Why I bought Kossan

If we noticed the market nowadays, it has been much more on sentiments rather than being rational. There's a lot more trading activities today where even the large funds are taking part. The emergence of retail players a.k.a. the "Robin Hood"s investors is allowing much more purchases based on sentiments. There are possibly tonnes of Telegram and Youtube groups advising people where and how to invest. When I switched on youtube channels on investments, even Gurmit Singh (Phua Chu Kang) in partnership with a young investor advisor is involved.

With this I would deem that there's opportunities to search for value. The rubber gloves companies do not need any more introduction as there are just too much "noise" out there. On my part I see that although vaccine is on the way and few countries (Israel, UK, maybe US) have shown good progress from the vaccination program, I believe it will take years before COVID will be fully addressed. In the past I was just too optimistic. Even as at now, many countries are seeing fresh highs as people get more agitated due to the length of the pandemic and they just take less precautions.

Even most economies could not bear the brunt of inactivities and they just have to open up. One do not need to look far but at Malaysia. Many governments are taking the stand that they just need to allow economies to work for its money (with conditions). 

The first round of MCO, there was money being ditched out to people (Makcik Kiah), Second round there were more funds but lesser amount. Moratorium for loans were introduced and practiced during the first six months. Those have stopped. Now, it is much more targeted assistance and even then they are in small bits and pieces.

I believe those similar situations are being practiced in many other countries which are developing when the virus is still rampant. In India, I was expecting the collapse of the health situation many month ago but it seems that they were contained - possibly because of people were willing to adhere to SOPs - and human beings especially from the democratic block were only willing to adhere to so as much. Now we see the brunt of what COVID can do to a country like India (with 1.3 billion people), poor developing country and with lack of basic discipline. 

Hence, COVID is here to stay for a while even with vaccines.

For gloves, there is no doubt there will be more companies starting to produce more. But the demand will still be outstripping supply until to a point when COVID is addressed. Even then, let's think through - with a pandemic this scale, many countries would be looking at relooking at their capacity to address the next pandemic. I do not think gloves will be much oversupplied for a while because of this.

I know that certain countries would be looking at gloves self-sufficiencies at some of point of time but there are just few countries which are manufacturing scale developed - which is why Malaysia is one of the beneficiaries from the gloves manufacturing capabilities.

Due to the above, I have hence bought Kossan (2200 units) for the Felice's Fund.

From 2 months ago until now, I have also sold some 3A and redeemed TA due to its delisting. 

As for the latest fund position, it is as below.

  

Purchased Top Glove

While in the past, I was critical but unsure of the company, this time around I think it is grossly oversold. The company had not paid much dividend as yet and has been repurchasing a substantial amount of its stocks over the pandemic period. The company remains to be the largest gloves manufacturer and is probably the company that benefitted the most in terms of revenue and profits due to the pandemic.

This is probably due to the aggressive nature of the management where they had increased capacities through organic and acquisition growth. The super abnormal profits have given opportunities I believe for many of the gloves manufacturers to improve on their efficiencies in the long run as they took this period to push more automation as well as improve on the living conditions of their workers especially the foreign workers.

I think given that Top Glove is trading at RM43billion valuation, it could be cheap. Post pandemic which for many countries could be seen by end of this year or mid of next year, we will potentially see restocking as these countries do not want to be shocked again by another similar situation. I think these gloves companies despite the coming on stream of other new entrants as well as much increased capacities of the existing company (including China and Thailand) may still see the plants running at full capacities.

I have hence bought 1500 units of Top Glove at RM5.19.

  

Bought Three-A Resources, Sold Freight and latest

I have decided to make some changes on my holdings by first selling all 17,500 units of Freight Management which happens to be a very well managed company. Even then, I felt that the recent rise of logistic companies provided a good enough price for me to sell.

From that sale, I decided to buy 10,000 units of Three-A resources (3A - 0012) as I felt that it has not been much followed by many investors. Typically like the business as it is trading at below 13x PE. So who says that we cannot find value during the time when some sector's valuation have gone very high - technology sector mostly.

I think it is attractive given the sustainability of its business - i.e. caramel food applications.

At the same time, I have converted all the 136,000 units of WCEHB-PA into WCEHB.

Below is the latest holding.

Two factors which could push DNEX higher

Well, tis the season for speculation. I do not really advise on speculation.

However, when I read some of the exercise regarding DNEX, there are some obvious reasons which somehow things may happen given the volatility.

Purchase price and manner the payment is made to the 60% of owners of Ping Petroleum. DNEX is buying Ping and one portion is paid by cash, another via shares.

The payment in shares as above is based on the share price 5-day VWAP of DNEX shares 2 business days before completion date. The exercise is yet to be completed, and the higher the share price, the lower the payment of shares is to be made to the sellers. In fact, if it exceeds certain share price, DNEX need not pay in RPS. Seems like at the moment given the share price, it need not issue RPS to the sellers.

Reason no 2.

DNEX still needs cash although they have raised some substantial private placement funds (don't know to who) at very cheap price of 30 sen and below.

DNEX WD's exercise price is at 50 sen and for warrant holders to exercise, it needs to be substantially above 50 sen. I would not exercise if the price is trading at 52 sen, if you know what I mean. Why take the risk.

BTW, the maturity date for the DNEX WD is 30 Jul 2021. Few months to go.

Well, I still use the word "could" as anything can happen. Shares can crash. DNEX may find other ways to raise more cash. Ping Petroleum's exercise may not go through. Silterra's deal may not happen. For example.

Whatever it is DNEX wins

 I woke up this morning listening to the news that the world is in short supply of chips as there are just not enough supply to meet demand. At the same time, the largest chip maker, TSMC has cornered 70% of the MCU market - not by design but due to their technological dominance where the rest of the competitors could not catch up - except for probably Samsung.

We have heard of there could be a delay in shipments of motor vehicles as when cars are fitted with more semiconductors when the demand has way outstripped supplies. Anyway, as in my previous article, I was critical of Malaysian companies like DNEX and Green Packet given the leading position to purchase the only fab owned by Malaysia - Silterra. They do not have the capabilities of running a fab.

I also woke up in a headline that says, Silterra is sold to DNEX - retaining the ownership in Malaysians hand. Well, it is  a pride thing. In that deal, DNEX and CGP of Beijing on a 60%:40% basis has bid for Silterra which is now owned by Khazanah.

DNEX does not know how to run Silterra, but the management of Silterra knows how to run the old 130nm fab as they have been doing it for years. Now China is really in need of chips and fabs especially given the Trade War situation as it is on the rush for owning and acquiring technologies such as a fab technology.

It is old but still needed especially that China will just take anything as long as it is still running and producing well. It may well be investing into a more current process technology and I believe given the technology maturity, the Silterra's team will know how to run it and make it working.

In the long run, on paper it is still owned by Malaysian company and it is just like the Proton Geely relationship where we for patriotism sake, we have 60% of ownership without ability to control the demand and supply while the other will control in terms of management and technology. Perhaps in this way, the Chinese would prefer the arrangement as they have a strong say.

Anyway, it is positive for DNEX - don't look at the financial fundamentals as DNEX will not have the capability to buy Ping Petroleum, invest in Silterra, expand it further as I believe behind the scene there were already planning, I believe. Otherwise Khazanah would not have sold it and let the fab grappling with liquidity issues. It would have been a political suicide. 

What nonsense is happening around Silterra?

We know that Silterra is a problem child for Khazanah and ultimately our country. It has been bleeding money since inception probably around 2000. Although the idea came noble, the execution was not. It probably has lost us money to the tune of more than RM10 billion (I do not think anyone keep track as it is already a sunk costs). While on the financial side it was never a win, on the technology acquisition side it did some justifications. Malaysia now has some knowledge of how to handle a foundry albeit a very old one. We also have now people working in several foreign owned foundries most of them in Kulim and Penang.

While we have thrown substantial sum of money, for a long period we have tried to keep the fab afloat running on positive EBITDA - more or less cashflow positive. But we know that running foundries on positive EBITDA is not the right measurement as foundries capital costs are high - latest technology can go up to $20 billion (a 5nm or 3nm fab). There is no point for us to catch up.

While it has been a sore thumb, today, foundries have become an important asset in return thanks to two things, firstly IoT, IR4.0 autonomous vehicle etc. - as some businesses are not chasing for Moore's Law where the theory is that semiconductor is reducing half in size every 18 months. So old fabs have value. Another thing is China. They are hungry (all the while) and especially today where US is blocking them off from foundry technologies. So an old fab in Silterra is becoming an asset back albeit lower value than the newer fabs.

However, what is there to do with DNEX and Green Packet? Those two companies do not know how to run a fab! They probably have not stepped into a fab before 5 years ago, until now. Why is there a need to sell to a Malaysian company. If one notice both deals are with a China partner. The Chinese would rather work with one which do not need to know how to run a fab - hence DNEX and Green Packet. It is a flipping exercise if I may call it.

We have people and companies in Malaysia which may be closer to knowing the intricacies of running a foundry - even that is tough. I can probably see that the deal would have Silterra providing support for China's demand for chips but why not sell direct? DNEX and those other Malaysian companies do not know much. One is in some software support and Oil and Gas - another gotten some China's AI technology and try to deploy them in Malaysia.

Get on with real stuff and be direct. We have made mistakes on this for 20 years and it still has not ended.   

GameStop Top Glove Short Squeeze: Who is Right Who is Wrong

By now almost every news either online, daily or weekly, they would have mentioned something about GameStop. Personally, I have never heard of this company before prior to this. The thing about this event is that it created a movement where seemingly for once the small guys have gotten ahead of so called the bad guys - which is the Wall Street guys. 

If we look at the price chart below on GameStop - Never in my life I have seen stocks moving in this kind of trajectory over my 30 years of investing life. The thing about this story is that GameStop did not discover gold, oil or have gotten a cancer drug approved. It is a company actually suffering from the current behavioral challenges as gaming has now moved into online and homes from its traditional distribution channel.

The story about GameStop is pure adrenaline, power of social, smartness of some and ignorance of the new batch of retail investors combined. Adrenaline is because of the hate towards Wall Streets where the community had never liked Wall Streets and they wanted a way to get back. Obviously, it was further pushed by several social media evangelists. The funny thing is that people like Chamath Palihapitiya, Elon Musks themselves do not really belong to the Main Streets group but they did inspire these new investors to jump in. The new group who do not clearly understand the meaning of valuation and business and investments. They are just followers.

In Malaysia, a similar group albeit smaller is trying to create a similar movement through Reddit. They claimed that JP Morgan in the runup to short sell Top Glove starting on 2 Jan 21 had tried to downgrade the stocks valuing the company at a valuation of RM3.50 (at the time, Top Gloves were trading at around RM7.00) which was way lower than the price provided by other investment houses. On 2 Jan, when short selling were allowed (with much limited conditions), Top Glove's stock were sold down with the short selling playing a substantial part. The Reddit group under Bursabets initiated under a pseudo-name  Revenant claimed that the company was wrongly targeted as it wanted to short the stock.

After that rally call, Top Glove's stock had a runup by as much as 13% the following day. Both Bursa Malaysia and SC had asked the investment community to be cautious of social media chatrooms not long after that.

Now my question about all these is, who are in the wrong due to all these?

In the GameStop's situation, some guys saw a huge weakness in the shorting of the stock. It was shorted by 140%, obviously way over-shorted (by this actions, we see that by allowing the stock to be shorted way more than the stocks available, it is already wrong) - and the group that rallied the retail investors knew that by getting the community to come together, it can cause the shorts to get into trouble. There is no fundamentals in getting the stock to $400 a stock, but so is the over-shorting of the stock to 140%.

In Top Glove's case, yes we know that JP Morgan is a licensed advisor. It is allowed to provide a call even though the advise can be totally ridiculous? Then are they allowed to short sell the stock even after making a controversial call? (We do not know for real whether JP Morgan did the short selling, but we know that several foreign funds did short sell Top Glove and JP could have acted on their behalf)

Bursa and SC will not apprehend JP Morgan for sure. Now my question is, can Bursa and SC get all these so called licensed advisors to be fair. Can they get these guys to not pick when to release their analysis i.e. releasing to their clients first then only to the public? Can they get the investment houses to not be making any trading on the stocks which they make a call? One must know, in the social media world, the calls by these licensed advisors can be even more assertive and viral. 

Gloves makers: Dividends, buybacks and share dividends are the way to go

When I wrote my earlier piece (around April to May 2020) on the gloves, I think few sees what's coming. It was huge profits and prices but not even today's gloves price. Even during the early days some of the founders of the gloves makers were taking profits by selling some shares. (I remember Hartalega's Kuan and Kossan's Lim were selling (see below) some shares, and I do not think it was to mislead the market. Why would they?) Some of them bought back the shares later on.

Today, and until today the prices of the gloves (not stocks but actual gloves) have gone through the roofs - up to 5x its previous prices. Whether these prices are here to stay, I think the big 4 gloves makers are not able to provide a definitive answer. What is more than certain is this. Top Gloves is probably expected to make Net Profits of around RM12 billion to RM13 billion for its FYE 31 Aug 2021. Remember it used to make around RM400 million to RM600 million during a normal year. That was close to 100x its market cap today. Again, to highlight no Malaysian company has enjoyed before such profits in a single year except for Petronas the parent company.

It is hard to predict whether how fast it will become normal again. What is known is this. Gloves used to be a 3D (dirty, dangerous and difficult) business where Malaysian workers would not want to be into. Some of the quarters as shown are outright not livable. Malaysia has been using foreigners for the business. 

Today, because of the cashflows that they are generating the guys are doing it differently. They are investing huge amount on automation, improving living quarters etc. Those were not so possible in the past. Hence, these are the changes that we will see in the near future.

Despite having so much funds, it seems that the world because of the pandemic just do not produce enough gloves for consumption. For this period, it seems that it is hard to replicate the factories and move on to produce more just to meet demand. At the same time, the glove makers are generating so much cashflow - an amount they have not seen before.

Top Glove is expected to bring in net free cashflow of about RM10 billion in the next 12 months. These are funds they may not need in the near term. So what should they do about it. I know that people have been critical of them when in just a few days they have spend some RM220 million just to do buybacks.

I think given the funds that they have this is just what they should do. Glove makers do not need funds like the highway or O&G guys. All the gloves makers - large ones especially - should just do all the 3 - i.e. cash dividends, buybacks and share dividends or even cancelling out their shares.

They can be done variably. When they think the share price is cheap, do buybacks. When it is not so cheap, then as what Top Glove has announced, do a aggressive dividend disbursement. Imagine, if they make RM12 billion PAT, 70% is just RM8.4 billion. There is still so much funds as compared to the past for them to use it for operations.

I am not sure how long this kind of cashflow numbers will continue to be enjoyed but by doing the dividends and buybacks they are bringing the right value to its shareholders as well as cashflow into the system.