Short Comments On Tong Herr

Just for the record...

The warning, ie the potential changes in the economics of the business: A Warning From Tong Herr?

Updated recently: Positive Development For Tong Herr

Yesterday Tong Herr announced its earnings. It made 6.35 million.

A Quick Look At Tong Herr's Earnings

Here's another stock which I need to make a couple of comments.

2nd Sep 2009, I wrote How Now For Tong Herr? which was follow up to the posting A Warning From Tong Herr?

Tong Herr announced its earnings last night.

I was interested. What was I expecting? What were you expecting? Here's a past screen shot of past Tong Herr's earnings (click here ).

I was expecting profits to be around 1 million or less. Tong Herr had lost some 800k the previously.

Here's Tong Herr's earnings.

Well again it's better than I had expected. (LOL! Do understand that I am merely stating things as it is. And if you like to make assumptions and ass-u-me that I now have my bull horns on, well that ass is yours, not mine. )

And it's exactly like Uchi's earnings comments posted earlier, Tong Herr had done extremely well if you compare to what it did the previous quarter.

However, like Uchi also, Tong Herr's current earnings pale in comparison if you compare to what it did the previous year.

Some would also point out that based on 'current' earnings, Tong Herr's current market prices are rather so rich.

But some would discount that and argue that it's pointless to look at current earnings and if the earnings turnaround sustains, then based on what Tong Herr had achieved in the past then Tong Herr price is not rich at all. In fact based on historical stock prices, the current price is a bargain.

Hey stop your stop and stare. LOL!

But isn't this how it is? A coin does have two sides, no?

Anyway, some comments from the company.

• The Group recorded revenue of RM48.47 million and profit before income tax of RM3.92 million in this reporting quarter compared to revenue of RM44.89million and loss before tax of RM381 thousand respectively, as recorded in the preceding quarter. The higher profit before income tax in this reporting quarter as compared to the results in preceding quarter are due to lower raw material cost.

So lower raw material cost is the huge helping hand.

How?

No matter which side of the coin you are at, surely you have to ask if the current 'lower raw material' scenario can sustain.

What if it doesn't?

Well on the other hand, some would bring out the low revenue, which again have two sides, in my flawed opinion.

On one side, one would say, the extreme low revenue compared to previous period last fiscal year shows how tough the business economics is for Tong Herr. Business is simply poor and not helping out is the anti-dumping warning mentioned by Tong Herr!

On the other side, some would argue that things can only get better.

Yeah, why so pessimistic? LOL! Sun will always rise and tomorrow is always a better day. (so true) and if things get better, then any improve in revenue should mitigate any rising material cost.

Well, that's a rather justifable reasoning.

But will it happen?

How?

Which side of the coin do you like?

Me?

All I have to say is "And as usual... how?Oh.. this again is not a tipsy. Please lah. The only way I know how to make anyone tipsy is to whip out my bottle of whisky or perhaps a bottle of wine. :)So if you like to ass-u-me, go ahead, your ass not mine. :D "

How Now For Tong Herr?

Here is a follow-up to the posting A Warning From Tong Herr?

Tong Herr closed yesterday at 1.86, down some 13 sen.

Was it due to the losses it posted or was it due to the warning from the company that it's facing anti-dumping charges?

Now assuming, it was due to nervous investors cashing out from the stock due to the ant-dumping charges worries, then perhaps it's best for the 'long term investors' to consider how Tong Herr was doing before fy 2004.

Why?

Those were the period when Tong Herr too had to deal with anti-dumping measures levied against the company. (Yeah, so much for free trade eh? But again one could argue this is not unexpected given the recent global Trade Protectionism (click there for recent postings) issues.)

Now back then, Tong Herr's number of shares were 80.294 million. So for fy 2003 TongHerr had eps around 24 sen.

Yeah, back in 2003, TongHerr was a treasured stock amongst investors. Company's balance sheet was in order and most of all, the growth rate was incredible. I mean earnings growth and not sales revenue growth. :) (Were you in or were you IN? back then? :D )

The chart of Tong Herr in 2003 does not lie.

Anyway as you can see the chart from finance.yahoo.com showed that Tong Herr was trading around 1.40 and 2.60.

Ok, assuming one's earnings estimates held true for Tong Herr in 2003, then one could say that Tong Herr was trading between an earnings multiple of between 5.8 to 10 times in 2003.

Let's look at it now.

Let me take a screen shot from my live quotes provided by RHB Invest.


Now if you click on the picture for the larger view and calculate the most recent 4 quarterly earnings, you would see that Tong Herr only earned some 3 million for the last 4 quarters.

Now put this 3 million into perspective of what Tong Herr was doing from 2000 to 2003.

Doesn't it pales in comparison?

Now Tong Herr share base has increased and Tong Herr now have 127.430 million shares, which means the recent 4 quarters earnings of 3 million, would only equates to an eps of around 2.4 sen only.

And Tong Herr last traded yesterday at 1.86.

So how? PER equals how much?

Which meanings Tong Herr today trades at much higher earnings multiple compared back to 2003.

And what's obviously different now compared to 2003?

Well back then in 2003, Tong Herr's earnings was growing at an exponential pace! Now? Earnings are in a slump and worse still, the company now warns of the anti-dumping proceeding against the company!

How now brown cow?

If you were a gambling person, which way you reckon the stock go?

A Look At Contrarian Investing Approach for Tong Herr.

Taken from Sun Tzu on Investing

Contrarian Investing

Contrarian Investing is a method of moving against the crowd, which relies heavily on a broad understanding of investor psychology, and when done successfully, you will appear to have seen the future. Sun Tzu advised his generals to devise strategies that deceived their opponents, wore them out, and put them at natural disadvantages. Rational investors will have a natural advantage during time of excessive bull market optimism and bear market pessimism. The key to recognizing such dangers and opportunities is to remain loyal to your Sun Tzu-style assessments, continue screening stocks one at a time and remain focused on determined business value. Your discipline will help you avoid paying too much during bull markets and enhance your confidence to buy bargains during bear markets. You will become a rational contrarian and your peers will think you have seen the future (or lost your mind).

Contrarian Investing is one of those terms often misunderstood. A contrarian investor doesn't move against the popular crowd simply for the sake of being different. The true contrarian is a strategic investor whose disciplined approach to stock selection is often at odds with the current trend. If you stick to any particular investing style, be it based on low asset valuations, high earnings growth rates, or high dividend yields, there will be period of times when your style will be in line with the popular thinking, and other times when it will run contrary to the style of the day.

The more long-term focused your strategy, the more likely it will be at odds with popular market trends. Contrasting styles of investing often result from investors' perspectives of the stock market. Chartists, technical analysts and speculators are looking at the short term price movement patterns in the hope they can glean some sense of a trend, able to predict what other investors are thinking. They are trying to understand the emotions of other investors and profit by anticipating their next move. As their guessing game becomes more sophisticated and everyone is observing the same charts - the professional guessers must now predict how the other predictors are guessing about how emotions of the majority investors will affect short-term price movements - this quickly becomes a frustrating guess-what-the-guessers-are-guessing game with no likely winners.

Taken from Mary Buffett's The New Buffettology

CONTRARIAN INVESTMENT STRATEGY VERSUS SELECTIVE CONTRARIAN INVESTMENT STRATEGY

In a contrarian investment strategy, the investor buys stocks that have recently performed poorly and have fallen out of favor with investors. This strategy is based on the stock research of Eugene Fama and Kenneth French, who figured out that buying companies that have had their stock prices beaten down in the two previous years are likely to give investors an above-average return over the next two years. This strategy focuses on falling stock prices and pays little mind to the underlying economics of the companies. With the traditional contrarian investment strategy investors don’t discriminate between price-competitive-type businesses and companies that possess a durable competitive advantage. So long as the share price has recently fallen, the stock is a candidate for purchase.

A selective contrarian investment strategy – Warren’s approach – dictates that investors buy shares only when a company has a durable competitive advantage, and only when its stock price has been beaten down by a shortsighted market, to the extent that it makes business sense to purchase the entire market. This strategy differs from the traditional contrarian investment strategy in that it targets specific companies that have an identifiable strategy in that it targets specific companies that have an identifiable durable competitive advantage over their competitors and are selling at a price that a private business owner would find attractive.

~~~~~~~~~~~~~~~~~~

In a contrarian investment strategy, the investor buys stocks that have recently performed poorly and have fallen out of favor with investors. This strategy is based on the stock research of Eugene Fama and Kenneth French, who figured out that buying companies that have had their stock prices beaten down in the two previous years are likely to give investors an above-average return over the next two years.

As you are very well aware that the market is full of risks.

And the success of an investor or even a trader depends on how well they acknowledge and manage their risk.

Let me give you some of my views. Not sure you would agree but here goes...

So firstly i would try to understand the theory.

The main assumption in this strategy is that all beaten down stocks will one day rise again.

Which basically saying is that all stock price movements are cyclical. Stocks will have their up and their down days.

So where could one go wrong?

1.How safe is our purchase price? What if the beaten down stock gets more beaten? Or simply put... is it time to buy now?

2.Yes, in general ... most stocks that get beaten down... will rise again... but what if it rebound does not past my purchase price? Meaning will the recovery be worthwhile? Will it be profitable?

3.What if the selected stock in the beaten down industry does not rise?

4.What if shit happens? Beaten down stock gets beaten down because it is so poor fundamentally. And the real danger is what if it turns into a real disaster? Yes what if the stock really goes DOWN under?

5. How long would it take for this recovery to happen? Say if we buy the stock now.. seeing that the stock price is beaten down... what if this recovery takes much longer than we expected? Will the stock price hold?

Well these are the questions I think that require much thinking.

In fact, me myself, cannot give you a logical answer to all of it because the bottom line is that the answers to the questions is itself unpredictable.

Which is why, in my opinion, I find what Mary Buffett wrote in her book, The New Buffettology , about her ex-father-in-law is a rather more useful approach.

A selective contrarian investment strategy – Warren’s approach – dictates that investors buy shares only when a company has a durable competitive advantage, and only when its stock price has been beaten down by a shortsighted market, to the extent that it makes business sense to purchase the entire market. This strategy differs from the traditional contrarian investment strategy in that it targets specific companies that have an identifiable strategy in that it targets specific companies that have an identifiable durable competitive advantage over their competitors and are selling at a price that a private business owner would find attractive.

Which basically means that the beaten down stocks must represents companies which has a durable competitive advantage.

Companies that are of good quality.

This, I believe will help the investor safeguard themselves versus the issues that I had written earlier.

This would be my contrarian approach.

Being contrary just for the sake of betting against the crowd is rather silly isn't it?

There's no need to go and get ourselves killed for the sake of being different yes?

Let's do a current example on Tong Herr.

• In a contrarian investment strategy, the investor buys stocks that have recently performed poorly and have fallen out of favor with investors. This strategy is based on the stock research of Eugene Fama and Kenneth French, who figured out that buying companies that have had their stock prices beaten down in the two previous years are likely to give investors an above-average return over the next two years.

Now based on Fama and French theory, we now have a stock which had a 3 month high of around 3.40 and a 12 month high of around 4.25 (adjusted for bonus issue).

Price of Tong Herr is now 2.85, off 1.40 (or 32%) from its peak last July. And Tong Herr does have a rather better than average balance sheet.

So would one be influenced just because of the low price to adopt a contrarian investing approach on Tong Herr?

Let's see, Tong Herr stock has performed poorly and surely one would say that the stock has fallen out of favor.

So would one consider Tong Herr as a candidate under this contrarian theory approach?

If so, let's put a marker at 2.85 and do a review on it maybe a year later? Ok?

Now compare the other contrarian approach. The selective contrarian approach.

• A selective contrarian investment strategy – Warren’s approach – dictates that investors buy shares only when a company has a durable competitive advantage, and only when its stock price has been beaten down by a shortsighted market, to the extent that it makes business sense to purchase the entire market. This strategy differs from the traditional contrarian investment strategy in that it targets specific companies that have an identifiable strategy in that it targets specific companies that have an identifiable durable competitive advantage over their competitors and are selling at a price that a private business owner would find attractive.

Simple reasoning.

Does Tong Herr, a producer of stainless steel fastener (bolts), have a durable competitive advantage?

My answer would be NO.

This is clearly a cyclical stock which had enjoyed tremendous fortune recently due to a couple of reasoning. Back in 2002, the removal of trade barriers (there were early accusations of price dumping in this industry) helped. But the biggest factor in my opinion that the management was simply brilliant when they stocked up their raw material inventory before the amazing bull run in the nickel started. Margins were fantastic and great profits were made in the early days. But all advantage from the brilliant hindsight of the management to stock up the inventory has passed.

And as stated in the company's recent quarterly earnings:

• The higher revenue and lower profit before income tax for this quarter are due to higher demand for the product and higher cost of raw materials purchased in the preceding quarters.

And when you compare the quarterly earnings, the negative impact caused by higher raw materials is showing. Compare the recent announced earnings versus the same period last year.

And based on these facts, I would question the long term competitive advantage of Tong Herr's product.

And when you factor in the current massive changes in the local business economic environment, where the petrol and power tariffs had been increased, I feel that perhaps NOW is not the time to adopt the selective contrarian investing approach and buy Tong Herr at 2.85.

That's my opinion which obviously could be faulty.

Tong Herr's Earnings

Tong Herr reported its earnings last nite.

It wasn't impressive at all.

Net earnings of 4.444 million versus 18.942 million ago is rather very, very poor.

And this is what the company said.

• The Group recorded revenue of RM99.64 million and profit before income tax of RM6.22 million in this reporting quarter compared to RM97.70 million and RM8.1 million respectively, as recorded in the preceding quarter.
  
  The higher revenue and lower profit before income tax for this quarter are due to higher demand for the product and higher cost of raw materials purchased in the preceding quarters.

Now BusinessTimes posted an article on Tong Herr, Tong Herr to invest RM70m on production

• TONG Herr Resources Bhd will spend RM70 million this year to boost its capacity in Malaysia and Thailand on strong demand for steel fasteners.
  
  The Penang-based company will triple the production of nuts, bolts, screws and other threaded items at its Perai Free Trade Zone facility on mainland Penang by September, its chairman Tsai Ching-Tung said yesterday.
  
  "We have earmarked RM45 million for machinery and the construction of a facility adjoining our existing one," he told reporters after the company's annual shareholders' meeting.
  
  Tsai said Tong Herr will also invest RM25 million to expand its 7,000 sq ft Thai factory located at the Amata Nakorn Industrial Estate in Chonburi, adding that rising steel prices had very little impact on Tong Herr's bottom lines.
  
  For its 2007 financial year ending December 31, Tong Herr recorded its highest ever revenue of RM487.67 million while net profit jumped 31 per cent to RM73.22 million.

Two issues for me.

Firstly, the decision to want to invest rm25 million in expanding their Thailand factory.

Look at the following screen shot of Tong Herr's notes on its segmental reporting.

Its Thailand operations only contributed a net profit of 636 thousand for the current quarter. And the boss wants to spend another 25 million???????

Last year, it was reported that this Thailand plant had already cost 20 million.

And Tong Herr wants to add another 25 million??????

That's 45 million!!!!!!!!!!!!!!!!

For a plant that only contributes 636 thousand in net earnings!

Holy cow!!!!!!!!!!!!!

What kind of Return Of Investment are we talking about here?????????

Blows my mind away man!

And then we have the statement from Mr.Tsai that "adding that rising steel prices had very little impact on Tong Herr's bottom lines."

I am so utterly confused here.

Now steel is the main raw material for Tong Herr, right?

And you have the company stating the following:

• The higher revenue and lower profit before income tax for this quarter are due to higher demand for the product and higher cost of raw materials purchased in the preceding quarters.

The higher cost of raw materials has resulted in the company net earnings plunging to 4.444 million compared to 18.942 million the same period a year ago.

However, Mr.Tsai says "rising steel prices had very little impact on Tong Herr's bottom lines".

Huh????????????????????????????