What's Down With JCY???

JCY is in a bear market on its own. What gives?

1) Announcement
Subject
:
JCY INTERNATIONAL BERHAD ("JCY” OR “COMPANY")
- Extension of Time to Obtain Completion and Compliance Certification

Contents
:
We refer to the approval letter dated 26 January 2010 (“Approval Letter”) from the Securities Commission (“SC”) for the listing of JCY on the Main Market of Bursa Malaysia Securities Berhad. Condition 1.2 (ii) imposed by the SC in the Approval Letter states that with regards to the property located at Plot 296 (PTD 63734), Tebrau IV Industrial Area, Mukim Tebrau, 81100 Johor Bahru, Johor Darul Takzim (“Property”), JCY is to obtain the Completion and Compliance Certification (“CCC”) within six (6) months from the date of the said Approval Letter.

On behalf of the Company, we wish to announce that an application for an extension of time of six (6) months up to 25 January 2011 for JCY to obtain the CCC from the relevant authorities in relation to the Property (“Proposed Extension of Time”), has been submitted to the SC and is currently pending the decision of the SC.

An announcement will be made upon receipt of the decision of the SC.

This announcement is dated 3 August 2010.
(A negative factor but does not explain the price weakness)


2) Some employees strike at Tebrau factory.
Press Release
In response to the recent foreign workers issues at JCY HDD Technology Sdn. Bhd.’ssub-contractor hostels at Kawasan Perindustrian Tebrau IV, Johor Bahru, both the company and the foreign worker representatives have met this afternoon and the issues had been resolved amicably with the workers returning to work immediately. Among the key issues highlighted by the foreign workers, the management had in conjunction with the sub-contactor for the hostel, shall take remedial actions as summarized below:
1. Company will provide a vehicle and driver on 24 hour standby at the main hostel to facilitate the emergency transportation of worker to hospital for any emergency treatments.
2. The company had agreed to revise and standardize the pay structure of the workers.
3. The criteria for the deduction of salary in relations to worker coming to factory late shall be revised and improved.
4. On top of the normal workmen compensation benefits, the company had agreed to improve the contribution to the beneficiary of the worker.
(Seems to have been resolved over the past few days)

3) CIMB had earlier estimated RM359m in profits for 2010, but 3 quarters now and profits is only RM198m, will not be getting close to CIMB's optimism. Mind you CIMB has also predicted RM441m profit for 2011. Recently CIMB did some updates: 2010 earnings is now lowered to 297.3 million and fy 2011 earnings is now lowered to 370.8 million, but damage is done and is unrealistic. How is the company going to post a RM95m in the 4Q??? Hence the downgrade is also suspiciously optimistic.
(This may explain some selling)

4) The continued paying down of debts owed to owner by the company, which has the net effect of a negative cash flow.
(This does not bode well in the midst of a weakening stock)



5) No activity to shore up share price. Everybody's mum, no buybacks.
(The silence is deafening as they say)

6) Its a cyclical stock. There are similar valuations of just 3x-5x earnings. It looks likely a base will be found at 65-75 sen, even then its not excitingly cheap.

7) The iPad effect. Primary losers: (1) Microsoft, given the impact of lost Windows sales and its lack of a competitive tablet response, (2) Intel and AMD, as they suffer lost unit volumes to ARM-based competitors, (3) HDD makers, Marvell, LSI given the move to solid state storage from hard drives in tablets. Secondary losers: Micron, Acer, ASUSTeK, Barnes & Noble, RadioShack, Best Buy.
(This weighs down JCY again)


NOTE: The above opinion is not an invitation to buy or sell. It serves as a blogging activity of my investing thoughts and ideas, this does not represent an investment advisory service as I charge no subscription or management fees (donations are welcomed though). The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis, or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

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Marketocracy Portfolio As At 27 August 2010

price history
		SMF m100 S&P 500 DJIA Nasdaq
		Graph Period: [7 Days] [30 Days] [90 Days] [6 Months] [1 Year] [2 Years] [3 Years] [4 Years] [5 Years] [Since Inception]

recent returns vs. major indexes
		Beating Today MTD QTD YTD SMF -0.23% -3.55% 4.16% -4.53% S&P 500 -0.77% -4.75% 1.92% -4.86% DOW -0.74% -4.59% 2.17% -4.24% Nasdaq -1.07% -6.03% 0.45% -6.63%

recent returns
		RETURNS Last Week -3.57% Last Month -4.81% Last 3 Months -6.04% Last 6 Months -4.36% Last 12 Months 0.78% Last 2 Years 28.52% Last 3 Years N/A Last 5 Years N/A Since Inception 20.59% (Annualized) 9.38% S&P500 RETURNS Last Week -3.53% Last Month -5.15% Last 3 Months -3.87% Last 6 Months -3.54% Last 12 Months 4.74% Last 2 Years -12.67% Last 3 Years N/A Last 5 Years N/A Since Inception -11.85% (Annualized) -5.86% RETURNS VS S&P500 Last Week -0.03% Last Month 0.35% Last 3 Months -2.17% Last 6 Months -0.82% Last 12 Months -3.96% Last 2 Years 41.19% Last 3 Years N/A Last 5 Years N/A Since Inception 32.44% (Annualized) 15.25%

alpha/beta vs. S&P500
		Alpha 17.21% Beta 1.16 R-Squared 0.77

turnover
		Last Month 13.02% Last 3 Months 28.99% Last 6 Months 66.53% Last 12 Months 167.19%

Symbol Price Shares Value Portion of Fund Inception Return NYB $15.60 6,000 $93,600.00 7.78% 42.39% QSII $56.77 1,500 $85,155.00 7.08% 13.93% Details SUN $33.75 3,000 $101,250.00 8.41% 12.99% Details BP $35.42 3,000 $106,260.00 8.83% 11.48% Details FMC $61.15 1,500 $91,725.00 7.62% 8.92% Details MIDDLE C $3.66 25,000 $91,500.00 7.60% 19.46% GE $14.50 4,000 $58,000.00 4.82% -2.09% PLD $10.56 8,118 $85,726.08 7.12% -4.28% F $11.17 8,000 $89,360.00 7.43% 35.78% WFMI $35.75 2,500 $89,375.00 7.43% -12.63% Details UCO $8.78 6,000 $52,680.00 4.38% -14.56% Details BAC $12.47 9,000 $112,230.00 9.33% 9.72% Details

Close Date	Type	Symbol	Shares	Net Avg. Price	Net
Aug 17, 2010	Sell	POT	1,000	$140.3169	$140,316.93
Aug 12, 2010	Buy	F	8,000	$12.4259	$99,407.51
Jul 29, 2010	Sell	NVDA	9,000	$9.1826	$82,643.21
Jul 22, 2010	Sell	C	5,000	$4.0199	$20,099.65
Jul 22, 2010	Buy	UCO	6,000	$10.2768	$61,660.69
Jul 12, 2010	Sell	BP	1,750	$36.6356	$64,112.22
Jun 25, 2010	Buy	BP	800	$27.55	$22,040.00
Jun 14, 2010	Buy	BP	1,500	$31.4431	$47,164.65
Jun 11, 2010	Buy	BP	2,000	$34.1535	$68,306.95
Jun 11, 2010	Sell	GS	700	$133.7412	$93,618.86
Jun 11, 2010	Buy	BP	450	$34.05	$15,322.50

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Good Deals, Bad Deals, Win-Win Deals

The way a company handle acquisition and disposal of assets tells us a lot about management's savvy and the way they would handle corporate strategy.



London Biscuits / Lay Hong / QL

I like QL and London Biscuits, but following the deal, I would have to take London Biscuits off the list. I liked their expansion plans, but obviously London Biscuits had no inkling of how to leverage, improve, rebrand, strategise their acquisitions. I doubt there was any positive value add management input from London Biscuits. Since they acquired Lay Hong, which was a good deal relative to Lay Hong's NTA, nothing has changed, Lay Hong was still barely profitable but trades at a 50% discount to NTA. Its share price did not budge much from the time London Biscuits bought them a few years back. Why buy in the first place??? Yes, bought at a good price, so what, you loaded debt to do it, unless you think you can increase value in Lay Hong, or the earnings from Lay Hong would more than cover your interest cost, why buy?

Now, Lay Hong is a lot better than TPC, why two egg companies? Both also not profitable and you sell the more attractive one. How do shareholders of London Biscuits view your selling of Lay Hong, and then to see Lay Hong's share price double literally in a matter of days??? What does that tell you???

That was a good deal by QL but a very bad deal for London Biscuits. Was it to pay down debts? Your debt level was just as high a year ago, and almost the same as when you loaded debt to buy Lay Hong, what gives?

I don't think its necessary to bring down debts by selling Lay Hong. They have been poorly advised. If you know there is deep value in Lay Hong, you should be selling close to NTA. If the buyer is not willing, then take QL shares, not cash. At least you can ride the unlocking of value in Lay Hong. Now London Biscuits look very silly indeed. If anyone asks London Biscuits about the Lay Hong deal now, they can only shrug their shoulders. Sigh...

Cocoland / F&N

Win-win deal. Fun is over when investors realise that F&N bought their stake at such a deep discount. Couldn't fault Cocoland as the deal would secure a big customer and a platform to emlarge earnings. This shows Cocoland management having the vision to forgo a bit to gain a lot. Look at where their share price is now.

3A / Wilmar

Win-win deal. Same as above. If I was 3A, I would have done the deal at 50 sen even, because the platform would be so enlarged and the prospects improving by multiples with just Wilmar inside.

MFCB / Jadi

It may not make sense to many but I think MFCB is on a winner and will be able to leverage and extract more value by having Jadi into its stable. Win-win deal.

Management needs to know when to do deals and using the right way. It can be cash, convertible notes, shares issuance, even a put and call deal ~ each option is important in its own way depending on how things would flesh out following the deal. An asset may be multiplied in a different company's ownership. There has to be consideration of "opening of doors", "whether you can take the asset to the next level", etc...

In the same note, advisers and bankers should be able to advise these deals better and not just do the deals for deal making sake, just to earn some fees.

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Tanah Pusaka by The Solianos

Readers of this blog will be aware of my strong support for Leslie from pop pop music label. His stable of artists have churned out excellent audiophile recordings by JZ8, 2V1G, Roger Wang and Gina Panizales. I have been a fan of The Solianos through the years, but mainly listening to their interpretations of jazz standards and the occasional Malay songs.

Don't get me wrong, I love Gadis Idaman Ku, which was composed brilliantly by Alfonso Soliano. During a night session at No Black Tie, I heard them play Tudung Periuk, followed by Gadis Idaman Ku, and a few songs later Tanah Pusaka. It clicked in me that this is a great concept of an album. For my life, I never could fathom why The Solianos never got an album out.

I dragged Leslie to their next gig and he was sold. Pure talented slogging Malaysian musicians with such a storied family, which has contributed immensely to the very fabric and development of modern Malaysian music culture and legacy. I said this album must be an all Malay songs album. There is certainly room for a great jazzy Malay album that reflects their talent and heritage.

Hence their song list below has a few songs composed by Alfonso Soliano, and the rest given the special Solianos treatment. The harmonies and virtuosity of The Solianos shine through the grand guidance of Ador as well.

As an appetiser, they have released a video of their superb recording of Tanah Pusaka, which will be in the album, but is brought forward to all ahead of Merdeka Day. We all love our country, we may hate the politics or some of its policies now and then, but let's be clear, most of us love our country. We all know in our hearts we really want a 1Malaysia, the one that is promulgated is still "in the works it seems", but we know the vision of the one we want in our hearts. Happy Merdeka everyone ...

p/s please do post / link / embed the video onto your blogs and facebook ... knowing that many offices have banned youtube, we have added the megavideo link as well ha-ha.

http://www.youtube.com/watch?v=hkKb9EaPirs

http://www.megavideo.com/?v=NH3LC8HG

The Solianos Project - Why!!!???

This will be in a series of articles on The Solianos Project. Why them? Although I begged Leslie to have a listen to The Solianos, although it seems like I "discovered" them as a recording potential, the truth is not so exceptional on my side. How do you discover a group that has been around for twenty thirty years?

Listening to the live, doing these 3 songs convinced me that there is something "big" ... Tudung Periuk, Tanah Pusaka and Gadis Idaman Ku. The Solianos have been plying their trade at various venues and even corporate events, and while most of their repertoire were in English jazz standards, I was convinced they had to do a Malay album which will totally encapsulate their brilliance, musicality, musicianship and melodious harmonies. It had to be a Malay album because it reflects their heritage perfectly (Alfonso Soliano and Tony Soliano).

The final song list is equally distributed with numbers composed by Alfonso Soliano and emblematic Malay songs through the years (with the Solianos treatment, they were given a fresh breath of vibrancy again - you didn't know that some Malay songs could actually sound so good).

In many ways, The Solianos represent the music culture for the past 60 years and the Pusaka album is more "1Malaysia" than anything I can imagine. If you are between 35-75 you will really feel that you lived through these songs, in your own country, cause nowhere else on earth will you get an album like this or get to appreciate one like this.

Both Tony and Alfonso were greats in their own rights. Alfonso was behind many artistes in the 70s, in fact he was the music arranger / director for Sharifah Aini's Pasir Roboh, Damak Ku Sayang, Serampang Laut, Dodoi Si Dodoi, etc... and thats just one artiste. I like Kartina Dahari a lot, and she also sang one of Alfonso's composition, Tunas Kasih. Tunku Abdul Rahman sought help from Radio Malaysia – Alfonso Soliano, Lanthall, Croft, Bert Read, Dol Ramli and Datuk Ahmad Merican to create the national anthem, Negaraku from a love song, Terang Bulan. Alfonso was always top of the list even then.


Alfonso's better known compositions include: Gadis Idaman Ku and Airmata Berderai. Hence the album which they are doing has almost half of them songs that linked the Soliano name to this group of talented musicians.


This great article was written by errol de cruz for NST and was published on merdeka day august 31, 2007,

IF there's one family that stands above all others in Malaysian music-making, it must be the Soliano clan.





There's an often-used joke which says that if you don't want to become a millionaire, all you need do is become a jazz musician. It's probably what used to happen in the early 1900s what with so many talented jazz and blues musicians succumbing to "occupational hazards".

In today's musical climate, however, jazz musicians have come a long way and several have made a big name for themselves, the Malaysian list includes Michael Veerapen, Lewis Pragasam, Andy Peterson, David Ah Wah, Julian Chan, Vincent Ong, Josie Thomas, David Gomes and many others.

Jazz itself has come a long way, finding its way into pop, rock and ethnic fusion; it's not surprising to find pop artistes who have matured, so to speak, turning back to their roots and hitting jazz joints with sets that include songs by Cole Porter, Frank Sinatra, Barbra Streisand, Ray Charles, Duke Ellington, Nat King Cole, Ella Fitzgerald, Nina Simone and Antonio Carlos Jobim.

Last week, for example, at popular jazz joint No Black Tie, patrons were pleasantly surprised to find evergreen artiste Khatijah Ibrahim at the mike, belting out her own originals and also jazz standards like Don't Rain On My Parade, Luck Be My Lady Tonight and Fever.

Accompanying her was an ensemble starring a renowned music family - the Solianos, arguably the only family in Malaysian showbiz who can claim a heritage of jazz that dates back well into the nation's history, well past the inaugural Merdeka celebrations, thanks to their forefathers, the legendary Alfonso and Tony Soliano.





The Soliano name hails back to the days of the British occupation, when Rufino Soliano and Dominado Tirona were brought in from the Philippines to play in the Constabulary Band.

Later, Alfonso and his nephew Tony came into the picture. Alfonso was the serious one, leading and writing for the orchestras of the time, while Tony was happy being the live wire, leading local musicians in one jazz ensemble or another on both sides of the Causeway, and in the heady Bangkok scene, too.

"Those were the days," many say, "when we had talented artistes like Ahmad Wan Yet, Zain Azman and Julie Sudiro entertaining us."

Alfonso and Tony died, months apart, in 1990, and it has been up to their children and families to keep things going.

Today's Soliano clan remembers the days of yore well, especially Valentino "Tinoy" Soliano who was the only one who performed with his father Alfonso. "I was the lucky one and yes, those were the days," he said.

"If you went to any of our homes after he passed away, there'd be a portrait of him above the piano and as we practised, we'd get that echo that said: "No bluffing, ah."

"Dad's talent was his wealth," Tinoy said. "He'd always bring himself down to the playing level of other musicians and make them sound good."

The Soliano Brothers picked up the flag from Alfonso and performed all over the country for more than 15 years, until individual talent and creativity nudged them into forming their own groups.

Now, instead of just one family ensemble plying the trade, there are at least six outfits pushing the Soliano envelope, from Langkawi to Singapore.

* Tinoy's sister, Isabella, leads one band at the Datai in Langkawi, with Conrado playing trumpet.

* Brother Rizal and niece Rachel have two bands, now performing at No Black Tie.

* Sister Irene sings with the Soliano Brothers whenever she can.

* Cousin Daniel Guerzo leads his Nine Lives in Langkawi.

* Tony Soliano Jr has a band in Johor Baru.

* Cousin Louis Tan Soliano plays drums at Jazz At Southbridge in Singapore.

* Older brother Remy had an accident recently and is currently bed-ridden.

* Tinoy and Tristano are session musicians. "We're the family mercenaries," Tano laughed.


The entire family gets together at Christmas and last year, they more or less took over Langkawi island for two whole weeks. And when they do get together, it's Salvador Guerzo who leads them.

Ado, pianist Rachel's dad, is the elder that the Solianos look up to nowadays. Like Alfonso in his time, Ado writes and arranges for the RTM Orchestra and also plays as often as he can with any of the Soliano outfits. Another "mercenary", yes, but this saxophonist is rather devoted to his daughter's band.

"Times have changed," Rachel chipped in. "I used to follow him; now it's the other way around."

It's a tough job, leading the entire clan when they get together, but Ado wears the mantle well, and his big hope is that he will one day be instrumental in making some Soliano dreams come true.

Rachel has plans to organise the Alfonso Soliano Jazz Festival and is hoping to acquire enough sponsorship over the next two years, and Ado wants to establish what they would all like to see - the Soliano School of Music.

"These are our dreams," Ado said, "and I know we can do it if we put our heads and talent together."

In this case, however, Rachel has the level-headed voice. "What we really need is someone with the business acumen to run it."

Considering the reputation the Soliano clan has earned over half a century and more, the realisation of such dreams would only be fitting.

Or as Rizal put it: "Dad didn't leave us any wealth because making music was more important than making money. But he did leave us with a big name, and it's up to us to do something with it."

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Country Market Cap As A Measure

It is popularly known that emerging markets as a percentage of total listed market cap in the world was a dismal figure. I don't have the exact number but I believe it was under 30% 10 years ago. That figure has been rising steadily as emerging markets got bigger, and more companies get listed in emerging markets.

Just think, as emerging markets companies grow bigger, and thanks to the last couple of financial crisis, emerging markets have made more inroads into that equation. The other factor is the recycling of petrodollar and massive trade surpluses - much of that went into buying big banks and mining firms.

It is foreseeable within the next 10 years that the BRICs plus another 10 emerging markets should overtake the old guard (US, Europe) in terms of percentage of market cap. It is almost inevitable, they keep spending beyond their means, and the trade surpluses keep going the other way. The main way to pay down their debts is actually via these emerging markets to buy out large stakes of their companies, as that would recycle back the funds.



Bespoke Investment Group:

One of the main headlines on The Drudge Report this morning is that China has overtaken Japan as the world's second biggest economy. Looking at Bloomberg numbers of equity market caps for countries, China is getting very close to second biggest as well.

As shown below, Japan's stock market capitalization is currently 7.97% of world market cap. China ranks second at 6.89%. Five years ago, Japan accounted for 10.34% of world market cap, while China accounted for just 1.10%. Back in 2005, China ranked just 17th in terms of market cap, behind countries like Saudi Arabia, Spain, Switzerland, South Korea, Taiwan, India, and the Netherlands. Now with the world's second biggest economy and third biggest stock market, it's hard to classify China as an emerging market, but it is indeed still emerging in terms of growth.

In the bottom chart we highlight the change in percent of world market cap over the last five years. As shown, China has had the biggest growth in percentage points, while the US has had the biggest fall. Hong Kong, India, and Brazil have seen pretty big increases in share, while the UK, France, and Japan have all lost the most ground after the US. It will be interesting to see how things look in another five years.

It is heartening to see Malaysia's percentage jumping from 0.49% five years ago to 0.77%. That was quite a jump in terms of absolute percentage. Somehow I think that was more because of the calamities the developed markets went through rather than through "actual initiatives" undertaken by ourselves. Singapore rose from 0.63% to 1.11%, also remarkable. If we strategise better, take better care of how we allocate our resources, we should be hitting 2% by now, seriously.

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How To Spot A Good Trade Part 2

There is earnings recovery, and then there is distinctive earnings recovery. There are still a number of issues which troubles the stock but overall its a concerted recovery over the past 18 months. Time for a major rerating. Its not a business I particularly like or fancy, just a trade in rerating.

A good indication of firmer footing, the company also declare a 2 sen dividend after paying nothing for sometime.

I only manage to get a report by RHB Research. This was dated February 2010, and their estimates have been surpassed, plus they had a target price of RM1.80. I am sure they would be revising that a bit higher now.

RHB Research:
Outlook. We remain positive on LFIB’s earnings outlook and on the back of:
1. The change in the National Automotive Policy in end-Oct that introduced incentives for local autoparts manufacturers, which is positive for SCB’s motorcycle parts and accessories business; and
2. Our projected total industry vehicle (TIV) sales volume growth of 8.5% in 2010, which will boost sales volumes at LFIB’s tyre manufacturing division;
and
3. The implementation of the two stimulus packages that will boost demand for building materials.

Earnings forecasts. We are raising our FY06/10-12 net profit forecasts by 43.4-51.5% to RM56.3m, RM62.0m and RM65.3m respectively, to reflect higher sales volume at the tyre manufacturing division.

♦ Investment case. Following the upward revision in our net profit forecasts, indicative fair value is raised by 43.9% to RM1.80 based on 7x revised CY2010 core EPS of 25.7 sen. Upgraded from underperform to Outperform as valuation has become attractive.

8486 LIONFIB, LION FOREST INDUSTRIES BHD

Quarterly rpt on consolidated results for the financial period ended 30/6/2010 23 Aug 2010, 18:33 Report Status UnAudited Quarter 4th Quarter For Financial Year End 30/06/2010 Individual Period Cumulative Period Current Year Quarter Precending Year Corresponding Quarter Current Year to Date Precending Year Corresponding Period 30/06/2010 30/06/2009 30/06/2010 30/06/2009 RM'000 RM'000 RM'000 RM'000 Revenue 241,648 190,782 873,619 598,037 Profit/(Loss) before Tax 56,145 17,574 183,667 170,351 Profit/(Loss) after Tax and Minority Interest 46,318 12,435 150,817 167,495 Net Profit/(Loss) for the Period 47,976 13,087 163,745 160,885 Basic Earnings/(Loss) per Shares(sen) 20.03 5.40 65.38 75.38 Dividend per Share(sen) 2.00 0.00 2.00 0.00 As At the End of Current Quarter As At the Preceding Financial Year End NTA per Share(RM) 4.6800 4.0900

NOTE: The above opinion is not an invitation to buy or sell. It serves as a blogging activity of my investing thoughts and ideas, this does not represent an investment advisory service as I charge no subscription or management fees (donations are welcomed though). The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis, or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

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Sell Side & Buy Side Research

I received the following article from Singapore on sell side and buy side analysts. At the end I have added a posting on the same topic.

--------------------------------------

Fund managers value honest and independent analyst reports that offer a different viewpoint. But they feel that such reports are few and far between.
Of course, underscoring that assessment is what they perceive to be a potential conflict of interest between sell-side research and stockbroking arms housed within a brokerage firm.



One fund manager who declined to be named says that 'sell' calls are as important to him as 'buy' calls. But he feels that very often, some brokers tend to issue only 'buy' calls and no 'sell' calls.

'I still see many reports which are done for marketing purposes. That is, they are written to get new businesses rather than present the true picture of the targeted companies,' he adds. 'There is still a lack of real independent research out there.'
The fund manager, who is with an Australian private equity firm, says that he values regular, continual coverage on stocks rather than 'ad-hoc' coverage.

One criticism about the industry has been a lack of research continuity for underperforming stocks where 'sell' calls are warranted, as it is the 'buy' calls that drive equity team sales at these brokerages.

A case in point is OSIM International, which was a magnet for analysts in its early years of sterling growth. But after it started reporting losses following its acquisition of US retailer Brookstone in 2005, analysts stopped covering the stock. Coverage of the stock has returned recently after OSIM staged a turnaround in earnings by writing off its Brookstone investment last year.



'These days, the large financial institutions have underwriting, proprietary trading and stock-broking businesses. Which is a larger profit centre?' asks Wong Kok Hoi, chairman and chief investment officer of APS Asset Management. 'They say they have China walls but frankly I am not sure how thick the walls are.'

But on balance, the unwillingness of users to pay for the research also has a part to play for the quality of sell-side research, Mr Wong adds. On a positive note, he believes that sell-side research has improved over the years.

Fund managers typically have large in-house research teams to meet specific research needs. The difference between sell-side research and buy-side research is who pays for them.

Sell-side research is often funded by the stockbroking business and its recommendations are directed across the general mass of the brokerage clients.
Buy-side research is paid for by the funds' clients, and recommendations are based on how well the investment meets the fund's investment strategy and portfolio.

Fund managers say they generally use sell-side research to gain new insights or investment ideas, obtain a third-party view, or to know more about new companies.

Hugh Young, managing director of Aberdeen Asset Management Asia, says he typically seeks out sell-side research for specific industry expertise that Aberdeen does not possess in-house. But he laments that there has been much rehash in research reports on what company management says.

'It's useful for people who don't have time to read the full management report. We do a lot of research in-house, so we can only blame ourselves when we get things wrong.'

Since short-term estimates or assumptions of the analysts are quickly priced into the market before fund managers could act on them profitably, fund managers often look out for the long-term views of the analysts.




'As long-term investors, we naturally would like to know the intrinsic value of a company,' Mr Wong says. 'Hence, we appreciate analysts' work on the long-term value of a company which, among others, must at least include long-term growth prospects of the industry and the company business franchise, including its durability.

'We also like to know what they think of the integrity and competence of management and appreciate those who can help flesh out the quirks among the fine print in the annual accounts,' he adds.

'We have always found it productive to speak with analysts who know management well, truly understand the business franchise's strengths and limitations, the company's competitors, etc.'

Sunday, August 09, 2009

Buy Side Vs Sell Side Analysts

For those not in the industry, the terminologies may be confusing. Buy side analysts refer to the analysts working within a fund management firm, generating reports, analysis and recommendation for their own portfolio managers or strategy sessions. Sell side analysts are those at brokerages trying to generate ideas on buys and sells to clients.



An example of a buy side analysts team (and its a big team) locally would be the analysts at Public Mutual. These recommendations by buy side analysts, made exclusively for the benefit of the fund that pays for them, are not available to anyone outside the fund. If a fund employs a good analyst, it does not want competing funds to have access to the same advice. A buy-side analyst's success or talent is gauged by the number of profitable recommendations he or she makes to the fund. In most cases, top buy side analysts end up as their in-house fund managers. This is usually why many of the traditional fund mangers positions are not advertised - they have instituted a hoard of analysts clamoring for those positions.

The buy-side differs from the sell-side in three main ways: they follow more stocks (30-40), they write very brief reports (generally one or two pages), and their research is only distributed to the fund's managers.

Buy-side analysts can cover more stocks than sell-side analysts because they have access to all the sell-side research. They also have the opportunity to attend industry conferences, hosted by sell-side firms. During these conferences, the managements of several companies in a sector present why they are a better investment. After gathering this information, buy-side analysts summarize their case in a brief report that also contains an earnings forecast. These reports are only distributed to the fund's managers.



The sell-side provides research and conferences to the buy-side in the hope that the buy-side will let them execute the large trades that the funds make when they act on the recommendation provided by the sell-side. Having access to the sell-side's primary research and the ability to attend industry conferences allows the buy-side analyst to follow many more stocks than a sell-side analyst. To compensate the firm for this information, the funds will buy and sell stocks with the brokerage firms that provide the best information.

You would think that a buy side analyst recommendation would perform better than a sell side because the former only has to please one client, while the latter may be "forced" to generate new ideas or do flip-flops in order to generate trades / commissions. The buy side is paid by the fund management house itself, hence just one client to please or piss off. The sell side is paid by the brokers, which means you can be praised or pilloried or pile-driven by many clients of the firm.

In a 2008 study by Boris Groysberg, Paul Healy and Craig Chapman for the CFA Institute in the Financial Analysts Journal Vol. 64, they looked at buy-side and sell-side earnings forecasts from 1997-2004. The conclusion was that buy-side analysts made more optimistic and less accurate forecasts than their counterparts on the sell-side. The performance differences appear to be partially explained by the buy-side firm's greater retention of poorly performing analysts and by differences in the performance benchmarks used to evaluate buy-side and sell-side analysts.

In a new study by professors from Harvard Business School and the University of North Carolina, they found that shares chosen by sell-side analysts performed more than 3x better than those selected by the buy-side analysts (1997-2004 as well). The findings are a surprise because buy-side forecasters have none of the conflicts with investment banking units like the sell-side.

A probable explanation is that sell-side research is published while buy-side is not. The fact that it circulates spurs competition, comparisons, scrutiny, and maybe even get recognised when "best of awards" come around. It is also fair to assume that buy-side analysts have a much much less of a chance to be fired, retrenched or replaced than sell-side, and for that reason as well sell-side analysts make much more money.

The results were culled from over 12,000 analysts at brokerages and 340 buy-side institutions. Buy-side "buy calls" generate an annual market adjusted return of 2.3% while sell-siders generate an 8.1% return average. This would really beg the question why fund management firms would continue to fund these buy-side research? One main benefit is to cover those stocks that generally do not appear on the radar of the sell-side analysts. Sell-siders can only reasonably cover big stocks as those are the ones that generate the commissions. Buy-side may need to discover more of the smaller companies.



In my view, the sell-side analysts will always know the companies and the senior management of the companies covered better than the buy-side analysts. Now that there is a stricter and hardier Chinese wall between research / sales / investment banking, it will make sell-side research have a bit more integrity and reliability.

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