Beyond stocks investing

I know that property prices have gone very high recently especially in the cities. Some may opt to wait for it to taper down and only then decide your purchase. Problem is "time waits for no man". I have advised people I know who finds it tough to buy especially with the continuous rise in prices of properties. I really do not know whether properties will crash or will it encounter a soft landing or will it not even drop at all. The thing I know is that the programs and books I read on US property crash recently, we are nowhere near that mishap caused by speculations and secondary market such as subprime. In Malaysia, there are speculations for sure - healthy or not, I am not sure. The fact I know though is that property prices in Malaysia is beyond the reach of many young working adults. That is a warning. However, remember this...

You cannot wait forever. You do not get to enjoy anything if your savings no matter how large or how little  - is stuck in your shares or even your savings account or FD. The thing I found out In life is that, Home is most important even if it is a small one. You do not need to buy your dreamed home. But home first, then only think about investing. Investments is for savings and old age, home is for now.

We should just stop claiming Malaysia as Top IPO market for Asia

While the facts is true for 2012, there is still 6 months to go. We have 2 large IPOs in FGVH and IHH both initiated by the government. I read Astro is coming back. Well, we are doing well on paper due to some factors.

First, the IPO market for this year is very soft, globally. Many companies have postponed their IPOs in Singapore and Hong Kong. We will never be anywhere near Hong Kong, a market where Chinese government helps to promote.

In fact, the IHH IPO is a dual market listing which includes Singapore. If Malaysia is a strong destination, we do not need to do a dual listing with our neighbor, a market which has same trading hours as ours. We might as well go NYSE or LSE direct and KL as an alternative destination.

How many more times Khazanah can create the same as in go around acquiring and list the assembled companies in Malaysia? Are they thinking of the "The Avengers" reborn?

We can be proud of the number of cornerstones involved - but anyway, the two large IPO listings shares are probably cornered anyway. Look at the limited public retail float.

The fact of the matter is that the attractiveness of our market is quite in a sad state. My earlier article on building ACE market is a case in point. Beyond CIMB, our investment bankers are not confident to carry our companies to IPOs. If we can't compete with Hong Kong, we might as well go small. You cannot do an Astro and Maxis - list and delist and list again too many times. There are only so few tycoons who can help.

How many investment bankers are doing well? CIMB, Maybank, CIMB, Maybank?

Let's not polish our own shoes.

What ACE market companies should perhaps do to improve on perceptions

There are a total 113 ACE market companies in Malaysia and out of that, only a handful are of quality ones. We used to have more but some delistings and progressions to Main Board have caused this group to shrink. Over the last few years, number of newly listed ones has really deteriorated, which is a cause for concern as this should be a platform for smaller companies to raise funds and also to allow the building of the SME market.

One of the main cause for concern for investment bankers to carry these small companies is the lack of  quality companies, they say. This however defeats the main purpose of Bursa and SC having the ACE market, i.e. to groom small companies and allow entrepreneurship to bloom. You do not groom companies when you do not create avenue for them to raise funds. We however cannot blame these bankers as previous cases such as IRIS, FTEC and many others have caused retail investors to lose quite some money which also caused SC to be extra careful.

While I feel that being careful is good, this defeats the purpose of creating a nation with enough good entrepreneurs rather than just having obedient employees.

To improve on the number of listings, some things have to change. If the bankers are not helping, I feel that the onus goes to the listed companies themselves to help to do the selling. Here are what I find more ACE companies should take note of in trying to improve their saleability as relying on bankers would be a tough one. By improving on the perception, the investors will be back.

Add on the information and be truthful

It is not just enough to have a good business but yet few information is provided on the websites or annual reports. A common mistake that most Chairperson(s) or CEOs have done is to virtually copy what others have on their statements to shareholders. Whenever I wanted to know more about the company as well as trying to find out the opinion of the CEOs, I would "google" or read its Annual Reports. However, more often than not, either the Chairman and/or CEO would start the statement with the macro-economic condition of the country leaving only a few paragraphs (if we are lucky) with the micro-economic outlook of the company. What most of them missed out is that, if I want to know the macro condition of the economy I would read The Economists, WSJ or other related papers on economics. People like us who do not know much about the business or industry that they are in would like to know more, from the managers. It would help if there are time spent by the CEOs on explaining as well as providing their frank viewpoint themselves. Let shareholders evaluate you and your business. Continue with the engagement.

Even in IPOs, while information from companies such as Frost and Sullivan is helpful, it is just not what I seek. I seek the opinion of the CEO rather than understanding the business from the perspective of Frost and Sullivan. Even for example, the IHH IPO, I do not get the opinion of the CEO but rather statement from the MD of Khazanah. Why would I want to know the opinion of the MD of Khazanah for, someone who is not running the company? If we are interested to invest, we want to know the business and it should come from the person who knows.

ACE companies, most of them are even worse. After the IPO prospectus, they no longer engage with their shareholders. Annual Report should be a platform for them to convey their messages. By being very truthful on this platform, we will seek to read their annual statements yearly like many of the investment communities seeking to read Warren Buffett's annual statement to his shareholders! Just like it takes time to build the business, it takes time to build the trust of the investors group especially for small companies.


Drop the syndicates

Some small companies hire (as I would think) agents or stockists to support their share price. The legal ones are called market makers (or recently price stabilization managers) which companies like IHH, FGVH hire while the illegal ones are called syndicates - to me both are the same. They are used to support share price (or often meddle with the price) either way you call it.

The problem however, when these small companies hire syndicates, the syndicates are into making money for themselves as well. It will destroy the perception of the company. Whenever that happens, only retailers with gambling or short term mentality will follow your company. The trade on the company will be much more volatile. More often than not small retailers would be the one who lose as this is a zero sum game. It will just destroy what you would want for your company if you are in for the long term. To build a strong company, it is not just the business itself. In includes the corporate side of things. If however, you are in for the short term, then this article is not for you.

Have a smaller loose float

The SC may not agree with this, but small companies are prone to third party syndicates play with or without the involvement of the main shareholders. This is because it costs much less to control the share price as these companies are of much smaller market cap. If the float for the ACE market companies are too large, it can become a platform for third party control. Once this happens, the management of the company would probably be too busy fending off external parties than committing to the business - see previous management of GHL. Again the volatility of the stock could have gone higher and long term investors may lose interest.

Have a clear dividend policy if possible

While not all companies can do this consistently, it is quite important to convey the dividend policies to shareholders. One must understand, some shareholders are into dividends and by having a clearer message to shareholders, it could have built the trust of the shareholders. However, by giving out too much dividend, it could impact the growth of the company - you do not need to over commit. Start small.

Sometimes ignore the investment bankers

These people are called sponsors but their main intention is to make money from the listings (not wrong though) but yet they do not want to take risks. They are more afraid of needing to answer to the stakeholders (SC, Bursa) than anything else. They have checklists of what to do and what not to do - but most of the time these people lack experience and only concentrate on what not to do. You see, business people and bankers do not tag well. Business people are more of a risk takers while bankers are much risk averse people.
(However, this does not mean to ignore the SC's guidelines as I do not want to be blamed for directors' being reprimanded)

EAH: Don't fall into the bad assets trap

This is not a company one should bother looking at, however I am pulling out the Balance Sheet of the company to highlight how bad the asset portion can be for the company. Yes, assets can be bad as to liabilities can be good! It is not confusing while I will just highlight on a company with bad assets today and present another that has a presumingly good liabilities on another article.

EAH's Balance Sheet

Notice the remark side below. What consists of bad assets i.e. one which you do not want to have, as too much can be a bad thing. For EA below, you can assume that it reportedly has a Net Asset of RM55.5 million. Well, this is what it reports in its Annual Report but what it does not highlight in the chart section is that its intangible asset is RM24.7 million. Hence making its Net Tangible Asset at RM30.8 million. Not so great yeah since I have not heard of the company before and its intangible strength may not be of a Coca-cola or even Apple. How valuable are the intangibles really? If you look further, EA bought an IT company call DDSB Sdn Bhd in August 2010 for RM19.4 million and due to that purchase, close to RM18 million is consolidated as goodwill.

What other bad assets that the company has? In business, if the trade receivables is manageable, it is manageable and we should be able to sleep knowing that it is collectible within the credit timeframe. However, what happens when your total receivables are close to your last year's total revenue? This is the case with EA Holdings. 

Look further on the trade receivables - a bad asset

Let's look further on its trade receivables in details. RM13 million of collectibles which is more than 120 days? Well, you may say that out of the RM30 million, around RM10.5 million is in the less than 30 days column. However, I can also ask for the entire year's revenue of RM36.6 million for 2011, at least RM10.5 million is registered in the final month? Are we saying that the company is registering at least 30% of the total revenue in the final month? They can claim that since the company is a project based company, their revenue can be lumpy. You have to convince me more than that.

Now, you know why it can be regarded as a bad asset? In this case, receivables may not seem to be as liquid as it seems. Sometimes, one may look at just the total current asset but imagine what if a large portion of the receivables is being placed on the cash and cash equivalents row rather. The total current assets remain the same but the liquidity of the company is much stronger.

Profit and Loss Statement below to show that its revenue for the year was RM36.6 million, Although it can register a nice profit of RM11.8 million, with this kind of balance sheet, is it justified?

You know what if you look further to its balance sheet for 31 March 2012, it has gone further worse.

Why I prefer stocks as an investment over anything else

Sometimes, you must be wondering why I am doing this. I love stocks and if possible I am interested into creating a platform for discussion especially for retail investors. I believe that as retail investors, one does not lose out to institutions if we follow a certain program and especially in a well-connected and informative world like today. (I remember my days of writing in to obtain Annual Report to company sec to buying the stocks investment guide by Dynaquest -:) - today is much easier with things online)

I have been into stocks for a long time - ever since I left secondary school. Believe me, I have made a lot of mistakes, something which I cherish today though as it makes me learn from those stupid mistakes such as putting my money into companies like Idris, Menang etc if you know what I mean. I am not into stocks alone. However overtime, I have much higher preference over stocks than anything else. Why?

1. There is no capital gains tax for stocks in Malaysia. Basically all your earnings from sale are kept by the individuals as compared to some countries like US, Australia, UK, Canada. For once, it is simple to measure as whatever we have sold as profit, it is kept in our books.
2. Dividend will be single tiered beginning from 2014. Hence, tax paid by companies will be the final tax and there will not be any tax deducted from payment to shareholders. In fact, if you notice, many companies today in Malaysia have already adopted single-tiered dividend. For a person who has other income, I will not be able to enjoy anything from the section 110 set off. Do check this out on Single Tier dividend in Malaysia.
3. Transactions are clean. I am sure to receive the proceeds from my sale after deduction of commissions and government related fees on the fifth day. As compared to properties, well property owners who have done transactions, you will know. The process of getting approval from DBKL, MBPJ, MPPJ, land office etc. with undertable paid or not it will still take more than a few months. There are certain element of trust as you would have to collect first 3% being the booking fee, then 7% etc. Well, property investments are worth it if you really have spent the effort, time and patience. I am not the type into the hassle of collecting rents etc. In properties however, your one mistake can be futile as it can be big as compared to stocks where we can start small, hence the mistake can be smaller.
4. Stocks are more liquid than most other investments types.
5. Of course, if you read some of my sample small portfolio, I am not pro Fixed Deposits. For some, these short term deposits however is needed as an emergency fund. In my sample portfolio, I have started with RM32,500 just to show that stocks investments can be worthwhile for those who would like to start small as including me, not many can start with a RM500,000. It is not advisable to start big anyway as there are mistakes to be made in any investments.
6. In stocks, you can do small investments as well as larger investments. If you have asked any person who is retiring, at age of 50 or above, they normally do not put money into properties except for those who have much higher extra savings - or those who trade in properties. As for stocks, you can put in RM5,000 or even RM50 million. Don't tell me you are only to start stocks investments when you only reach 50? - (although it is still better than don't do any investment at all.)
7. Investing into good companies is almost like having a good business. As long as you put your trust into companies that are well run, the management will work for the shareholders. A good business is a good hedge against inflation. For example, in my article where I have mentioned I like Nestle, with dominating brands such as Milo and Nescafe, their pricing and purchasing power (for a company its size) would be very powerful. These businesses are a good hedge against any unforeseen inflation. You would not walk into a supermart and be told that they are not selling Milo due to consumers complaint on price. Prices of cocoa or coffee can be sky high, but they would just pass the costs to consumers. If you put your money into the wrong companies though, your money would be doomed in these managers / directors hand. There are just too many examples to highlight, hence as an investor it is important for us to avoid those pitfalls.
8. Understanding how companies work is fun and an exhilarating process, for me. It will not work if I do not enjoy reading about companies, annual reports, studying the past records, understanding the industry and competitors etc.
9. By blogging, it is a process for me to understand how blogs and Facebook work as I am quite a novice at this...

Happy Investing!