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A Walk in the Park with Cypark Resources Berhad (5184)

Lately, I have been searching for a company which has good profit margins, a business model which is non-conventional (i.e., not manufacturing, banking, plantation, and trading in nature), and resilient to external market shocks. I hope I have found the right company! This week I will be looking at Cypark Resources Berhad (5184). Cypark is a company that is involved with the provision of environmental solutions. It has 4 main business segments which are: 1. Environmental engineering: Provision of nature conservation and environmental improvement services. 2. Landscaping and infrastructure: Provision of landscape services, project management services, and infrastructure development. 3. Maintenance: Provision of specialist maintenance works on leachate treatment plants, landscape services for parks, and maintenance of public amenities. 4. Green technology & renewable energy: Solar panel, biogas, biomass, waste-to-energy, and other renewable energy project

Part 1: Ways to make money in the stock market

I recently stumbled upon an article on the net on ways one can make money investing in the stock market. The article was written in a manner that was fairly simple and easy to understand. It highlighted 3 ways that one can make money from the stock market as an investor:

1. The company’s growth in intrinsic value
2. Appreciation in the company’s share price
3. Dividends received from the company

These are all useful concepts. If these concepts are internalized by every investor, everyone will have a pleasant experience investing. As simple as it seems, many people still lose money in the stock market despite being very familiar with the 3 concepts above; note that the 3 methods were intentionally placed in that particular order by me.

(1) Growth in intrinsic value
Of the 3 concepts, growth in intrinsic value is the most important. The first step is to identify a great business. A business can grow year-on-year if it has a competitive advantage over it competitors. Here are a few characteristics of companies with economic moats: it produces products which are appealing to its customers, has a cost advantage over its competitors, is an expert in its field of business, is a main player in a niche industry, and etc. In essence, the investor has to identify companies that have an economic moat over its competitors. ‘Economic moat’ was a term coined by Warren Buffet which means that a company has to have a competitive advantage that distinguishes it from its peers.

Based on my experience, the process of identifying businesses with economic moats is the most challenging and tedious. I would comb news and websites for leads to good companies to invest in. Sometimes after hunting for months, I am still unable to find a company to invest in. Only occasionally do I encounter a decent opportunity.

Companies with wide economic moats are usually able to grow in intrinsic value. In financial terms, increase in intrinsic value is where a company is able to increase its net asset value per share. There are multiple means to attain growth in intrinsic value. The intrinsic value of a company can increase if it improves its profit margins; achieve a respectable growth rate in its revenue compared to its peers; improve the collectability of its receivables / extend the settlement of its obligations, which in turn, shortens its cash collection cycle; secure long term sales contracts; own land which appreciates in value; have equity interest in business ventures that are profitable; establishes a strong brand name that builds customer loyalty, etc. An example of a company with an economic moat is Mc Donald’s. Through its strong branding power and its ability to keep costs relatively low, its fast food chains are always full of customers.

My method of spotting investment opportunities is to constantly observe businesses around me. I am always on the lookout for shops which are packed, people queuing outside shops, and reading analyst reports and business news. I usually confirm my observations by going through annual reports and quarterly reports of the company. After more independent research, I will form my own opinion on the company.

(2) Appreciation in the company’s share price
To me, this is the main reason I invest in a company. To invest in a stock that appreciates in share price is every investors’ dream. This is only achievable if Step 1 is executed well. Apart from identifying great opportunities, determining its value is another art to master; usually requiring patience, technical analysis skills and quantitative analysis skills which I will leave out for another day’s discussion.

Step 2 is the relatively easy as all it requires is perseverance to ride the ups and downs of the stock market. However, a lot of mistakes happen here as some investors usually panic and cash out before any significant profit is made. I’ve included a chart of Apple as an illustration. The point is to show that share price move in waves and not in a linear fashion. An understanding of technical analysis will undoubtedly help investors interpret share price movement in a different light. To understand how technical analysis is applied when analysing shares, check out my article HERE.

Picture 1: Apple Inc share price

Notice the non-linear movement in share prices. However, the overall direction that prices move is north.

(3) Dividends received from the company
I usually do not consider the dividend yield of a company as my main motivation to invest in a stock. Nevertheless, this is an important investment ratio that boosts the annual performance of my portfolio. Using a hypothetical example, if my investment achieves a 10% appreciation in share price value, and assuming annual dividend yield is 5% of my purchase price, my total return on investment for the year is 15%. Dividends is a means to boost my return on investment on a stock.

However, I noticed that stocks with high dividend yields have a lower propensity for capital appreciation. One probable reason is that companies that distributes a large portion of its profits as dividends are usually ‘cash cows’. As we know, cash cows do not experience much growth; hence, a slower rate in share price appreciation. Therefore, I seldom invest in cash cows. To get a better understanding of a cash cow, check out this example of a cash cow. Link with Apollo Article.

Conclusion
These are the concepts market participants can use to make money from the stock market. Market participants are generally classified as investors or speculators. Investors generally view stocks in this manner. In contrast, speculators perceive stocks as tradeable commodity. Both investors and speculators can be very profitable if a systematic, logical and proven method is followed. At the end of the day, investing is more of an art than a science.


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