Happy New Year!

Source: Just Marya Now

Here's wishing all my readers a Happy New Year. May 2012 be a kinder year to all our investment than the year that has just passed.

HARVEST- a riddle wrapped up in an enigma?

A reader, Coypond has commented on my post entitled "Speculators, Be Smart!". He wrote a very lengthy comment which I reproduced below. I have prepared my equally lengthy reply and I'm wondering whether I should post it as a simple reply to his comment or as a separate post. If I post it separately, it may appear I am making a big thing out of a simple comment. Then again, I believe that Coypond may welcome a civil discourse. For the benefit of all readers, I will post it here and I would welcome your comment.

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CoyPond commented:

Alex Lu, I refer to your article “Speculators, be smart!” dated 26Dec 2011. You may have a point there, but in Malaysia vis-à-vis the KLSE it’s difficult to do so.

First & Foremost, I don't want you and the readers to think that I am a big time shareholder, and neither am I defending the management of HARVEST. I am just a small time investor who thinks that there is prospective value in this company from the recent newspaper reports and announcements.

I see that you have a lot of doubts about HARVEST. I doubted AIRASIA too when it first came on the scene. That was an opportunity missed – big time!

You have also said much in the article – much too much. You remarked, you insinuated – mostly bad, about HARVEST and about Raymond Chan. A good many of your remarks were based on assumptions, and when you “assume” all the time you know what that means – I rest my case. No! I must go on.

In the first place it’s quite unkind of you to say that Raymond Chan would be silly from all the newspaper reports of his mega projects, completed and ongoing ones. His flagship SAGAJUTA is a cash-rich company – you should feel free to check this out. So surely a man who has built up such a successful business conglomerate must know what he’s doing when he decided to use a listed vehicle which happens to be HARVEST in this case to expand his business further.

You asked “whether Harvest can carry out any construction contract?” Good question. Why not? You don’t need much to be a main contractor. All you need is good management, ample finances for operational expenses and many good sub-contractors – to put it simply. Now I ask you, did Tony Fernandez have any airlines business experience before he started AIRASIA? Does he know how to fly an airplane? Is AIRASIA a success story today?

You claimed HARVEST is a weak company, again on assumption and without basis. But surely you would agree that to spot multi-baggers we would have to see the potential beyond historical data. And, in this instance, changes happening in HARVEST currently are significant. They have secured new core business - a new direction, a new and meaningful beginning sort of. Not just that. This will turn the company around, profitably for sure.

You also talked about rumours… well, you of all people should know better than to give credence to rumours as far as the stock market is concerned. Let's base our arguments on facts.

If you say HARVEST is grossly over-valued, then what do you make of the report by TA SECURITIES as the Principal Adviser and COVENANT EQUITY as the Independent Adviser on BURSA’s website on 19 & 20 Dec 2011? Was BURSA abetting TA SECURITIES and COVENANT EQUITY in cooking up the report on HARVEST’s new businesses? Somehow you inadvertently seem to be saying so!

Now on to the fundamental side, HARVEST has already been awarded RM199M worth of contracts and another RM609M by April 2012, refer to BURSA’s announcement on 19 Dec 2011. The total contract value over a 30 months period is therefore RM808M. Hence if we take an expected net profit margin of 10%, we get RM80m. On yearly basis, we get RM32M with an EPS of 17.7 cents based on paid up of 180m shares. And taking a PE of 10, it would give HARVEST’s share a fair value of RM1.77. Even at RM2.0, the PE is still in the teens. Not excessive at all!

In concluding, I hope you would give HARVEST another look based on BURSA’s report on 19 & 20 Dec 2011. We are just trying to justify why BURSA should not prolong the designation of HARVEST any further, let justice prevail. You have put up many good articles of stocks in your blog and I hope you will continue to do so.

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My reply:

Hi Coypond, Thank you for your long & thorough comment. Let me start by stating our area of agreement. There are:

1) Raymond Chan has built up successful businesses and one of his companies, SAGAJUTA is a big property investment company. I believe it owned 1Borneo, the biggest shopping complex in Kota Kinabalu.

2) If HARVEST can secure multi-million ringgit contracts, whether from Raymond Chan’s group of companies or third parties, it could be a profitable company. Its net profit would depend on turnover & profit margin.

3) If HARVEST can make good profit, then its current share price may not be overvalued.

You said that I have made assumptions about Raymond Chan that are mostly unfavorable. That’s not quite correct. I merely assumed that Raymond Chan is a smart businessman, who looks after his own interest. If you are such a person, you would not do the following:

1) You would not accept an exchange of something that you owned worth RM1 million for something worth less than RM1 million. Example: You would not swap an asset worth RM1 million in return for 1 million shares of HARVEST unless you think that HARVEST is worth at least RM1.00 apiece.

2) If you owned less than 100% of HARVEST, you would treat it less favorably than your 100%-owned private company. Implication: If you are developing a property, you would not hand the construction job to HARVEST at a hefty profit margin. To do so would mean that you are giving preferential treatment to HARVEST at the expense of your own company. Smart businessmen achieved their success by counting every ringgit & sen.

The above statements or assumptions are fairly straight forward. If you agreed on these, let’s move to the areas which we may disagree. I believe in the following:

1) HARVEST is a weak company. It is a loss-making concern, with accumulated losses of RM19.7 million (here). As at 30/6/2011, HARVEST's shareholders' funds stood at RM30.5 million (or NTA per share of 17.4 sen). Its outstanding shares are 174.3 million units of RM0.25 each plus 70.7 million warrants (known as HARVEST-WA).

2) Despite securing a few sizeable contracts from Raymond Chan’s private companies, I do not believe that HARVEST will make big profit for the following reasons. The reasons are:

• The current profit margin for construction work is about 10%. If you are in doubt, check out the account of Binapuri and Fajar.
• To carry out big contracts, you need a big team of personnel. HARVEST does not have that. It can rely on SAGAJUTA but that would not free. It can build up its own team but that would have a similar effect on its bottom-line.

All in all, I would be very generous if I were to assume that HARVEST can achieve a profit margin of 5%. In my opinion, it could be even less than that. Why?

I will give you an example. If I were to renovate my house by engaging a contractor, it would cost me RM100k. Now, I decided to help out my unemployed brother-in-law who has no experience in renovation work. I would pay him RM100k and he would in turn engage the same contractor at a cost of RM90k; thus he would pocket RM10k. It looks like a win-win situation for all, except the contractor. Do you think I would get the same level of workmanship from the contractor since he is getting RM10k less for the same work? I believe not. So, the real winner is my brother-in-law and the real loser is me.

Let’s go back to the case of HARVEST & SAGAJUTA. Raymond Chan cannot create profit for HARVEST out of the thin air. It has to come from somewhere. It will most likely come from SAGAJUTA. Do you think Raymond Chan would let HARVEST, a company which he has less than 50% shareholding, makes profit at the expense of his 100%-owned SAGAJUTA? If you accept this analysis, you can ignore the TA’s report.

Finally, I like to elaborate on my statement: “As a seller, Raymond Chan would be silly to accept Harvest shares after the share has been played up”. Again, we have to go back on basic human instinct. Would you allow a stock to be played up (HARVEST rose from RM0.08 to now RM1.00 while its warrant rose from RM0.04 to RM0.80) and then accept these securities as a currency in exchange for something that you owned. Before the rally, HARVEST and the warrant are worth about a total of RM21 million. Today, the shares & warrants are valued by the market for a total of RM230 million. Raymond Chan pumped in contracts into HARVEST and in the process boosted up the value of the securities. Would he now accept these securities in exchange for his assets for which the value remained stagnant? I have higher regards for Raymond Chan than to assume that he would do such a silly thing.

Based on the above, I cannot buy the HARVEST story. It just doesn't make sense.

CPO- short-term weakness could be a buying opportunity

Last month, I had posted that CPO was testing its intermediate downtrend line at RM3050-3070. In fact, it later broke above that downtrend line and rallied to a high of RM3300. Since then, it had corrected back to RM3000- breaching the earlier downtrend line. The question to ask is whether CPO has broken its intermediate downtrend or not.

I have drawn two possible downtrend line for CPO. The earlier downtrend line is RR and the alternative downtrend kine is R1-R1. If we used downtrend line, RR, we can conclude that CPO has in fact achieved a bullish breakout- albeit the recent pullback that went marginally below the downtrend line. On the other hand, if we assume the downtrend line to be R1-R1, CPO is still in a downtrend. My preferred downtrend line is RR and as such, I believe CPO has broken above its intermediate downtrend. It is likely to go higher after a short correction.


Chart 1: CPO's weekly chart as at dec 29, 2011 (Source: iFS.marketcenter.com)

Looking at the daily chart below, we can see the short-term uptrend line for CPO is at RM3025-3030. After a good run last 2 weeks, I expect CPO to weaken & test the short-term uptrend line support over the next few days.


Chart 2: CPO's daily chart as at dec 29, 2011 (Source: iFS.marketcenter.com)

Based on the positive outlook for CPO for the medium-term, which is however buttressed by an expected weakness over the next few days, I think we can nibble into the plantation stocks in anticipation of a rally in CPO & plantation stocks in 1Q2012.

Gold is likely to correct further

The improving outlook for risk assets over the past few weeks has resulted in correction in gold, a safe-haven. We can see from Chart 1 below that gold is now testing its intermediate uptrend line at USD1535. Chart 1 is a weekly linear chart, prepared by me using data from Bullionvault.com.


Chart 1: Gold's weekly chart as at Dec 22, 2011 (Compiled using data from Bullionvault.com)

However, if we looked at the daily semi-log chart from Stockcharts, we can see that Gold is now trading below the 200-day SMA line. Gold has broken its uptrend line at USD1600. The semi-log chart is preferred over a linear chart for long-term charting purpose.


Chart 2: Gold's daily chart as at Dec 29, 2011_plotted on log scale (Source: Stockcharts)

Based on the breakdown of the uptrend line on the semi-log chart, I believe that Gold is likely to correct further. Those holding gold may reduce their holding. However, you should consider buying gold again if the price had dropped closer to USD1000-1100. In a world where central bankers are actively engaging in quantitative easing, the value of fiat money is likely to erode further. Gold, with limited supply, would retain value better than fiat money.

KPJ- may have a bullish breakout

KPJ broke above its recent high of RM4.65 as well as the line connecting the past 7 months' high this morning. Is this a fake breakout, coinciding with the last day of trading for 2011? See Chart 1 below.


Chart 1: KPJ's daily chart as at Dec 30, 2011_10.00am (Source: Quickcharts)

KPJ tested its long-term uptrend line (SS) at RM3.80 in September.


Chart 2: KPJ's daily chart as at Dec 23, 2011 (Source: Quickcharts)

For 9-month ended 30/9/2011, KPJ reported a net profit of RM92 million on a turnover of RM1.385 billion (go here). The annualized EPS for FY2011 would be about 23 sen. Based on current price of RM4.68, KPJ is trading at a PE of 20 times. KPJ could be re-rated in line with the expected listing of Integrated Healthcare Holdings Bhd ('IHH')- Khazanah's controlled healthcare subsidiary- on both Bursa & SGX next year. For more, go here & here.

If KPJ can maintain above the breakout level of RM4.65 over the next few days, we can conclude that this breakout is genuine. In that case, KPJ could be a trading BUY. The potential target is RM5.45 (arrived at by adding the depth of the recent correction of RM0.80 to the breakout level of RM4.65).

Speculators, be smart!

December 26, 2011

A few weeks ago, our stock market was rocked by the designation of Harvest. This stock shot up from less than RM0.10 in early October to more than RM2.00 in a mere four weeks. Many speculators (or more precisely, punters) were caught off guard & had lost a lot of money on this stock. Last few days, we learned that the play on another stock, Envair had come to abrupt end, when the main person behind the stock announced that he had sold off all his shares. Envair rose from a low of RM0.10 in early October to a high of RM0.485 over the past two months. For those who are keen learn more about Envair, you can go here & here.

Why do punters choose to risk their hard-earned saving on such risky stocks? Let’s examine the story behind Harvest first. This company was supposed to be acquired by Raymond Chan, a Sabah-based property developer and contractor. He was rumored to be keen on injecting his property investments into Harvest? As stated in my post (here), Harvest is a weak company, which cannot possibly pay for any large assets acquisition. Nor, can it borrow to pay for such acquisition. The only way it can settle any acquisition is by issuing new shares to the seller. As a seller, Raymond Chan would be silly to accept Harvest shares after the share has been played up. There were also rumors of other businesses to be injected into Harvest, which we can similarly conclude to be far-fetched. What about construction contracts to be injected in Harvest? Raymond Chan is undertaking a few mega projects and he was rumored to be keen to pump the construction contracts into Harvest. Again, you have to ask yourself whether Harvest can carry out any construction contract. If not, what is Harvest’s role in the whole scheme? Is it merely to book in a contract to make the company & in turn the stock looks rosy? It is very likely that Harvest will act purely as an agent, with the bulk of the work being carried out by Raymond Chan’s private companies. If so, I do not think Harvest’s earning from these contracts would be significant. On that basis, we can conclude that Harvest is grossly overvalued.

The next stock, Envair was supposed to get a contract to supply two million barrels of light crude oil on a monthly basis for the next sixty months to An Hong Shenzhen industrial Co. Ltd. of China (here & here). With crude oil trading at USD100 per barrels, the contract would amount to RM600 million per month over a period of sixty months. The numbers were so humongous that people should immediately be on their guard. Unfortunately, many chose to do otherwise. If only they had asked one simple question: Why the buyer chose to buy so much crude oil through a third party and not directly from the suppliers? What can Envair possibly bring to the table? If it cannot bring anything extra, Envair is nothing but an agent. Having an agent to act on your behalf would increase your cost. If you subscribed to the belief that there is no free lunch in the business world, then you would have concluded that the deal was highly unlikely.

Based on such simple analysis- which can be done with a little bit of critical thinking- you would have avoided Harvest & Envair. Some punters probably did but they still took a bet on these stocks. They did it because they believed that the players or syndicates could push the stocks higher and that other punters would join in at a later stage. To these punters, the thinking was simply “buy high and sell higher”.

Before concluding, let me share a good article with everyone. Barry Ritholtz, the publisher of the popular blog, The Big Picture contributed a good article to John Mauldin’s website, Thoughts from the Frontline recently. It is entitled the “Your Three Investing Opponents”, which I strongly urge everyone to read (here). The three opponents are Mr. Market, Your Rivals and You. To wit:

You are your own third opponent. And, you may be the opponent you understand the least of all three. It is more than time constraints, lack of discipline, and asymmetrical information that challenges you. The biggest disadvantage you have is that melon perched atop your 3^rd opponent’s neck. It is your big ole brain, and unless you do something about it, it is going to lose all of your money for you.

We are coming to the end of a very tumultuous year in investment. Many issues have weighed down the financial market in 2011, such the Euro-zone problem, the continued deleveraging in the U.S. & the slowing growth in China. These problems will continue to impact the performance of our stock market in 2012. The challenging time ahead will truly test your investment skill. You will find that winning in this environment will be harder than ever. And, in this difficult environment, we will be tempted again & again by get-rich-quick plays such as Harvest & Envair. We must resist these temptations at all cost!

(This is my latest article in Merdeka Review. For the Chinese version, go here.)

More Thoughts on Market Manipulation

There were two comments made in response to my earlier article entitled "Surely You're Joking, Sam!". I want to reply to them in a post.

Reader CoyPond raised many interesting points, which I have summarized below together with my reply (in italic).

Why is Harvest designated longer than the 6-week designation suffered by Iris in 2006? Is the designation a test of will?

Iris was designated from May 11, 2006 to June 21, 2006. Harvest has been designated since November 15. In my opinion, it is not appropriate to set a standard duration for stock designation. If you do that, the manipulator will game the system by factoring the designation period into their play. It would be a real mockery if the manipulator were to use the designation as a “pause” to shake out the weak players, namely the retail players, before another big push.

By injecting an element of uncertainty in designation period, the exchange is able to hold the manipulators by the throat. The syndicate or pool may not have unlimited resources to keep share price at a certain level. Even if they have the resources to do so, they would not want to fight a losing battle with the exchange. They will eventually sell off & exit the stock. Once the syndicate or pool has done that- which the exchange can verify- then the designation would be lifted. The exchange should only be concerned with the action or position of the syndicate or pool, not the unfortunate position of the minority shareholders or punters who are stuck in the stock.

Why is Bursa maintaining the designation after Harvest has announced its additional business as per the announcement in BURSA's website on 19 & 20 Dec 2011?

I believe the designation of Harvest was triggered by market manipulation. While Harvest may have secured more business during the interim period, this doesn’t change the fact that the exchange’s finding that there was market manipulation in the stock. If we were to lift the designation on account of such announcement, many cases of market manipulation would go unpunished by simply making announcement of new projects or business secured.

Bursa claimed that it does not want a disorderly market and yet the action of designation is causing a disorderly market.

Sometimes when the police tried to stop a bank robbery, innocent bystanders got injured or even killed in the crossfire. Does that mean that we shouldn’t stop bank robbery? In the case of Harvest, how innocent are the retail players caught holding the stock? The exchange had issued UMA queries twice and a Market Alert on this stock. The retail players continued to get into the stock, totally oblivious to the danger involved.

Why Bursa hit on Harvest and did not take any action against Envair (or an older case, Jetson)?

Each case is different. Like many, I am very disappointed with the case of Envair. There appears to be gross misrepresentation made by the Company & the key players. Is there market manipulation? As a layman, you and I may feel that there could have been market manipulation. But, did the exchange detect any market manipulation, where the parties involved had created a false appearance as to the price of; or the market for; and, active trading in, the stock? It is the artificiality of the trade that is prohibited.

If guidelines and procedures are not transparent, it will lead to abuse and corruption obviously.

I agree with you on this point. There are many cases where we feel strongly that there were or could have been market manipulation and yet, the exchange didn’t take action. If the decision taken is not transparent, then there is room for abuse.

However, we must balance the need for transparency and the danger of publishing too much details of how the manipulation was perpetrated. These trade secrets should not be treated like sex education leaflets or pornographic magazines. They are more like manuals on how to build a nuclear bomb. Unless, you are okay with a backyard industry manufacturing nuclear bombs, you would like to safeguard these dirty secrets from the general public. Even more inappropriate is the capability of the surveillance system that the exchange has at its disposal. Like the game of cloak & dagger (of the spy trade), such information must be guarded properly. Does that mean that the public has no way of knowing that the exchange is working proper? No, we can set up a permanent committee comprising prominent people from the industry and senior personnel form the exchange to review cases of market manipulation.

Finally, CheahSweeKuan raised the question of competency of the people in the exchange. I don’t think it is appropriate for me to question the competency or even integrity of the personnel in the exchange. I work on the assumption that they are competent and that they look after the interest of the investors and other participants in the industry.

Integra- may have a bullish breakout

Integra broke above its medium-term downtrend line (RR) at RM1.23 yesterday. This morning, it broke above its "triangle" at RM1.25 as well as surpassing the horizontal line at RM1.33. Its next resistance levels are the horizontal lines at RM1.43 & then RM1.53. A lot of three...

Based on the multiple breakout achieved, this stock looks good for a trading BUY.


Chart: Integra's daily chart as at Dec 29, 2011_9.45am (Source: Quickcharts)

Oldtown- may have a bullish breakout

Oldtown was listed on the exchange on July 13. Its IPO price was at RM1.25. For QE30/9/2011, Oldtown reported a net profit of RM8.9 million on turnover of RM73 million. For more, go here. With an outstanding shares of 330 million, Oldtown's annualized EPS is about 11 sen. Based on current price of RM1.18, the stock is trading at a PE of 11 times.

Oldtown broke above its ascending triangle at RM1.15 today. With this upside breakout, Oldtown is expected to continue with the prior uptrend. Its next resistance is at RM1.20.

Based on this technical breakout, Oldtown could be a good trading stock or even a medium-term investment.


Chart: Oldtown's daily chart as at Dec 29, 2011_9.30am (Source: Quickcharts)

MediaC- poised for a decent rally?

Mediac is testing its downtrend line today. Depending on how the intermediate downtrend line is drawn (either RR or R1-R1), the stock has either broken above the downtrend line at RM1.10 or it is testing that downtrend line at RM1.15. See Chart 1 below.


Chart 1: MediaC's daily chart as at Dec 28, 2011_4.00pm (source: Quickcharts)

From a different angle, we can see that MediaC has already broken above the intermediate downtrend line at RM1.05-1.08. If so, this could potentially lead to a significant rally for the stock. See the weekly chart, plotted on semi-log scale below.


Chart 2: MediaC's weekly chart as at Dec 19, 2011 (source: Tradesignum)

Based on the above technical analysis, I believe that MediaC is poised for a decent rally. If there is follow-through buying tomorrow, MediaC could be a good trading BUY.

Surely You're Joking, Sam!

In Starbiz today, you will see an article entitled "Is Bursa too strict?", where the President of the Remisiers Association of Malaysia, Sam Ng Soon Lee was lamenting about the stricter measures implemented by Bursa Securities in order to curb irregular or manipulative dealing activities. Some of the market breaches that are forbidden by the exchange are price manipulation, short selling and trades with no change of beneficial ownership.

Sam feels that the stricter implementation of these rules may impact liquidity in the equities market. “We're semi-liquidity providers but many are put-off by the tightened measures over volume activity (which may breach stock exchange rules) and this will impact trading volume,” Ng said. He observed that market regulators must also consider the consequences of interpreting the rules more strictly as this could impact genuine participants whose business would be affected.

I do not agree with Sam. Firstly, I believe the exchange is very careful in making a distinction between genuine activities and irregular or manipulative activities as it has the powerful surveillance system to track all trades done in the market. From a recent seminar conducted by Bursa, we learned that the exchange has a Market Management process to deal with irregular market activities. The steps involved are:

1) Fact Sharing or Finding

2) Surveillance Query

3) Unusual Market Activities ('UMA') Query

4) Market Alert

5) Designation

The first two steps are preliminary steps taken to inform the remisiers and/or dealers concerned that they are under surveillance. They are given an opportunity to explain their action as well as to cease their activities. If these activities are genuine transactions, the exchange would not take any action against the parties concerned. If the exchange is not satisfied with the explanation given, it would take further action, such as issuing UMA Query. In the case of Harvest, the exchange was not satisfied with the reply to two UMA Queries and it had to issue Market Alert & followed with Designation.

Secondly, we should never condone market manipulation. It is self-serving to argue that a stricter regime would result in poorer liquidity in the market, when in actual fact, what you've wanted is bigger volume in order to generate more business for yourself. I am all for making more money, both for myself and my clients. However, we can see lately that some stocks in our market were played up sharply and these are zero-sum plays, where a fortunate few win handsomely while a whole lot of people lose their shirts. A good market cannot be sustained based on trickery.

Finally, if we want to see our Bursa Malaysia becoming a world-class stock market, we must lay down strict rules on transparency & corporate governance. How can such a market live side-by-side with a third-world mentality, lax rules & poor enforcement where market manipulation is a daily affair? We must lay down good laws and rules and enforce them strictly.

Sam Ng is a very dedicated remisier. He has served as the President of the Remisiers Association of Malaysia for a few terms. He had spoken out on a few issues where the interest of investors were trampled. He had also lobbied for rules and regulations to protect the interest of remisiers as well as investors. However, on the above issue, I feel strongly that Sam took the wrong position. His view does not represent the view of many remisiers who are not happy with the prevalent market manipulation involving 2nd and 3rd liner stocks. I believe the exchange is doing the right thing in trying to rein in such activities.

Petgas- has a bullish breakout

Petgas broke above its 'near' horizontal resistance at RM14.20 yesterday. With this upside breakout, Petgas would continue with its prior uptrend. The target for the next upleg is RM16.00, which is arrived at by adding RM1.80 [the distance between the near horizontal line and the trough of the recent price consolidation] & RM14.20 [the breakout level]. Based on this technical breakout, Petgas could be a good stock for medium-term investment.


Chart: Petgas's daily chart as at Dec 27, 2011_9.10am (Source: Quickcharts)

Note: I have earlier stated the potential target to be RM17.00. It should be RM16.00- the product of RM14.20 & RM1.80.

US stock markets may rally in 2012

DJIA broke above its near-horizontal (RR) resistance at 12250. Its next resistance is the immediate downtrend line (R1-R1) at 12550. See Chart 1 below.


Chart 1: DJIA's daily chart as at Dec 23, 2011 (Source: Stockcharts)

With the DJIA trading above its 200-day SMA line and the 50-day SMA line fast approaching the 200-day SMA line, the DJIA is looking more & more like September 2010. See Chart 2 below. If the 50-day SMA line were to cut above the 200-day SMA line and the index were to break above the 12550, we could see the continuation of the prior uptrend for DJIA.


Chart 2: DJIA's daily chart for 3 years up to Dec 23, 2011 (Source: Stockcharts)

The strength of DJIA is not reflected in the Nasdaq. Nasdaq need to break above its accelerated downtrend line (RR) at 2630 as well as the intermediate downtrend line (R1-R1) at 2690. See Chart 3 below.


Chart 1: Nasdaq's daily chart as at Dec 23, 2011 (Source: Stockcharts)

Like DJIA, Nasdaq is also looking more & more like September 2010 except for one small little detail- the 200-day SMA line is still pointing downward. See Chart 4 below. If the 50-day SMA line were to cut above the 200-day SMA line and the index were to break above the 2690, we could also see the continuation of the prior uptrend for Nasdaq.


Chart 4: Nasdaq's daily chart for 3 years up to Dec 23, 2011 (Source: Stockcharts)

Based on the above, we must be mentally prepared for a recovery in the US stock markets and possibly the global equity markets for 1st quarter 2012.

Market Outlook as at December 27, 2011

FBMKLCI broke above the horizontal resistance at 1490 last Friday. The 1490 level also looks like the neckline of an inverted Head-&-Shoulders formation. Despite the bullish signal generated by this upside breakout, the market did not react with enthusiasm as reflected by the subdued volume. One after the breakout, the market continued to trade in a quiet mode, with no follow through.


Chart 1: FBMKLCI's daily chart as at Dec 23, 2011 (Source: Tradesignum)

With the above mildly positive signal, another feather is added to the rooster of positive technical readings for the index. Let's look at the weekly & monthly charts below and list out the positive & negative readings. The positive readings are:

1) 10-week SMA line is swinging upward, while the 40-week SMA line is beginning to flatten out. 10 & 20-month SMA lines are similarly rising again.

2) The index is above the 10 & 40-week SMA lines as well as the 10 & 20-month SMA lines.

3) the weekly technical indicators (MACD, RSI & ADX) are all curving upward. In particular, the weekly MACD has hooked up and this could signal the beginning of a recovery in the market.

4) The weekly ADX seems to place the index currently at the same space as 1Q2009.

The negative readings are:

1) The monthly MACD is still bearish.

2) The other monthly technical indicators (RSI & ADX) are still pointing downward.

Based on the balance of probability, I believe the market could be at the start of a recovery.


Chart 2: FBMKLCI's weekly chart as at Dec 27, 2011_3.00pm (Source: Quickcharts)



Chart 3: FBMKLCI's monthly chart as at Dec 23, 2011_3.00pm (Source: Quickcharts)

Merry Christmas!

Source: Free Xmas

Here's wishing all my christian readers, a Merry Christmas.

Proton- the village bicycle!

There is an article in the Edge Financial Daily entitled "Proton sale will involve a general offer". The basis of this report is a written reply from Khazanah MD Tan Sri Azman Mokhtar to the Edge Weekly where he stated that Khazanah is looking at selling its entire 42.7% equity stake in Proton. The sale of this entire stake would result in the buyer making a general offer ('GO') under the takeover code.

I have stated before that the buyer of Khazanah's stake in Proton is unlikely to make a GO for the simple reason that the entire exercise would be too costly. Proton has an outstanding share capital of 549 million ordinary shares. If Proton stake is priced at RM4.50 per share, the buyer would have to pay RM2.47 billion. If the buyer can abstain from making a GO, the deal would only cost RM1.05 billion.

Why is the market concerned about whether the Proton deal would lead to a GO? The reason is some of the punters and medium-term investors are buying into Proton today on assumption that there is a GO and that GO shall be done at a price higher than the current market price of about RM4.50. If there is no GO, then the sale of Proton stake by Khazanah would not benefit the minority shareholders (and the punters and medium-term investors).

The big question is why would Khazanah care whether the buyer of its stake would make a GO or not. It should only be concerned with the following:

1. getting a good price for the share;
2. whether the buyer can help to upgrade Proton; and
3. whether the deal would contribute to the domestic automotive industry.

Any talk about a GO would only serve to push up the price of Proton and thus strengthen Khazanah's bargaining position. Is that the reason why the story in the Edge Financial Daily leads with the title "Proton sale will involve a general offer". Or, is there another reason for this? The same article rightly pointed out that a GO would be too prohibitive for the potential buyers and as such may frustrate the deal. Is Khazanah talking up the price in order to scare off the usual suspects?

Regardless of Khazanah's intention, I can think of a few ways that the new buyer can skip this costly exercise. It can do any one of the following:

1. Buy the entire 42.7%-stake together with another party and declare that both parties are not acting in concert;
2. Buy the entire 42.7%-stake and seek an exemption from making a GO;
3. Buy a stake of less than 33% (Who is going to say Khazanah cannot go back on its word?).

To all the punters & medium-term investors who are buying or who have bought into Proton, ask yourself these questions:

1. Is Khanazah really serious about selling of its Proton stake?
2. Will the buyer make a GO?

My answers to these questions are Definitely Maybe and Possibly Not. In that order...

TSM- took a big hit!

Results Update

TSM has just announced its results for QE31/10/2011. It reported a net loss of RM21.1 million on a turnover of RM96.0 million. The loss was attributed to loss incurred on the discontinued operation of a recently-acquired die-cast & precision manufacturing business, Kenseisha.


Table: TSM's last 8 quarterly results



Chart 1: TSM's last 30 quarterly results

The discontinued die-cast & precision operation has been a drag on TSM, affecting its overall results. With its discontinuation, TSM will focus on its core business of manufacturing wire harness (see Chart 2 below). Over the past 4 quarters, this segment contributed a pre-tax profit of RM35 million.


Chart 1: TSM's last 7 quarterly performance for the Wire Harness segment

Valuation

Assuming an effective tax rate of 25%, the company's net profit would be about RM26.3 million. This translates to a full-year EPS of 21 sen (based on current outstanding shares of 127.39 million units). Based on its closing price of RM1.12 yesterday, TSM is now trading at a PE of 5.6 times. This is fairly reasonable. However, I do not believe the stock will rise significantly in the near future as many investors are disenchanted with the stock due to the disastrous investment in Kenseisha.

Technical Outlook

TSM is in an intermediate downtrend. You may use the 100-day SMA line as the downtrend line, with resistance at RM1.20. Its immediate support levels are the horizontal line at RM1.10 as well as at RM1.00.


Chart 3: TSM's daily chart as at Dec 22, 2011 (Source: Tradesignum)

Conclusion

Little do we know that the recent investment in Kenseisha could turn out so badly for TSM. Our call to take profit on TSM in June was quite timely (here) It may be too early to jump back into this stock. However, if it drop to the RM1.00 level, you can consider accumulating a bit.

Perisai- may have a bullish breakout

Perisai is another stock which has broken above its intermediate downtrend line at RM0.69-0.70 this morning. Its next resistance is at RM0.75 & then at RM0.80. As such, Perisai could be a trading BUY.


Chart: Perisai's daily chart as at Dec 23, 2011_9.20am (Source: Quickcharts)

You have to exercise careful discretion in your trading as the market will enter into a lull next week due to the short trading period. Due to smaller participation in the market during the festive season, you can expect higher volatility.

UEMLand- may have a bullish breakout

UEMLand broke above the intermediate downtrend line at RM2.40 this morning. With this breakout, UEMLand could be a trading BUY. Immediate resistance at RM2.60 & then at RM2.80-2.90.

You have to exercise careful discretion in your trading as the market will enter into a lull next week due to the short trading period. Due to smaller participation in the market during the festive season, you can expect higher volatility.


Chart: UEMLand's daily chart as at Dec 23, 2011_9.20am (Source: Quickcharts)

JTiasa- time to take profit

Results Update

JTiasa has just announced its results for QE31/10/2011. Its net profit dropped 26% q-o-q to RM41 million on the back of a 8%-decline in turnover to RM240 million. Compared to the corresponding quarter last year, its net profit increased by 37% while turnover was higher by 25%. The q-o-q decline in the bottom-line was attributable to lower prices for logs, plywood and FFB.


Table: JTiasa's last 8 quarterly results

From the Chart below, we can see that JTiasa's performance is now driven equally by the timber products segment and the oil palm segment.


Chart 1: JTiasa's last 10 quarters' segmental results

Valuation

JTiasa (closed at RM6.99 yesterday) is now trading at a PE of 9.7 times (based on last 4 quarters' EPS of 71.71 sen). At this PE multiple, I believe JTiasa is fully valued.

Technical Outlook

Since the call to BUY JTiasa in March 2010, the stock has risen steadily. If I were to draw a trading band over the price movement for the past 18 years, the stock appears to be trading at the upper reach of the band. Can it break beyond that level?


Chart 2: JTiasa's monthly chart as at Dec 1, 2011 (Source: Tradesignum)

Conclusion

Based on full valuation & strong resistance from the trading band, I believe it is a time to take profit on our investment in JTiasa.

DKSH & Harison compared

Technical Outlook examined

Over the past 4 weeks, DKSH has been dropping very sharply after it hit a high of RM2.37 on November 21. The stock broke its accelerated uptrend line (S1-S1) at RM1.75 on December 12 as well as the strong horizontal support at RM1.50 on December 19. Its immediate support is the horizontal line at RM1.30-1.35. Below that, its next support is the intermediate term uptrend line (SS) at RM1.05.


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

Let's compare DKSH with a similar trading house, Harison. Harison is holding above its horizontal line at RM3.40. During the recent selldown, Harison tested its long-term uptrend line (SS) support at RM2.80. Can Harison hold onto the current horizontal support of RM3.40?



Chart 2: Harison's weekly chart as at Dec 19, 2011 (Source: Tradesignum)

Financial Performance Indicators & Ratio compared

Which is a better stock? I have tabulated the financial performance indicators & ratio for your easy reference. For the 9-month ended 30/9/2011, DKSH's net profit improved substantially while Harison's bottom-line remained unchanged. As a results, DKSH's ROCE improved from 11.6% to 19.3% while Harison's ROCE slid from 12.5% to 11.9%. However, it must be noted that DKSH is highly geared, with debts to equity of 0.9 time & total liabilities to equity of 4.4 times. Harison appears conservative with debts to equity of 0.2 time & total liabilities to equity of 0.8 time.


Table: DKSH & Harison's financial performance indicators & ratio compared

Valuation

In term of valuation, Harison (closed at RM3.46 yesterday) is now trading at a PE of 6.9 times (based on the 9-month results which yield an annualized EPS of 49.84 sen). DKSH (closed at RM1.39 yesterday) is now trading at a PE of 5.0 times (based on the 9-month results which yield an annualized EPS of 27.99 sen).

Conclusion

While DKSH trades at a lower PE multiple, I am not confident that it can maintain its recent strong results. DKSH has a long history of lackadaisical performance while Harison is noted for its steady growth. Despite the lower PE multiple and recent strong growth in its bottom-line, I am wary of DKSH. I still prefer Harison as it is a financially stronger while DKSH shows signs of over-trading - which may not be a healthy practice in the challenging times ahead.

AEONCr- bottom-line continued to grow at a fast pace

Results Update

AEONCr has announced its results for 3-month ended 20/11/2011. Its net profit increased by 7.7% Q-O-Q or 57.4% y-o-y to RM25.3 million while its turnover increased by 8% q-o-q or 60% y-o-y to RM90.0 million. The better results was attributed to "growth in receivables & increased financing transaction volume".


Table: AEONCr's last 8 quarters' results



Chart 1: AEONCr's last 18 quarters' results

Valuation

AEONCr (closed at RM6.57 yesterday) is now trading at a PE of 9 times (based on last 4 quarters' EPS of 72.75 sen). Based on a CAGR of 23% over the past 3 years, AEONCr's PEG ratio comes to only 0.39 time. However, we must note that the CAGR was exaggerated somewhat by the jump in the growth rate in the past 4 quarters. If we were to discount this jump in growth, AEONCr's CAGR is still quite decent at 12-15% per annum. The adjusted PEG ratio would still below 1 time. Thus, the current valuation for AEONCr is deemed undemanding.

Technical Outlook

The stock broke above the RM4.00 level in April & hit a high of RM5.00. It consolidated for a while before surging higher in November. Yesterday, it closed at the high of RM6.57. We can see some bearish signals from the indicators- MACD hooking downward & bearish divergence in the RSI.


Chart 2: AEONCr's daily chart as at Dec 20, 2011 (Source: Quickcharts)



Chart 3: AEONCr's weekly chart as at Dec 20, 2011 (Source: Quickcharts)

Conclusion

Based on good financial performance & undemanding valuation, AEONCr is a good stock for long-term investment. However, the bearish signal in some of the technical indicators could be a small red flag for medium-term investors. If so, you can consider taking some profit for this stock and re-enter it after the expected price consolidation.

Give the Game Changer a chance

December 15, 2011

Two weeks ago, I posted a piece in my blog where I posited that the European nations are about to move aggressively to solve their sovereign debt problem (here). I thought we had finally seen a game-changing moment in the Euro zone debt crisis. I took some risk in calling the Game Changer. As you may know, Game Changers are hard to come by. They are easier to identify after the event or crisis. This is understandable because when you are in the midst of a crisis - one with far-reaching consequences (think the next depression or the collapse of the global financial system) - you tend not to see the wood from the trees.

When the U.S. Fed announced in March 2009 that it would pump more than USD1 trillion into the U.S. economy, I thought that was a game-changing move (here). The U.S. sub-prime crisis in 2008 was extremely difficult, as it gave rise to many serious questions (such as the question of moral hazard) which constrained the response from the U.S. government. The timid response was always behind the curve; either inadequate or a bit too late. Once the difficult questions were brushed aside, the U.S. government moved aggressively to save its financial system. That was quite similar to the implementation of capital control by Malaysia in 1999, which put a floor on the then-collapsing economy during the Asian Financial Crisis.

The Euro zone sovereign debt crisis is much more complicated than our Asian Financial Crisis of 1998 or the US Financial Crisis of 2008. There have been many rounds of meeting & many plans announced which failed to contain the problem. Then in early December, Germany & France agreed on a "stability pact", whereby they would lay down strict fiscal rules to prevent overspending and over-indebtedness. The "stability pact" would include changes aimed at increasing fiscal coordination across the Euro zone and the enforcement of rules on deficit & debts levels. Once this new “fiscal compact” has been put in place, the ECB is expected to intervene by buying bonds of troubled euro zone states or cut interest rates. To me, this is the blue print for a comprehensive action plan in solving the problem.

Last weekend, 17 European leaders met to hammer out the finer details of the fiscal compact. After much jawboning, they agreed to the balanced budget amendment which inter alia allows the European Commission to oversee national budgets and impose penalties if a country's debt grows too much. This entails a revision to the Treaty of Rome. U.K. did not agree to the new accord and it may have to leave the European Union (‘EU’).

The market did not rejoice with the outcome for two reasons: firstly, there will be no EU Treasury, no shared debt issuance, no centralized tax collection and most importantly no fiscal transfer to depressed countries. The absence of any agreement in these areas is probably due to the German’s opposition to the idea of fiscal union or even a smaller idea of debt mutualization. Without fiscal transfer as compensation input, the balanced budget rule would call for painful austerity program for some countries and this would lead to slower growth or deeper recession & higher unemployment.

The second disappointment came when ECB President Mario Draghi hinted that ECB might not buy government bonds. Many attribute this backtracking to the Germans’ reluctant for extensive central bank intervention. With this discouraging comment from Draghi, ECB is also not expected to aggressively lower interest rate. Without an accommodative monetary policy from ECB, the affected countries would feel the full blunt of a fiscal policy that complies with the balanced budget rule.

Table: European nations' Debt & Debt to GDP for 2010 (Source: CIA World Factbook)

The Euro zone debt crisis can be very confusing. My direct take on the problem in Europe is as follows:

• Greece is too heavily indebted and requires a debt restructuring. Its lenders (mostly, German & French banks) would have to take a hair cut. This would lead to huge losses among European banks. ECB has however indicated that it is prepared to top up the equity of the affected European banks.
• Spain is not in the same boat as Greece as its debts as a percentage of GDP is much lower. It is feeling the contagion effect which caused her bond yield to skyrocket. ECB should step in and buy Spain bonds in order to lower the yield to a more comfortable level. Italy is somewhere in between Spain & Greece in term of sovereign debt to GDP. ECB should also buy Italian bonds to cap the yield.
• The Euro is too strong for some weaker countries in the Euro zone. ECB should consider devaluing Euro by 10-20%. This would bring growth to the whole Euro zone, especially the weaker countries (such as Greece) which need it more.

Based on the above, I believe that a solution to the Euro zone debt problem is possible. For the Game Changer to work, Germany needs to make more sacrifice.

(This is my latest article in Merdeka Review. For the Chinese version, go here.)

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.