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Thursday, October 30, 2008

Blog Capsule 6: Bought PROTON @ $2

Ok. This is definitely a stock that EVERYONE hates. Everyone must have their own (long) list of why they hate this stock. I'll quickly list a few here, and you can add some more in the comments section:


1. Generally lousy product quality. PROTON is so well known for its problems, to say its product quality is "below average" is being nice to PROTON.

2. Generally perceived (rightly or wrongly) below average management quality who are paid too much for doing too little.

3. Long record of being subsidized by the government in so many ways for so much and so long that it is still unsuccessful for such a long, long, long time.

4. Absolutely no reward to long term shareholders. Especially those that bought in the mid 90s when the stock price was well above $16 - $18 and the stock now trades at $2.

5. Everyone hates PROTON. Period.

So, why did I buy?

Here's a few reasons:

1. Stock price fell below $2 recently. The last time the stock price fell below $2 was in 1998. See chart below. This is the Asian Financial Crisis price.

2. Stock price of $2 is fundamentally cheap from Net Cash perspective. At $2, the stock is capitalized at RM$1.1 Billion. In other words, if you have RM$1.1 Billion, and if the stock price remains at $2, then, you could buy up the entire company. And what do you get in return?

Well, from a Balance Sheet perspective, based on the latest quarterly report at 30 June 2008, PROTON Cash alone is $1.4 Billion. Long term borrowings = $0.13 Billion. Short term borrowings = $0.11 Billion. Net Cash = $1.4B - $0.13B - $0.11B = $1.16Billion, which is bigger than the market capitalization of $1.1 Billion.

In other words, you get the rest of the coy fixed assets booked at $3.8 Billion for free effectively, since the Current Assets of $3.5 Billion is already greater than its total Liabilities of $1.9 Billion.

I'm being extremely lazy with my calculations here, but if you are diligent, then, you will find that the coy at $2 is dirt cheap from a fundamental perspective.

3. PROTON latest NA at 30/6/08 is $9.98 per share. So, buying at $2 is equivalent to buying at 20% of its Net Assets (= Total Assets - Total Liabilities). By traditional measures, it looks dirt cheap, but see cautionary statements below.

4. Q2/08 earnings reported at $52 M. Not large, but an improvement over same period last year which is a loss. Roughly speaking, annualizing this suggests possible earnings of say $200M per year, i.e. at $2, PROTON appears to be trading at a P/E of 5.5, which is not demanding at all. In fact, as long as PROTON does not make a loss, buying at $2 should have a limited downside for a long-term investor.

5. It is well known that TDM is a long time supporter of PROTON. At the moment, his son Mukhriz looks set to take the top job in UMNO Youth. It is obvious his chedet blog is extremely popular, with over 9 million hits in such a short period. The Malaysian Insider carries this article on TDM - http://www.themalaysianinsider.com.my/index.php/malaysia/11423-mahathir-is-back-with-a-vengeance. Personally, I am not a TDM supporter, and would never vote for him. However, at $2 PROTON, Mr Market is asking me to take a gamble with him to make money off PROTON. This is a pure speculative play, that should BN retains power and with greater Mahathir's involvement, we could see PROTON one day being in the forefront again.

6. At $2, the price appears to be capitulating, although volume is not large .... As chatter dorraidd says ... think also about those who are selling at $2. In other words, if this is capitulation, the people who are selling at $2 must have lost a lot of money. If you are anti-PROTON, buying it off the long time PROTON supporters at rock bottom price is not a bad way to get back at them, although bear in mind that they can get back at you by totally destroying this company too ... *grin*

7. EPF and Khazanah owns it at much higher prices than $2 or $4.

More cautionary statements

1. The market is still long term bearish say over the next 6-12 months, despite the current bear market rally at the time of writing. What appears cheap right now can get cheaper eventually. I will not be surprised if PROTON trades below $2 after this bear market rally is over. So, treat this Blog Capsule as an alert to cheaper prices ahead, but if I am wrong, then, I won't mind owning this at $2.

2. The car maker sector is still long term bearish, and worldwide, have taken great hits. Everywhere you look, the world leaders like GM and Toyota are taking huge beating to their share price. PROTON will also be hit as well. The future outlook for this sector is very bleak indeed.

3. Malaysia is politically unstable. Who knows what PROTON will become if there is a change in government policy to no longer subsidize the national car. It is clear PROTON would be need to be liquidated if by then, it is clear that it would be losing money. In other words, despite the Net Cash, we could see PROTON losing money and bleeding, and eventually, the coy would be liquidated. So, Net Cash today that is bigger than market cap, could turn out to be a Bankrupt coy in future in the worst case scenario.

My Strategy

1. In Graham terms, this is buying an average quality business at bargain like prices. The "cigar butt" approach to investing. So, since Graham diversifies across 100 of such stocks, don't bet the entire house and farm on PROTON.

2. Pure speculative Buy. I believe bear markets will eventually recover one day.

3. Don't invest more than say 3% to 5% Capital into this stock. I can bear losing these 3%-5% Capital.

4. This is the first out of say 5 possible buys. I spent less than 1% Capital at $2, and am waiting for lower prices.

5. I expect to make 100%+ return over the next 3 years, say by 31/12/2011. I need PROTON to get to $4 to make a 100% return. In return, I seriously doubt I will see PROTON trading at $1, with 50% loss over the next 3 years. But I could be wrong, since we are dealing with the future, and I don't have a crystal ball.

Disclaimer: I now own PROTON. I am still a trader at heart, although at very low prices, I shift towards being an investor since the latter is easier. If the prices rise too high, I will sell and trade, so, don't bid this stock price up.


Moola said...


Here are my comments: http://sahamas.net/view_topic.php?id=6694&forum_id=10

Seng said...

Thanks Moo.

I have posted my comments there, so, I won't repeat them here. *grin*

Y1 said...

Hmm... what if over the next 3 years they habis spending the cash?

jasonred79 said...

I actually found moolah analysis very informative. And actually worrying. Sold my proton.

Logic: Proton is a bigger entity than it was in 2004. Furthermore, it is projected that the next 3 years 2009-2011 will be worse for the car industry than 2004-2008. Therefore, there is the potential that Proton's cash holdings will fall even faster over the next three years, compared to the past 3 years.

Moolah has brought up the risk if Proton's cash declines by the same PERCENTAGE loss as in 2004-2008.

I would like to bring up what happens if Protons cash falls by the same, or greater TOTAL loss.

In other words, Proton goes into severe liquidity issues as Cash Reserves run close to NIL.

In this event, would the rakyat support a move to BailOut Proton, by injecting cash into it?

Again, I cannot help but wonder... if Seng had substantial shareholdings in Proton, would he rather that the government BailOut proton, or not?

jasonred79 said...

Oh, 1 more thing... why does Khazanah keep insisting that they might be willing to give over control of Proton to a foreign company?

They are not even willing to have a company without a Bumi CEO... or without 30% bumi equity. What in the world would make us believe that they are willing to hand proton over to a non-Malaysian company?

Ivan said...

well done. .
thank you to tell us the true. . that u adi have proton .

jasonred79 said...

Was looking at something. That 1billion in cash in hand... might not last very long.
Proton is trying to EXPAND. And with typical malaysian "good timing".
They announced that they want to increase production this increase in sales should be from expanding to 40% of their production being sold overseas by 2010. And they hope to export 60% of production by 2015.

That 1 billion... is about enough to develop 1 new platform for them.

RM 1billion cash in hand for an auto company is in fact very VERY little. It's not something to be positive on the company for.

Seng said...

Y1, I think you have to form your own probabilities whether they will finish spending their cash in the next 3 years, or their cash will grow over the next 3 years. There are no certainties in the stock market. For me, I would examine their net cash position, and their cashflow over the past few years concretely (and not generally), to come to a calculated risk view.

Jason, you have to form your own view whether the $1 billion net cash will last long or not. Again, I would have to say that your opinion should be based on examination of past numbers, and not generalized fear and generalized comments. You should examine its cashflow statements over the past few years. I like what I see in the most recent year, although I obviously don't like what I see in some other prior years. Don't expect Proton to be dependable over the very long term.

In investing, it's not absolute, but relative considerations that matter. If you want to buy superior business (and in Malaysia, mana ada?), then, expect to pay a very high price (as a general comment). For Proton, the business is only an average quality in the current government protected environment. The key issue is PRICING - has Mr Market priced in some, all or more of the possible bad news?

Of course price-wise, what is cheap can get cheaper, and this becomes the true test of an investor. Does he have the guts to buy at new multi-decade price lows, for a business that is only average quality (but not the lousiest quality relative to other Bursa stocks), but enjoys government protection, and doesn't appear in any practical sense to be dismantled by the government in the near future (and some argue foreseeable future as long as BN, UMNO remains in power and controls Khazanah and EPF)?

The other 2 issues is its trade payables - I don't like this large number, and poses a potential risk.

Also, the coming quarterly report is due very soon. Expect volatility to come in also.

Again, judge this not in short term, but over the next 3 years.

And remember, Graham diversifies across 100 stocks. Don't bet your house and farm on this one. This is clearly a more speculative investment over the next 3 years.

okating said...

hello seng, did you trigger your next level buy on proton ? today down 17cts , it is now 1.73.

Seng said...

No. As of today, market has shown me to be wrong, so, no sense to compound one's mistakes.

I'm still long term bearish.

No point catching a falling knife on the way down.

Perhaps my next buy could be months away from now, when global markets have found a bottom. I don't have a crystal ball, so, let's see.

I hope everyone have stick to the principle of just utilizing 1% of capital. Otherwise, it could be a very wild ride psychologically.