Wednesday, 16 October 2019


This message was originally written on 4 October, 2019

We like to to entertain distant possibilities and far-fetched notions. It's essential in our trading activities.

Think about a poultry counter like Leong Hup International (LHI). Today it's about 90 sen. Been rising a bit lately; prospects look good.

Let's set aside the fundamentals argument for a moment; we all have access to the same publicly available info. We can talk cock about chicken prices until the chickens come home. 

Let's think about the stock, or a number of stocks in poultry. It is hardly a secret that we like the sector, and we are already holding a long term position in a poultry counter.

Just take a moment and think about poultry stocks. Then, entertain some attractive possibilities. In this example it's LHI  and TEOSENG, a unit of LHI, also publicly listed.

LHI had hit a rough patch after re-listing last May. Chicken prices fell steeply due to an oversupply situation. The stock fell to 72 sen; some ways off of its RM1.10 IPO price.

Now let's say things are recovering, which seems the case for chicken and egg prices. From 72, LHI stock is now back at 90 sen.

What do you think will happen if LHI hits RM1.10 again? Here's what we think:

The stock will rally strongly. There will be latecomers and new big buyers coming in. We figure it's the institutional funds that are hungry to get yields. This has already been supportive of LHI prices in the near term. LHI offers a very attractive dividend policy (30% of net profits) to shareholders. Anyone would want a piece of that, plus potential capital gains.

So if LHI hits RM1.10 at some point, likely from improving fundamentals and new buying interest, we expect the stock to go even further, possibly RM1.30. In a down market, these are the kinds of opportunities people will flock to. The KLCI is at a four year low: do you think most people are still buying KLCI counters to get dividends?

The poultry sector is a defensive sector. At the very least, people won't stop eating KFC, or two eggs for breakfast.

So with this in mind, all that's left is to craft a trade. It can be LHI stock, TEOSENG stock, or any of the associated warrants.

Best case scenario is a poultry sector explosion, bringing everything to the stratosphere after some recent struggles. As an associate, TEOSENG will benefit too. It's not too far off from an all time high, believe it or not. Chicken prices are at multi year lows; we wonder what would happen if it recovers just a bit?

We foresee some positive movements in these counters, with a targeted timeline of until the end of this year. We have already bought into our position. They are for safekeeping, like a cozy rooster's nest.

Best thing is, these are not simplistic, speculative trades. The two companies are cash gushers. Their profits can be a bit lumpy, but they are still profits.

It's not a chicken and egg problem. These are gems that the market is starting to rediscover.

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