Sunday, April 20, 2008

Speculating vs Investing - Hua An, Part II

Benjamin Graham gave a definition of speculation in relation to investment: "An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative."

May Turtle also add, it is also related to time horizon. Speculating is betting on sentiments for somebody who is willing to pay higher price. Since sentiments can go up and down pretty quickly, a skillful speculator hope to get in first and get out before things fizzled out. In short, timing is everything. A skillful speculator has a system, a plan and rules to get in and get out. Stop-loss target is a must because losses can be very big because sometimes there is nothing to rely on; or a speculator does not wish their capital sitting on opportunity cost. For a speculator, to make money: churn!.

Buffet advised us to have a stomach to hold on to an investment even falling by 50%. You can do that because it has passed through a series of vigorous tests, it can bounce back, just give it a reasonable period of time.

Most decision making in real life is grey, not black or white. I picked Hua An as a case study. Hua An is in a business of producing and selling metallurgical coke. This is a pure China play.

Revenue increased from RM 730 millions(2006) to RM 852 millions(2007), up 17%. The recent commodity booms drive coal prices to record highs. Average sell price of metallurgical coke increased about 17% also. This Implies volume is flat, no growth but exhibit some pricing power to pass on to customers. Price of metallurgical coke is generally moving in tandem with coal. Coal prices had tripped since 2003. The question is how sustainable is the price?

2007 Earning Per Share is 12.11 sen, trailing PE at 0.75/share is 6 times. Price/Book 1.2 times. Is our principal safe? Balance sheet looks clean, no debt. Feeling more positives? No signs of receivables danger but there is RM 100 million goodwill.

Cash flow statement, a question mark on making a non-cash adjustment of RM 31 million for income tax recognized in income statement. Depreciation/sales is about 2.3%, does not seems to be a capital-intensive business, based on 2007 average selling price(ASP). Ratio could go higher if ASP goes down. Pared down RM 68 million debts, gets funding of RM 200 million from shares issuance to fund RM 237 plant expansion. Display some signs of prudence management. Gross dividend yield 3%.

You can get a copy of financial details from and company information at

Two risks, sustainability of ASP and potential slow down of Chinese economy reducing steel demand. Turtle will leave it to you as a judge: can this company be qualified as an investment. Are you feeling comfortable to buy the whole company or spending at least 20% of your total portfolio? What is the probability of earnings growth visibility over next two to three years? We must be speculating, if we do not consider it as an investment.

The issue is consistency in one's investment philosophy. Different persons can buy and sell stocks for different reasons and make money but confuse lots are those who are buying without knowing whys, this is the only point Turtle is trying to make. You have speculators billionaires and investors billionaires but Turtle yet to find a billionaires that they don't know whether they are a speculator or an investor.

1 comment:

thebigbang said...

hello Turtle,
your blog is very informative and i like it very much. thx for sharing all those important points.

btw, i am confused about this goodwill of 100 million u mentioned abt Huaan.
Can you please explain further what is this item stand for??