Some Broad Data on Property Market

AllianceDBS published a Malaysian Property Market report today and attached are these few charts showing the overall market for properties.

First off, the price growth had declined significantly, ‘High-rise’ had seen a negative growth which we see developers giving out big discounts for the newly developed unsold property after the project has completed.

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Bear in mind, any number in terms of Y-o-Y price growth lower than the inflation rate of 3-4% (depending on your location) results in a negative growth for value in these properties.

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As of 2018, the supply of newly completed residential recorded the highest stock close to 5.6 million units. Total unsold units (with certificate) after completion also recorded the highest at 30,000 units.

Not to forget, the total number of sub-sale units aren’t accounted for where units were bought during DIBS and buyers are still actively looking to sell.

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We can blame loan approvals in this case but indeed, Bank Negara must manipulate the money supply in properties if we are foreseeing higher rates in the future.

At the moment, BNM can reduce rates since Fed stops any rate hike for now. But if Fed starts moving upwards again, BNM would require to follow rather than seeing capital flight from a weaker ringgit.

Credits to AllianceDBS

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CIMB – A 43% Downside Rating on Air Asia

Under MFRS 16 (executive summary), the accounting standards for ‘leasing’ would be different. Air Asia’s structure from leasing of its airplanes would see a major change on the latest MFRS 16 balance sheet reporting.

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see report for larger image

MFRS 16 would see operating leases be brought back onto the balance sheet as a form of liability. That being the case, the gearing would rise significantly inside the balance sheet.

As a results from this, the operating cost would rise albeit only accounting numbers which naturally lowers the EPS. What we can’t tell is the market reaction towards a lower EPS. The cost aren’t on cash terms meaning the cash creation still stays the same.

We should see if the market agrees with the 43% downside target placed on Air Asia by CIMB. Have a look at their report below!

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More Indicators of Weakness

Yesterday we talked about how KLCI lags due to expected lower growth in banking EPS from rate cuts (here). Today, we look at some charts by AllianceDBS showing us where KLCI is trading on the PE band.

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The current index point proves to be close to its 8-year average, but a quick comparison proved that KLCI trades 1 standard deviation above the MSCI ASEAN. This can cause longer lags for KLCI if foreign investors would to compare it with our regional peers.

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Adding to the severity, we look at both consumer and business sentiment dropping back below 100 (negative sentiment) and purchasing managers reduce their inventory build up over the last two quarters.

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A bounce on the sentiment and inventory build up could be the sign of recover but until then, we are bound to go lower. The risk opens up to higher downward pressure if the US or China isn’t performing as well as it is now.

CIMB visits E&O’s Seri Tanjung Pinang Project

In their report, E&O organized a sell-side analyst visit to their project. The highlights would be Seri Tanjung Pinang 2 where it would unlock about 750 acres of reclaimed land just off the North East of Penang.

The huge drop for E&O shares came when the company issued a rights issue last month. It is expected that it would be completed in May.

Meanwhile, the size of the project is huge and the prospect ahead from the land unlocking brings about and estimated of RM50 billion in gross development value. But not to forget the famous project by IJM which is almost similar in nature to E&O’s reclaiming the coast of Penang had a major stall for years when the property market slowed.

It doesn’t quickly turn into profit looking at the land area as projects might be delayed. We believe that if you are interested, it is best to collect after the company’s rights issue.

See the report

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RHB 12 Counters for Growth 2019

0.7% growth in 2019 is RHB’s target for 2019 and well indeed this is such a small number where plenty of companies could beat it easily. But changing the EPS target to >10% reduced the number of counters popping up.

Slimming down the list, any counters with an estimated PE of 19x and above would be excluded and then what’s left would be 14 remaining counters.

The last criteria would be to include only companies that recorded a ROE of 9% and a dozen of counters left. The list are as below.

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See the full report by RHB on their strategy to screen growth companies for 2019.

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The Bank Negara’s Annual Report 2018

Much of the data simply compiles stuff from 2018 and much of the data are known to us already such as inflation numbers and GDP contribution. Moreover, pretty much of these data are only suitable if you are an analyst looking for a new alley of investment.

What You Would Like to Know

We found that one section that would always interest the general public where it talks about wages in the country. For starters, how are we paid in comparison to people in the world?

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It is pretty depressing that on average we are paid only USD340 for an output worth USD1000. This debunked the case more often brought up that Malaysian are under-performers at work because every person receives less for the same output. The only factor we can relate to is technology.

Assuming a product ‘Made in America’ sells at USD100 but the actual maker of the physical product is an Original Equipment Manufacturere (OEM) in Malaysia (most cases). The American company pays probably only 30% of the selling price to the real producers of the product.

On the other hand, the American company pockets USD70 as they initially invested in research for the particular product. Literally the American did less work but profit a larger sum of money due to the technology that they developed. The ingenuity of making smarter investment decision gains them an edge in technology through research in this case.

Another factor that caught our eye would be the ratio of wages to productivity across sectors. Similarly in every segment, we are behind the numbers recorded by benchmark economies.

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Mining by far is still the highest in terms of median wages while agriculture, retail and construction records the lowest. Retail and construction sees the biggest gain annually but that was due to having a low base to start with.

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Graduate Wages

The other factor that caught our eye would be the real starting salaries for graduates. Indeed the number of labor force with tertiary level education had increased 5% in the last 7 years.

Problem is executives with any tertiary education has seen a decline in real wages. A common case of supply being more than demand with government extending the retirement age for everyone.

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The graduates blame the employers while employers blame the graduates. This is where education starts to backfire where a certificate had became only a ticket to enter the workforce rather than a specialization obtained through study.

The employers however chose to use the simplest method of measurement which is level of education but in contrast graduates are filled to the brink with unrealistic expectations through education. Many over-estimated their ability due to the demand from school versus from work.

It is a never ending mess left by the education system and it is happening everywhere round the world. Looks at though it will get worse with time.

Conclusion

Apart from wages report, the economic report by BNM showed that the Malaysian economy is having a good time in 2018. The coffers of our government are still full where we could sustain even RM 1 trillion of debt.

Malaysia isn’t going to bankrupt like what is in everyone’s mind (political stunt). But the reason people felt that Malaysia is doing a very bad job is most likely linked to how they felt by their personal well-being translated through lower wage growth.

Day after day graduates come out with no jobs has their parents thinking back that it wasn’t that hard 30 years ago. Well times had changed but the education system did not. People are trained on obsolete skills rather than 21st century knowledge like coding.

If you are interested in the full report download it here

**With so many reach for this post, we would like to apologize for language errors on the article, no proof reading was done..

VS – Ability to Beat EPS for FY2019

VS just released the Q2 2019 results and it seems that market expected the latest figures from them. The consensus estimate for EPS for FY2019 comes in at 7.2 cents which meant that at 4.43 cents [1st half 2019], they company had hit more than half of it.

The problem still lies on the next 2 quarters due to low utilisation of the production lines.

Our Take

We believe that for 2nd half of 2019, a total of 3 cents EPS could be achieved bringing the FY2019 EPS to 7.43 cents limiting the downside of things. We believe that price should only be trading close to RM1.20 around October this year.

We recommend to continue buying on weakness below RM 1.00!

Meanwhile, take a look at these 2 reports for referencing.

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Advancecon A Growing Company?

Not often we see a company’s revenue growing this way. Apparently these are DBS’ estimates for Advancecon in the next two financial years.

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Just last week, we posted a report from RHB talking about the prospects for construction jobs in Sarawak. According to DBS Advancecon is seeking for contracts in the region as well.

Current order book looks something like this

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Concerns

The orderbook is huge but margins are still our main concern. the latest 4 quarters showed merely a 3.6% in margins putting the FY2019 Forward PE at 10 versus the current trading at 15.9.

Putting things in perspective, we felt that it is still kind of expensive for a construction counter. The margins are too low to work with in the first place and it opens up to risk. A sudden weak quarter will results in posting red results bringing the whole valuation downwards.

Nevertheless the growth seems to be interesting for now.

Take a look at the report below for some insights and you can be the judge of it!

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CIMB on Top Glove

It’s been awhile since the major drop of TOPGLOV gets some coverag from research houses. This time around, CIMB provide the numbers that we are looking in the future where we would be looking at 15% increase in production for 2019 and another 15% increase in 2020.

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Problem is the target price set by CIMB isn’t that high at only RM 5.08 and in fact, the share price is coming back to its 3 year historical average.

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Have a look at the report below

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Revenue Group – We Attended Their Briefing

We attended Revenue Group’s briefing last week.

Our view did not change even with the recent tie up with major companies like Public Bank and BIG by Air Asia. Rvenue is still a company that provides the terminal for transactions and the latest would be the mobile application for payment called revPAY.

revPAY Payment Platform

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The latest revPAY is Revenue Group’s proprietary platform where a simple use of the QR code scanning could pay for almost everything you see in store.

We felt that revPAY is targeted at merchants as it really smoothens payment on the receiving end leaving out conventional credit card intermediaries with heavy platforms and expensive to use. A mere QR code scanning and it’s done! The smartphone availability removes the requirement of those bulky devices you see in stores.

The other feature for revPAY comes in the form of e-wallet solutions but we felt that this service had already been led by a bunch of service providers in the market. So the trick for development still lies in the ability to create a platform that consolidates all the payment services like the one below.

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Data Harnessing

In hoping that users would do a lot of transactions on their platform, an opportunity for Revenue to collect a good quality of raw data from user seems to be a good start for generating extra income. The packaging of data for a fee could see a new stream of income for Revenue Group when the services gain traction. Companies could do what Revenue Group calls “a high impact targeting for marketing and sales”.

We shall see what will rise from this segment as we aren’t that optimistic due to the limited number of transactions at the moment. The creation of raw data and its quality would be slow for the time being. We believe that it would be a while before the application revPAY gains traction in fact the mobile payment sees tough competition with the requirment to provide plenty of incentives to use. Definitely plent of cost to incur before the lead!

New Money Lending License

Based on the market announcement last week, the Housing and Local Government Ministry granted Revenue Harvest (a subsidiary) the license to operate as a money lender.

During the briefing, this was explained further.

The execution would be to partner financial institutions in lending micro loans to their merchants. Apparently, the company has a conviction that they could use the records of their merchant’s transaction where it could serve as a credit-worthiness gauge for financial institutions to reference and lending out the micro loans.

Again, we aren’t that optimistic because we believe that banks already have those data, but they didn’t execute on somewhat a similar plan to Revenue’s. We could only conclude that merchants with high volume do not require these micro loans while smaller merchants do not even qualify for it.

Our Take

Overall, we felt that the current valuations have been fully valued and much expensive than what it should be. The share price showed that it is gradually decreasing after the IPO’s peak and that is not a good sign for the time being looking at their prospects ahead.

We would have t re-evaluate when the number from next quarters results are out. Until then we rate this as a ‘hold’.