Saturday, 26 September 2015

King of Sugar shares pearls of wisdom

By Emiko Terazono

Malaysian entrepreneur Robert Kuok on his trading philosophy

Robert Kuok, the billionaire Malaysian entrepreneur, maybe better known as the man behind the Shangri-La Asia hotel group, but in the commodities world, he is nicknamed the “King of Sugar”.

The 91-year old tycoon and uncle of Wilmar co-founder and chief executive Kuok Khoon Hong, still watches the sugar market daily, and trades the commodity so he can pay for his bottles of Petrus 1989, one of the world’s rarest and most expensive wines.

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Mr Kuok rarely gives interviews, but he shared his trading philosophy with Jonathan Kingsman, founder of Kingsman sugar consultancy and occasional Financial Times commentator, for his recently published book The Sugar Casino .

Here are some of his pearls of wisdom:

Always take profits promptly

“Not knowing when to take a profit is the Achilles heel for a trader. Take profits! Don't wait. If you have a profit you have to take it. If you wait it will be your downfall.”

The sugar market is prone to over supply

“In the sugar market, there is always over production. There is no point hoarding sugar. There is always a bumper crop coming up.”

Don't be arrogant when trading

“You have to be humble because you are never always right. You don't need to convince anyone. You can trade as a very humble man.”

You’re either a trader or you're not

“Traders are born, not taught.”

Cut your losses and walk away if someone abuses your trust

“If you want, you can keep that person as a friend but do so at arm's length; no more business dealings. But it is better to just cut the cord and part company. If you bear a grudge you are just hurting yourself; you are not hurting the other person. It is like throwing good money after bad. Keep your wits, keep your humour and if you are a good man, luck will come your way again. You will see another opportunity and you will grasp it.”

Always adhere to moral practices

“If someone asks you for a bribe you should say that neither you nor your company could do that. But stay polite. Don’t stand on your high horse and preach morality at that moment.”

There is nothing that can't be traded

“I have a simple motto in life: every single material thing that I have in life can be traded. It is for sale. It is a question of, when, where, to whom and price. The first three are more important. If you like a person the price becomes unimportant.”

The Commodities Note is an online commentary on the industry from the Financial Times

The Sugar Casino is available on Amazon ebooks.

The Importance Of Cash Flow Analysis

As we embrace the full influx of financial reports for the earnings season of 1st quarter, it is pertinent to note that besides paying close attention to profit margins and management’s view of the company that you’re looking at, an important piece of the financial report called the “cash flow statement” should be given a closer look as well.

The importance of cash flow statement lies in the fact that it explains the changes in cash and gives insight to the company’s operating, investing and financial activities. Also, cash flow statement will unveil the company’s ability to generate cash to meet its short-term obligations, thereby assessing if company’s liquidity and solvency position is sound.

In this article, I will show you a brief example on assessing the health of the company using Cash Flow Analysis. Before I go forth with my explanation, a stark contrast has to be established whereby “High Profits Do Not Equate To Healthy Cash Flows.” Many quickly assume that having high profits generally mean that the company is doing well. Ironically, profit figures could be easily manipulated via unconventional ways such as “off balance sheet financing” or “window dressing”, thereby making profits look “good”.

In a nutshell, the cash flow statement is made up of 3 categories, namely operating activities, investing activities and financing activities.

Operating activities – These are revenue generating activities of the company, which normally includes cash receipts from sale of goods and services, cash payments to suppliers for goods and services and disposal gains and losses of fixed assets.

Investing activities – These are activities that involve the acquisition and selling of fixed assets (long termed assets like land, building or plant), cash receipts from the disposal of fixed assets and cash payments to acquire fixed assets.

Financing activities – These are activities, which change or impact the size and the composition of owners’ capital. They include cash proceeds from issuing shares, or debt and payment of dividends.

The cash flow statement presented below will entail explanations on the analysis on the health of company A.

From the above cash flow statement, even if Company A’s income statement reflects a profitable figure, Company A is not earning real profits but instead “creating” profits. This can be seen by its significant disposal of fixed assets and lowering of provision, thereby reflecting “poor quality” of profits.

Breaking it down further, red flags should strike you upon noticing the fact that net cash from operating activities is negative, indicating unsuccessful business operations in terms of cash earned. Despite improvement in cash flow where closing cash and cash equivalent albeit being negative narrowed, closer attention will enable you to see that said improvement was actually attributable to the huge sell off of its fixed assets (plant and freehold land and building).

Because purchasing and owning fixed assets such as plant and machinery will subject Company A to depreciation charges, thereby weighing down profits, Company A has replaced the disposed fixed assets with long term leases. Long-term leases are akin to “renting”, in which things like depreciation or maintenance of the asset are absorbed by the owner and not the lessee. However, long-term leases will subject Company A to future cash flow commitments, which could create further liquidity problems.

Insufficient cash flow also led to the company raising funds through the share issue, which was done to cover the deficit but Company A’s business still reflected an overdraft figure of $60 million due to its poor operations. This is in addition to the fact that it chose to pay out dividends of $125 million despite such performance.

Summing this piece up, it is pertinent to remember that high profits do not equate to healthy cash flows. It is often easy to manipulate profit or balance sheet figures by adopting policies which capitalize on the grey areas of accounting standards, but it is not as easy to do that on a cash flow statement. To further enhance the analysis, financial ratios could also be used hand in hand with the cash flow statement to better understand the story told by the numbers.


Quote for the day

“I'm not saying that controlling your mental state is the magic solution to trading success. It's just part of the answer. But when you admit that the answer is within yourself, you've come a long way.” - Van Tharp