Contrarian Approach On China Sunsine Chemical

Ms Market’s Irrational Behaviour – An Opportunity And Threat

Been active in the stock market for more than 10 years, I had witnessed Ms Market’s illogically behaviour frequently. Sometime, you will find her dumping a stock and depressed its price for no apparent reason. You search through the website and company’s announcement but you just can’t find anything. And sometimes a stock’s price will skyrocket also without any sensible reason. Take recent incident on Uni-Asia as an example. This newly-listed company’s IPO was not really that hot at the beginning. A few weeks later the company’s share price went straight up rallied for a few weeks. From its IPO price of $0.55, Uni-Asia’s share price surged above $2.70 before it came crashing down. It was last traded at $1.40 this evening. Nobody is able to explain such phenomenon. The company’s management had clarified to the public that they are not aware of any information that could possibly explain the abnormal volatility. If you look at the company’s recent announcement including its interim report, there is nothing unusual. So the only explanation is – market speculation.

Whenever Ms Market behaves illogically, she presents to us great opportunity and threat. When she depresses a company’s share price, this is an opportunity for us and vice versa. So usually, I tend to take a closer look on company whose share price plunged for no apparent reason. As for skyrocketed share price, I tend to avoid it in fear that I might be the “last man”.

China Sunsine Chemical

China Sunsine Chemical (CSC) was listed on the SGX in Jul 2007 at $0.39 a share. Its IPO subscription rate was impressive and its price reached a high of $0.53 on its debut. Along the way, somehow it started to cool down. It seems that Ms Market had switched her attention away from this company. In September this year, I noticed that the company’s share price fell below water. I ran through the company interim report and its business and then I got interested with this company.

Firstly, the company claimed that it is one of the largest rubber accelerator manufacturers in the world and in China in terms of production capacity. In fact, in its recent corporate presentation, the management reported that they have approximately 14% of China market and 6% of global market. Although it is not something that will make me shout, but personally I find that kind of market share rather attractive. Next, the company has many renowned customers such Bridgestone, Goodyear, Michelin and the chemicals they are selling make up of a very small percentage of tyre production cost. The three chemicals that CSC is selling constitute approximately 6% of tyre production. What this means is that in bad times when customers are cutting cost, CSC is not likely to be on top of the list. So exactly what chemicals are CSC selling? From their presentation, the company explained that synthetic rubber needs to go through certain chemical process before it can be harden to produce tyre, rubber hose, boots etc.

On its interim report, CSC’s revenue and PBT grew by around 24%. What I really like is that its profit margin is around 15%. From my years of investment experience, personally, I tend to select company with above 10% profit margin, although there are many other important factors to consider. Generally, I will avoid investing in a low margin business such as distribution business. As for the balance sheet, it is as usual – reasonable liquidity, some cash, and no long-term debt. I will skip the ratio analysis here.

So in September, I decided to buy a little bit to see how the management materialize their growth target.

Deep Plunge On 29 Oct 2007

On 29 Oct evening, after I finished my dinner and sat comfortably in front of my computer to look at my portfolio, I was shocked to discover that CSC’s share price plunge to intra-day low of $0.295 and closed at $0.305. I quickly browse through the company’s corporate announcement and guess what – there is NO news that can explain sufficiently on the sharp fall in share price. The latest updates from CSC are:

1) Company received trial orders from Pirelli Tyre’s manufacturing plant in Brazil and turkey.
2) CSC released 3rd quarter report. From the report, Q3 operating profit dropped marginally by 4.6% which I have no problem with that. PBT dropped by 51.1% due to IPO issue cost. Again I have no problem with that since the correct focus should be on the operating profit. For the nine month ended 30 Sep 2007, operating profit actually improved by 14.2% to Rmb61 million. That is a satisfactory result.
3) CSC management clarified to the SGX that they are not aware of any information that could explain the plunge in their share price.

Back to the fundamental question – why does CSC’s share price fell by 5.5 cents? The answer is – there is no answer. I tried to check with some friends on any news that I missed out but unfortunately, none of them is able to offer a fundamental answer.

The Challenge

Now here is the challenge. In my opinion, there are two likely outcomes:

1) Insider trading and therefore, the management will be releasing adverse news very soon.
2) Ms Market’s illogical behaviour.

For the first possible outcome, it cannot be analysed. It is totally impossible to analyse the financial report or searching internet for insider information such as financial director wasted company’s money in casino or using company money to speculate in forex etc. In a sense, it is a question of luck (and that’s why we diversified) and we have no control. For second possible outcome, that is good news; that is an opportunity. That is what Warren Buffett did when people were selling Washington Post, Coke, or Amex. The more they sell, the more he buys (until he sits in the board). The end result is that the whole market was wrong; he was correct. Warren Buffett took advantage of Ms Market’s illogical emotion.

Fortunately for me, while searching the web, I found an article written by a research house on CSC. The report was generally positive providing better insight on the business and growth. Finally, I decided to ignore Ms Market and any other people’s speculative remarks and to trust my own research. I immediately share my finding with some friends and colleagues and recommended a buy at $0.31 while I average down my purchase price. CSC’s share closed at $0.32 this evening.

Conclusion

I always love to uncover such unexplainable incident, where a share price plunge/rally without any logical explanation. As a value investor, we should conduct our due diligence thoroughly and disregard Ms Market’s weird behaviour. We should never be influence by speculative remarks and believe in our own research. Even if we made a mistake, there is something to learn. But there is nothing to learn by following others blindly. As for CSC, we will take this as a learning example and I will update on it subsequently.

Lastly, as I had highlighted many times, quantitative analysis alone is insufficient for investment decision. It’s like a frog in the well. But unlike fund managers and Warren Buffett, we can’t simply get the listed company’s investment managers to bring us around and give us a Q&A session. Even if we are given the chance, as a retail investor, we just can’t afford buy an air ticket to China or Australia for such purpose. Fortunately, besides research reports available on the SGX, I also found another research house producing good report. I am currently seeking the company’s permission to allow me to publish their research report on my blog.

Game Of Interest Rates

Fixed Deposit Rates

One of my colleagues told me that May Bank offers a high fixed deposit rate (nearly 2% p.a.) compare to any commercial bank in Singapore. I didn't believe. So this weekend, I decided to get the facts correct. From their websites, I had put together a few bank's FD rate for your reference.

Assuming an initial investment of S$10,000, no bank offer a rate above 1% for 24 months deposit. Of course, if you have a few hundred thousands to save, then the rate will be slightly higher. Unfortunately for "commoner" like us (including my colleagues), we don't have a few hundred thousands to spare. While collating data, I accidentally discovers that Finatiq.com offers at very high FD rate. It's unbelievable but is stated on its website.

Be A Champion In The World Of Interest Rate

So that's how the bankers become so rich. They offer peanut rates when you parked your money with them. Generally, saving deposit fetched around 0.3% p.a., way below Singapore inflation rate. You actually buy lesser amount of rice (unconsciously) everytime you draw money from your deposit account to spend. I know people will tell me that they don't feel it. That is because they are ignorant; but the fact still exist. And if you borrow from bank for housing, renovation, education, car etc, they charge you very high interest rate. The worst is credit card charges. Remember - ALWAYS PAY YOUR CREDIT CARD BILL IN FULL. In essence, with the pool of deposits, bank lends it out to the mass (business or personal) again at high rate. So one of the basic wealth creation knowledge that everyone should have is this - for spare cash, don't park it in any bank deposit. Spare cash here refers to money that you don't need it for the near future. This is mainly cash put aside for raining days. You are better off buying Singapore Government Bonds, which I will touch on it soon. Make sure your money work hard for you; let the banks feel the margin squeeze.

Foreign Currency Deposit

Protecting Your Earnings

So after you made some money from the equity, and the bubble looks like it’s going to burst, what would you do? For most retail investors and people lacking investment knowledge, they will probably do what they have been doing – continue buying and selling stocks. But for the smarter ones, and those who had learnt their lesson (including myself), we know that protecting your earnings is more important than worrying that you might miss the continuous bull.

And if you are a newbie in stock market, I need to let you know on that the most important mission after making money from the stock market – DON’T RETURN BACK YOUR EARNINGS. It is not easy, considers that we are human of greed. And it needs profound knowledge and strategy to protect your earnings. Many years ago, I was searching for methods/strategy to protect earnings during an economic downturn. I am not worry at all of short-term correction; I am worried of economic downturn. And I believe that I had found the answer. In 2006, I attended a few seminars conducted by the SGX not because I am new to stock market, but because I wanted to know if there is anything I don’t know. I also wanted to take the opportunity to ask the speaker on “how to ride over an economic crisis”. I already have the answer in my heart but I like to have a confirmation from the experts.

I spoke to one of the speaker Mr Teong, a private fund manager. He shared with me on how he managed to survive the Asian Financial Crisis. In essence, as a private fund manager, he has the power and flexibility to switch to different asset class to maximize returns and to shun away from risky assets. Unlike those registered/regulated funds, he switched to fixed income instrument when Asia markets collapse in 1997. He successfully protected his investors’ money. But for a MAS registered fund (or unit trust), it cannot change its investment objective and policy as it likes. This means that if you bought technology fund in 2000, the fund will continued to invest 80% (if so stated) of it in technology stocks. Whether the technology stock will clash or the economy entering a downturn is irrelevant. So as least now you know that when there is an economic crisis, or you think that it is coming, you should be ready to get out of equity fund. Otherwise you will see your fund plunged together with the economy until it reached the bottom.

But note that it is also in the investors’ interest that the fund manager follows closely to the stated objective and policy. You certainly don’t want your fund manager to suddenly switch your money to some schemes (such as MLM) because it promise high return.

Foreign Currency Deposit

When the economy is shaky, one way to protect your earnings is to place them in a secured asset that provides reasonable returns. This asset should preferably have a negative correlation or at least uncorrelated to the economy. A fixed income instrument is one such asset. Recently, one of my friends told me that he took out his money from a NZD deposit and would like to put it somewhere else other than the stock market and local saving deposit. I recommended him to study Singapore Government Bonds. I will share with you more on bonds some other day.

And so now I am interested to know what kind of returns can we expect from a foreign currency deposit. I checked the DBS bank’s website for their rates and computed the expected returns from these foreign deposits that the bank is offering.

Firstly, I created a (formulated) spreadsheet so that by keying those numbers, the spreadsheet will calculated the annualized returns. Then I put together the result of all the foreign currency deposits. Take note that Japanese Yen is not included as the interest rate is a wonderful 0%. For Malaysia Ringgit and Chinese’s Rmb, is not tradable outside its territory. Actually I was more interested in Chinese’s Rmb but unfortunately. From the table, we can make some conclusion:

1) Bank charges high commission (through the bid and offer gap) and very high for some currency. If you open a Swiss Franc or Hong Kong Dollar deposit, you make a loss instantly.
2) Only a few foreign currency deposits offer a return that is higher than our local fixed deposit. Others offer unattractive returns (or losses) plus exchange risk.
3) The best deposit comes from the Sterling Pound with annualized returns of 3.8%. The next best is the New Zealand dollar. It seems that my friend was lucky after all.
4) The returns is also the threshold to the investor on exchange risk. If the exchange rate turned against you more than the annualized return, you made a loss.

Take note that:

1) The bid and offer is based on current quote. I can also project the exchange movement one year down the road and put in the figure to do sensitivity analysis.
2) The bank only charge (exchange rate) commission two times; when you buy and sell. So if you keep the deposit rolling, then your returns will be better. But on the other hand, if you keep it for too long, your exchange risk will be greater.

Conclusion

So as you can see, no matter what happen to you, the bank still earns a lucrative commission whenever you buy or sell. And this commission is even higher than local fixed deposit rate. That’s why I always scrutinize my investment whenever a bank is involved. I will do my best to ensure that bank does not earn an extra cent from me unless it is absolutely necessary.

In my opinion, most of the foreign currency deposits are unattractive. This is because you get exchange risk for the returns that can’t even match our CPF Special Account (CPFSA). And that is exactly why I frequently advised my friends not to touch their CPFSA. Personally, I use CPFSA rate as a ‘risk-free’ rate instead of Treasury Bills to evaluate potential investment. However, if there is a chance to invest in China's Yuan or Malaysia's Ringgit, I would not hesitate. Basically these two economy's currency is undervalued. So you better watch out for that chance. Lastly, if you like to have my spreadsheet or you found fundamental error, drop me a message please.

Mr. Market

Who is Mr. Market?

Who is Mr. Market? I guess you have seen me using this term (with title cap) frequently in my articles. I wasn’t the creator of this term; neither is Warren Buffet but his teacher Professor Benjamin Graham. Benjamin Graham was also known as the “Father of Security Analysis” and he created a legend – an investment legend that is the second richest man on earth and a philanthropist. In 1934, Graham and David Dodd together wrote a book titled “Security Analysis” that introduced a whole new way of investment approach. In Security Analysis, he proposed a clear definition of investment that was distinguished from speculation. It read, "An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative."

Graham described the whole market as a single entity known as Mr. Market. According to him, Mr. Market has emotional problem. When Mr. Market is in the mood, he will name a very high price for fear that you may snap up his interest and rob him of his gain. When he is depressed, he will quote an extremely low price for fear that you might unload your interest to him.

And as a follower of Warren Buffet, I also adopted the idea of managing “Mr. Market” so as to invest successfully. And it makes all sense by treating the whole market as a single entity. Whenever people ask me about how to beat numerous stocks experts, I told them not to look at it in terms of the number of investors, but as one single entity. It is almost impossible for you to beat millions of investors and experts but when you look at it as a single entity, it’s easier.

After investing for many years, I decided to describe this entity as “Ms Market” instead.

About Ms Market

Ms Market is a beautiful lady who is available and always available. Ms Market is highly attractive to many men, and women too. Just like any other woman, Ms Market is sentimental, emotional and temperamental. Guys would know that when your girl is not in the mood, she would be unreasonable and irrational. Similarly, when Ms Market is not in the mood, she will depress the price no matter what. When she is in the mood, she will push the price up so that you have no chance to compete with her.

So how most investors behave? Some experts try to forecast Ms. Market’s mood by doing some trend analysis. And then they come up with moving average, candlestick etc. Sometime they predicted correctly and make big money out of it. Other times they were wrong and Ms Market wipes them out. Nobody can be bigger and richer than Ms Market. Another group simply follow Ms Market’s mood. When Ms Market pressed down prices, they sold it to Ms Market at even lower price and vice versa. This is the worst and hopeless lot and most of them won’t make it. The remaining group will totally disregard Ms Market’s mood and make independent decision. The value investors are this remaining lot.

How is Ms Market Lately?

How is Ms Market lately? The obvious answer is that she is emotionally unstable. Nowadays it is more difficult to predict her mood than before. One of my friend’s colleagues wanted to know my opinion on the stock market as a whole, i.e. the mood of Ms Market. I refused to provide any opinion. Then they kept asking and wanted just two words from me. Finally I gave in and gave them my two words, “don’t know”. Basically I really don’t know and I don’t need to know.

Should We Hold An Investment For Very Long-term?

If you have been reading books or articles on Warren Buffet’s investment horizon, it will definitely tell you of investing in a company perpetually. I had friends who asked me if we should really invest for “as long as possible” and disregard the business cycle. Following Warren Buffet’s investment approach the answer is definitely yes. But we faced one problem – we are not Warren Buffet. We must understand that as a retail investor, we will never become or even come close to Warren Buffett. This is because Warren Buffett doesn’t buy 10 lots or even hundred lots in a company; he buys a controlling stake. This means that Berkshire Hathaway will be able to consolidate or recognise the profit from these investment regardless of stock price movement. In fact, Warren Buffett decides who becomes the CEO of a takeover company. Obviously as a retail investor we can’t.

We know that Ms Market always disintegrate a company’s intrinsic value with its share price. In bad times such as recession, while Berkshire Hathaway continue to report good profit from these investments (through consolidation), retail investors had endure with their portfolio losses and hoping that the Ms Market will recover soon. And during good times, the investing public, following the mood of Ms Market, push up share prices. Many will make money while the bubble is expanding. But still, Warren Buffett is indifferent; he had already recognised profits from his good investments for many years and many more years to come. When finally the bubble burst, you will get burnt but still, Warren Buffett is consolidating good profit from his wonderful investments.

“So follow Ms Market also cannot, follow Warren Buffett’s investment horizon also cannot, what should I do?”

In my opinion, which you may disagree, this is what we (retail investors) should do. Firstly, we definitely never follow the mood of Ms Market especially when she is throwing tantrum without considering the economic fundamental. When she is depressed, we will buy from her wonderful companies at deep discount. When she is in the mood and pushing up price, we should sell it to her and locked in our profits. But when the economic fundamental collapse, we will divorce Ms Market totally as she will be depressed for a period of time.

“So in normal time, we should take opposite direction against Ms Market, but how to know whether the economic fundamental is collapsing?”

Finally you asked an extremely difficult question. Unfortunately, nobody has a definite answer otherwise he would probably be richer than Warren Buffett. I mean only God know if US is entering into a recession this year or next year, or not at all. The best thing that any investor should do and can do is to be updated on local and global economic report. Find a group of friends with same interest and skills and share opinion freely. From there, it is easier to form certain objective conclusion. This will help you to determine your investment horizon.

Can The Empire Strikes Back?

I talked about this company known as Sunshine Empire previously in my blog. For a recap, Sunshine Empire (located at Toa Poyoh Hub) invites investors to buy their investment scheme promising exceptionally high returns. You join them by buying a "partnership" status and three are 3 types - Gold, Silver and Bronze Partnership. I don't really know the exact investment amount but I heard from my subordinates that it cost more than $10,000 a unit for Gold Partnership. And also the unit price can appreciate.

Anyway, this Sunshine Empire's scheme is hot at my work place and a few chaps even resigned and become "financially free" after investing in Sunshine Empire. One of them threw in huge amount of retirement savings. And other chap tried to talk to me on this scheme but I was never interested. I never invest in anything that I don't understand. To understand means that I know and have confidence about the business or trade. I am able to conduct due diligence independently and sufficiently. I am certain that the investment is genuine, legal and meet my needs so on and so forth. For Sunshine Empire, I was interested to dig out more information from those who joined. So this guy (let's call him Mr. S) had probably misconstrued that I might be interested in the investment. And if I join and become his "downline", he will be awarded with certain profit out of my investment amount.

This afternoon while having lunch with a colleague, an uncle approached me to give me a quick update on Sunshine Empire. According to him, the Empire appears on the paper and seems that MAS is watching it closely, or something like that. Unfortunately, he doesn't know the whole story. After my lunch, I went to canteen again to buy a cup of coffee (feeling sleepy). And I bump into Mr. S again. He is more aggressive now and paid for my coffee while the coffee girl was pouring it for me. I rejected his offer immediately telling him that I'll never accept "coffee" from any subordinate. That's my principal. Then Mr. S asked if we could meet some other time outside. I asked him where to and what for? He replied that he has no ill motive and perhaps...KTV.

Apparently, Mr. S had made three big mistakes. Firstly, I wasn't interested in the scheme; I am only interested in revealing the truth. Secondly, I am always informative and knew that this scheme appeared on the paper recently. Thirdly, he seriously under estimate my investment knoweldge and integrity.

Right here I will not jump to conclusion. We will see if the Empire is able to strike back and prove to its investors that it is serious about business. Frankly speaking, I really hope that it is genuine otherwise...... In case you missed this article, I found it on the net and paste below for your reading pleasure.

20th Anniversary of Black Monday

Correction Triggered, Finally

Let’s see what we have last week.

1) US home construction starts fell in September to their lowest level in more than 14 years.
2) Consumer prices (inflation) rose at the sharpest rate in four months.
3) Turkey likely to be at war with Kurdish.
4) Oil price surged passed US$90 a barrel before it retreated slightly.
5) On Friday night (19 Oct 2007), DJIA plunged 366 points to 13,522.02 while the City (Singapore) was sleeping. The S&P 500 plunged 39.45 points to 1,500.63, and the Nasdaq Composite plunged 74.15 points to 2,725.16 in "celebration" of the notorious Black Monday 20 years ago.

Today, 22 Oct 2007, Monday, STI plunged 105.34 to 3,642.64 following the sharp correction in US market on last Friday. Twenty years ago, on 19 Oct 1987, DJIA crashed by more than 500 points for no apparent reasons, if I remember correctly. Subsequently, many theorists and economists offered their explanations; most of it doesn’t sounds like “English” to me. But what’s really amusing is that these people just can’t get over it. This is something that occurred 20 years ago. Anyway, whatever the reasons, I had long expected this correction to be triggered and I had gave many warnings to my friends and colleagues. The indexes everywhere are simply too hot and a correction is needed to cool it down.

What Should We Do?

If you ask me, the first thing you should do is don’t run! Do not follow the crowd; they are always on the wrong direction, unless you had bought some nonsense stocks. You run when you are sure of a recession. If it is just a correction, you should wait patiently for your turn to strike. Control yourself and don’t let Ms. Market affects you. I assured you that Warren Buffet didn’t dump his listed companies last Friday and not even today. I am willing to bet with you with my last cent. My advice is that you should stop looking at the stock market as this correction may go on for a while. But in my opinion, it will settle down soon. As far as Singapore is concern, our economic fundamental is strong, with forecasted more than 8% GDP growth this year. And then our IR project, I don’t remember that the billion dollar contracts had been awarded to anyone. Some small contracts yes but that’s about all.

Najeeb Jarhom, head of retail investment research at Fraser Securities, said (in Business Times) that the anniversary of the US market crash may have affected investor sentiment but it had no fundamental significance to the Singapore market. He said that “Monday's heavy falls on the local bourse should not be cause for alarm. Instead, they provide a good opportunity for bargain-hunters”. I share the same opinion.

However, rising oil price is really a big concern. Take note that if oil price rise above US$90, it has reached historical high in “REAL” terms. This means that if we take into consideration the inflation rate, the highest oil price during previous oil-triggered recession was approximately US$90. Recently, I had highlighted to some friends and colleagues that with rising oil price, we should buy company that sells oil or in oil-industry related business. We should sell those who are drinking it. Citi economist Chua Hak Bin said (in Business Times) that “the economy remains supported by the financial industry as well as the construction and property sectors, where projects will continue regardless of high oil prices”. We share the same opinion.

OuHua Energy

One listed LPG company that I invested in plunged back to my purchase price. This is a China company - OuHua Energy. I could have locked in my profit recently but I did not. I intended to invest in OuHua for long-term. I believe LPG as a cleaner energy will have sustainable demand in the big China market. Current correction presented a good buying opportunity for those who have not invested in it. Certainly, if OuHua's price continue to fall, I'll average it down not because I need to, but I believe that it is a good investment. I'll put up my full analysis on OuHua subsequently.