Some insight on stocks in KLSE

I noticed that for a period of one last months, a number of visitors came to this site to check for certain investing news.

Let me give some of my thought.

Market has dropped considerably in the past one month because of profit taking and bad economic news.

For those who are still holding shares. Selling at this point of time will be the worst investment action. Market has dropped to a stage where it has reached a bottom of the current environment.

For those who are thinking of buying, now may present the second great opportunity.

Keep on holding, you will be heftily rewarded in medium and long term scenario.

As for me, I have not sold-off stocks for cash since I first bought them 6 months ago.

We will ride the temporary financial storm.

Update on Uchi

Uchi-Tech

The latest financial result has came out. I had expected that the revenue will fall, but the result is slightly below my expectation. I had expected a revenue of USD 6 million and earning per share of 2 cents.

Regardless, all is not lost.

Though the result of Q1 (first quarter) is quite dissapointing for me, but the fiscal financial result for fiscal year 2009 will be the collective of 4 quarters. Since we know that the 1Q is the worst period during this recession, then the other quarters Q2, Q3 and Q4 will give better result compared to Q1 barring any unforseen circumstances. For all we know, the sign is getting positive. Example - Home Starts, Leading Index Probably Rose: U.S. Economy Preview

Second quarter may stil be slow. But, I have written before the 4th Quarter is the estimate period of earning breakthrough the recession deadlock and grow positively, contributing to the dividend. With some probability, 3rd. may also be a blessed one for investor of Uchi.

More so, one important element of Uchi's balance sheet shows zero debt and is never near bankruptcy stage.


To understand Uchi performance last year and this year, let understand what Uchi does and it's relation with the economy. Uchi makes electronics products which is then assembled into electrical appliances and sold mostly in Europe and USA. The recession that we faced today started in USA in December 2007. It is also noted that the peak of the recession is at the first quarter of 2009. Consequently, the effect of recession do has a certain effect on Uchi's earning. Hence, this can be expected to be reflected in Uchi's profit and loss account.

Let see some of the highlight of Uchi performance along the quarters when the recession starts.



From the above table, when US recession starts in December 2007, it's effect is reflected in the 1Q of 2008. When the recession peak, it effect is reflected in the 1Q 2009.

The profit after tax (PAT) at 1Q 2009 is a mere RM 2.7 million compared to RM 18 million in 1Q 2008. It suggests that the fix cost of Uchi is approximately around RM 9-10 million ia quarter or RM 3 million a month. Uchi will achieve economic of scale when the revenue is around RM 26 million. (The effect of exchange rate is not discounted).

If the recession situation improve from (Q1 2009 to Q4 2008) for the 3 three consecutives next financial quarters, then a dividend rate of 10 sen per share (next year) can be achieved for fiscal year 2009. I am hopeful that this occurs as within my expectation.

However, if the economic situation does not improve, then Uchi management needs to do some cost cutting measures. Amongst the cost cutting measure are:-

• Embark on "reducing wastages" campaign and instill saving culture mentality.
  
• Offering the staff a reduction of salary with reduction of working time.
• Reduce the perks and benifits of the directors and management.
  
• Withold salary increase until situation improve.
• Renegotiate other fixed cost element such as rental of offices, land or equipment (if any).

I am quite confident that once the economy pick-up in the third quarter of 2009, Uchi's revenue and earning per share (thus dividend per share) will increase. This will satisfy the dividend criteria of long term investor. Even, at this less EPS and without any gearing, Uchi situation looks alright when compared with other companies . (such as IOI Corp. which has hugh gearing (debt), higher PE ratio multiples and lesser dividend rate of return (due to too high a price))

The Effect of Swine Flu on Economy

Investing is very abstract. Investors sometimes get caught with future event which is not foreseen at present. An example of an investment disaster is the effect of Kobe earthquake on the investor community. Kobe earthquake became the triggering point of a mass selldown in Nikkei even at that point, everything else was well. It caught many with commitment to margin, burnt and devastated. Many people still remember how it triggered the bankruptcy of Baring Bank due to the failure of it's currency trading department headed by Nick Leeson. While the former was bankrupted, the latter was jailed. Nevertheless, one important element of the bankruptcy is due to it uncovered exposure to japanese yen. Meanwhile, though it affected Nikkei index significantly, it only affects other world stock indices lightly.

With that historical frame of mind, I tried to research some facts regarding the swine flu pandemic to gather a conclusion on its effect on the world economy.

The 2009 Swine flu pandemic originated from Mexico and as at 30th of April, 11 countries has confirmed cases related to swine flu with 800 global caseload and 20 death, thus with mortality rate of 2.5%.

In order to contain the infection, Mexican President, Mr. Felipe Calderon ordered a partial shutdown on Mexico economy by asking the people to stay at home for 5 days. His order is logical and necessary but a little bit too late. Nowadays, people mobility is faster than the restraining order due to the convenient of air travel Eighty percent of the cases of swine flu outside Mexico comes from people who visited Mexico. Indeed, it has some capability in affecting other countries' economy if the same restraining order is given world wide.

Presently, there is a restraining order, but only localised at international airport. The health authorities either try to detect the symptom of swine flu either through passenger's declaration or termography unit or quarantine the passengers at the airport or some other localised place. It is still dependent of one factor - how smart the virus can evade detection. If I place this into an equation it will be like this.

Effect on economy = A.(Percentage of people who brought the virus) - B. (effectiveness of detection) + C.(Ability of virus to avoid detection).

The equation means that if the percentage of people coming from flight who hosted the virus is large, unless the health authority is very efficient to detect the symptom of swine flu, then it will have a significant effect on the world economies.

Directly, it is a matter of "how confident we are on the health authority to contain the sickness".
If there is a high confident level, it means that any significant selldown is a opportunity to buy.
Reversely, any selldown may mean the reversal of the current bull market.

Let pray that the disease is contained in Mexico and at international airports not for the sake of investing but for the sake of our health and wellness :)

Investing in Share Market

Investing in share market needs not only knowledge but also experience. But, even experienced traders can make mistake. More so, individual investors can be sabotaged or lured into making mistake.

Nevertheless, in a cycle of one decade, there will be one chance to get real gain with 95% confidence level. The concept of purchasing share is to purchase when the price is low.

But not all low share should be bought. I recommend to concentrate at share which could give high return in term of dividend relative to the current share price.

Try to avoid bad counters. Investors can check the performance of the company through internet. For example, if it is predicted that a company will give 12 sen dividend during the worst time and the company price is at RM 0.90, for all sake, it will turn to be a good buy.

But, if the compnay is in PN17 list or has probability that it is going to bankrupt, then these counters should be avoided regardless of how low the price has gone through. This technique is to help the investors to safeguard their investment. It is better to gain less than to lose all investment.

Next, is to the task to predict when the share is at the lowest level. This is quite a difficult predicting job to do and it consists of a lot of reading. Basically, it consists of two factors - (1) Prediction given by prominent people and (2) The acceptance of government head regarding present and near future state of their economy and their actions. Non-acceptance means that prediction can go wrong.

For example. let say that a number of corporate figures and government treasury around the world qualitatively mention that the 1Q is going to be the worst hit time for the economy, then it is with a tolerance of 2-3 months that this can be the worst hit time only and only when the government head of the most affected economy of the world has accepted it's nation current state of economy and is acting on it.

It is quite difficult right. But with this kind of judgement, we may have got it at the lowest price only and only if the price has gone done ( which followed the world market) and stabilizes at a certain level.

The assumption that I make over here is that, though the share price moves south to reflect the adverse economic impact on the company bottomline, but it will reach bottom when it hit the worst period of economy and subsequently the share price moves upward in advance of the future state of company profit because of efficient investors investing in the market.

And when is to sell ?

Basically, when it is predicted that the global economy will be in bad shape in 8 months time. For all you know, run away from the share market and protect your golden eggs for golden age. This is the best safety precaution that I know of.

Why does China finance US fiscal deficits and bailouts

I read the news (here) on China is financing US stimulus package by financing the US treasury bonds. Currently, China is the biggest creditor to US in term of USD 1 trillion.

But here come the plead by the China premier to US ,"Do not devalue your currency through reckless spending". The reason given by the China premier is that he wanted his asset (credit given to US) to be safeguarded. Simply, it means that if US dollar devalues, then the USD repatriated back to China is devalued to the stage that does not gives any return.

This is a paradox. It seems that the China premier is doubtful about US investment return which may bust when and if US goes bankrupt.  But China is willing to become a lender.This shows that China as the previous banker of US have no way other than to continue financing USA in order not to let it goes bankrupt. IWhy ? If, US goes bankrupt, then all the money currently tied in the US treasury and bond will melt together with the USA banking system. It looks like China is really-really tied up with USA, no matter which direction US goes, China has to bow.

There is another problem. Previously, China and other countries are willing to finance US because US is the buyer of their goods. By buying US treasury, yuan or remimbi are converted to USD. When this is done, the value of USD will appreciate. Once the value of USD appreciates, China made goods becomes more competitive than US made goods and hence will be bought by US consumer. This type of arrangement provides a big market for China and Asian countries. 

However, in the wake of the biggest economic crisis of the world, how much more  these type of arrangement can be done in the future ? US's consumer is very laggard nowadays. They have losses their home and now can't even own a car.

More so, one of the reason of the existance of US economic problem is it's very big trade deficit with China and one of the way which US can overcome this problem is through devaluing it's currency so that the trade deficit is narrowed. This is the most orthodox but effective way when we look at trade balances.

My thoughts about this matter is that the best way to help US to regain it's feet back ( and help China to sell your goods in the longer term) is to let Yuan appreciate in the short term ( a few years). Once the bond has reach it's maturity, it is better for China to purchase other types of assets (physical or stocks) in USA. Only when US economy has become stronger, then Yuan can slowly depreciate compared to USD and hence a more healthy trade quantum can be achieved in the future.

If China insists to keep on financing and also keep on ensuring that US trade deficit is balooning, sooner or later this bubble will bust and this will be very-very bad for the whole world.

Is the economy getting better ?

The world looks in bad shape now, very bad..but there is some light in Citibank even though the bank's share value has dropped to around 1 USD per share.

For all the bad things that we know, now the CEO of Citigroup said that the bank had an operating profit for January and February 2009. The first, since the 4th quarter of 2007. It gives the first shallow sign that the bailout in US is working.

Well, when "everyone around" whispers and says things are doom and gloom, it signals that it is time to invest. But, the investment suitable during this period is investment on value and not on growth. Therefore, it is important to select the company which will give the highest value on our investment with respect to the entry price. During recession, "value" is important since this ensure that the company gives a margin of safety for investor.

There are a few criteria that is looked at when investing in a company by value investing. Basically, it means buying shares which appear under-priced by fundamental analysis. For the news of Citygroup... see below.

AP
Pandit: Citi operating at profit through February
Tuesday March 10, 7:43 am ET
By Stephen Bernard, AP Business Writer

Citi CEO says bank had operating profit in first 2 months of year

NEW YORK (AP) -- Citigroup Inc. has been operating at a profit through the first two months of the year, according to a letter that the embattled bank's chief executive sent to employees.

In the letter sent Monday, CEO Vikram Pandit said Citi had an operating profit of $8.3 billion before taxes and special items through February. Pandit said the first-quarter performance so far has been the bank's best since the last time it recorded net income for a full quarter -- that was in the July-September period in 2007.

Provisions that could offset all or part of the operating profit include credit losses, write-downs and additions to loan-loss reserves. Pandit did not disclose the size of any potential provisions.

Citi has been among the hardest hit banks by the ongoing credit crisis and recession. It has been forced to take tens of billions of dollars in write-downs and loan losses since late in 2007 as the value of its investments plummet and more customers fall behind on repaying loans.

The New York-based bank has posted five consecutive quarterly losses, including a fourth-quarter loss of $8.29 billion.

During January and February, operating revenue was $19 billion, just $2 billion shy of the full-quarter average during 2008.

The letter was written to reassure employees as Citi's stock has taken a beating in recent weeks and as it has embarked on a plan that will increase the government's stake in the bank.

Citi shares closed Monday at $1.05, down 84 percent since the beginning of the year.

Late last month, Citigroup and the Treasury Department agreed on a deal that will give the government up to a 36 percent stake in Citi. The government, along with other private investors, will convert some of their $45 billion in preferred stock into common shares. If the maximum amount of preferred stock is converted, current common stockholders will see their ownership stake fall to about 26 percent.

That plan comes after the government provided Citi the $45 billion in capital in two installments late last year. Part of that $45 billion will be the capital converted to common stock. The government also previously agreed to cover a portion of losses on hundreds of billions of troubled assets and loans as Citi looks to right itself.

Government officials are drawing up contingency plans just in case Citigroup stumbles further and needs more support, according to a report Tuesday in The Wall Street Journal citing anonymous sources. The Journal said the discussions are preliminary and wide-ranging for possibilities that government officials do not expect to occur.

The stock conversion by the government and private investors is aimed at stabilizing and strengthening key capital ratios for the bank. Stabilizing a bank's financial strength has become vital in recent weeks as the government runs stress tests on banks to determine their long-term viability under various economic conditions worse than the current recession.

In the letter, Pandit said Citi has run its own stress tests for the bank at levels worse than those being used by the government. He said he is confident in the bank's capital position based on those tests.

Citi has been working in recent months to return to profitability. Among its plans, the bank is shedding assets and reducing staff to streamline operations. Citi has already announced a plan to sell a majority stake in its Smith Barney brokerage unit to Morgan Stanley.

Citi is also pursuing a plan to split its operations, separating the traditional banking businesses from the riskier operations that have been the primary driver of losses in recent quarters.

Uchi Tech Shares

I was having a debate with Moola and HCC on the "Where Ze Moola" blogspot  regarding Uchi Tech prospect. 

They have rightly pointed out that :-

a) Uchi was giving out too many ESOS in 2007.

b) Growth in revenue is slowing and thus earning is slowing.

c) Dividend payout is getting smaller. 

The picture painted was gloom and doom for Uchi. It's price in 2007 was RM 3.14 and at last Friday it was traded at RM 0.90, already an increase of 16 sen after it announces it's second dividend for last year financial result. 

The reason that I was interested in this share is due to it's dividend yield at current market price. Total for 2009 dividend is 12 sen which carries a yield of 12% at cost price of RM 1.00

However, those people over there argued about it's yield for next year at today's cost price. The questions posted by them are 

•  The yield cant be sustained for next year as the recession looms.
  
• Earning will be reduced.
  
• Prolonged recession may hurt Uchi's earning in the long run.

While it is true that recession do in affect Uchi's earning, the magnitude of this effect is unknown or uncertain. Currently we have 2008 quarterly data and an estimation of Q1 2009 for analysis.

First, let me help to derive an equation to calculate the dividend of the company

The calculation of dividend of any company is detailed as below :-

Div.= (Dividend payout ratio)(Revenue -Operating Expense )(Tax)

                                        Number of shares.

For Uchi, assuming dividend policy of 70% payout ratio is continued and no change in tax structure , as well as no change in number of shares (since ESOS cant be exercised at this price),

then all three component's above are  constants .

Let me denote the constant as K, 

where K = (Dividend PayOut Ratio)(Tax)

                               Number of shares

This lead to the above equation simplifies to :

DIV = K (Revenue - Operating Expenses)

Operating expenses consist of fixed cost and variable cost and it can be expressed in revenue. 

In term of revenue vs operating expenses, the distribution of revenue against operating expenses shall be studied before assuming the relationship between revenue and expenses. It may have a sigmoid relationship, exponential relationship, quadratic relationship or linear relationship.

For example, if the relationship is linear, then earning can be expressed in term of revenue by a linear equation. Let R = Revenue and E = expenses, this derives :

   E = m R + C 

So, by substituting E into the above equation, we have over here :-

DIV = K (R - mR- C) = K [ R(1-m) - C]

The variables that influence R are quite abstract and unknown. Though, many in technical analysis uses time series, I prefer not to use time series because there is a high error due to the fact that time series ignores the variables that influences revenue. It is simply too simplified..

In this article, I am using GDP growth and exchange rate as the independent proxy variables for calculation of revenue (dependent variable).

Assumption can be made by using GDP growth and exchange rate. (If you know any other variables that can be thought of, please do share).

 GDP growth reflects the economic situation and directly correlated with the market growth, whether the market will inflate or contract. A positive GDP growth inflate the market and negative GDP growth deflate the market. Since Uchi's product is sold in the UK, then GDP growth of UK is nearer to Uchi's revenue and a good proxy to be used in the calculation.

Exchange rate have a 100% correlation with Uchi's revenue due to the fact that Uchi's sales is quoted in term of USD.

More variables should be used if data permits to reflect the competion in the market, bargaining power of supplier, bargaining power of buyer, new product entry by competitor and product substituton. But this data is hard to be obtained unless one focussed 100% on this work.

Basically in this case, I am assuming only GDP growth and exchange as the variables, and their correlation with revenue can be expressed as below:-

Then R = (Sales in USD)*( Exchange Rate USD/RM) + GDP + Constant

A multiple linear regression method can be attempted. 

This comes to the final equation of 

DIV = K [ (Sales in USD)*(Exchange Rate) + GDP + constant) (1 - m) - C]

The final equation managed to express dividend in term of sales in USD and exchange rate.

Let us use a case study based on Q3 and Q4 GDP growth and RM/USD exchange rate in 

At 2008, Q4, the GDP contracted at -1.5% and exchange rate of 3.4 (average), the revenue is RM 25.8 million. 

At 2008, Q3, the GDP growth  is at 0% and exchange rate is 3.226(average), the revenue is RM 26.7 million.

It is clear that negative growth affect the revenue negatively even though the exchange rate work the opposite effect on revenue.

At 2009, Q1, the UK's GDP growth is estimated at -1.9% and the exchange rate is 3.7.

For 2009, UK's GDP is expected to be within -0.75 to -1.25 GDP growth overall for 2009. Based on that, at Q1 2009, the revenue is expected to be the least in 2009.  And slowly rebounding in Q3 and Q4 2009. 

As per conversation with a personal in Uchi, at end of February, the revenue stood at roughly USD 6 million. At 3.7 exchange rate, this contribute to an earning of RM 22.2 milllion. A clear statement that earning will reduce again in Q1 2009.

But looking ahead, for estimation of the above overall GDP growth in 2009 to be true, the negative growth shall be less in Q2,Q3 and Q4 or perhaps we shall see positive growth in Q4.

Shall this mean, earning will increase in Q2, Q3 and Q4 compared to Q1 ? It is yet to be seen and proven.

Nevertheless, with the above typeof expected revenue, my target for this year Uchi's EPS is 12 - 13 sen, with that type of EPS and dividend policy of 70%, I am hoping for a dividend of 9 sen to 10 sen per share. And at today's current price, this dividend yield is quite lucrative.