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 :)

Dec14 Portfolio

In Dec, I brought in Chin Well into my portfolio on top of PJ Dev and Sunway. Both PJ Dev and Sunway were bought earlier for their corporate actions. 

Thinking to average down PJ Dev-WC when the price dropped a lot few weeks ago but did not make the move in the end as I don't want to enlarge the portion of warrant in my portfolio. 

Made a positive short trade on Poh Huat 

For Singapore, still the same old HB Land and CES. 

For January, continue to do more studies and will make purchase if their price dropped to my prefer buying price. 


Happy new year :)

Bye Bye 2014

Well, it's almost the end for the year 2014. 

There were happy, exciting, sweet as well as sad, stressful and disappointment occasions happened on me throughout the year. Overall, it was still a good year for me :)

Looking back on the resolutions I posted at the beginning of the year, I'm glad I did most of them. 

1) Ensure my portfolio has at least 15% annual return in realized profit at the end of 2014. 

    This is the top priority of the list and I'm glad that I manage to do it :)

2) Spare out RM2.5k monthly to enlarge my portfolio capital at the end of 2014 by RM30k. 

    Yes this too. 

3) Study and invest in Singapore companies. 

    I studied a couple of companies listed in SGX. In the end, I only invested in 2 companies ( CES & HB land, both also "follow wind". My bad, need to catch a bit )

4) To have average monthly dividend of RM400. 

    Yes achieved. But still long way to go to achieve financial freedom.

5) Read a book once per 2 months. Isn't too few? Haha

    Yes. And I want to thank my partner too for accompanied me to go library during weekend.

6) Exercise at least twice per week. 

    Yes. 2-3 times per week unless I went for travel during certain weeks. Mostly jogging but now should have a fix weekly badminton session at Sunday morning :)

7) Improve my cooking skills. 

    Yeah. I think I'm better than before and I found out that cooking is not that hard when you try and cook more. I want to thank my bro for letting me to stay at his HDB too, else there is no way I can have the chance to learn cooking.  

8) Back to my hometown at least once per month. (p/s: I currently in Sg)

    Yes yes yes. Family is important. On par with health and wealth. 

9) To propose and ROM :)

    Yes. Next is the wedding dinner. 

So that's. Time flies when you are happy, right?

Thanks God for everything. Good or bad, they are important in my journey.

It's time to make resolution for year 2015 :)

George Kent: Email Exchange with IR regarding Q3FY15

Regarding the latest quarter performance of George Kent group, I dropped an email to their IR representative and glad that they replied me few days ago. Below are the details. 


1) The revenue and net profit from Manufacturing and Trading segment for the latest quarter (Q3FY15) were lower than corresponding quarter (Q3FY14). What is the reason behind for this drop as the new contracts from Vietnam and Singapore should help to lift up its performance?

Whilst sales to Vietnam and Singapore helped to lift the revenue for Meters sales, lower OEM sales and the change in presentation of sales of scrap contributed to the lower revenue for Manufacturing and Trading segment.

2) At the third paragraph of the press release, it's written that

"For its cumulative 3 quarters of FYE2015, the Group reported cumulative revenue of RM235.9 million. Higher revenue of Meters was achieved by the Manufacturing and Trading Division, contributed by new contracts secured in Vietnam and Singapore"

From the data on the quarter report, manufacturing and trading segment recorded only RM71.8mils revenue for cumulative 3 quarters of FY2015 while recorded RM84.4mils revenue for cumulative 3 quarters of FY2014. How come the press release would stated that higher revenue of meters was achieved?

The press release commented on Revenue, not Profit. It is true that the cumulative Revenue of the Manufacturing & Trading segment is lower as highlighted by the shareholder above. However, the press release merely highlighted that Meters sales (one of the revenue sources) were higher, which is true. However, OEM sales, another revenue source within the Manufacturing & Trading segment were lower. In addition, sales of scrap for tolling purposes were no longer reported as Revenue but the profit thereof were set off against cost of sales. This change in presentation also contributed to the overall drop in revenue.

3) When will the construction works of the Phase II of Kuala Lipis Hospital begins?

The construction works for Phase II of the Kuala Lipis Hospital has begun in November 2014.

4) Regarding the order book for the construction segment, is that the group only left construction works from Ampang LRT Line Extension project and the newly awarded Kuala Lipis Hospital project?

The current order book for the construction segment consist of the Ampang LRT line, Kuala Lipis Phase II and Mengkuang dam project however; GKENT is actively bidding for other projects to replenish their order book.

5) With the current drop in crude oil price, what is the effect on the group's performance on Meters sales and Construction work tender rate?

We do not foresee any impact on the Group’s performance and tender rate.

6) During the latest AGM, Mr Tan also mentioned that the group is looking to diversify into oil & gas industry. Is that any update on this?

This is currently still in the exploratory stage as the Group is still reviewing their options.


So, the construction segment still highly depends on its Ampang LRT line extension as the contribution from the Kuala Lipis Hospital project is quite small. For its manufacturing & trading segment, I am quite interested to see how they can double their sales as mentioned by the management or only paper talk.

Regarding the venture into oil & gas as mentioned by Mr Tan during the last AGM that caused a spike, I think it's cooler than water now.