The danger of over expanding in business

The danger of

over expanding

in business

Being in business is never easy especially when one is helming a public listed company. It comes with great responsibilities and major decisions are needed to be made decisively at times.

The decisions could not be a perfect one, it could even turn out to be a disastrous one that can send the company into deep, deep trouble.

Decision such as expanding or over expanding is never an easy one. When there is a big demand for a certain product and this company is one of that product manufacturer that is running at full capacity. What should you do if you happens to be the number one head honcho man?

Do you just maintain business capacity as it is or do you order more machineries, increase staff counts, invest in latest software, buy even more raw materials to increase your output capacity to cater to more demands?

It is my personal opinion that most ambitious entrepreneur business man if he is the big boss of that company (running at full capacity) would choose the later step i.e. invest more in the needed areas to increase production even more.

It is alright as long as the extra demand for the products is still there. The company would be raking in more profits for its shareholders. Everyone including staff and shareholders would be happy.

But what if after investing so much to increase capacity only to see that the demand has softened down due to competitors also producing more and at cheaper price or unexpected poor economic situation? Not only that, the less demand also prolonged into months or even years?

It could be disastrous for not rich companies that take big loans as they might have to pay interest for the loans, besides the cost of maintaining its new acquired machineries and even forced to retrench its redundant staffs.

If one is an investor in a public listed company, one should take note with caution when that company is embarking on a major expansion, taking on big loans as well. The slightest news you read or hear about slower demands that might affect the company, you must make a quick simple decision whether to sell your shares or to hang on.

Recently when there was news of Tek Seng Holdings Berhad reducing its 180 head count from production line (due to slower demand) in September.

It came as a shock to investors as Tek Seng was expanding several new additional lines to cater to strong demand for its polyvinyl chloride related products.

A quick Google search on related solar power issues seemed to portray that many similar overseas big players were experiencing slower demands due to massive overcapacity productions.

As I am just a "kacang putih" investor, I decided to dispose of all my shares and free warrants on that day. Of course it was easier for me to sell because my entry cost was just below 40 sen. It would be more difficult if late comers buying at RM1.20 and above as they might be reluctant to cut losses hoping for an eventual rebound.

It has been almost three months and it was a decision I was grateful I made. The share price of Tek Seng is now hovering above just 70 sen range.

Another lucky company I was very lucky to get out with good profits was now the defunct shipping and logistic services provider, Swee Joo Berhad. Its main focus was on providing containerized shipping services between Peninsular and East Malaysia, in the coastal waters of Sarawak as well as between Malaysia and regional destinations such as Bangkok, Ho Chi Minh City, Jakarta and Surabaya.

Listed on Oct 17, 2006, it closed above 80 sen on its maiden debut and went on to record as high as around RM1.60 two years later. After its listing, Swee Hoo embarked on aggressive expansion riding on shipping boom. It borrowed heavily for fleet expansion, including the acquisition of the four chemical tankers and container ships.

But the unforeseen 2008-2009 global financial crisis caused a sharp decline in freight rates. Shipping industry was adversely hit. Swee Joo was caught sadly. Business was bad and there was little cash flow left, but short-term loans and long-term liabilities of RM500mil as at Sept 30, 2009. Interest expenses amounted to RM28mil a year.

Eventually it went into bankruptcy and there was nothing left anymore for minority shareholders.

Yours truly was one investor who invested on its maiden listing day buying at 86 sen. But I was most truly lucky to sell off my 3,000 Swee Joo shares at around RM 1.50 plus two years later shortly before the start of the global finanical crisis. At that time, I was just in the mood of profit taking and not knowing anything about the coming global financial crisis.

Even more lucky was that when its share price tumbled down, I did not enter at all although I was very tempted to buy back especially when it was selling at my original purchase price of 86 sen. If I had done so, I would have given back everything I profited earlier. This is called luck.

Well, this will be my last article for 2016, I like to wish everyone good health, more wealth and ONG & HUAT in 2017. Happy New Year to you. Thank you so much for being with me since the middle of 2013. The journey has been wonderful for me so far. I hope you my loyal readers/followers enjoyed too regardless of what happened to the stock market.

See you again soon in 2017!

Mercury turning into a construction player

Mercury turning

into a construction

player

Mercury Industries Berhad recently announced it has entered into a conditional share sale agreement (“SSA”) with Interglobal Dynasty Sdn Bhd for its disposal of auto refinish business.

Mercury's reasons were that its auto refinish business has become increasingly challenging as a result of the slowing domestic economy, uncertainties in the global economies and weaker Ringgit.

Instead, Mercury will be banking on its 70% owned construction company, Paramount Bounty Sdn Bhd (PBSB) for its new revenue and profits. PBSB was acquired during the second half of 2015.

Some readers who followed my early blogs would recall when I first posted about Mercury on Sept 23, 2013 : Walk the talk with Mercury Industries Berhad with me. Dare you? Since then, I continued to make several more subsequent purchase of Mercury stocks until 36,000 shares.

There were several reasons why I was interested in Mercury. Way back in 2013, total vehicles sales in Malaysia were rising. Car paint business seemed like a resilient one with consumers needing to repaint their cars after several years of usage. Besides, any car sent in for repairing after an accident is likely to require some spraying of paint too. Incidentally, accidents in Malaysia are rather high compared to many other countries.

Another reason was its good dividends payout which not many other counters can rival. Since 2011, it has paid out 8 sen for 2011, 2012, 2013, 10 sen for 2014, 6 sen for 2015, 6 sen paid in July 2016 and a further 6 sen payable in January 2017, total 12 sen for Financial year 2016.

Remarkably, despite its high dividends payout, since 2011, the highest its share price touched was only at 1.70 done on June 11, 2012. Why dividends lovers shunned Mercury is rather a mystery to me until today.

Perhaps there are other ares of concerns about Mercury others investors see which I don't see. Mind you, I am just an ordinary Joe investor who are perhaps more lucky to be in the right place right time most of the times.

Now that the management of Mercury has decided to exit its auto refinish business and focus on construction, the most important question ordinary  investors like me to ask is should I stay on or sell out my 36,000 shares?

I am sharing this now because it was me who challenged readers to buy Mercury shares and stay together with me for long term investment. I am pretty sure there must be some followers who bought Mercury shares and are still with me.

If I am to sell, I would be making sure I would be posting my blog the very next day to make this selling decision as promptly as possible so that my followers will be able to make a  better informed decision on themselves.

So far, the construction division has been performing better than the paints division. It contributed the lion's share of revenue and pre-tax profits as well in the latest 3rd Quarter Result (July to September).

In fact, its pre-tax profits surged 25% compared to its corresponding quarter  in 2015. Note that PBSB was acquired in August 2015.

Granted that PBSB is a smallish construction company that is nothing compared to the giants like SP Setia or IJM Berhad. In fact, many mid-size property companies are even bigger than PBSB.

But then again, many of these giants properties companies at one time ago started as a little unknown company first. Who knows, PBSB might one day becomes a giant company as well.

At the moment, I have decided to stay on and take my chances and see how PBSB will carry Mercury to the next forte.

I have decided to add in more shares to my Basket of Defensive Stocks.

Buying 3,000 shares of Advanced

Packaging Technology (M) Bhd

on Dec 16, 2016 at RM2.28

Advanced Packaging Technology (Advanced Pack) is a very small cash rich company that has a good record of paying dividends since 2004. At this price, the dividend yield is around between 5.5% to 6% which is higher than banks' current fixed deposit rate of 3% or 4%.

Buying 4,000 shares of JCBNEXT Berhad

on Dec 16, 2016 at RM1.76

JCBNEXT Berhad (JCBNext) is formerly known as Jobstreets. Actually I am considered very late into buying into this company. (It has rewarded earlier investors with hefty payouts of over more than two thousand ringgits after it disposed of its main business).

But nevertheless, it still has substantial cash in its kitty and a strong presence recruitment business in Taiwan. It is also another consistent dividends paying company.

Have a wonderful Christmas and Happy New Year.