Lo Kheng Hong, and Bumi Resources

For those of you who've read this blog for a long time, you probably know very well that Bumi Resources (BUMI) is the one of the stocks that I would NOT recommend. The reason? No, not because I've been loss on the stock, because I never had it. But because, when I was getting into the stock market for the first time in 2009, BUMI is a stock with big zero fundamentals with very large debts and poor earning powers, but oddly owned by many investors, not only local retailers but are also foreign fund managers, and at the time BUMI was practically the most popular stock in the Indonesian Stock Exchange. And this was really disturbed me: What’s wrong with you people? How could you choose this stock as your favorite investment???

However, over time, investors are eventually realize that they are not going to gain anything from BUMI, and the stock slowly but surely continue to fall. In the end of 2009, the Jakarta Compsite Index (JCI) closed at 2,534, while BUMI closed at 2,425. And now? When this article was written, JCI was in a position of 4,391, or has risen 73.3% in four years. While BUMI? It plunged, not to 1,000, or 500, but.. 300's already! If in the last year the people were still confident to say that BUMI will not follow the footsteps of its brothers to become a member of club of ‘gocap’ (an Indonesian term for stock at the price of Rp50 per share, the lowest possible price in the exchange), now they began to have doubts. The term of 'stock of a million people' as BUMI’s nickname was already long gone, and the stock is no longer a favorite, even for speculators.

Anyway, that's not what we will discuss here.

You probably know that Mr. Lo Hong Kheng (LKH), the most famous individual investor in Indonesia, is currently stuck in a bad position on BUMI. And I have received a lot of emails which ask about this, because LKH is one of my mentors as well. Most of the email asking what was the reason of LKH’ decision to buy BUMI, but there are also some critics, saying that this time LKH have done a big mistake. Well, here are some things I can say:

First, LKH buy the stock of BUMI, including bought some other Bakrie stocks, not because of following the crowds, or because he had some ‘revelations’, but rather because its sole discretion, which is made in detail, carefully, and using conservative assumptions. For a value investor like him, the main consideration is always simple: A stock, whether represents coal or other companies, is worth to buy if the price is much lower than the real value/intrinsic value of the company. BUMI at the price of 8,000, 5,000, or 3,000 might not be worth to buy. But how about 1,000?

But what if I bought BUMI at the price of 1,000, then it just dropped further to 300? Well, just leave it be. In 1972, Warren Buffett had bought the shares of The Washington Post at a certain price that he considered already discounted. But instead of going up, a year later the stock fell and lost about half of its value, but still, Buffett keep holding it. Until finally, about twelve years later, The Washington Post stock rose twenty-five times! Perhaps LKH also learned from that Buffett’s experience, where he do not care if he have to wait for twelve years, including if the stock drop like crazy, as long as in the end he could make a multiple times of profit, and not just ten or twenty percent.

Just a note, LKH never said he bought BUMI at what price, but it's probably around Rp1,000 per share. And if he’s average price is 1,000, then that is the price which he considering reasonable, but please note that his assumption may be wrong, of course. LKH himself once said to me that he might be wrong in picking stocks.

Second, LKH not bought BUMI when it was in its zenith of popularity, but rather when it lost its title as the ‘stock of people’ (saham sejuta umat, I don’t know what is the right term for this) around the end of 2012, including when everyone (in the end) dumped the Bakrie’s stocks including BUMI. It is also in line with what is exemplified by Buffett. In 1964, the stock of American Express (AXP) plunged drastically after the company got caught a scandal that caused a loss of about US$ 150 million, or about US$ 1 billion at today’s currency. The status of AXP had suddenly changed from investor’s favorite stock into a total waste, as the company is predicted to be bankrupt soon. But you know what? When the stock price went down until a certain price, Buffett bought it massively! Of course, AXP did not going up immediately, but at first had continued to decline. But in the end the stock was eventually rise, and AXP then became one of the most successful stocks in the portfolio of Berkshire Hathaway, until today.

And if you notice, that’s the behavior of a value investor: He gets it when everyone else got out. He bought a good stock that the other consider it as a crap, and he likes stocks that no one wants to touch it. But believe it or not, this kind of 'contrarian' strategy is actually the strategy of many famous and successful investors, including LKH itself.

But in this case I do not say that BUMI will eventually rise as well, because we would not know about that. However, when compared with Berlian Laju Tanker (BLTA), for example, which the company was in trouble with its debts, even it was almost bankrupt (or it is already?), or when compared to Dayaindo Resources (KARK), then BUMI is still operating normally until now, including its coal production volume is still increasing steadily. Yep, in its financial statements, BUMI did look very, very bad with even a negative equity, aka capital deficiency (the amount of the debt had been greater than the total assets of the company). But on the mining field, the company is still operating normally, and have no debt issues with the creditors, so that it is the financial statement, which was intentionally made to look ugly. Or at least that’s what LKH thought (maybe, I don’t know).

Finally, the third, the biggest problem of BUMI is of course lies in its management, in this case the Bakrie Group, which is never fair to public investors. However, LKH’ position as a big guy caused him different from ordinary retail investors. LKH might also pointed himself as a commissioner or director of the company, although he did not. So in this case LKH is looking at the company's low valuation rather than the quality of management, because unlike public investors, he is in a position that allows him to actively participate in determining the policy of the company. LKH is also a good friend of Samin Tan and several high officials of BUMI, and I think if we've come to a position of 'inner circle' like that, then we will not take care about the market price of the stock, as long as we can see that our partners are still willing to cooperate in managing the company, and the company itself is still running well without any significant problems.

In the end, until this moment, I still do not think a second to buy BUMI. The first reason is, because I've got my own investment plan, and secondly, I do not have enough assets to be able to invite Nirwan Bakrie to a lunch, so in this case my position, and perhaps your position as well, is different to LKH. And how about the stock valuation of BUMI? Is it already undervalue so it is worth for the investment? Well, I do not know because it is very difficult to analyze this stock because its financial statements is fully engineered, but the price of 300 is certainly cheaper than the price of 8,000, is not it?

In fact, LKH is still holding the stock, so he does not assume that his decision was a mistake, although the stock have gone down. Just a note, for an investor who are already well known by the public as LKH, the psychological distress is not only when his stock is down, but also when there are plenty of criticism or even condemnation from the other investors, who thinks that this time he was doing a big mistake. But anyway, LKH is not affected at all, and I think this kind of mentality, once again, that makes LKH is successful as he is now.

If you have your own opinion about BUMI and of course Lo Kheng Hong himself, you can write it via the comment section below.

Any inquiries about investment in Indonesia Stock Market? Please send an email to teguh@averepartners.com.