CIMB Reports on Malaysian Banking Sector

This is a good report from CIMB with tonnes of information and chart that show trends in fundamental numbers for our country’s banking sector.

Click on pic for report!

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iPhone X Effects to Malaysian Equipment Makers

Well the biggest benefit definitely goes to Inari Amertron (INARI) but of course we are unsure how many parts would Broadcom be involved in until someone tears down the iPhone X.

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Some of the Broadcom RF Chips on previous iPhones

Broadcom recently stated that there would be a 40% in blended content in the new iPhone model. The non-RF components are expected to be taking place such as wireless charging and touch controller. This would not benefit Inari Amertron which specializes in RF Chips.

It looks like this time around, the retina scanning module by Inari would not make it into the new iPhone.

Globetronics (GTRONIC) on the other hand might see a better gain in revenue spike from the new iPhone. Light and gesture sensors equipped on the new devices would paved the road for the company. 3D sensors that are coming into the market in 2018 would see a new revenue stream with higher margins for GTRONIC.

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Release Date

The launch of iPhone 8 and iPhone X came out together but the only the iPhone 8 is available for pre-order. We felt that this would lag iPhone suppliers by around a month or so before it register true sales numbers.

Customers would love to compare both before buying and pre-orders for iPhone X to begin only in Oct 27. Foresee that most suppliers to remain weak for September and October. We expect iPhone 8 not to register good numbers even though the selling price is much cheaper than the iPhone X. Commonly, iPhone buyers are not price concern and doesn’t seem to prefer anything secondary to the top product.

The approach is simple now, if you are still holding to any iPhone based suppliers be sure to be holding on to it. If you are looking to jump in and leverage on what we think is one of Apple’s best product in years, fell free to buy on market weakness in the next two months or so.

 

 

Our Petrol Prices Being Rigged by Government?

With the recent rise in fuel prices albeit the whole world talking about major drop in crude. The chatter came onto social media saying that the government is rigging our petrol prices which makes it rise more than what it should.

Our analysis from historical data might disappoint you that it isn’t rigged. The chart below shows the plot from our expectation vs government determined pump prices.

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As you can see from the plot, the variation was huge when the pump prices were determined monthly but the chart narrow its differences when the weekly mechanism came into place. The chart below shows RON95 determined by the government versus Brent instead.

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Looks like the culprit is still our currency where Singapore Dollars are just getting stronger day by day. Our fuel prices are still determined using Mean of Platts denominated in SGD rather than USD. Just a quick disclaimer, our expected RON95 computed might have some discrepancies as we take our prices from Brent rather than Mean of Platts.

So remember this from now on, the pump prices are heavily pulled by the currency value and it gets worse if the economy of Singapore goes back to normal from their current slow growth.


Expected RON95 is calculated by using:-

RON95 price (last month) + (Brent price changes) + (Exchange rate changes)

= Expected Price for following month

Maybank Summarizes Banks 2Q 2017 Earnings

Take a look at the whole summary of bank’s report card for 2nd quarter of 2017.

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Our Take

We think that banks had rallied and recovered the losses trading fair to what it is now but we still think that you should hold if you have already seen capital gains holding from last year plus dividend payout that were made.

From now on, the movement is likely broad market related and we do not think that the major banking blue chip would outperform the KLCI. But we are still holding it rather than returning to cash as most stock seem fairly valued too.

What’s your take?

New Core Position in Gilead Sciences

A Brief Idea of Gilead Science

This company is famous for the R&D of hepatitis, oncology and HIV drugs in the market. As you can tell, there isn’t a cure for these diseases and what these companies are trying to achieve is to find a breakthrough for drugs to treat those diseases. But until then slow efforts are in the making to lower the destructive force that associated with those diseases. This proves that companies like these are subjected to steep growth if something valuable would to materialize.

That is the reason that attracted me to invest in pharmaceutical as the risk reward ratio presumably falls on the better side assuming moral hazard related issues were avoided.

What Initiated The Buy?

Gilead Sciences had been a targeted stock for quite a while and I’m pretty eager to add it as part of our fund since its growth potentials are really promising. But the price had been declining since my interest started in the beginning. As a matter of fact, last year the price didn’t actually correct to the upside making any point of entry being associated to ‘catching a falling knife’.

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That being the case, a clear technical indicator comes in to good use for minimizing the error of entry into a stock that is constant falling to no floor. Stock price begin to show strength prior to the Q2 2017 earnings release and I’ve decided to take position then.

 

Fundamental Numbers

We just can’t by into any pharmaceutical. Most big pharma companies are trading at price to earnings estimate at double digits. Gilead however is trading below 10 which doesn’t mean that the growth is much slower but there are some other reasons to that:

  1. Too much cash in the bank and shareholders are urging the management to buy smaller pharmaceutical companies

This phenomenon had gone over a year and they still haven’t found the right candidate for acquisition. The market had already paid a discount in terms of price to earnings expecting Gilead to do an acquisition. It is common for the market value of the acquirer to decline since the market acknowledge that the buyer always buys expensive than what the market perceives.

(see latest acquisition update below)

  1. It has been a while since new drugs by Gilead enter the market

With the most recent drug approved by the FDA, we shall see more approvals on its way. (see pipelines in the next section).

  1. Biggest revenue contributor Sovaldi recently faces cheaper drug competition

The stock price declined of about 40% seemed to have factor in this issue with lower performing drugs. The good thing is that drug quantity sold increases to match the lowered price. This stabilized the revenue for now until new products are approved in the future.

Pipeline

Pipeline shows the progression for each drug in the company’s drug portfolio. Phase 1, Phase 2 and Phase 3 differs with test runs on the amount of people. Phase 1 could run on just small group of 10 – 20 but Phase 3 goes up to the thousands.

Drugs might get stuck in Phase 3 for quite a while as the population increases, the variability extends and the occurrence of unwanted side effect presents itself. But after Phase 3, drugs get submitted to the FDA for approval and it doesn’t take long until it hits the market.

Compared to a year ago, Gilead’s pipeline had more and more drugs in the Phase 3 stage. This is a positive sign in the near future where once it gets submitted we see more than 90% success rate that the new drug gets approval. This is when the revenue and earnings start pouring in once again.

The company’s pipeline can be view in the link below.

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Conclusion

Most analyst had placed an overdone and there are just as many ‘Buy’ calls when the stock was trading at $90 versus our buying point of $70. This made it certain that it’s just a matter of time before things start to move again when the business stabilized.

I seriously do not think that if an acquisition would to take place in the near future, the price adjustment to GILD would not be huge. As every quarter passes with retained earnings pouring in, it just meant that the cash balance of this company would continue to climb.

As of now, the company has $8 billion (management stated $36 billion of cash, cash equivalents and securities) worth of cash holding as compared to a year ago at only $6 billion but the biggest problem is finding the right thing to buy. That would lag the stock movement since sitting cash isn’t making shareholders richer compared to invested cash with positive returns.


Acquisition

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28 Aug 2017 – Gilead finally decided to make their first purchase in years buying Kite Pharmaceutical for $12 B. The stock price reaction seems to be expected where the acquirer actually increase in value rather than falling.

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Guess this ends the chapter for continuous price decline for the stock awaiting acquisition. It is back to normal price movement now…

 

Another Quarter Another Feel Good Factor

Our high conviction stock post results for Q 2018 and in our view its not that satisfactory coming below our expectation. But the feel good factor comes knowing that there isn’t any deep selling done after a not so well quarter.

Institutions are buying recently with the names of Amanah Saham Bumiputera grabbing the stocks in bulk and this proves in fact showed that price to earnings would remain high with these institutional bodies on board.

If you have bought at a lower price to earnings premium then it is safe to say the asset you are holding on had been re-evaluated in terms of quality.

As attached, Maybank and CIMB reported and recommended a HOLD/Reduce rating for the stock. Since it falls on our high conviction target we are aggressive and holding on tight in return leveraging on this company’s growth.

Technicals

Meanwhile the chart is showing us chances of a break over RM 5.00 with an ascending triangle in the making. A rough drawn triangle following the upward sloping line marks somewhere just before Nov to determine where it would head.

Coincidentally, it would be near to next quarter’s earnings release. We recommend buying on dips for this stock.

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Report

Click for Report

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