V.S Vs Globtronics kcchongnz

This article is for sharing of opinion. It is not a buy or a sell call.

When I wrote an article on V.S recently in the thread below, there were quite some interesting debates about it. Thanks for the valuable feedback.
http://klse.i3investor.com/blogs/kcchongnz/76875.jsp
That is good as we all can learn from them. Although the argument can be a little heated up and blunt at times, I hope participants do not get offended and angry with each other. After all it is a sharing of knowledge, and it is not about personal attack.
My argument was “cash is king”. If there is no cash an investor can extract from the business, it is not a No-Brainer Investment, or NBI, purely in my context. A couple of forumers argued fervently that V.S is a good investment because of its fantastic growth prospect, and that we must be forward looking, and it is no use looking at past financial statements. They claimed that V.S is cheap at RM4+, as compared to MPI and Globtronics. Some argued about the qualitative aspect, that the management is very good, their integrity and willingness to share, and they are the experts in the industry.
The above arguments somewhat have their validity, after all, who can argue about the steep rise of its share price recently? And yes, my knowledge about V.S is also limited; I don’t know about its future, its management. I don’t have enough insights, insider information as some possess, and that is why I only rely on the past performance to make an educated guess. So please bear with me.
As an individual investor, we have our limitations, no doubt. But that shouldn’t stop us from making a judgement based on publicly available information such as its past financial statements, should it? Somehow it is strange for me, I always base on financial statement to make judgement, but it has served me very well to avoid investing in some lemons, though I missed some multi-baggers. The link below shows some of my experience. And you know what, it was 100% spot on; that the past performance of a poorly managed company tends to continue its streak.
http://klse.i3investor.com/blogs/kcchongnz/45373.jsp
Let us get started. First and foremost this is what I learned from a former here regarding the business model of V.S and Globtronics. Are they doing the same thing and are comparables?
Posted by soojinhou > May 24, 2015 08:25 PM | Report Abuse flagged
“OTB, with all due respect to Mr Koon, I think it's a folly to compare VS with Gtronic and MPI. VS is not an electronics components manufacturer, its is more of a PCB and plastic injection EMS player. In my opinion, it doesn't require the technological expertise that the latter 2 demands. Also, Keurig is not doing well, and I don't think a cold drink machine will not be as popular as a coffee machine, simply because your soda do not have the coffee connoisseur factor. In other words, would anyone pay a couple hundred dollars for a machine to make coke? Still, VS has a wonderful run and it is wonderful profit. But in my opinion its core competency and prospect is a bit over inflated.”
The above is just a statement. We can actually look at the financial performance, or get back to business. Is V.S a quality growth company? Should it deserve the same market valuation as say Globtronics as suggested by a number of forumers?
I did write an article on how to identify a high quality growth company as shown in the link below:
http://klse.i3investor.com/blogs/kcchongnz/70874.jsp

Marker valuation
The price of Globtronics and V.S closed at RM5.95 and RM4.15 respectively at the end of May 2015. At these prices, Globtronics is trading at a PE ratio of 26. V.S’s trailing twelvemonth EPS is 45.6 sen. Why there is nobody offering RM11.85 for V.S share with the same PE ratio of 26 as Globtronics? Is the high PE ratio of Globtronis due to its much higher growth than V.S?

Growth
Table 1 in the Appendix shows the revenue and net profit of V.S grows by a compounded annual rate (CAR) of 19% and 60% respectively since 5 years ago, compared to 10.3% and 32% respectively for Globtronics. V.S is certainly growing much faster than Globtronics.
Figure 1 below shows the share price performance of the two stocks. One can see the share price of Globtronics has been outperforming V.S by a wide margin. Why don’t investors pay a higher price for a higher growth stock such as V.S as compared to Globtronics?

The quality of growth
A high quality growth is accompanied by high return on capitals, higher than its cost. That is the very basis of corporate finance. I have said many times, a company can borrow RM1b and still grow the profit of the company by RM10m, if it just earn a return of 1% from the borrowed money. But that is certainly not a quality growth and a very clear shareholder value destroyer.
Let us first look at the return on equity by using the famous DuPont Analysis to dissect where does the return comes from. For those who are interested to know more about DuPont analysis, you can refer to the link below:
http://klse.i3investor.com/blogs/kcchongnz/49969.jsp
Table 3 below shows the DuPont analysis on the return on equity (ROE) of Globtronics.
Table 3: DuPont analysis of Globtronics

ROE of Globtronics improved year after year from 7% to 22.6% in 2014, twice above its cost of equity. The uptrend of the return on capital is also shown in the return on invested capital, ROIC. Globtronics ROIC is a whopping 47% in 2014. More importantly, the ROE was achieved with the increasing profit margin from 7.3% six years ago to 18.1%, and somewhat from a slightly higher asset turnover of 1.0 time in 2014. The leverage is maintained moderately low at 1.2.
In contrast, V.S has not shown its ability to improve its ROE for the last few years, despite its increasing high leverage of 2.4 in 2014, up from 1.9 in 2009. ROE has been in single digits every year, way below its cost of equity. It has extremely thin margin of 0.6% to 3.5%, hardly shows it is technology intensive kind of business, rather a low cost contract manufacturer without much moat. A further squeeze of its margin can easily result from profit to loss in its operations.
Table 4: Return on capitals of V.S

ROIC is also very low at 6.7% in 2014, hardly matching its weighted average cost of capital. A good company must have a ROIC of double digits figure.
ROIC is one of the two components of the Magic Formula described in the thread below:
http://klse.i3investor.com/blogs/kcchongnz/51631.jsp
Figure 2 below shows the comparison and trends of return on equity for Globtronics and V.S. A picture paints a thousand words.


Cash flow
My ultimate benchmark for a good company is, on average over a number of years, it must be able to produce cash, or free cash flow, after allowing for capital expenses to maintain its business. This I have deliberated in the thread below:
http://klse.i3investor.com/blogs/kcchongnz/76588.jsp
Comparing the cash flow of Globtronics and V.S as shown in Table 5 and 6 in the Appendix, it is easy to see which company is a cash cow, and which is sucking cash.
Table 6 shows that Globtronics produces an average positive FCF of RM26.8m last 6 years, with RM43.6 m last year. Its FCF on average amount to 9.3% of revenue (>5%), and its cash return is 16.4% (>10%) of its capitals invested in the business. It is indeed a cash cow.
In contrast as shown in Table 5, V.S has been spending huge amount on capital expenses. Average FCF is only 0.4% of revenue, and less than one percent of invested capital. It has shown some good improvement over the last two quarters though.

Conclusion
Looking at the business model, peeking through its past financial performance, V.S is far away in its performance when compared to V.S. It is like what the Chinese says  “a small witch seeing a big witch”, 小巫见大巫. How can V.S command a PE ratio the same as Globtronics? I wonder.
But then what is the appropriate valuation of V.S? In my opinion, using enterprise value is the right metric to value V.S as it has a lot of debts and substantial minority interest as I have commented in my first post on V.S. In this valuation, growth is not taken into consideration, but then what good is growth if it doesn’t come with increased margins and return on capitals?
What I can see V.S is not that great a company. But then not-so-good company can still be a good investment if it is selling cheap. Is V.S at the present price of RM4.15 cheap?
For those who wish to learn about how to identify quality growth company selling at reasonable or cheap price for a small fee, please contact me at
ckc14invest@gmail.com


K C Chong (31^st May 2015)

Appendix
Table 1: Growth of V.S


Table 2: Growth of Globtronics


Table 5: Cash flow of V.S


Table 6: Cash flow of Globtronics

2015年10家平均上涨159.24%的牛股，100中1的机率！

From:http://harryteo.blogspot.com/2015/05/1058-201510159241001.html

股市起起落落是很平常的事情，之前连续3天下跌已经出现了超卖的现象。所以今天大盘KLCI指数虽然下跌了3.31点，但是马股还是有484支上升股以及318下跌股。话说早上我在自己的Facebook也仙家了一番，今天神奇地应验了大盘跌, 小股却上。嘿嘿。。明天我就不知道了, 希望1MDB的课题可以快快SETTLE. 马股跑了5个月, 跟大家分享10家超级牛股。

开番股吹水分析：

• 上述的10家股平局上涨了159.24%,其中7家的涨幅超过100%。马股大约900多家公司, 其实买100家也许可以中1家。而且上涨100%以上的股可能已经有20家也说不定。买到这样的股药 看运气, 技术以及眼光咯。嘿嘿。。
• 其中4家是科技仙股, 可见马来西亚股市几喜欢炒仙股。因为小型股比较容易炒, 昨天的JHM就是一个例子。我亲眼看到JHM从29仙飞到43仙。夸张到。。。。
• 还好我家MITRA还算是争气, 今年也上涨了95.9%.上述的图表我忘记把股价从1.88 改成1.92.不好意思。
• 现在我希望还有一轮涨幅,那么我就可以出货。因为我跟我师父都觉得5 - 6月要保留多些现金。最好可以6 share 4 cash.共勉之。

How to accumulate wealth for a young person kcchongnz

How to accumulate wealth for a young person
“The biggest thing for your financial future is in yourself.”    Warren Buffet

“Mr. Chong, I am a young graduate and just started work. How can I accumulate a million Ringgit in today’s money when I retire in 40 years’ time?”

We usually think that wealth is built through money management, but more important is the management of another sort of capital—namely, the education, training, skills and experience that an individual brings to the workplace.
Human capital
Their ability to trade the human capital in you for goods and increase your earnings over the lifetimes will be critical to your financial survival, if not your success. Without the human capital and the rewards from it, one simply doesn’t have the financial capital to invest and grow his investment over time. None other return is more predictable as from the human capital, and from there you get the financial capital to advance in other returns. Utilize the human capital in you, focus on your career, do the best you can in your job, advance your career.
Notice I mentioned about human capital in you? That also includes other skills you acquire, such as some street smart investment skills and knowledge. Learn not only how to increase your return on investment in a less risky manner, and most of all, how you can avoid losing big time in the stock market.
Tis goeth down to a fundamental aspect that “An investment in knowledge pays the best interest”
For those who wish to learn about the fundamnetals of investing, you can contact me at
ckc14invest@gmail.com

Spend within your means
Few youngsters who are working now have any saving at all. Instead many could be carrying some debts; credit cards debts, student loans, car loan, personal loans from banks etc., all because of spend money on the unnecessary items, expensive cars, unearned holidays, expensive clothes, frequent eat out in expensive restaurants, pubs and cafes etc.
I personally do not advocate living like a pauper, taking advantage of others when eating out together, not giving a token money to your parents every month, not have a nice meal in a nice restaurant once a while with your girlfriend etc., but live within your means. Spending RM12 for a coffee in Starbuck, instead of a RM2 kopi in a coffee shop, every day, would be a waste of money. Spending RM30 for a nasi lemak, mee rebus, chicken rice etc. every day in a restaurant in Bangsar Shopping Centre will also be a waste of money. Drive a RM30000 second hand and low maintenance car such as Myvi instead of a new high maintenance RM250000 Volkswagen. Don’t buy every newest model of iPhone.
For this, I have a book to recommend you to read, that is “The Richest Man in Babylon" by George S. Clason. It shows how rich people lead their life within their means, save and accumulated huge amount of wealth.

The Magic of Compound Interest
“Start saving now”. Those are the three most powerful words in personal finance. Learn to pay yourself first by socking some saving each month before expenses, not save what is left after all expenses. If you start saving $5000 a year starting at age 24 now, or less than 20% of the salary of a young graduate, and increase your saving every year by 4% when your salary increases, and earning 10% compound annual returns, you would have saved $100k in just slightly over 10 years. If you continue to do that, by the time you retire at 60, you would have saved $2.2 million. But wait until age 45 to start saving for that $2.2m and you'd need to sock away $60,000 a year. This is what Albert Einstein said:
“Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.”
With the growing Employee Provident Fund contributions, your total retirement sum can to a handsome $4 to 5 million when you retire, which will meet your retirement goal of accumulating RM1m in today's money.
How to compound your saving at 10% a year? It is definitely not from putting you money in the bank.
“How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.”  - Robert G. Allen

Invest in business, good business
Use whatever small saving you have and invest wisely and give the time for compounding to work. You may have a better chance investing in a business to earn a return of 10% a year, or rather part of a business in the shares of a good public listed company. In investing, I have shown that the only reliable way to do earn that kind of return consistently is through value investing as shown in the US here:
http://klse.i3investor.com/blogs/kcchongnz/75910.jsp
And locally in Bursa Malaysia here:
http://klse.i3investor.com/blogs/kcchongnz/76066.jsp
http://klse.i3investor.com/blogs/kcchongnz/75985.jsp
http://klse.i3investor.com/blogs/kcchongnz/75962.jsp
http://klse.i3investor.com/blogs/kcchongnz/75946.jsp
All the above investment strategies provide good and consistent return this few years, and it is likely it will continue to do so in the long-term. But in investing, it is equally important to avoid big losses during economic downturn. This is easy. Once you have learned the language of the business, how to interpret financial statements and to do some valuations, coupled with some experience, it is very easy to avoid lemons.  With that half of your investing battle is won.

Do not be greedy
I remember watching a video on Warren Buffet’s advice to young people a few days ago. He specially mentioned three things as below:

1. When something seems too good to be true, it probably is.
2. When someone try to sell you something like a financial product, find out how much he earns selling it to you.
3. Avoid using margin financing

Is there any tooth fairy?
Some years ago a good friend of mine asked me to “invest” in this thingy called Swiss Cash through internet with an impressive website. Investors could make 25% a month return, guaranteed. He said his good friend had made it for few hundred percent return for the past years already. My friend withdrew all his EPF money, plus the saving he had, and put in everything there. He also get his wife and daughter to invest in it. So he kept on telling me not to miss this opportunity. I told him the first point above, and he didn’t take heed. Sure enough, he made 25%, first month and then the second month. He kept on telling me to follow him to invest as it was proven that he could make so much money. But I just told him off that “when everyone makes money and I don’t, it is ok”. After that he couldn’t get into the website anymore. The rest is history.
Just delete off if you receive a message that you have won a $100000 reward. Don’t bother to read further. It is 99% true that “when something seems too good to be true, it probably is”. Don’t get greedy. There is no free lunch in this world.
Put down your phone when the other side keeps on telling you to buy this stock, or whatever investment which would double in a year. It won’t happen.
What is your cost?
I joined an “independent” financial planning company with the most number of qualified and licensed advisors in Malaysia some years ago. Every time the talk in the office was about how to sell the products and services with the highest commissions. One product call Dominion Fund, a leveraged fund was for high net worth individuals with minimum investment of RM100000 a unit which I have talked about in this link here:
 http://klse.i3investor.com/blogs/kcchongnz/44344.jsp
The commission a representative get for successful selling of this fund was 10%, not sure how much the company will receive. The fund has to pay fees for some insurance companies for the investments managed by them, and there are of course management expenses in managing the fund. So with all these layers of fees, how much profit, if any, would be left for the investors? Go figure out. The fund collapsed and all investments there became worthless when the US Sub-prime crisis strike in 2008 and investors were left with nothing.
Cost is one of the very important factors in investing; how much you are charged by the product seller. Find out how much they earn from you.
Also read about how costs of other investment affects your return in the link below:
http://klse.i3investor.com/blogs/kcchongnz/75376.jsp
Last but not least is my favourite topic of margin financing.

Leverage in investing
A company can take up loans to do business and that is normal. Using other people’s money, OPM, to make more money is a norm for public listed company. I have deliberated this in a comment in a V.S threads using Scientex as an example on how management cleverly made use of OPM for its business and made bountiful return for its shareholders.
 For individual investors, you goal in wealth accumulation must go back to basic; save money from the income you earn, only invest when you have extra money which you can keep there for years, and most of all avoid using margin finance or borrow to invest. I have deliberated this in the links below:
http://klse.i3investor.com/blogs/kcchongnz/44344.jsp
http://klse.i3investor.com/blogs/kcchongnz/61822.jsp
There are a number of problems when you do that. For one you have to pay the investment banks a couple of fees, first a 0.5% to 1% set up cost which will be immediately taken away from you before investing, and about 5% interest charges every year. In an unexpected down market and if you just earn 3% from the money you have from the stock market, it is certainly alright, but not if you use say 50% margin, as the money you make may not be sufficient enough to pay interest charges and other cost. Hence you will need to make more than 3%, before costs is deducted, just to break even. Hence, with margin finance, you would have the urge to ty to search for riskier companies to invest in for a higher expected return.
This is alright if the stock market continue to rise. But have you seen the market continue rising without corrections, or even huge drop, 30%, or more? Please read my articles in i3investors on the rise and fall of the stock market in Malaysia since 1970s to 2008. There were numerous periods when the broad index has dropped by more than 30%, or even 50% in a short time.
If the portfolio of your shares drops by say 50% due to market volatility, whatever you have in your share investment evaporates, plus you still owe the bank some money, not to mention the constant mental harrassment from the investment banks to ask you to top up your margin. When you think of getting rich fast, you will do funny things and subject to a lot of unnecessary risk which can destroy you, and it is extremely hard for you to recover.
You may have heard some people may make a lot of money when they make a right call and their return was greatly amplified by margin. Listen to what Nassim Taleb said:
“Clearly my way of judging matters is probabilistic in nature; it relies on the notion of what could have probably happened… If we have heard of [history’s great generals and investors], it is simply because they took considerable risks, along with thousands of others, and happened to win. They were intelligent, courageous, noble (at times), had the highest possible obtainable culture in their day – but do did thousands of others who live in the musty footnotes of history:”
Do you think you are the chosen one who would beat the rest in the market and earn exceptional extra-ordinary return just by listening to rumours and tips? Please read the research on the performance of individual investor in the link below here:
http://klse.i3investor.com/blogs/kcchongnz/75376.jsp
You need to be the top 5% of super lucky investors to be able to just match the market return of about 10% in the long-term.
Also listen to a couple of super investors sharing their advice in this topic here.
“I've seen more people fail because of leverage—leverage being borrowed money. You really don't need leverage in this world much. If you're smart, you're going to make a lot of money without borrowing.” Warren Buffet
“Debt is Evil. Stay away from all forms of leverage. Don’t assume a maturing loan can be rolled over since you have no idea what the capital markets will do”. Seth Klarman

And here are what the religious people say:
“The Lord will open to you his good treasury, the heavens, to give the rain to your land in its season and to bless all the work of your hands. And you shall lend to many nations, but you shall not borrow.” Deuteronomy 28:12
“The taking of a loan is not something that a respectable individual would do without necessity, to create a burden upon themselves. When it is a necessity, then people should seek to assist their relatives and Muslim brothers, according to one’s capability.” Muslim teaching.
“Rivers can sometimes fill their banks, but the wants of human beings can never be filled.” – The Buddha
It is perfectly alright if you were to borrow money to buy a roof over your head. That you must do as a mean of building wealth and maintain a family. But there is a big difference from borrowing to invest. You will generally live in your house for many years. You are not going to sell it in a year just because it has gone up in price by 30%. Banks will not chase you for money because the house price has gone down by 30% as long as you can continue to pay the installment. They are completely two different investments.
With that, I wish you good luck.
K C Chong CFP
(27^th May 2015)