Review 2022 & Preview 2023

Year 2022 was a bad year to me in term of stock market investment in which my portfolio lost 16%.

The table below shows the stocks in my portfolio at the beginning and end of year 2022. Only 3 out of 14 stocks manage to end the year in positive territory.

These 3 stocks are Hibiscus, Master & Uchitec.

Apart from the hopeless Fast which has already been "impaired" long time ago, JHM & MI are the worst performer of the year with a 57% & 44% loss respectively.

MI was only added into the portfolio in Jan22. At that time, it has already fallen 50% from RM5 to RM2.50.

I didn't buy and sell a lot in 2022. Besides MI, I added LEESK into my portfolio, top up more JHM & Krono's shares and traded LTKM.

This "tech-heavy" move is the main reason that makes 2022 a bad year for me.

I sold and removed LeonFB, Jaks and Master from my portfolio in 2022. It seems like I disposed Jaks too late and Master too early...

Tech Stocks: Has The Value Emerged?

Can I buy tech stocks now?

I think most stock market investors in Malaysia will have this question.

Year-to-date, most tech-related stocks have seen their share price dropped between 30-50%. Their previous optimistic PE valuation of 40-60x has fallen to 20-30x currently.

PE ratio of between 20-30x seems to be fair and not expensive in recent tech super cycle. 

However, will the PE valuation ever go back to 40-60x again when the sentiment in stock market improves later?

I really don't know. Who knows the PE might go back to 15-20x region when the worry of semiconductor oversupply emerges?

Anyway, tech related companies with high growth potential should be a safer bet.

Preview of 2022: Tech Stocks Off To A Bad Start

 

Which sector in Bursa Malaysia will excel in year 2022? 

I think many investors opine that technology sector will continue to flourish in 2022 after doing exceptionally well in 2020 & 2021.

The reason is simple: 5G, electric vehicles, autonomous vehicles, Internet of Things, IR 4.0, smart devices, metaverse etc. 

These things are the future and it seems like they are still in their infancy stage. All of them need a lot more sophisticated chip.

Thus, semiconductor's demand is high in the foreseeable future.

However, as we step into the first two weeks of 2022, the stock prices of technology stocks in Bursa Malaysia drop like nobody's business.

Most of them suffers 15-25% slash in their share prices in the past one week alone.

Is this a golden opportunity to grab their shares or is it just the beginning of a prolonged downtrend?

Is It Time To Invest In US Stock Market?

At the end of 2020, I was bullish on the stock market in 2021.

It should be a recovery year from the pandemic as Covid-19 vaccines were rolled out in stages.

Now we are approaching the end of year 2021, and it turns out to be a tough year for stock market in Malaysia.

Unless you packed your portfolio with quality tech stocks, it's very likely that you will close year 2021 with a loss.

If you have Genetec or Kobay in your portfolio early in 2021 and hold on to them until now, you will be big winner in 2021.

Genetec rode a rocket from RM1.80 to RM50 while Kobay jumped from RM2.40 to RM18 (adjusted to bonus issue).

I had Genetec in my portfolio at the start of 2021 at a cost of RM1.49, only to have sold them "happily" at RM4.20... 

Black November: Pessimism Prevails

 

So far this November has not been a good month to most stock market investors.

This is the month when most quarterly financial results will be released, and we know that most results will not be very good.

We have stricter MCO 3.0 lockdown in June & July, and then the Covid-19 new cases surged to peak in August.

Currently there is worry about Covid-19 wave number four after everyone is free to travel across state borders.

New cases stay mostly above 5,000 per day despite close to 80% of the population have been vaccinated.

I sense that the whole stock market is full of pessimism in November. 

The share price response to good financial results was rather muted while a bit of bad results could be punished heavily.

What should be our strategy in such a period of time? 

Should You Go For Covid-19 Vaccination?

The unprecedented Covid-19 pandemic has been here for one year. I'm sure that almost everyone in the world wants it to end as soon as possible.

Now we Malaysians have a good chance to put all these miseries to bed, as our Covid-19 vaccination program has just started.

However, I find that some of those who are very scared of being infected with Covid-19 virus are reluctant to get themselves vaccinated.

Most of them want to wait and see first (if someone die from vaccination).

I think that this kind of mentality is common, probably due to influences of "news" from social medias which have been widely shared and circulating around.

"Four people died after vaccination", "XX country reports 30 death after vaccination", "Doctor or nurse died a few days after vaccination", "Someone paralyzed after receiving the jab" and so on.

For those pure headlines readers, they would probably be very scared of Covid-19 vaccines. However, if we read further, it's actually nothing to be worried about, at least until this moment.

Will Negative Comments Drive You Crazy?

If you frequent public forums and social media platforms associated with stock market, surely you'll see negative comments on almost all the stocks.

Some negative comments make sense but I'd say most do not. 

Some people like to create fear and anger in other people and they might have a sense of satisfaction in doing so.

So it's not uncommon to see heated exchange in public forums and social medias.

How should you react to this?

Are You B40, M40 or T20?

Department of Statistics did a survey on Malaysia household income in 2016. It shows the income level of B40, M40 & T20 groups in Malaysia.

B40 = Bottom 40%

M40 = Middle 40% (what we refer as middle class)

T20 = Top 20% 

Household income means combined incomes of husband & wife if both are working, and I suppose it is take-home income (after income tax).

		Household Income per month (RM)
		Range	Mean	Median
	B 40	<4360	2848	3000
	M 40	4360 – 9619	6502	6275
	T 20	>9619	16088	13148

According to the statistic, if both of your wife and yourself earn a combined income of RM5000 per month, you are classified as "middle class". 

Wow, it sounds great to be a middle class right? However, can RM5000 a month give you a middle class lifestyle especially if you have children?

These are 2016 figures, which are 4 years ago. I'm sure that in general, our income level has increased whereby RM5000 household income might be categorized as B40 now. 

The numbers below compare household income level of 2016 (in blue) and 2014 (in orange). The mean household income of M40 has increased RM840 from RM5662 to RM6502  in two years time.

But, please don't forget that inflation has caused the cost of living to increase throughout the years as well. 

So, our quality of life might not change much even though our income increase, as we also spend more at the same time.

If your household income is RM13,000, you are at the median level of the top 20% which means only 10% of Malaysian households earn more than your household.

Then you must be rich. If not you, who are those people who stay in million dollar houses and drive Mercedes, BMW, Lexus and other luxury cars? 

Is RM13,000 a month really considered "rich"? Well, I'll discuss this later.

Which group are you in, B40, M40 or T20? 

Are You A Contrarian or Trend Investor?

"Be greedy when others are fearful, be fearful when others are greedy"

This is a famous quote by Warren Buffet. He can't be wrong, right?

Mr Fong SiLing (Cold Eye), apparently, also adopted this strategy. He mentioned again and again in his articles that the best way to profit from stock market investing is to practice contrarian investing （反向投资）

Based on his 40 years of experience and success, he can't be wrong as well.

Recently he openly wrote that it is a good time to collect oil & gas stocks now. Oil price is at rock bottom, and so are many O&G stock prices. Everyone seems to be pessimistic about O&G now.

We know that eventually oil price will recover. O&G stocks price will recover as well, if they can survive the storm.

How long will it take for crude oil price to recover then? Can it be within 1 year, or 2-3 years? No one knows. 

Brent crude oil price has been in the downtrend since falling from above USD100 per barrel in mid 2014. It rebounded in 2016 from USD30 to reach USD80 in 2018. Then it fell below USD30 this year.

We know that it will go back to above USD60 per barrel again. It's just a matter of time.

By collecting good O&G stocks, you know that you are almost sure win, and may win big. However, how long are you willing to wait?

Are you willing to wait for 2-3 years? 

Some investors have no problem with that, and surely some do not have the patience.

       Armada: Downtrend for 6 years and counting

Besides O&G sector, there are other sectors which are also languishing in bear zone such as plantation, property, logistics etc.

Is it the time to collect stocks in those sectors as well? Now everyone is "fearful" in them, should we act now?

Stock market investing is like predicting the future earning of a company. For me, if you think that the recovery is close, then may be it's time to buy.

How close is "close"? Everyone has their own definition for that.

Property sector was hot in the early 2010s. New development projects were like mushrooms after rain and all were fully taken up. Property price went up like hell. A lot of non-property players diversified to join this property boom.

As a result, many property stocks at that time double or triple in price. 

The turning point was around 2015, when there was an oversupply of properties in the market, and the property price were unaffordable to many.

From that point of time, property sales dropped, company's profit dropped and the share price inevitably followed.

       MKH: Property + Plantation Play

Up to today, I still don't see any recovery hope for property stocks in the next 12 months. Covid-19 just makes the situation worse.

Nevertheless, after Covid-19's concern is over, would it be the time for property sector to turnaround amid low interest environment? 

I don't know when will this happen but my point is, buying property stocks in year 2016, 2017, 2018 or 2019 when most people were "fearful" in property sector is a contrarian move, but is it a good move?

I have a few property stocks before, and I have sold all of them except Matrix which I decided to keep.

The reason is simple, I foresee Matrix can continue to break new high in sales and profits even though the overall property market is going down hill.

To me Matrix is a well-managed company. It makes good sales, its unbilled sales go up and it gives good dividends too.

True enough, Matrix's sales and net profit increase year after year since listing in 2013. However, its share price has been quite stagnant in the last 4-5 years before Covid-19 dragged it down in Mac20.

It didn't drop like other property stocks though, but it didn't go up. So, its PE ratio is getting lower and lower at around 6x.

The reason is, Matrix is not in the positive "trend".

This brings us to "Trend Investing".

From my observation, trend investing is a good way to earn money in stock market, especially if you can identify the trend earlier than most people do.

So it means that doing homework does matter, not like rushing in when everyone already did so.

Currently it is the trend of gloves and PPE related stocks. If you are smart and alert, you might have bought and accumulated gloves stocks in Jan/Feb this year when Covid-19 started to spread globally, even though the jump in stock price only occurred in April.

Up to today I still haven't got any shares of glove stocks, mainly because I was slow to react, and most of the good glove stocks are "expensive" to me.

If you buy early in the trend, you just ride on it and make handsome profit. However, if you buy near the end of the trend, you might end up losing money.

The trend can last for few months to few years.

Last time the property trend lasted about 3 years from 2012-2015. If I'm not wrong, plantation stocks were also hotly debated at that time.

After that in 2014, the tremendous weakening of Ringgit against USD from RM3.20 to RM4.40 kick started the uptrend of export-orientated stocks.

Furniture, injection moulding, semiconductor and other export stocks were having a real good time.

       POHUAT: Furniture export stock 

This trend also lasted around 3 years until 2017 when MYR strengthened to below RM4.00. 

Last year there seems to be a brief box-packaging trend. Combination of several favourable conditions such as higher demand, lower raw material cost and promotion by some investors and analysts might have initiated and sustained the trend.

This trend lasted for about a year before being cut short by Covid-19.

How about the trend of technology stocks? Smartphones, 5G, IoT, cloud computing, driverless cars etc are the main trend of the world so I feel that it is always in the trend.

Even though we read that semiconductor industry has up and down cycle, or negatively affected by geopolitical issues, I actually don't feel any significant "out-of-trend" issue for the past 10 years.

When a tech company goes down hill, there will be another tech company on the up at the same time.

The important thing is to make sure that the tech company is always at the latest trend of technology. If not, it will be eliminated sooner or later.

       INARI: Uptrend from 2013 until 2018

Contrarian and trend investing seem to be two different kinds of investment strategies. Both can make money and lose money as well.

If you buy too early in contrarian investing, you lose time, and time is money.

If you buy too late in trend investing, you can be trapped and lose money.

No matter which kind of investors you are, it's all about the timing.

Those successful investors excel in the in & out timing, either using fundamental, technical, trend, contrarian or whatever methods.

We know that life is extremely tough for Airasia & GENM now. We also know that both of them will recover. 

Are you greedy now when others are fearful?

 

Casual Way of Blogging

For me, having a blog is good to record my investment journey, but to maintain it is not that easy. I see that there are quite a lot of blogs which I used to visit have become inactive now, though some might have changed platform to FB or others.

Looking back at my blog content since 2011, I can see how my investment style and mentality changed. To tell the truth, I feel embarrassed by some of the articles I wrote.

From now onward, I don't think I have the time and energy to write like before. Previously I used to do thorough research on a company and write it down in this blog.

Of course I still need to do some studies before I commit to invest in any stocks, but probably not as "detailed" as before. At least this is my current situation after being out of stock market for some time.

Last time when I planned to write about a company in a more comprehensive way, I need to spend many hours searching, reading and taking down notes. Then to arrange and transfer all of the notes into this blog, it probably takes 2-3 times more the time required to do research.

Thus, writing an article is rather time consuming. I can use this time to study more companies actually.

To keep on publishing posts in this blog, I probably will write in a more casual way. Readers should not expect it to be the same as previous years.

Hopefully, I can continue to do monthly review on my portfolio performance like I used to do, as this will make me more disciplined.

Lastly, please bear with me that I'm not going to answer all questions directed to me in this blog.

Torrid Time For Export Stocks

Recently I have been really busy both at work and at home, so it's hard for me to concentrate on stock market research and blogging.

As a result, I rarely monitor the stock market and this blog got temporarily "abandoned" as well since the start of 2016.

Year-to-date, KLCI suffers less than 3% loss but a lot of stocks in my portfolio have been beaten down by around 20%.

These stocks are nothing other than those export-orientated stocks, although many O&G, property and construction stocks also do not do well during this period of time.

Is the fall of export stocks due to recent strengthening of Ringgit?

From its peak at around RM4.40, MYR has strengthened about 6% to RM4.15 per USD since early 2016.

Is it related to lower and lower crude oil price? 

Crude oil price is edging ever closer to USD20 now, and surely it will affect Malaysia's income negatively.

Perhaps a lot of shareholders of those export stocks are hesitant whether they should sell their shares or keep buying more to average down.

Is it a good opportunity to buy just like August last year?

I'm also not sure as I can't predict future share price movement.

However, there are differences between current drop compared to Aug15 when the KLCI also fell quite heavily together with almost every stocks.

Now, KLCI still manage to hold on relatively well.

Anyway, I think I should wait until upcoming quarterly results announcement. 

I don't expect many export companies to post better result QoQ for the final quarter of 2015. If any of the export companies in my portfolio do so (except Notion) then it will be a bonus :)

How To Interpret Foreign Exchange Gain/Loss in Financial Report?

If you wish to know the answer for this question, then I'm sorry because I am also looking for it.

We know that when MYR value drops, exporters that sell their products or services in foreign currencies will get a profit boost.

However, if the raw material cost are denominated in foreign currencies and it makes up a big portion of its overall cost, then weakening MYR might not give too significant increase in profit.

If the export company has lots of debts/borrowings denominated in foreign currencies, then weakening of MYR might not be good for them.

In a company's quarterly financial report, it will show how its profit before tax are arrived at, either below the income statement or in the explanatory notes.

This section will usually include some realized/unrealized foreign exchange gain/loss.

For example, in Latitude latest FY16Q1 quarterly report:

It shows that in FY16Q1, Latitude has a net forex gain of RM7.829mil, and these are already included in arriving at the net profit.

(1) What does this foreign exchange gain made up of?

I'm actually not sure and hope that someone with accounting knowledge can help to explain.

From my guess, this forex gain/loss should be from its receivables/payables, cash/debts denominated in foreign currencies and perhaps other items in the balance sheet.

For example, company Z exports its products in USD.

Lets say credit sales of USD100k is made at exchange rate of RM3.50 in early Q1. This means that a revenue of RM350k is registered and it will have USD100k as trade receivables.

In the middle of Q1, part of the bill USD40k (receivables) is settled at exchange rate of RM4.00. So there is a realized forex gain of 40k x RM0.50 = RM20k.

If other outstanding amount are not yet paid and MYR ends Q1 at RM4.30, then there will be an unrealized forex gain of 60k x RM0.80 = RM48k.

So the total forex gain for this particular sales is RM68k in Q1, which means that the company can potentially receive RM418k from a sales that worth RM350k.

The same should apply to payables in foreign currencies.

For borrowings, if a company secured USD100k borrowings at exchange rate of RM3.50, and it repaid USD30k at exchange rate of RM4.00, it will have a realized foreign exchange loss of RM15k.

If MYR ends the reporting quarter at RM4.30, then there will be an unrealized forex loss of RM56k.

Am I right?

However, (2) Which exchange rate is used as reference in the subsequent quarter? Is it the rate when sales are made, or the rate at end of previous quarter?

Lets use the company Z mentioned earlier as example.

Company Z makes USD100k sales in early Q1 at RM3.50 rate, and ends Q1 with USD60k receivables at RM4.30 rate. If the bill is settled fully in Q2 at exchange rate of RM4.10, will it register a realized forex gain of 60k x RM(4.10 - 3.50) = RM36k in Q2?

Or for Q2, we use the exchange rate at end of Q1 which is RM4.30 as a reference so company Z will register forex loss of 60k x RM(4.10 - 4.30) = -RM12k when the rate drops from RM4.30 to RM4.10?

Besides, there is another "foreign currency translation" profit in the income statement under "other comprehensive income".

For Latitude in the same quarter, the amount of foreign currency income is relatively huge at RM42.710mil in a single quarter.

(3) What does this foreign currency translation income made up of?

I think this should be for its foreign subsidiaries which is in Vietnam.

As Vietnam Dong also appreciates significantly against MYR, there will be forex gain but I'm not too sure how this number is derived from but it seems like it is from the increase in net assets of its foreign subsidiaries QoQ due to currency exchange rate changes.

From what I understand, this type of profit should not be included under profit attributable to shareholders but it should not be totally ignored so it is put under "other comprehensive income".

So, it will not contribute to the company's net profit and EPS.

Hopefully some expert will help to answer the questions marked in red above.

Earning Dilution - ICULS

Reminder: All information provided in this post might not be accurate

Irredeemable Convertible Unsecured Loan Stock (ICULS) is another way for a listed company to raise money besides rights issue and warrants.

As the name implies, ICULS is a loan which can be converted into common stocks/shares.

Basically investors who take up the ICULS will "lend" their money to the company and in return, the company will pay interest to them, usually twice a year.

Holders can convert their ICULS into the company's shares at any time within the conversion period. 

From what I learned so far, it seems like all ICULS are compulsory to be converted to common shares. So, it will certainly cause earning dilution to the company in the future unlike warrant which may not be converted if they are not "in the money".

Unlike warrants also, ICULS holders do not need to pay extra cash when the ICULS are converted to common shares.

They only need to surrender their ICULS at a conversion price.

How much earning dilution can ICULS bring to a company?

Well, most of the time the maximum numbers of new shares from ICULS conversion will be given in the circular to shareholders while issuing the ICULS.

So, it's easy, just refer to the circulars to know the extent of potential earning dilution.

Lets take SAM Engineering as an example.

In order to acquire engine case manufacturing business in early 2012, SAM "borrowed" RM135mil cash through issuance of ICULS.

Below are part of the salient terms of the ICULS found in the circular.

SAM

Issue size : RM135mil

Issue price : 100% of the nominal amount

Form & Denomination : RM1.00 each

Conversion price : RM2.10 nominal amount of the ICULS per SAM share

Conversion mode : by surrendering ICULS with an aggregate nominal value of at least equivalent to the conversion price

Maximum new shares from ICULS conversion : 64,285,714

With conversion price of RM2.10, this means that potential ICULS buyers know that they can buy SAM's shares later at RM2.10 each. 

As the total loan is RM135mil, it can be converted to 64,285,714 new SAM shares. (135mil divided by 2.10)

I only knew about this recently. Previously, I looked at the information on my trading platform which looks like this:

The "Share Issued" shown above is RM117.524mil as at 5th Nov 2015. 

I thought the number of new SAM shares after all ICULS converted will be 117.5mil, and this is the main reason why I didn't invest in SAM in mid 2015.

Apparently I was wrong.

This RM117.524mil should be the total amount of loan remaining out of RM135mil issued, which means RM17.5mil has been converted into 8.32mil new SAM shares.

The maximum new shares is only 64.3mil, and from 5th Nov there are potentially 56mil more new shares when all ICULS are converted.

From its circular as well, it is mentioned that SAM's total shares will go up to 135.167mil once all ICULS are converted.

If I expect SAM's FY16 net profit to be RM60mil, my projected fully-diluted EPS for SAM will be 44.4sen.

Here is another example,

L&G

Issue size : RM77,779,589 (equivalent to 598,304,530 units)

Issue price : 100% of nominal value of RM0.13 each

Form & Denomination : RM0.13 each

Conversion price : RM0.26 for every one new L&G share

Conversion mode : by surrendering nominal value of ICULS equal to conversion price, OR by surrendering RM0.13 nominal value of ICULS together with cash such that in aggregate it equivalent to conversion price

Maximum new shares from ICULS conversion : 598,304,530

At conversion price of RM0.26, one would expect that the maximum numbers of new L&G shares from ICULS conversion is 77,779,589 divided by 0.26 = 299,152,265 shares.

However, it is stated that maximum new shares is 598,304,530.

This is because of its conversion mode, in which ICULS holders can either choose to surrender RM0.26 ICULS for a new share, OR surrender RM0.13 worth of ICULS and top up RM0.13 cash to get a new L&G share.

The latter works like a warrant with an "exercise price".

The maximum scenario assumes all holders will pay RM0.13 to get a new L&G share, which is unlikely I think.

So we will not know the exact numbers of new shares until the ICULS reach maturity. We only know that there will be minimum 299mil new shares and maximum 598.3mil new shares.

TGUAN

Issue size : RM52,602,650

Issue price : 100% of the nominal value

Form & Denomination : RM1.00 each

Conversion price : RM1.00 for every one new TGUAN share

Conversion mode : by surrendering the ICULS with the aggregate nominal value equivalent to the conversion price

Maximum new shares from ICULS conversion : Not mentioned

In Thong Guan's case, the maximum new shares from ICULS conversion is not mentioned in the circular.

We can know that from conversion price of RM1.00 and straight forward conversion mode, the maximum new TGUAN shares will be 52.6mil once all ICULS are converted.

Nevertheless, this is not the end of the calculation of EPS dilution from ICULS conversion.

Just look at the simple formula of EPS below,

Net profit attributable to shareholders

_____________________________

Weighted average numbers of ordinary shares

After the conversion of ICULS into ordinary shares, the denominator will increase thus EPS will drop.

Nevertheless, net profit attributable to shareholders will also increase at the same time as the company will save on the loan interest payable to ICULS holders if ICULS are converted.

If the company issue RM100mil worth of ICULS with interest rate of 4%, then it will "save" RM4mil a year if all the ICULS are converted into ordinary shares.

This RM4mil "saved" is subjected to normal tax like other profits in the company, so we need to deduct the tax rate to get the actual figure.

So, for EPS dilution from ICULS, the formula will be:

Net profit attributable to shareholders + convertible loan interest (1-tax rate)

____________________________________________________________

Weighted average numbers of ordinary shares + new shares from ICULS conversion

For convenience, personally I think I will not include the interest saved in my calculation of EPS dilution from ICULS conversion. It's always better to overestimate the dilution effect rather than underestimate.

As I only learn all these stuff by myself from online search, I can't be sure that all the information here are correct as I might interpret them wrongly.

So please correct me if I'm wrong.

For EPS dilution from warrants conversion, please refer here.

EPS Dilution - Warrants

While reading income statement in a financial report, we will see both basic EPS (Earning Per Share) and diluted EPS at the end of the report.

Basic EPS is simple, which is defined as:

Net profit attributable to shareholders

_____________________________

Weighted average numbers of ordinary shares

Average numbers of ordinary shares is used in the denominator because total number of shares may change in a given period of time.

If more shares are issued in that period (warrant conversion etc), total number of shares will increase.

If the company buy back its shares, total number of shares will decrease.

Calculation of the weighted average shares is a bit complicated. It is best explained with an example.

If company X starts year 2015 with 100,000 shares, issue additional 50,000 shares on 1st Apr15, and then buy back 20,000 shares on 1st Oct15, and end the year of 2015 with 130,000  shares, what will be its average outstanding shares for the whole year of 2015?

As company X has 100,000 shares for 3 months (1st Jan until 1st Apr), which is 25% of one year, its weight will be: 100,000 x 0.25 = 25,000

From 1st Apr to 1st Oct (6 months), company X has 150,000 shares. So the weight it carries in this period of time will be: 150,000 x 0.5 = 75,000

For the last 3 months from 1st Oct to 31st Dec15, company X has 130,000 shares outstanding. So the weight will be: 130,000 x 0.25 = 32,500

If we add up all 3 of them: 25,000 + 75,000 + 32,500 = 132,500, this will be the weighted average shares for company X in year 2015.

We know that when the company issue more shares, earning will be diluted and this is generally not a good news for existing shareholders.

In Malaysia, common securities that potentially dilute the earning are warrants, employee stock options (ESOS) & long term incentive plan (LTIP), convertible loans (ICULS) & convertible preference shares (RCPS).

While the dilution effect of ESOS is basically small, the "damage" from warrants and ICULS should not be overlooked.

For accounting purpose, company must display in its financial report the diluted EPS arising from existing securities which are convertible into ordinary shares.

To calculate the diluted EPS from warrants conversion, commonly "Treasury Stock Method" is used.

This method assumes that all the cash raised from the conversion of warrants will be used to repurchase (buy back) the company's shares and put them under treasury shares.

Treasury shares bought back will reduce the company's outstanding shares in the open market.

Just take Thong Guan as an example:

Thong Guan has about 105.2mil ordinary shares. It issued 26.3mil warrants in Sep14.

Below is Thong Guan's EPS in its FY15Q2 report ended 30 Jun 2015:

With PATAMI of RM7.101mil and weighted average shares of 105.2mil, Thong Guan's basic EPS is a straight forward 6.75sen.

We know that there are approximately 26.3mil warrants at this time which can be converted into one mother share each.

IF all warrants are converted to mother shares, total outstanding ordinary shares for Thong Guan will be 105.2 + 26.3 = 131.5mil.

So the diluted EPS should be 7.101 divided by 131.5 = 5.4sen right? This is my own way of calculating diluted EPS.

However, the diluted EPS stated in the report is 6.41sen, which is much higher than 5.4sen.

Lets calculate using the "Treasury Stock" method.

There are 26.3mil warrants with exercise price of RM1.50 each.

If all warrants are converted to mother shares in FY15Q2, Thong Guan will get RM39.45mil cash.

On 30th Jun15 which is the end of Thong Guan's FY15Q2, its share price closed at RM1.91 (might use average share price).

If all the cash raised are used to repurchase its ordinary shares from open market, it will be able to get 20.65mil shares.

So, there will be additional 5.65mil shares only after this convert & repurchase exercise (26.3mil - 20.65mil).

To calculate the diluted EPS, the total number of shares used is 105.2 + 5.65 = 110.85mil.

Thus, diluted EPS = 7.101 divided by 110.85 =  6.41sen.

Do you think this is a fair estimation of EPS dilution?

I don't think so.

In real life, we know that it is 100% impossible for a company to use 100% of the cash raised from exercise of warrants to buy back its own shares.

If the company do so, then what is the point of issuing warrants in the first place?

Even if the company does buy back its shares, the amount is usually small and negligible.

I think this "Treasury Stock" method seriously underestimate the EPS dilution effect so personally I won't use it.

Nevertheless, it is also not without flaw using my own way to calculate diluted EPS especially if the expire date of the warrants is still long and the company's earning may increase later.

Anyway, I tend to adopt the "worst case" scenario so I will stick to this at the moment.

Sometimes if a company has a bright future and gives attractive dividends, or the major shareholders want to strengthen their grip on the company, the warrants can be quickly converted into mother shares causing immediate EPS dilution.

For example Inari issued about 202mil of warrant-A in June 2013. Now (Oct15) there are only 9mil Inari-WA remaining in the market even though its maturity date is still long in June 2018. 

The rest of 193mil have been converted to Inari shares causing significant earning dilution to Inari.

However, this is not a big concern for Inari's shareholders as its earning was widely expected to improve tremendously.

In conclusion, diluted EPS from warrant conversion is calculated using the "treasury stock method". EPS dilution from ICULS will be calculated with different method though.

Budget 2016 Highlights

MALAYSIA BUDGET 2016 Highlights

Budget allocation

• 2016 budget allocates total RM267.2 billion, an increase from a revised allocation of 260.7 billion for 2015. The initial allocation for 2015 was 273.9 billion.
• For 2016, federal government revenue collection is projected at RM225.7 billion, up RM3.2 billion from 2015.
• The first priority of Budget 2016 is to spur domestic investment to contribute 26.7% to the GDP in 2016.
• The Budget aims to increase private investment to RM218.6bil and public investment to RM112.2mil.
• Subsidy allocations seen falling slightly to RM26.1 billion from RM26.2 billion this year. 

Taxes

• Income tax increased from 25% to 26% for people earning between RM600,000 and RM1 million. Increased to 28% for those earning above RM1 million. 
• Income tax relief for each child below 18 years of age is increased to RM2,000 from RM1,000 from year of assessment 2016.
• Tax relief for individual taxpayers whose spouse has no income is increased to RM4,000 from RM3,000.
• Children supporting their parents, even if not living together with their parents, to get tax relief of RM1500 (for the mother) and RM1,500 (for the father), if the parents are above 60 years of age.
• Parents of disabled children get RM6,000 tax relief and another RM14,000 if their child furthers his or her studies.
• Tax exemption of RM8,000 instead of RM6,000 is also set aside for every child above 18 years of age in an education institution, both local and overseas.
• GST to increase government revenue by RM39 billion, versus RM27 billion in the first eight months of 2015. Some basic goods to be zero-rated, including over-the-counter drugs, baby milk, nuts based food, noodles.
• The GST sum is to be credited into value of prepaid reloads from Jan 1 next year.
• All domestic economy class flights will be exempted from GST for rural folk.

Expenditure

• RM41.3 billion allocated to improve education.
• Defence Ministry allocated RM17.1 billion.
• Allocation of RM30.1 billion for development projects, RM5.2 billion for security, social development gets RM13.1 billion.
• Majlis Amanah Rakyat, an agency to facilitate the development of ethnic Malays and other indigenous Malaysians, allocated RM3.7 billion.
• RM100 million is to be provided by Communications & Multimedia Ministry for eRezeki, eUsahawan programmes which is expected to benefit some 100,000 people.
• RM360mil is proposed to improve National Service, with RM160mil allocated for non-governmental organisations.
• TEKUN to provide RM600mil + RM500mil for Bumiputras and RM100mil for Indian entrepreneurs.
• RM90mil is allocated as micro-credit loans for small traders and Chinese entrepreneurs.
• RM300mil is proposed to improve the welfare and development of the Orang Asli community. RM45mil is also set aside to assist with extra food, pocket money and school transport fees for the Orang Asli community.
• RM930mil is allocated to the Youth and Sports Ministry, with RM145mil set aside for training athletes.

Subsidies and handouts

• Spending allocation for Bantuan Rakyat 1Malaysia (BR1M), a programme providing cash assistance for low income households, will be raised to RM5.9 billion in 2016, up from an estimated RM4.9 billion in 2015.
• The Government will allocate a BR1M payout of RM400 to unmarried persons above 21 with incomes below RM2,000. 
• A BR1M payout of RM1,050 (for those with incomes below RM1,000), RM1,000 (for those with incomes below RM3,000), RM800 (for those with incomes below RM4,000).
• From Jan 2016, RM100 will be given in schooling aid to students from households with a monthly income of RM3,000 and below.
• RM250 1Malaysia book vouchers will be available for 1.2mil students.
• A payment of RM500 for all civil servants and RM250 is allocated for Government retirees to help with cost of living.

Development

• Affordable housing projects allocated RM1.6 billion, to be spent building 175,000 houses.
• RM28 billion is allocated for new MRT projects.
• RM900 million allocated to resolve Kuala Lumpur traffic congestion.
• Telecommunications infrastructure allocated RM1.2 billion.
• RM1.4 billion earmarked for development of rural roads nationwide.
• Pan-Borneo highway to be toll free when completed in 2021.
• Government to improve infrastructure in rural areas, including building houses and water supply.
• RM5.3 billion allocated to modernize agricultural sector.
• RM515 million allocated to improve electricity supply in Sabah state.
• RM200mil will be allocated to improve roads in Felda settlements.
• RM1.2bil is allocated to improve Internet speeds, from 5mbps to 20mbps.
• RM67mil is allocated for bus operation routes outside the city.

Tourism

• Government allocates RM1.2 billion to the tourism industry.
• Tourism is expected to contribute RM103bil to the economy. 
• E-Visa for seven countries (China, India, Myanmar, Nepal, Sri Lanka, United States and Canada) to be launched in mid-2016.

Oil project

• Pengerang oil project to receive RM18 billion in 2016.

Minimum wage

• Increased from RM900 per month to RM1,000 in peninsular Malaysia, from RM800 to RM920 in East Malaysia, starting from July 2016.
• The minimum starting salary in the civil service is set at RM1,200 a month from July 2016. The move is expected to benefit some 60,000 civil servants.
• From July 2016, the minimum pension rate is set at RM950 a month for pensioners with at least 25 years of service.

Source: The Star & Malaymailonline

2015/2016 Economic Report

MALAYSIA 2015/2016 Economic Report

• Goods and Services Tax (GST) to rake in RM39 billion in 2016 (3.1 percent of GDP) (2015: estimated RM27 billion from April).

• Malaysia's GDP to remain on a steady growth in 2016, to expand between 4.0 percent and 5.0 percent (2015: 4.5-5.5 percent).

• Growth in Malaysian economy to be driven by domestic demand with private expenditure to remain the main anchor.

• Malaysia's fiscal deficit is projected to decline to RM38.8 billion or 3.1 percent of GDP in 2016 (2015: 3.2 percent).

• Federal government revenue collection next year to grow marginally by 1.4 percent to RM225.7 billion, largely due to higher collection of tax revenue.

• Oil-related revenue to drop 14.1 percent in 2016 due to lower global crude oil prices (2015: 19.7 percent).

• The federal government expenditure to increase 1.7 percent to RM265.2 billion in 2016 (2015: RM260.7 billion).

• Of the RM265.2 billion Federal government expenditure, 81.1 percent allocated for operating expenditure while 18.9 percent for development expenditure.

• Operating expenditure in 2016 to increase marginally by 0.9 percent following continuous efforts to rationalise and optimise government spending.

• The development expenditure is expected to rise 5.4 percent next year, of which RM30.3 billion would go to the economic sector.

• The security sector would be provided RM5 billion in 2016 to enhance the capability of the armed forces and police.

• A total of RM1.6 billion would be allocated next year for general administration sector for upgrading of government facilities nationwide.

• Domestic demand is expected to register a growth of 5.5 percent this year driven by private sector spending.

• Private investment to increase 6.7 percent in 2016 with the bulk of investment in the manufacturing and services sectors.

• Private consumption is anticipated to expand 6.4 percent in 2016, benefitting from stable employment prospects and favourable wage growth.

• Public investment to record a higher growth of 2.3 percent in 2016 from 1.6 percent expected this year supported by new projects under the Economic Transformation Programme and 11 Malaysia Plan and the ongoing projects under the 10 Malaysia Plan.

• Services sector is projected to grow 5.4 percent in 2016 and increase its share to 54 percent of GDP from 53.8 percent this year with all sub-sectors continuing to expand.

• Inflation to remain stable at two to three percent in 2016 (2015: 2.0-2.5 percent).

• Nominal GNI per capita to increase 5.6 percent to RM38,438 next year from 4.2 percent anticipated growth to RM36,397 this year.

• Malaysia’s current account to post a surplus in the range of 0.5 percent to 1.5 percent of GNI compared with a surplus of 1.5-2.5 percent expected this year.

• Current account surplus in 2016 to be down more than half to RM11.3 billion from RM23.4 billion this year and RM47.3 billion in 2014.

• Gross exports are expected to rebound 1.4 percent in 2016 from a 0.7 percent contraction this year, supported by higher public investment and capital spending in the manufacturing and services sectors.

• Malaysia’s 2016 external position to remain encouraging in line with better growth prospects for regional and advanced economies, reinforced by steady expansion in the domestic economy.

• The outlook for world trade is projected to improve next year.

• The deficit in the services account next year is expected to improve to RM11.4 billion from RM14.7 billion this year.

• The federal government debt remains within prudent limits, and is well capped at 55 percent to GDP, placing Malaysia among medium-indebted countries.

• Offshore borrowings remained manageable at 1.6 percent of GDP, despite the appreciation of the US dollar.

• Malaysia’s financial system remains strong this year despite heightened challenges, i.e declining commodity prices and weakening ringgit.

• The East Coast Economic Region (ECER) has attracted RM78 billion in investments since its inception in 2007, accounting for 71 percent of the RM110 billion target by 2020.

• Insurance and Takaful Industry performance remains resilient with strong capitalisation and improved profitability.

• Trade surplus is expected to be higher at RM85.3 billion or 7.3 percent of gross domestic product (GDP) in 2015 (2014: RM82.5 billion; 7.5 per cent).

• Government commits to improve and strengthen the Islamic financial market, as part of its strategies to develop and prosper the nation.

• Agriculture to pick up in second half 2015 on higher palm oil, rubber output.

• Asean to set up working committee to enhance financial inclusion.

Source: Bernama, https://www.malaysiakini.com/news/316911

Pathological Gambler

Recently a "not-so-close" family member called and asked for my help.

She hoped that I can "save" her by lending her a few thousands ringgit.

She is a notorious gambler which is always debt-ridden.

Other family members have helped her to pay off her debts in the past but she somehow will get back into debt again and again.

And she never pay back the money she "borrowed".

What will you do if you were me?

My answer is a definite and firm NO.

If she asks me why, I will tell her the truth that my debts are hundred times more than hers.

I spend the minimum I can everyday, I work hard and save hard for the future of my children and family.

Do you think that I will give her the money to throw into the river?

There are other people who are more deserved to get the money.

To be frank, I hate gambling, even though I am not totally against it.

For me, if you want to gamble, please use your own excess money.

If you borrow to gamble, then you are digging your own grave.

I believe that there are lots of "pathological gamblers" around us.

These are the people who are so addicted to gambling until it becomes a disease or disorder.

Most of them are in the lower socio-economic group such as hawkers, renovation/construction workers, small business owners, drivers, salespersons, operators, housewives etc.

They all have financial difficulty and naturally they want more money. So gambling will be the easiest & fastest way for them to get rich.

If you advise them to save their money every month and learn to invest wisely so that they can have a chance to live comfortably in 20-30 years time, they will laugh at you.

For them, they can have a chance to get rich in few days time, why need to wait for so many years?

Sometimes they win but most of the time they will lose.

They will finally succumb to the euphoria of winning small and just cannot stop from gambling after that.

Since they are basically poor, where to get the money to gamble then?

The easiest way is to borrow, from relatives, friends and even Ah Long.

The fact is, they will lose all the money eventually. What will they do next?

They will borrow again from other people to pay back the earlier creditors, and then gamble again and hope they will have more luck this time.

If the creditors are too kind and not going after them, definitely they will not pay them back. They would rather use any available money to gamble.

More money in means more chances to win.

If you don't have a pathological gambler around you, then you are damn lucky.

I'm not that lucky though. I have a time bomb very very close to me.

I know what those gamblers' behaviours are like.

They will give you one thousand and one reasons on why they need to gamble.

They are expert in telling lies especially when borrowing money and when dealing with creditors.

They will steal when in dire need for money.

They can have more than 10 debtors at a time.

They always make empty promise on quitting gambling.

The best part is, they will never learn. They never learn the fact that the more they gamble, the more they lose.

Even though they are hassled by Ah Long, they will also never learn from that bad experience.

These are what we call "pathological".

Can they be treated with counselling etc? It is easier said that done.

If I rule the country, I will ban gambling.

There will be no casino, Toto, Magnum, online gambling and those stupid internet cafes etc.

Gambling has made the poor poorer, reduced the productivity of our workforce, ruined the future of our teens besides giving rise to so many family and social problems.

How about the stock market?

For me, stock market is a heaven for gambling, but it just cannot be banned, right?

Gambling in the stock market is absolutely legal.

I can foresee that in the near future more and more young people will engage in stock market gambling.

In casino, we play Big & Small. In stock market, we play Up & Down.

People can easily get addicted to this excitement, operated just by a few clicks in front of computers, or a few swipes on the smartphones.

Not enough money to "play" stocks?

No problem. We can legally borrow money to gamble in stock market as well.

Again, I'm not totally against gambling in stock market, as long as one is disciplined enough to control their greed and use only excess money.

Sometimes we read news that gamblers lodge complaints because they are being harassed by Ah Long or their family members want to cut ties with them.

I think they probably deserve that.

Please forgive me for being harsh to such gamblers.

You may not share the same feeling with me may be because you never face such gamblers close to you in real life.