How we select stocks using FVMR

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In this presentation you will get to know A. Stotz Investment Research as well as learning important lessons, based on research, about selecting stocks

You will learn what FMVR stands for, why it is important and how to select stocks using FVMR. Inside we present the result of thousands of hours of research that is related to FVMR.

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  • D:SKDTestingTesting_EPS accuracy_Thailand.xlsx
  • D:SKDTestingTesting price momentum.xlsm
  • D:SKDTestingTesting price momentum.xlsm
  • C:Dropbox (LifeFORCE)AstotzResult from global beta.xlsx
  • C:Dropbox (LifeFORCE)AstotzResult from global beta.xlsx
  • C:Dropbox (LifeFORCE)AstotzResult from global beta.xlsx
  • How we select stocks using FVMR

    1. 1. 119 August 2014
    2. 2. 19 August 2014 2 Investment research focused on stock selection Sornsak Kongcharoenpanich Andrew Stotz, CFA
    3. 3. 19 August 2014 3 What we do:  Advise One Asset Management as well as regional and global fund managers  Focus on selecting stocks across Asia  Construct and rebalance portfolios of selected stocks (e.g. Thailand, ASEAN, Asia ex Japan, Asia ex China) Who we are:  Andrew Stotz has been a financial analyst since 1993  Sornsak Kongcharoenpanich has worked as a financial analyst with Andrew since 2000  Alexander Wetterling joined the team in 2013 How we do it:  Our universe of potential investments is 7,500 stocks across Asia  In-depth academic-style research on stock selection and portfolio construction  Select stocks using FVMR format Introducing A. Stotz Investment Research
    4. 4. 19 August 2014 4Source: A. Stotz Investment Research Our universe of investable stocks in Asia
    5. 5. 19 August 2014 5 Valuation  How profitable a company is, and the trends in that profitability, is a window on management  Profitability tells us whether management policies are having a positive impact  We look for high or rising profitability  We consider both absolute and relative valuation to find companies with good fundamentals at cheap prices  That perfect combination is rare so we balance valuation with fundamentals  If fundamentals and valuation are favorable, positive momentum in price and earnings would be fantastic  We use momentum to avoid “value traps” (cheap stocks that never move)  And sometimes low momentum can reveal opportunity  Prefer companies that have low business and price risk  Not every stock in the portfolio is included based solely on maximum gain  Some stocks provide a stable return and high dividend, which contributes to overall long-term performance Sources: A. Stotz Investment Research A. Stotz Four Elements Fundamentals Momentum Risk  Pick stocks based on attractiveness with regard to Four Elements: Fundamentals, Valuation, Momentum, and Risk  Compare the attractiveness of each element versus all other investable companies  Start our stock-selection process from the most attractive of these stocks
    6. 6. 619 August 2014 High profits almost always fall Note: The results of this study were published on 12 June 2012
    7. 7. 19 August 2014 7 Sources: Maybank Kim Eng, Bloomberg Note: There is survivorship bias in this sample as companies that had previously closed were not included, their inclusion would have suppressed the lowest quintile return Reversion to mean occurs for ‘stars’ but not for ‘dogs’
    8. 8. 19 August 2014 8 Sources: A. Stotz Investment Research, Thomson Reuters Profitability: Revert to slightly above average Growth: Synergy wiped out by leverage CPALL: Profitability and growth6 out of 10 CPALL: ROA (%) & ranking CPALL: EPS growth (%) & ranking Dec-10 Dec-11 Dec-12 Dec-13 Mar-14 Best 2 14 15 17 3 4 6 5 5 6 7 8 9 Worst Note: CPALL is benchmarked against 310 companies in Asia. - 2 4 6 8 10 12 14 16 18 20 Dec-10 Dec-11 Dec-12 Dec-13 Mar-14 CPALL Asia Cons Staples Thailand Cons Staples (%, Return on assets) CPALL: EPS growth (%) & ranking Dec-10 Dec-11 Dec-12 Dec-13 Mar-14 Best 2 3 38 4 33 20 5 6 (5) (12) 7 8 9 Worst - 20 40 60 80 100 120 140 160 180 Dec-10 Dec-11 Dec-12 Dec-13 Mar-14 CPALL Asia Cons Staples Thailand Cons Staples (EPS growth indices, rebased to 100) Highest profitability companies eventually fall
    9. 9. 19 August 2014 9 Valuation Sources: A. Stotz Investment Research, Thomson Reuters CPALL: A. Stotz Four Elements Fundamentals Momentum Risk Worst Neutral Best Rank relative to peers* W B W B W B W B (%) Dec '10 Dec '11 Dec '12 Dec '13 Mar '14 Operating profit margin 6.6 6.6 7.0 5.6 5.2 Net margin 4.9 5.2 5.9 3.9 3.3 Asset turnover 292.3 299.9 295.2 150.9 163.7 Return on assets 14.4 15.5 17.3 5.8 5.3 Return on equity 36.5 40.5 45.2 37.7 32.7 (x) Dec '10 Dec '11 Dec '12 Dec '13 Mar '14 Price-to-sales 1.3 1.9 2.2 1.4 1.4 Price-to-earnings 27.0 36.7 37.6 37.1 42.9 Price-to-book 10.1 13.5 15.3 13.6 13.7 PE-to-EPS growth (PEG) 0.81 1.82 0.99 nm nm EV/EBIT 17.9 26.2 28.8 36.6 37.8 (%) Dec '10 Dec '11 Dec '12 Dec '13 Mar '14 Revenue growth 20.1 15.1 21.5 44.3 57.0 Recurring EPS growth 33.5 20.2 38.0 (4.6) (12.4) Operating profit margin chg. (bps) 83 3 36 (144) (173) 6mth 3mth 1mth 3wk 1wk Price change 20.8 10.1 (2.1) (0.5) (0.5) (x) Dec '10 Dec '11 Dec '12 Dec '13 Mar '14 Current ratio 1.1 1.2 1.2 0.3 0.8 Net debt-to-equity (%) (112.4) (109.4) (128.4) 569.4 539.6 Times-interest-earned 106,827 1,141,455 653,146 9 6 5yr 2yr 1yr 6mth 3mth Beta 0.8 0.9 1.1 1.0 0.9 Profitability has plunged in terms of ROA and ROE compared to Dec’12
    10. 10. 19 August 2014 10 Highest profitability companies are likely to fall within a few years But, they only fall to above average “Once a dog, always a dog”. Be very careful about investing in turnaround stories Source: A. Stotz Investment Research What we learned
    11. 11. 1119 August 2014 Analysts cannot predict future share prices Note: The results of this study were published on 3 March 2014 and 27 May 2014
    12. 12. 19 August 2014 12 Sources A. Stotz Investment Research Do errors in analyst target prices follow a normal distribution?  Is the actual outcome from analysts one year-ahead target prices a normal distribution?  Would some be very wrong on the positive side and some, on the negative side, but most would be clustered around the middle?
    13. 13. 19 August 2014 13 22 6 8 4 9 5 9 8 29 - 5 10 15 20 25 30 35 <-30% -30% -20% -10% +/-5 % 10% 20% 30% >30% Investable Asiaex-Japan(Consensusestimated target accuracy in 2003-2012,%) <== Overly pessimisticconsensus Overly optimisticconsensus==>Accurate consensus Sources: A. Stotz Investment Research, FactSet Analysts’ target prices were extremely wrong 50% of the time “Right” 18% of the stocks “Right” 35% of the stocks
    14. 14. 19 August 2014 14 Sources: A. Stotz Investment Research, FactSet Note: The chart shows the stocks, which were covered by at least three analysts Thailand: The three most over/underestimated by target price 72 40 42 15 (33) 12 (19) (35) (22) 144 42 63 (60) (40) (20) - 20 40 60 80 100 120 140 160 SIRI NOK THRE KCE TRUE PSL 12mth target upside/(downside) Actual return(%) Overestimated group Underestimated group
    15. 15. 19 August 2014 15 Sources: A. Stotz Investment Research, FactSet Note: The chart shows the stocks, which were covered by at least three analysts ASEAN: The three most over/underestimated by target price 105 68 99 (12) 7 10 (4) (20) 23 131 148 143 (50) - 50 100 150 200 250 SURYA SEMESTA INTERNUSA PT GAJAH TUNGGAL TBK PT BEKASI FAJAR INDUSTRIAL ESTA KNM GROUP MALAYSIAN PACIFIC INDS. NICKEL ASIA CORP 12mth target upside/(downside) Actual return(%) Overestimated group Underestimated group
    16. 16. 19 August 2014 16 Predicting the future of a stock’s price is nearly impossible Analysts are incentivized to be extreme (and mainly wrong) in their predictions Focus on where a stock is today, not on where someone guesses it will be next year Source: A. Stotz Investment Research What we learned
    17. 17. 1719 August 2014 Analysts cannot predict EPS Note: The results of this study were published on 3 March 2014 and 27 May 2014
    18. 18. 19 August 2014 18  Each month, we averaged the forecasted EPS absolute deviation during 2001-2013 from forward-11 months to the result date  Analysts continuously adjusted their forecasts until the result date  In Asia, analysts started the year by being 29% off with their EPS estimates, their estimates move towards actual results  Even though analysts’ become more accurate closer to the result date, they are still 16% amiss with their predictions at that date  On average, throughout a year, analysts’ EPS forecasts are inaccurate by about 22% The average analysts downgraded EPS forecast by half Sources: A. Stotz Investment Research, Thomson Reuters 29 16 10 12 14 16 18 20 22 24 26 28 30 Asia ex-Japan - Average (2001-2013) (% forecasted EPS deviation from actual EPS)
    19. 19. 19 August 2014 19  We chart the time series of over/under forecasted EPS, starting from forward-11 months to the result date for every year, FY2001-FY2013  In 12 out of 13 years, analysts started with expectations too high and adjusted them down  In the crisis year 2008, the big drop in Asia corporate earnings surprised analysts, who still started the year at 49% above actual earnings  For the past three years, analysts’ have, on average, cut their EPS forecast by two thirds by the time they have reached the result date  Conclusion: In nearly every year, analysts started with high estimates, failed to predict downturns, and were always overly optimistic Analysts in Asia are overly optimistic and fail to foresee declines Sources: A. Stotz Investment Research, Thomson Reuters 62 41 33 29 28 22 16 12 30 20 18 7 12 8 49 24 7 8 13 7 33 12 34 11 37 11 - 10 20 30 40 50 60 70 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Monthly forecasted EPS deviation from actual EPS (% over/(under) forecasted EPS)
    20. 20. 19 August 2014 20 Analysts are incentivized to be overly optimistic Profit from their predictable behavior Focus on current and past earnings and how they position the company for future earnings Every time you think you should rely on a forecast, stop and think again! Source: A. Stotz Investment Research What we learned
    21. 21. 2119 August 2014 Value stocks earned a 2% premium Note: The results of this study were published on 9 November 2012
    22. 22. 19 August 2014 22 Sources: Maybank Kim Eng, Datastream Value beats growth in developed and emerging markets
    23. 23. 19 August 2014 23 Sources: Maybank Kim Eng, Datastream In Asia, value outdoes growth in seven out of 10 countries
    24. 24. 19 August 2014 24 Valuation Sources: A. Stotz Investment Research, Thomson Reuters Notes: *Bars are decile rankings of most recent period. na = not available, nm = not meaningful SVI: A. Stotz Four Elements Fundamentals Momentum Risk Note: Benchmarked against 250 non-financial companies in Thailand. (%) Dec '10 Dec '11 Dec '12 Dec '13 Mar '14 Operating profit margin 8.4 8.5 15.4 20.0 20.2 Net margin 9.1 8.3 16.7 20.3 19.4 Asset turnover 168.4 176.5 173.2 140.1 140.8 Return on assets 15.3 14.6 28.9 28.4 27.3 Return on equity 30.5 (62.2) 66.2 47.9 44.6 (x) Dec '10 Dec '11 Dec '12 Dec '13 Mar '14 Price-to-sales 0.9 0.8 1.2 1.2 1.2 Price-to-earnings 10.0 nm 7.2 6.0 6.1 Price-to-book 2.7 4.8 3.2 2.3 2.2 PE-to-EPS growth (PEG) 0.68 nm 0.04 0.28 0.22 EV/EBIT 8.7 5.9 5.8 4.1 4.7 (%) Dec '10 Dec '11 Dec '12 Dec '13 Mar '14 Revenue growth 24.6 4.5 (8.8) 3.9 10.0 Recurring EPS growth 17.2 (8.1) 83.3 24.3 34.9 Operating profit margin chg. (bps) (75) 12 683 460 624 6mth 3mth 1mth 3wk 1wk Price change 12.6 3.2 1.8 7.2 5.7 (x) Dec '10 Dec '11 Dec '12 Dec '13 Mar '14 Current ratio 2.6 9.6 1.9 2.4 2.4 Net debt-to-equity (%) (52.9) (43.1) (5.0) (45.8) (44.8) Times-interest-earned 1,813.2 377.7 35.7 101.2 118.8 5yr 2yr 1yr 6mth 3mth Beta 0.9 0.9 0.9 0.7 1.3 Worst Neutral Best Rank relative to peers* W B W B W B W B The stock is cheap on most multiples, note the low PE and PEG
    25. 25. 19 August 2014 25 Value stocks produce higher returns due mainly to a strong dividend yield Value beats growth in both the developed and the emerging world, and in most Asian countries Source: A. Stotz Investment Research What we learned
    26. 26. 2619 August 2014 Avoid M&A, unless it hasn’t happened Note: The results of this study were published on 10 August 2012
    27. 27. 19 August 2014 27 Sources: Maybank Kim Eng, Bloomberg Pre-announcement: Best to hold the target company
    28. 28. 19 August 2014 28 Sources: Maybank Kim Eng, Bloomberg Post-announcement: Buying on acquisition date rarely works
    29. 29. 19 August 2014 29 Sources: A. Stotz Investment Research, Thomson Reuters Asset utilization: Reducing by half Net margin: Diminishing to five-year low CPALL: Breaking down ROA CPALL: Asset turnover (%) & ranking CPALL: Net margin (%) & ranking Dec-10 Dec-11 Dec-12 Dec-13 Mar-14 Best 292 300 295 2 164 3 151 4 5 6 7 8 9 Worst Note: CPALL is benchmarked against 310 companies in Asia. - 50 100 150 200 250 300 350 Dec-10 Dec-11 Dec-12 Dec-13 Mar-14 CPALL Asia Cons Staples Thailand Cons Staples (%, Asset turnover) CPALL: Net margin (%) & ranking Dec-10 Dec-11 Dec-12 Dec-13 Mar-14 Best 2 3 4 5 6 6 5 4 7 5 3 8 9 Worst - 1 2 3 4 5 6 7 8 Dec-10 Dec-11 Dec-12 Dec-13 Mar-14 CPALL Asia Cons Staples Thailand Cons Staples (%, Net margin) MAKRO was consolidated in 2H13
    30. 30. 19 August 2014 30 Sources: A. Stotz Investment Research, Thomson Reuters CPALL: “Buy on rumor, sell on the fact” 80 90 100 110 120 130 140 Jan-12 May-12 Aug-12 Dec-12 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 CPALL relative to SET Price when CPALL announced the M&A Index Post-announcement of MAKRO acquisition Pre-announcement of MAKRO acquisition
    31. 31. 19 August 2014 31 Valuation Sources: A. Stotz Investment Research, Thomson Reuters CPALL: A. Stotz Four Elements Fundamentals Momentum Risk Worst Neutral Best Rank relative to peers* W B W B W B W B (%) Dec '10 Dec '11 Dec '12 Dec '13 Mar '14 Operating profit margin 6.6 6.6 7.0 5.6 5.2 Net margin 4.9 5.2 5.9 3.9 3.3 Asset turnover 292.3 299.9 295.2 150.9 163.7 Return on assets 14.4 15.5 17.3 5.8 5.3 Return on equity 36.5 40.5 45.2 37.7 32.7 (x) Dec '10 Dec '11 Dec '12 Dec '13 Mar '14 Price-to-sales 1.3 1.9 2.2 1.4 1.4 Price-to-earnings 27.0 36.7 37.6 37.1 42.9 Price-to-book 10.1 13.5 15.3 13.6 13.7 PE-to-EPS growth (PEG) 0.81 1.82 0.99 nm nm EV/EBIT 17.9 26.2 28.8 36.6 37.8 (%) Dec '10 Dec '11 Dec '12 Dec '13 Mar '14 Revenue growth 20.1 15.1 21.5 44.3 57.0 Recurring EPS growth 33.5 20.2 38.0 (4.6) (12.4) Operating profit margin chg. (bps) 83 3 36 (144) (173) 6mth 3mth 1mth 3wk 1wk Price change 20.8 10.1 (2.1) (0.5) (0.5) (x) Dec '10 Dec '11 Dec '12 Dec '13 Mar '14 Current ratio 1.1 1.2 1.2 0.3 0.8 Net debt-to-equity (%) (112.4) (109.4) (128.4) 569.4 539.6 Times-interest-earned 106,827 1,141,455 653,146 9 6 5yr 2yr 1yr 6mth 3mth Beta 0.8 0.9 1.1 1.0 0.9 CPALL consolidated MAKRO in 2H13. Note the significant drop on all profitability ratios
    32. 32. 19 August 2014 32 Buy on M&A rumors and sell on the facts (when they are announced) If you must buy, buy the target company On the majority of occasions, mergers do not lead to fundamental improvement for the buyer Source: A. Stotz Investment Research What we learned
    33. 33. 3319 August 2014 Prefer ‘FreshMo’ over ‘StaleMo’ Note: The results of this study were published on 17 July 2014
    34. 34. 19 August 2014 34  The chart represents the distribution as a percentage of Asian stocks that have shown positive momentum for between one and 19 consecutive months  The bars show the distribution of the 1,200 stocks that had a market capitalization of at least US$500m (investable stocks)  About 56% of stocks showed the longest rising momentum for five to seven consecutive months at least once in the past 10.5 years More than half of Asian stocks show the longest momentum runs of five to seven months Sources: A. Stotz Investment Research, Thomson Reuters 13 22 19 15 - 5 10 15 20 25 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Percentage of stocks in Asia ex-Japan, (stocks with market capitalization of at least US$500m) (Distribution, %) Longest period of consecutive months of positive return during Dec '03 to Jun '14, months
    35. 35. 19 August 2014 35  In 46% (57 months) of the 126 months of our study, momentum was positive; in 48% (60 months) of the period, stocks produced negative monthly returns; and 6% were neutral months  Dropping by half: Stocks that continued to show positive return for a second month accounted for only 21%, or 27 months  Dropping by another half, for the third consecutive month, there was only a 10% chance of positive return  Only 5% of the time did stocks show positive return for four consecutive months or more  Losing months are more than winning months Long-lasting momentum is rare, losing more than winning Sources: A. Stotz Investment Research, Thomson Reuters 1 1 3 6 11 24 48 6 46 21 10 5 3 1 1 - 10 20 30 40 50 60 -7 -6 -5 -4 -3 -2 -1 Neutral 1 2 3 4 5 6 7 Aggregate probability - Asia ex-Japan (Percentage out of 126 months) <==Consecutive months of negative return Consecutive months of positive return ==>
    36. 36. 19 August 2014 36 Valuation Sources: A. Stotz Investment Research, Thomson Reuters Notes: *Bars are decile rankings of most recent period. na = not available, nm = not meaningful MINT: A. Stotz Four Elements Fundamentals Momentum Risk Note: Benchmarked against 250 non-financial companies in Thailand. (%) Dec '10 Dec '11 Dec '12 Dec '13 Mar '14 Operating profit margin 10.7 15.7 14.9 16.0 15.9 Net margin 6.8 11.0 9.9 11.8 11.5 Asset turnover 59.4 69.4 66.5 62.1 58.5 Return on assets 4.0 7.7 6.6 7.3 6.7 Return on equity 10.3 21.2 20.2 19.1 16.7 (x) Dec '10 Dec '11 Dec '12 Dec '13 Mar '14 Price-to-sales 2.2 1.8 2.9 2.8 2.9 Price-to-earnings 31.9 16.3 27.9 23.7 25.3 Price-to-book 3.0 3.3 5.0 4.0 3.9 PE-to-EPS growth (PEG) nm 0.29 3.26 1.43 2.54 EV/EBIT 15.9 11.3 17.3 16.6 25.7 (%) Dec '10 Dec '11 Dec '12 Dec '13 Mar '14 Revenue growth 10.2 44.1 19.8 10.7 12.0 Recurring EPS growth (11.6) 132.8 4.3 25.4 11.0 Operating profit margin chg. (bps) (206) 493 (79) 116 (32) 6mth 3mth 1mth 3wk 1wk Price change 8.3 4.0 5.3 7.0 5.3 (x) Dec '10 Dec '11 Dec '12 Dec '13 Mar '14 Current ratio 1.1 0.9 1.1 1.0 1.4 Net debt-to-equity (%) 109.5 134.8 121.2 86.1 80.8 Times-interest-earned 7.8 7.0 6.3 7.6 5.7 5yr 2yr 1yr 6mth 3mth Beta 1.1 1.3 1.5 1.5 1.2 Worst Neutral Best Rank relative to peers* W B W B W B W B Positive price momentum for the past six months
    37. 37. 19 August 2014 37 Valuation Sources: A. Stotz Investment Research, Thomson Reuters Notes: *Bars are decile rankings of most recent period. na = not available, nm = not meaningful KCE: A. Stotz Four Elements Fundamentals Momentum Risk Note: Benchmarked against 250 non-financial companies in Thailand. (%) Dec '10 Dec '11 Dec '12 Dec '13 Mar '14 Operating profit margin 10.1 4.0 13.8 14.7 15.3 Net margin 7.4 1.8 9.9 12.6 13.3 Asset turnover 82.7 79.5 66.0 86.2 88.8 Return on assets 6.1 1.5 6.6 10.9 11.8 Return on equity 21.8 5.0 22.7 32.8 32.6 (x) Dec '10 Dec '11 Dec '12 Dec '13 Mar '14 Price-to-sales 0.5 0.4 1.1 1.7 2.1 Price-to-earnings 6.8 19.3 11.5 13.2 15.9 Price-to-book 1.4 1.0 2.4 3.6 4.3 PE-to-EPS growth (PEG) 0.10 nm 0.14 0.33 0.51 EV/EBIT 6.4 8.6 9.0 10.2 16.3 (%) Dec '10 Dec '11 Dec '12 Dec '13 Mar '14 Revenue growth 26.2 (0.8) (10.0) 43.5 41.0 Recurring EPS growth 302.9 (75.3) 391.1 66.2 44.8 Operating profit margin chg. (bps) 296 (610) 987 90 143 6mth 3mth 1mth 3wk 1wk Price change 85.4 43.4 7.0 8.6 (2.6) (x) Dec '10 Dec '11 Dec '12 Dec '13 Mar '14 Current ratio 0.7 0.9 0.8 0.9 1.0 Net debt-to-equity (%) 179.6 180.7 167.6 109.2 79.9 Times-interest-earned 7.2 5.5 8.7 11.1 9.4 5yr 2yr 1yr 6mth 3mth Beta 1.0 1.0 0.8 0.6 0.9 Worst Neutral Best Rank relative to peers* W B W B W B W B We also care about earnings momentum
    38. 38. 19 August 2014 38 In the past 10 years more than half of stocks in Asia showed their longest momentum runs of about six months Long-lasting momentum is rare; only 10% of the time does momentum last for more than three months Invest in fresh momentum (‘FreshMo’) to lower risk, avoid stale momentum (‘StaleMo’) Source: A. Stotz Investment Research What we learned
    39. 39. 3919 August 2014 Stay invested: Panic selling is a long-term death blow Note: The results of this study were published on 12 June 2012
    40. 40. 19 August 2014 40 Sources: Maybank Kim Eng, Bloomberg In Asia, you lose half the return by missing 10 days
    41. 41. 19 August 2014 41 Sources: Maybank Kim Eng, Bloomberg In Thailand, you lose all the return by missing 10 days
    42. 42. 19 August 2014 42 By missing only the best 10 days in Asia over the past 20 years, you would have lost about half your return in Asia Panic selling in Thailand would have cost you all of your return Set your long term investing plan and stick with it, be careful about how extremely negative sentiment can hurt your decision making Source: A. Stotz Investment Research What we learned
    43. 43. 4319 August 2014 Low debt means high return Note: The results of this study were published on 21 September 2012
    44. 44. 19 August 2014 44 Sources: Maybank Kim Eng, Datastream Gearing alone works quite well as a stock selector
    45. 45. 19 August 2014 45 Sources: Maybank Kim Eng, Datastream Note: Total return is market-cap weighted mean return. In 1991-1998 the universe consisted of 500 companies and 2,400 in 2011 Low-gearing stocks outperform in times of crisis in Asia
    46. 46. 19 August 2014 46 Valuation Sources: A. Stotz Investment Research, Thomson Reuters Notes: *Bars are decile rankings of most recent period. na = not available, nm = not meaningful STPI: A. Stotz Four Elements Fundamentals Momentum Risk Note: Benchmarked against 250 non-financial companies in Thailand. (%) Dec '10 Dec '11 Dec '12 Dec '13 Mar '14 Operating profit margin 42.7 33.6 37.2 34.1 29.5 Net margin 42.8 39.9 33.1 33.7 27.4 Asset turnover 89.7 25.1 56.8 62.2 72.5 Return on assets 38.0 10.0 18.8 21.0 19.9 Return on equity 70.1 12.3 27.0 36.9 34.6 (x) Dec '10 Dec '11 Dec '12 Dec '13 Mar '14 Price-to-sales 1.9 11.4 11.0 5.7 4.6 Price-to-earnings 4.5 28.6 33.1 16.9 16.9 Price-to-book 2.8 3.5 7.8 5.4 5.1 PE-to-EPS growth (PEG) 0.14 nm 0.54 0.37 0.56 EV/EBIT 3.3 19.3 23.0 12.8 13.3 (%) Dec '10 Dec '11 Dec '12 Dec '13 Mar '14 Revenue growth (45.6) (79.0) 213.7 80.5 83.9 Recurring EPS growth 51.1 (80.4) 157.6 82.8 43.8 Operating profit margin chg. (bps) 2,735 (918) 362 (312) (932) 6mth 3mth 1mth 3wk 1wk Price change 25.1 9.3 6.2 12.6 6.7 (x) Dec '10 Dec '11 Dec '12 Dec '13 Mar '14 Current ratio 2.6 9.6 1.9 1.7 1.7 Net debt-to-equity (%) (52.9) (42.2) (85.8) (84.5) (79.5) Times-interest-earned 1,813.2 377.7 334.9 316.8 226.9 5yr 2yr 1yr 6mth 3mth Beta 0.8 0.9 1.0 1.0 1.1 Worst Neutral Best Rank relative to peers* W B W B W B W B The company has been net-cash over every period
    47. 47. 19 August 2014 47 Stock prices of companies with low or no debt tend to outperform The benefit is mostly felt in bad times when low-debt-company prices fall less Low-gearing companies are low risk and yield high returns Source: A. Stotz Investment Research What we learned
    48. 48. 4819 August 2014 Enjoy humdrum, low-beta stocks Note: The results of this study were published on 17 July 2014
    49. 49. 19 August 2014 49 50 100 150 200 250 300 350 400 Jan-93 Aug-96 Mar-00 Oct-03 May-07 Dec-10 Jul-14 World-equity indexIndex, rebased to 100  To investigate why low beta beats high beta, we look at the price performance of world equity  During the past two decades, world equity markets have seen three major booms and two major busts  The index dropped during the Asian financial crisis in 1997-1998 before it peaked in March 2000, then the dot-com bubble burst  After the bottom in March 2003, the next bull run began and peaked in October 2007, followed by the global financial crisis  Compared to the dot-com bubble, the global financial crisis showed a larger and faster drop in equity prices Major crashes in the world over the past two decades Sources: A. Stotz Investment Research, Thomson Reuters Note: Price index is weekly data of MSCI AC World index in local prices. -49% -56% Dot-com bubble Global financial crisisAsian financial crisis
    50. 50. 19 August 2014 50  To test this, we construct two annually rebalanced portfolios, one investing in the lowest-beta decile and the other in the highest-beta decile  The highest-beta portfolio clearly yields a higher return in bull markets; note how it outperformed until the dotcom bubble burst  After the bust, the lowest- beta experienced a much smaller drop and started to outperform the highest-beta decile and the market; this gap increased further after the global financial crisis  In the long run, low risk outperforms high risk due to superior preservation of capital. If you can’t time the market turns, choose low risk! World equity: Low beta beats high beta and the market Sources: A. Stotz Investment Research, Thomson Reuters Note: *World equity consists of, on average, 2,300 companies over the time period. - 50 100 150 200 250 300 350 400 450 Dec-93 Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Lowest-beta decile World equity* Highest-beta decile Mcap-weighted portfolio indices
    51. 51. 19 August 2014 51  Note that the emerging- world equity large-cap universe comprised about 100 stocks in 1994 and 1,200 in 2013. Chinese stocks started to appear in 2005  The lowest-beta portfolio did not get hit as hard as the highest-beta portfolio in the Asian financial crisis, the bursting of the dot-com bubble or the global financial crisis  Because it takes a 100% increase to recover a 50% loss, the lowest-beta portfolio clearly shows that reducing volatility, will significantly improve your terminal wealth  Our research supports the truth in Warren Buffet’s Rule No. 1: “Never lose money” Emerging world: Huge advantage of investing in lowest beta Sources: A. Stotz Investment Research, Thomson Reuters Note: *Emerging world equity consists of, on average, 430 companies over the time period. - 100 200 300 400 500 600 700 800 900 1,000 Dec-93 Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Lowest-beta decile Emerging-world equity* Highest-beta decile Mcap-weighted portfolio indices
    52. 52. 19 August 2014 52 Valuation Sources: A. Stotz Investment Research, Thomson Reuters Notes: *Bars are decile rankings of most recent period. na = not available, nm = not meaningful TTW: A. Stotz Four Elements Fundamentals Momentum Risk Note: Benchmarked against 250 non-financial companies in Thailand. (%) Dec '10 Dec '11 Dec '12 Dec '13 Mar '14 Operating profit margin 61.0 61.8 65.4 67.7 61.3 Net margin 46.9 46.5 47.5 49.7 46.0 Asset turnover 20.7 21.0 21.2 21.1 21.9 Return on assets 9.7 9.8 10.1 10.5 10.1 Return on equity 22.8 21.5 22.5 23.8 23.5 (x) Dec '10 Dec '11 Dec '12 Dec '13 Mar '14 Price-to-sales 5.4 5.3 8.8 7.5 8.1 Price-to-earnings 11.5 11.3 18.6 15.0 17.7 Price-to-book 2.5 2.4 4.1 3.5 4.1 PE-to-EPS growth (PEG) 0.51 4.78 1.94 1.64 nm EV/EBIT 8.8 8.2 12.5 9.9 15.9 (%) Dec '10 Dec '11 Dec '12 Dec '13 Mar '14 Revenue growth 8.6 3.4 8.3 5.2 5.2 Recurring EPS growth 29.4 2.4 10.6 10.1 (7.7) Operating profit margin chg. (bps) 66 86 354 231 (914) 6mth 3mth 1mth 3wk 1wk Price change 7.0 15.1 7.5 8.1 5.9 (x) Dec '10 Dec '11 Dec '12 Dec '13 Mar '14 Current ratio 4.1 1.2 6.4 2.4 4.7 Net debt-to-equity (%) 78.4 61.3 72.3 65.1 74.7 Times-interest-earned 8.0 7.1 6.7 7.6 5.3 5yr 2yr 1yr 6mth 3mth Beta 0.5 0.6 0.6 0.4 0.5 Worst Neutral Best Rank relative to peers* W B W B W B W B Beta is about 0.5x over every time horizon, hence the stock has low risk and reacts less to market movements
    53. 53. 19 August 2014 53 Low beta is boring in market up-cycles, but fantastic in down-cycles Stocks that the market calls “high risk” are often “low return” Low beta helps you follow Warren Buffet’s advice: “Rule No. 1 is never lose money. Rule No. 2 is never forget Rule No. 1.” Source: A. Stotz Investment Research What we learned
    54. 54. 5419 August 2014 Example of company research Note: This was published on 6 June 2014
    55. 55. 19 August 2014 55  Relatively large amount of cash gives flexibility, strong sales momentum, and gaining more sales from existing assets  STPI is using the full capacity of its steel fabrication, boiler, and pressure- vessel plants to service the Ichthys LNG project in Darwin, Australia, which will continue to be the company’s main profit driver for 2014 and 2015  We believe STPI’s unconventional strategy–running at low capacity while awaiting high-margin projects–will continue to drive the company’s long-term performance, and hence, the stock as well  The company trades at 14CE* 9.5x PE, a discount to its Thai sector peers  Risk: Inability to secure new projects; with growing demand for LNG there are going to be many competitive players bidding for these projects STPI: Unconventional strategy shows its strength Background: STP&I Public Company Limited is a distribution and service agent for mechanical equipment used in the construction and energy industries. It provides steel products for a vast array of heavy-industry projects, such as high-rise buildings, refineries, bridges and airports, and is engaged in projects in several countries, such as the US, Japan and Australia. Sources: A. Stotz Investment Research, Bloomberg, Company data, FactSet, Thai Institute of Directors (IOD), Thomson Reuters Note: *CE are consensus estimates Stock information: Name: STP&I Public Co. Ltd. Ticker: STPI TB Price (THB): 19.3 Mcap: US$886m 3MADTO: US$2m Beta (6mth): 1.1x IOD CG: 2 out of 5 Sector: Materials Industry: Materials Major shareholders: 13% Chanvirakul family 5% Suthep Setboonsang 40% Free float Year End Dec 11 12 13 14CE* 15CE* PE (x) 70.6 27.5 15.0 9.5 12.2 EPS (THB) 0.3 0.7 1.3 2.0 1.6 EPS growth (%) (80.7) 156.7 83.5 57.2 (22.0) PBV (x) 8.5 6.4 4.8 3.2 2.6 BVPS (THB) 2.3 3.0 4.0 6.1 7.3 ROE (%) 12.3 27.0 37.3 42.0 26.3 Dividend yield (%) 1.7 0.4 1.8 4.5 3.5 Watching ‘The Street’A. Stotz Four Elements na, 0 Neutral, 2 Buy, 2 Buy, 5 - 20 40 60 80 100 - 20 40 60 80 100 Dec' 11 Dec' 12 Dec' 13 Current STPI TB Buy Sell Buy Sell - 1 2 3 4 5 6 7 8 9 10 Risk Momentum Overall Fundamentals Valuation Worst Decile ranking Best 30 80 130 180 230 280 330 - 5 10 15 20 25 30 Aug-11 May-12 Jan-13 Oct-13 Jul-14 STPI-TH(LHS) Price relative to local index (THB) (%)
    56. 56. 19 August 2014 56 Selected completed and ongoing projects Revenue breakdown by product type 2013 STP & I Public Company Limited Sources: A. Stotz Investment Research, Thomson Reuters, Company data  STPI is a producer and distributor of three main categories of products:  Structures – It makes steel structures, including those of unusual shapes used in the construction of, for example, airports, exhibition halls, high-rise buildings, industrial complexes and power plants  Piping – Its piping products are fabricated at STPI’s facilities and transported to project sites for installation. Such pipes are used at facilities such as power plants, oil refineries, and aromatics plants  Modules – STPI’s module products include offshore and onshore modules installed on barges or platforms that are vital in crude-oil stabilization or gas separation  It carries out manufacturing at its plants on the eastern seaboard of Thailand, in Chonburi, Rayong and Si Racha and its first module assembly plant is located at the city port of Laem Chabang, also in Chonburi  STPI also offers consulting services related to its goods, such as construction, fabrication or engineering consulting for its steel-structure and piping products Completed Ongoing Doha Int’l Airport, steel fabrication, 38,000 tonnes Two IFC, Hong Kong, building structure, 9,000 tonnes Ichthys Project, Darwin, Australia, LNG facilities, 132,000 tonnes, 2012-2015 Modules Piping fabrication Sales and service 67% 17% 11%
    57. 57. 19 August 2014 57 Valuation Sources: A. Stotz Investment Research, Thomson Reuters Notes: *Bars are decile rankings of most recent period. na = not available, nm = not meaningful STPI: A. Stotz Four Elements Fundamentals Momentum Risk Note: Benchmarked against 250 non-financial companies in Thailand. (%) Dec '10 Dec '11 Dec '12 Dec '13 Mar '14 Operating profit margin 42.7 33.6 37.2 34.1 29.5 Net margin 42.8 39.9 33.1 33.7 27.4 Asset turnover 89.7 25.1 56.8 62.2 72.5 Return on assets 38.0 10.0 18.8 21.0 19.9 Return on equity 70.1 12.3 27.0 36.9 34.6 (x) Dec '10 Dec '11 Dec '12 Dec '13 Mar '14 Price-to-sales 1.9 11.4 11.0 5.7 4.6 Price-to-earnings 4.5 28.6 33.1 16.9 16.9 Price-to-book 2.8 3.5 7.8 5.4 5.1 PE-to-EPS growth (PEG) 0.14 nm 0.54 0.37 0.56 EV/EBIT 3.3 19.3 23.0 12.8 13.3 (%) Dec '10 Dec '11 Dec '12 Dec '13 Mar '14 Revenue growth (45.6) (79.0) 213.7 80.5 83.9 Recurring EPS growth 51.1 (80.4) 157.6 82.8 43.8 Operating profit margin chg. (bps) 2,735 (918) 362 (312) (932) 6mth 3mth 1mth 3wk 1wk Price change 25.1 9.3 6.2 12.6 6.7 (x) Dec '10 Dec '11 Dec '12 Dec '13 Mar '14 Current ratio 2.6 9.6 1.9 1.7 1.7 Net debt-to-equity (%) (52.9) (42.2) (85.8) (84.5) (79.5) Times-interest-earned 1,813.2 377.7 334.9 316.8 226.9 5yr 2yr 1yr 6mth 3mth Beta 0.8 0.9 1.0 1.0 1.1 Worst Neutral Best Rank relative to peers* W B W B W B W B
    58. 58. 19 August 2014 58 BEST Sources: A. Stotz Investment Research, Thomson Reuters Profitability: Stable at the Best Growth: Slowdown in growth, but still high STPI: Regional benchmarking STPI: ROA (%) & ranking STPI: EPS growth (%) & ranking 2010 2011 2012 2013 Now Best 38 19 21 20 2 10 3 4 5 6 7 8 9 Worst Note: STPI is benchmarked against 830 companies in Asia. - 5 10 15 20 25 30 35 40 45 2010 2011 2012 2013 Now STPI Asia Materials Thailand Materials (%, Return on assets) STPI: EPS growth (%) & ranking 2010 2011 2012 2013 Now Best 158 2 83 3 44 4 5 51 6 7 8 9 (80) Worst - 20 40 60 80 100 120 140 2010 2011 2012 2013 Now STPI Asia Materials Thailand Materials (EPS growth indices, rebased to 100)
    59. 59. 19 August 2014 59 Sources: A. Stotz Investment Research, Thomson Reuters Asset utilization: Rising asset turnover, lower than average Net margin: Superior margins STPI: Regional benchmarking – Breaking down ROA STPI: Asset turnover (%) & ranking STPI: Net margin (%) & ranking 2010 2011 2012 2013 Now Best 2 3 4 5 90 72 6 62 7 57 8 9 Worst 25 Note: STPI is benchmarked against 830 companies in Asia. - 20 40 60 80 100 120 2010 2011 2012 2013 Now STPI Asia Materials Thailand Materials (%, Asset turnover) STPI: Net margin (%) & ranking 2010 2011 2012 2013 Now Best 43 40 33 34 27 2 3 4 5 6 7 8 9 Worst - 5 10 15 20 25 30 35 40 45 2010 2011 2012 2013 Now STPI Asia Materials Thailand Materials (%, Net margin)
    60. 60. 19 August 2014 60 Profit & loss (THB m) Dec '09 Dec '10 Dec '11 Dec '12 Dec '13 Mar '13 Jun '13 Sep '13 Dec '13 Mar '14 Revenue 8,760 4,770 1,001 3,140 5,669 1,256 1,197 1,316 1,900 2,726 Cost of goods sold (7,436) (2,842) (971) (1,883) (3,638) (785) (705) (888) (1,260) (2,083) Gross profit 1,324 1,928 30 1,257 2,031 470 492 428 641 642 SG&A & others 13 105 306 (159) (191) (4) (87) (33) (67) 69 Operating profit 1,337 2,033 336 1,097 1,840 467 405 395 574 712 Other inc/(exp) 22 57 68 181 233 11 114 34 74 (52) Earnings before interest & tax 1,360 2,090 404 1,279 2,073 477 518 429 648 660 Interest expense (2) (1) (1) (4) (7) (2) (2) (1) (2) (3) Pretax profit 1,358 2,089 403 1,275 2,066 476 517 428 646 657 Income tax (72) (55) (3) (305) (248) (5) (109) (66) (68) (66) After-tax profit 1,285 2,034 400 969 1,819 470 408 362 578 591 Equity income 3 - - - - - - - - - Minorities - - - - - - - - - - Earnings from continuing operations 1,288 2,034 400 969 1,819 470 408 362 578 591 Forex gain/(loss) & unusual items 5 (12) - 70 90 (46) 79 3 55 (96) Net income 1,293 2,021 400 1,039 1,909 425 486 365 633 495 EPS (THB) 0.93 1.42 0.28 0.71 1.29 0.29 0.33 0.25 0.41 0.34 Weighted average shares (m) 1,387 1,419 1,452 1,464 1,476 1,464 1,476 1,477 1,477 1,477 Balance sheet (THB m) Dec '09 Dec '10 Dec '11 Dec '12 Dec '13 Mar '13 Jun '13 Sep '13 Dec '13 Mar '14 Assets 6,370 4,260 3,708 7,347 10,867 8,063 8,299 8,782 10,867 11,634 Liabilities 3,837 1,022 424 2,922 4,956 3,196 3,349 3,470 4,956 5,201 Equity 2,533 3,238 3,284 4,425 5,911 4,867 4,950 5,312 5,911 6,433 Growth (%) Dec '09 Dec '10 Dec '11 Dec '12 Dec '13 Mar '13 Jun '13 Sep '13 Dec '13 Mar '14 Revenue 25.9 (45.6) (79.0) 213.7 80.5 144.0 79.6 33.5 95.3 117.1 Operating income 27.3 52.0 (83.5) 226.6 67.7 543.8 110.6 (8.1) 42.5 52.5 EPS 15.6 52.8 (80.7) 158.1 82.2 218.8 180.2 (9.9) 57.8 15.6 Assets 7.8 (33.1) (12.9) 98.1 47.9 75.1 57.1 39.2 50.2 44.3 Liabilities (7.4) (73.4) (58.5) 589.2 69.6 160.5 82.4 43.6 69.6 62.8 Equity 43.4 27.8 1.4 34.7 33.6 44.0 43.6 36.5 37.1 32.2 Profits (%) Dec '09 Dec '10 Dec '11 Dec '12 Dec '13 Mar '13 Jun '13 Sep '13 Dec '13 Mar '14 Gross margin 15.1 40.4 3.0 40.0 35.8 37.5 41.1 32.5 33.7 23.6 Operating margin 15.3 42.6 33.6 34.9 32.5 37.2 33.8 30.0 30.2 26.1 Net margin 14.8 42.4 39.9 33.1 33.7 33.8 40.6 27.7 32.1 18.2 ROE 60.2 70.1 12.3 27.0 36.9 37.0 39.6 28.4 43.5 32.1 ROIC nm nm 34.7 130.0 954.7 nm nm 273.8 514.6 551.0 Sources: A. Stotz Investment Research, Thomson Reuters STPI: Financials
    61. 61. 19 August 2014 61 Board composition Institutional ownership Sources: A. Stotz Investment Research, Company data, FactSet, Settrade Notes: *outstanding ,**institution, ***growth at a reasonable price STPI: Leadership and Ownership Chairman Anutin Charnvirakul Managing Director Masthawin Charnvirakul - 2 4 6 8 10 Dec-11 Dec-12 Dec-13 Latest STPI TB SET100 (Institutional ownership, %)Top shareholders % O/S* Holding style % of inst** Government Pension Fund of Thailand 1.88 Aggressive Growth - Dimensional Fund Advisors LP 0.57 Deep Value - Dimensional Fund Advisors Ltd 0.01 GARP*** - Others 0.00 Growth 76 Total institutional ownership 2.46 Index - Region % of inst** Value 24 Asia 76 Yield - North America 23 Total 100 Europe 0 8 4 50 12 4 36 - 10 20 30 40 50 60 Number of Directors Number of Independent Directors Independent Directors (%) STPI SET100(#/%)
    62. 62. 19 August 2014 62 DISCLAIMER Analyst Certification The analyst(s) named in this report certifies that (i) all views expressed in this report accurately reflect the personal views of the analyst(s) with regard to any and all of the subject securities and companies mentioned in this report and (ii) no part of the compensation of the analyst(s) was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by that analyst herein. Required Disclosures The analyst named in this report (or their associates) does not have a financial interest in the corporation(s) mentioned in this report. Global Disclaimer This report was prepared by IND-X Securities (Asia) Limited (“IND-X”). IND-X is a limited company registered in Hong Kong and is authorised and regulated by Hong Kong's Securities and Futures Commission. The registered office is Unit 801-04,Kinwick Centre, 32 Hollywood Road, Central, Hong Kong. This report is for the use of intended recipients only and may not be reproduced, in whole or in part, or delivered or transmitted to any other person without our prior written consent. By accepting this report, the recipient agrees to be bound by the terms and limitations set out herein. The information contained in this report has been obtained from public sources believed to be reliable and the opinions contained herein are expressions of belief based on such information. No representation or warranty, express or implied, is made that such information or opinions is accurate, complete or verified and it should not be relied upon as such. Nothing in this report constitutes a representation that any investment strategy or recommendation contained herein is suitable or appropriate to a recipient's individual circumstances or otherwise constitutes a personal recommendation. It is published solely for information purposes, it does not constitute an advertisement, a prospectus or other offering document or an offer or a solicitation to buy or sell any securities or related financial instruments in any jurisdiction. Information and opinions contained in this report are published for the reference of the recipients and are not to be relied upon as authoritative or without the recipient's own independent verification or taken in substitution for the exercise of the recipient's own judgement. All opinions contained herein constitute the views of the analyst(s) named in this report, they are subject to change without notice and are not intended to provide the sole basis of any evaluation of the subject securities and companies mentioned in this report. Any reference to past performance should not be taken as an indication of future performance. IND-X does not accept any liability whatsoever for any direct or consequential loss arising from any use of the materials contained in this report. This report is prepared for professional investors and is being distributed in Hong Kong by IND-X to persons whose business involves the acquisition, disposal or holding of securities, whether as principal or agent. Distribution or publication of this report in any other places to persons which are not permitted under the applicable laws or regulations of such places is strictly prohibited. © 2014 IND-X

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