TTI’s New Core Position: Shinsho Corporation & Kobe Steel

Traditionally, towards the end of the year, me and my wife would discuss travel plans for the next year. We each get to choose 1 destination, and we’d fill in the spots with nearer, easier to get to places as and when time (and mood) permits.

Here’s my pick for 2018:

646) meteora.jpg

Make a guess where this is.

It’s frequently listed on every “Top 10 places to see before you die” YouTube videos.

Plus I absolutely love places with a rich history. It makes my skin tingle when I’m there, thinking that several hundred years ago, in a totally different world from now, someone has touched that same stone wall as me. It’s like a tiny part of me gets transported into that era, and I love that experience. It’s fascinating.

Maybe that’s why I was good at history as a kid. It’s a series of fascinating stories to me. I even kept my sec 1 History book prize envelope till today! So that envelope, is at least 23 years old. (I Did Something Fun As A Kid… And Now It’s Worth 6 Digits!!!)


SGX Bull Charge is this coming Friday, and I’ve collected my race pack.

The kids are going completely bonkers about the bull cap.

647) Bull Charge.JPG

Plus who doesn’t like freebies?


648) Freebies.JPG


I have earlier mentioned that I’m liquidating some positions to redeploy capital into another idea: (TTI’s Portfolio Updates – November 2017)

True to the nature of SG TTI, this new position is a contrarian, deep value one.

I currently own 2,500 shares in Shinsho Corporation, a position worth approximately 7.86mil JPY or SGD 94,000.

I also own 1,000 shares in Kobe Steel, a position worth approximately 1.02mil JPY or SGD 12,000.

Both positions have risen in value since my entry price.

649) Shinsho corporation.jpg

On top of that, it was also somewhat fortuitous that I entered into some currency swaps right after the recent japanese elections. Abe was re-elected, and the markets were expecting his policy of easy money and stimulus to continue, hence the JPY weakened considerably. I was able to do swaps at rather favorable forex rates:

650) JPY to SGD.jpg


About a month ago, Kobe Steel was forced to come out in the open and admit that they’ve been faking data to make it seem like some of their products have met specifications required by clients, when the products have not in reality.

Initially, they said that the affected products were mainly aluminium and copper products that accounted for only 4% of the division’s sales last year. 4% didn’t seem too bad, but it got my interest enough to investigate.

However, things went downhill real fast. On the 11th October 2017, the company announced that some of their steel products were also affected, and the dishonesty could’ve extended as far back as a decade ago, affecting 500+ clients, both local and international ones.

The shit really hit the fan, and Kobe Steel’s share price tanked 41% within 1 week!

The collapse of the share price reflected the uncertainty revolving around the scandal. Kobe Steel, being an upstream supplier of raw materials for many, many products used all over the world, could potentially have almost unlimited liabilities arising from this scandal.

Their client list includes a list of who’s who of mega companies. Think of all the jap automakers, airlines and even nuclear power plant makers. Using materials that did not meet specifications, could potentially be disastrous.

A fine, parallel case study is the recent air bag scandal with Takada. The company was forced to declare bankruptcy eventually, stemming from the numerous lawsuits. In that case, lives were even lost.

I thought that the scandal was over hyped though, and after doing my DD, I decided to allocate the bulk of my capital to Shinsho corporation, and a small token portion to Kobe Steel itself.

Shinsho corporation’s share price was also affected by the Kobe Steel scandal, as they are the distributor and trader for many of Kobe Steel’s products.

Taken from Shinsho’s website:

“Shinsho Corporation imports, exports, and trades iron and steel, ferrous raw material, nonferrous metal, machinery, information industry, and welding products worldwide. The company offers iron and steel products, including half-finished steel, special steel, construction material, casting and forging, carbon steel, wire rod, titanium and nickel alloy, and casting material and cast products; ferrous raw materials, such as materials for making iron and steel, and other products; and nonferrous metals comprising aluminum, cast, aluminum and copper material, copper, and processed aluminum and copper products. It also provides machinery and electronics consisting of chemicals and food processing…”

In the immediate aftermath of the scandal, Shinsho’s share price tanked almost 30%:

651) Shinsho corporation share price.jpg

This didn’t make sense to me, as the liabilities related to any recalls or lawsuits, would ultimately fall on the shoulders of Kobe Steel, not Shinsho. Exactly how much is Shinsho exposed to Kobe Steel?

Taken from Kobe Steel’s AR17, page 58:

652) Kobe Steel AR.jpg

For the year ending March 2017, Shinsho bought ¥184,678 mil of Kobe Steel’s products.

Kobe Steel is a client of Shinsho as well, buying ¥259,479mil of materials for equipment.

Since FY17 Shinsho’s revenue was ¥769,481mil, this means that Kobe Steel accounted for 33.7% of Shinsho’s revenue. That’s significant, but not critical. Assuming that Kobe Steel completely goes under, the maximum effect would be a loss of 1/3 of Shinsho’s revenue. This is a scenario that I consider highly unlikely.

With the massive drop in share price, both Shinsho Corporation and Kobe Steel were trading at a massive discount, compared to their peers.

Kobe Steel is the 3rd largest steelmaker in Japan, being dwarfed by Nippon Steel & Sumitomo Metal Corp (largest) and JFE Holdings (2nd largest).

However, Kobe Steel is a giant in it’s right. They are highly diversified, as opposed to their pure steel peers, they are into several other metals as well, including aluminum and copper products.

As a consequence of the scandal, Kobe Steel scrapped their full year earnings forecast and their interim dividends.

I did a peer comparison on their valuations, using projected PE ratios:

Kobe Steel

Share price: 1,084 yen

For 1H of fiscal 2017, Kobe Steel announced EPS of 108.62 yen / share, which is a 858 percent increase in net profit. (YES! 858% increase! The japanese steel makers are all doing very well now. More on this later)

Executive Vice President Naoto Umehara said the misconduct would likely reduce Kobe Steel’s second-half recurring profit by 10 billion yen, 70 percent of which will mainly come from the steel business.

TTI conservatively estimate 2H earnings to come in at 72% of 1H, that gives 28.8bil yen. (I used 72% of 1H, as that’s the guidance given by Kobe Steel’s other 2 peers, both of which gave 2H earnings guidance that’s approximately 70% of their 1H earnings)

Less the 10bil guidance from the misconduct, given by Naoto, and we have 18.8bil yen in earnings.

So full year earnings will come in at 58.8bil yen or EPS of 159.7 yen.

That gives a projected PE ratio of 6.8 times.

To illustrate how undervalued the shares are, if I take an extreme scenario whereby the company DOES NOT EARN A SINGLE CENT FOR 2H, the full year PE ratio would still be around 10 times currently.

Nippon Steel & Sumitomo Metal

Share price: 2,694 yen

Nippon Steel’s net profit for the April-September period came to 99 billion yen, 9-fold higher than a year earlier. It raised its interim dividend to 30 yen per share, from its earlier prediction of 25 yen, and forecast a 30 percent climb in full-year profit.

(Yes, 900% increase! The industry is booming right now, as I’ve alluded to earlier)

For 1H of fiscal 2017, they reported EPS of 112.34 yen.

For full year, guidance for EPS is 193 yen.

(2H EPS about 72% of 1H)

That’s a forward PE of 14 times.

JFE Holdings

Share price: 2,544 yen

1H EPS: 150.95 yen, forecast of 260.15 yen for full year (FY16 EPS was 117.81yen)

(2H EPS about 72% of 1H)

That’s a forward PE of 9.8 times.

Aside from steel, let’s compare to their aluminum focused peers:

UACJ Corporation

Forecasted earnings of 17bil yen for fiscal year 2017, vs 8.7bil in 2016 (given at end 2016)

As of Q1 results, no change to this forecast (EPS of 352.27yen)

For Q1 2017, earnings of 4.4bil yen or EPS of 9.12 yen, vs 1.4bil yen in Q1 2016

At share price of 3,380 yen, that’s a forward PE of 9.6 times

Nippon Light Metal Holdings

Mainly trades in Aluminum products such as ingot, sheet and extrusions, foil, powder and paste, as well as aluminium products including electronic materials and industrial components

1H EPS of 13.98 yen

Increased interim dividend from 3 yen to 4 yen.

Paid yr end dividend of 5 yen last yr.

Currently forecasting yr end EPS of 29.07 yen

Share price is 333 yen, which gives a forward PE of 11.46 times

Shinsho Corporation

For 1H of fiscal 2017, reported EPS of 322.41yen

(assuming earnings for 2H comes in at 72% of 1H) FY17 EPS of 554.5 yen

At share price of 3140 yen,

That’s a forward PE of 5.6 times

I have a much larger position in Shinsho Corporation than in Kobe Steel, as I believe there are still uncertainties around Kobe Steel, and much of the drop in the share price is justified, whereas Shinsho Corporation happens to be an unfortunate party and the drop in share price was unjustified.

Looking at the 1H earnings, it is clear that the whole industry is booming right now. In fact, part of my thesis revolves around the fact that despite Kobe Steel’s troubles, the industry is doing so well right now that Kobe Steel’s customers cannot switch to their peers even if they wanted to, as all their peers are running at full capacity right now!

https://asia.nikkei.com/Spotlight/Kobe-Steel-data-scandal/Kobe-Steel-focused-on-performance-overlooked-quality-scandal?page=2

UACJ has reported that Kobe Steel’s clients have made enquiries, but they themselves are running at full capacity and are unable to support.

Japanese end users have also been known to be notoriously reluctant to disrupt their supply chain.

To illustrate how well the industry is doing right now, check out Shinsho’s revenue:

653) Shinsho corporation revenue.jpg

(The figures are cumulative)

I believe their revenue at the Q3 mark, will likely match that of full year 17 already.

Shinsho Corporation’s EPS chart:

654) Shinsho EPS.jpg

At the 2H mark, EPS of 322.41 yen already exceeds the 310.11 yen at Q3 mark of fiscal year 17.

As it stands currently, none of Kobe Steel’s clients have reported any major casualties or detrimental effects related to the use of Kobe Steel’s products.

There have been, thus far, zero recalls either.

In the midst of my DD, it is my understanding that although the data surrounding Kobe Steel’s products were fabricated to meet industry requirements, the actual characteristics of the products still fall within an “acceptable” range. In fact, without Kobe Steel’s admission, end clients would’ve continued using the same products without recognizing any difference.

Let’s not forget that this fabrication has been going on as far back as a decade ago!

Of course, it’s not defence for Kobe Steel’s behavior, but I do think media reports have vastly exaggerated the extent of the deception. This also doesn’t resolve Kobe Steel from lawsuits from their clients. At the minimum, several of their clients would’ve run up additional costs from doing additional checks after the break of the scandal, and Kobe Steel would likely have to reimburse them for their costs.

Notice that all these revolve around Kobe Steel though, and do not affect Shinsho Corporation directly.

Coupled with the positive outlook for the industry, I believe it’s a matter of time before the scandal blows over, and the share price recovers to trade at a valuation closer to their peers.


On a separate note, I’ve also initiated a token position in Alliance Mineral Assets and currently own 100,000 shares at $0.365.

All indices worldwide seem to be hitting new highs every other day, so going forward, I’d be very cautious about allocating capital. Finding cases of simple undervaluation is just not enough now, I’d require a clear stimulus in sight. Failing which, I’d be happy to keep cash.

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TTI Is Banking On The Eighth Wonder Of The World

It’s funny how my portfolio updates and performance tracking posts generate so many views. It really is.

It takes me minimal time to write up those posts, since I track the returns on my own anyway, so it’s just cutting and pasting. It doesn’t take much effort to pen my thoughts either since I’m very well familiarized with the companies I own, and can write it off the top of my head.

Yet these posts generate so much more interests than other generic posts that sometimes take a lot more effort to research, find data, compile, analyze and present.

Since my recent post (TTI’s Portfolio Updates – November 2017), I’ve had some guys who have discussed your personal returns with me. It seems like everyone’s having a good year. Or at least those who bother to email me to show off a bit.

On IN, there are some guys with reported what… 40%, 50%, 70%, even 80% (gasp!) returns YTD! WOW!

Hmmm, on the other hand, it really makes one wonder if we are near the top of the bubble market created by the Fed. When everybody’s popping champagne and having a good time, that’s when we’d better be like Cinderella and make for the exits before the clock strikes 12.

With the incoming new Fed chair, we gotta worry if the transition will finally be the proverbial straw that broke the camel’s back.

I don’t try to predict what will happen though; in my experience that’s a futile effort. Knowing what I don’t know, is probably more important than knowing what I do know.

Well, I hate to be the party popper here, but here’s what I really think:

Having a single great year, is not going to make you rich in the long run. 

For retail investors at least.

It might make you really rich if you leverage up, use OPM (other people’s money), like professional fund managers, leverage on 1 big idea, and BOOM!, do a go-big-or-go-home kinda move, and am proven right.

Kinda like John Paulson.

1 great idea, 1 great bold move, 1 big win, and subsequently, he’s been dead wrong all the way since the 2009 GFC. Yet, he remains a billionaire. (I think). Or at least a multi millionaire.

For retail investors, it doesn’t work that way unfortunately. Cos you have no fancy hedge fund 2 / 20 fee structure to insulate you from losses and glorify you when you win.

Retail investors who have had a stellar 40%, 50% type of gain in a single year, usually fall under 1 of these categories:

  1. Small capital
  2. Unusually large proportion of capital in 1 winning idea
  3. No long term track record

When your capital gets larger, that’s when you’d run into trouble trying to find that 1 gem in the rough. Sometimes, there isn’t even that 1 gem.

Someone on IN said that he is “100% invested” in Geo Energy Resources because it is a “high conviction idea”. Another commentor said that “high conviction means it’s a no brainer right, so must 100% in”.

Readers would know that I am optimistic about the company, and am vested since August last year and currently hold 500,000 shares.

But 100%?! Wow. Thank you very much for your support, but seriously 100%?!

I can only conclude that the 100% capital must be relatively puny.

And if there’s 1 thing I know about investing, it is that there are no no-brainers. If you think something’s “a clear no brainer”, guess who’s a level 1 thinker? (Read Howard Mark’s writings)


Does this mean there’s no hope for us, poor retail investors? Are we destined to be stuck at the bottom of the investing pyramid, feeding off scrapes from the pros?

Don’t worry!

There’s still the Eighth Wonder Of The World we can rely on!

640) stock-photo-milford-sound-new-zealand-34152775

When I googled “Eighth Wonder Of The World”, that’s the image that pops up:

Milford Sound in New Zealand, South Island.

Wow. That really looks like a piece of heaven on earth.

……………………………………..

BUT, how come when TTI went, it looked like this:

642) Milford Sound.jpg

Not quite the same right. Grrrrr…

OK, it’s still quite a nice place, with the myriad number of waterfalls, islets sticking out of the water, cool mist in your face etc., but nothing that resembles the Eighth Wonder pic on top.

And it’s really an inaccessible place to get to. It takes several hours by coach to get to and back from Queenstown. I’ve been to quite a few fiords, and this just doesn’t seem like it’s worth the effort, if I’d be honest.

In fact, I think Queenstown itself is even more beautiful. Queenstown is one of my favorite cities in the world, in my opinion, it ranks closely to Zurich and Zell Am See as the most livable places in the world.

Close fight amongst the 3 contenders:

Queenstown

643) Queenstown.jpg

Zurich

644) Zurich.jpg

Zell Am See

645) Zell Am See.jpg

Damnit, how come I didn’t take a panorama of the lake and the city. Anyway, “See” = “Lake”, so the whole place is a series of interesting low-rise buildings littered around a mega lake, which is also bordered by mountains on both sides.

有山有水, what more can one ask for?

But I digress.

Milford Sound is NOT going to save the average retail investor.

The Eighth Wonder Of The World that really will….. is this:

641) Eighth Wonder of the world.jpg

COMPOUNDING.

The power of compounding returns year in, year out, over a long period of time, is what will make the average investor rich. Mega rich.

You don’t have to take TTI’s word for it. But if Einstein says it……………

This means instead of trying to shoot for the stars with a single year of unbelievable returns, we should instead focus on the avoidance of mistakes aka not a single year of terrible returns. (Something I’m guilty of! I’d one year of massive losses, in the quest for the 1 holy grail, the 1 idea that’d make TTI rule the investing world…)

I read somewhere that the human brain is not equipped to really understand compounding. (Einstein’s brain is not considered human)

Our brains think of things proportionally.

2—> 4000

4 —> ???

Everyone can tell it’s 8000.

Our brains can visualize arithmetic, but somehow the effect of compounding is something that our brains cannot grasp easily. We have to illustrate the effects of compounding, and the illustration is what our brains can grasp.

So let me do exactly that, illustrate, with myself as an example.

TTI’s portfolio size for listed equities (excluding illiquid stuff like private equity, property etc), is…. I estimate, around SG$1.2mil right now. I am not sure exactly what it is right this instance. But just for convenience’s sake, let me round that down to $1mil.

Assuming I start now (at 35 yrs old), and stop/die/become retarded at 70yrs old, and if I can get an ROI of 20% annually, how much will this $1mil capital grow to when I’m 70 yrs old (35 years from now)??

Don’t play cheat, don’t take out a calculator to do the math.

Just guesstimate. Use your brain’s visualizing powers. Go on, make a guess.

Now, I’ve already primed you to think of an obscenely large number right? What, with all my pep talk about the human brain’s inability to understand compounding.

Still, the answer will shock you. (It shocked me)

Yr Beginning Capital Capital at Yr End
1 $1,000,000 1.2 $1,200,000
2 $1,200,000 1.2 $1,440,000
3 $1,440,000 1.2 $1,728,000
4 $1,728,000 1.2 $2,073,600
5 $2,073,600 1.2 $2,488,320
6 $2,488,320 1.2 $2,985,984
7 $2,985,984 1.2 $3,583,181
8 $3,583,181 1.2 $4,299,817
9 $4,299,817 1.2 $5,159,780
10 $5,159,780 1.2 $6,191,736
11 $6,191,736 1.2 $7,430,084
12 $7,430,084 1.2 $8,916,100
13 $8,916,100 1.2 $10,699,321
14 $10,699,321 1.2 $12,839,185
15 $12,839,185 1.2 $15,407,022
16 $15,407,022 1.2 $18,488,426
17 $18,488,426 1.2 $22,186,111
18 $22,186,111 1.2 $26,623,333
19 $26,623,333 1.2 $31,948,000
20 $31,948,000 1.2 $38,337,600
21 $38,337,600 1.2 $46,005,120
22 $46,005,120 1.2 $55,206,144
23 $55,206,144 1.2 $66,247,373
24 $66,247,373 1.2 $79,496,847
25 $79,496,847 1.2 $95,396,217
26 $95,396,217 1.2 $114,475,460
27 $114,475,460 1.2 $137,370,552
28 $137,370,552 1.2 $164,844,662
29 $164,844,662 1.2 $197,813,595
30 $197,813,595 1.2 $237,376,314
31 $237,376,314 1.2 $284,851,577
32 $284,851,577 1.2 $341,821,892
33 $341,821,892 1.2 $410,186,270
34 $410,186,270 1.2 $492,223,524
35 $492,223,524 1.2 $590,668,229

Answer: $591 million!!!

Wow. Ok, how many of you got a number that’s around that ballpark? Or more?

I would’ve thought it’s maybe…. $250mil or so.

So all I really need to achieve, is a 20% IRR every year, year in, year out for the next 35 years. Great.

And this is assuming zero capital infusion for the next 35 years.

It also excludes other possible assets like PE, property and other collections.

So putting all these figures and esimates together, is a $250 mil listed equities portfolio size by 2052 reasonable??

(LOL, this illustration is specially for my wife. She thinks I’m a dreamer. I think all achievements start from a dream)

Now, let’s paint another scenario.

Instead of an annualized 20% return for the next 35 years, what would the final figure be like if I had gotten :

YEAR 1: 10%

YEAR 2: 10%

YEAR 3: -10%

YEAR 4: 10%

YEAR 5: 60% (!!)

And repeat this 5 year cycle 7 times for the entire 35 years?

Would the figure be higher or lower than a consistent 20%?

Hmmm, seems like a close fight right? 10% ROI is not too bad, with a single bad year of -10%, but it’d be saved by an absolutely fabulous year of 60%.

There’s no doubt that if you are a professional fund manager, this 2nd scenario is much better. Why? Cos the year with 60% ROI would guarantee you primetime appearances on CNBC, your AUM would swell like mad, and people would throw money at you.

Coupled with 10% in most years, with only a -10% every 5 years…. that’d really put you at the top of the hedge fund world.

But for the retail investor…. guess which scenario is better?

Yr Beginning Capital Capital at Yr End
1 $1,000,000 1.1 $1,100,000
2 $1,100,000 1.1 $1,210,000
3 $1,210,000 0.9 $1,089,000
4 $1,089,000 1.1 $1,197,900
5 $1,197,900 1.6 $1,916,640
6 $1,916,640 1.1 $2,108,304
7 $2,108,304 1.1 $2,319,134
8 $2,319,134 0.9 $2,087,221
9 $2,087,221 1.1 $2,295,943
10 $2,295,943 1.6 $3,673,509
11 $3,673,509 1.1 $4,040,860
12 $4,040,860 1.1 $4,444,946
13 $4,444,946 0.9 $4,000,451
14 $4,000,451 1.1 $4,400,496
15 $4,400,496 1.6 $7,040,794
16 $7,040,794 1.1 $7,744,873
17 $7,744,873 1.1 $8,519,361
18 $8,519,361 0.9 $7,667,425
19 $7,667,425 1.1 $8,434,167
20 $8,434,167 1.6 $13,494,668
21 $13,494,668 1.1 $14,844,134
22 $14,844,134 1.1 $16,328,548
23 $16,328,548 0.9 $14,695,693
24 $14,695,693 1.1 $16,165,262
25 $16,165,262 1.6 $25,864,420
26 $25,864,420 1.1 $28,450,862
27 $28,450,862 1.1 $31,295,948
28 $31,295,948 0.9 $28,166,353
29 $28,166,353 1.1 $30,982,988
30 $30,982,988 1.6 $49,572,781
31 $49,572,781 1.1 $54,530,059
32 $54,530,059 1.1 $59,983,065
33 $59,983,065 0.9 $53,984,759
34 $53,984,759 1.1 $59,383,235
35 $59,383,235 1.6 $95,013,175

Answer: $95 million!!!

Vs $591 million in the 1st scenario with a consistent 20% return.

The difference is massive.

Real massive.

Of course, in both scenarios, the law of diminishing returns kick in as the capital increases. It’s easy to get a 20% ROI when you’re dealing with $100k. A 20% ROI when you’ve $10mil is another ball game. 20% when you’ve $100mil? That’s when you really need to start doing asymmetrical stuff that nobody else does.

So that’s it. The gauntlet is set. 20% for the next 35 years!

Now, let me get back to work.