Monday 17 February 2020

Adventa: It's Do or Die with APD

Obviously, my Stock X is Adventa Berhad.

I put it as Stock X as I fear that I might have bought it too early, and it's proven that indeed I am. However, I don't mean that it's time to buy Adventa's shares now.

The first time I bought Adventa's shares was in July 2016, but I have been following it for a few years before I made my move.

Adventa used to be a medical gloves manufacturing company until it sold this business in 2011 to a private company related to its MD Mr Low Chin Guan.

After a brief period in PN17, Adventa kick started its new businesses in healthcare industry in the form of hospital supplies distribution, medical devices sterilization & home dialysis.

I bought Adventa's shares only because of its home dialysis business under its wholly owned subsidiary Lucenxia.

Lucenxia has come out with the APD (Automated Peritoneal Dialysis) machine called "Intellis" under the Malaysia's Economic Tranformation Programme (ETP) launched by the previous government.

If you don't know what is APD, you can refer the the earlier post "About Stock X".

To prove its efficacy, it must run clinical trials first and this is usually a long, painful & money-burning process. After several delays, Intellis was finally launched in January 2016.

Nevertheless, Adventa is not the only one who provides APD in Malaysia. Prior to that, there are already two established international players here: Baxter (US) & Fresenius (Germany).

So, Adventa does not monopolize APD, but it offers "Made in Malaysia" perhaps cheaper option of APD.

For Adventa's business to become successful, I think there are a few criteria that need to be met.

First, it's the efficacy of Intellis. In other words, it must work well! No one will ever use something that is in doubt, especially when it's related to health. If it passed the clinical trials, I assume that it should be OK unless new issues arise later.

Second, it must be priced competitively. Patients will rent the APD machine with service and not buying the whole machine. So the monthly expenses must be cheaper than Baxter & Fresenius, just like Proton cars must be cheaper than Toyota cars then only got people buying Proton.

Generally, CAPD is the cheapest way of doing dialysis. HD & imported APD cost higher. Adventa's local APD ideally should cost in between CAPD & HD.

Unfortunately I don't know the exact cost of Intellis APD at the moment. I read an article earlier from Focus Malaysia and Adventa's MD mentioned about the cost per patient of this Intellis. I can't remember the figure and can't find that article now, but I feel like it's slightly lower than HD cost, perhaps about RM3000 per month.

Third, it's about government support & policy. A significant numbers of dialysis patients are being paid by the government/JPA/Socso. Even if it's supported by NGO, most are also subsidized by the government. If the government approves payment for Intellis users, then it can have a chance to get more patients to choose Intellis.

To get government support, cost & expenses are surely a factor, besides some political connection. If it can save government money, surely it has a chance especially when government has tight budget.

Anyway, APD is still not that popular among Malaysian, with only 13-14% of PD patients are on APD while the rest are on CAPD/DAPD (modified form of CAPD)

To recap, 10% of dialysis patients in Malaysia are on PD, the rest are HD. So APD is 13-14% of those 10%.

In numbers, only 605 patients are on APD in year 2016, out of total 39,711 dialysis patients. That's merely 1.5%. However, we can see that the numbers of APD is increasing yearly without fail since 2007.

After the launch of Lucenxia's Intellis, it might create more awareness and increase the percentage of patients on APD.

Like I mentioned before, most kidney failure patients will be put on HD first before PD, that's why we have 90% of patients on HD.

From online search, I found that Malaysia Ministry of Health actually has adopted "PD first" policy since 2013, which means all kidney failure patients will be prepared for PD first, only if PD is not feasible then only do HD.

"PD First" Policy reported by New Straits Time Malaysia in 2014

Current practice is like "HD first" which is the other way round. This "PD first" policy is never implemented, if it really exist.

If "PD first" is seriously carried out, how much do you think it can benefit Adventa? You guess it.

Hong Kong is one of the region who successfully adopted PD first policy since 1985. As of year 2013, 76% of kidney failure patients in Hong Kong were treated with PD.

Our neighbour Thailand also adopted PD first policy since 2008. It is reported to be successful and their PD users comprise approximately 30% of total dialysis patients in 2015.

Most of the patients on PD are on CAPD which has lower cost, but we can expect APD will also rise because of more awareness of PD.

Percentage of HD & PD in year 2015

Back home in Malaysia, the dormant PD first policy is not easy to execute in my opinion, unless we have a very dedicated health minister to make it happen.

As you can see, dialysis is a big business. We have a lot of private dialysis centers (HD) that are owned by or connected to doctors, nephrologists (kidney specialists) & prominent figures in the society. So it's not that easy to promote PD first.

Adventa might face headwind for its home dialysis business to grow fast at home, but perhaps there is a chance overseas?

It has been a while that Adventa works with Sri Lankan government to introduce its APD there and currently it might be in trial phase. If it can be rolled out successfully, then it will only be good news to Adventa's shareholders.

Photo from Adventa Berhad website

A lot of things happen after I bought Adventa's shares. In Oct 2017, news broke out that Top Glove was going to acquire Aspion, a medical glove manufacturing company previously sold by Adventa.

As Aspion was at that time held by a private company Adventa Capitals Pte Ltd, which has the same name "Adventa" as publicly listed Adventa Berhad, speculators jumped in to push up the share price from 60sen to almost RM1. Then everyone knew it was a mistake and the share price quickly retreated to 60sen.

A year later, Top Glove found out that the acquisition price was overstated by RM640.5mil and filed law suit against Adventa Capitals (not Adventa) and its directors. Again, Adventa's share price took a hit.

This time it was not totally irrelevant because Adventa's MD Mr Low Chin Guan is also a director of Adventa Capitals. So his accounts were frozen and the initial plan to inject fund into Adventa through rights issues and free warrants has to be called off. 

Personally I don't like this rights issues as it will significantly dilute the earnings. So its cancellation is a good news to me.

The burning question is, is the MD Mr Low Chin Guan a credible and trusted person to lead Adventa? Hmm.... I really don't know.

In May 2019, Adventa announced its decision to dispose entirely its sterilization business (E-beam) and took a net gain of RM35.2mil. It distributed 7 sen per share of special dividend back to shareholders ex-ed on 14 Jan 2020.

Sterilization business has been the only profitable business of Adventa in recent years, while its healthcare segment (hospital supplies distribution & home dialysis) is loss-making. 

Moving forward, we can expect Adventa's bottom line to be in red throughout year 2020. When can it turn profitable will largely depend on its home dialysis business.

Actually I welcome the move to divest its sterilization business, to get the much needed cash to concentrate on healthcare business and pay the debts.

Just weeks ago, because of the Covid-19 outbreak, somebody still thinks that Adventa produces medical gloves and its share price jumped again only to fall back as expected.

The home dialysis business is still in infancy stage, its success will depend on how well Adventa promote it locally and regionally, as well as government policy.

As explained above, I think it is not easy to roll out fast in home soil. So, regional expansion might be the key.

If Adventa receive RM3000 per month from each patient using its Intellis APD machine & service, it will generate RMRM36,000 of revenue in one year per patient.

If there are 100 patients using it, one year revenue will be RM3.6mil. At this stage I'm not sure whether it can break even or not.

If there are 1000 patients using it, revenue per year will reach RM36mil and it should be able to generate profit. I expect the profit margin should not be low if it achieves economy of scale.

One thousand users seem to be a lot, but it's only 1.5% out of 70,000 estimated total dialysis patients in Malaysia in 2020, and we're not even counting contribution from overseas.

APD is cost effective & convenient, and it improves the quality of life of dialysis patients. I can't find a reason why anyone will not consider it as first choice.

The current truth is, patients are not given a proper chance to choose, which is sad. I believe that one day the public awareness will increase and APD will be more commonly used.

Adventa published a very good video (as shown below) on its Intellis APD cycler few years back. I think those whose family members, relatives or friends who are planning for dialysis should take a good look into APD.

Friday 14 February 2020

About Stock X

Malaysia's population is increasing. Certainly, its elderly population is also increasing because of increased life expectancy.

I think no one will disagree with me if I say that chronic degenerative diseases such as hypertension, diabetes mellitus, heart attack, stroke, cancer, kidney failure etc are getting not only more common, but also affecting younger age group.

Kidney failure, one disease that many people fear of, is no doubt getting more prevalent no matter you like it or not.

From Malaysia National Renal Registry data, there were 7,663 new dialysis patients and total 39,711 active dialysis patients in year 2016.

Even though new dialysis patients drop slightly for the first time in don't know how many years in 2016, total patients on dialysis treatment is on a steady rise without fail, doubling from approximately 17,000 patients in 2007 to 40,000 patients in 2016.

Unfortunately, we only have data up to year 2016, even though now we are already in 2020.

Nevertheless, base on this trend, if I just add average 8,000 new cases each year, end of 2020 will see 72,000 patients on active dialysis.

For someone who has end stage kidney failure, the only "cure" is kidney transplant. If not, dialysis is the only other option to prolong life.

In Malaysia, when talking about dialysis, almost everyone will straight away think of "cuci mesin", “洗肾中心”, "dialysis center", which is hemodialysis (HD).

In HD, a patient is connected to a dialysis machine and the machine filter the metabolic waste from blood and circulate the clean blood back to the patient.

Not many people realize that there is another way of dialysis called peritoneal dialysis (PD).

In PD, fluid (dialysate) is drained into a patient's abdomen where an abdominal structure called peritoneum acts as a natural filter. After a few hours, the fluid with toxin and waste is drained out.

Peritoneal Dialysis (PD)

According to National Kidney Registry Malaysia, approximately 90% of kidney failure patients are on HD, while the rest of 10% on PD. Obviously HD is overwhelmingly a more popular choice among Malaysians.

These figures remain rather constant throughout the years, but we can see that PD might be on a slow rise.

Between HD & PD, which one is better, safer or more efficient?

Each methods has its pros and cons, and I'm not going to go into such details here.

In short, actually PD is equally good, if not better than HD according to various researches.

Since PD is at least equally good, why are so many patients treated with HD rather than PD in Malaysia? It's more about government's policy & hospital "culture".

Basically in Malaysia, when a patient is diagnosed with end stage kidney failure and needs long term dialysis, doctors will straight away prepare the patient for HD without talking much about PD to the patient.

If everything is OK, patient will start HD. Only if HD is really not suitable or failed, then the patient will do PD.

Some HD patients don't even know the existence of PD after undergoing dialysis for many years!

So in Malaysia, it's "HD First" policy even though I don't think this is officially in place.

There are generally 2 types of PD: Continuous Ambulatory Peritoneal Dialysis (CAPD) & Automated Peritoneal Dialysis (APD).

In CAPD which is usually home based, patients need to manually drain the fluid into their abdomen through a permanent catheter fixed at abdomen, leave the fluid inside (dwell) for 4 hours then come back to drain out the fluid and put in fresh fluid again. This cycle goes on and usually 4 cycles are needed per day, everyday.

Patients with HD have to travel to dialysis center 3 days a week, with each day 4 hours of dialysis. If we include transport and waiting time, 5-6 hours might be needed for a HD session.

So in CAPD, you have 4 hours to move around freely when the fluid is in your abdomen. You have to come back home to drain out the fluid. In HD, you're stuck to dialysis machine at least 12 hours a week, the rest of the time you can freely move around.

HD needs transport to a dialysis center with big needles poked into your arm every time you are connected to the machine. CAPD can be done by own self at home 4 cycles a day everyday. Which one would you prefer if you're going for dialysis?

Most patients who stay in rural area need PD because no investors will want to set up a dialysis center in rural area just to treat a few patients, and transport to a dialysis center in town is costly and inconvenience.

If you don't want or can't go to dialysis center for HD, and don't like the hassle of draining the dialysis fluids in and out 4-5 times a day, then Automated Peritoneal Dialysis (APD) is the solution.

APD is just like CAPD which can be done at home using peritoneum in the abdomen as filter. The difference is, APD is done at night while you're sleeping using a machine (cycler) to drain the fluids in and out automatically.

So, after waking up in the morning, you are free to move everywhere. You just need to connect to the machine when you're going to bed at night. Basically it does not affect your day time activities. You can go KLCC shopping for a whole day without the need to come back home after 4 hours.

Even when you are traveling to other places for few days or weeks, you don't need to face difficulty in searching for dialysis centers to slot you in, you can carry the portable APD machine with you.

Personally I think APD is the best way of dialysis. However, it is the least used method in our country by miles.

Some readers should have known by now what is my "Stock X". Obviously, it is related to this APD.

Only 10% of dialysis patients are on PD, and even less patients are on APD. Will it be enough to support Stock X's business of APD home-based dialysis?

I'll discuss more in the next post.

Saturday 8 February 2020

PPHB Into Hotel Biz

Corrugated packaging companies are having a good time recently, as we can see from the share price trend of Master-Pack and PPHB.

In the third quarter of 2019, both companies released wonderful financial results with significant jump in bottom lines.

Both attributed this to better margin or lower manufacturing cost or better cost control. Someone says that the raw material price (paper?) has dropped which probably is the case but I'm not too sure whether it remains low now.

Master's net profit margin increases from 6% to 10%, while net profit margin of PPHB shot up from 10% to 19% in FY19Q3. Personally I hope this trend to sustain for a while, but for how long?

While Master has successfully ventured into Vietnam, PPHB has diversified into hotel business.

Prior to this, PPHB has already involved in property investment through JV. If not mistaken, those properties are CMART Nibong Tebal and the surrounding shoplots. 

Its hotel operation is located at a very strategic area in Georgetown UNESCO World Heritage site (Church Street Ghaut) within walking distance to ferry terminal and famous historical sites there.

The 162-room 4-star hotel is called "The Prestige" and was just launched in Jun 2019.

From its FY19Q2 quarterly report, the hotel division registered PBT loss of RM1.4mil from RM211k of revenue, as it has just started operation for one month.

It's a bit surprise to me that it manage to break even in its subsequent quarter of FY19Q3, with revenue of RM2.15mil and PBT of RM112k.

FY19Q4 is peak season for travel and hotels, so I'd expect it to perform better in this period.

At the moment The Prestige has received lots of positive ratings from travelers who stayed there. It is rated above 9 out of 10 in average from almost all the online hotel booking sites.

Hotel business is not expected to contribute tremendously to PPHB's bottom line. If it doesn't make loss continuously, then it is already good.

Some shareholders may not even like this diversification as the money can be used to grow the core business with perhaps better return.

Nevertheless, I still expect it to make RM1mil net profit per quarter.

Thursday 6 February 2020

My Portfolio Jan20

Summary for January 2020

Numbers of stocks 15
Share Sold Stock X (part)
Share Bought None

Overall 2020
Portfolio Return Jan20 7.59%
KLCI Return Jan20 -3.63%
Portfolio Return YTD20 7.59%
KLCI Return YTD20 -3.63%

Stock Portfolio @ End of Jan20

Stocks Avg Dec19 Jan20 Div20 Jan20% Overall%
Stock X

24.2 14.6
BJAUTO 1.92 2.10 1.85 2.75 -11.9 -3.6
DAYA 0.035 0.005 0.005
0.0 -85.7
DKSH 2.500 2.620 2.550
-2.7 2.0
FRONTKN 0.980 2.290 2.340
2.2 138.8
HIBISCUS 1.050 0.940 0.850
-9.6 -19.0
INARI 0.22 1.70 1.76
-3.5 700.0
KRONO 0.76 0.75 0.785
4.7 3.3
LATITUD 2.09 2.83 2.80
-1.1 34.0
LEONFB 0.505 0.420 0.430
2.4 -14.8
MATRIX 1.42 1.91 1.91
0.0 34.5
NOTION 0.40 0.960 1.210
26.0 202.5
PPHB 0.57 1.080 1.070
-0.9 87.7
PRLEXUS 1.15 0.820 0.715
-12.8 -37.8
SCIENTEX 2.735 9.45 9.05
-4.2 230.9

Most of the stocks started year 2020 positively, only to succumb to major melt down in the last 2 trading days of Jan20 due to the Wuhan novel Coronavirus outbreak. 

My portfolio still able to achieve a positive return of 7.6% in the first month of 2020, thanks to Stock X & Notion.

Overall, 8 out of 15 stocks in the portfolio dropped in Jan20, especially BAuto, Hibiscus & Prolexus. I do not hold a lot of BAuto shares but the other two have significantly affected my portfolio return.

Those who bought Daya at 0.5sen should be "safe" because there is no more room for the share price to fall, haha.

Stock X has lifted my portfolio in Jan20. I decided to reduce Stock X shares as I feel that relatively, I have too many of them and it's quite risky. So I locked in some profit when the opportunity came.

I'm currently writing about this Stock X and hopefully I can publish it within this month.

As of today, most of the stocks in Bursa have recovered from the sell down in end of Jan20, at least temporarily.

However, the nCoV is still here with more human-to-human transmission reported in countries other than China. 

Anyway, the sell down driven by fear represents a great opportunity for investors to grab quality stocks at discount, isn't it?

Sunday 2 February 2020

Notion with Dyson?

I wonder how many of you notice that, a listed company's executive chairman made comments and answered questions in i3investor social forum!

That company is Notion Vtec, and it was around end of last year.

From the way he answered questions and his in-depth understanding of the company, I believe that he was no doubt an important figure in the company.

He painted a very rosy picture of Notion in the near future, with how many new & important customers secured recently, most notably Dyson.

Anyway, all his previous comments in i3investor have been removed.

What he said in the forum was almost like what was reported by The Edge earlier in Nov19 "Notion Vtec Ventures Into EMS Space".

Previously Notion was dependent on HDD & Camera parts, but now these 2 segments are expected to be stagnant & drop respectively.

The growth area is the automotive segment & the new EMS (Electronics Manufacturing Services) segment.

In its automotive segment, Notion mainly produces braking plungers for Electronic Braking System (EBS). It produces 30mil plungers annually which are fitted into one of every 6 new cars globally.

It was reported that Notion recently secured 3 new customers in this automotive segment, namely Delphi International, Hilite International & BorgWarner which should contribute to its FY2020.

For its EMS segment, it will supply metal parts to customers, not plastic parts like VS industry and SKP Resources.

Aluminium is the main raw material for Notion. So recent drop in aluminium price should benefit it.

As mentioned before, Dyson should be its main European customer in this EMS segment. Notion chairman even shared a link of Dyson's airblade 9kj hand dryer in the forum.

More interesting to investors, the management gave sales target for the next two financial years in its latest FY19Q4 quarterly report.

For the past 5 years, highest revenue achieved by Notion is RM275mil in FY2017, and FY2019's (ended Sep19) revenue stands at RM238mil.

For the upcoming FY2020, it has a target sales of RM320mil, and a whopping RM400mil for FY2021.

It also targets a PAT margin of between 7.5% to 9%. If we take a modest 8% PAT margin, PAT for FY2020 & FY2021 might be RM26mil & RM32mil respectively, with EPS 7.6sen & 9.5sen based on 336mil shares at the moment (before bonus issue).

If we give a PE ratio of 15x for a company with expected growth (currently VS 15x, SKP 20x), it will be RM1.14 & RM1.43 for the next 2 years. Current share price is at RM1.21.

Nevertheless, I think Notion still has great potential for further growth. According to its chairman, Notion has competitive edge compared to its peers, and potential customers are amazed with its new modern facility and quick response time.

As reported by The Edge, Notion has a target of achieving market capitalization of RM 1 billion by 2024. To achieve this, its share price has to be at RM3.00.

Anyway, target is just a projection or forecast. Investors need to be cautious that it might not hit its target.

Readers of this blog should be aware that I have Notion's shares. After the company started its automotive segment I have a feeling that more diversified customers might come in if it concentrates on its expertise, not doing things like selling handphones.

Recently Notion's share price has advanced more than I can hope for, probably due to its proposed 2:1 bonus issue. I think I will continue to hold and hope that its business will perform better that its forecast.