As you know most of the exporting company shares reported reduced profit in their recent quarter due to the strengthening of our Ringgit. As a result the share prices of Focus Lumber, Latitude etc fell more than 20%. But Lii Hen share price is shooting up like a rocket and I wanted to know how they managed to report historical high revenue and profit.
I attended Lii Hen AGM on 1st June 2016 and I found out how they could overcome US$/ Ringgit exchange rate and managed to earn historical profit. They have more than 50 American distributors and they limited the quantity of their products to each of their customers. In this way, they always wanted more to buy.
Moreover, they based on the exchange rate of Rm 4.10 to one US$ to fix their selling prices for their products. They have been increasing their production every year in the last 10 years.
In the last quarter, they reported historical high profit and revenue. Its revenue was 50% more than last year but its profit is 100% more than last year.
Recently a big buyer from China visited their factory and obviously interested to buy. This is a new big market. They will be sending their 1st shipment in August.
I also asked how they could overcome the current labour shortage unlike other manufacturers. Besides their own factories, they have about 30 small subcontractors nearby. Most of them are making furniture parts which will be assembled, polished and painted by their own factories. Using subcontractors is the most efficient way to save cost and time. Lii Hen does not need to provide and maintain factory space. The subcontractors just extended their garages and work from there.
All these are reassuring us that they will continue to make increasing profit. Profit growth prospect is very good and it complies with my share selection golden rule.
At the AGM, I suggested to issue free warrants which is like giving aung pow to all the shareholders. I think the news is out as shown by the recent increase in volume and share price.
Basing on the its 1st quarter EPS of 11.4 sen and bonus warrant issues, I believe the last closing price of Rm 3.30 is still cheap, selling P/E below 10.
Most of those people who have sold to take profit earlier would not admit their mistake and buy back at a higher price than the price they sold. To be a super investor, you need to change your small trader mentality. You must forget the past. Examine the facts in front of you carefully and make decision. Would you buy Focus Lumber because it also reported 30 sen eps for last year and its 4th quarter eps was 10 sen. It share price has fallen more than 29%. Lii Hen also reported the same result.
The advantage of subcontracting
You must remember, when you employ a worker, you are actually paying for his time which is not link to his production. A subcontractor can closely supervise and see that his workers’ hands are moving all the time.
We use a lot of subcontractors in our construction works. We always sub contract out work where ever possible. Now I remember a good lesson I learned when I first started as a contractor more than 50 years ago. I used to wonder how my competitors could always submit a cheaper tender than me. Their prices were even cheaper than my cost.
At that time, there were a lot of tenders for building Government quarters. For example my competitors subcontract the laying of roof tiles. The subcontractors included labour and breakages.
I would normally allow 5% for breakages to submit my tender. In my case when my lorry load of tiles arrived on site, one man would climb up the truck and throw the tiles to another man at the roof top to catch. Of course, he missed his catches quite often which increased my cost.
But, my clever competitor would sub contract his title laying work which included the cost of labour and breakages. In his case, the workers carried and walked up a temporary staircase with a few tiles at a time and guaranteed minimum breakages.