TENAGA

A bit of trivia.  Fundamentally, TENAGA needs no introduction.  It's not the best fundamental business out there, but it's definitely above average due to its pricing power, even if not managed by the best quality management.

Started buying TENAGA on 28 Apr 2021, nearly 3 years ago.

• Added 3 more times as indicated by the upward pointing triangles.
• Then near resistance, sold a small amount.  Still retain 85% of purchase.

With this kind of price action and trades, as of 25 April 2024:

1. Total Returns = 15.18% per annum CAGR (Price + Dividends).

2. Total Price Returns (exclude Dividends) = 10.65% per annum CAGR

3. This suggests that the Dividend Returns = 15.18% - 10.65% = 4.53% per annum CAGR.

The Dividend Returns are solid - lower than EPF long term returns of 6% per annum, but still higher than FD long term returns of say 3% per annum.

But ... Price returns are even better - more than doubled the Dividend Returns.
That helps Total Returns a lot - especially the 2 buys near the bottom.  That's like tripling the dividend returns!

Moral of the story:

1. Invest, don't trade. (TENAGA charts are not that suited for trading)

2. Invest in above average quality dividend stocks for wealth accumulation.

3. Invest more when the price of this above average quality business is sold at an attractive price.  At the time, the dividend yield when I entered in my 3rd and 4th purchase was around 5.5% to 6% iirc.  

4. Position size is critical.  If neutral position size is 3% and you feel the price might go lower but not too sure, invest a portion of the 3% first.  The advantage is that when your price sense turns out correct, add more when price is lower.  You can do this without violating your position size rules.   

5. However, I didn't get a full 3% position on my last purchase.   I didn't look harder and didn't ask myself timely enough whether I've seen the bottom in TENAGA when price went above my first entry or prior.  On the uptrend, I should at least get a bit more to get to 3% full position size around July 2023.  (too busy with work).

6. Sold a small portion near the horizontal resistance, but price continues to break above that, so, this looks like good odds of an uptrend.   The best thing to do in an uptrend is to sit tight and do nothing.

7. Quick 1 second visual look - next resistance is probably near RM13 (weaker) and RM14 (stronger).  As these are longer term charts, there's no need to watch prices everyday.   Don't need to be precise, but glance once in a while.

Why sell a little bit?  

Things are not black and white.  Probably lowers total return for a long period (because cash drags), but important to have some cash because one day, markets are guaranteed to crash if one has a 5-10 year horizon.  When this happens, you will be glad to have cash.  And you have no idea on when this will happen.

CHINWEL

I think it's entering Accumulation Zone.  Position sizing is critical now.

Long Term Charts

The 61.8% Fibonacci level near 1.18 is a logical first entry.

There's a couple of downtrend line support below around 1.10 down to 1.00.

There's the 78.6% Fibonacci level near 0.96.

The patient long term investor will stalk his prey over the coming months.

Business Profile

Simply put, its 2 main divisions are fasteners and wires.  Historically, it's cash cow has been the fasteners products (wires lesser extent) but in recent times faces huge headwinds in both segments, which is why the stock price has taken a hit.  It also has a massive net cash, built up from windfall gains in recent years.  This is simply due to the cyclical nature of its business - some years faces tough times, other years huge windfall gains.  The most recent gain was spectacular, causing the company to turn from a company with sizeable debts for a decade, into a huge net cash in just 1 year.  The company was prudent - it paid off its borrowings, and also bought a subsidiary withfreehold land worth over RM62 million.  The land doesn't pay interest though, and probably won't be disposed, but it's worth something and not nil.

See image below - during 2022, it acquired a subsidiary with 62m worth of freehold land. Land by nature doesn't earn anything. 

Turning Point to huge Net Cash - 2022

Compare FYE2022 vs FYE2021.

The turning point is huge PBT 122m (2022) vs 32 (2021) or 90 million difference.

Also good receivable and good inventory management vs prior year further increases its cash.  Responsibly does the opposite with payables.  Good management during very good times (it's easy to be good management when one is flooded with cash).

Sometimes, I wonder if it's too good to be true ... (here, we have to trust the external auditors).

Huge Net Cash Today, but wasn't like this all the time

Today, Net Cash + Land = RM288 million, or RM0.96.

Two years prior, Net Cash = RM0.3 million.  (Was 2022 too good to be true? No reason to doubt yet from price charts)

There's no magic to this huge growth - they had a windfall year back in 2022 and in the last year faced huge headwinds.

Near Term Future Prospects Bleak causing short term analysts to miss the picture

That's one view.

I do hear other views questioning if the analysts actions - originally started with HOLD - and then briefly turned to BUY - followed by recent SELL - the question is isn't this type of action intended to shake off the weak holders?   

Regardless, we use these to our advantage.

Analysts Short Term Business Analysis is not wrong

I agree that short term, the key fastener segment sales volume looks subdued short term.  Earnings for Wires look bleak too and they are waiting for government contracts.  Overseas particularly from Europe is challenging, due to the conflicts there.  North America is holding.

Just look at last 3 months vs prior year and just see how volatile its business is.  2022 was bumper harvest year, 2023 is lean and will probably get leaner before it gets better again.

Here's another comparison past 6 months 2023 vs 2022.  The recent revenue fall is very real.  But this is what cyclical stocks mean.

Where is the source of optimism for the long term?

The business financials have clearly fallen hugely - big huge drops in revenues, segment profitability has turned from large positives to almost nil.  Why can't earnings turn negative in the coming months?  Why can't there be more pain?

The truth is nobody knows.  Odds are, it's probably not bottom yet.

Founder and Substantial Shareholder Actions

If you own this stock for the long term, you must know this guy - Mr Tsai Yung Chuan.  He's the founder since 1989.  His wife and his 3 children are directors and senior management.

He's not a very good market timer - some of his past acquisitions are at high prices.  However, his most recent buy at end Feb 2024 at 1.19-1.20 is close to price chart - the 61.8% Fibonacci level at 1.18.  The size is decent around 300k+ shares - a tiny amount for him, but still, not that small.  But he did buy bigger back in Feb 2022 at 1.56 before it shoots up to 2.00 but what he couldn't predict is that hardship that followed after a very good 2022 year.  Nobody has a crystal ball on what's going to happen in Europe, not even him.

Past 10 Years Fundamentals

The 10 year CAGR is not inspiring, but that's expected for a cylical business.

The NAPS grows 6% p.a. compounding and comparable to EPF, so, that's decent say B-

EPS and DPS depends on start year but the key is to note the huge 2022 EPS which was that bumper year that's unlikely to be repeated soon.  But if you have a 10 year time frame in this stock, then, it's very good odds to see a repeat over next 10 years.  Still, Buffet would prefer something better quality than this type of company, but if you time your purchase and sales, it could turn out to be similarly rewarding / better.

Trade Strategy and Position Sizing

We don't own cyclicals for its Long term Dividend Yield - that's self defeating, because cyclicals will have lean years leading to nil dividends and is not a suitable source of reliable yearly dividend income like EPF.  If you want stability of yearly income, invest in EPF.

The strategy with Cyclicals is Price Gains.  Simply put, buy when it is low, and sell when it is high.  Never lose sight of this fundamental goal.  Everything that Analysts say or what everyone else say in investment forums should be ignored.

The risk with this strategy is what goes low, can go lower.  I showed some price levels.  There are no guarantees with these price levels.  They can break, they can fall.

Your safety is intrinsic.  You know the business is worth 96 sen.  Excluding the land, it is worth 74 sen.  If price falls to these levels, or lower, you want to keep buying more, because this company has a long proven history to share profits with you.  However, to make sure your portfolio will keep making new all time highs, you don't want to have too huge a position size.

If neutral position size is 3%, at the bottom, it should not be more than say 5% portfolio.  I highly doubt it will sell at 74 sen, but if it does get there, we know getting to RM1.50 (or doubling) is many times more likely to happen over next 5-10 years.

Hence, I would aim to get to 3% portfolio near the 61.8% Fibonacci level.  

As price falls, my value will fall and I will slowly add to keep it around 3% and higher slightly.

• Around 1.10, I may aim for 3.5% or more.
• Around 1.00, I may aim for 4% or more.
• Around 0.95, I may aim for 4.5% or more.
• And below that, I may aim for additional 0.5% capital or more.
• These are just high level thoughts.

They are not cast in stone - every quarterly report provides an opportunity to review the fundamentals of the company to re-evaluate if the business fundamentals have change.

In terms of target price, over next 5 years, getting to RM1.8 is very good odds.  Ignoring dividends, it should meet your 9% per annum return criteria.  It could take longer if global market enters a crash and recover.  It could be sooner too if the situation overseas resolve itself sooner. 

Risks with this strategy

The founder and his wife are both late 60s.  Typically, where the business is today is because of them.  The bumper year in 2022 is a typical result after many decades of getting ready for this.   It is safe to say that if the founder is no longer around, there will be disruptions that may have repercussions not only short term but potentially longer term.   Whilst their children have been in the business for a decade, this reduces the risk but doesn't eliminate the risk completely.  Hence, at the bottom, never own more than 5% portfolio.

The reliance on exports to Europe and North America, and reliance on Vietnam as inputs adds forex volatility risks but is also opportunity to diversify.   As I have a highly diversified portfolio, I'm fine with this and doesn't bat an eyelid.  Nobody can predict forex movements over the long term.

The stock price can stay low for a very long time, and for a strategy in cyclicals where dividend yields are less reliable, this could depress the portfolio returns longer than expected.   Fortunately, I don't need to the dividend income to spend yet, I expect to still have other sources of income over the next 5 years, it's a non-issue for me.

Whilst the company has a proven history to share profits with shareholders, the most recent nil dividend declared is slightly perplexing, as they always share 40% profits.  Once, during tough times, they shared more.  However, not a major issue because to me, I suspect management is trying to be responsible to send the message that the upcoming 6 months can be expected to be tougher i.e. don't expect earnings to be positive (i.e. nil dividends).   So, the base case is there may be better buying opportunities coming given this announcement of nil dividend.  In theory, as the next 2 quarter results are announced, watch out for price  divergence signs, especially if price doesn't go lower on negative earnings.

Stock market crashing always open up opportunities elsewhere.  Besides utilizing market crash cash reserves (these are held as cash solely to capitalize), it is a viable strategy to sell CHINWEL too, to raise cash and buy other stocks that will recover faster.   Likely CHINWEL will hold its value better than other stocks when market crashes, due to its high Net Cash position.  Hence, market crash and temporary loss in CHINWEL is very welcome opportunity!

Summary and Conclusion

1. Target 3% capital near 1.18.
2. Own a bit more at lower prices due to the high Net Cash position.
3. Never own more than 5% capital for this stock.
4. Have at least 5-10 year horizon for this stock.
5. Welcome broad market crash, which is opportunity to swap into better stocks that will recover faster after market crashes.

FPI

 I like this stock from both fundamentals and long term chart perspective.

Long term Chart

Usually, the good ideas tend to jumped out at you, and the chart below just jumped out at me. 
Odds look high, that the long term investor is going to profit from this type of chart / price action, when combined with excellent fundamentals (but nothing is guaranteed in markets).

Past 10 years business performance

The past 10 year's CAGR looks good, but too good to be true from future perspective?  

True 2014 EPS and DPS starts from a low base but even if we look at 9 year CAGR for EPS or DPS, this stock has proven its superior past performance.

Nevertheless, the past doesn't guarantee the future (even if at least this company has proven itself in the past very successfully). 
It's a stock where we want to consider own a full position or more near the local bottom.

Note:

1. The current dividend yield is at least 7% per annum.  My personal long term assessment of its dividend yield is around 6% per annum, matching/beating EPF.  Very nice and good odds to be sustainable (although there may be a short term bump down).

2. It's Net Cash is around RM1.40, when price is RM3.13. 
This means net of cash, the business is valued at 3.13 - 1.40 = 1.73.   
My long term assessment of its EPS is around 25 sen, factoring in the upcoming bump (even if TTM EPS is around 45 sen). 
If you assume EPS=25 sen first, the business is available for sale with a P/E of 6-7 times only. 
If you assume TTM EPS of 45 sen, the entire business is available for sale with a P/E of 4 times only.
Either way, whether 4, 5, 6 or 7 times, it is a very undemanding valuation. 
The cheapness (Price vs EPS) just jumps out at you.

3. This company has proven to have grown its Net Cash over past 10 years.  It's clearly above average, good to excellent quality business over the past 10 years.  

4. The Management of this company has proven itself to share its Net Cash with shareholders the past 10 years through generous dividend yield. 

5. The stock is available for sale during the corrective wave, i.e. it is not exactly chasing and buying on a breakout, but on pullbacks.  There's some fears about declining revenues in the current year, as it's quite a sizeable drop for FYE2023 vs FYE2022.  The drop may not be over yet.  The question is - is this drop permanent, or do you trust Management to solve this temporary problem over the next 5-10 years?  Price looks fair to me for an above average quality business.  

6. There's potential for a price gains in the future.  It's NTA is currently 2.10, where 2/3rds is Net Cash.  It could consider a special dividend one day (a nice bumper gain) and this will also improve its capital efficiency, giving even greater returns to shareholders.

Major Shareholders

Interestingly, the only major shareholder is Wistron owning 26%.  The rest are minorities.  Top 30 only owned 58%.  Feels a bit too low, not quite understand why this would be the case ... (perhaps it due to its ageing Group MD and management?).

Target Position Sizing

At the right price, this stock may deserve an over-weighted position.  If my neutral position size is 3% capital (roughly equivalent to 33 long term investing position), then, this stock deserves at least 4% or more (but see below for what I don't like about this stock too).  The business fundamentals the past 10 years is good, the management is good (trustworthy enough to share their profits fairly with shareholders, maybe can do a bit more), the chart pattern is good (for long term investors), this one can buy during dips to get to a full size position.

What I don't like about this stock?

Every stock has risks, and sometimes, it's good to play devil's advocate to a stock that you like.

Here are some reasons why I don't think it's wise to own too large a position.  If neutral position is 3% of one's portfolio, then, too large a position could be say doubling or 6%.

1. The drop in revenues in FYE2023 vs FYE2022 is quite large.  The EPS in 2023 is supported by one-time gains.  Next year FYE2024 could show a sizeable shrinking in EPS.  Hence, I think 25 sen is a good estimate of its long term EPS, notwitstanding it earned much higher from 37-46 sen the past 3 years.  At 25 sen, it is still cheap.  However, there's always risk that its future revenue might never make all time high over the next 2-3 years again i.e. it could be a long wait.   However, its dividend yield is attractive, but if EPS is too low, future dividends might be cut.  Nothing is guaranteed.

2. Related to 1, the business can be regarded as niche, dealing with speaker systems, acoustic products.  It's client base is smaller and niche so, there's a higher business/revenue risk than say MAYBANK, due to smaller potential customer base and competition.  Whilst it should beat MAYBANK returns over next 5-10 years, it pays to be cautious.  Both are good in their own ways.

3. The Group MD, responsible for past success, is a 68 year old Taiwanese who was appointed in 1989... has the alarm bell rung yet?  Who will be its successor? Given the large decline in 2023 revenues, does this ageing Group MD still possess the necessary drive to turnaround FYE2023 declining revenue?  

4. The stock market cap is only RM800 million - looks like a small cap to me.  Small caps are volatile - they can give big wins but they are also riskier and has higher chances of dropping a lot.  Hence, not more than 5% of one's portfolio.  

5. There's no rule that says that Management can't continue to hoard its Net Cash in the future, especially if the Group MD is getting older.  All else equal, older management are typically more conservative.

6. Charts are fickle.  Odds are never certain.

7. Over next 10 years, it's almost a certainty that KLSE will face a market crash.  Odds are high.  In the event of a crash, this stock will crash more than say MAYBANK.  

8. The stock is not well covered by analyst.  According to i3, there's no coverage.  This is both good and bad.  The good thing is if one day it gets coverage, the stock is likely to run.  If not, we continue to collect its nice dividend yield, well supported by its net cash.

9. Can't find its capital commitments in the last quarterly report.  This can raise eyebrows, because R&D seems essential over the long term for future growth, and not too clear from the Quarterly Report on how much it is investing for its future growth over the next 5-10 years.

Hence, for long term wealth accumulation, never be greedy.  Overweight from neutral at the right price, say 3.5% to 4%, and that is probably good enough.  If there's no opportunity to further add, that's fine too

Investing Strategy & Timing

Overall, I still feel positive about this stock.

Price action feels favorable overall.  Since Sep 2021 peak, it has clearly entered a corrective wave phase.  Today is March 2024 i.e. it has been consolidating for 2.5 years.   Normally, this feels like we are getting close to the bottom, before the next impulse wave up that could last for several years.  Nothing is guaranteed of course, but a chart reader plays the odds.

Additionally, I feel the odds of pullback and retesting is more than 50/50.  Hence, over the next few months / 1-2 years, we will get a chance to buy cheaper than RM3.13.   My immediate target is around 2.85.  

I currently own this stock.  At 3.13, it is 3.1% of my portfolio, so, I am already slightly overweighted relative to neutral.  My average buy price is RM2.63.  I first entered on 3 May at RM2.69, continue to buy on the way down at RM2.32 but didn't buy enough, then, buy more on the way up as high as RM2.87 to get to near 3% capital.  

And this is good enough to give me a paper gain that is larger than my biggest short term swing trading win.  (I trade using a smaller position size, than my long term investing position).

Summary and Conclusion

Some ideas jumped out at you, and this one certainly did a few months ago.

We can never get our entry timing precisely right and we don't need to. 
Whilst hindsight is 20/20 and it's easy to feel like I should have loaded up when price fell to 2.32, but this kind of thinking is wrong thinking because nobody knows the future.   
Additionally, it's actually not a bad idea, if one's position is not yet full, to be able to buy when price went back up.
I pat myself at the back for forcing myself to get to a full neutral position at least with this stock, even if it means chasing up to 2.87.  This is because at 2.87, the valuation is still compelling.   That was in early January 2024.

Nevertheless, after nearly 3 months of watching its price action, I suspect over the next few months/ 1 to 2 years, there is good chance to see 2.85, when I plan to load up a little bit more to perhaps up to 3.5% to 4% (depending).  It's certainly on my watch list.  If it falls below 2.85, that's okay too in the short term, as my game plan is over a much longer time-frame.

Over the next 5-10 years, the odds of making a new high looks better than 50/50 from chart perspective (even if the Group MD is now 68 years old).  And the dividend yield is nice 6% or higher per annum and growing.  And net Cash growing too.  

Hence, decent odds to beat EPF's 5.5% to 6% per annum returns over next 10 years.  It's worth a solid position in one's investing portfolio, slightly larger than 3% neutral position IMHO.

As usual, never get greedy, no matter how attractive a stock is.  Every stock has risks. 

And never be stubborn.  Eventually, price action will reveal itself, and when it does something different that what is expected, be mindful to review and reconsider our initial thesis.