Tuesday, February 28, 2006

Initial Report Card For Idris Jala (MAS)
Not Good, Man... Not Good

As reported in The Edge Daily (28/2/06): "Malaysian Airline System Bhd (MAS), went deeper into the red with a net loss of RM1.3 billion for the nine months to Dec 31, 2005, is deep in all sorts of crises and needs to turn things around fast to avoid a complete collapse. Facing a “current cash crisis”, its cash of RM1.17 billion as at Dec 31 may be depleted by April and losses will total RM1.7 billion by end-2006, if it continues on its present course.It will need RM4 billion in cash that will be raised through internal and external sources to tide it through the crisis. Its banes include high operating costs and unprofitable routes. It posted a net loss of RM616.43 million in the third quarter ended Dec 31, weighed down by higher operating costs including fuel costs and additional provision relating to receivable and engineering spares, compared with a net profit of RM57.62 million a year earlier. Revenue was RM3.17 billion, up 4.5% from RM3.03 billion a year ago. For the nine-month period, net loss was RM1.26 billion compared to a net profit of RM216.91 million a year earlier. Revenue was RM9.08 billion, up 10% from RM8.25 billion. Idris said out of the RM4 billion needed, RM1.1 billion would come from cost-cutting measures, RM1 billion from short-term borrowings and RM2 billion from “long-term” government aid. "The fact that we have secured RM1 billion has put less pressure. All options are available. We are talking to Khazanah (Nasional Bhd) and the MoF (Ministry of Finance),” he said. "

My observations:

1) RM4 billion is needed to turn around MAS - Is there a better way to use the RM4 billion, because I can get RM200 million in interest a year without risking the RM4 billion at all. What kind of risk/reward scenario are we looking at? Have we looked at the opportunity cost of using RM4 billion to TRY and turnaround MAS? Why didn't MAS go to the capital markets for the funds, if foreign lenders are going to reject the fund raising, why aren't we? Are we comfortable with the situation MAS is in? Are we throwing good money after bad money?

2) Jala said he will NOT consider job cuts but will drop unprofitable international routes, and will raise prices for domestic routes - How can Jala rule out job cuts, the company is bleeding operationally, job cuts are inevitable. As for raising prices for domestic routes, that is so against the tide because many of the domestic routes MAS operates in are also handled by Air Asia (AA) and AA charges even lower and still makes a profit, and here you go to raise prices on these routes to attract customers - fuzzy logic, not going to work. An additional 10% of zero is nothing. Cutting unprofitable international routes - jumping the gun here. MAS is not the only international airline with unprofitable routes, by cutting them in a knee jerk reaction, it will be difficult to win back customers and routes - all airlines have this problem, they solve it by joining mini-cartels in alliances to do code sharing, obviously MAS has not been strong in this area at all - go and appoint a top notch person/team that is strong on networking/alliances/routing capability.

3) Root of problem - High operating cost and unprofitable routes - have addressed the latter, as for operating cost, MAS needs to learn from AA or SIA. Does MAS have specific performance targets for each department or cost ratio analysis, boy, do they need key performance indices to be efficient. There is probably no mechanism currently to provide the efficiency feedback. Again, please consider buying a small stake in AA and let AA run the domestic routes.

Jala did not mention about how most of the losses is due to mismanagement of fuel oil exposure. This is not the first year MAS is operating as an airline, fuel price volatility is part of the business. If you can incur such huge losses on fuel oil, that means the company has taken huge bets on the direction of the price of fuel oil, one way or another. MAS must realise they are not in the position to trade fuel oil. The fact that Jala has been quiet on this issue makes me think his hands are tied and he does not wish to shame the previous management.

What about the previous management, why is there no censure, board of review, investigation into what caused the downfall of MAS? Surely, somebody must be interested to see if there was CBT or gross negligence on the part of management - no sound, backbenchers on holidays - that is why GLCs will always under-perform, Khazanah can lead the way to turn the tide by punishing "bad management" (if that was found to be true). When professional managers can just up and leave and leave behind a mess, with no inquisition - where is the incentive to perform? It will be the same cycle over and over again.

I have written about Jala before, and his performance for announcing measures to counter the blood letting misses the mark almost on all points. Even if you get the RM4 billion, it will be wasted. If nothing changes, soon MAS will come asking for more money again, then what? After a few years, when nobody will lend MAS any more money, the government will have to step in and privatise the company - at the expense of Malaysians. We are not blaming Jala for the actual losses, nothing was his fault, but he was brought in to correct those problems - man, Jala you are offering the wrong medicine for the disease. Jala, you did not address the right problems and when you did address the right problems, you give the wrong cure (and I am being nice, Simon Cowell would have slaughtered you). Initial report card: D-.

Government Investing Agencies - Less Is More
There Are Valid Reasons For Their Existence

Rohan888 wrote the following: "Should a country actually hold shares in companies? You mention Temasek as an example, but I think there are dozens of countries who do not own any shares in any (local or foreign) companies or only limited (for instance only the natural resources industries like oil and gas exploration). I think that the Singaporean example is both positive and negative. Most initiatives seem to come from the government holdings, not from private investors/inventors etc., not sure if that is so healthy for the future." Thank you Rohan888 for helping me to clarify my opinion.

As a rule of thumb, governments should NOT own shares in companies (local or foreign) unless the industry or sector needs to be protected or controlled (to some extent) - e.g. utilities, telecommunications, media are good examples. So, the first exception is where national interest is at stake. Some countries will also pull in the media as a political mouthpiece. Then there are natural resources within the country that needs "protection" to save it from being controlled by foreign parties - such as oil & gas reserves, ports, timber concessions, etc...

One can argue that a government can already control investment flows into and out of the respective sectors by laws/approval and review committees, hence you do not actually need to own them. Yes and no, when the assets are huge, no one company can even think of swallowing such an asset, least of all try and control it.

The second reason why governments have to get involved is size. Assets can be too big for a company. For Malaysia & Singapore's case, certain ventures may require too high a capital base, thus a government linked venture has to step in. Things like the MSC, Putrajaya, the two casinos in Singapore, national car project, industrial parks ... require government intervention.

The third reason is diversification. Malaysia and Singapore are small countries and the industrial base is tiny. Neither do we have critical mass of population to support our economic production, hence we need to trade and export - which means we have to be reliant on other countries. We need to diversify our "accumulated earnings" into industries that we are not strong in to solidify and secure our economic competitiveness. Say, a country like Sri Lanka and 90% of export earnings is from exporting tea leaves. Plus they do not reinvest the earnings into other foreign industries. The country would be so vulnerable to the vagaries of price movements in the tea market. Even if they can produce and export 10% more tea each year, it will ruin the nation if the price of tea falls by 15% every year or crops get wiped out every now and then.

A state investment vehicle is usually vibrant when a country has managed to record good trade surpluses for an extended period. In Singapore, I agree that the government linked arms are very strong and their decisions are heavy handed. It could mean that nothing big will be accomplished or undertaken by private enterprises if they keep inviting government linked arms to take the lead in significant projects. These state units should be there to "support" local companies, allow entrepreneurship to bubble among the masses - once the public get the feeling that the big stuff are left for the big fish, no one will bother to venture out from their pond to the big sea. No one should feel that nothing ever moves unless the government moves! In Malaysia, control in certain companies should be reduced by the government gradually - intervention by the government should be minimised, hands-off policy... less is more.

Monday, February 27, 2006

Khazanah's Report Card



Wow, what an ambitious article. Who is even qualified to make a call on Khazanah (K) with the amount of brain power on hand? Anyway, I jest, it is important to consider the "performance" of Khazanah regularly now since it has been helmed by Azman Mokhtar because of the timeline of objectives it has taken on. These objectives will have a big impact of the performance of KLSE/KLCI and how the Bursa will be viewed by the global investment community.

Key themes of Khazanah Nasional's mandate as a strategic investment house include: a) Creating sustainable value; b) Raising national competitiveness; c) cultivating a culture of high performance. These are to be achieved via four strategic pillars; namely,
- Legacy investments: streamline, restructure, nurture
- GLC transformation: Increase shareholder and strategic value
- New investments: New sectors, cross border
- Human Capital Management: Active leadership management


1) Legacy investments - Well, Azman and his team was not responsible for what is on Khazanah's portfolio. He can only do with what he has been given. If one were to examine the full portfolio, one can already make some "smart investing decisions". Let's just consider the healthcare sector - Khazanah has a 10.87% stake in Apollo Hospitals, a 36.6% stake in Faber and a 28.9% stake in Pharmaniaga. Naturally to consolidate all operations under one management would allow for better synergies and cost savings. So, which vehicle would you use to absorb the rest (as a rule of thumb, you should use a less attractive vehicle to issue shares when buying assets), but in this case we have to bear in mind that control is of utmost importance. This is what is likely to happen: take Faber private because Faber is trading way under fair value, can probably succeed by buying at RM0.70 or RM0.80, still way undervalued. Once K has 100% of Faber, inject both AH and Faber into Pharmaniaga for shares. This will propel K's holdings in Pharmaniaga enormously. Why not the reverse, you might ask, well its a bit like a very attractive girl going out with a guy - injecting 100% of Pharmaniaga into Faber is like a guy asking the attractive girl out (iffy and the real impact may/may not be exciting); but injecting 100% Faber into Pharmaniaga is like an attractive girl asking you out (cannot lose and there are bound to be boasting rights!). As an investing strategy - collect Faber as much as you can; once they announce the privatisation deal, start unloading Faber but buy Pharma - this is however a very, very long term thing to play out, 1-2 years at least but it should happen. I cannot believe Azman will let these 3 stakes to be left alone like that. When you know what value, synergies and efficient usage of capital are - you will tear your hair out if you can put those things into place.

On the transportation sector, we can see that K only has a 0.53% stake in MISC. If I was Azman, I'd be pretty disappointed with that. Don't know how yet, but if I was driving the K ship, I will be looking to buy more MISC, at least triple the holdings. MISC is important and strategic, in fact, Petronas should be the one selling down some of it. As for MAS, that is a big headache as K has 69.34% - like I have mentioned before, the best way out for MAS is to take a stake in Air Asia and work together to sort out matters (please read blog on Air Asia).

As for auto sector, the 42.74% stake in Proton is definitely political soccer ball. If one is an objective analyst, you don't want Proton to go it alone, it doesn't have the critical mass of market demand. I believe Azman will invite a JV partner to come in, even lose control if that's what it takes. Proton could be a good recovery play once they have a JV partner. Proton as it stands would be a good regional production, sourcing and distribution channel for one of the top 10 car makers.

As for technology sector, its 19.96% stake in D'nonce is neither here nor there - get rid of it already. Other things to get rid of becaus ethey are too small include: 9.9% stake in Parkson Retail (profitable though); 0.16% stake in RHB Capital; 17.2% stake in Ho Hup; and the excruciating 24.85% stake in Parkmay. A place such as K should have a certain number of top managers for it to function effectively. One person can maybe manage/oversee 2-4 companies or 1/2 sectors well. If you have ten top people, you should want them to look at stakes of at least RM200 million and above. Having one person to manage four companies of very small stakes (say RM40 million worth) will be a waste of resources no matter how much value he/she can add to the RM40 million. So, get rid of the small value stakes even if they are profitable.

2) GLC Transformation - The GLC transformation is unique as K got involved with not just companies under K but all government linked companies. The changes in top management insituted and the implementation of specific KPIs for each company/sector is well and good. Still need to see how this all pans out. It is important to see what Azman will do when certain heads fail to attain their KPIs - that will give a better indication of the effectiveness and follow through program.

3) Human Capital Management - This ties in with the how K works with the leaders of the companies under its helm and other GLCs. So far so good, some brave appointments made and some even braver decisions to let certain people go. Internally, K has a slight problem - there are roughly 16 director/executive director positions within K. If we were to take out the functionary duties such as HR/financial controller/IT/legal, the 16 positions would be down to 14. The thing is, Azman used to be the Director / Head of Research for UBS in Malaysia. Guess how many of the 13 positions are filled by very senior alumni of UBS... 3, so including Azman it will be 4. Well, we work with who we know best, but we must also be careful not to be regarded as an unofficial subsidiary of UBS. We should not give the impression that K could care less about what the world thinks or possibility that people might talk - even though we have done everything transparently. This is something Azman will have to look at, perception is also important sometimes, you can do without the vicious whispers.

4) New Investments - New sectors and cross borders. This is about time, and though some may say K is following the footsteps of Temasek, so what. As a small country with a population that is way deficient under the "critical mass measuring tape", we need to secure significant stakes to ensure whave a finger in some of the future's important big pies. This will diversify our country's holdings, hence our wealth, hence our economic viability and dependency. Just imagine if all we have to depend on are oil & gas and the natural resources of timber, rubber and oil palm. What if all these market prices halve in ten years time - it could happen, there could be advances made in science and technology to come up with viable and cheaper substitutes? Our country's economic destiny cannot be tie in with just our resources, we need to spot "growth sectors of the future" that we may not be very strong in or have the natural factors to compete (no population for demand), and then invest accordingly.

To do that, K will be selling some stakes. I have touched upon that before but not all stakes are attractive to buyers. If you have to sell something tomorrow, K will probably be able to offload some of its: 55.22% UEM World; 10.56% DRB-Hicom; 30.04% TimedotCom; 21.48% Astro; 44% Time Engineering; 40.17% Telekom; 37.35% Tenaga; etc... Certain stakes are okay to be lowered, certain stakes K would not even consider selling, these are good, important stakes such as 17.32% Pos Malaysia; 3.65% Maybank; 6.23% EON... to name a few. The few that will probably be sold down (not all just part of it) and would be of interest to foreign investors:
a) Tenaga Nasional
b) Telekom Malaysia
c) UEM World
d) DRB-Hicom
e) Astro
It is also likely that K will tap the global bonds market for funds to buy stakes in foreign companies. K should not have a problem raising US$1-2 billion as it has a net worth of around US$12 billion, you need that as a starter.

Some investors might fear that if K sells down some of its stakes, that would lead to a drop in their share prices as well. Well, that is not the case in reality. In fact, as the "controlling party" sells down shares in a decent company, the share price actually performs better with better liquidity as that attracts more institutional buyers. The main objection foreign funds have for not buying Malaysian stocks is lack of liquidity, not that they don't like the company, but that they need to get in with a certain size to make it count, and need the volume to get in and out when he/she chooses. In fact, I am willing to bet that the KLCI wil tread on higher ground once more details are revealed on K's selling down its stakes and the overall global investing community will receive the news positively.

I believe the bulk of the new investments overseas will be targeted at the IT side of things, because that's where we are weak in. I also believe that Azman and his team will need to work much closer with the people from BI Walden (highly successful venture capitalists in the US and Asia, and they have some highly astute professionals at the top of their company) for link up work. K has a 34.09% stake in BI Walden Ventures Ketiga.

So, the report card for Khazanah - before Azman was appointed: C-. The period under Azman Mokhtar: B+.

New Aussie Advertising Campaign
"Where The Bloody Hell Are You?" & Singapore Is Different

Many of you might already know this, the Australian tourism folks have launched a A$180 million advertising campaign to attract foreign visitors. It goes something like this:

It begins in an outback pub with a farmer saying: "We've poured you a beer". Then follows a sequence of iddyllic scenes including a boy at the beach saying "We've got the sharks out the pool", and party goers watching Sydney Harbour fireworks saying, "We've turned on the lights". A traditional Aboriginal dancer says, "And we've been rehearsing for more than 40,000 years". The ad ends at a white sandy beach with a bikini-clad young woman stepping out of the sea asking "So where the bloody hell are you?"

Though there have been detractors both in Australia and elsewhere, if you really know OZ land, that phrase is such a harmless expression. The phrase in question automatically brings the conversation between two people so much closer and intimate, no pretences, no airs, no polite repaartee - all very Australian qualities. A great advertising idea and campaign in my mind. (Yes, I studied and worked in Sydney for about 10 years).

The funny thing about all this is that whether the new slogan will be lost in translation. Fran Bailey, the Australian tourism minister, said the "bloody hell" slogan would be used everywhere except in Singapore "to respect local laws". In Singapore, the ad will simply say, "Where are you?" (LOL... maybe Singaporeans should be only allowed to visit Wollongong or Jenolan Caves as they are largely untainted and free from harmful societal influences).

What if Singapore were to do a similar ad, trying to draw visitors to the island state? Colloquial charm to the max, hokkien-singlish mix, the ad should end with "Kan Nee-Niah, lu chor har mee, come here lah" (ha-ha... rhyme some more).

Saturday, February 25, 2006

DPW and P&O - Bush Finally Doing Something Right

First Singapore's PSA International thought they had the deal sealed with its US$6.4 billion bid for P&O (a UK ports & ferries group). Even P&O were happy with the bid. The deal would have made PSA the world's largest ports company. But no, petrodollars effect reared its ugly neck when DP World decided that they MUST have P&O at any cost - literally. How about US$6.9 billion! Thankfully, PSA pulled out of the bidding war, which was already at stratospheric level. The premium being paid for the acquisition is for control, for size and status. Well, we thought the deal was done, but NOOOOO... some American senators have to step in to block the deal. Finally, President Bush did something which I agree with. It is wonderful to see Bush doing something of value in addition to being good fodder for comedians.

Bush surprisingly defended DPW's deal, which would include the operation of seaports in Baltimore and five other cities in the US. Bush threathened to veto if Congress tries to kill a deal his administration has approved. Facing a sharp bipartisan backlash, Bush took the unusual step of summoning reporters to the front of Air Force One to condemn efforts to block a firm from the United Arab Emirates from purchasing the rights to manage ports that include those in New York and New Orleans. The deal has to go through. The fact that so many senators protested the deal shows THE TOTAL LACK OF APPRECIATION OF THE DIFFERENCES BETWEEN ASIAN NATIONS. Dubai or UAE is a totally different animal from the more volatile Middle Eastern countries. The assumption that everyone who sport the same skin tone will act and behave similarly??!! The fact that the P&O only has slightly more than 10% of its assets in the US was also missed. The fact that the USA SHOULD NOT PREJUDGE a company based on its location or heritage was not considered. The protestations showed how naive some Americans are when it comes to dealing with international politics and business - WE ARE NOT ALL THE SAME. Its like categorising all Europeans as ONE TYPE OF PEOPLE WHO BEHAVE ALIKE!!??

Prejudging, preconceived ideas... that's the hall mark of subtle racism, or in this case, not so subtle. We all understand the paranoia due to 9-11, but knee jerk conclusions are not needed. The main reason why Americans as a country is hated generally by the rest of the world is that they failed to appreciate the nuances, differences, heritage, cultural sensitivities and many other aspects of each country. Policies are rushed through and rammed down everyone's throats. At least Bush is doing something to reverse that.

The cycnics would want you to believe that Bush is supporting the deal with UAE because UAE has bought US$8.4 billion worth of military equipment from the US and France over the past 5 years. While it is true that UAE has in recent times bought a significant 80 F-16 fighter planes from the US, 36 British Aerospace Hawks, 100 ground attack aircrafts, 4 warships from Germany, 2 frigates from Holland, 400 battle tanks from France ... and a partridge in a pear tree... so what. UAE has been and can still be a voice of reason for the rest of the world in the Middle East. This is a country with the world's third largest oil reserves and fifth largest gas reserves. The most important thing is UAE is modern, forward looking, wants to assimilate into the world of business... successfully, and is an important friend and ally for most of the democratic world.

"I want those who are questioning it to step up and explain why all of a sudden a Middle Eastern company is held to a different standard than a British company," Bush told reporters. He concluded that it poses no threat to national security. He praised the United Arab Emirates as a close ally against terrorism and warned of sending the wrong message to the world by condemning a business just because it is Arab-owned. Does any of the protesters know that the United Arab Emirates provides docking rights for more U.S. Navy ships than any other nation in the region. It is pretty important that Bush prevails in this stance - this will send a powerful and positive message to all - to remove the paranoia, read, learn, accept, understand and tolerate.

Friday, February 24, 2006

UFS Buying PT Kiani Kertas
Got More Than UFS Bargained For

United Fiber System Ltd is a listed company in Singapore. It had the guts and gumption to consider a takeover of PT Kiani Kertas, a company once controlled by Suharto's ex-son-in-law Prabowo Subianto. Back in August 2005, UFS appointed Deutsche Bank as its financial advisor and financing arranger for the deal. (For a totally different case but also involving Deutsche Bank and co-starring Indonesian / Singaporean companies, please read blog on Deutsche Bank vs Beckett).

Johnathan Paul DB's Co-Head of Global Banking, Asia-Pacific said at the time, "We believe the proposed investment opportunity will further enhance the development of UFS into a key player in the international pulp market...". On 25 June 2005, UFS signed a Letter Of Intent with Kingsclere Finance Limited to buy a majority stake in PT Kiani Kertas and on 25 July 2005 UFS had entered into an Operational Management Agreement with PT Kiani Kertas to operate the pulp mill while the transaction is in progress. That LOI was amended last month when UFS took on the exclusive sale and purchase agreements between Kingsclere Finance Limited and the vendors of Kiani Kertas to acquire 100% interest in Kiani Kertas. Kingsclere had entered into the exclusive sales and purchase agreements with the owners of Kiani Kertas on 5 December 2005.

However, DB has quit as adviser on the takeover amid pressure from environmentalists concerned at the fate of Borneo’s forests. In stepped Merrill Lynch to replace DB as the funder and co-buyer under the consortium led by UFS. The withdrawal by DB could actually lead to a collapse of the proposed acquisition, as other investment banks may be unlikely to replace it for fear of attacks by environmental campaigners.

Speak of the devil, just yesterday, Merrill Lynch has decided against funding UFS also. That means it is the third investment bank to turn down UFS after rejections from DB and JP Morgan.

The problems surrounding PT Kiani Kertas also highlight Indonesia’s struggle to overcome the legacy of three decades of rule by former president Suharto, as the company is owned by a consortium led by a former son-in-law of the one-time strongman.

The environmentalists argue UFS should cancel plans to build a new wood chip mill and pulp mill in addition to the existing Kiani Kertas facility, as this would place too much pressure on Borneo’s diminishing natural rainforests.
UFS argues the project has a 10-year supply of sustainable wood, but the campaigners maintain that the combined facilities would have capacity far in excess of available existing sources of plantation timber, creating an incentive to clear more natural forest for plantation.


Upon completion of the acquisition (assuming UFS can find a funder for the deal), UFS will pay US$220 million to the vendors of Kiani Kertas in the form of a combination of cash, zero coupon mandatory convertible bonds maturing twelve (12) months after completion and promissory notes issued that are to be redeemed over thirtythree (33) months. The Kiani Kertas mill is a large scale modern plant with an annual capacity of 525,000 tonnes.

The state-owned PT Bank Mandiri said that it has no plans to cut the debt of paper company PT Kiani Kertas. "We still want investors who want to take over Kiani to repay at least US$201 million plus US$13 million in interest," Ekoputro Adijayanto, the bank's spokesman said. Adijayanto said Bank Mandiri would only consider bids for Kiani Kertas of at least US$201 million. His statement came after a Singapore Straits Times report in Singapore which quoted Adijayanto as saying that Bank Mandiri may consider forgiving part of Kiani Kertas' US$201 million debt.

Now UFS is apparently working with ANZ to see if they can come up with the funds. The funny thing is that ML decided not to fund the deal but is apparently still in the consortium with UFS to buy PT Kiani Kertas - ok to buy, not ok to fund??!! The other interesting thing to come out from this adventure is the role played by JP Morgan - JPM pulled out after clashes with UFS' major shareholder on environmental issues - gee, looks like you can make a billion dollars and still be a good corporate citizen - ok JPM, come and take me public anytime, man.

At the end of the day, it also looks like UFS is a wee bit too small to attempt such a takeover. The fact that operating results for existing busineses under UFS have been bland for the last 2 years also do not bode well. Plus the fact that this is a politically-charged company. The fact that UFS have had to go through rejection after rejection for funding shows a lot of (lack of) pre-planning and naiveness in investing in Indonesia. ... (go on, go on now.. go back to the kiddy pool).

Of Market Rallies, Stock Manipulation & Rubbish IPOs

A frequent visitor and commentator to my site is Rohan888, love your learned comments, man. It gets my juices flowing. He just posted the following reply: "The last half year at least 90% of the BM trading days losers outnumber winners, and 100% of the days there is last minute support by "the invisible hand". The only reason the index is holding up well is because of the top 10 counters, who have more weight than the other 990.Add to this that one of the most speculative counters (THHin) is associated to the former head of the SC, and that the current head of the BM thinks it is a good idea to swamp the market with even more rubbish IPO's.Are these good signs for the Malaysian market? I get the impression that it gets less and less relevant in Asia let alone in the world, and for the right reasons it seems. "

1) 90% days are down days - That is pretty normal actually. A normal year would see probably just 2-3 bullish runs, each lasting between 2-4 weeks. So you can guess how the rest of the days are going to be like. Bull runs are necessarily like that because it needs the convergence of a number of factors before taking off - and the main factor being sufficient liquidity in the system. Its a bit like inviting people to a party and getting them drunk for all to have a good time - it is hard enough to drag most to the party as some may be feeling down due to job instability, got laid off, fending off bankruptcy, business failing, overheads rising, blah-blah... So, to get sufficient people to the party is a headache in the first place, then you have to get them to drink, and for some to drink they need the right mood music, etc... So 2-3 bullish periods a year is about average.

2) Top heavy - Unfortunately, not talking about girls here. The index is weighted to favour the top 10 or even the top 20, hence the index is more stable - fair comment. However, that is usually the case in most markets. One can only support the index so much, I mean, did you see how far the index collapsed to in 97/98, we are talking 400-500 level. Where was the collusion to support then? Even so, last year the KLCI was one of the worst performers in Asia by staying put the whole year, so I do not think there had been a collusion or conspiracy by the "invisible hand".

3) Even the ex-head of the SC has to find work somehow. When Ali Kadir was in charge of the SC, I must say there were headways made in corporate governance. TH Hin is a decent company. As in some boardroom tussle, shares are bought up to shore up defences or alliances. If you look at TH Hin's shares, it went back to normalised trading range pretty quickly. A properly manipulated counter would require concerted effort to prop up and take in the buyers over a period of time and then unload gradually before letting the bottom fall off - that takes at least 1-3 months. Have a comparison on price range and trading activity of Farm Best or Mithril - very deliberate and not very subtle at all, man. TH Hin does not fall into that category.

4) Rubbish IPOs - That I agree with you but not all IPOs are supposed to be decent, or else people won't have to do their homework. If you read my blog a couple of months ago on Mesdaq stocks meltdown, you will find a linkage between poor IPOs and certain merchant bankers who brought them public. Some merchant bankers are careful, cautious about their reputation... while some have targets to meet or an aggressive profit sharing scheme. Buyers beware. Malaysia has a record which not many people know - we probably have one of the higher ratio of GDP that is listed in the world. What that means is that once a business (any business) makes RM1 million - RM3 million a year, merchant bankers will be knocking on their doors to prepare them for listing. When Mesdaq was introduced, you don't even have to make money, just have a good idea (no need to be brilliant, just good) - not that I am knocking Mesdaq. Hence, what you are left with that is NOT LISTED are laundromats, papa-mama shops, coffee shops, mamak stalls (even though many are raking in millions, nobody should know the real figures right!, so no listing), etc... Most developed countries in Europe have only half of our percentage of the economy that is listed. So, getting listed in Malaysia is a normal procedure, and that is also why the stock market's fortunes tie in so closely to our personal and country's financial well-being. The link is a lot less in many developed nations.

Thursday, February 23, 2006

Markets Are Always Looking For Reasons


Be Smart Buyers Of Stocks

How do you characterise the minor correction, particularly in second and third liners, over the last few days? It is a normal occurrence, especially in a bullish market. I do not trade the market anymore for short term gains (i.e. less than 10 days turnaround).

Whenever you say that you like a stock, there will always be some who will question your integrity the moment it dips. Let's be fair here, an opinion on a stock is just that, an opinion, not a fail-proof trading idea. Certainly not one that will provide for the immaculate in-and-out. Hence when you buy a stock, do not be flustered if the price drops soon after - always ask if the basis, justification and grounds of your purchase are still intact. If they are, everything should even out in the end.

Market rallies such as the one seen on KLSE for the past month needs to be understood further. The leaders of the market for the past one month were second and third liners, that should be easy to spot. That also meant that the beta of these stocks (volatility) are very high. Barring any "bad news", the rally should continue for some time. Markets are always looking for reasons, either to go up, or down. The skill is in spotting what is "reason enough". Bull markets tend to brush away a lot of negative news. Bear markets tend to brush away a lot of good news. Deciding on what will turn the tide - well, like they say, you have pay the tuition fees, man!

When markets run up like it did for the past month - fair and not overly excessive - all participants are looking for reasons to correct. Usually a run will last 1-2 weeks tops, and then correct slightly before moving forward again. Prolonging the bull run will only build up the anticipation of a correction even more, thus making the correction quantum more severe than it needed to be, when it finally arrives.

Discerning between what is "really bad market moving news" - usually they are new news (not the ones that are heard once a week like GDP growth forecasts; or another economist's bearish prediction; or research houses sell recommendations; etc.). They may involve a corporate scandal/ manipulation/ CBT. The bird flu thing which cropped up last week was a good example of largely unanticipated news. I do not think the market's over-reacting here because Asian countries have seen examples of the effect it can have on the real economy should portions of the economy shut down.

Markets are necessarily a discounting instrument. It tries to discount all the realistic projections, net present values, etc... as best it could. If the market really thinks that Malaysia's GDP would grow by 8% in 2008 - the stock market would move up to try and discount that properly. In general, the stock market cannot look too far ahead, 12-18 months is about as far as it will go as studies have shown that markets seem to regard anything longer than that as too wishy-washy to take into account properly (i.e. too many variables and things can happen to change the equation).

I have stated that I am bullish for Asian stocks this year, and I have not seen anything that would derail that, with the exception of a full blown bird flu epidemic.


Monday, February 20, 2006

Deutsche Bank vs Beckett
Political Risk, Investment Risk, Country Risk

This legal case is being heard in Singapore, and hence will be patchily reported in Malaysia (if at all). However, the case is very interesting for all regional investors concerned as it exemplifies the 3 different risks of investing in a developing nation. The strange thing is that the "aggrieved party" is an Indonesian concern. Apparently, there is political clout and real political clout.

During the terrible days after the financial implosion, DB arranged a US$100 million loan to Beckett (controlled by Sukanto Tanoto and Hasjim Djojohadikusumo). This loan largely funded Beckett's profitable stake in Adaro Indonesia, allowing Beckett's stake to rise from 15% to 40% in one of the world's biggest coal mines. Both DB and Beckett are registered in Singapore.

Following that, Beckett had problems keeping up with payments and in 2001 DB exercised its right to sell the highly prized 40% stake in Adaro Indonesia to Edwin Soeryadjaya for just US$44.2 million. The stake has since been sold off last year by ES to a consortium in recent times to Goldman Sachs, Citigroup and a Singapore government investment arm.

The main point of contention from Beckett was that the US$100m loan was offered as part of a longer term capital raising plan proposed by DB. Obviously Beckett claimed that the follow up financing was not made to them thus causing them to lose control of the collateral. Did DB or people in DB collude with ES? Wow, better than fictional spy movie.

The accusations were aplenty, here's my take:

1) The court and legal processes in Singapore are efficient, and the ability to seize collateral and exercise it may actually encourage more foreign companies to set up official companies in Singapore when dealing with companies/countries in the region. It may prove to be a big step to encouraging all parties to set up Singapore based entities when signing up important deals - this could be made a preferred requirement by foreign companies in the future.

2) Is Beckett's court actions only put in place because of the sharp rise in coal prices over the last 2 years?

3) The stake was already on-sold to an influential consortium, who should be aware of Beckett's claims prior to the purchase, or is it otherwise? If the consortium was aware of Beckett's intention to sue, why did it go ahead with the purchase? Was it so confident that the deal would stand with a Singapore government investment arm in its consortium?

4) If the consortium was not aware of Beckett's protestations and intentions to sue, what would become of the "stake" if Beckett prove to be successful in its claims? Many observers would also be quietly aware that this case involve a Singapore government investment arm - any "gives or takes" or will justice and fairness prevail the day.

5) DB's actions in seizing the collateral and selling it quickly looks dubious. Surely, the coal mine is a very attractive asset even back in 2001, and a refinancing package based on the 40% stake in Adaro Indonesia should have been a more acceptable solution even though Beckett has defaulted on the earlier loan. The fact that DB did not keep written records of crucial meetings as it negotiated the sale to ES again makes it more questionable. There is no evidence of DB calling for alternative bids. DB has countered that by saying that they did receive two other bids, but were lower than ES'.

On the surface of it all, it looks like DB could lose the case, which will bring forth a lot of repercussions for all parties involved, not to mention a number of heads to roll at DB.

Thursday, February 16, 2006

Bursa - Look Deeper To See The Warts



As reported in The Star Biz today (16/2/06): Bursa Malaysia Bhd reported a net profit of RM81.3mil for the year ended Dec 31, 2005, surpassing the RM60.3mil it forecast at the time of its initial public offering (IPO) in February last year. The company announced a final gross dividend of 10 sen a share following an interim gross dividend of 10 sen that was paid earlier. These are apart from the capital distribution of 83 sen a share in December. Yusli Mohamed Yusoff Chief executive officer Yusli Mohamed Yusoff pointed out that Bursa produced a total shareholder return of 88% for investors who successfully subscribed to the shares at RM3 each last year. This outstanding total shareholder return is based on the dividends paid and payable for its 2005 financial year, cash distribution and appreciation in its share price that closed at RM4.68 yesterday. Yusli said improvements in the financial results were achieved in spite of the “challenging market conditions” last year. One aspect of these conditions was a significant withdrawal of retail investors from trading or investing in stocks. Yusli said retail participation in the market formed only 29% of trading value – an eight-year low – compared with 71% by institutional investors last year. As a group, individuals accounted for only a third of total turnover versus about 50% in previous years. “We would like to draw retail investors back into the market,” he added. In doing so, Bursa will work closely with the brokerages. The research sponsored by Bursa for small listed companies, for instance, was working well. Chief operating officer Omar Merican said more products would be introduced for retail investors who formed a growth sector of customers. The country has a young population and each year, there are half a million new investors. “They should shift their savings into good investments,” he said. Yusli observed that as investors' sentiment improved, market velocity improved from 25% last year to 30% up to Feb 10. “We hope the current volume of trading can be sustained,” he said.

The financial results were good. However, an exchange's priority is more than just EPS or total return on assets. The board and management have to put into place startegies, product development, improve market monitoring & surveilence, championing the integrity of the markets and protecting minority interests. So, a proper report card will look at many facets of operations, and more so, the management's awareness of growth factors needed to elevate the Bursa to the next level. Here are some of the other important factors that should be addressed by the Bursa and how well they have been faring:

a) Number of IPOs - While that is a function of the underlying economy, it is nonetheless the role of Bursa to facilitate a steady stream of good IPOs to excite investors. It is a quandry, the Bursa should have a good pipeline of listings and at the same time do more have more checks and QCs to maintain the integrity of the exchange in terms of companies allowed to be listed (2005: C)

b) Funds Raised - One of the main functions of an exchange is to facilitate companies to raise funds. It could be in the form of an IPO, or promotion of new instruments such as REITs. Bursa should also have closer dialogue and working relationship to speed up approvals/rejections on applications for issuance of new shares/rights or other forms of fund raising. A speedy turnaround allows for a more effective exchange (2005: B)

c) Companies Regulation & Governance - An exchange in concert with the Securities Commission should be keeping regulatory standards of Malaysia on par with market's best practices. So far so good, albeit a tad excessive. Quarterly reporting already places too swift a turnaround doing just numbers collating with little value add. Over-regulation imposes a higher running cost for certain departments, and at the same time over-burdens the board and management with mundane issues when they could be focusing on more important ones. Ask any board and management if they think the current system should be lightened - probably 99% would want things to be lighter by 20%-30% (2005: B)

d) New Instruments - An exchange should not just introduce new instruments every so often unless it is thought to provide the market with more breadth, and the market participants have the ability to trade the instruments as informed investors. The introduction of REITs is a welcomed move as it will allow for investors to park their funds at annuity-like assets, a good alternative to fixed deposits, and at the same time allow property owners to cash out a portion of their holdings to be parlayed into other projects (thus boosting the underlying economy). However, the exchange have been slow to introduce structured warrants or covered warrants, and the brokers have been very slow in moving to promote these instruments. Covered warrants have been a big hit in HK and Singapore, no reason why it would not be successful in Malaysia - needs more promotion and leadership from the Bursa. Another product that suffered a similar fate is equity linked (EL) instruments, which is a lot better than straight out short selling as EL instruments allows for yields to be captured with an equity linked bet, which could be a put or a call or both. Again, leadership is lacking from the Bursa. Of course, not all products is right for the Malaysian market, e.g. I personally do not think the market has the depth for stock specific put and call options (2005: C)

e) e-Integration - Assimilation into the new world of internet. Neither here nor there, it looks as if the Bursa will see how the internet impacts on them rather than see how they can leverage on the advantages of the internet to better position the exchange. Internet based brokers are left to live and die on their own, again, a more deliberate form of leadership is needed in this area. Is internet broking the future for broking or isn't? Then, play the cards accordingly, Bursa (2005: D)

f) Market Regulation - This is regulation with respect to intervention by the Bursa on market based activity. Whatever the Bursa did or didn't do, they will be cursed. When they don't intervene, they are accussed of allowing excessive speculation and ordinary investors to be scalped. When they do intervene, they are accussed of interfering with free market foces, buyers beware adage is often quoted to support this backlash against the Bursa. My opinion is that, rules and parameters must be made clear on the outset - we already have limit ups and limit downs per session - these are in place to cool sentiment one way or another. If a stock goes limit up for two or three sessions over a two or three day period, the Bursa will usually step in by demanding that buyers pay with cash for the stock - this is a good and effective enforcement and regulation tool, and the Bursa should be more aggressive with this on stocks that have been overly exuberent (not backed by fundamentals). The recent warning given by the Bursa on TH Hin on its overactive behaviour should be a percursor to implementing the ruling on cash buying only. Things like Fountain View can be very difficult to stop, like who is to say Farm's Best is not another Fountain View?? But we have not seen any additional market warnings on stocks such as Farm's Best, Nasioncom or Iris, just check out their gains for the past 1 month!!! The Bursa needs to be more consistent - an internal rule or guideline must exist, such as if any stock is up by more than 70%-100% over a one month period (of which all the mentioned stocks would come under that qualification) would have a public warning to investors (like the one issued on TH Hin). Continuance upward movement after the warning would be followed by the cash buying only ruling (if the stock is being bought by genuine buyers on fundamentals, then paying cash should not be a problem, plus it will eliminate all those who buy on gearing so that they will not be caught badly in any correction) (2005: C)

g) The 3 Boards & Relevance - The existence of rules pertaining to the attractiveness of the Main Board, Second Board and Mesdaq must be reviewed annually. Are the paid up rules too low for Main and Second Board? Are Mesdaq listings too easy? The Second Board in particular are in dire straits and nothing much has been done to it. The market activity in Second Board stocks for the past 2 years have been pathetic, many companies which should have been delisted are still hanging around in Second Board. The rate of delisting must be speeded up to clean up the respective boards. I am not too worried about Mesdaq rules being too easy, yes, companies will fail, and fail at quite a high rate in Mesdaq, but that's the beauty and purpose of Mesdaq, these are growth potentials. We will see more companies failing in Mesdaq over the next 2 years but the Bursa should be firm to maintain the essence and integrity of having Mesdaq, to tweak the rules to a more difficult level would erode a lot of the important characteristics of a growth companies' board. As for the paid up of Second Board (RM40 million), that should stay, no point lifting it as most of the problems Second Board companies faced stem from "self-speculation & indulgence" during the heady days of 1995-1996, and has very little to do with the RM40 million paid up thing. Main Board's minimum paid up should be increased to RM100 million or RM150 million to distance itself from the other two boards (2005: C-)

h) Working With Intermediaries - Bursa should do a lot more in working with intermediaries as they would be able to add a lot of value and speed up the supply-chain to benefit the Bursa and investors. Working closer with MDC, venture capital firms, merchant bankers, trustee & custodian companies, private bankers, MITI, brokers, minority interest groups, accounting bodies, internet financial portals, other exchanges in the region and globally, research/institute of higher learning, etc... will ensure more effective turnaround of ideas and implementation of value-added practices into the market place (2005: C)

i) The Singapore Equation - ask any broker in town, who among them wants to do inter-broke business (trades passed from overseas brokers to local brokers) as the margins are almost non-existent. I believe both exchanges have been talking but let's get a move on it as it has been dragging on for way too long. Allow brokers for both countries to buy and sell shares on each other's exchanges. Immediately, you will find both broking firms on both sides getting a lot more business, doubling the number of companies one can buy/sell/market. Both exchanges will get enormous gains from the additional fees from additional trades. It will add so much more depth and market participants. The Singapore brokers would gain more than the Malaysian brokers as more Singaporeans would want to buy Malaysian stocks than vice-versa, but that is a narrow minded view to take. The benefits has multiplier effects for everyone involved. Let's integrate the trading systems of both countries already! (2005:C-)

Conclusion - So, we need to have the Bursa to look at other areas as cited above as it is not sufficient to report good financial results when the overall market is lacklustre - that only means that the Bursa got good profit margins on overcharging on various fees, but the market participants are not reporting similar good financials, why? The Bursa should plough back a certain portion of fees charged to improve the state of the markets (as cited above) that it manages. You gotta take care of the angsa that gives you the telurs, don't just gloat about how nice the telurs "you made".

Henderson's Pandora Box
Stock lending, voting rights & minority interests

HK's Henderson Land Development's second attempt on January 20 to take its 73.5% owned Henderson Investment private was rejected despite it winning support from the unit's largest independent shareholder, Franklin Templeton Investments. Apparently, some shareholders controlling 10.94% of the firm's minority shareholding voted against the proposal, while those owning 85.74% voted in favor. Henderson Land needed to win the backing of shareholders controlling 90 percent of the minority stake for its share swap offer, worth about HK$10 billion, to succeed. Management insisted that the lack of a cash offer wasn't the reason the buyout bid failed. In December, Henderson Land was forced to sweeten the buyout offer after minority holders, including Templeton, objected that the offer was too low. The original offer of one Henderson Land share for every 2.6 Henderson Investment shares was increased to one for 2.5. Franklin Templeton managing director Mark Mobius said that the US-based fund group had voted in favor of the proposal the second time around. The fund now holds about 0.409 percent of Henderson Investment, followed by Baring Asset with about 0.2 percent. Henderson's management said the group has no plans to make another offer. Securities and Futures Commission rules bar Henderson Land from making another privatization bid for Henderson Investment for 12 months. Henderson Land successfully took its mainland property affiliate Henderson China and loss-making Henderson Cyber private last year.

The buyout attempt could have given Henderson Land more direct control over businesses held by Henderson Investment, the prize being its 37% stake in Hong Kong and China Gas, the sole supplier of piped gas to Hong Kong and an increasingly important supplier to mainland customers as well. Henderson Investment also owns 31% of Hong Kong Ferry, a transportation company that also has property interests, and 44% of Miramar Hotel and Investment, which runs a hotel in Tsim Sha Tsui. Under Hong Kong regulations, a parent company buyout plan for a subsidiary can be blocked if more than 10% of minority shareholders oppose it.

Henderson Investment Ltd. shares had their biggest one-day decline in more than eight years after shareholders vetoed the buyout offer from its parent. The day after, shares in Henderson Investment closed 16.6% lower at HK$12.80 in Hong Kong, the biggest one-day drop since October 28, 1997. They fell as much as 19.5% during the day. Henderson Land declined 1.2% to HK$38.65 after sliding as much as 2.1%. A hedge fund owning 72 million shares of Henderson Investment and with a short position on the stock voted against. The hedge fund's 72 million shares represent 95%of the 75.5 million shares that were in opposition to the offer.

Henderson Investment shares had surged more than 44% from Nov. 9, when Henderson Land announced its second attempt to privatize Henderson Investment, to Jan. 19, the day before trading in the company's shares was suspended pending the results of a shareholders' meeting. Hong Kong's Hang Seng Index rose 7.4% in the same period.

Naturally, some observers are questioning the abuse of "stock lending" and voting rights pertaining to it. When a company borrow stock, it naturally has the voting right attached to it Any proposals to reform stock lending should be done carefully as you do not want to rewrite the rule book every so often. Yes, in this case, the hedge fund took advantage of a double whammy loophole. By borrowing sufficient shares in Henderson Land, it has the potential to create a large short position. Knowing that if the proposal did not go through would send the shares plummeting worked in the hedge fund's favour. The problem lies not in the actions of the said fund manager but rather in the ruling that the company must get 90% in favour of the deal in order for it to pass. When the regulations are set like that, you are bound by the those rules.

Some corporate activists think that stock lending is a form of market abuse as it allows temporary shareholders to exercise voting rights. We have to be firm in allowing short selling and hence stock lending has been a sub-sector in many developed financial markets - short selling allows for a more transparent market place, and allow investors with differing point of views to place their investment bets accordingly. As for exercising voting rights, it makes no difference whether a shareholder is temporary or long term, that is ridiculous - if you hold the shares during the voting period, you vote. Whether you sell the shares quickly after that is not for anyone to question in a free market economy. No where does it say when you buy shares that you have to hold it for a certain period to become entitled and priviledged.

Looking at the sweetened offer, while it is a decent offer from the parent, it is not fair value no matter how you look at it. There is easily room for the parent to raise the offer value by another 10% at least, and it would still have been a good deal for all parties. This incident should not be linked to just hedge funds, in fact, the short seller could have been any fund or anyone for that matter. If the deal is so good, then the original shareholders of Henderson Land would NOT and should NOT have lent their shares out in the first place. No point arguing for rule changes, Henderson's management should just take their pill, learn their lesson and strategise better (anticipate potential calamities). This event can easily be anticipated and rectified - again, the over-confidence and exaggerated self-belief of management's egos got the better of them when considering minority interests.

Tuesday, February 14, 2006

BCHB's Offer For Southern Bank (Updated)
Strange Why Investors Are Not Expecting Better Counter Bids

Bumiputra-Commerce Holdings Bhd (BCHB) on Feb 13 announced a takeover bid of up to RM6.35 billion for Southern Bank Bhd (SBB), with Datuk Nazir Razak saying they will leave it to SBB shareholders to decide. In conjunction with that, BCHB served a conditional notice of voluntary general offer (VGO) to acquire all the outstanding shares and warrants of SBB for cash and new BCHB redeemable convertible unsecured loan stocks (RCULS) of RM1 each. BCHB’s maximum total outlay will be RM6.35 billion. It offers to acquire SBB’s entire business and undertaking of SBB for a sum equivalent to RM4.08 comprising RM3.08 cash per share and RCULS at RM1 each. It will also acquire all oustanding SBB warrants at RM2.34 per warrant not already held by BCHB. BCHB said the effective offer price for each share was about RM4.15 based on the theoretical price of the RCULS as at Feb 10 of about RM1.07. As part of the proposals, SBB will carry out a capital reduction exercise to return all the profit arising from the disposal of the SBB business, share capital, share premium, other reserves and retained earnings to SBB shareholders. BCHB and persons acting in concert held about 4.9% of SBB shares.

Points To Consider #1 - It is probably a very similar offer that BCHB made to Tan a few weeks back. I don't see the price being improved at all. One was offering around RM4.20 and the other wanting RM4.50. So, nothing has changed

Points To Consider #2 - By putting the offer out in the open, it forces Southern Bank, and in particular Tan onto the back foot. The real offer is on the table, now do you have a better one that can top that. If SBB cannot find a buyer willing to pay more, it will probably have to accept BCHB's offer

Points To Consider #3 - The fact that BCHB and persons acting in concert only holds about 4.9% of SBB shares. That means BCHB could walk away anytime from the deal as they do not have a lot riding on this.

Points To Consider #4 - The fact that SBB's share price only rose slightly but below the actual offer of BCHB meant that most investors do not think there will be a counter offer or new bidder for SBB. Very surprising indeed

I do expect other parties to be interested, such as Public Bank, Hong Leong Bank and Alliance Bank. Their non-action is quite surprising to say the least. Watch this space. Monitor SBB's share price closely, any marked movement upwards will point to a much better bid for SBB. Besides the 3 banks I mentioned, there is another very likely suitor, i.e. Maybank. The reason why Maybank could be interested is manifold, mainly due to the fact that BCHB has been gobbling up brokers and banks that they are getting ever closer to Maybank's size and stature. BCHB has been acquiring like crazy and consolidating well. BCHB has been doing so well, growing so fast, that Maybank may have no choice but to act. Maybank may have to buy up SBB to distance itself from the second placed bank. If BCHB succeeds in acquiring SBB, it will be too close for Maybank's comfort. One or two more acquisitions may even put BCHB above Maybank in size, and that is quite unthinkable to Maybank. So, if Maybank could be in the picture, SBB price should go higher than the current RM4.04-4.06.

Monday, February 13, 2006

IPO Pricing - Somebody's Taken The Easy Way Out


Merchant Bankers, Stop Stealing

Its been a long known fact that IPOs in Malaysia is an excellent way to make money, provided you can get your hands on them. Even in the bleakest of days, most IPOs will still give you 5%-10% gain on opening day. Except for that short period of time early last year where a few new Mesdaq listings even went underwater after being listed. However, that was a very small blot in the years of great gains of IPOs.

A decent listing in Malaysia would probably yield 20%-30%, anything more than that would be classified as successful. The strange thing is that, the percentage of IPOs registering more than 30% gains after a week or two is significantly higher than most other markets. You go to HK, and they would be laughing gleefully if their IPO shares got 15% gains on opening day trading. Malaysians would be quietly cursing the same thing.

What prompted me to write about this was an article in Financial Times today with the headline "String of Successful IPOs cheers Wall Street". Then a glance at the gains, I was almost choking at what they considered as "successful". Below are the biggest IPOs by value in the US in 2006 and their performance vis-a-vis their IPO price after 1 week:

8 Feb US$650m EXCO Resources (+1.5%)
9 Feb US$539m Magellan Midstream (-2%)
2 Feb US$507m Energy Transfer (+4.5%)
31 Jan US$496m Ternium (+13.7%)
18 Jan US$439m Western Refining (+3.8%)
2 Feb US$421m Healthspring (6.2%)
30 Jan US$275m Regency Energy (-0.4%)
12 Jan US$246m Linn Energy (+6%)
7 Feb US$207m Crocs (+26.4%)

I mean, the listings were decent, but certainly not outstanding when compared to Malaysia. Some may say that the issues in US were much larger, hello,... so too are their financial markets! The thing is, Malaysian merchant bankers have been getting away with murder. Competition is not hard enough, the companies do not press hard enough for a better pricing structure. Most merchant bankers in Malaysia would use previous deals as examples for sticking to the cheap IPO pricing. The local merchant bankers by sticking to this type of pricing almost completely eliminates the risk involved in underwriting an IPO - when was the last time an IPO was under subscribed (yes, there might have been cases but they are so rare). The fees generated to the merchant bankers has to be for something of value - most are just "cut and paste" type of work in terms of documentation - it is the risk involved that companies are paying the listing fees for. so merchant bankers, where and what are the risks shouldered... pray tell??

This sort of comfortable situation is accepted and "wink-wink" among all merchant bankers. Under pricing the IPO is not immaterial - it robs the owners of better prices when selling their shares, it gives successful IPOs subscribers an excessive rate of return for the risk undertaken, it allows merchant bankers to assume a lot less risk than merchant bankers in most other countries when it comes to underwriting an IPO, it causes the merchant bankers to do less homework and crunch less numbers but rely more on relationships to seal the deal - overall not a good thing for the development of a strong, maturing financial marketplace. The main reason why stocks go so wild on listing day is that the pricing was done badly in the first place by the merchant bankers.

Sarawak Play - Too Few
A Few Good Men (Stocks)

Avenue Securities came out with an interesting research report on potential run-up in Sarawak state stocks, particularly politically linked ones, in the coming months in the run up to the impending state elections. Avenue Research said based on the satisfactory performance of Sarawak-based stocks in the past three state elections, it expects buying interest in selected stocks to start building up in the next six to nine months as speculation on the date of the upcoming state election intensifies. “Excluding the state election in 1991, share prices of Sarawak-based stocks appreciated by, on average, 15%, six months before the election day and another 20%, six months thereafter (or 35% in total),” it said. While there was no clear trend in the 1991 state election, those in 1996 and 2001 showed a pattern whereby the average Sarawak-based stocks performed strongly before and after the election day, Avenue Research said. “We believe the stronger performance of Sarawak-based stocks in 1996 and 2001 was mainly due to investors’ confidence that the ruling state government will win by a substantial margin,” it added. The research house said the current lacklustre trend of Sarawak-based stocks could reverse as buying interest starts to emerge over the next three to six months. “We estimate there are at least 32 Sarawak-based companies that are listed on Bursa Malaysia – notable ones include Naim Cendera, Ta Ann, Jaya Tiasa, Weida, Zecon and Lingui,” it said. The research house also expects Sarawak to get a bigger development allocation in the upcoming 9th Malaysia Plan (9MP) because a higher allocation is “crucial” for the approaching state election. “While consensus is expecting the 9MP to announce lower total national development expenditure allocation of about RM150 billion (8MP: RM170 billion), representing a decline of 12%, we reckon that the allocation for Sarawak could still grow by at least 2% (or RM175 million),” it said. The construction sector would stand to benefit from this as Sarawak aims to be a developed state, leading to greater requirement for new roads and infrastructure, better healthcare, airports and ports facilities and water supply, it added. Avenue Research said it was recently revealed that Sarawak would be getting RM5.5 billion of the RM55 billion allocated for the federal government’s works ministry under the 9MP. “Out of the RM5.5 billion, RM2.9 billion is for new projects and the rest (is) for those projects carried forward from the 8MP,” it added.

My take: It is unlikely to happen in a big way this time around, the way it did in 1996 and 2001 - back in 1996, we were still in the midst of a long term bull cycle (93-97), and any theme was welcomed to play up selected group of stocks, investors were more trigger-happy with any hint of rumours to base their stock selections on; in 2001, the market was short of market-themes, and the run up wasn't that terrific to speak of. If you were to check the few stocks noted by Avenue Securities - they are either too small (paid up) or have traded very little for an extended period, both not good indicators. Among those cited (Naim Cendera, Ta Ann, Jaya Tiasa, Weida, Zecon, Lingui), none are that hot profit-wise with the exception of Ta Ann Resources (but that is nearly a RM6.00 stock already). Lingui did not even budge much during the hot period for palm oil stocks, so go figure. However, I do agree with Avenue Securities that there will be some stocks that will move that are linked closer to the elections in Sarawak. (Read Below).

However, if you read my blog on January 30 on "Time To Move From Sarawak", you will find some stocks that should move with the Sarawak themd-play. They are strong on political ties, good paid up, and can capture invetsors' imagination. Not that I am strongly recommending them, but for those who want to have something linked with Sarawak play, then consider them.

Cahaya Mata Sarawak (RM1.00)
Press Metal (RM0.375)
MMC (RM2.15)

Of the 3, I prefer Press Metal, as it is smaller, will move faster, and even without the Sarawak linkages, it is a well run and profitable company. The absolute price of Press Metal is also low enough to attract a greater group of speculators. .... but I thought we should all move from Sarawak!!??

Saturday, February 11, 2006

Coming To Terms With AIR ASIA
What's There Not To Like About AA

Singapore Not Really For Free Trade
For those who have been following Air Asia's dealings with Singapore to gain landing rights in Changi, knows what I am referring to. The Singapore authorities have been making Air Asia's life as difficult as it can be, mainly to safeguard the stupid monopoly of flights known better as KUL-SIN. Fernandes tried to step around the obstacle by ferrying passengers by buses from Johor to Singapore and vice-versa. Even that was blocked by Singapore’s Transport Ministry. So, Singapore should not always say they favour free trade and has no protectionist policies. Malaysia do have protectionist trade policies. Singapore should just come out and say they do want to protect certain sectors of their economy, while at the same time wanting to be a world class air travel destination and airport operator.

MAS & Air Asia
Now the LCC Terminal is scheduled for full operations on March 23, three days ahead of Singapore’s Budget Terminal. The terminal was renamed from low cost airport terminal (LCAT) earlier. This Subang site will prove to be a critical development in launching Air Asia to the next level. The LCC Terminal will be the first in Asia and will cater up to 10 million passengers. Fernandes expects AirAsia to handle four to five million passengers next year. This will weaken MAS' hand even further. MAS is in a no-win situation. MAS should just give up trying to come up with their own budget airlines.


There is one good solution, just have to check their egos at the door. MAS to buy 20% of Air Asia - full stop!
1) This will remove the need for MAS to start another budget airline. Save on capital and eating into each other's margins
2) A more effective redistribution of local routes of MAS to Air Asia, a win-win situation instead of a "I want this - you take that" schoolyard bullying exercise. This will have the effect of lessening the losses suffered on certain local routes operated by MAS, and reduce duplication of services
3) MAS will be able to help Air Asia in certain areas such as linking up of flights to other international destinations, and Air Asia could teach MAS a thing or two about cost control, flight routing capability, internet transactions and interfacing with clients, and the list goes on
4) The deal will cause both MAS and Air Asia share prices to go onto a higher platform as there are unbelievable synergistic benefits and cost savings

But the egos, man, oh man, the egos... MAS has to come to terms and accept that Air Asia does a lot of things better than them. By acquiring the stake, MAS should NOT even think of getting a controlling stake (that's why 20% or 25% is proposed) - check your egos. Will that happen? I don't know. If I was the Finance Minister or head of MAS/Khazanah, that's what I will do... or even force them to do. I do think Air Asia and Tony would be very welcoming to a deal like that, save them a lot of headaches - and losing something but gaining something even more will get Air Asia easily behind the deal.

Friday, February 10, 2006

Southern Bank Update
Forced Marriage Or Arranged Marriage

The Edge Daily reported late on Friday on their website on the latest developments with Southern Bank. "Southern Bank Bhd (SBB), one of the country’s smallest banking groups, has outlined five criteria for any suitors, which it says are crucial to protect its shareholders and stakeholders’ interest. SBB chief executive director Tan Sri Tan Teong Hean said on Feb 10 the board was pursuing an alternative merger partner, after it had called off talks with CIMB Group Sdn Bhd on Wednesday. The five criteria would be to create value; allow shareholders to realise value; strategic vision; minimising disruptions and corporate governance, he said at a press conference in Kuala Lumpur.

The criteria are:
* Valuation, including potential upside value and risks;
* Transaction structure, which minimises completion risk and allows shareholders to realise value with minimal delays;
* Strategic vision and business fit, to ensure that synergies can be gained and branding can be leveraged; a friendly arrangement with harmony of approaches will be vital to retaining value;
* Integration plan that ensures risks are controlled and disruptions are avoided, and that provides for the earliest realisation of merger benefits; and
* Corporate governance and decision making that optimises value for the merged entity.


Well, now it looks as if Southern Bank is a girl who has been knocked-up, and her stomach is showing. Mr. Tan can do nothing else - has to marry her off - his only flexibility is in the choice of partner. Tan knows that he will be out of the picture if Nazir gets his way, maybe he can still stick around with Alliance Bank, who knows.

However, the thinking behind the media blitz could be a deeper strategy on SBB side. By voicing out the parameters for a partner, it opens up discussion and terms of the deal out to the open. It allows SBB to champion minority interests ahead of any merger plans. This media blitz may be shrewd enough to "allow" SBB to seek out more suitors. Already many banks have privately voiced dissatisfaction with Bank Negara's ruling that a bank can only seek permission to negotiate potential sale with one approved party. One failed negotiation may take up to 6 months to conclude. Also, by bringing this out into the open, SBB probably hopes to eliminate being "forced into a certain partner" whether they like it or not.

What's Next For Southern Bank?
Logical Conclusion - Up

As reported in the Edge Daily over the past few days, Southern Bank Bhd (SBB) has discontinued negotiations with CIMB Group Sdn Bhd (CIMBG) on a possible merger of their banking businesses, claiming that it has not received a formal offer from CIMBG after three months of talks. The latest development could lead to a hostile takeover move by CIMBG if it wants to go ahead with its plans for the merger of the banking businesses. “The Board is of the view that further prolonged discussions would not be in the best interests of SBB and its shareholders and other stakeholders, including its customers,” SBB said. SBB also said it is informing Bank Negara that it does not intend to proceed with the merger discussions with CIMBG. It said the bank remained committed “to explore other options to maximise shareholder value”.

“The board believes that a merger with another banking institution could be value creating for shareholders at this stage in the Malaysian banking industry evolution. Hence, the board will immediately actively seek a near-term merger alternative that is in the best interest of all shareholders and stakeholders,” it said. In an immediate response to SBB’s announcement, Bumiputra-Commerce Holdings Bhd (BCHB) said: “While BCHB is disappointed with the unilateral decision of SBB’s board of directors, BCHB intends to continue discussions with shareholders of SBB, who remained interested in a merger between BCHB and SBB.”

Fact #1 - Could not agree on price, one wanted to buy at RM4.25, the other wanted to sell at RM4.50, Goldman Sachs thought SBB was worth at least RM5.00 per share

Fact #2 - Enters Chua Ma Yu. Is he linked to CIMB? Not likely. How about MPlant, very likely. In fact, the entire Alliance Bank-Singapore connection rested on Chua's networking

Fact #3 - If SBB sells, it is likely be to Alliance Bank, it makes sense as one of the jewels in SBB is the asset management unit and decent amount of funds under management - complement Alliance Bank more than CIMB

Fact #4 - Nazir will try the backdoor, but it will only mean doing the deal at a price nearer to his own valuation. Does SBB have a real new suitor, if it does, shareholders/owners of SBB will be silly not to consider the new guy's offer first

Fact #5 - The new suitor knows what is on the table. There won't be a deal if the suitor won't pay close to RM4.50 per share at least. If it was RM4.25 or lower, many people will get blasted for not selling to CIMB. Plus with Singapore side backing, paying a bit more to do the deal won't be an issue with Alliance Bank

Fact #6 - SBB closed at RM3.98, investors should have thought it out a bit more, very likely will get RM4.50 a share very soon. Special situations/events trader should buy up SBB by the bulk

.... have a nice day!!!

The Performance Of PNB


Splendid or Fortunate or Well-Planned

Permodalan Nasional Berhad was incorporated on March 17, 1978. PNB was conceived as an important instrument of the Government's New Economic Policy to promote share ownership in the corporate sector among the Bumiputera. Prior to the establishment of PNB, shares allocated to individuals were seldom retained. When Bumiputera shareholders sold their shares, the profits generated were consumed and not reinvested. Through PNB, substantial shares acquired in major Malaysian corporations from funds provided by Yayasan Pelaburan Bumiputra or Bumiputra Investment Foundation were transferred to a trust fund and sold to the Bumiputera in the form of smaller units. By doing this, PNB ensured that these shares are retained, resulting in the cultivation of widespread savings habits. Total funds managed by PNB now surpassed RM50 billion.

However, that does not explain its ability to pay decent dividends year in year out. Even the best fund managers will find it tough. The main thing is that PNB recruited well, operated with a lot of transparency, and is accountable to the board of trustee. That sets the platform for a well managed company. The other factor why PNB garnered so much success is that they have a strong research and investment link - all invested companies are followed diligently.

In the 2004 annual report PNB remarked that it has invested in 322 companies of which 275 companies are listed. That means 85.4% of their holdings are listed. That means PNB has a stake in about a quarter of total listed firms on KLSE. Strong performance can be obtained depending on your entry price, even if the company's prospects are just so-so. One can safely surmise that PNB would have manage to obtain the bulk of shares at IPO price or even pre-IPO prices. This will form an excellent buffer to ensuring good performance.

In cases where PNB takes up shares allocation of a listed company, usually the placements will come at a discount, which again will provide a similar buffer. This is not to say that anyone can do PNB's job - they still have to develop the expertise to screen out companies that they don't want to hold any stakes. The fact that PNB has stakes in only 25% of total listed firms says a lot about selectivity.

The other reason for the good performance of PNB is in holdings of unlisted companies - these are usually undiscovered gems that are listable in 2-5 years time. Naturally if they are well nurtured, the gains upon listing will be manifold. PNB being PNB, will naturally have a solid networking and access to important incubation ideas and can leverage on their influence and capital. Their mandate is a powerful persuasion tool.

Besides that, PNB follows up with instilling good corporate governance practice via their nominee directors (167 nominee directors in 111 investee companies for year ended 2004).

PNB also cleverly "controls" significant sectors of the economy, thereby allowing them to exercise strategic moves to maximise efficiency and productivity within that sector. For example, PNB have significant stakes in Golden Hope Plantations and Island &Peninsular - the rationalisation exercise have created two more focused giants in plantation and property development.

Another useful example is in the area of Islamic banking. PNB acquired Bank Islam Holdings Berhad to strengthen its Islamic banking exposure. This complements PNB's Islamic insurance management (takaful) role through Syarikat Takaful Malaysia (via Bank Islam), Takaful Nasional (via Malaysian National Reinsurance) and Mayban Takaful (via Maybank). By leveraging on these linkages, PNB will be able to push these companies to develop and offer more Islamic financial products and at the same time have the ability to add more distribution power.

The best strategic play in recent times by PNB has been the consolidation of its holdings in Chemical Company of Malaysia. CCM is a highly attractive, efficient and profitable company. CCM controls the chemical and fertilizer industry in Malaysia. PNB have the following plantation companies such as Kumpulan Guthrie, Consplant and Golden Hope. This type of upstream-downstream value addedness is what PNB does well.

Their mantra - hire well, invest well, monitor well, synergy, synergy... the rest wil fall into place. So, is PNB really that great after all that - PNB has done a very creditable job, despite the fact that PNB does get some preferential share placements, it will not be sufficient to mask a badly run company - so credit is due, PNB did well.