I don't invent ROC theory lol. And surely ROC theory doesn't have to explain what others are paying for.

And this comes back to Icon's point, why some stocks have disconnection between their ROIC and PE i.e low ROIC but high PE.

Why did Scientex's share price went up 800%, P/E expanded from 7x to 17x, over the past 7 years, while TG's share price only went up 200% during the same period when TG's margin and ROIC is superior to Scientex (excluding property division)? Because the market has higher expectation that Scientex's aggressive expansion will increase future cash flow (once they slow down their expansion), thus generate a sustainable and gradually higher ROIC in the future (when utilisation rate catches up).

Not saying TG is bad or anything, 200% gain in 7 years is impressive, but ROIC cannot be interpreted based on the number itself. Investor has to connect that number to what the business is doing. ROIC is not a formula, or a meaningless number on a stock screener, but a starting point for investor to understand the business strategy.

ROIC is like the bananas (fruits) on a banana tree. IF you see beautiful bananas (ROIC), you want to pay more to own the tree. But if you see disease and pest eroding the tree roots, then you will pay less because future bananas will be less or even none. In contrast, a banana tree might have little to no fruits now, but if one is to look at its healthy roots, strong trunk, fertile soil, then one would pay more knowing the future banana will be abundance and delicious.

Hope you get the analogy. The point is: Don't always look at the fruits, the fruits right now is irrelevant, you're paying for future fruits (future cash flow), and the only way to be sure you'll get alot future fruits is to look at the tree, the roots, the trunk, the soil, the weather (industry).

Scientex spent >$500 mil making acquisitions over the past 5-6 years so ROIC will definitely get dragged down due to a massive increase in invested capital. And if Scientex continue to acquire other companies in the future, which they will, ROIC will continue to be less than TG. But then again, investing is about paying for future ROIC, not past ROIC; future cash flow; not historical cash flow.

So what are you trying to say?

Let me try to translate your point so I can get your point

All these "smoking is bad" nonsense

Look at my uncle, my neighbour, my friend etc

What is their health (super healthy)? How much they smoke (a pack a day)?

Get my point?

if a company can compound 20% over 3-5 years, then one should buy all they can at 13x.

But to achieve 20% growth, assume dividend payout of 0%, ROC has to be 20%.

When did I say you should trust me instead of Tguan's boss? Never said that. All I'm writing here is to provide an alternative perspective. I never said whether Tguan is good or bad either. Any stock is good at some price, bad at other price. I'm telling you what's happening in the flexible plastic packaging industry, it is up to you to make the judgment how that is going to affect Tguan in the next 10 years. But if one is going to call others academian or theoretician everytime someone offer a conflicting view, life is going to be tough. That, I don't need empirical data.

Probability, like that die loh, everything need empirical data to support. go ask TSLim to empirically support that PE 11-13 is fair then.

Let's start with you. Given pasar malam talk is the same as theory, but I don't trust you. Maybe you should provide you empirical data to support pasar malam talk = theory. Don't forget to add reference and citations.

Connie, you're getting better, but I'm waiting for your discussion on Tguan, not Son, not Baba, not Softbank, not Wework, but Tguan. Oh wait, what happened to Wework? Should be very successful right?

Everytime someone can't win argument, they call it 'theory'. When someone can't win argument, they go ad hominem. Oh wait too theory, let me explain ad hominem "refers to a fallacious argumentative strategy whereby genuine discussion of the topic at hand is avoided by instead attacking the character, motive, or other attribute of the person making the argument"

Let's dissect Connie's writing:
Personal attack #1 - at the end u are destine to serve the labour force for the entire of your life
Personal attack #2 - u better stay in ur mancave and continue ur phobia of buying a share ok
Personal attack #3 - Go back and make some money until u no need to work.

When someone can't discuss the matter, that is, Tguan, he inevitably start attacking the writer to divert attention to make it look as if he wins the argument.

Sorry Connie. You need to do better than this.

Connie, as always, haven't offered anything substantial. Really theory? I haven't even started throwing formulas. Uncle, england not good no problem. But at least write something useful, not blow water everyday. If you want cafeteria talk, free come Kuching. But if you want to talk Tguan, I'll wait for you any day.

Oh hey Connie, how are you? Yes I did write about Tguan, and why it doesn't deserve Scientex P/E (based on what we can see), and I don't have to repeat it here.

Tguan share price could go up 30% or 300%, but that is irrelevant to my writing. Hypothetically, had Tguan share price goes down, should I come out and shout 'hey I am right?', no right? And again Connie, focus on process, not outcome. Now since you guys crave analysis, here comes my analysis:

"High gross margin may likely to sustain or improve for the rest of FY19, due to low raw material cost as a result of lower Linear Low-density polyethylene (LLDPE) prices." - How sustainable is low material cost? What happens if it normalise? And apply 2nd level thinking, if all plastic packaging manufacturers i.e Scientex, Daibochi enjoys lower material cost, what is going to stop others from passing the cost savings (from the low material cost) over to their customers? And once that happens, what competitive advantage does Tguan has over others to maintain their profitability? Is the customers going to say I like to pay more for Tguan's plastic over Scientex's plastic? At this front, Tguan is a price taker, same as every other manufacturers like Scientex.

So when the ability to control selling price is out of question, the focus comes back to controlling the cost. And that comes to the central argument: the whole flexible plastic packaging industry is consolidating; worldwide. Scientex has to keep acquiring other plastic companies to grow because they knew you either go big and scale to maintain cost advantage or lose the war. Too many plastic players and inefficiency in the industry shows why most players hardly make any money. When an industry consolidate, you either acquire others or get acquired. What is Tguan strategy? Tguan currently rely on organic growth, production capacity is half of Scientex and if Scientex managed to hit $10 bil in revenue by 2028 which they target to, their capacity is likely to be 3x bigger from now. I'm not saying this to mean Scientex is superior, but you have to ask where does Tguan find its cost advantage with their current size given that all players are price taker? Tguan either has to do what others does, scaling up massively, or specialised into some niche market, which would mean limited growth opportunity.

If you plan to buy Tguan for a year then sell it, sure, Tslim already gave you a good analysis, but if you plan to hold Tguan for many years to come, why on earth are you interest in analysing LLDPE price and exchange rate? Those are not even within the company's control so why obsess over it? The only thing they can control is cost but why there is zero analysis on the cost structure of Tguan? And it also make sense that if one is so good at analysing LLDPE and forex, the natural path is to become a LLDPE or forex trader. Not playing in the stock market.

Lastly, valuation is intimately tied to the business's return. What effect business return? Of course, it is profit margin and asset turnover. How do you improve both margin and turnover? Scale!!!

Are you happy with my analysis? As for the SWOT thing, let's dissect:

Strength:
1. Improving profit margin and growing revenue in recent 3 qtr. - What then for the next 100 qtrs?
2. Capacity keep expanding in stretch firm, courier bags and PVC food wrap productions lines may further improve its market share especially in Europe and Japan. - Growth is great. But the question is what is the long term ROC?
3. Growing to be one of the largest PVC food wrap producers in Malaysia. - One of the largest? This is like all the restaurants advertising they are the award winning restaurant. Pretty much meaningless statement.

Opportunities:
1.Potential beneficiary from Japan 2020 Olympic games where the demand of packaging products may increase. - Again, one off gain. Does Tguan survive based on once every 4 years Olympic? How many % will the extra profit gained from Olympic contribute to their next 10 years valuation? 1%?
2. Strong USD/MYR in last 6 months rate further improve its profit margin or it may have forex gain (USDMYR rate hovering at 4.17 for past 3 months) - Enough said.
3. Expected to have small growth in profit in coming 1-2 years based on 1 billion revenue target and growing profit margin and revenue - okay. sounds legit.


Are you happy with my analysis?

So why learn FA when you can provide the stock pick service?

While I agree with most of your points, I disagree with the point about moats.

You confuse growth with moat. Just because a company has been growing, that certainly don't mean they have moat. Absence of evidence is not evidence of absence. Moat is the ability to defend abnormal profitability, not whether the company is growing. Heineken Malaysia has moat as shown by its ROIC of 50% over 14 years and longer I'm sure, but it isn't going to have high growth because reinvestment opportunity is limited in Malaysia. Hence the reason why payout ratio is 90%.

I am not sure why there is a higher chance of picking the wrong stock in Malaysia than developed countries. If anything, there is a higher chance of moat erosion in countries like US because of the nature of the market; the first market every company wants to get in is the US.

Yea you're not wrong at all. Knowledge can become a curse if we cannot abandon it when reality has changed. But that doesn't mean it is better not to have knowledge. It is like being rich can have many issues, so lets not be rich. Doesn't work that way right?

The way to solve this is to convert knowledge into wisdom. Having wisdom means you know when you should rely on your knowledge and experience to guide you, and when to throw it away; know when knowledge betrays you. Gaining knowledge, and subsequently, wisdom, is a mean to have a mindset to stay open mind and update ones knowledge (meaning constantly killing your ideas), it is not meant to be kept as a treasure or trophy.

Knowledge and wisdom has to be fluid and dynamic i.e constant learning and updating, otherwise it would be a liability rather than an asset.

Rule of thumb:
- If you want to find a quality stock, find one that never issued any new shares or 'sweeteners' like options or warrants
- If you want to identify a successful investor, find one wear slightly sluggish instead of ones in tie and suits
- If you want to be a great investor, focus on things that don't change instead of some secret formulas.

How is that having too much knowledge is a hindrance to making money?

Why is 99.9% of people bickering about the price of something? Because they don't know the value of it.

I'm glad you enjoy the joke. Don't be so serious, no one gets out alive.

make my day -> ricky say tguan how la how la...ended up tguan moved today

Please prepare me a report of 'how tguan move everyday' thank you

Haha. Just be careful. Every black swan is different.

Pragmatist or not, there is a fine line between experience helping and deceiving you. If that is valuable for a non-margin person, then it is live or death for a margin person.

@Icon8888 there is alot of nuance in your "depends how you manage it" which most likely ruled out 99% of people from using margin.

Remember, those that refused to evacuate before Hurricane Katrina hits New Orleans are those that have survived all the previous hurricanes, and their experience betrays them.

Not saying something bad will happen to your way of using margin, but what is important is not 'I have survived so many black swans before using margin", rather it is "will I survive the next black swan?". Remember you only need to get it once. It is like playing Russian roulette. Will you play it once to make $10 million? Sure but you're still dumb. But no one would play it 6 times in a row, because that is just beyond dumb.

And then there is the problem of "I have survived so many black swans before using margin". If Titanic never sank, you'll be pretty sure human will continue to build bigger and bigger ships until one eventually sinks (to learn the lesson). Similarly, if one never ever get caught in irreversible losses for using margin, that person is going to keep increase his leverage (risk) until he hits one. So be careful with that.

@paperplane there is no bias. But I would recommend you to look up ergodicity. Finance is non-ergodic.

You say what about Dutch Lady, you can get wipe up even though Dlady has compounded their share price for the long-term. Just go and count how many times has Dlady's share price fallen more than 10% in a matter of few weeks. The most recent one being 22 Aug - 22 Sep 19. Of course depending on how leveraged you're, you can get wiped out even if Dlady do well in the long-run.

And going back to understand KYY. Sure he would tell you how much you stand to gain by using margin. But for a barber who wants you to have a haircut, he never tells you why you don't need a haircut, even if you're bald.

Margin is an excellent way to understand fragility.

To find out whether something is qualify as fragile, you can ask 2 questions:
1. Can randomness harms it in a nonlinear way?
2. Will one get squeezed?

To question one, the answer is yes. When you do margin, any negative black swan event would kill you instantly compared to those who don't use margin. And it is nonlinear - the bigger the black swan/randomness, the more one gets hurt. Which goes to 2nd question, which is yes too. Under normal circumstances, margin does little harm, but when it gets into black swan category, you get squeezed. Because you're forced to liquidate all your position at whatever price the market tells you. The lack of optionality makes margin fragile.

The aggression how both Lim are acquiring Scientex shares are crazy. They already increase their stakes so much over the past 1 decade.

You're right in that sense. But still people who use DDM factor dividend into valuation.

Outside of AeonCr topic, one thing I have been thinking for sometime is whether dividend affects valuation.

On one hand, theoretically, dividend doesn't affect valuation. Since valuation comes from all the future cash flow a business can generate aka Operations cash flow minus maintenance capex, so whether a company pays dividend or not is irrelevant.

But on the other hand, dividend does affect valuation. Because of time value of money. The cash receive today is worth more than one received tomorrow. And in a lot of cases, high dividend paying stocks have been valued based on their dividend i.e dividend growth model. And it also seems to be the case that dividend paying stocks do trade at a higher multiples.

So something interesting to think about.

Think it this way, if you invest your money in a stock that earns 20% ROC (return on capital) year in year out for 30-40 years, your money will compound at 20% (assume PE doesn't change). And this assume the stock has 0% dividend. So your money can still compound even with 0% payout ratio.

Now if the same stock pays out half (50%) of what it earns every year as dividend, will you still compound your money at 20%? That depends on few factors:
1. Can you find another stock that provide a similar return i.e 20% ROC?
2. If you reinvest back into the same stock, valuation becomes another issue, what if that stock has a high valuation, if you wait, there is the time opportunity cost; if you don't wait, the your risk lowering your compound return when the stock's valuation gets rerated.

So you can imagine when you receive dividend, the company is transferring some 'jobs to you'. Because you have to make decisions when and where to invest. And not to mention there's more reason for investors to spend their dividend rather than reinvest.

But you can achieve compounding without dividend. And there is overwhelming reasons that dividend investing actually lowers compounding.

Why does dividend investing has snowball effect?

Margin is not dangerous itself, it is the overconfidence in the market that makes it dangerous

@speakup, what are you trying to say? Your statement is like "tell you a secret, I have been smoking for 80 years and I still can run a mile under 4 minutes."

Of course no one cares, so you shouldn't reply to me. Unless you've something great to say.

That's my point, does every company that earns $100 mil deserve $1 bil market cap? No.

I get what you mean with $1.5 bil revenue. But revenue has little relationship with market cap. You can have a $500 mil rev. company with $1 bil market cap as well as a $2 bil rev. company with $500 mil market cap.

I'm not quite sure what you're trying to say here. What does $1.5 bil revenue estimate has anything to do with $1 bil market cap?

Again margin compression or not is not even the issue here. It is like saying gloves companies are affected by rubber price. Of course they're. The point is Tguan is going to find it hard to earn an abnormal return because they have little to no competitive advantage, which is why their ROC sits at around 10%. And I don't see that changing for the mid-long term, which means it will take another 10 years for them to hit $1 bil market cap.

Of course I can always be wrong, but I'm interest to find out why the fair value should be $4-5 (or market cap of 630-800 mil), or PE of 11-14x, and not what it is right now?

And for the 10 years record, TG's PE ratio has only exceeded 10x once, in 2014, to 13x, because their business took a dive. Otherwise, their PE has never gone into 11-14x territory, which again simply because their ROC has remain at the same level. Of course the market can suddenly get excited on TG and push their PE into 11x or more, but is that the game you want to play? Against the odds of 10 years track record?

If you're not going to 'gamble' on the odds that the market will suddenly get excited, being the probability is relatively small for that to happen, even smaller if you're a trader with short investment horizon, then the next thing you have to look at is TG's ROC. So what's the probability for TG to improve their ROC so market can give a higher PE? Higher growth? Growth is only good if it exceed opportunity cost.

Something to think about.

And let's do a thought experiment, to forecast when will Tguan reach market cap of 1 billion. Current market cap is $450 mil, or 45% to $1 bil.

Historically, TG payout ratio is around 20-30% of total earnings, or reinvestment rate of 70-80%. And historically, return on capital has been around 9-12%, so one would expect the revenue growth rate to be 8-9%. Historical growth rate is much slower (5% +/- p.a), but net income has been a lot faster.

So if future ROC remains more or less the same, then you would expect TG to hit $1 bil market cap at around year 2028.

There was a news in 2016 (https://klse.i3investor.com/blogs/ss2020_TGuan/99307.jsp) where TG targets $1 billion market cap in 3-5 years time, or hitting that target between 2019-2021, which is unrealistic and nonsense.

And if one read the news carefully, the management explains "the market gives us a very low valuation". So he is pinning on the prospect that the market can ascribe a higher valuation aka higher P/E, then of course you can easily hit $1 bil, if suddenly the market gives you P/E of 15-20x instead of the current P/E 8x. That is why "Ang believes that a PER of 15 times for Thong Guan “is not asking too much”

Then the question comes back to why the hell is the market only giving TG 8x instead of 15x?

It goes back to the ROC of TG. Why would the market give a 15 PE when the ROC is around 9-11%? Given the logic that if Scientex's ROC is 14-15% with a PE with 13, why should market give the same PE to TG when their ROC is way lower?

So again, if TG wants to get to $1 bil before 2028 as I would estimate, lift their game, don't blame the market. Lift their ROC to increase growth rate, and market will start giving higher PE. Simple as that.

I'm not quite sure why they can't do what Scientex has done. Scientex only has a market cap of $700 mil in 2012, and their packaging business is probably smaller than what Tguan is today. So it has more to do with intention and strategy, less to do with inability. And scale is relative.

Some observation: If you pay attention to the flexible film packaging (FFP) industry, you will realised the industry is undergoing a lot of consolidation. Amcor, one of largest plastic manufacturer based in Australia (rigid and flexible) acquire Bemis, a big player in US almost a year ago. At local front, Scientex has acquired 5-6 local companies over the past 7 years, the latest one being Daibochi.

Generally, when an industry is undergoing consolidation, it is mostly because it has become too cost inefficient, cost overrun for smaller size plastic companies. And of course the ROE is become really poor. And this is apparent looking at the profit margin of plastic players in Malaysia as well as other countries.

As players started to consolidate and hit scale economies, this is going to present problems for small players like Tguan. Tguan's profit margin could be under alot of pressure because bigger players can use their lower cost structure to squeeze smaller players.

And also keep in mind film packaging is 'commoditised'. Yes, one does need to meet certain food regulations but basically no one is going to say hey I prefer Tguan's film over Scientex's film. This is also one of the reason why Scientex is moving up the value chain, from manufacturing industrial stretch film to transition over to other films like food packaging, bread packaging, and metallic BBOP packaging used for candies because those carries a better margin.

Although Tguan is spending alot on expansion, but on an absolute scale, they're gradually becoming a smaller and smaller player as the market consolidate so that is going to be something you need to think about.

And again why tech stock is cheap below 20? aka fair at 20? why not PE 10? Are WeWork a tech stock or property? Would that decide whether WeWork should be valued at 10 or 20?

Never mind. That doesn't answer the question why 10 is considered fair. Why not 10.5? Why not 12 be fair? What's the underlying principle that tells why PE 10 is fair for a stock and not fair for another stock?

If it is a 'standard', all less than PE 10 stocks are undervalued?

Any reason why PE 10 is the 'right' valuation? Why not 9? or 11? or 15?

But keep in mind the return above doesn't include the dividend payout. Dividend should add another 3% +/- to the return, or around 12.5% - 14.2% p.a, which is close to the return of capital of Scientex.

Scientex targeted $8 bil revenue by 2028 is considered achievable. If based on current's market cap premium over it's current revenue, that would mean Scientex market cap will be around $10.5 bil in 2028. All else equal (P/E unchanged), share price growth should hit 9.5% CAGR.

Based on current profit margin of 10% when $8 bil is achieved, profit for 2028 will be $800 mil +/-, at 15x, which is considered reasonable based on Scientex's ROC, that would value the company at $12 bil, or a share price growth of 11.2% CAGR.

Some context on MFRS9 - https://www.pwc.com/my/en/assets/publications/alert123-mfrs9.pdf

"One of the main criticism on the MFRS 139's impairment model is the delay in recognition of credit losses due to the need for a loss event to occur. Understandably, the biggest change under MFRS 9 would be, impairment based on expected credit losses even if a loss event has not occurred. This would result in entities needing to book in day 1 credit losses."

Why has Airasia dropped for continuos 3 quarters after this article come out?