Business Commentary As I Am Traveling

No time for long posts, but I will try to record down interesting observations pertaining to business and commerce. Still in HK, contrary to popular perception, this financial center has many layers to it. The ultra rich (listed company owners and property owners) basically get to enjoy all the perks. HK is a place where its good to be rich. The ultra rich population probably is just the top 1%-2%. Then there is the upper middle class. To qualify, you basically has to have paid up at least one property and be invested / paying off one or two more properties - that will put you in the net assets region of HK10m-HK30m. I think that makes up another 10% of the population. I think I have to qualify here, its 10% of households, and not an absolute number of people.

Its crazy I know, but if your net worth is below HK10m, I don't even consider you as upper middle class, because you are not living as upper middle with your net worth below that in HK. If your net worth is between HK1m-HK10m, you are middle class. That grouping probably makes up another 20% of households. If your household net worth is less than HK1m, you should be living in government flats, busily saving to put down payment on a private property - this grouping should total about 50%. Included in this group are those who are still battling the negative equity aspect from the last financial crisis.

What about the rest? The rest are barely making ends meet, and its a significant grouping, with a large number of them being recent immigrants. Many are just around the poverty line, and would be receiving some sort of subsidy or monthly allowance from the government.

Of course, this is not a scientific data collection but rather from my observations from having been in HK many times over the past 10 years. Its a brutal society when it comes to money. Its unapologetic in its pursuit of money, and when you have it almost all your other character failings an be overlooked. The funny thing is that even the poor would still be wanting to work and live in HK, rather than complaining and protesting of the wide disparity of income between the poor and rich. Here is one place where the poor and striving will work hard willingly, grumble a bit about where they are but will not blame the place or the rich because they somehow embody and breathe the spirit of capitalism - its OK to be poor, but at least its a place that give me a shot at being rich if I work hard, get the right opportunities, and/or the other cards fall in the right places for me.


p/s photo: Rachel Kum

Why I Like Supportive International Holdings

If you mention Supportive International Holdings, most investors would ask if they were listed or if they were recently listed ... or you'd think they were in the undergarments business. This used to be a counter called SDKM Fibers Wires & Cables which started in Mesdaq before moving to the Main Board in May 2008. However their usual business suffered and had to be resuscitated by realigning their business. This brought about the reverse takeover exercise by Supportive Technology Sdn Bhd (ST) in February 2008.

The company, which was founded by Lee Kuang Shing in 1994, started off as a plastic components manufacturer. The founder’s family (shareholders) comprises of Lee
Kuang Shing, Tan Siew Hong, and Khaw Hooi Huang. Since then, it has diversified into manufacturing and sale home theater systems and wooden/plastic consumer durables (kitchenware, toys, etc) or consumer ‘light’ durables (CLD). ST’s purchase consideration was RM197m, which SDKM settled with issuance of 178m new SDKM shares (issue price of RM1.00 per share) and RM19m cash to ST. This resulted in a reverse acquisition as ST emerged as the group’s major shareholder. Name of company was then changed from SDKM to Supportive International Holdings.

The group’s total product range includes manufacturing and sale of home theater systems, audio/video/telephony products and cords, intercoms, as well as, plastic and wooden CLD. Not terribly exciting products but steady business. They have a strong list of major customers that include SONY, KenWood, Pioneer, Onkyo, Yamaha , JVC, Panasonic, IKEA, etc. OEM customers tend to have demanding requirements ; like timing of delivery, ability to adapt to latest designs quickly and high quality control (QC) standards - so far so good. It has been supplying products to the Panasonic Group for the past 11 years because of ST’s strong execution capabilities.

Over the last 4 years, ST’s revenue from the Panasonic Group accounted for 88% to 92% of sales. On the flip side, this also illustrates ST’s ability to maintain strong ties; an asset for SIH. Thus, SIH has been actively reducing dependence on the Panasonic Group by securing new customers, like SONY and IKEA. The group can continue diversify its clientele by tapping into SDKM’s existing audio products’ clients, such as Kenwood and Pioneer.

Catalyst #1: Basically the new owners have never seen daylight for their shares as the price dwindled down almost immediately owing to the timing of the financial crisis and went as low as 0.595. Technically speaking the share has never been higher than its 52 week high of 0.96 except yesterday. I like the volume build up and the surge past its 52 week high a lot. An indication of some corporate action or acquisition is likely.

9-Nov-09	0.85	0.87	0.84	0.85	-0.005	1,800
10-Nov-09	0.88	0.88	0.84	0.84	-0.005	1,734
11-Nov-09	0.86	0.90	0.86	0.90	0.060	4,710
12-Nov-09	0.91	0.93	0.88	0.91	0.010	15,493
13-Nov-09	0.92	0.94	0.92	0.94	0.025	2,129
16-Nov-09	0.95	1.03	0.95	1.03	0.095	29,252

This is the kind of price / volume action that I like (open, high, low, close, change, volume).

Catalyst #2: SIH completed the SPA to acquire Welcome Properties Sdn Bhd (WP) for RM10m on 4/2/09. Consequently, the group will recognize RM9.5m negative goodwill. WP owns the 48.6ac mixed development project, called Aman Bayu, in Teluk Air Tawar, Butterworth, Penang. Normally I would frown on companies suddenly going into property but to me this counter needs another layer of business to parlay its bread and butter earnings. Typically, property developers can reap 10%-22% net margins compared to the E&E sector’s 1%-5%. The sea-fronting land fronts Penang Island is highly attractive, and is adjacent to Taman Air Molek (established mid to high end residential development) while being accessible via the new Butterworth Outer Ring Road. The land has an NBV of RM35m or c.RM16psf. The RM358m GDV gated and guarded community project will consist of mid to high end landed residential and condominium developments, as well as, some commercial content. The project is expected to yield a 30% gross development profit margin and is expected to be completed in mid 2012.

Lee Kuan Shing said its RM360mil Aman Bayu project in Butterworth would contribute about 30% to revenue this year. They have sold half of the 100 three-storey terraced houses priced about RM350,000, which were launched early this year. The second and third phases, comprising 250 semi-detached houses and bungalows, will be launched next year.

Catalyst #3: Copycat? - Mah Sing started off in the plastic injection molding business in 1965 with listing status in 1992. Since then, it ventured into its first property development project in Johor Bahru (Sri Pulai Perdana). As property earnings became Mah Sing's biggest contributor, the company was reclassified as “properties” in 2000. Its still a long way off but it looks increasingly likely that ST is adopting the Mah Sing's blueprint for longer term success. To be recognised as a property player, the company will need to grow its landbank to at least 1,000 ac. Look for possible land acquisitions in the near future.

The net profit for year ended Jan 2009 was a smart RM12.9m on revenue of RM90.8m, not bad considering the turmoil in broader markets over the past 16 months. Paid up: 218.5m shares. If it stayed as an OEM in E&E products, the margins are thin and it would take a quantum leap to get to the next level. Having said that, its business is steady and the clients long term support is evident, showing they are doing the right things operationally. For me, their property project is attractive and is the start of the next leg up. If you wait for their land bank acquisitions, the price would have flown by then. It is by no means and ultra exciting, or exceedingly well managed company - its a steady company, adding an attractive new layer to its earnings, and could win over institutional holders over the near term.

The attractive RM358m GDV property project may bring about a gross profit of RM107m, halve that to a net basis you still have RM53.5m. Take that over 3 years, that is still a healthy whack when you consider its existing net profits of RM12.9m a year.


The above were views on stocks and sectors that I like, not an invitation to buy or sell. It serves as a blogging activity of my investing thoughts and ideas, this does not represent an investment advisory service as I charge no subscription or management fees (donations are welcomed though). The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis, or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

p/s photos: Rachel Kum

Emerging Markets Bull Run To Continue?

The sharp outperformance by emerging markets in general compared to developed markets have rankled some experts in the US. They would cite that the outperformance is unfair, that emerging markets are loaded with huge risks - yea.. thanks for the subprime fucking mess dudes ... low risk indeed.

According to the MSCI Emerging Market Index, emerging markets stocks have gained 80% to July 27 since it reached bottom in November 2008 . High global liquidity, improvements in risk appetite, falling core markets volatility (VIX), rebounding commodity prices and relatively stable emerging markets fundamentals in comparison to past episodes of crisis are behind the recovery. Moreover, EM countries' policy response to the crisis has been relatively aggressive, planting the seeds for a positive domestic demand story.

However downside risks remain in place due to a bleak corporate earnings outlook, worries over the real economy, revival of global risk aversion, and higher US Treasury yields. So far this year (to July 27), EM equity markets have jumped 47% YTD, while global equities have increased 12%.

Outlook:

• July 27: "Research by Société Générale's cross asset team argues it is time to sell because the price-to-book value of emerging-market stocks is now higher than those in the developed world. The only other time this valuation measure was at a premium to that of the developed world was from mid-2006 to mid-2007. Emerging-market equities fell by two-thirds in the 12 months to the start of November 2008.
• July 13: July 13: According to Citigroup equity strategist Geoffrey Dennis and Jason Press “The correction in regional equity markets has reached the expected 10-15 percent range.” “Although the mood has turned sour on worries over the timing of economic recovery, there is little more downside from here and expect regional markets to break out to the upside again later this summer.”
  
• The MSCI Emerging Markets Index may climb to 985 by June 2010 from its closing price of 743.72 on June 18th, Jonathan Garner, Morgan Stanley’s chief Asian and emerging-market strategist, wrote in a research note. Profits will rebound 28 percent next year after a 15 percent slide in 2009, Garner wrote. That compares with his earlier forecast for a 20 percent gain in 2010 and a 25 percent drop this year.
  
• June 15: Deutsche Bank AG said that Latin American stocks may drop 15 percent this summer (2009) because of increased share sales in Brazil, weaker China bank lending and the unlikelihood of a rebound in the U.S. economy in the second quarter.
  
• June 2: The surge in emerging-market equities may last another six months (until the end of 2009) as faster economic growth in developing countries prompts investors to keep shifting out of lower-yielding assets. Emerging-market stocks may keep on gaining as investors shift some of the $3.8 trillion in money market funds into equities.
• May 26: If the US economy surprises on the upside, Chinese economy surprises on the downside, or the financial sector lead global sectors, developed markets will outperform emerging markets equities.
  
• May 18: Emerging-market stocks may gain an average of 20 percent this year as they rebound faster and stronger than their peers in developed countries, according to Black Rock Inc. The global economy has probably seen its worst in the past two quarters, with developing nations already starting to emerge from the recession.
• April 21: The bulls say that this is just the beginning of a sustainable recovery in global risk appetite, supported by signs that Chinese demand is growing again and hopes that the U.S. economy is not free falling anymore. The bears say that, although the medium-term outlook for emerging markets is appealing, the prospect of a slow and painful global economic recovery will translate into bouts of selling pressure.
• April 21: There are still significant downside risks and it will be important to differentiate between emerging markets. Asia remains best positioned and CEE and CIS are the most vulnerable.
  
• April 16: "Emerging-market stocks will surge a further 39 percent this year as government spending and interest-rate cuts from China to the U.S. revive demand for developing nations’ exports", according to JPMorgan Chase & Co.
  

Regional Performance:

Asia (ex-Japan): Asia (ex-Japan): Asian equities have outperformed mature markets in 2009 thanks to FII inflows, hopes of economic revival in H2 2009, and fiscal stimulus and liquidity measures that are finding their way into equities. These factors might be making some Asian markets expensive. Markets have gained 48% YTD as of July 27 (82% since October 2008) with China (50%), India (65%) and Indonesia (62%) as the best performers, and Vietnam (22%) and Malaysia (35%) as the worst. Sri-Lanka posted an exceptional 141% gain due to the end of the 26-year civil war, a $2.5-billion loan agreement with the International Monetary Fund and the government's positive stance on reforms and liberalization. Asian markets have recovered 56% of the losses incurred in 2008 (peak to trough, down 59%).

Latin America: Latin American equities has outperformed the other emerging markets regional indexes by rising 55% YTD to July 27 (92% since it hit bottom in November 2008), with strong performances in Brazil (up 68% YTD) and Chile (up 55% YTD). The laggards are Argentina (up 22% YTD) and Mexico (up 27% YTD). Overall, LatAm equities market have recovered 44% of the 2008 crash (peak to trough, down 68%).

Eastern Europe, Middle East and Africa (EMEA): EMEA equities market have gone up 36% YTD to July 27 and 69% since it reached bottom in March 2009. Russia (51% YTD), Turkey (44% YTD) and Israel (30% YTD) lead the mark, while Morocco (-0.3% YTD) and South Africa (10% YTD) have underperformed. EMEA stock markets have recovered 35% of the sharp correction induced by the global crisis (peak to trough, down 66%)

Recent EM market Dynamics:

• July 28: "I wouldn't want to encourage people to invest in China and India who have never invested before," cautioned Jim O'Neill, Goldman Sachs chief economist. "Wait for a correction."
• July 28: "Investors around the world have been pouring money into emerging-market stocks faster this year than at any other comparable time on record, despite strategists' fears of a bubble. They plowed a record $35.5 billion into emerging-market stock funds in the first half, according to funds-flow research firm EPFR Global, whose data go back to 1995. By contrast, investors withdrew $61 billion from developed-market stock funds over the same period, EPFR said."
  
• July 8:“Risk aversion levels have risen across the board,” said Nigel Rendell, a senior emerging-market strategist at RBC Capital Markets in London. “While sentiment is still uncertain, emerging markets generally will be weaker.”
  
• June 24: Overall, regional markets are now in full correction mode. This correction is now the longest and sharpest since the impressive regional rally that began on March 2 and took MSCI Latin America 73% higher in almost exactly three months. This correction is unlikely to turn into a rout due to (1) improving global and regional growth prospects; (2) a likely trough in regional earnings over the next few months; and (3) the low cost of capital, including short rates.
• June 18: Emerging-market stocks fell for a fifth day, the longest losing streak since January, amid concern credit losses at banks will mount. The MSCI Emerging Markets Index dropped 0.8 percent to 743.41 at 2:10 p.m. in New York, taking the benchmark measure’s five-day slump to 6 percent and trimming the gauge’s 2009 gain to 31 percent.
• June 10: According to JPMorgan Chase & Co., Latin American equities are poised to climb at least 22 percent by the end of 2009 because shares are cheap relative to history, global investors may increase stock holdings from a near 20-year low and commodities may rally. The investment bank said that the MSCI Latin America Local Index will advance to 73,882 in 2009. The index closed at 60,256.08 on June 9th.
• June 8: Emerging-market stocks dropped the most in two weeks as Credit Suisse Group AG advised selling Taiwan shares and speculation the Federal Reserve may raise interest rates curbed demand for higher-yielding assets. The MSCI Emerging Markets Index fell 1.9 percent to 772.25, the steepest drop since May 21.
• June 3: Reuters found that Central and Eastern Europe lagged behind the general trend in the current stock market rallies. Despite rebounding by 30-40% over the past three months to June, CEE bourses still generated rather small turnover and rallies were patchy.
  
• June 3: Sub-Saharan African markets have been among the worst performing markets in 2009 struck by domestic conditions of high government borrowing and commercial banks’ exposure to margin lending. South Africa the best performing market in the region has risen by a mere quarter. Sub Saharan Africa is experiencing a slump in private and aid inflows since the onset of the global slowdown which is a prime factor behind the underperformance of its equities.
• June 3: In late October, EM equities hit a bottom and started to rise. Since then, the FTSE emerging markets index has outperformed the developed markets index by 48.8 per cent.

p/s photos: Rachel Kum