AIA Engineering Ltd

Stock Opportunities Not-so-Hidden Gems
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Investors are being careful while touching AIA on the concerns that if the clients are not doing good how can they in a difficult market environment. Essentially what it means for AIA is how can they keep up the topline when client are looking into ways for cost cutting. In the short run of course they can avoid giving new orders and de-stock the inventories however in the longer run they still need to come back with new orders for the replacement demand of wearable products. When will that happen, only time will tell.

Discl: Invested 2% of my PF, looking to add at the right time

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I have developed a very high conviction for the company after going through the VP thread , the recent annual report and by my own analysis of numbers at screener.in . Currently constitutes 1.2% of my portfolio. Tracking it very closely. Although the price at current level looks very attractive, I am just being greedy and waiting to see if the price falls down any further. Would become irrestible at 750s level. If it doesnt go down any further then I would rather buy when the price goes atleast 15% up from current level. Would like to make it atleast 12-15% of my long term portfolio within a year or two, either through reallocation or through fresh cash pumping.

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Wow…that is a lot of conviction. Yes. AIA had been a star performer but a fallen angel now. The reverse gear has been a painful journey for me but I am still hanging in there

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In today’s conference call, the management was candid and optimistic about business.
Management is clear that for the next few years they would be concentrating market share rather than profitability.

For some reason, the management is not comfortable talking about their prospects in China.
Either they have been unsuccessful in the China market and are sore about it or I am missing something?
Anyone can throw some light on the Chinese market?

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OUT STANDING management !! CLEAR vision of management intact. Solid balance sheet and prudent capital allocation and cashflow is beauty of Mr Shah. Now the only valid concern is - slowdown in commodity and mining. However, as discussed by Ayush the recurring nature of the business will not make AIA’s business dry. Moreover, I would like to share that management has been repeatedly telling that while the whole pie may not expand in this tough time, but the company is trying to gain market share from convention peers, by dealing and explaining customers about the benefits of high chrome. So, that could help them not to drop in volume drastically. Nevertheless, one smart and prudent investors should love crazy people to react and drag the stock price so that he can get at lower price and create long term fortune. The lower it gets the better it is…

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Critical Mass Mental Model for AIA.pdf (245.4 KB)

Dear All,
I post above my article that I have written about applying mental models to AIA Engineering stock. Would love to hear back what you think about it.
Thank you for reading.
Disclosure: Invested.

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For a company claiming superior technology, its surprising to see “NIL” R&D investment in AR-2015. Neither in Capex, nor in recurring expense has the company spent any money. So, how did AIA get their edge? And how will they retain in future?

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The absence of R&D expense has been a feature since 2006. Thats the earliest annual report I have and there has been nil R&D expense since then. This reveals that the product in its current form fulfills the requirements of the grinding industry and that maybe the reason why the company is not developing it further.

To answer the first question AIA got their edge from a technological collaboration with Magotteaux Belgium. Through a technology transfer program the HCMI technology came to AIA. When the partnership ended in 2000 AIA retained the right to use the technology but could never patent it. As to how they will retain their superiority in future is a question of whether a better technology can replace AIA’s product. The answer to this question has been my search focus for sometime and I am still looking. Only a metallurgical engineer could shed some light into this.

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Nice application of mental models.
Have you explored possibilities of AIA expanding into
other verticals?

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Hello Bharat,

I am glad you enjoyed reading my post. To answer your query, I refer to an interview video of Mr. Bhadresh K. Shah by Axis Capital. When asked about the future growth prospects he first mentioned the size of the mining replacement market at 2.5 MTPA growing at 4-5% PA. Beyond that he said that the ore crushing process that comes before the grinding process also has application for AIA’s product but it is not their focus right now but will be in future.

Here is a link to that video: https://axis-capital.kpoint.com/kapsule/gcc-f3e8d95d-7209-490b-9e1b-360405b29995/xc/HHNM0/t/interview-mr-bhadresh-shah

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Hi Abhinav,

Good to see your write-up. Its interesting to apply different mental model to make the understanding of potential. However, I think critical mass + networking effect example can be applied to too many industries…I think its more critical to think about the reasons for the success of this company and why the competition is still very limited? For eg: When you gave the other examples…you can see that most of the areas have several players…while in this case the industry has been limited to just 3-4 players with Magotteaux and AIA cornering a lion share. What is even more interesting is - the peer comparison of the numbers of Magotteaux and AIA…that throws out very interesting insights :smiley:

@arunsg - Yeah, i have also wondered as to why the R&D figure is not there…but I feel it might also be a case of accounting…there are several companies who do R&D but don’t account for it separately as they don’t have a separate department for it. Its a continuous investment in knowledge, experimentation and human.

Regards,
Ayush

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thank you
will check out the link

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Hello Ayush,
Thank you for reading my write up. I agree that these mental models can be applied to almost any product and technology. One cannot help but notice my attempt as a classic case of “to a guy with a hammer every problem looks like a nail.” Having said that I do believe in what I wrote and that is why I invested. However, this was just a personal view of a small investor and I may be proved wrong in the future. There are countless cases where everyone thought the network effects were strong, only to be disappointed when the product did not reach the tipping point.
On another note, you mention you found some interesting insights while comparing the numbers of Magotteaux and AIA, would you be so kind enough to share them here with us.
Cheers.

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Hi Abhinav,

What you have written is correct - you are right to say that once the adoption of high chrome alloys reaches a certain level, the whole industry adopts the technology as they see the benefits and don’t want to get left behind or become un-competitive. And if the adoption increases in the mining sector in the coming years then this company has a great potential!

Financials and investor presentation of Magotteaux are easily available and what I find interesting is the significant gap between the operating margins of AIA & Magotteaux. Given the weak financial profile of Magotteaux till now, I feel that the competitive intensity would be much lessor for AIA and hence they can continue to capture market.

Regards,
Ayush

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If I understand Network model correctly, it means a company A adopts a process or technology because another company B adopted it and A has a benefit by B adopting it. A classic example is a Credit card. I use a brand because it has wide acceptability; & it has wide acceptability because there are a lot of people like me using it. For those with an Engineering bent of mind, this is called as positive feedback cycle. Positive here is not meant in the sense of good, but in the sense of input causing more output, which in turn causes more input. Such positive feedback can cause very high growth rate, and also instability as per classical control system theory !

Other examples can be newspaper ( advertisements and readerships feed each other), or Supermarket chains.
It could even be as simple as an accounting package where all your suppliers or customers use the same. No wonder the SAPs of the world grow into 800 lbs gorillas.

But AIA being a network effect beats me.

Thanks,
Arun

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Here is a primer deck on network effects in the tech space from Andreesen Horowitz, one of the premier VCs in the world. Hope this helps in developing a deeper understanding of network effects. https://t.co/ddBebRused

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Hello Arun,
Good points on the network effect model and I agree with your definition but what you are focusing on is only a certain type of network effect. Not all network effects have to have a positive feedback loop to be named a network effect. Network effects encompass feedback loops ranging from positive to nil to negative. For example a negative network externalities can also occur, where more users make a product less valuable, but are more commonly referred to as “congestion” (as in traffic congestion or network congestion). There are multiple categorizations of network effects such as two sided, direct, indirect and local.

Additionally, there are two sources of economic value that are relevant when analyzing products that display network effects:
Inherent value: I derive value from my use of the product
Network value: I derive value from other people’s use of the product

In AIA’s case each miner derives inherent value from the use of the High Chrome product. And the network effect is that once significant information is disseminated about the potential benefits of adoption others will follow your example. The information can be anything from improvement in margin numbers to better mineral recovery from the ore.

Cheers.

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Relate this rise to rise in cement companies as lot of cement companies are rising capacity. Hope you have bought during the recent correction.

It is going to be interesting.

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Today I write to share with my fellow AIA investors a report that I came across while researching AIA’s advent into the mining space. It contains a purchasing strategy study conducted by a college student for KGHM. KGHM is one of the largest producer of copper and silver in the world.

Link to the report:

Developing a purchasing strategy for high chromium grinding media.pdf (1.1 MB)

This study was conducted in 2012 and 2013 and on page 35 I have highlighted where the study mentions VEGA, India a subsidiary of AIA. The report does not contain the outcome of the sampling study so we do not know whether KGHM went ahead to source HCMI from AIA or not. Even in AIA’s annual reports I could not find KGHM mentioned. But this report offers a great insight into what miners look for in a supplier for high chrome grinding media. You can read it on page 15 - 17 of the report.

I am researching this topic because I like to attack my investment thesis brutally and I need to understand that if HCMI is such a big opportunity then why are bigwigs like Molycop (global leader in grinding media) under the Arrium group who manufacture forged media right now which HCMI will replace are not doing everything they can to thwart AIA’s plan.

Based on a preliminary search I have found Molycop to mention High chrome in 2011, 2012 and 2014 analyst presentations. All three times they say that, “high chrome grinding media has limited overlap with Molycop as their natural fields of application are different: cement industry for Magotteaux’s high-chrome balls, base metal ore grinding for Moly-Cop’s forged balls.”

They also say, “Because of their much higher relative price, High Chrome Cast Balls have a narrow field of application in cement grinding and ultrafine wet regrinding operations where corrosion may be the predominant wear mechanism.” (As you will read in a study down below HCMI has better corrosion resistant properties than forged media.)

I also found in the same presentation that HCMI grinding balls are generally of a smaller size (grouped as small & medium) when compared to forged and cast balls which are medium to large size. My understanding from this is that HCMI is used in a regrinding process for finer grinding applications after the forged media grinding.

Links to the presentations:

https://www.arrium.com/~/media/Arrium%20Mining%20and%20Materials/Files/Presentations/FYEnd2012/Mining%20Consumables%20Analyst%20Presentation%2021%20March%202012%20ASX%20release.pdf

http://www.onesteel.com/images/db_images/news/Mining%20Consumables%20South%20America%20Analyst%20Site%20Tour%20Presentation%20-%207%20June%202011.PDF

https://www.arrium.com/~/media/Arrium%20Mining%20and%20Materials/Files/ASX%20Announcements/FY2015/Mining%20Consumables%20Presentation%20and%20Site%20Tour%2024%20Nov%202014.pdf

Further researching the advantages of HCMI over forged media I came across this report from International Mining.

International Mining Report.pdf (1.4 MB)

You can also read it online (not highlighted) version here:

http://www.min-eng.com/comminution/316.pdf

The report is a very interesting read that reassures you about what AIA’s management have been saying that HCMI is a superior product to forged media. (Never take management’s word at face value, do your own research) I have highlighted the important portions of the report if you want to do a quick read but I would suggest to read the report thoroughly from page 3 to 6.

On page 5, first column last paragraph they mention a research study conducted by Magotteaux employees. I must say the study is very technical and anyone without a scientific frame of mind or an engineering background might not understand it. I have highlighted a few sentences that are relevant to your AIA investment.

You can find the study here:

The-Application-of-High-Chrome-Grinding-Media-at-MMG-Century-Mine-for-Improved-Grinding-Media-Consumption-and-Metallurgy-Performance.pdf (620.9 KB)

You can also read it online (not highlighted) from Magotteaux’s published papers website:

http://www.magotteaux.com/wp-content/uploads/2013/07/The-Application-of-High-Chrome-Grinding-Media-at-MMG-Century-Mine-for-Improved-Grinding-Media-Consumption-and-Metallurgy-Performance.pdf

Overall, after conducting this research I am more at ease with my investment in AIA. Hope this piece provides the same benefits for you.

PS: My next research topic is what new technologies could displace HCMI in the grinding process.

Have a great weekend.

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The acquisition of Magotteaux by Sigdo Koppers Group - Competitor to Molycop is an important development. Sigdo Koppers is also Steel Grinding balls ( SAG). Molycop is 4 times bigger than Magotteaux and it is very tough to break a 8 decades relationship unless HCMI ball prove to be better than SAG balls in copper, gold and iron-ore industry. One need to watch the increase in ore milled to see the increase in demand for grinding media.

In India, cement expansion is happening after a long time and AIA can start doing well from now on. I am not clear on the Coal demand as renewable energy can keep the demand down. In India, watch the increase in production of coal and cement for AIA.

Success in Mining is an extraordinary development for AIA.

Rgds