Publish date: Fri, 29 Dec 2017, 06:04 PM 

 

Introduction 

Well, 2017 was a very interesting year. For some, it was a fantastic year.

We had the Construction Bull-Run at the start of the year, which was coupled with the Semiconductors Bull-Run for much of the year as well. And we ended the year with the incredible oil refinery and oil producer bull run, which was primarily due to the widening crack spread and rising oil prices.

For many, it will also be a year of pain.

Those of chased the fast rising construction stocks and held till today, would have lost a lot of money.

There is the incredible IWCITY double limit up and down, and the incredible rise for Ekovest, Gadang, Malton etc, as well as the subsequent slide down.

Its also quite hilarious how at the start of the year, people thought the RM would weaken against the USD to 4.8 or 5, however, we now end the year at 4.08 with most predicting that it will drop below 3.8 next year.

It just goes to show that when making predictions, most people extrapolate the now to the future, with no regards to reversion to the mean, nor take into account the fact markets is dynamic and reactive with natural feedback loops.

On a personal level, i am up roughly 20% this year. However, my stock picks for the 2017 stock pick competition had a disastrous performance with a gain of only 3.2%, with a high of 18% during the year.

If i’m being honest, i think i was incredibly lucky with my personal portfolio, considering how foolish i was at the start of the year. And in my stock picking portfolio, considering how foolish i was when i chose them, whatever stocks that went up, i was for the most part lucky to have picked it. Whatever went down, i wholly deserved it.

However, i also learnt a lot this year. I finished reading 5 years worth of annual reports for every company listed in the KLSE and also built a relatively rudimentary latticework of mental models so far.

It is very important to reflect on out success and failures, to understand our decision making process, as well as to determine whether our success is due to skill or luck, and if our failures are deserved or just unlucky.

So lets start.

 

• AEONCR (Up roughly 45% including Loan Stock)

I picked this one back then, mainly because i had a feeling then that it was a good business in a great industry and should be undervalued.

I was right, but my lack of precision and understanding of this company back the was incredible. It was mainly luck to caused it to be in my portfolio.

During the year, i understood how to value financial institutions and banks.

Rule of thumb, the fair value of a financial institution with a Return of Asset of 1%, and Leverage of 10 times is 1X Price/Book Value.

Back when i first chose it, it happened to be somewhat undervalued. Right now, it is a touch above fair value quantitatively.

Why do i say its a great industry?

Its simple, people like to live beyond their means. People do not know how to calculate effective interest rates when buying. All they see is that, by paying RM60 a month for 3 years, they get a new fridge. This company is primarily based in selling of electronic goods via finance lease as well as credit cards.

Their cost of capital is 4.3% while they loan out at 21% effective interest rate. Its utterly incredible.

And by virtue of being a financial institution, their business is the borrowing of cash. Which means, no onerous or mediocre Capital Expenditure expansion, no bad allocation of capital etc etc.

I can write a lot more about the management, but ill stop here. I had some of it in my personal portfolio, and i sold sometime back at RM14.3 for another better (Maybe) and cheaper (definitely) company.

•  AIRASIA (Up 46.36%)

When i bought this, i knew 2 things, Airasia is a fantastic company, with incredible management, and in a fat and weak industry filled with GLC’s.

In addition, despite being in a cut throat cost based industry, they managed to build a moat, and have the lowest CASK in the world.

I knew it was undervalued when i paid. Back then at RM2.3, it was trading at essentially 2X EV/EBITDA. 

This was also one of the stocks i got lucky back in the day buying at RM0.9 to RM1.0, before selling at RM2.6.

Through this company, i learnt that markets are truly irrational. It went from RM0.9 to RM3.1 in less than a year, before sliding down to RM2.1 and subsequently shooting up to RM3.5 before settling at RM3.3.

Except during these incredible price swings, the company was just as good and fundamentals never changed. Just shows you the incredible stupidity of sentiment, and the power it has in real life.

In my personal portfolio, i bought at RM2.4 before averaging down over 3 months to RM2.1. A truly painful exercise for a newbie, especially when one only knows the price and not the value of the company.

I sold half my holdings when it rebounded to RM2.5 and the rest at RM2.9.

I was so foolish to sell early and not top up during the drop just because of emotions. I learnt to look at shares a fractional ownership of the company since then.

 

• FLBHD (Down 23%)

It was cheap then, its even cheaper now. The only fault i can really identify, is that  i had not yet finished reading the annual reports of all the companies in the bursa back in the day. They were better opportunities around.

If i made the decision again, i would have lowered the size of this to something like 7-8% instead of 10% of portfolio, or even changed it completely to another one like INSAS.

However, it is no metric for comparison, as if i chose INSAS instead of this and INSAS went down, i might say i should have chosen FLBHD instead. 

Right now, value wise, i will prefer INSAS due to the extremely high NTA that is actually tangible.

In my personal portfolio i bought at 1.6 and sold in early at 1.8. I sold for a stupid reason, ie, it went up, so i should sell, with no regards to the intrinsic value.

I was lucky. Every dog has its day.

 

• GAMUDA-WE (Down 3.5%)

I chose this because it was OTB favorite, and OTB has had fantastic results over the last 3 years.

Again, a mistake, i should have done my own analysis instead of relied on another.

Question is, would i have said the same thing above, if it was GKENT instead and it went up 40%?

Gamuda is a great construction company, but it is not cheap, EV/EBIT it is 19 times. Very expensive especially when compared to other opportunities. Something i found out when i finished the KLSE reports.

One reason why valuations is so high despite being a construction company, is due to the company having multiple divisions giving some resilience to earnings and the company paying out consistent dividends, both of which make this an overvalued stock.

These days, i’m not keen on any construction company at all, unless it becomes very cheap, because of how difficult it is know future earnings and the lack of any significant moat.

 

• MAGNI (Up 35%)

I chose this because it was cheap-ish then and it was KCCHONGNZ’s favorite.

Well, it worked out, it went as high as 70% at one point during the year. In my personal portfolio, i sold at RM5 to buy AEONCR, watched it go u to RM7.77 before coming down now to RM5.69, feeling both sad and happy, both stupid and brilliant.

Was i lucky? I think so. Another of my picks PRLEXUS was cheaper than MAGNI, but it instead went down 36%. Despite things like ROA or ROIC being roughly the same if RNAV is used.

The only reason this stock went up was due to results being better than expected (Something i could not predict or know),  and that this company does not do any share diluting activities like rights issue (unlike PRLEXUS). And the owner of this company, truly acts like a shareholder with personal share purchases.

Industry wise, not a fan, cost based etc etc. 

 

• PBBANK (Up 5.12% not including dividends)

Well, best bank in Malaysia, I only bought it as an anchor.

Now that i know how to value banks, i’m unlikely to pick this again, as it is the most expensive bank in the bursa if you don’t count MBSB.

Having said that, if one were to pick only PBBANK for this year, one would have made roughly 8% this year including dividend, more than double my entire 2017 stock pick portfolio.

Makes you think a little.

 

• PRLEXUS (Down 36%)

I bought it as it was cheap then at 3.5X EV/EBIT. Business wise, fairly decent, but not a good industry. I also held this in my own portfolio. It went up 1.66 at the middle of the year, making me feel brilliant, and not so brilliant when it fell.

I also held the warrants in my own portfolio, but thankfully, i sold that early, as i didnt want my exposure to PRLEXUS being too high.

I’m still holding some of my PRLEXUS shares.

At 0.86 now, its too cheap to sell (2.3 times EV/EBIT and 1.6 times EV/EBITDA), but i like other companies as well, so i’m not sure i can still buy it.

 

• SAPRNG (Down 56%)

By far my stupidest decision. I bought it, because i thought oil was too cheap, and should go up in price in 2017, and being a complete idiot, the only company i could really think of in a pinch was SAPRNG, so i picked it without even looking in the financial statements.

Thankfully, i never touched this in my personal portfolio.

Most indebted company in the Bursa. RM15 billion in debt, and finance cost of more than RM1 bil per annum. Wow.

 

• TENAGA (Up 9.5%)

I bought it as it dropped before the year end. Not a smart way to think, but a fairly decent pick.

Utilities are all depressed right now (or were they overvalued before this? I know Malakoff was and still is).

Not the worst investment. The thing i dislike is how inefficient all GLC’s are. I know TNB is wasting more money than they should.

 

• TMCLIFE (Down 15%)

Great company and hospital, very very overpriced. I made a mistake with this. I purchased this thinking the stupidity of people overpaying for it will continue. I was betting on the greater fool.

Foolish way to buy. Now, i only look at discount to intrinsic value.

 

 

My Personal Portfolio

 

• VIS

I bought it at RM0.6 and sold it at RM1 before the split. I’m not much of a growth investor, nor was i able to identify the moats of the company. It was only a small position. I’m fine with selling it. It was not cheap when i bought it, and it was expensive when i sold it. I’m not one to rely on the foolishness of someone paying more to make money. Its too risky.

 

• OKA

Great business, good moat, fairly nice valuation at EV/EBIT of 6, i bought at RM1.3, sold at RM1.8. Definitely wanted to buy more when it drop to 1.4X but i just didn’t have the cash. Position wasn’t big. Only like 7% of portfolio.

 

• TIMECOM

Fantastic business, valuations are not cheap, and fair at best. But i think its worth paying for. By far the biggest position at 30% of portfolio, still holding today, 5% paper loss so far.

 

• EVERGREEN

What i learnt from this, is that just because a stock is close to all time low, does not mean its cheap. And that relative comparison of opportunities is most important. It is overvalued when compared to its peers. 8% position, sold it at a loss of 9% at 0.85.

 

• PETRONM

When it first shot up to RM4.6, i didn’t dare to buy then, as i knew the price, but not the value (smack head). At RM7.6 i did my research, 4X EV/EBIT cash cow, holy shit, bought some. It then promptly dropped 50 cents. As a newbie, panicked, almost sold, but luckily, i was less dumb than i was at the start of the year, doubled my position and held till today.

 

• HENGYUAN

This is one of my stupider moves. The initial mistake itself was not the worst, but it definitely cost the most.

When i first found it through my screener for stocks at all time low, it was RM2. I kid you not. I check malaysiastock.biz, snd certain functions were not working at the website for this stock then. Figured might be a rubbish company like chinese ones.

I looked deeper, saw the massive losses previously, thought it might be a typical  oil company suffering from the excesses of overspending in 2014, forgetting to check if it was impairment on goodwill or inventory (big difference).

I still wanted to buy, but i saw EPF and KWSP etc selling like nobody business. Again stupidity on my part, EPF and KWSP are not gods, they do very very stupid things all the time. I did not buy, and bought Airasia instead.

Then the ICON8888 article came out, and i studied a lot more. Bought at RM5.6. Sold it at RM7.4. Saw stockraider start to goreng it like mad, after he stupidly recommended evergreen and sold it all in the middle of the year.

But what he said made sense. Buy back at RM7.6, but position was small. Told people not to buy at RM10.6, and then all time record result come out. Doubled my position at RM11.2. Held till today. Sold at RM15.

Lesson learnt, study harder, read more, listen to yourself. Don’t rely on i3 or malaysiastock.biz so much.

 

• ELSOFT

Bought as a punt at RM1.7, figured it was a good company, held to RM2.4 and sold. Like i always said, i don’t know what moat it got, and valuations are not cheap.

 

• MUIIND, PMCORP

Listened to calvin, bought small 3% positions each. Sold at the crazy jump. May buy again as it is really a nice net asset play.

 

• CHOOBEE

A true Graham net net play. Good company, selling less than net net working capital. I put 30% in. Sold half at 1.95, as i was a newbie and cannot tahan the price movement. Sold the rest at RM2.1. I still want to buy back in, but i have other opportunities and my name not KYY or warren buffet.

 

• DAIMAN, PLENITUDE, ORIENT

Some of the greatest net asset companies in bursa, total they are about 13% of portfolio, just hold only.

 

• PBA

Bought at 1.27, its now 1.15. I dont think i made a mistake, valuations wise, its cheap. Only problem is the incredible RM100m a year capex. Only 2% of portfolio, keep only.

 

• RCECAP

Great business in good industry, selling at big discount. Not saying more. I firmly believe that if you find what you think is really cheap, you will just diam and buy.

If i knew how good Hengyuan was, i would just diam and buy, i wouldn’t mind if i bought Hengyuan and price never move for a year. Average cost is RM1.57. i hope it can drop more. 

 

• FIMACOR

Cheap valuations, decent company. I didnt like it as it feel crony. And is too reliant one customer, sold at 5% loss.

 

• LIIHEN

Bought at RM3.09, sold half at RM4. Kept the rest. Good company, with great growth and cheap valuations even if growth not taken into account. Want to buy more, but prefer another company.

 

• LATITUDE

Bought at 4.65. 2.3X EV/EBIT. Profitable company that grow over the last 5 years. Too cheap. just buy.

 

• FAVCO

2.5X EV/EBIT using lowest earnings on record. Fantastic management, best crane company in the world. Just buy.

 

• VS-WA

Bought at RM0.5 sold at RM0.8. Too expensive d. Could go higher, but let someone else make that money.

 

• SUPERMAX

Bought a 3-4% position as i felt it was cheap compared to other gloves stocks, almost 3-4 times cheaper in terms of valuations actually. And i figured, the company share buybacks means the owner must really think the stock is undervalued, and this should maintain the price, started buy at RM2, and topped up in RM1.9. Sold at RM1.9 after thinking abit. Before it went up to RM2. I’m fairly happy with my thought process when it come to my selling of the stock.

My mistake, if a company is undervalued compared to its peers in an incredibly overvalued industry. It is still overvalued. The glove industry had one hell of a boom in earnings and multiples (goreng) in the last few years, with P/E’s at sky high levels, for the expected growth. Every company doubled or tripled capacity with future expansions on the way.

This resulted in oversupply and margin compression even for Hartalega. After i sold, it went down as low as 1.75 and i felt very smart.

And then, suddenly, China decided to save glove shareholders in Malaysia by closing vinyl glove factories in china, giving record earnings to all these companies.

Oh well. I’m not going to rely on being lucky or not being unlucky to make money. Good luck to people holding that.

 

• ESCERAM

Bought because price was low historically, P/E is low compared to its related industry in gloves, say the automation thing. Again, low in an overvalued industry, not low on its own basis and when compared other opportunities.

Lost about 15%. Lesson learnt.

 

They are other companies, but they are not as significant.