Posted by: donmihaihai | August 19, 2007

Be very afraid?

Heard from my friend that there many speculators were hurt in the last few days. There is one lady who broke down and cried after losing about 20K, her husband was there to help her of course. Such real life story is very common when stock market turn upside down just like there are many stories of happy gain when the market keeps going up. So should we be afraid now or fear of the unknown?

I would like to borrow from Ben Graham “Mr Market”.   

 He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business.  Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his.     Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market’s quotations will be anything but.  For, sad to say, the poor fellow has incurable emotional problems.  At times he feels euphoric and can see only the favorable factors affecting the business.  When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains.  At other times he is depressed and can see nothing but trouble ahead for both the business and the world.  On these occasions he will name a very low price, since he is terrified that you will unload your interest on him.     

Mr. Market has another endearing characteristic: He doesn’t mind being ignored.  If his quotation is uninteresting to you today, he will be back with a new one tomorrow.  Transactions are strictly at your option.

So why be afraid since Mr Market mood swing every day? Because the market is moving downward almost everyday? Well, the headline news sound bad or even ugly but why not read it in another way. If the news title is : Market crashed, investor lost money. I can always read it as “Market crashed, speculator lost money, investor gain.” Why investors gain? Because as an investor, I will like to buy low and sell high. But there is always a limit on how high the market or individual stock can go so everytime when the price shift downward, I gain by buying it lower and lower. Only in stock market, higher price is greeted with cheer and lower price is greeted by gloom. My mood lightens up for the past week as compare to few weeks ago I am more cheerful.

What about being very afraid of Pfood? An unknown virus spread nationwide in China, prompting pork shortage and inflation. Pfood is hit very hard that they are barely profitable if profit from associated Pine Agritech profits are excluded. Never In any public available record show such a low level of profit, not even during SARS. If Q2 2007 profits are annualise, Pfood ROE is just 1%. And news flow about the spread of disease are ugly as well, it is still clearing pigs on it path. The impact on Pfood is shortage of pork and an inflated price which can last more than 1 year.

So what happen? Together with the general fear in this falling market, Pfood slumped from a high of $2.22 not too long ago to $1.05. That is a dropped of >50%. Be afraid? What about being not afraid as everyone is swimming with load of greed? Pfood provided with 2 warnings in May and July on the pork situation in China. The party of greed throw the 1st warning away and continue to support Pfood share price. It is only after 2Q2007 results out, share price dropped like a stone.

How many cash out with a profit after the results is out? To be fair, I did not do anything during that period. But I sold off half of my holding after the announcement on nationwide shortage of pork. Unable to know how serious and how bad it is, I sold half with a fair but not cheap valuation of $2. Keeping half of the holdings or 1/4 of my initial holdings because I think Pfood is a well run company that will benefits alot as China develops.

So should we be afraid and avoid Pfood at the current price of $1.05? A few things must be very clear. Will the disease stay, kill all pigs which kill Pfood as a company? With Pfood strong balance sheet plus as a listed company plus a professional management. There is no question of Pfood staying power. Any crisis will only provide a chance for them to increase their market shares.

All things will past but Pfood will stay. So what kind of ROE wills Pfood earns post crisis? I would like to say the same or even improve ROE compare to the last few years. But with this virus, the industry will change. It may become more or less favourable to Pfood which I don’t know. The only thing I know is weak player will be left behind and leave the industry.

Pfood has a NTA of about $0.62(exclude Pine Agritech). The market value of Pine is $0.34. Pfood is trading just above sum of NTA of Pfood and market value of Pine. Not to mention dividend payment from Pine of about $0.011 to Pfood, this is increasing as well. At this moment, the market value of Pine is not excessive too.

Compare to Pfood, Ufood pork segment is having a better time. Why is it so? I think about it and decided to give this question a pass. It is too hard as why Ufood can generate much better results(the results itself is ugly but is still much better than Pfood). There are reasons that I can come out with but it is not an urgent matter and waiting one or more quarter to see how it goes is ok with me.

Ufood is even cheaper, but it doesn’t get my vote because they are having a shrinking pie while Pfood is able to grow their pie.

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