GADANG (9261) - Another lesson from Gadang kcchongnz

GADANG (9261) - Another lesson from Gadang kcchongnz

 As a shareholder (former) of Gadang, I have been reading about all the interesting stories about it in i3investor, including the latest one with this statement below:

“They are stupid. They only believe in financial analysis which is encouraging as it is based on historical figures. FA cannot tell you the future of the company.”

With that, as an investor using purely fundamental analysis, I finally decided to join in the fun here. I will attempt to give some response on whether’

    Are fundamental investors stupid?
    Was the result of Gadang, with EPS of 40 sen in fy2016 encouraging?
    Are those “historical” figures useless?
    Can FA tell you the future?

First let’s carry out a simple event study of Gadang in the last few months.

Event study of Gadang

Figure 1 shows the share price movement of Gadang for the last few months. Its share price was already shooting up from around RM2.00 at end of June 2016 prior to the announcement of its wonderful 4th quarter result ended 30th May 2016 on 21st July 2016 to RM2.33, with the final quarterly result with an annual EPS of 40 sen.

Figure 1: Event study for Gadang

GADANG (9261) - Another lesson from Gadang kcchongnz

There were heavy promotions of this stock then. It was at that time that I decided to utilize some behavioural finance of Daniel Kahneman such as the cognitive belief bias and jumped into the bandwagon to invest in this stock, not because of the deceiving profit growth (I will explain later), but the hot-hand fallacy of the “Golden Rule” investing.

The share price continued to go up to RM2.60 as the golden rule investors poured in their money as I have expected. Why not? As the market capitalization of Gadang was about RM500m then, it is easy to push up the price. When a multiple proposal of freebies in share split, bonus issues and “free” warrants was announced on 25th August 2016, its share price shot up again to a high of RM3.30 on 25th October 2016. For those who want to know about the peril of chasing corporate exercises may refer to my article here,

That was the time I saw another promotion of the stock titled,

“Do you still dare to buy some more Gadang?”

Quote“As you know I have recommended you to buy Gadang and many of you would have bought it. The chart below shows that it has gone up from Rm 2.10 to close at Rm 3.31 today, an increase of Rm 1.21 or 58% in the last 3 months.

As the price has gone up, your margin limit has also gone up and you have additional buying facility.

All the buyers of Gadang would have seen its announcement in Bursa as follows: one share will be split into 2 shares. After the share split, one bonus share will be given to every 4 shares and one free convertible warrant will be awarded to every 4 shares. The EGM to approve this multi proposal is on 3 rd Nov. 2016.

All the buyers would have also seen that Gadang’s earning per share was 40.7 sen for last financial year, ending 31st May 2016.

A Super Investor: The super investor will study the case carefully and he sets a realistic target price after taking into consideration of its 40.7 sen EPS, the bonus shares, bonus warrants and its future profit growth in the construction business. Moreover, Gadang was awarded the contract to develop 24.5 acres of Kwasa Land within 20 years. Although property market is currently not so good, Gadang did not pay for the land. Gadang can wait while the land value appreciates. Can you imagine how much the land appreciates in 10 or 20 years?

I think Gadang will go above Rm 4.00 easily at P/E 10.

Can you find another share selling at P/E 10 with such good profit growth prospect? Unquote”    

I wrote to one of my investor friends then as I saw some serious misinformation there, like Gadang was given a blank check in the Kwasa Land Development.

“I sold off Gadang and Gamuda at RM2.89 and RM1.39 respectively about a month ago as I was not comfortable with the heavy buying (with margin) and promotion by someone, which I thought if the market turns ugly, the consequence could be very bad, and hence I follow my very principle of taking care of the downside first in investing. That proved to be a correct move.”

No, I didn’t know its next quarter results would be bad, but just became cautious.

What can fundamental analysis (FA) shows you on Gadang results?

The final quarter result ended 31st May 2016 announced on 21st July 2016 shows earnings per share, EPS of 40.7 sen. At about RM2.50 then, PE ratio is only about 6, very cheap. Someone placed a fair value of Gadang at RM4.00 using the simplistic PE ratio of 10. However, FA practitioners place a lot of emphasis (at least for me) on cash flows. Gadang has a negative cash flows from operations (CFFO) for the same period. Good accounting before-tax earnings of RM124m, but negative cash inflows. Why?

Gadang spends enormous amount of money for “Development costs” of RM288m last year. It has RM62.2m receivables which further sucked up its cash. if not for delaying payment to its subcontractors/suppliers in the year with increase in payable of RM233m, the cash flow situation would be much worse. A red flag

Further looking at the footnotes of the financial statement, it says,

“Revenue for the current year (property division), to date increased by 44.3% to RM172.72m and profit before tax increased by 33.6% from 39.76m to RM53.1m. This was mainly due to higher development progress for various projects.”

And now you look at the balance sheet in the current asset section on “Property development costs”. The item has increased from RM200m to RM484m.

Revenue has been recognized, but costs capitalized? How? Have all the properties sold out already that cash will be eventually all collected? I don’t know.

I do have a concern, don’t I? Especially seeing someone posted dismay pictures of one of its property development projects in JB. No, I didn’t say it is true, but a cautionary note for myself.

Well, I guess I have answered the first three questions above, and if you continue to criticize that FA is historical and useless, and FA practitioners looking at ROE, cash flows etc. are stupid, I have nothing else to say.

For the fourth question, no, I as a FA practitioner can’t tell the future, and I believe the picture in the future of Gadang painted by you may be wrong too. I for one will not believe a historical price chart can tell the future performance of the company too. Gadang may get some high margin construction projects in the future and its profit in the following quarters may be higher. Who knows? Isn’t that the construction industry is still bullish? Well, I am not saying so, and neither I say no. There isn’t any crystal ball in-front of me.

But FA for sure can avoid a lot of pitfalls in investing. Don’t believe? You can refer to what I have written here:

For the record, I have been right for every of the stocks mentioned there written 4 years ago.

FA practitioners are not stupid. Financial statement analysis is very useful as it is the language of business, and FA is more intuitive than any “Golden rule”, in my opinion.

That is why I have been advocating FA all the time in a public forum like i3investor. I have been promoting my course in FA in i3investor all the time.

For anyone is convinced and wishing to learn FA in a structured manner to avoid any pitfall in investing, you may contact me at

You are welcomed to give constructive criticism in my article here.

KC Chong

GADANG (9261) - Another lesson from Gadang kcchongnz