We Should Be Watching China Instead Of E.U.

As mentioned before, China is a more important economic influence on Asia. It is safe to say that China is having some issues, some quite seemingly insurmountable. How to engineer a soft landing for the few pockets of overheated industries? That is the key. If cracks start appearing larger, it could overwhelm Asia. ... and Australia will be hit really really bad.



Pundits have heralded China's stimulus programs as an effective model for other countries to emulate.  However, the Chinese government has lit the fuse of its own implosion and many analysts have made the mistake of comparing Keynesian apples to bank lending oranges. As the flow of credit slows,  China will not only risk an economic collapse, but a political one as well. It seems a matter of when, not if.


Instead of China's government pumping printed or borrowed money into the economy, its stimulus funds have come from bank lending.  estimated that   2011 financing will hit 17.5 trillion-18 trillion yuan ($2.7 trillion-$2.8 trillion), more than a third of China's entire GDP. Financing for 2009 and 2010 equated to more than 40% of GDP.


The credit push has lead China to consume more than half of the world's cement, 47% of the world's coal and 48% of all iron ore. This, for a country whose GDP is just 10.7% of the entire global economy and hundreds of millions wallow in poverty.


Sustaining the credit expansion in an attempt to prevent a recession has built the world's largest house of cards. Estimates have put the number of vacant apartments built as high as 64 million. Entire ghost cities have been constructed and sit virtually empty. The homes are simply unaffordable.  In the commercial sector, China holds the record for the world's largest shopping mall. Currently it is 98% vacant. 

China's real estate bubble, one of the few remaining, is losing air at an astonishing speed. In just the past few weeks, hundreds of real estate brokerages have shuttered and thousands of workers have been laid off. The private SouFun Group in Beijing announced that the number of transactions fell by more than half in six of the 35 cities it surveyed just this month compared to last year. At least some declines were seen in 80% of the cities it surveyed.


The real estate slowdown has put pressure on copper prices around the globe, dropping more than 20% from a recent 2010 peak. Beijing is trying to curb inflation by slowing and in some instances limiting the credit available. Chinese firms have been using copper as a financing tool.  Stockpiling and using copper as collateral allowed many firms to obtain credit outside officially sanctioned channels. While many saw strong demand for copper as proof of a stable economy, at least one research firm has been told by their sources that almost all of the copper imported in the past three months has been used for these financing purposes, not for building


As the demand for copper subsides, prices will invariably decrease. The copper used as collateral will no longer be enough to service or guarantee the debts of numerous firms. Inventories of the metal will have to be sold. If the price of copper tumbles quickly, an entire portion of China's economy could collapse. Even Beijing will have problems propping up the price of copper with all its other troubles.


Beijing has been forced to close off sources of easy credit to keep inflation from running rampant. The tightening brings copper to a tipping point where massive business defaults could occur, pushing prices even lower. In turn, the slowing of China's real estate market could be pushed into a freefall that makes the rest of the world's problems look miniscule. Pile all of those potential economic disasters on a poor and angry populace seeing success in fighting government for the first time in decades and the outcome will be anything but stable. In fact, China may not be the largest country on the planet for many more years. What was once called China could be dozens of smaller states fighting for the scraps left after the fall of Beijing.


Hedge fund manager Jim Chanos,  who is known for profitably shorting Enron prior the company’s collapse, recently predicted an upcoming crash in the Chinese economy and a collapse in the Chinese real estate market


Chanos notes that although the central Chinese authorities in Beijing have been attempting to slow what appears to be an overheating economy down for quite some time, local government officials have stymied the cooling efforts.


According to Chanos, many local officials are continuing to sell real estate to developers, often with the use of risky leverage. These actions are currently fueling a massive property bubble in the growing economy.
Likewise, noted economist Nouriel Roubini  has also predicted a “hard landing” in China.  Roubini at a recent investment conference in Singapore, stated that there is a “meaningful probability” of a hard landing in China after 2013. Roubini bases his prediction on the fact that investment now makes up more than 50% of China’s GDP. According to Roubini, previous cases in which this phenomena have occurred (like South-East Asia in the mid 90s) have resulted in disaster.

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Why Investing Is So Difficult? (Updated)

This was posted back in January, thought I should add a few more pointers. The market can be mad or even maddening but we cannot afford to be either. Successful people have that quiet confidence about them, and in the way they carry out each project. Confidence can be in your own abilities and with a distinct minimal fear of failure.





The trouble is when you make investment choices based on "madness" or rage. Then there is over confidence, or rather a blatant disregard of the consequences (can only focus on the positive consequences), and an abject disregard of the fear of failure. Both scenarios are terrible choices.


Again, the key word is "choice", its a choice we make. The quiet confidence that people have stems from how they faced previous successes and failures. They take both into their strides, never letting one to bog them down or lift them up too high from learning more. Too many people just dwell on their failures too long, always thinking "what if". This is a sickness, too many people face failures by dwelling in depression, its a kind of self pity treatment ... oh, woe is me, look how sad and broken I am ... Successful people also have their share of failures, its how they deal with them that separates them from the boys.


Warren Buffett says the investor's greatest enemy is themselves. Every investor will have their own tale of letting emotions get the better of them, whether it's getting sucked into the hype or failing to cut your losses.

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The markets are bizarre and silly. How else to explain a financial history littered with booms and busts? To believe the market is always rational is like saying people never let their emotions - greed, fear, whatever - get the better of common sense. Once you accept that basic truth, it's time to recognise your own biases and mental rules of thumb, which can lead you to make poor decisions.

Let's start with a basic question: are you a better-than-average investor? Most of us will answer: of course I am. And it's not just amateurs. If you are NOT, why are you still dabbling in the markets? If you think you are, do you know why? If you cannot answer one of the two or both, you should not be playing shares.

If you think you are, surveys showed that more than 70% tend to believe they are better than the average investor. Nothing wrong with a bit of self-belief, is there? In fact, being overly optimistic about one's own abilities is one of the most prevalent mental biases and also one of the most dangerous one. That's because overconfidence can lead to overtrading, which studies have shown leads to individual investors drastically underperforming the market. 





Seriously, we all cannot be better than average ... certainly a large portion of us are very wrong! So, being realistic about your own abilities is important, yet it's something that eludes most of us. It's also against our nature to be contrarian. Uncomfortable alone, we seek the safety of the crowd, sometimes with disastrous consequences.


Psychologists use a theory known as "cognitive dissonance" to help explain the persistence of booms and busts. It means most of us feel anxious when faced with conflicting beliefs. So, to assuage this feeling, we tend to gravitate towards new information that supports what we want to believe. To get rid of this nasty feeling of dissonance we may also change our previous feelings or thoughts on a subject.

For example, you may have been the most rational of property investors, insisting on a reasonable rental yield before buying. But as the property market inflated, you started looking for reasons to no longer stick to your investing rules: for example, by saying that property was in a "new paradigm" where the old rules no longer apply. Its the same old argument, "this time its different", ... they are never different, just new idiots blowing the same horn every few years.

Human psychology is very important to investing. Why do you think so many people hold on to stocks that are dogs, and never let their profits run. They take minimal gains but ride the down trend in losses like piss poor performing CEOs. Its BECAUSE, we hate losses more than we LOVE gains. Its BECAUSE we remember LOSSES more than gains. You make RM10,000 ... ha-ha, you are happy for a couple of days ... you lose RM10,000 .. you are miserable for a whole month, always thinking what RM10,000 could have bought you and your family. If you have that mentality still, don't play stocks.

We tend not to let our profits ride, or is too quick to take profits ... because we fear LOSSES more than we like GAINS. You have that mentality, go shop at pasar malam, stop playing stocks.

I was having a fantastic discussion about investing with a close friend and thought I should blog about it. It has to do with book smarts and investing. We see many people subscribing to technical charting software (expensively) to try to beat the market, maybe they have given up on trying to understand and beat the market on fundamentals after years of trying.

How does one become a better than average investor, don't even say super market player? I doubt very much one can be great by studying the books. I mean we get tons of super brainy people graduating with honours in corporate finance and/or MBA all the time ... and say these people go on to study religiously the ways and strategies of Buffett, Soros, Graham-Doddsville, Ben Graham, Peter Lynch, Bruce Berkowitz, etc... - can they then be superior investors?

I don't have to answer that because the reality is for all to see, an emphatic NOOOOO. Investing is quite silly and befuddling. We try to regard it as a "subject" that can be studied, I mean if a person is brainy and wants to be a doctor, you will eventually be one by getting the degree, and if one wants to be a surgeon, he can go for more studies and training, and he will be a surgeon, he can be a better surgeon by learning all the time about the latest equipment and research findings and hone his/her skills .... you put in so much, you get so much output and benefits ... but the same cannot be said about investing, its not like you put in so much, you will end up a better investor!!!

I think investing is a like a growing mass of blob or astronomy, the more you know, the more you don't know. Does it mean that if you are a superior analyst for 20 years that you will see a similar track record when you become a fund manager? No. Does it mean if you are a brilliant performer when your portfolio is $2mn that you can then manage similar returns with a $200m portfolio? No.

For many people, we just want to beat the market consistently. Is that a futile effort? I don't think so. I believe there are many that can beat the markets consistently but must also be cognizant of a few truths:

a) no matter how good you are in investing, you will never have a perfect batting record, I believe superior investors will make money in 6 or 7 out of every 10 trades ... if you are not so good your averages will dwindle.

b) if (a) is a truth, then we must let our profits run and know how to minimise our losses, we must not let our losses get us down or get angry and try to average down aggressively again and again - that's like not acknowledging the first time you bought was a mistake (timing wise or valuation wise) and just stubbornly holding on to the hope that you are still right.

c) cutting your losses is something many "aunties" (I use that term not to describe all aunties but male/female who just cannot bear to cut losses) will never do, they just keep holding and holding until they have 30 stocks in the portfolio.

d) you must know that the market is bigger than any kind of technicals or fundamentals, even Public Bank will go down if the overall market is going down, can always buy back later ... e.g. if you hold a stock at entry price of RM3.00 and it went to RM3.60 but you did not sell, it goes back to RM3.00 and you hate yourself, but you know its a good stock so you hold on, then the market turns and it goes to RM2.60, you hate yourself even more but is unwilling to cut, it then goes to RM2.20 and you have no more money to average down ... yes if fundamentals is intact it will go back to RM3.00 but what was the opportunity cost??? It may have taken 3 or 6 months to see that thing climb back. If you had cut at RM2.80 ... you could have bought back at RM2.30 and ride it on the way up. Another point, if you had cut at RM2.80 and did not buy at RM2.20 and then recovers swiftly to RM3.00, even at RM3.10 or RM3.20 you should still go back in (something the majority will NEVER get themselves to do) ... which leads to my next reality.

e) The same stock may be RM2.20 or RM3.00 or RM3.50 and still look good depending on the state of the markets. Buying when it recovers back to RM3.20 may be a good move because the overall condition of the market has improved markedly. Selling the same stock at a loss at RM2.50 my be a good move because the downside or downtrend looks to be quite prolonged.

f) Fixating our basis of fair value. We use anchor and adjust too much in investing. If we had bought SP Setia-WB at RM2.00 and did not sell at RM2.30, we still use RM2.00 as your ultimate reference price, hence when it dips to RM1.50, you think its a good buy because to you this thing cost RM2.00 a couple of weeks ago. You know, and only you know RM2.00 was a "fair price" because the share price has NO recollection that its fair value was RM2.00. Fair value is a moving term, its not formed in an unmovable statue carving. Fair value is dependent of the state of markets. If it has fallen to RM1.50, then RM1.50 is your only reference price, not RM2.00. (p/s SP Setia-WB has gone to below 40 sen ... where is "fair value" now?)

g) never belittle a trend, be it upside or downside, is it better to buy at RM1.80 and then later at RM1.50 and then later at RM1.20 ... 3 times in a down trending market as they all represent value? Or is it better to buy after it has hit a low of RM1.20 and then moved back up to RM1.80, and then only buy at RM1.80 - its the latter of course because when you buy at RM1.80 in the latter's case the trend is favourable and market conditions have improved. Must learn not to say "aiyah, it was RM1.30, wanted to buy then but did not" ... that is always only uttered by the usual market losers, I can guarantee you that.

h) Woulda, coulda, shoulda ... stop thinking like the people talking rots at kopitiams because those sentiments will never get you anywhere and always uttered by people who will fail at most things they do in life. Learn, keep learning, give yourself the integrity of bypassing the "woulda, coulda, shoulda", move on ... what you did not do means diddlysquat to you and to all.

So, if you think certain books or courses can help you be a better investor, by all means do it, there is no magic "model" that is out there. If there is, you better believe that it will be selling for millions of dollars. Investing is a large unknown just like your brainpower usage rate, you might know 3% of the whole thing but if something can help you get to 4%, and improve your batting average, how can that hurt.

So, in the end all the gurus are just people who have 5%-6% knowledge of the topic compared to the average investor who may be at 3% ... overall, in that light no one is a guru, not even Buffett.

The market does not owe us a living. How to be surefire winner in the markets - don't be a buyer of shares, be an issuer of shares ... ; )

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Benalec, This Is My Playground

The recent listing of Benalec brings forth a unique company onto the board. Many are still to discover just how unique their business is. Scale is important, which is what they have. Track record is solid. The niche industry is expanding rapidly and they will be a major beneficiary. This is one stock to buy and hold for 6-12 months without much worry. If Buffett is here, he would buy and hold this for sure, it has an entrenched position, relatively high barriers to entry, track record, and able to extract high margins owing to their 'one-stop business model'. For a niche industry that is going to be worth RM3bn a year and growing at a rapid pace owing to the evolving demands of the related industries, Benalec is a solid exposure to have.



Benalec is involved in marine construction which include:
(i) land reclamation & dredging
(ii) rock revetment, shore protection, breakwater construction & beach nourishment
(iii) marine pilling & structures.

It owns a fleet of 91 vessels to support its marine engineering works and for 3rd party charters in Singapore. For land reclamation works, Benalec employs a unique model whereby it also accepts part of the reclaimed land as payment. This enables the job to be awarded even if the client is tight on cash as no initial outlay is needed (i.e. Benalec provides indirect financing).

Reaping high margins. At 30-50% for FY08-10, Benalec’s gross construction margins arearguably one of the industry’s highest. Larger contractors such as IJM, Gamuda and WCT have their margins at 4-12%. Benalec’s above industry margins are due to:
(i) the lucrative nature of marine engineering vs civil works
(ii) owning its own vessel fleet with in-house repair and maintenance
(iii) minimal subcontracting at 18% of project value
(iv) ability to adapt to various environments via innovative construction methods to cut costs.

Its main raw materials are diesel (for its vessels) and sand (for reclamation). The Malaysian marine construction industry is estimated at RM2.87bn from 2006-2009 which grew at an 18.8% CAGR. Frost & Sullivan estimates another RM60bn in marine construction industry revenue within the next 10 years. Some 1500 hectares of land in Penang will be reclaimed by 2020 costing RM6.5bn. The Melaka State Govt has approved land reclamation activities estimated at M6.3bn. Various sites in Iskandar have also been earmarked for reclamation to facilitate waterfront developments and dredging for port expansion.



Benalec is the main beneficiary of more marine construction jobs given its 17.9% market share in the industry. We can expect most of its contract flows to come from Melaka, Penang and Johor. Aside from the domestic front, there should be a constant flow from Singapore, whereby its sister company Oceanlec has won a building material supply contract. Oceanlec has signed an undertaking to (i) not compete for jobs that Benalec is bidding and (ii) provide Benalec the first right of refusal as subcontractor for jobs that Benalec is not licensed to directly bid for.

OSK: At the core earnings level (i.e. ex land disposal gains), we expect growth rates of 38%, 48% and 30% for FY11-13 respectively. This implies a significant 3 year CAGRf of 38%. Underpinning this strong earnings growth is the kick start of the RM468m reclamation works for 720 acres at Mukim Klebang, Melaka.

Benalec Holdings Bhd announced two weeks back that the group had on 21 March 2011 accepted the letter of award for a reclamation contract in Klang. The contract was awarded to wholly owned Benalec Sdn Bhd by COMTRAC Sdn Bhd on behalf of Glenmarie Cove Development Sdn Bhd - a unit of DRB-HIcom Bhd. Glenmarie Cove is a low-density riverfront residential resort development (~200 acres) that is located at Teluk Gong, Klang. The contract value is RM37mil, with a work programme of 14 months – i.e. until 17 May 2012. The project entails earthworks, river protection works as well as other associated works at Precinct 4 of the development. This, in turn, should put the group in a position to secure additional reclamation works scheduled within the area. This represents the second contract that the group has successfully clinched in a week following the Kota Laksamana project in Malacca announced in early March.



Arab Research: We re-iterate our BUY recommendation on Benalec with a fair value of RM1.90/share – based on the sum-of-parts methodology. Benalec is trading at an undemanding FY11F-13F PEs of only 6x-9x against solid earnings CAGR of 41% and FY11F net gearing of 11%. We believe this is unjustified, given the group’s deepening progression as an integrated marine engineering specialist – with access to prime seafront land via its unique business
model.


I like its pick up in volume and price over the last 2 weeks. Once past RM1.50, I expect this to move up very fast.

At present, the order book size is c. RM360m for marine construction contract while eyeing for at least 5 states in Malaysia to ramp up its order book with collectively valued at c. RM1b. Due to its niche position in the market, we see Benalec will be the main beneficiary for land reclamation works in Malaysia and Singapore.



Catalysts: I expect more local funds to start establishing a substantial position in the stock. I also expect more deals being secured in the weeks ahead. RM2.00 within this year should not be a problem.

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). I may have a position in the counter already. 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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