Wellcall Research Trip

Dear Fellow Investor,

Wellcall Research Trip

On Thursday, 24 October, we visited Wellcall, the largest Malaysian producer of rubber hoses. On my left is Leong Hon Chong the Executive Director and on my right Pong Teng Siew , research head of Interpac Securities as well as other company officers. 

               From Dynaquest Research

Founded in 1998, today, Wellcall, based in Ipoh is a global and the largest industry rubber hose manufacturer in Malaysia with a workforce of 350 staff. It has its our own in-house Research And Development Division (R&D) which is able to develop customized products. WellCall has expanded its existing factory space from 150,000 sq. ft to 320,000 sq. ft, encompassing a total land area of approximately 504,570 sq. ft.

Among the products manufactured by Wellcall are protective cover hose, multi-purpose hose, air hose, water hose, car heater hose, fuel hose , food delivery hose, fire reel hose, general wash down hose, low pressure oil hose, twin-line welding hose, radiator hose, low pressure textile braided hose, oil discharge hose, sand blast hose and petroleum oil hose. Wellcall manufactures and sells rubber hose for 6 application markets such as Air & Water, Welding & Gas, Oil & Fuel, Automobile, Ship Building, and Food & Beverages.

Wellcall can produce the extruded type of hoses from the smallest bore size of 3/16” to the largest of 2”. While the large bore size of mandrel hose (nylon wrappings) type can be produced under the range of 1/2” to 8”. In addition, Wellcall is undertaking R&D activities to develop the bore size of 24” mandrel hose and to produce a higher temperature resistant product. The Group sells its products to customers in over 60 countries.

For 9M19, Wellcall exported 90.9% of its rubber hose to USA/Canada (34.1%), Europe (18.1%), Asia (16.9%), Australia/New Zealand (11.2%), South America (8.5%), Middle East (8.3%) and Africa (2.9%). Finally, Wellcall has a strong balance sheet with not only zero borrowing but has cash in hand of RM46.916m or 9.42 sen per share as at 30.6.19. Cash flow is healthy due to the recurring revenues of the hose replacement cycle.  Dividend is now 5.8 % and well covered.

Their investment moat is their world wide distributer network  with their ability to customize customer needs meaning they can do relatively small orders that are not cost efficient for large multinational companies to handle.

Wellcall has been under pressure and is trading at a multiyear support due to the global slowdown, trade war, negative market sentiment and weakness in oil prices.

Should oil stabilize at these current levels and Trump be re elected in 2020 expect this share to recover to old highs. 34.1 % of their revenues are from the US and Trump is friendly to the oil industry.

Our positions in Hong Kong including Link Reit, Hong Kong Land and the EWH have suffered due to the Hong Kong unrest. These are all quality companies and once The Hang Seng  stabilizes and the rioters lose popular support our shares should go back up. Most Hong Kong citizens want to get back to work so these positive things are happening.  There is less focus on Hong Kong by the Western media including BBC and CNN which is a good sign.

From Bloomberg research, on the home front professional short sellers of KLSE shares are covering their short sales. A short seller has unlimited risk and must pay interest and dividends on the shares they short. If shares go up the short sellers will die. This is what is happening to the short sellers of gold. Major banks such as JP Morgan, and hedge funds have lost multi billion USD on their gold shorts in their efforts to suppress  gold prices as gold has risen over 30 % this year. Rising gold prices are a vote of no confidence in governments so governments through the large banks will do all they can to push gold down. They will succeed in the short term because the Federal Reserve can print money to buy short futures contracts and push gold down but ultimately they can not repeal the laws of supply and demand just like the Federal Reserve can not repeal the law of gravity.

Invest well and grow your wealth

Bill

Happy Deepavali to all our Hindu clients and friends.

My Singapore Research Trip

21 Oct 2019

Dear Fellow Investor,

Singapore Research Trip

We visited Singapore last week and met the Phillip Securities research analysts to review our Singapore portfolios.  They could find no issues with the shares we are holding. We have focused on value shares/ REITS/banks and utilities  that pay dividends.

There is a marked slowdown in the Singapore retail sector. High end shops in Orchard Row are suffering as customer traffic has fallen  The clerks in the massive Takashima department store have sad looks on their faces as business is very slow. There were no lines to check out in the Kinakunia book shop.  Usually there are long lines to pay.

The only business on Orchard Row that was doing well was the Apple store. It was full of customers. These were paying customers as most of those walking out of the store had Apple shopping bags.  

On Saturday we attended the last meeting of Motley Fool Singapore.  They have provided excellent stock research for the last 7 years and their model portfolios have outperformed the SGX.

Davis Kho, the CEO of Motley  Fool in his farewell address made the case for cash becoming worthless over time and why we need to hold income producing assets.  This has always been our focus.

David Kuo who spent much of his life in  Hong Kong  explained why Hong Kong will return to normal and that the crises will pass.  China needs Hong Kong to remain a financial center with rule of law and HK dollar convertibility and will not bring in the PLA.  He mentioned that even with the riots the HKSE has not collapsed and has stabilized at current levels.

Singapore just lowered rates and the economy is stabilizing. Well located properties are attracting buyers.  Tourism is picking up but these tourists are careful spenders.  

On Sunday we visited the national museum and they have introduced many interactive exhibits including a nature show that takes you through a jungle, a rain forest and mountain scenery. The animals including sun bears, tapirs, and hornbills seem real.

Invest well and grow your wealth

Bill

Critter of the week is a mountain lion from the National Museum of Singapore

Market reaction towards Budget 2020

Dear Fellow Investor,

On Friday,  Budget 2020  was announced.

Market reaction was muted. The KLSE was up marginally and the EWM which is the Malaysian country fund traded on the NYSE was also up marginally.

Weekly EWM the Malaysian country fund ETF traded on the NYSE reflecting the Friday close in New York. This ETF consists of KLSE index linked heavy weight shares.

If the budget was positive EWM would have risen strongly.

It would have meant foreign fund and professional  buying to front run Monday’s KLSE open

 

Notice price trades below the 50 week moving average. This is evidence of a KLSE index linked downtrend.

The CIO of Phillip Capital Mgt posted a strategy report last week and mentioned the KLSE has been down 4 out of the last 5 years and is currently trading at the 1998 level of around 1500.

Not all is bad news: Many export related stocks are doing well because of the weakened Ringitt  Some technology stocks are also outperforming  Some high quality businesses are trading at extreme undervalued value levels. These are companies with growing earnings, dividends and consistent cash flow. 

Our CEO says by focusing on these we can beat the index and at some point the market will recognize the value.

I attended a seminar today given by the 5^th person, an Asian research group. They made a good case for beaten down Malaysian  Hong Kong and Singapore value shares. They stressed value + dividends to help ride out the volatility. They expect the current world wide trend of lower interest rates to support these shares. They also like selected REITs.

Invest well and grow your wealth

Bill

Critter of the week is the world’s largest lizard a Komodo dragon living at the Singapore zoo.  It would cost you a few thousand to visit Komodo island in Indonesia to see a Komodo dragon and in 2020 the island will be closed to visitors and once it reopens the visitor's permit will be 500 USD. I think I will choose the Singapore option.  

 

 

 

Financial Engineering

5 Oct 2019

Dear Fellow Investor,

Financial Engineering

Suppose someone owns 3 condos in a prime area in Kuala Lumpur. They are each valued at 1.5 million. This person sells one to his brother for 1.7 million and after a few weeks the brother sells to another brother for 1.9 million. The money stays in the family. This goes on among the 3 condos and because of publicity and media hype the property  investment crowd joins in.  After a year and a half  prices are up 50 %

The brothers then cash in their gains and walk away. The latecomers who bought at the high are caught .At least they may be earning rental income but may be suffering  capital losses.

No real value has been created. No new wealth has been created. Money has been churned.

The same thing has been happening in stock markets especially in the US.  Mr Tong who writes the stock market column in the Edge describes that 8 out of the last 10 Unicorn IPOs in the US such as Uber/ and Lift are suffering losses of well over 30 % in just a few months.Many IPOs in Malaysia have suffered the same cruel fate.

Just as in our condo example these IPOs have not been creating value in fact they have been destroying by value making large losses and burning cash. They were also promoted and hyped by the financial media so that the original owners could offload to the public at high prices.    

This is why I am a mainly a value investor and avoid IPOs .

I want to invest in established well managed businesses with increasing return on equity that share some of their profits in the form of dividends.

One of our holdings HK Land has suffered mainly because of the Hong Kong unrest.

They are well established and meet all of my value investing criteria including diversification into Singapore and Thailand. They also pay a solid dividend in USD backed by increasing cash flow.

I am not worried about the price correction in HK Land . According to one of our clients who travels frequently to HK, there is a silent majority of HK citizens who do not support the demonstrators.  They want to live normal lives and continue business as usual.  The new face mask law implemented yesterday  under the emergency law should make it easier for the police to identify the violent thugs.Carrie Lam is finally taking firm action. In New York last week  the EWH, The Hong Kong ETF country fund  traded on the NYSE has stabilized. HK Land should recover.

Next Tuesday, I will be attending a briefing at CIMB by the Hong Kong market strategist who is flying in from HK to give us an up to date view. . Will keep you posted.

Invest well and grow your wealth
Bill

Critters of the week are Sri Lanka elephants. Last year we toured the country and encountered an elephant sanctuary  with hundreds of these noble beasts.  They like to herd together just like IPO investors who sometimes go to the slaughter house.

 

 

The strongest sectors in the KLSE

28 Sept  2019

Dear Fellow Investor,

The strongest sectors in the KLSE are  presently the energy and technology sectors. Our only holding in energy is Dialog which is holding up well. The main revenue driver of Dialog is their tank farms which are used to store oil.  This produces recurring revenue and makes money no matter the price of oil.   Being integrated they also participate in down steam as well as upstream projects.

Our  technology share is Inari. Inari is a play on Apple as they supply Apple components.  As long as Apple performs, Inari will follow. Apple continues to make new highs.

The Group acquired Amertron Global Inc and changed name to Inari Amertron Berhad. The acquisition of Amertron Global added opto-electronics and fiber optic capabilities to the Group and manufacturing facilities in Malaysia (Penang and Johor Bahru), Philippines (Clark Field and Paranaque), and China (Kunshan).

Tim Cook and Donald Trump made a deal to exempt Apple from China tariffs so there is less uncertainty and the price has risen.

Other technology shares both in Malaysia and the US are also performing.

The chart below of the XLK, an ETF trading on the NYSE continues to uptrend The XLK represents the leading tech shares in the US. It includes semiconductor companies..

Weekly XLK representing US tech shares as well as Broadcom, an equipment maker   which is a shareholder of Inari .

My view is that the market is anticipating a US China trade deal. Otherwise XLK would be trending down. The insiders of these tech companies know better than the talking heads on CNBC and the retail crowd. 

The present gloom and fear overhanging Asian markets is now the Trump impeachment probe. Investors are afraid if Trump is removed from office stock markets world wide would collapse. CNN, BBC, CNBC and most of the media are beating the non stop impeachment/ recession drums.

It will never happen. For a US president to be impeached both houses of Congress must approve. The House of representatives are controlled by the opposition Democrats so they will probable impeach Trump but  the Senate is controlled by Trump’s party, the Republicans. It takes a 2/3^rd  vote of the Senate to remove Trump from office.

Odds of Trump being removed are remote.  This will never happen. For 3 years the opposition Democrats have obstructed the major issues such as infrastructure, immigration, health care reform, border wall, etc. Nothing is getting done. The voters are angry at the desperation and inaction of the Democrats. They can see through the lies, rumours and misinformation being presented as facts.  

The Democrats will be punished by the voters in 2020.

As long as Trump is in charge expect higher stock prices world wide and I think the 50% of Americans who hold stocks via their pension plans and outright holdings understand this.

Invest well and grow your wealth,
Bill

Critter of the week is a rescued Sun Bear. For 7 years a prisoner and now free. The authorities should put the owner in a cage.

KUCHING, Sept 25 — In just less than 24 hours, the concern voiced by the public had managed to put pressure, forcing the authority to make a move to rescue a sun bear, allegedly locked-up under cruel condition at a house in Demak Laut here.

 

 

Mr. Phua Lee Kerk's Talk

21 Sept  2019

Dear Fellow Investor,

Today, I had the rare opportunity to hear Mr Phua Lee Kerk, Strategist of Phillip Capital Management in a talk he gave to a group of professional investors.

He answered some of the pressing investment questions that many of you have been asking.

Questions included: Value versus growth stocks? Why is the KLSE stuck in a trading range near 1600 ? What catalyst to move the index ?  What are the foreign funds waiting for ? Why Donald Trump will continue to make sure the Dow Jones goes up and why this correlates positively with world markets.

Value Stages a Comeback

PE Levels current vs historical as of 3 Sept 2019 for S &P 

Historical Medium	Current	Implied Price Change	Value Advantage
Growth PE	19.7	32.5	-39 %
Value PE	11	10.3	7 %
Value Advantage				46 %

Maludin economics

From an odds point of view value investing has a 46 % advantage over growth investing at the present time.

Growth stocks such as Facebook/ Netflix are faltering while value stocks such as consumer issues are outperforming as fund managers shift from  growth to value. This is a world wide phenomena.

The KLSE remains stuck at 1600 because investors are waiting for the budget to be announced and waiting for ratings agencies to decide if to remove Malaysian bonds from the world bond index. Foreign funds are out of the market and will return when these uncertainties are resolved. Foreign funds hold less than 31 % of the market which is close to a historical low which means not much downside from current levels.

Donald Trump is only interested in getting re elected so he will send out a positive twitter when the market corrects and a negative twitter when the market goes up too fast. Every one of his actions is designed to get the most votes as possible. Morgan Stanley has created the Trump Twitter Index to measure Trump’s twitters. The whole world of traders are exploiting this index for quick gains. This index is available on the Bloomberg work station.

The Hong Kong disruptions are lessening and are limited to a few violent hard core criminal protesters. The general public are getting tired of it and want to get back to business as usual. Phua feels by 1 October the 70^th anniversary of the Communist party Hong Kong will stabilize. There is value in Hong Kong shares as fear and uncertainty dominate but this is opportunity for brave investors.

Invest well and grow your wealth
Bill

Critter of the week is the white tiger.

White tiger at Zoo Negara. Once the haze lifts we will definitely visit the tigers. And pray to God these wonderful animals are not suffering. Hopefully by the end of October we will have relief.

 

 

An opportunity to make more profit with less risk.

Dear Fellow Investor,

Before becoming a fund manager, I was very active trading commodities. My specialty was meat and grain futures. This background has helped me in share investing.

One takeaway from grain markets  is there is a trading advantage of buying a lagging but related market. For example, if corn, wheat, oats, soybeans, rice are trending up while  palm oil is congesting in a trading range, it is a good bet to buy palm oil. Chances are palm oil will join the other up trending grain markets.

This will give you an opportunity to make more profit with less risk.

A similar opportunity is presenting itself in the KLSE.

Most Asian markets are beginning to trend up while the KLSE is lagging.  Taiwan, Hong Kong, Singapore, Korea, Thailand and Vietnam are moving higher while the KLSE continues to congest.
My view is that risk is low buying high quality KLSE shares beaten down by foreign fund selling. Malaysia should in time catch up with the other Asian markets.

Another dynamic occurring in the US markets which affect all markets is a shift from growth to value stocks. Smart money is taking profits on their high flying technology shares and switching into boring consumer stocks that pay  dividends and trade at attractive valuations. Examples in the US markets include Wallgreen Boots Alliance, Campbell Soup, and Kraft Heinz.

 

Weekly chart of the EWM which is an ETF traded on the NYSE representing a basket of high quality blue chip Malaysian shares.

In our Malaysian portfolios we hold such shares and they have diverged from the down trending main KLSE index.  An example is United Plantations, a high quality plantation company which has been well supported and pays a solid dividend. .

Invest well and grow your wealth,

Bill

Critter of the week is a Sabah sun bear, the world's smallest bear. These are highly endangered but can be found in most Malaysian zoos.