TRADE is the THEME

During a period when we have terms such as "Trade WAR", "Trade Friction", "Trade Skirmish", "Trade Scuttle" - it just means that we are living in a world where we cannot do without TRADE. With trade, it also means more people, goods, food are transported. With trade means more roads, bigger ports, more flights, more containers, oil are traded. Think about it. In the context of business, transportation and trade, in several aspects there are big winners - Alibaba, Amazon, Airasia, Maersk, Hutchison, Keppel Port, Grab - but trade also create ecosystems where the middle size players, small players are able to survive and some consequently thrive.

Over the past few decades, there have been massive growth in movement of goods, people between the Pacific, Europe to Asia to American continent. And that growth will not stop. Will a friction between China and US on trade ever reduce that? It will slow it down a little - but over the long run, this will not reduce - unless there is a real war!

Some of things that the US government is pushing for example, i.e. more electronics being manufactured in US will not happen in a big way. Today, China, perhaps is contributing 80% to 90% of the world's electronics manufacturing.  That percentage will not grow anymore as China has over the last few years been rethinking its economy model from largely producing to more consumption based - but it will take time but eventually they will succeed. While the percentage will not grow, the total will continue to grow - for the next decade at least.

So what does it means? Some other countries such as Vietnam, Malaysia, Indonesia, even India will slowly take over the small role of producing for the world. (With that, Malaysia for example will even experience bigger trade volume.) Unfortunately, Malaysia has stagnated to some extent, and we are still being considered as an alternative place for large medium and large manufacturers. With that though, Malaysia will ever need bigger ports, more and bigger roads, IT systems, logistics companies.

Today, it is inconceivable that US will be growing its manufacturing base in a big way, as its economic base has passed that. It will not be manufacturing textiles, furniture, phones, shoes in a large way but what will happen is that high end products such as planes, machines, may still be from there.

Many commentaries I find have also said that the so-called Trade War seems more like a "Technology War". It is not surprising considering the attention given to one of China's more respected company, Huawei - as the world is moving towards usage of technology and electronics.

Looking back into Malaysia. What will the Trade War bring to us? Malaysia still has a strong manufacturing base. We do have talent, infrastructure for that - although it is never enough - no country has enough. Both US, China and some of the large companies that are in between i.e. from Germany, UK, Japan - will always look for alternatives. It has been proven that Vietnam has been the main beneficiary. Malaysia, is another alternative. Hence, while the world will trade a little less, Malaysia may not be that affected when comes to physical goods trade as goods may be manufactured and traded off from here. The hike in oil price will be curtailed as demand may soften. But our logistics companies, transportation related companies, toll roads especially such as PLUS will not be that affected. In fact, these sectors' fundamentals will improve.

I have hoped that our government sees through this. We need more technology companies, talents. MESTECC has to look at how to encourage more creation of tech companies rather than focusing on plastics (i.e. what harms it brings), solar, LYNAS. MITI has to look at making Malaysian companies ready for this change. Which is, more Malaysian companies taking opportunities rather than solely dependent on foreign investments. From this part, I still do not see the light.

However, with the last 7 months uncertainties - I think there will still be uncertainties riding through 2019 - coming from Malaysia and the world. Like someone whom I know said, she is still uncertain over what will happen to toll businesses as it seems the government is allocating RM1 billion to pay the concessionaires next year while in the past they claimed that it could have easily been solved through buying out of these concessions. (If you read my previous articles, one will understand that it is not that easy - as these businesses, financing have already been intertwined - if one is taken away, the other will collapse - just like playing Jenga and in a situation where there are only very few pieces to hold one another. Many whom are hoping for toll elimination or even simple reduction just do not see the complexities although it has been made into simplified context during the election period.)

The massive drop in the market has also created opportunities - one has to continue to look for well-run, good companies and hopefully those that are less dependent on government and their "flippings and floppings". (In a way, I can understand as they are still in learning mode - many newbies, although it is hopeful that the learning can be much faster.)

I have hence decided to buy 7000 units of Freight Management. Why? Because it is a company that has dropped in its price but not value, lesser affected by some drastic change in where the world has moved into in terms of e-commerce and trade and less affected by government's action.

For Freight, if we understand what caused its stagnation in the past 3 years and looking at its growth trend for the longer term i.e. revenue (micro), macro economy situation, I think it is cheap as it is currently at 5.5x PE and having about 6% dividend yield.

With that Happy New Year to all readers!

Airasia is not pulling back from India

In my previous analysis, I have opposing view towards the Maybank's analyst's view that Airasia is pulling back from India.

True enough, it is not pulling back from India as in its plan through the analyst's briefing. By end of 2018, Airasia will have 20 planes in India to enable it to fly internationally. In its plans for 2019, Airasia will allocate 6 planes for India (out of its total 24 net additions). Watch the analyst's briefing below (26:00 to 26:40). In its plans for 2019, net additions are as follows: 6 for Malaysia, 4 Thailand, 3 Indonesia, 3 Philippines, 6 India, 2 Japan.




Hence, it is probably being the most aggressive for India, planning a 30% growth in terms of planes for India.

I have explained before for Airasia to operate successfully in India, probably the best strategy is by having a hands off strategy. It's overall growth plan and how it franchises and automate processes is Airasia's strength.

Why we should look at beyond Price Earnings Ratio

One of the subjective area to look at in evaluating a business or listed company is not its Price Earnings, Price to Net Asset Value but its planning, vision, how it makes use of situation to make itself a leader in the future. Most professional analysts, amateur investors (like me) forget about that.

We more often than not concentrate on concession value, delivery, Price to Net Assets, total book order etc etc. Those are very much Graham and the old Buffett. The new investors including the new Warren Buffett, Softbank, some of the best PEs and VCs in Silicon Valley look way beyond what we see. That is why they were able to figure out Google, Uber, Grab, Facebook, Alibaba and many more.

I have to admit I do not have the capabilities and capacity to be in that realm. I do not have that opportunity as well as my universe of looking at companies does not include the very good startups or visionary companies that remain private.

However, among the local traditional companies, we can possibly decipher which company that look beyond its current as compared to those who do not. There are those we know is is danger of being or already been disrupted. Those are the transportation companies for example, media company such as Media Prima, TheStar for which I am not able to figure out where its future is heading.

The easier intangible investment is one where we see the macro picture - i.e. where disruption of affecting, and then we look at micro level and see at what stage is the position of the company. I will take one example. We know that e-commerce is in the midst of disrupting retailing, we then take several malls and try to figure out its positioning. Will it be disrupted? Is the space they are playing different. One example is IGB REIT. How do we see its future. Company or business like Mid Valley will not be disrupted like a taxi business being disrupted. It may face a slower growth. The much lesser malls may face a harder truth where they may not even survive at all, but perhaps not One Utama, MidValley or KLCC. They will face slowdown but not death in the short term.

Over in this, I would like to highlight 2 traditional companies where if they play it right, they can be part of the disruptor. If they are not, they will also be disrupted.

Airasia

18 years ago, Airasia was a disruptor to the traditional airlines like MAS, SIA. It is so successful, so much so that what we would have thought a business that is hard to survive has in fact caused continuous difficulties to MAS. It is now much bigger than MAS today and I am not able to figure out the survival of MAS beyond the next 3 years - unless there is another round of financial support from Khazanah.

Airasia, however is facing a new challenge. A wave of disruption to disrupt its own business. At the moment, its business model is being copied and airlines that are operating from a bigger airspace may want to eat into its market share. Its vast advantage in costs is also reducing as other airlines are now figuring out how to reduce costs as well.

Hence, it is now facing different challenges as it expands into other countries like India and Japan, 2 countries that are very different when looking at low costs tickets. India already has a very dominant low costs airline which is more competitive than Airasia India - Indigo. It is much larger, probably politically stronger and has more planes and better command of routes. Hence, Airasia in competing has to look at 2nd and 3rd tier cities. Luckily enough, India is such a big country that not one airline can dominate the airspace. It is more like China and US than Malaysia or Thailand.

To compete, I strongly believe that what the management of Airasia led by Tony Fernandes is doing is right. Going digital. By going digital, it is probably going to create that little inch of advantage as it goes regional. When Airasia was at its infant age, it started credit card purchase. That was a small disruption but its other advantages in the digital space was still early. Today, its booking system, checkin and others are ahead of many airlines including SIA - as I tried using Scoot. I happily admit Scoot still lose out to Airasia's booking system despite it not being perfect.

The community today is also more used or susceptible to self booking, payment, checkin etc. That is something which brings advantage to Airasia as it is trying to reduce its manpower per passenger. Airasia's digital strategy is beyond what I can imagine. I believe it is looking how to attract its recurring customer, minimising fuel costs, introducing new routes, new marketing channel, payment system from using its digital initiatives.

Going digital is what Airasia have to continue to invest and its push has to be continually better than others for it to continue to thrive.

Gamuda

Ironically, Gamuda is a company which I now look more in depth after the many situations where its projects was under the threat of being cancelled especially MRT2 underground contract that I now think that it is probably a lot ahead of other construction and developer companies in Malaysia such as IJM and UEM. My previous perception of the company, today I have to eliminate - not because I invested into the company but because now I look at the company more inept. This is because, my investment into Gamuda is still way too small to affect me, personally.

But Gamuda, with its group of management, knowledge depth has to be developed somewhat like Airasia rather than threatened. Most countries that are developed, has strong construction technologies and knowhow. We see that in Korea, Japan, China and previously US. We cannot continually be dependent on foreign technologies when building the country - like what we have done in the past government.

In my reading of several largest construction companies in Malaysia, the other construction companies in Malaysia - like I said even UEM and IJM talks about digital threat and taking advantage of it like how Gamuda sees it. This is unless these other companies do not communicate like how Gamuda does now - but I do not think so.

From here, I strongly believe, because it continuously in the discovery mode - like its investment in tunnelling technology, Industrialised Building System, this mindset is the right mindset for the future of the company. From here, as in any analysis, we should not just look at Gamuda's book order and how many future projects the current government is trying to introduce. We should rather look at how the company get readied itself towards the future.
To understand my writing further, do look at these companies Annual Reports and compare with its industry competitors.

Bought Gamuda and Sold MRCB

I decided to buy Gamuda as I thought that the selling was overdone. I was not around during that time, this trade was made in 8 November 2018.

Generally, I thought that the MRCB announcement of compensated for its highway was already accepted by the investing public. Despite selling, I still think that MRCB is still undervalued but I feel that Gamuda is a better bet in the long run.

I think despite both are not apple to apple, but Gamuda is a better company in terms of capabilities and capacities. Although it has lost several contracts like the MRT3 and HSR due to postponement, Gamuda is still a more solid company in the long run.

One can see that Maybank analyst is targeting Airasia

There is definitely going to be impact onto aviation business with the introduction of levy for travellers by government, RM20 for ASEAN and RM40 for non-ASEAN. Local travelling, there will still be no levy.

However, in reading the release here by Maybank, I think the opinion is wrong. How can Airasia and Airasia-X be impacted while MAHB is not impacted?

MAHB's revenue is dependent on passenger traffic. If ever, MAHB is more affected than Airasia's revenue is only about 30% from Malaysia, whereas MAHB's bulk of revenue is on passenger traffic.

His analysis is wrong.


Part of the article from STAR is below:

Maybank Research said the departure levy will negatively impact AirAsia and AirAsia X’s passenger load as their passengers are perceived to be price sensitive. 

Historical accounts are mixed regarding the impact of tax hikes on air travel; in Europe, it caused a multi-year traffic decline while in Hong Kong and Singapore, it merely reduced the traffic growth momentum ever so slightly. 

“The jury is not yet out whether the departure levy will kill passenger demand,” it said.

Maybank Research said the tax burden for international air travel will rise by 49% (within Asean) and 51% (outside Asean). 

MAHB is largely unaffected but it is negative for airlines.