A look into the Malaysian Employees Provident Fund (EPF)

Dear Readers

Before I begin, I would like to place a caveat in this article: this article is based solely on my opinion.

The recent downfall of crude oil prices has revealed the vulnerability of the Malaysian economy to the movement of crude oil prices and its reliance, to an extent, on oil money, to fund fiscal policies. Acting in tandem with crude oil prices is the valuation of the Ringgit; Ringgit’s fate is usually sealed alongside the fluctuation of crude oil prices.

Credit: USA Today

Because of the drop in the valuation of Ringgit compared to the US Dollar, import items and commodities (generally traded in USD) are more expensive. This effect has driven the increase of prices of everyday items. This consequently drives inflation up.

Is inflation good?

Inflation is, as Banjamin Graham puts it, “shrinkage of purchasing power”. In other words, the value of your money decreases over time. This explains why a bowl of yummy noodles which costed RM2.50, 10 years ago, is now RM4.00.

However, inflation, when viewed in a macroeconomics point of view, is preferable over deflation. Deflation is the opposite of inflation; where the value of money increases because prices of goods and services decrease over time. You may be thinking,  wouldn’t it be better if my money increased in value every year? Well, not necessarily, because that means you, me and every other humans, would hold off on purchases for the reason that things will get cheaper in the near future. As a result, businesses will suffer tremendously because of the lack of sales. When businesses suffer, so do employees who make up a bulk of consumers.

Having explained the vicious deflationary cycle, it is easy to see why deflation is bad for the health of the economy. Certainly, excessive inflation is not good either –  look at the mess that it had created in Zimbabwe and Venezuela. Hence, central banks are tasked to strike a delicate balance between an inflation which is sufficient to stimulate the economy but would not burden consumers.

Recently, inflation has been a hot topic among Malaysians. This is because inflation has been on the upper-side since the beginning of 2017. In fact, inflation in September 2017 hit 4.3% but eased in October 2017, at 3.7%. I believe that the average inflation this year will be above 3%.

How will inflation affect your savings and investments?

You are all savers and investors as soon as you start earning an income. Most of your first investment is mandated in the form of EPF. EPF doubles as a savings account and an investment account for your retirement. The saving component is derived from the mandated contribution into your EPF, at the rate of between 11% to 8%. Of course, your employer co-contributes between 12% to 13%, depending on your salary.

The investment portion of EPF is achieved by the payment of dividend declared by EPF every year and the reinvestment of that dividend. The effect of the reinvestment of that dividend will be compounded over time until your retirement age is reached. Through savings and investing, it is hoped that you will be able to build a decent nest egg.

Because inflation decreases your value of money over time, your savings and investment in EPF will also be effected.

Malaysia’s average inflation in 2016 is about 2.1%. At the same time, EPF dividend return in 2016 is at 5.7%. That means there is a 3.6% actual growth in our savings and investment in EPF. If all things being equal for the foreseeable future and you no longer contribute to EPF, a 3.6% actual growth means that it will take 20 years for your investment in EPF to double (compounded of course). For example, RM100,000 will become RM200,000 in 20 years. In another 20 years (40 years in total), RM200,000 will become RM400,000.

However, if the actual growth is 5%, with all things being equal for the foreseeable future and you no longer contribute to EPF, it will take you 14.4 years to double up your money in EPF (compounded). For example, RM100,000 will become RM200,000 in 14.4 years. In another 14.4 years (about 29 years in total), that RM200,000 will become RM400,000. In another 11 years (40 years in total), that RM400,000 will become roughly RM714,285.

This illustration, although superficial, shows how a difference of 1.4% (5% – 3.6%) in actual growth, compounded over a lengthy 40 years, could affect your nest egg greatly.

Is EPF doing enough?

It is quite resounding that the majority of Malaysians do not have enough retirement savings. Two thirds of EPF members age 54 have less then RM50,000 in EPF savings. This is due to many factors including the lack or inability to save money, and possibly the low dividend yields declared by EPF.

As illustrated above, even a net growth of 1.4% can do wonders over time. So is it that hard for EPF to yield a 7% dividend yield per year? Personally, I think a 7% dividend pay out per year is not far-fetched or beyond the realm of possibilities (of course not in a financial crisis which has global implications).

EPF, in my opinion, would have to allocate more fixed income investment (which it holds about 51% in 2016) to more dividend-yielding equities (about 42-43%). Because Malaysia is a small economy, there are only so many quality blue chips, bonds and real estate to go around. Hence, it only make sense to invest in overseas assets. In 2016, EPF has 29% of overseas assets which yields 39% of gross investment income. It is important to note that Norwegian’s sovereign fund, the largest in the world with USD 1 trillion in assets, invest as much as almost all of its assets overseas. This is because Norway has a very small population and economy.

I’m sure EPF is aware that overseas market is providing better yields especially when our local market which had seeing red between 2014 to 2016. On the other hand,  the Dow Jones, Nasdaq, Nikkei and Hang Seng are hitting new recent highs.

However, nothing is as simple as it seems especially when there are other factors which may influence EPF’s investment decisions. Government interference may be one of those factors. Section 11 of the Employees Provident Fund Act 1991 allows the government to give the EPF Board directions as to how the Board performs its functions and duties. Those directions must be adhered so long as they do not go against the EPF Act. The government’s influence in EPF can be seen when Prime Minister made a promise that EPF will invest in American infrastructure. That raised a lot of controversies. But at the same breathe, isn’t it good that EPF is seeking to invest overseas instead of Malaysia?

So, what do we want?

Maybe it is time to reform our pension scheme. Maybe it is time to do away with a pension system like EPF. Maybe it is time to introduce a superannuation scheme.

Instead of making it compulsory to invest in EPF, you are required to invest in superannuation schemes which is similar to the Private Retirement Schemes. That way, you have control over your investment through a multitude of investment funds, and at the same time, developing the local financial industry to service this sector. There will be little or no government intervention into the way your money is invested and you are the master of your destiny.

So what are your thoughts? Should we move away from EPF? Or is EPF is reasonably good and flexible as it allows you to withdraw a portion of your EPF to be invested in EPF-compliant funds? Are there other pension schemes which you would like to share?

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My Journey

October 2017 Portfolio Report

Dear Readers

My portfolio has tanked a little since last September 2017 Portfolio Report.

The main culprit which contributed to my portfolio’s sharp decline in October 2017 is Ekovest. Its share price plummeted after news broke out that Ekovest, may put to a vote, a proposition by Lim Kang Hoo. Kang Hoo’s proposition is that Ekovest purchase a substantial part of IWCity, thus taking IWCity private. To be realistic, no one can tell whether such a deal would benefit the shareholders of Ekovest or IWCity. My opinion right after the news broke (at that time, Ekovest’s shares were still suspended) was that the proposition may not benefit Ekovest. True enough, the market reacted negatively to such proposition as many fear it may change the fundamentals of Ekovest.

If you are holding either counter, I suggest that you take a wait-and-see approach to suss out whether the proposition will go through.

3A 6.50 1.18 1.11 -6.16
AIRASIA 27.09 2.80 3.45 13.65
CIMB 22.66 5.53 6.25 12.86
DNEX-WD 7.00 0.24 0.215 -9.93
EKOVEST 10.20 1.22 0.98 -19.62
EVERGREEN 7.17 0.84 0.76 -9.50

In all, portfolio achieved a 21.5% gain. This is however a decline of 4.22%, from a 25.77% gain, achieved in the last report.

As for dividend, 3A has declared an interim dividend of RM0.018 per share, going ex on 24.11.2017. Similarly, Ekovest has declared a final dividend of RM0.02 per share, which will ex on 27.12.2017. Cash is at 13%.

It appears that the mood in Bursa will remain somber whilst all other exchanges are hitting record highs. If you are affected by the volatility, I hope you are not perturbed by it; have some faith in your picks as long as their fundamentals remain unchanged.

Till next month!

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Analysis of Scientex Berhad

Dear Readers

Today we dissect Scientex Berhad (“Scientex“) to find out what it takes to be “healthy, friendly & happy”.



Scientex consists of two main arms; the manufacturing of plastic packaging products and property development.

Plastic packaging manufacturing

Product packaging typifies the way the goods are sold. Not only does packaging secures goods, it also adds shelf life to certain perishable products and also ensures that products, such as food and medicine, remains hygienic. Moreover, packaging is often seen first before the actual product. Hence packaging gives a presentable appearance which entices buyers and also adds value to the price of the product.

In logistics and warehousing, packaging assists with warehouse organisation and space utilisation. Imagine a scenario where boxes, containing goods, are stacked on a pallet. In order to utilise space efficiently, boxes may be required to be stacked vertically. But staking boxes vertically may increase the risk of the boxes collapsing. However, when the boxes are secured by using a stretch film, the risk of boxes collapsing drops significantly. Hence, efficiency is space utilisation translates to profit.

Stretch film wrapping machine in action. Credit: Wikipedia

The point in which I am proposing is that plastic packaging is a vital component of the clockwork of consumerism. And Scientex, being at the forefront of plastic packaging manufacturing, is able to cash in on consumerism.

Scientex produces a variety of plastics packaging. They can be grouped into 4 broad categories:

  1. Industrial packaging.
  2. Consumer packaging.
  3. Automotive interior.
  4. Green Energy products.

Industrial packaging includes, among others, stretch films (to wrap around pallets), woven bag (bags to store fertilizers, animal feed, cement, etc), raffia string and FIBC bag (basically supersized tote bags which can fit up to 500kg -1000kg of materials).

Scientex  has the reputation as the largest stretch film producer in Asia Pacific and stretch film is the core of the manufacturing division. Credit: Scientex Bhd. 

On the consumer side, Scientex’ manufactures plastic wrapping and packaging for breads, beverages, ramen/instant noodles, fresh food products and feminine products. It also provides the printing services for the wrappers and packaging.

Scientex produces polymer products and skin materials from PVC or thermoplastic polyolefin (“TPO“) sheets for the automotive sector which are used to wrap, among others,  seats, dashboards, door trims, consoles and armrests giving those items a leather-like appearance and touch. Its clients are mainly Japanese (Toyota, Honda, Subaru, and Suzuki), American (Ford and GM) and local (Proton and Perodua) automotive manufacturers.

On the green energy front, Scientex manufactures films or ethylene vinyl acetate (“EVA“) films which encapsulates solar cells, in solar PV modules. Its functionality is to prevent humidity and dirt from affecting the performance solar cells.

Overall, the manufacturing of plastic packaging represents about 70% of Scientex’s revenue. Notwithstanding that, manufacturing contributed only 30% of Scientex’s operating profit, in FY2017. That accounts to about RM97 million of RM325 million operating profit; translating to a razor thin operating profit margin of about 4%.

Close to 75% of manufactured products were exported overseas where main markets , in terms of revenue contribution, include Japan (21%), followed by Korea (11%) and Indonesia (6.7%), as per FY2016 annual report.

Property development

Scientex’s property development division is a major contributor to top line despite the absence of any synergy between said and the plastic manufacturing division.

Scientex’s property development division focuses on landed housing developments in suburbia across Johor, Melaka and Perak. These property developments consist affordable housing, like Scientex Kulai, Scientex Klebang and Scientex Senai, to luxurious housing developments,  such as Scientex Skudai and E’roca Hills (Kulai).

The gross development value of all of its projects is about RM1.5 billion.

Despite recording less revenue (about 30% of revenue), property development contributed 70% of Scientex’s FY2017 operating profit. Hence, RM227.5 million of operating profit was generated from property sales, in FY2017. That represents an operating profit margin of about 9.5%.


DATA 2017 2016 2015 2014 2013
REVENUE (RM’000) 2,4031,51 2,200,980 1,801,684 1,590,472 1,229,045
OPERATING PROFIT (RM’000) 325,069 312,560 224,978 189,620 146,104
PROFIT TO SHAREHOLDERS (RM’000) 255,873 240,865 158,190 148,450 110,284
SHAREHOLDERS’ EQUITY (RM’000) 1,535,464 1,175,167 941,978 712718 628,665
DEBT (RM’000) 973,909 1,009,439 635,113 664,955 637,732


DEBT TO EQUITY RATIO 0.63 0.86 0.67 0.93 1.01
OCF RATIO 0.43 0.53 0.38 0.28 0.49
OPERATING PROFIT MARGIN (%) 13.53 14.20 12.49 11.92 11.89
PROFIT MARGIN (%) 10.64 10.94 8.78 9.33 8.97
EPS (CENTS) 54.83 105.88 70.43 67.12 51.04
EPS (ADJUSTED) CENTS 52.91 49.81 32.71 30.70 22.81
DPS CENTS 16.00 22.00 22.00 21.00 26.00
DIVIDEND PAY OUT (%) 29.18 20.78 31.24 31.29 50.94
P/E 16.14 5.95 10.01 10.35 10.75
ROE (%) 16.75 20.72 16.89 20.84 17.97

Scientex has a lot going for it in the past 5 years. During that time, its top line has been increasing exponentially to a point that it doubled. No small feat indeed.

In August 2016, Scientex underwent a corporate exercise in the issuance of 1:1 bonus issue of shares. As such, there was a dilution in earnings per share, seen in FY2017.

By my calculations, earnings growth rate, is at 18.9%, throughout the years under coverage. However, to achieve such a high rate of growth, the company had to increase its borrowings. Debt is being used to, improve production in its local plants, fund the expansion of its manufacturing operations in the US, and acquire land to sustain its property development.

As a result of higher short-term borrowings, Scientex’s operating cash flow has been pretty tight. However, it is not a cause for concern for a growing mid cap company.

Insofar as dividend is concerned, Scientex paid decent dividends of an average of 20 cents per financial year under coverage; except in the FY2017, where it paid only 16 cents. Dividend payout is very erratic in my opinion as it ranges from 50% – 20%.

Potentials in  manufacturing 

The Nano6 stretch film which are manufactured by Scientex is still competitive in many ways. It is touted as one of the world’s thinnest stretch films. The film is light, thin, more durable and offers a good transparency (making barcode scanning less cumbersome). Nano6 may be the driving force for the production and sales of stretch films and it is surely worth keeping tabs on it.

Scientex’s collaboration with a Japanese company, Futamura Chemical Co. Ltd, in 2016, led to the construction of Malaysia’s biggest biaxially-oriented polypropylene (“BOPP“) film production plant in Pulau Indah, Selangor. The plant is said to have a capacity of 60,000 tonnes. However, it will only be operating at half of its maximum capacity by the end of 2017. While most of its productions are exported to Japan, there is a strong local demand for BOPP which Scientex is looking to exploit. At the moment, Malaysia imports much of its BOPP needs from overseas.

The US remains an untapped market for Scientex. That market only contributes nominally to Scientex sales; less than 1% of exports of plastic packaging. However, things are about to change when Scientex completes its production plant in Arizona. The plant is slated to manufacture stretch films (presumably Nano6) for the US market.  The plant has a maximum output of 30,000 tonne of stretch films per annum and is expected  to boost Scientex’s overall manufacturing capacity of stretch films from 150,000 tonnes per annum to 180,000 tonnes per annum. This expansion will be completed in the end of 2017 with a cost of about USD25 million. Commercial rollout is expected in the first quarter of 2018.

I have mixed feelings about this expansion since the US market only contributes nominally to Scientex’s sales. I foresee Scientex having to spend time and money to develop supply and logistics chains while incurring marketing expenses to build a customer base in the US. As a result, meaningful contribution, if any, can only be seen sometime in FY2019 or FY2020. However, the abundance of shale-gas based resin, for raw material, and savings in logistics, and supply chain, are potential upsides to this venture.

Potentials in property development 

Scientex has purchased 26.4 hectares of freehold land in Rawang. The land is located in the greater Klang Valley region and costs RM85 million. The purchase will only be completed in the first half of 2018. With the addition of the Rawang land, Scientex’s land bank now stands at 1,093 hectares (as at August 2017) and is able to sustain the company for 10 to 15 years.

There are a couple of housing development which will be unveiled in FY2018 for bookings. These projects are located in Durian Tunggal, Melaka (197.4 acres) and Kulai, Johor (121.2 acres).

With many high end developments slowing down, the affordable housing segment, which has been the main thrust of Scientex, continues to enjoy breeze sales due to high demand and affordable pricing. Having survived the general slowdown in the property market in 2017, I expect the property market, in 2018, to be kind to Scientex due to a good mix of affordable housing along with other premium developments.


Scientex is appealing, in my opinion, for the following reasons:

  1. It has a strong reputation and achievements in the plastic packaging industry, especially in the industrial packaging segment.
  2. It is expanding its consumer packaging segment, especially in the BOPP production.
  3. Strong presence in property development with a focus on affordable housing.
  4. Strong access to new packaging and plant technology from Japan and Germany.
  5. Keeping up with reinvestment, by modernising and expanding plants, and replenishing land bank.

I find Scientex unattractive for the following reasons:

  1. US expansion is a big gamble considering that, in my opinion, it has been a market in which they have neglected thus far.
  2. Its expansion and modernisation of plants and equipment may endure a gestation period of a couple of years before there can contribute positively to earnings.
  3. Profit margin in the manufacturing business is already tight even in an environment of low crude oil prices.
  4. Scientex’s share price is selling at a premium. Its fair value, from my calculation (which may well vary yours), is within the range of about RM7.40 – RM7.60 per share.

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  1. Scientex website
  2. Scientex FY 2016 Annual Report
  3. Scientex Q4 FY 2017 Report




Peer-to-peer (P2P) Lending: Maximising gain and reducing risks

Dear Readers

In my previous articles, P2P Financing Tips & Who’s afraid of P2P financing?, I have shared with you an overview of P2P Financing and some tips in choosing a sound SME to invest.

In this article, I will share with you a method to maximise profits in your P2P Lending investment whilst reducing its associated risks.


Reinvesting repayment

Since July 2017, my investment in P2P Lending through Funding Societies Malaysia, has multiplied from 1 portfolio to 3 portfolios.

This rapid expansion was made possible by reinvesting the monthly repayments, from my first and initial portfolio, as they are paid into my account balance, into other crowdfunding exercises. Funding Societies Malaysia makes reinvesting very accessible because the minimum investment amount for a crowdfunding exercise is RM100.

Through reinvesting, I have effectively invested RM1,500 even though I have only invested RM1,000. To illustrate, I have prepared this TABLE.

As you can deduce from the table, I reinvested a total of RM500, in September 2017, that was split into two portfolios of RM300 and RM200 respectively. Now, that RM500, has the opportunity to earn interest, which it wouldn’t have, had it just sat in my account balance (where no interest will be accrued).

Consequently, I am utilising my initial investment capital as efficiently as possible by squeezing every single drop of opportunity there is to earn interest. This is essentially another way of compounding returns – earning interest on interest.

Compounding returns is how wealth is built, over time. The wonders of compounding returns can only be fully taken advantage of when you start investing in the early part of your life. Do this by setting aside a portion of your salary to invest in quality investments such as P2P Lending.

Of course, before committing to any investment, you should stick to a few handy P2P Financing Tips to aid you in sieving out a right SME to invest.

Risk management

P2P Lending, like any other investments, is not immune to risks. The major risk in P2P Lending is the inability of a SME to make repayments associated to the financing. In other words, defaulting on repayments.

However, by picking a financially sound SME in which to invest and adopting proper risk management plan, it is possible to earn a handsome return with relatively low risk.

For example, I have RM454.24, currently, in my account balance (See: TABLE) which I have yet to reinvest. I’m looking into reinvesting RM400 by splitting them into two portfolios of RM200 each. By doing so, I am essentially spreading the risk, should there be a default, by investing in smaller amounts across multiple portfolios. Not only do I maximise my returns, I am also limiting any untoward risk which may affect my investment. That is definitely a win-win scenario.


It has been 4 months since I have started investing in P2P lending and I have gained a return of 3.7% (excluding service charges). I have already achieved a higher return rate than a 12-month-return-rate of most fixed deposits plans in Malaysia. And I did it in just 4 months.

Because of the low default rate, none of my portfolios experienced any hiccups or defaults. As long as I continue reinvesting my returns and capital, and adopting a risk management system, I anticipate that I will be receiving a total return of ~6% (excluding service charge) by year’s end. Not too shabby for an investment timeline of only 6 months.

So, what are you thoughts of this investment strategy? Do drop me a comment.

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Helpful links

Click the link if you would like to know more about P2P financing with Funding Societies Malaysia.

Click this LINK to register an account with Funding Societies Malaysia and earn RM50 when you deposit and invest RM1,000.00 through them.








My Journey

September 2017 Portfolio Report

Dear Readers

Did we just escaped an all out nuclear calamity by the skin of our teeth? It sure did seem like it.

Although the world has moved on from the peak of the rhetorics between the Delusional Mr President and Little Rocket Man, the effect of such a threat is still lingering in the market to the extent that money is being reaped off from the equity market to be sown in gold, Yen and bonds (traditionally safe haven investments in anxious times).


Aggravating the already dire situation was the Fed’s indication that it will raise interest rate in December 2017. Since such announcement, the Greenback has been strengthening and an outflow of foreign funds, from the Malaysian equity market, is gaining prominence. The effect of which meant Bursa went into consolidation mode thus reinforcing September’s notoriety as consistently the worst performing month for Malaysian equities for some time now. It is currently on a 7-8 days bear streak with no light at the end of the tunnel just yet.

Considering everything that has happened, my portfolio remains resilient. In fact it gained 1.5%, down from a gain of 3%, right after the nuclear war rhetorics between North Korea and the USA.

The star performer was the shares of Samchem which rallied quite a bit (about 20%) bringing it back to the black. I disposed half of my holdings at RM0.995 making a tidy profit and channeled that profit to purchase more of blue chip stocks such as CIMB which experienced a gap down.

3A 6.45 1.18 1.14 -3.62
AIRASIA 28.40 2.80 3.45 23.30
CIMB 22.06 5.53 6.30 13.77
DNEX-WD 5.40 0.245 0.215 -12.45
EKOVEST 11.00 1.22 1.09 -11.00
EVERGREEN 7.20 0.84 0.79 -6.00
SAMCHEM 9.00 0.945 0.955 1.05%

I am upbeat about the dividend payments from AIRASIA, SAMCHEM and CIMB in October and November 2017. In all, my portfolio has achieved a 25.77% gain this year, inching ever closer to the 30% mark. Cash is at ~10% of portfolio.

Lets see what October has in store for us.

How well did your portfolio brave the bear of September? Do drop a comment.

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Who’s afraid of share margin facility?

Dear Readers

Leverage is a double-edge sword.” You may have heard this adage ever so often. Leveraging is the usage of debt to acquire an asset.

There are many forms of leveraging. However. as the heading suggests, we will be sharing our thoughts about share margin facility (“SMF“), through our experience.

Having too much leverage is like walking on a tight rope. Credit: finpipe
What are the benefits of leveraging?

From an investment perspective, leveraging can magnify your gains. This is true when the gain achieved from leveraging is higher than the cost of borrowing.


If the RM1,000.00 which you have borrowed, has achieved a yield of 10% per annum, when compared to an interest rate of 3% on an annual basis (cost of borrowing),  you will have a net gain of 7%. In other words, you have pocketed a gain of RM70.00, which you would not have, had you not used leverage.

Further, leverage also provides you with additional liquidity to take advantage of an opportunity when it arises.

What are the downfalls of leveraging?

Leverage is risky and often works in the opposite by magnifying your losses.


If the RM1,000.00 which you have borrowed from the bank, with a 3% costs of borrowing per annum, incurred a loss of 10% per annum,  you will have a net loss of 13%. That means you have lost RM130.00, which you would not have, had you not used leverage.

In addition, interest, imposed on leverage, is often costly.

What is a SMF?

SMF is a line of credit which is often secured by a collateral. It may be easier to compare SMF to a revolving credit facility (for example, credit card) in that you only draw down funds as much as the credit limit allows.

There are a few components to a SMF, which this write-up intends to touch upon, to assist you in better understanding how a SMF works:

  1. Credit limit.
  2. Collateral.
  3. Margin account.
  4. Interest.
  5. Margin call.
What is a credit limit in a SMF?

Much like a credit card, SMF has a CREDIT LIMIT which depends largely on your disposable income. Once it is approved, you may, at any time, draw down funds, by providing an acceptable share as collateral.


Investor X has a credit limit of RM500,000.00 in his SMF. Before he is able to draw down the facility, he must pledge some shares in a form of a collateral.

What type of collateral does a SMF provider accept?

Most financial institutions accept COLLATERALS in the form of:

  2. Mutual funds.
  3. Fixed deposit.

It is important to note that a certain multiplier is attached to a form of collateral. Usually, a multiplier for fixed deposits, pledged as collateral, is set at 2 times/2X whereas a multiplier of a share, pledged as collateral, is set as 1.5 times/1.5X.

Multipliers are important because they multiply the value of your collaterals in relation to the available credit thus allowing you to control a larger amount from a smaller amount.


Going back to Investor X, he would now like to draw down RM100,000.00 from his SMF which has a credit limit of RM500,000.00, by pledging, either RM50,000.00 of fixed deposit (2X) or RM66,666 worth of shares (1.5X).

What is a margin account?

Upon a successful application for SMF, a MARGIN ACCOUNT will be created for you. A margin account is an account where the drawn down funds are made available. This will also be the account which you will be using  to make purchases of shares through SMF.

The margin account has an associated CDS account with Bursa Malaysia (“Collateral CDS Account“). Shares which are pledged as collateral, and shares which are purchased through the margin account, are held in the Collateral CDS Account.


Returning to Investor X who has decided to pledge 5,000 shares of SCIENTEX as collateral.  He fills out the appropriate Bursa Malaysia Transfer of Securities Request form which will transfer 5,000 shares of SCIENTEX from his personal CDS account to the Collateral CDS Account.

Upon confirmation that the 5,000 shares of SCIENTEX has been transferred to the Collateral CDS Account, his SMF provider makes available a RM100,000.00 line of credit to his margin account which Investor X can then draw down as when he pleases.

Seeing a right moment to make a purchase of shares, Investor X then draws down RM50,000.00 of the RM100,000.00, from his margin account to finance the purchase of 15,000 shares of AIRASIA.

A few months later, he draws down the remaining RM50,000.00 line of credit to purchase 7,500 shares of CIMB.

Therefore, the Collateral CDS Account holds 5,000 shares of SCIENTEX, 15,000 shares of AIRASIA and 7,500 shares of CIMB.

How is interest calculated?

Currently,  INTEREST on most SMF is about ~5% per annum. Hence, the cost of borrowing is quite high.

Interest is accrued on a daily basis, commencing from the first drawn down, on all outstanding credit balance. There is no obligation to make monthly repayments (as there is none per se) so long as there is no margin call.


Going back to Investor X, his first draw down, in the amount of RM50,000,00 was to finance the purchase of 15,000 shares of AIRASIA. Interest will start to accrue on that RM50,000.00, at that point in time, on a daily basis, at 5% per annum. 

If you remember, Investor X, a few months later, made another draw down of RM50,000.00 to purchase 7,500 shares of CIMB. At that point in time, interest will accrue, on the credit balance of RM100,000.00 instead of the previous RM50,000.00.

A costly interest rate is further exacerbated by the fact that any outstanding sum on unpaid interest will be added onto the principal amount (like an interest of a credit card). In other words, interest is compounded.

Hence, your debt grows exponentially because of the compounding interest. In the long run, this will also affect your loan-to-value ratio (“LVR“) (see below). Therefore, you should act sensibly by paying off any accrued interest, which is calculated on a monthly basis, to ensure that your LVR is well-managed.

What is a margin call?

The benefit of a SMF comes with certain obligations. One of such is to maintain a certain fixed ratio between your outstanding credit (principal + interest) and the value of  your collateral or also known as a LVR (loan-to-value ratio).

LVR = outstanding credit ÷ value of collateral

Generally, most SMF providers require that margin account be maintained at or a lower  LVR of 60%. 60% is usually the threshold level. I’ve seen a couple of SMF providers who set a threshold level of 70% (this is much better that a threshold level of 60%).

MARGIN CALL is a demand by a SMF provider that you deposit fresh funds to bring the LVR at or below the threshold level.


Back to Investor X who has been maintaining an outstanding credit amount of RM100,000.00. The value of the shares in the Collateral CDS Account is in the amount of RM166,666.00, in aggregate. Accordingly, Investor X is maintaining a LVR of 60%.

Unfortunately for Investor X, the share market crashed as a result of an unforeseeable alien invasion which caused the value of his collateral to fall by 50%. Consequently, the LVR of his margin account has skyrocketed to 120% (RM100,000.00  ÷ RM83,333.00). 

To maintain a LVR of 60%, he must pare down the outstanding credit in his margin account (by injecting cash) for a failure to do so may cause the SMF provider to sell off the shares in the Collateral Account, and demand any shortfall from Investor X.

What to consider prior to applying for a SMF?

Roughly, prior to obtaining a SMF, you should give consideration to the following factors:

  1. Whether your broker is in the list of approved brokers by the SMF provider?
  2. What is the LVR?
  3. What can be used as collateral?
  4. What is the multiplier attached to each collateral?
  5. What is the prevailing interest rate?
  6. Will interest be compounded?
  7. What shares are acceptable to the SMF provider for the purpose of a collateral? [Because of their volatility, penny stocks may not be in a list of shares which are acceptable by the SMF provider as collateral.]
  8. Is there a base price value for collateralised shares and are you comfortable with that base price value? [A base price value means that even if the share of, say MAYBANK, is RM9.80 in the market, the SMF provider will only accept a base price value, of a share of MAYBANK, as RM8.00, for the purpose of accepting the share as a collateral. In other words, your shares may not worth much as collateral.]
  9. Is there any flexibility to pare down your credit limit?
  10. How much is the stamp duty? [Stamp duty depends on the credit limit – if we are not mistaken.]
  11. How helpful is the sales team? [From your interaction with the sales team, we recommend that you gauge their service performance. You need a SMF provider which provides a helpful service.]

Debt should not be connoted as a form of negativity. There are good debts and there are bad debts. An SMF is what we consider to be a good debt. It allows one to generate income from it. On the contrary, mounting debts on a credit card to fund your lifestyle purchases are bad debts.

Leverage should be viewed in a holistic manner in one’s portfolio and it can be utilised in many different ways, as long as the need for capital arises. Hence, our stance is that every investor should have a margin account even if there is no impending need for it yet. Like substituted soccer players, you can keep them on the sideline and only put them to play when it is necessary to do so.

So what are your thoughts about leveraging and SMF in general? Do leave a comment.

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Analysis of Ajinomoto (M) Bhd

Dear Readers

In the last 11 trading days, the shares of Ajinomoto (M) Bhd (“Ajinomoto“) took a nosedive from an average price of RM26 (24.08.2017) to an average price of RM19 (13.09.2017). That is an average RM7 drop in share price. Percentage-wise, that is close to a 27% loss.

In my personal view, the negative movement in the share price was caused by:

  1. an adjustment to the share price as the dividend and special dividend, to the tune of RM1.55, went ex on 30.08.2017; and
  2. a widespread selloff in a cascading manner.

There were high volumes of transactions at that time during which RM400 million was wiped off from Ajinomoto’s market capitalisation.


For the benefit of those who are in the dark, a special dividend was approved for distribution from a one-off compensation of RM166 million. The compensation is with regard to a compulsory acquisition of a 7.58 acre land, at Jalan Kuchai Lama, KL. The land which houses one of its plants was acquired by the government for the Mass Rapid Transit Line 2 project.

Now as it seems like the dust has settled, the more fitting question to be asked is whether the shares of Ajinomoto are attractive at their current average price of RM19?

Let’s find out.


Ajinomoto is part of the Ajinomoto Group which was founded in Japan. Its principle business is the manufacturing and sale of umami seasoning. Umami is one of the basic tastes such as sweetness, saltiness, sourness and bitterness.

In Malaysia, Ajinomoto’s business can be categorised into the manufacturing and sale of:

  1. retail products; and
  2. industrial products.

Apart from the basic monosodium glutamate a.k.a. MSG seasoning (AJI-NO-MOTO), Ajinomoto’s retail products have branched out to include chicken stock (TUMIX), instant seasoning of various local dishes (SERI-AJI), pepper (AJI-SHIO), sweetener (Pal Sweet), blended garlic and onion-based seasoning (AJI-MIX) and a premium taste enhancer (AJI-NO-MOTO Plus).

Meet the Ajinomoto retail familia. Credit: Ajinomoto

Its industrial products consist of TENCHO which encompass a range of industrial food ingredients used in the food processing industry such as noodles, sauces, processed food and etc.

Apart from the Malaysian market, which accounts for 60% of Ajinomoto’s sales, other sources of revenue come from overseas markets such as the Middle East (14%) and Asian (24.8%), among others.

During the FYE 2017, Ajinomoto’s retail business contributed RM305.3 million (73%) to its revenue whilst its industrial business contributed a cool RM114.6 million (27%).


Ajinomoto is a well-known for its umani seasoning since it was first marketed in Japan in 1909.

In Malaysia, Ajinomoto has become a household name since 1961 due to its aggressive television marketing in the past. Further, the use of umani seasoning is deeply entrenched and synonymous with Asian-styled cooking. The versatility of umani seasoning meant that it can be incorporated into a variety of ethnic cooking including Indian and Malay.

Through its leading market share and strong branding in the local scene, Ajinomoto’s products gets an unparalleled competitive edge over rivals.

Being a staple consumer product means that it has enjoyed steady sales even during economic downturns and the same will stay true in the future.


Ajinomoto plans to introduce a new segment in its business which may entail the manufacturing and importing of food products as part of its plan to diversify beyond the seasoning products line. It wants to emulate what its counterpart in Thailand is doing; by selling food products and food seasoning. If indeed so, there is a likelihood that Ajinomoto may be producing or importing 3-in-1 coffee sachet, canned coffee and instant noodle. However there is nothing concrete to this regard yet.

The company also intends to boost sales in the Middle East as it sees potential in that market, especially in Saudi Arabia, Jordan, Oman and Yemen. Ajinomoto’s product which are produced in Malaysia has a better chance of penetrating the Islamic market.

DATA 2017 2016 2015 2014 2013
REVENUE (RM’000) 419917 400200 340376 345351 332908
OPERATING PROFIT (RM’000) 211469 53941 40596 37596 28085
PROFIT (RM’000) 187462 40787 29733 28041 19403
SHAREHOLDERS’ EQUITY (RM’000) 474638 307813 279524 262077 244344
DEBT (RM’000) 57800 59240 53422 45942 50060


DEBT TO EQUITY RATIO 0.12 0.19 0.19 0.18 0.21
OCF RATIO 1.20 1.26 0.92 1.27 0.76
OPERATING PROFIT MARGIN 0.50 0.13 0.12 0.11 0.08
PROFIT MARGIN 0.45 0.10 0.09 0.08 0.06
EPS (CENTS) 308.30 67.10 48.90 46.10 31.90
EPS (ADJUSTED) CENTS 308.30 67.10 48.90 46.10 31.90
DPS CENTS 0.00 33.80 20.00 18.50 20.00
DIVIDEND PAY OUT (%) 0.00 50.40 40.90 40.10 62.50
P/E 5.16 13.40 12.90 11.10 13.90
ROE 39.50 13.25 10.64 10.70 7.94

With the exception of FY2017, there is a steady growth of earnings from FY2013 to FY2016. FY2017 is a little tricky though as there was a one-off gain, of RM166 million, from the said compensation. Generally a one-off gain would be discarded when valuing the fair value of a company; Ajinomoto is no different.

Of the RM166 million, only about RM144 million was recognised as profit. This can be seen in Ajinomoto’s Q4 FY2017 income statement and it’s Annual Report for FY2017.

By discarding the RM144 million from profit, Ajinomoto made only about RM42 million of profit or an EPS of about RM0.70 for FY2017.

Hence, between FY2013 and FY2017, earnings progressed at the a compound annual growth rate of about 17%. Impressive!

Other praiseworthy qualities are its low debts, good cash flow, improving profit margins and improving business efficiency. Dividend was erratic throughout the years but on the plus side the payout was on the modest side, with the exception of FY2017.


Even if Ajinomoto could sustain its current high growth rate in the foreseeable future, its average price of RM19 per share is, unfortunately, well above its fair value. My calculation of Ajinomoto’s fair value is about RM11.

Before I am accused of ruffling feathers, I would like to fortify my opinion that Ajinomoto is a company with solid fundamentals. Further it has a commendable economic moat in that its core MSG products are resilient from competition and economic downturns.

However, my only concern is that, at the price of RM19, there is a higher risk of a downside than an upside. Hence, a potential investor, contemplating purchasing at RM19 per share, is left with no margin of safety should things take a turn for the worse.

Having good fundamentals should not only be the sole consideration of whether a company is worth buying. This is because those fundamentals may change as time passes. To ensure that you are well protected from any adverse change in the fundamentals of the company, you must deploy a safety net in the form of a margin of safety. That means becoming a part-owner of the company for a sum lesser than its fair value.

While I am not suggesting that Ajinomoto’s share price will likely to decrease to a level near to RM11 over time (in fact it, at the time of writing on 13.09.2017, Ajinomoto’s shares are massively oversold, and may even rebound), I suggest putting Ajinomoto to your watchlist and only contemplating purchasing its shares are priced favourably in the future.

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  1. Q4 FY2017 report
  2. FY2017 Annual Report

P2P Financing Tips

Dear Readers

In my last write-up, P2P financing update, I brought all of you to date with my P2P financing investment through Funding Societies Malaysia. As highlighted previously, P2P financing yields much better returns than traditional investment bonds and fixed deposits. Consequently, it is an effective investment to combat inflation.


Every investment has an inherent risk. P2P financing is no different. The major risk of P2P financing is the risk of a default by a borrowing SME. Fortunately, the default repayment percentage through the platform established by Funding Societies Malaysia is a negligible ~2%.

As for me, I have received 3 monthly repayments (July, August and September 2017) out of an agreed 6 monthly instalments. I am at the midpoint of the repayment schedule which has been a breeze thus far. I do not foresee any hiccups in receiving all of my remaining capital plus interest.

Business Term Financing Fact Sheet

Funding Societies Malaysia makes available, to all of its registered investors, a Business Term Financing Fact Sheet (“Fact Sheet“) for crowdfunding purposes. The Fact Sheet contains all of the necessary information regarding an SME including its financials over a certain period of time. This information is obtained by Funding Societies Malaysia through a due diligence process.

Unfortunately, Fact Sheets are confidential and only accessible to registered investors. Hence, I am unable to disclose the Fact Sheet of my investment. However, Funding Societies Malaysia was very accommodating when they provided a sample Fact Sheet which can be obtained by clicking the link HERE. As the format of the sample Fact Sheet is similar to that of the format of other Fact Sheets, is therefore ideal to be used for illustration purposes.

For convenience, I will refer to the SME in the sample Fact Sheet as Chocolate SME. As you click on the above link, you will notice that there are several headings in the sample Fact Sheet. The headings and their contents are listed in the table below:



Financing Details Contains all of the terms of the financing including financing tenure, simple interest rate, effective interest rate (compounded) and other conditions of finance.
Investors’ Repayment Schedule Contains an anticipated repayment sum which investors are to receive for each instalment until the end of the tenure.
Company’s Summary

Contains vital information on the SME including its incorporation date, the nature of the SME’s business, paid up capital, employees, existing litigation, any blacklist and financing records.

Financing records will summarise the SME’s other financial commitments with other lenders.


Director’s & PG’s Summary Contains vital information about all of the directors of the SME.
Financials Contains the past audited financials of the SME.
Financial Ratios Contains an evaluation of the financials of the SME.
Bank Statement Summary Contains a snapshot of the SME’s bank accounts.
Risk snapshot Contains an outline of the risks associated with the SME.
Comments Contains important highlights made by Funding Societies Malaysia.

The sample Fact Sheet contains information which you may analyse to make an inference as to the sustainability of the business and financial liquidity of Chocolate SME.

However, as a prudent investor, you should nonetheless read and understand all of the contents of a Fact Sheet. For the purpose of this write-up, allow me to list some of the major considerations which you should take into account prior to deciding whether to invest in Chocolate SME.

First consideration: Nature of business

Chocolate SME is a manufacturer of cocoa products in Malaysia, mainly chocolates. The chocolates are sold to chocolate retailers including the ones in Langkawi.

As excited as you are, at the thought of investing in a chocolate confectionery manufacturer,  you will need to satisfy yourself of the risks involved in Chocolate SME’s business.

But what makes a business risky? Well, any two persons looking at the same business may reach a different conclusion about the sustainability and risks associated with that business. Hence the answer to that question is better left to your knowledge, experience, power of observation and common sense.

For example, if an SME is in the business of selling typewriters, I would categorise it as a risky business. It is apparent, through my knowledge, experience, observation and common sense that not many people, if at all, are still using typewriters.

As chocolates is a popular confectionery and there is a strong demand for it in Malaysia – especially in a tax haven like Langkawi. Therefore, there is no reason for you to discount the sustainability of Chocolate SME’s business.

Second consideration: Debt repayment history

Ever heard of the saying, “History repeats itself”. The knowledge of the debt repayment history of an SME is crucial in gauging whether it has the means to make timely repayments.

In the case of Chocolate SME, the “Payment Behaviour and Financing Record” item of the Fact Sheet indicates that Chocolate SME has a good payment history across 2 existing accounts. That means that it is truly committed and financially capable of satisfying its debts.

Third consideration: Current ratio

The “Financials” part of the sample Fact Sheet consists of a summary of the income statement (the upper part of the Financials) and the balance sheet (the lower part of the Financials) of Chocolate SME. Some parts are blacken out as the information is not currently available.

With the available information, you should analyse whether Chocolate SME has too much debt for its own good in the short term. Why short term? It is because the financing tenure is only for 12 months (See: “Tenure” under the heading of “Financing Details”) . Therefore, it is only necessary to look at the ability of Chocolate SME to service its short term debt.

For the financial year-end (“FYE“) 2016, Chocolate SME had about RM2.7 million in current asset. Current asset is classified as an asset which is likely to be converted into cash within a year. For example, inventories are one of such types of assets because they can be easily sold in return for cash. Other types of current assets are cash (or its equivalent), equipment and receivables (money owing by debtors).

On the other hand, in the same year, Chocolate SME had about RM370k in current liabilities. Current liabilities are classified as moneys due to creditors within a year and are usually short term debts and account payable (to utility provider, suppliers and etc).

As a general rule of thumb, you want to invest in an SME which owns more current assets than current liabilities. This can be measured by using a current ratio.

Current ratio = (current assets ÷ current liabilities) x 100%

The current ratio of Chocolate SME for FYE 2016 was about 720%. This means, for FYE2016, Chocolate SME had roughly 7.2 times more current assets than current liabilities. Very impressive indeed.

Fourth consideration: Inventory turnover ratio

An inventory turnover ratio is simply a measurement of the effectiveness of an SME in dealing with the sales of inventories. In other words, how good is Chocolate SME in selling their inventories. Why is this relevant? This is because the more inventories are being sold – the more income that is generated by Chocolate SME. And by having more income, there will potentially be better cash flow to pay off outstanding financing liabilities.

An inventory turnover ratio is obtained by dividing the cost of goods sold with the average inventory. The higher the ratio, the better.

Inventory turnover ratio = cost of goods sold ÷ average inventory

For FYE2015, the inventory turnover ratio was at 6.70. This means the inventories were sold 6.7 times over during the course of FYE 2016. Even though it was lower than the than the 7.14 and 7.74 recorded for FYE 2013 and FYE 2014 respectively, that difference is not too far off.

Fifth consideration: Receivables Turnover

Receivables turnover ratio is a measure of how efficient Chocolate SME is able to collect receivables. Receivables means money/accounts to be received by Chocolate SME from its debtors. The more money Chocolate SME receives, the better it is for its cash flow. Consequently, a better cash flow translates to a better ability to pay monthly financing repayments.

A receivable turnover ratio is calculated by dividing net credit sales with the average account receivable. The higher the ratio, the better.

Receivable turnover ratio = net credit sales ÷ average receivable

For FYE 2015, the ratio was 7.40. This means that Chocolate SME was successful in collecting 7.4 times the average receivables during the course of FYE 2015. The ratio of 7.40 was slightly lower than the 8.75 and 8.37 recorded for FYE 2013 and FYE 2014 respectively but not by a huge margin.

Sixth consideration: Risk Snapshot and Comments

The Fact Sheet also contains Funding Societies Malaysia’s comments and observations of the financials and the risks associated with an investment in Chocolate SME.

I find that these observations are insightful as I was able to discern that:

  1. Chocolate SME’s products are sold on a healthy profit margin which has been improving other the years.
  2. The purpose of the financing is to expand its production capacity. I would be less inclined if the purpose of the financing is to pare down other outstanding debts.
  3. The directors of Chocolate SME are experienced business people.

Before I end, I just want to reiterate that the above considerations are not meant to be exhaustive in nature. There are many other considerations which you can take into account in determining whether a SME has a sustainable business model with the means of making financing repayments.

And more importantly, I hope that this write-up will arm you some guidance, courage and the confidence to nudge you into investing in P2P financing as a means to diversify your investment portfolio.

Your safeguard to the risks in every investment, including P2P financing, is knowledge.

Till then, happy investing!

Helpful links

Click the link if you would like to know more about P2P financing with Funding Societies Malaysia.

Click this LINK to register an account with Funding Societies Malaysia and earn RM50 when you deposit and invest RM1,000.00 through them. 

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My Journey

August 2017 Report Card

Dear Readers

With the end of August, comes September,which has always been a notoriously dreadful month for Malaysian equity.

There is always a silver lining even in a pessimistic month like September. However, to take advantage of the impending bargains, I suggest that you keep some cash lying around. About 19% of my portfolio is in cash at the moment – ready to pounce at a moment’s notice.

Bruce Plante Cartoon: The Stock Market
Credit: Bruce Plante Cartoon
What’s new?

I’ve added DNEX-WD (warrant) into my portfolio when the market was frantically disposing DNEX’s shares because of its lacklustre earnings, last quarter.

A couple of counters announced the distribution of dividends: Samchem @ 1 cents per share (30 Aug) and Airasia @ 12 cents per share (5 Sept). Rest assured, the dividends will be reinvested.

Presently, my portfolio consists of the following counters:

Airasia Bhd – 21.25% gain

CIMB Group Holdings Bhd – 31.88% gain

Dagang Nexchange Bhd WD (warrant) – 12.45% loss

Ekovest Bhd- 6.49% loss

Evergreen Fibreboard Bhd – 4.72% loss

Samchem Holding Bhd – 13.13% loss

The portfolio, despite of the losses suffered by 4 out of 6 counters, only retreated 0.3% to a 24.2% gain. You may compare August’s performance with July’s performance.

Until next time. Happy investing.

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Becoming Warren Buffett

Dear Readers

Ever thought how Warren Buffett became Warren Buffett?

HBO Documentary shows an interesting insight on the life of Warren Buffett.

Do enjoy.