Monday, January 30, 2006

Time To Move From Sarawak

What's with the Bakun project? It was suppose to help alleviate the power shortage in Peninsular Malaysia... but that idea went belly-up... after spending about RM2 billion. Now, we can say enough is enough, cut the project.... or find a problem to the solution... The solution is Bakun can generate lotsa electricity... now how do we find the users for that ... now that transporting it to the Peninsular is not feasible.

The dam (damn) project is now expected to gradually generate electricity from late 2009. Shutting down the Bakun project seems to be a lost of face for the authorities... cannot let this happen... or else people will laugh at us (pssst... they already are laughing).

So they came up with aluminum smelting plants. These plants are big consumers of ... electricity... with soaring electricity tariffs and raw-material costs, many aluminum plants have closed shop in the United States and Europe. Major smelters are now searching the globe for places where electricity is cheap, and waahhh-llaaaahhh ... we have a match with Bakun's excess potential.

This is an environmentalist nightmare, first they had to protest fervently on the erection of the dam in the first place, the destruction of tropical rainforest, landscape, displacement of animals and people, the usual thing.... environ 101. Now, they have to contend with aluminum smelters. For those who are not aware, ... China, the world's largest aluminum user, have closed more than 40 smelters last year because of higher costs and government moves to curb pollution. If there was a casebook study of how to export pollution - this is it!!! Now China is not exactly known to be a strict police when it comes to environmental issues... so if Chinese government deem these to be "unsavoury".... why the hell are we allowing these things to be put up in beautiful Sarawak... is it because its far enough from Putrajaya??

In 2001, the government, after the undersea cables were deemed to be unfeasible, surprisingly decided to stick to the original 2,400MW capacity. Sarawak has a wealth of alternative energy resources such as natural gas. According to the Bintulu Development Authority, the state has a total known gas reserve of about 50 trillion standard cubic feet. The production of aluminum requires a huge amount of electricity, accounting for close to 40% of production costs, which explains why many smelters are built near major sources of electricity supply. We now have bidding for approval to build a smelter from Smelter Asia with China Aluminum International Engineering, which reportedly wants to set up a 500,000-tonne-capacity plant that would consume about half of Bakun's output. Another Malaysia-China consortium is seeking approval for a US$3.2 billion smelter. The local firms in this consortium are Cahya Mata Sarawak (CMS) and Press Metal. Giant multinationals reportedly also in the running are Australia-based Rio Tinto Group, BHP Billiton teaming up with Mitsubishi Corp, and the Alcoa Group. Smelter Asia is owned by tycoon Syed Mokhtar Al-Bukhary. CMS, on the other hand, is a well-connected group with diversified interests in Sarawak led by Sulaiman Abdul Taib, the son of powerful Sarawak Chief Minister Taib Mahmud. CMS Cement, which is capable of producing some 2 million tonnes a year, has a near-monopoly on cement in Sarawak, while another, CMS Steel, produces 300,000 tonnes of steel bars and wire rods. In 2004, the group announced that CMS Energy had been awarded a 51% stake in a contract worth RM130 million for design and execution of the hydraulic steel structure package of the dam. The group is thus well placed to benefit from the dam's construction work, which requires huge amounts of cement and steel. Environmentalists are worried about the polluting effects of smelters. Smelters emit perfluorocarbon (PFC), which is detrimental to humans, animals and vegetation and has global-warming potential. The environment has already been terribly degraded through logging and the rivers polluted through siltation and sedimentation.

RM4-6 billion is quite a sum, we could use it to build a really large planetarium, turn Sarawak to be the epicenter for eco-tourism, map out hiking and mountain biking trails, build 3 and 4 star accomodations throughout the state attractions, organise Sarawak to be the Asian center for "high-octane" sports (iron-man, rock climbing, super marathon, eco challange, kayaking, white water rafting, skydiving, bungee jumping, etc...), hey, even a casino with a landing strip all on its own is not too bad an idea, or how about a special world class research university concentrating studying tropical rainforests and its inhabitants, a really big holiday village of spa treatments/yoga/meditation/ayurvedic/slimming farms/detox camps/culinary camps ... and still we won't be able to spend the entire amount, I think.

This is not just a political issue ... even as a business case, the Bakun dam cannot stand on its own merits. If the original plan to transmit the power via underseas cable to the Peninsular is still viable, maybe Bakun could be justifiable. Bakun itself is already riddled with a horrific cost-benefit analysis with the destruction and displacement to make way for the dam. At least if the power generated was for the people ... but now... the power generated is for smelters which will continually take its toll in the surrounding areas. What next, allow nuclear testing off the shores of Sarawak?? Why must we be so thin-skinned, why can't we admit that the Bakun thing was an "irrational exuberence" mistake of the excessive 90s, and move on. Yes, RM2 billion has been spent, now we are pouring another RM4-6 billion to make sure the mistake will fester and grow and live on and on. There are certainly more important things in life than business... are the people of Sarawak suffering from dire unemployment, what kind of important technology transfer will the smelters bring to the state, will it push Malaysia higher up the economic development scale... the resounding NO to all is quite clear. What are our priorities ... as citizens, politicians, home-makers ... is this for the people??? How will we explain to our children??

Thursday, January 26, 2006

SYDS - Same Wolves, New Wool or New Wolves, Same Wool

Only in Malaysia and Singapore where the word "syndicate" has become a very much tainted word in our financial vocabulary. Even taxi drivers and hawkers can use the term to tout potential movers on the KLSE. The actual definitions of the word in a proper dictionary include:

1 a : a council or body of syndics b : the office or jurisdiction of a syndic
2 : an association of persons officially authorized to undertake a duty or negotiate business
3 a : a group of persons or concerns who combine to carry out a particular transaction b :
CARTEL
2 c : a loose association of racketeers in control of organized crime
4 : a business concern that sells materials for publication in a number of newspapers or periodicals simultaneously
5 : a group of newspapers under one management

The funny thing is, to Malaysians and Singaporeans in general, when you mention syndicates, it probably means "a loose association of racketeers in control of organised crime". To those who are in the syndicates themselves, they would take it to mean "a group of persons who combine to carry out a particular transaction". To prevent further negative association with the word, for the rest of the article the word "syndicates" will be substituted with "syds".

2005 saw syds being very quiet in the KLSE. There were occassional runs by syds in a few stocks, particularly Mesdaq ones, but fizzled out relatively quickly. Thats because many syds were not convinced that the market's underlying strength last year was that strong. The collapse of Fountain View really pushed many syds to play more golf, or take that junket to LA.

The first couple of weeks of 2006 saw some new syds in the market place. Rumours and hearsays are all we need to deduce important financial decision making (ahem). After staying away for sometime, the evergreen financial wizard (I'm being overly nice here) ... to be safe, I shall scramble his moniker, Coper Aul (sounds like a Jewish Chinese guy... and in many ways he is), is back doing what he does best. Only this time he has roped in hedge funds to be his bit players.

Many of you must be aware of the enormous surge in the number of hedge funds (HF) being set up in Singapore for the last 2 years, even dwarfing the figures for HK. While the bulk of the funds are in quant related arbitrage and specially tailored instruments, there is sufficient gung-ho funds out there masquerading under the hedge funds banner. HFs are special in that most do not have strict reporting rules and everything can be their plaything. It is very difficult for a proper equity fund manager to take up shares in dubious companies (especially with the dire repercussions when they tank).

The grapevine has it that at least 3 shares have had large blocks placed out by our Jewish Chinese friend to a number of HFs. The timing is pretty good too as the market has been looking for leads for a long time. Keep a man hungry enough for a long time, even crumbs will taste good. His track record also is pretty good, ... not spotless or bloodless ... , but ringgit for ringgit ... pretty good. I do not condone what syds do for a living, but a market is a market, you jump in with both eyes open (or is that closed... I always get that confused). Nobody can make money on the market without somebody losing out.

I personally would never buy these stocks, but it makes for an interesting watch to see how this plays out. I am curious to see if the professional HFs are better at this game than the highly rated amatuer syds of the past.

Oh.... the rumoured 3 stocks, ... again, love my scrabble... so you have to unscramble them: Marf Steb, Siri, Socfin ... (please just observe, don't get involve).

Monday, January 23, 2006

US Dollar's On Prozac & Levitra

What does Bill Gates, George Soros and Warren Buffet have in common - all three predicted that the US dollar would correct in 2005, all betted against the dollar and lost.

If you follow an economics textbook, the US dollar would have, should have ... corrected by at least 30% by now to go anywhere close to solving their current account deficit. However, the US dollar looks likely to be thereabouts and thumb its nose at naysayers for the following reasons:

1) It is still the most popular reserve currency in the world. Go to any country for holidays and you cannot go wrong carrying US dollars. That reality is based on the convergence of some very important factors, and that perception will not go away overnight.

2) Somebody must be financing the deficit. Well, you now have the Middle East petrodollars being recycled to buy US Treasuries. China's emergence as an economic powerhouse have also recycled a lot of its savings into US assets.

The current account deficit is entirely sustainable and a natural consequence of globalization. In terms of fundamentals, there are no reasons why the dollar shouldn't be doing well. The dollar's 2005 bounce from three years of decline counters the traditional theory that an economy can't run a large current-account deficit for long. Harvard's Kenneth Rogoff, a former International Monetary Fund chief economist , said in a study last year that the dollar might need to fall 40 percent to keep luring the US$2.1 billion of foreign cash the U.S. needs every day to plug the gap, which last year reached a record 6.5 percent of gross domestic product.

3) Bank of China's strategy of delivering growth through exports is to keep buying U.S. government securities to keep the yuan undervalued. China's foreign-exchange reserves rose US$209 billion to a record US$818.9 billion last year, triple their level of 2002. China accounted for purchases of a net US$2.2 billion of U.S. Treasury securities in November 2005 alone, bringing its holdings to US$249.8 billion. Holding that much US Treasuries have the effect of holding down U.S. interest rates, stimulating consumer spending and the imports that widen the trade gap.

4) Naturally, what keeps Gates, Buffet and Soros in the bear camp is the prediction that the Chinese, Japanese and Arabs will not always continue to buy those Treasuries. Can you imagine if China or Japan decided to halve their holdings of US Treasuries in favour of the Euro - now that is what we call a correction, US interest rates will spike immediately to say 25%, while the dollar will drop 20%-30% in value overnight, after a while it will stabilise but interest rates will be hovering around the 10% level for a few years. That is just a scenario, a "what if" that is highly unlikely to happen because of this small thing called globalisation of trade. As trade is inter-connected and global, no one country can afford any of the top 5 trading nations to collapse as the domino effect will be severe and felt throughout the supply and demand chain. Nobody benefits with the US dollar collapsing. If it was, say 30 years ago, and trade wasn't so global, China could and probably would threaten to dump their holdings of US Treasuries just based on political scuffles too numerous to mention. The impact is very much localised, unlike now. No one can afford that domino effect, hence you have the big boys all making sure the sick patient don't die or slip into a coma, as the patient will come back to haunt them day and night, night and day!!!

5) Another premise for Gates, Buffet and Soros to boost their argument is that the deficit cannot keep rising forever indefinitely... Now its 3% of GDP, then 3.5%, next 4%, followed by 5%, will 6% be the critical figure, or is it 7% of GDP?? The US government cannot allow that because the other top trading nations will not allow that. Both sides have skeletons, both sides are pointing loaded guns at each others' temples. The only people who can stop the US government from running a deficit of 3% GDP or 4% GDP are the people responsible for the deficit in the first place - will China or Japan have the political will and economic leadership to do that? I'm afraid not bloody likely. In fact, I view the US lawmakers as jumping the gun by calling for China to devalue the yuan and asking for quotas and tarriffs - if the US lawmakers don't do that, China and Japan can turn around and take the initiative to ak for more debilitating measures to be undertaken by the US themselves to correct the problem. At least now, the amount of hoopla generated by the US spin doctors puts the ball in their opponents court and not theirs (but we know better which court the ball really is in).

6) I will start getting really bearish on US dollar when there is a viable alternative to holding US dollar. The Euro needs to grow up very quickly for that to happen. We need very deep Euro bond issues, and Euro countries need to expand their trading prowess into more countries. The EC will also need to take up economic leadership for the world, blah, blah.... probably not in another 5-10 years at least.

7) The other fallacy is that the deficit is so huge, its as if Americans do not have savings, and is mortgaging their assets. One big blip which is often not accounted for is the savings that is accumulated in their properties. Cut it anyway you like, many Americans have a lot of equity in their property besides their pension funds. A related fallacy is that USA will have to keep selling their companies to foreigners to sustain the trade imbalance. That again is not true, in fact US companies are sitting on the largest cash hoard ever, and just biding their time to reinvest or buy other investments to fund their future growth. As long as US leads in technology and business, it is very hard to undermine the value of the dollar.

In conclusion, yes the US dollar should be weaker this year, but it is not in for a major correction, maybe dropping 4%-5% in value. Soros and Buffet have been dollar bears for 3-5 years now - the thing about being bearish over the long, long, longer term is that you will be right eventually. But you will lose quite a bit of dough in between.

The US dollar is on Prozac because it puts up a happy face even when it is supposed to be depressed; obviously taking Levitra as the US dollar is showing nerves of steel when it should be flaccid.

Sunday, January 22, 2006

Finally The Sun Also Rises In Japan

In the early part of my career, I have the priviledge of working for the biggest broker in Japan, Nomura Securities. It was a wonderful experience as I got to sell stocks, convertibles and warrants (aahhh the Japanese warrants, what an instrument) to institutions in Australia and NZ, yet I get to travel to Tokyo extensively. It was a heady period. I was naturally a top sales guy as the Nikkei zoomed from 22,000 to 31,000 during my stay. An excessive bull run tend to make one believe that they are smart and near invincible. My bosses only chided me for not spending enough in my entertaining of clients - can you beat that, gotta love the Japanese work culture.

Thankfully I got out and went into equity research for Asia Pacific markets a year before the Nikkei started imploding. Naturally, markets would correct and they would come back after a few months or even a year or two, but the Japanese equity markets never recover that way. It was like it went into a coma and took more than 10 years to ebb to 10,000. If you stayed out for 10 years, you'd save a lot of money. I have yet to make bullish comments on the Nikkei for the past 12 years, but I think its time to get bullish now. The Nikkei's plunge this past week made the headlines around the world for the wrong reasons. People should look at how well Japanese stocks have done since 2000. Japanese stocks rose 24.83 percent between 2000 and 2005. Not fantastic figures but looks to be a solid base building for the Nikkei. Yup, it takes that long to build a base, especially when they took 10 years to deflate.

U.S. investors have been putting their money where the growth is. In 2005, they put more money into international stock funds than domestic funds for the first time in more than 20 years. During the four weeks that ended Jan.4, 2006, investors pulled US$2.07 billion out of U.S. domestic equity funds, while they invested US$802.5 million in international stock funds. For the first time in 15 years, there was a pickup in domestic demand that's not due to on government public projects. Other more interesting signs of growth include rising golf membership fees and land prices as well as increasing amount of bank loans.

My main deciding factor for rating Japanese equities well is due to Koizumi. That guy managed to stay around and around, and has managed to push through effective reforms. Crunching the archaic postal savings system and further push for foreclosures and reducing cross-holdings of shares have all started to gather steam for the real economy. Smart private equity funds have invested aggressively in many listed and private Japanese firms, and this has renewed thinking about corporate restructuring and reforms. Life time employment is so last decade. Outsourcing is no longer a political issue but rather part of Japanese business model. I believe the Japanese equity markets have a few solid years ahead. 20,000 to 22,000 for the Nikkei is attainable within the next 1-2 years.

Friday, January 20, 2006

Stop Blaming China (Alone) For US Trade Deficit Problem

Bloomberg reported the following today: "People's Bank of China Assistant Governor Ma Delun said the market is determining the yuan's exchange rate, rejecting U.S. criticism that the government keeps the currency artificially weak to spur exports. Ma said currency policy wasn't to blame for the U.S. trade deficit. ``Workers' pay in China is 1/33rd of that of a U.S. worker,'' Ma said. ``The U.S. has to accept this global reallocation of industries.'' Senators Charles Schumer, a New York Democrat, and Lindsey Graham, a South Carolina Republican, are sponsoring legislation in Congress that would impose tariffs on imports from China unless the yuan is allowed to appreciate more rapidly. The U.S. government estimates the trade deficit with China widened to $185 billion in the first 11 months of 2005, up 25.4 percent from a year earlier. The yuan's value has risen 0.5 percent against the dollar since a decade-old peg ended in July, compared with a 3.4 percent jump in Korea's won and 4.8 percent advance in Thailand's baht. China's currency failed to jump this month when the central bank reduced its role by allowing 13 commercial banks including Citigroup Inc., HSBC Holdings Plc and ABN Amro Holding NV to act as market makers, who pledge to offer prices for the currency. ``We're not manipulating the yuan,'' Ma said. ``The U.S. trade deficit is not caused by the yuan. It's easy to explain this to an economist, but those who don't know about finance don't understand this. They should go back to university.'' European Central Bank President Jean-Claude Trichet and Japanese Finance Minister Sadakazu Tanigaki have joined Snow in saying China's currency doesn't reflect the fact that the economy is growing faster than any other, adding to manufacturing job losses and trade imbalances in more developed nations. China's trade surplus tripled to a record $102 billion last year, helping to drive economic expansion of more than 9 percent. The nation's foreign-exchange reserves jumped to $818.9 billion at the end of December, the world's second biggest after Japan's. "

One can go to the website of US Census Bureau to get a good look at the trade figures. It will shed more light on the issue. After doing some sums, the US trade deficit from January till October 2005 comes to US$632 billion. Now if we take just the Asian countries alone, the US trade deficit with Asian countries comes to US$278 billion or 44% of total deficit.

(TD=Trade Deficit in US$ billion; %=Percentage of Total TD)

1 China -167 (TD) 26%
2 Japan -69 (TD) 11%
3 Canada -61 (TD) 10%
4 Germany -42 (TD) 7%
5 Mexico -41 (TD) 7%
6 Venezuela -23 (TD) 4%
7 Malaysia -19 (TD) 3%
8 Ireland -17 (TD) 3%
9 Italy -16 (TD) 3%
10 South Korea -13 (TD) 2%

Naturally China is the whipping boy with its 26% share of the US trade deficit. However, how much of China's exports were actually due to American MNCs setting up outsourcing factories in China and then shipping their products back to the US??!! A recent guesstimate by a foreign research house economist has that figure at 60%-70%!!!

China contributes to 26% of trade deficit, but it is the biggest country in the world by population and their average salary is only 1/30 th of the average American (according to Ma above) - so it is only natural that China becomes the outsourcing capital of the world. How to legislate against natural economics laws? Unless the US wishes to force China's average salary to at least double every 3 years, then the deficit should diminish after about 10 years.

China contributes to 26% of trade deficit but how bloody big is that country?? Plus, it is the most populous country too! If you take Canada, Mexico and Germany together - they add up to 24% of US trade deficit, why don't we hear the US senators making much noise over these 3 countries??? Even if we leave out Germany, just Canada and Mexico alone accounts for 17% of US trade deficit - thats really huge considering their overall population and size of both countries when compared to China.

Another reason why the rest of the world hates US of A!!!

Wednesday, January 18, 2006

System Overload!! ... System Overload??

As reported in Bloomberg today: "The Tokyo Stock Exchange halted trading for just the second time in its history after a surge in orders overloaded computer systems. Trading on the world's second-largest exchange stopped at 2:40 p.m. Japan time, 20 minutes before the regular close. The exchange, which replaced its president last month after two computer breakdowns, said it may shorten trading hours tomorrow. Japan's Nikkei 225 Stock Average tumbled 2.9 percent to 15,341.18, extending a decline that wiped off more than $300 billion of market value this week. Tokyo Electron Ltd. and Toshiba Corp. were among technology-related stocks that dropped after earnings from Intel Corp. and Yahoo! Inc. fell short of estimates. The exchange halted trading after processing 4 million orders, the maximum it can handle. It earlier asked brokerages to pool client orders to reduce the number of transactions. The suspension may further undermine investor confidence in the exchange, which halted all trading for the first time on Nov. 1 because of an error triggered by a systems upgrade. Takuo Tsurushima resigned as president last month after glitches scuttled a planned initial public share sale this year. The exchange said the breakdown in November was caused by a systems upgrade it conducted in October and that it may bring forward the timing of another overhaul planned for February. A malfunction at the exchange on Dec. 8 prevented Mizuho Securities Co. from canceling a trading error, causing the brokerage unit of Japan's second-largest bank about 40.5 billion yen (US$350 million) of losses. "

My take:

It just needs a system upgrade. Every system will have a limit but to have just 4 or 4.5 million orders as a limit is silly, and heads should roll. The queasy thing is that the expected new upgrade to be done at the end of January 2006 by the TSE will boost its limit to 5 million trades per day - gawd.... if you are hitting 4.5 million and is already having problems, increasing to 5 million will only postpone it somewhat. Should be looking at 6-8 million at least to give the exchange some kind of buffer.

This boils down to IT people not asking enough questions/feedback from traders. Naturally the chairman/ president would do a lot of deep bowing and then resign.... sigh, how we wish for the harakiri days...

All this after a system upgrade, I thought the TSE system was alright before the upgrade. After the initial upgrade, you have the Mizuho Securities fallout - and that basically was due to the inability for the trader/securities house to cancel the order from the system immediately. I am a firm believer in that in a proper exchange, all trades sent through the system should be honoured - even if it was a mistake. However, in the case for Mizuho, the sell order that was put through was more than the actual paid up of that share - i.e. if A has a paid up of 20m shares, the sell order put through was a few x 20m shares, surely the system must have in place reasonable limits to prevent this kind of acitivity (which can sabotage any firm if you have a really disgruntled employee).

There should be prudent limits preset in the system to counter human error, another black eye for TSE. Where are the circuit breakers???

Then the TSE should have stepped in to arbitrate between the buyers and sellers. One party should not benefit excessively from a genuine mistake, especially when the system infrastructure was not smart enough to prevent these mishaps.

p/s Maybe the Bursa should ship over the KLSE system to the TSE as the Malaysian versions works a lot better - anyway the activity on KLSE is so slow anyway, we should take the TSE system in exchange (how we can hit 4 million orders a day??).

Friday, January 13, 2006

Enough Said, Please Read The Judgment

You can read it on Page 4 in NST and the front page of The Sun, ... but you will have to dig pretty hard to read it in The Star (tsk, tsk, used to be my favourite paper...) and then The Star had the audacity to leave out the names of the two corporate players. The case starring roles involved Metramac, Metro Juara, STKG, DBKL ... among others. Featuring Halim Saad and Annuar Othman. Special appearance by Justice Sri Ram. Revolves around selling a company for RM97.5m when it is due compensation of RM764m.

The greed, deception, trickery, arm twisting and collusion involved is as obvious as Lim Kok Wing's hair piece. Good thing is that cases such as these made the light of day. I thought these would be (once again) swept under the carpet of wishful thinking. It is embarassing to the country but it needs to be done, and maybe, just maybe, there will be less injustice, ... and more integrity in the financial , legal, political and economic system. Its a long and winding road ... but at least we are taking baby steps in the right direction.

The article as reported in NST 13 Jan 06: Two of the biggest names in corporate Malaysia received mention in the Court of Appeal today — and not all of it was favourable.They were Tan Sri Halim Saad, one of the country’s best known businessmen, and Tun Daim Zainuddin, the former Finance Minister. In a unanimous decision, the Court of Appeal ordered Metramac Corporation Sdn Bhd, a toll operator, to pay about RM65 million to a construction company in compensation for loss of advertising rights.Judge Datuk Gopal Sri Ram also ordered Metramac to pay Fawziah Holdings Sdn Bhd all proceeds to be received under future contract.The amount is to be assessed by a High Court registrar.He also ordered costs to Fawziah Holdings, which had appealed against a High Court ruling.Further, Sri Ram dismissed a cross-appeal by Metramac for a declaration that several agreements between them were null and void.Metramac is the owner and operator of the East-West Link Expressway (Karak-Kuantan) and Sungei Besi Expressway. Datuk Fawziah Abdul Karim and her mother Maimon Bee were directors and shareholders of Fawziah Holdings and they are also directors and shareholders of Syarikat Teratai K.G. Sdn Bhd (STKG) now known as Metramac. In July 1986, Fawziah Holdings, through STKG succeeded in obtaining a tender from the Kuala Lumpur City Hall (DBKL) to design, construct, finance and operate the privatisation of a number of roads in and around the city, which included one in Jalan Cheras. In December 1988, four institutions invested in STKG, bringing in RM65 million worth of capital. DBKL, the concessionaire, however, suspended toll collection sometime in September 1990 due to a demonstration at the Cheras toll plaza.As a result, compensation of RM764 million was payable by DBKL to STKG.STKG was then bought over by Metro Juara Sdn Bhd for RM97.5 million.Sri Ram said Metro Juara Sdn Bhd shareholders, Halim and Anuar Othman, had something which Fawziah did not: patronage of then Finance Minister Daim.The judge said DBKL was supposed to pay STKG RM764 million as compensation after suspending the company from collecting toll. However, he said Daim had told Fawziah that the Government had no money to pay compensation.It was at this juncture that Metro Juara came into the picture and bought STKG for RM97.5 million. "This is a crude form of economic duress presented in a subtle form," Sri Ram said. The judge said no right-thinking person would sell STKG for RM97.5 million when the compensation was RM764 million.Judges Datuk Hashim Mohd Yusoff and Datuk Zulkefli Ahmad Makinuddin heard the appeal with Sri Ram.Their decision was unanimous.Datuk Muhammad Shafee Abdullah, who appeared for Metramac, told the court that the company would file an appeal with the Federal Court.Datuk Dr Cyrus Das, Benjamin Dawson and Koh San Tee represented Fawziah Holdings.On March 7, 1995, Fawziah Holdings filed an action for breach of contract against Metramac seeking RM65 million as compensation for loss of advertising rights and profits under future contract.Metramac counter-claimed for a number of declarations, including that certain clauses in the agreements were null and void.It also asked for an account of all revenues received by Fauziah Holdings under those agreements.High Court judge Datuk Kang Hwee Gee had on Oct 2, 2003, ruled that Metramac was in breach of the agreements.However, Kang ordered loss of advertising rights to be assessed. He dismissed the claim for future contract .

How To Make A Bad Thing Worse (Part 2) - Proton (Again??) & Volkswagen

As reported in The Edge Daily:
Share price of Proton Holdings Bhd fell as much as 19.6% or RM1.25 on Jan 13 in a knee-jerk reaction after Volkswagen (VW) scrapped joint-venture plans to build and sell VW brand cars for the local market. VW chief executive Bernd Pischetsrieder reportedly stated that there were differences in the proposed JV.
“We had a very specific idea how we wanted to proceed there. Unfortunately the Malaysian government, Khazanah (Nasional Bhd) and Proton had different ideas. Therefore what we wanted in the cooperation with Proton will not materialise,” chief executive Bernd Pischetsrieder told investors gathered in Dearborn, Michigan, on Jan 11. VW placed the presentation from a Lehman Brothers event on its investor relations website on Jan 12.

In a Bloomberg newsbite posted on Jan 12:
Proton's spokesman Yusri Yusof said the carmaker had not received formal notice of an end to the investment proposal. ``As of today, we are still waiting for an official reply from Volkswagen,'' said Yusri, based in Shah Alam outside the Malaysian capital, in a phone interview. ``We are caught by surprise by the announcement.''

Now whose fault is that? It is bad enough that the talks have been called off, couldn't both parties have at least parted ways better - like having a joint statement!! Simple PR. It does not look good (particularly for Proton) when the spokesman for Proton had to come out and say that they are still awaiting an official reply from Volkswagen.... when the head of Volkswagen has already spoken at an auto trade show and posted it on a Lehman Brothers investor relations website!!!

No point pointing fingers at Volks or Proton now, both parties are at fault. It is unprofessional to terminate proceedings without laying out how the news/decision should be communicated. Both are long time listed companies, and to commit such a juvenile corporate error may tell us all more about BOTH companies attention to detail (or lack of), and priority on investor relations. It is also pointless for any of the two companies to come out now and explain why - its too late.

Its like a courting couple and suddenly one of them got dumped by the other via SMS - both parties end up looking baaaddd...

Tuesday, January 10, 2006

EPF's Returns vs Armed Forces Fund's Returns



I was browsing through The Star paper and came across this letter to the editor from a Dr. Chang from Klang. He cited the impressive performance of the Armed Forces Fund, which recently announced a 15.75% payout to its contributors for the last financial year. The returns included a 7% dividend, a 3.75% bonus and a special bonus of 5% in the form of free unit trust units. Dr. Chang further compared that with the sedantary EPF which declared a dividend of 4.75% for 2004. Naturally, Dr. Chang implored EPF to shore up its performance to at least somewhere closer to the Armed Forces Fund.

EPF is a convenient punching bag for all. I think 4.75% last year from EPF is decent, not in the "very good" category, but decent. There are a few things that Malaysians who contribute to EPF must know:

1) EPF is very big, and the amount of fresh funds coming in every month is also substantial. To move those funds into appropriate assets is not easy.

2) It is a pension fund, not an equity fund or even a convertible bond fund, certainly not a futures and options fund. As such, Malaysians SHOULD HOPE that EPF do not produce returns of 10% a year, because that means that they have taken on a lot more risk than the fund should to obtain that kind of return. You cannot get supernormal returns relative to prevailing interest rates without taking on a lot more corresponding risk.

3) Yes, the Armed Forces Fund produced superior returns, but I do not know the makeup of their assets exposure. I certainly hope this is a one-off for Armed Forces Fund because if they continue in that vein, it spells trouble. A one-off superior return can be acceptable, e.g. they could have sold a building at a very good price, and the book value of the building has not been revalued for a long time. You get the drift. If the Fund was speculating in some leveraged trading or hedge fund or speculative second or third liner stocks to get that superior return, somebody should at least audit the Fund's transactions and exposure. In fact, somebody higher up should do so already!!!

4) Other "good explanations" for the Fund's good performance could be allocations on certain IPOs that did very well - but those kind of things would not make a dent on the EPF's overall performance. EPF need to keep the bulk of it in local currency, and then mostly in bonds, the closer to risk-free the better. It may diversify some to foreign equity but not much, or foreign bonds particularly of our trading partners - it all has to do with balancing risk of the pension fund. Hence Malaysians certainly should not expect EPF to produce returns more than two hundred and fifty basis points than the prevailing interest rates (e.g. interest rates is 3.5%, EPF should not put up a dividend more than 6% - if they do, alarm bells should be ringing, maybe they increased their exposure to equities excessively).

5) One thing the EPF should stay away from is to act as a piggy bank for certain dubious equity holdings or loans. So far, we did not see an implosion triggered from these transactions, well, probably because as a percentage the amount is still small. However, we must strive to uphold the integrity of the pension fund and never to use it as a dumping ground or lender of last resort.

So, Dr. Chang, be wary of excessive returns, its like a girl who agrees to go home with you after 5 minutes talking at the bar - something that good gotta be "not right".

Monday, January 09, 2006

KLSE'S Low Market "Velocity"



A fellow professional and a close friend asked me today about KLSE's low market velocity. I was stumped at first because I did not know that a stock market has velocity. Velocity of money, I have heard of, but in a stock market?? Maybe its the time difference and distance when the client bangs his head against the wall after buying shares?!!

As an after thought, I think I understood his usage of the term. Its the low volume turnover on a daily basis relative to the market capitalisation. OK, granted that the fundamentals for 2005 have not been overly exciting but there are other Asian bourses which can register decent daily volume relative to their overall market capitalisation even in dull periods. Why not the KLSE??

My take:

a) Developed countries favour mutual funds investing rather than personal investing. For example, US investors are generally averse to invest in stocks themselves. Mutual funds are a preferred choice for most. As institutional funds control the market, it will have good volume. Many banks and brokers own funds management unit, and it is good for business that things "move". Malaysia's fund management industry and size is still in its infancy.

b) In more established Asian bourses, like HK and Singapore, their spread of private investors is probably similar to Malaysia. However, private investors in HK and Singapore are more likely to follow research reports and corporate news before buying or selling (especially in Singapore). Of course, there are also private investors in Singapore & HK who will jump in on hearsay and speculate on rumours, but the situation is more aggravated in Malaysia. Followers of market fundamentals will find more reason to do bottom fishing even during flat or sluggish markets. Those who don't, will tend to wait till the next bull rally comes along. The KLSE was flattish the whole of last year, can you blame the private investors for taking the year off!

c) Private investors will only be in the market when activity is bustling and simmering or boiling even. When a market is flat and/or sluggish, you can bet that most private investors in Malaysia will be out. Even bottom fishers are in the minority in Malaysia because bargain hunters after buying the stock may have wait a terribly long time before any upsurge activity can be traced. The KLSE is too much geared towards a "bull market only" participants. Activity kind of slack off considerably without leads.

d) Part of the contributing problem is the inability to short stocks - then people will really read research reports to look for bad eggs!! If stocks don't move up, nobody can or should make money. A proper stock market should allow investors to reward and punish companies according to their performance. It is of little use to "protect" companies against short sellers, just like a parent blinded by love for his "under-developed child". Let the child grow up. If a company do not want to be targeted by short sellers, get your books in order, plan your strategies properly, get decent returns, rid the company of fat, etc...

e) Commission rates still too high. If you compare with HK, the overall commission and additional rates charged per transaction by the KLSE is still high. More activity will go hand in hand with good effective transaction costs.

f) Free float restricted. Particularly from good companies. Good companies on KLSE are a dime a dozen. There is no reason to hold onto 55% or more shares of your company even if it is doing well. A good owner must hold onto the mantra that investors must be rewarded for investing in my company. A good free float should be at least 35%-45% of total shares. The lack of shares will dissuade a lot of institutional investors from putting your stock on the radar. Right now, there are not many stocks on the radar of big fund managers, so is it any wonder then that activity in volume traded is lower when compared to regional markets. If owners of good companies places out more shares deliberately, just by doubling the number of companies on the radar of big funds will bump up volume activity substantially.

So, I guess the extending of T+3 to T+7 or T+10 is part of the Bursa's scheme to encourage market velocity. As explained in my blog before, T+10 or T+7 is good, but they are bull market instruments, i.e. will be only effective when a bull market is present. Still, a good move, but the Bursa should try and get at the root of the problem.

p/s I think there are currently only 20-25 Malaysian companies on the radar of big funds, and that is out of over 1,000 listed firms.

Redtone's Tumble & Who's Next

As reported in The Edge Daily:

"REDtone International Bhd, whose share price fell to its historic low of 94 sen on Jan 6, has warned of lower earnings in the next two quarters as competition in the industry continues to intensify. Group chief executive officer Wei Chuan Beng said that its local business was operating under intense competition in the telecommunications market as major telecommunications companies were slashing their call rates. Wei also said the commercial rollout of its discounted call business in China this month would contribute to its earnings from March onwards. In Pakistan, since its commercial rollout last January, the operations have been showing monthly revenue of RM3 million. For the second quarter ended Aug 31, 2005, REDtone posted a lower-than-expected net profit of RM6.01 million. Analysts’ consensus estimates for the financial year ending Feb 28, 2006 is RM27.08 million net profit. "

To me, Redtone is easily one of the better run Mesdaq companies. In general, the level of senior management's knowledge, persistence and strategising ability are way above average. The tumble in their share price has more to do with the business itself, which itself is becoming commoditised. When it gets easier and easier to put up a box and start terminating/sending calls, when it is difficult to clamp down on illegal operators, when there are many "questionable operators" acting as intermediaries to terminate international calls at dubious below market rates - it makes for a very difficult environment to be operating in. Still, Redtone should survive albeit at lower margins.

The tumble in share price could have been lesser in quantum if the company added new revenue streams from other platforms (not VOIP related). VOIP was a good platform for Redtone to build a successful small company. Rather than fall in love with the industry, one must strategise a company's business mix much like predicting cycles and turns in real economy.

What is amazing is that there are similar type companies being helmed by people that are less capable on almost all levels when compared to Redtone, and amazingly their share prices are still standing firm - probably because institutional investors and big players have shown zero interest in them in the first place, so no shares to sell. If they had even a better spread of shareholders, these two companies (VOIP based) would and should drop by an even bigger quantum than Redtone. This is not a piece of investment advice - just an opinion - if short selling is legal, I'd be shorting Modular Tech and Nasioncom.

Wednesday, January 04, 2006


The Questions On Transparency - Proton

Well, well, now we have questions on transparency on Proton's decision to sell "the thing" for 1 Euro. Part of the letter written by Tun Mahathir and Tengku Mahaleel is reproduced below:

"Who offered to sell or who offered to buy at one Euro?
Were there other bidders?
Was there an attempt to get the buyer to pay a higher price?
Was there an announcement that M.V. Agusta was up for sale?
If not did Proton approach only one bidder?
If other bidders were offered, did they reject?
Who in fact made the decision to sell?
Can Proton explain how selling an entity bought at Euro 70 million for one Euro would not cause Proton to lose money as is claimed?

Gevi S.p.A. is not a household name in the automotive industry. Is it a motorcycle company, confident that it can turn around M.V. Agusta, something that the sale by Proton implies that Proton has no capacity or ability to turn it around? Not having to pay Euro 70 million will be an advantage for Gevi.
These are questions that need answering. As the two people most involved in the purchase of M.V. Agusta, our credibility and honesty is at stake. We want to know the correct answers. The public too may want to know as Proton is a National project.


Dr Mahathir bin Mohamad
Tengku Mahaleel Tengku Ariff "

While waiting for Proton's board to come up with some answers, here's my take:

a) Yes, Proton's board and management need to be transparent on the transaction. Was there sufficient effort expanded to secure more bids for the company? Was there an attempt to obtain a fair price for the company?

b) The questions for more transparency on the subject is very much welcomed, but why only Proton, why only now - there were so many deals that lacked transparency, but there is one, just one which totally flabbergasted most Malaysians, maybe we should put the transparency test on why Khazanah was forced to buy out Tajuddin Ramli's stake in MAS at more than twice the market price at the time?? Why were the minority shareholders not offered the same deal?? Why the selective transparency???

c) New management at Proton, and if they decided that going forward their strategy would not include the "bike company", yes, it should be discarded. There should be no need to keep businesses for "old time's sake" when they are not part of the strategy going forward. Hence the one year period in buying and selling should not matter as new management were roped in during the in-between period.

d) As for the "no loss on disposal" statement by Proton, I have made fun of them already (please read below) but let's get at the real issues, because everyone knows that it was a bad PR job and not a malicious intent to decieve.

e) Finally, if we are going to put the sale through a transparency test, we should also put the purchase through a similar test. What was the rationale for the purchase? Was the 70 million Euro plus the assumption of 232 million Euro in debt a fair price? How was the pricing arrived at? How was the turn around strategy going to be like? What was the technology transfer value?

Tuesday, January 03, 2006

Mesdaq IPOs - Meltdown & Reasons


Used to be, investors would jump in with all they have whenever there was a subscription for new IPOs. Back in the early 90s till the financial implosion in 97, most IPOs were recording opening day gains of at least 30%, and usually a lot more than that. Even during the dreary post financial crisis days, one can still get decent gains on most IPOs. For the past 3 years, Mesdaq IPOs started shakily, but thanks to new listings such as Symphony House (now transferred to the Main Board) and the huge (but sedentary YTL-e), investors got more comfortable with Mesdaq stocks. As long as one can make money, people will come in droves. Sensing an opportunity, syndicates got involved quickly. The authorities basically practiced a hands-off approach as the rise in Mesdaq activity bodes well for future listings and viability of Mesdaq.

This is good for most concerned as entrepreneurs get to cash out (well, some or most of it, if they play it smart). VCs and angel investors got to really cash out big time, thus propelling interest for the VCs to fund more start-ups.

In The Edge Daily, it was reported that: "Most Mesdaq Market initial public offerings (IPOs) in 2005 were disappointing, with more than half or 26 of the 46 listings closing on Dec 30 below their offer prices. Analysts blame the disappointing performance of these Mesdaq counters on unexciting prospects, high valuations and poor market sentiment. ... On a brighter note, analysts say a handful of Mesdaq companies such as mTouche Technology Bhd and Green Packet Bhd appear to have gotten their strategies right and are moving in the right direction. ... ES Ceramics Technology Bhd was the worst performer. Its share price fell 66% to 18.5 sen as of Dec 30 from its offer price of 55 sen. Ygl Convergence Bhd is down 58% to 37.5 sen (IPO price 90 sen); ConnectCounty Holdings Bhd 60% to 13 sen (32 sen); MLabs Systems Bhd 49% to 28 sen (55 sen). EcoFuture Bhd is down 50% to 12.5 sen (25 sen) and Vitrox Corporation Bhd 28% to 43 sen (60 sen). ... However, analysts say there were several companies that bucked the trend, especially those with strong business models and growth strategy. mTouche’s share price surged 460% to RM3.36 (60 sen) while Green Packet’s jumped 270% to RM2.04 (55 sen). TMC Life Sciences Bhd is up 136% to 90 sen (38 sen) and KZen Solutions Bhd 92% to 63.5 sen (33 sen). "

The authorities have threathened to tighten listing requirements for Mesdaq companies. Since Nov 29 last year, companies now must provide a profit forecast while non-technology-based but high-growth firms must have an audited operating revenue for at least three years. My view is that the authorities should take a hands-off approach (as much as possible) as over-regulation will impede the natural forces critical for the well-being of a "good capital market". Tightening listing requirements is good as it was a too easy to list before - but we should be careful from here on as we don't want to make it so hard to list. Bearing in mind these are "growth stocks", the risks associated with them would be much higher and investors have to understand and live with it.

What the authorities should do, is to tighten where/when the owners/promoters get to sell their shares. As these are growth companies, one is listing to secure capital to fund their growth - it is not a cashing out exercise. That being the case, the owners/promoters must show as much committment to the company as the investors are willing to bear the high risk of buying their company shares. Even the current rules are too loose for owners/promoters. We first need to tighten rules that allow owners/promoters to sell their shares. We need to discourage them from a quick turnaround. I would recommend something like:
a) owners/promoters must collectively hold at least 50% of the company's outstanding shares for 4 years
b) after the first 4 years, the minimum ownership level will be lowered to 40% for another 4 years
c) owner/promoter cannot sell a single share until 12 months after its IPO, even then they can only sell no more than 5% of outstanding shares each year

That would solve part of the problem of dumping. The danger here is that if we enforce lock-ups of a large amount of shares, it will make it easier for syndicates to play havoc with them, without the need for approval/consent from owners/promoters. However, this is not the kind of problem faced by Mesdaq listings, but rather the grave under-performance of new IPOs. Let's face the facts, for every Mesdaq IPO, only a very small amount gets to the hands of the public. The bulk has been placed out to institutions, high net worth individuals or fund managers. The fact that most of them still went below their IPO price soon after tells us that even "astute financial minds" do not consider the growth prospects of most these companies to be up to scratch. If they do, they would be holding on to these shares.

So why do we have a problem with most new IPO listings. For one, it is the over-aggressiveness of merchant bankers to score new deals that the "viability" and "growth prospects" are being glossed over. I am a firm believer in free market forces, i.e. when a merchant banker brings an issue to the market, the risks transfers to the buyer of the shares. It is up to the buyer to assess the inherent risks and attractiveness of the counter. Too much hand-holding by the merchant banker,... well, you might as well ask the merchant bank to buy the shares themselves and sell it to you when the price goes up! However, we must have a stronger link and effect on merchant banks to their IPOs, so that investors know their reputation is on the line. We need the media to focus more on performances of the Mesdaq firms and the merchant banks that took them public. If there is more accountability, eventually the merchant bankers will tighten up on themselves on the listability of a firm, whether they can get long term institutional shareholders to hold the shares instead of "trading outfits", and whether they can sell the growth prospects/concepts for the stock - plus they will make more of an effort to educate and inform the public on the prospects and make-up of each company. Below are the bankers involved in the under-performers and out-performers cited in the article in The Edge Daily. You draw your own conclusions, but its pretty clear to me. Just go ahead and list the Mesdaq IPOs and their sponsors for the past 2 years and see how they have been performing.

Under-performers

YGL Convergence - K&N Kenanga
ES Ceramics - AmMerchant Bank
Connect County -AmMerchant Bank
MLabs Systems - Alliance Merchant Bank
EcoFuture - Affin Merchant Bank
Vitrox - Hwang DBS

Out-Performers

mTouche - Public Merchant Bank
KZen Solutions - Public Merchant Bank
Green Packet - OSK Merchant Bank
TMC Life Sciences - AmMerchant Bank