Never trust the bank's marketing pitch

Yesterday I received a call of a telebanker from Standard Chartered Bank who was trying to persuade me to make a credit card balance transfer to the Standard Chartered account. Too bad that I am debt free so I did not accept the offer from the telebanker. The telebanker then offered me another package to make a personal loan of RM7,200 from the bank with only 4.99% charge per annum. He told me there are 3 period selections I can choose to repay the loan, i.e. 9-month, 1-year and 1.5-year.

I was quite curious about the package of RM7,200 loan with the marginal 4.99% annual interest rate charge, so I inquired the telebanker that whether I can repay the principal plus interest of RM7,559.28 (=RM7,200 * 1.0499) at the end of 1 year if I take up the 1-year loan package? But the fellow told me that I would need make installment to repay the loan for 12 months after a month I receive the loan.

When I was listening to the telebanker about the installment to repay the loan, I realised that the loan effective annual rate is more than 4.99% per annum. Let me work out some illustrations to show how the marketing trick of the bank to mislead the borrower by pitching a loan promotion with low rate but end up the borrower needs to pay more than the loan rate without realised he is paying more.

If I borrow a loan of RM7,200 with a marginal interest rate of 4.99% to be repaid within 12 months by installment, so each month I need to pay RM629.94 (=[RM7,200*(1.0499)]/12). The effective annual rate can be worked out by using the money weighted average return method (or the so called Internal Rate of Return, “IRR”). By working trial and error on the IRR in order to make the Net Present Value of the plan to be zero, I am able to get the effective rate to be 9.09%, which is 1.82 times higher than the marginal interest rate of 4.99%. So the effective annual rate for 12-month package is shown as below:-

RM629.94/[(1+IRR)] + RM629.94/[(1+IRR)^2] + …+ RM629.94/[(1+IRR)^11] + RM629.94/[(1+IRR)^12] – RM7,200 = 0

IRR = 0.7572%

Annualised IRR = 0.7572% * 12 = 9.0867%

How about the effective interest rate of the 1.5-year loan of RM7,200? Please refer the calculation shown below:-

Monthly installment = (RM7,200*[1+(0.0499)*18/12])/18 = RM429.94

RM429.94/[(1+IRR)] + RM429.94/[(1+IRR)^2] + …+ RM429.94/[(1+IRR)^17] + RM429.94/[(1+IRR)^18] – RM7,200= 0

IRR = 0.7711%

Annualised IRR = 0.7711% * 12 = 9.25%

From the computation, it is clearly showing that the longer period we take to repay the loan with installment, the higher effective interest rate we have to pay. By knowing I need to pay the loan with principal with interest by installment, I straigh away rejected the "kind" offer from the telebanker.

A rumour about Tan Teng Boo's new Ferrari Car

Today I was attending the CFA Level III course at the Kasturi College at Menara Plaza First Nationwide. During the class, one of the classmates mentioned that when he was parking his car in the car park of Menara Plaza First Nationwide, he noticed a Ferrari sport car was parked inside the car park as well. So he further inquired in the class whether it was the lecturer’s car. Immediately the lecturer’s denied he drove car come to work lah cuz he used to ride motorcycle come to lecture (I think the lecturer was very humble cuz he is a brilliant and knowledgeable fellow who can earn enough to afford a luxury car).

In order to further prove that he has no sport car, the lecturer said that the car could be possible belong to Tan Teng Boo as he is the one most qualified to own a good car in this building (Note: TTB’s office of Capital Dynamics is located at the same building of Menara Plaza First Nationwide at floors 16 and 17 which I have visited before). So I assume that TTB was driving his sport car to work at the office on Sunday, then it is a good news to the ICAP’s shareowners that the FM is so hardworking and productive as he even works on holiday.

By the way, I remembered last time TTB was used to drive a Lotus sport car. Maybe now he buys a more stylish one after last year the bull run (he also opened more news offices during the crisis). Hope he can drive safe and thus the ICAP shareowners can sleep well with his good health condition...^_^!!

Is ICAP's NAV discount relevant to value investor?

The purpose of setting up ICAP is to enjoy capital appreciation in the long run. In an extreme case that if all initial IPO investors of the fund were serious value investors and who invest ICAP because of TTB's outperformance, they wont sell a share from the 1st day of listing. So the fund would have a stale price of RM1 since its listing, not RM1.83 now. Indeed, the meaning of 'close' end fund mean there would be no additional fresh capital (except right issue) being added into the fund and thus the original investor dont really expect about the 'new' investors.

So what will happen to those investors who bought at RM1 at the IPO and still being priced at RM1 today? Their only concern is the growth of NAV, not the share price. In this case the market is non-existance, TTB can just liquidate the fund and everyone will get back their value base on the NAV instead of receiving wrong reward base on market price.

Of course now the situation is not at the extreme side that the original IPO investors wont sell a share since IPO otherwise you and I can't buy the fund to enjoy its benefit. The situation is just at the midpoint of the extreme amid the discounting the NAV is becoming bigger. But just like what I mentioned in the extreme case that the role of market doesnt matter or it is just irrelevant.

By the way, those who think can beat TTB by "emulating the fund's purchases by investing in the bigger companies and ignore the smaller ones have yielded a much higher returns" wound end up just like those who try to beat Warren Buffet by mimicking his portfolio holding. However, we simply just dont know when TTB or Warrent Buffet is going to liqudiate their position and left the mimicker like a dumb ass who think they have outperformed (Please refer to the case of Berkshire Hathaway Holding of China Oil then you would know those Warren Buffet mimickers look stupid today).

Lastly I wanna quote a phrase from Warren Buffet: "If a business is worth a dollar and I can buy it for 40 cents, something good may happen to me. Those who cannot understand this concept in 5 minutes will not get it through even after 10 years." So any of those who bought ICAP shares but feels uneasy being trapped in discount, please stop pretending to be value investor and dispose the shares to get out from the trouble.

ICAP’s 5th AGM (Part 4)

Below are the 18 companies that ICAP has mentioned during the AGM:-

1) Airasia
According to TTB, he thinks Airasia is a well-managed company and it is expanding aggressively. Due to this kind of aggressive expansion, Airasia leveraged quite heavily to finance the purchase of new airplanes.

ICAP believes that Airasia could make an outstanding profit and also penetrate well into the aviation industry during good time, however it would invite high risk as well while encountering bad time.

After ICAP invested into Airasia not too long at year 2008, the world financial market faced a rapidly deteriorated economy due to the bankrupcy of Lehman Brother. So the pessimism was spread so furiously and caused a huge confidence risk as most banks wanted to withdraw their credit. As a result, ICAP concerned about Airasia could be in trouble due to liquidity risk amid the confidence risk. Thus ICAP sold Airasia decisively for security purpose. The disposal made a gain of RM540,000.


2) Axiata
It was not ICAP's intention to invest Axiata. Axiata is the product of the demerging exercise of Telekom Malaysia Berhad ("TM"). ICAP was initially investing TM before the announcement of demerging TM Internationl ("TMI") from TM (TMI was subsequently renamed as "Axiata").

The initial investment of TM was not because of Axiata. In fact, ICAP is more interested to the fix-line telephone business that still under TM now. Thus ICAP decides to keep the original TM shares after the demerging plan and was finding a good timing to dispose Axiata.

However, the reality always to its back to investors as it happened the opposite way as what ICAP has expected. Instead of finding a good timing to dispose Axiata at a higher price, Axiata's announcement of Right Issue with an issue price of RM1.12 per share and also the 'Lehman Panic' incident just sent its share price to a hell down from around RM8 to the lowest at RM1.47. Since the Right Issue was RM1.12 and thus it was very dilutive to the existing shareholder if he decided not to subsribe the Right Issue offer. So what was the reason that ICAP dispose Axiata and realised a loss of RM14 million without further subscribing the Right Issue?

TTB explained that Celcom is the gem of Axiata and so far the best performing subsidiary. Nevertheless, Malaysian cellphone market is going to be saturated and thus it will step into a mature stage. Hence TTB doubt that whether Celcom can further support other non-performing subsidiaries of Axiata? Axiata's the other 3 subsidiaries are either stuck in a mass loss or a slight marginal gain situation, thought I believe they are turning the situation these few years.

All these 3 other subsidiaries are operated at foreign markets and their accounts are recorded with foreign currency amounts, and thus they are subject to a great foreign currency exchange rate risk while consolidate into Axiata's group account. (Note: for my own opinion, i think the foreign currency exchange rate risk is a non-issue as the foreign currency exchange rate is too fluctuate that today can make a foreign currency exchange gain and tomorrow these would be a foreign currency exchange loss. As a whole, this foreign currency exchange gain and loss is just an accounting issue and thus will offset each other in long run, unless the depreciation or appreciation of the the foreign currency exchange rate is a structural change).

Though the 3 oversees subsidiaries seems to have very good potential, it is a question that when will they break even and start to contribute to Axiata's bottom line. Moreover, Axiata was in heavy debt to TM. This is the reason why Axiata wanted to engage the Right Issue in order to spin off the debt to TM. However, after paying the debt to TM, Axiata borrows a huge debt funding again for the acquistion of the shareholding of another subsidiary, i.e. "Idea". So Axiata's net gearing rises once more and TTB thinks the aggressive expansion via high debt funding seems not a wise move. In fact, the existing 3 oversees subsidiaries still have room to improve and thus post a better organic growth. Instead of improving internally, Axiata chooses an easier way to grow via acquisition and thus taking more financial leverage risk to turn around another subsidiary.

As ICAP did not want to further expose to the Axiata's high leverage risk and also there were other better investment opportunities than Axiata at Bursa Malaysia, ICAP decided to dispose off Axiata and used the remaining proceed to invest into other more promising counters.

(This was almost the same reason that I wrote in the previous thread to indicate that why ICAP realised Axiata at a loss of RM14 million).
http://kinwing.blogspot.com/2009/08/icapaxiata8-8-2009.html

东和资源股价跟镍价的联系。

由于收到草根兄有关东和资源股价(Tonger’s Price)跟镍价(Nickel’s Price)联系的问题，所以特别开了这个帖回复草根兄的疑问。其实我现在也正在以英文作草稿撰写着Tongher’s Price跟Nickel’s Price之间的正面联系(Positive Correlation)，它将被呈现在"TONG HERR RESOURCES BERHAD (PART 2) 或 （PART 3)"。

我之前向草根兄提过东和("Tongher")是以先进先出（"FIFO")的会计方式来记录其存货的成本，这也是唯一被FRS会计准则允准的存货记录方式。另一种的存货成本记载方式是后进先出("LIFO")，这种方式比较广泛用于美国的会计制度("GAAP")，其对FIFO的优势是延后缴税("Deferred Tax")。不过美国GAAP将逐渐的与IFRS融合（"Harmonise")并逐渐过渡采用IFRS的准则，所以LIFO在未来将不被接纳。

FIFO的方式会将原料成本购买价的效应延后一段时间才发酵。其原料成本价效应通常是在未来原料购买价与之前的购买价出现了相反的发展趋势才能感受得到。可能我这么说草根兄还不能明白，所以我在以下举个例子。

假设我们现在是处于2007年的高通货膨胀时期("Inflation")，所有的原料价都涨价，包括Nickel's Price。由于原料价的上升，因此这给Tongher一个理由来为它的制成品("Finished Goods")涨价,以尝试将高涨的成本转移至客户身上。所以这有助于公司提高它的销售额("Revenue")。另一方面，由于受制于FIFO的方式，Tongher的销售成本("Cost of Goods Sold"或简称"COGS")却没有大幅度增加。这是因为Tongher的2007年会计帐目不能即时反映2007年的原料高收购价，而只能以2007年之前的低收购价来记录其COGS。

即使Tongher在2007年年头所购买的原料存货并在同一年的年尾以Finished Goods来出货(Real time inventory transaction is using LIFO),但是Tongher的会计记录方式还是要用2007年之前较低的原料收购价来反映其COGS。由此可见Revenue的增加是即时反应了通膨的效应，但COGS却往往在这个时刻因为FIFO的因素而保持不变甚至有所下降，因此这种落差将会为公司的营运盈利("Operating Profit")带来正面的增长。

相反地，当原料价下跌时，公司的Revenue就会即时反应出下跌的趋势(因为那时候Finished Goods不降价都不行，因为客户极可能会给公司压力，尤其是工业产品并无任何实质的品牌效应以保持起其产品价格不变），但之前在高价买进的原料存货却需得在这个时候呈现出来。所以祸不单行的是除了公司的Revenue下降之外，其COGS也在此时大涨。所以公司往往会在原料价下跌时会面临Operating Profit的下跌甚至蒙受亏损。

所以草根兄你也可能回观察到很多工业股都有类似的情况，那就是它们的股价跟原料价的联系("Correlationship")。 SHELL REFINING COMPANY (FEDERATION OF MALAYA) BERHAD （"SHELL"）就是其中一个典型的例子，当原油价高涨是Shell的盈利将增加并带动股价的上升。而当原油价下降是Shell的盈利将降低进而导致股价下滑。

(以上是我的看法，不一定正确，所以有待各位的指点)。

ICAP’s 5th AGM (Part 3)

(My photo shooting skill still need to improve...^_^")

Before Tan Teng Boo ("TTB") commenced to share us a list of shares that compse the ICAP's portfolio like last time, he mentioned why ICAP should be traded in premium (OK, I was patient to listen to this salesman promotion...^_^!!). The reasons given by TTB to justify 'why ICAP should be traded in premium' can be found from the previous article in my blog.
http://kinwing.blogspot.com/2009/08/forward-company-analysis-icapitalbiz.html

So he was just repeating the few points such as the 3 'N' principals, how the fund manager is saving lot of costs for the fund lah, how the fund manager is picking cheap stocks lah, how integrity the fund managerlah and blablabla. For me, I view the most important point is the 3 'N' principals, i.e. 'No' Borrowing, 'No' Derivatives / Off Balance Sheet Liabilities and 'No' Short Selling that enrich the financial strength of ICAP. At least I can sleep soundly during nights without worrying wake up the next day and found out the fund is in bankruptcy.

Later, TTB shown us a list of shares that the fund has invested. The list of shares is shown below in alphabetic order:-
1) Astro All Asia Networks PLC (ASTRO, 5076)
2) Boustead Holdings Berhad (BSTEAD, 2771)
3) Fraser & Neave Holdings Berahd (F&N, 3689)
4) Haio-Enterprise Berhad (HAIO, 7668)
5) Integrax Berhad (INTEGRA, 9555)
6) Kuala Lumpur Kepong Berhad (KLK, 2445)
7) Lion Diversified Holdings Berhad (LIONDIV, 2887)
8) Mieco Chipboard Berhad (MIECO, 5001)
9) Padini Holdings Berhad (PADINI, 7052)
10) Parkson Holdings Berhad (PARKSON, 5657)
11) Petronas Dagangan Berhad (PETDAG, 5681)
12) Poh Kong Holdings Berhad (POHKONG, 5080)
13) P.I.E Industrial Berhad (PIE, 7095)
14) Suria Capital Holdings Berhad (SURIA, 6521)
15) Swee Joo Berhad (SWEEJOO, 5119)
16) Telekom Malaysia Berhad (TM, 4863)
17) Tong Herr Resoruces Berhad (TONGHER, 5010)

(to be continued)

Is YTLLAND (2577) a good buy in long run?

According to my analysis on YTLLAND, fundamentally it is totally not appeal to me. Extremely low ROE (if not mistaken by referring to the annual report, its average-5 year ROE no more than 5%), due to low profit but large base asset. The relative valuation such as P/E not attractive at all also because of low EPS.

Moreover, due to the nature of the business in property sector, the profit is highly fluctuating. In year 2005 and 2006, it had profit around RM40 mil and subsequently the profit dropped 'gaogao' till RM13 mil in year 2008. For me, a good company should have increased its profit gradually every year instead of decreasing. For your information regarding the the latest FYI 2009 (unaudited), the company only made a profit of RM1.9 mil. What a pathetic poor result.

Even in a good year, YTLLAND seems cannot make a good profit while it sit at a huge asset base and I just cant' imagine what kind of poor result it will attain during bad time. This is the reason why I don't like most of the property stocks in Bursa Malaysia.

Of course, if we look at the technical side, we might well receive different perception because the share price is at an uptrend bounce. Since it is a high-beta stock as we look at the graph above that showing it could drop at a high of RM2.38 to RM.425 (around 83% depreciation from peak), then it could be probably stand again at RM2.38 if KLCI index can bounce to the peak of 1,500 points. But who knows what is going happen to YTLLAND if it just sound too crazy to value it at RM2.38. YTLLAND just does not worth for at RM2.38 base on its earnings track record.

As a conclusion, YTLLAND is a speculating stock which can only be hold for short term and not fundamentally strong to hold for long term.