Guanchg- uptrend may be over

Technical Update

Guanchg is again testing the horizontal line RM2.00 today. The last time we saw a test of this level was at the end of September & early October. The stock subsequently rebounded back to RM2.50. This time, the outcome of the test of the RM2.00 horizontal support may be different. The reason for this is the outlook for both cocoa & USD-RM has changed.


Chart 1: Guanchg's daily chart as at Dec 19, 2011 (Source: Tradesignum)

The main reason for Guanchg's out-performance in the past few quarters is that the company made the right bets in the market. As far as the trading in cocoa bean & cocoa products, it could take the form of the followings:

1) going long on cocoa bean or entered into long-term forward contract for supply of cocoa bean; and/or
2) selling processed cocoa solid & butter at prevailing market rates

In addition, Guanchg also took position in the forex market. Both strategies on the buying & selling of cocoa bean & cocoa product as well as currencies have worked very well for Guanchg for the past few quarters. After a long downtrend, USD-RM has finally reversed (here). Cocoa price may have peaked (see Chart 2 & 3 below). Whether this is a cyclical top or a secular top for cocoa, we cannot be sure. Even a cyclical top could have a negative impact on the financial performance for Guanchg. There would be a need to write-down the higher cost inventory or to make provision for some forward supply contracts. All in all, I expect the next one or two quarter(s) to be very challenging for the company.


Chart 2: Cocoa's weekly chart as at Dec 16, 2011 (Source: Mongabay)



Chart 3: Cocoa's monthly chart as at Dec 1, 2011 (Source: Mongabay)

Conclusion

In my last results update, I rated Guanchg is rated a HOLD based on continued good financial performance (albeit a break in sequential rise due to unfavorable forex movement) & attractive valuation. Based on the reversal in USD-RM and the top in cocoa, I think it is time to reduce or sell Guanchg.