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of 9 Webinar Recording: http://kclau.com/webinar/investment-quadrant

The Investment Quadrant: The 4-Step System to Finding Profitable Investment Fast

Webinar date: July 15, 2014 Speaker: Victor Chng and Rusmin Ang are the lead columnists of the website www.FifthPerson.com posting various articles about investment specially Singaporean Companies and Malaysian Companies. They are also full time investors. Authors of the book entitled Value Investing in Growth Companies published by Wiley.

Victor Chng invested in two companies. These companies will be used as models under his topic.

Some people invest because of what they hear from other investors. This could be dangerous. Be more careful.

We wait for the growth to happen.

Super Group Company

Sells Instant Coffee

Started 2006/7

Bought in 2011

There was a demand for ingredients but short in supply. The ingredients were lacking.

There was good news about the company.

We sold our stocks in 2013 for $4.50. This is about 343% gain.

Japan Food

Great business

Related to Ajisen Ramen Restaurant. They keep making cost cutting to increase earning. This is inorganic growth. Revenue growth is only 8%.

We bought stocks within 2010-2011 at an average of $0.305.

Sold at $0.80

There is limited growth in Singapore.

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Make sure the company is growing at a minimum rate of 15%.

The Fifth Person Disclaimer

The Investment Quadrant

The Art Part o Business and Management o Requires experience and understanding of the business o Knowledge of human psychology is very important o Difficult part

The Science Part o The easiest part o All are fixed o Your decisions are made on the numbers that are given to you




Business

Never invest on a business you cannot understand - Warren Buffet

Invest in simple businesses

You can easily understand the figures

Does the business have a competitive advantage? o Monopoly is a form o Some companies technological advantage o Network of the business have. The customers support their business.

Is it a business model that can scale? o There is room for growth

Management

Focus on the value system o Don’t invest in Chairman / CEO who are arrogant and high ego. Their mind is

close and don’t take feedback from other people. o The ideas come from the staff and employees. o Don’t invest in casino business. Their value system is different.




Should be aligned with shareholder’s interests

o If the company is going to a crisis, they don’t pay themselves just to serve their shareholders.

Capital Allocation Behavior o How the management allocate money to create more value to us o Does the company allocate the money to technology that can improve the

business? And eventually improve our margins.

Numbers

Money isn’t everything, but lack of money is everything. Franklin P. Adams

Key ratios o Consistent Growth in the revenue, profit, and operating cash flow o These are quality companies

o Gross Profit and Net Profit Margin No benchmark for this Depends on industry and type of business

o Total Debt to Equity < 0.5 How much debt the company has If the company has less debt, they pay more to the shareholder




Exception - Nestle, 7-11 are companies that can have higher debt level o Cash Ratio > 0.5

The company must always have cash on hand Check if the cash is really there If they have cash, make sure they pay dividends well

o Current Ratio > 1 o Return of Equity > 15%

Tells you have how much you are getting back on your capital o Receivables and Payables Days

This depend on the type of industry Has no fix rule Compare with industrial peers

o Inventory Turnover Days Do they trade their inventory fast?

o Dividend Pay Out ratio This should be consistent and strong The profit should continue to increase

o Dividend yield Valuation

Which model should you use?

Discounted Cash Flow Model

o Use only for stable companies o Companies that are mature

Discounted Earning Model o Use for smaller companies o They are in the growth stage

Sum of Parts

Stock Market Valuation include o Price/Earning o Price/Book Ratio o Price/Cash Flow Ratio o Price/Sales Ratio o Enterprise Value/EBITDA Ratio

Types of Investing




Predictable Value Investing o Great Business o Fair Business

Focus on numbers and valuation

Rusmin Ang discusses on the tale of two tissue papers

Tale of Two Tissue Papers

Hanwell Holdings Ltd

NTPM Holdings Bhd

In May 2012, you are given S$10,000 to Invest o Capitalizations are S$200,000,000

Comparison

NTPM is higher in gross margin

o Also returns the money faster than Hanwell o Return of Equity is low for Hanwell

Return of equity




o Hanwell has been single digit while NTPM two digits

Dividends paid

Hanwell didn’t pay in 2008 because of market problem

NTPM has been consistent

NPTM is single digit here while Hanwell is 44x

Which to invest?

NTPM investors gained 82% in just one and half year

Technique is purely quantitative

What happened o Hanwell has a lot of products

Health solution, consultant property development, investment: Intraco




Formerly known as PSC There were many subsidiaries that were highly paid Not shareholder friendly

Performance was not that good

o Look for companies that are more focused than those who tend to diversify. o NTPM highly focused on toiletries

Very focused o Hanwell VS NTPM Performance

NTPM Holdings Bhd

Lower cost holder

Strong branding

Wide distribution Network

Question and Answer Q: What sectors are you avoiding in SG and Malaysia? A: Oil and Gas. Q: When you start investing do you use dollar cost averaging or invest one lump sum? A: We use dollar cost average but we don’t do it each month. While you keep improving, you’ll keep buying. You must carefully select an option.




Q: When to use Discounted Earning Model? A: Use for smaller companies. They are in the growth stage. Q: Do you have software for screening stocks? A: You can go to google finance for the stock screener tool. Q: What method do you use to shortlist companies? A: We do look for people who can give reliable insights about companies. The best way is through your own competent investors. Q: Timing. How do you determine the holding period? A: It depends on the company you are investing in. You can look at the quantitative criteria for example the valuation. Q: Interest rate increase in Malaysia. Will this have an effect in the stock market of Malaysia? A: I look at Malaysia now, there are a few things I can buy but I have been defensive of Malaysia. If you want to invest, don’t put in large amounts. Keep 70% of your cash on hand and wait for the right time. The worst thing you can get is when you don’t know what to invest. Q: What happen when crisis occur? Do you buy before or after the crisis? A: Nobody can determine when the crisis comes. Just try to increase you cash position. Don’t invest all you money. The very top companies don’t drop a lot. Investors know they are highly stable. Don’t panic.

If you found any error on this note, please email to [email protected] We definitely need your help to improve.


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