For KLSE Market

VALUE INVESTING

L. C. Chong

http://lcchong.wordpress.com

24 May 2013

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Stock Picking

Due-Diligence

Profitability Cash Flow Financial Risks

Asset Quality Reporting Quality Potential Growth

Buy and Hold Returns

Market Timing

Intrinsic Value EY% Oscillator DY% Oscillator

Absolute P/E Technical Analysis Changes in Shareholding

Quarterly EPS

Performance

Entry/Exit

Franchise Quality Analysis Due-DiligenceShareholder Wealth

Creation

STOCK PICKING

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SECTORS THAT I WILL APPLY VALUE INVESTING

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Consumer Products

• Tobacco

• Breweries

• Food and beverage

• Poultry farming

Trading Services

• Telecoms

• Gaming

• Electricity

• Diversified business

• Rice and grains

• Media and publishing

Financials

• Banks

• Stockbroking

Industrial Products

• Oil and gas

Plantations

• Oil palm

FILTER CRITERIA

• Filter criteria applied in www.equitiestracker.com to search investment grade, large capital

growth and emerging investment grade companies.

• Criteria:

• Franchise Quality Analysis

• Min: 70%

• Max: 100%

• Due-Diligence Basic

• Min: 70%

• Max: 100%

• Shareholder Wealth Creation

• 5 Years and 10 years

• Min: 8%

• Usually, the above criteria will return 120++ companies. 5

FURTHER SCREENING

• The next criteria will be Shareholding Analysis.

• I will only shortlist the companies where institutional funds have substantial

shareholding.

• This criteria can eliminate 20-30 companies from the list.

• The last criteria is to determine quality of the management team.

• I will ask around my friends and relatives, as well as search though Internet for track

record of the management team in three aspects:

• Transparency, Integrity

• Shareholder Friendliness

• Incentives, Ownership, and Stewardship

• With this criteria, sometimes, we can eliminate 5 – 10 companies with poor

management stewardship.

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FURTHER SCREENING

• High level financial/business performance

• Check each company in EquitiesTracker for consistent growth of:

• Cash Flow

• Profitability

• 5-Y Average of ROE ≥ 10%

• At this stage, this criteria is meant to be slightly loose because I do not want to

eliminate turnaround companies.

• I will eliminate those companies with inconsistent growth.

• At this stage, I should have around 20 – 30 stocks in my shortlist. The next step is to

check financial health and potential growth of these companies in details.

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DUE-DILIGENCE

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MEASURES

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• Please refer “Stock Analysis Measures.pdf” where you can download in my blog.

STOCK COMPARISON

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STOCK COMPARISONS

• In KLSE, there are roughly 25 – 35 companies that meet most of the criteria that I defined

in Stock Filtering.

• It is impossible for us to invest in all of these companies.

• Not all of them are giving good returns even if their fundamental are sound.

• Therefore, we have to compare the companies, and eliminate weaker companies until we

found the best of the best. This is a tedious work, but it is worth to do.

• At one time, I will only maintain 10 – 12 stocks in my watch list.

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IMPORTANT KEY METRICS FOR COMPARISON

• Return On Invested Capital (ROIC)

• Cash Return On Invested Capital (CROIC)

• Growth Rate

• Earnings per Share (EPS)

• Trend of Net Cash from Operations

• Strong brand, monopoly or barriers to entry

• Historical capital and dividend payout (dividend yield)

• Valuation and earning yield

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MARKET TIMING

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ENTRY RULES

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Method Description Applicable To

EPS The current quarter's EPS is up more than 15% from the

same quarter the year before.

All companies

DCF Intrinsic Value Price is below Intrinsic Value Companies with consistent growth of cash

flow

Absolute P/E Price is close to Buy Price Companies with inconsistent growth of cash

flow, but consistent growth of earning.

DY% Oscillator Price is below or around the price derived from DY%

High

Companies with consistent growth of

dividend payout

Market Direction Stock price breaks out of consolidation/dip on an

uptrend.

All companies

Institutional

sponsorship

Company owner, EPF, Khazanah, PNB and major fund

institutions heavily buying

All companies

EY % Oscillator Price is below or around the price derived from EY%

High

Companies with inconsistent growth of cash

flow, but consistent growth of earning.

ALERT/EXIT RULES

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Method Description

EPS Quarterly EPS drop for 5 consecutive months.

DCF Intrinsic Value Has the stock risen too far from its intrinsic value?

Absolute P/E Price is close to Sell Price

DY% Oscillator Price is above or around the price derived from DY% Low

Market Direction Long term trend changed from bullish to bearish

Institutional sponsorship Company owner, EPF, Khazanah and PNB heavily selling.

EY % Oscillator Price is above or around the price derived from EY% Low

Fundamental Analysis Fundamental of business turns unattractive or bad

- Declining cash flow

- Serial charges

- Serial acquirers

- The CFO or Auditors leave the company

- The bills aren’t being paid

- Changes in credit terms and account receivable

- Found a better opportunity to replace this stock

DISCLAIMER

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• This document is

• Mainly for myself

• Educational only

• Does not contain investment advice

• I am not originator or inventor of any rules and methodology that used in this

document. I am just standing on the Shoulders of GIANTS. I stated the source of

ideas and material in bibliography.

• The methodology and rules that I am using definitely not 100% fit you because I

have personalized the methodology and rules to my risk tolerance, capital,

personality and lifestyle.

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