Where are we in the Palm Oil Cycle? Sold United Plantations.

I've been holding United Plantations (KLSE:2089) and valuations are looking stretched.  At RM3/share, its got a PE of 20 at an ASP of RM 4.2K per tonne.  A 5% yield at a 99% payout ratio.

Should I keep holding?  The key is the price of palm oil.  Can we predict it?

Demand has too many moving parts:

• Economic growth
• Price of substitute oils (eg: rapeseed, sunflower, soybean)
• Biodiesel

Supply is easier.  Palm oil trees produce no fruit for the first two years, then rapidly increase production until they are 5-6 years old:

Source: MP Evans

So a supply response from newly planted trees takes 3-6 years to hit the market.  Usually when a commodity's price skyrockets, people are incentivised to produce more.  But in the short term, prices move higher due to the delay in bring on new production.  The supply response, delayed at first, eventually leads to a glut.  High prices are the cure for high prices.

Have we seen the start of a supply response yet?

The two main suppliers are Indonesia with 2/3rds global production, and Malaysia with 1/3rd:

• Indonesia had a moratorium on new plantation from 2018 to 2021.  Land use grew 2% over that period (p21).  In 2022 it grew 4.9%, in 2023 3.8%.  We don't have 2024's numbers yet.  Palm oil from the 2022 trees should start hitting the market now.  

Source: Indonesian Oil Palm Statistics 2023 (BPS Statistics Indonesia)

• The Indonesian President urged massive expansion of oil palm plantations early this year, but if implemented, the supply from this won't hit for at least another 2 years.

• Malaysia has not planted new trees, but has decreased its palm oil plantation size (down 4% from 2020 to 2024).  Production fell 3% in that period.  Malaysia has decided to focus on sustainability and productivity, instead of plantation size.

So Malaysia has no increase in production, and decreasing plantation size.  Indonesia had a 4.9% increase in plantation size in 2022: oil from those plants should start tricking in to the market this year and increase for the next 4 years.

Conclusion

• There's no obvious massive flood of palm oil coming yet.  But we've seen the start of the supply response.  If Indonesia did ramp up in 2024 and keeps doing so this year, I may be shorting palm oil stocks in a few years time.
• At a PE of 20, too much good news is priced in for United Plantations.  With a 99% payout ratio, its not a compounder, just a cyclical.

Sold my shares in UP at RM 23.10.  Profit was around 160% over 4 and a half years, including dividends.  Its been a good run.

I was thinking of only selling half, as the Palm Oil Bull market may still have some legs.  But decided to sell all as the US market and economy looks shaky.

References:

• Google for "Indonesia Oil Palm Statistics 202X". (eg: 2023)
• Google for "MPOB Overview of Malaysian palm oil industry" (eg: 2023's result)
• Alternative production and land use figures from the US FAS.  You can Select "Indonesia or Malaysia" and Palm Oil".

Portfolio

After the market euphoria of Trump's Election has faded, we are looking at slowing growth and inflation.  I don't know how long for.  I'm rebalancing my portfolio away from commodities and towards towards poor corrupt growing countries EMs.  It depends on what stocks I can find.  Now I'm a quarter in EMs:

I'd consider shorting the US market, but too busy at work to stay up and place trades.  US market hours interfere with my sleep cycle.  Much as I would love to gain experience shorting - I need to make money in all markets - its not worth it now.

Bought AEM:SGX

AEM is a semicon supplier making test platforms for Intel, which should benefit from Intel's new Foundry business.  They made a loss in 2023 due to the biggest-ever covid-"stay-at-home"-semicon-bubble deflating, and the stock is down 35%.  I got this idea from the Value Investing Substack (part1) (part2) (paid links).

Its both a growth stock and a cyclical:

I think the 2H23 results were a cyclical drop, they should recover with the semiconductor cycle. And they have a structural tailwind behind them with the US trying to construct semiconductor fabs outside Taiwan and Intel re-establishing its manufacturing capability.

The key question for this company is: how much of its revenue is cyclical/non-cyclical, and recurring/non-recurring?  I am not sure yet, but it would affect wether its a trade or a buy-and-hold:

Source: 2023 Results Presentation (slide 11)

Its trading at around 10X peak earnings, not as cheap as I'd like but OK for a fast grower.  I bought a 5% position.

Risks:

• I don't have good knowledge of the semicon industry, hard for me to keep track of this niche (Suppliers of systems level testing equipment to Intel).

• In January an inventory shortfall was discovered, company said it was due to a manual mistake.  I believe theres no high-level fraud.

• The chart looks like shit and I may lose some fingers catching a falling knife.

• Or dead-SGX-stocks remain moribund, while Q's and crypto rocket in a new liquidity bubble.

I'm in a negative cash position now, so won't be buying anything else.  Will take a few months to pay off from my dividends/salary:

This blog will probably be quiet for a while.

Bought Malaysia Smelting Corporation

Update on this company - it hasn't changed after my initial post more than a year ago.

Start with the tin price - it was stable in 2023: lower than 1H 2022, higher than 2H 2022:

The company has 2 segments, Tin Mining and Tin Smelting:

Smelting profits should be more stable, but were impacted by Covid in 2022 and the closing of an old smelting facility in 2023.  Its hard to tell which of the 4Q23 costs are one-offs or which are normal operating costs (either recurring or randomly occurring ones).  They have moved to a new smelter in P. Indah, which started operating in 2021.  They will start dismantling the old Butterworth smelter in 2024. 

The biggest risk seems to be that smelting profits/losses are inconsistent (especially Q423's loss), and we don't know how long this will continue.

Mining profits tend to follow the tin price, with variable revenue and fixed costs:

Don't overthink it.  Its a company that primarily makes money from Tin Mining - the profits and share price follow the tin price.

The company has adopted a dividend policy paying out at least 30% profits.  The 7 sen dividend is 34% of 2022 profits.  2023 earnings look "normal" - not too peak-ish.  At RM 2.10, it would be trading at 10 times 2023 earnings.

I bought MSC this week on the KLSE, making up 5% of my portfolio.

Bought Oil, Sold Gold

A few hours after my previous post, Hedgeye's trading signal on oil changed to bullish trend. I've been waiting for months for this, so I bought a whole lot of oil stocks.  From 5% to 15%.  Risky, because its overbought and the signal can always flip back, but now is as good a time as any.

I still think we are in a decade of inflation.  I expect oil to maintain its price for one or two years, then explode in 2025 or 2026.  Like Uranium now.  Meanwhile, I'm paid to wait as oil companies gush cash (at 2023 oil prices) with generous dividends or buybacks.  For context, after peaking in 2022, the oil price hovered between $70-90 last year:

CNQ is a Canadian oil sands producer with long-life reserves, profitable, with generous dividends and share buybacks:

In 1Q24 they target to reduce net debt to 10 billion, after which they'll return 100% of free cashflow to shareholders.  I estimate either doubling dividends, or more than doubling share-buybacks.  Annualising their 9M23 profits, they are trading at a PE of 13.

Acker BP is a Norwegian O&G producer, that is still paying down debt but still also pays dividends:

Its trading at 12X 2023 earnings.

Var Energy is a smaller Norwegian producer, from Modern Investing Substack.  Although they pay dividends, they are a growth story, aiming to increase production by 50% by 2025.  Its trading 8 times 2023 earnings.  This company has more operational risk. 

The risks are politics and ESG.  Norway's district court overturned approval for several oil projects. While Canada will introduce a carbon tax.

Also sold my gold I'm as no longer expecting a recession.  And I need cash to buy stocks.

Bought Philippines Stock Exchange

I bought half my position (2.5%) in the Philippines Stock Exchange (PSE).  I love stock exchanges - they are simple, inflation-proof businesses.  Most are expensive, but PSE is reasonably priced: ex-cash PE around 12 with a 5% yield (before 25% witholding tax for Singapore residents).  Its a dirt-poor, growing country and their stock market is cheap and unloved, with some catalysts (paid link).  Long term the key metric to tracks is the number of listed companies.  In the short/medium term, it depends on the cycle.

Why buy now?

• We are nearer the end of the bear market (started end 2021) than the beginning.
• Hedgeye's trend signalled the Philippines stock index is in bullish trend.  And the country has expected increasing yoy gdp growth in the next 2 quarters.  This trend might last for months, quarters, or change tomorrow.  But since I was intending to buy a some anyway, buy a little now.

Why buy only half?

• I'm expecting a US recession and bear market in 1H24, if this happens, other countries' indexes and stocks will probably follow it.  Final leg down.

Long term, the key metric to track is the number of companies listed.  The market will go up and down when it wants, but long term, you need to have companies listed for people to invest/trade.

PSE is a *very* illiquid stock, even buying a few thousands dollars worth can set the price.  Long term holding, not a trade.

Aker BP

A quick look at the second largest Norwegian oil & gas producer.  They operate purely on the Norwegian Continental Shelf (NCS).

Cashflows

They pay taxes every two months, so even quarters have higher taxes.  The current quarter has one tax payment, the next has two: however they made an additional $500m tax payment this quarter (p6) to smooth it out.

For each calendar year, their percent of FCF (CFO-CFI) paid out as dividends is:

The payout ratio increased after the Lundin acquisition.  Maybe they are transitioning from a growth company to a cash cow, or maybe its because of lower energy prices.  Their dividend policy is to payout 20-30% of CFO.  Negligible share buybacks.

Lundin Acquisition

They acquired Lundin Petroleum's NCS assets (excluding renewables), in a deal announced Dec 2021 and completed June 2022.

Debt increased 60%, shares outstanding 75%:

Production and reserves doubled:

Source: Acker BP 2022 Q4 presentation (p9)

With hindsight, the acquisition may have been timed wrong: 2Q22 was the peak of the energy market.  But there are a only a handful of listed players on the NCS so opportunities like this are infrequent.  They did not stretch themselves financially.

Balance sheet

Debt is a bit high, but all fixed and long drawn out.  I think we are at the peak of the interest rate cycle anyway.  93% of their debt is fixed-rate long term bonds:

                                                        Source: Company Website

The 6% bonds were issued June 2023, so their interest payments will have been included in the current quarter.  Total interest expense this quarter was 41m, easily covered by 300-500m quarterly profits.

Future growth

Production is expected to decline from 2023 to 2026, before picking up with new projects in 2027/28.

Source: Q3 2023 Presentation (p11)

"Between now and 2028, this will require the investments of approximately $20 billion pre-tax, corresponding to around $3 billion after-tax. This CapEx estimate has remained unchanged since we submitted the PDOs to the Norwegian authorities approximately a year ago" (p4)

ESG

Their climate transition plan is less ambitious (more realistic) than Equinor's:

By 2030:

• Reduce scope 1 (energy consumed on rigs and spills/flares) and scope 2 (energy purchased) emissions by 50%
• Net zero (scope 1 and scope 2) emissions.  Offset emissions by carbon capture.

By 2050:

• Reduce scope 1 and scope  2 emissions to zero.  By electrification: using renewable energy produced onshore to power rigs.

They are not making investments in "renewables" (outside of their own use).

Valuation

TTM EPS is USD 2.04 (which contains $1/share impairments in 4Q22).  At a price of NOK 300, the PE is 14.3 (counting impairments) or 9.5 (not counting impairments).

Misc

• They Hedge commodity and currency exposures.  They hedge energy by buying Brent puts.  They may hedge up to 100% of next 12 months anticipated oil production, up to 75% for the subsequent 6 months, and up to 50% for the subsequent 6 months.  I could not find the amount of oil hedged (Only the current P&L of the hedges).
• Presentations/reports are not as well-presented as Equinors.  But I thought relevant numbers were easier to find.

Conclusion

The numbers and business plans look good.  Similar to Equinor but without the ESG risk.  Short term I bearish energy, but I think it'll be worth buying sometime.

Bought Vermillion Energy (VET)

Hedgeye's oil price Risk Range went to bullish trend on the 17th July after being bearish for a year.

Looking for something to trade, I came across Vermillion Energy:

• Half its 1Q22 revenue is from oil (2/3rds of that from Canada, 1/3rd from Europe), and half from gas (70% of this half is priced in AECO (Canada), 30% from Europe.  in Q2, we expect 40% from Europe).
• Leverage on the high side, they are concentrating on reducing it.  Mostly fixed rate.  Negligible dividend.  Some buybacks.
• 2P reserves of 14 years, not great.  Read somewhere there are some questions about how they depreciate their reserves.  No breakdown by oil and gas.
• Its a high beta stock: it dropped 60% from the peak last July's peak to the trough.  Could be due to Canada's oil and gas pricing varying more than WTI (due to lack of transportation from Canada) and the wild variations in European gas pricing.
• 1Q22 Annualised EPS is $8, trading at CAD 18, thats less than 3X a year's earnings.  Not a lot has to go right.
• European Windfall taxes end in Dec 2023....if they are not renewed.  Pro forma, removal of the windfall tax would have added another 5% to their 1Q22 earnings.

Its a trade - not a Buffet-like stock to pass to your grandkids.  Hopefully the trend lasts a few months or quarters.  I'll sell it when Hedgeye's oil trend changes.  Would not hold a stock this volatile thru a downturn.

Bought a 1% position last night @ USD 13.25, after the stock dipped for 4 days.  I would go up to 3%.  The problem is it rarely dips enough to take a big position.

My positions haven't changed much:

• The portfolio is quite oily, and has started to go up with oil.
• Removed some shorts that changed to bullish trend.
• Added some long term index puts.
• Have VET and Silver in an "Inflation Trades" basket.  2% total.

Update 6th Aug 2023:

• Increased VET position to 2.5%.  It wont go down enough to buy a big position.
• Silver position increased to 1.5%.
• SPX looking bearish, may buy more puts (June 24) if we get a bounce next week.  If things work out this could be my last chance to buy.

Update: 8th Aug 2023 morning: Increased VET to 3% last night.  Last night's rebound was weak.  SPX is no longer oversold, AAPL has broken down and VIX has broken out.  Look to press shorts, probably tonight.

Rare Earths: An Introduction

(Updated: 29th June 2023)

Quick notes on Rare Earth Elements (REEs) which are are used to make magnets used in hybrids, EVs and windmills.

It takes years to enter the rare earths business, because:

• As you're extracting 7 or 8 elements, processing is far more technical and complex, than an iron ore or copper mine for example.
• There's no benchmark pricing, so its hard to new entrants to get long term contracts needed for financing.
• Production involves several steps.  And for each step, the product has to go through a rigid qualification process.  So you usually complete one step at a time, each of which takes one or two years.

Processing Stages

The steps involves are:

• Mine the ores (which have < 10% concentration of Total Rare Earth Oxides (TREO)) and upgrade it to concentrates of at least 60% TREO for further processing.  Starts with a mechanical process, followed by a chemical process.

• Separate the concentrates into individual Rare Earths Oxides.  When extracting, we have to move from left to right on the periodic table, extracting the lightest first.  You can't choose the ones you want to extract.  For example, if we want to extract Nd, we have to extract La, Ce and Pr first, in that order.

The rare earths we want for magnets are Nd, Pr, Tb and Dy.  The elements on the left are low priced money losers, and the heavier ones on the right are precious.  So the concentrations of different light and heavy elements matter.  For example, typically you may have 25% La, 25% Ce and 1% Dy.  Current prices (USD/kg, early June 2023) are in pink - see the wide variation.

Scandium (Sc) is not really an REE (its like aluminium), so is not subject to the above extraction order.  Its grouped with REEs because its often found with them.

This is the hardest stage of production.  It is challenging for a newcomer to prove they can produce the correct amounts of oxides consistently.

• Produce Alloys from the oxides.  Low margin business which requires strong environmental safeguards.

• Produce Magnets.  Needs to be produced under license, using patents for one of 2 processes.  Both processes were developed in the 80's: one by GM is now held by a Chinese company, and  another by Sumitomo which is now held by Hitachi. So you need to license from Hitachi.

Industry Structure

There are 5-10 producers within China, and 2 outside it (Lynas and MP):

Source: Wood Mackenzie

Other Chinese companies (not shown above) are China Rare Earth Group (a merger of 6 SOEs), Shenghe Resources (who buys from MP above), GuangSheng Nonferrous, Yuijing & Huicheng Environmental Protection.  A lot of China's rare earth production is a side-product (eg: from iron ore), so it does not have to be economical.

China dominates rare earths metals at every stage.  Its been hard for other junior producers to start up, as they have to build a mine and separation facilities (around $25-50m), while arranging off-take agreements to get financing, under the shadow of China holding prices below production cost.  This prevented new players emerging, at least till the 2021 bull market.  It takes around 3-5 years to get mining and separation facilities up and running. 

Prices

I haven't been able to find free long term charts of all the rare earth elements.  But they seem to follow each other:

La, Cr, Nd and Pr: 2003 to 2015:

Source: Resaerchgate

La, Nd and Pr: 2008 to 2018:

Source: https://www.oryktosploutos.net/

The only recent chart:

Source: tradingeconomics 

Prices peaked in 2011 after China blocked exports to Japan in 2010, for a week.  They peaked again in the "everything bubble" of 2021/22, before falling 55%.  A bet on REEs now is a bet that increasing EV penetration and "green energy" drives demand up, while supply takes time to come online (takes years to start up mines and separation facilities) despite US government subsidies.

Introduction to Semiconductors

 An overview of the semiconductor industry.  Aims to understand:

• What are the moats in the industry?  
• When you are looking at a company, where does it sit in the ecosystem?
• Long term trends.  Trends in this industry take years of industry-wide cooperation and billions of dollars to play out.  Once you can see a trend start, you can pick tomorrow's winners.

Types of Chips

Memory Chips

Memory chips were a commodity subject to wild supply and demand swings. Now the industry has consolidated into 3 players: Samsung, SK Hynix (both Korean) and Micron.

Source: For the first time in Memory, have durable profits finally arrived?

China's YMTC recently entered the market, aiming for a 6-8% market share in 2022.  Their chips are state-of-the-art, but YMTC is on the US blacklist.

Despite its oligopoly structure, the memory industry is in a downturn (crash?) now due to falling demand from a post-covid hangover.  While Samsung is maintaining capex.  The memory industry is still irrational.

In the long run:

• The Koreans look like winners due to scale and predatory capex/pricing.
• Micron looks like a loser due to debt and lack of EUV.
• YMTC will operate in its own market, but will slowly fall behind from lack of EUV.

Logic Chips

Two main types:

• CPU's run general instructions to allow a computer to do anything.  They are designed by Intel/AMD (for computers), or ARM (originally for handphones - now also computers).
• GPUs are specialised chips to perform simple math calculations.  Used for graphics displays (eg: realistic games) and AI (matrix calculations).  The leading GPU designer is NVDIA - they have a moat from their CUDA interface being a standard, but its being challenged.

Logic Chips are built in Fabs, usually separate from the company that designed them.  The foundry industry has consolidated so that only three companies can build modern logic chips:

Source: Fabricated Knowledge Substack

Of the three leading-edge players:

• Samsung is fucked for high end logic chips.  They have a top down management culture unsuited to technology development and are serial liars.
• TSMC is the clear leader due to their partnership with Apple.  The risk for TSMC is a Chinese blockade/invasion of Taiwan - I give it a 30% chance before 2030.  Even without war, new foundries have to be built elsewhere, which has to be bad for the market in the long term.
• Intel has historically fabbed its own chips from when it was the leader in the 90's, but has now fallen behind both in chip design and foundry capability.  Intel has a bad capital structure and was bleeding to death.  They may have stopped the bleeding with their Feb dividend cut.

CPUs are currently in a downturn due to the covid-hangover, but not as bad as memory.  

GPUs (including ASICS for crypto mining) are in a downturn, but NVDIA's stock is in an AI bubble.

Analog

Analog chips are simple ones used to convert "real-world data" (eg: light/voice for camera/phone) into digital signals to processed by other chips.

Players are Texas Instruments (design and fabs), Analog Devices (design only) and Tower Semiconductor (fabs).  All these companies look interesting.  Haven't looked at their valuations or the industry cycle.

System on a Chip (SOCs)

Up until 10 years ago, we made computers faster by improving their CPUs: squeezing more transistors into a piece of silicon, and increasing the clock speed (time to process one instruction).

This stopped working, and we now combine CPU, GPU and memory onto a single chip.  The idea is to allow different parts of the chip to perform specialised tasks (eg: in your phone: a GPU for video processing, with a less powerful CPU for general processing).  It allows more tasks to be done faster with less processing and heat.  Apple's desktop M1 chip used this in 2020 to leap over previous generations in terms of performance.

Some consequences of this are:

• Expect the decline of Intel/AMD chip designs in desktop/server computing.  Intel/AMD's x86 or x64 chips use CISC (complex instruction sets) which are unsuitable for SOCs.  The only advantage of x86/x64 is that you can run legacy DOS/windows programs developed since the early 80's.  ARM chips (which are non-x86 or RISC) were not able to run them, but this has changed.  Apple now has an emulator to run intel-compiled programs.  Microsoft is developing an arm based server and tablet devices.  Expect Wintel to die.  Expect the majority of servers/desktops to move to ARM based processors, while x86/x64 chips become a specialised market for running legacy software.
• Big Tech (Apple, Google, Microsoft, Amazon) design their own in-house chips for their products/operations.  e.g.: Amazon's Nitro SOC runs the hypervisor (VM manager) in their AWS, freeing up resources for user operations.  Google's TPUs run AI calculations.  This vertical integration can be a way to extend their moats.  (...Or maybe over-optimisation just distracts them from their real business: Amazon, Google).
• Increasing importance of the "packaging" part of the chip production process (below).

Classifying Chips by Usage and Size

Another way to categorise chips is by size (nm).  When discussing chips, you need to place them by size and timeline to know what parts of the industry you are talking about. 

Roughly they can be broken down into:

• High End: For phones, PCs and Servers.  Produced in Taiwan, the US and South Korea.  Designed in the US.  Probably anything smaller than 28nm.
• Medium End:  Probably 28nm or above.  For automobiles, aerospace.  Produced in Malaysia, Thailand, Philippines, Singapore, plus the above countries.
• Low End: For the IOT.  To help your refrigerator keep track of your shopping list.  Produced in China.

This diagram shows it visually:

Source: S&P Global (2021): Analog chips - poised to become the next big threat to automakers?

There was a huge shortage of medium end chips for car manufacturers in 2021.  Foundries cannot easily add capacity for these older chips, which are sold so cheaply because their production facilities are fully depreciated. New production facilities require higher prices and long term agreements.

Node sizes for the 3 foundry businesses are not equivalent: Intel's 10nm is equivalent to TSMC's 7nm (so its now called "Intel 7"), and Intel's 7nm ("Intel 4") is equivalent to TSMC's 4nm.  See "Node Name Disconnect".

Production Process

The 5 steps of chip production.  Generally, the outputs of each step are the inputs to the next:

Wafers

Produce the silicon wafers that chips will be printed on.  The wafer market was an oligopoly, but may now be cracking:

• 5 companies produce(d?) 90% of silicon wafers (p5).  2 of those are Japanese: Sumco and Shin Etsu.
• 150mm and 200mm wafers are for older chips, 350mm are for newer ones.  A proposal for 450mm wafers was killed by TSMC in 2013.  The industry hasn't changed much since the 90's.
• Sumco expects no capacity expansion till 2024, despite a wafer shortage.
• This may give space for Chinese companies to enter the market, especially for 150 and 200mm.  Chinese firms expanded production in 2021.  South Korean imports form China almost doubled from 2020 to 2022.  Chinese wafers are reportedly 5-10x cheaper than Japanese ones.

Lithography (ASML)

Lithography is the process of etching circuits into a wafer.  A good description is in Doug O'Lauglin's Fabricated Knowledge.  Chips 7nm or below require EUV, which is from one company: ASML.

ASML's EUV machines are incredibly complex and precise:

• "molten tin droplets of around 25 microns in diameter are ejected from a generator at 70 meters per second. As they fall, the droplets are hit first by a low-intensity laser pulse that flattens them into a pancake shape. Then a more powerful laser pulse vaporizes the flattened droplet to create a plasma that emits EUV light. To produce enough light to manufacture microchips, this process is repeated 50,000 times every second."  
• ASML's supply chain is worldwide.  Their suppliers are small companies that each specialise in one out of the hundreds of steps required. (eg: A small company in Vienna selling equipment to produce photomasks).

No one can replicate this and integrate the work of hundreds of suppliers to the required precision.  Especially when the market is limited to three customers who all invested in ASML in the first place.  ASML is a monopoly for the next ten years.

If I was buying ASML, valuation is the only question and the key number is their recurring revenue for their installed base vs new sales.  The stock is too expensive now.  ASML or its suppliers may be a cyclical play later.

Applied Materials Sculpta process may halve the need for EUV.  Or maybe not.  Hard for lay people to judge.

Inspection

Covers non-intrusive ays to measure a chip to make sure its correct.  Theoretically it means using beams of electrons, x-rays or light to measure the surface of a chip.  The complexity is in interpreting information from the reflected beams to form a picture of reality.  More details from Fabricated Knowledge's Meterology Primer.

Packaging

Attaching the silicon chip onto a motherboard. From old to new:

• From the old days, a DIP chip package, with its iconic "spider legs":

• Wire bonding: Using copper wire to attach the chip to the circuit board.
• Flip Chip: Depositing an array of solder balls onto the board's pads, and "flipping" the chip onto it.

• 2.5D packaging: TSVs passing through the wafer (like underground cables) connect different chips on the board.  Used for SOCs.
• 3D packaging: Connect different chips which are all sitting on top of each other (on the circuit board).  Currently used in memory chips, not yet in logic chips.

See Fabricated Knowedge's Packaging Primer for more.

Testing

Theres two levels of testing:

• Functional Testing: Running a current through a chip to test input and output combinations.
• System Level Testing: Test the chips under the conditions they are expected to be used.  eg: Test at varying temperatures, or for long run-times (burn-in), structural tests, or software level testing (calling the chips functions/libraries in the same way that software wold).

The big companies involved in the last 3 steps are Applied Materials, Lam Research and KLA Tencor.  

2.5D or 3D packaging may be done more by the fabs (TSMC). 

Conclusions

Theres less than 10 big players forming the semiconductor ecosystem.

Things change slowly, but they do change.  eg: Wintel's fall and TSMC's rise.  These are not Buffet-like stocks to pass to your grandkids.

I believe China will not be able to make high end logic chips - they would have to replicate an entire ecosystem.  They can do high end memory.

Biggest moat is for ASML.  But everybody knows it and they are expensive.

TSMC is the clear foundry leader, and fabs have pricing power.  They are reasonably priced, though probably its not the right time in the cycle.  Big geo-political risk.

Intel was dying.  They have stopped the bleeding.  Maybe a turnaround play?  Can they get the money to build Fabs in a downturn, and as the market moves away from CISC?

Resources

• Fabricated Knowledge Substack.  Good introduction.
• Semi Analysis Substack: Goes into more details.
• SemiWiki: I can't understand their technical articles, but can read their business ones.
• Transistor radio podcasts.

Bursa Malaysia (KLSE)

 Malaysia's stock exchange looks cheap based on historical earnings, lets look further.

You can't buy it with Interactive Brokers, I trade KLSE stocks with a Singapore broker.

TLDR: Everything depends on KLSE trading volume, which is unpredictable, I think this stock is too expensive now.

Malaysia is a developing country.  Its a commodity producer, and I expect commodities to do well this decade.  It also exports electronics and mid-tier microchips, so may benefit from manufacturing leaving China.

Business and Revenue Breakdown

Most of their revenue is from trading:

And most of the trading revenue is from Securities trading:

So Securities trading is the only thing we have to think about.  Derivatives trading revenue is constant, and Islamic Trading is small.  This is a company with one single business.

Financials

Good financials.  All stock exchanges seem to follow the same pattern.  As of Sep 2022:

• Large net cash position (plus some Investment Securities), no debt
• CFO is basically PBT plus small depreciation and small working capital.

• 40% profit margin (after all expenses, including tax) in 9M 2022.
• Minimal Capex with high dividends:

• The dividends are too high:

• They are paying part of the dividend out of accumulated "cash and investment securities".  As of 3Q22, "cash and investment securities" is worth RM 565m, or roughly 9% of their market cap (@ 6.40 per share).

Conclusion

This stock exchange is a cash generating machine.  The only question is how much you'd pay for it.

Everything depends on whether we think the big jump in Securities Trading revenue in 2020 and 2021 can be maintained.  This company is easy to understand, but hard to value.

If I had to catch a falling knife, I'd probably be willing to pay 12-15X normal earnings.  Based on 2017 to 2019 earnings, the price would need to drop significantly, to around RM 3.70 to 4.00.  Not buying it now.

MetalsX (ASX)

My last piece on Tin.  There's 3 listed tin producers.  The third one produces in the DRC which is un-investible.  This one is in Australia, which is safer.

Business

A 50% JV in the Renison Tin mine, a hundred year old mine in Tasmania which is still producing.  Mine life is projected until 2030, with scope for further extension.

They also own 50% of Rentails: tailings dams from historical mining operations containing around 100,000 tonnes of tin.  Significant capex is required to bring this into production.  A new DFS should be completed this year to make a decision in 2023.

They used to own copper and nickel interests but these lost lots of money.  They sold them off and are now purely focused on tin.

Balance Sheet

All numbers are from their June 2022 Annual Report.

They has a windfall from FY2022's high tin prices.  They used it to pay down their debt, and now have 110m in net cash.   Held  as AUD.

Quick side note: They have 28m of convertible notes receivables.  After selling their Copper/Nickel operations, they lent money to develop them, and should be paid back in (MetalX's choice of) cash or shares in March 2025.  New mining operations are dodgy, especially in a recession, so let's wait to see if they get paid back.

Despite the 2022 windfall, they have not paid dividends.  I think they need the money for capex.

Capex

Sustaining capex is 8-10m per year (p10).

In addition, to continue production at Renison until 2030 (Area 5), they need 50-55m capex (p5).

Both the above can be covered by their 2022 windfall.

In 2023 they should make a decision on rentails.  An old 2017 estimate is 205m (or around half of this for MLX's share - p14).  Lets say 100m in 2017 dollars, which might be 150-200m today.  Can be funded from their cashflows if we get another tin spike in the coming years, but don't expect MetalsX to pay dividends anytime soon.

Earning, Cashflows and Breakeven

Our starting point is always the tin price:

Its hard to look at their long term profitability because past tin results are overshadowed by their money losing copper/nickel operations.  Their 2021 AR was the first time they stripped these out. My breakdown of their profits from 2020 onwards, important lines in blue:

As expected, the biggest factor affecting profits is revenue (ASP).  This company is highly cyclical.

I estimate their cash breakeven tin price at around AUD 17-22k/ton.  At that price their Cashflows from Ops would be zero.  If we also cover sustaining capex of 10m per year, we get a required tin price of AUD 19-25K (or 11.8 to 15.5K USD today).   The company estimated their AISC at AUD 17K/ton (p3), which I guess is too low.  Estimates in AUD are tricky because the AUD is so volatile.

Don't think they've been hedging the tin price, there was no mention of commodities derivatives.

Reserves

Excluding Rentails:

Misc

Information is quite skimpy.  I could not find any quarterly results on their website or ASX.  Nor any transcripts of shareholder meetings.

Yunnan Tin is the logical acquirer of this company (their 50% partner in the JV).  Unlikely to happen now since everyone hates the CCP.

Don't buy right now: