Thursday, September 18, 2014

All Money Is Not The Same!

Once in a while, you would read the title of an article and you would just give the article a miss. That's what I did when I came across an article entitled Red Chips not putting much stock in their own cash? which appeared in the Edge newsletter last weekend. This is not the first time that the Edge discussed this subject and I dare say that it would not be the last time either. The article did serve an important function of informing investors to be cautious when investing in Red Chips by raising a very valid question: Why are the Red Chips treating their cash holding as if it is not there?


Table: Cash Balance held by Malaysia-listed China stocks (Source: The Edge)

If you look at their accounts, these companies have fair substantial cash holding (see the table above). Now, we cannot blame the investors for choosing to completely ignore this 'fact'. The simple truth of the matter is the bosses also chose to ignore this fact. These companies would apply to carry out Rights Issues in order to raise fund to finance their expansion despite having a few hundred of million RMB in their bank accounts. The bosses could easily privatize their companies via selective capital repayment (by tapping on the cash alone) and end up owning their entire companies or the businesses for 'free' and yet they would choose not to do so.

The Cantonese have a saying that goes like this: Where can you find a frog hopping on the street (and everyone ignores it)? There could only be one answer to that riddle: the frog may not be a frog. Stories of the disappearing cash hordes, such as this one, do not instill confidence in investors.

So, instead of lamenting and complaining about the Malaysian market or investors not knowing how to value their companies, the bosses should use the money in their bank accounts and carrying out aggressive share buyback. As the saying goes, the proof is in the pudding! 

Until then, investors will be wise to treat all Red Chips like the former Soviet Union: A riddle wrapped up in an enigma.
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5 comments:

  1. limkoThursday, September 18, 2014 10:59:00 AM

    When u don't understand, u don't invest.

    ReplyDelete
  2. luckystock2Thursday, September 18, 2014 12:44:00 PM

    Hi Alex ,
    Can you comment on Oldtown and Landmark's technical outlook ?
    Appreciate it very much!

    ReplyDelete
  3. KSThursday, September 18, 2014 5:15:00 PM

    Hi Alex,
    I'm on dilemma currently as i see
    I Bhd share price fall tremendously after the announcement on few corporate exercises, do you think its share is still worth to buy for long term purpose? What is your comment after the share goes ex price?

    Appreciate your reply and thank you so much !

    ReplyDelete
  4. Alex LuWednesday, September 24, 2014 9:43:00 PM

    Hi luckystock2

    Oldtown is at the strong horizontal support of RM1.90.

    Landmark is at the strong horizontal support of RM1.30. If that fails, the next support at RM1.20 is even stronger.

    Between the two, I prefer Oldtown. Landmark struck me as a Johnny-come-lately stock. It rallies when everyone else has gone up. Stocks like this make me nervous.

    ReplyDelete
  5. Alex LuWednesday, September 24, 2014 9:50:00 PM

    Hi Kim Soon

    I think IBhd is a good stock that has gone up quite substantially. If the property market starts to correct next year, it would be hit because of its run-up. Otherwise, it would be alright since it raised a lot of money to expand further.

    Chartwise, its uptrend line support is at RM0.90-0.95. That's also a very strong horizontal support. Before we see this price level, the stock must break the psychological RM1.00 mark. And, that's a strong support too.

    So I think you can hold into the stock & add to it atRM0.90-0.95.

    ReplyDelete