Wednesday, July 30, 2008
Thoughts on Auto Suppliers
I've bought and sold some auto makers for a few times over the last few years without much success. I don't know the reason why but I was never quite able to catch the price movement. Since I never treated those as investment, I wasn't particularly concerned. My limited experience in Canada taught me that most, maybe except Toyota, auto makers do not seem to enjoy prolonged success as the industry is too cyclical and worse competitive. At one time Chrysler was the favorite as it invented the minivan, then it was Ford with the SUV, but now it was Toyota with the hybrid. Anyone guess who tomolo's winner is?
Having said this, the China growing middle class story continues to attract me and I wonder whether in China the auto market will be different. But there's are even more automakers there who share with me the same inspiration, and this pretty much balances the odd, i.e. greater competition in a greater market. So instead I opted for autopart suppliers who may present some value.
Minth (425)
A body part builder which supplies mostly to Japanese brand automakers in China. 85% of sales last year was local so it should be least affected by the slowdown in overseas market. As Japanese brands are usually more energy efficient and have better quality than competitors, Minth's order book should have more stability. Minth's products also seem to be of higher grade, judging from its ability to serve Japanese automakers and to obtain various grant from the local government to support it R&D (~3.5% of sales). However it's hard not to ignore the effect of the rising gasoline prices which will, if liberated eventually, dampen overall auto demand.
Profit has been growing nicely in over 30% over the last 3 years, in RMB which means even higher growth in HKD. Of course a large part of it was due to the growth in the China auto market and the aggressive expansion plan of automakers. Net margin was about 20% but the tax rate was very low at single digit, due to the preferential treatment which will phase out in a few years. ROE has been around 20%. Financial position is very good as Minth raised 1.5b from the market timely last July when the share price was over $12 (vs $5 now). NAV was 3b and net cash including FX products was 1.4b which was a lot!
Orders should be in RMB but somehow Minth had considerable exchange loss last year (50m compared to profit of 360m). It appeared Minth had been tempering too much with FX products. It had 600m invested in funny named instrument like range accrual and basket note that did not appear to be of much business value other than earning interest. Probably Minth didn't really have plans for the huge placement proceeds and felt compelled to do something about it. Distributing the extra cash makes better sense as dividend yield is absurdly low at 2.35% even at today's price.
At current price of $5 Minth appears fairly priced at a p/e of about 13x (if adjusted for a higher tax rate), for a bigger discount is needed to compensate for the uncertainty in the auto market and its treasury management. I quite liked Minth actually but since there's plenty of alternatives to choose from these days, the standard has to be set higher.
Norstar (2339)
It is the opposite of Minth which supplies brakes and suspension system to mostly overseas markets, biggest of which is US aftermarket. There's about 20% sales to Europe and local sales was only 15%. So it's safe to say it pretty much covers all major disaster zone. While secondary demand should sustain even in a downturn, afterall one can't really drive with faulty brakes, the US and Europe markets do look shaky at the moment. Norstar is trying hard to develop the China market but that will take some years before profit contribution becomes meaningful.
Norstar is already feeling the heat like other export-oriented industrials. Its margin and profit growth was eaten up by rising RMB and production costs. It also shares similar downside risk as Minth, too little tax paid but too much tempering with fx products. Norstar even has exposure to JPY/NZD rate which looks like a carried trade to me. In fact, much of earnings growth last year came from these structured products and year end invested sum could be as much as 1.1b. The company's huge pile of cash also looks a bit strange to me, and it had been holding over 1.4b net cash in the beginning of last year, yet it raised another 1b of syndicated loan during the year, but year end capital commitment was only 150m. Bear in mind NAV was 3.3b so about half was in cash (and possibly fx products). And it's hard to feel comfortable when Norstar didn't tell exactly how much it's invested in what. There's some description but in scant details and I'm not counting on the sensitivity analysis provided by management either. Norstar may turn out to be an excellent fx trader, but that's not why I was attracted to this company in the 1st place.
Even Norstar is traded very cheaply as the whole company is valued at only 1.7b, when last year's recurring earning was about 500m, there's probably good reason for this.
Looks like I'm not ready for the auto sector yet.
DISCLOSURE: I don't hold 425 nor 2339 at time of writing.
Having said this, the China growing middle class story continues to attract me and I wonder whether in China the auto market will be different. But there's are even more automakers there who share with me the same inspiration, and this pretty much balances the odd, i.e. greater competition in a greater market. So instead I opted for autopart suppliers who may present some value.
Minth (425)
A body part builder which supplies mostly to Japanese brand automakers in China. 85% of sales last year was local so it should be least affected by the slowdown in overseas market. As Japanese brands are usually more energy efficient and have better quality than competitors, Minth's order book should have more stability. Minth's products also seem to be of higher grade, judging from its ability to serve Japanese automakers and to obtain various grant from the local government to support it R&D (~3.5% of sales). However it's hard not to ignore the effect of the rising gasoline prices which will, if liberated eventually, dampen overall auto demand.
Profit has been growing nicely in over 30% over the last 3 years, in RMB which means even higher growth in HKD. Of course a large part of it was due to the growth in the China auto market and the aggressive expansion plan of automakers. Net margin was about 20% but the tax rate was very low at single digit, due to the preferential treatment which will phase out in a few years. ROE has been around 20%. Financial position is very good as Minth raised 1.5b from the market timely last July when the share price was over $12 (vs $5 now). NAV was 3b and net cash including FX products was 1.4b which was a lot!
Orders should be in RMB but somehow Minth had considerable exchange loss last year (50m compared to profit of 360m). It appeared Minth had been tempering too much with FX products. It had 600m invested in funny named instrument like range accrual and basket note that did not appear to be of much business value other than earning interest. Probably Minth didn't really have plans for the huge placement proceeds and felt compelled to do something about it. Distributing the extra cash makes better sense as dividend yield is absurdly low at 2.35% even at today's price.
At current price of $5 Minth appears fairly priced at a p/e of about 13x (if adjusted for a higher tax rate), for a bigger discount is needed to compensate for the uncertainty in the auto market and its treasury management. I quite liked Minth actually but since there's plenty of alternatives to choose from these days, the standard has to be set higher.
Norstar (2339)
It is the opposite of Minth which supplies brakes and suspension system to mostly overseas markets, biggest of which is US aftermarket. There's about 20% sales to Europe and local sales was only 15%. So it's safe to say it pretty much covers all major disaster zone. While secondary demand should sustain even in a downturn, afterall one can't really drive with faulty brakes, the US and Europe markets do look shaky at the moment. Norstar is trying hard to develop the China market but that will take some years before profit contribution becomes meaningful.
Norstar is already feeling the heat like other export-oriented industrials. Its margin and profit growth was eaten up by rising RMB and production costs. It also shares similar downside risk as Minth, too little tax paid but too much tempering with fx products. Norstar even has exposure to JPY/NZD rate which looks like a carried trade to me. In fact, much of earnings growth last year came from these structured products and year end invested sum could be as much as 1.1b. The company's huge pile of cash also looks a bit strange to me, and it had been holding over 1.4b net cash in the beginning of last year, yet it raised another 1b of syndicated loan during the year, but year end capital commitment was only 150m. Bear in mind NAV was 3.3b so about half was in cash (and possibly fx products). And it's hard to feel comfortable when Norstar didn't tell exactly how much it's invested in what. There's some description but in scant details and I'm not counting on the sensitivity analysis provided by management either. Norstar may turn out to be an excellent fx trader, but that's not why I was attracted to this company in the 1st place.
Even Norstar is traded very cheaply as the whole company is valued at only 1.7b, when last year's recurring earning was about 500m, there's probably good reason for this.
Looks like I'm not ready for the auto sector yet.
DISCLOSURE: I don't hold 425 nor 2339 at time of writing.
Wednesday, July 16, 2008
Something Else
My new grown fondness of mathematicians.
I recently finished two books about math and mathematicians by William Poundstone. I don't know how to classify these books but I'd say it's not boring at all. It's like 'Freakonomics' in math and written in a more serious manner.
It covered topics like atomic bomb, world war strategy, game theory and moral dilemma, binary code, casinos, stock market, and private lives of mathematicians, the last bit which turned out to be most interesting and surprising.
One anecdote cited one math professor Edward Thorp was so much into thinking about winning the casino that he built a roulette predicting device with his colleague and tried it in Vegas, in disguise and with their wives trained too! (for the stunt required four person to pull off successfully)
His interest later transferred to blackjack and he wrote a paper on it, which got so much attention from outside the academic circle (for obvious reason) that the idea of card counting was later explained in the best seller "Beat the Dealer". As an experiment to prove his idea, he unknowingly teamed up with two big time gangsters from New York, who provided seed capital, and did a nation wide casino tour. He later found himself practically banned from all casinos. So he began studied the stock market and before long he co-founded a hedge fund which delivered a compound return of 15% over 19 years, only to be dissolved because his partner was associated with the then junk bond king Mike Milken and hence was under SEC investigation and later trial.
I sure wouldn't have guessed a mathematicians would lead a life like that. But the biggest discovery of the book was about another math professor John Kelly and his concept of the Kelly criterion, which became the cardinal rule in gambling but never appeared in modern day finance, just like the whole value investment school of thought by Graham and Dodd.
In mathematical term it means maximizing the geometric mean will maximize long term grow rate in a repeated gamble with a positive expected value. In my term it translates to "it's better be safe than sorry" in investment (or gamble). Being risk averse in making investments will generate the greatest long term wealth, whereas being risk neutral will lead to blow up in the long run in certainty. This is why it's common to witness strings of success followed by spectacular fallout in finance. BTW, the Graham and Dodd school of thought follows very a similar line of reasoning but without the mathematics, i.e. stress of capital preservation before appreciation.
I know this all sounds too philosophical but this has always been a mystery and dilemma to me, as my felt like playing safe but was taught to be risk neutral in making decisions. So thanks professor Kelly for providing the mathematical ground.
I recently finished two books about math and mathematicians by William Poundstone. I don't know how to classify these books but I'd say it's not boring at all. It's like 'Freakonomics' in math and written in a more serious manner.
It covered topics like atomic bomb, world war strategy, game theory and moral dilemma, binary code, casinos, stock market, and private lives of mathematicians, the last bit which turned out to be most interesting and surprising.
One anecdote cited one math professor Edward Thorp was so much into thinking about winning the casino that he built a roulette predicting device with his colleague and tried it in Vegas, in disguise and with their wives trained too! (for the stunt required four person to pull off successfully)
His interest later transferred to blackjack and he wrote a paper on it, which got so much attention from outside the academic circle (for obvious reason) that the idea of card counting was later explained in the best seller "Beat the Dealer". As an experiment to prove his idea, he unknowingly teamed up with two big time gangsters from New York, who provided seed capital, and did a nation wide casino tour. He later found himself practically banned from all casinos. So he began studied the stock market and before long he co-founded a hedge fund which delivered a compound return of 15% over 19 years, only to be dissolved because his partner was associated with the then junk bond king Mike Milken and hence was under SEC investigation and later trial.
I sure wouldn't have guessed a mathematicians would lead a life like that. But the biggest discovery of the book was about another math professor John Kelly and his concept of the Kelly criterion, which became the cardinal rule in gambling but never appeared in modern day finance, just like the whole value investment school of thought by Graham and Dodd.
In mathematical term it means maximizing the geometric mean will maximize long term grow rate in a repeated gamble with a positive expected value. In my term it translates to "it's better be safe than sorry" in investment (or gamble). Being risk averse in making investments will generate the greatest long term wealth, whereas being risk neutral will lead to blow up in the long run in certainty. This is why it's common to witness strings of success followed by spectacular fallout in finance. BTW, the Graham and Dodd school of thought follows very a similar line of reasoning but without the mathematics, i.e. stress of capital preservation before appreciation.
I know this all sounds too philosophical but this has always been a mystery and dilemma to me, as my felt like playing safe but was taught to be risk neutral in making decisions. So thanks professor Kelly for providing the mathematical ground.
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