Accumulating Wealth – Every Dark Cloud has a Silver Lining

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On 10th October 2018, the FBMKLCI had its worst performance after the GE14, plunging 39 points, with losers close to 1000 counters. The US market echoed on the same night – the Dow Jones Industrial (DJI) plummeted 832 points and 546 points the following day on concerns of trade war effects and the rising interest rates. In Europe, the DAX, CAC40 and FTSE100 indexes have sunk well below the Moving Average (MA) 200 line, indicating the bear is in control. China was not spared, for the Shanghai Composite Index fell 142 points or 5.2% on 11th October 2018, forming a new low since 2016. The market could be responding to the recent IMF’s downgrade on the global economy outlook.
With the choppy market sentiment that persisted, is there a silver lining? The answer is ‘yes’. Before we discuss that, let’s see how our portfolio fared in October 2018:

Disclaimer:
The companies or strategies mentioned in this article are meant for study purpose only. It doesn’t constitute any ‘buy’ or ‘sell’ recommendation. Please consult your financial professional if you want to make any decision.

The portfolio has showed a gain of 228% since November 2015. In October, we made a switch of two counters.

Sold KESM (9334)
While my view for KESM is long term bullish, I switched it to another company, which could offer higher upside in the mid-term. We sold 5000 shares of KESM at RM15.20, which was lower than the entry price of RM15.90. The sale incurred a loss of RM3500 and raised capital of RM76000.

Bought KGB (0151)
KGB is a one-stop facility solution provider of turnkey engineering services. Its three divisions, namely process engineering, ultra-high purity (UHP) gases and general contracting contribute about 22%, 41% and 37% of revenue respectively. There are five highlights for KGB:

Its revenue has grown from RM63.8 million from 2009 to RM313 million in 2017, a nearly 500% growth in nine years. Its net profit has broken new highs to RM11.8 million in 2017. According to The Edge Daily published on 15th January 2018, its company CEO Raymond Gan anticipated another 30% growth in 2018.

The company has strong ability to secure new contracts. As at 2017, its outstanding contract was 370 million. In October 2018, KGB announced on Bursa Malaysia that it has secured three overseas contract worth a combined RM101 million.
KGB’s 2018 Q2 report shows that it has RM60 million cash and debt of RM20 million, making it a net cash company.

The company has completed an on-site gas generator and has started supply in February 2018. Besides, KGB aims to be the second largest CO2 manufacturer in Malaysia, with its new plant in Terengganu that will start operations in 2019.

While everyone is fearful of trade war, KGB is the beneficiary of it as it capitalises on the ‘Made in China 2025’.

Seeing the company’s foundation and prospects, we bought 60000 shares of KGB at RM0.98. With the cash brought forward plus the switching from KESM to KGB proceeds, our new cash level is now at RM48165.

The Silver Lining
While everyone was talking about how Malaysia’s relationship with China lately has affected foreign investors’ confidence, China’s Pacific Construction Group Ltd (CPCG) announced a plan to invest RM10 billion over 10 years in Malaysia in infrastructure development, hi-tech machinery and education. This is by far the biggest investment plan by a foreign company since the general election. In addition, Hong Kong based Value Partners Group Ltd is opening an office in Malaysia. The company founder Datuk Seri Cheah Cheng Hye, also known as the Warren Buffet of the East, said “After decades of sliding, Malaysia can only go up and we want to be part of that growth story.”

12So the question is this: if there is no opportunity, why do these world-class players want to invest in Malaysia?

Conclusion
As you can see, every dark cloud has a silver lining. And the market always overreact, be it overly bullish or bearish. Let’s get ourselves prepared so that when the market behaves irrational again, we may take advantage with confidence and peace of mind.