Hello everyone and happy weekend,

This is Philip here. I am answering to a question that a young man brought up that I was just thinking of replying on telegram, but I thought would be easier to write an article on it instead of hiding it in telegram for people to find. Anyway, here is the question\

"Is it true the  Malaysia stocks money are mostly made on cyclical? Is thre stocks that can be multibaggers and hold for long term in bursa?I guess I have a problem where I don't know how to spot a business that will thrive for a long term. I know what they do, but how to assess if they can scale up higher?"

This is a very very interesting question indeed. And I spent decades of my life thinking about this very question, as it becomes the basis of growth investing, or investing in companies that can grow further and further over the years, instead of plateauing and you sit on the dreaded value traps, companies where your money sits and does nothing while you wait and hope for something to happen.

I was sitting with my grandchildren thinking about how to answer this question when I found the perfect answer to explaining it.

Now, this may not be a robotic and exact science, but business valuation rarely is. We have to accept that there is an element of chance in any investment, and our only ability is to pick the best odds.

Now back to the grandchildren and their cute cartoon, the pikachu. What is a pikachu? a pikachu is apparently an evolved monster that looks similar to the monster before it,the pichu. its also has a passing resemblance to the monster that is evolved even further, the raichu. they all have thunder tails, a cute face and verying sizes in the wild. However what is diffrent about pikachu? apparently he has a secret power that is helping his owner to defeat much bigger monsters in the pikachu world.

Anyway,

how does a pikachu relate to business valuation? 

In a simple nutshell. Comparative growth analysis. This is the core principle in how I pick stocks, and so far it has done me well. Here are the big problems in buying growth stocks. 

1. Buy too early, and you buy into the thousands of stocks with big stories that never get anywhere. for every Tesla and BYD story, you get a nikola, quantumscape, canoo, arrival, lordstown and fisker. the draw is definitely there, but unless you know what you are looking for, buying the industry as a whole, you will end up in tears.

2. Buy too late, and you end up putting a lot of money into companies which are no longer in the growth phase, moving slowly up and down, and you feel lost out as other companies are growing much much faster. Then you realize that the company no longer is hitting on all four cylinders and you are losing out.

This leads to FOMO and YOLO themes which never seem to end well when you buy it, but you see everyone around you seems to benefit from it. so, how do you really go about selecting those companies? For me, as a general guide, i use comparisons, but not peer to peer as most analysts do. I try to break a company into multiple phases where a capability comes up, even though the size is not there yet, or the earnings are in yet, but the companies addition of new skillset or complexity combined with its ability to execute, will usually in the long run end in a very good return over time. 

Does this concept seem difficult to understand? Lets take a few scenarios of investments in which I bought which turned out well:

1. QL - I first bought deep into QL in 2009, here was the annual report. https://disclosure.bursamalaysia.com/FileAccess/apbursaweb/download/?name=EA_DS_ATTACHMENTS&id=119240

I remember that the previous iteration of QL was when it started with its feed mill and egg business and added the fishing and frozen foods business, and I was very impressed, as I was also one of their contractors and a very happy client as their payment was excellent. So, how did I look on my investment in QL? Firstly, the next bigger version of QL was obviously CP ( Charoen Phokkhaphan is the largest private company in thailand) and they provided the roadmap of success for QL, which was obviously diversification via vertical integration. For any agricultural/ industrial giant, the key secret is managing costs via vertical intergration. This was something they did very well when they decided to venture and expand their palm oil plantation into Indonesia. I bought a huge sum at this time and then added more as they expanded into chicken/eggs into vietnam and indonesia further. I kept adding more as they kept on the roadmap by following CP into adding the family mart franchise into Malaysia, adding a huge number of stores. By using the inflection of adding new complexities of skills and to compare their performance of someone who has already been there done that (like CP in thailand), you are able to judge the rate of success of  the company by the efficiency of how the company carries out its growth phase. Why did I not buy into LHI or CCK or layhong? If you look at eh hurdles and roadblocks they have to jump through to get the next level to be within the line of a CP, you can see which company is doing the best way to push their business into the next level of growth, you can easily see why I chose QL.

2. PCHEM - I first bought deep into PCHEM in 2019, and kept on buying more through the downturns and upturns. 

https://klse.i3investor.com/financial/annual/5183/31-Dec-2018_2865796688.jsp

As I said, why buy PCHEM when oil is going down, prices of materials is dropping and demand for plastics versus growth of new plants is lowering? Simple, location location location. Every successful petrochemicals plant is built based on strategic locations and additions of new capabilities. For pchem, my comparison was BASF and BAYER. The interesting part here was how pchem started. It started as a fertilizer maker in bintulu in the 80s, doing ammonia and urea, basically fertilizer business for the sarawak and east malaysia. Following the roadmap of BASF, they added into ethylene and prop, moving towards additives and polymer business and also soon divested the vinyl business. Adding new capabilities was their near monopoly of the SEA region, allowing them to sell at high profit margins with feedstocks from petronas and doing a lot of good acquisitions along the way. The reason I bought into them was then their FID into Pangerang and adding new capabilities aka the isononanol plant, and the specialties chemicals business from davinci, which leads into opening up the beauty and skincare market. Roadmaps which BASF started.

So now the simple parts is covered, buy companies which are following along a roadmap of success set by the predecessors, and judge how fast they are moving along the roadmap to decide which company to invest in. But the interesting part is this, when to invest? How to time this purchase?

for me it is never about time and share price or PE ratios etc.Coming back to the earlier post about buying too early or late, I have recently found that the best time to invest seems to be: when the new capabilities are achieved is a good time to buy. what do I mean? take for example PCHEM, if you had bought it at any time after the acquisition of da vinci/ the stratup of PIC running last year, you would have been investing at a time when the only thing that is required for success is time. No sure way of timing the purchase, but if you had bought quarterly after their acquisition, and just held on over time, you would definitely do well for yourself.

https://www.brb-international.com/news/2019/09/pcg-completes-acquisition-of-da-vinci-group-bv

So remember this, first build a mental model that every succesful company will already have a history of MORE successful companies in its market before it that you can take advantage of to turn it into a report card of sorts to compare when and what the the company you are planning on investing in should do, and what they are already doing. buying amazon? look at what walmart did all those years ago to take market share. walmart? look at how woolworths started in the 20s. so on, and so forth. Once you have that report card, you have a benchmark, a time chart and a gannt list of how the company should be performing, or in this case outperforming its peers. this is how i find business valuation interesting, not based on share price, not based on  TA charts. But a thorough understanding of the business fundamentals itself.

I hope this serves you well.

Philip

P.S. As for Serba dinamik? Why am I still holding? Here is my comparative growth analysis for it.

dayang <--- Serba dinamik <---- schlumberger

for dayang the pichu, to serba the pikachu the comparative growth analysis was simple, both started out as maintenance outfits for petronas, however the main difference was serba added new capabiliityin doing operations as well as maintenance, and added education and training into its arsenal to maintain the staff capability. For dayang to grow into a deep investment, they cannot only remain as a topside refitter for petronas but they have to add new capability in doing all the o&m jobs as well as venturing out into doing epcc works directly. This part is very hard to do, and many companies fail at doing it (sapura kencana, bumi armada) all jumped to far and tried too hard, and even money is no replacement for ability.. For serba dinamik, the reason why I like them is that they are still following the roadmap of schlumberger (their foray into internet capability with the acquisition of geoquest, sema and omnes, their expansion into toolings and valves with the acquisition of Smith international), where the goal was always to have a one stop shop of oilfield services, tooling and repair all in one location nearest to the customer end. I still feel that they are doing their best to follow the roadmap of O&M+training+EPCC+education+IT all in one service village, and that moving forward this will still remain true. So far this has yet to change, and I think when this business model changes, then I will reconsider as their advantages in the market are still very strong in the industries that they are in.