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STARS Search: Eng Kah Corporation Berhad (7149)
Date of Review: 01st September 2013
Closing Price: RM2.87/share (as of 30th August 2013)
STARS Rating: 10*
Investment Decision: KIV (Keep In View)

Practice is always the best way to have hand-on experience on stock evaluation. I have been
practicing my STARS Evaluation System and improving the process to enhance its functionality and
effectiveness on identifying quality counters. In order to make our learning process more interesting
and proactive, I would like to share with you my "STARS Search" from time to time for ease of
learning and identifying investment opportunity.
From my course, you may have realized that, by using my STARS Evaluation System, there are not
many counters could pass through it. You may wonder whether my system is too stringent that
even those so-called famous big-caps could also be out of my list. Well, what I would like to say is
that this is how my system is working. I only interested in those counters with genuine good
financial and management quality but not based on what publics are talking about and expecting.
I must admit that, sometime, small is beautiful. Therefore, I also keep searching for those quality
counters that may be neglected by the public due to whatsoever reason. In this months article, I
would like to share with you my latest STARS Search: Eng Kah Corporation Berhad.
I do not know this company until I saw an article in Personal Money magazine that discussed about
high yield stocks. Of course, there are more than ten counters being recommended in the said issue
but they all failed in my STARS Evaluation System, unfortunately, except Eng Kah.
Eng Kah Corporation Berhad is a low profile Penang-based investment holding company with its
subsidiaries operates in three segments:
1. Personal care: include the manufacturing of cosmetics, skin care, perfume and toiletry
products;
2. Household: include the manufacturing of household products;
3. Investment holding
In 2011, it joint ventured with Cosway Corp Ltd for business expansion by setting up a plant to
manufacture personal care and household products for Cosway stores in China. As of 31st
December 2012, its geographical sales composition is as follow:
1. Malaysia - 63%
2. Australia - 18%
3. Hong Kong - 9%
4. Others - 10%
In terms of segmental sales, the composition as of 31st December 2012 is:
1. Personal care - 70%
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2. Household - 12%
3. Investment holding - 18%
Well, based on the above research, Eng Kahs business is rather straight forward and easy to
understand. Its main focus is still in Malaysia market with personal care segment as it main business
focus. However, as its products are rather common in nature, I really wonder how it manages to
survive within the stiff competition environment. Before I look into more detail, I take a quick look
at its business profitability (via net profit margin) and management performance (via Return on
Equity) through its 2012 annual report to ensure that this company is worth for my time for further
analysis. The outcome: Its business return is impressive (over 15% net profit margin) with
reasonable Return on Equity (over 15% as well). So, it passes my quick test. I therefore compile the
whole financial information required in my STARS Evaluation System and present it in the following
table.

Table 1
For the past 11 years, its sales revenue growth was almost double. However, I can see the
contraction in 2007, 2011 and 2012. I therefore look for its annual report for the respective years.
Followings are the summary:
2007: The sales contraction was caused by slow manufacturing activities as a result of
renovation work for production expansion. The renovation work was completed in
second quarter of 2007. As what it highlighted that production capacity has always been
one of the main constraints for the Group to achieve higher growth, I believe it could
perform better in the future after the said expansion and the growing trend can be
observed in subsequent year but 2011.

2011: It did not mention the reason for the mild sales contraction (1.86%) but its net profit
improves substantially by 6.72%. To me, it is still fine in view of overall profitability
improvement.

2012: It said the decrease in sales was due to implementation of stringent credit control policy
to further strengthen its working capital.

To justify this statement, I refer to its Balance Sheet and income statement for the year for
Trade Receivable and Revenue to calculate its Day Sales Outstanding (DSO). DSO is used
to measure the average number of days that a company takes to collect its trade
receivable. It will be good to a company if it collects outstanding receivables as soon as
possible for it to have chance to put the cash to use again. Therefore, low DSO may also
Counter *ENGKAH
Column Labels
Values 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Sales Revenue 46,833 54,329 65,001 78,981 81,677 65,201 72,542 75,566 97,399 95,582 84,300
Net Profit to Shareholder 6,505 10,302 13,907 15,206 15,227 11,415 11,099 6,832 12,010 12,817 12,996
Net Profit % 14% 19% 21% 19% 19% 18% 15% 9% 12% 13% 15%
Cash Flow from Operation 1,973 11,534 11,125 15,426 16,299 6,997 3,845 17,533 10,768 17,201 13,882
Cash % 1.3 2.0 1.7 1.8 2.0 1.4 0.6 0.7 0.5 0.8 1.3
Dividend Yield 5% 2% 2% 6% 6% 11% 12% 10% 8% 8% 7%
Return on Equity 12% 17% 19% 19% 18% 13% 13% 9% 15% 17% 17%
"STARS" Evaluation 11 10 10 10 10 10 10
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means that a company does not require short term loan to fund its working capital that
could avoid interest expenses. The formula of DSO is very simple:

(Trade Receivable / Sales) * 365

To investigate Eng Kahs DSO, I have done the following compilation and analysis:

Table 2
What we can see from this table is that Eng Kah indeed attempts to lower its DSO via stringent credit
control system. To me, it is a good sign as it has improved its DSO significantly from previously over
100 days to less than 80 days in 2012.
After investigation, I find that Eng Kahs sales growth trend is still intact with reasonable explanation
over its minor contraction in some years. I give it 1* for this category.
Further on that, to analyse its net profit trend, I realize that the contraction of its 2007 net profit was
due to the impact of the renovation work for its plant expansion while 2009 was due to change in
product mix by consumers. As for its net profit contraction in 2009, Eng Kah highlighted that it was
due to the increase in operating cost and changed of product mix which reflected the market
demand as a result of unfavourable global economic condition. To justify this, I observe that Eng
Kahs net profit recovers since then. This means its business has improved. Since the contraction is
acceptable to me, I give Eng Kah 1* for its net profit trend.
Next, since its average net profit margin for the past 11 years is at 16% mark, I give it 2* in this
category.
As Eng Kah passes the first three criterions of my STARS Evaluation System, all I need to do next is
just to evaluate the remaining four criterions according to my STARS Rating System. After the
analysis, I can conclude that:
1. Eng Kahs business is viable with good profit margin
2. Its management able to create value to its shareholders throughout the evaluation period
and award its shareholders generously via cash dividend payment
3. It is a cash rich company with more than enough cash to cover its total obligation. That is
why it has strong cash flow from operation and is debt free
Now, back to the question on how it remains its competitiveness with common products. We
should understand that should the raw material price increase while the company unable to transfer
the cost up impact effectively to its customers, its profitability performance will be very much
affected. However, this scenario is not applicable to Eng Kah. As we can see from its consistent
strong net profit margin, I can conclude that Eng Kah is trying to control its costs at reasonable level
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despite of increasing cost pressure as a result of inflation. This has reflected the intelligent of Eng
Kah's management on cost control to remain its competitiveness and profitability.
Throughout the evaluation, I can realize that it score 10* and above which also shows the
consistency of its management and financial performance.
I also take a quick check on Eng Kah's financial performance in 2013 so far. Based on first half yearly
unaudited result, I have annualized its Sales and Net Profit for a quick reference:
Items 6-Month Result
(RMk)
Annualized
(RMk)
Sales 32,968 65,936
Net Profit 4,070 8,140
Net Profit % 12%
Table 3
Do note that the annualized figure is only an indication for ease of analysis. If I compare it with 2012
result, it shows a contraction of 23% in sales while its net profit margin is still intact. As the 6-month
financial result is an interim report, no further explanation is given. Furthermore, the actual annual
result might not be turned out this way should there be any counter measure to be taken on sales
recovery. In view of this, I will keep this counter in view for further observation.
How about its share price movement? Below is its price movement chart since 2012:

Chart 1 (Source: chartnexus.com)
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Its trading volume is rather fair without any surprise but still acceptable to me as long as its volume
moving average is not flat. Even with the recent market turbulence, I can't see there is any panic
selling over this counter (sharp price contraction along with high trading volume). However, I can
observe that its share price was on the downward trend since October 2012 and has entered into
long term downtrend in January 2013 when its share price fell below 200SMA. (Note: The 200SMA
is used to observe the long term share price movement trend. It is calculated based on the simple
average of the past 200 days' closing price)
I can conclude that its share price movement does not in line with its financial performance.
Probably it is due to its unpopularity. Furthermore, due to recent market turbulence, its recent
share price has reached early 2012 level. In other words, for those who hold this counter since 2012
gain nothing from its share price movement but did receive dividend payment of 8% per annum.
Well, even though the return is not so promising, it is still performing better than fixed deposit
return.
In short, I might consider taking the position only when all of the below condition are met:
1. 50SMA is above 200SMA - this means mid-term trend has become bullish
2. 200SMA shows uptrend - this means the counter is turning from bear to bull
3. price uptrend is supported by increasing trading volume
4. my Process #2 indicates buy
5. other positive macro and micro factors that might arise
This is a good example of a good counter that is being ignored by the market with unreasonable
price movement. To me, as long as it is a good counter, I will continue to keep it in view.


** Please note that this article is purely based on my personal observation, analysis and judgement.
It is purely for information sharing and educational purposes only. I do not recommend any buy or
sell of this counter. I disclaim any responsibility, liability, loss or risk which may arise as a result of
this illustration.