Friday 4 July 2014

The ODD mathematics of The World Cup

The recent second round playoff matches of the FIFA World Cup in Brazil have been very exciting,  with many of the deciding goals scored in the very last minutes of the matches, and often during overtime.

Two of the eight matches were decided by penalty shoot-outs, which were by themselves nail-biting. This included the match won by Brazil where Neymar scored the decisive penalty against Chile.

As a compulsive analyst, I was intrigued by the mathematical probabilities of the results of the playoff  games. Here are some of my observations:

    1. Using the pre-game betting odds as the indicator of the favorite team to win each match, I found that every match was ultimately won by the favorite team. What is interesting, however, was how the matches were won. 
    2. Of the eight matches played in the second round, five of them were won by the strong favourites as per the pre-game betting odds indicated in the table. These five winning teams were Argentina, Germany, France, Brazil and Belgium. But surprisingly, only one of the five matches (France versus Nigeria) was won during the 90 minutes of regulation (plus injury) time.  You would have thought that all the heavy favourites would have been able to win after 90 minutes. 
    3. By contrast, of the three matches where the odds were more balanced – meaning no clear favourites -  two of them were won during regulation time. The exception was the match between Costa Rica and Greece, which went into the exciting (for fans) but dreaded (for players and managers) penalty shoot out. 
    4. In the eight matches played, the average time to score a goal was 68 minutes during regulation time. Interestingly, it took only 13 minutes to score during extra time.
    As betting odds and payouts are different for the scores at the end of the 90 minutes regulation time, and for the final outcome - including extra time or penalty, if any – I wonder if the results of the second round matches can be a useful betting guide for the remaining matches of World Cup 2014.

    Looking at the pre-game odds for the quarter-finals, will the match between Brazil and Columbia and the one between Holland and Costa Rica go into extra time since both Brazil and Holland are strongly favoured to win?

    Well, as football fans are happy to say, the ball is round and anything can happen.

    Friday 27 June 2014

    Mid Year Review and Outlook

    In February, we published The Edge’s inaugural State of the Nation report, outlining our thoughts on the economy, stock market and key sectors. This was followed by weekly State of The Nation updates, where we track major economic and stock market trends.   

    This week, we review what has happened in the first half of 2014, and what lies ahead. 

    Many of our analysis and predictions have come to pass, and some are continuing to unfold. Malaysia’s high levels of large household debt have affected consumer spending, lending and the property sector. Corporate earnings growth has slowed and the Malaysian stock market has underperformed its regional and global peers. 

    However, our prediction that the stock market will weaken as liquidity is withdrawn due to the tapering of Quantitative Easing (QE) in the US, has turned out wrong. Or rather, the effect is being delayed by new events.

    Stock markets in emerging markets have continued to rise (although very modestly for Malaysia) due to newly introduced monetary easing measures in Europe and Japan, which have added new liquidity and helped offset the effects of the QE tapering exercise in the US. 

    The FBM KLCI is up a modest 1.2% this year to 1,890. 

    Will the uptrend continue? What lies ahead? We take a closer look at the economic and corporate prognosis including the impact on interest rates, currency, property, stock market and global liquidity.

    For the full report, read The Edge this week.

    Sunday 22 June 2014

    High unbilled sales no guarantee of good future profits

    The surging property market over the last few years will finally start to slow, as developers, investors and the general public brace themselves for the effects of GST (goods and services tax), on top of other property cooling measures. 

    This week, we discuss the potential impact and possible spill over effects of GST to property developers, which is set to affect their top and bottom lines sooner than expected although scheduled to kick in starting April 2015.

    Gross margins impacted by introduction of GST

    As residential property is exempted from GST, the increase in input tax cannot be claimed by the property developers or passed on to the house buyers for properties already launched and sold.

    Having locked in their future sale value, these developers would have to absorb the rising costs when they commence building activities.

    We are starting to see the effects of compressed margins even before April 2015. Already, SP Setia in its latest quarterly results has reported lower profit margins as a result of them recognising the financial impact of GST for projects already launched. The remaining effects of GST will unravel in future financial periods, in accordance to future work in progress.

    Slight fall in gross margins has a pronounced effect on net margins

    A fall in revenue will cascade to the gross profit margins, which will cause a further drop in net margins after fixed costs and taxes.

    The simple financial model example below (Table 1) tells the story. With the imposition of GST, a drop in gross profit of 14% translates to a drop of 43% in net profit, assuming operating costs remain constant.

    The above financial model has not even factored in the possibility of the property developers being at the mercy of contractors who are bound to hike up their charges due to their higher contribution and input costs.

    This effect will be more prominent as we enter into the 2nd half of 2014, as more developers would already start factoring in the GST cost once they can reliably estimate the additional cost to be incurred.

    High unbilled sales does not secure future margins

    Though most key developers have strong future progress billings to possibly sustain cash flow throughout the next year, sales recognised in the upcoming years will be exposed to rising cost pressures, with falling profit margins.

    Read the full analysis in The Edge this week.