As a value investor, you get bored most of the time due to inactivity. We get used to it. However, there are times when opportunities pop by and moment of epiphany strikes. You know that if you fail to follow through this opportunity, somehow all the books that you have been reading are wasted. It is like taking a first dive when you finished reading “Swimming for Dummies”. CPGT in June 2014 was a perfect example of this.

On the early June, the stock price was freediving to the level around 100ish. Due to our habit of scanning stock on 52w lows and biggest lost list, naturally CPGT fell into our radar. We started to read and study the company. At that time, we were wondering if this was an opportunity. However, at that time, we decided that the margin of safety was not large enough for us to establish the position. We did not think that CPGT business, which was selling at discount, could give us assurance in form of operation performance. After all, we were quite surprised that CPGT did not perform better than what we expected from a well-established player with a good brand.

Fast forward later, on June 23th, the founder Andianto Setiabudi was arrested due to the investigation on the possible fraud in the Koperasi. That has caused a big dive of the stock price. A lot of people have been selling due to the fear that the koperasi’s Rp. 3.2 trillion liabilities would spill over to the listed company. The result was the market suddenly valued this company at 50-60ish. A company that was selling at 190 at its IPO, was now selling at less than 1/3 of its initial price. What caused this havoc? Is slaughter justified? Is this just a case of Mr. Market going haywire?

Context

First of all, we tried to establish the context. In the midst of such crisis (even if we can write with clarity with the benefit of hindsight), information flow was unclear. Confusion reigned as the media added fuel to the panic. The truth was, the media might not know any better than average CPGT investor. However, media might be tempted to cause more panic as it could generate more traffic. That is why we always warn people who think they can substitute media with primary source (such as from IDX website) and their own thinking.

We had mentioned before that the main concern was that the Koperasi’s liability would spill to CPGT. Lesser concern was that the arrest would cause disruptions to the company’s operation. If these two concerns could be addressed, we had a clear green light that Mr. Market was terribly irrational. As we would see later, at Rp.60, CPGT’s market cap is just around 216 bio. This was very cheap.

The Mythical Birds that Bear the News

There was a greatly promoted myth that the court would order the confiscation of CPGT’s asset to satisfy the koperasi’s stakeholder. In fact, this myth was greatly pumped by the media for unknown reason for us. It might be a sabotage, an effort to boost readership, or an effort to drive the share price down. Careful investors, referring to the official announcement, would notice that the public’s perception was extremely disconnected with official announcement. In fact, despite many desperate clarification attempts by by CPGT that the operation was not affected and more importantly, that CPGT and the koperasi were two separate and different entities, these information was buried deep down under the pile of noise and junk information. Information from reputable news companies was not an exception, as these companies were trapped in the same blunder. If one followed the conversation at stockbit, one of our favorite site, these bad pieces of information were mixed further with information from trolls and audience who clearly did not have their thinking hats on. These people just shout “Fire”, and when asked why they said so, they snapped back and continued the day shouting “Fire”. Rumors were thrown arbitrarily without proper follow up, sourcing, and thinking done. These sources, when probed further, would always cite other unknown sources.

We value information. We change our mind a lot, since we constantly seek for information that could challenge our initial conclusions. However, we believe the reliability and accuracy of information should be taken into account. Hearsay and “bird news” (kabar burung) should be taken into account according to it’s source clarity. In assessing CPGT’s situation, we found out that the most of the information that explained the panic, turned out to be just propagation from few sources, which couldn’t justify their original thoughts. One of the lesson we did well here is that in the time of extreme optimism/pessimism, people usually listen to the loudest source. This is true not just in the market; it is true in our faiths, our families, and our relationships. Just because a proposition is repeated again and again does not make it true. In fact, usually a well-thought truth does not need repetition to justify itself.

The Adventure of Andrew and Bernard

In CPGT’s case, we formed a few pieces of opinion. First, CPGT is a different entity than the koperasi. Even though the owner owns both CPGT and the koperasi, common sense dictates that the liability of the one entity does not spillover to the other, unless it is stated so. For example, Andrew starts a fishing company Bubba Fish with Bernard. At the same year, he also starts a restaurant company by himself. One day, for some reason, Andrew’s restaurant is sued by his customer because apparently he has been serving a fake fish instead of real fish in his restaurant. The judge orders his restaurant to pay the customer an amount that would surely bring Andrew’s restaurant into bankruptcy. Will this threaten Andrew’s life? First, if the restaurant is formed as limited liability, the customer cannot get money more than whatever asset that the restaurant has. If it is Koperasi, we are not sure, but in this case, we do not need that piece of information. Andrew will not need to be responsible beyond the restaurant unless he himself issues a personal guarantee (out of good will) or the court decides that Andrew should be liable. The next question, will the court be able to confiscate Bubba Fish’s asset? Well, they cannot do that, since Bubba Fish is a separate entity with different shareholder. It will be absurd if Bernard has to be liable for Andrew’s other business’ problem. The exception is if the court decides that Bernard is a co-conspirator in providing the fake fish, or if Bubba Fish guarantee the liability of the restaurant (as we will see later, this will be the case for CPGT). Our common sense says that the court can only seize Andrew’s share in Bubba Fish, not the assets inside Bubba Fish. The likely scenario here is that Bernard will just end up with another shareholder to replace Andrew.

In CPGT case, the shareholders other than Andianto are Bernard. As we initiate the position, we too are part of Bernard. During the panic, there was a false sense surrounding the air that somehow the court will seize all CPGT assets to pay koperasi’s liability. This is at most unfounded and speculation. There are two likely options for the koperasi’s shareholder. They will takeover Mr.Andianto’s share in CPGT (which will only cover less than 20% of the total 3.2 Trillion that they are claiming for). They can hopefully run CPGT’s operation to slowly recover what they are owed for. Or they can take over, liquidate all CPGT’s asset, and issue a special dividend. Both option will not disrupt the “Bernards” of CPGT. In fact, those that established a position in CPGT at a discounted book value, could have a catalyst to unlock the value if the second option is taken.

Fraud Risk

Of course, we are aware that at this stage, the biggest risk for us is fraud, which will render all our analysis useless. However, if that is our default position, then we will not be able to invest since all other IDX companies have the same risk. Investors invest based on risk/reward ratio, not based on certainty of information. Sometimes, all you have are the documents from the companies and we have to trust the management to be able to provide it truthfully (or with minimum amount of distortion). In CPGT case, it was found later that they had guaranteed part of the koperasi’s liability. We question the legality of this arrangement. We have found no disclosure of such arrangement with the bank (since it is from the koperasi’s side), and being a public company, CPGT should disclose it. Maybe we have missed it in the prospectus or other documents, if that is so, we hope the readers could point it to us. The release of this disclosure caused some temporary panic. However, if an investor could just open up the document and read the content, instead of relying on news or second-hand source, he would have found that the maximum guaranteed loan would amount to 17 bio. CPGT’s asset could easily cover than 20x.

Some people objected to your analysis for our lack of in the field experience. One of the investors told us that we did not understand CPGT. He said that most CPGT’s cars were not owned by CPGT. Most cars were arranged under profit-sharing agreement with private investors. However, if one compares CPGT’s business size with koperasi’s, then it is reasonable to expect that out of 5 cars that have CPGT name on it, only one or two are owned by the listed entity. Unless the documentation from CPGT lists the koperasi’s cars as its own, then we do not see a problem here. If it did that, then we will fall into accounting fraud, of which the auditing firm needs to be questioned.

Is the koperasi a fraud?

The news said that the whole koperasi was a fraud. It was compared to Ponzi and other legendary money game in the past. If a person read the news during that time, you will see that Mr. Andianto’s was portrayed very badly. We sympathized with him. That is because in our opinion, the koperasi was not a fraud. It was at most a perfect storm consisted of bad promise, bad forecast, bad timing, and bad industry. Mr. Andianto could be at most making a bad business decision, not a fraudster. Comparing him with Ponzi and other famous money gamers, is unjustified. First of all, if Mr.Andianto really wanted to cheat people’s money, why would he bother start a company to do execute such scheme? Starting and growing a company is not easy, especially what Mr.Andianto had done with Cipaganti. As investors, we respect entrepreneur’s courage and perseverance. We have to give a proper credit that Mr.Andianto deserves. Comparing Charles Ponzi (or the founders of GTI, BMA, MMM, Lexus etc) and Mr.Andianto is a sheer ignorance. The former group does not add value nor contribute to the society. The latter starts a company that employs people, a real business. Furthermore, if a person wants to run a money game, why would he promise a return of 15-21% per annum? He could have promised more. 15-21% per annum is high, but it is not absurdly high. It is more expensive than traditional lending, but this number pale in comparison of what some money games are offering.

We also applaud of Mr.Andianto’s statement to personally guarantee the whole liability. This from our point of view an unnecessary, but it is an honorable act. Again, we don’t think koperasi is a fraud. We suspect that his desire to expand caused the whole debacle. It is a foolish business decision, not fraud. And in an entrepreneur’s life, he sometimes screw up, hopefully he will be able to stand up tall again. That is what we eventually wish for Mr. Andianto. As for the koperasi’s investors, we sympathized with them, but they should have realized that there are no risk-free investment. The same people might also fall into the money game fraud. We hope those people learned that there are no free lunch. Investment requires work and a lot of thinking.

Valuation (The Boring part)

Unlike many investors, you would probably have noticed that we almost devote very little attention to numbers. It is not because we do not do valuation; we think it is an important part of investing. We do believe that qualitative assessment formed a big chunk of investment decision. That is the part with no formula and certainty. As we always said with the investment business, it is quite simple, you make money when you are right, and you lose money when you are terribly wrong. As with valuation, you might find a much refined calculation from other sources, such as www.teguhhidayat.com, www.saham101.com, and www.dnacapitalgroup.com. They provide a much better quantitative view that we could elaborate here.

Anyway here is the small glimpse of our thought when analyzing the value of the company. As of Q1 2014, CPGT’s total asset amounted to 1.365 Tio. This consisted of:
Cash                  22 bio
A/R                    66 bio
Inventory            6 bio
Prepaid              21 bio
A/R                     36 bio
Deposit               19 bio
Fixed Asset   1,188 bio
Others                   5 bio
Total              1,365 bio

Here is the liability:
Debt               18 bio
A/P                 19 bio
Deposit             3 bio
Bank Debt    170 bio
A/P                  97 bio
Bank Loan    237 bio
A/P                  88 bio
Related A/P      3 bio
Tax Payable     87 bio
Wage Payable    7 bio
Total                742 bio

All our numbers are estimate. We are not expert in accounting or finance; a lot of people are smarter than us in this regard. We simplify this because we want to understand the business and whether CPGT was a good buy at certain prize. Anyway, here is our thought. CPGT has book value around 600 bio. We don’t have to dispute the size of liability, this is usually harder to engineer. However, the key here is to see whether CPGT’s asset really worth whatever the amount that they state in the book. One comment that we want to make is that we think CPGT is a bit moderate in using the depreciation rate of 8 years for vehicles and 10 years for heavy equipment. We would be more happy with 5 years and 8 years.

One quick glance at CPGT’s list of assets, one would notice that there is a bulge of number at the fixed asset. One worrying point here is that in the Annual report, CPGT used the word “OWNED” in its Heavy Equipment (HE) division and “OPERATED” in its Vehicles division (except in taxi division). How do we know if CPGT’s asset really worth the stated book value? If one is in vehicle trading business, then you can list down all the vehicles that the company owns, and calculate the total of the replacement value. However, there is a big part of the asset, the vehicles worth 600 bio, which will be your dead end using this method. Since we do not have this knowledge, we revert to the next best available option to us, which is to look at the depreciation. in 2013, the depreciation is amounted to 193 bio. Using the worst case depreciation scenario (8 years), that depreciation is based on 1,544 bio of asset. Using 10 years will yield 1,930 bio worth of asset. Some will ask, why not 5 years? We don’t think that CPGT wants to use 5 years because it will depressed the earning, which is already quite low. 8-10 years is reasonable because bulk of CPGT’s asset is in form of Vehicles and heavy equipment.

Again, this is a very crude method. At this point, a lot of readers who are analyst with CFAs will question a lot of our assumptions and financial pedigree. Some might ask why I don’t do DCFs or Graham formula here. At this point, this is all that we got, and we are operation with the limited information. There will be other people with better set of information, and we hope to learn from them.

Anyway, if we can trust CPGT’s 600 bio numbers, let’s say it is 400 bio (30%) discount, then at Rp.100, CPGT’s total market cap was 360 bio. This was another 10% discount. We established our position at just below 60, which is around 200 bio. Are we a good market timer? No, price touched 51, and we almost have 20% loss. But looking at the flipside, there is almost 50% discount from the 400 bio, 66% discount from the 600 bio. We have to admit that we were trembling with greed at that time. This is probably once in five years opportunity.

We think the fair value at current time is around Rp. 100. Although, there might be possibilities that CPGT is still undervalued based on depressed earning (CPGT’s earning might be more than stated in the book). However, we would need do more research on this.

We look for your valuable input in our thoughts here. As it is true with other research or opinion piece, most of the things here will likely to turn out as false. 🙂 So, keep your thinking hat on!

Disclaimer:
We have exited all our position in CPGT. We might establish another position, but any investment decision should be the responsibility of each person after careful and deliberate thinking.