@Probability what do you mean by the same? I can refer you to this graph https://cdn8.oldschoolvalue.com/blog/wp-content/uploads/franchise2.jpg

Asset value is a subset of earning power value, therefore both can have the same value but asset value can never be larger than EPV itself. But if both is the same, there will be no need to use the term EPV anyway.

His assumption on the asset valuation based on the transactional information from Petron or Petdag is sound and valid. But his own PE valuation should have triggered his own red flag that either 1) His judgement on asset value is incorrect or 2) His PE estimation is flawed. Since both assumptions cannot be valid at the same time.

Yes you are right, my focus is on his valuation method and his understanding of valuation, not the valuation of HY. That's why I never mentioned a word as to whether HY is undervalued or overvalued. Another reason why I focus on valuation method is if one doesn't have a clear understanding of how to do valuation, and he go on and value say 10 stocks, I don't have to study all 10 stocks to know if he is right or wrong, I will know they contain errors, because the 'process' is wrong, even if the outcome of the stock price falls within his estimation. And you know investing is all about process not outcome.

Posted by stockraider > Nov 25, 2017 11:23 PM | Report Abuse

JUST PUT IT THIS WAY LOH....!!

1. COST OF COMING UP WITH A REFINERY SIMILIAR TO HENGYUAN WILL COST BETWEEN RM 15 BILLION NEW & RM 9 BILLION USED LOH..!!
THIS WILL COST BETWEEN RM 30 TO RM 90 PER HENGYUAN SHARE LOH...!!

2. HENGYUAN EXPECTED TO GENERATE RM 3.00 PER SHARE LOH...!!
AT PE 8X TO 12X....U SHOULD EXPECT SHARE PRICE OF RM 24.00 TO RM 36.00 PER SHARE LOH...!!

3. HENGYUAN GENERATE RM 3.50 CASH PER SHARE USING MULTIPLE OF 8X TO 12X....BASED ON CASHFLOW WOULD YIELD RM 28.00 TO RM 42.00 LOH...!!

4. SO LONG TERM VALUE OF HENGYUAN CURRENT SHARE PRICE OF RM 10.72 CONSIDER VERY CHEAP LOH...!!

5. DO NOT LET HENGYUAM CHINESE TAKEOVER AT RM 1.92 PER HENGYUAN FROM SHELL TO FOOL YOU LOH...!! ALWAYS INTELLIGENTLY VALUE THE HENGYUAN STOCK MAH...!!
ASK YOURSELF WHAT IS FACEBOOK, TENCENT, AMAZON, ALIBABA, GOGGLE SHARE PRICE 5 YRS AGO, AND WHAT IS THEIR SHARE PRICE NOW LEH ?

Value derive from different based does not change the fact that you conclude asset value can be higher than earning power, which you never gave any evidence to support it (since you want to be specific). It is not coincidence that they come up with the same value, it is indicative you don't know how to value.

I never disagree, I only base on what you told me. You derive a lower valuation from PE compare to asset valuation. And now you trying to say both are from replacement value. Fuzzy thinking. You are welcome to ctrl-F your own comments.

Stop changing your statement. You derive your $40 per share from PE ratio not based on upgrade from Petron.

Basing on your theory of asset value > earning power, you should advice HY to stop their business operation, because the asset is worth more than the business. So if you stop the operations, i.e depreciation, inventory, expenses will all reduce, resulting in super huge cashflow.

It is not the upside that matter. It is the expected value that takes into account the magnitude of both upside and downside that counts. Looking at upside is exciting, while the focus on not losing money is boring and dull. But it is the dull, of not losing money, that enable compounding. Talking about sensationalism.

@Pang72 - that's called the illusion of causality. Finding meaning in noise and fit data to explain pseudotheory

Reality doesn't work in linear fashion i.e if steel price up, then profit will go up. Another reason not to read news.

Thanks Noby

Hi David, just a few questions:

1. Why is the calculation of operating cash flow / net profit called Quality of Earnings? My understanding is I have never encounter this ratio and the difference between the two simply comes down to the timing of cash, which when monitor over a length of say 10 years, will come to be more or less the same. And this has nothing to do with the quality of earning, which suppose to mean the sustainability of the earning in the long term.

2. How do you justify that Annjoo deserve a higher PE just because they have best financial metrics compare to other steel companies when in fact their ROIC is at a level that is destroying shareholders value? And looking at the track record where their 10 years incremental return is no better than 10%, won't PE of 10 seems to justify the right valuation?

Thanks.

Sexy babe, I'm waiting for your response. Thank you.

Since one suggest that asset value > earning power, maybe this charlatan should suggest HY to stop the refinery business, because all the assets are simply worth more sitting idle than what they are currently producing.

@ Paperplane, care to explain why EV is higher than market cap, hence HY should price near $14?

@equityengineer your reasoning is valid. But you shouldn't frame what I am saying in a way I set out to confuse others. Just as others can be optimistic, I establish myself as a skeptic. Forum means "a meeting or medium where ideas and views on a particular issue can be exchanged." It is not a cheerleader club. And when someone is going to spin that asset value can be larger than earning power, it is my duty to speak up.

From your point of view, 'limitless' is a harmless, layman term that you understand what you truly mean, which is fair. But in the eyes of other readers, that term might mean 'buy at any price' in their own interpretation. It is not my obsession with precision but rather the danger such a word present to other readers. And the benefit for yourself when you provide something concrete i.e numbers is it reduce the room for other interpretation. You can come back years later and access whether your own judgement on HY if is indeed correct, for self improvement purposes. If you use words like 'limitless' or 'gems' any outcome of HY, whether it becomes a $10 mil or $100 bil company, can be fit into that word to rationalize and justify your past decision.

On luck and skill, I have already explained to stockraider, but he still get confused between the statement 'he is lucky if he is successful' with 'he is successful if he is lucky'. If I believe investing is the same as a random throw of dice, what am I doing here? My point is investors underappreciated the role of chance in investing and attribute too much to their own skill. It took LCTM 4 years to collapse; equally the same length of time for Jim Paul to go bankrupt and went on to write a great book and many other cases where traders blow up when they are invisible. In most people's mind, luck only happen for a day or a few hours, not years. And worst of all, an investor that judge his own skills based on the share price movement.

Stocks and Science are indeed different, but I would say there is more similarity than difference. Newton failed investment is an invalid conclusion that both things are different. There can be equally many other Scientists that have done well in investing but their stories never make it into the news.

@stockraider

1. "Occasionally asset replacement value can be higher than earning power valuation" - There is no occasionally. Earning power > Asset. Asset is part of earning power. Period. But deceive yourself if it satisfy your ego.

2. On luck. Confusion on reasoning and probability. Confuse between the statement "he is lucky if he is successful" with "he is successful if he is lucky"

3. On horserace handicappers. Misunderstand true definition of gambling; not aware both stocks and horserace are pari mutuel betting. And miss the main point: more information lead to overconfidence.

4. On Quora and single piece of news. What make sense has nothing to do what is true.

5. On Shell selling price. Oil price collapse is just a hypothesis that explains why Shell sell at that amount. Just as someone points out Shell wants to repay debt, which is another hypothesis. Or Shell could exit because refinery margin is low without any substantial upgrade. All have them are hypotheses, and many others hypotheses have to go through the process of disproof to find the most likely ones. Picking a hypothesis that fits your theory is gambling.

6. I am still curious on your answer to my Kelly Criterion question, if you did invest 87% of your total capital in HY given the overwhelming evidence and your estimated fair value.

@equityengineer limitless? Care to define limitless? Put it in numbers please. Limitless as in $10 bil, $50b, or $100b. Limitless imply infinity. The 8 sentences you wrote are anecdotal evidence but nothing that can be validated or invalidated. If someone says something as 'limitless', skepticism is required until the claim is proven, the hypothesis that says 'HY is limitless' must be tested and verified before judgement is given. If it cannot be verified, he is a charlatan. Understand, it is you who claim HY is a 'potential multi bagger', the burden of proof is on you to provide plausible evidence to back it up, not on me to show you that is not the case.

I could pick a stock, and spin out 10 pages of writeup filled with vague hypothesis like "China market potential are limitless (used by charlatan to promote IFCAMSC)"; "adding additional capacity to grow revenue (charlatan to promote Latitude at peak price)" and many readers would be suckers and gladly buy into my story. But if those hypothesis cannot be tested what use is it for? I am either a charlatan or a folly.

In case you like to think falsification is a 'gimmick' I use to argue, it is not. Falsification is the bedrock of science. No amount of observations of white swans can allow the inference that all swans are white, but the observation of a single black swan is sufficient to refute that conclusion. While investing is far from the same as hard science like physics or chemistry, and 100% truth may never be attainable, but the same process is required to separate what is real from charlatan, just as Science use it to separate real science from pseudoscience. In saying that, absence of evidence is not evidence of absence. If you cannot validate your claim, it does not mean your claim is false, but it just mean I will reserve my belief until more evidence are provided. I am hopeful you can give me facts and figures.

I reread your comment Stockraider, so you are saying:

1. Valuation on asset, HY is worth $30-90 per share
2. Valuation on EPS, as in Earning power, HY is worth $24-36 per share

Mind if I ask how in the world of logic that earning power valuation can be lower than asset valuation? (and to be serious, please don't add them up, HY will reach $100 per share). No one taught me this. I am keen to learn.

One more thing: Given your fair value estimation of $28-42, with a conservative 90% probability of winning (the way you frame is is more like 99.99%), based on Kelly Criterion, you should have 87% of your total capital placed in HY, care if I ask is that the case? If not why it isn't? Because it is not rational for one not to optimize their bets given the magnitude of such winning. I would presume given the persuasiveness of evidence and truth you've discovered, 87% is considered low.

I am not 'blinded' by evidence, but I am rather impressed you guys can process those gazillion information thrown at you with cocksureness about your own ability to process them. If you think you can process them, why should I question your capability?

But it does remind me of Paul Slovic. Who show 8 horserace handicappers 88 variables and ask them to pick 5 most important variable and use that to make prediction which will win the race. But the fun part comes after, he gave them 10, 20, 40 variables and plotted their accuracy of forecasting on a graph, their accuracy did not improve whether they're given 5 or 40 variables, and in fact dropped a lil when given 40 variables, but one thing does increase: confidence. Confidence doubled the more information they receive.

And from my understanding, the quality of evidence comes from 'disproving' and falsification. Multiple theories or hypothesis should gone through a process of rejection and the one that resist disproof is most likely the correct hypothesis. It is falsification not confirmation. Maybe you guys have falsified these evidence before presenting them. But I doubt.

So from my layman understanding is your evidence is explaining:

1. Shell with their wealth of knowledge, is happy to sell HY at $2 when there is a moat that is worth close to 20x of that value? What is the plausibility of that happening? Or did Shell think they can generate more value in another investments based on the cash they receive? (> 20x)

2. So you pick a person's knowledge from Quora and from news at face value. You do know a sample size of 1 doesn't tell you a thing if you study statistics and probability, which I am sure you guys do given your ability to process these information. Is the person's knowledge sufficient to explain that HY has a moat? Let's do falsification. I can find Jamnagar refinery, given the capacity and build cost, HY is only worth RM4 bil with their current capacity.

3. Let's flip this around, if the hypothesis that given the current HY capacity it is indeed worth $9 bil, what does that tell you about the capital required for an upgrade to make profit grow or sustainable?

4. Just to be clear, there seems like a flip-flop going on, are you going to value HY by asset or by earning power? You have to pick one. If you keep adding both up, like how you add the land value with cash flow, I really don't know what to say.

"The confidence people have in their beliefs is not a measure of the quality of evidence but of the coherence of the story that the mind has managed to construct.” - Daniel Kahneman

@ dunspace, what is your estimate on long term ROC given that you think Insas can earn a higher return than you if they pay dividend?

Yes I knew you will answer that. Good luck.

Yea that's for pang72 to answer

Can someone define himself as smart by comparing their entry price with where are the market price now? Lecture or no lecture, this is the kind of illusion that luck gives you.

If an aunty ask me to buy HY at $1 many years ago, and I follow her advise, am I smart or dumb?

Remember: It is not what you know but what you don't know that gets you into trouble. It also rings true that what you think you know that just ain't so gets you into trouble too.

So you have a choice, either you pretend nothing happened and continue what you usually do or quickly find out what you don't know so you can protect yourself against the unknown.

@SHC70, of course you don't. You are not interested to know.

Interesting how so many can be so cocksure to attribute skill to their result without an ounce of humility that they play a game where there are large amount of chances and luck. Lets do a thought experiment. Take 10,000 investors randomly, ask them to do a coin flip for 5 times, roughly 313 of them will get 5 consecutive Heads or Tails, so called 'Hot streak', out of pure luck. Now of course, the difference between this and real investing is no one will attribute coin flip to skill, but it is hard not to do that in investing. Considering the anecdotal evidence, complexity and lack of feedback. And relying on market price as feedback is the surest way to fool oneself.

A research titled "BOYS WILL BE BOYS: GENDER, OVERCONFIDENCE, AND COMMON STOCK INVESTMENT" found that men tends to be overconfident when there is a lack of clear and ambiguous feedback, such is the case for stock investing. If anyone don't understand why feedback mechanism in investing is ambiguous then let me know, I'm happy to explain to you before market humbles you. It is also the fact that self-serving bias (attribute success to own character and failure to external factors) makes it almost impossible for investor to 'disbelief' that this can be all down to luck.

Always good to have disclaimer here: I am not calling anyone here that they have no skills. I can't mind read nor am I good enough to tell the proportion between luck and skill. I just find the lack of sensitivity and appreciation on the influence of luck rather amazing (ignorant). It is never fun when ego get bruised by something as 'insignificant' as luck. And no one wants to think about it because luck is abstract and ambiguous. We have no tolerance for that.

@rojakmee, FOMO much? Not me

@probability, fair enough. I would agree with you on this point, that most people here is not worth the effort.

@probability isn't it good to ponder if fact is crystal clear, HY should be where everyone here would agree which is $15. But of course, everyone here would happily move their goal post to $20 and beyond when it hits $15. Had someone done a survey a year ago asking HY shareholders what is the fair value is, few to none would have called out $11. But at present it feels normal to call out the current price as 'undervalued', whereas none would have dared to call $11 as undervalued one year ago. Anchoring bias isn't it.

And forum is always a best place to boost each others ego isn't it. 10-20 people cheering each other. A 'What you see is what you get' illusion, failing to consider the silent evidence that there are thousand of others out there that refuse to invest and it is precisely their viewpoint that one should sought out, to find contradictory view, rather than suffering confirmation bias.

Don't get me wrong, I have no concern with the fair value of HY. I don't have to answer what other pays. Besides, I have 0.1% confident I can convinced anyone, especially when they are treating their own view like trophy (the precise reason why they cannot stand contradictory view). But the lack of skepticism in here is just extraordinary.

Your luck isn't good, it is just normal that we don't see how randomness rule the market place. I own scientex since 2012 @ 1.20+, currently $8.50+, and trust me, I am just being lucky.

Why not? Ask all the investors in the entire world to flip a coin, there will be many that can get 10 consecutive 'Head'. And there are many traders that think they are 'invisible' for YEARS before they blew up. I have to put caps because someone can be lucky for years and go bankrupt overnight. This is called illusion of skill.

Let me explain what you are doing. You gain 90 cents within a few days. You brain is wired to think causally, to find an explanation as to why it happens, so you fit your theory of observing petrol price as the most plausible explanation why you make a paper profit of 90 cents.

The fact is it is pure luck, there is no explanation nor any theory. Your theory doesn't predict anything.

I don't think you've any idea what you are doing. You'll be the first to get wipe out.

@pang72 it is also a fact that luck evens out in the long run.

@rojakmee - Seriously, those that make judgement based on the movement of share price shouldn't be allowed to invest and go back to school.

Are you talking about the sleeping for longevity or sleeping for filter? I don't have argument for the first but I do for the latter.

You are right. Just as I don't need to know how our brain works to know human fallibility.

I will be happy if you can share the scientific evidence to conclude that sleeping can remove useless information that one derive from daily market price and market news.

@Pang72 - You reminded me of a quote 'A little knowledge is a dangerous thing.'

There is a fine line between price as a source of information and a source of influence. That line has been breached long ago.

The 2 authors also wrote a research paper titled 'Boys will be boys' on how male are generally overconfident compared to female and as a result trade more to the detrimental effect of lower return. And I think this is important. One does not become something just because they associate themselves with it. We can read Ben Graham, Warren Buffett and understand the principles of value investing but it doesn't make us a value investor. All value investor like to think 'we are 'better' than those average investors'. That is a dangerous mindset. I can categories myself as a 'value investor' but carry on with the behaviour of checking the share price everyday. I am not criticising value investing, the principle is sound, but the danger lies when someone confuse themselves between investing and gambling. And value investors are especially vulnerable to this illusion when they think they are practising VI just because they are familiar with the concept. This is probably just as applicable to other type of investor i.e fundamental, growth or whatsoever.

The point is - Overconfident permeate the entire investing community no matter what you like to think yourself are. And it is not what you think you are i.e I am a value investor that determine your long-term return, but rather it is the attitude one carries in the market that determine if he makes or loss money in the long run. Market is blind to categorisation. He doesn't care what you like to categories yourself as, if you don't have the right temperament, if you don't practice skepticism, humility, you will be part of the statistics.

@SHC70, this is called pseudo-TP. A TP that changes according to market price. Akin to shooting an arrow and paint a red bull eyes around it.

How irony when someone call others fortune teller but he himself repeatedly calling for a TP of RM5 or higher.

Given the unpredictable nature of macro factors, you want to be roughly right not precisely wrong. And it is common even for analyst to miss actual EPS by 10-30% +/-

Again this underlie a huge misassumption. EPS of a quarter has little to do with value, hence it rarely changes the fundamental valuation of a company. If share price does change, it has more has to do with market sentiment that true fundamental, disagree as you like. It is not that hard to test this hypothesis. That is why I can never fathom why someone would enjoy estimating EPS, throw in a multiple, 10x just to make it convenient, and assume the market will agree with him. And worse, when the actual EPS came out and confirmed his prediction and the share price followed, he started to think he is skilful. I think this misconception of fundamental is worse than the estimation of EPS, which itself is a futile exercise to begin with.

Just a thought experiment. Not saying your assumptions are wrong but an experiment. The assumption of 130 cents EPS rest on 10 variables, which 7 out of 10 are macro factors. To build in the uncertainty of reality, assume all variables are off by 5%. So what is suppose to 'benefit' will adjust downward by 5% and likewise revise upward 5% for any cost.

So:

A) 106k bpd x 85 days x 9.5 USD/brl x 4 RM/USD = 342 mil

B) 47.6% hedging x 4700K = 2237k x USD 49/brl = 109 mil (Starting)
2237k barrels x USD 53/brl = 119 mil (Ending)
Gain = 10 mil x 4 RM/USD = 40 mil

342 mil + 40 mil = 382 mil - 126 mil (SGA) = 256 mil or 0.85 cents

So a mere 5% swing on all the variables is enough to swing EPS by 35%

Hi Bizfuneng, sorry to hear your loss. Please accept my condolences.

I think for clarification, whether I've been here for 100 years, or tiba-tiba muncul a minute ago, it has nothing to do with what I say. Just as you know you shouldn't judge a person based on skin color, age, first impression etc. But I am not surprise when someone can't make a distinction between fundamental and market expectation, they are bound to make such a damning mistake.

Hm 20% quarter to quarter growth is very different from 15% growth for 5 years.