Winning System: CAN SLIM part I

I just finish read the book, How to Make Money in Stocks (4th Edition) by Willim J.O'Neil.

He created a winning system in good or bad times, namely CAN SLIM system. The system combines fundamental and technical part to screen companies & buy it at the right time. Each letter in the CAN SLIM systems stands for one of the seven basic fundamentals of selecting outstanding stocks. 

The system helps to identify companies with strong fundamentals - large sales and earnings increases resulting from unique new products or services and then buy their stocks when they emerge from properly formed price consolidation periods. 

C = Current Quarterly Earnings per Share. 

Quarterly earnings per share must be up at least 18-20% or more - the higher, the better. They should also be accelerating at some point in recent quarters. Quarterly sales should also be accelerating or up 25%. 

Compare EPS to the same quarter a year earlier, not to the prior quarter to avoid any distortion resulting from seasonality. 

Omit a company's one time extraordinary gains. 

A = Annual Earnings Increases. 

There must be significant (>25%) growth in each of the last three years and a return of equity (ROE) of >17%. If return on equity is too low, pre-tax profit margin must be strong

For turnaround stocks, look for annual growth rate of at least 5%-10%, two straight quarters of sharp earnings recovery. 

N = New Products, New Management, New Highs. 

Look for new products or services, new management, or significant new changes in industry conditions that able to drive the company move forward. 

S = Supply and Demand 

Shares outstanding plus big volume demand. Any size capitalization is acceptable in today's new economy as long as a company fits all other CAN SLIM rules. Look for big volume increases when a stock begins to move out of its basing area. 

Select companies with low outstanding number of shares. Easier to push up price since the supply is low. 

Choose entrepreneurial management rather than caretaker. 

L = Leader or Laggard. 

Buy market leaders and avoid laggards. Choose among the best two/three stocks in the respective field or industry.

Avoid sympathy stock. It refers to a laggard stock that traded cheaper to leader stock will not enjoy the valuation given to the leader stock. 

Always, without exception, limit your losses to 8% of your cost, given that you bought your stocks precisely off sound base. (Consolidation area)

I = Institutional Sponsorship. 

Buy stocks with increasing sponsorship and at least one or two mutual fund owners with top-notch recent performance records. 

It takes large source of demand (Institutional investors) to push up the price. 

Avoid over-owned by institutions as it's probably too late to climb upwards. 

M = Market Direction. 
I will have another post for this as this section is quite long


The system is different from the conventional fundamental approach. 

The philosophy of the system is to buy the stocks when they're on the way up in price, not on the way down. And when you buy more, you do it only after the stock has risen from your purchase price, not after it has fallen below it. 

Buy stocks when they're nearer to their highs for the year, not when they've sunk so low that they look cheap. 

Pay less attention to a company's book value, dividends and PE ratio. Focus more on important proven factors such as profit growth, price and volume action and whether the company is the number one profit leader in its field with a superior product. 

Lastly, you also have to acquaint yourself with charts to buy the stocks at the right time after it came out from the consolidation phase. 

Above post is abstracted from the book "How to make money in stocks". I find it quite interesting on the system but I think the figure need to be adjusted a bit in order to suit KLSE counters as I don't think the annual EPS growth must be at least 25% for 3 consecutive years. Furthermore, the company must be the leader of the industry. All this while, I always think of the growth of the market leaders are quite low or stagnant. Need to further study a bit. 

AP Oil International: Company Analysis Part I

AP Oil International Limited, is a one stop solution provider for lubrication needs. It manufactures and markets lubricants and specialty chemicals products to some 20 countries.

Some brief history. The group started as lubricant distributor in 1975, ventured into manufacturing in 1981 and listed in 2001. It acquired A.I.M Chemical Industries in year 2000 to expand into specialty chemicals who operates a chemical blending plant providing toll blending and contract manufacturing.  

The group has R&D facilities to provide customised lubricants for specific needs of customers and improve operational efficiency of cost effectiveness.

Application for its lubricants are automotive, industrial and marine industries. Did you encounter any of the lubricants produced by the group before?

The group currently operates 6 manufacturing plants. (3 for lubricants and 2 for specialty chemicals). Two lubricants plants are equipped with terminals and a private jetty.

Acquired a lubricant plant with a fully equipped laboratory through established 30:70 JV company, AP Saigon Petro in Vietnam in FY2008. The plant has an annual production capacity of about 25,000mt, products being distributed through Saigon Petro's network of about 400 petrol stations and exported to neighbouring countries.

Revenue of the group throughout the year was in upward trend but not a smooth one and dropped significantly in FY2013. Net profit was in the region of SGD4-5mils for the past 5 years.

Gross profit margin was between 15-25% while operating profit margin and net profit margin were in the region of 7%. Typical chemical manufacturer with single digit profit margin.

Dividend for the past 4 years were 0.5 cents. No increase no decrease. Payout ratio was below 20%. 

The group is in net cash position ever since FY2009.

As in AR2013, all cash, receivables and payable are denominated in Sg Dollar. 

Cash balance is so high that it contributed around half of the group’s total assets. In addition, the group liabilities mainly contributed by the shareholders’ equities, in the region of 80%. Thus, all the invested capital comes from the shareholders themselves. 

Current ratio is also high at 4 to 5 times. The group balance sheet is so strong that able to survive any potential crisis and also make any acquisitions when opportunity arises. 

The group's operating cash flow was quite strong throughout the years. In the mean time, the group only need very minimal capex expenditures yearly (~1mils). Capex/Sales ratio was less than 3% yearly. Thus, depreciation is also low accordingly.  

So, it’s not hard for the group to generate positive free cash flow year and year.

FCF/Sales was good. Averagely >5%.

Net cash flow from operation/net profit also more than 1 for the past 3 years. Very genuine cash generation from its revenue

So what to do with the positive FCF every years with the dividend payout still <20% and no borrowings? 

Keep in the bank and waiting for opportunity. 

AP Oil's control on its inventory, trade receivables and payables has been quite stable at which the cash conversion cycle recorded was between 35-55 days. It takes less than 2 months for the company to convert its products into cash through sales. 

In terms of returns, ROE was above 10%, dropped to 11.7% in FY2013 due to lower profit recorded. If breakdown using DuPont analysis, assets turnover and equity multiplier had been quite stable due to stable growth of its shareholders' equities and assets. Thus, the performance of ROE highly depends on its profit margin. 

ROIC was quite high throughout the years, it recorded 34.3% in FY2013 which is far higher than its cost of equity which is a good thing as it generated value to its shareholders on paper. 


AP Oil seem like a good fundamental, sound and stable company. Will evaluate more on next post.

Scientex: Email Exchange with IR (01/15)

After the group released its first quarter report for FY2015, I dropped an email to their IR for some enquiries. They replied back and seem like the strengthening of USD may do more harms than good to the group. However, the increase in production capacity, decline in raw material price and higher margin should help to can the loss in foreign exchange

Below are the details of the email. 

1) Operating profit margin from manufacturing segment dropped from 6.12% in Q1FY14 to 4.59% in Q1FY15. What is the reason behind for this drop in operating profit margin and is it temporary?

A: 1Q15 operating margin drop was mainly due to product mix in the manufacturing segment, where we adopted a market penetration strategy to gain market share in the consumer packaging sector in South East Asia. In the broader sense, we foresee this to be a temporary phenomenon. On the whole, we see continued strong demand in the region.

2) The group made a provision for unrealised foreign exchange loss of approximately RM5.0 mil in Q1FY15. Which currency is that and why the management concluded that the group will experience a potential loss? What are the precaution steps to be taken to prevent such circumstance from happen again?

A: Most of our loans are in USD which works as a natural hedge for our export sales in USD. For the moment there will be no change to this policy.

3) With the recent drops in crude oil price which directly reduce the chemical material cost, to what extend the group is benefit from this? Does the group foresee requests from customers to reduce the selling price due to the drops in material costs?

A: For consumer packaging, we typically deal with manufacturers who sell to end-consumers, and contracts are negotiable annually. Therefore Scientex will benefit from improved margins in this segment. As for selling price reductions, there is more value-added components involved (e.g. printing, slitting, bagging) which enhances our overall margin.

For industrial packaging, the price adjustments are done monthly, and there are fewer value-added functions compared to consumer; so the margin increase isn’t as substantial.

4) Is the group's management on inventory FIFO type? Any time lag between commodity price and the group's material cost?

A: Typically FIFO, and the time lag is minimal.

5) Regarding the weakening of RM against USD recently, I checked back the foreign currency sensitivity analysis in AR2014, page 117. The statement is as below,

" (iii) The Group’s sales less cost of sales and other items of expenses denominated in USD during the financial year ended 31 July 2014, offset against the Group’s exposure in USD in the statement of financial position at the end of the reporting period for a 3% change in foreign currency rates. A positive number below indicates a profit where the Ringgit Malaysia strengthens 3% against the USD. For a 3% weakening of the Ringgit Malaysia against USD, there would be a comparable impact on profit or loss, the balances below would be negative."

For a 3% weakening of Ringgit Malaysia against USD, there will be impact on loss of RM2.59 mils on the group's net profit after taking consideration of all the group's sales, cost of sales, other expenses and borrowings that all denominated in USD currency.

Is my interpretation correct? Understand it's just an estimation.

A:  Yes.

Let's say RM will weaken around 10% against USD in FY2015, the estimated loss is around RM8mils on the group's net profit based on the foreign currency sensitivity analysis in AR2014. 

It's roughly around 5.4% loss ( RM8/RM148) on the group's net profit in FY2014. 

Is it acceptable for you? 

Luxchem Corp: Study the Effect of Crude Oil Price

It’s noted that Luxchem Corp. has 2 segment divisions, namely trading and manufacturing. With the recent drop in crude oil price, it prompt me to look at some sectors that will benefit from the decline in oil price.

Obviously, Luxchem is one of them.

Luxchem does not manufacture nitrile, it sources the chemical from Zeon Chemicals of Japan and supplies nitrile to glove producers. I do not have any info of any local competitors who supply the same chemical to the industry and also which glove producers are their customers. However, Kossan for sure is one of them due to their close relationship. 

For its trading department, the management once said that their product selling price depends on the material price they bought plus certain margin. When the raw material price changes, they can adjust the selling price of their products. But to me, said is easier than done, it’s not easy to transfer the cost to the customers especially when competition takes place.

I tried to find some linkage between crude oil price, USD/MYR rate and Luxchem’s sales for the past few years. Below are historical price chart and Luxchem data. 

Financial year of Luxchem is at the end of December.

Year 2008: Crude oil price started the year at USD90, up till USD140 at mid before crushed to USD45 at the end of year. USD increased from 3.10 to 3.7 peak. Revenue increased 10% compared to year 2007.

Year 2009: Crude oil price started the year at low USD45 and rebounded to USD70 before moving up gradually to USD75-80. USD dropped 3.7 to 3.2. However, revenue was down closed to 8%.

Year 2010: Crude oil price was quite stablished, hovering between USD70 to USD90. USD dropped from 3.3 to 3.05. Revenue up 31% with sales from local increased tremendously.

Year 2011: Crude oil price was little bit fluctuating, gone up to USD115 from USD95 in the beginning of year, then dropped back to USD80 before end the year at around USD100. USD stabilising around 3.0. Revenue up around 25% with sales mainly from local. 

Year 2012 & 2013: Crude oil price was stabilising and forming a convergence between USD88 and USD108. USD stabilising around 3.1 before moving up to 3. 3 at year end. Revenue for 2012 & 2013 remained flat.

The relation is not that direct since it still involved other factors (Sales growth, new markets etc). But one thing for sure is the gross profit margin is in declining mode throughout the years. Up to Q3FY2014 this year, the gross profit margin dropped to around 7.1%. 

When breakdown into segments, the operating profit margin of the trading segment was declining.

Perhaps there was entry of new competitors that eat into their market share

Perhaps the group cannot pass over the cost to the customers

Perhaps the group locked down or signed mid term contract with the suppliers/customers for a certain fix price. 

I have really no idea about that. 

For the manufacturing department, raw materials such as petroleum based styrene monomer and glycol are used to manufacture unsaturated polyester resins (UPR) and they are subjected to oil price.

Above operating profit data were taken on external sales which eliminate the inter segment sales.

For manufacturing segment, it’s easier to observe the effect of the crude oil price changes. Operating profit margin was at the highest at year 2009 & 2010 when the oil price was in USD42 (beginning of 2009) to USD90 (end of 2010) per barrel while USD also dropping from USD3.70 (beginning of 2009) to USD 3.10 (end of 2010). Both work in favour for the segment.

For year 2011-2013, the gradual increase in USD currency rate and crude oil price cause the operating profit margin dropped to around averagely 10%.

Moving forward, the crude oil price may not have much significant effect on the trading department, albeit I foresee their operating profit margin will keep on declining.

Perhaps, will we see the return of 15-20% operating profit margin from the manufacturing segment next few quarters?

The increase production capacity in year 2014 may help too.

 So, perhaps Luxchem, a good buy? 

Homeritz: FY2014 annual report update

Homeritz just released its FY2014 annual report last week. So I take time to update my data base and also update in my blog here. 

I guess everyone knows how good the company is. 

Revenue increased 12.6% and net profit increased 33% compared to FY2013. 

3 years of positive and improving free cash flow

FCF/invested capital is more than 30% for the last 3 years, even recorded 54% in FY2014. That is awesome. The cash generability is just too good. 

Net cash position all this while

Cash conversion cycle less than 100 days

ROE ~23

ROIC ~45

What more can I say? 

In terms of valuation, PE of 9.4 may not sound like a good entry point. I think Homeritz has the highest PE among the industry. Didn't really find the info

However, but using enterprise value multiple valuation which include its debt, excess cash, minorities and using operation profit as denominator, the earning yield is still 16%, which far exceed the WACC of 10.9% I calculated. 

Due to its strong cash flow, FCF yield is good at 11.3% currently. 

P/B ratio is 2.1 which I think is unsuitable to use to evaluate manufacturing companies.  

Base on AR2014, more than 99% of the group's sales were from exports. Weakening of RM against USD may do them a favour, but I think the group also purchase the raw material in USD too. 

There was a new customer who contributed more than 10% of the group revenue. So the 3 customers contributed around 36% of the group revenue. 

Base on the foreign currency risk sensitivity analysis as displayed in AR2014 which focus on the effect of currency changes on the group financial assets & liabilities, the 5% strengthening of USD against RM will increase their PAT by around RM779k. 

Both Fong Siling and Koon Yew Yin also in the boat. Somemore, using margin account. 

Looking back, the share price once dropped to somewhere around RM0.68 during October sell-down which provided a good opportunity to accumulate such a good and stable counter. 

But I didn't make the buy call. It's always easier to look back on the history share price and think "what if .."

Homework not done properly. Mental and emotion also not ready. It's not easy to buy when there is a sell down. Experience needed :)

Chin Well: Email Exchange with IR (01/15)

I dropped another email to Chin Well IR to follow up on my earlier enquiries. Below are the details. 

Since the group intend to improve the DIY segment contribution for FY2015 from 11% in FY2014, what kind of target the group is looking to achieve in terms of revenue contribution?

A: Targeting 30% in 3 years

What is the rough PBT margin for DIY segment, normal fasteners and wire rods respectively? 

A: We do not disclose each segment’s margins due to competitive reasons; suffice to say gross margins are about 15-20% across all products.

It's noted that the group's inventory turnover is quite high and almost half of the inventory is finished goods. Is that any reason why the group need to keep such a high level of finished goods in hands? Does it affected the quality (corrosion) or it will become obsolete? 

A: This is mainly to cater to local market demand, where we are able to make next-day deliveries for orders made before 12 noon. Obsolescence and corrosion are no issues.

The group announced to acquire the remaining 40% stake in Chin Well Fasteners (Vietnam) not owned by the group for RM47mils. Is the acquisition going to be completed at Dec 2014?

A: We are awaiting Bursa’s approval for the share issuance portion.

Since one of the terms of the acquisition is to issue 27mils new shares at RM1.45 to shareholders of Asia Angel, is the price going to be adjusted due to the enlarge paid up capital and ordinary shares? 

A: Only EPS would be affected, i.e. adjusted upwards in tandem with higher profits attributable to shareholders.

Based on the sensitivity analysis for foreign currency risk as published in AR2014, a 10% weakening of the

RM against the USD currencies would have decreased PBT by around RM2.1mils. Is my interpretation correct?

A: Yes, but please take note that forex risk in USD will be set off against forex risk in Euro as both have opposite effects.

There are some local furniture players in Malaysia also shifted part of their operation to Vietnam due to lower labour cost. However, it's noted that the labour wages in Vietnam is increasing recently as was reported in their quarter reports and caused their profit margin dropped. Is the group's operation in Vietnam experiencing the same problem? What steps had been taken? 

A: Favourable product mix of DIY products mitigates the labour cost.

I'm believe Tong Herr Resources group is one of your competitors, but their main products are more to stainless steel fasteners. Is Chin Well exhibit any competitive edge over Tong Herr Resources? 

A: We manufacture different types of fasteners that have different applications. Tong Herr produces stainless steel fasteners that are mainly for indoor applications; Chin Well makes carbon steel fasteners for outdoor applications. Therefore our customers don’t mix, and we do not compete against each other.

Welcome 2015 & Resolutions

Here comes with beginning of the year of Goat, 2015. 

New year, new targets

• First one of course still the same and utmost important, to have at least 20% annual return in realized profit at the end of 2015.

• Study and invest Singapore and Hong Kong companies. 

• Average study one company per week. Currently have 63 companies in my data base, so target to add another 52 companies in my record. 

• Update my blog averagely at least 2-3 posts per week.

• Learn some basic technical skills to aid my entry and exit price. Will allocate some capital for short trades. 

• Read a book once per 2 months. Same as 2014. Haha

• Keep exercise twice per week.

• Be with my parents once per month. 

I left out the monthly capital injection into my investment fund as one of the targets because I will use the money for my wedding which probably scheduled some time between end of 2015 to first half of 2016. 

And I also don't want to set a monthly dividend target as based on my current capital, I would prefer capital appreciation more than dividend payment. So, bye bye to defensive stocks. 

So, that's, similar to last year. Haha

Wish everyone have a good & prosperous year ahead

It's a "To Do List" for the whole year, not only January okay :)