Are You A Contrarian or Trend Investor?

"Be greedy when others are fearful, be fearful when others are greedy"

This is a famous quote by Warren Buffet. He can't be wrong, right?

Mr Fong SiLing (Cold Eye), apparently, also adopted this strategy. He mentioned again and again in his articles that the best way to profit from stock market investing is to practice contrarian investing （反向投资）

Based on his 40 years of experience and success, he can't be wrong as well.

Recently he openly wrote that it is a good time to collect oil & gas stocks now. Oil price is at rock bottom, and so are many O&G stock prices. Everyone seems to be pessimistic about O&G now.

We know that eventually oil price will recover. O&G stocks price will recover as well, if they can survive the storm.

How long will it take for crude oil price to recover then? Can it be within 1 year, or 2-3 years? No one knows. 

Brent crude oil price has been in the downtrend since falling from above USD100 per barrel in mid 2014. It rebounded in 2016 from USD30 to reach USD80 in 2018. Then it fell below USD30 this year.

We know that it will go back to above USD60 per barrel again. It's just a matter of time.

By collecting good O&G stocks, you know that you are almost sure win, and may win big. However, how long are you willing to wait?

Are you willing to wait for 2-3 years? 

Some investors have no problem with that, and surely some do not have the patience.

       Armada: Downtrend for 6 years and counting

Besides O&G sector, there are other sectors which are also languishing in bear zone such as plantation, property, logistics etc.

Is it the time to collect stocks in those sectors as well? Now everyone is "fearful" in them, should we act now?

Stock market investing is like predicting the future earning of a company. For me, if you think that the recovery is close, then may be it's time to buy.

How close is "close"? Everyone has their own definition for that.

Property sector was hot in the early 2010s. New development projects were like mushrooms after rain and all were fully taken up. Property price went up like hell. A lot of non-property players diversified to join this property boom.

As a result, many property stocks at that time double or triple in price. 

The turning point was around 2015, when there was an oversupply of properties in the market, and the property price were unaffordable to many.

From that point of time, property sales dropped, company's profit dropped and the share price inevitably followed.

       MKH: Property + Plantation Play

Up to today, I still don't see any recovery hope for property stocks in the next 12 months. Covid-19 just makes the situation worse.

Nevertheless, after Covid-19's concern is over, would it be the time for property sector to turnaround amid low interest environment? 

I don't know when will this happen but my point is, buying property stocks in year 2016, 2017, 2018 or 2019 when most people were "fearful" in property sector is a contrarian move, but is it a good move?

I have a few property stocks before, and I have sold all of them except Matrix which I decided to keep.

The reason is simple, I foresee Matrix can continue to break new high in sales and profits even though the overall property market is going down hill.

To me Matrix is a well-managed company. It makes good sales, its unbilled sales go up and it gives good dividends too.

True enough, Matrix's sales and net profit increase year after year since listing in 2013. However, its share price has been quite stagnant in the last 4-5 years before Covid-19 dragged it down in Mac20.

It didn't drop like other property stocks though, but it didn't go up. So, its PE ratio is getting lower and lower at around 6x.

The reason is, Matrix is not in the positive "trend".

This brings us to "Trend Investing".

From my observation, trend investing is a good way to earn money in stock market, especially if you can identify the trend earlier than most people do.

So it means that doing homework does matter, not like rushing in when everyone already did so.

Currently it is the trend of gloves and PPE related stocks. If you are smart and alert, you might have bought and accumulated gloves stocks in Jan/Feb this year when Covid-19 started to spread globally, even though the jump in stock price only occurred in April.

Up to today I still haven't got any shares of glove stocks, mainly because I was slow to react, and most of the good glove stocks are "expensive" to me.

If you buy early in the trend, you just ride on it and make handsome profit. However, if you buy near the end of the trend, you might end up losing money.

The trend can last for few months to few years.

Last time the property trend lasted about 3 years from 2012-2015. If I'm not wrong, plantation stocks were also hotly debated at that time.

After that in 2014, the tremendous weakening of Ringgit against USD from RM3.20 to RM4.40 kick started the uptrend of export-orientated stocks.

Furniture, injection moulding, semiconductor and other export stocks were having a real good time.

       POHUAT: Furniture export stock 

This trend also lasted around 3 years until 2017 when MYR strengthened to below RM4.00. 

Last year there seems to be a brief box-packaging trend. Combination of several favourable conditions such as higher demand, lower raw material cost and promotion by some investors and analysts might have initiated and sustained the trend.

This trend lasted for about a year before being cut short by Covid-19.

How about the trend of technology stocks? Smartphones, 5G, IoT, cloud computing, driverless cars etc are the main trend of the world so I feel that it is always in the trend.

Even though we read that semiconductor industry has up and down cycle, or negatively affected by geopolitical issues, I actually don't feel any significant "out-of-trend" issue for the past 10 years.

When a tech company goes down hill, there will be another tech company on the up at the same time.

The important thing is to make sure that the tech company is always at the latest trend of technology. If not, it will be eliminated sooner or later.

       INARI: Uptrend from 2013 until 2018

Contrarian and trend investing seem to be two different kinds of investment strategies. Both can make money and lose money as well.

If you buy too early in contrarian investing, you lose time, and time is money.

If you buy too late in trend investing, you can be trapped and lose money.

No matter which kind of investors you are, it's all about the timing.

Those successful investors excel in the in & out timing, either using fundamental, technical, trend, contrarian or whatever methods.

We know that life is extremely tough for Airasia & GENM now. We also know that both of them will recover. 

Are you greedy now when others are fearful?

 

Latitude & Poh Huat: Buy Or Sell?

Since China placed an oil rig at the disputed waters between China & Vietnam in early May 2014, the relationship between both countries have been tense.

Sadly, the supposed-to-be peaceful rally against China in Vietnam turned into riot on 13th May 2014.

From the news, the area that is most heavily affected is Binh Duong province in southern Vietnam, which is an important industrial zone where both Latitude Tree and Poh Huat have their factories there.

There are news that many factories are sabotaged and even set on fire.

Yesterday both Latitude Tree and Poh Huat released an announcement regarding this issue.

Unfortunately, even though they are from Malaysia, both companies' factories in Vietnam were affected by the riot, in which trouble-makers vandalized the main office buildings & its equipment there.

Fortunately, both companies mentioned that their manufacturing facilities were not affected, there is no serious fire damage and nobody is seriously hurt. However, like almost all factories in the area, production was halted at the moment for the safety of the employees until further notice.

Both Poh Huat's facilities in Binh Duong & Dong Nai province were affected, while one of two Latitude's facilities in Binh Duong was affected.

Latitude's assets in Vietnam are insured against riot but there is no mention from Poh Huat regarding this matter.

For Latitude, as all the damage to assets are insured, the main problem will be loss of revenue arising from production halt. Latitude operation in Vietnam contributes almost all of its net profit at the moment.

It seems like the peak of the riot was on 13 May, and has subsided the day after as Vietnam police started to make arrest.

Personally I think the most important thing is when will the production restart. If the production stops for less than a week, then it is still acceptable. However, if it is more than that, then it's not a good sign.

I don't think that Vietnam government will be so naive to continue to let the rioters causing troubles in one of its most important industrial area. It will negatively affect foreign investment in the future.

Furthermore, Vietnamese are at risk of losing their jobs if factories close down or stop production for a long time. Some workers were actually protecting their factories during the riots.

So I think this will be a short-term setback for both Latitude Tree and Poh Huat, and it may present an opportunity to collect their shares, unless the production halt persist for too long.

Furniture Stocks Draw Attention

I came to know about Latitude Tree just last week. In the early morning of that day, I still never heard of this stock, but later in that day just before the market closed, I decided to add it into my portfolio.

It is rather impulsive. I saw its share price spiked after a magnificent quarterly financial result.

Latitud is a Malaysia-based furniture manufacturing company founded & controlled by Taiwanese. It started off as a manufacturer of dining chairs in 1988. Now it has grown into a complete medium to high end dining & bedroom sets manufacturer. It also produces living room collection sets and some office furniture.

There are quite a number of furniture manufacturers listed in Bursa Malaysia. I pick 4 of them to do a very simple & superficial comparison. They are:

• Latitude Tree
• Homeritz
• Lii Hen
• Poh Huat

* The information, figures, calculation & opinion provided below might not be accurate or true. Please do own research if in doubt.

Products

Company	Products
Latitude	Wooden furniture
Homeritz	Upholstered furniture
Lii Hen	Wooden furniture
Poh Huat	Wooden furniture

Homeritz is different from all 3 others as it designs and manufactures upholstered home furniture such as leather and fabric-based sofas, dining chairs, bed frames etc. It also has its own brand Eritz since 2009.

The other 3 companies design and manufacture wood-based furniture. Both Latitude & Lii Hen concentrate on home furniture but Poh Huat manufactures both home & office furniture.

Market

All 4 companies export majority of their products to overseas which include the Americas, Europe, Middle East, Australasia & South Africa. 

Latitud exports 99% of its products, in which 92% are exported to the United States (FY2013). The rest are to Canada, Europe, Australia, South Affrica & Middle East. I think it still has a lot of room to expand its presence worldwide.

The other 3 companies claim that they export to more than 50 countries worldwide.

Homeritz's major export destination is Europe, which comprises 41% in FY2011. United States is Poh Huat's biggest export country (?%) while export to the Americas (North & South) makes up 77% of Lii Hen's revenue in 2013.

Facilitiy

Latitude has 3 factories in Malaysia, 2 in Vietnam & 1 in Thailand.

Homeritz & Lii Hen both have 5 factories each in Johor.

Poh Huat has 2 factories in Vietnam, while others in Malaysia, China & South Africa.

Latitude might be less affected by the effect of minimum wages and increased electricity tariff in Malaysia, as its mainly concentrates its production in Vietnam, while scaling down its Malaysia operation.

Market Capitalization

	Latitude	Homeritz	Lii Hen	Poh Huat
Share price	1.74	0.56	1.64	0.85
M/Cap (mil)	169.1	112.0	98.4	96.4

Latitude has biggest market cap followed by Homeritz.

Financial Performance

RM mil	Latitude	Homeritz	Lii Hen	Poh Huat
Revenue	493.7	112.9	346.5	392.0
PAT	24.4	15.1	21.3	15.2
Gross margin%	14.4	16.9@	15.4	13.4

*Latitude FY2013 (end June13)

*Homeritz FY2013 (end Aug 13)

*LiiHen FY2012 (end Dec12)

*Poh Huat FY2012 (end Oct12)

@ Operating margin

Latitude sells more and earns more compared to others. However, Homeritz has the best gross margin even though its revenue is the lowest.

For latest financial result,

Latitude and Homeritz break previous years' earning record. Lii Hen & Poh Huat's 9MFY13 revenue & PAT are lower YoY but there is a special one-off loss for Poh Huat.

Balance Sheet

RM mil	Latitude	Homeritz	Lii Hen	Poh Huat
Total Asset	478.6	103.8	190.4	243.3
Total Liab	179.3	16.5	46.8	94.5
Cash	112.5	34.7	40.4	30.2
Borrowings	91.2	2.7	17.6	33.4
ROE (%)	10.5	20.2	15.9	10.7
D/E ratio	Net cash	Net cash	Net cash	0.02

Almost all are in a net cash position.

Homeritz has the best ROE, while Latitude has the lowest ROE but still not too bad above 10%.

Dividend

	Latitude	Homeritz	Lii Hen	Poh Huat
Share price	1.74	0.56	1.64	0.85
Dividend (sen)	6.3	3.0	12.0	2.0
Div Yield %	3.6	5.4	7.3	2.4
Div Payout %	25.0	40.8	33.8	16.0

*Share price at 4th Dec 2013 close

*Base on previous full financial year total dividend

Homeritz & Lii Hen are more generous in their dividend payout. At current share price, Lii Hen has the best dividend yield, followed by Homeritz, Latitude and Poh Huat.

Value

	Latitude	Homeritz	Lii Hen	Poh Huat
Share price	1.74	0.56	1.64	0.85
EPS (sen)	25.07	7.56	35.5	14.04
PE	6.9	7.4	4.6	6.1
NTA	2.57	0.41	2.39	1.37
P/B	0.68	1.36	0.69	0.62

*EPS base on last full financial year earning

All 4 stocks have relatively low PE ratio. This shows that the furniture stocks are not popular and perhaps overlooked.

Due to recent spike in share price, Latitude's PE ratio has gone up from 5.3x to 6.9x. Lii Hen has a very low PE but it is anticipated that its upcoming FY2013 profit will be lower. All except Homeritz are trading below their book value.

       Homeritz's dining set

Out of all of these 4 companies, Homeritz stands out with best gross margin, best ROE, best dividend payout ratio, decent dividend yield and its recent financial results are good. That's why it's the "most expensive" one here.

As all 4 companies are export-orientated, I think they will have good time ahead as the US and Europe are slowly coming out from recession. US house sale seems to recover thus there will be more demand for furniture. The expected strengthening of US dollar will also improve exporters' earnings to a certain extent.

For me, I think Latitude is the best bet in furniture manufacturing, mainly because of its future earning prospect and low projected PE.

       Latitude's bedroom set

Latitude's latest FY14Q1 result records a 27% and 62% increase in revenue and net profit YoY, due to higher orders, production and sales, while the USD has strengthened only 3.6% between these two periods. Its FY14Q1 net profit already makes up 60% of FY2013 full year net profit.

RM mil	FY14Q1	FY13Q4	FY13Q1
Revenue	177.1	124.4	139.7
PBT	20.7	9.4	12.2
PBT%	11.7	7.6	8.7
PAT	14.6	5.9	9.0
MAS Rev	28.9	23.2	29.2
MAS PBT	1.2	-1.0	0.8
VIET Rev	142.2	96.1	106.3
VIET PBT	20.0	12.0	11.7
THAI Rev	6.0	5.2	4.2
THAI PBT	0.02	-0.5	-0.2

In FY2013, there is an increase in monthly production capacity of a factory in Vietnam by approximately USD1.0mil. I am keen to know what is the utilization rate of its overall production capacity and its future plan of capex.

In early 2013, Latitude has proposed to acquire all the subsidiaries of Latitude Tree International Group Ltd (LTIGL) for SGD48.75mil, which includes 99.99% of share capital of Latitude Tree Vietnam Joint Stock Company. Operation in Vietnam (under LTIGL) contributes 100% of Latitude's profit in FY2013 as operation in both Malaysia & Thailand suffer minor loss.

Currently Latitude Tree holds the shares of Vietnam operation indirectly through 77.6% owned LTIGL. Once the corporate exercise is completed, Latitude Tree will directly own 99.99% of its most profitable Vietnam operation. 

The net profit attributed to non-controlling interest for FY2013 amounted to RM7.68mil, compared to RM24.37 net profit for owners of the parent. If both are combined later, its net profit might be 32% more.

For recent FY14Q1, PBT from Vietnam operation increases as much as 70% both QoQ and YoY to RM20mil. To add icing on top, operation in Malaysia turns profitable in this quarter after scaling down of its operation.

Latitude will only need to pay SGD2.3mil cash for the acquisition, the balance of SGD46.4mil will be settled by way of set-off against the capital due to be returned to Latitude Tree. I actually don't understand what it really means, but it seems like Latitude does not need to borrow or deplete its cash substantially, or do share placement to complete the acquisition.

The proposed acquisition is expected to be completed before 31 Dec 2013.

       Latitude's dining set

As Latitud's business is moderately affected by seasonality, one would expect its Q3 & Q4 results (Jan-Jun) to be weaker. If LTIGL acquisition is completed in Q2, then Q3 & Q4 result might be good due to full contribution from Vietnam operation.

My personal estimation of Latitude's FY2014 PAT is RM40mil (64% increase from FY2013). This will give it an EPS of 41sen base on 97.2mil shares. Thus, my own target price for Latitude is RM3.30, if we give it a PE ratio of 8x. 

Anyway, I think Latitude's FY2014 net profit has a good chance to exceed RM40mil. Next quarter's result (FY14Q2) will be vital to determine whether to top up the shares.

At current price of RM1.7x, Latitude still looks quite cheap to me.

Both Latitude & Homeritz are perhaps worth to invest in, as both are good and manufacture different types of home furniture.

Last but not least, in Latitude's FY2013 annual report just released last week, Cold Eye Fong SiLing appears to be its no.12 largest shareholder at 1.4%. In FY2012, his name does not appear in the Top 30 largest shareholders list.