Kobe Steel & Shinsho Corporation

Divestment Of Shinsho Corporation & Kobe Steel – TTI’s Post-Mortem

1stly, some thanks is in order.

Lilin from SGX told me they’re sending “Team ThumbTack” (as they so affectionately put it) some red packets for CNY, and I was expecting a couple of packs in the mail.

Then my guard passed me this:

IMG_2571.JPG

Inside was a massive box of several packs of red packets.

IMG_2572.JPG

IMG_2574

Wow, that’s enough for several CNYs. How’s that for some festive mood?

Plus they’re smart enough to have generic red packets that can be used regardless of which year it is.

So thank you, SGX!


3 months ago, in Nov 2017, I wrote about my investing thesis for Shinsho Corporation and Kobe Steel:

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

As stated, I accumulated a position of 2,500 shares in Shinsho Corporation, and 2,000 shares in Kobe Steel

Experts In WEF Davos + Updates On Shinsho Corporation

Since then, both companies have reported Q3 results that have handily beaten market’s expectations, the share prices have shot up, and I have taken profit in 2 batches, the 1st being a sale of 1,000 shares of Shinsho Corporation at 4,100 JPY on the 1st Feb 2018.

690) Shinsho Corporation take profit 01022018

Results

To build my positions, I converted SGD 124,000 into JPY at a rate of 84.34291, ending up with JPY 10,458,521

Following complete divestment, I ended up with JPY 12,257,387, giving me a capital gain of approximately 17.2% for 3 months.

The real returns were further boosted by Fx gains, as the recent bout of volatility in the markets resulted in a rapid strengthening of the yen, and my conversion of yen to SGD was done at a rate of 82.784, resulting in a balance of SGD 148,064.

Real returns for the past 3 months or so is thus, SGD 24,064 or a ROI of 19.4%

Not too shabby for 3 months huh.

Post-Mortem

I’ve previously already described my rationale for my core positions, with a particularly large one in Shinsho Corporation, and a smaller one in Kobe Steel.

Since then, the markets have proven me to be largely correct. All japanese steelmakers have seen their share prices rally, but Shinsho’s and Kobe Steel’s have rallied much more strongly on most days compared to their peers.

Comparison Kobe Steel vs other share prices

As I said earlier, it’s really difficult taking up contrarian positions, especially when the markets continue to move against you AFTER you’ve completed your accumulation. And trust me, it ALWAYS does.

Expecting to accumulate right at the bottom, is akin to expecting to learn to fly right after jumping out of a moving plane. It just doesn’t happen. And when the markets continue to move against you, every day feels like an eternity.

Each time that happened though, I took solace in my research. In this case, I dug deep to analyze the trends in Japanese steel production figures, and compared that to the relevant market share of each player. I also kept track of Chinese steel production figures, particularly it’s export figures.

Japanese steelmakers are having a field day right now, from a rare combination of lack of cheap chinese steel exports, as well as huge demand from construction projects within Japan, in view of the Olympics 2020. Another source of huge demand comes from the Jap automakers, which have been ramping up production.

In 2017 to date, China has greatly restricted it’s steel production, choosing to consolidate within the industry and cut exports. This created a sudden void, and steel prices such as rebar steel (used in the construction industry) and hot rolled sheet steel (used by automakers) firmed up strongly.

My tracking of the production volumes also gave me the confidence to build a core position and hold resolutely.

The Japanese steel market is dominated by 3 players:

  1. Nippon Steel & Sumitomo Metal
  2. JFE Holdings
  3. Kobe Steel (a distant third)

With that, I figured that the overall industry figures would fairly accurately reflect the fortunes of the 3 players, proportionately.

The data that I have compiled and assessed, constantly gave me the confidence to be contrarian. Check it out.

691) Steel Products Orders.jpg

This table shows the steel products orders by end clients. Comparing y-o-y growth, hot rolled sheets (used mainly by automakers) and steel pipes and tubes (used in construction), showed the strongest growth of over 6% more than the corresponding period in 2016. (Highlighted in yellow)

Steel manufacturing is the largest division of Kobe Steel, and the largest contributor to earnings. Within the steel manufacturing division, these 2 particular sub types are the main types that Kobe Steel supplies.

As mentioned before, the huge demand on the industry, supported by the drop in chinese exports, resulted in a rare environment where steelmakers could raise prices on their products. In fact, domestic demand was so strong, that Japanese steel exports dropped by more than 10% y-o-y as producers found clients to take up their production easily:

692) Export numbers.jpg

In addition, we can see from the table that demand growth came mostly from construction projects and automakers.

I even went to investigate the steel product orders by regions, as I postulate that the higher the regional demand that Kobe Steel resides in, logically, the greater the business for Kobe Steel.

693) Orders by regions.jpg

Kobe Steel’s headquarters reside in Kobe, which is within Kansai.

In fact, Kobe Steel is the single largest employer within Kobe. That further gave me confidence that it is not in the interests of politicians to overly penalize Kobe Steel so as to cause insurmountable troubles.

Don’t bite the hand that feeds you, ya.

I prefer to look at y-o-y data for the periods I track, instead of month on month data, so as to smoothen out seasonal demands. The steel demands tend to be substantially stronger in 1H, with the lull being in the Oct-Dec winter period (which is Q3, as they all have a March year end)

Now, having digested all this data…….. logically, does a 40% drop in the share price due to this scandal seem kinda illogical? A 40% drop means the markets are pricing in a catastrophe type of scenario, and perhaps, even pricing in insolvency and bankruptcy.

TTI didn’t think so, looking at all the data.

But that’s not all. The best investments are always those that you have superior insights that would give you a competitive advantage over the markets.

So… How did I actually end up looking at Japanese steelmakers? (I actually hate to look at Japanese companies. The financials are presented differently from what I’m used to, the numbers in yen always look so large and it’s not fun for a number cruncher like me, and the english in their website is usually atrocious).

Answer: By chance, actually. 

I’d really like to say that I’m a genius who had the foresight to determine where the Japanese steel market was going, but it was really an idea that I chanced upon.

Because of my position in Dutech, I was actually tracking rolled sheet steel prices in China (that being a major cost for Dutech), and noticed rising prices. I also noticed a sudden drop in Chinese steel exports, and came across an article which described how the Chinese gov was consolidating the industry, shutting down inefficient steel mills and producing higher quality steel. They were also limiting steel exports in an attempt to regulate steel prices. (whether it’s by choice or due to political pressures, I wouldn’t know)

Specifically, when looking at the Kobe Steel scandal, I also knew that unlike the doomsday scenario that the press painted, it is more likely that Kobe Steel’s clients would work together with Kobe Steel, to contain the fall out, rather than go after Kobe Steel with pitchforks.

This confidence is gleaned from my previous investment in CDW Holdings.

Post-mortem Of CDW Holding Ltd Divestment

Grass Is Always Greener On The Other Side… + CDW Holdings FY16Q4, TTI’s Thoughts

CDW’s CFO Mr Philip Dymo, gave me precious insights into the manufacturing industry and corrected many misconceptions I had.

For example, I used to think that the manufacturer – client relationship is one where the power resides in the clients. It seems logical right? The manufacturer doesn’t have any competitive advantage, the client can just go to the cheapest manufacturer who can provide the same goods, at the lowest cost. What pricing power does the manufacturer have?

But in reality, their relationship is more like a partnership. At least for CDW’s industry, a client would need to accredit the manufacturer before beginning on a working relationship, and that process can take as long as… 2 freaking years!

In fact, for Kobe Steel, I believe some of their clients are actually aware of the discrepancies in their product specifications themselves. Complicit agreement is what this is.

Financials

I’ve been discussing Kobe Steel’s fortunes above, that’s because Shinsho Corporation’s macro fortunes really mirrors that of Kobe Steel’s.

For the financials though, let’s look at Shinsho’s, since that was my core position to begin with.

Q3 financials put many of the market fears to rest, and rewarded my positions heavily.

694) Kobe Steel earnings.jpg

Earnings definitely surprised the markets, coming in at 515.68 yen per share. Market’s fears of clients bailing out on Kobe Steel / Shinsho Corporation did not materialize. Earnings were just as strong.

More importantly, check out Shinsho’s forecasted earnings for the full year:

695) Kobe Steel forecasted earnings.jpg

Projecting full year EPS of 564.68 yen.

That’s actually very very close to my own estimate in my investing thesis.

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

I wrote:

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”


My own ascribed fair value for Shinsho Corporation is actually much higher than my divested price, at around 4,500 yen. That would give a forecasted PE of around 8 times.

I chose to divest now, and leave approximately 20% of gains on the table, because I need the liquidity right now. (No, I did not foresee the markets will suddenly turn volatile)

The needed liquidity is related to this:

PE Moving On To Pre-IPO; TTI’s Projected Returns: 1,000% Within 10 years.

Maybe I’d write about it at a later stage when the deal gets done and dusted.

Alright, that’s all I have for this post.

Have a good CNY ahead!

Wishing all readers a prosperous year ahead!

Cheers

Advertisements

Evidence Based Investing – TTI’s Case Reports

In medicine, clinicians have to practise evidence-based medicine.

What does that mean?

It means you can’t just carry out a procedure or a treatment, based on your mood, your personal beliefs or what you personally think will work, even if you have strong personal grounds to believe it’d work, or even if you have good intentions.

You get into trouble for doing that.

Good intentions, no matter how pure, is not a defence.

Everything must be evidence based, that is, based on literature from research work done by heroes who devote their lives to doing research, all for the betterment of mankind. (I say heroes and I genuinely meant it, cos most research work is actually relatively poorly remunerated, with a lot of hard work. It’s just shitty work IMO, despite how much the gov tries to promote it and all the life sciences nonsense.)

Amongst the different levels of evidence, there’s the gold standard at the top, the double blinded randomized controlled trials (RCTs). That’s like the strongest evidence.

case report

Then there’re also the case reports, which are great for learning from fellow colleagues, but may not provide very strong evidence. Still better than relying on your personal beliefs.

Anyway, here’re TTI’s case reports for my brand of deep value, investigative, no-nonsense digging type of contrarian investing. (And here I’d help InvestingNote by promoting them a bit)

Over at IN, I have made 5 estimates:

Alliance mineral 1

Alliance mineral 2

blackgoldnatural

CDG estimate

Geo energy

And the cumulative result of these 5 estimates are:

Market estimates results


(Please don’t bother to join IN to follow me, I don’t think I’d be making estimates that often anymore.)

Now…. of these 5 estimates, 2 have hit, 2 are ongoing, and 1 has been widely off the mark.

Of the companies that the 5 estimates involve, 4 of the estimates are done with lots of loving care, due diligence, seriousness and are evidence based.

The last 1 was done somewhat as an experiment, with next to zero research, with callousness and I think I spent a grand total of 15mins looking at it.

Hazard a guess, which is the one with no effort put in? No prizes for guessing.

TBH, I don’t really know what BlackGoldNatural is doing right now. I roughly know they’re in the coal industry from my work with Geo Energy, but that’s about it. I made the estimate after reading 1 solitary article about them winning some contract.

And THAT, is why casual, read-the-news-and-invest, is suicidal.

(well, my estimate for Geo Energy hasn’t hit the mark, but for all practical purposes, I’d consider it has, since it rose as high as $0.31, just barely below my $0.32 estimate. Plus I’m deeply in the money on this one, having gotten in right from the start when it was unloved)

Geo Energy Resources Investing Thesis – Part I

Geo Energy Resources Investing Thesis Part II


Finally, let me give just 1 more “case report” as evidence.

Sometime in Nov (2 months ago), I posted my investing thesis for Shinsho Corporation:

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

In my most recent post, I said that this week is exciting, as the major steel makers would be posting results.

Experts In WEF Davos + Updates On Shinsho Corporation

And THIS, is what Shinsho Corporation did today (at the time of typing this):

Shinsho corporation

With this, my large core position is looking real pretty today, with an approximately 24% gain or so in the past 2months++.

And that’s not taking into account Fx gains, which has fortunately, worked out in my favour as the JPY strengthened of late. That’s gonna add a few more % points to that 24%.

I think Shinsho Corporation was a classic case of contrarian investing: Having the balls to take a position when the world says no. Right after I built my position, even more of the world said no. And as late as just a few weeks ago, naysayers continue to think that there isn’t much value left to capitalize on.

Today, things have swung to my side, as a bit more of the world is starting to recognize what I saw 2 months ago.

Yet the difficulty in contrarian investing, lies in truly believing that you’re right while the general market is wrong. That’s something very difficult to do, especially if the share price continues to move against you. Afterall, we validate our investing prowess by the share price.

IMO, the only way to really stand firm in the barrage of dissenting information and opinions, is to know what you’re investing in, and know it better than the other guys.

Even with the massive jump today, Shinsho’s share price is still a tad below what I deem to be fair value. But I’d have to reassess it again tonight or over the weekend, cos global markets are looking shaky of late, there may be some better opportunities thrown up elsewhere that’d warrant deployment of capital.

I’d like to see how STI ETF can beat SG TTI this quarter; I’d really have to screw up big time for the next 2 months for that to happen.