Tong Kooi Ong
Falling margins will hold back stock price gains
Stocks around the world chalked up a second straight month of gains in February. This means that after having suffered one of the worst losses since the end of the global financial crisis in late-2018, markets are now enjoying some of the strongest starts to a new year. The world’s most closely-watched bellwether, the Dow Jones Industrial Average have rebounded some 20% from last year’s lows and is now less than 4% off its record high.
Markets late last year were driven by extreme pessimism for the global economy. That has since been dialled back after the US Federal Reserve adopted a more dovish stance on future interest rate hikes. Indeed, many have now turned bullish, especially for emerging markets.
Chinese stocks, the worst performing market in 2018, led the rally with the Shanghai Composite index up almost 18% for the year-to-date. The gains were accompanied by a surge in trading volumes as well as margin loans as progress on US-China trade talks bolstered investor confidence. President Trump extended the March 1 deadline for a trade deal, delaying the previously announced tariff hike (from prevailing 10% to 25%) on US$200 billion worth of Chinese goods.
Optimistic investors are also betting the Chinese government will loosen its credit crackdown, including on shadow financing, and announce more stimulus measures to buffer the economic slowdown. Nevertheless, there are some who are sounding a note of caution as the current rally brings back memories from the last market bubble in 2015.
Indeed, whilst fear has receded and stocks have rebounded, the outlook going forward remains uncertain. We suspect continuation of the rally will require validation from improvements in corporate earnings, which is far from convincing at the moment. In the US, analysts are still paring back their earnings forecasts, now expected to contract 2.7% y-y in 1Q2019 and grow by just 0.7% in 2Q2019.
As we mentioned last week, slower (but still positive) sales growth and narrowing margins are symptoms of late-cycle earnings. That could translate into a tight trading range for stocks from hereon. The challenge is to identify companies that will buck this trend.
Shares for Sunpower Group continued to rally prior to its 4Q2018 earnings results, which were released after market close on February 27. We are now making returns totalling 10.1% on this investment.
The company reported a strong 66% growth in revenue, mainly attributed to its manufacturing and services arm, where sales expanded from RMB1.8 billion in 2017 to RMB2.5 billion (about 77.4% of total). Orderbook increased to RMB2.5 billion as of February 2019, up from RMB1.1 billion two years ago.
More importantly though is the growth in the green investments (GI) segment, which is recurring income and carries significantly higher margins. Revenue totaled RMB737 million in the first full-year of operations for the business – 4Q2018 results were bolstered by the acquisition of Yongxin Plant. Ebitda from GI rose to RMB276 million in 2018, about 56% of the company’s total for the year.
The company will continue with investments in GI, ramping up utilisation and adding capacity to existing projects, completing two new projects under construction as well as evaluating pipeline projects. Sunpower has invested-committed some RMB1.34 billion in equity investments so far, which are expected to total RMB2.5 billion by 2021. Hence, we expect to see revenue and earnings growth, plus rising average margin over time as GI accounts for a larger share of total earnings.
On the other hand, share prices for Nine Dragons fell after reporting sharply lower profits y-y for 1HFYJune2019. Net profit fell to RMB2.26 billion, almost halved from the RMB4.33 billion in the previous corresponding period.
The results were not wholly unexpected as profit margins normalised. Recall that margins in 2018 shot up due to shortage of domestic old corrugated cardboard (OCC) after the government tightened purity requirements for imported scrap and cracked down on small polluting paper plants.
Nine Dragons also reported higher operating costs, including that related to newly acquired pulp mills in the US. It was not able to pass on these costs amid demand weakness due to de-stocking activities and China’s economic slowdown. We think upside gains for Nine Dragons could be limited in the near-term although valuations remain attractive for the leading containerboard manufacturer in China.
Meanwhile, there were some solid 4Q2018 results for Malaysian companies including for those in my portfolio, Dialog, HL Industries, Ajinomoto and SAM. Generally though it was another weak quarter of earnings and we are seeing quite a few cutbacks in market earnings forecast. It could get worse.
That said, expectations have been lowered going into this latest reporting season. So, the disappointment was less severe. The FBM KLCI fell 0.8% for the week ended Thursday.
Earnings for consumer companies remain relatively resilient and car assemblers are recovering, aided by last year’s tax-free months. But the downturn in infrastructure activities and property sales is filtering through earnings for construction, materials and property companies. Margins are dropping on the back of lower utilisation with rising risks of impairments for assets and receivables.
Falling margins on the back of rising costs remain a key issue for most of the companies. Amongst the index heavyweights, telcos are reporting dismal profits while plantation earnings are weighed down by rising stockpile and weak prices. The nation’s biggest bank, Maybank reported record earnings for 2018 but was cautious on future loans growth and expects net interest margin to narrow this year.
The Global Portfolio was up 1.6% last week, boosted by gains from Sunpower and Alibaba. This pared total portfolio losses (since inception) to just 1.7%. Over the same period, the MSCI World Net Return Index is up 1.7%.
Stocks on the Bursa Malaysia ended in the red for four of the past five trading days. Profit taking was evident following gains in the previous week. Sentiment was also dampened with the current reporting season failing to beat expectations, on average.
Total portfolio returns now stand at 54.2% since inception. The portfolio continues to outperform the benchmark index, FBM KLCI, which is still down 6.7%, by a long way.
Performance Comparison Since Inception (%)
- Tong's Value Investing Portfolio
- FBM KLCI
| SHARES HELD | QUANTITY | AVERAGE COST | COST OF INVESTMENT | CURRENT PRICE | CURRENT VALUE | GAIN / (LOSS) | GAIN / (LOSS) |
|---|---|---|---|---|---|---|---|
| SCGM BHD | 11,066 | 1.732 | 19,218.4 | 1.190 | 13,168.5 | (6,049.8) | (31.5%) |
| AJINOMOTO (M) BHD | 1,500 | 11.813 | 17,720.0 | 18.640 | 27,960.0 | 10,240.0 | 57.8% |
| PANASONIC MANUFACTURING MSIA | 600 | 26.157 | 17,182.0 | 38.100 | 22,860.0 | 5,678.0 | 33.0% |
| Y.S.P.SOUTHEAST ASIA HOLDING | 10,500 | 2.413 | 25,340.0 | 2.900 | 30,450.0 | 5,110.0 | 20.2% |
| FORMOSA PROSONIC INDUSTRIES | 18,000 | 1.540 | 27,720.0 | 1.810 | 32,580.0 | 4,860.0 | 17.5% |
| HONG LEONG INDUSTRIES BHD | 2,000 | 9.126 | 18,251.0 | 9.920 | 19,840.0 | 1,589.0 | 8.7% |
| MALAYAN BANKING BHD | 3,000 | 10.250 | 30,750.0 | 9.530 | 28,590.0 | (2,160.0) | (7.0%) |
| ECO WORLD DEVELOPMENT GROUP BERHAD | 15,200 | 1.235 | 18,772.0 | 0.950 | 14,440.0 | (4,332.0) | (23.1%) |
| DIALOG GROUP BHD | 5,700 | 3.452 | 19,676.4 | 3.230 | 18,411.0 | (1,265.4) | (6.4%) |
| SAM ENGINEERING & EQUIPMENT | 3,000 | 7.380 | 22,140.0 | 8.100 | 24,300.0 | 2,160.0 | 9.8% |
| POH HUAT RESOURCES HOLDINGS | 13,000 | 1.490 | 19,370.0 | 1.580 | 20,540.0 | 1,170.0 | 6.0% |
| SUPERLON HOLDINGS BHD | 15,000 | 1.300 | 19,500.0 | 1.300 | 19,500.0 | 0.0 | 0.0% |
| Total | 255,639.8 | 272,639.5 | 16,999.8 | 6.7% | |||
| Shares bought | |||||||
| No transaction. | |||||||
| Total shares held | 255,639.8 | 272,639.5 | 16,999.8 | 6.7% | |||
| Shares sold | |||||||
| No transaction. | |||||||
| Cash Balance | 35,690.3 | ||||||
| Realised Profits / (Losses) | 91,330.0 | ||||||
| Change since last update Feb 21, 2019 | |||||||
| Portfolio | (1.2%) | ||||||
| FBMKLCI | (1.3%) | ||||||
| Portfolio Returns Since Inception | 200,000.00 | 308,329.8 | 108,329.8 | 54.2% | |||
| Portfolio Returns (Annualised) | 12.3% | ||||||
| Portfolio Beta | 0.661 | ||||||
| Risk Adjusted Returns Since Inception | 81.9% | ||||||
| Performance Comparison | At Portfolio Start | Current | Change | Relative Portfolio Outperformance | |||
| FBM KLCI | 1,829.7 | 1,707.7 | (6.7%) | 60.8% | |||
| FBM Emas | 12,700.4 | 11,826.7 | (6.9%) | 61.0% | |||
Footnote:
*Current price is as at February 28, 2019.
*Portfolio started on Oct 10, 2014 with MYR200,000.
*This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks.
*Current price is as at February 28, 2019.
*Portfolio started on Oct 10, 2014 with MYR200,000.
*This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks.
STOCKS SOLD IN THE LAST 12 MONTHS (Currency: MYR)
| SHARES SOLD | DATE BOUGHT | DATE SOLD | QUANTITY | AVERAGE COST | COST OF INVESTMENT | PRICE SOLD | SALES PROCEEDS | GAIN / (LOSS) | GAIN / (LOSS) |
|---|---|---|---|---|---|---|---|---|---|
| PANASONIC MANUFACTURING MSIA | 21-Jan-16 | 27-Jul-17 | 400 | 26.125 | 10,450.0 | 37.100 | 14,840.0 | 4,390.0 | 42.0% |
| ELSOFT RESEARCH BHD | 30-Mar-17 | 24-Aug-17 | 8,000 | 1.844 | 14,750.0 | 2.650 | 21,200.0 | 6,450.0 | 43.7% |
| JOHORE TIN BERHAD - WA 12/17 | 04-May-17 | 24-Aug-17 | 17,000 | 0.655 | 11,135.0 | 0.680 | 11,560.0 | 425.0 | 3.8% |
| FOCUS LUMBER BERHAD | 03-May-17 | 30-Aug-17 | 6,000 | 1.660 | 9,960.0 | 1.530 | 9,180.0 | (780.0) | (7.8%) |
| WILLOWGLEN MSC BHD | 23-Nov-16 | 30-Aug-17 | 7,000 | 0.768 | 5,377.0 | 1.430 | 10,010.0 | 4,633.0 | 86.2% |
| WILLOWGLEN MSC BHD | 23-Nov-16 | 28-Sep-17 | 7,000 | 0.770 | 5,377.0 | 1.180 | 8,260.0 | 2,883.0 | 53.6% |
| LII HEN INDUSTRIES BHD | 14-Dec-16 | 28-Sep-17 | 5,000 | 2.820 | 14,100.0 | 3.720 | 18,600.0 | 4,500.0 | 31.9% |
| COMFORT GLOVES BERHAD | 28-Aug-17 | 08-Dec-17 | 25,000 | 0.960 | 24,000.0 | 0.930 | 23,250.0 | (750.0) | (3.1%) |
| JOHORE TIN BHD | 08-May-17 | 08-Dec-17 | 9,000 | 1.600 | 14,400.0 | 1.180 | 10,620.0 | (3,780.0) | (26.3%) |
| THONG GUAN INDUSTRIES BHD | 12-Dec-16 | 08-Dec-17 | 5,000 | 4.243 | 21,215.0 | 4.100 | 20,500.0 | (715.0) | (3.4%) |
| KERJAYA PROSPEK GROUP BERHAD | 12-Jan-17 | 15-Mar-18 | 11,000 | 1.025 | 11,280.0 | 1.540 | 16,940.0 | 5,660.0 | 50.2% |
| KERJAYA PROSPEK GROUP BERHAD - WARRANTS B 2018/2023 | 08-Mar-18 | 15-Mar-18 | 3,000 | 0.000 | 0.0 | 0.330 | 990.0 | 990.0 | - |
| LUXCHEM CORPORATION BHD | 30-Aug-17 | 15-Mar-18 | 16,500 | 0.732 | 12,072.5 | 0.720 | 11,880.0 | (192.5) | (1.6%) |
| WILLOWGLEN MSC BHD | 14-Dec-17 | 22-Mar-18 | 20,000 | 1.010 | 20,200.0 | 1.260 | 25,200.0 | 5,000.0 | 24.8% |
| MUAR BAN LEE GROUP BERHAD | 26-Oct-17 | 22-Mar-18 | 13,500 | 1.240 | 16,740.0 | 1.170 | 15,795.0 | (945.0) | (5.6%) |
| CHOO BEE METAL INDUSTRIES BHD | 07-Sep-17 | 16-May-18 | 8,000 | 2.190 | 17,520.0 | 2.440 | 19,520.0 | 2,000.0 | 11.4% |
| CHOO BEE METAL INDUSTRIES BHD | 07-Sep-17 | 21-May-18 | 8,000 | 2.190 | 17,520.0 | 2.300 | 18,400.0 | 880.0 | 5.0% |
| SUPERLON HOLDINGS BHD | 01-Dec-17 | 21-May-18 | 6,000 | 1.175 | 7,050.0 | 1.550 | 9,300.0 | 2,250.0 | 31.9% |
| OKA CORPORATION BHD | 14-Dec-17 | 28-Jun-18 | 12,000 | 1.541 | 18,488.0 | 1.270 | 15,240.0 | (3,248.0) | (17.6%) |
| SUPERLON HOLDINGS BHD | 01-Dec-17 | 28-Jun-18 | 6,000 | 1.175 | 7,050.0 | 1.210 | 7,260.0 | 210.0 | 3.0% |
| WILLOWGLEN MSC BHD | 14-Dec-17 | 28-Jun-18 | 100 | 0.500 | 50.0 | 0.540 | 54.0 | 4.0 | 8.0% |
| PANTECH GROUP HOLDINGS BHD | 17-May-18 | 02-Aug-18 | 43,000 | 0.580 | 24,940.0 | 0.560 | 24,080.0 | (860.0) | (3.4%) |
| KERJAYA PROSPEK GROUP BERHAD | 10-Jan-17 | 06-Sep-18 | 11,000 | 1.020 | 11,225.0 | 1.400 | 15,400.0 | 4,175.0 | 37.2% |
| LUXCHEM CORPORATION BHD | 25-Aug-17 | 06-Sep-18 | 16,500 | 0.717 | 11,825.0 | 0.655 | 10,807.5 | (1,017.5) | (8.6%) |
| HOCK SENG LEE BHD | 19-Apr-18 | 06-Sep-18 | 14,500 | 1.520 | 22,033.0 | 1.370 | 19,865.0 | (2,168.0) | (9.8%) |
| GENTING MALAYSIA BERHAD | 06-Sep-18 | 28-Nov-18 | 3,800 | 5.070 | 19,266.0 | 3.060 | 11,628.0 | (7,638.0) | (39.6%) |
| TOP GLOVE CORPORATION BHD | 06-Sep-18 | 06-Dec-18 | 3,600 | 5.500 | 19,800.0 | 6.030 | 21,708.0 | 1,908.0 | 9.6% |
| MAH SING GROUP BHD | 28-Jun-18 | 14-Jan-19 | 19,000 | 1.005 | 19,095.0 | 0.930 | 17,670.0 | (1,425.0) | (7.5%) |
| WILLOWGLEN MSC BHD | 14-Dec-17 | 14-Feb-19 | 19,900 | 0.500 | 9,900.0 | 0.464 | 9,236.0 | (714.0) | (7.2%) |
A Note to Readers
It is my pleasure to share with you my Value Investing Portfolio. However, I must emphasize that it is by no means a recommendation or a solicitation or expression of views to influence you to buy or sell any stocks. I am just sharing openly on what I am doing with my stock portfolio.
Further, I like to remind all investors that investing is not just about the profits or returns. You will inevitably suffer stock losses too. You need to understand your own investment objective, risk appetite and the amount of loss you can afford to bear. So, while many investors talk only about absolute returns, I am also sharing the computed risk-weighted returns of my portfolio.
Tong Kooi Ong
