My purpose of writing this piece is to teach you how to invest wisely and not to lose money. Do not just follow the price chart and its financial analysis blindly. You must always remember the price chart is a demonstration of human reaction which can often be wrong and the financial analysis is based on historical figures but it does not tell you its future profit.
The Megasteel plant closure as reported by the local newspapers a few days ago will benefit almost all the other steel products manufacturers and investors are rushing in to buy steel stocks including Choo Bee indiscriminately.
The below chart shows Choo Bee’s share price is shooting up almost vertically. But you must be careful to look at the company’s business. Its main products are small diameters water pipes and galvanized steel pipes which are used inside the house.
As you can see there is already an oversupply of houses and condominiums in every town and city in Malaysia. As a result, the demand for water pipes will be much reduced.
Buying Choo Bee’s share is the same like buying a property company’s share. If houses and condominiums cannot sell, household water pipes also cannot sell.
You must read the following extract of Choo Bee’s announcement in Bursa Malaysia carefully especially its reduced revenue.
Review of the performance of Choo Bee and its principal subsidiaries
Current year-to date vs. Previous year-to date
The performance of the respective operating business segments of the Group for YTD 2Q 2016 as compared to YTD 2Q 2015 are analysed as follows:
Manufacturing The manufacturing operations recorded revenue of RM70.4 million for YTD 2Q 2016, which decreased by 28.1% as compared to RM97.9 million in YTD 2Q 2015. The decline in performance was mainly due to weak market demand.
Trading The trading operations recorded revenue of RM127.1 million for YTD 2Q 2016, which declined by 18.5% as compared to RM156 million in YTD 2Q 2015. The weaker performance was mainly due to weak market demand. B2 Comparison with preceding quarter’s results The Group’s revenue for 2Q 2016 shrank by 3.9% to RM96.8 million as compared to RM100.7 million achieved in 1Q 2016. The softer performance was mainly due to the weaker May’16 and Jun’16 metric tonne sales, where dealers were still clearing off inventory purchased in Mar / Apr’16 during the spike in global selling prices while adopting a cautious stance on supply and demand trend.
Despite the lower revenue trend, the Group’s profit before taxation for 2Q 2016 surged by RM9.3 million to RM13.3 million as compared to RM4 million for 1Q 2016. The stronger performance was due to higher profit margins achieved as a result of improved average selling prices coupled with lower material cost. Profit before taxation was strengthened further by an inventory write back of RM1.9 million, interest income of RM0.6 million from short term deposits with banks and favorable foreign exchange gains of RM0.5 million.
CONCLUSION: The good reported profit was from previous sales. If houses cannot sell, household water pipes also cannot sell and future profit will be reduced. That is why its revenue is reduced.
Do not buy Choo Bee. If you have Choo Bee, you should sell and use the proceeds to buy other better stocks.