Thursday, February 16, 2006
Bursa - Look Deeper To See The Warts
As reported in The Star Biz today (16/2/06): Bursa Malaysia Bhd reported a net profit of RM81.3mil for the year ended Dec 31, 2005, surpassing the RM60.3mil it forecast at the time of its initial public offering (IPO) in February last year. The company announced a final gross dividend of 10 sen a share following an interim gross dividend of 10 sen that was paid earlier. These are apart from the capital distribution of 83 sen a share in December. Yusli Mohamed Yusoff Chief executive officer Yusli Mohamed Yusoff pointed out that Bursa produced a total shareholder return of 88% for investors who successfully subscribed to the shares at RM3 each last year. This outstanding total shareholder return is based on the dividends paid and payable for its 2005 financial year, cash distribution and appreciation in its share price that closed at RM4.68 yesterday. Yusli said improvements in the financial results were achieved in spite of the “challenging market conditions” last year. One aspect of these conditions was a significant withdrawal of retail investors from trading or investing in stocks. Yusli said retail participation in the market formed only 29% of trading value – an eight-year low – compared with 71% by institutional investors last year. As a group, individuals accounted for only a third of total turnover versus about 50% in previous years. “We would like to draw retail investors back into the market,” he added. In doing so, Bursa will work closely with the brokerages. The research sponsored by Bursa for small listed companies, for instance, was working well. Chief operating officer Omar Merican said more products would be introduced for retail investors who formed a growth sector of customers. The country has a young population and each year, there are half a million new investors. “They should shift their savings into good investments,” he said. Yusli observed that as investors' sentiment improved, market velocity improved from 25% last year to 30% up to Feb 10. “We hope the current volume of trading can be sustained,” he said.
The financial results were good. However, an exchange's priority is more than just EPS or total return on assets. The board and management have to put into place startegies, product development, improve market monitoring & surveilence, championing the integrity of the markets and protecting minority interests. So, a proper report card will look at many facets of operations, and more so, the management's awareness of growth factors needed to elevate the Bursa to the next level. Here are some of the other important factors that should be addressed by the Bursa and how well they have been faring:
a) Number of IPOs - While that is a function of the underlying economy, it is nonetheless the role of Bursa to facilitate a steady stream of good IPOs to excite investors. It is a quandry, the Bursa should have a good pipeline of listings and at the same time do more have more checks and QCs to maintain the integrity of the exchange in terms of companies allowed to be listed (2005: C)
b) Funds Raised - One of the main functions of an exchange is to facilitate companies to raise funds. It could be in the form of an IPO, or promotion of new instruments such as REITs. Bursa should also have closer dialogue and working relationship to speed up approvals/rejections on applications for issuance of new shares/rights or other forms of fund raising. A speedy turnaround allows for a more effective exchange (2005: B)
c) Companies Regulation & Governance - An exchange in concert with the Securities Commission should be keeping regulatory standards of Malaysia on par with market's best practices. So far so good, albeit a tad excessive. Quarterly reporting already places too swift a turnaround doing just numbers collating with little value add. Over-regulation imposes a higher running cost for certain departments, and at the same time over-burdens the board and management with mundane issues when they could be focusing on more important ones. Ask any board and management if they think the current system should be lightened - probably 99% would want things to be lighter by 20%-30% (2005: B)
d) New Instruments - An exchange should not just introduce new instruments every so often unless it is thought to provide the market with more breadth, and the market participants have the ability to trade the instruments as informed investors. The introduction of REITs is a welcomed move as it will allow for investors to park their funds at annuity-like assets, a good alternative to fixed deposits, and at the same time allow property owners to cash out a portion of their holdings to be parlayed into other projects (thus boosting the underlying economy). However, the exchange have been slow to introduce structured warrants or covered warrants, and the brokers have been very slow in moving to promote these instruments. Covered warrants have been a big hit in HK and Singapore, no reason why it would not be successful in Malaysia - needs more promotion and leadership from the Bursa. Another product that suffered a similar fate is equity linked (EL) instruments, which is a lot better than straight out short selling as EL instruments allows for yields to be captured with an equity linked bet, which could be a put or a call or both. Again, leadership is lacking from the Bursa. Of course, not all products is right for the Malaysian market, e.g. I personally do not think the market has the depth for stock specific put and call options (2005: C)
e) e-Integration - Assimilation into the new world of internet. Neither here nor there, it looks as if the Bursa will see how the internet impacts on them rather than see how they can leverage on the advantages of the internet to better position the exchange. Internet based brokers are left to live and die on their own, again, a more deliberate form of leadership is needed in this area. Is internet broking the future for broking or isn't? Then, play the cards accordingly, Bursa (2005: D)
f) Market Regulation - This is regulation with respect to intervention by the Bursa on market based activity. Whatever the Bursa did or didn't do, they will be cursed. When they don't intervene, they are accussed of allowing excessive speculation and ordinary investors to be scalped. When they do intervene, they are accussed of interfering with free market foces, buyers beware adage is often quoted to support this backlash against the Bursa. My opinion is that, rules and parameters must be made clear on the outset - we already have limit ups and limit downs per session - these are in place to cool sentiment one way or another. If a stock goes limit up for two or three sessions over a two or three day period, the Bursa will usually step in by demanding that buyers pay with cash for the stock - this is a good and effective enforcement and regulation tool, and the Bursa should be more aggressive with this on stocks that have been overly exuberent (not backed by fundamentals). The recent warning given by the Bursa on TH Hin on its overactive behaviour should be a percursor to implementing the ruling on cash buying only. Things like Fountain View can be very difficult to stop, like who is to say Farm's Best is not another Fountain View?? But we have not seen any additional market warnings on stocks such as Farm's Best, Nasioncom or Iris, just check out their gains for the past 1 month!!! The Bursa needs to be more consistent - an internal rule or guideline must exist, such as if any stock is up by more than 70%-100% over a one month period (of which all the mentioned stocks would come under that qualification) would have a public warning to investors (like the one issued on TH Hin). Continuance upward movement after the warning would be followed by the cash buying only ruling (if the stock is being bought by genuine buyers on fundamentals, then paying cash should not be a problem, plus it will eliminate all those who buy on gearing so that they will not be caught badly in any correction) (2005: C)
g) The 3 Boards & Relevance - The existence of rules pertaining to the attractiveness of the Main Board, Second Board and Mesdaq must be reviewed annually. Are the paid up rules too low for Main and Second Board? Are Mesdaq listings too easy? The Second Board in particular are in dire straits and nothing much has been done to it. The market activity in Second Board stocks for the past 2 years have been pathetic, many companies which should have been delisted are still hanging around in Second Board. The rate of delisting must be speeded up to clean up the respective boards. I am not too worried about Mesdaq rules being too easy, yes, companies will fail, and fail at quite a high rate in Mesdaq, but that's the beauty and purpose of Mesdaq, these are growth potentials. We will see more companies failing in Mesdaq over the next 2 years but the Bursa should be firm to maintain the essence and integrity of having Mesdaq, to tweak the rules to a more difficult level would erode a lot of the important characteristics of a growth companies' board. As for the paid up of Second Board (RM40 million), that should stay, no point lifting it as most of the problems Second Board companies faced stem from "self-speculation & indulgence" during the heady days of 1995-1996, and has very little to do with the RM40 million paid up thing. Main Board's minimum paid up should be increased to RM100 million or RM150 million to distance itself from the other two boards (2005: C-)
h) Working With Intermediaries - Bursa should do a lot more in working with intermediaries as they would be able to add a lot of value and speed up the supply-chain to benefit the Bursa and investors. Working closer with MDC, venture capital firms, merchant bankers, trustee & custodian companies, private bankers, MITI, brokers, minority interest groups, accounting bodies, internet financial portals, other exchanges in the region and globally, research/institute of higher learning, etc... will ensure more effective turnaround of ideas and implementation of value-added practices into the market place (2005: C)
i) The Singapore Equation - ask any broker in town, who among them wants to do inter-broke business (trades passed from overseas brokers to local brokers) as the margins are almost non-existent. I believe both exchanges have been talking but let's get a move on it as it has been dragging on for way too long. Allow brokers for both countries to buy and sell shares on each other's exchanges. Immediately, you will find both broking firms on both sides getting a lot more business, doubling the number of companies one can buy/sell/market. Both exchanges will get enormous gains from the additional fees from additional trades. It will add so much more depth and market participants. The Singapore brokers would gain more than the Malaysian brokers as more Singaporeans would want to buy Malaysian stocks than vice-versa, but that is a narrow minded view to take. The benefits has multiplier effects for everyone involved. Let's integrate the trading systems of both countries already! (2005:C-)
Conclusion - So, we need to have the Bursa to look at other areas as cited above as it is not sufficient to report good financial results when the overall market is lacklustre - that only means that the Bursa got good profit margins on overcharging on various fees, but the market participants are not reporting similar good financials, why? The Bursa should plough back a certain portion of fees charged to improve the state of the markets (as cited above) that it manages. You gotta take care of the angsa that gives you the telurs, don't just gloat about how nice the telurs "you made".