Yinson, could you answer my few questions?

Dear Yinson IR (Insage)/Management and Cheah Chor Sooi,

After reading this article: Don’t compare us with Serba Dinamik, I have two (2) questions as below:

1. Could you try to explain clearly on the non-recourse debt of RM 3.92 billion, IF possible explain in a layman term? By the way, what is the "sic"?

[1] The above article: "Among others, Yinson disputed claims by calvintaneng by clarifying that it is important to note that the company’s RM3.92 bil of debt “is non-recourse to Yinson, ie Yinson does not have a guarantee on the repayments of these loans” as highlighted in its annual report for the financial year ended January 2021”.

“The lenders of these projects would typically instead seek repayment solely on the cash flow of the projects or the parent company guarantee of (sic) or clients,” Yinson further pointed out."

[2] Page 94 of Annual Report 2021:  "Although Net Gearing Ratio has increased, debt levels remain manageable. As at 31 January 2021, RM3,919 million of loans and borrowings are project financing loans for FPSO JAK and FPSO Helang, which are structured to ensure smooth repayment over the course of the firm charter period. Project financing loans are non-recourse to Yinson once operational with Yinson's guarantee being released from the project financing loan, which minimises the risk of these loans to Yinson’s liquidity. The project financing lenders are only entitled to repayment from cash flows of the projects the loan is financing, and not from any other assets of Yinson. As at the issuance date of this Report, the project financing loans for FPSO JAK and FPSO Helang are non-recourse, where the project financing loan for FPSO Helang became non-recourse on 3 February 2021. Had the project financing loan for FPSO Helang become non-recourse on 31 January 2021, the Group's Gearing ratio and Net Gearing ratio would have been 0.54 times and 0.03 times respectively."

BUT, from the Note 32 to Financial Statements (may refer to the below extracted data),  it shows that a total debt of RM6.11 billion, in which mainly consists of the SECURED term loans of RM4.92 billion. 

On the other hand, from the above statement published by Yinson IR (Insage)/Management or Cheah Chor Sooi, it seems that the non-recourse loans of RM3.92 billion is a unsecured loan with Yinson who does not have a guarantee on the repayments of these loans. Not even a collateralised loan? But inside the book, the long-term UNSECURED loan is accounted for RM0.397 billion...How so?

2. Would it be misleading by using the total order book of RM40.26 billion to claim that it's more than sufficient to repay debts, operating costs and pay dividends over time? Is the order book (just top line only, right) be directly contributed to the bottom line? Won't the order book being cancelled or terminated? It sounds like no risk at all by running this kind of business.

Let's put the order book into perspective as below table:

"“For simplicity, (Yinson’s) total order book remained at US$9.75 bil (RM40.26 bil) as of March 31, 2021 which is more than sufficient to repay debts (net debt RM4.1 bil), operation cost and pay dividends over time,” asserted Yinson."

At last but not least, Serba Dinamik has also secured a lot of contracts and bringing the current order book to RM18.50 billion...

Ray Dalio: World moving to new order with China on top

Excerpts of the interview with the co-chairman of Bridgewater Associates (the world's largest hedge fund), Ray Dalio have been edited for brevity and clarity.

Q: How do you view the coronavirus pandemic from a historical perspective?

A: The virus triggered a surprise economic downturn, but a downturn would have inevitably come for some reason because they always do, and there was great vulnerability before the virus. Central banks had run out of power to continue the normal debt cycle in countries with a lot of debt and enormous wealth gaps. 

This period is most similar to between 1930 and 1945. Like then, central banks and governments are desperately trying to fill the income and balance sheet holes with newly created money. Individuals, companies and countries that don't have much savings are going bankrupt. For basically the same reasons as existed in the 1930-45 period, this will change the global geopolitical balance of power and the world order.

There will be clashes over wealth and power. Within countries, there will be more questioning of the merits of capitalism versus socialism. Between countries -- especially between the U.S. and China -- we will see more conflict over wealth and power.

Q: How will the U.S. fare from this shift in global power?

A: In the short run, the U.S. has the great power of being able to create the world's currency -- dollars, which are desperately needed. When there is great demand for the currency because of the large amount of dollar-denominated debts that needs to be serviced, that gives the U.S. great power, as is the case now.

Once these debts are wiped out through defaults or the printing of dollars in a few years, then we will see the fall in the value of the dollar as a reserve currency. That would greatly weaken U.S. economic power. History has shown that all empires rise and decline with their debts and their currencies. This is very similar to the experience of the British and Dutch empires and their reserve currencies.

Q: After the U.S. declines as an empire, do you think China will be the next empire and the yuan will become the world reserve currency?

A: Yes, but this is happening in an evolutionary rather than a revolutionary way. While China will likely be the most important world economy in not too many years, the U.S. will likely be a rival power for quite some time. How the U.S. and China deal with that rivalry will be hugely important for the world. 

As for a reserve currency, that will evolve slowly because reserve currencies have significant lag times in their powers. And in order to have a world reserve currency, one has to have open capital markets. China will evolve into being more important over the next 10 years or so.

Q: How have you stress-tested your investment strategy over the events of the recent past?

A: I have found that everything happens over and over again, and that reality works like a machine driven by understandable cause-effect relationships. What is happening now has happened many times before for essentially the same reasons, though never exactly.

For that reason, we have timeless and universal investment principles that we have tested going back to 1800. That doesn't mean we catch everything, because we don't. We didn't catch the pandemic's impact, but we have caught most big things.

Q: Do these stress tests include historical events like the Spanish flu pandemic?

A: I missed the Spanish flu pandemic because it happened in 1918 at the same time as a sharp fall in economic activity right at the end of World War I. I mistakenly assumed that downturn was exclusively a postwar adjustment. Until I saw this coronavirus pandemic, I hadn't seen the economic impact of a pandemic happening. I'm kicking myself for missing that.

Q: Could this coronavirus be an event that you will use to observe the economy and markets in the future?

A: Yes. We're going back and building various acts of nature and climate change into our decision-making system including pandemics, droughts and floods.

I've found the importance of acts of nature in breaking economic and political systems. They have been the cause of many stresses and many mighty crises. If you have an over-indebted economy, large wealth gaps and an act of nature -- those three things are a most devastating combination.

Q: If there wasn't so much debt before the pandemic, would the economy have suffered lighter damage?

A: Much lighter. If you look at what differentiates countries and people and companies, it almost entirely depends on how much savings they have versus how much debt they have. Those with strong balance sheets will be the winners. Those with savings will win, and those with debt will be the most hurt.

Q: What do you think of the economic stimulus efforts in response to the pandemic? Are they sufficient?

A: Governments have done a lot to create money and credit, which were needed and will have their own problems. Governments and central banks will need to do more to create the money and credit to fill holes in balance sheets and income statements. At the same time, that will diminish the value of money and debt assets.

Q: Do they need to do more?

A: There are different circumstances. Emerging markets with poor balance sheets that cannot print the hard money will experience credit problems and inflation because they will print local currencies. They will need enormous financial help, or they will collapse. Everyone needs strong balance sheets and reserve currencies to survive this, because that's what is widely accepted.

Q: Do you expect the world order will be transformed after the pandemic subsides? What will happen to capitalism?

A: I believe we will see a changed world order. We will go through a period of fighting over the merits of capitalism and socialism, and there will be a significant redistribution of wealth. I worry that this will be similar to what happened in the 1930s, with modern-day versions of communism and fascism.

The struggle to restructure the world order will last probably about five years. Then the winners and losers in the new system will be clearer, and we will move in a more orderly way. Still, these restructurings are temporary adjustments. The big picture is that human adaptability and inventiveness are the greatest force, so better times will follow this restructuring.

Q: Do you think that new order will be something very beneficial to the U.S.?

A: Both the absolute and relative position of the United States will depend on whether it can take care of the fundamentals that make countries strong. In the short term, there will be a big debt restructuring, but that will pass. In the long run, the quality of education and civility of its people, inventiveness, work ethic, respect for law and other such things will matter most.

Chances are that living standards will rise, but more slowly than that of China's. What happens depends largely on how the U.S. and China approach their disagreements. If they approach them badly, both will suffer.

We are seeing classic conflicts over wealth and power, both within countries and between countries. History has shown us that the outcomes depend largely on whether the parties involved handle them peacefully or violently.

Source:

1. https://asia.nikkei.com/Editor-s-Picks/Interview/World-moving-to-new-order-with-China-on-top-Bridgewater-s-Dalio

Warren Buffett's Failures

Makes failures your teacher, NOT your undertaker.

I would like to mark down the failures that I could learn from others, especially from Warren Buffett, the Oracle of Omaha. 

1. 1962. First invested in Berkshire Hathaway when it was a failing textile company. He thought he would make a profit when more mills closed, so he loaded up on the stock. 

Later, the firm tried to chisel (out of sth: to get money or some advantage from sb by cheating them) Buffett out of more money. A spiteful Buffett bought control of the company, fired the manager and tried to keep the textile business running for another 20 years. Buffett estimated that this vindictive move cost him $200 billion. 

Investment advice. Don't let emotions factor into financial decisions.

2. 1972. In his 2007 letter to shareholders, Buffett explained that he passed up the chance to purchase the Dallas-Fort Worth NBC station around the time he bought See’s Candies in 1972. He turned down the offer despite wholeheartedly trusting the person who made it, knowing there was excellent growth potential and it would require essentially no capital investment.

Reminiscing about the missed opportunity, Buffett pointed out that the station earned $73 million pre-tax in 2006, and at the time he wrote the letter, it was valued at $800 million.

Investment advice. To take advantage of an opportunity when it comes knocking.

3. 1975. He purchased Waumbec Mills -- another New England textile company. 

“The purchase price was a bargain based on the assets we received and the projected synergies with Berkshire’s existing textile business.”

Investment advice. When making investments, if at first, you don't succeed, move on to a new strategy. 

4. 1989. Back in 1989, airline stocks were gaining popularity and none more so than USAir. (The company changed its name to US Airways in the 1990s and later merged with Amercian Airlines.) Buffett bought into this airline, which had achieved tremendous revenue growth since its founding 50 years earlier.

Buffett purchased $358 million of USAir preferred stock with 9.25% dividend, mandatory redemption in 10 years, and right to convert into common at $60 a share. The investment quickly turned sour, as USAir didn't achieve enough revenue to pay the dividends due on his stock, and approached bankruptcy. Only down to a stroke of luck, Buffett was able to offload his shares at a small profit at a later date.

Buffett still regrets his first foray into the airline industry to this day. In a 2007 letter to shareholders, he stated that he bought the stock as a security, but would never do it again. The airline industry, in general, is fickle because of a lack of customer loyalty, massive competition, and customers' tendency to choose the cheapest option. As a whole, airline investments rarely produce positive returns for investors.

US Airways didn’t join the ranks of failed Warren Buffett stocks, but he does regret his 1989 purchase of $358 million worth of shares in the now-consolidated airline.

The shares never appreciated, but after weathering turmoil, Forbes reported that Buffett likely got all his principal and dividends back. Buffett credited the airline’s rebound to both his and Munger’s exit from the board and the arrival of CEO Stephen Wolf. He praised the latter for saving what could’ve been a very costly investment. 

Investment advice. To research every investment before buying, so you know exactly what you're getting into —— whether you're a beginning investor or a longtime pro.

5. 1993. He purchased Dexter Shoe Co. for $433 million —— It cost investors $3.5 billion at the time, this was 1.6% of Berkshire Hathaway's net worth.

Investment advice. A company is at its best if it has a viable competitive advantage. If there’s no solid reason for customers to continue patronising a brand, it’s likely destined for failure.

6. 1998. The 1998 purchase of General Reinsurance (Gen Re) was initially not the best move for Warren Buffett’s investment strategy. Buffett turned things around, but he does have some regrets. 

In his 2001 shareholders letter, he offered more insights on the reason Berkshire Hathaway took such a large initial hit on the purchase. This included enduring underwriting losses, overlooking the possibility of terrorist attacks and failing to realise Gen Re didn’t have enough in reserve to pay losses from old policies. Berkshire Hathaway realised $800 million in losses from the latter in 2001.

“After some early problems, General Re has become a fine insurance operation that we prize,” wrote Buffett in his 2016 letter to shareholders. “It was, nevertheless, a terrible mistake on my part to issue 272,200 shares of Berkshire in buying General Re, an act that increased our outstanding shares by a whopping 21.8 percent. My error caused Berkshire shareholders to give far more than they received (a practice that — despite the Biblical endorsement — is far from blessed when you are buying businesses).”

Investment advice. [1] To double-check the numbers and run them by several trusted advisors. You should always know what a worst-case scenario could cost you. [2] To fix your mistakes the right way and enjoy the rewards of success.

7. 2006. Buffett has owned a stake in the company since he bought ConocoPhillips shares back in 2006. Phillips 66 shares was spun-off from that company in 2012, giving Berkshire its first 27 million shares. 

In his 2008 shareholders letter, Buffett wrote, “Without urging from Charlie or anyone else, I bought a large amount of ConocoPhillips stock when oil and gas prices were near their peak. I in no way anticipated the dramatic fall in energy prices that occurred in the last half of the year.” 

Buffett spent just over $7 billion on 85 million shares of ConocoPhillips, but its market value at the time of the letter was only about $4.4 billion.

Investment advice.  To emphasise the importance of consulting people you trust before making a major investment. Sometimes, getting a different perspective is the best way to see the big picture.

8. 2007. Berkshire Hathaway purchased $2.1 billion of these Energy Future Holdings bonds that were needed to finance the TXU leveraged buyout.

“About $2 billion of the debt was purchased by Berkshire, pursuant to a decision I made without consulting with Charlie,” Buffett wrote, referring to Charles Munger, Berkshire Hathaway vice chairman.

Investment advice. Always run big decisions by a business partner or trusted confidant before diving in headfirst.

9. 2011. Berkshire Hathaway Inc. said Monday it will buy chemical maker Lubrizol Corp. for $9 billion, in its latest expansion into the industrial sector, where the billionaire investor has been seeking new avenues for growth. 

In 2011, Warren Buffett and Berkshire Hathaway were under fire after it was revealed that David Sokol, then-chairman of several of the firm’s subsidiaries, pitched Lubrizol Corp. to Buffett as a potential takeover. The problem was that Sokol owned stock in the chemicals company. 

Berkshire bought Lubrizol for roughly $9 billion, and Sokol earned a $3 million profit. Since he hadn’t disclosed his stock ownership to Buffett, this violated insider-trading rules. 

Buffett didn’t realise his mistake immediately, but at the 2011 Berkshire Hathaway annual meeting, he admitted that he should have probed deeper with Sokol.

Investment advice. Not to be overly trusting. Ask more questions than you think are necessary, because you can't be too careful when your reputation is on the line.

10. 2012. Berkshire Hathaway owned 415 million shares of UK-based grocer Tesco at the end of 2012. In 2014, the grocer overstated its profits and shares tumbled. 

“An attentive investor, I’m embarrassed to report, would have sold Tesco shares earlier. I made a big mistake with this investment by dawdling.” —— He admitted the move cost the company a $444 million after-tax loss. 

Investment advice. To make decisions promptly.

11. 2015. In his 2015 shareholders letter, Warren Buffett highlighted the depth of Berkshire’s manufacturing, service and retail operations, noting that some businesses in the firm’s portfolio have poor returns, and he considers those serious mistakes. 

“In most of these cases, I was wrong in my evaluation of the economic dynamics of the company or the industry in which it operates, and we are now paying the price for my misjudgments,” he wrote. “At other times, I stumbled in evaluating either the fidelity or the ability of incumbent managers or ones I later appointed.”

Investment advice. Not to jump into investments blindly. If you're not intimately familiar with a company, pass on it or seek advice from a trusted expert.

12. 2017. Buffett was asked why he’d never bought stock in Amazon. He admitted he didn’t have a good answer. 

“Obviously, I should have bought it long ago, because I admired it long ago,” he said. “But I didn’t understand the power of the model as I went along. And the price always seemed to more than reflect the power of the model at that time. So, it’s one I missed big time.”

Warren Buffett’s investments never include businesses he doesn’t understand, which is both good and bad. Backing companies blindly is not a smart move, but shying away from them isn’t wise, either.

Investment advice. Partnering with someone whose strengths differ from yours can help you avoid missing out on great opportunities. 

13. 2017. Warren Buffett’s portfolio doesn’t include Google stock, and that’s something he regrets. At the 2017 Berkshire Hathaway annual shareholders meeting, he told investors he made a mistake by not purchasing shares in the tech giant years ago when it was getting $10 per click from Geico — a wholly owned subsidiary of Berkshire. 

Buffett has shied away from tech stocks in the past because he didn’t understand their models. Still, he said he should have figured them out because he was effectively a client of the Google ad business. 

Investment advice. Not to overlook investment opportunities right under your nose.

14. 2020. Warren Buffett says Berkshire Hathaway dumped all of its holdings in the airline sector, painting a grim picture of the industry that has been badly hurt by the COVID-19 pandemic. 

“I was wrong about that business,” Buffett said, speaking on Saturday in Omaha, Neb., at Berkshire’s annual shareholder meeting, which was held virtually due to the deadly disease. 

Buffett explained at the meeting that he thought he was getting roughly 10% of the four largest airlines for an attractive price. He also owned stakes in American Airlines Group Inc. and United Airlines Holdings Inc. Collectively, those airlines, represent some 80% of the passenger miles flown in the U.S., Buffett said.

But he determined recently that his decision, in light of the emerging pathogen, was ill-advised and he sought to unload his position: “I just decided that I’d made a mistake.”

Source

1. https://www.cnbc.com/2017/12/15/warren-buffetts-failures-15-investing-mistakes-he-regrets.html

2. https://www.marketwatch.com/story/buffett-dumps-entire-airline-stake-saying-the-world-changed-for-airlines-2020-05-02

3. https://www.fool.com/investing/2019/10/14/3-stocks-warren-buffett-was-wrong-about.aspx

Fund Manager| Peter Lim Tze Cheng

I am writing to introduce a Malaysian fund manager, Peter Lim Tze Cheng by referring to some of the articles that I read online. 

Excerpts:

One of the reasons why Lim Tze Cheng became CEO of Inter-Pacific Asset Management Sdn Bhd (InterPac) was to start a fund that could create a positive impact on society. The InterPac Social Enterprise and Social Responsibility Fund was introduced in May.

This does not come as a surprise as Lim has been donating half his salary to charity since 2007. While he can afford to have a luxurious life, he still drives a scooter to work every day and lives in a modest apartment.

“I would like to have a Mercedes-Benz and live in a bungalow; they are nice. But are they necessary? Most of my money goes to charitable causes. I don’t keep much for myself,” says Lim.

He has always been involved in charitable causes, partly due to his humble family background. He was born and raised in Muar, Johor. His father was a bus conductor who worked on the buses that travelled between Muar and Batu Pahat.

Lim, who is the youngest of six siblings, started working in factories when he was 13 to help reduce the family’s burden and buy the things he wanted. In university, he started a business where he imported stationery from China and sold it to the cooperatives in schools and universities to pay for his education and living expenses.

“Anything I wanted back then, I had to earn it myself. Nothing was handed to me by my parents. That is also how I have been throughout my life,” says Lim.

Another incident that contributed to his involvement in charitable causes is the fact that his elder brother was a drug addict and he had seen how his brother asked for money from his parents to buy drugs. “I can tell you that my eldest brother was a drug addict since I was a year old. What you read in the newspapers or see on the big screen about drug addicts is true,” he says.

Because of this, Lim has always wanted to do something more for society. When he joined InterPac, he seized the opportunity to launch the Social Enterprise and Social Responsibility Fund — the first of its kind in the local fund management industry.

The fund is a wholesale equity fund that invests in Asean markets. The initial minimum investment amount is RM300,000. There is an annual management fee of 1.5%, but no sales charge.

Every year, the fund disburses 20% of its returns to its investors so that they can donate the money to charity. The remaining 80% is reinvested in the fund.

“I tell investors to draw a 3km radius from where they live and there is bound to be an orphanage or charity home. They can donate the money by buying rice for such charities, or fixing the roof or kitchen, or doing something bigger like building schools,” says Lim.

The fund has raised RM7.6 million so far. His goal is to raise RM100 million. “To me, this is my dream come true. I have hung photos of various religious leaders on the walls of my office. It is a reminder to grow the fund and continue doing good for society.”

Some of his sharing I found that was quite useful and knowledgeable and also a published book that he wrote to guide the layman on how to invest unit trust or shares. I hereby compile the information gathered from the articles that I read online in the summarised form.

Summary

1. Choose a handful of stocks you know are set to boost profit and hold out until they rise. If you get the first part right, and can resist the temptation to react to daily events or try to time the market, the rest of the job should, essentially, be dull -- all you have to do is ignore the noise.

2. Concentrated Strategy: Lim pursues a concentrated approach, never holding more than 40 stocks, with most holdings usually making up at least 3 percent of the portfolio. Some years, he says, he won’t add any new companies if he can’t find good ideas, preferring to double-down on existing picks.

3. Lim was attracted to the company (Inter-Pacific Asset Management controlled by Tan Sri Vincent Tan) because it gave him a chance to set up a social enterprise fund, an ambition he had for 10 years, he said.

4. Despite his success, he says his real excitement is in making money for charity. He gives half his salary to a non-denominational non-profit organization that helps the country’s needy. His social enterprise fund returns 20 percent of its gains to investors for donation to charitable causes.

5. The global markets did not totally collapse and after 2009, they embarked on a long recovery period and have not looked back since. Lim says he knew this would be the case based on the data he had read on the level of cash US banks had deposited with the Federal Reserve at the time.

“The Fed published a quarterly report on the total cash US banks deposit with the central bank. I remember that in the fourth quarter of 2008, I read one of these reports and noted that the banks had a high level of cash deposited with the Fed. I decided to do more reading and concluded that it was not a real crisis.

“If the financial system has no cash, that is a real crisis. But if your banks have a high level of cash sitting with the Fed, the so-called ‘crisis’ is due to a lack of liquidity because banks are not giving out loans.

“This is not a real crisis, but a short-term phenomenon. That is why when the Fed started to lower interest rates and the banks were forced to give out loans, the market recovered. That is what gave me the confidence to buy during the crisis. Not many people took note of the reports because of the bad news reported in the media and there were fears that the market would crash.”

6. Lim Tze Cheng talk about his mentor, Tan Teng Boo.

Lim attributes his ability to cut through market noise and remain true to his convictions when making investment decisions to his mentor Tan Teng Boo, the founder, CEO and managing director of Capital Dynamics Group. He had joined Capital Dynamics as an analyst in 2003 after a short stint as an accountant at BDO Malaysia.

“It was very tough. Every month, we lost a few analysts. They lasted only about three months on average. Over the six years I was there, we lost about 60 people a year. At one point, I even plotted a chart and found that the peak month [for analysts leaving] was April,” says Lim.

It was tough because he had to conduct thorough research on the entire value chain of an industry before visiting a company. He also had to meet up with all the relevant regulators to understand the industry’s regulations.

Then, he had to talk with the representatives of government agencies such as the Malaysian Investment Development Authority to gain knowledge of government incentives and foreign investment flows. He also had to meet with the competitors of a particular company as well as its suppliers.

“Company visits were the last thing we were allowed to do and many analysts did not have the patience to go through the process,” says Lim.

More importantly, he had no access to brokers’ reports nor a Bloomberg terminal, which are important sources of market information. This was due to the cost-saving measures implemented by the firm. Another reason was to allow its analysts to make independent judgement calls and produce their own research reports instead of being affected by what was being said in the market.

“We did not have any Bloomberg [terminals] and all the brokers’ reports went to Tan. At the time, I did not even know there were brokers’ reports. This means that if you want to analyse something, you had to analyse it from scratch as you do not know what kind of calls the other brokers are making [about the companies you are looking at]. The independence is really there.”

Lim took six months to produce his first analyst report. Even then, he could not obtain Tan’s approval easily. “If you talked nonsense, he would challenge you. This was partly because he had access to brokers’ reports. But at the time, I was young. I also did not know he had access to this information and wondered how he knew all these things,” he says.

Despite the challenges, Lim appreciated Tan’s patience in allowing him to take his time to learn things. “He is very patient and does not compromise. That is one thing I admire about him. It is the same when it comes to investments. He really does not care what the market is saying, whether it is a ‘buy’ or ‘sell’. If he likes a stock, he can wait years to buy, sell or hold on to it. His patience is really amazing and I respect him for this. That is one of the reasons why I worked for him for six years,” he says.

7. For now, Lim’s favourite sector is technology due to its growth potential. He likes test companies that utilise technology to conduct tests on electrical and electronics (E&E) components such as light-emitting diode (LED) lights and smartphone chips. Many local companies belong to this category.

8. “You would ask why as smartphone sales have not seen a huge increase. But smartphones are not the biggest consumer items globally — it is cars. According to statistics, 400 million smartphones and 90 million cars are sold every year. But what is the price of a smartphone compared with that of a car?”

9. Globally, cars are becoming more electronic, says Lim. Not only are regular cars using more E&E components, there is the emerging trend of hybrid, electric and autonomous cars.

Hybrid and electric cars allow drivers to save on fuel costs while contributing to a greener environment. Tesla has just introduced the first affordable autonomous car, the Model 3, which costs US$35,000 each.

“Cars today use more E&E components than they used to. And even more will be used in the future. So, it is the car industry that has been causing the surge in demand, not smartphones,” says Lim.

10. Companies he likes include Elsoft Research Bhd, one of the core holdings of his funds. There are also Vitrox Corp Bhd, which conducts visual testing for E&E components such as LED lights, and Aemulus Holdings Bhd, which conducts testing for wireless chips used in smartphones and other devices.

“[Local companies] are quite strong in the testing business and they are supplying their services globally. These companies will be the beneficiaries of the bigger trend,” says Lim, adding that it is based on this strategy that he does not hold the stocks of some semiconductor companies that many other fund managers are holding.

11. Lim also likes companies with a regional or global presence in the consumer manufacturing sector. “My portfolio is very manufacturing-centric. I won’t touch things I don’t understand. I need to see and touch them if I want to invest in them,” he says.

12. Oriental Food Industries Holdings Bhd and Power Root Bhd are two companies he likes in this [consumer manufacturing] sector. They have been expanding their export business, which has enabled them to generate good earnings despite weak local consumption in recent years. “About 50% of their business comes from exports. That is why they are still able to perform when domestic consumption is soft,” says Lim.

13. He also looks at the evolution of these companies. One example is Oriental Food, whose product Super Ring has been popular since it was introduced more than a decade ago. But when the healthy food trend came along, the company replaced its artificial cheese flavouring with a natural one. It also expanded into healthier snacks such as Jacker potato crisps. The company’s latest product is biscuits, he says.

“You can see the company’s evolution into manufacturing and selling higher-grade products. On top of that, it manufactures products for some Japanese brands, which is not easy. This shows that management is thinking about the long term. In fact, the company has been around for more than 30 years,” says Lim.

He adds that investors who look into companies like these have to accept that their revenue growth will not be exponential. The natural growth rate is 5% to 8% per annum. But there will be a bigger jump when they increase production capacity.

14. Being a bottom-up stock picker, Lim says the real risks of his investment style are those related to the company’s business such as a change in management. “Let’s say, the founder and CEO passes away and there is a complete change in management. This is definitely one of the key business risks.”

15. He also considers selling a stock when the company starts to diversify into sectors that are not relevant to its core businesses. Based on his experience, most companies that embark on diversification fail to generate good earnings.

“It is a warning sign and I am usually quite worried when they do that. Diversification does not work out most of the time based on history. It shows that the company is not so confident about the future of its core businesses,” says Lim.

16. He says companies should distribute their earnings via dividend payouts to shareholders instead of using it to diversify. “For instance, a glove maker that diversifies into property. Why do I need you to diversify? If I want to have property exposure, I can buy into another company that has a focus on the property business. Why don’t you distribute your earnings to shareholders?”

17. After spending the last 17 years recommending stocks and managing investors’ money, he has turned to investor education as head of research at EquitiesTracker Holdings Bhd.

18. One of the ways he does so is by publishing research reports and making them available to the public at no charge.

19. “I also think many retail investors have forgotten about the fundamentals of valuing a company. If you are looking to buy a stock, which is a business, you need to consider many qualitative factors such as the company’s brand values, competitive advantage and reliability of its workforce. But nowadays, some of them behave like investment analysts, focusing on forward earnings and valuing a company based on future dividends, cash flows, interest rates, among others. One should think like a businessman who wants to buy a company, and not just analyse numbers like an academic exercise.”

20. The job of a fund manager is to evaluate various stock recommendations provided by analysts and decide on when and what stocks to buy, he points out. “For instance, an [equity] analyst tells a fund manager that he likes 10 of these companies. The fund manager’s job is to decide whether to invest in, say, six or eight of them. He also needs to decide how much money to invest in a particular stock and when to buy or sell it.”  

21. The job of an analyst is to research various companies and come out with a conclusion on whether the stocks are worth buying. “So, you would only want to become a fund manager or an analyst if you want to specialise in these specific skill sets,” says Lim. 

Source:

1. Fund management boring for Inter-Pac Asset Mgmt CEO who is up 51% this year

2. Cover story: Man on a mission

3. 2018 The Edge Thomson Reuters Lippers Fund Award: Inter-Pacific Asset Management Sdn Bhd - Won Two Individual Awards

4. First Person: Empowering retail investors
5. Proof of Value - Medium 

6. What I learnt as an Analyst