Sunday, November 29, 2015

RGB - Gambling in Bursa is NOT for Everyone - YiStock

Please Note: The articles i wrote are merely for sharing purpose only. All data are pending verification and It is not a buy call.
Also, these articles are for value investors and mature thinker only.  Please do not read on if you are speculators.

RGB, my favourite stock so far in Bursa. I was attracted to their long recovery journey as per what i have written back in month of 28 May 2015. http://klse.i3investor.com/blogs/RGB/77353.jsp
LET SEE THE PRICE ACTION of RGB for YTD:

- I have start to accumulate RGB when i first notice RGB in May 2015 concurrently with my first article on RGB. It was about 0.17 per share at that time
2 - the market when viral during Aug 2015 and the PRICE was beaten down to 0.105. This is a massive 38% down. I managed to add a significant position at stage 2 at around 0.125 as i not able to get at 0.10
3 - The price was then lifted by a good set of 2Q result from 0.105 to as high as 0.20 per share. A massive 90% jump from 0.105. If you are a contrarian, you are fated to earn that 90% paper profit in 3 months.
"What you going to do?" - RGB has recently released a set of result, which to me "nothing to worry", but to many is equal to "end of the world". The price was beated down again to 0.15  and now at 0.16. 
Look at above price action, you probably agree with me now. Bursa is definetely not for everyone.
A few key point worth to have deep thought:
First: When RGB is on nice recovery journey and the price was at 0.17, while  fundamental is getting better, the price can be beaten down to as low as 0.105. The only conclusion to this is, market is irrational during panic. This is more or less like, when a gambler is in crisis mode, they can just sell their wife or kids just for the sake of saving themself. 
2nd: Just how many really look at  P&L and Balance Sheet when investing in Bursa? 
3rd: How about the future of RGB? Should i hug it untill forever? Or when should i actually must sell the RGB and move to other companies?

LET SEE MY ACTUAL ACTION on RGB for YTD:
First of all, I must say that nobody suppose to show their actual share holdings in public. However, i was recently challenge by a speculator and crowned me as I3 Holland King. Hmm, i take it as compliment.
I hold the principle where good people, with good intention, with good heart and positive thinking and action, will eventually receive good vipe. This is basic of "Law of Attraction". I have deciced to show to all value investors, how i win small, and hope to win big in Bursa.

Above is my holding of RGB in bursa on 14 November 2015 (1) before the price adjusted down again. If i would to act like gambler / speculator, i doubt i can get 25.5% gain (4) in 6 months ( May to Nov). A typical act of speculator, they will either cut loss at 0.15 back in august, or take profit back in November. Note that my holding was stood at 1.6xx million (2) and the average price is 0.1514 (3). By the way, the share price actually went to as high as RM 0.20 per share, that was 32.1% in 6 months.
I didnt sell the holding, as i learned a great quote from MR OTB, "LET THE PROFIT RUN". To win big, we must be brave! To be brave, you need to learn from winner, I have 2 sifu, MR KCCHONG and MR OOI TEIK BEE. Both are of different in investment nature, but both are winners. 
Above is my holding as of today 28 nov 2015. Many will probably say i'm stupid as i didnt take the profit when it was at 0.20. My paper profit shrink all the way and left merely 4.85%. Slightly better than bank FD. I didnt cry like many, since i have the experience at 0.105. The famous quote from Mr Cold Eye: " I'm not afraid of share price being beated down, I'm very scare when a company got rotten". 
Look at no. 2 and no.3, Notice that my shareholding actually increase to 1.7 million? Instead of average "down", i choose to average "UP". I actually bought more, and therefore, average price now become 0.1526, instead of 0.1514. 
What trigger me to buy more at higher price? What if the price continue to drop and reach 0.10 again? What if what if and what if.....
Let go back to fundamental. 
Whoever interested can read on my earlier post on RGB by following link : 
After that post, there are 2 quarters of results being announced. Since then, the fundamental of this company actually get better and better from my point of view. I see value, many see rubbish. People sell, I buy. As simple as that. 
Of course, i must say, nothing is guaranteed. Not even the performance of a company. Recent case of johotin is one very good example. But again, that is merely 1 quarter, but we have seen someone cry like baby and start to blame here and there. Perhaps he/she treat a businesses to have a life span of just 3 months. Not 30 years. A quarter of bad result, the company will be sentence to death. Personally, I see as the company is not dead, but that speculator has killed himself.
Below is the latest 4 Q of balance sheet from RGB:
After 4 quarters:
1- Cash and bank balances + deposit increased from RM 60.6 million to RM 76.7 million (+26%)
2 - Total Asset increased from RM 267.8 million to RM 311.8 million (+16.4%)
3 - "Foreign currency translation reserve" has touched RM 29.8 million. One key note is that, RGB is a clear beneficially of weak ringgit, but the foreign exchange gain is not reflected as earning just like other semi conductor biz / furniture biz.  I suspect this is due to RGB functional currency is on USD. But presentation currency is in RM. Therefore, such gain in foregn currency can only classified into translation reserve and reflected in total equity. Wheareas for other local semi con / furniture companies, the functional and presentation currency are all in RM, hence, any change in currency exchange will reflect in earning. However, i'm not really sure about this and i hope any expert consultant can guide on this. 
4 - Non current borrowing has drop from RM 38.9 million to RM 25.9 million (- 33.4%)
5 - Current Borrowing (commercial paper) has drop from RM 27.8 million to RM 17.9 million ( - 35.6%)
6 - Total Liability reduced from RM 147 million to RM 113 million (-23%)
7 - Net asset per share increase from 9 sen to 14 sen (+55%)

How about Cash Flow:
Quarter EndedDec 2014March 2015Jun 2015Sept 2015
CFFO ('000)45,2414,30211,44723,809
FCF ('000)30,668-0.3154,3847,150

The business able to continue to generate great cash flow to lower down the debt and fund the operation of the company. 
The management has recently consolidated all the commercial paper payable and enjoyed a lower interest rate from principal banker. The recent Private Placement has also allowed them to secure more fund to paired down the debt and save finance cost.
By the way, just what is Commercial Paper? Not a common loan took by companies in bursa. I try to search Investopedia and below the explaination.
"High Credit Ratings and credit Worthiness" - Ok, this give more confident to me.

LET come to the equally important part of Company, The Earning Part:
From RGB website, we can actually download the corporate presentation of performance. I like RGB as they always stay communicated with the shareholders. Here is the link: http://rgbinternationalbhd.com/pdf/1H2015-AnalystBriefing.pdf

From many news sources from website, RGB's MD has actually set a target of 1400 machines for the full year of 2015. This test my investment sense. Is the target achieveable? Well, having read through all the material i have and RGB' journey of recovery, I CHOOSE to believe that target is achieveable.
Then, it was reported in their corporate presentation that for the first 6 months of the 2015, only 350 units of machines being recognised in SSM revenue. How about the balance 1050 units?

I try to tabulate below segment infomation:
Quaters Revenue ('000)Q1 Q2 Q3 (LATEST) 
SSM18,916 27,524 57,237 
TSM19,600 22,231 22,277 
Others0.261 0.173 0.245 
Result (prior expenses) % gross margin % gross margin % gross marin
SSM2,36212.43,78313.77,00012.2
TSM5,11526.07,02032.05,98226.9
Others-0.111 -0.259 -0.277 
Total Result7,366 10,544 12,705 

Based on the guidance provided by the management, the Q1 & Q2 SSM is actually for 350 machines. If i would to average the total sum (18,916,000 + 27,524,000 = RM 46,440,000) is roughly translated into about RM 133k per machine. Based on info from blogger, http://klse.i3investor.com/blogs/koko888/83521.jsp, he highligted that per machine is at RM 116k per unit based on 400 machines. So i think my guess is not far away. 

For Q3, the SSM reported 57,237,000,  i "GUESS" that was for 430 units of machines. Added up the 350 for 1st half, total is 780 machines. Still there is a short of 620 machines. or revenue of RM 82,460,000 (44% up from Q3) that will appear in Q4? 
I DO NOT KNOW. I'M NOT GOD!

As usual, i try to forecast the earning:
IF, the whole sum of RM 82.46 million is to be registered into Q4 SSM, adding TSM division of RM 22 million, that will total up to about RM 104.46 million. Based on average of 12.77% margin for SSM, that should be about RM 10.5 million gross profit, addiing up 5.9 million from TSM, it will be RM 16.4 million or 29% higher gross profit.
Initially i done my calculation based on the above figures and the result should be good. And I anticipate result to be very good. I cannot say i m dissapointed with Q3 result. The SSM did register a higher revenue, so the where are the "problems that causes lower earning?
Accoding to management explaination, the lower profit was due to higher depreciation cost and spare parts use to upkeep the machine.
Parameters ('000)Q1Q2Q3
Revenue38,72949,88079,666
Depreciation6,2076,0636,835
Others*18,30126,16653,266 (sudden surged)
Admin8,4608,4808,562
Operating Profit6,6868,6438,049
Finance Cost1,3461,2171,065
Profit before tax5,3407,4266,984
Tax0.9710.7831.148
Profit4,3696,6435,836
Foreign currency translation gain8,6023,91431,052
Total Comprehensive Income12,97110,55736,888
Cash54,75472,16476,707
Total Liability123,471113,343113,644
Total Asset257,698277,114311,811
NAPS (sen)101114
    

I see the main culprit is not the depreciation, but fall under the others, which is the spare part and upkeep for the machines which is part of COST of GOOD SOLD. Well, i can only think this way, any business will incur such sudden repair and maintainance cost. If i do the business, the similar cost will incurrec too. So, i m not particular alarming as i see admin cost is well maintained. 
See the Foreign currency translation gain? Massive RM 36.88 million! But back to same reason of functional and presentation currency, so i guess that amount can never category as gain, buth will continue enhancing the equity of the company.

FUTURE PROSPECT:
RGB is very smart. They have present themself very well in Philippine. See below report from BusyWeekly.
Notable Philipine has the highest CAGR of Gaming business in the region. As high As 13%. Well some will start to worry, the profitability has drop most. Let me give a possible reason: Higher CAPEX. Philippine is currently under massive expansion on casino and integrated resort concept and i will see it as the next asia las vegas.
RGB managed to have their main foot hold in philippine. I'm very pleased on this. 
Some tourism statistic:

China is 5th largest contribution to the tourist to philipine. Perhaps this is why the gaming biz slow down happened in SG and Macau casino is not felt in Philippine. 

If you like to know more about the development about philippine and world gaming business, you can click below:
I source a lot of infomation from here.
Conclusion:
Besides ColdEye 5 yardsticks of valuing a company, his famous concept in share investing is:
" I DO NOT KNOW IF THE SHARE PRICE WILL UP OR DOWN, I RATHER STUDY IF THE BUSINESS IS DOABLE OR NOT, GOT MONEY TO EARN OR NOT".

With that, Thanks for reading this KOPI-O RESEARCH. thanks to Zbaikitree, or so call the Optimus Group

I find this term KOPI-O research a very interesting description. Ha ha

Cheers 
YiStock
28 Nov 2015

Additional Note:
I can never be 100% correctly predict the performance of the company I invest in. My investment strategy is very simple, If the business fundamental has not change, i will buy in whatever amount i can when there is a price correction. On the other hand, once i start noticing sign of deterioration, i will immediately cut the profit / losses. I only take care of downside, the upside will take care of itself
If i missed any investment opportunity, i will acknowledge i missed it. If i make a mistake on judging the source of info or material i read on certain company i invest in, i will do the same. 
My strategy is FA come first, and forever FA.
I only have 2 sifu, one is KCChong, One is OTB. Take courses from these 2 sifu, and do your own practice. I believe in: the master leads you to the door, the rest is up to you. 
I have a idol, Bursa Dummy.
I have several investors that i pay high regards to: ICON8888, RicheHo, Justabouttheprofit, SooJinHou, Noby. 
I dont have enemy. 

Thursday, November 19, 2015

Let your winners run kcchongnz

“Cut your losses short and let your winners run.”      The Golden Rule for Traders

This strategy of not to stay in a losing position too long and, on the other side, not close a winning position too soon is often used by experienced traders. You want to be quick with losses and patient with profits.

I would think that this strategy is absolutely essential for traders as traders mainly look at the price and volume actions in the market place, aiming for quick profit, and not so much about the fundamentals of businesses they put their money in. They hate to have to wait for three years, or even three months. Day traders even can’t wait for a day!

If they are wrong in a trade, often can be very wrong because they basically depend on the greater fool theory; you buy, I buy, you sell, I sell. Why? I don’t care. Hence cutting loss is a must to limit losses. And yes, the winning can be very big, and it is a good strategy to ride on the winners. It is not necessary to bother about the fundamentals too.

But how many traders actually made money using this trading strategy? What are the statistical evidences available showing the success of this strategy. You can do your research on it as there are plenty of resources and research available in the internet.

For my own experience in early 2000, I did let my remisier the freedom to handle my investment with this strategy as he introduced to me. The results were not encouraging. Here, we will not deal with it. I would be happy if other traders can share their experience here.

As I am a fundamental investor, I will discuss this from my own experience in fundamental investing if this strategy of “cut your losses short and let your winners run” is useful for me.

I will address these two questions:

  1. Should I continue to ride on winners, or buy more even though they appear overvalued?
  2. Should I cut loss?

My investment philosophy and strategies
My philosophy of investing follows that of Warren Buffet, i.e. to observe his two important investing rules;

Rule No. 1, don’t lose money (at least try),
Rule no. 2, don’t forget Rule No. 1.

With those rules, I generally have two major investment strategies which I have been harping on all this while;

  1. the Magic Formula of Greenblatt; buying good companies on the cheap, and
  2. the Graham Net Current Asset Value (NCAV), and the negative enterprise value; buying quality assets on the cheap

For those who are interested what they are can refer to this link below:


Of course these strategies are based on the past performance of companies. As I am just a small time retail investor, not a professional analyst, nor an investment bankers, what else can I base on, Paul the Octopus? Mind you, professional analysts and investment bankers on average are wrong about predicting the future most of the time, and often very wrong, as research has shown unambiguously.

Stocks in my portfolios
Table 1 and Table 2 in the Appendix shows the stocks I have selected for the two stocks selection contests organized by Tan KW, another i3investor forumer in 2013. The investment thesis and detail reports of those selections can be viewed from the following links:

The first portfolio set up on 23rd January 2013 as shown in Table 1 in Appendix is here:


As at to date, the return of the portfolio is 127.3% compared to the 6.5% of KLCI.

And the second one set up on 1st August 2013 as in Table 2 with the total returns of individual stocks.


The return of the portfolio is 113.3% compared to the drop of 1.9% of the broad market.

As you can see from both the portfolios, there are a number of stocks which have risen for more than 100% in less than 3 years of holding period; Datasonic, 570.8%, Prestariang, 442%, SKP Resources, 367.7%, Homeritz, 361%, Pintaras 180%, and Fibon 108.1%.

Let us for discussion purpose, take a few stocks from there to discuss here if one should have kept those stocks until now, or should have sold them when they have reached their intrinsic values, and what would have been the results of each action.

SKP Resources in My First Portfolio
About six years ago, you can purchase 100,000 shares of SKP Resources for RM4500 at an adjusted price of 4.5 sen per share. If you have kept the shares for 3 years, you could sell them for RM34000 at about 34 sen a share, or for a gain of 656%.  

The share price of SKP Resources stayed at around that price, i.e. 34 sen for another three years until the beginning of 2014. I started invest in it somewhere at that time and I remembered, the fundamentals of SKPR was very strong and it was selling cheap. That was why I have included it as a stock in my first portfolio.

And how many investors who have bought it at 34 sen at the beginning of 2012 held it for 3 years without any movement of its share price? How many speculators were willing to wait “left of three years and right for three years”? I guess very few.

SKP Resources share price shot straight up from 34 sen from then on to RM1.52 within one and a half year at the end of July 2015 as shown in Figure 1 below. The gain from there was 347%! The RM34000 invested in 100000 shares of SKPR has become RM152000. For those who have invested in it during early 2009 would have made 2071%, just in 6 years!

How many investors let the winner runs and have kept the shares for so long? I have to admit that I am not one of them as when its share price doubled from 34 sen to 68 sen in October 2014, it appeared that SKPR was already overvalued.

Letting your winner runs would have made an investors very well investing in SKP Resources as shown.

Let us look at another share which is in My Second Portfolio as shown in the Appendix, Datasonic.

Datasonic, the supersonic

Datasonic caught my attention in mid-2013. At that time, its share price was about RM3.00, or at an adjusted share price of about 24 sen, with all the bonus issues and share split. At that time, it share price has already risen by 220% in less than a year ago.

Soon after that the share price shot up by 870% in 7 months from 24 sen to RM2.33 on 2nd April 2014, before retreating to half its peak price to RM1.03 in 6 months on 4/12/2014!

At the close at RM1.57 on 18th November 2015, if I have kept my shares until now, my gain is still a whopping 554%, in less than 2 years, even after the steep drop in early April this year!

Those who have time the market right by selling of at the peak of RM2.33 would have laughed all the way to the banks. But just wonder how many have done that?

Let us look at another one in My First Portfolio, Prestariang.

Prestariang
Prestaring first caught my attention when it was selling at an adjusted price of about 50 sen in mid-2013. Its price has in fact stayed at around that since listing about a year ago as shown in Figure 3 below. It had fantastic fundamentals in terms of very high returns on capitals, and abundant cash flows. Its dividend yield then was very attractive too. At 50 sen then, it was a real steal!

Prestariang’s share price shot up suddenly to RM2.30 within a year for a gain of 360%. Most investors would have sold it of for a handsome gain by then, and felt happy when its share price retreated by 40% in mid-December 2014 when the bear strikes. Little did they know that it jumped again to a close of RM2.60 on 18th November 2015?

How many investors managed to invest at its trough at 50 sen 2 years ago, sold at its peak at RM2.30 a year later, and bought back 6 months later and hold it until now and make tons of money? I believe there is none.



Lessons taught on “Let the winner runs”
Most fundamental investors who make their sell decision based on business valuation would have missed out the continued uptrend of the stock prices above, unaware with the investing maxim of “Let the winner runs”.

This brings to the subject that, investing is not an easy thing. Theoretically, all investments are for sale for the right price. Practically though, it's very hard to know what a stock is truly worth. Fundamental investors make their "sell" decisions based on "overvalued" criteria which is a difficult subject. Consider these points:
  • Company value is subjective, it depends on who is valuing it, what are the assumptions, and for what purpose. Value, like beauty, is in the eye of the beholder;
  • Value is vague - it's not a precise static number, it's a constantly changing range based on "educated assumptions" about the uncertain, unknowable and ever-changing future;
  • Under-valuation is easier to identify because there is an objective floor (liquidation value). Over-valuation, on the other hand, is far less certain - there is no clear ceiling;
  • Over-valuation is also a range, data and assumptions will play out differently for different people.

Naturally, as over-valuation increases, it becomes more obvious, and the decision to sell becomes easier. The problem is - where do you draw the line? How "over" should be overvaluation?
 
The above example of stocks in my portfolios have shown why one should not sell stocks of good companies for the reasons below.

  1. Great companies are rare and very hard to find and get in
  2. Once you sell a long-term investment, you are leaving a business you know well.
  3. You are leading yourself to a reinvestment risk, what other better businesses you can buy and confident about with the proceeds of the sale?
  4. One of the worst things that can happen to a long-term investor is the loss of perspective and leads you to a speculative mentality. The more you try to exit and re-enter, the more you will think like a speculator and less like a business owner. It might damage your ability to make good long-term investments.

What about cutting loss?

Cutting loss
What would traders do in speculating? As I have mentioned above, it is an essential action to take if one is speculating and trading stocks. If you refer to my “Model stocks’ in the link below, traders who cut loss would have saved a fortune. It is like the difference of becoming a bankrupt, and one who can still survive in this market.


What about cutting loss in fundamental investing?

Well if one looks at the return of the stocks in both portfolios in the Appendix, does he think cutting loss is necessary if one is investing based on a fundamental sound and safe approach?

The biggest loss is Daiman at 11.9%, and the other two out of 21 stocks, Haio at -7.8%, and Kumpulan Fima at -1.4%. The losses are all minimal. They are all in My Second Portfolio which was formed after the run up after the General Election in 2013.

Selecting fundamental stocks based on the principle of investing in great companies at cheap prices doesn’t really need the cut-loss action as shown in the return of stocks in the portfolios. In fact cutting loss can be detrimental to the investing outcome of fundamental investing.

Considering the case of Prestariang as shown in Figure 3 above, most traders would have cut loss when Pretariang fell to 85 sen on 2ndSeptember 2013, or RM1.70 in Mid-2014, or RM1.30 at mid-December 2014.

Once cut-loss, very few speculators would have bought it back when seeing its prices rises abruptly again and would have missed the boat at the price of RM2.60 now. That is human nature.

Maybe i should say even if we have considered the safe way in fundamental investing, we can still go wrong and cutting loss may be necessary. But the probability in very low, in my opinion.

What to do in fundamental investing on price change?
From the above experience, when we buy stocks, we can add Margin of Safety (MOS) to the conservative end of the estimated fair value range to absorb the impact of uncertainties and mistakes. Similarly, when selling stocks, we can add MOS to the optimistic end of the fair value range, for the same reasons as illustrated in Figure 4 below.

For those who want to know the concept of MOS, please refer here:


Figure 4: Margin of safety when buy and sell stock

This will avoid from selling the winner too soon.

But would I buy more if the prices continue to go up above the upper limit the "Sell" MOS? No, I won't.

“All there is to investing is picking good companies at the right times and staying with them as long as they remain good companies.”      Warren Buffett

Again for those who are interested in the philosophy of fundamental investing and wish to learn the methodologies for stock selection the fundamental way, please contact me for an online investment course for a small fee at


K C Chong (19th November 2015)

Appendix

Table 1: Stocks and their returns in my first portfolio

Table 2: Stocks and their returns in my second portfolio