Sunday, 19 April 2015

Eco World Lights Up Northern Batu Kawan

More than one year ago, it was reported that Eco World was the sole runner to acquire a site in the northern part of Batu Kawan for development of golf course.

Now the deal has been confirmed. Eco World will lease about 150 acres of land from Penang government to develop a minimum 18-hole international standard golf course and clubhouse for RM65.34mil. The lease is for 30 years with an option to renew for another 30 years, 

Meanwhile, EcoWorld also acquires 299.64 acres of leasehold land in the same area for RM730.93mil for its own property development known as Eco Marina.

Eco Marina has a potential GDV of RM10bil with 60% residential & 40% commercial development.

The location of land is on the northern tip of Batu Kawan, which has hilly terrain and can be developed into "luxury, green, eco-friendly hilltop living".

What's more, the land which is next to Pulau Aman jetty, is also "sea-fronting" or more accurately, Jawi River mouth-fronting and it will be good if Eco World can clean the river and transform it into a clean "Marina".

       Batu Musang jetty at Batu Kawan to Pulau Aman

Previously, major and exciting development of Batu Kawan are all concentrated in the southern part of Batu Kawan. These include Batu Kawan Industrial Park, IKEA, KDU, Hull University, Logistic Hub, Premium outlet etc.

The middle part of Batu Kawan is planned for PDC's affordable apartments and perhaps luxury landed houses on the other side.

Northern part of Batu Kawan is the earliest to be developed since the state stadium was ready for SUKMA in year 2000.

That was 15 years ago and most of the early development are low-medium cost landed houses.

A more exciting story in northern Batu Kawan is about GOB's Crescentia Park. Currently this area is occupied with landed low-medium cost units and may be this is the reason GOB is slow to launch its projects here.

With the entry confirmation of such a glamorous developer like Eco World, development of Batu Kawan will be more "balanced" geographically and the overall chance of success will be lifted.

So, even though Eco World will bring in competition, I think GOB should be very happy to have Eco Marina opposite its Crescentia Park.

Monday, 13 April 2015

Growth Or Dividend?

When I started to invest in stock market seriously since mid-2013, I have a clear plan.

I plan to invest only in small to mid cap growth stocks, hold for longer term until the day I think its growth has stopped or slowed down significantly.

Dividend is not that important to me.

I have to do this as I have limited seed money to start with, and I think my priority is to grow the money as fast as possible so that I can accumulate enough fund for retirement, which is my ultimate goal.

If I can reach retirement later, I plan to put more money into lower-risk investment vehicles such as fixed deposit, bond funds or blue chip stocks, and hope to survive on interest & dividends earned.

Basically I don't invest solely for dividends at this stage, but if the growth stocks pay good dividends along the way, then it's a bonus.

As we know, dividend yield = annual dividends per share / share price. High dividend yield may not necessarily mean good.

For example, a blue chip stock's share price is at RM10 and it pays 60sen dividend a year. So, it has 6% dividend yield now.

If its profit grows consistently year after year, it will pay higher dividends as long as its dividend payout remain the same, and its share price will go up accordingly as long as the market gives it the same PE ratio. 

Lets say its profit doubles after 10 years and it has similar dividend payout. If the market gives it similar PE ratio, its share price will be doubled to RM20 and dividend will also be doubled to RM1.20 per share. Its dividend yield will still be 6%.

After 10 years, even though its dividend yield is still 6%, investors enjoy 100% capital gain and more actual dividends in cash. 

If the company's profit is flat for 10 years, dividend payout and share price will stay stagnant but investors can still get 6% return every year which is still better than current FD rate of 3-4%.

However, if the company's profit is deteriorating year after year, its dividend payout and share price are likely to decline as well. 

Lets say if its profit drops by half after 10 years, its share price and dividend will fall by half as well to RM5 and 30sen respectively. Its dividend yield is still high at 6% but investors not only suffer 50% paper loss, but also less actual dividends received along those 10 years.

We have to pray that our dividend stocks deliver at least flat results, if not growth, to increase our wealth.

So focusing solely on dividend yield might be misleading, especially when the company has some one-off gain and gives one-time special dividend.

Anyway, stocks are called blue chips because they are huge and stable, has significant competitive edge or monopoly in their business, and has proven track record.

So it's unlikely they will give persistent deteriorating profit over many years though profit might still fluctuates. However, undoubtedly growth will be slow and limited.

For me, growth is still the most important part of my investment.

So I plan to invest in high dividend yield blue chips stocks only after accumulating enough money for retirement.

Typical textbook teaching tells us that growth stocks tend to give little or no dividend as they need more money to grow. 

However, from my experience so far, I find that many growth stocks can give better dividends than blue chips, and their share price certainly move up much faster than blue chips.

Why not investing in such stocks?

Some examples are Inari, Gtronic, Pintaras, BJAuto, Homeritz, Poh Huat, LiiHen, Wellcall, VS, Matrix, Huayang, Tambun etc...

Of course we don't expect the growth will continue forever.

There will be a time when property, smartphones or furniture demand drops, and when the great time for O&G and plantation finally arrives, those growth stocks in these sectors will perform well.

Now we know it's not a good time for property, so we expect lackluster financial results from most property stocks in the next few years to come.

By right I should have sold all my property stocks by now but I didn't. I didn't execute my initial investment plan well... Why?

Out of 3 pure property stocks I hold, I opine that Matrix and Huayang can at least sustain its current earning level for the next 2 years. So I decided to hold and see, since they are also generous in rewarding shareholders.

For Tambun, its growth phase might be over and I have decided earlier to sell all of its shares in stages.

However, I was quite surprise to see better-than-expected demand from its recent launch, which include the new apartment in Pearl City, Avenue Garden. I see almost 70% of Tower 1 have stickers on them and now Tower 2 are open for sale.

They even withdrew some earlier promotion because sales is better than expected.

Its International school and shopping mall are on track to be completed this year, and should be able to collect some rental income.

Besides, it has also just purchased a piece of land in prime location in Bukit Mertajam.

It is rumoured that EcoWorld will launch its project Eco Meadows in Simpang Ampat within this year with 3-storey terrace starting from RM850k. This makes Pearl City's property looks cheaper.

It is also rumoured that Bank Negara may lower interest rate in the second half this year. Will it breathe some life into property sector?

Tambun might have an "outside chance" to sustain its RM100mil annual profit this year.

After that it is hard to predict. It can be better or poorer.

Who knows it will later renegotiate the previously cancelled huge land deal next to its Pearl City and successfully acquire it?

I'm still thinking whether to keep or sell my remaining Tambun shares. Should I sell for other growth stock or keep for good dividend?

Tambun should give at least total 9.5sen dividend for its FY14, and it is still a good yield above 5% now.

Perhaps I have fallen in love with this stock, which I know is one of the deadliest mistake investors should avoid.

Tambun is the one and only stock which occupied my core portfolio before. It almost single-handedly reverse my previous loss in stock market.

However, if it gives negative surprises repeatedly like Zhulian, I will not hesitate to sell all even though its dividend yield is still attractive.

Monday, 6 April 2015

Geshen: Gets Double Boost

Geshen is primarily a plastic injection molding player like the famous high-flying VS Industry & SKP Resources. It was incorporated in 1995 and is based in Johor Bahru.

Base on FY14 full year net profit of RM2.56mil, it is currently traded at actual PE ratio of 18x at recent average share price of 58sen which is not attractive at all.

Its injection molding business seems to hit the bottle neck in which its annual revenue always stays at around RM80mil with little and fluctuating net profit since year 2005, except lower turnover and net loss during economy crisis in 2008/09.

Its management took some steps to grow the group by diversifying into cosmetic & skin care business in 2010, and then into manufacturing of fiber products (like Heng Huat) since 2012.

Unfortunately, these two new business ventures do not live up to expectation and incur loss without fail to the group since operation.

Here comes the first BOOST.

Geshen has disposed these 2 loss-making subsidiaries. The disposal was first announced on 19th Dec 2014 and was announced as completed on 2nd Mac 2015.

How will the disposal affect Geshen?

From Geshen's latest FY14Q4 financial report, it is mentioned that these 2 subsidiaries registered total loss of RM4.283mil in the whole FY14 (red box below).

The PBT & PAT of its continuing operation (ie. plastic injection molding) in full FY14 is RM8.733mil & RM6.825mil respectively.

However, there is a one-off pre-tax gain from disposal of subsidiaries amounting to RM1.194mil in Q4.

After deducting this special gain, its plastic segment PBT should be RM7.539mil, and PAT should be RM5.9mil base on similar 21.8% tax rate.

If its plastic business can maintain its performance and reports similar RM5.9mil net profit in FY15, then its EPS will be 7.38sen (80mil shares). 

So the projected PE ratio for FY15 will be 7.8x.

Nevertheless, there is a significant drop in revenue of FY14Q4 due to reduced order. This remains a concern.

The second BOOST is its proposed acquisition of its peer Polyplas which does exactly the same thing as it does.

Geshen will acquire 75% of Polyplas for RM33.8mil which will be paid by internal fund and issuance of 30 million Redeemable Convertible Preference Shares (RCPS) at 60sen each which are convertible into ordinary shares within 5 years.

The RCPS will raise RM18mil and its holders are entitled to 5.5% dividend per annum. 

Geshen has the option to acquire the remaining 25% of Polyplas in the future.

How good is this Polyplas?

Polyplas is incorporated in 1988 and is based in Bukit Mertajam Penang.

Though Polyplas is only half the size of Geshen in term of annual turnover, it seems to me like Polyplas is a more exciting company for reasons below:

Polyplas is growing

Compared to Geshen's stagnant revenue, Polyplas's revenue improved significantly by 39% YoY in its FY14 (ended Oct14). 

However, we don't have long enough data to ascertain that it is really a consistent growth, as revenue of contract manufacturers can fluctuate a lot. 

Anyway, recent growth is still a good sign. It is even constructing a new factory recently to increase its production and warehouse space. It is expected to be completed in Aug 2015.

Polyplas FY14 production capacity utilization rate is at approximately 52% based on operating hours.

The utilization rates based on various machine tonnage are as follows:

There are different machine tonnage which caters for different customers' products so it is almost impossible to utilize all the machines at one time.

Anyway, it is reported by analyst that SKPRes has current utilization rate of 75-85%, from 60% during its disappointing time in calendar year 2013. It has constructed new factory that will increase its capacity by another 75%!

       Polyplas @ Bukit Minyak

Polyplas has much better profit & margin

Despite lower revenue by half in FY14, Polyplas manage to produce better net profit than Geshen. 

This is because of its unbelievably high net profit margin of 18% in FY14 despite an effective tax rate of 22.6%.

Report says that this is achieved through better sales and production efficiency, without any one-off special gain.

Polyplas has more diversified business & customers

Geshen mainly involved in plastic injection molding for Electrical & Electronics sector, primarily in audio-visual segment.

Apart from E&E sector, Polyplas has capability and business in manufacturing products for medical sector which might be the next investment theme.

       Medical products by Polyplas

Polyplas derives 55% of its revenue from export sales to Asia, Europe and US, while 85% of its raw materials/components are sourced locally in FY14.

       Marked sales improvement across the board

There should be a mistake in the table above in FY14 which I think sales to Hungary should be close to zero. However, overall sales to Europe still increases by a good 33% YoY.

Geshen's has largely Japanese customers but Polyplas has wider geographical presence and strangely, there is no Japan in the list.

Polyplas's main export country in FY14 is US, which makes up about 37% of its export followed by Europe (32%) and Asia (31%). So, acquisition of Polyplas will give Geshen a good global exposure straight away.

US economy is recovering while Europe and Japan are busy printing money now. Will this give Geshen another boost?

Polyplas has much better official website

Though this is half joke but I have a tendency to judge a company by looking at its website, though I know that it's wrong.

Both VS and SKPRes also have lousy website design but they are good companies.

You can go to Geshen and Polyplas official website and see for yourself.

Geshen will acquire 75% of Polyplas. If Polyplas can achieve similar net profit of RM7.9mil in FY15, then Geshen will get RM5.9mil.

If we add together projected net profit of Geshen (RM5.9mil) and 75% profit of Polyplas (RM5.9mil), it will be RM11.8mil.

After the corporate exercise, Geshen's outstanding shares will remain at 80 million as long as no RCPS are converted into ordinary shares. So, guesstimated FY15 EPS for Geshen will be 14.8sen.

After all the RCPS are converted, Geshen's shares base will increase to 110 million. So, diluted guesstimated EPS will be 10.7sen.

Please bear in mind that even though Polyplas produces a great profit margin and financial result for FY14, it does not mean that FY15 cannot be poorer.

Anyway, sooner or later Geshen will acquire the remaining 25% shares of Polyplas. If Polyplas remains profitable, then it will add a significant amount of profit to Geshen in the future.

Geshen does not acquire 100% Polyplas's shares at one go as it wants Polyplas's director and founder Narinder Singh to stay committed to lead the company.

Mr Narinder is a real entrepreneur and almost single-handedly leads Polyplas. His leadership was just recognized last year and it remains a mystery why he decided to sell his company.

Overall, at below 60sen per share, Geshen looks undervalued after all those corporate exercises which is expected to be completed in the 2nd quarter of 2015.

Its RCPS is set at 60sen per share which is higher than current share price of below 60sen!

Balance sheet and cash flow of Geshen is good and it currently has net cash of RM10.8mil. It needs RM15.8mil cash to acquire 75% of Polyplas so apparently no more net cash after this.

Geshen shares liquidity is very low, with merely 80 million paid-up shares in which only 25.96% are in public's hands and the top 30 shareholders have already taken up 91.6% of the company.

Earlier this year, its public shareholding spread of 22.83% was not compliant with listing rule so its major shareholders have to dispose 2.5mil shares in Feb15 to lift the figure to 25.96%.

When I first notice Geshen through an article by Icon8888 in i3investor, I actually have the same excitement as when I first discovered Latitude Tree. 

Both have operation in Vietnam and both are going to acquire something that will boost their earnings significantly.

Latitude produced superb organic growth with magnificent quarterly results while Geshen is going to get rid of its loss-making subsidiaries.

However, Latitude is one of the market leader in its industry but Geshen is not. Latitude's revenue is growing all these years but it is not the case with Geshen.

Plastic injection molding is a highly competitive industry with over 1,500 manufacturers in the country.

VS Industry and SKP Resources/Tecnic are clear market leaders. Other listed players include LCTH, HIL Industries, Kumpulan H&L, Luster etc.

Once these contract manufacturers get a fat contract to manufacture and assemble something new, their revenue and profit will surge. This is shown in VS (Keurig coffee machines) & SKPRes (Dyson vacuum cleaner). 

Geshen is clearly still not in that league but it has been trying to grow the company through diversification twice since 5 years ago. Hopefully it's third time lucky for Geshen.

SKPRes is trading at high PE of over 15x now but it seems to have strong growth and capacity expansion ahead. Otherwise I think fair PE for this industry should be 10x.

For Geshen, it might only command a PE of 8x the most. I'll use my FY15 forecast diluted EPS of 10.7sen to set my target price. Thus my target price for Geshen will be 86sen.

It's better to be more conservative as Geshen's FY14Q4 revenue drops 35% QoQ, and Polyplas might not sustain its good performance in FY14.

Though disposal gain of its subsidiaries are consolidated into its FY14Q4 report which ended in Dec14, but the completion of disposal was only announced on 2nd Mac 2015. So I'm not sure whether the loss-making subsidiaries results in Jan-Feb15 will still be included in its FY15Q1 or not.

With wider customer base, inclusion of Polyplas management team and diversification into medical products, hopefully Geshen can achieve significant organic growth which it fails to achieve in the past 10 years.