Wednesday, May 31, 2006

Snippets, Snipes & Snides
29 May - 31 May 2006

Las Vegas Sands To Break Even In 5-8 Years?
The world's largest casino firm by market value, expects its Singapore casino to reach break even within five to eight years after the start of operations. The firm, which runs the Venetian in Las Vegas and a successful Macau casino, last week won the 30-year concession for the first of Singapore's two planned gambling resorts after promising to invest more than US$3.2 billion in what will be the world's most expensive casino. Bearing in mind that their first casino in Macau repaid itself in full within the first year of operations, the 5-8 year payback is more for the masses. How do you like it if you come out and say that the project will be profitable in a couple of years? (even if its true or plausible).... thta is not good PR. Its interesting that Sands almost immediately started work on the Marina Bay project - sigh, I guess they did not want anyone to start protesting the decision... its OK guys, you are in Singapore, not somewhere else in Asia, things don't flip-flop in Singapore.

Foreign Funds Sold US$5 bn
Emerging market equity funds were responsible for a whopping US$5 billion of the net outflows during the week ended May 24, or 1.74% of total assets, their worst outflow since May 2004, according to Emerging Portfolio Fund Research. The Boston-based company said on May 29 that inflation fears leading to uncertainty over US monetary policy and global liquidity conditions helped inspire the particularly sharp round of profit taking and panic selling in the second half of May, just as it did two years ago this month. Even the investor favorites in recent months, the BRIC equity funds that invest in Brazil, Russia, India and China, saw their first week of net outflows since EPFR began tracking them separately in October 2005. Europe Equity Funds, which invest in developed European equities suffered their worst outflows since May 2004 as investors pulled out US$1.7 billion. Japan Equity Funds had their second straight week of outflows, reducing year to date net inflows to just under $5 billion. US Equity Funds had only modest outflows on the week, but investors have pulled more than US$4 billion from these funds in the last two weeks.
If you noticed, some markets suffered more than others, especially India. The present pullback is not the same for everyone. Please look at the vulnerability for each market in my blog on 8 May "Are We Bubbling Yet?"

Sell In May And Go Away
Many hedge funds may be wishing that they followed that advice and closed out positions given what's been a headache inducing, crappy month for many of them. For hedge funds, May has been a miserable month that may mark the end of earning easy money and the beginning of tough trading conditions. Nothing has gone smoothly in the US$1.2 trillion hedge fund industry since a sell-off in precious metals prices spilled on emerging markets and soon affected developed markets. In the absence of a real catalyst, analysts blame fears of inflation and rising rates for the sudden drop. Many of the world's roughly 8,000 funds lost between 3 and 6 percent in the first three weeks of May with some having seen swings of 10 percent or more. Now hedge fund managers, who earned strong returns by simply being long on equities, will have to make savvier stock picks, and any bets on commodities may have to be a little bit quicker with more moves in and out. That may be a shock for the legions of managers who earned more money in the first four months of 2006 than all of 2005 simply by jumping on trends that were too good to pass up. Losses weren't confined to metals however and that's what is making the month so treacherous. Global macro funds that bet on currencies, commodities and interest rates are said to have given up roughly 25 percent. Funds specializing in emerging markets and even mid-cap stocks were said to have given back as much as 50 percent.

Tuesday, May 30, 2006

Bursa, Mesdaq & Bonus Issues
Good Move By Bursa

Bursa Malaysia Securities Bhd has announced that public listed companies whose accumulated losses exceed their reserves are not allowed to undertake bonus issues. In a statement announcing amendments to its listing requirements and Mesdaq market listing requirements in relation to bonus issues, Bursa Securities said PLCs were disallowed from undertaking bonus issues “if their accumulated losses exceed the reserves to be capitalised for the bonus issue''. It said the amendments were made as part of Bursa Securities' continuous efforts to enhance investor protection under its regulatory framework and listing requirements. The amendments will take effect immediately for all applications for listing of securities arising from bonus issues submitted to Bursa Securities on or after yesterday. Bursa Securities is a wholly-owned subsidiary of Bursa Malaysia Bhd.

We have had a spate of proposals, mainly from Mesdaq counters, asking for bonus issues. The ruling with regards to accumulated losses / reserves is very astute. However, that is just one side of the equation. Many of the Mesdaq counters are basically shares with a par value of 10 sen or 20 sen, when compared to the Main Board or Second Board shares where their par value is usually RM1.00 or RM0.50 at least.

It is so obvious, the aim of management of those companies applying for bonus issues is to lower the average share price and nothing more. It makes it easier for them to farm shares out to syndicates for speculative play. For those not clued in:

a) a share that trades at RM0.25 will become RM0.125 with a 1 for 1 bonus, the share capital will double but in the eyes of most retail players its a doubling of their shares but they do not see it in terms of a doubling of share capital (I know its illogical)

b) management knows that players are more likely to hold onto a share if it trades at just RM0.10 or RM0.20 as it is close to zero and won't have much to fall (again the logic is financially naive and ill-informed but that's the yardstick for many unsophisticated retail players). Hence management thinks that there will be more "natural support" should the bottom fall out from the speculative plays

c) penny stocks image should be discarded wherever possible - most penny stocks are speculative counters with no real tangible assets or businesses, in most markets' perception. They do get support buyers as they are numerically cheap in absolute terms but to keep allowing these companies to do bonus issues (especially Mesdaq counters) is to allow for these shares to be kept near the 10 sen or 20 sen level. Don't need to have that, I am sure Bursa is smarter than that and the management of Mesdaq counters should really try and go and improve their real businesses than thinking of shallow ways to manipulate share prices

Bearing that in mind, Bursa needs to cover that loophole. A share that trades below RM1.00 should never be allowed to have bonus issues even though their reserves are adequate. If your shares are below RM1.00, you must have a pretty substantial number of shares floating out there already. Bearing in mind also that bonus issues are ZERO SUM GAMES, it does not add value at all. The basic premise is to reward shareholders and make shares more affordable, if you are below RM1.00, your shares are already very affordable. It only makes sense if a share has risen a few times over and management wants to make it "affordable", then it might be prudent to do a bonus issue.

The other thing which negates a bonus issue is that shares are now tradeable at 100 share lots and not 1,000 shares like before. The 100 share lot trading rule basically eliminates the need for bonus issues. Bursa has to be more vigilant as we do not want to see a large majority of shares trading near 10 sen or 20 sen in the forseeable future - then KLSE will be known really as a penny stock market. By the way, a good move by the Bursa - I would strongly recommend that there'd be an additional ruling in that shares below RM1.00 be prohibited from doing bonus issues.
Lion Forest Industries
Attractive Trading Patterns

Lion Forest Industries, which was featured in my blog on Mega M&A Deals In Malaysia on 22 May, has been trading attractively for the past 3 days. Its stock code on KLSE is 8486. While every single market in Asia dwindled and dawdled on Monday and today, the buying pattern has been very solid in Lion FIB for the past 3 days (you can check out the buying which looks like strategic accumulation, but not very subtle, which leads me to believe the buying is largely genuine rather than syndicate based). As mentioned, the NTA is RM8.21, hence any deal to sell should be struck around RM6.50-RM7.00 at the bare minimum.

LFI through its 97.78% owned subsidiary, Sabah Forest Industries Sdn Bhd is Malaysia's largest producer of printing and writing papers. SFI's main products are paper, pulp, sawn timber, plywood and commercial logs. The subsidiary also produces other products like building materials, lubricants, spark plugs, industrial equipment and automotive components. The respective annual production capacities of SFI for its various products are 150,000 MT for paper, 120,000 MT for pulp, 100,000 m3 for sawn timber, 120,000m3 for plywood and 500,000m3 for commercial logs. In addition, approximately 30% of its wood-based products are exported to countries in the Middle East and the Far East. LFI has a NTA of RM8.21 a share, and even if it is not offered up to its NTA value, market expectations are that its assets could easily fetch around RM6.50-RM7.00 a share. That may be below NTA but it's still a rich price relative to its current share price of below RM4.00.

Monday, May 29, 2006

Top Hedge Funds Earners
Mind Boggling Numbers

You need to make US$130 million in 2005 to make the top 25 earners in hedge fund managers ranking by Institutional Investor. When it comes to pure wealth creation — arguably the biggest motivation for the majority of hedge fund managers — times have never been better. Thanks to the power of hedge fund math, driven by management fees and performance incentives, more managers are making more money today than ever before. One year ago Edward Lampert of ESL Investments made headlines when he became the first manager to earn US$1 billion in a year. This time there are two who broke the billion-dollar barrier: James Simons of Renaissance Technologies Corp. and BP Capital Management’s T. Boone Pickens. In 2005 math whiz Simons, we calculate, earned a staggering US$1.5 billion, edging out oil tycoon Pickens, who took home an equally astounding US$1.4 billion from two hedge funds he quietly launched ten years ago. Although Lampert saw his earnings cut by more than half in 2005, he still made a cool US$425 million, good enough for sixth place. Rounding out the top five are three longtime managers: Soros Fund Management’s George Soros, US$840 million; SAC Capital Advisors’ Steven Cohen, US$550 million; and Tudor Investment Corp.’s Paul Tudor Jones II, US$500 million.

This swelling of personal gains has made many hedge fund managers enormously wealthy. At least 13 of the managers out of 25 are billionaires — Simons; Pickens; Soros; Cohen; Jones; Lampert; Shaw; Bruce Kovner of Caxton Associates and David Tepper of Appaloosa Management (tied at No. 7); Israel Englander of Millennium Partners (No. 11); Kenneth Griffin of Citadel Investment Group (No. 13); James Pallotta of Tudor Investment Corp. (tied for No. 14), and Louis Bacon of Moore Capital Management (No. 19).

Investors have long insisted that hedge fund managers have a substantial percentage of their net worth tied up in their own funds to ensure that the interests of all parties are aligned. Now, as hedge fund assets have grown, and managers’ assets in their own funds have grown with them, managers no longer need to put up high returns to make a lot of money.

Six managers this year make the top 25 despite generating single-digit returns: Caxton’s Kovner, Citadel’s Griffin, ESL’s Lampert, Tudor’s Pallotta, Raymond Dalio of Bridgewater Associates and Och-Ziff Capital Management Group’s Daniel Och. Clearly, there is a disconnect between pay and performance, it appears that once you have the size, everything appears larger and stretched. People are getting paid extraordinary amounts of money for performance that is mundane and very average. As hedge funds have grown, management fees — which mostly range between 1 percent and 5 percent, depending on the manager — have become an increasingly important piece of the economic equation. Ten years ago a US$10 billion hedge fund was rare; today there are 20 managers who run at least that much in assets. You can make T-bill returns and be just fine because you have a 2 percent management fee. Of course, some do deserve the pay scale due to the returns and terms of the agreement - e.g. Gendell made US$215 million in 2005 thanks to a 38 percent net return, which followed 100 percent-plus returns in 2003 and 2004.

The billions and billions of dollars being accumulated by hedge fund managers is a concern for investors. The wealth creates the potential for major distractions for all managers who are successful - wealth has the potential to have a dulling influence on a manager’s drive, you start buying your own Gulfstream, buy a small island off Tahiti, ... indulge in art, wine, women... maybe even fund a movie of your choice.... or give it all up to spend a couple of years in Nepal.

In every profession, whether it is a football coach or a surgeon, the best person makes the most money. The same is true with investment managers. The great ones are hedge fund managers. Why is that Tom Cruise gets US$20 million per movie and nobody says anything, or the US$6 million per movie by Nicole Kidman.... or the US$60 million dollar man Schumacher who doesn't know how to turn, park or drive.

1 - James Simons - Renaissance Technologies Corp. US$1.5 billion
Simons’ legend grows apace with his portfolio and his philanthropy. Last year the veteran Long Island hedge fund manager’s quant-driven Medallion hedge fund returned 29.5 percent net. That was all the more remarkable given the US$5.3 billion fund’s 5 percent management fee and 44 percent performance fee. (The gross return was nearly 60 percent.) Even so, Medallion fell short of its roughly 34 percent annualized net return since its 1988 inception. The odds are pretty good that Simons will figure out how to make up that shortfall. Many hedge funds are run by teams of pointy-headed rocket scientists, but Renaissance Technologies Corp. might be able to run its own space program. The 68-year-old Simons, who has a Ph.D. in mathematics from the University of California at Berkeley and has taught at Massachusetts Institute of Technology and Harvard University, has packed his East Setauket, New York, enterprise with math and computer whizzes. These quantitative specialists use arcane programs to trade the globe’s most liquid securities rapidly and frequently, using lots of leverage. Nonetheless, no program can entirely capture the markets’ vicissitudes. The firm’s new US$3.4 billion Renaissance Institutional Equity Fund, which Simons says in an investor document has the capacity to handle as much as US$100 billion in assets, got off to a slow start last year, rising just 5 percent from its August 1 inception through year-end. RIEF’s US$20 million minimum investment gears it to institutions; unlike the shorter-horizon Medallion, the new fund takes mostly long positions and holds them for relatively protracted periods. RIEF’s gain in assets came as Simons moved Medallion ever closer to being a closed portfolio for himself, his friends and his employees. Always generous, Simons is devoting a large amount of time and money to philanthropies near and dear to him. He has donated US$38 million to research the cause of autism, with which his teenage daughter was diagnosed when she was young. He and his wife, Marilyn, are said to be prepared to spend a further US$100 million on promising autism studies. Early this year Simons, who once chaired the math department at the State University of New York at Stony Brook, gave US$13 million to nearby Brookhaven National Laboratory so that it could keep running its Relativistic Heavy Ion Collider, the only device in the world that can mimic the “Big Bang” in the lab. Simons, along with a large number of other managers on our list of top money earners, is supporting New York State Attorney General Eliot Spitzer’s bid to become governor of New York.

5 - Paul Tudor Jones II - Tudor Investment Corp. US$500 Million
The Robin Hood Foundation’s annual benefit often brings out the quirkier sides of Wall Streeters along with their checkbooks. For last year’s gala Paul Tudor Jones II, a co-founder of the charity, dressed as Star Wars’ Darth Vader. “This is what will happen to you,” Jones, who is 51, warned traders under 40, according to those who were present. Going over to the dark side hasn’t hurt his performance. Since opening Tudor Investment Corp. in 1980, Jones has never had a down year. In 2005 the firm’s US$5.3 billion flagship Tudor BVI Global Fund climbed 14.7 percent net of its 4 percent management fee and 23 percent performance fee, marking its fifth year in a row of double-digit net returns. Most of the gains came from global equities, including macro bets in Japan, energy and emerging markets. (James Pallotta, No. 14, oversees Tudor’s Raptor funds and himself earned US$200 million.) Jones, whose Greenwich, Connecticut–based firm manages US$12.7 billion in all, is a staunch supporter of wildlife conservation. He owns Grumeti Reserves in Tanzania’s Western Serengeti and was recently lauded by the East African country’s Parliament for not permitting hunting in his reserve. He has given money to Democrats in key races in 2006, backing New York State Attorney General Eliot Spitzer’s run for the governorship of New York.

6 - Edward Lampert - ESL Investments US$425 Million
Time magazine, in its May 6 issue featuring “the lives and ideas of the world’s most influential people,” poses this question about one of its 100 profile subjects: Is Eddie Lampert the best investor on Wall Street? Lampert’s fund was up just 9 percent in 2005, chiefly because of a sizable cash position. As a result, he wound up taking home about US$600 million less than the more than US$1 billion he pocketed in 2004, when he was No. 1 on our list. All the same, Lampert’s investors have little to bellyache about. Even with last year’s listless showing, ESL Investments has compounded at about 28 percent a year, on average, since the 43-year-old launched it in 1988 at 26, fresh out of Goldman, Sachs & Co.’s risk-arbitrage group. ESL’s prospects now depend upon the health of mass-market retailer Sears Holdings Corp. Since Lampert took a recapitalized Kmart public in the spring of 2003, then merged it with Sears, Roebuck & Co. in mid-2005, his investment has soared tenfold. The company accounts for two thirds of Greenwich, Connecticut–based ESL’s US$11 billion equity portfolio. Sears’ shares finished last year up 16.8 percent. ESL’s other two big positions: a US$1.7 billion stake in car retailer AutoNation, whose shares rose 13 percent in 2005, and a US$2 billion investment in parts supplier AutoZone, which was flat. One question on the minds of Sears shareholders is what Lampert, who is chairman, plans to do with the US$4.4 billion sitting in its till. At Sears’ annual meeting in April, he hinted at additional acquisitions. Meanwhile, Lampert is battling New York–based hedge fund Pershing Square Capital Management for control of Sears’ Canadian operation (Sears Holdings owns a majority stake).

14 - Timothy Barakett - Atticus Capital US$200 million
For an activist investor, Timothy Barakett kept a low profile after launching Atticus Capital in 1995, at age 26. That changed last year when Atticus and the Children’s Investment Fund U.K., a London hedge fund, teamed up to block Deutsche Bšrse’s US$2.5 billion bid for the London Stock Exchange. They proposed instead that the German market issue a special dividend or buy back shares. Six months later Deutsche Bšrse’s CEO, Werner Seifert, quit, and the LSE has become the object of ardent courtship by both the Nasdaq Stock Market and the New York Stock Exchange. Then the battle-hardened Atticus turned on another exchange. Earlier this year the New York firm and accounts it advises amassed a 9.1 percent stake in Euronext and urged that the Paris-based electronic exchange combine with Deutsche Bšrse. In February, Barakett fired off a letter to Arcelor CEO Guy DollŽ expressing his extreme disappointment that the Luxembourg-based steelmaker, in which Atticus has a 1.3 percent stake, wasn’t paying more attention to a tender offer from Mittal Steel Co., also based in Luxembourg. Barakett, who holds a BA in economics from Harvard University and an MBA from the Harvard Business School, does not make his rather handsome living just from badgering CEOs. His Atticus Global fund was up a net 22 percent in 2005, and his Atticus European fund — managed by David Slager, who is tied for No. 20 — surged 62 percent. On a capital-weighted basis, Atticus’s funds were up 45 percent, on average. Little surprise, then, that the firm’s assets more than doubled in 2005, to US$9.2 billion. That must please Barakett, but it is also gratifying to Atticus vice chairman Nathaniel Rothschild, son of Lord Jacob Rothschild. The younger Rothschild earned about US$80 million last year.

20 - Daniel Loeb - Third Point US$150 Million
Daniel Loeb puts the “pistol” in epistolary. The Third Point founder’s letters to CEOs can be blunt, as in a blunt instrument. In one guided missive in February 2005, he wrote Irik Sevin, then CEO of Stamford, Connecticut– based heating-oil distributor Star Gas Partners: “Sadly, your ineptitude is not limited to your failure to communicate with bond and unit holders. A review of your record reveals years of value destruction and strategic blunders which have led us to dub you one of the most dangerous and incompetent executives in America.” Three weeks later Sevin resigned. But for all his bluster, the 44-year-old Loeb dedicates less than 10 percent of his New York firm’s US$3.8 billion in assets to shareholder-activism strategies. Instead, the 1984 Columbia University economics grad is a traditional value and event-driven investor. Last year Loeb cashed in on surging energy prices. He racked up big gains on two Houston-based energy companies — 140 percent on McDermott International and roughly 50 percent on Plains Exploration & Production Co. His return for the year: 18 percent net. In a more serendipitous investment coup, Loeb made a 500 percent profit in 2005 by selling a 1984 Martin Kippenberger painting that he had held for three years to advertising figure Charles Saatchi for $1.5 million. The hedge fund manager owns more than 30 works by the German artist, whose credo was to shock and disturb people to expand their perception, not unlike Loeb.

Top Ten:
1. James Simons $1.5 billion Renaissance Technologies
2. Boone Pickens $1.4 billion BP Capital Management
3. George Soros $840 million Soros Fund Management
4. Steven Cohen $550 million SAC Capital Advisors
5. Paul Tudor Jones $500 million Tudor Investment
6. Edward Lampert $425 million ESL Investment
7. Bruce Kovner $400 million Caxton Associates

8. David Tepper $400 million Appaloosa Management
9. David Shaw $340 million D.E. Shaw
10. Stephen Mandel $275 million Lone Pine Capital
Asian Currencies On Tenterhooks

The dollar's slide against Asian currencies could provide a catalyst for greater regional economic cooperation in an effort to avoid another financial crisis. So far this year the US unit has fallen by between five and eight percent against the Thai baht, Malaysian ringgit, South Korean won and Indonesian rupiah amid worries about global economic imbalances and upward pressure on the Chinese yuan. This is putting pressure on Asian economies by making their exports less competitive and cutting into companies' repatriated profits and leaders in the region are worried that the dollar will continue to decline.

Somehow, the smaller Asian nations' central banks are willing to let their currency appreciate vis-a-vis the dollar because they see real competition coming more from the Chinese yuan rather than pricing in US dollars. In the global export paradigm, the blackboard is denominated in yuan and not US dollars. Current and future competition among global exporters will have to deal in yuan terms - if yuan is allowed to appreciate, it is ok to appreciate in tandem. Having said that, the quantum of the increase have been greater for the smaller Asian countries' currencies when compared to the yuan.

The appreciation in Asian currencies is a controlled thing, as long as everyone moves up together, their exporting ability is not diminished badly. Asian central banks have to allow the appreciation to cope with imported inflationary pressures also. What we don't want is a period of volatility, a period of gradual appreciation is not volatility - just a measure to get up to the new competitive landscape. All economies are basically adjusting to help the US economy compete better and to stave off a derailment of the American economy. The overall economic strategy needs to price the US dollar cheaper (as it has been printing too much money), allow for better wealth redistribution / creation in developing countries owing to the enormous deficit registered by the US economy, and doing all that without very high inflation or interest rates. Its a tricky and delicate balancing act.

Asia does not want to see another financial crisis like 1997 which was triggered by currency speculation and volatility. If your economy is big enough like China and Japan, your currency is safer. However the other Asian nations' are at the mercy of market forces especially during periods of excessive speculation. Hence the idea of an Asian Currency Unit (ACU). To be fair, an ACU is likely to be successful as a viable bond market for companies and government to tap the capital markets, and have exposure in a currency which is stable. To think that the ACU would ever become like the Euro in the EU - forget about it, its not going to happen in our lifetime.

To try and develop a deep Asian bond market in ACU will reduce volatility of the Asian currencies as much as possible and allow for more cooperation and reliance on one another. There will be a lot more cooperation and joint manouveres with respect to sharing monetary and fiscal policies in Asia. A meeting was held of the ASEAN members long with China, Japan and South Korea agreed in Hyderabad, India, earlier this month to study the possibility of a single Asian currency similar to the euro. The Asian Development Bank (ADB) has been spearheading a proposal for the creation of an Asian currency unit or ACU, which is an index of currencies, as part of a bid to bolster monetary stability and spur regional economic growth. The ADB is also supporting the Asian Bond Market Initiative to develop an efficient bond market for the region. Finance ministers of ASEAN Plus Three -- which includes Japan, China and South Korea -- have already made progress in boosting financial and monetary policy coordination. But substantive coordination could be prompted by a sudden US dollar crunch which is possible. This may take place (because of speculative) capital inflows into China, and when China suddenly has to intervene in a massive way maybe that could be an opportune time for the finance ministers to really discuss this issue. Hopefully the region does not have to wait for another crisis. Asian nations still have painful memories of the 1997 Asian Financial Crisis which began with speculative attacks on the Thai baht and spread rapidly to other regional economies, causing sharp falls in stock markets and currencies. Although Japan and China are considered less vulnerable given the size of their economies and foreign exchange reserves, they are also involved in moves towards closer economic ties. Strained relations between Japan and both China and South Korea over war-time history have raised concerns that efforts to form an "East Asian Community" are losing momentum.

Probably now the bigger Asian nations are arguing over how the currency index should be constructed as everybody wants a higher profile. When it comes to egos and pride, I fear for Asia. Its time to discard that and work for the common good of the region - failure to cooperate will result in the entire region being vulnerable and lose out in potential growth synergies.

Saturday, May 27, 2006

Sand In My Face
Casino IR Goes To Las Vegas Sands

Well, it was supposed to be between MGM and Harrah, since both have local partners in Capital Land and Keppel respectively. It cannot be that Sands have a highly superior proposal, can it?!! I mean, MGM and Harrah also busted their guts, and all things being equal, surely the ones with local partners should get it. Assuming the submissions are almost equal in attractiveness, the fact that Sands got it may mean:

a) the committee wants no local players to be involved
b) that automatically means Genting will be the frontrunner for Sentosa

I still think giving it to Sands is a mistake because Sands investments in Macau is a few times bigger than the Marina Bay IR - however you want to cut it, priority and preferential treatment will go to Macau, be it entertainment, high rollers, incentives, etc.... Sands have more to lose if Macau fails than the Singapore project. Giving it to just a foreign company with no local participation will start to grate on Singaporean nerves should Sands start reporting net profits of S$500 million or more a year. A gaming outfit always have the odds in favour of the house, Singaporeans will start getting pissed off if Sands and Genting IRs start to rake in hundreds of million of Sing dollars a year, mostly at the expense of Singaporeans with little going back to charity. This is so unlike Singapore horse racing or Singapore Pools where bettors know their losses are going to good projects locally. Bad vibes.

The Nusajaya Disney project if announced may actually thwart Genting's chances - surely they do not want to see two big Malaysian companies have a huge slice of the action in southern Johor and Singapore. Hmmm... for those who fear that the attrition on Sentosa IR will be greater if Disney does go to Nusajaya - on further deliberation, having Disney in Nusajaya will actually result in a multiplier effect for both Malaysia and Singapore tourism, feeding off each other.
Brazil vs South Africa

It is just before the Bafana Bafana v Brazil match. Ronaldinho goes into the Brazilian changing room to find all his teammates looking a bit glum.
“What’s up?” he asks.
“Well, we’re having trouble getting motivated for this game. We know it’s important but it’s only S.A. They’re sh*t and we can’t be bothered.”
Ronaldinho looks at them and says, “Well, I reckon I can beat them by myself—you lads go down to a pub in Soweto.”
So Ronaldinho goes out to play Bafana Bafana by himself and the rest of the Brazilian team go off for a few jars. After a few pints they wonder how the game is going, so they get the landlord to put the teletext on. A big cheer goes up as the screen reads “Brazil 1 – Bafana Bafana 0 (Ronaldinho 10 minutes)”. He is beating Bafana Bafana all by himself! Anyway, a few pints later and the game is forgotten until someone remembers, “It must be full time now, let’s see how he got on.” They put the teletext on.

“Result from the Stadium ‘Brazil 1 (Ronaldinho 10 minutes) – Bafana Bafana 1 ( Nomvete 89 minutes).”

They can’t believe it; he has single-handedly got a draw against Bafana Bafana!! They rush back to the Ellis Park Stadium to congratulate Ronaldinho. They find him in the dressing room, still in his gear, sitting with his head in his hands. He refuses to look at them.

“I’ve let you down, I’ve let you down.” “Don’t be daft, you got a draw against Bafana Bafana, all by yourself. And they only scored at the very, very end!”

“No, no, I have, I’ve let you down…I got sent off after 12 minutes.”

Friday, May 26, 2006

Snippets, Snides & Snipes
22 - 26 May 2006

Oops, UEM World & UEM Builder
Following the news on Penang Bridge project (and maybe the expose on Disneyland Nusajaya), both shares decided to surge over the last 20 minutes yesterday. Before anyone here thinks that I would have the clout or resources to move shares up or down, let me assure you that I only blog on what I know, what I hear or interesting information that fall upon my ears. I will only blog if what I write somehow adds value or has some commentary / analysis. Investors who act on information in my blog do so on their own initiative - you will not give me a share of your gains, and neither should you bitch to me about your losses.

More Talk On HK's Peg
Chief Executive Donald Tsang have reiterated that the yuan will need to be fully convertible before HK considers replacing its currency peg to the US dollar. The Hong Kong dollar was trading at 7.7562 versus its US counterpart Thursday afternoon. Hong Kong has fixed its currency to the US dollar since 1983 and allows it to trade in a band between 7.75 and 7.85. Chances are very very low that HK would repeg to the yuan, but chances are high that HK will repeg to a basket of currencies (including the yuan). Its not a matter of IF HK repegs, its a matter of WHEN HK repegs. I hope there are enough smart people in HKMA to know that when they repeg, DON'T LEAVE THE CURRENCY PEGGED TO THE USD, its no longer relevant. By being pegged to the dollar, their monetary policies basically is governed by the US to a large extent. To compete and navigate in a global market place of today, you need flexibility to adjust and monitor your currency with a view to competition, industry changes and domestic demand. To be continually pegged to the US dollar is to be at the mercy of the US monetary policies. The financial implosion in Asia in 1997-2003 should be sufficient evidence of the need to be more flexible. The basket of currencies should naturally include HK's major trading partners - a hypothetical ratio could be: 25% US dollar, 20% yuan, 10% Japanese yen, 25% Euro, 20% Asean currencies. That is a more stable platform for HK to work on.

The Smartest Guys In The Room Are Going To Prison
To me, Ken Lay and Jeff Skilling deserve to go to jail, not so much for the the wrong things they did, but for the audacity in doing it. The blatant manipulation is naively head strong and ill conceived. To be a brilliant "manipulator", the tracks and things they concocted were a bit dumb. If you are going to be a thief, try to be brilliant at it, if not, you deserve the slammer for being mediocre .... but ballsy I must add.

Vonage - Should Never Have Been Listed In The First Place
Vonage, an ISP in the US fell 10% from its IPO price on first day of trading, and has gradually edged lower to be off 25% since. The investment bankers have a lot to answer for in bringing the deal to the public. Supposed to sell 25% of the company - Deutsche Bank, UBS and Citigroup only managed to sell 23%. The company even acknowledged that it may never make any money in the highly competitive VOIP... ever. The company spent huge sums advertising in the Super Bowl and used bucket shop tactics to win customers.The company burned through US$190 million in cash from operations in 2005, and another US$150 million in investing activity in the same year. What’s more worrisome is that the company is unable to sustain pricing control in the market, as Skype, the cable companies and the telcos all roll out competively priced products. And consumers are notoriously fickle in having zero loyalty to telcom service providers, switching long distance carriers and local providers as soon as they get a good deal. The growing commoditisation of phone services basically puts a lid on any spin-doctors for the stock. Its not the institutional investor who got burnt this time, this deal was largely placed out to retail with many institutions already shying away weeks leading up to the doomed IPO. The US$531 million raised was the worst US market debut in more than 2 years. The company pushed to get sold off after Sype was sold to eBay for US$4.1 billion but there were no takers for their asking price.

Thursday, May 25, 2006

Malaysia's Most Caring Employer Award
Cannot Be A Plantation Firm

On 13/5/2006, the National Level Labour Day Celebration was held , organized by the Human Resource Ministry. In this event, Golden Hope Plantations was awarded the MOST CARING EMPLOYER AWARD! I must say, they have a very effective corporate communications department, one that dishes out tons of information via their annual reports and website. Check out their website at and you will find a darn good website for financials and other news and activities that make them a better corporate citizen. You can do one thousand and one things but if the bulk of your employees are not treated well - you do not deserve the "most caring employer" award.

It matters little if you have a zero burning rate policy (some plantations, especially in Indonesia will burn before replanting thus causing massive pollution) .... it matters little if you have good transparency in revealing financials and in corporate governance ... those are not traits of a "great and caring employer". Those are traits of a company with good corporate governance and a high level of social reponsibility.

Let's look at the employees of Golden Hope (or any plantation firms for that matter). What kind of government would give such an award to a company that has breed poverty among plantation workers over 4 generations! The guaranteed monthly wage is RM325- RM350 per month (US$90-US$98), and even if you were to double that with other incentives and performance related pay, it is still way below the poverty line. Many of our plantation companies make hundreds of million a year - all at the expense of these toiling workers. Sure, they get accomodation, but have you look at the quality of accomodation provided. I thought a "caring employer" would look into the total welfare of an employee, and not be part of a plantation co-op that pay workers pittance compared to company's earnings. There are many ongoing struggles by plantation workers under this company such as Semenyih & Bangi Estate in Ulu Langat, Sogamana and Kinta Kelas estates in Perak and Victoria Estate in Kedah - who are fighting for alternative housing and fair compensation due to eviction. Are we still back in the colonial days, ripping off the locals? Shouldn't there be a minimum wage, like McDonald's, if one is so caring?

The following things / issues are still lacking for many plantation workers: 24-hour water and electricity supply; proper medical care and education for their kids; decent living conditions; a fair living monthly wage; an annual increase; an annual bonus and retirement benefits. Plantation firms will argue that they needed to compete, .... well... so does everybody, but you don't see oil and gas workers getting RM500 per month, do you!!!? Plantation firms are not making tiny margins mind you. For the financial years of 2004 to the projected 2008, Golden Hope's EBITDA margin ranges between 14%-18%, and that's basically the same story for all plantation firms.

Companies have evolved, but these practices at most plantation firms have got to go. How we treat one another, is a reflection on our humanity, personal integrity, fairness and moral values. To be able to blend in profitability, capitalism, social responsibility with an ethos of compassion and generosity of spirit is what every decent company should vie for. We cannot sit idly by and complain that "that's the way things have been done in the past" or "we need to be competitive" as excuses to treat our fellow man poorly.

Certainly none of our plantation firms deserve to be even short-listed for Most Caring Employer awards. People in responsible positions who can do something about this pseudo-slavery situation should take note.

Wednesday, May 24, 2006

Disneyland In Johor?
Trumping Singapore (Again)

Prime Minister Badawi is in Japan at the moment. Word on the street has it that he will be meeting with the Japanese partner for Tokyo Disneyland, with the aim of bringing Disneyland to Nusajaya, near the Second Link in southern Johor. Apparently, officials from UEM Land, a 100% subsidiary of UEM World, are tagging along with Badawi in Tokyo for the pitch. The PM's contingent also includes Azman Mokhtar, the MD of Khazanah, which is also UEM World's largest shareholder. Badawi is said to have already met top Disney officials early this month when he was attending the World Congress for IT 2006 in the US. People familiar with the Disneyland-Nusajaya overture believe that Abdullah's team is in Tokyo to make a serious pitch, with sweeteners that may include offering Disney an internationally competitive package of incentives. Should the pitch be successful, any announcement of Disney making an entry into Malaysia would improve dramatically the values of land near Nusajaya. UEM World is the biggest landowner in Nusajaya. This rumour has a high level of reliability and a decent chance of success. The ramifications are aplenty should it be successful, let's have a look at a few interesting points:

1) Style, Culture, Execution - Having met Disney officials earlier, the Malaysian team is now meeting the Japanese operator, Oriental Land. Chances are Disney will be positive for the project going ahead provided Malaysia rope in the Japanese operator as a partner. Oriental Land has an excellent track record with Disney - first park in Urayasu, Chiba in 1983, and the DisneySea a later addition, both still highly successful. By engaging Oriental Land, Disney would have a higher chance of successful execution should nthe project go to Nusajaya. It would also ensure for proper follow-through and a strict adherence to management style and operational culture. These are the bigger concerns, not just the financial viability alone.

2) Slap In The Face For Singapore - The two Integrated Resorts / Casinos will cost the bidding companies a bomb in Singapore. None of the bidders for the two IRs manage to rope in Disney as partner for the IR. The likely winner for Marina Bay IR is likely to be between Harrah's (my favoured team) or MGM. Genting should get the Sentosa IR with Universal Studios as its partner. Should Disneyland be erected at Nusajaya, it will have a free ride on the incoming tourists to the two IRs. The attrition will be greater for the Sentosa project as you are basically comparing Disney with Universal Studios theme parks - no fight, plus the Disney one will be able to price their products / services a lot cheaper in Nusajaya. The main reason why none of the IR bidders could rope in Disney is that it does not want to be associated with gambling, which will hurt Disney's image - Nusajaya hence becomes a very viable alternative. So, inadvertently and in all probability, Singapore has helped Malaysia get Disneyland.

3) Critical Mass & Feeder Traffic - Chances for success is high for Nusajaya as the critical mass study would reveal the same pitch for the Marina Bay and Sentosa IR projects. There are two potential international landing strips in Johor which will further boost AirAsia / MAS visibility and feeder services. Already AirAsia is very successful ferrying regional travelers at very attractive rates. Imagine the ability to offer routes from Phuket, Bangkok, Haadyai, East Malaysia, HK, Bali, Jakarta to KL/JB for less than RM200 return (US$55) - which is their current pricing structure or thereabouts. Bodes well for AirAsia and could sway Disney's decision. Malaysia's population on its own is insufficient to justify a Disneyland but with AirAsia/MAS, that could seal the deal - wonder if Tony Fernandes is also part of the contingent with Badawi? (He should be, you know).

4) Size, Cost & Cannabalising - The land in Nusajaya is huge. Big enough to fit in 5 or 6 Disneylands with rooms for resorts and hotels. Disney and Oriental Land hold the aces, Badawi and UEM World will probably agree to most requests - free land, waiver of 30% bumiputra holdings, tax incentives .... but its worth it. As for Disney, they are running out of room to grow after HK Disney. They may do one in Shanghai and a Nusajaya Disney would be far enough away from HK, Tokyo and Shanghai to capture the regional crowd without cannabalising the crowds at other Disneys. As for cost, well, the land could come free for all UEM World could care. Compare that to the hundreds of millions each successful bidder will have to pay for the IRs in Singapore - it would be very silly for Disney NOT to do the project.

Credibility & Success Factor: 80%
(Yes, UEM World will benefit, but please don't go overboard until the project is secured and figures have been released).

Tuesday, May 23, 2006



The team is young, many would not recognise half the team. Older players are left out including Seedorf, Maakay and Davids. One of the reason France did poorly in 2002 was because they were old, famous, rich and the defending champs - did that, done that, money in the bank, nothing left to prove. You need hunger and youth in the squad as they will fight and have a lot to prove. It will be the ticket to doubling or tripling your value as a player.There is a sufficient mix of experience in Nistelrooy, Van Der Sar, Heitinga, Van Bronckhorst, Van Bommel and Robben. Whether Holland does well or not will depend on how well the newbies perform - especially Vennegoor, Van Der Vaart, Sneijder and Kuyt.

The trump card for Holland this time around is that there is a lot less internal bickering, and the team does play for more than just themselves and their country, they also play for their coach. Marco Van Basten, easily the top 3 players ... ever ... from Holland, and probably a teen idol to many of the current team members, has been able to ignite free-flowing attacking football with sensible defending. Its a remarkable thing to have a team that will play for the coach, and that might just be the edge Holland needs to do well this time around.
Events Searching For Reasons
The Poor Man's Analyst

The markets' slide yesterday in the afternoon confounded everyone. What was so bad that caused some panic selling? Nobody could tell really. When things happen that is out of the ordinary, we go searching for reasons... sometimes there isn't any. Sometimes there is but it is something we already knew. If there were no new information, then the fall yesterday is not justifiable, right? When a girl gets dumped by a guy, we can safely say she might cry and be bothered for a couple of weeks, but she might also go and kill herself or go to a singles bar - many things happen for the same reasons... when there were no new information that caused her to do so many things. We can only predict the first few things but we cannot estimate the length, gravity of the reverberations correctly.

The following were the cited reasons, and I have market their credibility out of ten points (the higher, the more credible the reason for yesterday's demise):

1) Hedge funds selling stocks to cover their magnified losses in commodities exposure / cut-loss operations (7/10)
2) Continued declines in commodity prices from last week's bust, further deflated wealth (8/10)
3) US funds repatriating their capital due to a stronger US dollar, triggering a region-wide sell-off (2/10 or basically learned BS)
4) Markets fell in sympathy with the sharp correction in commodities-heavy bourses: Australia -1.3%; India -4.2%; Indonesia -6% (6/10)
5) HK was doubly affected by funds tied up in big IPOs. The Hang Seng index was down 3.11% yesterday (9/10)
6) Other markets were less affected as they had less foreign fund buying activity over the last 2 months: Malaysia -2%; Singapore -3.1%; Seoul -2.4%; Tapei -1.9%; Tokyo -1.9%; Bangkok -2.9% (4/10)
7) Iran stated that they will continue to use uranium for power generation, not nuclear bomb making - causing further escalation in tension (3/10)

In HK, Bank of China's IPO has tied up a lot of funds. The IPO is valued at HK$76.8 billion and will commence to trade on 1 June. Total funds tied up to apply for the shares amounted to a staggering HK$655 billion (US$84 billion). That is a lot of funds doing nothing in the bank for a few weeks. The brokers had new applications of nearly HK$30 billion for margin lending from retail to subscribe for the IPO. Besides the Bank of China IPO, there are a couple of attractive smaller China-related IPOs: port operator Tianjin Port Development and Champion REIT (combined they raised HK$7.4 billion).

When someone gets hammered we don't know how long it will take to recover, or were there any internal injuries. All said, a large portion of yesterday's sell-off was the unwinding and cut-loss activity perpetrated by commodity price slide and hedge fund trading. Unless commodity prices slide further, the blood-letting should cease. No big cause for worry.

Monday, May 22, 2006

Mega M&A Deals In Malaysia
A Precursor Of Things To Come?

KLSE had lacklustre year in 2005 when almost every Asian equity market performed better than the Malaysian bourse. However, last week saw two mega M&A deals rocking the investment scene in Kuala Lumpur.

MMC Corp Bhd announced last Wednesday its proposal to buy all the assets of independent power producer Malakoff Bhd for RM9.3billion (US$2.58 billion) cash. That will greatly expand MMC's girth, especially in 2008 when it will have full-year impact from the large 2,100MW Tanjung Bin power plant that will soon be commissioned in phases. That is expected to enable MMC's earnings to step up from current levels of RM300 million a year to about RM600 million, if it retains 100% of the power assets compared with its current shareholding of 22% in Malakoff.

Just one day earlier, OYL Industries Bhd said Daikin of Japan offered RM5.73 or a total of RM7.6 billion (US$2.1 billion) cash for all its shares. That was the largest takeover of a Malaysian company by a foreign group. None of the earlier takeovers come close, with the largest being Telenor of Norway's takeover of DiGi.Com Bhd. Telenor progressively bought up to 61% of DiGi for a total of about RM2.2 billion in 2001.

Could this evolve into a trend for the rest of the year? The big US/European private equity buyout firms have been setting up offices in Asia aggressively. Though they have largely concentrated on China and Japan, and to a lesser extent India and Indonesia - it may not be too far fetched to see them seeking out likely candidates in smaller nations in Asia-Pacific. Could the bigger companies be trying to make a move to acquire these "value-assets" before engaging in a price war with the big private equity buyout firms? I believe so judging from the new hires by these private equity firms. This has the effect of bringing up the valuation of "under valued" listed vehicles. The large funds backing of these private equity firms will ensure that willing buyers and willing sellers are easier to placate.

In America these buyout firms are likely to do these deals flying solo or with fellow buyout firms. The experience has been slightly different in Asia with buyout firms playing a secondary role by funding a corporate buyer. Its a safer approach as the Asian financial landscape needs local hands to navigate the political and legislative minefields.

Below are three listed vehicles in Malaysia which have a high chance of being acquired within the next 12 months:

1) Lion Forest Industries. LFI through its 97.78% owned subsidiary, Sabah Forest Industries Sdn Bhd is Malaysia's largest producer of printing and writing papers. SFI's main products are paper, pulp, sawn timber, plywood and commercial logs. The subsidiary also produces other products like building materials, lubricants, spark plugs, industrial equipment and automotive components. The respective annual production capacities of SFI for its various products are 150,000 MT for paper, 120,000 MT for pulp, 100,000 m3 for sawn timber, 120,000m3 for plywood and 500,000m3 for commercial logs. In addition, approximately 30% of its wood-based products are exported to countries in the Middle East and the Far East. LFI has a NTA of RM8.21 a share, and even if it is not offered up to its NTA value, market expectations are that its assets could easily fetch around RM6.50-RM7.00 a share. That may be below NTA but it's still a rich price relative to its current share price of below RM4.00.

Chances are very high that a deal will be transacted because of the surging commodity price trends, and the fact that any sale will see the proceeds going back to shareholders (even minorities) because there is a loan covenant which ensures that the distribution to Lion Industries (81% owner of LFI) should SFI be sold. This situation is more attractive for all concerned unlike when Lion Diversified, which disposed its brewery assets in China for RM1 billion in 2003 but only distributed RM140 million to shareholders.

2) JobStreet Corp. The company has a strong niche in Southeast asia for online job search market. JobStreet has already scaled past the critical mass needed to be profitable, and the first mover advantage has not been fully appreciated by the market. The company has a market cap of just approximately RM380 million (US$10.5 million) as it trades at just a forward PER of 16x. Even is finding it difficult to penetrate the Asia-Pacific online job search market. Global net players such as Yahoo or Google will find JobStreet to be a cheap buy into a viable online platform to build their Asia-Pacific net strategy. Other potential buyers will include the big successful newspaper companies in the region. Buying JobStreet by Star Publications or Singapore Press Holdings will create a better revenue strategy for these print media companies. An actual M&A deal could see a deal which could double JobStreet's existing market capitalisation.

3) RHB Capital. RHB Capital has a 70% stake in RHB Bank, a commercial bank with 185 bank branches in Malaysia. Khazanah holds the other 30%. The bank has to be consolidated under a bigger banking group because its current ownership structure is convoluted. RHB Bhd controls RHB Capital, and other stakeholders directly and indirectly include the state pension fund EPF, Utama Banking Group and KWAP. A sale of RHB Capital is inevitable as RHB Bhd struggles with debts of over RM3.2 billion.

The buyer, there won't be many (I mean there won't be many that will be "allowed to buy") and the prime buyer will be Bumiputra-Commerce Bhd. Fresh from digesting its acquisition of Southern Bank, many investors would think that BCB would not be in the mood for another acquisition. The potential acquisition should go through because its ramifications are more than just business and numbers. As it stands, Maybank is the country's largest bank by assets with RM2.2 billion and BCB with assets of RM1.5 billion after the acquisition of Southern Bank. To swallow RHB Bank would propel BCB assets to RM2.65 billion (approximately). That would make BCB to be the largest bank in the country. Najib Razak is expected to be the next Prime Minister. Wouldn't it be "lovely" if BCB (helmed by younger brother Nazir Razak) were to be the country's biggest bank then?

RHB Capital trades at RM2.46 currently, a deal could see the transacted price to be between RM2.90-RM3.10 range.
Market Risk - Asia Pacific
Malaysia & India Examples

Global equities is slightly jittery after the slump in commodity prices and fears of higher inflationary pressures in the US. To assess market risk, one should look to the earnings of the top tier companies in each country. India deservedly got the biggest whacking as its markets also rose frothily over the last year and a half. Despite that hiccup, the Bombay Stock Exchange is still up by some 77% over the past 52 weeks. The BSE has been gaining an average of 7%-8% for the past few months, which was clearly unsustainable. Figures from IMF shows that foreign investors accounted for 6% of Indian market's turnover and about 13% of its capitalisation. That ratio has to be one of the highest in Asian markets. In Asia, the markets are not all the same. In terms of being overdone, India, China and Australia are markets which have leapt the highest and with the most froth. Hence a 5%-10% pullback is not alarming but necessary.

As for Malaysia's inherent market risk, one should look at the earnings of top tier companies being announced. YTL Power's third quarter FY06 net profit was RM217.3 million, a 21% year-on-year jump. Came in slightly better than forecasted. UMW's first quarter FY06 net profit was RM63.1 million, in line with estmates. That was a 69.2% year-on-year increase in pretax thanks to demand for tabular goods from the oil and gas sector. Star Publication's first quarter FY06 net profit was RM31.6 million, flattish but has a strong balance sheet with no debt and a cash hoard of RM447.2 million. These results are decent, not spectacular and share prices are trading in line with expectations.

The market also has some underlying value aspect with the announcement of two mega buyout deals: MMC buying Malakoff for RM9.3 billion (US$2.58 billion); Japan's Daikin buying OYL for US$2.1 billion. These two simultaneous deals could indicate that big companies are preying on "value assets" before the other big private equity buyout groups do likewise in the region. So far, the big US/European private equity buyout groups have concentrated in Japan, China and to a lesser extent in India. Maybe some key companies are sensing an imminent revaluation of good assets by these big private equity groups for Asia-Pacific assets. Bodes well for Asia-Pacific equity valuation. You heard it here first.

Sunday, May 21, 2006

Finally Some Smart Comments
Dr Hilmi Yahaya, The Voice Of Reason

It is heart warming to hear smart comments from an indispensable department of the government in Malaysia. Dr Hilmi Yahaya, the parliamentary secretary for Finance Ministry said CEOs of government linked companies who failed to perform have been advised to retire early. During a parlimentary session last Thursday, Dr Hilmi said that four of the 15 largest GLCs in the country suffered losses last year - they were Bank Islam Malaysia, MAS, UEM World and Proton Holdings.

The problem of having a paternalistic government is that peole entrusted with responsibilities doesn't get "penalised" if they performed poorly. Thankfully, Khazanah recognises this, and in a very indirect way is basically telling the CEOs of GLCs to buck up. Already some of the driftwood have been asked to leave last year. Only by imposing the Key Performance Indicators can there be accountability. Heads will have to roll for the "management culture to be revitalised". It used to be no big deal if the GLC you are running is being ran to the ground - not even a slap on the wrist, that has to change. Khazanah should make this book as a must read for all senior management of GLCs: Execution - The Discipline of Getting Things Done by Larry Bossidy and Ram Charan.

Saturday, May 20, 2006

Rebuttle To Comments By SC & Bursa
Designation, Disclosure, Speculation & Transparency

This has been an eventful week for stocks, and if you are involved in Malaysia and Singapore stocks, the week was even more evntful on the issue of stock designation and disclosures. Huge articles were written in The Edge and The Star Biz on the related issues. Interviews were conducted with the head of SC and Bursa, and here are my rebuttals and comments:

Yusli (Bursa head honcho): In deciding to designate, retail sentiment is a concern but not necessarily a primary one. What is of paramount importance is the maintenance of a fair and orderly market ..
My comments: Good answer, retail sentiments should not be a primary factor is designation.

Yusli: In the case of IRIS, an UMA and Market Alert were issued previously to warn investors not to be driven by excessive speculation in their investment decisions relating to IRIS.
My comments: The warnings were not serious enough. Investors do not take these warnings to heart because just this year alone there were 20 "Unusual Market Activity" / Market Alerts issued this year so far, how many were designated?? Because of the low hit ratio, investors generally brush them aside. If the hit ratio is closer to 50%, you bet investors would take these warnings seriously. Then investors would try to avoid getting involved in these counters once warnings are issued.

Yusli: It is not possible to have an automatic mechanism for designation because there are several factors that have to be considered that are fluid, not static. Designation is based on a set of criteria & parameters. We are not at liberty to disclose these parameters as doing so would jeopardises the effectiveness of our surveillance function.
SC : Actions such as designation of securities are taken in specific circumstances after consideration of all aspects of trading of a security and a thorough assessment of all relevant factors. Such a considered approach allows a holistic review of a particular situation, permitting a nuanced and un-mechanistic response.

Comments: As per my previous blog, the designation can have automatic goalposts. Right now, we have no knowledge of the crtieria. If SC & Bursa are concerned on syndicates "escaping and navigating" via these goalposts, there could be additional liberty to designate above and beyond these stated rules, but there must be clear rules / mechanism that all investors should know beforehand. Right now, investors are playing in the dark. Its like betting on an Arsenal / MU match and MU is giving half a goal, but with 20 minutes remaining, the goalposts of Arsenal is shrunk by half in width - it is not fair. Buyers of these counters buy on the understanding of available facts, not on sudden changes in rules that are currently impossible to divine or estimate. A balance has to be struck on effectiveness of governance and transparency.

Zarinah (SC): If they know there are dishonest people (in the SC), please let me know. Don't just talk about it.
My comments: As the governing body, the onus should not be on the public but rather that the structure of the organisation must be transparent enough to gain respect and integrity among investors. Hence if there is "room" for hanky panky to happen, it must be dealt with internally. By have automatic suspension / designation rules being made public, it solves a lot of problems and reduces the "vicious rumours". As a public body with a strong governing threshold, the independence and transparency of the body is of utmost importance. Why give room for the public to suspect or talk!?
HK Dollar's Peg Gotta Go
Even Tsang Is Worried

Having voiced concerns over Hong Kong's competitive edge amid the robust economic development in the mainland and after calling for better financial and economic integration, Chief Executive Donald Tsang Yam- Kuen said Hong Kong could consider pegging its currency to the yuan. But he insisted that the existing currency peg to the greenback would remain the SAR's long-term policy. He said he also hoped that yuan bonds would eventually be issued in Hong Kong, helping foster closer financial ties with the mainland and allowing SAR traders to prepare for the full liberalization of the currency. With the yuan being allowed to appreciate and rise above the key level of eight to the US dollar last Monday, Tsang said the current peg remains the long-term policy though the government could still study the feasibility of a link between the HK dollar and the yuan. But he noted that the free convertibility of the yuan must be the prerequisite and that there is still a long way to go before this currency link could be realized.

The problem with the yuan is its convertability and acceptance. There are still a lot of restrictions with respect to the transactability of the currency. The second thing is the lack of a deep bond market denominated in yuan. The third, is HK's economy has very little to do with the economy of mainland China. Unless there is a huge convergence of both economies, it is silly an preposturous to consider linking the HK dollar to the yuan. Having said that, the HK dollar remains quite overvalued, although the weakness of the US dollar over the past 6 months have helped the HK dollar somewhat. Longer term, the HK dollar has to go weaker, either to repeg to 10 US dollar to 1 HK dollar (from the present 7.8 to 1) or to repeg with a basket of currencies including the yuan, Euro, yen and dollar. Below are excerpts from a much earlier blog on the HK peg and its deficiencies, which was published as an article in AsiaTimes Online:

Time to go for Hong Kong dollar peg

In a recent TV interview, Hong Kong Monetary Authority (HKMA) chief executive Joseph Yam asserted that Hong Kong will retain its own currency even if the Chinese yuan continues its rising trend and becomes the stronger of the two units. The managed float of the yuan has seen it appreciating, albeit painfully slowly, for the past several months. There is a general belief that the yuan will continue its slow appreciation ride, so as not to jeopardize China's hurtling economic growth, and to protect foreign investors' confidence for the longer term. During the 1997-98 Asian financial crisis, Hong Kong suffered little initially when compared with such countries as Malaysia, Thailand, Singapore and Indonesia. Although the territory's peg to the US dollar cushioned the negative effects well for the first few months, the drawbacks of the dollar-peg policy began to become apparent when other Asia-Pacific currencies dropped. By 1999-2000, most free-floating Asia-Pacific currencies had in effect been devalued 25-50% against the US dollar. All the while, the Hong Kong dollar remained the same.

A free-floating currency allows a country and its industries to realign their competitiveness when necessary. Although sharp currency devaluations and corrections are hard to stomach, they are sometimes necessary to "deflate and reflate" economies. By sticking to the peg, Hong Kong basically lost out completely in pricing power compared with the rest of the region. Salaries and rentals became so much more expensive than elsewhere that foreign companies inevitably diverted their investments and head-office operations. Even Hong Kong companies had to outsource whatever they could to southern China. Unemployment, a nosedive in property prices, and the phasing out of non-competitive industries were part and parcel of the resulting upheaval. If Hong Kong had floated or, better still, re-pegged its currency in 2000, a lot of hardship and jobs could have been saved.

A re-peg from HK$7.8 per US$1 to a 10:1 exchange rate back in 2000 would have done wonders for the economy, and prevented numerous suicides and personal bankruptcies. When an economy lacks the ability to adjust to spectacular economic changes elsewhere, this will take its toll on people, companies and asset values one way or another. The powers-that-be in Hong Kong lack the political will to devalue the Hong Kong dollar as most of them are beholden to the city's economic magnates - no one who is asset-rich would want to see his cash and fixed assets in Hong Kong dollars devalue by 15-20% overnight. Plus, there is no way to devalue gradually - just the hint or rumor of possible devaluation would send share prices plummeting rapidly and tons of funds fleeing. Any devaluation or re-peg has to be done with fewer than two or three people knowing about it, or it will never work.

Despite the practical difficulties, the need to revalue must be faced, unless Hong Kong can come up with a convincing answer to the question: What does Hong Kong do so well that it can compete with Singapore, Malaysia, and Thailand despite 20-40% higher costs? To oversimplify, Hong Kong basically makes money three ways: (1) tourism and tourism-related activities, (2) shipping and services, and (3) stocks and property. The last of these will never grow if the first two are not healthy, so what do the first two sectors need in order to remain competitive? In 2000, Hong Kong's tourism sector was hammered because everything in the city seemed dramatically overpriced. And the shipping sector has been slowly losing ground to less expensive ports in southern China and elsewhere. So the logic of a re-peg or float becomes overwhelming. Re-pegging or floating the currency would act as a lever to rebalance the economy's competitiveness vis-a-vis the rest of the world - leading to a slower hemorrhaging of jobs to southern China. Unfortunately, since nobody wants to see his property values dropping by 30% in US dollars, any re-pegging or devaluation would take great political will and economic astuteness. Imagine having to defend the move to an irate public and corporate heads who in effect lost 20-30% of their net worth. Suppose the head of the HKMA announced out of the blue that as of midnight, the Hong Kong dollar would be re-pegged at HK$10 to the US dollar. The newspapers would have a field day bashing both the head of the HKMA and politicians in general. Heart-rending stories would appear about an 80-year-old woman who wanted to send HK$10,000 to her granddaughter in mainland China for medical treatment - how tragic that she didn't do it yesterday! But the positive effects - though less newsworthy - would not be long in appearing. Share prices would rise to a new level, and foreign investors would be more than happy to pour in additional funds. Foreign property buyers would be much more attracted to Hong Kong. Foreign companies would be more willing to send expatriate staffers to the city; more exhibitions and conferences would choose the territory; and so on.

Are there other options? Yes. For example, one could eliminate the Hong Kong dollar completely and use the Chinese yuan instead. But this is not likely to happen within the next 20 years; it will be a long time yet before the yuan is a globally recognized currency in the same way that the US dollar, the euro and the Japanese yen are. Recognition, transactability, and free movement of the currency lead to acceptance, and the yuan is far from achieving these. Another option would be to peg the Hong Kong dollar to the yuan - again, for the same reasons just cited on the shortcomings of the yuan, that is not going to happen either. There will be a real need to link up with the yuan if (and only if) the two economies converge; but right now and for the foreseeable future, the economy of Hong Kong is vastly more advanced than that of China as a whole. Right now the Hong Kong dollar is still about 5% more expensive than the yuan. But it is very likely that the yuan will surpass the Hong Kong dollar in terms of US dollars within the next 12 months. Then, the media will begin to discuss the loss of face for Hong Kong, and questions will surface on the need to re-peg the Hong Kong dollar, float it, or peg it to the yuan. Currency soothsayers, take note.

Friday, May 19, 2006

My Problems Are Bigger Than Yours
Abberations Revealed During Pullbacks

There are problems and then there are ... their problems. When global equities have a pullback, everyone suffers, but some suffer more than others. Of course, when looking at markets that got hammered more than yours, its kinda gratifying that you did not have it as bad as some. Rejoicing in the suffering of people worse off than you -- aahhh... the joys of the wretched! One of my favourite lines from Ally McBeal was when she was asked why her problems are more important that other people's. Without missing a beat, she said "Because they are mine". That sums up the whole thing we call perspective.

Back to the sufferers:

a) India markets have it so bad, they even lost more than 6% in just one day of trading this week. India was even riper for a correction than the rest as it had gone ballistic over most of 2005 and carried on this year. I have been rating India as way overbought in my blogs, thanks largely to over-enthusiastic Japanese funds I guess. Added to the fuel, India has a substantive number of "commodities related" companies, which got whacked real bad owing to the correction in commodities prices, particularly Hindalco Industries.

b) Leading indicator CalPers (please read blog on Calpers/Wilshire on 20 April) which went gung-ho into Indonesian equities last month, got royally trumped, as the Jakarta Stock index lost as much as 4.2% in just one day this week on fears of continued slide in the rupiah (thus forcing Bank of Indonesia to up rates to stem capital outflows). Thanks CalPers!

As for the rest, it was just a pullback, as argued before, the bulls are intact. The main danger is whether we see US equities as being overvalued - because that is the market that will be under a continued higher interest rate environment for the rest of the year (owing to pressure to weaken the dollar). If US equities is overvalued, the higher rates will hit home hard on US stocks and that could derail global equities. However, from what I can gather, US corporate profits is very decent in terms of growth, and more significantly, its the amount of cash held by US companies, its at an all time high. Given that there will be a weaker dollar, the latter part of 2006 may see more buying of US assets by foreign companies due to the currency factor. All said, US equity's inherent risk is low this year despite rumblings in oil and US rates.

Thursday, May 18, 2006

Asian Markets Opening Comments
Thursday 18 May

Bourses followed the US lead in sympathy, rather than in actual weakness. In the US, stocks declined the most since January after consumer prices increased 0.6% in April. Excluding food and energy, so-called core prices rose 0.3%, Labor Department data showed. Economists had forecasted 0.5% and 0.2%increases. So what's new? Readers of my blog will know these are not new factors, but the gradual unveiling of the natural course of events:

a) US wants a weaker dollar and a stronger yuan to combat the deficit. The weaker dollar is also a preferred strategy by the Fed though not often announced publicly.

b) Yuan is appreciating very slowly but surely, other developed and developing currencies are gaining a bit faster against the dollar. Other countries have a built safety device to absorb inflationary spikes via their appreciating currency.

c) The Fed has no choice but to engage in a regular raising of rates. Holders of US bonds for the past 6 months have been one of the worst performers, losing in pricing and currency. Bernanke will have to raise rates further to satisfy foreign demand for better yield before buying Treasuries. Another 100 to 200 basis points from now till year end is not out of the question.

d) Will the rate increases jeopardise the US economy. Inflation will rise, but the dollar will weaken further, but so too will the attractiveness of US dollar assets such as stocks. Its a deliberate tango of death, no mis-steps from anyone please! US equity stays strong, everyone is happy.

e) Will this scenario affect global demand - no, because Asian markets by and large are doing well, there is a wealth re-creation period with stronger currencies and higher demand, underpinned by the economies of China, India and Japan.

f) The commodities boom has been due largely to the dollarisation effect (as argued in my previous blogs)... too much dollars swishing around in the global economy, and the jump in issuance of ETFs for commodities. The correction in commodities last week was very good as no one got hurt really bad.

The current pullback was due to two events: the commodities correction and US inflationary pressures - both not unforseen and it coincided with global equities that was searching for reasons to correct, rest and concolidate. Hence the weakness is only temporary in nature. Can buy on weakness. The bull run has got some legs yet in it. There is one qualification, the above scenario would crumble if oil prices touches US$100 cos then everybody will have to face higher inflation that is not sufficiently tampered by gains in productivity, and a global slowdown in demand may follow. That has a less than 20% chance of happening so bullish hats still on, but good to keep track of oil prices.

Wednesday, May 17, 2006

2006 Top Buys #7
Unexpected By Many

I cannot tell you how many times I have wanted to make this stock as a Top Buy for 2006 but the share price just runs and runs. I have never read ONE report calling this stock a buy, but I have read many credible research reports calling this stock a Strong Sell or Avoid. Currently, Standard & Poor's has the stock as a rare "Strong Sell". I don't think I can wait anymore. I was thinking that the overall global equity pullback for the last two days may see a more decent entry price... but NO. Funny thing is, I have attacked this company many times in my blogs. Want a scathing report, read my blog on 10 March 2006 on this company. For an even more scathing critique, take a peek at the 16 February 2006 blog.... lol. Then you will understand better my liking for the stock.

The reason why I can criticise this stock for the longest time is that there are so many areas they can easily improve. There are signs that the new machinery in management is moving things. Why would 99% of research analysts rate this a sell. It is so hard to justify calling it even a HOLD. Before you kill me for creating the suspense, the stock is Bursa Malaysia. Factors usually cited by the analysts to sell Bursa:

a) Too expensive in terms of PER, FY06 PE is about 38x when regional exchanges trades at an average of just 30x. No one can look beyond that PER figure, whether you convert that to Enterprise Value over EBITDA, its the same end result.
b) The continued surge in share price can only reinforce an analyst's call. If you had the stock at a Hold when it was RM5.80, when it surged past RM7.00, you have to call it a SELL.

The above is a couple of major drawbacks I have with company analysis, they are held back by boundaries of valuation. If you cannot justify by realisable numbers projections, its useless and non-defensible. Comparative analysis is only good for comparison, there is no automatic suggestion that everything will gravitate to the mean. Bursa Malaysia is the kind of stock that you can only invest by imagination and leveraging on its potential rather than its present form.

Bursa Malaysia
Share Price: RM6.85
Paid Up: RM515.1 million
NTA/share: RM1.66
P/Book Value 06: 3.8x
Expected net EPS 06: 18 sen
Forward PER: 38x
Target Price - 12 month - (6x P/B): RM10.40
Potential Return: 52%

Why I like the stock:
1) A monopoly that is under-rated. The surge in valuation of almost every exchange in the world over the last 9 months is due to an appreciation of the market monopoly and the growth in global trading. Exchanges trying to gobble one another is a sign of "too much of a good thing" going after "another good thing". Bursa is an "under managed" company, i.e. have yet to flex its potential and leverage on its platform. Remember , its a monopoly.... its even better than cigarettes, you like BAT, then Bursa stands head and shoulders above that.
2) So bad, it is good. Lack of exciting products. Slow in introducing REITs, ETFs, Singa Stock Futures and Covered Warrants compared to the rest - only spells potential.
3) Listing fees up. Trading and transactional fees will go higher as Malaysia is just re-emerging from the terrible financial implosion from 1997-2004. the massive wealth destruction has gradually been built back to a decent liquidity level.
4) The Singapore equation. Though it will be delayed, the prospects will be enormous for both sides. It will improve transactional fees both ways. A share swap is likely to consolidate the deal. Allowing Malaysians to buy Singapore stocks and vice versa is a natural and necessary development. Other exchanges are rapidly bulking up on covered warrants and ETFs - the fact that the stocks on Malaysia and Singapore are quite distinct and different will be a major point for pushing the deal forward. Both sides have their speckies, Malaysia's Mesdaqs and Singapore's small China plays.
5) Comparing regional exchanges valuation using PER is short-sighted. SGX 06 PER is 27x, ASX is 20x and HKE is at 44x (Bursa is at 38x). I would like to look at P/Book Value: SGX is at 8.5x, ASX at 11.8x and HKE at 13.6x (Bursa's is only 3.8x). Now why is that.... there are a couple of factors which have escaped most analysts: Malaysia has one of the highest percentage of its GDP that is listed in the world; and the level of retail participation is in the top quartile of global exchanges. Both of these factors would ensure for a more vibrant trading environment. The market velocity has been very low for the last few years due to the country just re-emerging from a period of constricted liquidity.
6) The company will not have to spend a lot of money in R&D, profits mostly goes straight to the bank and back to shareholders. For a monopoly that does not have to defend its turf, we can expect more special dividends and bonuses.
7) Last year was a poor year for Malaysian stocks, trading was stunted and we finished end 2005 basically at the same level when we started in beginning 2005. This year was much better and I expect the next couple of years will be quite decent too. Even in a so-so year like 2005, Bursa can still chalk up impressive profits, what more in a good year.

Recent rumours that Nasdaq might buy a stake in Bursa is sheer stupidity. I would not rule out a share swap with SGX as it makes a lot of sense, it automatically propels both exchanges as ONE up in size, credibility and volume. Staying independent just does not crack it when NYSE is buying Euronext and Nasdaq is gobbling LSE.... the world is getting global and smaller at the same time. One that would not just rival HK but may eventually out strip HK even. I do not see Bursa's share price easing, that's why I am giving up on waiting. Profits will continue to pour in, and Yusli will continue to improve EPS, and he is likely to sell the Bursa building and do a leaseback which will add RM300 million into its coffers. The establishment of a RM100 million clearing guarantee fund will release RM115 million back to Bursa also. Gotta go, Yusli should be calling soon....

Croatia - (Zagreb-Split-Hvar-Dubrovnik-Prague) #1

Why Croatia? The decision to go to Croatia was taken way before they fared so well in the World Cup, for a population of just 4.5m. If you ...