Happy Diwali

Wishing all friends and readers happy Diwali.

US' Geithner warns ending stimulus will imperil recovery

This is one of the news that I follow very closely -- when are the authorities going to withdraw their stimulus supports or plan to raise rates to mop up liquidity. As long as they send consistent messages to the markets that they are going maintain loose monetary policy. It's still a good bet to remain in the markets. However, let me speak like a pro with a twisted tongue: that does not mean we don't have corrections along the way. As soon as the corrections are over, we are going to see new highs......good enough?

(TheStar)NEW YORK: Treasury Secretary Timothy Geithner said Thursday the economy is in the midst of a recovery that could be imperiled if the government's support systems are removed too quickly.

"A classic pattern in past financial crises is governments tend to put on the brakes too soon, withdraw support too early, and that's been a very costly mistake and we're going to be very careful to avoid that mistake," Geithner said at a conference sponsored by The Economist magazine in New York.

Geithner stressed that a robust recovery depends on businesses investing more in the economy and that it is the government's responsibility to give them the tools to do that.

While he said he's seeing signs of improvement, Geithner stressed that the recovery will be slow.

http://biz.thestar.com.my/news/story.asp?file=/2009/10/16/business/20091016075104&sec=business

"Almighty presence"

I have been standing firm that it's liquidity that's driving these markets. It is also worldwide government stimulus spending that keeps everyone above water. May be some of us have forgotten that worldwide governments pledge to spend about US $ 2T(trillions) on stimulus packages. To recap, US $ 787B, China $ 586B, EuroZone $ 24B, Japan $111B, UK $ 45B.........

What we have seen in 2009 is just a peanut. Only 25% of that US 2T in 2009 are being spent, we already feel that "almighty" presence. The best is yet to come, the bigger snowball is still rolling down the hill, another 60% of that is going to happen in 2010, of which is only 3 months away.

Is Proton a value trap?

Some stocks though are cheap but it could remain cheap. Is Proton one of them?

CIMB Research has maintained that PROTON HOLDINGS BHD [] is a trading buy at RM4 with a target price of RM6.05, stating that recent reports of DRB-HICOM BHD []’s bid for a 32% stake in the national carmaker wasn’t unexpected.

“Overall, we are neutral on DRB-Hicom’s bid for Proton. While there is potential for synergies, we do not see how DRB-Hicom, a conglomerate with diverse operations, will be able to transform Proton into a globally competitive entry,” said CIMB.

While CIMB is encouraged by Proton’s recent turnaround, the research house believed that a tie-up with an experienced and reputable foreign partner is what paves the way for technological exchange, and that is what national carmaker needs to stay ahead in the competitive industry.

http://www.theedgemalaysia.com/business-news/151184-cimb-maintains-trading-buy-on-proton.html

I'm not a fan of heavy industry, it will drive me even further away especially the government has to justify their national pride or thinking it's a national security thinge.

Before I comment on Proton, look the first class one first - Toyota. It has a market cap of US $ 122 B vs Proton US $ 644M. Despite of its world class execution and innovation, return on equity(%) 11, 11, 8 for 2006, 2007, 2008 and losing money for 2009.

We need to put different emphasis on different measurement metric for different industry. In heavy industry, I think Price/EBITDA is important because it represent the ability to generate cash flow. Price/EBITDA(X) comparison is as follow for2007/2008/2009

Toyota 5.5/3.15/11.81
Proton not available/7.4/7.34

Only one aspect of valuation seems to be cheap, Proton has a Price/Book Value of 0.4 vs. Toyota 1.2X. But then Toyota is a global brand and generating at least close to double digit ROE.

So, the only way for shareholders to realize their investment is to hope for somebody to show up to buy them. If someone want to set-up a new operations, it is going to cost them some money. It's going to cost them about the same book value(assuming Proton acquiring all the assets efficiently). IF the share price is about RM 4, its BV is about RM 10 based on P/BV of 0.40. CIMB argues that Proton has been trading around 10 year historical P/BV of 0.8(BV RM 8), if there is a real genuine car maker were to enter paying RM 6, they are still getting 40% discount to BV or 25% discount to historical traded P/BV.

I don't see DRB-Hicom can add value as a new partner. However, are they buying a stake from the government so that they can get around the political BS to resell it to others? In other word, is this a first step for more serious reform? A Yes will increase odds a lot better. If not, it's a value trap -- a Graham's dog.

Taking a closer look at property sector

(Click on chart if you want to take a look at gems)

In the early bull run, property sector normally assumes some leadership role. Where are we now? It has taken me almost the whole day to put togother the information in a table. If you take a close look at it, you will notice a few things:-

1. I've taken the pains to add up all market cap of the properties counters listed in the Star paper. The number came in about RM 39B. The whole sector is smaller than just one stock like CIMB(44B) or Maybank(47B) or slightly bigger than Public Bank (37B) as at Oct 7, 2009.

2. Only about 18 stocks with market cap above $500M, which contributed to about 72% of the whole sector market cap. There are way too many properties counters listed in our Bursa - Geez - 88 of them. The rest of 70 counters only account for 10B+.

3. 16/18(88.9%) stocks retreated after they hit 52 week high. You may noticed that sector leaders like SP Setia, UEM Land went into correction mode since June 09. They have not gone into bear market territory yet.

4. Most of the followers went into corrections mood too sometime in mid-Aug.

5. There are last few laggards begin to catch up, hitting 52 week high last week.

6. It will be critical to watch leaders closely to determine whether rally in this sector has rolled over.

7. Valuation wise, PBV has more or less revert back to last 2 years valuation except some are selling to deep discount like BJAsset, BRDB and SPB.

8. Looking at RNAV or GDV is a little bit tricky because it has a lot of subjectivity into it. Big assumptions are are billing timing, assigning the value of land or properties and etc, which are unrealized yet.

9. In other words, RNAV has element of "mood" into it, if I feel optimistic, then I can assign much higher price per square foot. Tebrau for example, some are speculating land in IDR can shoot up to RM 110 psf, based on the landbank of 1,012 acre, Tebrau's RNAV will jump to RM 7. Even you apply 30% discount to it, UOB KayHian argued you should pay RM 5 for the stock(damn Singaporeans). I will ask UOB to be cautious because it is highly speculative.

10. Those black cells in the table signify I'm refused to put RNAV based what analysts think or people have yet to figure out its worth.

It's 1.30 am now, got to go to bed. Won't be posting till next Tuesday. Take care.

Number Crunching

Not many things to blog. Just throw out some numbers for info only. Just to show you how each sector performs as at Oct 7, after hit the low in March 09?



At the level of 1,230, should you continue to chase winners, buy some laggards or doing nothing?

Australian raising rate --- a good news or a bad news ?

The whole world cheered when Australian central government raised interest rate by 0.25% to 3.25%, from a 49 year old low: 3.0%. Looking at half full - that's a powerful signal of strong recovery and the worst is behind us.

However, if other central bankers like the US, ECB or Japan starts tightening cycle, that could spells disaster unless they are convinced with a V-shape recovery or else certainly a potential policy mistake.

On the flip side, if the rest of the world still keeps their interest rate low, the Aussie will be a fertile ground for hot money(much stronger exchange rate). Australian Dollar to Ringgit year-to-date is pretty strong.


Liquidity tightening will certainly help preventing bubble(Austrian school economist will be extremely happy) but we will have to go through the pains and financial asset prices will have to fall. The six trillion dollar question is: do the governments have the political wills to pull it off?

(TheEdgeMalaysia)SYDNEY: Australian housing and CONSTRUCTION [] data on Wednesday added to evidence of economic recovery that spurred the central bank to raise interest rates on Tuesday, Oct 6 and is expected to bring more tightening in months ahead, says Reuters.

Demand for investment-related home loans and construction finance jumped in August, government data showed. A separate industry survey showed a pickup in overall construction last month, helped by a revival in demand for housing, ending 18 months of contraction.

http://www.theedgemalaysia.com/business-news/150807-australian-housing-recovery-builds-rate-rise-case-.html