Regarding Asia Media (AMedia)

Got the following set of comments:

• Mike said...
  I would like your opinion on Amedia. I bought it recently at 31 sen because my remiser recommended it. I was told that Amedia is a super buy with a very good future. It will spread it's wings to Indonesia & Thailand & Singapore. It is a growth stock and is projected to list in the main board next year. The TP of $3 is easily reachable. However, my luck is not good. After I buy Amedia keeps falling. My remiser keeps asking me to average down. Should I? Can you please give your opinion on the stock?

Mike, let me just share my flawed way of thinking and please understand I am not anyone friendly investment advisor because I am simply not qualified. No joke.

Ok, I admit that when an investor makes an investment in a stock, they just don't buy all at one go and yes, most likely a form of averaging down is used to accumulate the shares. Say, say if the investor decides to invest 20k into a given share, they most likely will not buy 20k worth of the stock at one go. They would most likely have a plan and the plan includes buying more when the stock goes down. The cheaper it gets the better. It's a fairly advisable accumulation strategy.

However, having said that I just don't like the idea of how averaging down is done locally. Everyone average downs JUST because the stock had fallen. They don't ask why, they just buy more. Now what does common sense dictates here? When they don't ask why then how do they know if they had made an initial mistake in their 'investment'? And many buys a stock, many aren't prepared for the worst. They are not prepared that the stock could go down and when the stock does go down, they just buy more. Again without asking why.

Now let me ask a difficult question. When you bought the stock at 31 sen, were you prepared that the stock could go down? The stock is now at 23 sen. Are you willing to put in more money to average down this 'investment'?

Do indulge in me for a moment. (LOL! I am a known to be a long winded!) Now I had written the following set of comments on that stock JCY recently on March 2011.

Take the dropping share issue again.

Let's use JCy as the scapegoat again.

So at what price does one consider a dropping share a bargain? A 30% drop? would that be a fair assumption? (if you don't agree, please la.. do voice out. )

So we start using 1.70 for JCY as guide, ok? Why cos at that moment, if my memory fails me not, JCy was touted to be worth a nice 2.68 or so.

So the investor or is it speculator waits.... patiently.

Share drops. JCY drops to 1.20. 30% of 1.70 is actually 1.19. So we use 1.20 as the first buy ok?

1.20.... whack one time... buy 10,000 shares or outlay of 12,000.00.

Share drops some more...

30% of it is 84 sen. Again... the investor/speculator aims again... but this time... they got greedy a bit. Share 'supposed' to be worth 2.68. Ok, 2.68 don't have, 2.00 also sounds really good, yes?

So the investors buy 20,000 shares... at 85 sen..... handicap the one sen. (hehe)

0.85 whacks 2nd time... buy 20,000 share or outlay of 17,000.00.

Share drops some more...

Investor waits again... at 58 sen or another 30% discount... buys 30,000 shares

0.58 buys another 30,000 shares or outlay of 17,400.00

Time to check cost...

60,000 shares have been bought. Total outlay = 12,000 + 17,000 + 17,400 = 46,400

Average cost = 46,400/60,000 = 77.3 sen.

So far does it sound like a 'sound strategy'???

JCY closed on 25 March at 0.665 sen.

These 60,000 shares are now worth 39,900.00

Total current 'paper' losses = 46,400 - 39,900 = 6,500 or 14%!!!

Could JCY drop some more?

Well if JCY next quarterly earnings is about the same as it did the previous quarter, ie 7.5 million, it would mean JCY's first half earnings is only about 15 million, giving it the possibility of only 30 million for the full fiscal year.

Ok.. maybe that's bit too low. Say JCY earns 50 million this fiscal year.

Now JCY has 2044 million shares.

An earnings of 50 million would only equate to an eps of ...... 2.4 sen!!!

With an eps of 2.4 sen....... at 60 sen.... JCY would be trading at a rather high PE yes?

So there's a chance that JCY could fall some more yes?

How?

See the great danger of using the a dropping share can bring great rewards???

How much can one continue to average down?

In a bull run, some stocks could have a massive bear run! It's possible!

Buying and holding it long term could be extremely painful!!

Ok. Back to Amedia. You bought at 31 sen. Say you purhased 10,000 shares or rm 3100.00. ( For simplicity sake, I just don't count all the additional costs),

The stock is now 23 sen. Do you buy another 10,000 shares? Assume you do.

You now have 20,000 shares and your cost is 3100 + 2300 = 5400 and your cost per share is now 27 sen.

The stock is now 23 sen and you are still deep under cost. Do you hold? Or if Amedia drops to 20 sen, would you buy more? Yes, you need to address this. Ask yourself, if Amedia drops, would you buy more? And also, how much more are you willing to buy?

Of course, the share market is not mine and of course, it's possible that the Amedia does not drop to 20 sen. See? I am not a share market VoDoo-er and I have no idea how Amedia would trade in the future. But if I was in your shoes, I would address this issue. I need to ask myself, what if Amedia drops some more? Am I going to buy more? And how much longer can I repeat this?

Now say, the worse does happen. Amedia drops to 20 sen and your new averaged down cost is 27 sen. And you decide to buy more. Another 10,000 shares at 20 sen.

Your new cost = 3100 + 2300 + 2000 = 7400 and your cost of investment is 24.6 sen. And your 'paper' loss is 1400. (If you had not averaged down, the paper loss is 1100.00.)

And what if the shares continue to drop to 17 sen? Not possible? Let's address the 'what if' scenario. You buy more. Another 10,000 shares at 17 sen. Your new cost = 3100 + 2300 + 2000 + 1700 = 9100. And your average cost per share is 22.7. At 17 sen, the potential paper loss using this average down strategy = 2.3k. (If one had not averaged down, the paper loss is 1400).

Yeah, the losses magnified. (This is assuming Amedia continues to fall. And needless to say if Amedia recovers, one could even exit Amedia with a nice profit. )

Well, I hope you see my flawed way of thinking here. Warren Buffett used to say, when you find yourself in a hole, you should stop digging!!!

See investment or trading or punting mistakes can always happen. No one is perfect. Mistakes could always happen. Knowing when one is wrong is said to be the key for one success. If a mistake was made in the stock market, averaging down or buying more, means only one thing. One is only buying more of their mistake. Is this a wise strategy?

And averaging down cannot be repeated forever and ever. Why? There is a limit to one's financials! No one can continue to average down forever. Yes, there's a monetary limit on how much one can buy!

Ok but what Amedia itself?

First thing I would do is take a quick peep in the stock chart.

Now if I minus out the current 'steep correction' and look at your 31 sen entry price. I would assume that you did not chase the stock and you bought the stock because Amedia hit a of 39 sen on a very impressive run and when the stock pulled back to 31 sen, perhaps there was a justification to take a punt on the stock. 'Buy on strong pullbacks' is a normal advice and many times it is known to work. But it's known to fail too.

With such a drastic pullback from an intraday high of 39 sen, my concern would be what if pullback is much stronger. And of course, now, present day, looking back now, it's much easier. The pullback is much stronger and some would be greatly concern. The stock had broke up from the 27 sen region but it has retraced much, much lower. It had couple of minor bounce but the pullback is strong. Very much strong.

What I be concern? What if this is a great pump and dump? Should I be asking this?

Next thing I would ask is why did the stock had such a great run recently? Was it based on pure fundamentals or did this stock enjoyed a great run along with other ACE penny stocks? (this is one issue you have to address yourself)

This is Amedia's bigger chart.

It's a fairly new stock!

So how do we determine how good is the stock?

Amedia was listed on 11 Jan 2011.

On 25 Feb it announced its quarterly earnings. Quarterly rpt on consolidated results for the financial period ended 31/12/2010

And that's all. Not much information. There's some small cash in its balance sheet and some small debts too. There's simply isn't enough financial data to determine the quality of the company.

RHB had a small write up for Amedia's IPO.

This is what RHB wrote.

Background. Asia Media Group, a MSC Malaysia Status company, commenced its business operations in Oct ’07 to operate the Transit-TV network system via its flagship channel that uses LCD-TV screens to deliver information and to provide entertainment programmes, advertisements, community-driven messages and public bulletin in public transports, namely in RapidKL buses, Causeway Link Buses, Plusliner, Nice and Nice++. Currently, the company has installed over 3,293 LCD-TV on 1,450 buses. Overall, the company communicates it to over 500,000 viewers daily, travelling within Klang Valley and Johor Bahru.

Future plans. The company plans to carry out the following strategies in the future to further strengthen their position as the leading digital out-of-home media player, which includes: 1) expanding coverage to other public transport systems such as KL Monorail, LRT and KTMB Komuter, where the company would be able to reach out to more public transport users; 2) overseas expansion, namely Indonesia, given its large population and high percentage of its population uses public transportation; and 3) improving its DTTB technology and techniques, where the company would be able to deliver a wide variety of live programmes provided by the local TV stations. In addition, this system allows them to provide live information such as disaster warning.

Forecasts. We project Asia Media to post FY09-12 core net profit CAGR of 53.6% driven by its ongoing expansion and penetration of its transit-TV network, which includes additional systems in public transport and operating stationary advertising platforms for major bus and train stations. As per the prospectus, Asia Media does not have a fixed dividend policy in place and as such, we have assumed that the company will not be paying any dividends in the near-mid term.

Valuations. Our indicative fair value for Asia Media is based on a relative valuation method using PERs. Applying a target FY11 PER of 6x, we arrive at an indicative fair value of RM0.29. Our target PER is at a 60% discount to our target CY11 PER for Media Prima of 16x, mainly to reflect its significantly smaller size, in terms of market capitalisation and revenue base.

How? So Amedia installs and operates a transit TV network on buses. It plans to expand other public transport systems such as the monorail, LRT and KTM. Now if one is looking at it from an investing perspective, one should ask, what's really the potential? How is their current content? How about taking a Rapid KL bus and observe the TV network operated by Amedia. Does it have potential?

Does one understand Amedia's business model? The following snip is from the same RHB report.

Range of services provided. The company currently provides the following services:

Air-time sales – These are slots of time for advertisement sold to advertisers, content providers or parties that wish to convey their messages via the company’s Transit-TV network system in public transport;

Programme sponsorship – Provides an alternative option for anchor advertisers who wish to leverage on the company’s Transit-TV network system to gain more publicity and goodwill instead of just advertising their products and services in one of the airtime slots; and

Creative and production works – Provides customers with an end-to-end solution from conceptualisation to broadcasting of marketing campaigns, which include assisting customers in producing their advertisements such as basic animation, filming and video shooting.

How?

Can this ACE stock be listed in the main board next year?

I do not know but isn't it way too early to tell?

And then, perhaps one should address the issue of buying a stock just because it could be 'promoted' to the main board. Is this a wise decision? Or is this an unwise decision?

For me, whenever someone promotes such an idea (ie buy ABX cos ABX gonna be promoted to main board), I would usually check past data. Meaning to say, perhaps it's best to check out if this is a sure win strategy. Has there been proven success stories? And have there been some horror stories?

Me? I tend to remember horror stories! LOL! Stocks like GHL and Dreamgate (RGB) comes to mind. They were promoted from Mesdaq (now called ACE) to the mainboard and they have not done well at all.

So if you ask me, this is one huge assumption (buy a stock cos it will transfer to mainboard) for one to make. There's no guarantee a stock is worth a buy cos of such reasoning.

Recent news clips of interest:

Asia Media surges 74% on ACE Market debut

Going For Listing: Asia Media keen on branching out

Asia Media eyes Indonesia

Asia Media to roll out transit-TV in Klang Valley by 1H

So how?

Could you determine if Amedia is an investment grade stock?

Yes, apparently the company has great plans to expand as per their statements in the local media but there's no proven track record to support this claim. As it is, the company have one quarterly earnings report. That's all. There's no historical data.

I understand that one should buy a stock based on its potential future prospects but one has to be realistic and one have to address if such plans can be achieved and the only one can do is to refer to some proven track record from the company. Or in layman's term, one needs to gauge if the company can deliver what it promises.

Now this issue is important cos there had been far too many companies making such claims on their future prospect but somehow, they fail to deliver what they promise.

How? Do you even like Amedia business prospects?

ps: As usual, I have no crystal balls and I have no VoDoo stick than can make a stock go up or down. Seriously, I do not have such skills.