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Weekly Snippets, Snipes & Snides
March 27 - April 1, 2006

AirAsia's Got The Upper Hand - In a most unusual collaboration with MAS, AirAsia seems to have got the better deal in terms of domestic routes. Both MAS and AirAsia would benefit from leveraging off each other as connecting hubs but AirAsia should be sporting a wider grin. AirAsia will take over 96 non-trunk domestic routes and would be sharing capacity with MAS on 19 domestic routes. This will help MAS to reduce its number of aircrafts from 40 to 21. AirAsia will probably not buy the aircrafts from MAS as they have just two types of aircrafts now, and adding another type would increase maintenance cost. MAS would also (finally) be reducing manpower count from 23,000 to 16,500. AirAsia would be working with MAS to try and absorb some of the staff affected by the MAS' layoffs. The other longer term kicker is to have AirAsia owning the new LCC terminal in Subang. For AirAsia, the fundamentals are ticking along nicely but the valuation is a bit rich no matter how you cut it. It deserves to be at a premium even when compared to other LCCs but it still needs to be lower. From its current price of RM1.76, savvy investors should look to pick up AirAsia anywhere between RM1.50-1.55 (if it does come down at all). As for MAS, even though some of the recent developments with AirAsia are what I would support, the turnaround is unlikely to yield the kind of profits for the stock to be at RM3.04 (current price). Even with a 75% success rate with its turnaround plan, MAS is not likely to see earnings returns more than their cost of capital. Still, that is what you get with a stock that has less than 30% in free float.

Temasek's Limitation - As written in my blog on Temasek and GIC, both these entities are facing more obstacles in the international investing strategy. Most of the industries they are interested in are also sensitive strategic sectors, such as telcos, energy, aviation, banking and real estate. Hence certain countries are likely to limit the exposure to a single investor or foreign government linked entity. No government will look at Temasek (or any of its controlled GLCs) as being any different from GIC despite both company's protestations. The recent rebuff of DBS Group's bid to buy Korea Exchange Bank was due to the fact that DBS' largest shareholder Temasek is not a bank. In India, the government rejected a joint bid by Singapore Technologies (Temasek controlled) and Telekom Malaysia for 48% of mobile operator Idea Cellular - main reason being that Temasek already owns a stake in Bharti Tele-Ventures. Even in Malaysia, SingTel (again controlled by Temasek) had to sell down its stake in Southern Bank after breaching the 5% threshold - as it already indirectly controls another Malaysian bank in Alliance Bank. The issue will get more complicated as more important companies are added to the stable. The recent acquisition of the 11.5% stake in Standard Chartered Bank is a good example. StanChart have a lot of strategic stakes in various "sensitive countries" such as China, South Korea, Thailand and Indonesia - how will that be viewed when the regulators consider Temasek's actual holdings in their banking sector. Maybe the best way to get around that is to get big fund managers such as Fidelity or Capital Group to set up a huge sector fund, e.g. European Bank Sector Fund or Asia-Pacific Bank Sector Fund - if Temasek or GIC puts in US$5 billion into these funds, they could account for just 20%-30% of that fund, and any investments made by the fund would not be viewed as so political - that would work if Temasek's interest is solely in accumulating profit growth that is. Or am I mistaken?


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