Tuesday, 25 April 2017

Eating Chocolate is easy, but understanding the making of a Chocolate is an Art

According to my previous article in GCB, I believe now you will be anticipating eagerly to know my thoughts and perspective into Guan Chong Berhad (GCB - 5102).

Here, I will share with you 2 of my views into GCB from different angles.

On the first angle, I will definitely need to highlight the massive 40% drop of cocoa prices in the international market, and it's subsequent effect for the next 2 to 3 years.

Let's go to some basic of economics - The Law of Supply and Demand.

If you do not really know what is supply and demand, I will try to explain to you in the simplest manner I can using my own layman words. Basically, consumer creates demand, and manufacturer creates supply.

For a consumer point of view, when a subject item is cheaper, it will create more demand. For example, a chocolate bar selling at RM 25 might probably get 100 buyers, but if the same chocolate bar is now selling at RM 10, then there will be 700 buyers willing to buy it. So, when an item get more expensive, the demand become lesser ; vice versa, an item get cheaper, more demand. So, I assume you already understand the terminology of "demand" now.

Now, we will look into the "supply" of the chocolate, since we are talking about chocolate now. For a chocolate manufacturer point of view, if the chocolate is going to be sold at RM 25, then they will be willing to manufacture 900 pieces, but if the chocolate is to be sold at RM 10 (baseline price), then the manufacturer will be willing to manufacture 100 pieces only.

Let's say at the baseline price of RM 10, the cost is RM 9 and the profit is RM 1. Now since the raw material price - Cocoa, had dropped to almost 50%, the input production cost become lower now.

Let's assume the cost is RM 4, and the manufacturer continue to take RM 1 profit, so the new baseline price is RM 5 now.

As you can see in the chart, there will be a new Supply Curve S2 formed due to the lower production cost. And without sacrificing the manufacturer own profit (Maintain at RM 1), now the manufacturer is able to sell at a cheaper price (due to cheaper raw material cost), hence pulling more demand from consumer as the price of chocolate bars drop. This will see a new equilibrium at point E2, where buyer increase from 400 to 500.

Based on this simple analysis, I can tell you that Chocolate demand will pick up again, and it will definitely going to last for more than 1 year if there is no supply disruption. When that happen, GCB will be having a busier year grinding more cocoa which will translate to more revenue, and more profits.

Now, after looking at the macro economic scale, I will bring you to see the immediate relationship between the prices of cocoa and the share price movement of GCB.

As you can see from above, I had done a same period comparison from year 2011 to the current 2017. The price movement of the cocoa and share price movement of GCB definitely have an inverse relationship, whereby when cocoa price increase, GCB share price will drop, and when cocoa price decreases, GCB share price will increase.

This inverse relationship is of course by no means of luck. If you would understand the law of demand and supply, you would understand that when chocolate bars are cheap, then there will be more consumer demands. When raw material become cheaper, chocolate bar manufacturer will increase their production and sell cheaper chocolate bars. The increase in production from the chocolate manufacturer will then increase the buying of cocoa powder, which means, GCB will need to buy more raw cocoa and grind them into cocoa powder, and sell them to the chocolate manufacturer.

That is a simple 2 different angle of view I had presented to you on my analysis towards GCB.

If that is enough, then go and do your own due diligence and study.

Still have doubts? Alright

Now, I will give you one more information before you decide to invest into GCB.

I know that you might be wondering why the 4th Quarter FYE 2016 result is so poor. As you can see from the statement obtain from Bursa filling, the 4th Quarter took in a lot of impairment from forex and commodity futures contracts. These 2 item alone had taken RM 50 million off from the profits, which can contribute to 10 cents of EPS (Share outstanding only 480 million)

Since the MYR had already rock bottom, and could be poising for recovery due to foreign fund flowing back into emerging market, this is a good time again for GCB, ready to ride high on 2017 with a clean sheet after full impairment done.

So, I had gave you a 3 point shot. But, the ball will be on your hand, to take the shot, or to call it off. But again, make your own study until you are convince, don't rush into it.

Thursday, 20 April 2017

When Crude Oil crashed, Polymer company blossom on lower cost. Now Cocoa crashed, this company will benefit sharply

When the equity market takes a correction, that means things will start to cool off, and prices will start to come down and consolidate again. This is part and parcel of the life in the equity market. Share price goes up, share price goes down. In fact, you will need to get out of the market if the share price does not goes up or down.

I had to agree that the market had been over bullish since the start of the Year 2017. Anyone who took a bearish stance for the past 3 months had definitely miss out a good opportunity. Of course, all the opportunity comes with 2 sides of the risks - risk of gaining too much and don't know what to do with the money, and risk of losing too much and have no money then.

As you can see, one of the method in trading the stock market is to track the pricing of the commodities. For instance, when FCPO (Crude palm oil futures) goes up, then the local plantation player will generally be able to reap better profits because of the better margin they receive for selling their plantation fruits. Of course, when FCPO dived below certain level, plantation company will start to suffer from thin margin, while some will fall into the red due to lacking of economies of scale or inefficient operation process.

This can be applied to the recent major event in the global market - The crash of Crude Oil. When Crude Oil crash into the region below USD 40 per barrel, a lot of oil company went into financial and cash flow problem. This 2015 oil crash had resulted in Singapore based Ezra going into bankruptcy, which had also directly affect Perisai Petroleum listed in KLSE.

However, on the other hand of the world, businesses that used crude oil as input material are enjoying better margin due to a cheaper raw material supply. For example, Nylex manufactures polymer which uses oil as raw material. The cheaper price of oil resulted in better margin, hence better profit for Nylex.

Another example can be taken at SLP Resources Berhad. This plastic packaging company also manufacture its own plastic and plastic polymer. Ever since the crash of crude oil, SLP had been reporting humongous growth and profits, and is rewarding shareholder with hefty dividend as well.

You must know that every crash will be a crash on the surface, but behind the crash is a new opportunity.

Now, I am going to highlight to you a commodity which had crashed to it's 5 year low - Cocoa.

Above I am showing you the price chart of US Cocoa Futures. It is notable that Cocoa had crashed more than 40% from the peak of USD 3200 to the current USD 1900. I don't know if you would want to label a 40% drop as a crash or not, but I had to tell you crude oil also crash around 40 to 50%, and global analyst called it a crude oil crash.

Maybe you might not know what is Cocoa, but I believe everyone in the world would had tasted a piece of Chocolate before. And that ingredient to make chocolate came from cocoa.

For this reason, I am going to highlight to you that this company is that is standing to benefit from the crash of the cocoa prices. This company is - Guan Chong Berhad (GCB - 5102)

The business of GCB is very easy.
1.) GCB purchase raw cocoa
2.) GCB open up the grinding machine and grind the cocoa into cocoa powder
3.) GCB will sell the cocoa powder, or process them into cocoa butter and sell it to the global market.

As you can see, the major raw material input cost will be Cocoa. And now that the prices of Cocoa had fallen for 40%, that will effectively put the input cost lower by 40%

As you can see, GCB had not really participate in the bull run, however, they had been spending time in the consolidation stage.

According to the technical chart, the consolidation could be ripe, and GCB will be ready to take the ride up, back with low cocoa price that will help them save 40% of input cost in the coming days.

Today I am not going to tell you more, but just highlighting to you that
1.) International Cocoa prices had crashed to the lowest in 5 years.
2.) GCB will stand to benefit from a lower raw material price.

If you still do not understand, please do your own research and take sometime to understand this industry. Again, investment comes with risk, so please do your own due diligence before investing into any equities.

In the next article, I will put down some of my detail analysis and forward projection into GCB, and draw out the relationship between the prices of Cocoa with GCB dividend policy. If you believe the cocoa prices will stay at the range of 1800 to 2400 in the next 12 months, then GCB is definitely something you would like to hold on for at least 1 or 2 years.