Thursday, November 15, 2018

Rethinking About Recycling


This is a damn powerful image. The work he is doing, recycling, is so noble and forward thinking...and yet we know that he is also probably not paid well for it. Something is not right, for something that is so right.
































































Photo: Shen Yu / Imaginechina

Wednesday, November 14, 2018

Stan The Man



Let me state first that I am not a big comic book person. Like it or not, all of us grew up pretending every now and then to be Spiderman, and later The Fantastic Four and X-Men. I also really liked Black Panther, needless to say.



I hope what's not lost amidst the accolades of the comic book guru was his strong stance against racism and discrimination. That to me was very pleasing to know and added loads of character and integrity to his achievement.

Below were some quotes by Stan Lee throughout the ages.



‘If we could only learn that the world is big enough for all of us …’


In 1968, the year Dr. Martin Luther King Jr. and Robert F. Kennedy were assassinated, Lee wrote: “Let’s lay it right on the line. Racism and bigotry are among the deadliest social ills plaguing the world today. But, unlike a team of costumed supervillains, they can’t be halted with a punch in the snoot or a zap from a ray gun. The only way to destroy them, is to expose them – to reveal for the insidious evil they really are.   Now, we’re not trying to say it’s unreasonable for one human being to bug another. But, although anyone has the right to dislike another individual, it’s totally irrational, patently insane to condemn an entire race—to despise an entire nation—to vilify an entire religion. Sooner or later, we must learn to judge each other on our own merits. Sooner or later, if man is ever to be worthy of his destiny, we must fill out hearts with tolerance. For then, and only then, will we be truly worthy of the concept that man was created in the image of God–a God who calls us ALL—His children."



“The bigot is an unreasoning hater – one who hates blindly, fanatically, indiscriminately … He hates people he’s never seen – people he’s never known – with equal intensity – with equal venom … It’s totally irrational, patently insane to condemn an entire race – to despise an entire nation – to vilify an entire religion,” Lee added at the time. 


During a 1971 interview with Rolling Stone,  Lee said: “I think the only message I have ever tried to get across is for Christsake, don’t be bigoted. Don’t be intolerant. If you’re a radical, don’t think that all of the conservatives have horns … I think most people want the same thing. They want to live a happy family life, they want to be at peace, they want no physical violence, nobody to hurt them, and they want the good things that life has to offer. But I think everybody sees us reaching that nirvana by a different path.” 


In the same 1971 interview, Lee added: “I think one of the terrible things in the world is that we are so inclined to think in black and white, hero and villain, good and bad, if you don’t agree with me I’ve got to destroy you. If we could only learn that the world is big enough for all of us. For a guy who wants to wear his hair long, and a guy who wants to be a skinhead. Neither of ’em has to be bad.”


During an interview in 2016, Lee said: “America is made of different races and different religions, but [that] we’re all co-travelers on the spaceship Earth and must respect and help each other along the way.”


Tuesday, November 13, 2018

Mr. Sachs, Show Me MY Money



We tend to take things for granted very easily. With what we know as of today, just imagine if we did not change the government back in May. Many dastardly shenanigans would have continued, the degenerates would have continued merrily stuffing their pockets, the skimming and shaving and loading would have continued unabated.

Plus its not just financial crimes. If anyone stood in their way, things would kautim-ed one way or another, by hook AND crook. Planted evidence, unnecessary audits, the taxman cometh ... or let's take a trip to Kajang.

So, it is in this light that our Finance Minister is asking back the fees paid to Goldman Sachs. It is also good to see the share price of Goldman Sachs being "sold down" in light of the 1MDB issue.




























We are 'lucky' in that the 1MDB fiasco was big enough to make a dent to the behemoth that is GS. Can you imagine if our "losses" were minuscule compared to their market capitalization, reputation, integrity, profits??!! Then 1MDB might not have mattered to them and their shareholders.

Going down 7.2% in a single day is a big deal. Its market cap is around $76bn, a 7.2% drop meant in one day it has lost $5.5bn (RM22.7bn). To put that in perspective: ...the $6.5 billion it raised in 2012 and 2013. Goldman Sachs handled the deals, reaping almost $600 million in fees.

Anyone can see that IT WILL BE CHEAPER TO JUST GIVE US BACK THE FEES. Rich people are not stupid, especially when the figures are staring like that in their faces.


So was what GS did so bad?

Answer: YES, YES ...

a) the corrupt who has the power can only do so much... they need "ideas", shortcuts, devious means and ways to "get the deal done" ... hence the enablers of a crime/CBT should be punished as well

b) GS cannot say they did not know... they knew, otherwise who will pay such exorbitant fees for a simple bond issue... Malaysia is not a third or fourth world country .. the bond rates and fees charged were nothing short of being exorbitant and repulsive

c) Big banks were fined royally for pushing toxic products, and/or money laundering ... this is worse, being complicit and enabling corrupt politicians and influencers to pillage and burn.


Losing $5bn in market cap (with more to come) ... or pay us back $600m, and I am certain Malaysia can sue for at least another $2-4bn for collateral damages, punitive damages, etc...

Wednesday, November 07, 2018

Bohemian Rhapsody - Review & Personal Notes



Movie Review: It is terribly unfair with all the hype surrounding the movie prior to its release. Expectations were high. If you don't know Queen or just a so-so fan, this movie would still rate 9/10. If you are a true blue Queen fan, its way off the charts fantastic.

One thing is clear, Rami Malek will be a shoo-in to win next March Best Actor Oscar. He was so good. You can have voice training and even movement coaches, but you still need to have the ability to assimilate and interpret. After 10 minutes you feel you were watching Mercury.

To be fair, there were some minor tweaks to the real truth (such as how Mercury became the band's singer, etc.), and the focus on the Live Aid concert as the "grand finale". But movie producers need an entertaining movie.

Its a riveting portrayal by Rami Malek, and he did not overdo it. If you were a Queen fan, you'd be amazed at the similarities in expressions and mannerisms. 

The movie uses Bohemian Rhapsody as the anchor as to how it came about and how it conquered the world - but till today most people still have a vague understanding of the lyrics. 

There were incredible moments: when the fans sang back Love of My Life to the band; when Freddie composed the first few lines of the song; when Freddie wrote the first few lines of BH and cried; the sheer amount of love and respect Freddie showed to Mary; etc...

There were no dull moments in the movie, and the selection of songs to be played was well thought out and appropriate. The best thing about the movie was how much more we could see things from Mercury's perspective, in trying to understand his inner demons and unabashed brilliance.

There will be plenty of mediocre reviews by critics because it was not savage enough, or too entertaining, or glossing over facts ... That's all good, this was not meant to be a real biopic but rather a tribute to Mercury and Queen, where we can get to know both much better.

And just like Queen, ... having fun is paramount, which was what the movie did.



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Why Queen Is My Favourite Musical Artiste

I started to listen to Queen thanks to a friend who so kindly recorded the 3rd album Sheer Heart Attack on a wonderful cartridge for me. It was so good, I looked for their earlier albums, Queen 1 and Queen 2. Then came NATO (our fanboys favorite way to refer to A Night At The Opera).


They were not the conventional rock band. They love to evolve and do different things. They were not shy of composing melodies and catchy hooks for rock songs. Plus they have a keen eye for harmonies, for a rock band, that was prissy. They also had no problem embracing technology and did not put rock and roll into a box but rather their music had none of the usual boundaries.

Musicality, Brian May was superb as their lead guitarist and a great composer. May and Roger Taylor's drums were largely responsible for Queen's sound. Roger is a very decent drummer and an even better high pitched harmony singer. Mercury was mercurial, a great composer and his voice was unique and wide-ranging.


My favorite albums in order of preference:

1.  Sheer Heart Attack
2.  Night At The Opera
3.  News of The World
4.  Jazz
5.  Day At The Races
6.  Queen II


I was fortunate enough to catch Queen live back in 86 or 87 in Sydney with Mercury still delivering the goods. Its the only concert where I could be seen singing to every bloody song. It was magical and satisfying.


What about the songs? Here is my recommended list of lesser-known ones, if you haven't heard most of Queen (just go to You Tube):

a)  Brighton Rock - a brilliant catchy rock number with possibly the best guitar solo by Brian May in the middle, play it loud.

b) In The Laps Of The God - An eerie, hymn-like, religious chant that is very melodious. Great harmonies. Listen to Roger Taylor's ethereal soaring harmonies. The song comes in 2 parts.. its the beginning of the inclusion of long play-operatic songs which led to BR.

c) Mustafa/Teo Torriatte - An throwback to Mercury's Persian/Zanzibar roots. Brave and bold. Plus a Japanese song that could have easily be the theme song for a Japan Olympics.

d) Fat Bottomed Girls - I had the huge poster of naked gals riding bicycles from the album. It was so wild.

e) Good Old Fashioned Lover Boy/ Bring Back That Leroy Brown - In their early records, they always insert some sort of vaudeville-like song. Versatility at its best.





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Friday, November 02, 2018

China Evergrande - A Precursor & Harbinger Of Calamity For China Property Markets

If you just brush aside the latest news on Evergrande, you are actually missing the headline for a future newspaper article - China Property Companies Crashed! The news is so smacked right in your face that it is too obvious to not to notice that the emperor is naked... heck, the whole parade, and procession are naked.


In the first half of the year it generated $44bn of revenues and $4.5bn of profits, paying out half in dividends. It has $98bn of debt, $44bn of it due within the next twelve months.


Any first-year business and accounting student can tell you it is highly unsustainable. $4.5bn profits and you pay out half in dividends. The amazing thing is that for 1H2018, it paid out $4.2bn in interest payments!!! If it had no debt, net profits would have doubled.

(owner, Hui Ka Yan)
Assuming you do the same for the second half of 2018, you have $4.5bn to cover the $44bn due over the next 12 months. That's provided the $4.5bn is real net positive cash flow and not gains on revaluation of assets.

The key here was that Evergrande has recorded NEGATIVE CASH FLOW every year since 2010!!! Every bloody year. It has been running on fumes. As long as property markets there remain speculative and robust, the fumes will not be so toxic... but...

So what triggered the calamitous view? Read below:

The owner, Hui Ka Yan, had to put in $1.8bn of his own money to subscribe to the new company fund rasing bond. The coupon rates were 11%-13% p.a.  ... where on earth do you get a company bond with that coupon rate??? I mean, one of the largest listed stock in China/HK.

It means, no banks want to lend any more, they have maxed out usual suspects for fundraising. Look at their net profit ratio to revenue, they barely make 10%. That would not be sufficient to pay the coupon rate even.


Why Care About Evergrande

- It is the largest China property company by revenue.

- It is also the most indebted developer there.

- It still has a market capitalization of $30bn, the potential domino effect should it fail will be catastrophic.

- An implosion of the country's largest developer will see a lot of its property holdings for investments being sold, which will further flood the marketplace. Any signs of weakness in the leader will further exacerbate other property developers in terms of their borrowing cost.

- We may see a "who can get out fastest" among the developers soon.


Evergrande's assets, as suggested above, are large. For instance, its current land reserve, which spans 822 projects, covers a mammoth 305m square meters, close to 120 square miles, a touch below the size of Malta.
We thought we'd turn our attention to a corner of that expanse, $23bn worth of investment properties. According to one equity analyst we spoke to, little attention is paid to these investments which, despite only accounting for 9 per cent of total assets, represents half of Evergrande's equity due to its levered nature.
According to its half-year report, Evergrande's investment properties “include commercial podiums in living communities, office buildings with gross floor area of about 8.43 million square meters and approximately 408,000 car parking spaces”.
Yet it does not look like these investment properties generate much cash. In the past six months, rental income from investment properties amounted to $68m, an annualised yield of only 0.6 per cent. A figure significantly below the Shanghai Interbank lending rate, which stood on Wednesday at 2.49 per cent, according to S&P Capital Markets IQ.
One reason for the low rental incomes is that some of the properties are still under construction, but at the end of 2017, this was the case for just 14 per cent of the portfolio. So unless all are let at peppercorn rents, some must be empty, provoking memories of China's ghost cities, vast unoccupied real estate developments built in the hope of future demand.


Recently it has been borrowing more from China’s trust companies: its loans from those quarters jumped 63% last year to $42 billion. That move showed that the company may be running out of "the usual options" for refinancing. It also shows that Beijing is aware of the importance of Evergrande, and cannot let it fail. Sounds familiar - too big to fail.


Strategy, Views, Opinions... & Catalysts

One can have a view that a certain market is overvalued or overpriced, or vice-versa. That does not become actionable unless we have a sense of timing involved because if you are bearish or bullish long enough, BOTH will eventually be right.

Key then is to note the catalysts, and to me Evergrande has just provided the biggest bullet... excessively high coupon rate with $44bn due over the next 12 months.

























Battling Shorts

It is also the most shorted stock in HK, almost 18% being shorted. The owner has been very combative, engineering sudden share buyback to squeeze the shorts. You cannot squeeze the shorts forever if your balance sheet and cash flow have problems.

Trouble is, the funds you raised will somehow go to more share buybacks to battle the shorts, instead of actually paying down loans. You do the math, something's gotta give...




Hopeful Saving Grace

- If the trade war ended completely, then Evergrande may have a chance to survive the next 12 months. Otherwise, its implosion possible at the cinemas.

Wednesday, October 31, 2018

Why EPF So Good Ah?


The study by the World Bank was timely (I will explain later). Being a government led pension fund puts EPF squarely against other similar funds by other countries. I must say that EPF has been punching above its weight for the longest time.


The Future Challenges 

However, we need to know why EPF did well, or else we will not be able to replicate the past performances. I think its critical that EPF, having done wonderfully, has to reposition and re-strategize because it has gotten too big for certain assets that it has invested heavily in the past.

EPF will also have to contend with how much more inter-related and correlated global markets is nowadays and will continue to be even more so in the future (thanks to the proliferation of ETFs and indexing).

As good as EPF has been, we have to be cognizant of the fact that Malaysia is still a place where there are not a lot of safety nets (e.g. reasonable life term pension scheme, unemployment benefits, free medical, free university education, etc. ... basically, programs that protect their citizens from economic shocks and natural disasters).  

Just looking at the average savings would reveal the first problem - insufficient amount to retire). The second statistic, which is less than half the population actually has an EPF account, is just as alarming. To be clear, both issues are not under the purview of EPF and its management, but rather on the government's blueprint going forward.

























EPF Stats

As at the end-2016 total funds managed by EPF was RM731.1b.  As for the end of June 2018 it stood at  RM814.3b. EPF is the second largest pension fund in the world among developing countries. The fifth largest in Asia and 15th globally. To put into better perspective, Malaysia is number 66th globally in nominal GDP per capita. In terms of working population size, Malaysia is ranked at 36th position globally.

























Success Factors for EPF

Show the above chart to all CPF holders, they will cry. The study by World Bank confirmed that the "success of EPF" was due to:


a) an astute team that developed in-house expertise over the years to make sound large-scale investments over multiple asset classes,



b) strong governance structure - one that is independent and transparent, and free from interference from the ruling government of the day (although the last bit may be open for interpretation on its absoluteness).










The above excerpt is very important. It shows that EPF is very much aware of the ballooning size of funds under management and the need to tweak exposure to certain assets. This is to ensure that EPF does not turn from an investor to a substantive/critical investor in that asset class. The danger of that is that it could distort the market prices, and worse, artificially influence the price.






























Another feather in the cap is that the cost to manage the funds stands at just 0.26%, almost the average cost of ETFs or indexing. Believe you me, that is a great achievement. On a side note, we still need some deep restructuring to the local unit trust and funds management industry. No investor should be made to pay more than 1% or even 1.5% to invest, period. The current practice is ridiculous and eats at short and long-term investment returns substantially.




















If you have ever needed to deal with EPF, its a breeze. It is easily the best-managed government-linked unit in terms of customer service. When it is solid at the top, it transpires to every facet of the company. The same argument can be made with other inefficient and slow government departments when dealing with the public.

I have written often on how wonderful EPF has been, how most of us take for granted the 6%-7% annoual returns for a fund of that size:

https://malaysiafinance.blogspot.com/2018/02/epf-returns-pictureworks-nabs-ocean.html


The Future Challenges II

a) Size per asset class - The Malaysian equity market has been taken up by more and more local funds, esp over the last 10 years. EPF would have been aware of such developments, and wisely, has upped its overseas equity investment side. Nonetheless, we have to careful how "fairly valued" are local equities moving forward. If the bulk of local funds hold substantive stakes in key index component stocks, it could be easy to "manage or maintain" prices regardless of the fundamentals of the said stock. Call it a crowding out effect, call it by any name, it is a big issue.

b) Inter-related/Correlated Investing - The world's investing paradigm has shifted over the past few years with the rise and rise of ETFs and indexing.

https://malaysiafinance.blogspot.com/2018/08/the-future-for-equity-funds.html

The bulk of my arguments lead to the age of normalized returns, the age of reduced alpha and the need to concentrate more on small caps.

c) Safety nets/only half of the working population has an  EPF account/ average sum of savings not sufficient for retirement - These 3 issues are not EPF's problem but the ruling government. Take note.


Saturday, October 20, 2018

The Real War Behind The Trade War


Well, the main reason we have the trade war now is Trump, whom I am trying very hard to describe without using foul language. However, it is not a deficit issue that is driving the trade war. In my view, the trade war is the result of four main issues, which will be elaborated later.

Being the reserve currency, it will be naturally strong. Being naturally and unnaturally strong will inevitably lead to trade surpluses (ceteris paribus). Unless the Federal Reserve practice tight monetary policies the same way as Paul Volcker, the "balance sheet" will get out of whack. That leads to whether China purposely weakens the yuan to exacerbate the trade gap.

Maybe China does but even so, it is insufficient to justify the gap. China is a developing nation with hordes of people becoming middle class from rural class - it is thus necessary to stay competitive to build up every sector of the economy.


a)  The Strategic Asset Acquisitions By China - Beijing does not mind registering huge surpluses (even if it meant higher import prices for consumers) as it has been diverting the surpluses via state funds or state link companies to acquire strategic foreign assets. To Beijing, its ok for the USA to keep its reserve currency status and keep them binging on goods and services because Beijing will end up owning substantive strategic lumps of fixed assets and proven global technology players (supply chain) throughout the world in another 10-20 years.

The One Belt One Road policy, grand in its mission, is now being regarded as "suspicious" and "unnecessary" to some extent by many under-developed and smaller developing nations. Many countries have taken on huge long-term debt from China to proceed with the said projects and some have quickly turned into disasters.

Hence to a certain extent, Trump is aware of the rise and rise of Beijing, and one sure way is to bring down the trade gap.


b)  The Approval Blockade - The trade war can be traced back to an increasingly combative USA, thanks to the confrontational, naive, inherently suspicious, shoot from the hip Trump. Back in August 1st, the US Congress approved granting sweeping powers to the Committee on Foreign Investment (CFIUS). CFIUS now can review deals that involve a change of control of an American company PLUS those which is acquiring any influence. The wide-ranging definition of influence lends CFIUS a lot of leeways to kill deals, and it has done so swiftly.

The EU has done a similar thing albeit smaller scale. Back in May, the EU voted to introduce a screening framework for foreign investment that allows the bloc to overrule a member's state interests. Many saw that as an effort to better protect strategic European assets.

The nationalistic fervor permeating throughout the world all point their fingers to largely China.

If you remember how Trump blocked Broadcom's takeover bid for Qualcomm, even though both were 'largely' American companies. The probable fear for the deal was maybe the CEO/owner of Broadcom was a Malaysian Chinese?

A few months later when Qualcomm wanted to acquire NXP from the Netherlands, it was nixed by Beijing. Was that a tit for tat? Was that to show Trump that Qualcomm was not under Beijing's influence? Anyhow, its Qualcomm that got squashed in the middle for both decent M&A deals.

In August Germany blocked a takeover of machine tool manufacturer Leifield Metal Spinning AG by a Chinese investor. The first time a deal was blocked based on national security justification.

c)  The Patents & Technology Royalties War - This has been allowed to fester for too long. China has been blocking the biggest web companies from operating in China on the guise that it needs to filter things. Partially true, as it also helps them to nurture local giants (Tencent, Alibaba, Xiaomi, Huawei, etc...) that now compete globally as well.


Beijing has been sorely lacking (decidedly on purpose) in enforcing patents enforcement and its regulation, leaving most overseas patent holders unable to extract proper payments from Chinese companies.


d) The Spying Scandal - This was not widely reported. Only via investigative journalism by Bloomberg Business Week, do we have a clearer picture of what happened and its ramifications. 

In 2015 Amazon bought Elemental Technologies, a company that can compress massive video files and reformatting them for different devices. Elemental's product was so good it managed to get projects that can communicate with International Spaces Station, and funnel drone footage to CIA.

To do that, Elemental need supercomputers and the best around was Supermicro a USA based company owned by a Taiwanese American couple. Supermicro is also the world's biggest supplier of server motherboards.

An independent third party audit revealed that a tiny microchip (like a grain of rice) which wasn't part of the original design. That chip had been inserted at factories run by manufacturing subcontractors in China. That chip would have made it easy to gain access, bypassing passwords and stealing encryption keys.

Beijing has denied involvement. This was discovered during Obama's tenure and a softer approach had been taken to resolve the debacle. Once Trump was in the office and upon his discovery of the matter, well... all hell broke loose.


Resolution: None in sight. Trump will continue to be belligerent. Even though China is bearing much of the brunt of it, it cannot back down against USA, not with Xi Jinpeng trying to hold the fort.

Trump could very well come under enormous pressure should the mid-term November elections turned against the Republicans. That may pave the way for an impeachment.

Failing that, and Trump manages to stay afloat... Beijing will have to offer concessions on patent and royalty payments to get the ball rolling.



Wednesday, October 10, 2018

Why Capital Gains Tax Should Not Be Implemented


I have to reiterate why a Capital Gains Tax is a very bad idea for Malaysia.

Unique traits of Malaysia:
a) Very open economy


b) Ringgit has been weak, which actually has helped plenty of exporters but they are being very quiet about it
c) There are very very few safety nets for Malaysians unlike many developed countries, which means we should not overly burden the lower income group
d) We have a very simple tax code, let's not complicate it as its a major plus point for FDI
e) Our stock market has the largest portion of GDP that is listed compared to all the rest of the bourses in the world, that implies that it has a very high multiplier effect for the rest of the economy. Hence efforts must be made to preserve its vibrancy.



 Capital Gains Tax - Categorically no. The entrepreneurial spirit Malaysia is so proud of should never be curtailed, not even with a small capital gains tax. Being an open economy, we must allow the economy to function as freely as it can. This goes back to the (e) factor cited above. 

... in the USA if you sell a stock, you pay 15% (20% for high earners) of any profits you made over the time you held the stock. Those profits are known as capital gains, and the tax is called the capital gains tax. One exception: If you hold a stock for less than a year before you sell it, you'll have to pay your regular income tax rate on the gain - a rate that's higher than the capital gains tax. My gripe is that is you have capital gains tax, then you must also have loss deduction on taxable income ... but that only benefits people with income, what about those with no income (retirees). Please note that the local bourse has one of the highest retail market participation in the world.



The ramifications:

1) A huge amount of liquidity will be sucked out of the system. It will probably take at least 3-5 years for the market participants to get used to the CGT regime.

2) Might be a zero-sum game - You cannot have CGT without a corresponding reduction to taxable income when investors register losses. Who is to say you will get more WINNERS than LOSERS.

3) Cumbersome to report for tax returns and calculations. Do you withhold gains or do we have to save them for year-end? We already can see the problems arising from this.

4) Our local burse has one of the highest levels of retail participation among all global markets. Which is to imply that a substantial number of participants are retirees. You can whack 15% CGT on their stock gains, what about when they make losses? They have no other taxable income to deduct the losses from. Give them a 15% voucher for upcoming funeral services?

5) Like it or not, all markets need some level of "cowboy-ness" in it to generate liquidity and activity. Like it or not, a substantive portion of liquidity in the system emanates from the grey unregulated economy, for want of a better word. You impose CGT, all these funds will disappear overnight... who wants to report all transactions for tax purposes? Imagine a prolonged stock market trading at only 30% of average daily volume ... that would make imposing CGT counter-intuitive and disastrous.

6) Bearing in mind our local market has the highest level of GDP that is listed when compared to other bourses. That means there will be a huge multiplier effect up or down.


Back To The Drawing Board

Instead of imposing 20 new taxes to get a paltry amount... there's no other way than to list Petronas to buy a substantive breathing room for the next 5 years at least. RM200bn will help us a lot. Note - we have to list first before the mega Aramco.

Listing of Petronas - This is a brilliant idea. Last year's profit was RM45bn. Price of oil has climbed steadily this year, can extrapolate profits to RM50bn this year. Using 20x = RM1,000bn market cap. Government sells 20% = RM200bn. Although I am against selling vital resources, but we can get important local funds (PNB, EPF, etc.) to take up 6%, and let retailers take up another 4%. The company pays decent dividends. When our country's balance sheet is better, we may even consider buying back and taking Petronas private later on. 

Tuesday, October 09, 2018

Tread Gingerly On Taxes


Plenty of voices now in anticipation of the upcoming Budget on new taxes to be implemented to help shore up our finances. Malaysia is a very open economy. There are traits to consider before implementing new taxes.

Unique traits of Malaysia:

a) Very open economy
b) Ringgit has been weak, which actually has helped plenty of exporters but they are being very quiet about it
c) There are very very few safety nets for Malaysians unlike many developed countries, which means we should not overly burden the lower income group
d) We have a very simple tax code, let's not complicate it as its a major plus point for FDI
e) Our stock market has the largest portion of GDP that is listed compared to all the rest of the bourses in the world, that implies that it has a very high multiplier effect for the rest of the economy. Hence efforts must be made to preserve its vibrancy.

Nobel laureate Joseph Stiglitz has come up with a few recommendations, so too from a few local and regional economists.

1) Inheritance Tax - Many might not know that the tax was once imposed in Malaysia under the Estate Duty Enactment 1941, which was repealed on Nov 1, 1991. At the time, estate duty was charged at scale rates of 0%, 5% and 10%. It was not applicable to estates with a value below RM2 million, while the highest tax rate of 10% applied to estates valued at over RM4 million.

I do agree that some form of inheritance tax is fair (just have a look at some other countries' inheritance tax. Owing to evolving times, the threshold may have to be lifted. Maybe estate duty should start for assets over RM4m (e.g. 5%) and the highest threshold of over RM10m at 10%.


We cannot be overly creative and try to go for a higher tax number because then the rich will try as they may to hide assets, and may cause a flight of capital.

2) Capital Gains Tax - Categorically no. The entrepreneurial spirit Malaysia is so proud of should never be curtailed, not even with a small capital gains tax. Being an open economy, we must allow the economy to function as freely as it can. This goes back to the (e) factor cited above. 

... in the USA if you sell a stock, you pay 15% (20% for high earners) of any profits you made over the time you held the stock. Those profits are known as capital gains, and the tax is called the capital gains tax. One exception: If you hold a stock for less than a year before you sell it, you'll have to pay your regular income tax rate on the gain - a rate that's higher than the capital gains tax. My gripe is that is you have capital gains tax, then you must also have loss deduction on taxable income ... but that only benefits people with income, what about those with no income (retirees). Please note that the local bourse has one of the highest retail market participation in the world.

3) Property tax for people/companies with large properties - Again no. Same reasons as above. This goes back to the (e) factor cited above. 

4) Carbon Tax - I do not think our energy producers are at an efficient enough level to stomach that. Plus I believe it will just be passed onto consumers.

5) Property Stamp Duty - Yes, I do think its plausible to raise that from 3% to maybe 6%, but all first home buyers should be exempt from it.

I would venture to add the following:

6) CPO Export TaxCurrently, the CPO export duty structure fluctuates on a monthly basis at between 4.5 and 8.5 per cent. If palm oil prices hover between RM2,250 and RM2,400 a tonne, the tax is 4.5 per cent. If the prices are between RM2,550 and RM2,700 a tonne, planters will be taxed 5.5 per cent.

While producers complain that these are already non-competitive vis-a-vis Indonesian producers, we all need to tighten our belts. I do not see a single listed CPO counter locally suffering losses. As our main export, the 4.5% can be hiked to 6% while the 5.5% could be hiked to 7%.

7) Tourism Tax - The RM10 per hotel room night tax should stay. It is a well known fact that our 4 and 5 stars hotels are the cheapest in whole of Asia. In addition, a per entry tax for tourists should be imposed, say between RM20-30. I do not think that would deter tourism, in particular, looking at the trend of the ringgit for the past 5 years. If people are detered by that, then I don't think those are the tourists we want to have anyway. We have around 26m tourists annually, that could contribute RM520m-780m a year. 


Rethinking About Recycling

This is a damn powerful image. The work he is doing, recycling, is so noble and forward thinking...and yet we know that he is als o probab ...