solar companies in the world), where in 2011, they won an award as their top supplier.



This is because the boxes used by the solar industry tend to be custom made, to account for the unique product being shipped.

And from there, they built up their customer base in the solar industry. And today, the solar industry makes up 67% of their sales.

Resulting in their below historical results,




Which is in line with their major customer, First Solar’s own explosive results.




Catalyst – Falling Costs


Since the second half of 2019, prices for wood pulp have fallen drastically and have stayed down mainly due to reduced usage of papers, while capacity expansions by wood pulp companies coincided with the coronavirus pandemic. Until the current industry consolidation is completed, prices for wood pulp are expected to stay low.


Low wood pulp prices are also the main reason why paper packing companies like MUDA, ORNA, PPHB and MASTER remained profitable throughout the pandemic.




Catalyst – First Solar Blockbuster Q3 Results


For the third quarter, their major customer First Solar have recorded an incredible 70% growth over the previous year, and 44% over the previous quarter.


Like in 2019, when First Solar’s Revenue exploded upwards, resulting in a 38% growth in revenue and 146% growth in profit for MASTER, a similar result should occur this time as well.




Long Term Catalyst – First Solar 2nd Factory in

Malaysia & Biden Presidency

With Biden being the new American President, solar energy demand supplies, incentives are expected the skyrocket, growing the renewables industries further.

And this is something First Solar is planning to capitalize on by opening their second factor in Malaysia.

In addition, the First Solar factories in Vietnam have also hit a 98% manufacturing yield, resulting in higher outputs. This should also result in additional order for Master Pack’s factories in Vietnam, where they also support First Solar’s factory.



All of which are likely to bode very well for First Solar, who is their premier packaging supplier in Malaysia and Vietnam.




Risks – Lower Revenue in Q3 2020 (continued)

Now, for the first two quarters of 2020, MASTER recorded a lower revenue, due to their Malaysian factories only being allowed to run at 50% capacity. However, this was partially set off by their Vietnam factories which started up in Mid-2019 to support First Solar.

However, for Q3 2020, revenues for MASTER fell. Why is this the case?


This is mainly from First Solar, recommissioning their current remaining Series 4 lines in Kulim, Kedah to manufacture Series 6 solar panels. This resulted in a temporary drop in revenue. According to First Solar’s Q3 Earnings Call Transcripts, this conversion has be completed in late Q3.




Projected Profit for Q4 2020 & Target Price

Given the completed conversion in the Malaysians First Solar Factory, as well as impending orders by First Solar, who recorded record revenues in Q3 2020 and expected to record even higher revenue in Q4.

I think it would be conservative to project a back to normal earnings for Master, and a slight increase on top especially with the Vietnam factories contributing fully from the second half of 2019.

For the purpose of our projection, we will use Q2 and Q3 2019. Mainly due to the Q4 2019 results being impacted from reduced demand in China due to the Covid 19 cases.

Now, I do think using Q4 2019 RM6m in earnings may be to optimistic. However, Q2 2019 earnings are a little too low as it does not include the full Vietnam factory contribution. With that in mind, we will use a conservative RM 4m in net profit for our projections.

And so, we arrive to our target price of approximately RM2.5, when earnings for Master Pack return to the mean.


Do note this does not price in the additional orders that are likely to come from the second factory from First Solar which is expected to start Q1 2021.




And, One Last Thing.

Is it priced in?

Other than the brief pop back in April-May 2020, which affected all stocks, it has only gone down since then and is way below its Dec 2020 closing price of RM2.55, despite being projected to make more money in Q4 2020, and have earnings increase further after the new First Solar factory is started up in Q1 2021.


Clearly the market still thinks that the drop in revenue or earnings is not temporary, resulting in this mispricing. I don’t think the market is pricing in any of the facts I have written above have not been priced into the stock at all.


Disclaimers: Refer here.


Facebook: Choivo Capital

Website: www.choivocapital.com

Email: choivocapital@gmail.com

Telegram:  https://t.me/Choivo_Capital


Labels: MASTER
  Be the first to like this.
supersaiyan3 ok, buy little bit lah.

(Yesterday asked to quote corrugated boxes, didn't expect it to be such a high price. Minimum order costs RM13k, that's enough boxes for 6 years for me. )
02/12/2020 12:32 AM

(CHOIVO CAPITAL) BAT (4162) - Budget 2021 (The Dark Knight Rises)

Author: Choivo Capital   |  Publish date: Mon, 9 Nov 2020, 8:04 PM


For a copy with better formatting, go here, its alot easier on the eyes.

(CHOIVO CAPITAL) BAT (4162) - Budget 2021 (The

Dark Knight Rises)




Budget 2021, The Dark

Knight Rises.




One company I’ve always had at the back of my mind, is British American Tobacco (Malaysia) Berhad. Even with the advent of vaping etc, cigarettes is fundamentally a very good business. It is naturally addictive, and because of that, has a certain pricing power (the taste of one cigarette is very different from another as many smokers will attest).




The Challenges in the Malaysian

Cigarettes Industry

However, this business has faced a lot of challenges in Malaysia, mainly due to a few reasons.


  1. The constant increase in excise tax on cigarettes.


Since 2004, excise duty on cigarettes have risen every year.


With a culmination of a 42.8% increase in 2016, which coupled with a lack of enforcement, resulted in an explosion in the illegal cigarettes market.


The math is simple, if a pack back then cost RM15 – RM18,while the illegal one costs RM3 - RM5, regardless of how much you prefer the taste of the other, if you’re in the B40 and M40, whose income levels have not risen in tandem with Global or Malaysian inflation, you will more likely be choosing the cheaper options.

And here, we can see that the main method used to supply illegal cigarettes is via smuggling. (Vape is technically illegal as well, but as the market is very fragmented for them, coupled with lack of regulation, we don’t really know the numbers)




  1. The complete failure in enforcement against illegal cigarettes.


Now why is smuggling the most popular method in the supply of illegal cigarettes?


For one, its much cheaper to produce cigarettes overseas. And secondly, due to our long coastal lines and lax shipment laws regarding cigarettes, it is very easy to bring in illegal cigarettes.


For example, in the countries like Singapore and Australia, illegal cigarettes are only 10% of the market (Malaysia: 65% of the Market) despite prices being 2 – 3 times higher than Malaysia.


The main reason for this is because these countries banned the transhipment of cigarettes. This means no cigarettes can touch their ports, unless it is for local consumption.


This is not the case in Malaysia, where we have many ports, many of which are lax in enforcement, where containers of cigarettes meant for transhipment, can arrive full and leave empty for various reasons.




  1. The rise of vaping and electronic cigarettes, which was not regulated sufficiently, or enforced.


And lastly, there is the vaping and electronic cigarettes industry, which based on recent estimates, have become a RM2 billion industry. This is an industry there is until today is still unregulated and untaxed. This naturally affects the legal players like BAT.


And how have this affected BAT in terms of the numbers?


As we can see here, since their high in 2015, earnings have only gone down for BAT. And this has naturally led to this very depressing looking chart which we can see here.



Since reaching their high of RM72.50 back in 2015, it has only going downhill due to the last excise duty rate increase in 2016 which have resulted in the explosion of the illegal cigarettes industry and the decline in their profits.


Except something incredibly (and unthinkable just a few months ago) good for BAT have happened with budget 2021.




The Turnaround – KYO


Even before the 2021 budget announcements, BAT have started turning things around by introducing KYO, a budget range of cigarettes at around RM11.50 for a pack of 20. In addition, the movement restriction orders meant that more people are ordering their cigarettes from online (you cannot find vape and illegal cigarettes on Shopee and Lazada etc), culminating in 2 consecutive quarter of q-o-q profit increases.




The Turnaround – Budget 2021

Naturally, this was not something that BAT took laying down. Since 2015, they have spoken endlessly about the loss in tax revenue for the government due to the illegal market.


However, they were too many fingers in this pie. And the ball was thrown around with the Ministry of Health (MOH) stating that it has no authority to enforce legislation against illegal cigarettes, and it is up to the Customs department.


The customs department naturally (and conveniently might I add) disagrees and says it is the MOH’s prerogative to clamp down on illegal cigarette packets which don’t portray health warnings (which is irrelevant as even illegal cigarettes have health warnings). You should read up on our Customs department and its placing on the corruption index.


That was, until today.


Facing an unprecedented squeeze in our budgets, with the government more desperate than ever for additional revenues, all gloves are off.


According to the 2021 Budget, effective from 1 January 2021, the Government will implement the following measures:


  1. Freezing the issuance of new import license for cigarette;


  1. Tightening the renewal of import license for cigarette through review of license conditions including the imposition of import quota;


  1. Limiting transhipment of cigarette to dedicated ports only;


  1. Imposition of tax on the importation of cigarettes with drawback facilities for re-export;


  1. Disallow transhipment of cigarettes and re-export of cigarettes by small boats including kumpit and instead be allowed only in ISO containers; and


  1. Making cigarettes and tobacco products as taxable goods in all Duty-Free Islands and any free zones that have been permitted retail sale of duty-free cigarettes.


  1. Impose excise duty of 10 percent on devices for all types of electronic and non-electronic cigarettes including vape effective from 1 January 2021.


  1. Liquid used in electronic cigarettes will be imposed an excise duty at a rate of 40 cents per millilitre.


This is an unpresented level of enforcement on illegal cigarettes by the Malaysian Government and is very close to the level of enforcement done by countries such as Singapore and Australia where illegal cigarettes is only 10% of the market.


In addition, the tax of vape liquids of 40 sen per millilitre translates to around RM40 in excise tax for one standard 100 ml bottle.

Given that each 100ml bottle is on average RM40 per bottle this translates to around the excise tax being around 50% of the total selling price for vape liquids.


This brings it in line with the current cigarette excise tax levels.


Currently, each cigarette is tax at RM0.40. Using Dunhill (since the above is a premium juice product) as a comparison.

Now if you ask most cigarette users, the feeling of the vape liquid is just not comparable to that of smoke.


And given that prices are going to equalize (and with there being strong enforcement on illegal cigarettes) , I think most smokers will be going back to normal cigarettes.


In addition, let’s not forget the various initiatives BAT have done to cut cost and win back market share, such as shutting down their Malaysian factories to move to a full import model to reduce costs, as well as, introducing KYO (the budget cigarettes) and GLO (their heating based solutions).


All of which resulted in earnings increasing for Q2 2020.


And lastly, now that the vape market is regulated, BAT can bring in their own solutions VYPE. Which holds a 41% market share in the UK, and high teens in other countries.






Due to its very stable business (with proper regulations and enforcement now in play) with high dividend pay-outs of 100% or more and close to zero capex (now that everything is imported in due to lower cost of producing overseas), I’ve always looked at BAT as a dividend play.



Now, for our worst-case scenario, I’m going to assume that all these actions done by the government did nothing in reducing the market share of illegal Cigarettes and Vape market share, and only maintained the current status quo.


In which case, we are only looking at a 50% upside given dividend yield requirements of 5.5% with a target price of RM15.28.


Now, what if due to these actions, the market share of illegal cigarettes and vape, goes back to 2017 - 2018 levels of 50% vs the 75% today?


Well, we are now looking at 212% upside or a target price of RM31.84.


Now what if things went back to its 2016 levels, except instead of making RM900 million a year, we adjust it downwards to RM700m a year due to there being  new players like the vaping industry?

Well, we are now looking at a target price of RM44.6 and an upside of 336%.




One last thing,

And where is BAT price today? Is it priced in?

Well, it went up a little, but not by much.


Personally, when I first found out, I wanted to buy as much as possible that Friday on 4.50pm but was unable to do so.


During the weekend, I was personally scared that it would limit up without me getting a share, however, I only needed to pay 5-6% extra.


One thing to note about this company, is that for a long time, this company was a local and foreign fund darling, and many of them still hold it as it is too cheap to sell given the dividend yields.



And like many here, they are also all very familiar with the problem that plagued this company, and given the 2021 Budget announcements, would likely want to top up, or stop selling.


However, for the foreign funds, chances are they have not read the news yet this morning, and there fore still queued to sell, while the local funds, chances are, they need to write something up for their investment committee to approve.


They are inherently unable to be as agile as a retail participant.


Let me quote you something I wrote back in 20 January 2020.


Well, what do you think I’ll be doing?



Disclaimers: Refer here.


Facebook: Choivo Capital

Website: www.choivocapital.com

Email: choivocapital@gmail.com

Telegram:  https://t.me/Choivo_Capital






Labels: BAT
  2 people like this.

(CHOIVO CAPITAL) LIONIND (4235) - Budget 2021, Rising Steel Prices

Author: Choivo Capital   |  Publish date: Mon, 9 Nov 2020, 12:42 PM



When thinking about the companies affected positively by the budget, we naturally look for companies whose valuations are also currently very attractive.


And I think Lion Industries Corp Berhad fits the bill, especially since they are among the top 3 largest steel rebar players in Malaysia.



Budget 2021 - Construction

For Budget 2021, the government have allocated quite a large amount towards construction and infrastructure development. The main ones being,


  1. RM 15 billion will be allocated to fund the Pan Borneo Highway, Gemas-Johor Bahru Electrified Double-Tracking Electrified Project and Klang Valley Double Tracking Project Phase One. In addition, several key projects will also be continued such as Rapid Transit System Link from Johor Bahru to Woodlands, Singapore and MRT3 in Klang Valley.


  1. RM3.8 billion to fund new projects such as,
  • Construction of the Second Phase of the Klang Third Bridge in Selangor
  • Continuing the Central Spine Project with the new alignment from Kelantan to Pahang;
  • Upgrading the bridge across Sungai Marang, Terengganu;
  • Upgrading of Federal Road connecting Gerik, Perak to Kulim, Kedah
  • To continue building and upgrading Phase of the Pulau Indah, Klang Ringroad Phase 3, Selangor
  • Construction of the Pan Borneo Highway Sabah from Serusop to Pituru; and
  • Construction of the Cameron Highlands Bypass road, Pahang with emphasis on preserving the environment.


  1. RM780 million to fund regional projects such as,
  • Rapid Transit Bus Transport System at 3 High Capacity Routes and construction of busway at IRDA in Johor;
  • Construction of the Palekbang Bridge to Kota Bahru, Kelantan under ECER;
  • Construction of infrastructure and related components of the Special Development Zone project in Yan and Baling, Kedah under NCER;
  • Infrastructure Project in the Samalaju Industrial Area, Sarawak under SCORE; and
  • Continuation of the Sapangar Bay Container Port Expansion Project, Sabah under SDC.


  1. EPF will continue the development of Kwasa Damansara with an estimated Gross Development Value of RM50 billion. It will consist of commercial, residential and more than 25 thousand houses (including 10,000 affordable homes) to be built.


  1. Sabah and Sarawak will receive Development Expenditure allocation of RM5.1 billion and RM4.5 billion respectively. These allocation among others are for building and upgrading water, electricity, and road infrastructure, health and education facilities.


  1. Additional funding of Low-cost housing amounting to RM1.2 billion.


  • RM 500 million to build 14 thousand low cost housing units under the Program Perumahan Rakyat;
  • RM 315 million for the construction of 3,000 units of Rumah Mesra Rakyat by Syarikat Perumahan Nasional Berhad;
  • RM 125 million for the maintenance of low cost and medium-low stratified housing as well as assistance to repair dilapidated houses and those damaged by natural disasters; and
  • RM 310 million for the Malaysia Civil Servants Housing Programme (PPAM)


And many more smaller development projects, including initiatives to promote and ease homeownership for the citizes




Rising Steel Prices

And even before all these are happening, steel prices have been steadily marching upwards.


Per Statista.

LME Steel Rebar Prices


In the major steel producing countries China and India, steel prices have been increasing very strong, and this is similar globally as recovery and demand picks up pace, faster than the reopening of supply.


This is also corroborated by various news articles around the world.



“Steel Prices In Asia expected to increase strongly in the second half of 2020”



“US Rebar prices hold steady in November, after rising strongly in September and October”



"In China underlying demand remains exceptionally strong,…,The rest of the world is picking up after a horrendous Q2 and Q3, and now we're seeing steel prices recovering pretty strongly across all regions,..., I think they will continue to rise.


Prices of hot rolled coil steel, used in the manufacturing sector, have shot up 37% since April in China, the world's biggest steel market and the first country to recover from the pandemic.”



Domestic steel companies have increased prices by Rs 2,700-3,000 per tonne in August — the third time since the start of the pandemic — as demand improves and input costs remain high due to shortage of iron ore. The uptick is in line with an increase in the international price of steel.


While both primary and secondary steel players increased benchmark prices of hot-rolled coils by Rs 700-750 per tonne on an average from July 2020, for cold-rolled coils, prices have gone up by Rs 500-550 per tonne. Those of pig iron and steel have gone up by Rs 3,000 per tonne in the local market in August, industry sources said.


A key factor is international steel prices, which have improved by almost $500 per tonne, according to a top official of a state-owned steel major.



Domestic steel companies have increased prices by Rs 2,700-3,000 per tonne in August — the third time since the start of the pandemic — as demand improves and input costs remain high due to shortage of iron ore. The uptick is in line with an increase in the international price of steel.


While both primary and secondary steel players increased benchmark prices of hot-rolled coils by Rs 700-750 per tonne on an average from July 2020, for cold-rolled coils, prices have gone up by Rs 500-550 per tonne. Those of pig iron and steel have gone up by Rs 3,000 per tonne in the local market in August, industry sources said.


A key factor is international steel prices, which have improved by almost $500 per tonne, according to a top official of a state-owned steel major.



China’s national price of HRB400 20mm dia rebar, an indicator of the domestic steel market development, continued to increase for the third working day on October 30 to Yuan 3,860/tonne ($577/t) including the 13% VAT. It was up by Yuan 22/t on day, the steepest rise among the three days.



And these steel prices are also increasing in Malaysia, as shown by YKGI’s  (a Malaysian Steel Manufacturer’s) most recent quarterly result, where they recorded a net profit of RM2.3 million after 9 quarters of losses





Net Cash & Additional Disposals


Unlike other steel companies, LIONIND is in a strongly net cash position. As of today, they have net cash totalling RM255m, this is higher than their current market capitalization of RM 193m.


In addition, they are also in the process of disposing Antara Steel Mills Sdn Bhd for a cash consideration of RM546.56 million (USD 128 million)


Bringing their total cash balances to RM806 million.




Target Price

Given the imminent closing of the disposal, the 2021 Budget which is expected to strongly increase the demand for rebar steel for construction in Malaysia, as well as rising steel prices around the world, I think there should be enough factors in line which should positively impact LIONIND’s share price.




One last thing,

Is it priced in?

Well, does not look like this is the case at all.



Disclaimers: Refer here.


Facebook: Choivo Capital

Website: www.choivocapital.com

Email: choivocapital@gmail.com

Telegram:  https://t.me/Choivo_Capital







  godhand likes this.
GLNT I think the opposition is trying to reduce expenditure on construction projects before they approve the budget.
09/11/2020 2:08 PM

(CHOIVO CAPITAL) MBMR (5983) - 10% Projected Dividend Yield, All Time High Revenue and Earnings (SUMMARY)

Author: Choivo Capital   |  Publish date: Thu, 5 Nov 2020, 1:34 PM

For a copy with better formatting, go here, its alot easier on the eyes.

(CHOIVO CAPITAL) MBMR (5983) - 10% Projected Dividend Yield, All Time High Revenue and Earnings (SUMMARY)





10% Projected Dividend Yield, Record Earnings.




This pandemic has changed the way people travel and their modes of transportation.


With the virus around, people who previously used public transport, now much prefer using their own vehicles which have resulted in increased demand for vehicles.


Due to the ongoing pandemic, there is a much stronger focus on vehicles that are, cheap and have value for money. As a result, the three main beneficiaries are as follows.


  1. Perodua (Monthly Sales have broken their 27 year record for 2 consecutive months)
  2. Proton (Sales have recorded 5 consecutive months of Y-o-Y Growth)
  3. Second-Hand Cars (Sales have soared with Myvi being the most popular vehicle)


In addition, the government have also announced SST exemption (100% on locally assembled cars, 50% on imported cars) till 31 December 2020 to spur sales.




Why MBMR Resources Berhad 


In the Malaysian vehicle market, Perusahaan Otomobil Kedua Sdn. Bhd. (“Perodua”) is the industry leader.



Despite declining number in vehicles sold in Malaysia from 2015 (666,677 cars) to 2019 (604,287 cars.) The number of vehicles sold by Perodua have increased from 213,307 cars in 2015 to 240,341 cars in 2019. Increasing market share from 32% in 2015 to 39.8% in 2019. Its market share in 2020 have further increased to 42.5%.


Why is this the case? This is due to income levels in the M40 and B40 rising slower than in previous years, resulting in a stronger focus on cheaper and value for money cars. This pandemic has further strengthened this focus.


Currently, the cheapest (all-in ownership cost) and most fuel-efficient car in Malaysia is the Perodua Bezza 1.0 G (A Proton Saga 1.3 Base is cheaper by about RM2k but is 30-40% less fuel efficient). The release of this car also resulted in a strong increase in revenue and profit for Perodua.

Now, Perodua is owned by, UMW Corporation (38%), Daihatsu Motor Co. (20%), Daihatsu (Malaysia) (5%), MBM Resources Berhad (22.6%), PNB Equity Resource Corporation (10%) and Mitsui & Co. (4.4%). The fact that no one holds a controlling stake also means that Perodua’s earnings are usually paid out as dividends.


Unlike companies like DRB-HICOM, who has many other businesses, many of which are loss making during this COVID period, and thus mask the increased earnings from PROTON. The earnings and dividends contributed by Perodua is usually around 75% of MBMR’s earnings and cashflow.


However, despite being expected to record explosive earnings in Q3 and Q4, MBMR is currently selling at RM2.85, far below its Pre-covid valuations of RM4.0 and is selling at just 4 PE today.




Earnings Versus Dividend Payout

Despite large dividends by Perodua to the MBMR, the dividends paid by MBMR is usually lower, why is this the case?

As we can see here, this is mainly due to a large loan taken out in 2011. Since then, the reduction in dividend pay-out was mainly due to cashflow being diverted to pay off this loan. When the MBMR turned strongly net-cash in 2019, dividends payment tripled. In addition, as we can see here, the other segments of MBMR usually generate additional cash as well. So why was the loan taken out in 2011?




Why was the loan taken out in 2011?

In 2011,a loan of RM370m was taken out by MBMR for the privatization of Hirotoku Holdings Berhad which cost a total of RM410 million (to this day, this company is run by the Japanese Partner). This company is primarily in the business of manufacturing Acoustic and Safety Products for vehicles.


In addition, in 2012 the company also started OMI Alloy (M) Sdn Bhd, an alloy wheel manufacturing company. Both companies are under the Auto Parts Manufacturing Segment.


How has these companies performed over the years?



For Hirotako Berhad, earnings have fallen somewhat since the glory days of 2009-2013, however it is still quite profitable. However, the lower profitability did require a write off on goodwill in 2017.


But for their alloy wheel manufacturing company OMI Alloy (M) Sdn Bhd, it performed badly due to China flooding the market. This loss-making division have been shut down in 2019 and would no longer result in losses for the company.


What about their other division, the Motor Trading Division?



Its profitability fell during the 2013-2017 period but have since risen again to all time highs due to the release of the Perodua Bezza. The contribution by Perodua have also increased to record highs.


Both segments are likely to contribute positively to the record earnings to be recorded by Perodua for Q3 and Q4, as well as in the future.




How has Perodua performed during

the pandemic?



As we can see here, in the month of April and May, sales have naturally fallen due to the controlled movement order. However, since then, Perodua’s has soared far above its 2019 sales numbers.


For the other carmakers, there is a slight purchase backlog factor, which have result in sales increasing in the subsequent months, but they have since fallen back down.

Perodua on the other hand, have increase continued to record increasing sales numbers, Perodua’s monthly sales for September and October have broken their 27 year record for 2 consecutive months.


This is due to the change in traveling methods, where people no prefer to travel in their own cars, and the strong focus on a cheap and value for money vehicles, for which the Perodua Bezza ticks every box.




Q3, Q4 and Full Year Profit Projection

Given what we know about the company, we first get some baseline assumptions using the 2019 numbers.



As we can see here, on average, Perodua contributes RM 781 of profit to MBMR per unit of vehicle sold in 2019. (There is various product mixes etc)


And on average, the non Perodua segments contribute about RM 3.471m in net profit per quarter. (As associate contributions and dividends is not taxed, we can just deduct the Perodua Contribution from the Net Profit of MBMR)


With these assumptions in mind,



As we have Q3-2020 sales unit numbers, there was no need for additional projection. As for Q4, sales in October is 26,852 units. As maximum production capacity is only 25,000 units per month. We will only project 76,852 units (26,852+25,000+25,000).


It appears that MBMR is going to post record operating earnings for the Q3 2020 (RM55.3m) and Q4 2020 (RM60m). As of today, they are still producing vehicles at maximum capacity (appoximately 25k per month) to be sold.




Dividend Payout?

The question now is this.


Will most of these profits be paid out as dividends, or used to purchase other companies or PPE?


There are a few things to note.


  1. With the borrowings being fully paid off, it would be reasonable to think that a significant part of the additional cashflow will be used to pay dividends, as they have shown in tripling the dividend payout in 2019. In addition


  1. Back when they acquired Hirotoku Berhad, the car parts manufacturing business was a good one, this was before china came into the picture. Given the economics today, this industry is not very attractive anymore, and this is why PPE purchases by MBMR have been quite low over the years. After the OMI Alloy fiasco, I don’t think they will want to try that again.


  1. The 50.2% owner of MBMR is Med-Bumikar Mara Sdn Bhd. Like Perodua, there is no controlling owner. 70% of the shares are controlled by 6 different families who have entrepreneurial/business background. Given that no one has control over the company, historically, any additional income would likely be distributed out, so the respective families can do whatever they want with it.



With these in mind, I think that for the FY2020, at minimum RM100m (70% of earnings) would be distributed as dividends by MBMR, this translates to 10% dividend yield.




Target Price?


For the purpose of calculating and initial target price, I will use my projected 2020 full year profit of RM137m.


This is extremely conservative, considering their normalized profit in 2019 and 2018 is RM184m and Rm166.8m


In addition, there is the release of the highly anticipated new SUV, the DL55, which is based off the Daihatsu Rocky, and expected to again focus on value for money, like the Bezza


Given the conservative assumptions, only a small discount in relation to margin of safety is needed. Target price is dynamic, however I think this works well as a mid-term investment as well.




And, One Last Thing.

It appears we are not alone, in the last few months, there have been very strong institutional buying. Much of it likely due to the factors explained above.


Disclaimers: Refer here.


Facebook: Choivo Capital

Website: www.choivocapital.com

Email: choivocapital@gmail.com

Telegram:  https://t.me/Choivo_Capital


Labels: MBMR
  2 people like this.
wkc5657 MBMR or POS better?
05/11/2020 1:43 PM
Choivo Capital I have both, MBMR is bigger size though. Because lots of money coming out as div.
05/11/2020 1:44 PM
soojinhou Another note, many people say that the sales volume is boosted by the sales tax exemption. If one is to study the quantum of discount before and after the exemption, it is on average 3% savings of 2-3k only. I don't think such a minor discount can drive such strong sales. Therefore, I think it is credible that avoidance of public transport is also responsible in driving the strong sales, playing straight into the private transport theme. Therefore, should the sales tax exemption be removed next year, I think sales should still be resilient at around 20k unit per month.
05/11/2020 2:20 PM
speakup Choivo still around? not arrested by SC for giving out stock recommendation without license?
06/11/2020 9:20 AM
ITreeinvestor Choivo, where is icon8888?
06/11/2020 9:54 AM
Gidstock Hi Choivo, what do you think when electronic vehicle become common in the future and selling at affordable price? Is perodua R&D working towards electronic vehicle? Oil will deplete one day and electronic vehicle is the effort human is taking towards green and renewable energy.
06/11/2020 11:33 AM
KevinL MBMR 0176
Plus point:
- Reducing debt level since FY17.
- Low P/B in FY20 of 0.56. However, average P/B since FY15 is 0.57.
- DCF (discounted at 15%, growth rate of 8%) based on past 3 years average is RM 3.24.
- Positive liquidation price of RM 0.51.

Negative point:
- Slim net profit margin. 5 years median of around 5%
- Low 5 years average core ROE of 4.55%
- Annualised P/E in FY20 is 22.1. Average P/E since FY15 is 8.4. Despite the current price has drop significantly in FY20, it is still relatively higher than the price pre-FY19 even though its FY20 annualised net profit is much lower than pre-FY19 net profit.
- Negative expected return: Downside RM 0.51, upside RM 3.24. Current price RM 2.86. (-2.35 x 50% = -1.175) + (+0.38 x 50% = +0.19) = -0.985
- Expected return vs current price: -34%

- Unattractive from long-term valuation perspective.
- Require sentiment and catalyst i.e. very strong boost in QR earnings to invigorate market interest.
06/11/2020 6:54 PM
Zuliana After what happened to Choivo Lctitan prediction .. no more looking at another Choivo prediction.
Once bitten, still want to be bitten again???
07/11/2020 6:07 PM
stockraider Posted by Victor Yong > Nov 7, 2020 4:53 PM | Report Abuse

Too strong the tsunami in volume, traders yang negatif rugi saja :). Big Dana sapu, tiada dapat stop it

Date Close Volume
06/11/2020 0.14 210,315,400
05/11/2020 0.125 157,969,200
04/11/2020 0.115 170,114,300
03/11/2020 0.10 22,745,700
02/11/2020 0.10 15,774,400
30/10/2020 0.105 8,089,700
28/10/2020 0.12 653,000
27/10/2020 0.12 3,567,700
26/10/2020 0.115 2,413,300
23/10/2020 0.12 3,333,300
22/10/2020 0.13 6,231,200
21/10/2020 0.13 8,978,900
20/10/2020 0.14 4,131,700
19/10/2020 0.14 7,777,700
16/10/2020 0.14 7,777,700
15/10/2020 0.15 3,656,000
14/10/2020 0.15 14,174,900
13/10/2020 0.16 3,426,000
12/10/2020 0.155 13,841,200
07/11/2020 6:28 PM
stockraider Very powerful rally coming for netx-w mah...!!

Netx will breakout from present consolidation 13.5 to 14.5 sen soon towards elevated level of 15 to 20 sen soon.

As usual the warrant will magnify this potential gains towards 8 to 12 sen loh...!

Your gain is more substantial with warrant if u hentam kuat kuat at 4 to 4.5 sen mah...!!

Always support the house or insiders...u will have the advantage like Raider loh..!

Master the insider skills bet with the insiders & not against them in Netx loh...!!

The management already put in Rm 35m RI excess in netx...that will trigger buy & u should follow buy mah....!!










Posted by Victor Yong > Nov 7, 2020 4:53 PM | Report Abuse

Too strong the tsunami in volume, traders yang negatif rugi saja :). Big Dana sapu, tiada dapat stop it

Date Close Volume
06/11/2020 0.14 210,315,400
05/11/2020 0.125 157,969,200
04/11/2020 0.115 170,114,300
03/11/2020 0.10 22,745,700
02/11/2020 0.10 15,774,400
30/10/2020 0.105 8,089,700
28/10/2020 0.12 653,000
27/10/2020 0.12 3,567,700
26/10/2020 0.115 2,413,300
23/10/2020 0.12 3,333,300
22/10/2020 0.13 6,231,200
21/10/2020 0.13 8,978,900
20/10/2020 0.14 4,131,700
19/10/2020 0.14 7,777,700
16/10/2020 0.14 7,777,700
15/10/2020 0.15 3,656,000
14/10/2020 0.15 14,174,900
13/10/2020 0.16 3,426,000
12/10/2020 0.155 13,841,200
07/11/2020 6:30 PM
stockraider Remember With Rm 126m to Rm 131m net cash in Netx with the RI completed ,u can find big opportunity mah...!!

In addition there is a bigger skin in the game, where management confidently buyout netx & had put in rm 36m of its own hard own money to be the new substantial shareholders loh...!!

Everything is reset for Netx, it is the beginning of a New Era & a new prosperous technology NETX Mah....!!

Very Bullish scenario mah...!!
07/11/2020 6:30 PM



Posted by Good123 > Nov 7, 2020 10:48 AM | Report Abuse

on the way back to 20sen then private placement to hongkong/china group to expand to fintech microfinance or digital banking probably.

cheap valuation , margin of safety is big. mgmt buyout to ensure top mgmt interests are in tandem with shareholders

Posted by Good123 > Nov 7, 2020 10:50 AM | Report Abuse

current price 14sen, possible to double or even triple in price few months down the road probably. better late than never.

ask your fund manager :)
07/11/2020 6:31 PM
stockraider Remember Technology business high growth sector must have some exposure when they are opportunity get it for a song like Netx mah..!
07/11/2020 6:33 PM
bursakid My EP is 2.85, I will come back and have a look at it again after 2 more QR's
08/11/2020 9:18 PM

(CHOIVO CAPITAL) KRONO (0176) - Is it Alibaba (Alibaba Cloud)? (SUMMARY)

Author: Choivo Capital   |  Publish date: Tue, 3 Nov 2020, 12:03 PM

For a copy with better formatting, go here, its alot easier on the eyes.

(CHOIVO CAPITAL) KRONO (0176) - Is it Alibaba (Alibaba Cloud)? 





A few hours ago, a friend updated me on this information relating to KRONOLOGI (Kronologi Asia Berhad), a company I’ve had at the back of my mind for some time.


KRONOLOGI had won an exabyte-size cloud hyper-scale supply and managed services contract in China. It was by a market-leading web search, online community and artificial intelligence services provider. And according to the CEO, Edmond Tay, “Involves China’s largest cloud hyper-scale infrastructure for cloud-based data archive, long-term data preservation and retention services”


They did not disclose the identity of the Chinese entity. But this sure sounds like Baidu or Alibaba.





Brief Background of KRONOLOGI

As im not done with my analysis, i will only provide a summary for now.


KRONOLOGI is an Enterprise Data Management (“EDM”) company.


They provide both the hardware (servers etc) and the software needed to retrieve, compute, store, archive and backup data for medium sized companies, or companies who are not keen on taking on the large minimum costs that is charged by the top tier companies like Oracle, as well as provide yearly maintenance and service.


In the last few years, they’ve started to also offer a PAAS model, where you pay as you use, based on your capacity. This is because many customers do not want to have physical servers in their offices, nor do they want to incur the capex cost.


However, this is very good for KRONOLOGI as it results in much larger profits over the long run. There is a reason why Microsoft prefers for people to sign up for a Office 365 subscription versus selling you Microsoft Office outright.





Acquisitions (Expanding Reach and Capabilties)

Unlike most companies listed in Malaysia, KRONOLOGI makes use of the benefits of being publicly listed, that is to use their shares to buy other companies at reasonable prices, allowing them to grow their reach and capabilities much faster.

Over the years, they have acquired these companies using a mixture of cash and shares.


2019: Sandz Group

Price: RM75m

Structure: RM5m Cash, RM70m in Shares (RM0.5665 per Share)

Valuation: RM6.3m (USD1.5m) yearly profit (12x Price-Earnings)


2018: Quantum China Limited (16.67% Ownership)

Price: RM12.6m

Structure: RM12.6m Cash

Valuation: RM60k profit (Profit grew 600% to RM375k in 2019. This indicates contracts already baked in upon acquisition, just not yet materialized)


2018/2017: Quantum Storage (Hong Kong) Limited

Price: RM45m

Structure: RM5m Cash, RM40m in Shares (RM0.98 per Share)

Valuation: RM5m (USD1.2m) yearly profit (9x Price-Earnings)


2016: Quantum Storage (India) Pte Limited

Price: RM26m

Structure: RM15.2m Cash, RM10.8m in Shares (RM0.1941 per Share)

Valuation: RM4.1m (USD1.0m) yearly profit (5x Price-Earnings)


The biggest concern of these acquisitions is that because they (other than the Sands acquisition) are often related or owned by the Directors.


This was due to Kronologi being listed/born on the Malaysian public market in in a different way from most. In their case, a holding company was first created, and their then largest company injected into the holding company to be listed.


In the subsequent years, the management wanted to consolidate all their companies into the public company, and so we have the above acquisitions.

Now, when it comes to public companies acquiring companies related to the management, there are naturally some misgivings towards the company, as there is the fear that the management is using the public company to bail out their private holdings.


However, as we can see here, post acquisitions and consolidation of their businesses, the Revenue, Profit and Estimated Operating Owners Earnings have grown consistently every year.


Their profit in 2020 fell mainly due to one of their larger customers being from one of the largest Airports in Asia (with this China contract, this point is moot).


So, at minimum, we can say that the probability that acquisitions are truly accretive in terms of reach and capabilities is quite high.


And to be frank, the valuations they paid to acquire these companies is more than fair.


Where else do you get to acquire companies in fast growing industries like datacentres for 5-12 times earnings?




The Proof -  The Alibaba (or Baidu)


Having said that, despite the nice table above which showed consistently increasing revenue and profit post acquisitions, that is in my opinion insufficient, as the time period is too short, and the real reason for the acquisitions is in order to be capable of taking on the really big contracts.


And this brings us to the China contract that they just obtained. For one, this is a CONTRACT, not a Memorandum of Intent (Which means nothing).



Given this pandemic, the data centre business is expected to go through an explosive growth period, as companies around the world digitalize.


And China will be growing especially fast. They have started speeding up the construction of their data centres. Baidu have unveiled plans to have more than 5 million intelligent cloud servers by 2030.


And Alibaba is going next level by announcing plans to spend 200 Billion Yuan or (USD28 billion) to build hyperscale data centres in China. They just finished 3 of them this year, with 10 coming in the next 2-3 years.


And KRONOLOGI just got a contract for one of them.


KRONOLOGI is a company run by Singaporeans who have the capability to provide services to TEMASEK. I am fairly certain they will do a good enough job with this contract to justify getting a few more of these contracts. And given the speed at which companies like Baidu or Alibaba is moving, these contracts should also be very juicy, as they will be focused on providers who can do a good job, not so much on price.



Target Price / Valaution

One of the difficulties in companies like these, is that it’s often not that easy to put a price on them.


If this turns out to be the start of something amazing, you are likely to severely undervalue the company. If it turns out horrible, you get WeWork etc.


Having said that, given KRONOLOGI’s track record, I think they have a good chance are turning out well.



Given the new contract, i think there should be an increase in estimated operating earnings of RM18m (RM27m, less maintenance Capex of RM9m) in 2019.


To be very conservative, I’m only going to increase projected earnings by 10% to RM20m.


Given that this company grew Estimated Operating Owners Earnings to from RM9.2m to RM26.9m, as well as the Alibaba/Baidu data centre contract, I think a PE Ratio of 25 times is appropriate. For the record, most data centre companies are either 40-50 times Earnings, or 20-40 times Revenue.


Having said that, I think with this contract, they are likely to break their previous record high profit, and thus break their previous high of RM1.2 as people start seeing it as the good company in fast growing industry.






And, One Last Thing.

Is it priced in?


Other than the brief pop back in April-May 2020, which affected all stocks, it has only gone down since then and is way below its pre COVID price of RM1, despite having made a core operating profit in Q2, having obtained the Alibaba/Baidu data centre infrastructure contract, and having good financial structures and a net cash position.


In Q1, the company recorded a loss due to an impairment to PPE of RM11.6m taken out of prudence. As they had new infrastructure coming in, and they decided to replace their current PPE early to take advantages of the new PAAS demand coming. A portion of their old infrastructure was used by Hospitality, Airport and Airline customers, making Q1 an opportune time to replace them.


In Q2, like most companies in the world, they were affected by the pandemic, as well as higher air freight cost for their components, but still made a profit. This profit would likely increase as freight cost fall over time, and when the Alibaba/Baidu contract starts.


Based on the current price, I think most of the facts as well as the Alibaba/Baidu contract written above have not been priced into the stock at all.


Disclaimers: Refer here.


Facebook: Choivo Capital

Website: www.choivocapital.com

Email: choivocapital@gmail.com

Telegram:  https://t.me/Choivo_Capital



Labels: KRONO
  6 people like this.
speakup choivo still around?
thought arrested by SC for giving out stock recommendations without license
05/11/2020 9:54 AM
enigmatic [control your emotions, discipline your mind] The company really is Baidu.

13/11/2020 6:30 PM

(CHOIVO CAPITAL) POS (4634) – The Next Proton (Except you can buy it directly)

Author: Choivo Capital   |  Publish date: Sat, 31 Oct 2020, 8:50 AM

For a copy with better formatting, go here, its alot easier on the eyes.

(CHOIVO CAPITAL) POS (4634) – The Next Proton (Except you can buy it directly)




“Never Waste a Good Crisis.”

Winston Churchill

One thing about a crisis, is that they change consumer habits, speeding up both the demise and growth of different industries.


As this is Bursa Malaysia, when one can only go long and not short, i’ve spent quite sometime the last 1-2 months looking for companies whose growth have sped up, or whose business is poised for a turnaround as a result of this crisis.


And most importantly, companies whose valuations are still logical.


And this last criteria of logical valuations is particularly hard to meet, especially these days, when every glove, plastic, healthcare stocks are flying through the roofs.


Last week, I think I’ve found a fairly compelling idea.


I’m still in the process of doing a very deep analysis on the company and am planning to do a full write up.


However, it appears that doing so will take much more time than expected.


So here is a summary instead, which i think is more than comprehensive enough, and conveys most of what I’ve discovered and think about the company.



The Online Delivery Boom

One industry I thought should do well during this crisis, is the companies in the Delivery Industry, whether they are a “Last Mile Provider” or “Warehouse/Integrated Logistics Provider”.

Larger amounts of online deliveries (number of parcels processed per day have doubled from 400k to 800k according to POS Laju), should result in a drastic expansion in this industry.

I mean, even the government is sending you SMS’s to start buying things online.


And looking at their share prices below.



As we can see, most of them have recovered up to their pre-pandemic valuations. Some of them are also doing very well in terms of share price appreciation.


GDEX is an obvious candidate to benefit from this, given that their biggest business (more than 95%) is in the last mile delivery.


Meanwhile, companies like TASCO benefited from being linked to vaccine transportation by virtue of their cold logistics chain (they have since denied it), as well as an increase in flight freight rates which implied increased profits.


Or, TRIMODE who benefited from being the logistic provider of choice for most glove companies in Malaysia.


However, one thing that stands out the most for me, is the underperformance of POS Malaysia in terms of share price.


POS Malaysia, like GDEX is the most direct beneficiary of the E-commerce Boom but is a major laggard.


However, unlike GDEX, who has seen its share price increase 33.3% since the start of the year, the share price of POS Malaysia has instead fallen by 39%.


I don’t think this is justifiable, given their position as the largest last mile provider with the widest reach in Malaysia.


Especially since POS Malaysia have particularly strong market share among SME’s and new e-commerce businesses, which are currently the main drivers of e-commerce and likely to continued doing so in the future.



The Transformation of POS Malaysia

& Taking Advantage of a Crisis

Nobody ever said that only people in the equities market can take advantage of a crisis. Businesses can too.

So how has POS Malaysia taken advantage of this crisis?

Or more precisely, what are the things POS Malaysia have spent the last 3 years doing in order to be perfectly poised to take advantage of this crisis?

Opening an Online Portal (POS Laju Sendparcel)

On October 2019, POS Malaysia Launched POS Laju Sendparcel.


This is a fully online platform, which allows customers/businesses to auto generate consignment numbers easily, provide 24-hour access and fast order placements, instant pricing quotes, and drop off parcels at drop off points (they can come to you if volume is enough), and auto-calculate volume discount.


This is part of a 5-year transformation plan that started since 2019 (after they recorded their first loss in 2018) with the end goal of increasing efficiency by fully automating systems, and finding new sales channels (SendParcel), to push yields and enable them to increase capacity from 500,000 parcels a day to 1,000,000 parcels a day by the end of 2021 without substantially increasing costs.


Since it opened in October last year, they have grown exponentially (with the numbers exploding upwards due to the CMCO), and now have 86,000 users (that is a lot of users if your customer base is SME’s), and is on track exceed its initial target of RM30 million in Revenue for its first year.


According to the CEO, it is currently hitting 2 million parcels a month in September (this translates to around RM13.2m a month in revenue, given average revenue per parcel of around RM6.6 (RM21.7m revenue generated, 3.3 million parcels delivered from SendParcel for Oct 2019 – June 2020).


From barely 400k average parcels per month for the period of (October 2019 – June 2020), to 2 million packages a month for September. Utterly incredible



Creation of Fully Automated Fulfillment Centres

Currently, POS Malaysia has a courier segment capacity of 530,000 parcels a day from two parcel processing centres in Shah Alam and at KLIA2 (That excludes 78 Pos Laju offices nationwide, which double-hat as a front office to receive parcels as well as to act as mini parcel processing centres in the back of the premises).


As many would have noticed, the two main parcel processing centers are in Selangor.


As there is no other parcel processing centers anywhere else this increases processing time. For example, a package from Singapore to the receiver in Johor, needs to pass by KLIA first.


To make their courier segment/parcel delivery more efficient, they will be spending approximately RM340 million develop fully automated integrated fulfilment centers in the Northern region, East Coast Region, Sabah and Sarawak.


Their first one in Senai Airport (costing RM40 million with the capacity to process 120,000 parcels a day) will be completed in 2021.


These fully automated integrated fulfilment centers will enable them to do cut them processing time, and provide same day deliveries in these areas.


Installation of Semi Automated Sorting Systems

Over the last two years, since the new CEO have joined, POS Malaysia have installed 28 distribution centers with semi-automated sorting systems which reduce manual workload and streamline workflow for total efficiency.


The installation of these semi-automated sorting systems results in immediate benefits to its processing capacity and speed, where they are now able to process 60 per cent more items, bringing down the total processing time by one to two hours per day.

Drastically Increasing Personnel via the POS Rider

Scheme (Bypassing Unions)

For Q2 2020, courier volume increased 72% versus Q2 2019 from 343,000 parcels daily on average, to 590,000 parcels. Today, the daily average is 600,000 to 800,000 parcels a day.


To cope with this increased demand, POS Laju decided to take advantage of their POS Rider Scheme (launched October 2020), which paid their riders purely on commissions (They took in an additional 1,300 riders initially).


This bypasses their Unions (There is 7 Unions  in this Company), and makes these additional costs purely Variable instead of a Fixed one.


In addition, it also appears to be decent for the riders, many of them who have lost their jobs during this crisis.


If one manages to delivery 150 packages a day (basically work 24 hours a day, assuming 10 minutes per package) and works 6 days a week. One is theoretically able to hit RM10,000 per month in income (This is gross, before accounting for maintenance, fuel etc which is borne by the riders. Think GRAB)


This also appears to be the model POS Malaysia will be taking in the future, likely reducing their overall “all in” cost in the future.



Directly Hiring Cargo Planes

Since April, POS Malaysia have taken to directly engaging with Cargo Flight Services to supply the sudden increase in demand.  Increasing the capacity of cargo transportation from 200 tonnes a week to 510 tonnes a week.

And all this during a time when rates for planes are at close to all-time lows, from jet fuel being so cheap these days (it used to be the highest and most expensive grade), that it is even being blended and used in Ships (which typically uses the lowest grade).

Bringing Forward IT Investments

(Save Costs, Increase Revenue, Expand Bottomline)

For most companies, increasing IT investments during this period means spending money on ZOOM, Microsoft Teams, and Laptops.


This is not the case for POS Malaysia.


They have brought forward their plans to spend RM100m to digitalize their core systems, including a new track-and-trace system, to drive up revenue and service quality up while containing costs.


The new core systems are expected to be fully operational by mid-2020, with the peripherals and sub-systems to follow.


The data analytics portion will be fully online in two years. The data analytics portion is there to help them manage their resources more efficiently, for example, in terms of manpower distribution and responding to volume growth in different areas.


In addition, POS Malaysia are also looking to launch an app that will allow its postmen to become agents for bill payments, mobile credit reloads and other payment services that can be done online, so that they can a moving outlet for these services, increase yield per employee, and increase their own salaries.

Funding the Above – Simplify, Simplify, Simplify

(Disposal of Non Core Systems)

How to pay for the above? Right issue your ass all the way to Holland?

Well this not the POS Malaysia way.

Since the new CEO came in, POS Malaysia have taken steps to dispose partial stakes of their Non-Core Business, to business partners with the capability to run it well. Just like Proton.

  1. Divestment of 51% shares in wholly owned subsidiary World Cargo Airline Sdn Bhd (WCA) to Asia Cargo Network Sdn Bhd (ACN) via issuance of new shares in WCA to ACN for RM40m cash. This will give rise to RM63m in disposal gain. Last year, this company lost RM32m.
  2. Divestment of a 49% stake in Pos Aviation Engineering Services Sdn Bhd to SIA Engineering Co Ltd for a cash consideration of RM10.09 million in February 2020.
  3. At least one more divestment is will happen next year, and if I have to guess, it will be the Ah Rahnu pawn broker.

Finding the Right Management

For some of you who have been keeping track of POS Malaysia, and Syed Mokhtar Albukhary’s companies in general, you would have noticed quite the flurry of activity.


For one, Syed Mokhtar has put his daughter on the Board of Directors in his companies, from MMCORP, Tradewinds, DRB-HICOM and of course, POS Malaysia.


Interestingly, unlike the children of most extremely rich businessman (like the YTL daughters who seem more interested in enjoying the nice things in life) this lady appears to be quite the go-getter and have quite the CV.


Like many of the third-generation children, she has immaculate University Credentials, and Investment Bank experience (This can also be Top Tier Consulting Firms, or Banks), which, to be fair, is definitely something that can be bought with connections, donations or the potential of future business.


However, in her case, one thing really stood out.


She was also an external consultant for the Bill & Melinda Gates Foundation from October 2015 to May 2016, where she produced an integrated index to measure women’s empowerment and submitted a list of realistic recommendation on empowering women in various age groups.


Unlike, the above, this is something that cannot be bought.


In addition, in POS Malaysia, Syed Mokhtar changed 3 CEO’s in 2 years, in search for the right person, and most of them have very Non-GLC backgrounds, whether it was an ex Airasia C-Suite member, or people who worked for a long time in his other companies.


In addition, the new Chairman, Datuk Yasmin binti Mahmood, is not some political appointee or ex-government personnel who is there to warm the chair for optics. She was formerly the Managing Director of Microsoft in Malaysia.


Let’s not also forget, that Syed Mokthar was the person who dared to sell 49% of Proton (A company with the entire eyeballs of Malaysia on it, and deep emotional attachment for the Bumiputra’s) to a Chinese company, and have a Chinaman run it.


This is clearly not your typical GLC.

The Art Of Turning Weakness

Into Strength
Now looking, at the constantly down trending chart, the market no doubt seems to be thinking that the challenges being faced by POS Malaysia far outweigh the actions above taken by the Company to turn things around.

Let’s look at some of the key risk’s and challenges being faced by the company and see if this thinking is justified.

POS Malaysia have 7 Employee Unions and is


One thing people like to refer alot to, is the seven employee unions under POS Malaysia, and how this must mean that the company is inefficient.


It does sound quite reasonable, but let’s see if this is the case.



Since being taken over by DRB-Hicom/Syed Mokhtar in 2012, POS Malaysia have steadily recorded a reduction in Staff Cost % over Revenue.


This is from efficiencies found in the business, as well as, acquisition of DRB-Hicom’s logistics division to be integrated into POS Malaysia


(In case anyone is wondering, the acquisition was paid for with POS Malaysia Shares then, at RM3.3 per share. Which I think is fairly decent given that POS Malaysia shares were overvalued then)


However, when looking at the numbers, we must always think about the comparison to its competitor.


And who better to compare against, other than GDEX.


The second biggest last mile provider in Malaysia, and because it is run by Chinese and have Singaporean links, is widely seen to be highly efficient.


As we can see from here, this is not really the case.


In fact, POS Malaysia staff cost as a percentage of Revenue, is lower than that of GDEX.


And even if we were to ignore the acquisition of POS Logistics in 2016, it does not change the fact that GDEX’s staff costs % have been steadily increasing over the years, while POS Malaysia’s have been staying even or reducing.


Why is this the case? Which brings us to the second point.

Mail Volumes have seen an accelerated decline

As it is widely known, around the world, mail have seen an accelerated decline over the years.

And this is no exception for POS Malaysia, from 2014-2016, total volume of mail has fallen from 1.026 billion to 893 million per year, for a CAGR of -7%. This has accelerated and from 2016 to 2019, this has fallen from 835 million per year to 655 million per year.


And the reason is obvious, with the advent of email, the internet, the mobile phone etc, the need for physical mail have fallen drastically.


Historically, the biggest users of mail with 95% share of customers, is commercial companies, such as banks etc who use it to send physical bank statements.


However, today, most people are getting their statements via email, which reduces the usage of physical mail. This along with other similar factors, resulted in the reduction of mail volume.


Historically, sending mail is a high volume, low value, low margin (if any) business, whose selling prices is capped by the government.


Except, cost escalates every year from both inflation, and the government’s requirement for increased coverage area (as they are a Universal Service Provider).

Since 2010, these rates have not been adjusted until 1 February 2020, when POS Malaysia got government approval for a postage rate increase for registered mail, commercial mail and small parcels below 2kg.


Stamp Rates (Commercial Mail): RM0.60 increased to RM1.30 (most companies use this when sending out mail)

Commercial Private Letterboxes: RM150 increased to RM 200 per year.

Postage of Commercial Registered Mail: RM2.20 increased to RM3.10

Postage of Non-Commercial Registered Mail: RM2.20 increased to RM2.40


As explained earlier, one of the roles of National Postal Services companies like POS Malaysia is their “Universal Service Obligations” to serve every corner of the country.


And currently, there is no profit in providing this service, it is a cost.


This increase in rates and is expected to contribute an additional RM100 million to RM150 million in pure net profit per year to POS Malaysia and help to reduce the cost of providing this service significantly.


And so, we must ask ourselves, is the reduction in usage of Mail a bad thing to POS Malaysia?


The answer is surprisingly not so simple.


Historically, “Mail” and “Courier/Poslaju” are two very distinct divisions. They often have their own sorting center, routes, delivery staff, and delivery vehicles etc.


However, as POSLAJU grew to represent an increasingly larger percentage of revenue and the “Postal” segment, POS Malaysia have started to take steps to merge these operations and consolidate them.


This initiative started somewhere around 2012 when DRB-Hicom took over and have only accelerated since then.


If you were to check with your typical POS Malaysia delivery person today, chances are their items consist of both Parcels and Mail.


Now, on average each piece of “Mail” gives slightly over RM0.70 of revenue, while each “Courier” on average gives about RM10 or so of revenue.


Given that operations are now consolidated, would it be better to drive 5km to deliver one piece of mail for RM0.70 (on average) or to deliver a Parcel which gives you RM10 (on average)?


Of course, there is the matter of sizing. However, I think that pales in comparison to the staff cost and fuel cost etc involved.


With their consolidated “Courier” and “Mail” segments, the reduction in “Mail” items and the increase in “Courier” items means that, POS Malaysia’s Postal operations is transitioning upwards in the value chain from low value items, to high value items that include tracking.

Too Many Outlets

Now, in the point earlier, I showed that the revenue of POSLAJU/Courier segment have been increasing very strongly.


However, when analyzing a company, we must look at the numbers not in isolation, but in the context of the industry and other players.

And who best to compare to, then the second taikor of the Malaysia courier industry, GDEX.



Now what does these numbers mean?


Who grew faster?







Well, whether on a 3 Year, 5 Year or 10 Year basis. At every level, POS Laju have grown faster than GDEX.


How can this be the case?


How a Malaysian “GLC” beat a private company that is run by both Chinese and invested by TEMASEK (Singapore’s National Fund) and SingPost (Singapore National Postal Company)?


The answer is simple.


By virtue of being forced by the government to be a Universal Service Provider, this meant they needed to have a nationwide presence.

This network and coverage is something that was built up by POS Malaysia over its more than 100 years history.


And it is also the reason for their absolute dominance in the Consumer or SME market which led to their faster growth rate.


Now, for many of us, when we get a parcel from Shopee, Lazada (for example) these days, it would be from J&T Express, GDEX and POS Laju etc.


It would be fair to say that the smaller players, especially if combined, hold more market share in these large e-commerce businesses.


Now, business with large e-commerce players is something most would welcome due to the large volume.


But the fact of the matter is, businesses like this is not that lucrative. Because these business have have very strong negotiating power, and you can bet that every year, they will find a way to chop you on the price.


Now, let’s talk about the consumer of small SME market instead.


Let say you have a package to post, its very easy to find a POS Laju outlet, where on earth do you find a GDEX outlet or a J&T outlet?


These outlets do not exist (you can try to find a “Mail Box Etc” outlet, but these are far and few in between).


And if you are a standard consumer, or just started your business due to this pandemic, chances are POS Laju will be the first thing on your mind for delivery options, and you will be paying the list price.


In addition, E-commerce is largely driven by small businesses. The top 100 largest ad spenders on Facebook (less than 0.1% of business users), constitutes of only 17% of their revenue. It isn’t the giant businesses who will make up for the bulk in online spending.


It is the SME’s who do online Facebook live shows, or have a small e-commerce stores etc like these who will drive e-commerce.


And this E-Commerce trend is only going to be accelerated by this pandemic and keep booming upwards in the coming years.


And it is far easier and cheaper to maintain a network of about 1,000 contact points to grab this Consumer/SME market, than it is to build one from the group up.


When I was studying POS, I could not help but notice the similarities between POS and Intel (back in the 1974-1984).


Back in 1974, Intel had 82.9% market share in DRAM, and this contributed more than 90% of their revenue.


Over time, the Japanese improved, and obtained production yields of around 40% higher than the US companies. They then flooded the market and turned DRAM’s into a commodity.


Intel suffered. And by 1984, their market share was just 1.3%.


Now, from 1974 to 1984, their Microprocessor division have been growing to become a large part of the business, and some of their middle managers have also quietly made the decision to adopt a new process technology which inherently favored Microprocessor rather than DRAMS.


And in 1984, at this inflection point, when facing the decision to on whether to throw more money into the DRAM blackhole, or to leave that business (it would be equivalent to Ford leaving the car business) and go all in into Microprocessors.


They picked Microprocessors, and until recently again got back a 90% market share.


Like Intel back in 1984, looking at the rise of ecommerce and the boom in the parcel business, POS Malaysia is currently at an inflection point.


And they have chosen to go all in, into the courier business and optimizing every inch of it.

Projected Profit for Q3 2020?
And so, I can hear the questions already.

“OK, it looks like it has a good chance of turning around this year.

You know, maybe the last two years results are not so good as it was still the gestational period of installing semi-automated sorting systems, and starting the online platform, and there was no rate increase then.

But what is the proof that all this is working?

Show me the numbers!”

Well, when POS Malaysia changed their CEO to Syed Md Najib in 2018, they embarked on a 5 year transformation plan, starting 2019, with plans to breakeven by 2021.


In a recent interview on 20 September 2020, he said that, due to the increased postal revenue from its SendParcels business as well as measures to increase the efficiency of its operations.


The original plan to breakeven for the year by FYE 2021, have been brought forward a year to FYE 2020.

His exact words are:

“A lot of our forecasts and plan had been expedited because of the Movement Control Order (MCO).

It would be fair for me to say that our plan has been fast-forwarded by about a year owing to the increase in demand for SendParcel’s services during the MCO period.

Originally, we forecast to break even [for the year] by the end of FY2021.

But now, we think we can hit break-even point by the third quarter and be profitable by the fourth quarter.

If the trend of increased demand for e-commerce continues, we are hopeful of reaching this target”

Now, this seems like a very bold statement to make, especially for a Company that made losses since Q2 2018.


In addition, for the year-to-date Q2 2020, POS Malaysia have made a net loss of RM66.75 million.


In order to breakeven by Q3 2020, it needs to make around that RM66m in profit.


Now based on the CEO’s statement above, he appears to be banking on the “Postal Segment” (their biggest segment) to turnaround and post profits.


Is this possible?


Let’s look at the Postal Segment results for Q1 and Q2.

Now, the above numbers are “Year to Date”. This means they are cumulative and not for Q1 and Q2 separately.


And you can see something a little strange here, the YTD Revenue for 30 June 2020 (RM959.5m) is higher than YTD Revenue for 31 March 2020 (RM422.1m), but the YTD Loss is lower.


Breaking it down into the individual quarters, and


Firstly, we exclude the additional revenue from the increase in mail rates (which was projected to be around RM100-150 million a year).


This is because we want to estimate the increase in mail volume and revenue due to this pandemic, and not have the data distorted by this increase in rates.


We estimate this at RM10m per month.


From here, we can see that Q2 actually recorded a profit of RM4.2 million, versus the RM49.9m loss in the previous quarter.


As this segment has high fixed costs (but low variable costs), we need to calculate the Gross Profit Margin of the Additional Profit, and the Additional Revenue for Q2 vs Q1.


And from above, we can see that from Q1 – Q2,


  1. Courier Revenue and Volume have grown by RM105.3m or 26.2%
  2. Courier Profit have from increased by RM44.0m or 137%
  3. Gross Margin on Additional Revenue is 41.8%

And using the above Revenue Growth Rates for Q2 and the Q2 Gross Profit Margin on Additional Revenue, Projected Revenue and Profit for Postal Segment for Q3 alone is RM640.3m and RM59.7m.


Now, they are three other segments in POS Malaysia, “Aviation”, “Logistics” and “Others”. How would these perform?


  1. Aviation: This division is going to be impacted by planes being grounded etc, as the previous two quarters have shown. However, POS Malaysia also have their own planes, and airfreights rates have increased very strongly the last few months. And is evidenced by TASCO’s Q2 profit quadrupling from RM2.6m to RM10.7m.
  • Logistics: Given the strong demand for logistic services recently this division should do fairly well, or at least better than the last quarter.
  • Others: Revenue from here come mainly from their pawnshops. Whose profits have increased very strongly. They made RM8.9m profit in Q1 and doubled this to RM17.6 profit in Q2.


All in all, it looks like the turnaround is real, and there is a good probability that POS Malaysia is going to breakeven for the year 2020 on Q3.


And one last things, since no analysis is complete without a reference to Vaccines or Covid-19.


To put the cherry on top, since early 2019, POS Malaysia have been doing deliveries of medication, lab samples and the like for some government hospitals.


This means they have the capability to distribute the vaccine as well.


Given the fact they initiated the POS Riders initiatives, which helped the government to reduce joblessness and increase the income of the people, who do you think the government will give the COVID 19 distribution contract to?


I think it’s going to be POS Malaysia.

Target Price
And so, to calculate our target price.

To be conservative, we are just going to assume that the other divisions combined make a grand total of zero profit, and only use the “Postal” numbers.


Make no mistake, these growth in earnings are not a one-time show.


This turnaround and success happened when the 2 years of hard work from POS Malaysia and the new CEO Syed Najib to make the company more efficient, automated and increase sales channels, meets an unprecedented opportunity, ie the COVID 19 crisis which caused an E-Commerce boom.


POS Malaysia and Syed Najib are the phrase “Never let a good crisis go to waste” personified.


Again, target price is dynamic, as people realize that this company is turned around, it should go to around RM1.5.


When Q3 comes out and people see proof of the turnaround, it will go to RM2.1.


As people realize POS Malaysia have turned around and is going to record increasing profits due to the accelerated growth of E-Commerce, there will be significant additional price appreciation.


In addition, whether got MCO or not MCO, COVID or no COVID, POS Malaysia is expected to continue growing at an accelerated pace.


Don’t forget, POS Malaysia was a RM5 company back in 2018, before the new government came in.


And it was a RM3 company when the new CEO first came in, and it is a far better and far more profitable company today than it was then.

And, One Last Thing
Like my LCTITAN pick, I don’t like investments or trades where all the upside is priced in, like the current glove counters (You think Covid-19 will stick around forever? You think nobody will open new factory?).

There is a reason why despite making record profits, share prices went down instead.

Think again, why on earth would Top Glove pay out a fat dividend, and then plan to raise more money by selling shares on another listing in Hong Kong?

I like my investments, where they will do well whether COVID 19 is around or not.

Fact of the matter is, even after COVID 19, people are still going increasingly do their shopping online as it is just a better solution. 


And so, we must ask ourselves, is it priced in? Has this stock been fried?

Like my previous pick, LCTITAN, this stock is 
pretty damn clean.

Other than the brief pop back in April-May 2020, which affected all stocks, it has only gone down since then and is way below its Dec 2020 closing price of RM1.5, despite being projected to make more money in Q3 2020.


Clearly the market still thinks this is some random GLC that is inefficient and going to suffer (or even potentially go bankrupt like MAS) for the next 1 – 2 years.


It had unfortunately shot up a bit due to the SMS from the government, which resulted in people turning their eye to the logistics industry.


However, I don’t think most people understand the full scale of how much better POS is doing to do. Most of the facts I have written above have been priced into the stock at all.


As always, buy and sell it at your own discretion. Determine for yourself whether this is a trade or investment.


Target price is dynamic. Set your own based on your own understanding of the situation, your sizing and your risk assessment/tolerance.


All the best and good luck.


Disclaimers: Refer here.


Facebook: Choivo Capital

Website: www.choivocapital.com

Email: choivocapital@gmail.com

Telegram:  https://t.me/Choivo_Capital

Labels: POS
  4 people like this.
VenFx Give 1 like for Pos article
31/10/2020 10:12 AM
CharlesT certainly worths a look
31/10/2020 10:40 AM
lcwin hahaha.. I realised you deleted my comment by reposting this again. Trying to con retailers is bad Karma. Anyway I won't comment further as you will delete it so for Investors beware of this Guy....Cheers
02/11/2020 10:11 AM
Slc1 In bursa we have to 'saya jaga saya' motto or else you will see all your money disappeared.
02/11/2020 10:23 AM
MohdHafiz Joker come con your money. please dont even read and follow. he post and he ady bought u all help him make money
05/11/2020 5:16 PM
MohdHafiz Icwin is correct. he will rot in hell. karma guy. his project of lctitan 8 bucks. where is it.
05/11/2020 5:16 PM
Choivo Capital lcwin,

if i want to, i can just make it so cannot post comment.

I deleted and reposted to ensure it gets tagged to the stock page.

Who are you btw? You're not that important you know.
05/11/2020 6:18 PM
Choivo Capital If you wake up, nothing to do and want to post comment. Go post all you want.

All my post allow people post comment one.
05/11/2020 6:19 PM
Fear Trend haha... lame choivo is at it again. please comment lctitan 300 million profit my dear... post exaggerate thing to con ppl... bossku
05/11/2020 6:38 PM

(CHOIVO CAPITAL) LCTITAN (5284) – An Update on Naptha, Polyolefin & Butadiene Prices

Author: Choivo Capital   |  Publish date: Mon, 19 Oct 2020, 9:49 PM

For a copy with better formatting, go here, its alot easier on the eyes.

(CHOIVO CAPITAL) LCTITAN (5284) – An Update on Naptha, Polyolefin & Butadiene Prices




Well, since my last article on a call for LCTITAN on 26 September 2020, the share price of LCTITAN have increased from RM1.96 to RM2.51, a gain of RM0.55 or 28%. For those who have taken action the moment the summary was posted on I3, they would have been able to buy it at RM1.81, for a gain of RM0.70 or 38%.

Now, if you’ve read my article, you would know that the key to the explosive earnings for Q3 and Q4 lie mainly on 3 factors,

  1. Current and Future Naphtha Prices
  2. Current and Future Polyolefin & Butadiene Prices
  3. Sentiment and How much is priced in?

Lets look at each factor.


Current and Future Naphtha Prices

Since my article was written, Naphtha prices have increased slightly from USD353 to USD383. However, they have since gone on a downward trend.

Having said that, prices are still significantly lower than the 2016 averages (when they recorded all time high profits).

With that in mind, and coupled with Polyolefin and Butadiene prices holding steady or increasing since i last wrote (i will elaborate on this next), Q3 and Q4 are likely to record an explosive growth in earnings, the only question would be the quantum of the its profitability.

Studying the development in oil prices (which correlate tightly with Naphtha prices), its difficult to predict where prices would go in the next few months within 5% upwards or downwards.

Having said that, i think my thesis still stands.

Currently, demand for oil have fallen structurally by about 10-12% due to lower transportation and airlines still being unable to fly internationally.

Supply have also naturally fallen due to shale rigs in the US going bust, and most of the producers cutting productions to control prices. OPEC+ (actually just Russia and Saudi Arabia) have reiterated that their current production cuts (which should prevent oil prices from falling), but there are others like the US who are now restarting oil production.

In addition, they are countries like Kuwait, who rely very much on the sale of crude oil, to meet their national budgets.

The current oil crisis have resulted in a downgrade of Kuwait’s bonds, by Moody’s due to liquidity risk, and as of today, Kuwait are actually unable borrow money in the bond markets, and are forced to dip into their general reserves.

I imagine their current situation would mean that if prices every got a little higher, they would open the taps secretly to get some extra cash. This would apply to a lot of other oil producing countries. Malaysia for one is not cutting output.

If i have to make a guess, i think oil prices should remain range-bound, absent a resurgence in demand, something that looks quite unlikely in the next few months especially with COVID-19 cases increasing.



Current and Future Polyolefin & Butadiene Prices

On the other hand, Polyolefin and Butadiene prices have largely stayed even or increased somewhat due to supply constraints in the US, as well as Hurricane Laura knocking out certain refineries and Hurricane Delta that happened last week, which cut out the power.

One thing i think many are concerned about is, how will any future lock downs affect the usage of plastics, especially in terms of packaging.

Well, one reason for the strong resurgence in plastic prices was due to these lock-downs creating a strong demand for food delivery and online deliveries which massively increased the demand for plastics.

Here are some of the news flow when it comes to plastic prices, as well as its supplies and demand currently.

Weekly Resin Report: Spot Materials Remain Scarce
Oct 14, 2020
Processors scrambled to secure material to fill supply gaps, add to inventory as a buffer against additional supply-chain disruptions…

Weekly Resin Report: Spot Resin Prices Hold Flat, But at Elevated Levels
Oct 07, 2020
Resin prices were flat last week, and trading did not skip a beat as the calendar flipped to October and…

Weekly Resin Report: Processors Face Thinning Supplies and Escalating Prices
Sep 30, 2020
Heavy demand from both processors and resellers came up against insufficient supplies last week caused by…

Weekly Resin Report: Supply/Demand Imbalance Continues
Sep 22, 2020
Widespread damage and ongoing Louisiana power outages in the wake of Hurricane Laura kept some polyethylene and polypropylene producing plants from restarting. The production shortfall has become more evident and the supply/demand imbalance more…

For a more detailed read, you can go to this website PlasticsToday and do some reading.

Sentiment and What is priced in?

Now when it comes to every trade, we have to ask ourselves how much of this is priced.

At the current price of RM2.51 or RM5.7 billion; for a company with RM4 billion in net cash, and expected to make about RM300m for Q3 and Q4, i have to say not too much.

The last time it Naptha prices were this low, LCTITAN was selling at RM6.5 per share.

Now i have to admit, prices for Polyolefins and Butadiene was higher then, and so i think a reversion to mean target of RM4 is more likely.

Of course, quite a few things needs to happen for this to happen.

For one, many investors and fund managers are still slightly apprehensive about LCTITAN earning potential given the missed targets previously.

And so, they likely only bought their initiating positions and are waiting for the Q3 results to come out before taking up the rest.

And secondly, prices of Naphtha needs to remain at current levels or lower, while prices of Polyolefins and Butadiene need to remain at current levels of higher for the next 2-3 months till 31 January 2020 to result in earnings to maintain or increase for Q4.

And of course, if a result comes, rising sentiment and increasing prices have a way of reinforcing positive feedback loops, taking things to the next levels.

And as always, target prices are dynamic, and dependent on your own risk assessment and trade sizing.

So you will have to think for your own target price given the information provided in my previous article and this one, along with whatever additional information you found on your own.

Good luck.


Disclaimers: Refer here.


Facebook: Choivo Capital

Website: www.choivocapital.com

Email: choivocapital@gmail.com

Telegram:  https://t.me/Choivo_Capital

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19/10/2020 10:41 PM

(CHOIVO CAPITAL) LCTITAN (5284) Five Magic Words - Rising ASP’s, Falling Costs, Hurricane (or is it Butadiene?)

Author: Choivo Capital   |  Publish date: Sat, 26 Sep 2020, 8:36 AM

For a copy with better formatting, go here, its alot easier on the eyes.

(CHOIVO CAPITAL) LCTITAN (5284) Five Magic Words - Rising ASP’s, Falling Costs, Hurricane (or is it Butadiene?)





In the last 1-2 weeks, I’ve been studying up on the convenience store sector.  One thing led to another, and I found myself watching this video of a 
guy eating delivery hot pot with friends.

The thing that surprised me the most, was the sheer number of plastic containers being used. Its utterly incredible. Every single piece of meat and vegetable had its own plastic containers.





Now, one of the things I’ve been thinking deeply about this crisis, is how consumer spending and behavior have changed.

During a crisis, certain trends pick up speed, and other trends may fall completely. And some of these trend changes may very well be permanent, and thus affect valuations of many companies very differently.

The one trend that i think this COVID19 crisis have helped gain serious momentum in, is the online food delivery trend.

Currently, more people are buying food via online deliveries, and even the older generation who often still uses Banking Cheques, have embraced the use of GrabFood and Foodpanda. And all these food deliveries use up a lot more plastics.

This is a trend that I think will persist in a positive upward trajectory over the next 10 - 20 years because it just works, and the convenience is something people will pay for. The only problem previously was gaining traction fast enough, which COVID19 just helped solve.

And so, I decided to study the plastics industry.


And I think I have found, what I consider to be a top tier short to mid-term trading opportunity. At current prices, I also think it also makes a decent investment.




So, the question here I’m sure many want to ask.


Why not a plastic packaging company like SCGM, SCIENTEX and DAIBOCHI etc?



Well, it’s simple.

SCGM and many of the plastics packaging companies have run up so far ahead, selling something like 30PE on record earnings, or all time high prices due to the strong demand in plastics.

And because of this, i don’t think they make that good investments or trading opportunity anymore as most of it is priced in.

However, unlike the plastic packaging industry, the plastics focused petrochemical refining industry did not.

In addition, for these industries, they have a far better catalyst.

Because in the case of LCTITAN especially, their raw material cost (Naphtha) has fallen significantly during this period.

In addition, like the previous refinery run, a hurricane has struck in the petrochemical refinery complexes in the US, decimating supply at a time when demand is rising very strongly.




In the Plastics/Resin Petrochemicals Refining market in Malaysia. They are only two real suppliers. PCHEM and LCTITAN.

Now, both have had their share prices beaten down severely during this COVID-19 pandemic.


They reason for it is this.

The first, is that in terms of Revenue, plastics contribute approximately to each respective company,


PCHEM: 60%

This is their “Olefins and Derivatives” segment, a large portion of it is plastic resins/polymers, but it also includes other Olefins and other basic and high-performance chemicals. Which means the real plastic resin/polymers contributions is significantly smaller than the stated 60%.

In addition, the main feedstock for PCHEM is Methane and Ethane (basically Natural Gas), whose prices have increased during the year, by about 5%.



This is their “Polyolefin products” segment. It consists of ONLY plastic resin/polymers.

In addition, Unlike PCHEM whose feedstock cost have increased 5% this year, LCTITAN’s feedstock cost (which consist of more than 95% of their costs) which consists of Naphtha, which have FALLEN 34% since the start of the year. This reduces their cost very significantly.



What does Lotte Chemicals make?

Now, as said earlier, 80% of their revenue comes from “Polyolefin products”, which is basically “plastic”, and when it comes to “Plastics”, there are two main categories.


Polyethylene (“PE”)


There are 3 main categories for this that is produced by LCTITAN, these are HDPE, LDPE and LLDPE. What are these used for?



To put things simply, these are softer types of plastics, that is used mostly for plastic bags, packaging industry, food packaging etc 



Polypropylene (“PP”)



To put simply, this is a harder kind of plastic with more structural integrity.

It is mainly used for plastic bottles, cups, car parts, solar panel covers, plastic spoons etc. Basically, any and everything else that uses plastics.



LCTITAN is the biggest (if not, the only) manufacturer of Butadiene in Malaysia with its 100,000 metric tonne production capacity and a supplier of Synthomer, the only manufacturer of Nitrile Butadiene Rubber in Malaysia.


Butadiene is the key ingredient in the production of nitrile gloves and prices of Butadiene have doubled since Q2 due to the strong demand of nitrile gloves worldwide.



For a more comprehensive picture, you can refer to this slide by LCTITAN.



In addition, the increased usage of Face Shields, Throat Swabs, Personal Protection Equipment etc have also increased the usage of PE’s and PP’s globally.


As you see in the slide below, PP’s are a key raw material of these items.





Catalyst and Important Factors

Rising Average Selling Prices (ASP)’s.

So, how have prices of Polyethelene (LDPE, HDPE, LLDPE) (“PE”), Polypropylene (“PP”) and Butadiene (“BD”) fared?

Well, it’s really difficult to find the prices of these items, as there are very little public charts on them, and when it’s available, you’d usually need to pay a subscription fee.


There are some public prices like this one from investing.com



This one shows to LLDP PE is back up to mid-2019 levels, but this is only one segment of PE and does not even include PP prices. And so, it is clearly not enough.


With some help from a friend access to a Bloomberg Terminal, we get the below.





And as we can see here, prices for all PE and PP items have increased versus 2019, and reached Q2 2019 prices, which was the high point in 2019.

As for Butadiene, South East Asian pricing have reached back to Pre-Covid levels due to the strong demand for nitrile gloves, whose factories are primarily located in South East Asia.

Now, for some of the items like PE-LLDPE and PE-HDPE, there isn’t a single price available, as it depends on the markets.

This is because refineries only exist in certain places/markets in the world, and their distance to consumers or feedstocks is different, resulting in somewhat different prices depending on the market.

And so, I picked the largest ones, China and Houston. And their price changes are as follows.


Polyethelene (LDPE): USD7,105mt to USD7,325mt (3% increase)

Polypropelene: USD751.5mt to USD784.6mt (4% increase)

Polyethelene (HDPE – Houston): USD705mt to USD1,005mt (43% increase)

Polyethelene (LDPE – China): USD744.0mt to USD747.3mt (0.4% increase)


As for Butadiene, prices have doubled since Q2, and is higher than Pre-Covid levels, which I’ve defined as Feb 2020.

Versus Q2 2020 - Butadiene (South East Asia): USD275mt to USD725mt (163.6% increase)

Versus Feb 2020 - Butadiene (South East Asia): USD665mt to USD725mt (9.0% increase)


So, what does this mean?

Well, as we can see from this chart, 2020 Q3 prices have basically recovered back to 2019 Q2/Q3 levels in just 3 short months, with HDPE increasing roughly 43% vs 2019.

And this pace is expected to continue due to strong demand increase, especially for Butadiene due to the strong demand for Nitrile Gloves.

And how does this matter, well in 2019 Q3 and 2019 Q4, given current prices for PP and PE LCTITAN could make at minimum roughly RM130m per quarter, or RM520m per year, except Naphtha cost is down 34% today.

Now, I understand that a lot of the information here will not be available publicly, and so I also enclose here some screenshots from the Bloomberg terminal to prove its authenticity.


This is the price of Propylene (a chemical byproduct that is mainly used in producing PE and PP, and usually created from Naphtha by LCTITAN) in Japan.



This is the price of Ethylene (a chemical byproduct that is mainly used in producing PE and PP, and usually created from Naphtha by LCTITAN) from Japan as well.

These charts are 10 years in length, but as you can see, 2020 prices are back to 2019 levels.

And this is the price of Butadiene in South East Asia. Last week, prices jumped up 13% in a single week. You can also refer to this link for the sole Butadiene price chart i can find online.

By and large, PP, PE (and all their associated chemicals) and Butadiene have had their prices increase across the board in ALL Regions back to Q2 2019 levels or Pre-Covid Levels.

Falling Costs (Naphtha)

Now, LCTITAN only use one kind of feedstock.

Naphtha. That’s it.

Naphtha is produced primarily from crude oil (whose price and demand have fallen due to low economic activity and transportation) and is primarily used for 3 things.

  • Dilution of Crude Oil for processing – Demand for this has naturally fallen as transportation (especially air) have fallen like a rock. Car Traffic is down 8% globally.
  • Plastics – Except due to natural gas prices being quite low historically since 2009, due to the increase in shale oil fields in the US (which produce Natural Gas), most plants in the US (a major supplier of plastics) using Natural Gas instead of Naphtha as feedstock. So, there isn’t much competition for Naphtha in this space either.


And with these things in mind, how does Naphtha prices look like today?



Fallen like a rock.

It is close to its all-time low (the all-time low is the peak of Covid-19 when it fell to USD130.44, before that it was the 2008 crisis when it fell to USD258.17) and has in fact fallen from USD536.17 to USD353.85 (Down 34% for the year).

Interestingly, due to the lower Naphtha prices, natural gas prices have increase due to the closing of shale rigs in the US reducing supply of natural gas in the US, LCTITAN now holds the cost advantage versus PCHEM in PP and PE, even though PCHEM signed a fixed cost contract for natural gas with PETRONAS in 2016.

Except that is not the end of it.




Hurricane Laura Decimating Petrochemical Refineries in USA

When it rains, it pours.

Just like the previous petroleum refinery trend in 2017-2018, a hurricane occurred two weeks ago in Louisiana, United States.

Hurricane Laura has hit and affected the petrochemical complexes in Lake Charles, Louisiana, and this is expected to further squeeze the already rising and high PE and PP prices.

From April to July, inventories of PE and PP in the US have already fallen by 756 million lb or 343,000 metric tonnes due to the increased demand, which resulted in the price increases you see above.

What this means, is that the impact of the hurricane has not yet been priced in yet into the prices of PE and PP.

Here are extracts of the reports

1 September 2020: The added production disruption will further tighten already scarce polyethylene (PE) and polypropylene (PP) supplies, and several producers declared force majeure, which will apply continued upward pricing pressure on these already rising markets, reports the PlasticsExchange in its Market Update. Its trading desk returned the third straight week of record results, placing August 2020 among the resin clearinghouse’s highest-volume months ever, equaling the extreme Hurricane Harvey market back in September 2017.

Estimates provided by the PlasticsExchange included 16 NGL crackers with a daily capacity of 95 million pounds, 14 PE reactors with daily capacity of 30 million pounds, and five PP reactors with daily capacity of 20 million pounds. Indeed, Hurricane Laura slammed into Louisiana last Wednesday as a very strong Category 4. The sustained 150-mph winds made it the largest storm to hit the United States in a decade and tied the strongest in terms of wind speed ever recorded in Louisiana, matching a storm back in 1856.



Supplies of PE and PP were tight even before Hurricane Laura made landfall, Pruett said.

From April to July, inventories of PE fell by 565m lb (256,000 metric tonnes), he said. From June to July, PP inventories fell by 200m lb.

These are significant reductions, Pruett said. He estimates that inventories for both plastics stand at 5-6 days below normal.

"With not enough PE or PP supply to satisfy demand prior to Hurricane Laura, these markets have just become extremely tight," Pruett said.

As Hurricane Laura approached Louisiana, Pruett said that 10-15% of US PE and PP production shut down as a precaution.

Many of these plants escaped damage and are starting up.

Still, that leaves about 5-6% of PE and PP capacity that will remain down in Lake Charles for more than a month, Pruett said.

Even when power is restored, workers returning to the plants could find more extensive damage, which could keep plants down for even longer, Pruett said.

Sasol Chemicals North America declared force majeure on all polyethylene (PE) products Aug. 31, including linear low-density polyethylene (LLDPE) and high density polyethylene (HDPE) grades at their Texas and Louisiana manufacturers in light of Hurricane Laura's assault on Aug. 27.

 LyondellBasell has shut multiple plants in Louisiana and Texas ahead of Hurricane Laura's landfall, reported S&P Global with reference to a spokeswoman's confirmation in an email Aug. 26.




Million Dollar Question – What is the Projected Earnings?

Well, throughout the years, changes in Naphtha, PP and PE prices can be quite large.

And as LCTITAN does not really disclose average prices for all 3 for the year, it does not really make sense to project the earnings by year.

Therefore, to do our projection, I will use the quarter where PP and PE prices are quite like the amounts today (Naphtha prices is generally very volatile, as oil prices are also very volatile).

And this would be Q2 2019 as I previously explained in the “Rising ASP’s” section earlier.

(A) Cost of Goods Sold
The cost of goods sold includes item such as depreciation and staff cost which is fixed. To identify and isolate the 34% drop in naphtha costs, I deducted the 2020 Q2 latest depreciation number, and the staff cost of RM50m a quarter, and that amount is multiplied by 34%. This gives you the savings to be had from lower naphtha cost.

Do note, for staff cost the total amount for the whole company is RM50m a quarter, or RM200m a year. But some of this amount needs to be allocated to Distribution and Administration expenses.

However, as I did not have the breakdown, I just allocated the entire amount to the Cost of Goods sold.

The right amount of savings should be higher.


(B) Cost of Goods Sold
For other income, this is due to write back of inventory in Q2 2019. For 2020, there is already a write back in Q2, (due to the steep fall of PE and PP prices in Q1 which have since increased). So, I don’t think this is relevant. Its also to be more conservative.


(C) Miscellenous Items
I have no idea what the numbers for these are going to be next quarter or next year. But they are typically quite small. And since the net impact to Q2 2019 Income Statement is positive, to be conservative, I will remove it.


(D) Finance Income and Costs
Fall in interest rates mean lower finance income and finance costs. I’ve therefore changed it to the finance income and costs in Q2 2020.


(E) Income tax
Tax is adjusted to 24% of the projected profit.


And so, just from the decrease in naphtha costs, and not even including the potential profits from the higher ASP due to margin squeeze from the hurricane.

LCTITAN is projected to make roughly RM483.4m for Q3. Giving an annualized profit of RM1.9 billion.

Now, knowing my readers, many people would naturally be a little skeptical.

These numbers do seem quite high, and so we have to ask ourselves, what other things can we use to support these assumptions?

As many would be able to deduce by now, the crux of the much higher projected profitability is the low price of Naphtha.


Now referring to the chart below,




The last time Naptha prices were around these levels is in 2016 (Naptha prices was in fact still significantly higher then) during the oil price crash.


What was LCTITAN’s profit’s in 2016 like?



All time high.


Now, what if we include the higher PP and PE prices, from both long-term trends in the increased usage of PP and PE, as well as the impact of the hurricane?



Quarterly profit increases to RM695m to RM908 million. Giving rise to annualized numbers of RM2.8Bil to RM3.6bil

Now, to be fair, since its already 13 September 2020, 2020 Q3 numbers will be nowhere near that, instead it will be more like RM520m. So, these will be more towards Q4 numbers, and depends on how much capacity the hurricane removed and how long it will take for plants to come back etc.

Still, it does not change the fact that plastic demand has gone through the roof in the last few months due to additional production of PPE, Masks, Online Deliveries, coupled with the low outputs in US refineries due to the shutdown of shale wells in the US resulting in lower gas supplies.





Current Valuation

And so, how much is LCTITAN valued today?


In terms of market capitalization, it is at RM4.4bil. This is a zero-debt company that also holds,



RM3.9 bil in cash and cash equivalents (This is for the LINE PP and PE plant in Indonesia, where the country does not have their own PP and PE refinery and therefore need to import these products).

This basically means, you buy the company for the cash it has in there, and you get for free, a business making at minimum RM483m per quarter or RM1.9bil a year, that has the potential to make RM908mil a quarter or RM3.6bil a year (if all the stars lined up).

Quite the deal.




Public Share Float

Now, one of the questions I’m sure is on everybody’s mind after this is,

“Yes, can go up, but LCTITAN is so big and heavy, how to go up?”

Well, the current market cap in LCTITAN is RM4 billion.


However, 76% of the shares are held by the ultimate holding company, Lotte Chemical Corporation. And they cannot sell it if they want to maintain basically the right to do whatever they want including changing the Articles of Association etc (which is why when they listed, they only sold 25%).



So, the publicly traded shares only amount to RM1.1bil.

In addition, as people start to read this article, I’m sure many of those who were previously “Stuck” (like many in Supermax before this) would now think to themselves,

“Maybe I should hold or even buy more as I think price will go up”

Resulting in the previously ample supply of stock from people who are stuck and want to sell, now drying up instantly, as they decide they want to keep and make more money or maybe even buy more.

Liquidity is dynamic after all.





50% Dividend Payout Policy


One of the problems with Hengyuan previously, and even today, is that it is owned by a Chinese company and is therefore unlikely to pay out much dividends etc.

LCTITAN is different.

It is owned by Lotte Chemical Corporation and therefore to move money back to the holding co, they need to constantly pay out dividends.


Historically they have paid out dividends every year.



And the only reason for the reducing dividends was lower earnings due to PE and PP prices falling in 2019 (due to the ban on plastics import from the US by china, resulting in flow of supply to Asia) and most importantly, high Naphtha prices in previous years.

As you can see here, they lowered the dividend payments because earnings fell  when Naphtha prices increased to almost USD725 in 2018.

In addition, there was also the fall in PE and PP prices in 2019 due to the ban on plastics imports from the US by China, resulting in the flow of US supplies to Asia.

As Naphtha prices is much lower today, while PP and PE prices have recovered to Q2 2020 levels and expected to go up further from the hurricane, I expect earnings to increase very explosively in Q3 and Q4 2020.

Which given history, should result in a large dividend, something that was also stated by their CEO, who confirmed a 50% dividend policy in a recent SinChew interview.





Risk Factors

Industry Risk

On a fundamental level, this industry is supposed to enter an oversupply situation in 2021 and 2022.

However, given the sudden surge in demand, which is likely to be structural and permanent, this situation should resolve itself mostly.

In addition, capex cuts by many petrochemical companies around the world (most refineries do other items including PP and PE, few are as focused as LCTITAN), there may be an undersupply situation in the foreseeable future instead.

Most affected refineries from the hurricane is expected to be restarted by October.

However, this is still hurricane season in the US, so you never know. The current impact in US is due to Hurricane Laura, but let’s not forget Hurricane Sally which may hit Louisiana as well.

However, even if everything goes back to normal, I expect LCTITAN to make RM482m in Q3 and more in Q4 as Naphtha prices are expected to remain depressed for some time due to the low economic demand as we are still in recession.

Lotte Chemical USA Corporation

LCTITAN owns a 40% share in an ethane cracker and monoethylene glycol (“MEG”) plant in the USA.

This plant was started up in September 2019 and primarily used to make ethylene from ethane. And MEG from ethylene.


Hurricane Laura also affected that plant as you see here.



However, here is why this information matters little.

This plant was only opened in September 2019, after running for 6 months, they basically cut production severely in Q2 2020. Coupled with the low ethylene prices in the US then, it recorded a loss of RM18 million.

This amount is included in my target price estimate, even though it is running and contributing to profit for a full 2 months, and with ethylene prices increasing strongly from July to September 2020.


The more important question is this, how much did this US Plant make back when it was first opened and running at full capacity?






Profit of RM163m in ONE QUARTER (Q4 2019).

How much do you think it will contribute for Q3 2020, when ethylene prices are higher than it was in Q4 2019?

If anything, they contribute a similar amount this year for Q3 2020.

Do note my target price does not incorporate this. Earnings may be up to 30% higher than the RM483.4m projected just for Q3.

In addition, in the statement, LCTITAN states that the impact will not be material.

In “Audit” terms, this means it should affect less than 5% of revenue, or in this case 10% of profit.

Increase in Naptha Prices

As we can see in my thesis above, the increase in profitability hinges mainly on Naptha prices staying low.

As Naptha is primarily produced from Crude Oil, for prices of Naphtha to stay low, crude oil prices need to stay low.

To start thinking about Crude Oil prices, we need to think about the supply and demand of crude oil.

Here is an interesting statistic.

As per Statista, from the previous financial crisis in 2009 to 2019, oil consumption have only grown by a CAGR of 1.73%.


And if we take the last 5 years from 2015 to 2019, it only has a CAGR of 1.07%.



This is an incredibly low rate of growth.


Now, in terms of %, oil is mainly used for,



Road Transportation.

Now, according to friends who work in highways in Malaysia, in terms of KM travelled, road transportation has fallen by about 8% compared to 2019 when comparing the latest month in 2020.

Meanwhile, for Aviation, it has basically fallen to zero.

This basically meant that about 12% of oil demand have been lost, with the 4% (from road transportation 8% X 50% = 4%) likely structural (due to work from home habits being built) and will need to be regained slowly.

And when it comes to air travel, I doubt international travel will be allowed any time soon.

Make no mistake, governments around the world are all itching to allow it again, but they just don’t have a good enough reason to do so yet.

To be honest, i think international travel will only be allowed after a vaccine is released and most of the key risk groups the population is vaccinated.

This is likely to happen in Q2 2021 earliest.

And even if international travel was allowed, I doubt it will recover previous levels, because business air travel (which previously consisted of 30% of all air travel) just does not make much sense these days when you can just work or meet remotely via video conferencing, and this is a habit every company in the world have now cultivated.

And because of this demand for oil is likely to fall back to 2014-2015 levels, while supply will not be reducing, as most shale wells in the US is expected to be restarted come end of September 2020, putting further pressure on crude oil and thus Naptha prices.

In addition, countries like Iran, Kuwait, Iraq who are already facing severe liquidity crisis due to most of their country’s revenue coming from the sale of crude oil, will likely be increase production in desperation.

Supply is likely to exceed demand in the short term (3-6 months) resulting in the current Naphtha prices to continue being depressed in the foreseeable future.



And, One More thing

With all the information above, we need to ask ourselves one very fundamental question.

Is it priced in?

Has anybody fried this share up so far?

This stock is 
more virgin than extra virgin olive oil.

Other than the brief pop back in April-May 2020, which affected all stocks, it has only gone down since then and is way below its Dec 2020 closing price of RM2.4, despite being projected to make more money in Q3 2020.

Clearly the market still thinks this is some random petrochemical company that is going to suffer for the next 1 – 2 years due to reduced demand.

None of the facts I have written above have been priced into the stock at all.

When you are reading this, prices is likely to be a bit higher as much of this information is likely to be public from a summary i will publish beforehand, and this may move prices upwards a little.

Also, there was an interview with the MD in Sinchew, which spiked up the price a bit at first.


Target Price

And so, the second million-dollar question, what is the target price?

For me, the target price is dynamic.

When this article releases, and PP, PE and Butadiene prices shoot through the roof, it should increase to somewhere around RM2 to RM2.5 by 31 October 2020 as market now anticipate the strong projected profits.

I’m being conservative on this one, as there are quite a few fund managers who have been traumatized by this company and want to get out. This amount may be higher, if the telegram groups start promoting.

Personally, I’m projecting around RM550m or more for Q3, which is an all-time high quarterly profit.

But to be conservative, let’s say I’m wrong on this one, and its only RM350m.

Well, currently the market is pricing this company on a price to book basis, with the company not being worth much more than its cash, as most people still think this is some random petrochemical company that will suffer during this COVID, instead of one that will make record profits.

The results will surprise most of the people and result in an increase in share price, but as the market may still think the profit may not be sustainable, it may only increase to RM3-RM4 post Q3 results, as people want more proof.

Now, im certain Q4 will also be at least RM400m-RM550m in profits.

When this happens, suddenly, in the mind of the public, this company’s survival will no longer be in doubt, instead people will be thinking about all the expansion plans this company has.

They will think about the US associate contributing RM150m a quarter.

They will think about the Indonesia PP and PE plant which will grow revenue to RM25bil etc.

And then, suddenly, they would want to price in the growth and maybe push it up higher to 10PE.

This is where it will go up to RM6.5 or more.

The most lucrative investment is one where people go from thinking the company dying (and thus valuing it on Price to Book Basis), to thinking it will now be making supernormal profits with strong potential for growth, and thus valuing it on a Price to Earnings Basis.

And I think LCTITAN is one of these stocks with a lot of catalyst upcoming.

Needless to say, quite a few things have to line up very well in order to hit the RM6.5 target price, but I think the odds are pretty decent.

Buy and sell it at your own discretion. This is my target price, set your own based on your own observation and understanding of the situation.

As always, all the best and good luck.




Disclaimers: Refer here.


Facebook: Choivo Capital

Website: www.choivocapital.com

Email: choivocapital@gmail.com

Whatsapp: Email me, for Whatsapp, i can only accept up to 256 people (unlike telegram where the limit is 20k). So i try to be more selective for this.

  2 people like this.
LaoTzeAhSir wow. mgmt holding 75% shares. just like harta 50% above. the price can simply move upward easier than tg n supermx
26/09/2020 10:08 AM
davidtslim Haha, this fler is a NO principle guy. Previously keep criticise other ppl as quarterly predictor and now this fler become quarterly predictor. Obviously can sense him NO profitable track records on investment n just pandai talk, while I hv spotted a few good stocks n earned comfortably over 4-5 years. He often say want long long term investment but now picks a cyclical stock like LCTitan.
26/09/2020 1:35 PM
davidtslim For me nothing wrong with quarter prediction n cyclical stock as many of my previous articles. This guy is the most arrogant ppl that I ever see but NO track records n always think he is smarter than others in investment. Actually I believe our past 4-5 years results show our overall capability.
26/09/2020 1:40 PM
Choivo Capital David,

When life gives you lemons, you make lemonade.

Even if I wrote it as an investment, the structure is still the same.

It's hard not to find buyers, when you are selling gold for a very cheap price.
26/09/2020 2:27 PM
Choivo Capital Also, as an investor, I love buying at cyclical bottom.
26/09/2020 2:28 PM
Sslee Haha,
When you are young, you tend to act as an idealist, who somehow thinks things in an ideal form as they shall or ought to be rather than as they are. When you are a little older you wise up and think things as how they should be but accept what they are.
Jon’ wonderful company TimeCom is a good long term investment.

We should encourage more bloggers to share their research work as nowadays you just need goggled to find out the relevant data.
26/09/2020 2:31 PM
Choivo Capital Look at your top picks today and mine.

Timecom (rm9 to m12)
Opensys (RM0.3 to RM0.8, high of Rm1)
Rcecap (rm1.2-1.9)
Petronm (this one I admit didn't go well)

All of the above not counting div.

I'm willing to bet 1-2 year from now lctitan price will be higher than today as well.

What about you?

Etc, too many to list.

What was the price when you recommended and the price today?

Anyway, let's not talk about unrelated things here.
26/09/2020 2:33 PM
davidtslim Actually I like LCTitan also and ever cover it b4. I have some performing stocks like Tguan, Supermx (at price RM3.5 ex-bonus), dayang at price RM1 and rise to RM3 at one time.
26/09/2020 4:54 PM
speakup if u like lctitan, pchem is a better choice
26/09/2020 5:12 PM
Philip ( buy what you understand) Hi davidtslim, mind to share your portfolio so we can study your comfortable picks? So far your sharing on Supermax is after the event happened, your sharing on hengyuan and petronm has already crashed ( I don't see any sell call from you, only buy calls), and your dayang picks also similar endings.

Hope to you learn more from you, do share some of your long term results.
27/09/2020 8:44 AM
Choivo Capital Either way, at 1.96, I think for the next 3-6 months, everybody who buy at this price will make money. Unless something incredibly unexpected happens.

Above rm3, well, everyone have to sendiri be smart.
27/09/2020 11:41 AM
Choivo Capital Personally, david, we have our differences.

However, I don't want to argue. You have your way and I have mine.

However, it appears our path cross at this particular stock, and we actually think quite similarly for this one.

Good luck.
27/09/2020 11:47 AM
supersaiyan3 Choivo, I reread the whole passage. Wonderful job, congratulations!
28/09/2020 9:48 AM
cruger12345 Gosh ... I hope you hit the number right.... I did the number in April 20 and feeling confidence I have all the number right only to be proven wrong after they release its Q2 20 result. If not because of the RM103m reversal of 1Q’s RM81m inventory write-down to net realisable value, it Q2 2020 was actually a losses. and now you are expecting a reversal and a profit of 482 Mil... That is irrational. All the best bro .. I hope you hit the jackpot
28/09/2020 11:25 AM
Primeinvestor rubbish chiovo, petrochemicals cant annualise peak earnings at even 10x, if you think supermax is worth RM2, lotte is not even worth Rm2, please be consistent in your assumptions
29/09/2020 4:04 PM
Sslee Dear all
For your information:
30/09/2020 9:20 AM
newbie8080 You are trying to link LCTITAN with butadiene for glove making?

Acrylonitrile butadiene rubber (NBR) and butadiene by itself is different.

Glove makers need NBR not butadiene.
30/09/2020 10:48 AM
22/10/2020 1:28 PM
MohdHafiz Tulis panjang tapi mana target price 8? tak graduate ni. mak tak ajar dia mathematics.
22/10/2020 6:54 PM

(CHOIVO CAPITAL) LCTITAN (5284) - Rising ASP's, Falling Costs, Butadiene (Glove Proxy), Hurricane, Selling For Cash (A Summary)

Author: Choivo Capital   |  Publish date: Fri, 25 Sep 2020, 11:02 AM

Well, this is a piece i've started studying for the last two weeks, and i think its one of the best ideas i have had in Bursa. 

I will only be sharing the summary for now. The full article will come this weekend.

Enjoy, and i hope you as my reader, can pick it up cheaply still.

This is the full article.






COVID19 resulted in increase in demand for online delivery for goods and foods, as well as face mask, PPE, throat swabs etc as well as nitrile gloves.

This resulted in large increase in demand for plastics and butadiene.

Currently supply for Plastics is insufficient, from April to July, inventories of PE and PP in the US have already fallen by 756 million lb or 343,000 metric tonnes due to the increased demand.

In addition, globally, butadiene prices have increased very strongly with even TOPGLOVE facing supply shortage.

Despite explosive earnings projected for Q3 and Q4 2020, share prices of plastic and butadiene focused petrochemical companies are sharply down.




80% of revenue is from polyolefins (polymers and plastics), and polyolefins segment contributed more than 85% to its Profit Before Tax in FY2019. PCHEM plastics contribution is less than 50%.

Feedstock consist of 95% of petrochemical company’s costs. PCHEM feedstock is Natural Gas (up 5% for the year), LCTITAN feedstock (Cost of Goods) is Naphtha (down 34% for the year).



Rising ASP's

Polyolefin and Butadiene prices have increased strongly due to supply shortage and is higher than 2019 or pre-covid levels.


Polyethelene (LDPE): USD7,105mt to USD7,325mt (3% increase)

Polypropelene: USD751.5mt to USD784.6mt (4% increase)

Polyethelene (HDPE – Houston): USD705mt to USD1,005mt (43% increase)

Polyethelene (LDPE – China): USD744.0mt to USD747.3mt (0.4% increase)

As for Butadiene, prices have doubled since Q2, and is higher than Pre-Covid levels, which I’ve defined as Feb 2020.


Versus Q2 2020

Butadiene (South East Asia): USD275mt to USD725mt (163.6% increase)


Versus Feb 2020 (Pre Covid)

Butadiene (South East Asia): USD665mt to USD725mt (9.0% increase)


Even with just these prices (before the Hurricane Price Spike comes), LCTITAN can go back to Q3-Q4 2019 earnings, RM130m per quarter, or RM520m per year, except Naphtha cost today is much lower.




Falling Costs

Naphtha is the main feed stock for LCTITAN and 95% of their costs. Prices for Naphtha is close to all time low, fallen from USD536.17 to USD353.85 (Down 34% for the year).



The last time Naptha prices was around this level was in 2016 (it was still higher then). In 2016, LCTITAN recorded their all time high profit at RM1.3bil.




Hurricane Laura Decimating Petrochemical Refineries in USA

Just like the previous petroleum refinery trend in 2017-2018, a hurricane occurred just last week in Louisiana, United States.

Hurricane Laura has hit and affected the petrochemical complexes in Lake Charles, Louisiana, and this is expected to further squeeze the already rising and high PE and PP prices.

("With not enough PE or PP supply to satisfy demand prior to Hurricane Laura, these markets have just become extremely tight," Pruett said. As Hurricane Laura approached Louisiana, Pruett said that 10-15% of US PE and PP production shut down as a precaution.")



Public Float

76% shares held by Korean Holding co who won’t sell. As the free float is only 24%, share price is likely to increase without much resistance when market realizes their potential.

There is also now increased liquidity due to the Dividend Reinvestment Scheme by the company.



50% Dividend Policy

Historically, LCTITAN have paid out dividend every year, and have 50% dividend policy.

Reduction in dividend previously was due reduced earnings, from falling PE and PP prices in 2019 (due to the ban on plastics import from the US by China, resulting in flow of US supply to Asia) combined with higher Naphtha prices.

Explosive earnings in Q3 & Q4 2020 is likely to result in a high dividend pay-out this year.



Projected Earnings

  1. Cost of goods sold include depreciation and staff cost. These are removed to isolate the Naphtha Feedstock cost. Amount shown is the 34% savings in net Naphtha costs.


  1. This is writeback of inventory (additional profit) for Q2 2019. It is a one-off item and thus not included to be conservative.


  1. These items are usually random and small in nature, as the net impact is an addition to profit, it is removed to be conservative.


  1. Interest income and expenses is adjusted to account for the lower BLR rate.


  1. Income tax is adjusted to 24% of the profit before associate loss and finance income.

Q3 2020 profit projected to be around RM482mil, with an annualized number of RM1.9bil.

When PP and PE prices increase due to Hurricane Laura,

Q3 & Q4 2020 profit is around RM695m – RM908m with annualized profit of RM2.8bil to Rm3.6bil.




Market Cap today, RM4bil, and,


Its also a zero Debt Company, with net cash of RM4bil.


Buy RM1 for RM1, get company that can make RM1.9b annualized for free.



Risk Factors: Lotte Chemical USA Corporation

LCTITAN owns a 40% share in an ethane cracker and monoethylene glycol (“MEG”) plant in the USA. This plant was started up in September 2019 and primarily used to make ethylene from ethane. And MEG from ethylene.

Hurricane Laura also affected that plant as you see here.

Worst case scenario, it is shut down like in Q2 2020, where coupled with the low ethylene prices in the US then, it recorded a loss of RM18 million.

This loss is included in my target price estimate to be conservative.

However, the power plant was running and contributing to profit for a full 2 months, and with ethylene prices increasing strongly from July to September 2020.

The more important question is this, how much did this refinery make when running at full capacity?




Profit of RM163m in ONE QUARTER (Q4 2019).

How much do you think it will contribute this round, when ethylene prices are higher than it was in Q4 2019?



And, one more thing

Is it priced in?

Has anybody fried this share up so far?

This stock is more virgin than extra virgin olive oil and is completely untouched.

Other than the brief pop back in April-May 2020, which affected all stocks, it has only gone down since then and is way below its Dec 2020 closing price of RM2.4, despite being projected to make more money in Q3 2020.

Clearly the market is still pricing LCTITAN as some random petrochemical company that is going to suffer for the next 1 – 2 years due to reduced demand.

NONE of the FACTS I have written above have been priced into the stock AT ALL!

Do note my target price does not incorporate this. If this is included, earnings is likely to be 30% higher than the RM489m projected just for Q3.

In addition, in the statement, LCTITAN states that the impact will not be material, this means it should affect less than 5% of revenue, or in this case 10% of profit.




Target Price

Why 23% Margin of Safety?

Because I want the target price to be IPO price. Haha, but I think its adequate.

This company is going to go from being valued on a Price/Book basis, to Price/Earning basis, resulting in explosive share price growth. This does not account for momentum trading and herd mentality which is likely to increase the share price further.

Forward PER less than 2X.


Disclaimers: Refer here.


Facebook: Choivo Capital

Website: www.choivocapital.com

Email: choivocapital@gmail.com

Whatsapp: Email me, for Whatsapp, i can only accept up to 256 people (unlike telegram where the limit is 20k). So i try to be more selective for this.



  LaoTzeAhSir likes this.
soojinhou Haha what do you know. The fler who called everyone else quarterly predictor himself became a quarterly predictor haha. Talk about irony.
25/09/2020 6:19 PM
Sslee Haha,
A first for sharp mind and acid tongue Philip to say something good about Jon, this make it a “must buy and don’t miss category”

Philip ( buy what you understand) Bought lctitan 200k shares on 22-23 after reading some reports from Jon around 1.79
25/09/2020 4:50 PM
25/09/2020 6:55 PM
stockraider Chivo our Hero loh...!!
25/09/2020 7:48 PM
supersaiyan3 Nice one! But I couldn't quite get it until I red the other article by JomnJerry.
26/09/2020 12:58 AM
inPeace A sick psychopath write again to manipulate the stock prices
26/09/2020 8:24 AM
Choivo Capital https://klse.i3investor.com/blogs/PilosopoCapital/2020-09-26-story-h1514324256-_CHOIVO_CAPITAL_LCTITAN_5284_Five_Magic_Words_Rising_ASP_s_Falling_Cost.jsp

This is the full piece.
26/09/2020 8:42 AM
Sslee TQVM Jon,
Finally a turnaround, dividend giving and potential growth stock, I’m waiting for to employ part of cash in my hlebroking trading account. (Bought about RM250K worth) My only complaint why Philip manage to get at RM 1.79 whereas my cost is about RM 1.84?

26/09/2020 10:03 AM
davidtslim Haha, this fler is a NO principle guy. Previously keep criticise other ppl as quarterly predictor and now this fler become quarterly predictor. Obviously can sense him NO profitable track records on investment n just pandai talk, while I hv spotted a few good stocks n earned comfortably over 4-5 years. He often say want long long term investment but now pick cyclical stock like LCTitan.
26/09/2020 1:35 PM

(CHOIVO CAPITAL) SUPERMAX (7106) – The Greatest Fool?

Author: Choivo Capital   |  Publish date: Sat, 5 Sep 2020, 6:08 PM

For a copy with better formatting, go here, its alot easier on the eyes.

(CHOIVO CAPITAL) - SUPERMAX (7106) – The Greatest Fool?














“Now shoulda woulda coulda, means I’m out of time
‘Cause shoulda woulda coulda, can’t change your mind
And I wonder, wonder, wonder what I’m gonna do
Shoulda woulda coulda are the last words of a fool”.

“Beverly Knight: Shoulda Woulda Coulda”

On 22 May 2020, I wrote this article.

Ragret Del Luna: 10 PE Glove Companies (SUPERMX – 7106)

When that article was written, SUPERMAX was at RM5.75.

When I wrote that article, i was filled with regret at not buying the week before, despite having discussed in depth with a trader friend of mine on the Average Selling Prices (“ASP”) price increases, and felt that it was not fully priced in.

The plan was to put around 20% – 30% of my portfolio in.

I even made the choice of choosing SUPERMAX out of all of them, though for all the wrong reason (ie it was the shittiest and when speculating you want the worst of the lot ). It was the best option due to them having the largest percentage of Own Brand Manufacturing sales, enabling them to raise prices with wanton abandon.

As many can guess by now, especially if you know me, and the type of person i am, as well as my weakness in staying out of speculating despite the edge being so clear; you would know that i did not buy a single share. I Shoulda Woulda Coulda done it. but i didn’t.

Instead, I just sat at the sidelines, going about my daily life, trying to ignore the sight, sound and clamor of it going up.

Talk about an exercise in futility, when you are part of 2 – 3 investment or trading group. SUPERMAX was the only thing anybody can talk off then.

Back then, I thought the price would go to maybe RM7 – RM8 and that’s it. As i felt that the previous increase from RM1.8 to RM5.7 have already incorporated a significant portion of the gains.

In addition, i was a little too emotional at missing out on the initial rise, and thus too focused on what i missed out on, and thus to see what it would become in the short term, when all the factors I listed in my blog post above,

  1. Unprecedented Level of Demand for Rubber Gloves
  2. Structural Capacity Constraints
  3. Price Increases
  4. Lower Costs
  5. Everything else is shit.
  6. Record KLSE Transaction Volume, Record Retailer Participation

converge and act together in ways that will feed back on each other and become what Charlie Munger would call a “Lollapalooza Effect”.

Also known as, SUPERMAX, RM24.44

It got so insane and the volumes so high, that Bursa actually crashed multiple times the last few months.

If I was more rational, I think it would be possible for me to buy at RM5.75 (or 1 – 2 weeks earlier) and sell out at probably RM17 – RM18

And so, there i was, starting the SUPERMAX journey as the Greatest Fool.

So why this article? To inform you of my stupidity?

Well, there is that and more.

Where can the Share Prices of SUPERMAX / Glove Companies go from here?

This I guess is the million-dollar question (it would be a literal question for some) on many people’s mind right now. Let me answer this question in 2 perspectives.

What is the market sentiment and the news like today? How it will be like in the future?

When I first wrote my article in May, we were just coming off the one of the sharpest stock market crashes in history, and the subsequently, one of the sharpest stock market recovery in history.

And at that point, there appeared to be nothing but good news in the horizon for glove companies. COVID 19 seemed like it was getting worse and worse, and the consensus then was that the vaccine is at least 1-2 years off.

(I disagreed with the vaccine bit, because that was a problem where, with enough political will and money, it will be solved. This is not pregnancy, where its impossible to get a baby in 1 month by getting 9 women pregnant)

It was so obvious that anyone could see it (and everyone did), which resulted in an unprecedented level of capital inflow into glove stocks.

And as share prices go up, along with the news of the worsening of COVID-19 around the world, as well as the increase of glove ASP’s by glove companies, this fed a certain positive feedback loop for the stock prices of glove companies.

Today, 3 – 4 months later, things are quite different.

China and Russia have effectively pushed their vaccines to final trials and is likely to mass produce them by the end of the year.

Yes, the Russian vaccine is effective. And yes, that is a picture of Putin riding a bear with a gigantic needed that was posted on his Facebook (since deleted).

And i guarantee you, regardless of whether FDA or EURO approval is obtained for the vaccines above, even if it was rushed out with potential side defects. Countries will use it, because the trade offs is far worse, as many can see from the current economic fallout.

If i am frank, i think Sweden strategy of not doing anything (or maybe just a 2 – 4 week lock-down to allow the public healthcare system to get up to speed) was the right way to go.

And from current news in the US, i think they too will release a vaccine by year end, whatever the costs.

And as every day passes, the risk of a vaccine being released increases (and do note market prices in the future and not the past).

Its safe to say, the future news is not in favor of the present holders of glove companies stocks.

And in terms of sentiment.

Like how people tire caring about COVID-19 and following about the health and safety procedures, the endorphin high of owning glove stocks and watching it march steadily upwards have also worn off.

With 3 – 4 months to respond, the previously constrained capacity for glove production also does not seem so constrained anymore, with numerous new and old players planning to expand to take advantage of the price increases and incredible returns (for now).

If I were a betting man, COVID 19 was only a good thing for the glove companies in the short term, but a horrible thing long term wise.

Even before this, if you were to discount the ban on vinyl glove production by China.

Margins and ASP’s on gloves have been falling for 2 years. With COVID-19 basically bringing forward a ton of capacity expansion plans, funding the less efficient players to enable them to last longer, and attracting a lot of new players.

I expect supply to normalize in 3-6 months from now, before it goes into an oversupply situation, and prices plummet.

And this oversupply, resulting in lower prices is likely to be a structural issues that the industry is going to need years to shake off.

2 years from now, the share price of SUPERMAX is going to be far lower than the current price.

Does anyone still remember HENGYUAN, the lesson it taught in terms of financial results of temporary ASP increases, and its current vs previous share price?

The second perspective is this.

Who is the current and future owners of glove stocks

A few months back, back when Dayang was all the rage, i wrote this article.

The Art of Trading DAYANG Profitably Around Mr Koon Yew Yin and Mr Ooi Teik Bee.

One of the key ideas there i wrote about was about the “Diversity of Participants” which i think is very relevant today and i will elaborate it here again using SUPERMAX as an example.

Every market or individual stock is a complex system that is typically filled with a diverse group of participants who are irrational in one way or another.

They consist of people having different ideas and different views of things. Long term, short term etc etc, and all these individuals are a little or very irrational towards one end or the other.

For example,

The long-term investor may decide not to trade even though it may make sense for this quarter, allowing the trader to trade and make that profit.

The trader’s inability to sit still and hold, allows the long-term investor to buy it from them and hold it, making the money from the long-term growth of the company. Etc etc.

Despite the irrationality of their participants, their diversity ensures that they are all irrational in different directions, giving a net effect of zero, allowing the wisdom of crowds to prevail over the long term.

This ensures that the market is efficient and accurate most of the time. This means that over the long term, movements in share prices are usually in line with movement in earnings.

However, this diversity can often undergo phase transition, and thus result in boom or bust in the short term. What is a phase transition? This is where small incremental changes in causes lead to large-scale effects, or the “Grand Ah-Whoom!” moment.

What is this Grand Ah-Whoom! moment?

Imagine this. Put a tray of water into your freezer and the temperature drops to the threshold of freezing. The water remains a liquid until—ah-whoom—it suddenly turns into ice. Just a small incremental change in temperature leads to a change from liquid to solid.

The Grand Ah-Whoom! moment, occurs in many complex systems where collective behavior emerges from the interaction of its constituent parts. And this includes the behavior of the stock market.

In complex systems with human beings like the stock market, diversity is the most likely condition to fail first.

As you slowly remove diversity, nothing happens initially. Additional reductions may also have no effect. But at a certain critical point, a small incremental reduction causes the system to change qualitatively.

Taking SUPERMAX for example,

At the beginning before the COVID 19 boom, their active participants (Most majority shareholders do not really deal in the shares, and if they did, it is usually quietly. For this illustration I am going to ignore that subset) consist of mainly,


At RM1.8-RM2
Cyclical Value Investors (say 20%)
People who were trapped (say 70%)
Geniuses who saw the potential impact of COVID 19 on the stock (10%)

This results in the shares being quite undervalued, as the people who were trapped do not want to top up and the cyclical value investors, are there by virtue of their cheapness. While the geniuses, by virtue of being geniuses, and the rarity of geniuses, are the smallest portion.

As the boom starts, the market participants become increasingly diverse as new participants buy the share from the current participants, and the price slowly approaches fair value, the participants now consist of say (figures are just for illustration, they are likely to be different),


Cyclical Value Investors (15%)
People who were trapped (15%)
Growth Investors (15%)
Koon Yew Yin & TY Yap & Ooi Teik Bee & Other Goreng Insiders (5%)
Koon Yew Yin & TY Yap & Ooi Teik Bee & Other Goreng Outsiders (20%)
Geniuses who saw the impact of COVID 19 on the stock (10%)
Shrewd Traders (20%)

As the boom rushes along, the “Cyclical Value Investors” and “People who become trapped” becomes increasingly smaller portions of the pie. It’s also very possible that some people turn from “Cyclical Value Investors” to turn into “Shrewd Traders”, especially as the retailers (foolish and shrewd) and fund money looking to ride the wave come in.

And so the boom continues, and the shifts continue. Soon, our participants consist of


Growth Investors (5%)
Koon Yew Yin & TY Yap & Ooi Teik Bee & Other Goreng Insiders (5%)
Koon Yew Yin’s & TY Yap & Ooi Teik Bee’s Other Goreng Outsiders (30%)
Shrewd Retailers (Usually Momentum Traders) (15%)
Foolish Retailers (25%)
Fund Money (20%)

It is around this point, as the price climbs higher and higher territory, that the Koon Yew Yin & TY Yap & Ooi Teik Bee & Other Goreng Insiders, fund managers, shrewd retailers and growth investors may start selling as well.

Soon the price shoots way past fair value, as well as past the moon and mars, at which point, the shrewd individuals sells out and it looks more like this.


Koon Yew Yin & Other Foolish Insiders (2%)
Koon Yew Yin’s & TY Yap & Ooi Teik Bee’s Other Goreng Outsiders (30%)
Foolish Retailers (58%)
Fund Money (10%)


At this point, population diversity falls, invisible vulnerabilities and risk start to build despite the price constantly marching upwards or staying even.


Because every single one of these participants use extremely similar trading strategies, and as they keep buying, their common good performance is reinforced.

How do you know you’re at this stage?

“When everyone in the stock cannot think of even one bad thing that will happen, or about the company, and the comments all sound the same.”

This makes the population very brittle, and a small reduction in the demand for Supermax/Glove shares could have a strong destabilizing impact on their prices.

I’m sure you guys have noticed how some days, the share price drops like crazy before recovering.

It is at this point that risk is at absolute highest.


As most of the market participants have the same strategy, in the event the thesis, or in this case, the news that is coming out is not as positive they expected, or worse, a vaccine is released.

It’s not just some of the market participants who want to sell, but, ALL OF THEM.

And as prospective buyers are likely to be market participants with similar trading or investment strategies, demand dries up instantly as well.

In the meantime, even if positive news comes out (by positive i mean any delay in vaccine or Covid 19 mutation), it will not increase by much as everyone who wants to buy the stock already has it, and has exhausted their cash and credit lines.

In this case the expected value calculation is highly negative, it probably looks something like this.

20% Very Good News of Vaccine: Down 60%
50% Good Vaccine News: Down 20%
20% Vaccine Delay News: Up 5%
5% Covid-19 Mutation News: Up 10%
5% Vaccine Delay and Covid-19 Mutation News: Up 20%

Expected Value: (0.20-0.6)+(0.50-0.2)+(0.200.05)+(0.050.1)+(0.05*0.20)= -19.5%

This means all outcomes considered, this has a negative expected value of 19.5%, the week when this news come out, and its likely to fall further as people sell.

Now as you can see in my elaboration earlier, often the goreng artist like Mr Ooi and TY Yap is very shrewd, and would have sold a large portion of their position as prices go up and inform their followers (Or at least Mr Ooi did, no comment on what TY Yap did, whom i consider more one of the most unsavory characters in the Malaysian market. But if you read the news online, you would have an inkling) .

This is where you may see some “consolidation” in terms of chart movements, which is where TY Yap & Mr Ooi & Other Goreng Insiders direct followers, shrewd traders and fund managers are transferring their shares to the foolish retailers.

Mr Koon on the other hand, often considers himself an investor and does not learn from his lessons and, to be blunt, swallows his own bullshit.

He will hold on longer, or wait for margin calls to force him to sell.

In 2018, he was burnt properly in 2018 from Jaks and Sendai and ended up losing more than half his networth and had to sell land in Ipoh, because he swallowed his own bullshit and was over leveraged.

Before making it and more back frying Dayang in 2019.

Before losing 90% of his net-worth in 2020 from swallowing his own bullshit and being over leveraged. An information he would like the public to forget today, considering that his blog post for that was deleted.

And now, he appears to have made most of it back from the rubber gloves, and looking at his constant postings (reading my article on how to trade around OTB and KYY, this is the stage where he is all in and no more money left to buy), and appears to have again swallowed his own bullshit and is again over leveraged.

I wonder what will happen this time.

History does not repeat itself, but it sure does rhyme.

While the foolish retail participant who are now out in record amounts due to the work from home initiatives, who is in reality a trader, but foolishly considers himself an investor, will likely make the fatal mistake of averaging down, often on margin.

Turning a bad trade, into a mediocre and fatal investment.

And with time, diversity returns, and the foolish retailer, turns into people who are trapped. And as prices fall further, with the cyclical value investors return.


There is a saying that many traders, especially the shrewd ones, live by.

“Do not try and make the last dollar”

And this is for good reason.

For most of these momentum or goreng trading strategies, the key ingredient for it to work, is to attract the greater fool to purchase the stock. And it is a very viable strategy.

And the last dollar is there to attract the greatest fools who will take the steaming pile of shit from everyone else.

And as each day passes, and as the stock prices increases, the average level of foolishness increases.

And so, if you are trading this strategy, the question you need to ask yourself is,

“Who else haven’t buy?”

“Who are the other greater fools left?”

Well, the below picture that was released one month or so ago, when Supermax was RM17.4.

For me, this is as great an indicator of where you are in the cycle as you are ever going to get.

If I was implementing this strategy, this was a sign that we are near the top.

If the uncle selling chicken in pasar also buy d, who else is left to buy from you?

Do you think they are greater fools left?

Well, when this all started, i was the greatest fool. And i hope that you, the person reading this, will not be the greatest fool when the clock strikes 12 and the music stops.

I am likely wrong at this very specific point in time (in fact given my track record, it may go up on Monday), but as each day passes, the probability of me being right increases.

With that, i end this. I hope things end will for you. And if you are still holding and currently have some gains and losses. I hope this piece helps you make up your mind.

Good luck, 走好,不送.


There is an old story about the market craze in sardine trading when the sardines disappeared from their traditional waters in Monterey, California. The commodity traders bid them up and the price of a can of sardines soared. One day a buyer decided to treat himself to an expensive meal and actually opened a can and started eating. He immediately became ill and told the seller the sardines were no good. The seller said, “You don’t understand. These are not eating sardines, they are trading sardines.”

Like sardine traders, many financial market participants are attracted to speculation, never bothering to taste the sardines they are trading. Speculation offers the prospect of instant gratification; why get rich slowly if you can get rich quickly? Moreover, speculation involves going along with the crowd, not against it. There is comfort in consensus; those in the majority gain confidence from their very number.

Today many financial-market participants, knowingly or unknowingly, have become speculators. They may not even realize that they are playing a “greater-fool game,” buying overvalued securities and expecting — hoping — to find someone, a greater fool, to buy from them at a still higher price.

Seth Klarman


Disclaimers: Refer here.


Facebook: Choivo Capital

Website: www.choivocapital.com

Email: choivocapital@gmail.com

Telegram: https://t.me/philipcapitalmanagement (This is Phillips Telegram Chat, but i consider it the best telegram to follow for Malaysia Markets period. Its amazing how we got here given our history. He's one of the few with whom where i find myself more wrong than right whenever we argue/discuss)

Whatsapp: Email me, for Whatsapp, i can only accept up to 256 people (unlike telegram where the limit is 20k). So i try to be more selective for this.





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  9 people like this.
chewck631 The very fact that so many companies want to jump on board the gloves band wagon indicate that the demand will continue to grow for sometime. Cannot be all these companies hire fools to research and decide on such huge invest!!
06/09/2020 9:39 AM
CharlesT Few things i do agree with u...

Do not try n make the last dollar...

Will not hold any single share of supermax (or maybe will hold 1 lot for sentimental reason)in 2022 (or even SH 2021)
06/09/2020 9:40 AM
CharlesT Chewck631 u r wrong..99% of those co who claimed they want to venture into glove biz r mainly to goreng their share prices..especially those penny stocks..
06/09/2020 9:42 AM
CharlesT Glove biz r oligopoly....not any tom dick n harry can enter
06/09/2020 9:43 AM
Orlando WHO recommends wear a mask whn having sex

The more careful n wary r putting on condom too

Hidden demand KAREX
06/09/2020 9:55 AM
Orlando Though do not wish tis on my worst enemy

Whn WHO or Fauci say even jz 'U can't rule out semen carrying Covid...' KAREX wil fly
06/09/2020 10:14 AM
Orlando In KAREX u wil get 2 in 1 Condom n Gloves
06/09/2020 10:15 AM
Orlando U do no want to b looking back in 6 month time n having to Shoulda Woulda Coulda bot KAREX whn it was below RM 1 while squeezing ur balls hard
06/09/2020 10:18 AM
AT1mil Choivo Capital, no offence but arguing politely. You should get more experience in stock market before managing others money.. Write this decision in your dairy and look back in 2021 and you will know how inexperience you are in managing your friends and relatives money. Sorry ya.
06/09/2020 10:34 AM
pBlue What drives the glove bull run?

The Covid19 pandemic. The virus does not care about human sentiment. Why does the gloves have more to run... because there are more humans to infect. Currently 26 million people have been officially infected.... increase that by a factor of 10 to account for people who are asymptomatic... and it is just 260 million people. There are 7800 million people alive and humanity does not have immunity to this virus. Do not look at this like an economic bull run with greater fools, look at this as a pandemic with doctor having to contend with contaminated environment and hospitals that are flooding with Covid19 patients. It is bad in developing nation because they are poor and it is bad in developed nation because hospitals are not build to have excessive spare capacity. There are another 7500 million people more to go.

Vaccine typically take 5-10 years to develop. So saying we have a vaccine in 1 year is as you say expecting 9 pregnant women to give birth to a baby in 1 month. Politicians may say it time to throw a party. CEO will claim it can be done. And scientist will say we will do our best. But really the fastest vaccine ever developed took 4 years (mummps). Ebola vaccine with all modern tech of the last 2010s took 6 years to develop and test (It applied for FDA approval in December 2019).

Finally sure, you maybe willing to use the Swedish model, please consider 2 factors. (1) While the mortality rate of Covid19 is on average ~1%, this is only true if your hospitals are fully functional. 20% of people infected need medical care... as simple as antibiotics to as severe as ICU. When hospitals are pushed to their limit, the mortality rate goes up. Hospitals run of out essentials and common items, drugs, oxygen, even stuff as common as gloves. At its height the mortality rate of Covid19 in Italy was 8%, and people were saying China was hiding the true deaths as it had reported only 3.4% mortality rate.

(2) 1% mortality rate is still 1% of 7800 million people, that means 78 million people dead. More deaths than the 1918 pandemic. More deaths than WW2. In malaysia, it mean 310,000 deaths. Sweden has 20x more deaths than its neighbors. In New York, there were so many dead people, that the crematorium had to run 16 hours a day 6 days a week. Excess bodies had to be buried in mass graves and there were still bodies found rotting in the sun because Covid19 infected bodies could not be processed fast enough.
06/09/2020 10:34 AM
kelvin5349 i hope you understand what you are writing in your blog here since it is read by many.i hope you do some in-depth research before coming up with such.
06/09/2020 10:51 AM
cruger12345 Just because someone write something against the counter you holds you called him a fool and no in-depth research and tons of non sense. Ever asked your self that the author could be right and you are at the wrong side ? Ever asked yourself the price that you paid was much higher than the value that you get ? If you are saying the gloves companies are cheap because they can hike the ASP forever then who is the greater fool here ? Does TG shall wiorth 80 bil just because you expect that it can make 4 bil annually in the coming 2 years ? Did you ever ask yourself TG shall be valued on par with MBB even though MBB made 6 bil annually for the past 5-6 years. If it is not greater tool to push up the price I don’t know what else. But having said that if doesn’t mean you shall avoid glove counters because you could very well make more money but selling it to others who are willing to pay you higher premium. It is a hefty price that you are going to pay if you are actually speculating while thinking that you are investing in a heart company. Don’t confuse yourself . Just because you bought a fundamentally good company and paying a hue premium for it that is not consider speculating . What will you say if someone bought TG at 50,75 or even 100 isn’t him speculating that the ASP will be higher and higher forever ? This round the market maker is making a killing .
06/09/2020 11:17 AM
goldenluck16 Very simple strategy, buy when there is panic selling. TAKE profit when it hits new high. In between, trade wisely, medium term still very bright for glove companies. Covid-19 is here to stay. So called upcoming companies trying their luck can't survive the competition, they just put up a lot of hypes to unload their shares.
06/09/2020 11:18 AM

Date: 05/09/2020

Source : CIMB
Price Target : 13.50
Price Call : BUY
Last Price : 9.60
Upside/Downside : +3.90 (40.63%)
06/09/2020 11:22 AM
inPeace https://www.webmd.com/lung/news/20200805/who-says-theres-no-silver-bullet-for-covid-19

WHO: There's No 'Silver Bullet' for COVID-19


COVID-19: The Real Results Are A Long Way Away

We still don't know just how long this pandemic will last - will one vaccine emerge that gives the immunity? Or will we have to endure life with the virus for years or decades to come?

No matter how promising early studies or phases are, there's always a chance for the final phase to have one serious adverse effect or not hit a target antibody response, causing all the work to go out the window.

Trial completion will take time, and interim and preliminary data provide mere glimpses of the overarching study. but keep in mind the risks that are associated with pushing vaccines through unprecedented fast timelines, as hope for a vaccine by the winter far exceeds the endpoint timelines of next year and beyond.


''Some are pushing for a vaccine to come out as quickly as possible so that life can 'return to normal.' However, we have to set appropriate expectations. Just because a vaccine comes out doesn't mean you can go back to life as it was before the pandemic."

The new computational model finds that a COVID-19 vaccine will have to be at least 80 percent effective to achieve a complete "return to normal"


Scientists are reporting several cases of Covid-19 reinfection


from the blog of Bill Gates
What you need to know about the COVID-19 vaccine


COVID-19: Surgical glove makers struggle to keep pace with booming demand


Value of the personal protective equipment market worldwide from 2019 to 2027


Vaccine makers plan public stance to counter pressure on FDA

Some of the articles that perhaps you need to consider before making a fool of yourself and jeopardize your reputation. Tq
06/09/2020 11:23 AM
inPeace https://www.webmd.com/lung/news/20200805/who-says-theres-no-silver-bullet-for-covid-19

WHO: There's No 'Silver Bullet' for COVID-19


COVID-19: The Real Results Are A Long Way Away

We still don't know just how long this pandemic will last - will one vaccine emerge that gives the immunity? Or will we have to endure life with the virus for years or decades to come?

No matter how promising early studies or phases are, there's always a chance for the final phase to have one serious adverse effect or not hit a target antibody response, causing all the work to go out the window.

Trial completion will take time, and interim and preliminary data provide mere glimpses of the overarching study. but keep in mind the risks that are associated with pushing vaccines through unprecedented fast timelines, as hope for a vaccine by the winter far exceeds the endpoint timelines of next year and beyond.


''Some are pushing for a vaccine to come out as quickly as possible so that life can 'return to normal.' However, we have to set appropriate expectations. Just because a vaccine comes out doesn't mean you can go back to life as it was before the pandemic."

The new computational model finds that a COVID-19 vaccine will have to be at least 80 percent effective to achieve a complete "return to normal"


Scientists are reporting several cases of Covid-19 reinfection


from the blog of Bill Gates
What you need to know about the COVID-19 vaccine


COVID-19: Surgical glove makers struggle to keep pace with booming demand


Value of the personal protective equipment market worldwide from 2019 to 2027


Vaccine makers plan public stance to counter pressure on FDA

Some of the articles that perhaps you need to consider before making a fool of yourself and jeopardize your reputation. Tq
06/09/2020 11:26 AM
JohnFarmer458 CGS-CIMB (5 September) BUY call TP 13.50

Affin Hwang (3 September) put overweight on Glove , BUY call

UobKayHian (4 September) put overweight on Glove , Buy call
06/09/2020 11:42 AM
Cyrogx6 Half past 6 article
you didnt buy because you missed the boat, if you cant adapt, then buy others like XOX, M3Tech, Lambo.
Choivo aim supermax but no aim tan sri counter ?
scared your theory wont work with TG is it ?

This common sense article, chicken seller uncle also know how to blow water
06/09/2020 11:44 AM
kltower "I expect supply to normalize in 3-6 months from now, before it goes into an oversupply situation, and prices plummet." -- wrong analysis.

The actual fact is: Cumulative deaths expected by January 1 total 2.8 million, about 1.9 million more from now until the end of the year. Daily deaths in December could reach as high as 30,000. 

Twindemic is coming, the whole year of 2021 vaccine is just 杯水车薪,小水无法救大火
06/09/2020 12:03 PM
alkanphel You can write very well my brother.
To me, you sound like a geek more than an investor.
Meet more people, learn from others who are more experienced than you.
The more you know, you'd realize the less you know.
Good luck with your fund!
06/09/2020 12:09 PM




06/09/2020 12:56 PM
DarkTemplars the greater fool theory is sound but only when exuberance mania is everywhere. of course u cannot predict it but i would think only next year would the party end.
i believe when u see major sh starts selling then u will know. especially from supermax n top glove owners. they will surely dispose some no?
06/09/2020 1:06 PM
DarkTemplars according to many news sources i think the party will only end by end of next year. with oversupply, competition from locals, china etc. asp prices tapering out. lesser profit growth etc.
06/09/2020 1:17 PM
Goldberg WHO says widespread coronavirus vaccinations are not expected until mid 2021

The organization is stressing the importance of rigorous checks on their effectiveness and safety.

NONE of the candidate vaccines in advanced clinical trials so far has demonstrated a “clear signal” of efficacy at the level of at least 50% sought by the WHO, spokeswoman Margaret Harris said.
06/09/2020 3:06 PM
ruby20 Glove oversupply in 3 months? LOL!!

Good article but that sentence alone discredit everything
06/09/2020 4:03 PM
Hazzyy You can know the stupidity of the person by the questions he asked and the wisdom by the answer he gives
06/09/2020 4:12 PM
Hazzyy Intelligent but not smart . Does it sound right ?
06/09/2020 4:37 PM
lembest HAHAHA i rest my case
06/09/2020 5:27 PM
sosfinance Actually it is quite simple, when Supermx/Top Glove next quarter exceed the research houses' consensus with double digits, and ASPs still has no sign of peaking in Nov or Dec, share price will move up (moratorium issue is temporary knee jerk).
06/09/2020 8:25 PM
infinity888 I believe the greatest fool is YOU
07/09/2020 3:13 AM
teareader818 Choivo, I think you missed an important point that there may be a worldwide conspiracy led by the mainstream media to heighten the fear of Covid-19 in order to destroy the world economies. CDC just admitted that in US, actual deaths from Covid-19 were only about 6% of the total announced earlier. The other 94% deaths had on average 2.6 additional causes, such as cancer, heart and lung diseases, etc. Cases of people of having died from car accidents with Covid-19, were reported dead from the disease. CDC has also bluntly stated that there have been more deaths from suicides and drug overdoses than from Covid-19. These falsified reports in the US have very much to do with the US Elections in November. Cheers!
07/09/2020 6:19 AM
Tryingtogetrich Almost Everyone agree the party will end some time next year right? Look around !!!! Maybe people r starting to leave. Don’t be the last to leave oh.......... the last few to leave will have to clean out your account!
07/09/2020 7:17 AM
stockraiders Petronas is not only reporting loss, but they are also jumping into the glove mania by investing into the set-up of the glove-related industry.
07/09/2020 8:50 AM
speakup petronas making the chemicals for glove. their cost is the chemicals
07/09/2020 9:38 AM
speakup what petronas is making is like what luxchem is making, but on a much much larger scale
07/09/2020 9:40 AM
Primeinvestor STOCKRAIDER means he is smarter than petronas...HAHAHAHA
07/09/2020 9:50 AM
Investor https://www.cdc.gov/vaccines/hcp/acip-recs/general-recs/administration.html

*Note: This guideline is pre-Covid*

General Precautions
Persons administering vaccinations should follow appropriate precautions to minimize risk for disease exposure and spread. Hands should be cleansed with an alcohol-based waterless antiseptic hand rub or washed with soap and water before preparing vaccines for administration and between each patient contact (1). Occupational Safety and Health Administration (OSHA) regulations do not require gloves to be worn when administering vaccinations, unless persons administering vaccinations have open lesions on their hands or are likely to come into contact with a patient’s body fluids (2). If worn, gloves should be changed between patients.
07/09/2020 9:57 AM
newbie4444 Why Superman drop? Is it KYY, OTB sold while KYY ask us to buy?
07/09/2020 12:30 PM
hng33 Glove export to US on decreasing trend

07/09/2020 12:32 PM
Jack Khan Distribution Phase my friends. It will sideline and once awhile spike up to attract more fish then after 6 month it will start drop until normal. Sometimes may take years.
Not much flesh now only bone if you want.
07/09/2020 12:52 PM
Vairocana9999 I beg to differ.

Even when WHO's prediction of mass vaccination starts in mid 2021 comes true, it is only a beginning phase because it can take years to produce ample vaccines for the world populations.

The world economy will only start the real recovery journey when efficacious vaccines are available beyond 2021.

And to declare the Covid-19 pandemic is over, it could be another few years after 2021. In fact, WHO has predicted earlier that this pandemic would only be declared over most probably in 2025.

Then only the glove demand and supply will reach an equilibrium. However, the post covid-19 ASP for the big 4 will remain high and stable, due to the structural shift in demand and the new normal caused by this once in a century pandemic.

So from now till 2021/2022, we have a golden chance to witness the explosive PATs by the big 4 in the coming qtrs, and this is also once in a century, may be.
07/09/2020 2:13 PM
supersaiyan3 I disagree, based on:

1. HY is a trap (or collateral damage, it was never the intend of the owner to make money from goreng?), the owner from China make up the numbers, get loan, and reporting bad numbers even since. Evidence by top directors + CEO resigned (immediately after something goes wrong). JAKS (in JAKS, the owner never say they can make so much money, only KYY+ talk about their ambition), SENDAI got net cash?

Bear in mind i said similar thing about HY even before the rise. I hate to earn dirty money like that.

2. I think you are making a mistake without study in depth on the company, the technology, the pandemic, etc (or maybe you did? kindly share your insight). We may defer in opinion/conclusion but at least you study on the company first. I mean, don't talk about sentiment only, in the longer term, its always about the company.

3. Nobody knows about the future, who knows if somebody crash a plane into it tomorrow. However, based on available information, Supermax will do superbly over the next 12 months at least, it is equally risky to invest in the recovery.

4. Even after this pandemic, other disease may come. This is not a one-off event, the transmission is just amazingly fast, and therapy is so difficult. In the future, to prevent such event from happening, worldwide precautionary measure is pushing the glove industry to grow superfast year after year.

You know? China always has weird diseases, swine fever, h5n1 and we Malaysia as a country (and the rest of the world), never allow to import any livestock or uncook meat etc from China, because they will always have outbreak, forever. Only this time this pandemic is so strong due to its manmade nature. They may make more because it looks like they are winning the war.
07/09/2020 4:02 PM
Philip ( buy what you understand) 1. Supermax will have superb results there is no doubt about it. However... does the results match the euphoria and forward looking investments dollars to put into it moving forward? Can supermax next quarter reach 800 million? next quarter after that 1600 million? how about next quarter after that? Yes, one may not know the future, but paying the price today assuming that every year will be covid-19 year is not rational.

2. study or not, one thing is for sure: either you believe there will be a vaccine, or you believe that there will not be a cure. The probabilities of a vaccine coming out is far more likely than not, considering the entire world is rushing to produce a vaccine. The question to ask is simple: if no covid, how much will be the glove demand moving forward? If covid continues to exist... well.. different story.

3. Yes, other diseases will come, but that is not the question to ask. The question to ask is moving forward, by 2021 and on, how much more glove capacity will exist in the world? As supply will undoubtedly overload demand, how much will the price change versus supply? It is silly to assume that no one else has the capacity to produce gloves, and moving forward at such great margins, no one else will want to join in the game.
07/09/2020 4:13 PM
speakup chivo is very happy now
he can buy supermax cheap
07/09/2020 4:17 PM
Choivo Capital My long term fair value of supermax is maybe at RM2.

Good luck, unlikely to touch it in the interim.
07/09/2020 4:55 PM
Choivo Capital @supersaiyan



I wrote about supermax before the super run up in May and the virus in April.
07/09/2020 5:04 PM
EatCoconutCanWin good job Choivo ...you help a lot..tq
07/09/2020 6:04 PM
supersaiyan3 Philip, there is a big problem in your assumption. If you think Supermax double its profit every quarter, then in a year it will be 16 times growth, one way to value it will be 1600 times PE. That will be roughly RM1000.00 Per share. If you do a DDM, NPV, etc whatever 201 stuff you will get "infinity" as an answer.

I am quite sure nobody think Supermax worth RM1000, yet.

Supermax only need RM800m next QR, then slowly towards RM1b profit. At 20 times PE, assuming 4b net profit per annum, that will be 80b market cap. That will make Supermax worth slightly more than RM30.

(At RM2 a share, if Supermax make 4b profit, that would be PE of 1.4?? Possible, but not probable. )

Choivo, I got Supermax and glove fairly early too. What i mean is to advice you to do the calculation just as you did with Airasia. Don't jump into conclusion without working it through.

Let the numbers speak. Kossan, Harta still talking about USD30-40 ASP, Supermax is aiming USD280 now. Kneel to figures.

Remember bitcoin? Monopoly money can worth USD30k.

My guess is a half year pandemic will consume 2 years production of glove. It looks like it will go on for another 9 months at least, that will create excess demand for another 4 years at least.
07/09/2020 6:31 PM
blood7 loves kavalan solist hi jon, good evening....

let me share with you a very good article in i3.....

-so your opinion would be long term holders are idiots? the greatest fools too? :p
-you use 'supermax/glove companies'... so your article also meant Top Glove too? :)

i think in life there's 3 situation....
1)you fall in love, you chase and you succeed....
2)you fall in love, you chase and failed....
3)you stand by the side wondering if the girl is perfect before you decide to go after, but then the girl left.....

jon, i am not guru or sifu, neither am i a multi-millionaire... but i can tell you this - please, please.... don't always choose 3

hahahaha.... good luck!
07/09/2020 6:53 PM
godhand looking at his article i can deduce that jon is one of the most neautral and human investor in this forum.
18/11/2020 8:39 PM

(CHOIVO CAPITAL) Airasia Group Berhad (5099) – The RM6 Billion Baggage Fee

Author: Choivo Capital   |  Publish date: Sun, 30 Aug 2020, 6:46 PM

For a copy with better formatting, go here, its alot easier on the eyes.

(CHOIVO CAPITAL) Airasia Group Berhad (5099) – The RM6 Billion Baggage Fee










Airasia Group Berhad used to be an on/off investment for me that I sold just before the MCO happened, and the rest of the world went into lock-down.

I had wanted to write an article on my research into the company since as early as March 2020. However, the process of completing my research and compiling my old notes took more time than expected (it just kept expanding and taking detours), as well as other priorities.

If i have to be honest, i guess the main reason for the delay is because I don’t consider it a good investment based on my criteria’s, and that the only reason I’m really writing this is because I promised someone I would, subsequently announced it the my friends, and afterwards, i just felt like i had to finish it, and do a good job at it.

I don’t think I did that good a job (mainly because i don’t plan to invest in it, but it still reached 10,000 words lol). However, I think I managed to illustrate the gist of the company and all the pertinent issues surrounding it currently, and how it would affect the valuation.

I hope it provides some value to some of the Airasia investors here, who i’m sure have a lot of questions regarding the company today.

Background Grandmother Story

To be honest, the experience of researching and writing this article has been a little bit of a roller coaster ride intellectually and emotionally for me.

Airasia is one of those companies that I have some deep emotional ties with.

I remember that as a kid growing up, i had constantly read and actively observed the meteoric rise of Airasia and could not help but be in awe of the company and the man that was Tony Fernandes.

I still vividly remember the day when his autobiography came out.

I did not have much money and was therefore not able to buy it. However, I remember sitting in the bookstore for 3 hours and finishing it in one go.

I also remember in 2008, just before the 2008 World Cup, when I was a salesman for OSIM at Subang Parade.

A friend had told me he was at the Heng Seng (I think) store nearby.

I quickly ran over, introduced myself, shake his hand, and “helped” my friend sell him a huge RM50k LED TV System to watch the World Cup on (TV’s used to be much more expensive then).

When I first started reading up about Warren Buffett and value investing, one of the first company I thought about with Airasia and Tony Fernandes.

Despite not knowing anything about the numbers and the company, beyond what i’ve read in his autobiography, and my observations, i always encouraged my parents to invest in his company’s and IPO’s, which included AAX and TUNEPRO.

If not for their own risk controls in terms of portfolio sizing, that would have been a much more painful experience.

It was also one of the first companies that i had “Sailang”-ed in early 2016.

This was after the short report by GMT Research. At that time, i was very certain, that at minimum, Airasia was not faking the numbers. It may be messy and imperfect in terms corporate governance, but it was not malicious or fraudulent.

I bought a large position (whatever money I had) at RM0.9-RM1.2, doing very little research (it was peak period in audit and I had no time) and sold it off at RM2-RM3 and above.

Having said that, with the experience that inevitably comes with time (though slower than I would like), my perspective on Airasia is no longer as positive.


For many businesses, its often not that difficult to have an outlook on their futures with a high confidence level.

Companies like BORNOIL are likely to be underperforming and destroying capital for next 10 years.

Reasonably good companies like LIIHEN and PETCHEM are likely to continue chugging along with good profits helped by favorable industry/business dynamics. While wonderful companies like TIMECOM etc. can be expected to increase revenue and profits like clockwork for the next 5-10 years. The real question is mainly on the price.

(I can sense Phillip about to disagree with me right about here haha. I’ll extend an olive brand say concede that QL is a wonderful business, the price is just a little too rich for me given other opportunities.)

For companies like BORNOIL, it’s just so obvious. Incompetent management coupled with a horrible industry is unlikely to do well.

And for business like LIIHEN, PETCHEM or TIMECOM. Their futures are to an extent quite predictable to due to their business models being proven with reasonable/wide moats around it.

Revenue and earnings of these companies are also stable as they know very clearly how to continue being quite profitable, and where to invest this profits in order to obtain above average returns.

As the saying by Warren Buffet goes,

“You don’t need to know the age of a man to know if he’s old, or the weight of a woman to know if she is fat”

Wonderful investments often look obvious.

This is not the case for Airasia, even before the COVID 19 epidemic. A TIMECOM this is not.

Its Low Cost Carrier (“LCC”) business appears to be proven and is growing rapidly, but its economic dynamics are different in each of its airlines in different countries (an airline business in Malaysia faces very different economic and political problems in Indonesia or India).

Coupled with very strong competitors in certain regions, who are often deep pocketed, and more than willing to burn money and cut corners in order to obtain more market share. This has resulted in their profitability (along with the industries) being sporadic. Spectacular at times, middling to reasonable in most, and atrocious in others.

And to top it off, unlike businesses like HARTALEGA or TIMECOM, who define their circle of competence very clearly, and drive hard at these circles while waiting for fat pitches, Airasia seems to take on Venture Capital like characteristics, where they take stabs and gambles at other vertical or horizontal industries.

Instead of focusing on their core Malaysian LLC business, the company often has new ventures popping up continuously.

And again, some did spectacularly.

Airasia Thai, AAE Travel Pte Ltd Joint Venture with Traveloka, Asian Aviation Centre of Excellence, Tune Insurance etc.

While the others seem more than capable of crippling the company in the long run.

Airasia Japan, Airasia Indonesia, Airasia India, Airasia Phillipines, Big Pay, AAX

And now, we have the COVID-19 epidemic, which have placed both Airasia and the entire airline industry in deep and unknown waters with their survivability in doubt.

Given the above, I genuinely doubt that it’s even possible to identify the fair value of this company within a range of 30% or so, and create a 5 year discounted cash-flow that will have less than 50% variance to actual outcome.

In more ways than one, investing in Airasia feels very similar to venture capitalism where one is investing in a relatively hazy and opaque future.

And like most startups/venture capital type companies, Airasia is not a wonderful business that even an idiot can run (PCHEM is one, but they do have middling management, the best management that money can buy in terms of GLC’s, but that is a really low bar).

It has so many self-inflicted complexities, that in order to survive, much less thrive, this company needs extremely competent management, especially during times like this.

Given all these factors, when analyzing this company, i decided to double and triple down on the qualitative aspects, and when looking at their history, to see if the management’s decisions / thought process made sense at that point in time, and how each decision was executed. And from there, get an idea of how Airasia will handle the current crisis at hand, and its long term plans.

And so, we need to take a walk in this business through the shoes of Tony Fernandes and Kamarudin Meranun.

Walking in Tony’s And Kamaruddin’s Shoes

It was a sunny morning in 1983, when Tony woke up in his Epsom College dormitory bed, hungover, and with a strange woman in his arms who appeared to have been a British Airlines air stewardess…

Just kidding.

We all know the story of Airasia in its early days.

On 8 September 2001, Airasia was purchased by Tony Fernandes and Kamarudin Meranun’s company Tune Air.

When they took over the company from DRB Hicom, it had negative equity of more than RM100 million. They injected about RM110 million worth of capital and expanded the company.

For the next 10 years, their rise will be meteoric.

They had correctly identified the huge latent demand when it comes to air travel in South East Asia (I still remember the days when, as a kid, i just can’t help but feel a certain sense of awe whenever I meet someone who had traveled overseas by airplanes before, due to how rare it is as a result of the high costs) from referencing what Virgin, Ryanair and Jetstar did for the western world.

The business model they decided on is to have the lowest “Cost Per Available Seat Km” (CASK) in the region (and the world) and thus charge the Lowest Fares and rip market share from Malaysia Airlines (and every other airline in Asia in the next few years).

For the first 5 years, as they scaled up, there was quite frankly zero competition in South East Asia.

And by 2005, they had the lowest cost base in the world. Compared to its competition like MAS, its cost was at one point 70% lower.

By the sixth year of operation Airasia overtook MAS.

So how did they do it?

During the first 10 years of its birth, Airasia pioneered (or took the initial ideas of Ryanair etc to the extreme) some innovative methods to lower costs, such as.

  • Changing from Leasing Planes to Buying Planes, and to do so in Bulk
    When they first took over the company, Airasia’s planes consist of leased Boeing 737’s. They had lower capacity (148 seats versus 180 seats) compared to the Airbus A320’s that they had planned to replace it with.

    When looking at it in terms of KL – Kuching, the cost comparisons were as followed.

    Fuel Cost: $75 per Barrel
    USD:MYR: 3.65
    Fare: RM150
    Load Factor: 80%
    Airbus A320 Seats: 180
    Boeing 737 Seats: 148

This was the first step.

Given their early success, and seeing the huge vacuum in the market, Airasia then decided that the right step was make their company the LCC leader in ASEAN in order to have economy of scale and enable them to drive costs even lower, and the solution was to go all in at creating associates and joint ventures in South East Asia.

This enabled their second step, which was to buy their planes in bulk.

Airasia was one of the first (and to do it to such extremes) to make gigantic plane orders that stretched more than 10 years in advance.

In 2007, they secured an order of 130 Airbus A320’s for delivery up to 2012, planes worth easily 10-20 times the value of the company then.

They then increased this amount to 200 Airbus A320’s by 2008.

In 2011, they ordered another 200 of them, and from this order, becomes Airbus’s single largest customer.

In 2012, they placed orders for another 100 of them, and in 2016, they did it again by ordering another 100.

By placing such huge orders, they were also able to obtain discounts of 30% or more off the list price, and get the planes customized to suit their needs exactly.

In addition, as their initial orders were made just after the financial crisis, and before the boom in low cost airlines (A trend that was sparked by Airasia) in Asia, they were able to buy large amount of planes at a discount from the already low prices that were at the low end of the cycle.

This allowed Airasia Group to charge its Joint Ventures and Associates leasing fees for using their planes (The company AAC was created in 2013 to manage this) and it also enabled them to be in a business to of selling planes and slots to airplane leasing companies when the airline boom started.

In just a few years, this would go from a cost cutting measure, to a highly profitable venture and one of the key reason for Airasia’s profitability.

  • Extremely Good and Cost-Efficient Marketing
    Before Airasia came onto the scene, I think very few people would have heard of ads that say things like,

    “20,000,000 Free Seats”

    These were some of the really innovative ads that had a clear call to action/purchase. And to this day, Airasia’s ads and graphics is still top tier.

    It also spawned a business model where customers started to be conditioned into making holiday plans and air ticket purchases months in advance.

    This enabled Airasia to now fill up planes long in advance, and then use hedging to lock in fuel prices etc (this is not necessarily a good thing, as hedging is essentially insurance, and therefore there is a net cost element to it), and thus lock in the profits.

    They were also the first to identify the fact that referees have some of the most television time in the English Premier League, but had zero advertising on their clothes, and thus obtained an extremely cheap price for the first few years of that sponsorship.

    In addition, by having all the Joint Venture / Associate airlines under a single brand, they are now able to spread marketing costs widely, and thus obtain marketing costs per km that was close to 80% less than the competition, while advertising more widely.

    And to top it off, during the 2007-2008 financial crisis, when advertising spending was at an all-time low, they went big into marketing the business, and during this period, with the help of cost cutting everywhere around the world, they helped permanently changed consumer and business habits to be accepting of low-cost flights.

By the end of 2009, they have almost tripled the number of passengers carried at 14.3 million, from 5.7 million at the end of 2006.

The same can be said for capacity which increased from 7.4 million at the end of 2006 to 19.0 million.

This level of growth rate will not be seen or matched until 2007, when Airasia Indonesia and Airasia Philippines turned from associates of the company, to subsidiaries under the group and had their traffic combined.

  • Income Tax Allowance (extra 60% on top the 100%, can brought forward indefinitely)
    Airasia also negotiated with the government to provide them with an additional 60% Capital Allowance on purchase of airplanes, which can be set off against a maximum of 70% of Statutory Income.

    They first obtained it in 1 July 2004 – 30 June 2009, this was then extended another five years from 1 July 2009 – 30 June 2014.

    Subsequently, in view of the higher profits and less support required, it was lowered to 50% to 50% 1 July 2014 – 30 June 2019.

    This enabled Airasia to have a better cost structure.

    This was originally supposed to apply for planes in Malaysia only, however, it also applied when the plane is purchased by the Malaysian company, to be leased out to the associates.
  • Low maintenance and staff cost.
    “Cost are like fingernails; they need to be trimmed constantly”

    In addition to having an incredible focus on cost-cutting, Airasia also happen to be located in a low-cost region, when the industry is used to paying USD rates for airline staff.

    In their earlier days, they also managed to lock in long term maintenance contracts at low prices.

    If you were to read the annual reports, the sheer drive they have to lower costs and be more fuel efficient is incredible.

    Unfortunately, i can’t seem remember much beyond sharklets, and computer testing of routes etc, and i don’t think there is too much value in me giving it to you in detail as they are know to have the lowest cost per km in the world.

However, Airasia did not just focus on the costs, starting from 2005 onwards, they started really driving ancillary income.

The gains in ancillary income is two pronged, the first is the passenger related ancillary income, the second, is the income from the new horizontal or vertical businesses, as well as optimizing the usage of planes (Teleport etc).

In terms of Passenger Related Ancillary income, after they started driving it in 2005, it only took them about 5 years to hit the maximum in terms of proportion of passenger related revenue.

By 2010, it was 20% of passenger revenue and has maintained around that region since.

The rest of the gains came from non-passenger related revenue such as the Aircraft Operating Lease Income (which we will go into later) as well as Freight Services/Teleport.

At its peak in 2015, these ancillary revenues hit 22.6% of revenue, all of it coming from Aircraft Operating Lease Income.

Currently, Ancillary Income in Airasia can be basically split into 3 types.

Passenger Ancillary Revenues

  • Live Dynamic Pricing

    This was introduced in 2015, which basically means that the price of the airfare charged depends on the supply and demand at that point in time. Its not considered ancillary revenue but I wanted to somewhere to disclose it.


  • Express Boarding
    Self explanatory. Pay to board early.


  • Seat Selection
    Self explanatory. Pay to choose your seat.


  • Luggage/Baggage Fees
    This one was quite interesting. Over the first few years, you can see the company start optimizing this by increasing the minimum size and spend. Correctly predicting that there is a certain pricing in-elasticity for people who need to bring a luggage bag and what is the perfect amount to get the maximum revenue.

    And in 2017, they took it to the next level by introducing Live Dynamic Pricing depending on the supply and demand at that point in time.


  • Food
    Started out standard, now they are opening the restaurant, will explain further below when discussing Santan.


  • Insurance
    Travel insurance is one of the most profitable kind of insurance you can do. Combined Ratios for Travel Insurance at times can be as low as 60%. For more information on combined ratios refer here.



Aircraft Operating Lease Income

With the purchase of these huge purchase planes to fund their regional ambitions, as stated previously, Airasia, the Group Company now had a new income stream that would grow far more profitable than expected.

It would not be unreasonable to say that by 2016, this has grown to be their second largest revenue and largest profit contributor.

Without it, the Airasia Group would be lossmaking.

Externally, this also caused huge headaches with accusations by GMT Research that Airasia was only profitable due to the leasing of these planes resulting in profit transfers from unprofitable regional Joint Ventures, to the group holding.

Internally, i’m sure the other joint venture or associate partners did not feel comfortable about this as well, as it could be seen as Airasia Berhad milking the associates for all its worth.

This culminated in the sale of the planes and the leasing business

  • 28 Feb 2018 (Completed 31 Dec 2018) – BBAM Limited Partnership / FLY RM 9,775.6 million and RM 262.3 million (82 Aircraft and 14 Engines)
  • 24 Aug 2018 (Completed 8 August 2019) – Castlelake L.P. USD 739.5 million (RM 3,559.5 million) (25 Aircraft)
  • 25 July 2019 (Completed 31 December 2019) – Castlelake L.P. (RM 1,240 million) (14 Airbus A320-200)

Resulting in net gains of RM 298.8 million and RM 101.54 million, but a net loss in profit of around RM 643 million p.a until the new planes come in.

For the more cynical and realistic individuals, the real reason for the sale would be to settle Tony Fernandes’s and Kamarudin’s RM 1 billion margin loan that taken to inject into the company back in 2016 when prices of the shares were so low.

COVID19 non-withstanding, i do consider this a bit of a mistake.

With hindsight, it looked like a good decision due to COVID 19 happening, but I think fundamentally, it was an erroneous decision, made mainly for the reason of paying out enough dividends for Tony and Kamaruddin to pay back the margin loan, as the income lost is really too significant and the gains too little.

Freight Services / Teleport

Previously, each Joint Venture and Associate was responsible for filling up the belly space of their own planes.

Starting from 2016/2017, the responsibility of filling up the belly space of all the planes in the Group was allocated to HQ, and in 2018 Teleport was founded to finalize this and provide end to end shipping for customers.

The Overseas Airline Ventures

Earlier in the article, we wrote about how Airasia correct identified the gap in affordable air travel in South East Asia and after pioneering it in Malaysia, decided to do the same in other ASEAN countries.

They started this as early as 2004, just 3 years after taking over from DRB-Hicom, taking an extremely aggressive line in terms of business expansion.

To a large extent, to really drive down cost and drive up ancillary income, these ASEAN related airline ventures were needed.

So how did they do?

Well, even before COVID 19 happened, its record was spotty at best.

Now, do note the numbers i’ll be showing here do not include the loans and advances made by Airasia to these Associates and Joint Ventures.

They are very significant and will be included afterwards.

Airasia Thailand

Airasia Thailand was started in 2004 as a Joint Venture with Shin Corporation, and recorded increasing losses for the first 4 years as they expanded rapidly.

Like the Malaysian Portion, it was during the 2007-2008 financial crisis, when Airasia took advantage of the low advertising by other companies, and went on a marketing blitz, making low cost flights the choice for companies cutting costs then, that things turned around for them.

Losses instantly narrowed from RM 338.4 million in 2008 to RM 94.2 million in 2009, and by 2010, the company had recorded its maiden profit of RM 287.2 million and also repaid all loans owing to the group company.

In 2011, they showed profits of about RM 152.1 million, showing a certain ability to maintain profitability, and so Airasia instantly started the IPO process, and managed to raise money at roughly 10X earnings.

This meant their stake is now worth roughly RM 1,051.4 million, a roughly 8,622% return on investment of RM 12.1 million. (Airasia owned the Thai Airasia Stake, which is then owned by the publicly listed holding company. However, as the main business of the public listed arm is in owning the Thai Airasia Stake, we can easily do some extrapolation on the value assigned by the market to this stake)

Again, this is just on the investment in shares and not all the advances and loans made to the company over the years which have been repaid.

Over the years, Airasia Thailand have generally maintained its profitability, and is the only one of the joint ventures to ever pay dividends back to the Airasia Berhad and in a relatively consistent manner.

It was the crown jewel of the overseas ventures.

Things started to turn sour starting 2018 and 2019 due to losses, and in 2020 equity has fallen from a high of RM 989.7 million in 2017, to RM67.8 million. A sum that a mere one more quarter of loss will turn negative giving significant bankruptcy risks.

At today’s share price, the stake in Airasia Thailand is estimated to be around RM777.9 million, but, as stated earlier, this is based of the value of the holding company which owns the 55% stake in Airasia Thailand, and so that company has its own assets and may not be liable for the losses of the subsidiary in which Airasia owns its stake.

Therefore, by using the share price, I am probably overestimating the value of Airasia Thailand. A more accurate price would probably be the book value of just RM67.8m, the same valuation currently given to Airasia Berhad.

Or, if one is a touch more morbid, as Raymond Yap from CIMB famously put for AAX, Target Price RM0.

Airasia Indonesia

Airasia Thailand is where the sweet dreams end and the nightmare begin.

If Airasia Thailand was the crown jewel.

Airasia Indonesia might as well be a chronic slipped disk injury, that threatens to turn you into a quadriplegic at any point in time.

The company was started just one year after Airasia Thailand in 2005 with PT Fersindo Nusaperkasa. And like Malaysia and Thailand, it grew quickly, making increasing losses, and turned around during the 2008 financial crisis.

However, that was where their paths start to differ.

They were unable to maintain profitability as giants like Garuda Indonesia and Lion Air decided to enter this space and basically fight Airasia Indonesia to the death.

This was unlike Thailand, where the National Carriers like Bangkok Airways decided to stick with full service instead of going into the LCC model, giving Airasia Thailand full reign of the LCC market with the competitors being either too small, or Thailand not being their major markets.

As for Malaysia, it did so well because the only competitor was MAS and they are a GLC without a monopoly who never had serious competition before. Its like taken candy from a baby/

By 2015, the company was so illiquid that any advances and loans to them needed to be capitalized, and RM 625 million was converted to shares. In 2017, they had to inject a further RM 1,013 million.

In 2017, the company somehow managed to make a profit, and Airasia decided to IPO the company in record speed by doing a reverse acquisition. This valued their effectively 75.11% stake at RM1,841.9 million, and a gain on investment of 85%.

Miracles do not happen twice in a row and they were hit by massive losses again in 2018. The bleeding did not end and by 2019, the shares were suspended.

It is currently negative equity, with the amount not disclosed in the annual reports. And it has not published its quarterly reports since the end of 2019.

To say its currently worth zero would be understating it.

Chances are Airasia have advanced significant amounts to the company, which will probably need to be impaired.

Airasia Phillipines

Airasia Phillipines was basically started in 2006, but never really got off the group till 2013 with the acquisition of 85% Zests Airways.

And surprise surprise, a deluge of losses followed.

By this time, there are many low cost carries in south east asia, and I don’t think Airasia still has the edge outside of Malaysia and Thailand.

Just 3 years after taking over Zest Airways, the company became illiquid and needed Airasia to convert RM 961.1 million advances into perpetual securities.

As of 2019, accounting for the perpetual securities, the value of Airasia’s investment is now only RM 213.9 million.

I would imagine that 2020, would knock that amount down to negative when results come out.

And like Airasia Indonesia, the amount advanced / loaned to them is likely lost.

Airasia Japan

Ever the glutton for punishment (The real mark of ambition and an entrepreneurial spirit) , Airasia also started a Joint Venture with All Nippon Airways (“ANA”) in 2012 for a low cost carrier in Japan.

As usual, losses for the first few years and thus requiring constant capital injection. However, in 2014, in a stroke of good fortune, ANA decided to buyout Airasia and recompense them in full.

True to the Airasia Spirit, Airasia instantly found another partner in the four musketeers of Octave, Rakuten, Noevir and Alpen to restart the venture that same year.

To date they have invested RM416.1 million (not counting advances) and is likely in negative equity (or it wont need so much constant injections), and I imagine 2020 will not be a good time for them.

For the sake of Airasia Berhad shareholders, i hope a miracle happens again, and the four musketeers buys out Airasia this time as well, and recompense them in full.

I’m personally not betting on it though.

Airasia India

And if you thought Airasia India was bad, well you have not met Airasia India, which I think should darken the skies of any Airasia investor.

This joint venture was done in together with Tata Sons Limited and Telestra Tradeplace Private Limited.

If there is one thing that public listed companies in Malaysia have learnt, it is to never do any business in India unless absolutely necessary.

Mudajaya can show the scars for it, and even till today, they have not fully healed.

The reason for this is due to the absolute sheer idiocy of the Indian Government and Indian Bureaucracy. The fact that someone as insane as Modi can be considered a good choice shows you just how bad the rest of it is.

The bureaucracy of that place is so retarded, that in order to buy a phone simcard in india, you actually need government approval.

You actually have to fill in a 6 page form in quadruplicate with 4 passport photos to buy a simcard. And it takes 3 days minimum for the approval to come through.

Good lord.

Imagine having to do business in a place like this, and an incredibly hard one like airlines to top it off.

And by the way, airlines also do particularly badly in India (read Kingfisher Airlines).

This is due the government forcing airlines to fly uneconomically viable route, with no compensation, as well as other retarded rules on international travel (remember, just for simcards you need to fill in a six page form in quadruplicate).

And with the partner being TaTa Sons Limited, where the sons are, to put it mildly, not known for their business acumen, does not bode well.

If this was Reliance (Mukesh, not Anil), I would be more optimistic.

So far, RM438.2 million have been invested, not including advances and loans.

Here’s to hoping this is entire amount that Airasia India will cost the company

Airasia X

This one does not really count as an overseas venture, but its convenient to elaborate on it here.

It started with a subscription of RM 26.7 million in preferred shares in 2007. The company was owned by Tune Air then. (Why does it need to be owned by Tune Air while being funded by Airasia? Corporate Governance is another theme we will touch on later.)

Another RM 16 million was injected in 2010, and in 2012, the company bought RM 16.8 million of ordinary shares and converted the rest resulting in a 13.76% stake.

During the IPO in 2013, Airasia was on a high related to its strong earnings since 2009 and optimism towards the company was at an all-time high.

Post listing, the market value of the stake held by Airasia was worth about RM270.7m.

Unfortunately, massive losses again followed. And by 2015, it require a rights issues and capital injection to be kept afloat.

Airasia had to inject and additional RM 53.8 million. As at today, AAX is negative equity, and it would not be a stretch to say the RM0 target price given by CIMB is accurate.

The reasons for AAX losses, are probably two pronged.

One, the long distance LCC business has not be proven.

Long distance flights are usually more expensive, due to the distance, and the increased weight of the planes due to the longer distance requiring more fuel and the type of planes and engines used is also different.

This meant higher base costs. Now Airasia runs a no frills airline, where if you want the 
“Frills” , you need to pay for it.

For shorter distance flights, the business models work, because “Frills” are a larger percentage of the costs.

But for long distance flights, the frills are now a much lower percentage of the costs, and for customers, if you’re going to be stuck in a plane for 15 hours, you would probably pay up for some comfort.

A 45 minute flight to Singapore?

Well, Airasia can stuff me into the luggage space for all i care, as long as it’s the cheapest option. A 15 hour flight is a different story.

The second prong is probably an incompetent CEO. When you need to give out free flights during your AGM, you know you screwed up.

Unless i’m mistaken, Benyamin Ismail the CEO was also the person who suggested the Malaysia to Hawaii Route.

How on earth is one supposed to make money on a RM2,000 two way flight to Hawaii is beyond me. And when it comes to flight slots, when you get it, you’ve got to run it, regardless of whether or not it makes money.

The unsuitable business model is probably not helped by having a CEO who appears less than competent.

Other Non Airline Ventures.

Unlike Airasia’s airline related ventures overseas, its non-airline related ventures did much better. And we will start with the one that did best.


AAE Venture Pte Ltd

AAE Travel Pte Ltd was an online travel agency joint venture with Expedia. Airasia invested approximately RM 29.4 million in 2011 for a 50% stake.

The company took off the ground quickly. By the second year, it was high profitable, and by the third it had tripled earnings.

Expedia probably realized their error of doing the joint venture with Airasia (as most of the work was done by Expedia), and wanted to buy back the shares.

Airasia sold half of it back for RM 347 million, with the company valued at RM 1,388 million (or about 34 times earnings), giving them a 2,363% return on investment.

Personally, I think they could have probably gotten more for it at that point in time given the sentiment and the growth then.

However, as I don’t have the accounts or did a deep dive into the situation then, I can’t comment too much.

They sold the rest of it in 2018 for RM231 million. Valuation has fallen during the sale of the these remaining shares, as i imagine earnings of the company would have fallen due to Google eating the lunch of Online Travel Agencies with the Google Hotels module.

As a whole, Airasia gained RM563.4 million or a 2018% (not sure if this was intended!) return on investment.

Asian Aviation Centre of Excellence Sdn Bhd

Asian Aviation Centre of Excellence Sdn Bhd was a joint venture with CAE International Holding Ltd to provide academy for aviation staff.

At this point Airasia was growing so large, that they needed their own training academy.

Airasia invested RM 82.8 million for a 50% stake of the joint venture and it was profitable from day 1.

CAE International Holdings bought out the stake in 2017 for RM 375.9 million resulting in a net gain of RM 293.1 million or return on investment of 354%.

At about 16 times earnings, i think that Airasia probably sold it for a little too cheap, especially with it growing so quickly. However, as they also got a long term fixed rate on the training out of the deal, it was mostly still quite reasonable.

Tune Insurance

Tune Insurance was a company being run by Tune Money, a company outside the Airasia Group owned by Tony and Kamarudin.

Before the company was listed, Airasia had a call option on the company for 20% of the shares.

Airasia exercised it for a 20% stake in 2012.

It was listed in 2012, giving the company an instant net gain of RM 187 million or 1,269% return on investment.

For me, the real question here is this?

For a company’s, whose primary business at that point consisted of selling insurance to Airasia’s passengers, why was it done from Tunelife, the holding company of Airasia owned by both founders instead of Airasia itself?

Now this is not illegal and may not even be considered unethical.

However, serious (in my opinion) conflict of interest like these happen a lot in Airasia’s corporate history, mainly because Tony and Kamarudin both do Airasia related business via Tunelive outside of the Group.

I think this one is still relatively benign, but in our next example, the conflict of interest will be more egregious.

In any event, back to the business, so how is it?

As an insurance company it is decent, due to the incredible combined ratio when it comes to the travel insurance sold to the customers of Airasia and other airlines.

However, this incredible business is also coupled with some really major flaws.

For one, as a digital insurance company, it has completely dropped the ball on online insurance offerings.

It was one of the first to do online insurance for cars and vehicles, but other banks and insurance companies were very quick to do it as well.

The key products for insurance which need to be done online, due to high agent fees, are life insurance, health insurance and savings plans etc, which are unfortunately not offered by TUNEPRO.

Unlike other insurance companies who cannot do this due to the baggage they have in terms of agent networks etc (try doing it and all your agents will boycott you), TUNEPRO did not have this problem.

And now companies like AIA allows you to basically sign up for all your insurance needs online. And we also have fintech companies like Covertouch and Sureplify etc doing the same thing.

To an extent, I think Tony and Kamarudin knows this as well, which is why they changed 3 CEO’s in 2 years plus.

And as an insurance company, one of their biggest failures for me, is the lack of a good investment team within Tunepro.

Currently, significant portions of the funds is managed by malaysian unit trust companies, which comes along with its own obscene malaysian boleh level of fees.

If it were at least placed into Exchange Traded Funds it would not be as bad.

Think Big Digital Sdn Bhd (BIG Points)

In terms of failures in corporate governance

(Do note just because a company have imperfect corporate governance and contains large conflicts of interest, it is still possible to have everything be above board and be perfectly legal, as in this case).

this one takes the cake for me.

In 2013, Airasia Berhad, along with Tune Money Sdn Bhd (owned by Tony and Kamaruddin) opened a RM 2 company for a Joint Venture to do BIG POINTS, Airasia’s version of Bonus Link Points.

In 2014, this company was now magically worth RM 7.7 million, and Airasia invested an additional RM 3.7 milion and now included Almia Holdings UK II Limited (no idea who) as a shareholder. Its stake now falls to 47.8%.

Just two years later, the company is now magically worth 54 times more at RM 407.6 million. And Airasia Berhad now purchases a 24.9% from Tune Money International Sdn Bhd (the company owned by Tony and Kamaruddin) for RM 101.5 million.

And what did the company have to show for it that year?

Losses of RM 13.5 million and negative equity of RM 2 million.

Come 2018, the company is now worth “only” 25% more, and Airasia bought a further RM54.1 million stake from Yickal Holdings Limited (no idea who, probably a partner, a venture fund in the company, or some related company).

Now, in the best case scenario, Airasia somehow bought this company at a castle in the sky, loss making tech companies level of valuation, and that both the management of Airasia (Tony and Kamaruddin and Board of Directors) as well as Tune Money (Tony and Kamaruddin) considered this a fair price.

Non withstanding the fact that Tony and Kamaruddin only own 32% of Airasia Berhad and 100% (Probably? The number is probably close or much higher than 32%) of Tune Money.

Or….. Well, I don’t want to speculate.

But I doubt a “Points” provider business is worth this much.

And here’s the thing, even if the intent was, to put it nicely, non-extra virgin olive oil, all of this is completely above board.

As all you need is, board approval from a board whose directors were effectively elected by the majority shareholders of Airasia.

And these directors also basically own either zero or very little shares.

I mean, other than one person, Dato’ Mohamed Khadar bin Merican, the number of shares owned by the other members do not even amount to one year’s worth of directors fees.

To be fair, I think Dato’ Abdel Aziz may own some shares in Tune Live (The main shareholder of Airasia owned by Tony and Kamaruddin) by virtue of being a founding member.

Then again, this is a flaw within every single public listed company globally, except for Berkshire Hathaway and maybe CACC, so you can’t fault them too much for it.

To be fair, Tony seems very earnest in pushing for Big Points, and Airasia is doing a lot of stuff with Big Points, but I seriously doubt it is worth that much, and the serious conflict of interest issues happening is not helping.

Of course, one potential explanation is that Tune Money did this together with some venture capitalist who went crazy with the valuation, and if everyone already paid so much, you can’t exactly do a down-round, and so Airasia needed to bite the bullet.

Other than in 2018, Airasia does not disclose the results of BIG Points and I’m not interested in spending the money to buy these reports. And so, ill end this one here.

Big Pay

In 2014, 100% of Big Pay was purchased from Tune Money for RM10 mil (cue corporate governance spiel), and there is subsequent fund injections.

In 2018, Tony Fernandes said this company will be worth more than airasia.

Well, it may very well happen, but I just don’t see it

(It may IPO to massive numbers like AAX, TUNEPRO and Airasia Indonesia, but I doubt the long term economics is that good)

the way its going.

In 2020, BigPay now has more than 1 million debit card holders.

Except, I’m certain they are still losing money.

Now, one can think of this as building the base for a very profitable business in the future. Rome is not built in a day after all, but I don’t think this is the case.

The main reason people use BigPay Cards (I have one) or basically most e-wallets etc out there, is because my credit cards give me good cashback when I deposit money into Big Pay.

That’s it.

Their remittance business looks ok, but the cost structure and method of transfer is very different from Instarem or Transferwise who use the Islamic “Hawala” system.

I’m personally not psyched on this.

Also in 2018, 11.3% stake was given to the founders Christopher Paul Davidson and Navin Rajagopalan.

As i understand from talking to Airasia staff, one of the things that Airasia and Tony likes to do, is that when someone has an idea that Tony likes, and the guys seems capable of carrying it out, Tony will usually open a company and ask that person to run it, and potentially give a stake somewhere down the line.

So, this may probably the above scenario.


In 2015, Airasia acquired a 73% stake Rokki (not from a related party this time, or at least its not obvious) for RM 876k.

It was a company that aims to provide in plane wifi service. It also had negative equity and on the verge of bankruptcy. The founder continued to work in the company.

In 2017, they purchased another 10% for RM 2.5 million.

Somehow in two years, this previously almost bankrupt company became worth an additional 21 times more.

And in 2018, the remaining 17% stake was purchased for RM5.5 mil, and the company has somehow grown in value by 25%.

It’s still loss making.

To be fair, this could just be a way to pay the previous owner for his performance in the company, but I honestly don’t know how he or the company is worth anywhere near that amount.

Do you know how much is the owner of MFCB Berhad, the owner of the Don Sahong Hydroelectric Plant, whose contract took blood and sweat to get and build and will now contribute RM 240 million to RM 400 million a year in profit.


For some reason, this guy is worth about 8 times more. Maybe Tony’s heart got too soft.

T & Co Coffee / Santan

In 2016, Airasia paid RM 914k for and 80% stake in T&Co with, the remaining 20% stake purchased for RM 380k.

From there, they have used this as a launch pad to create Santan.

This is a business I actually quite like and I think there is a strong possibility of success if they can solve a few items.

The idea for Santan is this.

Airasia has central kitchens in all around Asia. Instead of just supplying food to the planes, why not supply it for a franchise (or own some of the restaurants) all around asia as well, as the food in Airasia is fairly decent.

The plan is for the food to be pre-cooked and pre-packed before sending to the franchisee every other day. So, all the franchisee needs to do is heat up the food. This really saves a lot of the costs and complexity.

It used to be “Now everybody can fly.”, well its now “Now anybody can open Santan franchise.”

In addition, Santan also has a website where people can order food online to be delivered, and so far, as I understand, about 40% of a shop’s revenue come from online.

Looking at the food packages, its RM12.90 for the Nasi Lemak and Juice (the juice tasted quite nice and the packaging looks great). I would prefer if the price is more like RM10.90, but they can probably set the right price themselves.

My only qualm is this, the food is not at the level where I would actively seek them out.

The sambal in the nasi lemak is ok, so is the chicken, but the rice is actually quite bad and sticking together like a pulut.

However, as I understand, Tony and his team (I think the CEO of Santan is called Catherine? Very young and hands on) will be aiming to improve it, so we’ll see.

The franchise fees is also around RM65k, which sounds mostly reasonable?

As I understand, Airasia also opened a chicken farm called OurFarm in Vietnam (or Cambodia?) due to the inability of chicken producers to meet their demand (This does not make sense to me but ill take it at face value for now).

Chicken farms are generally very difficult businesses, but if its Vietnam (or Cambodia?) where income and consumption of meat is going to boom, it should do OK I guess?


AA.com is one of those companies that just popped up in 2017 with no explanations for one reason or another.

However, in 2019, they paid RM3.5m for the remaining 50% stake from Netrove Ventures Corporation & Aaron Sama, and further invested another RM12.6m

As I understand, they are trying to make this site into an Airbnb type business, and to an extent, it makes sense due to the sheer amount of traffic Airasia gets.

My only question is, why does Airasia need to pay to buy a company which is borderline bankrupt with a website, instead of making it on their own?

Maybe its just a matter of speeding things up? No idea.

The business have reasonable probabilities for success, but i won’t bank too much on it.



Ground Team Red Holdings

This was one deal, i found really confusing in a good way.

I have no idea how earth Tony pitched this ground management business to SATS in Singapore.

But somehow, SATS were willing to pay about 40 TIMES NET ASSET and 80% of SATS Ground Services Singapore for a 50% stake in Ground Team Red Holding.

Its so insane, that i do not think too much valuations like this in the very bubbly tech venture capital exists, unless it was paid by Son Masayoshi

Wow. Just wow.



The Amounts owed by Associates, Jointly Controlled Entity and Related Parties.

And here I’ve included a summary of the net amounts owned to by the various Associates, Jointly Controlled Entity and Related Parties.

The amounts from 2014 to 2017 fell mainly due to the amounts owing by Airasia Phillipines and Indonesia being converted to Preference Shares and Ordinary Shares due to liquidity problems in those companies.

With COVID 19 (or even if COVID 19 didn’t happen) I expect for this to continue.

One thing to note is that Airasia Phillipines and Airasia Indonesia are considered subsidiaries since 2017, this is due to control being held by Airasia Berhad instead of the other parties.

This means the amounts owing by those companies are not in the list above, I expect them to constitute the largest amount, potentially larger than the entire amount above combined.

The Covid 19 and Malaysia Airlines Factor

With COVID 19 happening, airlines around the world have gone into a tailspin.

As for Airasia, they are slightly luckier due to the company having disposed of all the planes before this, and so unlike other airlines, they have very little loan covenants etc.

What this means it that there is little chance of everything being due at once and sending you right to the bankruptcy court when you break the covenants. Instead, you get a little leeway as only a certain amount is due each month, come rain or highwater.

Now, some people would argue that amount due to aircraft leasing companies is more flexible than banks.

I don’t really think this is the case, as aircraft companies like AERCAP would take your plane away within a week from any airport in the world and redeploy it somewhere else if you don’t pay up.

Now obviously they will not do this now as there is nowhere else to redeploy the planes.

In addition, the terms are such that, like banks, the only thing that can stop them from chasing the money from you is bankruptcy, if you are not bankrupt, they will chase you down.

However, like banks, if you owe them so much money that their own lives are at risk if you default, and you are worth more to them alive than dead, they will likely be willing to be flexible.

For investors in Airasia, there is really 2 major items related to COVID 19 and MAS that needs to be answered before a right price can be put on Airasia.

The Bailing Out Of Airasia

As of today, I would challenge anyone to find me a better airlines’s balance sheet than Airasia’s, other than the recently bailed out SIA.

I would think it would be a real struggle, and this is mainly due to the disposal of the planes 2 years ago. Today most airlines in the world (especially South East Asia) is up to their gills in planes they own, that are not flying, whose value will fall every day, while the loans outstanding stay the same.

While Airasia is in an interesting position, where they can potentially negotiate on the lease rates of these aircraft, whose values have fallen and are in large supply.

When they get out of this, given the large amount of additional aircraft’s that these aircraft lessors will have, it is not unthinkable for them to get a discount on the current rates, and be able to lease a large amount of new aircraft’s at a much lower rate, enabling them to make super-normal profits for the first 1-2 years and get a nice head-start.

In addition, Airasia as a business in Malaysia, is good enough, that if the Malaysian Government does not bail it out, someone else will via capital injection.

So, what are the differences between the two?

Government Bailout

Some here may remember, that just one or two months before MCO, when the government was discussing handling the MAS problem, one of the lead runners for the deal was Airasia.

The plan was for Khazanah to pay Airasia around RM12 billion to take MAS out of their hands.

The RM12 bil paid is for the cost of canceling plane orders, do layoffs, cancel rubbish contracts, buy new planes to replace the Boeing’s that is to be disposed etc etc

And then COVID19 struck.

Now, there is nothing that Khazanah would like to do more than get MAS out of their hands. And, if the government ever gives any soft loans to Airasia, they will want to somehow tie MAS into the deal.

Except the terms at this point in time is unlikely to be as pretty as before, since Airasia really needs a soft loan now.

From Airasia’s perspective, they may want to consider playing chicken with the government a little bit


This is one of the few times where the government actually have a good reason and excuse to let MAS die.

They can always say that due to how horrible everything is, they need to prioritize on who to save, and they just don’t have the capacity to save MAS.

And so, it may make sense for Airasia to wait for the government to come to this conclusion, before they push hard for the soft loan.

Either way, whether MAS dies or is combined with a Airasia, an Airasia without MAS to compete with in Malaysia will enter a new age of super-normal profit in Malaysia and Singapore, and good luck to whoever who wants to compete the LCC line with them.

The only question is how and when it happens.

If Airasia is forced to capitulate and take MAS in on onerous terms, with much larger than expected dilution (Khazanah will want some shares), the future super-normal profit may not be enough to make it into a good investment.

Just ask CITIBANK or AIG shareholders who were diluted 99% due to both companies being close to bankruptcy then. Until today, the share prices have not even reach 10% of the pre 2008 crisis highs.

And lastly, even if the government gives a soft-loan in addition to the purchase of shares, it is not so simple either.

Is this softloan only to save Airasia Malaysia?

Or the Philippines, Indonesia, Thailand, India and Japan arms as well? Is it even politically tenable for the Government of Malaysia to be seen as bailing out other countries economy and jobs at a time like this?

Other than Thailand (and its just a very very small possibility), there is no way on earth the governments of those countries will want to bail out the foreign owned airline in their country, and Airasia is just too small in those countries to talk any kind of terms.

For example, in Indonesia, why not just bail out Garuda and Lionair, and have them buy over the carcass of Airasia Indonesia?



Private Bailout

The more likely option in my opinion, would be a bailout by private hands. Tony once raised SK Corp as an option.

Having said that, that was 2 months ago, and the amount is too small.

Realistically, with Airasia making the decision to save their associates and subsidiaries, looking at the Q2 2020 report where they transferred RM 724.3 million out to them, I think Airasia would need a minimum of RM 3 billion.

Thailand will lose at least RM500mil this year.

Indonesia will probably lose at least RM600mil.

Phillipines probably RM300mil.

Japan I would estimate about RM200mil.

India at least RM600mil.

And Airasia X, if they somehow want to save it, will need at least RM800mil.

And I think this is the minimum, if they are willing to let a few of them die they may need less. So, the question now is this?

Who can and will buy the stake?

For me, I think there is only really one company in any position to do this now.

Singapore Airlines.

After the gigantic bailout for them from the Singaporean government for them to the tune of SGD 19 billion or RM58.3 billion, and with Airasia only selling for RM 2.2 billion on the public markets now.

Buying the entire company would only cost them less than 5% of the bailout money.

In addition, the Singapore government have explicitly given SIA the authority to use this money to not just survive, but to thrive and to take advantage of this crisis to come out stronger.

If I were a betting man, I think Airasia would probably need to issue at least around RM 2 billion in share via private placement at a premium to SIA, while SIA will extend a further RM 1 billion or so in loans to the company as well.

After that (or concurrently), Tony can just sit tight and wait for the Malaysian Government to capitulate and give them a nice deal for MAS and buy some Airasia shares.

The reason being that the Government of Malaysia (“GOM”) simply cannot let SIA (which is basically owned by the Singapore government now) be a majority shareholder in Airasia, as it would be too big of a slap in the face.

At minimum, Tony & Kamarudins and GOM’s stake together needs to be larger than SIA’s.

With MAS, AIRASIA and SIA now combined, there will be no one who can compete with them in Singapore and Malaysia.

However, all this is just speculation and its just too hard to know what’s the right price for the business until a solution to the above problems is known.

Airasia’s Historical Numbers

Now, let’s talk about the historical numbers of Airasia. One of the things I decided to do, is to do an owner’s earnings analysis of Airasia.

In my piece above, I wrote about the blackhole of losses faced by Airasia from their overseas ventures. And so the question I asked myself is this.

“What if Airasia decided to focus on the short-haul Malaysia market, the market where competition is non-existent, did zero airline joint ventures, and even forgoes all of the very profitable non airline joint ventures?

Ie, What if Airasia just stuck to their core competence and edge.”

Now, a few things to note, my “Owners Earnings” is not the kind typically defined at Investopedia.

This is because I wanted to know some additional information.

I created 4 different types of owners earnings

  • Owners Earnings (A+B+C+D)
    This is relatively standard owners’ earnings, except I used comprehensive income instead of profit after tax. The reason being I consider “Other Comprehensive Income/Losses” just as relevant as profit or loss. As I did this analysis for a 20 year period ,the fluctuation balances itself out.

    I did not deduct certain non cash items like forex gains/loss, derivative gain/loss, as these items are very real costs, and if taken over a long period of time, is very relevant. And since these amounts are under / overprovided and adjusted each year, it evens out.

    Investment related Gains / Losses are deducted out, as I wanted to see the real operating numbers, and as these differences are recognized in the “Investments Additions and Disposals”. Very simply put, if you invest money into a company and made losses, upon disposal, the amount you get back will be less. Showing a net negative.

    However, as most companies invest more than they dispose, this one will always show a negative, which is why I also created an “Operating Owners Earnings” to show a normalized number that excludes any Capex and Investment.

    If the companies acquisitions and expansion is accretive financially, it should show an increase over time.

    And lastly, for this category, I did not deduct share of associates/joint venture profits or dividends from associates and joint ventures, as i consider them just as valuable or damaging to the company as if it was cash, and it also nets off against the “Investment in Associate / Joint Ventures” in the balance sheet which is paid with cash.

    To put it simply, i think about Investments in Joint Ventures and Associates the same way I think about Property Plant and Equipment acquisitions.
  • Owners Earnings (A+B+C) (Excluding Interco and Investments)
    This one basically answers our question,

    “What if Airasia decided to focus on the short-haul Malaysia market, the market where competition is non-existent, did zero airline joint ventures, and even forgoes all of the very profitable non airline joint ventures?”

    in terms of how the Owners Earnings would look like.

    In this case, i removed the share of associates / joint venture profits (losses) or dividends from associates and joint ventures, as well as the working capital changes related to inter-companies.

    In addition, the “Investment Additions & Disposals” is also not added, basically resulting in a good estimate of how the numbers would look like if Airasia Berhad focused on Malaysia only.
  • Operating Owners Earnings (A+B)
    Basically Owners Earnings (A+B+C+D), excluding C and D.
  • Operating Owners Earnings (A+B) (Excluding Interco and Investments)
    Basically Operating Owners Earnings (A+B), excluding C and D.

And so, what do we see?

  1. Owners Earnings (A+B+C): RM4.22 billion
  2. Owners Earnings (A+B+C) (Excluding Interco and Investments): RM10.60 billion
  3. Operating Owners Earnings (A+B): RM10.3 billion
  4. Operating Owners Earnings (A+B) (Excluding Interco and Investments): RM16.3 billion

In essence, Airasia’s dalliance with items outside of their core competence where they have an edge cost them about RM5.6 billion to RM6 billion. And this is excess baggage they are going to have trouble getting rid off.

Ie, the RM 6 billion baggage fee. Jeng Jeng Jeng. Lol.

In addition if you were to look at the “ 5 year Rolling Average Operating Owners Earnings”, when related party working capital requirements are included, you would be hard pressed to find any upward trends from 2011 onward. If there was any, it is very slight.

Remove the intercompany working capital requirements, and it shows a truly beautiful upward trend.

Its Malaysian arm is truly a wonder, that is somehow managed to subsidizing all these blackhole overseas investments.

In addition, if you ask me, i think companies like Santan, Rokki, Asian Aviation Centre of Excellence, Tune Insurance (Travel Arm), Leasing Arm and Teleport, are items that are firmly within Airasia’s circle of competence, as they touch their own core business very directly.

In more ways than one, its not so much a new venture, but maximizing income from their core assets, and reducing costs of the core operations.

Having said that, while writing this article, i was thinking if there is a better way to go about the overseas joint venture for quite a long time.

The reason being, if I was in Tony’s and Kamarudin’s shoes in back in 2004 and 2005, I think I would have thought that doing the overseas ventures was a good idea and have done the same.

The one business model that I think makes sense in this scenario, is the one used by Hilton Hotel in managing their hotels globally.

Hilton hotels do not actually own the hotels, they only provide the HQ services and core competence to manage these hotels, any profits and losses belong to the joint ventures.

I think a modified version of this model could work.

One where the other party comes out with the capital, and Airasia provides the management to run it, and lease them planes at a cheaper rate due to the low price they got for the planes (enabling them to still buy planes in bulk).

If it is profitable, Airasia would get 50% of the profits calculated on a high water mark basis.

If it made losses, in terms of the cost of managing it, Airasia would bear all of it (HQ cost, HQ staff cost, Upper management cost in JV). While, the airplane lease fee is maintained, as a discount is already given, limiting their loss since airplane lease fee is often num 1 or 2 in costs.

Having said so much, I am reminded of a poem by Theodore Roosevelt.

 “It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.”

At the end of the day, I am a person with the benefit of hindsight, who have never started a business, much less impacted lives in South East Asia the way Tony Fernandes & Kamarudin Meranun had.

Because of them, the low cost carrier model was ignited sooner, and now almost everybody in South East Asia can fly.

Quite frankly, as i was writing this. i wondered if I even have the right to criticize Tony Fernandes & Kamarudin Meranun in the management of Airasia.

The only relevant comment I can make is on the Corporate Governance.

If I am being very honest, I don’t think Tony Fernandes & Kamarudin Meranun is actively trying to screw over Airasia.

Instead, I’m sure that they keep a certain account of things in their head, where, if Airasia got an extremely good deal from their private businesses in one way, they will take some of it back via another deal.

However, I do feel the ledgers are a touch more towards their private businesses.

Having said that, many of these decisions may be a little unconscious, but affected by the knowledge that they know deep in the recesses of their minds, that they own 32% of Airasia, and a lot more of the other.

And with this I end this piece. I hope you find it useful.

As always, if you feel i’m wrong, or missed out on anything, please let me know.

Disclaimers: Refer here.


Facebook: Choivo Capital

Website: www.choivocapital.com

Email: choivocapital@gmail.com


  2 people like this.
mlchin06 I find this article extremely insightful, so thank you for sharing. Both my husband and I have worked in a few public listed companies and we found that corporate governance is one area that authorities/govt must address. The Minority Shareholder Watchdog Group do not seem to have enough bite regarding this issue. Just attend a few AGMs and you will see how the major shareholders circumvent all the doubts raised. The mechanism of approving proposals can be impoved too. Something needs to done to protect public funds from going into the wrong pockets!
30/08/2020 8:09 PM
Sslee Dear Choivo,
Q&A Tunepro 9th AGM

Answer to Question A6
We will continue to work closely with the AirAsia eco system to explore opportunities to deepen our existing collaboration within their eco system and overcome any regulatory constraints. We will consider any opportunities in health and wellness protection. Our businesses are in general insurance and general reinsurance while life, savings and education insurance are typically distributed by life insurance companies.
Is the answer implied Tunepro do not have license to do life insurance?

Answer to Question A11
We adopt a conservative investment approach due to the short-tailed nature of our business. Our investment objective is to achieve an investment return which commensurate with the Group’s risk appetite. Moving forward, we will continue to adopt a prudent stance. To take advantage of the low interest rate environment, we have increased the allocation in fixed income portfolios, with more weight on highly rated securities, good underlying credit strength and those which are government guaranteed. The Group has also shifted its funds from Money Market/Deposits Funds to Conservative Bond Funds (mainly government-guaranteed) for yield improvements. As at 30 June 2020, fixed income funds and debt securities/bonds made up 90% of our investment portfolio
Is the answer implied Tunepro are only allowed to invest in fixed income funds and debt securities/bonds?

Your comment will be appreciated as I will seek further clarification on Tunepro AGM Q&A.
30/08/2020 10:48 PM
abang_misai Abang mengantok membaca
30/08/2020 11:21 PM
Choivo Capital Sslee,

That was really disappointing.

Low yield environment, let's go buy more bonds.

Smack head.
30/08/2020 11:29 PM
patrico8 A very detailed history of AA's tortuous accounts. Wonder what gives you the energy and motivation on this rather long article. A love of numbers, I guess. Thanks.
30/08/2020 11:45 PM
supersaiyan3 Hi, Choivo, sorry, can't finish reading it.

1. TF bankrupt every other business he had, next on the line is AAX, and he will be left with Airasia.

This makes TF a speculator, not an entrepreneur. This is against everything we read about him.

2. What Airasia has been doing it wrongly: a. Airasia treat all subsidiaries as colony. Colonization and force planting/flying has proven failure. b. Failed hedging strategy, Airasia buy very little oil futures contract when oil price is low and buy a lot when oil price is high. They are trying to speculate rather than hedge and they speculate extremely noob. c. they have stopped/slowed innovation, expenditures keep rising as a percentage of revenue. d. they reacted too slow to COVID-19, say inflight preventive measures or switch fast to cargo?

3. Airasia has portray itself as a competitive company, in fact it is not. Airasia was doing well in Malaysia because MAS is weak. In every other markets, Airasia can barely make money.

4. In Airline industry, you buy a ticket because you trust the company, so you pay premium to its ticket, Airasia has no trust premium. Why would people want to join franchise to sell cheap? That's also the reason most subsidiaries failed.

5. In management, if you let an Accountant runs the company, that's what will happen. (I think accountant cannot comprehend big matrix in their brain, too many attributes....)
31/08/2020 12:33 AM
Choivo Capital Supesaiyan,

you basically summarized in those few para's what i took 10k words to say.Haha.

Except i would disagree on 5. I think most people cannot, its just that often the people who climb to the top have a numbers background, therefore giving rise to this particular steretype.

Haha, as you can see from my post, im one myself.

but i get where you're coming from. I think a often fail in thinking exponentially when it comes to business. Too much focus on the past and not enough on the future.
31/08/2020 2:32 AM
Choivo Capital Quite frankly, i felt like giving up many times.

But i said it would get done and wanted to do a good job. It took me about 1-2 months of parsing and reparsing the numbers, And about 1 month to properly understand the flow of the number and corporate history for each major subsidiary. To be fair i procrastinated quite abit and had work stuff to attend to.

And to finish it off, a 48 hour writing and editing marathon this weekend haha.

patrick8 A very detailed history of AA's tortuous accounts. Wonder what gives you the energy and motivation on this rather long article. A love of numbers, I guess. Thanks.
30/08/2020 11:45 PM
31/08/2020 2:34 AM
supersaiyan3 Finally I finished reading it, sort of.

Its a wonderful piece, you should publish it. Hire an editor and put in some pictures, get comments from TF, title is good enough.
31/08/2020 7:06 AM
supersaiyan3 One other thing, what Airasia has been doing is actually not true innovation, semi-innovation maybe?? They incorporate available technologies into new application which is destructive (rather than disruptive, because they are selling cheap) to the industry.

Isn't it a negative-sum game in every industry Airasia enters?

I used to think Airasia is disruptive, however I change my view after Airasia gets irrational by wanted to kill MAS once and for all in 2018-19. (You can't kill a competitor, a company only dies when the owners are giving up).

A wise shoe salesman (謝家華)once said, if there is only one crazy player (keen on price competition) in the industry/on the table, the whole industry is doomed.
31/08/2020 7:19 AM
kalteh You should consider doing this detailed analysis for compensation, very insightful. Thanks for sharing!
31/08/2020 8:43 PM
RainT Omg

super long
01/09/2020 2:17 PM
01/09/2020 10:17 PM

(CHOIVO CAPITAL) Why Highways are a Gruesome Industry – WCE Holdings Berhad (3565)

Author: Choivo Capital   |  Publish date: Mon, 25 May 2020, 8:40 PM


For a copy with better formatting, go here, its alot easier on the eyes.

(CHOIVO CAPITAL) Why Highways are a Gruesome Industry – WCE Holdings Berhad (3565)



Over the last year or so, i’ve gotten relatively familiar with the highway industry in general, and given what I know today, i can’t help but think back to one of my earlier research.


A brief analysis and valuation of WCE Holdings Berhad (WCEHB).


Quite frankly, I couldn’t be more wrong.


Even if one forgave my superficial knowledge of the highway industry then, what was unforgivable in that bit of research, was two things.


  • Assumption of a certain IRR without a deep understanding of the factors that need to happen to give rise to that IRR.


  • To be a bit laxer in my own research and understanding of the company because people I admire hold some of the shares.


The thing that was really bugging me about that research, is that it was quite frankly one of my more popular pieces, in terms of views, comments, likes etc on the I3 Malaysian Investment Forum. And i therefore felt a certain sense of responsibility to try and remedy that.


Personally, for me, it was one of my bigger mistakes. I can only thank that small part of my brain that refused to take it beyond a minor position in my portfolio.


Now, in order to understand WCE Holdings Berhad, we need to first understand the Highway Industry.


Lets Begin.


Allow me to warn you, this will be a very long piece.


If you want a summary, highway industries is a gruesome business and i think each share is worth around RM0.25.


The main reason for this is that traffic growth for the last 5 years have been extremely low at 1-2%, while when this concession agreement was signed in 2015, it likely projected 3-4%. This severely impaired the economics of the business.


But i am being quite conservative, and there are a multitude of factors that can bring its fair value up very very significantly.






Overview of the Malaysian Highway Industry

One of the biggest misconceptions that people have in terms of the highway industry, is that it is a very lucrative one.


A lot of it stems from us constantly seeing the alleged cronies who are usually taking up highway concession contracts, and from the general observation of people paying tolls every day.


I mean, if you see traffic jams every morning and evening, and the long queues in front of the toll plaza.


It only makes sense they are all very profitable right?


Having gone through the 5 year annual reports of every highway concession company in Malaysia, and every major highway company globally (for some companies, I’ve read more than 20 years’ worth of annual reports), this cannot be further from the truth.


Here are some of certain factors and risks, intrinsic on the highway industry.





Huge Initial Capital Expenditure, 10-15 year Gestation Period (Ie, Bleeding Period)

Like most concession type companies, such as power generation etc. Highway concessions require a huge initial capital outlay.


During the construction period, retail investors who are not familiar with the accounting standards, would think that it is profitable, and would be profitable when it opens and start toll collections.


This is a very grave misconception.


During the construction period, any interest expense, is capitalized into the balance sheet under the Concession Assets (or any other similar terms). Once the highway is opened and toll collections begin, these interest expense can no longer be capitalized, and will now flow out through the income statements.


For most if not all highways, the initial toll collections will be far from enough to cover the interest expense, resulting in losses in the income statement.


Depending on the highway, for great highways, the losses may only be for 5 years before it makes enough money to pay the interest. For average ones, it may take around 10 years.


For the mediocre ones (which consist of most of them), the losses will never end, the only thing you have ahead of you, is the constantly deteriorating equity and an endless stream of restructurings. (I will expand on the economics of these highway companies in later section)


So how do highways get built?





Government Funding (Implicit & Explicit) and Creative Financing

Like many other public infrastructure works (especially those in the transportation industry), it is almost fundamentally impossible for them to survive without government funding or subsidies (think trains etc)


There are some edge cases such as the Hong Kong MTR Train Systems (Read ThisThis), but these are few and far in between.


So how does these highway projects get funded? They usually consist of a combination of,


  • Government Grants (rare);


  • Government Supported Loans (more common, with super creative loan repayment schedules);


  • Government Shareholding (more uncommon, but the Government usually either hold a Golden Share, or have various clauses in the Concession Agreements that effectively give certain Government Agencies the ability to dictate terms);


  • Government Guaranteed Sukuk/Bonds (most popular, you can be very creative with this. For example, make the Guranteed Sukuk junior to the Non-Guaranteed One, and now the implicitly guaranteed by the government, enabling lower interest rates to be obtained, while it stays off the books for the government since its implicit. Really very cute.)


  • Nominal investment by Private Party of 0% to 30% (most are in the range of 10-20%)


Now, some of you may think, if highways are not such gruesome business, why on earth would private individual decide to invest in them (short of idiocy, which undoubtedly exists) ?





The Meat is not in the Toll Collection

As stated in the point above, in terms of private money, the amount put up in terms of financing the project, is usually not that much, ranging from 0% (pass the completed  highway to the private individual to operate and maintain) to 20 or even 30%.


Now often, the reason why private parties are willing to take this on, is because the real meat of the highway business is not in the toll collection, but in the construction of the highway, and its maintenance.


If done right (very rare), you can technically make back your investment even before the highway construction is finished! And after the construction is done, you can now get recurring income from maintaining it.


The trick here is, to have the government and the banks/bond holders, hold most of the debt, while the private individual holds most of the equity (close to 100%), despite only financing 0%-30% of the project.


And because the highway is kept in a separate company, while the construction and maintenance company are held in another company.


This way, you can keep extracting money from that highway concession despite it being loss making entity, via maintenance etc. In fact, companies like UEM Edgenta Berhad and Touch & Go are such companies for the North South Expressway (Though this highway ended up being profitable and turning into the crown jewel then).


And for those who are really smart, they can even structure their investment such that 10% of it is in Ordinary Shares, while the other 90% is in Convertible Preference Shares with a fixed dividend, enabling them to take out any excess cash (even if the Retained earnings is negative, for those who don't know, when a company has negative retained earnings, dividends cannot be paid on the Ordinary Shares.)


For most highway concession companies, the future toll collections are more of a pseudo-lottery ticket. They expect/hope for it to make enough to cover maintenance, and dream that it may actually be successful and take them to the moon. (I will go in depth on traffic projections in my next point).


As the private investor would have close to 100% equity on the project, this means if that if the actual traffic far exceeds the projected traffic, they would have hit the jackpot.


Imagine this, government funds at least 80% of the project (via explicit or implicit guarantees), and their return is capped, while the downside risks belong to the Government and whoever (foolish enough, at least for bonds that are not explicitly guaranteed by the government) buy highway bonds.


As for the upside, they all belong to the private investor.


Ie, privatize the profits, democratize the loss.


This situation is common worldwide. (To be fair, these days governments are a bit smarter and require a profit-sharing clause in their concession agreements. WCE’s concession agreement contains one)


Now, why would any government decide to do this?





The Disincentives of the Highway Concessions Industries

As Charlie Munger always says,


“Track the Incentives! Show me the incentive and I’ll show you the outcome”


Incentives are the iron law of nature; at the end of the day you get what you incentivize for. If you put out honey, you get ants.


Most Governments around the are incentivized to show a lighter balance sheet.


However, everyone also wants to do more public infrastructure (Unprofitable but necessary, why else we pay tax for?).


The solution therefore for most governments is to use mostly use implicit guarantees and if necessary government guaranteed loans or explicit guarantees for bonds.


Now, the really cute thing about implicit guarantees is, other than in very select scenarios, where it’s a national asset, or the counter-party is someone who, you simply cannot piss off, the government can often choose to not act on that implicit guarantee.


This is because they are so many things can be done to effectively still hold control of the highway, even if it’s now bankrupt and belongs to the creditors (who usually consist of some random institution or rich individuals elsewhere).


This has happened before elsewhere in the world (I have no idea if it happened in Malaysia before).


However, in most highway concession agreements worldwide, there is a clause allowing the respective country’s Highway Authority to set the toll rate to be charged (this can be different than what is in the concession agreement), effectively still granting control to the government, with the difference to be paid as compensation.


And the compensation usually needs to be jointly certified with the government agency.


Now, if that government agency wants to have you jump through numerous fire hoops, and take their sweet time with the decisions, make last minute changes or requirements that basically require you to redo everything.


What are you going to do?


Are you willing to sue the government and sour this relationship forever (especially applicable in countries where there isn't a strong democratic process)?


In addition, compensation is often capped to a certain traffic amount each year.


If you happened to own a highway that makes super-normal profits and the government did not allow you to increase toll rates (due to political pressure), and instead opt to pay compensation, your compensation will usually be less than what you can collect.


Now, for some of my sharper readers, you will now be thinking,


"You know, government's wanting a lighter balance sheet does not seem like a strong enough argument."


You're right.


Here is a bell curve of the Corruption Index performed by Transparency International on 180 countries.


It’s not all 500 countries in the world (as stated by one Malaysian Minister), however, it consists of most of them. As for those who are not in the list, chances are, they probably scored extremely low.

The Index scored out of 100 Marks. Assuming the passing mark is 60, about 146 countries would not make the grade, this consist of about 81% of the 180 countries. No prize for guessing which part of the curve Malaysia falls on.


Needless to say, concession agreements like these (especially when structured right) and very lucrative and convenient things to dole out as reward to cronies.





The Lottery Ticket - Traffic Projections

Now, lets talk about traffic projections.


Among all type of government concessions (power, telecommunications, highways, petroleum etc), there is particularly lottery like nature when it comes to highway concessions.




Because everything hinges on the projected demand, which you will not know, other than based off your own gut instinct, or some traffic consultants gut instinct.


(To be frank, traffic consultants are a zero-value add job whose purpose is to put on some veneer of acceptability on traffic projections which will likely be inaccurate to a large degree.


It’s not their fault though, try projecting something for 30 years and see.



Just a matter of supply and demand.)


For example, when it comes to power generation concessions, it is a very clear and flexible commodity, whose supply and demand you can see clearly.


All you need to do is sign a concession agreement with the government who will agree to buy most of your power at market price, build the power plant, and then connect it to the transmission lines.


The only real risk is pricing risk, which can backfire spectacularly, as you can see in Hyflux who did not predict that Natural Gas prices would fall by more than 50%, causing power prices to fall, resulting in their Power Plant which does not use Natural Gas to basically die.


When it comes to traffic projection, the number of factors that impact traffic projections is numerous, and thus its complexity is higher by several orders of magnitude.


The questions consist of,


  • What is the impact of GDP to Traffic? How elastic/inelastic is it? What is the local GDP?
  • What are the plans for new expressways or roads around your highway, what are the alternative routes?
  • What will demographics trends look like?
  • What about trains and other modes of transports?
  • Cars vs Motorcycles demographics?
  • Travelling trends? Saturation points?
  • Given the above as well as cost of constructing the highway, what price to charge?


The list of questions goes on and on and on.


To paraphrase Howard Marks,


"Who can respond to this many questions, come up with valid answers, consider their interaction, appropriately weight the various considerations on the basis of their important, process them for a useful conclusion regarding the expected traffic and the right price to charge?"


You are either to going to get it very right or very wrong. And given the economics and history, you will likely get it very very wrong.


However, predict they must.


(At the end of the day, the highway project must go on, as the meat of the highway industry is in the construction and maintenance, not the toll collection.)


Now, for most, including myself it would seem perfectly reasonable for traffic growth to be around 4-5% per year, in line with Malaysia’s GDP.


However, this thought process have stopped holding true since 2015, unless you have a new highway in urban areas or do capacity expansion (extremely expensive).


These days, looking at the Bond Rating Reports from MARC, the North South Expressways (largest highway of Malaysia) is only seeing growth of 1-2% per year. This is not the news any current or future highway concessionaire would like to hear.


Still, a free lottery ticket (depending on which part of the deal you’re at), why not?


And for those who actually get a winning lottery ticket, you now have the opportunity to use these traffic projections to do some financialization, ie borrow more money and take it out as dividends etc.


For the more recent deals, you can look at the RM1.35bil bonds raised by Bright Focus (A Maju Holdings Subsidiary) using Maju Expressways as collateral.


Around of half of the bonds were then paid to the Maju Holdings. The bonds listed at a AA Rating and have since then turned to BB1 Rating (ie Junk Status)


Still, i don’t blame them for wanting to do so.


Top off deteriorating demand and highways being such a politically charged matter in Malaysia, it makes sense to take out as much money from your highway concession as humanly possible.





The Malaysia Political Factor

Why do politics matter so much for the highways industry in Malaysia?


Well, unlike in other countries, both our governments have decided to shoot themselves in the foot by making toll roads such a highly charged political issue (this is really quite unique to Malaysia).


Despite having one of the lowest toll rates in the world (back of envelope calculation), the sheer political pressure and attention on this issue have resulted in there being no toll rate increase in all highways in Malaysia since 2011. The government would rather just pay compensation than incur the public wrath.


As a highway toll concessionaire, this is not a good thing.


If you have a highway concession, due to the previously explained traffic caps, the toll compensation you receive is likely to be less than what you can collect.


In addition, you now must go through the process of jointly certifying toll compensation and claiming such compensation, which require additional cost to be borne by you, and if there are any delays through no fault of your own, good luck having the government pay you interest on the toll compensation.


And if you have a bad toll road (which will likely be the case), with huge cash-flow issues, well, good luck to you.


In Malaysia, we are also home to one of the most incredible restructuring deals. Yes, im talking about the planned planned restructuring for PLUS Berhad, whose highways have some of the lowest toll rates on earth (by a wide margin i might add) and in Malaysia.


The toll concession will be increased by 20 years, with no additional increase in toll rates (after the 18% discount).


Well, name me one other product whose prices have not increased in the last 30 years in terms of nominal value (ie, don’t account for inflation). I cannot think of even one thing to be honest.


I'm not privy to the additional details, but if that is all there is to that restructuring, i imagine they would literally rather take the shorter toll concession period and maintain the current toll rate schedule in their concession agreement.





Overview of Malaysian Highway Companies Profits/Losses

During the year, I had an opportunity to go through the accounts of all the highway companies in Malaysia (I made a friend in SSM who has sadly left the place).


Profitable Years are highlighted in “Green”. Loss-making Years are highlighted in “Red”. And as for the cells highlighted in “Orange”, the accounts couldn't be found or was not released at that time.


For the highways in "Red", those concession have ended or have been terminated.



Making sense of the numbers

In order to understand the context of these numbers, we need to be aware of the accounting treatments of certain items that are specific to Highway Concessions.



Provision For Heavy Repairs

For highway concession companies, they are required to handover the highways and all associated equipment back to the government at the end of the concession period in good condition.


Therefore, in their accounts, the highway concession companies will make an estimate of all future heavy repairs from now till the end of concession, using current cost estimates, traffic projections and expected inflation.


This amount is then discounted back to present value using the nearest available matching risk free rate.


For example, if you had a concession that is expected end in 10 years, you would use the 10-year MGS interest rate.


Changes in any of the items above, can result in very significant variance when it comes to the profit for the year.



Concession Assets (or other similar terms)

This basically consist of the cost of building the highway. If it was purchased from a third party, you may then have goodwill baked into it as well.


This item sits on the balance sheet and is amortized using a rate which is calculated as follows.


[(Actual traffic for the year) / (Actual Traffic for the year + Projected Future Traffic till end of Concession)] X Concession Asset


Now this is different from the usual straight line or reducing balance method of calculating depreciation.


In a way, this is a utilization kind of amortization. This means that assuming projected future traffic is unchanged, if the traffic this year is less, the amortization is less.


However, every year, the toll companies are required to procure a traffic projection report, which means that the “Projected Future Traffic till End of Concession” also changes from year to year. Which can give rise to a very significant swings in profit.


In addition, a discounted cash-flow needs to be performed each year in order to see if the future earnings can still support the value of this asset on the books. If it is insufficient, an impairment will be needed, which again gives rise to very significant swings in profit.




Restructuring, Restructuring, Restructuring

Being a gruesome business that is subject to a lot of political pressure , there is no surprise that that these companies usually go through plenty of restructuring in their lifetime.


This restructuring also often result in wild swings in the profit numbers.




Cashflow Not Earnings

Now, the 3 items (Restructuring, when it happens) above usually constitute the among the top 3 costs to the company, now as some of you you might have noticed, those are just accounting entries, and not real cash items.


These provisions or changes just move the numbers in the Income Statement but have no real impact on the real cashflow.


This is correct, however, as I am looking at it in terms of the industries economics, all these numbers matter.


If you were to build a new highway, amortization constitutes the worst of expenses, as instead of paying your expenses as you use, you will now need to pay the expenses of the next 30 years today.





Notes on Malaysian Concession Companies

Well, I think the numbers in the table speaks for itself.


However, there are a few common trends I think I need to elaborate on.

  • Around the word (this also applies to Malaysian ones) the only highways that make money are the ones that are in Urban areas. and except for 1 or 2 exceptions, they are also in high density, high traffic jam areas in Kuala Lumpur or Selangor. Having said that, just because you are in these areas, does not mean you will make money, due to the reason below.


  • Elevated Highways, Bridges and Tunnels cost the most money to build, and are therefore extremely unlikely for those companies to ever recoup their investments the usual style (dividends). There isn’t a single bridge in Malaysia that is making money. Not in Penang, not even the Singapore ones that are jammed like crazy every morning and evening. (There is also other problems like soil etc, but not as major)


  • For Intercity Highways in Malaysia, only North South Expressways is making money, as it was the first with no viable alternatives as the federal roads usually takes 3 times longer. For a Northern Interstate Highway, Anih Berhad is doing an amazing job though keeping theirs alive for so long.


For some of the highways, there are some differences in the numbers that I feel I should give some color (the favorite "Atas" word of every western investment analyst) on.


(A) Ampang–Kuala Lumpur Elevated Highway - Projek Lintasan Kota Sdn Bhd (AKLEH-  Prolintas)

This company is typically profit making, however it made losses in 2017 due to impairments in the Concession  Asset.


These things are quite common in highways for the reason described above.



(B) Stormwater Management and Road Tunnel - Syarikat Mengurus Air Banjir dan Terowong Sdn Bhd

It turned to a major loss in 2017 due to impairments in the Concession Asset, again, very common.


Fun fact. It is also the highway with the highest toll rate per km in the Malaysia, as it costs the most money per km to build, with it being located its deep underground and including its famous storm water features etc.


Personally, I'm in awe at Gamuda's ability to build it within budget (mostly) and keep it alive till today.



(C) DUKE 1 and 2 - Konsortium Lebuhraya Utara-Timur (Kuala Lumpur) Sdn Bhd (EKOVEST)

Well, this is still a very young highway, so numbers are a touch lumpy.


Having said that, actual traffic vs traffic projections are quite good, which is why it is able to make a profit much earlier than expected, despite only opening in 2010 or so and have a lot of elevated structures.



(D) Kuala Lumpur–Karak Expressway & East Coast Expressway Phase 1 (ECE1) – Anih Berhad

The year 2015 would be loss-making if not for a bond restructuring.


The income statement remained positive in 2016, before nosediving in 2017 and 2018 as they caught up on their Heavy Repair Provisions (should be this item as its cash-flow did not change much).



(E) Kemuning – Shah Alam Highway - Projek Lintasan Shah Alam Sdn Bhd (LKSA - Prolintas)

Highway was too expensive with a lot of elevated structures, and the multitude of free options available around it, which is why it is loss making despite being in a high-density urban area.



(F) Senai–Desaru Expressway - Senai-Desaru Expressway Berhad

It would still be in loss making in 2015 if not for the restructuring of the ICULS (Basically a loan with equity kicker).


This highway concession is a gigantic elevated structure / Bridge from Senai to Desaru. It was incredibly expensive to build and its basically impossible for it to ever turn over a profit, unless you forgive 80-90% of the debt.



(G) Sprint Expressway - Sistem Penyuraian Trafik KL Barat Sdn Bhd

It turned into a profit in 2015 and 2016, however, there was a strong increase in heavy repair provision (likely due to under-provision in prior years), which resulted it making losses again in 2017 and 2018.


Having said that, it is very close to making a profit, should turn green soon once the loan is low enough.



(H) Sultan Abdul Halim Muadzam Shah Bridge - Jambatan Kedua Sdn Bhd

It would still be loss-making in 2017 if not for Forex gains.


Huh? Why forex gains you ask?


Well this is a very cute company.


I’m not sure which fool or investment banker suggested it, however, it has about RM1.5 billion to RM1.7 billion in USD denominated loans.


This is also the reason behind the huge losses in 2014 to 2016, and the large turnaround in 2017. Given the increase in USD in 2018 and 2019, i expect massive losses for these years.


It also has a very interesting/creative structure.


The government basically told the company that in exchange for building it, they will pay the company RM7.51 billion in 2031, which is why they have unwinding of non-current receivable on their balance sheets.


And this is also why, despite it currently being in negative equity situation, the bond holders have not gone crazy yet, as the loan amount RM6.4bil is technically still below the amount payable by the government by 2031.


I would actually consider taking bets on there being a restructuring on this company within the next 2 years.






WCE Holdings Berhad (WCEHB: 3565)

And so, after the long grandmother stories (Mark Spitznagel of Universa Investments will be proud), we come to the meat of this article.


What is the equity of WCE Holdings Berhad worth?


To find out, we have to ask two questions, the first one being,


Do equity holders of WCE Holdings Berhad get to participate in the meat of this highway concession, ie the construction and maintenance of this highway?


Well, the construction is done by IJM, and I would imagine that as the majority shareholder of the highway (Direct 20% stake in the highway, and 28% stake in WCE Holdings Berhad), they would ensure that any major maintenance or upgrading work, is also done by IJM or its subcontractors.


As IJM and WCE Holdings Berhad minority equity holders are very different entities who benefit from this highway very differently, I think the answer is a “No”.


As minority shareholders, you are unlikely to be benefiting from the meat of this investment.


In this case, the second question is this.





What is the value of your WCE Berhad lottery ticket?

The lucky thing minority investors have going for you, is that the Mamee Family and Surin Upatkoon (the father in law of one of the members of the Mamee Family, also owner of Magnum) is in this together with you, in your exact position.


Also, as equity holders, you are actually contributing the higher end of the scale in terms of funding for the project (almost 30%).


Both of which seem to indicate that these people have really really done their homework, which helps you chances abit.


Now, lets do our homework.


To do this, we will use a simple and high level discounted cashflow.


They are a multitude of various different factors and scenarios such as,


  • The highway opening in stages;
  • Duration of concession likely mismatching by one or two years due to opening in stages;
  • Increase in opening loan amounts from interest accumulated during the construction stage;
  • Changes in maintenance cost % as the highway gets older;
  • Expected upgrading works;
  • Loan repayment schedules;
  • Potential toll compensation issues messing up the cash flow and incurring opportunity cost.


Etc, etc, the list goes on.


However, the goal here is to roughly correct, not to be precisely wrong. As Warren Buffet once said,


“You don’t need to know the weight of a man to know if he’s fat, nor the age of a women to know if she’s old”


The goal here is to be roughly correct, and err on the conservative side.


If the numbers don’t look obviously good when done from this perspective, well, forme i'll throwing it to the too hard pile,and let whoever is left to figure this out.


To calculate this high level discounted cash-flows, we need to come with reasonable estimates and assumptions.


  • Expected Operating Costs or EBITDA%
  • Expected Financing Cost
  • Traffic Projections
  • Expected Concession Asset Value and Expected Income Tax
  • Dividend and Discount Rate
  • Value of Investment



Expected Operating Costs

Depending on the type of highway, geographic profile, the kind of maintenance agreed in the concession agreement, the age of the highway as well as the efficiency of management involved, the cost of operating a highway when translated to EBITDA is usually around 60-90%.


For WCE, it is an Intrastate highway, which means that they usually have higher maintenance cost due to lower economies of scale (a long highway means a lot of mobilization costs).


In addition, Intrastate highways tend to have a higher (Class 2 and 3 – Lorries and Trucks) demographic from long distance shipping. According to conversations to various people, despite these two classes being around 20% of the traffic, they contribute to around 80% of damage done to the pavement due to overloading for these lorries and trucks.


Having said that, a young highway is also cheaper to maintain than an old one.


Now, the operators of Interstate Highways in Malaysia are Anih Berhad and PLUS Berhad, the highways are relatively old (20 - 40 years old), and they record EBITDA of around 60-70%.


For reference, top Urban Highways such as DUKE, KESAS etc can record EBITDA of 80-90% relatively easily.


For WCE, we will assume 80% of the first 10 years, 75% for the next 10 years, and 70% till the end of concession.


This is somewhere in higher end as the other two highways usually use subcontractors to maintain their high. IJM should be able to get the cost slightly lower in view of their deep expertise in construction and road maintenance.





Expected Financing Costs

From what I can see in the latest annual reports and right issue documents, by the time the highway is completed, WCE would have used up a borrowing facility amounting to RM4.74 billion.


This consist of 3 kinds of loans,


  • RM2.24 bil Government Soft Loan (“GSL”) at 4% per annum. Repayment starts 6 years from first drawdown, in 108 equal quarterly installments. First Drawdown was in 2016. Therefore first repayment will be in 2022.


  • RM1.00 bil Sukuk issued in 2015. Interest rate is around 6.8%. Repayment starts 12 years from first drawdown, in 10 equal yearly installments.


  • RM1.50 bil Syndicated Term Loan. Interest is around 6.7%. Repayment is in 2028 bullet style.


This translates to the table below and a blended rate of 5.45%

Looking at the table above, considering that interest expense is likely to be around RM 290 million per year, i don't think they will generate enough cash flow to meet interest cost for at least the first 10 years.


However, given the long concession period, refinancing is probably possible as long as the traffic is not too bad (we will go into this later).


To make things simple, we will ignore the schedule above, and just assume that all excess cash would go to interest and principal payments (after accounting for a reasonable dividend policy) and that any lumps in the cash-flow will be handled while refinancing.


The goal is to completely repay the borrowings by the last year of the concession period.


Do note, they are also a multitude for covenants (FSCR Ratios, Debt to Equity Ratios etc), as well as making sure the equity is positive in order to pay dividends etc.


But these would really massively complicate things, as i will then need to create a sample balance sheet. Therefore i decided to go with the above method.


Having said that, if the final numbers looked fantastic and it looks viable investment, i would probably proceed to do a full fledged discounted cash-flow, with a balance sheet component in order to better understand the numbers. In this case however, it did not.





Traffic Projections

In WCE’s latest Bond Rating Report by RAM Rating, they provided some information on the traffic projections used by WCE Holdings Berhad. (If you want one you need to pay RM500 for one copy, i happened to have a friend, so that helps).



Looking at the numbers, they appear to be projecting a long-term traffic growth of around 2.4 – 3.2%.


If you notice, revenue growth is actually about double that of projected traffic growth, this is likely due to toll rate increase. Using some back of envelope calculation, it appears that the toll rates are increased by 10% every 5 years. Initial revenue is expected to be between RM275 million to RM461 million.


Do these numbers look accurate?


Well, lets compare them with North South Expressways, whose highway is parallel to WCE's.



Looking at PLUS Berhad’s projected traffic growth, as per their latest MARC Bond Rating Report (Again RM 500 to buy, I love my friends), for the North South Expressways, traffic growth for 2019 is only 1%.


As I understand, the 2019-2023 traffic projections is lower as it includes impact from the West Coast Expressways (WCE). Looking at the rest of the years, it looks like 1.5% is probably a reasonable long-term estimate for North South Expressways.


Now, just by comparing the traffic projections for both WCE and PLUS, there is clearly a huge difference.


There both used different traffic consultants, this means one of these consultants is much more wrong than the other.


Why is this the case you may ask?


Because in truth, projections says more about the people projecting it than that of the underlying reality.


Again, listen to Charlie Munger, track the incentives.


Traffic consultants are not governed by any strict supervisory body (unlike Auditors) and they are hired by the management.


Whose bread I eat, his song I sing (to a point, in general).


Having said that, North South Expressway's traffic projection is backed by 20 years of traffic data, while WCE’s is basically castle on the clouds.


Therefore, we will be using North South Expressway's traffic projections as a base.


Now, it is important to note that this 1.5% traffic growth, includes Selangor, Kuala Lumpur, as well as Johor Bahru, which are likely have traffic growth that is higher than the average for North South Expressways.


To simplify things, we will just split the highway into three portions, called Northern, Southern and Central.


In addition, in PLUS’s annual report (they are not listed by the way), they announced RM3.7 billion in toll revenue (excluding toll compensations), as the revenue is not split by concession (they own 5 highways altogether), we need to think of a reasonable estimate.


As two of the concessions are basically intertwined (North South Expressway & North South Expressway Central Link.), I’m just going to make a high level projection, and say that both of them amount is about RM3 billion (this proportion also makes sense in terms of what was seen in terms of traffic volumes stated in the report).


Now, we will now do a high-level estimate and try to obtain the growth and revenue by region. This is where it becomes more speculative, but we will try to be as reasonable as we can, and err on the side of conservatism.


We start by identifying the characteristics of each region, before coming up with some assumptions and estimates.




Characteristics of Each Region.


Central Region
This region holds the bulk of Malaysia’s economic development and thus should logically have the highest traffic growth and toll revenue.


Look at it from economic development wise, car ownership in each region etc,  it would be reasonable to say it’s toll revenue is the combined of both Southern and Northern Regions.



Northern Region
Other than Penang, which is a really small island, in terms of economic development, it should be the lowest of all regions.


Perak, Kedah, Kelantan etc are not known for their economic prowess after all. Therefore, we can say that traffic growth and toll revenue should be the lowest among the 3.



Southern Region
This area includes Johor Bahru, which due to its closeness with Singapore, should do better.


However, it also includes areas like Negeri Sembilan and Melaka and the other parts of Johor, which are not exactly economic powerhouses.


On net basis, it should at minimum do better than the Northern Region, but not by much. Let’s say 20% better.


All this translates to the following assumptions.



I think this is a relatively reasonable one and if it errs, its probably on the side of conservatism.


Now that we have our long-term growth, we now need to really think about its initial growth rates (as a new highway grows faster at the first few years before stabilizing), as well as the Initial Revenue.


For Initial Traffic Growth, I decided to use the following,


Again, it seems conservative enough for me, i think a stronger initial pop may happen as it is about 50km from NSE, despite being parallel, however, again we strive to err on the side of conservatism.


What about the Initial Revenue then?


Well, as per the table above, Northern Revenue for North South Expressways is around RM675 million per year.


According to RAM Rating, WCE’s traffic consultants projected RM471 million (RAM sensitized it to RM 275 million) in revenue per year.


This represents somewhere between 40% (RAM Sensitized) - 70% of North South Expressways Northern Revenue.


Since WCE is expected to take away some traffic from North South Expressways, this amount seems a little high to me, especially since PLUS have lowered the toll rates by 18%, bringing it to around 11.45 sen per km in the article above. 


How much is WCE’s toll rate then?


The information is not public, however, according to the article above, it is estimated to be 13.7 sen to 15.53 sen per km.


This appears to be corroborated by this article at the end of 2018, stating that it should be in line with PLUS’s 13.96 sen per km, according to a minister.


My guess is that it’s probably somewhat higher that North South Expressways. As if it was lower, they would have answered it clearly.


This is not good news.


However, to be fair, WCE is also banking on vehicles that uses the free federal roads to use their highways as well, as its likely to be more convenient and a better drive.


However, one should also note that the Northern Federal Roads are actually quite well maintained, without much traffic jam, in which case i'm not sure how much traffic will transition to WCE's more expensive highway.


So, what’s the right number?


I have no idea, but if I to put some money on it, a predict a number that is within 30% lower of the actual future traffic, i would say around RM 200 million, which is far lower than what was represented by management and sensitized by RAM Rating.





Expected Concession Asset Value and Expected Income Tax

Now back to the other assumptions, we also need to calculate the Expected Income Tax. As the income tax is likely to be determined by the profit for the year, which will need to include the expected amortization rate, we will need to derive it by identifying the Expected Concession Asset Value.


And then amortize it using the revenue for the year, against the total projected revenue.



For the project cost/ highway cost, i'll be using this amount. The interest capitalized is around 3% of the entire project cost from 2015 to 2023. This is about half of the current interest rate.


I did this to account for the fact that the loan is progressively drawn down.


For the tax rate, we will use the current corporate income tax, which is 24%.


For losses brought forward (to be used to reduce tax), i will assume that the current 7 year law applies till the end of concession.





Dividend and Discount Rate

For the dividend, we will just massage it to have it fit such that the all borrowings is paid off at the end of the concession period.


Discount rate of 4% is used. This is the current 30 year MGS (not sure if it changed with).


Some will think its a little, low, but for me, i am already adjusting in the margin of safety via all the other assumptions, and we will also compared it against the current share price later (difference is the margin pf safety).


I'd rather do it this way than make my life unnecessarily complicated.




Value of Investment

Now for value of investment, this is to identify out what is will be the NPV per share. Again for this, we will go the most conservative route.


To identify our number of shares, we refer to the right issue prospectus. According to the prospectus, under the maximum scenario, the maximum number of shares is ~3,509,575,000 shares.


This assumes that all RCPS currently held by shareholders will be fully converted to new WCE Holdings Berhad shares, by surrendering one RCPS together with the required cash payment, for one new share of WCE Holdings Berhad.


It also assumes that the Warrants currently held by the shareholders will be fully exercised in the First Exercise Period at RM0.39 per warrant.


This expands the number of shares to ~3,509,575,000 shares from the current ~1,297,000,000 shares.


This expands the number of shares by around 171%. Dropping the final valuation by that amount.


In any event, if as an investor you think the shares are valuable, you would want to exercise the warrants, and in this case, all of them thought so and did so.


I accounted for the cash inflow as a positive in the Cash-flow workings, as we are already dividing it over the maximum number of shares.





WCE Highway High Level Cashflow

Given all of the above assumptions, what does the cash-flow look like?

Using realistic assumptions (that err somewhat on the side of being conservative, in terms of your Initial Revenue and Number of Shares), your lottery ticket is worth about RM0.25 sen per share.


This is about 2.18% lower than the current market price.


Having said that, these numbers hinges on one very important thing, which is that toll rate increases at 10% every 5 years. I think this accurate, but we need actual confirmation on this.


Even then, it does not look that attractive to me.


Also, remember, these numbers does not consider the possibility of toll compensations being lower than what is supposed to be received (traffic caps) and delays in toll compensation etc.


Having said that, my guess is that the traffic caps will not come into play when toll compensation is calculated as my projected traffic used is so much lower than that of management’s, which would have been used in negotiating the toll concession.


I think considering the conservatism I took in calculating this, this fair value should more than account for toll compensation delays etc.


Now, if you were to decide to use managements traffic projection, and instead of RM200 million and 1% growth, and replace it with RM471 million and 3% growth.



Your lottery ticket will be worth about 13 times more or RM3.26.


But these numbers would be a real stretch and quite frankly, I don’t think it’s possible in this world.


If this was another reality where for some reason, Singapore did not separate from Malaysia, and this new Malaysia was didn't have Race, Religion and Royalty completely baked into our culture, enabling the kind of economic development across the Northern Region that can give rise to this kind of traffic growths, this may be possible.


But there is a price for everything.






With that i end this piece.


Having said that, for the current shareholders, my assumptions are probably quite conservative, and if its only 2% below market price given these very strong assumptions, its not all bad.


In addition, you have a relatively decent property development arm in WCE Holdings Berhad.


With some luck, the RCPS will not be fully converted, enabling the fair value per share to go up. And that the warrant expire in 2024 and 2029 mostly unconverted, enabling your per share value to increase significantly.


Of course, this is all predicated the current cash being sufficient, and that there is no additional cash calls.


I hope this is the case.


One thing i did find particular impressive about when writing this article, is the fact that this highway concession is not completely underwater when using my assumptions. It's actually still likely to be profitable, just severely impaired.


This for me speaks volume about how good a deal this was back in 2015.


Of course, an alternative explanation is that the low traffic growth for the last 4-5 years is just cyclical.


Though i would struggle to think of any reason why its mostly cyclical, as we've had boom years in that period.


If i had to make a guess, i would say that this is from income for the middle and bottom half of society having not as grown much in the last 5-10 years.


This resulted in many people deciding to use Motorcycles instead of Cars. (In exchange, this particular trend gave rise to companies like AEON Credit, who are now recording super-normal profits)


As always, if you feel i'm wrong, or missed out on anything, please let me know.


Disclaimers: Refer here.


Facebook: Choivo Capital
Website: www.choivocapital.com
Email: choivocapital@gmail.com

Labels: WCEHB
  2 people like this.
Integrity. Intelligent. Industrious. 3iii (iiinvestsmart)$€£¥ If you cannot tell me the core story in 2 minutes why this company is or is not a good investment, all the other extra information do not aid my decision making.
25/05/2020 8:51 PM
Choivo Capital Patience my young padawan.

25/05/2020 9:38 PM
Booyeah great article
25/05/2020 11:00 PM
Philip ( buy what you understand) Progress of 3% was done for the pan Borneo highway in the writing and reading of this article.

But I still don't get it.
25/05/2020 11:07 PM
Trust Salute you for an impressive thesis and analysis..
26/05/2020 5:57 AM
abang_misai Luckily i saw this article and I managed to sell all at 0.250
10/06/2020 6:20 PM
lcwin yep final word, you make money in the maintenance not the tol collection directly as its politically unfeasible. Look at PLUS n u know the maintenance costs is daylight robbery. Its also why they delist the highway maintenance cpy when they realized their mistake.
29/06/2020 4:25 PM

(CHOIVO CAPITAL) Perak Transit Berhad – The Peculiar RM3.2bil – RM4.8bil Bus Terminal Boom In Malaysia (PTRANS – 0186)

Author: Choivo Capital   |  Publish date: Sat, 23 May 2020, 4:55 PM

For a copy with better formatting, go here, its alot easier on the eyes.

Perak Transit Berhad – The Peculiar RM3.2bil – RM4.8bil Bus Terminal Boom In Malaysia (PTRANS – 0186)


One of the companies I’ve always been interested in is Perak Transit Berhad.


So much has been said about their Amanahjaya Bus Terminal in Perak, and its apparently monopoly like position when it comes to bus travel in Perak.


In addition, with the soon to be completed Kampar Bus Terminal, it seemed plausible for earnings to double, and thus the price of the stock as well (at least according to some analyst).


In fact, I actually bought a small position during the March bottom, before selling it off after finishing up my research.


The thing is, i don’t think it is as simple as that, as they are quite a few things that don’t seem to line up/make sense for me numbers wise.


Well, lets begin.




Overview of the Business

Perak Transit is involved in 3 main business lines,

  • Operation of Petrol Stations
  • Operation of Public Transportation
  • Operation of Integrated Public Transportation Terminal



Operation of Petrol Stations

Fairly standard business, makes about RM 1 million per year. No real surprises here.



Operation Of Public Transportation

Well, the thing about operating bus routes, is that it is fundamentally a loss making business, that requires government subsidies to survive. The subsidies given are as follows.


  • RM10 million given by the Public Private Partnership Unit of the Prime Ministers Department in 2012 for the construction of their current Amanjaya Bus Terminal.


  • Interim Stage Bus Support Fund. A fund to address the shortfalls of revenues for certain unprofitable routes. This translates to around RM 2 million a year. The contracts run for 2 years before renewal.


  • Stage Bus Service Transformation ("SBST") Program, which basically turns it into a cost plus contract. As a network operator, they will be paid cost per km for each vehicle in the 16 stage bus routes in Ipoh, with the fares collected and repaid to Suruhanjaya Pengangkutan Awam Darat ("SPAD") (The Land Transport Government Agency) . The contract runs for 8 years before renewal is needed. This particular program has grown to become a major part of the bus operations.



And as we can see here, subsidies/cost plus contract have grown to become approximately 43% of the business from the initial 23%.


And despite costs plus contracts being a major part of this division, margins is still relatively lackluster (which is a good thing from a citizen perspective I guess?)


Having said that, from my experience in working with the government on things that require them to subsidize and make payment, i personally don’t particularly like the experience.


This is because the government service is usually run by little Napoleons, with whom you have to really jaga the relationship etc, as at the end of the day, they will do what they (while giving reasonable sounding explanations).


I still remember Ekovest bosses making sure to show their face on a random update meeting with the Malaysian Highway Authority on 2 hour notices.


At the end of the day, when the chips are down, nobody dares to sue the government (in Malaysia) at least, to fully enforce their contracts.


Having said, this is not a particularly politically sensitive kind of subsidy, so i'm not too worried.


I don’t particularly like this part of the business, but then again, nobody really does. It also does not contribute much in terms of profit anyway.




Operation of Integrated Public Transportation Terminal

And now, we come to the real meat of the business, which includes their “Monopolistic” Amanahjaya Bus Terminal and soon to be completed Kampar Bus Terminal.



At first glance, the numbers look absolutely incredible!


I mean, it almost looks as if Surgical Glove companies should just pack up shop and go into the business of opening bus terminals.


However, one thing Perak Transit includes in their numbers here, is something called a “Project Facilitation Fee”.


In their prospectus, it is stated that these are generally one off items, that should not constitute a major part of their income.


So lets try and extract it out and look at the normalized numbers.



Well, it looks a bit more logical, however, do note this is a segment reporting number, and it does not include any consolidation set offs.


And yes, the margins really are 80% (I’ll explain later)


Lets account for the consolidation adjustments, and take a look at how the company’s annual results will look like excluding the PFF’s (since it is paid by third parties only anyway).



From what we can see here, it appears these “One Off”, “Non Recurring” and “Icing on the Cake” items, are not just continuously recurring, they have also consistently increased in size, that they now take the cake when it comes to company’s earnings by contributing to more than 50% of it in 2019.


Its almost as if, Perak Transit Berhad is not primarily a Bus Terminal company that gives advice to others on how to open their own Bus Terminals.


Instead, it is a company that specializes in giving advice to others on how to open a Bus Terminal, and also happens to have a Bus Terminal of their own!




What are these “Project Facilitation Fees” (“PFF”) ?!

So, we now have the million dollar question, what are these fees?


They detailed out the nature of these fees in their Prospectus and Annual Reports, it can get quite lengthy, however, they all revolve around saying the same thing.


PFF’s are when the company provides advisory services to third parties who want to build their own Bus Terminals.


What they do is they rent out Terminal Amanjaya’s equipment, utilities and facilities, prepare preliminary concept paper for the proposed project, discussion and sharing of knowledge on design, planning and construction of terminal and attending all meetings organised by the third party with SPAD and other relevant governmental departments.


And all of this is due to their their experience with Terminal Amanjaya and the management’s long-term expertise in public bus services.


Basically, if you are interested in opening a bus terminal, we will help you with your proposals, talk to government and settle everything.


According to management, this there is very little incremental cost relating to the Project Facilitation Fees, its basically all profit (Prospectus indicates margins of 80%), and that these fees usually consist of 2-3% of the Bus Terminal Project’s Gross Development Value.


During their IPO in 2016, they were even kind enough to provide the breakdown of the fees for the year 2015.



Well it looks very reasonable, except.



Except, these amounts have continually increased, and as of FYE 2019, they have received almost RM96.9 million in project facilitation fee’s.


Now to be fair, on the surface, this is a very good thing for the Company and its shareholders. However, we do need to really understand what this item and its nature.


I mean, if your children, started coming home from school with RM10,000 a day from whatever he is doing outside, i would imagine that as a parent, you would be more worried rather than happy. (But if you found out he's doing some weird software stuff that is doing extremely well, you would be very very happy)


So, back to the topic at hand.


Depending on whether it is 2% or 3% of the Gross Development Value, this indicates proposal for new Bus Terminals in Malaysian since 2014 totaling RM4.8 billion or RM3.2 billion. With the bulk of it happening in 2019.


To put things in perspective.


For RM4.8 billion, you can buy the entire Sunway Pyramid or even One Utama, the biggest shopping malls in Malaysia, with some of the best locations and still get change.


It does not make sense to me that they are RM4.8 billion worth of bus terminals proposal in Malaysia in the last 5 years.


This is bus terminals, not Highways or Airports.


And to make things really interesting, all these payments since 2014, came from a single party.


Maksima Timur Sdn Bhd.  (They also happen to own around 1% of Perak Transit shares).


So who are they?




About Maksima Timur Sdn Bhd (Perak Transit 50% Profit Contribution Machine)

Now, according to their annual financial statements, Maksima Timur is an operator of transportation business, property development and investment holding, whilst its property development activities include acting as a project manager for construction of new integrated public transportation terminal complexes.


Now, let me be clear. So far things are a little fishy. However, it does not appear to be fraud. As the most important Red Flags are not there. This is not the new episode of China Hustle (Malaysia Edition).


The PFF's are actually paid, and they are no long outstanding amounts in Perak Transit receivables (Though if i'm honest, as an ex-auditor, if these two companies are related and want to play with the numbers a bit, its not that difficult).


By the way, the company is audited by a small audit firm in Ipoh called, CWC & Company.


For the most part, I think the numbers should still be accurate, but for a fee of less than RM10k, I doubt the auditors will goreng them too much into the numbers, especially since Audit Oversight Board Reviews are usually on listed companies, and i doubt this firm has any listed clients.


Now, looking at Maksima Timur’s annual financial statements and annual returns.


They are no overlapping directors and shareholders with Perak Transit Berhad, which seem to lend credence that it really is a third party company.


However, they are a few interesting things in the annual financial statements that don’t seem to make sense for me.




Building Contractor with ~ RM50m Revenue (Without Any Construction Equipment)



In 2018, this property contractor generated more than RM45 million worth of contract works revenue.



However, they did it with only RM1.1 million in Plant and Equipment and RM2.2 million in Investment Property (I imagine this is their office, and also property rented out to third parties).



And if you look at their Plant and Equipment, they generated that almost RM50 million worth of Contract Works Revenue with nothing but RM0.33 million worth of cars, and RM0.001 million in Computer and Office Equipement. Very impressive!


Look Ma, No Hands!



In fact, their “Investments” which consist wholly of quoted shares in Malaysia (and their shareholding in Perak Transit I imagine), at RM10 million (2017: RM18 million), is 3 times more than their Property Plant & Equipment and Investment Property combined (2017: 6 times).


Ok, to be fair, maybe they are just a weird pseudo project manager, that for some reason, only recognize a very small part of the project .


Honestly, it would be the first time I see something like this.




RM3.2 – RM4.8 billion worth of Terminal Proposals, Contract Work in Progress less than RM60mil

And here is something very interesting as well, for a company that have done proposals for RM3.2 billion to RM4.8 billion worth of bus terminal proposal.


The amount of contract works in progress is less than RM60 million.



Ok, to be fair, just because a proposals is completed, does not mean the project actually gets through.


In addition, many of the projects may already have been completed by this property project manager that does not have building equipment.


And to make things even more interesting, we can see that their additions in Contract Work In Progress in 2018 and 2017 is RM17.7 million and RM36.6 million respectively.


While the amount of Project Facilitation Fees paid by the Maksima Tinur (therefore added to Contract Work In Progress) to Perak Transit amounted to RM18.5 million in 2018 and RM21.7 million in 2017.


( I imagine there is some differences in the amount recognized during the year as Perak Transit year end is December, while Maksima Timur's year end is September.)


Looking at their numbers, its almost as if their projects consist solely of handling proposals on Bus Terminals from third parties, and paying fees to Perak Transit.


One wonders, why do these third parties need to go through Maksima Timur, instead of going to Perak Transit directly?


Ok, to be fair, it could really just be those few guys sitting there and managing subcontractors, but even then, the numbers is still a little funny.




Zero Profit (Excluding Gain/Profit from Investment in Quoted Shares)

In 2018 and 2017, the company made RM6.0 million and RM18.6 million in profit.



Except, if you were to exclude the Fair Value Gain/ Gain on Disposal on quoted shares, which are not taxed (Malaysia does not have Capital Gains Tax), the profit will be zero.


Which would make sense of this was a company that is related in some way and in the business of moving around numbers (legally).


Or it could just be coincidental.




Conclusion and Valuation

Having done my research, in terms of valuation, I now understand why the price of this company barely moved, despite so many analyst talking about doubling of earnings (and thus price) when the Kampar Bus Terminal is completed.


PFF’s contribute more than 50% of the company’s earnings, and the real nature of these things, how recurring are they etc, is all in doubt.


In addition, even if all those questions are answered, one major question remains.


This bus terminal expertise, does it lie with the company, or the top management of the company.


If it lies with the top management of the company, they can very simply just decide to open an Advisory Firm separate from the company and provide these consulting services, and thus keep 50% of Perak Transit's profits all to themselves.


As for the relationship between Perak Transit and Maksima Timur (the Number One Profit Generator for Perak Transit).


Who knows?


It is probably legal, and being an ex-auditor, to paraphrase Shakespeare,
“There are more things in Corporate Structures, Perak Transit Minority Shareholder; than are dreamt of in your philosophy”


There is probably some kind of corporate structure, that is kept in line via verbal agreement, handshakes, and honor.


In any event, there is a little too much speculation for my taste, and i'm not too keen to spend more money (beyond buying one copy of Maksima Timur's accounts) to find out more.


Well,Good luck!


And as always if you think i missed out on anything, have a different perspective, or think i am wrong, period. Let me know.


Disclaimers: Refer here.


Facebook: Choivo Capital
Website: www.choivocapital.com
Email: choivocapital@gmail.com

Labels: PTRANS
  4 people like this.
kalteh Interesting case study. Seems like those analyst need to at least dig in as deep as you.
23/05/2020 10:18 PM
Alex™ kantoi. learn scuttlebutt. come see the bus terminal yourself.
23/05/2020 10:20 PM
Choivo Capital 用手子算够了
23/05/2020 10:28 PM
plainer can ask during agm about the maksima timur
23/05/2020 10:28 PM
Choivo Capital One question your should probably ask is on the advertising etc. I dunno how to get rm2m a month lah, if you go visit the amanjaya terminal.
23/05/2020 10:30 PM
robot888 Choivo Capital, why u never mention about Ptrans Debts?
23/05/2020 10:36 PM
plainer where can find the advertising 2m per month info?annual report stated bus charter and advertising income for about 8m
23/05/2020 10:57 PM
Sslee I hope one day SC will have many more people like Choivo in their fraud investigation team so that tough measures can be taken to correct market aberrations, punishing the culpable/fraudster, delisting the failing companies, and cleaning out the riffraff. And make sure whoever breaks the rules will pay a heavy price
23/05/2020 10:59 PM

(CHOIVO CAPITAL) Ragret Del Luna: 10 PE Glove Companies (SUPERMX - 7106)

Author: Choivo Capital   |  Publish date: Fri, 22 May 2020, 9:49 PM


For a copy with better formatting, go here, its alot easier on the eyes.

Ragret Del Luna: 10 PE Glove Companies (SUPERMX - 7106)




Well, the picture is self-explanatory. No prizes for guessing the "Del Luna".


Looking at history, missing out on some major bull and goreng runs, appears to be a real talent of mine.


Lets list them out.


Construction, Technology and Petroleum Refining (2017 Bull Run)
Semiconductors and Steel (2017-2018 Bull Run)
Oil & Gas Supporting (2019 Bull Run)
FAANG & SP500 (2016 to 2019 Bull Run)
And now, the Gloves and Covid-19 (2020 Bull Run)


For some of them, I either buy way too little (less than 5%) or sold far too early. I guess some reflection is in order.


So, how do we begin? Well, I guess I’ll talk about 3 things.

  • The Bull Run for Rubber Gloves.
  • The Nuances of the Various Factors that really drove prices.
  • Why Glove stocks are at 1X Forward PE.


(As many of you may notice by now, talking/writing is a specialty of mine, while making the decisive decision to sell some of some of my other holdings and leverage up to buy Glove Stocks, is clearly not.



And this is despite understanding the factors I’m about to explain to you, being privy to certain information’s from a Top Glove management meeting 2 weeks before results came out, as well as confirming things with my friends in Top Glove and Hartalega.


Its really a talent I tell you)



The Bull Run for Rubber Gloves

Well, if you’re one of those who are wholly unaware of what has been happening in the KLSE in terms of rubber glove companies, well, you must be one hell of an investor.


If you never really understood the meaning of “MooNing” as often used in the cryptocurrency space, well, the rubber stocks such as Supermax, Careplus and Comfort (along with their structured warrants) have risen far faster in the last month that Bitcoin etc ever did in a one month period.


Its ascension is quite literally a rocket shooting vertically towards the moon.
(Again, aihhh)


Quadrupling or more in less than 1 month.


I could elaborate, but that would be the equivalent of explaining water to fishes. There is quite simply no need to.



The Nuances of the Various Factors that drove Prices



  • Unprecedented Level of Demand for Rubber Gloves

Not much needs to be said here, every time someone gets swabbed for a COVID 19 test, one pair of gloves will be thrown away, and this applies to even mass testing’s, house visits, contract tracing etc.


Demand became so strong, that glove companies today take a 20% deposit (this is unprecedented) on any orders made today, with delivery only happening 1 year from now (earliest).




  • Structural Capacity Constraints

Unlike Personal Protective Equipment (“PPE”), Face Masks, or Sanitizers, there are some very structural constraints built into the supply for Rubber Gloves.


In the last few weeks, we would be reading news of some Tom Dick Or Harry, making all of the above items (except for Rubber Gloves) every other day.


There is that little girl helping to weave PPE (along with many other textile companies), alcohol companies that have decided to pivot and create hand sanitizers, Louis Vuitton and Razer (a computer accessory company) now produce face masks, and car companies like Ford now create ventilators.


The list goes on.


But we don’t hear news like these for gloves. Why is this the case?


Why don’t I hear rubber tappers or condom manufacturers going into glove manufacturing?


Its simple, in order to qualify for surgical gloves, you need FDA approval, a process which can take longer than a year for new companies.


In addition, in order to produce these gloves at an economical level, you need machinery and factories that can produce at least a few billion of them per year.


This means any additional capacity, can only come from the incumbents like Top Glove, Hartalega, Supermax etc


And these additional capacities can only arrive earliest by year end, with the additional supply likely to be nowhere near enough.


In the case of increasing production capacity of rubber gloves, its one of those things that just take time, no matter how much money you have to pour into it.


Like making a child, one cannot impregnate 9 women in order to have a baby born within 1 month.




  • Price Increases

So limited supply, meets unprecedented demand, coupled it inability to increase capacity quickly.


What does this mean?


Price increases for OEM surgical gloves at the rate of 5% or so PER WEEK. With own brand prices increasing by 200%-400%.




  • Lower Costs

Due to the virus, demand everywhere else is much lower. Which means much lower costs for the glove companies.


Rubber Prices are down 30% from the start of the year.


Butadiene (For Nitrile Gloves) are down 50% from the start of the year.


Labour Costs is down or even as people have no other jobs to go to. Staff are also a very easy to train unlike the textile industry.


Gas prices are down still down around 40% from the start of the year due to lower demand.




  • Everything else is shit.

There is a phrase in a Leonard Cohen song I quite like,


“There is no decent place to stand in a massacre.”


Well Leonard Cohen have not met rubber glove companies during a virus caused global economic shutdown.


They don’t just survive or maintain earnings, they actually thrive!


If what you’re looking for, is potential for upward price movements in the short, mid (or, at a stretch) long term, there is quite simply very little else to look at in the market today.


Even hospital revenues are technically down, as other surgeries are all down from people either delaying their surgery out of fear, or reduced by management in order to make capacity for Covid Testing.


Needless to say, whether you’re a fund manager, retailer or institutions, everyone piled into the rubber glove companies




  • Record KLSE Transaction Volume, Record Retailer Participation

One thing our broker or banker friends would have noticed the last one of two months, is record draw-down of personal loans, house refinancing (a lot of them are for investment into stocks according to a friend at RinggitPlus) and new account creation for new brokerage accounts.


In the day for "Work From Home", gambling/trading in stocks have proven to be a popular hobby.


Even the best of them like MPLUS is lagging a little, with Maybank's brokerage accounts being close to unusable.


In any event, these new retail participants are more than able observe the meteoric rise of the rubber glove companies, and are certainly more than capable of doing first level analysis of the business and share prices.




And thus, we have today.  Share price increases of 5X or more for some of the companies.





Why Glove Stocks are at 10 forward PE

Now, the answer behind the clickbait title.


Many of you may be wondering, he siao liao?


Heart pain until don't know how to read already?


Isn’t Supermax etc all more than 70PE?


Well, quick question.


What happens to the bottom-line when increase in revenue is due to Margin Expansion versus Increase in Volume?


Lets do a very high level analysis with SUPERMX's numbers.

And there you go, 10PE. A real bargain (depending on how you look at it).


So, what is the market pricing in now for Glove Stocks?


Well, the market is basically saying that COVID 19 and its other mutations will be with us for the next 2-5 years at minimum, and that demand for everything will be low, except for rubber gloves and a few other select industries.


A stagflation or depression basically.


Well, if you think that is the case, it may even be at a slight discount.


Again, do note "Target Price" and "Intrinsic Value" are two very different things.





Personally, I do wonder how i failed properly identify and consider the above factors. The information is all there and i even gave some thought to it in March.


How did i airball so badly and fail to purchase even 5% for myself?


Well, after some consideration, i think the main reason for it is that i tend to instantly discount/ignore stocks that are rising, especially if they are popular and Koon Yew Yin is talking about it.


This has also been one of the fundamental reasons why it took me so long to buy companies like Google, Facebook, or even the SP500 index/ Investing Overseas.


And so, by error of omission instead of commission (the favorite excuse of every value investor when he fails) , here goes another fortune slipping from my fingers.


Aihhhhh. Oh well, at least I’m still young.



Additional Anecdote 

In the week before the quarterly results, me and an acquaintance (he is a trader) were discussing on glove companies and the above 10PE scenario.


We were discussing it as a trade, and this excerpt of our conversation was quite illuminating for me.


Choivo: Well, it looks like the market is not pricing in the fact that earnings may be double or quadruple. There appears to be a significant enough gap. So, what’s your trading plan? I think i may actually put 20% on it.


Acquaintance: Well, buy up to about 30% of portfolio over the next few days.


Choivo: Are you sticking to the 10% Cut loss?


Acquaintance: Yes. Gambling must have a cut loss.


Choivo: You know, I’m curious, is it even possible for you to be an investor?


Acquaintance: You know, i don’t think so. If prices drop by 10%, I cannot tahan and will cut loss instantly. In addition, if price does not move up within one or two days, I also cannot tahan and will cut straight.


Choivo: I wonder, if market drop 10% the next day, despite how right this thesis sounds, would you still cut?


Acquaintance: Yes. I will cut. If price drops 10%, it means market is telling me I’m wrong, so I will cut.


Choivo: And if it goes up 5% after it drops?


Acquaintance: I will buy back straight away.


Choivo: Why?


Acquaintance: Because Market is always right. Market is telling me now that my rule in that case was wrong, and I should not have cut loss, so i will buy back. I have no problems chasing back.


Choivo: And if it keeps doing that?


Acquaintance: Well, I’ll keep doing it, key thing is to minimize the loss and maximize the gain. If it’s going up, I won’t cut, unless I think everyone is way too happy, and everything that I know, the public also know.


Choivo: You know, I really wish I was your broker.



You know, one thing i did last year was to read the entire Market Wizard series on Traders. I can definitely see some niche that i think i am capable of doing.


However, I do wonder if its possible for me to buy something for more than its worth, in order to sell it to someone for a higher price.


Ie: Buy High and Sell Higher.


I’m not sure if I was capable of buying it at RM4.6.


But, in any event, I should have been more than capable of reading into the situation enough to buy a 10% - 15% position when Supermax was RM1.5 or so.


Oh well, you live you learn. I hope it sticks this time.


Disclaimers: Refer here.


Facebook: Choivo Capital
Website: www.choivocapital.com
Email: choivocapital@gmail.com

  5 people like this.
qqq33333333 hottest thing in town...all welcome to speculate............
23/05/2020 1:48 AM
Choivo Capital Glad it was useful for you.

probability Good info which i was actually trying hard to figure out earlier. Thanks Jon!
23/05/2020 3:28 AM
CharlesT It took me a long while to adjust my mentallity towards koon bee play..

U r younger than me i hope u r less stubborn than me too

Making money is rule no 1 in stock mkt
23/05/2020 6:43 AM
Philip ( buy what you understand) I hope your post is not saying what I think it is sharing. That everyone should be buying more glove stocks with made up numbers of suddenly pe10. The ability to rationalize is to know when to go against the herd, and when they are leading you to water. This requires you to put ego out the door.

In any case, I have sold my entire long term holdings in topglove, my second longest holding. When everyone is asking silly prices for my stock, it is time to head out, and find out where everyone is forgetting.

You are welcome to join a telegram group my daughter set up for me, tme/philipcapitalmanagement
23/05/2020 7:10 AM
Sslee Haha Ahchoi is saying he spends night and day reading all the foreign companies annual report and bought:
1) Google
2) FB
3) Stoneco
4) Berkshire
5) Master
6) Visa
7) Aercap
8) Netflix
And day-dreaming “Should I talk about yesterday? When I found out that it was that precise moment, where I made the correct decisions to not to throw all caution to the wind, and jump in with nothing but my underwear left, was the absolute bottom? (My thesis was that margin and forced sales are over, and its time to buy, it appeared to be accurate). And that if I had done so, i would likely not need to head back to the office come the end of the movement restriction, with so many of my high conviction purchases up by 200-300%.”

But miss our “Jaguh Kampung” glove stocks that actually went up 200-300% in 1 month. So he still heading back to the office after the MCO
23/05/2020 8:55 AM
probability I think Philip did the the right thing to sell Topglove........but he should be buying Supermax
23/05/2020 9:09 AM
supersaiyan3 Eh, it depends on its a one off event or a permanent change. For some companies i believe its a permanent change, for others is only a one off event. When this is over, who will still be running at full capacity?
23/05/2020 9:20 AM
CharlesT can last for 2 FYs
23/05/2020 9:20 AM
probability If you go to any pharmacy (my experience in overseas), they sell you gloves in boxes, if you check the brand, it has a local company name.

The name is something that you have not heard of - no connection to Malaysia, but the gloves are definitely from Malaysia.

This shows the distributors buy from Malaysian glove makers and hike up with a significant margin to make money themself (likely much higher margin than the manufacturers).

As such, if you can have your own brand (OBM) like Supermax, it would certainly make a huge difference on profit.

Most importantly, it means Supermax has the competitive advantage of killing other distributors (competitors) being the manufacturer themself.

This vertical integration is indeed very powerful.

There would be no reason for PE rating of Supermax to be not comparable to other big players like HARTA
23/05/2020 9:23 AM
probability May be Supermax should buy a Rubber plantation too, so that they can have their own latex - will be useful to gain competitive advantage at times when oil price shoots up raising raw material Butadiene price (synthetic rubber)
23/05/2020 9:37 AM
Philip ( buy what you understand) This post below is the reason why I'm holding on to QL and selling topglove. Is you opinion that I should be buying Supermax based on greed and fomo? Or based on intrinsic value and looking term growth.

The prices now are speculative prices with future earnings baked hard into current prices.

I prefer to buy companies selling at a nice relative valuation to future prospects.

Or you believe the prices, volume and demand will go higher and at the same rate 5 years from now? That earnings will continue to quintuple next year and stay that way, and shortage will still be unresolved years from now?

supersaiyan3 Eh, it depends on its a one off event or a permanent change. For some companies i believe its a permanent change, for others is only a one off event. When this is over, who will still be running at full capacity?
23/05/2020 9:20 AM

probability I think Philip did the the right thing to sell Topglove........but he should be buying Supermax
23/05/2020 9:09 AM
23/05/2020 9:42 AM
Philip ( buy what you understand) This level of speculation and greed is horrifying. Can you really think that harta performance and Supermax performance over time is comparable?


probability If you go to any pharmacy (my experience in overseas), they sell you gloves in boxes, if you check the brand, it has a local company name.

The name is something that you have not heard of - no connection to Malaysia, but the gloves are definitely from Malaysia.

This shows the distributors buy from Malaysian glove makers and hike up with a significant margin to make money themself (likely much higher margin than the manufacturers).

As such, if you can have your own brand (OBM) like Supermax, it would certainly make a huge difference on profit.

Most importantly, it means Supermax has the competitive advantage of killing other distributors (competitors) being the manufacturer themself.

This vertical integration is indeed very powerful.

There would be no reason for PE rating of Supermax to be not comparable to other big players like HARTA
23/05/2020 9:23 AM
23/05/2020 9:44 AM
freetospeak Thanks Chovio for a great writeup. Got more info from your article. For others, a 2 year bumper profit run is enuff to propel supermax to another level. And move supermax from a 30 million /qtr to a 70 million/qtr business even covid is over. With the next propelling move coming from its contact lens business. i am confident it will keep supermax in the 90 million profit /qtr in 3 yrs time.that is enuff to mantain its price at rm6 at pe 20.even after covid is over.

for how high supermax can run during this covid fever.

to match current topglove marketcap since they might b earning same profit for coming qtr...supermax will hav to reach rm21. or topglove price need to adjust down to supermax price. or they will meet halfway.
23/05/2020 9:47 AM
freetospeak the above assumption is unique to supermax only...other glove counter i am not confident.
23/05/2020 9:52 AM
Philip ( buy what you understand) If you didn't know Supermax well enough 1 year ago to invest in it, what makes you think you suddenly know supermax well enough today to give such glowing opinions? You are basing multiple years of performance off a singular black swan event.

Wouldn't it be more rational to invest carefully, and to buy it when it was at reasonable valuation rather than heavy speculation?
23/05/2020 10:05 AM
lazycat phiip ur recent stock pick kinda no good --> pchem , yinson , gkent

i wanted to ask you what you plan to buy next, but no bother la
23/05/2020 10:09 AM
lazycat i kinda wanted to recommend you some stocks , but you sure pijak my stock pick 1 , so i oso no bother do it lol
23/05/2020 10:13 AM
freetospeak philip..yes i am limited on my knowledge and is craving for more information as well. Whether it is valuable or not is a developing event. my reasonable valuation keeps changing from 1 yr ago until covid strikes, when it develops into pandemic, the valuation keeps changing.
With more information unfolds, the market is more intelligent in keeping the correct valuation.I am jus investing ahead of market and sharing my insight on this.Since most fund invest based on past information and is slow in action. Forward earning is the way to outpaced them.I do not recommend ppl to follow me, but i am just a learner.
23/05/2020 10:15 AM
CharlesT Value investors prefer to look for good stocks which can post 20% growth a year for next 10 years.

They dont like cyclical stock which can go up 200% a year
23/05/2020 10:21 AM
Sslee haha CharlesT now also know how to play KoonBee stocks.

Philip recent bought HKG China Feihe also on the down trend as China moves to impose controversial Hong Kong security law.
23/05/2020 10:27 AM
CharlesT I knew KB games since many years ago...only recently managed to convince myself to join the game
23/05/2020 10:31 AM
CharlesT Money is innocent
23/05/2020 10:31 AM
Sslee Haha CharlesT,
If you can’t beat them join them. Welcome to the music chair club but remember don’t be caught without a chair when the music stop.
23/05/2020 10:37 AM
probability Philip sifu, kindly enlighten all of us here what special characteristics that a company like Harta has against Supermax to cause such difference in PE.

Exclude the recent effects of Covid 19, i believe it boils down to competitive advantage concept you had introduced in i3

please break it down for us to digest...

23/05/2020 10:58 AM
CCCL The company founder vision.
23/05/2020 1:06 PM
qqq33333333 Kenanga latest projection of $ 230 m and $ 400 M for FY6/2020 and FY6/2021, very aggressive already.......................and then of course, the appropriate PE for abnormal profits............lol............
23/05/2020 1:16 PM
qqq33333333 for all the last 10 years Harta has always had the best metrics in terms of costs, margin, ROCE, cluster, first in nitrile........and I guess IR..........
23/05/2020 1:20 PM
probability Supermax Outlook:

Plant 12 consists of Block A and Block B, each consisting of 8 double former lines with 2.2b pieces each (total 4.4b pieces).

As of now, for Block A, its remaining 3 lines started commissioning in end March 2020 on top of the 5 lines already in commercial production.

For Block B, all 8 lines are expected to be fully commissioned by 2H 2020. Upon full commercial production by 2H 2020, installed capacity will rise 13.4% to 26.2b pieces per annum.


Recall, it had completed the acquisition of a piece of land in Meru, Klang on which it plans to build three plants namely Plant 13,14 and 15 which will contribute another 12bn pieces of gloves to its total installed capacity over the next few years.

The 3 plants would add 12.0 billion pieces per annum to the Group‟s installed capacity from 26.18 billion gloves to 38.18 billion gloves when these 3 plants have completed commissioning and in commercial production fully by CY2022.


On March 11th , 2020, the Company had also entered into an agreement to purchase another piece of industrial land in Meru, Klang, on which the Company plans to build plant #16. Construction work has already commenced on 2 plants and work on a 3rd plant would commence soon.


Total = 42 Billion gloves/annum
23/05/2020 1:46 PM
Philip ( buy what you understand) Ok. There is an option in i3 to maintain your portfolio so as to compare your recommendation versus your results, do you use that?

FYI based on my 2019 started portfolio I have been holding 25% of my portfolio in topglove , and sold it recently as well as star media, documented transactions.

I do not do stock picks, I just share the stocks that I do buy.

I would say my performance is ok,

As I also bought:

Pchem at 4.09
Serba at 1.12
Gkent at 0.46
Yinson at 4.56

At huge volumes on margin. You know that the transactions cannot be deleted or edited right? It's all up there you can check individual transactions.

So looking at the results based on these averaged down figures, do you think I did well or not? When everyone is frozen and scared to buy, I bought when blood was on the streets. And I bought just these few stocks instead of 50 stock picks.

So, how did you do during this period? More importantly how did your recommended stocks do during this period?


Posted by lazycat > May 23, 2020 10:09 AM | Report Abuse

phiip ur recent stock pick kinda no good --> pchem , yinson , gkent

i kinda wanted to recommend you some stocks , but you sure pijak my stock pick 1 , so i oso no bother do it lol
23/05/2020 2:02 PM
Philip ( buy what you understand) In a simple word: patents.

Let me bring up an article from 2010 that caught my attention, and caused the rise of Hartalega huge profit margins.



Have you been to Hartalega glove factory before? I went in 2015,
and topglove one in 2009 to understand what makes them different from kossan and supermax and comfort etc.

Basically for medical nitrile gloves they have to meet certain size and quality specifications for US supply.
Hartalega has a patented production processes method that allows them to meet those specifications and yet produce commercially at a cheaper rate than all of its competitors, even topglove, and sell at a higher price.

That is why harta is worth 30 billion.

And a very simple question. What is asp for harta vs asp of other nitrile gloves producers.

That is a competitive advantage that supermax does not have. For it to be valued at 8 billion is an exercise in speculation.

I have held topglove for over 10 years and even I have never seen such speculation. Do you really think supermax is worth that much, or this fervour is sustainable?


Posted by probability > May 23, 2020 10:58 AM | Report Abuse

Philip sifu, kindly enlighten all of us here what special characteristics that a company like Harta has against Supermax to cause such difference in PE.

Exclude the recent effects of Covid 19, i believe it boils down to competitive advantage concept you had introduced in i3

please break it down for us to digest...

23/05/2020 2:21 PM
lazycat this is my 2020 stock pick competition lists


but in real life i only holding 3 stocks , myeg , scomnet , atrium
the reason i split 50/50 , 50% for the 3 stocks , 50% for 5 stocks , 10% each in the competition is because ... i dono .. diversify more , don't concentrate too much , i copy TKW style, 10% for each stocks

but turn out, the stock i hold in real life rebound nicely , i think it will continue going up, what do u think?
23/05/2020 2:33 PM
probability Thanks for the discussion Philip. More clarification below:



'Hartalega has a patented production processes method that allows them to meet those specifications and yet produce commercially at a cheaper rate than all of its competitors'

This means the product is the same, but the production method is different. Do let us know the magnitude of the reduction in production cost/margin expansion due to this if you are aware. My guesstimate says 95% of the COP can only be the raw material which should be the same for all competitors.


'Basically for medical nitrile gloves they have to meet certain size and quality specifications for US supply.'

Guess the above is the reason why ASP of Hartalega higher than its competitors - for having a niche market. This could be the better explanation for the higher profit margin, unlike COP. Do let me know if there are other reasons you are aware.
23/05/2020 2:43 PM
Philip ( buy what you understand) I will not comment on what I think, as you seem to think I, will pijak your stocks pick. But the more important question is, did you have confidence in your 3 stocks to buy even more when the big discounts came? Or did you hold, wait and see what was going to happen? Or did you take out margin, sell father mother and go all in your 3 stocks during the super discount fear day.

How you buy is just as important as what you buy.

Look at Jon Choi, looking for alpha overseas, when he could have made huge gains in Malaysia by investing in stocks that he knew well locally.

But fear and worry and thumb-sucking is what really separates profitable investors from article writers.

Not only stock picks, but volume, position size and sell picks.

When you see most gurus don't post their portfolio, hide behind xx stocks and XX stocks, then you know they don't actually do as well buying stocks and give excuses as to why they don't maintain a portfolio. Because a trackable portfolio will reveal how well they manage equity, how much risk they are bearing, how they cut losses, and how they ride winners.
23/05/2020 2:45 PM
Sslee Dear Philip,
Result speak for itself so let us compare the past 4 quarter results of Supermax at RM5.75 VS Hartalage at RM 10
Quarter: Revenue: PBT: NP: NP to shareholder: NP margin: ROE: EPS

31-Mar-2020 447,247 95,277 72,349 71,056 16.18% 5.90% 5.42
31-Dec-2019 385,497 41,829 30,022 30,165 7.79% 2.69% 2.31
30-Sep-2019 369,941 32,443 24,960 24,747 6.75% 2.14% 1.89
30-Jun-2019 375,964 16,198 14,004 15,059 3.72% 1.38% 1.15

31-Mar-2020 777,898 137,575 115,711 115,579 14.87% 4.58% 3.43
31-Dec-2019 796,550 159,697 121,661 121,273 15.27% 4.94% 3.60
30-Sep-2019 709,424 137,327 104,206 103,867 14.69% 4.42% 3.09
30-Jun-2019 640,101 121,654 94,254 94,063 14.72% 4.07% 2.81

So any particular reason why Supermax quarter end 31-March 2020 NP margin jump from 7.79% to 16.18% and EPS 5.42 overtook Hartalage 3.43.

29-Feb-2020 1,229,777 130,374 116,012 115,683 9.43% 2.92% 4.52
30-Nov-2019 1,209,100 125,452 111,757 111,426 9.24% 4.32% 4.36
31-Aug-2019 1,189,594 81,160 80,076 80,052 6.73% 3.29% 3.13
31-May-2019 1,190,235 82,239 75,188 74,665 6.32% 3.01% 2.92
23/05/2020 3:08 PM
probability Perhaps the recent covid outbreak, forced U.S to use Supermax gloves though it had not met the special specification needed earlier..

Who knows, this may catalyze a new breakthrough market for Supermax permanently...

Perhaps we can look it at it another way, Harta has the risk of losing the margin in the future if Supermax is able to penetrate the same niche market
23/05/2020 3:13 PM
qqq33333333 why the sudden jump in profits in supermax not harta?

I guess it has to do with consignment stocks...

OBM stocks overseas stocks are considered sold in period....

whereas Harta sales are to agents.......

different timing
23/05/2020 3:28 PM
lazycat ya man , i have high confidence at the 3 stocks i hold, i did buy more during price plunging hahahaha..
23/05/2020 3:49 PM
Lanesra Good article, for young ones in the forum.
23/05/2020 5:08 PM
EngineeringProfit Enough of poster, research data and advertisement for season one.....

......(pause first and start writing for articles to be posted when its price in tge range of RM10-15, i.e. Calvin's calf turns a little cow - giving milk, bonuses, biggest dividend ever, eyc)
23/05/2020 5:13 PM
PureBULL ... son Choivo ,
u do have high passion in equity investment.

u do know a lot a lot.
most importantly learn from the v BEST, the 1st ancient guru from wall street u must to excel every yr.
there r 2 cycles on klse.
every cycle u n we must catch the Ms u stocks early !?!
23/05/2020 5:35 PM
myongcc5 U r young talented n honest!
Experiences will gets U far one day.
Honestly, I bot 100% into comfort n made double returns. However, ti's did not happen in my young days.
Do not b dismay, there r plenty opportunities ahead of u.
23/05/2020 5:47 PM
willie88 https://klse.i3investor.com/servlets/ptres/55259.jsp

based on this cimb recommendation still hv room to profit, wld u even consider to trade supermax. Another opportunity now ???
23/05/2020 11:03 PM
newbie911 Analyse a lot...but cant earn.
Can see cannot eat.
24/05/2020 10:28 AM
freetospeak seems many here still surprised by the high margin for supermax. My calculation shows supermax margin for next qtr is 31%. Hope will raise anyone attention.

My projection for qtr 3 with profit from 75 mil to 100 mil. my projection was off a bit becoz supermax sold old stock at cheaper pricing n bumper profit appears only in march onwards. Supermax starts backward billing now which commands highest price getting stock first will boost margin many fold.New lines online since march will further boost sales as well.
24/05/2020 10:46 AM
probability when we hear the word vaccine - we need to understand two things:

(1) How good is the vaccine - 100% effective?

Can the vaccine has 100% effectiveness? Even if 1% is not effective, Considering this - would FDA allow it to be used worldwide?
Dont forget its mutating rapidly. Vaccine for current virus may not be effective for the mutated version.

(2) Does the vaccine has - 0% side effects?

Almost all vaccines has side effects and you cannot know what is the side effects till you use it and see the effects after a year.

Say the side effects is minor. Would u still get yourself immunised? After all, the cases are not that high and the risk for young and healthy is almost nil.


Considering the above, would the world quickly implement a newly discovered vaccine without thorough long terms side effects studies and enforce it?

the risk vs gains would not justify such enforcement easily unless they are absolutely 100% sure it is effective and has ZERO side effects.

In my opinion, the above is the reality and you would not hear vaccination enforced for the next 2 years at the least.

Governments would rather encourage self protection measures till then.
24/05/2020 2:10 PM
samheong78 For supermax to invest RM50 million in share buy back tell us something we don't know.
25/05/2020 9:09 AM
Alex™ alex watch comfort from 60sen to rm3...

why no buyyyyyyy
25/05/2020 9:16 AM
Alex™ if sailang all in x3 sell car sell house comfort....wah....can retire d
25/05/2020 9:17 AM
Investor Seriously, PE 10 ???

By going 95% now, they probably have to cut ties with some existing customers. Question is what they will do post Covid19 or several years from now (when their additional capacity comes in).. The competitors will not be HARTA, TOPGLOVE, KOSSAN but the big international names. If SUPERMAX can compete then it's re-rating and game changer.
25/05/2020 2:01 PM
Joon Chan You/Me/We have huge case of cognitive dissonance.

But there are few rational answers, just that some are more rational than the other, depending on tolerance,position size & ideology.

The past few days, 240m ringgit greedy money heading to the moon.

On one had, you argue with Ms.Market, though you are right, it's only in the future you're exonerated.

I'm taking Ms.Market to dinner, making her pay for my meal, then ghosting via stop-loss.

Which is more accurate?
QL will increase in value 98% probability in 3 years.
Supermax will increase in value, 98% probability in 18 hours.
29/05/2020 6:57 AM

(CHOIVO CAPITAL) Hot Potatoes (Hidden Structural Risks in Insurance Companies and Banks)

Author: Choivo Capital   |  Publish date: Sun, 10 May 2020, 11:41 AM

For a copy with better formatting, go here, its alot easier on the eyes.

Hot Potatoes (Hidden Structural Risks in Insurance Companies and Banks)


Here is an interesting statistic.

Across the world, out of the 196 countries in the world, only around 50 or less countries run a budget surplus or balanced budget, ie the cou