Wednesday 20 January 2016

How To Interpret Foreign Exchange Gain/Loss in Financial Report?

If you wish to know the answer for this question, then I'm sorry because I am also looking for it.

We know that when MYR value drops, exporters that sell their products or services in foreign currencies will get a profit boost.

However, if the raw material cost are denominated in foreign currencies and it makes up a big portion of its overall cost, then weakening MYR might not give too significant increase in profit.

If the export company has lots of debts/borrowings denominated in foreign currencies, then weakening of MYR might not be good for them.

In a company's quarterly financial report, it will show how its profit before tax are arrived at, either below the income statement or in the explanatory notes.

This section will usually include some realized/unrealized foreign exchange gain/loss.

For example, in Latitude latest FY16Q1 quarterly report:

It shows that in FY16Q1, Latitude has a net forex gain of RM7.829mil, and these are already included in arriving at the net profit.

(1) What does this foreign exchange gain made up of?

I'm actually not sure and hope that someone with accounting knowledge can help to explain.

From my guess, this forex gain/loss should be from its receivables/payables, cash/debts denominated in foreign currencies and perhaps other items in the balance sheet.

For example, company Z exports its products in USD.

Lets say credit sales of USD100k is made at exchange rate of RM3.50 in early Q1. This means that a revenue of RM350k is registered and it will have USD100k as trade receivables.

In the middle of Q1, part of the bill USD40k (receivables) is settled at exchange rate of RM4.00. So there is a realized forex gain of 40k x RM0.50 = RM20k.

If other outstanding amount are not yet paid and MYR ends Q1 at RM4.30, then there will be an unrealized forex gain of 60k x RM0.80 = RM48k.

So the total forex gain for this particular sales is RM68k in Q1, which means that the company can potentially receive RM418k from a sales that worth RM350k.

The same should apply to payables in foreign currencies.

For borrowings, if a company secured USD100k borrowings at exchange rate of RM3.50, and it repaid USD30k at exchange rate of RM4.00, it will have a realized foreign exchange loss of RM15k.

If MYR ends the reporting quarter at RM4.30, then there will be an unrealized forex loss of RM56k.

Am I right?

However, (2) Which exchange rate is used as reference in the subsequent quarter? Is it the rate when sales are made, or the rate at end of previous quarter?

Lets use the company Z mentioned earlier as example.

Company Z makes USD100k sales in early Q1 at RM3.50 rate, and ends Q1 with USD60k receivables at RM4.30 rate. If the bill is settled fully in Q2 at exchange rate of RM4.10, will it register a realized forex gain of 60k x RM(4.10 - 3.50) = RM36k in Q2?

Or for Q2, we use the exchange rate at end of Q1 which is RM4.30 as a reference so company Z will register forex loss of 60k x RM(4.10 - 4.30) = -RM12k when the rate drops from RM4.30 to RM4.10?

Besides, there is another "foreign currency translation" profit in the income statement under "other comprehensive income".

For Latitude in the same quarter, the amount of foreign currency income is relatively huge at RM42.710mil in a single quarter.

(3) What does this foreign currency translation income made up of?

I think this should be for its foreign subsidiaries which is in Vietnam.

As Vietnam Dong also appreciates significantly against MYR, there will be forex gain but I'm not too sure how this number is derived from but it seems like it is from the increase in net assets of its foreign subsidiaries QoQ due to currency exchange rate changes.

From what I understand, this type of profit should not be included under profit attributable to shareholders but it should not be totally ignored so it is put under "other comprehensive income".

So, it will not contribute to the company's net profit and EPS.

Hopefully some expert will help to answer the questions marked in red above.

Wednesday 13 January 2016

Hevea Under Attack

Recently Hevea has been under relentless attacks by a few people in i3investor.

I'm alert to this as I'm also a small shareholder of Hevea.

Last week I wanted to write about my opinion on this issue but finally I did not do so. I thought that I should not let my decision affecting other readers since the reliability of those information are in doubt.

A few people made the allegation, and some people tried to counter it by posting feedback from Hevea's management. All these information might not be true.

Yesterday, the first reliable source of information finally came out. CIMB organised a conference call with Hevea management and its institutional investors, and published the note today.

Last week, the first allegation was that Hevea's directors & major shareholders had some physical conflict and are involved in a few civil suits.

The major issue the author wished to bring out was that Hevea tried to hide these law suits from the shareholders/investors by not disclosing them to Bursa when they are obliged to do so.

Both parties consist of HeveaWood controlled by HeveaBoard's MD Yoong's family, and Dato Loo who is a non-executive director & founding member of HeveaBoard.

Those who know Hevea well should know that HeveaWood is not a subsidiary of HeveaBoard but is a major shareholder of HeveaBoard.

This is just some personal conflict among HeveaWood shareholders who also happen to be HeveaBoard shareholders.

So I think Hevea has no obligation to reveal these law suits under material litigation in their financial report as they do not involve Hevea directly. 

After CIMB's report, we know that the law suits are because of non-payment of dividends at HeveaWood and the court has actually decided in favour of Yoong's family.

Of course these conflict among directors is not good for Hevea. However, it should not affect Hevea's operation as Dato Loo is not an executive director and this case were already closed even though an appeal seems to be on-going.

       Yoong Hau Choon & Dato Loo Swee Chew

The second allegation was about 700 containers stuck in Korea port and Hevea could potentially face hefty fines and was alleged to sell hazardous products!

I opined that this could not be true. The number of 700 is too huge and how can Hevea passes Japan test but fails in Korea?

Finally it turned out that it was 700m3 containers and the Korean custom actually used the wrong testing method. This issue has also been resolved.

From the 2 allegation above, we can know that the attacker has close relationship with Hevea as he can gain access to those information. 

However, why did he only tell half of the story? Didn't he know that the Korea issue is just a misunderstanding and has been resolved without "hefty fines"? 

He either knows only a bit and inevitably gave inaccurate information, or knows the issues well but chose to mislead the public deliberately by posting and exaggerating only on the negatives.

If he is really a neutral person who is trying to help the investing public as he claimed to be, he should quickly write another article to support his earlier claims or apologize for his mistakes, especially the 700 containers story.

However, he didn't.

So to me, there is a well-organised plot to attack Hevea & its current executive directors for whatever reason I'm not sure but it seems to me that it is related to earlier law suits.

As for the accounting fraud part, though I'm not good at accounting, I wonder why the "amount due to/by related parties of HeveaWood & HeveaBoard must be the same. Can't there be other parties involve other than these two?

Now CIMB has reported that there are other parties involved so this allegation is a joke.

Similarly, the attackers should counter CIMB report or Hevea MD's clarification by giving concrete evidence. If they fail to do so, this just exposes their desperate plot to down Hevea with purpose.

There might be more allegation coming out but the credibility of those attacking authors are surely waning.

I just write my view on one of my company I'm investing in and I might also be wrong. 

Hevea's MD might cheat those institutional investors and gave empty promise if he is really that bad & "no big no small" as described by the attackers.

The attackers will surely continue to find faults in Hevea and we can't rule out that they might find something real in the future, as I don't think a big organisation can do things 100% right.

We as outsiders can only use our own brain to think and make a decision on who is right or wrong.

Please be reminded that this is not a buy or sell recommendation on Hevea. 

Tuesday 5 January 2016

Review 2015 / Preview 2016

Review 2015

When I decided to keep those 3 property stocks in my portfolio early last year, I actually did not expect my 2015 annual portfolio return to beat 2014's figure of 44.5%.

So, I am extremely delighted to have achieved 107% return in 2015.

KLCI ended 2015 at 1692.51 compared to 1761.25 at the end of 2014 , representing a minor loss of 3.9%.

       KLCI 2015: From 1761.25 to 1692.51 (-3.9%)

Given the internal & external issues that Malaysia faced in 2015, KLCI's performance was actually not as bad as most of us would have imagined. It was actually better than Singapore, Thailand and Indonesia.

The reason for my portfolio gain is no other than those export-orientated stocks such as Inari, Globetronics, Latitude Tree, Heveaboard, Geshen, Scientex, Johore Tin, Heng Huat & Jadi Imaging.

As mentioned in "Preview 2015" exactly one year ago, I planned to concentrate on export stocks in 2015 and this decision has certainly borne fruits now.

Could it be even better if I disposed all those property stocks last year and bought other export stocks in my watchlist such as Magni-tech, Prolexus, Superlon, KESM, Unisem, Thong Guan etc?

Certainly it will be better.

The table below shows annual stock price performance of 3 pure property stocks in my portfolio.

Year 2015 Performance of Property Stocks
Stocks End 14 End 15 Div 15 G/L%
HUAYANG 2.05 1.85 0.13 -3.4
MATRIX *2.33 2.49 *0.162 13.8
TAMBUN 1.62 1.41 0.097 -4.2
* adjusted for bonus issue

Throughout the year, only Matrix manage to register a "not bad" gain while Huayang & Tambun were both in red.

In the year of 2015, almost all property stocks suffer.

Huayang calendar year 2015's financial results were good as expected. However, unbilled sales drop due to delay in new project launch amid soft property market.

At RM1.85, it is trading at forward PE ratio of just 4.1x base on TTM EPS of 45.16sen, and its dividend yield is as high as 7.0%.

The response for its upcoming launches such as Mines South and Penang project could be vital to sustain its performance & dividends.

Tambun Pearl City's projects have been hit by delay in APDL approval, causing its financial results, unbilled sales and share price to drop.

Despite slow down in property market, projects in Pearl City are still very well-received and its new sales are expected to jump in FY15Q4/FY16Q1 after obtaining APDL approval in Nov15.

GEMS International School has started in Sep15 while Pearl City Mall is on course to be completed in Q1 of 2016. Jit Sin High School SPS branch is also set to start student intake for year 2017.

At RM1.41, Tambun is trading at forward PE of 6.1x base on TTM EPS of 23sen, with potential DY of 6-7%.

Matrix is a rare property stock that ends 2015 with a gain. More importantly for me, it will certainly achieve higher new sales in 2015 together with a record high unbilled sales, due to robust demand in its Bandar Seri Sendayan.

Its TTM EPS is 50sen, which means it is trading at forward PE of 5.0x at share price of RM2.49, with a dividend yield of more than 6%.

Matrix has an outstanding leader and management team. That's why I feel secure to invest in them.

So, it has been shown that in term of maximizing portfolio return, I have made a wrong decision in keeping those property stocks, though I have already expected this.

Those property stocks in my portfolio with high dividend yield act more like a diversification or buffer just in case export stocks do not perform up to expectation.

My main investment plan is still growth, and try to be part of its business owner as long as the company stays competitive and continues to grow.

In the year of 2015, I added 8 new stocks into my portfolio.

Earlier in the year, I bough Johotin (Feb15), Geshen (Mac15), Hevea (May15) & Jadi (Aug15) which are all export-orientated stocks.

These stocks have done exceptionally well, along with other export stocks bought earlier in 2013 & 2014 and kept throughout 2015.

Year 2015 Performance of Portfolio's Export Stocks
Stocks Start Price End Price On G/L %
GESHEN 0.575 Mac15 2.76 End15 380.0
GTRONIC 4.30 End14 6.50 End15 51.2
HEVEA 0.775 May15 1.62 End15 109.0
HHGROUP 0.43 End14 0.644 Dec15 49.8
INARI 2.54 End14 4.58 End15 80.3
JADI 0.056 Aug15 0.095 Nov15 69.6
JOHOTIN 1.54 Feb15 2.09 End15 35.7
LATITUD 3.65 End14 7.39 End15 102.5
SCIENTEX 7.09 End14 9.75 End15 37.5

Geshen is undoubtedly my best performer in 2015 with 380% gain in 9.5 months. Its FY15Q3 result was simply magnificent.

Though subsequent quarters' result might not beat that quarter, I hope that it will still be good to justify current share price, especially when Polyplas is in expanding mode and Geshen might acquire its remaining shares later.

When I first bought Geshen, I have the intention to put it in my empty core portfolio since there is a chance of more than 100% upside from my calculation.

However, just like Latitude last year, I failed to do so but as a consolation, it is still one of the "heavier" stock in my portfolio which has played a major part in my overall 2015 portfolio return.

Hevea's shares were bought in May15 at a "high price" of RM3.10 before bonus issue went ex-ed.

I bought it mainly because of its robust cash flow and I just felt that I should be part of its business. Its subsequent quarterly results were good surprises to me.

With Japan's domestic demand expected to increase prior to 2020 Olympic games, I think Hevea's product demand will still be strong.

Despite strong USD which increased its revenue and profit margin, Hevea actually suffered some forex loss due to USD denominated loan.

With its borrowings reducing fast thanks to robust cash flow, it is currently in a net cash position for the first time in its listing history and investors can expect lower forex loss and interest expense going forward.

Johotin has a roller-coaster year in 2015. Its share price rallied from around RM1.40 early in the year to RM2.80 in Nov15, before dived sharply to close at RM2.09 at year end.

The commencement of its milk packaging business seems to be delayed, and strong USD does not do any good to it.

I'm eager to see what this new business venture will bring to its top and bottom lines. I will continue to hold its shares but I might need to wait longer.

I invested in Jadi mainly because I think it will benefit from strong USD and low crude oil price. As its share price is low at below 10sen, I think it can potentially give 100% return in one year time if quarterly results are good.

True enough Jadi's share price advanced about 100% in just 3 months time from RM0.05 to RM0.11. I sold all its shares but only after it has retreated from its highest point, as this "opportunistic investment" has done its job and I planned to limit my portfolio to maximum 15 stocks.

HHGroup posted a rather bad quarterly result in the end of Nov15 and I felt that it might persist for a certain period of time. So I decided to sell off all its shares at around RM0.65 which was way below its high of RM0.88 just 5 trading days earlier.

Anyway, it's still a successful investment with slightly more than 100% gain in slightly more than one year.

For other stocks like Gtronic, Inari, Latitude & Scientex, I have discussed about them many times and there is nothing much to discuss here. Apart from Latitude which I think is currently quite "undervalued" because the management is reluctant to give bonus issue, others have very good growth prospect in the near term and are expected to have a good 2016.

As year 2015 drew to an end, I added in BJAuto, Notion, Complete & AWC to my portfolio. Besides Notion, the other 3 of them are not export-orientated companies.

From here you can roughly see my strategy in 2016.

I don't mean that export-orientated stocks will not perform well in 2016. Actually I hope that they will, because export stocks still make up 80% of my latest portfolio.

I wish to limit my exposure to export stocks unless there is one which is selling really cheap but I doubt whether there is any.

Many export stocks have extraordinary results in their most recent quarters because of significant jump in USD against MYR.

As a result, their share price also jumped significantly and hit record high.

Most of those stocks have significant forex gain which were classified under "other operating income", perhaps from their USD denominated cash or receivables etc, when there was a sudden jump in USD value.

As personally I don't expect MYR to further depreciate against the USD in 2016, I will try to avoid such stocks unless it has great growth potential and still not too overvalued.

Notion is a peculiar case. It is an export stock which is supposed to be a beneficiary of strong USD but it made massive loss from stronger USD due to unfavourable currency hedging.

As I don't expect MYR to depreciate further against USD, I actually expect it to gain a bit from its hedging.

Despite the loss in 2 consecutive financial years, its cash flow is actually not bad and it is paring down its borrowings in the same manner as Hevea. 

Nevertheless, it certainly need to generate more sales in the near future in order to turnaround in style.

I view BJAuto as a fixed deposit and plan to hold for real long term. It has and will have lots of cash to distribute as dividends, and I actually predict that Mazda's vehicles sales volume will double in around 5 years time (average ~2,000 vehicles sold per month).

However, this ambitious prediction looks difficult to materialize as other than CX-5, I don't actually see lots of Mazda 2, 3 & 6 on the road as anticipated...

A massive loss in the final quarter of FY15 (ended Mac15) for Complete has made its overall FY15 result looked ugly.

The loss is an one-off impairment loss on vessel sales, as the company is trimming its shipping segment while expanding its land logistics business by building three more new warehouses.

For me, in normal circumstances, Complete should be able to generate EPS of 3sen a quarter, and it should be more after the new warehouses are in use soon in CY2016.

Anyway, it is a very small company without consistent dividend payout.

AWC, generally a facility management service provider, stirred some interest because of its recent acquisition of 2 companies with profit guarantee.

At current share price of about 38sen, it might be already fairly valued after factoring in the profit guarantee.

However, I think it still has some growth potential especially the impending contract renewal with revised rate for its facility management service with states government.

It is also expanding its management service to include private sector and healthcare facilities lately, and the new business acquisition (plumbing & rain water harvest system) will make it a more complete service provider.

The downside is, it last paid dividends to shareholders in 2013 despite a strong net cash position.

Year 2015 is a difficult year for Malaysia. Crude oil price continue to slide while crude palm oil price also went down.

       Crude Oil 2015: From USD56 to USD37 (-34%)

       CPO 2015: From RM2287 to RM2198 (-3.9%)

In Aug15, there was a panic moment in stock market in which KLCI fell sharply from 1740 to 1500 in less than one month time.

During that time, rumours saying that the stock market will crash and the country will go bankrupt were flying around. 

My sister who worked oversea warned me that her friends and also a family member who previously worked as a remisier, advised everyone to get out of the stock market.

My wife, who almost doesn't know a single thing about stock market & economy, even sent me a long message she received from a friend who also know nothing. That message described an upcoming economy "disaster and collapse".

Of course I was also worried, but I was confident with my stock portfolio and decided not to sell them like there is no tomorrow. I even bought and topped up Jadi shares at that time.

Looking back, I feel very fortunate that I did not sell any shares at that time, except a bit of Latitude shares in the end of Aug15. If I sold stocks like Inari, Geshen, Hevea etc, I'm not sure whether I will ever buy them back and my portfolio return will not be as good as it is now.

I don't mean that I'm more superior than those who sold their shares at that time. Again, I believe that no one can predict the future. Those who predict it correctly is just because of luck.

Now we are in 2016, has anything changed?

US has decided to raise interest rate in Dec15, so this uncertainty has gone.

Besides, the supposed Malaysia economy "killer" - low crude oil / CPO price, depreciated MYR & corruption, are still there.

Crude oil price has actually fallen further to below USD40 while CPO price is still sluggish.

USD/MYR still stays high at around RM4.30 and nothing has changed in the country's politics. 

So the same collapse theory and concern will still carry forward to year 2016.

       USD/MYR 2015: From RM3.50 to RM4.30 (-23%)

Preview 2016

For year 2016, as mentioned earlier, I think MYR will not get significantly weaker against USD as MYR looks like oversold to me.

Generally export companies should still do well but those with significant one-off forex gain without much sales growth might see their profits drop.

If you believe that US and Europe's economy are growing, then those companies who export to these region will get the most benefits.

Now, crude oil price at USD36 seems to hit rock bottom and the more likely trend in 2016 should be either sideways or up.

There is a possibility that MYR could stage a rebound against USD if crude oil price reverse its downtrend. Who knows?

Property and plantation sectors should remain "cold" this year I guess.

There is no particular sector or theme that I prefer to invest in for 2016. I will just look for undervalued good companies and/or companies with high growth potential.

My target is still 30% annual return from stock market investment. In order to achieve this target, I know that I can't be too diversified.

I will strive hard to obey to the maximum number of 15 stocks in my portfolio, and ideally it should be around 10 stocks.

Also, to have higher chance to achieve >30% return target, I think I should wait patiently and buy only when those shares are significantly cheaper during market correction.

Lastly, I wish all readers a fruitful and prosperous year of 2016.

Friday 1 January 2016

My Portfolio Dec15

Summary for December 2015

Numbers of stocks 14
Cash:Share ratio 6.5%
Share Bought Complete @ 0.78, 0.80

AWC @ 0.375
Share Sold HHGroup @ 0.644
Overall 2015
Portfolio Return Dec15 10.7%
KLCI Return Dec15 1.22%
Portfolio Return YTD15 107.3%
KLCI Return YTD15 -3.90%

Stock Portfolio @ End of Dec15

Core Portfolio

Satellite Portfolio
Stocks Avg Nov15 Dec15 Div 15 Dec15(%) Overall(%)
AWC 0.375 n/a 0.39
n/a 4.0
BJAUTO 1.92 2.19 2.14 2.25 -2.3 11.5
COMPLETE 0.79 n/a 0.805
n/a 1.9
GESHEN 0.77 1.89 2.76
46.0 258.4
GTRONIC 2.43 6.38 6.50 23.0 1.9 167.5
HEVEA 0.775 1.47 1.62 1.625 10.2 109.0
HUAYANG 2.32 1.93 1.85 13.0 -4.1 -20.2
INARI 0.82 4.22 4.58 9.5 8.5 458.5
INARI-WB n/a 2.00 2.66
33.0 n/a
JOHOTIN 1.54 2.15 2.09 3.5 -2.8 35.7
LATITUD 2.09 7.43 7.39 12.0 0.7 253.6
MATRIX 1.77 2.45 2.49 17.75 3.2 40.7
MATRIX-WA n/a 0.415 0.425
2.4 n/a
NOTION 0.40 0.39 0.42
7.7 5.0
SCIENTEX 5.47 8.27 9.75 22.0 17.9 78.2
TAMBUN 0.77 1.38 1.41 9.7 2.2 83.1

  • Dividend ex-ed for Matrix (3.5sen) & Latitude (12sen) in Dec15
  • Geshen contributed massively to overall portfolio performance in 2015
  • Achieved target of at least annual 30% return a year
  • Hevea, as expected, becomes the 7th stock in the portfolio since mid-2013 to touch >100% return, after Tambun, Inari, Gtronic, Latitude, Geshen & HHGroup.
  • It's a slight "net sell" year in 2015, which means cash obtained from selling shares exceed cash used to buy shares.
  • Sold all HHGroup's shares after quarterly result announcement.
  • Added in Complete Logistic & AWC into portfolio.
  • Total stocks in portfolio reach a new high of 14, which I think is not that "healthy".


  • Try to trim my portfolio in 2016
  • Hope can discipline myself to buy only on market weakness