Further Analysis of Malaysia Smelting Corporation Berhad

The author published the analysis report here is for his own reference only. It is not an indication of the author's business interests for companies being analyzed. It is definitely not an investment advice, please see the full disclaimer located at the bottom of the blog post.

Malaysia Smelting Corporation Berhad's (hereafter called "MSC") principal activities including the smelting of tin concentrates and tin bearing materials, the production of various grades of refined tin metal under the MSC brand name and the sales and delivery of refined tin metal and by-products.This analysis report is continuation of previous blog post titled "Malaysia Smelting Corporation vs. Perusahaan Sadur Timah Malaysia (PERSTIMA)". Let's start looking into detail of the company.

Company Events
In 2007, MSC adopted the following diversification plans:

• In March 2007, a wholly-owned subsidiary PT MSC Indonesia, acquired a 60% equity interest in PT Tenaga Anugerah for a total cash consideration of RM411,000 (USD120,000). The intended principal activity of the newly acquired subsidiary is to carry on offshore mining operations in Indonesia. Incurred RM123,000 loss for the year.
• On 18 September 2007, the Company entered into an Underwriting Agreement with its associate, Australia Oriental Minerals NL (AOM) relating to its renounceable rights issue exercise. Upon completion of the exercise in October 2007, the Company had subscribed for a total of 226,863,490 new shares amounting to approximately RM5.5 million (AUD 1.8 million) and the Company's direct shareholding in AOM has increased from 39.45% to 49.11%. Profit for the year RM1,846,000; Loss in 2006 RM2,296,000.
• The Group has a 40% equity interest in Redring Solder (M) Sdn Bhd. Redring Solder's principal activities are the manufacture and sale of both the tin lead and lead free solder products for jointing and semi-conductor applications in the electrical and electronic industries.
• In October 2007, MSC entered into a joint venture agreement with Guangxi Guilin Jinwei Realty Co. Ltd and Vertex Metals incorporation of Taiwan to enable it to own and operate a tin smelting plant in the Guangxi province. The Company's stake in this joint venture is 40%. The smelting plant is located in Linqui, Guangxi and is expected to have a targeted annual production capacity of 10,000 tonnes of refined tin and tin based products, including tin chemicals and is projected to commence operations in the second quarter of 2008.
• In December 2007, MSC acquired a strategic interest in a nickel development project in Vietnam through the subscription of 12.8% shares in the Canadian listed Asian Mineral Resources Limited (AMR) with provision to increase is shareholding further up to 18.96%. AMR's nickel project offers high grade massive sulphide nickel deposit which is being developed to become low cost nickel producer with a short lead time to production and is expected to commence in early 2009.
• In March 2008, MSC chalked up another historic milestone following its strategic entry into the gold sector with the acquisition of 18.9% interest in Beaconsfield Gold NL, a company listed on the Australian Securities Exchange. Beaconsfield is a mid-tier gold producer operating a high grade underground gold mine in Tasmania, Australia.

(All items above are taken from MSC's 2007 Annual Report)

• In April 2008, the Group proposed acquisition of a 30% interest in a high grade polymetallic copper, gold, zinc and silver project in the Philippines at an estimated cost of approximately USD18.9 million pursuant to a strategic alliance agreement with LG International Corp and Korea Resources Corporation.
• In July 2008 the Company, jointly with its 42.7% Australian listed associated
  company, Australia Oriental Minerals NL (AOM) announced the acquisition
  of a strategic 30% interest by the Company and AOM respectively in a coal
  development project in Kalimantan, Indonesia for a cash consideration of
  USD6.75 million for the 30% equity interest each. The capital required for
  this coal project was originally planned to be financed from the proposed
  rights issue. With the deferment of the proposed capital raising the Company
  and AOM will limit the investment at the existing level.
• In July to August 2008, MSC subscribed for 7 million right issue shares and underwrote another 13 million shares to increase its shareholding to 90 million shares, representing 22.48% of the enlarged paid up capital of BCD.
  

(All items above are taken from MSC's 2008 Annual Report)

Let's look at the effect of the diversification plans to the bottom line of the company in recent years:

Oops! The diversification plans drag the company's bottom line down to the bloody red in 2008 and 2010, and barely profitable in 2009. What happened in these years and what's wrong with the diversification strategy? Please see the following items:

• The Group incurred a pre-tax loss of RM28.16 million for the financial year 2008 compared with a pre-tax profit of RM120.99 million in 2007 mainly due to
  the RM55.29 million unusual charges (impairment charge and write-offs of its mining assets and its exploration and development expenses.) and RM28.98 million exchange loss.
  
• Development and construction of high grade nickel sulphide project in Vietnam by the Group's 18.20% Canadian listed associate, Asian Mineral Resources Limited was suspended in October 2008 due to the downturn in nickel prices and consequently certain losses were equity accounted in the Group's results for the year.
  
• At the Group's 22.48% listed gold associate in Australia, Beaconsfield Gold NL, development and turn-around expenses written down in 2008 further affected the Group's overall results for the year. Beaconsfield managed to achieve a successful turnaround and returned positive results in January 2009.

(All items above are taken from MSC's 2008 Annual Report)

• Consequent upon a decision made in 2009 to reposition the Group to focus on its original core business of tin, MSC has initiated a programme to divest some of the Group's non-tin investments and assets.The Group's non-tin investments comprise 22.12% interest in a listed gold and copper associate in Australia, BCD Resources NL; a 18.22% interest in a Canadian listed nickel associate, Asian Mineral Resources Limited; a 30% interest in a polymetallic mine (producing copper, zinc, gold and silver in concentrates) in the Philippines; a 76.91% Australian listed subsidiary, Australia Oriental Minerals NL (AOM); and a 53% effective interest in a coal development project in Indonesia.
• PT MSC Indonesia and the Company's 40% associate, PT Tenaga Anugerah, commenced tin mining operations during the second half of the year, with one gravel pump mine operating in Bangka Island and three cutter-suction dredges for offshore operations. The Group expects to commence generating positive results from these operations in the first half of 2010.
• The Company's joint-venture company named Guilin Hinwei Tin Co. Ltd for smelting and refining of tin, and the production and sale of tin and tin-based products in the People's Republic of China has not made much progress as GGJR has not been able to fulfill certain obligations within the specific time frame.
  

(All items above are taken from MSC's 2009 Annual Report)

• Rationalisation efforts were undertaken in respect of the Group's other tin interests held through its subsidiary, PT MSC, which is developing on-shore tin operations in Indonesia, and its 18.54% interest investment in TMR Ltd/PT Tenaga Anugerah (PT TA) which undertakes off-shore tin mining operations in Indonesia. These investments are expected to generate positive results in 2011.
• The divestment of the Group's interest in BCD was completed and the Group ceased to be a shareholder.
• AMR has been actively pursuing equity and debt funding to complete the nickel mine development project in Vietnam. Pending the conclusion of the proposed fund raising exercise, MSC will continue to evaluate its options on how best to maximize its value by divesting its investment in AMR.
• The agreement for the sale of the coal development project in Indonesia has been executed and the disposal is expected to be completed in the first half of 2011.
• The divestment of the Group's interest in KM Resources Inc may take a bit longer than expected. As a result of rising copper, gold, silver and zinc prices, the valuation of KM Resources Inc has also risen and MSC is seeking to enhance shareholder value by ensuring it sells the project at prices reflecting this increase in value.
  
• After providing for exceptional items totalling RM154.48 million, the Group recorded a loss before tax of RM78.46 million compared with a Group net profit before tax of RM109.84 million in 2009. The exceptional items mainly comprised the loss incurred on the disposal of investments in BCD and impairment provisions on the Group's non-tin assets. The 2009 net profit included a surplus of RM65 million on the valuation of the Group's interest in KM Resources Inc.
• On January 27, 2011, MSC listed in secondary listing on the Singapore Stock Exchange, a total of 25 million new shares was issued, raising the enlarged issued and paid up share capital of MSC to RM100 million, comprising 100 million MSC shares. Total proceeds of approximately SGD43.75 million (equivalent to RM104 million) will be used mainly for development of new mines and the balance for expansion of current operations and general working capital.

(All items above are taken from MSC's 2010 Annual Report)

From all items above, it was clear that the adoption of the diversification plans is a mistake. Fortunately, a decision made by management in 2009 to reposition the Group to focus on its original core business of tin, the Group has initiated a programme to divest the Group's non-tin investments and assets.

It is anticipated that the Group will take at least 5 years from 2009 to complete this divestment plans to unlock the investments and provisions, normalize the level of gearing and better use of capital resources of the company.

Tin Industrial Usages and Applications

Diagram above is taken from London Metal Exchange

For more information, please see Tin's Application and Future Markets for Tin section of MSC's 2010 annual report at page 41 to 44.

Tin Historical and Future Price

Tin price of cash seller and settlement graph above is taken from London Metal Exchange

From the graph above, you can see the current market price of tin is far from the peak of early 2011 and slightly below the peak of mid 2008. In worst time, the tin price can fall down to US$10,000 approximately as it happened in early 2007 and 2009. This indicated fluctuation of tin price is high.

Table above is taken from London Metal Exchange

From the table above, tin futures of 3 months and 15 months traded at price higher than current price (Cash). This is the indication of growth potential of tin's market price.

In conclusion, I think the tin price is in upward trend. Unless the debt crisis of euro zone explode to critical stage in 2012, this trend should be continue.

How Much MSC Worth?
It is challenging to value MSC properly given the Group's bumpy results in recent years. I will attempt to value it using much conservative numbers.

Given the company CAGR of EPS is 12% (approximately 12.09% in the past 5 years) and Dividend Per Share is 10% in the next 10 years, the EPS of the company will be RM$1.118 in 2021 (included adjustment of 2 bad years in 10 which reduce 40% of group's net profit) and the forecast dividends received over the 10 years period totaling RM$2.78 (included adjustment of 2 bad years). Please take note that the 2011 EPS is RM$1.00 (at least 25% discount from expected) and 2011 Dividend is RM$0.30 is used in the calculation.

If the stock price of MSC sell at 5 times earning in 2021, it is RM$5.59 and included total dividends received, it is RM$8.37 per share. Given annual 6% inflation rate in next 10 years, the discounted rate is 0.591898. So, RM$8.37 discounted to today price, it is RM$4.95 per share.

The discounted price is 19% higher than yesterday (27 December 2011) closing price RM$4.01. In my opinion, the stock is in bargain, what do you think?

Malaysia Smelting Corporation vs. Perusahaan Sadur Timah Malaysia (PERSTIMA)

The author published the analysis report here is for his own reference only. It is not an indication of the author's business interests for companies being analyzed. It is definitely not an investment advice, please see the full disclaimer located at the bottom of the blog post.

Malaysia Smelting Corporation Berhad's (hereafter called "MSC") principal activities including the smelting of tin concentrates and tin bearing materials, the production of various grades of refined tin metal under the MSC brand name and the sales and delivery of refined tin metal and by-products. Perusahaan Sadur Timah Malaysia (PERSTIMA) Berhad's (hereafter called "PERSTIM") principal activities including operation related to the manufacturing and sale of tinplates and tin free steel.

Side-by-side Comparison

MSC's data is from latest quarterly unaudited report 3Q of 2011, PERSTIM's data is from 2011 annual report

Capitalization
Measure by size, both companies are similar, MSC is slightly bigger than PERSTIM, 23 millions approximately.

Income Items
Important items under this section is per share earnings and dividend, MSC earnings are beating PERSTIM except the Average Earned per share, 2009-2011, as it experienced significant loss in 2010 which drag it dividend down to 0.023 per share. The winner of dividend payment is PERSTIM.

Balance Sheet Items
PERSTIM has very solid balance sheet, Cash or cash equivalents is almost enough cover the Current liabilities and even the Total liabilities. Current assets is more than enough cover the Total liabilities. Even MSC has much higher Liquidity per share, 2.41 compared to PERSTIM, 0.76,  this advantage is offset by it's high Current liabilities, 749 millions.

Ratios
Price-wise, MSC is more attractive at the moment given it sell at lower multiple of earnings currently except Price/earnings, 2009-2011, but it is questionable whether it's current earning momentum is sustainable (more study need to be done). The main concern of MSC is it's level of gearing is comparably high, which recorded 1.83 times. This concern maybe less worrisome as it fully covered by Current Assets where 235.1 millions is Cash or cash equivalents.

PERSTIM is selling at higher valuation at the moment, but it is understandable and reasonable as it has much better number than MSC in all items under this section especially Dividend yield, 8.09%. An exception is it achieved slightly lower return measured by Earnings/book value per share.

PERSTIM has steady earning growth rate in both near-term and long-term. These numbers is not applicable to MSC as it experienced significant loss in 2010.

Price Record
PERSTIM has slightly higher price growth rate in the long-term where MSC has slightly higher price growth rate in the near-term.

Financial Summary

MSC's Financial Summary

By looking into detail of the financial summary of MSC, it experienced 2 bad years out of 5, which is 2008 and 2010. The results in these two years greatly distort the growth numbers and average numbers of the company and make some of these numbers not applicable and meaningless. However, it's 2011 Q3 results are promising which may worth the effort for further study and analysis.

PERSTIM's Financial Summary

PERSTIM has low historical growth record in the past 5 years, recorded Compounded Annual Growth Rate (hereafter called "CAGR") for 6.61% in sales, 6.85% in operating income, 7.1% in net income and earning per share. When look in the detail of growth records in year on year basis, it recorded negative growth rate in earnings in 3 out of 5 years. So, the earning growth of PERSTIM in past 5 years was very much flatten, if not negative. The bright spot in the financial summary is the company recorded 19.48% CAGR in dividend per share and 51.3% reduction of the total liabilities in 2010. A question come to mind is "Is the growth of dividend payment of PERSTIM sustainable?" To answer this question, let's look at a new item: Liquidity per share in the financial summary. I am confident that the company wouldn't have problem to maintain it's level of dividend payment in next 5 years as long as the CAGR of Liquidity per share grow in parallel with Dividend per share. The annual growth of dividend payment may not as high as 19%, but I think 10% annually growth is not a problem.

As conclusion, the ultimate winner of this comparison is PERSTIM.

How Much PERSTIM Worth?
Given the company CAGR of EPS is 7% (approximately 7.1% in the past 5 years) and Dividend Per Share is 8% in the next 10 years, the EPS of the company will be RM$0.636 in 2021 (included adjustment of 2 bad years in 10 which reduce 30% of group's net profit) and the forecast dividends received over the 10 years period totaling RM$3.00 (included adjustment of 2 bad years).

If the stock price of PERSTIM sell at 5 times earning in 2021, it is RM$3.18 and included total dividends received, it is RM$6.18 per share. Given annual 6% inflation rate in next 10 years, the discounted rate is 0.591898. So, RM$6.18 discounted to today price, it is RM$3.66 per share.

The discounted price is 1.34% lower comparing to today (23 December 2011) closing price RM$3.71. In my opinion, the stock is in fairly value, what do you think?

DKSH Holdings vs. Harrisons Holdings

The author published the analysis report here is for his own reference only. It is not an indication of the author's business interests for companies being analyzed. It is definitely not an investment advice, please see the full disclaimer located at the bottom of the blog post.

DKSH Holdings (Malaysia) Berhad's (hereafter called "DKSH") principal activities including general trading, warehousing, and distribution of consumer, pharmaceutical, bio-medical, chemical, and industrial products, and also sale of the Famous Amos chocolate chip cookies. Harrisons Holdings (Malaysia) Berhad's (hereafter called "HARISON") principal activities including marketing, sales and distribution of consumer, engineering, building materials, wines and chemical products and the operation of shipping, insurance and travel agencies.

Side-by-side Comparison

Capitalization
Measure by size, HARISON is slightly bigger than DKSH, 17 millions.

Income Items
Important items under this section is per share earnings and dividend, HARISON is the all-time winner for both per share earning and dividend.

Balance Sheet Items
HARISON have more solid balance sheet compared to DKSH, Liquidity per share is 1.67 and 0.84, where Book value per share is 3.97 and 1.11.

Ratios
By look at Price ratios, HARISON is much more attractive at the moment given it sell at lower multiple of earnings currently and historically and much higher current dividend yield.

HARISON advantages are higher profit margin and appropriate return on book value with adequate gearing as shown by Net income/sales and Total Liabilities/book value. DKSH's level of gearing might be a concern as it is recorded 5.18 times. 

HARISON has better historical earning growth rate compared to DKSH in both near-term and long-term.
 
Price Record
DKSH has much better historical price growth rate in near-term and slightly better in long-term compared to HARISON.

Financial Summary

DKSH's Financial Summary

By looking into detail of the financial summary of DKSH, it show better records in 2010 and 2009 except increase of total liabilities 115 millions, 14.57% in 2010. Record of past two years make the growth numbers look great compare to records of 2006 to 2008. The new management deserved a great applause by achieved a decent operating result (improve return of shareholding equity and profit margin significantly, at the same time reduce the gearing of the company).

HARISON's Financial Summary

HARISON has great historical growth record, recorded CAGR for 8.1% in sales and 21.58% operating income, 29.53% in net income and earning per share and 29.17% in dividend per share. The company CAGR on the previous mentioned items better than DKSH, except net income and earning per share which may due to DKSH start from a low base. Historically, HARISON is more conservative financially compare to DKSH, as it utilized more appropriate level of financial leverages (D/E ratio 76%) compared to DKSH (D/E ratio 517.53%). Even HARISON has much better return on average equity, 5 years averaging 11.4%, compared to DKSH 8%, but DKSH has slightly better return on average equity in 2010 and 2009. However, HARISON has much better return on average assets, 5 years averaging 6.23%, compared to DKSH 1.15%, which may due to it has smaller asset base. Even DKSH has lower operating overhead than HARISON, 5 years averaging 0.78%, HARISON still in the winning side as it 5 years average profit margin is much higher, 2.33% compared to 0.34% of DKSH.

As conclusion, HARISON is the ultimate winner in this comparison.

How Much HARISON Worth?
Given the company CAGR of EPS is 15% (approximately 29.5% in the past 5 years) and Dividend Per Share is 12% in the next 10 years, the EPS of the company will be RM$1.074 in 2021 (included adjustment of 2 bad years in 10 which reduce 30% of group's net profit) and the forecast dividends received over the 10 years period totaling RM$1.85 (included adjustment of 2 bad years).

If the stock price of HARISON sell at 5 times earning in 2021, it is RM$5.37 and included total dividends received, it is RM$7.22 per share. Given annual 6% inflation rate in next 10 years, the discounted rate is 0.591898. So, RM$7.22 discounted to today price, it is RM$4.27 per share.

The discounted price is 19% higher comparing to yesterday (21 December 2011) closing price RM$3.46. The stock is in bargain! What do you think?

I'd love to hear comments from you!

Plenitude vs. Asas Dunia

The author published the analysis report here is for his own reference only. It is not an indication of the author's business interests for companies being analyzed. It is definitely not an investment advice, please see the full disclaimer located at the bottom of the blog post.

Plenitude Berhad's (hereafter called "PLENITU") principal activities including property development, property investment and investment holding, provision of management services for hotel industry and travel operations and trading of construction materials. Asas Dunia Berhad's (hereafter called "ASAS") principal activities including property development, building construction, investment holding and property investment.

Side-by-side Comparison

Capitalization
Measure by size, PLENITU is more than double the size of ASAS, 518.4 millions and 228.93 millions

Income Items
Important items under this section is per share earnings and dividend, PLENITU is the all-time winner for both per share earning and dividend.

Balance Sheet Items
PLENITU have much solid balance sheet compared to ASAS, Cash or cash equivalents is double the total liabilities, it is a cash-rich company which liquidity per share is 1.24 and cash available after pay off all liabilities is 169.38 millions (0.63 per share).

Ratios
By look at price ratios, PLENITU is much more attractive at the moment given it sell at lower multiple of earnings currently and historically and higher current dividend yield.

PLENITU advantages are higher profit margin and much higher return on book value as shown by Net income/sales and Earnings/book value per share. Even PLENITU has higher gearing compared to ASAS, it is not a concern at all as the company's cash is more than enough to pay off all liabilities.

PLENITU has much better earning growth rate compared to ASAS, 60.36% and 25.89%.
 
Price Record
PLENITU and ASAS has comparable growth rate in near-term price record, but PLENITU achieved better growth in long-term.

Financial Summary 

PLENITU's Financial Summary

By looking into detail of the financial summary of PLENITU, it show a steady historical growth records, recorded Compounded Annual Growth Rate (hereafter called "CAGR") for 7% in sales and operating income, 12% in net income and earning per share, and 8% in dividend per share. It achieved this steady result with minimal financial leverages and minor increment of total liabilities. Both return on average equity and assets are moderate, but satisfactory. I particularly like the low operating overhead attribute of the company (5 years average 7.01%) shown by narrow margin of Operating Income/Sales and Net Income/Sales.

ASAS's Financial Summary

ASAS has great historical growth record too, recorded CAGR for 12% in sales and 25% operating income, 33% in net income and earning per share. The company CAGR on the previous mentioned items better than PLENITU, but the loser is dividend payment, the company pay 2 dividends of similar amount out of 5 years. Historically, ASAS is more conservative financially compare to PLENITU, as it utilized minimal financial leverages (D/E ratio is less than 15%) compared to PLENITU, this may due to the company is short of liquidity. However, both return on average equity and assets are low, 5 years averaging 2.8% and 2.4%. Even the company have lower operating overhead than PLENITU, 5 years averaging 2.35%, PLENITU still in the winning side as it 5 years average profit margin is higher, 25.3% compared to 19.3% of ASAS.

As conclusion, the ultimate winner of this comparison is PLENITU.

How Much PLENITU Worth?
Given the company CAGR of EPS is 10% (approximately 12.2% in the past 5 years) and Dividend Per Share is 8% in the next 10 years, the EPS of the company will be RM$0.422 in 2021 (included adjustment of 2 bad years in 10 which reduce 30% of group's net profit) and the forecast dividends received over the 10 years period totaling RM$0.80 (included adjustment of 2 bad years).

If the stock price of PLENITU sell at 8 times earning in 2021, it is RM$3.37 and included total dividends received, it is RM$4.17 per share. Given annual 6% inflation rate in next 10 years, the discounted rate is 0.591898. So, RM$4.17 discounted to today price, it is RM$2.47 per share.

The discounted price is 24.8% higher comparing to today (1 December 2011) closing price RM$1.98. The stock is in great bargain! What do you think?

I'd love to hear comments from you!

TDM vs. Glenealy Plantations

The author published the analysis report here is for his own reference only. It is not an indication of the author's business interests for companies being analyzed. It is definitely not an investment advice, please see the full disclaimer located at the bottom of the blog post.

TDM Berhad's (hereafter called "TDM") principal activities including management of oil palm plantation, processing and trading of palm oil and related products, also provision of consultancy and management services to specialist medical centres and owner of specialist medical centres. Glenealy Plantations (Malaya) Berhad's (hereafter called "GNEALY") principal activities including operation of oil palm plantations, oil mills and quarries.

Side-by-side Comparison

Capitalization
Measure by size, both companies are similar, TDM is slightly bigger than GNEALY, 77 millions approximately.

Income Items
Important items under this section is per share earnings and dividend, GNEALY is the all-time winner for per share earning, but TDM pay higher dividend.

Balance Sheet Items
Both companies have solid balance sheet, Cash or cash equivalents is more than enough cover the Current liabilities. Current assets is more than enough cover the Total liabilities. GNEALY is stronger financially as it's Cash or cash equivalents is more than enough cover the Total liabilities.

Ratios
Price-wise, TDM is more attractive at the moment given it sell at lower multiple of earnings currently and historically and much higher current dividend yield. TDM achieved higher return on book value, but with lower profit margin. TDM has much better earning growth rate compared to GNEALY, 381.9% and 103.6%.

GNEALY advantages are higher profit margin and much stronger balance sheet as shown by Net income/sales and Current assets/current liabilities. A question come to mind is ... Is the overwhelming availability of current assets of the company showing the incompetency of management in capital allocation? At the same time, the current dividend payout is less than 25% of earning and yielding much lower return compared to TDM.

Price Record
TDM has much higher growth rate in both the long-term and near-term price record, the growth of price is reflected the growth of earnings.

Financial Summary

TDM's Financial Summary

By looking into detail of the financial summary of TDM, it show an amazing historical growth records, more than 50% in operating income, net income, earning per share, dividend per share with an exception in financial year 2009. It achieved this great result with reduction in total liabilities every year in the past 5 years except financial year 2010. Both return on average equity and assets are moderate, but it perform better in the past 3 years. Every year the company have lower and lower utilization of financial leverages shown by D/E ratio. I particularly like the low operating overhead attribute of the company (5 years average 4.54%) shown by narrow margin of Operating Income/Sales and Net Income/Sales.

GNEALY's Financial Summary

GNEALY has great historical growth record too (more than 20% in operating income, net income, earning per share), but less appealing compared to TDM. Historically, GNEALY is more conservative financially compare to TDM, as it utilized minimal financial leverages (D/E ratio is less than 30%) compared to TDM. But this advantage is disappear compare to recent record of TDM as it achieved D/E ratio 28.5%. Also, the company have much higher operating overhead, 5 years averaging 14.59%, 10% higher than TDM.

As conclusion, the ultimate winner of this comparison is TDM.

How Much TDM Worth?
Given the company CAGR of EPS is 20% (approximately 56.1% in the past 5 years) and Dividend Per Share is 15% in the next 10 years, the EPS of the company will be RM$0.635 in 2020 (included adjustment of 2 bad years in 10 which reduce 50% of group's net profit) and the forecast dividends received over the 10 years period totaling RM$1.30 (included adjustment of 2 bad years).

If the stock price of TDM sell at 10 times earning in 2021, it is RM$6.35 and included total dividends received, it is RM$7.65 per share. Given annual 6% inflation rate in next 10 years, the discounted rate is 0.591898. So, RM$7.65 discounted to today price, it is RM$4.52 per share.

The discounted price is 31.1% higher comparing to today (25 November 2011) closing price at RM$3.45. The stock is a great bargain! What do you think?

I'd love to hear comments from you!

BLD Plantation vs. Kwantas Corporation

The author published the analysis report here is for his own reference only. It is not an indication of the author's business interests for companies being analyzed. It is definitely not an investment advice, please see the full disclaimer located at the bottom of the blog post.

BLD Plantation Berhad's (hereafter called "BLDPLNT") principal activities including operation of a palm oil refinery and kernel crushing plant, cultivation of oil palm, processing of fresh fruit bunches and sales of related products. Kwantas Corporation Berhad's (hereafter called "KWANTAS") principal activities including operation of oil palm plantations, palm oil mills, kernel crushing plant, palm oil refinery plant, shortening plants, oleochemical plants, biomass power plant, bulking installation and trading of palm oils and fats products.

Side-by-side Comparison

Capitalization
Measure by size, both companies are similar, KWANTAS is slightly bigger than BLDPLNT, 43 millions approximately.

Income Items
Important items under this section is per share earnings and dividend, BLDPLNT is the all-time winner.

Balance Sheet Items
BLDPLNT has much stronger and healthier balance sheet compared to KWANTAS.

Ratios
On the first glance, KWANTAS is more attractive by looking at Price/earnings ratio, given 5.41 times earning. But it is not the case when look into the following items:

1. Price/earnings, 2009-2011: BLDPLNT has more appropriate valuation compared to KWANTAS, 11.42 times earning and 38.6 times earning.
   
2. Current assets/current liabilities: BLDPLNT has adequate level of working capital, where KWANTAS was at alarming level, short of 30%.
   
3. Earning growth per shares: Both near-term and long-term of earning growth of KWANTAS is negative.
   

Price Record
The current price level of BLDPLNT reaching it record level since it listed in 2003, where KWANTAS at the low end of it's historical price level.

As conclusion, the winner of this comparison is BLDPLNT.

Financial Summary

BLDPLNT's Financial Summary

By looking into detail of the financial summary of BLDPLNT, it show a amazing historical growth records with one exception in financial year 2009.

The recent return on average equity (hereafter called "ROAE") is in appropriate level, but return on average asset (hereafter called "ROAA") and profit margin is in single digit. I think this is due to the company involved in trading business.

How Much BLDPLNT Worth?
Given the company CAGR of EPS is 20% (approximately 37.4% in the past 5 years) and Dividend Per Share is 10% in the next 10 years, the EPS of the company will be RM$1.104 in 2020 (included adjustment of 2 bad years in 10 which reduce 50% of group's net profit) and the forecast dividends received over the 10 years period totaling RM$0.98 (included adjustment of 2 bad years).

If the stock price of BLDPLNT sell at 10 times earning in 2021, it is RM$11.04 and included total dividends received, it is RM$12.02 per share. Given annual 6% inflation rate in next 10 years, the discounted rate is 0.591898. So, RM$12.02 discounted to today price, it is RM$7.11 per share.

The discounted price is merely 4.14% higher comparing to today (24 November 2011) closing price RM$6.83. I don't think the stock is undervalued, what do you think?

I'd love to hear your comments!

Kumpulan Fima vs. Fima Corporation

The author published the analysis report here is for his own reference only. It is not an indication of the author's business interests for companies being analyzed. It is definitely not an investment advice, please see the full disclaimer located at the bottom of the blog post.

Kumpulan Fima Berhad's (hereafter called "KFIMA") principal activities including production and trading of security and confidential documents, oil palm cultivation including oil palm production and processing, bulk handling and storage of various types of liquid and semi-liquid products and manufacture and distribution of canned fish. Fima Corporation Berhad's (hereafter called "FIMACOR") principal activities including production and trading of security and confidential documents and oil palm cultivation including oil palm production and processing. KFIMA is control entity of FIMACOR, 61.92% shareholdings at financial ended 31 March 2011.

Side-by-side Comparison

 

Capitalization
Measure by size, both companies are similar, FIMACOR slightly bigger than KFIMA, 43 millions approximately.

Income Items
Important items under this section is per share earnings and dividend, FIMACOR is the all-time winner.

Balance Sheet Items
Both companies have a strong balance sheet and are cash-rich company as Cash or cash equivalents is more than enough to pay off all liabilities of the company.

Ratios
Given market price on 31 March 2011, both companies has similar level of valuation, following items catch my eye ball:

1. Net income/sales: FIMACOR has larger profit margin than KFIMA, 10% extra. 
2. Earnings/book value per share: FIMACOR has better rate of return compared with KFIMA, 5% extra. 
3. Total liabilities/book value: More importantly, FIMACOR achieved the results above with lower gearing than KFIMA. 

Also, FIMACOR has better earning growth prospect than KFIMA in both near-term and long-term.

Price Record
FIMACOR has better long-term (2001-2011) price growth rate compared to KFIMA, but the near-term (2010-2011) price growth rate of both companies are similar.

Financial Summary

KFIMA's Financial Summary

FIMACOR's Financial Summary

By looking into detail of the financial summary of both companies, FIMACOR winning all measurements except dividend growth rate.

The 23.38% compounded annual growth rate (hereafter called "CAGR") of total liabilities of FIMACOR catch my attention, it was caused by acquisition happened on 2008 which doubling the total liabilities. This is not an issue as cash on hand of FIMACOR is more than enough to fully cover all liabilities.

As conclusion, the ultimate winner of this comparison is FIMACOR.

How Much FIMACOR Worth?
Given the company CAGR of EPS is 15% (approximately 30.23% in the past 5 years) and Dividend Per Share is 10% in the next 10 years, the EPS of the company will be RM$1.958 in 2020 (included adjustment of 2 bad years in 10 which reduce 30% of group's net profit) and the forecast dividends received over the 10 years period totaling RM$1.67 (included adjustment of 2 bad years).

If the stock price of FIMACOR sell at 10 times earning in 2021, it is RM$19.58 and included total dividends received, it is RM$21.25 per share. Given annual 6% inflation rate in next 10 years, the discounted rate is 0.591898. So, RM$21.25 discounted to today price, it is RM$12.58 per share.

The discounted price is 119.5% higher comparing to today (22 November 2011) closing price RM$5.73! The stock is in great margin of bargain! What do you think?

QL Resources vs. Lay Hong

The author published the analysis report here is for his own reference only. It is not an indication of the author's business interests for companies being analyzed. It is definitely not an investment advice, please see the full disclaimer located at the bottom of the blog post.

In this analysis, two agricultural based companies: QL Resources Berhad (hereafter called "QL") and Lay Hong Berhad (hereafter called "LAYHONG") put side-by-side for comparison. QL and LAYHONG was not a direct competitor as QL's principal activities including marine product manufacturing, integrated livestock farming and crude palm oil milling, where LAYHONG's principal activity is integrated livestock farming only. Also, QL is substantial shareholder of LAYHONG, 23.91% shareholdings at financial ended 31 March 2011.

Side-by-side Comparison

Capitalization
Measure by size, QL is about 30 times larger than LAYHONG.

Income Items
Important items under this section is per share earnings and dividend, LAYHONG is the all-time winner except Avg. Earned per share 2005-2007.

Balance Sheet Items
QL has stronger balance sheet, albeit LAYHONG book value per share was 2.77 over QL's 0.95.

Ratios
Given market price on 31 March 2011, LAYHONG has much lower valuation than QL, what make QL has such high valuation?

1. QL has better earning power than LAYHONG, as illustrated by Net income/sales: 7.01% over 3.49% and Earnings/book value per share 15.75% over 10.64%.
2. QL has more appropriate and lower gearing (using less financial leverages) than LAYHONG, as illustrated by Total liabilities/book value, 0.85 over 1.33 and Current assets/current liabilities 1.47 over 0.96.

However, LAYHONG has much better earning growth prospect than QL, 1264.1% over 465.26%. A question come to mind is: Is the earning growth of LAYHONG sustainable? I will discuss this aspect under Financial Summary section below.

Price Record
The long-term (2001-2011) price different of QL is about 10 times and LAYHONG is about 5 times, QL has better price growth prospect in long-term. The near-term (2010-2011) price different of QL is about 2 times and LAYHONG is about 3 times, LAYHONG has better price growth prospect and expect higher price volatility in near-term.

Financial Summary

QL's Financial Summary

LAYHONG's Financial Summary

By looking into detail of the financial summary of both companies, you should understood why investment community giving QL such a high valuation: It demonstrated consistence earning power and average return on equity around 20%.

It is right that LAYHONG has much better return in the past three years, but I have no clue about LAYHONG's ability to maintain it's grow momentum as it's business was sensitive to grain price such as corn and soya. A hike in price of grain will eat up LAYHONG's 3.5% profit margin.

Please take note that QL increase it's weighted average shares year on year, but the increment mostly via share-split and bonus issue where increment of weighted average shares of LAYHONG via private placement and options exercised of Executive Share Options Scheme (ESOS).

As conclusion, the ultimate winner of this comparison is QL.

How Much QL Worth?
Given the company CAGR of EPS is 15% (approximately 18.46% in the past 5 years) and Dividend Per Share is 12% in the next 10 years, the EPS of the company will be RM$0.317 in 2020 (included adjustment of 2 bad years in 10 which reduce 30% of group's net profit) and the forecast dividends received over the 10 years period totaling RM$0.52 (included adjustment of 2 bad years).

If the stock price of QL sell at 15 times earning in 2021, it is RM$4.76 and included total dividends received, it is RM$5.28 per share. Given annual 6% inflation rate in next 10 years, the discounted rate is 0.591898. So, RM$5.28 discounted to today price, it is RM$3.13 per share.

The discounted price is merely 6.28% higher comparing to today (18 November 2011) closing price RM$2.93. I don't think the stock is undervalued at the moment, what do you think?

Analysis of TASCO Berhad

The author published the analysis report here is for his own reference only. It is not an indication of the author's business interests for companies being analyzed. It is definitely not an investment advice, please see the full disclaimer located at the bottom of the blog post.

Background Information From IPO Prospectus
TASCO Berhad (hereafter called "TASCO") listed in Bursa Malaysia on December 2007 is principally engaged as a total logistics solutions provider while its subsidiary companies are principally involved in the business of truck rental, in-house truck repair and maintenance, insurance agency services and warehouse rental as well as freight forwarding service providers and alliances with NYK Group for global logistics operation which comprises six core business divisions: Ocean, Air, Land, International Freight, Auto Logistics and International Network Solutions.

• Forecast of PE 7.43 times for FY 2008 based on EPS 14.8 cents.
• NTA per Share RM1.46 as at 31 August 2007
• Market Capitalization upon listing is RM110,000,000 based on RM1.10 issue price for 100,000,000 shares.
• Proceeds RM18.5 million mainly for the development of Bangi Logistics Centre to reduce storage constraints, lower down operation costs and enhance revenue, and acquisition of Port Klang Logistic Centre (PKLC) to strengthen market position as it contributed significantly Group's revenue and save on rental cost.

Operation Profit Margin (OPM)
In the latest annual report of TASCO, it's operation comprises the following six business divisions and two segments:

The international and domestic segment both have equal proportion on contribution to group's revenue of all reporting periods, but domestic segment contributed close to 80% operation profit in the recent years' financial result. It was understandable that the management focus on growing the domestic businesses as it has more stable operation profit margin compare to the international segment. However, as international segment is asset-light business, which required less capital commitment compare to domestic segment, the recent years' financial result may show that the management under-grow the business of this segment.

Financial Summary

The Compounded Annual Growth Rate (hereafter called "CAGR") of the Revenue of TASCO is average, 5.73%. Even with average growth of revenue, it still managed to achieve CAGR of Earning per share (hereafter called "EPS") about 18.9%. The management need to put more effort on growing revenue. The CAGR of Total Liabilities is about 13%, but it was still considered healthy as still achieve 6% margin compare to earnings growth rate.

Rate of Returns and Financial Leverages

TASCO achieved satisfactory of Return On Average Equity (hereafter called "ROAE"), average about 10% for the 5 years period, doing well especially in 2010, 12.2%. Return On Average Asset (hereafter called "ROAA") is moderate, in the range of 6.5% to 8.8%. The aspect which worth paying more attention is the financial leverages adopted by the company, which measured by Debt to Equity Ratio is below 40% except 2007, it show that the management is conservative on the use of financial leverages.

How Much It Worth?
Given the company CAGR of EPS is 10% (approximately 18.9% in the past 5 years) and Dividend Per Share is 6% in the next 10 years, the EPS of the company will be RM$0.26 in 2020 (included adjustment of 2 bad years in 10 which reduce 35% of group's net profit) and the forecast dividends received over the 10 years period totaling RM$0.77 (included adjustment of 2 bad years).

If the stock price of TASCO sell at 7.5 times earning in 2020, it is RM$1.97 and included total dividends received, it is RM$2.74 per share. Given annual 6% inflation rate in next 10 years, the discounted rate is 0.591898. So, RM$2.74 discounted to today price, it is RM$1.62 per share.

The discounted price is merely 4.58% higher comparing to today (25 October 2011) closing price RM$1.55. I don't think the stock is undervalued, what do you think?

Analysis of China Resources Power Holdings (CR Power)

The author published the analysis report here is for his own reference only. It is not an indication of the author's business interests for companies being analyzed. It is definitely not an investment advice, please see the full disclaimer located at the bottom of the blog post.

As outcome of analysis of top 4 china power producers (Part 1 and 2), the China Resources Power Holdings Co. Ltd. (hereafter called "CR Power") is shortlisted to perform further detail analysis.

Competitive Advantages
CR Power have following competitive advantages over it peers:-

1. The company is better position in improvement of fuel cost control from the acquired coal mines that operating toward full production mode. Even this may increase finance cost of the company, the acquisition of coal mines still making a good business sense as fuel cost carry more weight in the influence of profit.
   
2. Even the key business of the company was coal-fired power generation, it is aggressively expands into wind power generation in recent years and aimed to be the leading wind power producer in China. It was a strategic move as the cost of wind energy is declining steadily according to this report (but the construction cost of wind energy plant is sensitive to steel price as 80% of it's raw material comprised of steel).
   

Financial Summary

The Compounded Annual Growth Rate (hereafter called "CAGR") of the Revenue of CR Power is great, 49%. However, Total Liabilities is chasing the tail of Revenue, it's CAGR is 45%, grow moderately slower than Revenue. The good news is Total Liabilities grow at 5 years lowest rate, 25.73%. I expect the grow of liabilities will be stabilized over time with the aid of improvement of fuel (coal mines ownership) and finance cost control (issuance of corporate bonds with better rate compared to bank borrowing), as growing liabilities at 45% annually is unsustainable.

The CAGR of Net Generation Volume (Mwh), Capacity (MW) and Net Profit achieving more than 20%. Even CAGR of Weighted Average Shares of the company recorded 4.71%, it still managed to achieve CAGR of Earning per share (hereafter called "EPS") and Dividend per share (hereafter called "DPS") about 15%.

By looking into Net Profit or Earning per share data of CR Power, it was clear that the nature of power generation industry is cyclical, as it has up and down year within 5 years period.

Rate of Returns and Financial Leverages

 

CR Power achieved satisfactory of Return On Average Equity (hereafter called "ROAE"), more than 12% for the 5 years period except 2008. But Return On Average Asset (hereafter called "ROAA") is far from satisfactory especially in year 2010, merely 4.4%. The aspect which worth paying more attention is the financial leverages adopted by the company, which measured by Debt to Equity Ratio growing year on year except 2009, it reach 184.54% in 2010.

Cash Flow Analysis

The Cash Flow statement is simplified version of the consolidated cash flow statement of the company to ease the work of analysis. From 2006 to 2010, the Total Cash Generated by the company is HK$1,607 millions only where Total Cash Inflow is HK$41,957 millions and Total Cash Outflow is HK$40,368 millions in the same period. The ratio of Total Cash Generated to Total Cash Inflow is 3.83%, it is clear sign that power generation is cash sucking industry.

In 2009 and 2010, the cash inflows generated by the company barely enough to cover cash outflows, but in 2006 and 2008, it almost lost all the cash generated in 2007.

The dividend paid for the 5 years period amounted HK$7,100 millions and it is look like funded by the new issuance of shares in the same period, amounted HK$7,756 millions.

How Much It Worth?
Let's say the growth of power demand of China will be slow down and the company CAGR of both EPS and DPS is 10% in the next 10 years (approximately 15% in the past 5 years), the EPS of the company will be HK$2.69 in 2020 and the forecast dividends received over the 10 years period totaling HK$5.79.

If the stock price of CR Power sell at 10 times earning in 2020, it is HK$26.90 and included total dividends received, it is HK$32.69 per share. Given annual 6% inflation rate in next 10 years, the discounted rate is 0.591898. So, HK$32.69 discounted to today price, it is HK$19.35 per share.

The discounted price is 26% higher comparing to today (1 August 2011) closing price HK$15.32. Do you think it is worth to place a bet?

Invest and Grow with China Market

Are you thinking of participate into the fastest growing market of the world -- China? You can do so by invest into China companies listed in Hong Kong Stock Exchange (hereafter called "HKSE") via your local stock brokerage firms which support Hong Kong stock trading.

There are 267 China companies (164 H Shares and 103 Red Chips) listed in HKSE currently, how do you start?

Take a moment and think about it, "What make a great business?" In my humble opinion, it is consistent earning power. So, I capture 5 years (from 2006 to 2010) Earning Per Share (hereafter called "EPS") data of the 267 China companies listed in HKSE to an Excel spreadsheet as starting point of the analysis. Given these helpful data, I can start from companies that had more consistent annual earnings first.

Would you be interested in this set of data? Act now! You can get it by less than 60 cents per company, the data package contains the following items:

1. An Excel spreadsheet that recorded 5 years (2006 - 2010) EPS data of the 267 China companies (for companies listed in 2006 or prior year only). Please see the first 10 China companies.
2. Soft copy of the latest annual report of China companies (for companies listed in 2006 or prior year only).

Be sure to drop a message in comments section below for further enquiries.

I'd love to hear from you!

Analysis of Top 4 China Power Producers (Part 2)

The author published the analysis report here is for his own reference only. It is not an indication of the author's business interests for companies being analyzed. It is definitely not an investment advice, please see the full disclaimer located at the bottom of the blog post.
 
In part 1, I look into Revenue, Net Profit and Net Profit Margin (NPM) of the top 4 China Power Producers such as Huaneng Power International, Inc. (hereafter called "Huaneng"), China Resources Power Holdings Co. Ltd. (hereafter called "CR Power"), China Power International Dev. Ltd. (hereafter called "China Power") and Datang Inter. Power Generational Co Ltd (hereafter called "Datang"). This time I will look into following items:

1. Why Huaneng's net profit of 2010 minus approximately 50% compared with 2006?
2. Why power generation industry experienced minimal profit or massive loss in 2008?

Down of Huaneng's Net Profit
In 2010, Huaneng's net profit declined 50% even operating revenue growth more than 100% compared with 2006. It is great the sales was double compared to 5 years ago, but I don't think the reduction of profit to the half of 2006 is a decent return.

By look into tabular data above, operation cost advance 168.41% and revenue advance 135.47%, operation cost grow more than 32.94% compared to revenue in 5 years period. The grow of operation cost mainly constituted by advancement of fuel cost, 200.3% in that period. Operating profit margin further narrow when ratio of operating cost to revenue achieved record level in 2010, 91.6%. Obviously, unpleasant outcome of Huaneng's operating results in 2010 was very much due to fuel and coal price hike. The fuel cost matter is not so much different compared to year 2008 when the company's management reported RMB4,551.83 millions loss. I believe the #1 challenge to the management of the company in near-term is -- fuel cost control, since it is the main dragging factor of company's performance. In my humble opinion, fuel cost control is much more critical than growing revenue to the company at this point of time.

Minimal Profit or Massive Loss in 2008
The minimal profitability for CR Power and Datang or massive loss for Huaneng and China Power in 2008 was caused by following factors:

1. Natural disaster: rainstorms and snowstorms in southern China, the severe earthquake in Wenchuan on 12 May
2. Drop of power demand due to global financial crisis
3. Continuous rise of coal price to record level historically
   
4. Significant increase in finance costs due to six interest rate hike

All things being equal, natural disaster and drop of power demand are non-controllable and unpredictable items that each company has more or less equal probability in occurrence. But I don't think so for fuel cost and finance cost. These two type of costs is very much related to efficiency of cost control of the company's manager. I believe cost control is important component to profitability especially in capital-intensive industry such as power generation. Let's see whether is this cost control factor keep CR Power and Datang remain profitability in 2008.

Looking into tabular data above, it was no doubt that fuel cost constitutes to large portion of operating cost, averagely 52% to 64% of revenue for these 4 companies. The best company in term of fuel cost efficiency is China Power, it's Compounded Annual Growth Rate (hereafter called "CAGR") of fuel cost is 28.15%, grow slightly less 0.92% than revenue, 29.06%. Next, the remaining three power companies have huge space of improvement in term of fuel cost control as all of them grow fuel cost faster relative to revenue in CAGR measure such as 5.62% for CR Power, 7.76% for Huaneng, 9.42% for Datang.

By refer to the table above, all companies grow finance cost greater than operating profit measured by CAGR, it was clear that power generation is capital-intensive industry which using financial leverages is a norm. However, it is common practices, doesn't means it is good. I believe if businesses can generate equals amount of operating profit, using lesser or no financial leverages is better, paying less finance cost means gain more in net profit. In finance cost control aspect, the previous fuel cost control winner -- China Power is the poorest performer among 4 companies, it's CAGR of finance cost is 83.52%, grow more than double of operating profit, 34.58%, different 48.93% relatively. The best company in term of finance cost efficiency is CR Power, it's CAGR of finance cost is 47% and operating profit is 34.1%, different 12.9% relatively. The 12.9% relative result is the smallest among 4 companies indicates CR Power using the least financial leverages relative to it's operating result. The second position measured by least uses of leverages is Datang, it's relative result is 29.68%, still more than double of CR Power. I believe it is combination of finance cost efficiency and fuel cost efficiency made CR Power has much wider profit margin comparing to it's peers.

That's all for the analysis of these four power producers, next blog post is devoted to analysis on CR Power including it's competitive advantages.

Analysis of Top 4 China Power Producers (Part 1)

The author published the analysis report here is for his own reference only. It is not an indication of the author's business interests for companies being analyzed. It is definitely not an investment advice, please see the full disclaimer located at the bottom of the blog post.

The analysis is perform based on 5 years revenue and net profit data of 4 China Power Producers such as Huaneng Power International, Inc. (hereafter called "Huaneng"), China Resources Power Holdings Co. Ltd. (hereafter called "CR Power"), China Power International Dev. Ltd. (hereafter called "China Power") and Datang Inter. Power Generational Co Ltd (hereafter called "Datang").

Revenue

In 2006, it is very clear that Huaneng is the biggest power producer in the country, 52.69% of total revenue out of four companies concentrated to this single company. 5 years later, it's market coverage declined to 45.75% as it's Compound Annual Growth Rate (CAGR) only achieved 23.88%, lowest among the four companies. CR Power achieved highest and impressive CAGR of revenue 49.44%, it's market coverage improves from 11.58% in 2006 to 21.31% in 2010, close to double in 2006 to 2010 period.

Net Profit

In 2010, Huaneng performance was far from satisfaction (if not crying) as it only achieve plus 3,323 millions given the revenue of 104,318 millions compare to year 2007 with less than half of the revenue of 2010, 49,767 millions which gain close to double the net profit of 2010, 6,481 millions. It is worth detail investigation what happened to Huaneng in 2010. In 2006 to 2010, Huaneng achieve year-on-year negative growth in net profit except 2009. It is obvious that 2008 was a difficult year for the energy industry as all four companies had negative growth in net profit where CR Power and Datang remain profitable, Huaneng and China Power experienced massive loss.

Net Profit Margin (NPM)

By looking into the tabular data above, it is no doubt that CR Power poses certain competitive advantages over it's peers. From 2006 to 2010, it's enjoy very wide net profit margin compare to others, approximately double it's competitors averages.

What's Next...
I will look into following items:

1. Why Huaneng's net profit of 2010 minus approximately 50% compared with 2006?
2. Why energy industry experienced minimal profit or massive loss in 2008?
3. What is the competitive advantages of CR Power, is it durable?

I'd look to hear your comments as usual.

Edited on 22-Jun-2011: Correction of Huaneng's Net Profits, update related description, update Net Profit Margin (NPM) table.

Reading the Letter to Partners of Buffett Partnership 18 Jan 1965

In 1964, the overall result for the Buffett Partnership was plus 27.8% compared to an overall plus 18.7% for the Dow. The advantage of 9.1% on a partnership basis were the poorest since 1959.

Buffett's opinion for 2 largest open-end funds and 2 largest close-end investment companies underperform the Dow, an unmanaged index:

1. group decision - my perhaps jaundiced view is that it is close to impossible for outstanding investment management to come from a group of any size with all parties really participating in decisions;
2. a desire to conform to the policies and (to an extent) the portfolios of other large well-regarded organizations;
3. an institutional framework whereby average is "safe" and the personal rewards for independent action are in no way commensurate with the general risk attached to such action;
4. an adherence to certain diversification practices which are irrational; and finally and importantly
5. inertia.

Buffett's view of conservatism:
It is unquestionably true that the investment companies have their money more conventionally invested than we do. To many people conventionally is indistinguishable from conservatism. In my view, this represents erroneous thinking. Neither a conventional nor an unconventional approach, per se, is conservative. Truly conservative actions arise from intelligent hypotheses, correct facts and sound reasoning. These qualities may lead to conventional acts, but there have been many times when they have led to unorthodoxy. We derive no comfort because important people, vocal people, or great numbers of people agree with us. Nor do we derive comfort if they don't. A public opinion poll is no substitute for thought. When we really sit back with a smile on our face is when we run into a situation we can understand, where the facts are ascertainable and clear, and the course of action obvious. In that case - whether conventional or unconventional - whether others agree or disagree - we feel we are progressing in a conservative manner.

According to Buffett, to achieve an outstanding investment results, you need:

1. A long life, and
2. A high compound rate

Buffett's advice to newcomer of stock investment:
If a 20% or 30% drop in the market value of your equity holdings is going to produce emotional and financial distress, you should simply avoid common stock type investments.

Buffett's opinion on seeking third party for money management:
Any investment manager, whether operating as broker, investment counselor, trust department, investment company, etc., should be willing to state unequivocally what he is going to attempt to accomplish and how he proposes to measure the extent to which he gets the job done.

In "Our Method of Operations" section, Buffett added a new category known as "Generals - Relatively Undervalued", totally four categories. Below is the description of two categories of "Generals":

1. "Generals - Private Owner Basis" - a category of generally undervalued stocks, determined by quantitative standards, but with considerable attention also paid to the qualitative factor. There is often little or nothing to indicate immediate market improvement. The issues lack of glamour or market sponsorship. Their main qualification is a bargain price; that is, an overall valuation of the enterprise substantially below what careful analyzes indicates its value to a private owner to be. Many times in this category we have the desirable "two strings to our box" situation where we should either achieve appreciation of market prices from external factors or from the acquisition of controlling position in a business at a bargain price. While the former happens in the overwhelming majority of cases, the latter represents an insurance policy most investment operations don't have.
2. "Generals - Relatively Undervalued" - this category consists of securities selling at price relatively cheap compared to securities of the same general quality. We demand substantial discrepancies from current valuation standards, but (usually because of large size) do not feel value to a private owner to be a meaningful concept. We have recently begun to implement a technique which gives promise of very substantially reducing the risk from an overall change in valuation standards; e.g., we buy something at 12 times earnings when comparable or poorer quality companies sell at 20 times earnings, but then a major revaluation takes place so the latter only sell at 10 times.

Buffett's additional comments about "Controls": Controls in the buying stage move largely in sympathy with the Dow. In the later stages their behavior is geared more to that of workouts.

In my opinion, below is how the equity interests evolves over a period of time:

Generals - Relatively Undervalued (Minority Interest) -> Generals - Private Owner Basis (Largest Shareholder) -> Controls (Controlling Interest)

I'd love to hear your comments as usual.

Reading the Letter to Partners of Buffett Partnership 8 Jul 1964

During the first half of 1964, the Dow advanced from 762.95 to 831.5, plus 10.9% (including dividends received), where Buffett Partnership results will differ only insignificantly from those of the Dow.

Regarding relative result of investment performance, Buffett commented:
I would feel much better reporting to you that the Dow had broken even, and we had been plus 5% or better still, that the Dow had been minus 10%, and we had broken even.

For partnership's performance beating the Dow, Buffett commented:
I have always pointed out however, that gaining an edge on the Dow is more difficult for us in advancing markets than in static or declining ones.

For important of investment performance measurement and objective evaluation, Buffett said:
All investment managements (including self-management) should be subjected to objective tests, and that the standards should be selected a priori rather than conveniently chose retrospectively. We feel it is essential that investors and investment managements establish standards of performance and, regularly and objectively study their own results just as carefully as they study their investments.

Did you chosen a good yardstick to measure your own investment performance? Yes, I did.

Reading the Letter to Partners of Buffett Partnership 18 Jan 1964

In 1963, the Dow achieved plus 20.7% (including dividends received), where Buffett Partnership achieved plus 38.7%, different 18%, an extraordinary result.

As usual, Buffett compares performance of the partnership to the Dow and 2 largest open-end funds and 2 largest close-end investment companies. Buffett partnership achieved 22.3% Annual Compounded Rates where the Dow is 10% and the 4 investment companies under-perform the Dow in the period of 1957 to 1963.

In the "Our Method of Operation" section, Buffett further elaborates more about the partnership's three investment categories such as "Generals", "Workouts" and "Controls" which first mentioned in letter of 24 Jan 1962. In my opinion, this piece of information and it's examples in appendix section is an outstanding investment materials, I urge you to go through it (Buffett Partnership Letter on 18 Jan 1964) yourself again and again.

Establishing Investment Yardstick for US and Hong Kong Market

I am firm believer of active investing (a.k.a. active portfolio management). I believe intelligent investors able to beat the investment performance of market averages over long-term, albeit they are minority. This strong belief not an idea pop-up from my head while I wake up this morning, but instead it was based on facts.

Even an intelligent investor able to beat the investment performance of market averages over long-term, the rational question come to mind is "Am I the able intelligent investor?" So, I created the following 4 lean indexes based on open market price of 1 June 2011 to measure my investment performance of US and Hong Kong Market over any reasonable period of time (with such a period including both advancing and declining markets):

US Market
Dow Jones 15

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The initial investment capital of this index is US$100,000, which invested into top 15 US companies (top 15 index components of Dow Jones Industrial Average). It's weighting is equals to 73.91% of Dow Jones Industrial Average.  Please see the corresponding spreadsheet for detail of creation of this index.

Fortune 10

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The initial investment capital of this index is US$100,000, which invested into top 10 World's Most Admired Companies published by Fortune Magazine. The idea is originated from the book titled Getting Started in Value Investing, in page 62. Please see the corresponding spreadsheet for detail of creation of this index.


Hong Kong Market
Hang Seng HK 15

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The initial investment capital of this index is HK$1,300,000 (minimum amount), which invested into top 15 Hong Kong companies (top 15 index components of Hang Seng HK 35). It's weighting is equals to 77.58% of Hang Seng HK 35. Please see the corresponding spreadsheet for detail of creation of this index.

Hang Seng Mainland 12

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The initial investment capital of this index is HK$750,000 (minimum amount), which invested into top 12 China companies listed in Hong Kong Stock Exchange (top 12 index components of Hang Seng Mainland 25). It's weighting is equals to 80.71% of Hang Seng Mainland 25. Please see the corresponding spreadsheet for detail of creation of this index. 

Annual review will be performed in January for 4 lean indexes above. Components of Dow Jones 15, Hang Seng HK 15 and Hang Seng Mainland 12 will not change unless the stock removed from the corresponding index of stock exchange, when there is any changes to weighting of the lean index components, it will based on open market price of first market day of the year. Fortune 10 will be updated annually. If Fortune Magazine published the top 10 World's Most Admired Companies of the year after the annual review, the Fortune 10 will be updated whenever the news published.

Read till this far, you may curious "Why the author take the hassle of creating his own indexes instead of just use the general indexes defined by stock exchange for his investment performance yardstick?". The motivation is simple: If being prove that my investment performance cannot beat the market average over a reasonable period, I better as well re-allocate my investment capital to these lean indexes.

I'd love to hear you comments as usual.