The Next Hot Stuff?

What's the hottest sector in the local market?

Without a shadow of doubt, it's the glove sector. Everyone knows that and no, I am not here to gloat either but for the sceptics, if it really pleases you, do refer to past postings such as A Quick Look At Top Glove Quarterly Earnings. , Do I Not Give Credit Where Credit Is Due and Top Gloves Tops Again!

But that's the past. As it is now, the issue now is whether one is continuing to ride this massive wave in this hot trend sector (chasing hot sectors not has rather massive risks) or perhaps one is seeking out a new hot sector.

So what could be the next 2010 potential winner?

Could it still be the gloves sector or could it be something else.

This morning, I shall try using my flawed reasonings to highlight a potential winner. LOL! before you continue to read the rest of the posting, do understand that I cannot guarantee that you could lose money in this sector and if you do lose money, it's your money to begin with and if you unfortunately win big money, keep it, it's yours, not mine. LOL! Yup, my simple nasty disclaimer.

Now first thing first. Here's the chart of the leading stock in the sector.

The stock in focus is indeed APM Automotive Holdings. (Spot on Digital!! - Did not mean this to be a teaser but I just did not have time to finish. :P)

Now back in 2005 and 2006, APM was considered a top notch investment grade stock. It had the classical good balance sheet and of course SOLID growth. Here's a simple table showing the impressive growth back then.

Then weakness or the lean times hit the auto parts sector. (see this posting her )

• Another reason we might buy a stock is because we like the industry it is in. An industry could be just at the cusp of the next wave of growth. A rising tide lifts all boats. So a company in the right sector is likely to do well. Witness the oil and gas and marine-related sectors in the last couple of years.
  
  Industry cycles tend to last a few years. The growth came because there had been a neglect of that sector for a period. Few were investing in the sector and thus production capacity was limited. And when suddenly a surge of demand materialises, established companies can increases their prices and enjoy supernormal growth.
  
  But slowly, more companies would join the industry, and established companies would invest to increase their output. This would continue until one day the supply would again exceed demand, and the industry would head south. (source here ) (cycles... the earnings cycle... good point not to discount!) (ah.. if the industry is cyclical, then investing long term might not work out great, yes? This is simply because the stock could most likely be hit by the bad times)

The good fortune in auto parts manufacturers' industry cycle would see an end by 2006. And APM was hit hard the next few three fiscal years.


On Aug 2006 it even retrenched a ton of workers!

• APM Industries Holdings Bhd, for example, recently retrenched more than 500 employees at its Perak plant after its contract with a national carmaker was stopped."Poor car sales are one thing. Shrinking margin is another. Industry margin has become lower and lower as car manufacturers and assemblers demand that suppliers bring down costs," said one vendor who declined to be named.From a bullish target of 565,000 units forecast in January, the Malaysian Automotive Association in its mid-year review last month revised it down to 520,000 units, a 6 per cent drop from total sales of 551,042 units last year. (source: here )

But lately, there are positive indications that good times 'could' be back. (of course, the risk issue is the sustainability of the industry cycle)

Firstly the data.

As can be seen, positive earnings turnaround has happen since APM reported its 2008 Q4 earnings. Earnings doubled in 2009 Q1 and increased steadily since then.

As an auto parts industry player, what's the clear driving catalyst in these set of stronger earnings?

Are we seeing strong automotive sales?

Could this industry cycle trend last?

Would it be as hot as the rubber glove sector?

These are the issues that the potential investor needs to address, yes?

Here is the link to its last reported earnings: Quarterly rpt on consolidated results for the financial period ended 30/9/2009

From its notes.

• Group revenue in the third quarter fell marginally by 1.6% to RM245.7 million from RM249.7 million recorded in the corresponding quarter last year. Operations in Malaysia registered an increase of 8.5% to RM223.5 million from RM206.0 million, while operations outside Malaysia registered a decline of 33.3% from RM46.8 million to RM31.2 million.
  
  Group pre tax profit improved to RM30.2 million from RM23.5 million achieved in the corresponding period last year. Operations in Malaysia registered an increase pre tax profit of 6.9% to RM27.8 million from RM 26.0 million achieved in the same quarter last year. Operations outside Malaysia recorded a pre tax profit of RM2.3 million compared with pre tax loss of 2.4 million in the same quarter last year. The improvement of profit margin for operations outside Malaysia was due to better selling prices and the strengthening of functional currencies against the major trading currencies, which has effectively lowered the cost of imported materials.

And here is APM strong balance sheet.


The biggest question is could this cycle be sustainable or are we just witnessing a plain temporary industry rebound?

Well, if one is betting on the auto parts sector, one cannot expect to rely just on the durability of the sector since replacement spare parts are always sold in regardless of the cycle. Obviously true but for me, I would want to see if there are clear signs that the new model sales are increasing and the new model sales would be the catalyst for a longer and sustainable industry cycle. (Well, if the industry cycle is short and unpredictable, then logically the risk intensifies, yes?) (And the durability of the spare parts sector driven by replacement parts is preferred by some to the outright motor manufacturers.. but then preference is such a wild beast in the stock markets, yes? Yeah, many prefer stocks like Tan Chong)

In a recent news article More upside for auto sector next year

• The Malaysian Automotive Association (MAA) said on Monday sales of vehicles rose in November to 45,200 units, up 10.6% from the 40,865 units a year ago and it expected sales to pick up in December.
  
  From January to November, vehicle sales declined to 489,234 units from 508,290 units in the previous corresponding period. Production declined to 444,755 units from 498,419 vehicles.
  
  RHB said its projection of a 4.3% growth in sales to 542,000 units in 2010 was underpinned by the improvement in affordability and sentiment amid the economic recovery.
  
  For 2010, the research house forecast demand to pick up for premium and commercial vehicles as well as heavy-duty equipment, which is a typical sign of recovery.
  
  "While there is a risk of inflationary pressures on cost, we expect better economies of scale to help mitigate the risk," the research house said.
  
  It said the key risks to its projections for 2010 were inflationary pressure amid economic recovery and the weakening of the ringgit against the US dollar and yen.

And here is a CIMB report.

Now obviously, for the stock mentioned, APM, one have to note that APM has been on a tear lately.

LOL!

And critics would point out that this is a potential sucker recommendation. "Stock goes up so much, now only mention. What is the INTENTION yo? You write, they buy, you sell ah?"

Ahh... that's the risk yes?

You could always ignore this posting.

Or you could choose for other motor players. (table from klse tracker)

Or you could choose other auto parts players. (table from klse tracker)

Hey, as mentioned many times before, it's your own money, not mine, so do be really responsible. Ok?