Friday, March 31, 2006

Car Prices In Asia-Pacific


Topping The Charts As The Costliest Place To Buy Cars

If you live in KL, Singapore, Bangkok or HK, time and again you will find some gwailo driving around in a beaten up car. We are talking about someone probably on an expatriate package driving around in a cheap car. Mostly its because they cannot envisage paying for a new car at those ridiculous local prices. They have bought and driven many cars in Australia, USA, UK or Europe but never could they imagine that cars in Asia-Pacific could cost so much. If you look at the average per capita income of these countries, you'd be surprised at how most Asians even manage to buy a car! Just have a look and compare the recommended retail prices of the following cars - the first price is in the local currency, followed by a converted price into USD for comparison sake. Not all prices or car models were available in all countries. I just selected from Malaysia, Australia, Singapore, HK and Thailand. And to think that the Malaysian government just lowered the car prices some more, Malaysian car prices cited are the "new lowered prices".

AUDI A6 2.4 Multitronic (Auto)
MYR368,000/US$100,000
AUD80,600/USD57,500
HKD431,000/USD55,500
THB4,170,000/USD107,400
SGD188,000/USD116,100

AUDI TT Coupe 1.8 Turbo (Auto)
MYR338,000/USD91,700
AUD81,200/USD58,200
HKD433,000/USD55,800
SGD186,000/USD115,000

BMW525i (A) E60
MYR398,000/USD108,000
AUD93,900/USD67,300
HKD565,000/USD72,800
SGD222,500/USD137,500

BMW 645Ci COUPE
MYR808,000/USD219,400
HKD1,298,000/USD167,200
SGD345,000/USD213,000

BMW Z4 ROADSTER 3.0
MYR468,000/USD127,000
HKD533,000/USD68,600
AUD93,400/USD67,000

CITROEN C2 VTR SENSODRIVE (Auto)
MYR130,000/USD35,300
HKD148,000/USD19,000
AUD23,000/USD16,500

HONDA CIVIC 2.0 VTi-s (a)
MYR124,000/USD33,600
HKD185,000/USD23,800
AUD26,500/USD19,000
SGD79,000/USD48,800
THB1,020,000/USD26,200

HYUNDAI SONATA 2.4L (a)
MYR122,000/USD33,100
HKD159,000/USD20,500
AUD31,500/USD22,500
SGD65,000/USD40,100

LAND ROVER 4.4 V8 (A)
MYR772,000/USD209,600
HKD1,250,000/USD161,000
AUD141,900/USD101,600
SGD368,000/USD227,500
THB8,450,000/USD217,500

MERCEDES BENZ CLS350 STANDARD (a)
MYR688,000/USD186,800
HKD935,000/USD120,500
AUD139,400/USD99,900
SGD289,000/USD178,500
THB8,600,000/USD221,400

MERCEDES BENZ S350 (A)
MYR1,230,000/USD334,000
SGD329,000/USD203,300

PROTON WAJA 1.6 (A)
MYR63,000/USD17,100
SGD56,000/USD34,600

Generally Singapore car prices tops the bunch but there is still the COE for the Singapore buyer to pay for. The COE is an entitlement for buyer to buy certain type of cars, the bigger size the engine c.c. the higher the COE. But since the COE is tradeable, it is not a full expense item. The funny thing is that the Protons and Peroduas are so much more expensive in Singapore - take it from me, don't buy the Malaysian cars if you live in Singapore, its just not worth it. The argument that cars in the US are cheap cause they have the volume is shallow. Just look at HK, its a small place, expensive place, high per capita income, great infra even, but cars are very decently priced.

The car prices have to be seen in light of the average per capita income of the residents in the respective countries:

HK - USD36,800
Australia - USD32,000
Singapore - USD29,700
Malaysia - USD10,400
Thailand - USD8,300

So, if we take the BMW 525i (A) E60, a HK resident would take 1.98 years to pay it off. An Australian would take 2.1 years. A Singaporean would take 4.6 years. While a Malaysian would take 10.3 years. That is why so many gwailos would never ever buy new cars while living in Asia cause its ridiculous. The even more astounding fact is that, you will find an even higher ratio of the luxury cars being driven on the roads in Asia-Pacific!!!

While it is certainly cheaper (relatively) to buy in HK, the cost of maintaining a car in HK is very prohibitive when it comes to fuel, parking fees and parking spaces. For Malaysia, even with the recent price reduction, it is silly to have such high car prices when mobility is so important in Malaysia and the country do not have such congested city streets (relatively) when compared to Singapore, Bangkok or HK. It is downright embaressing when Malaysia even produces cars on its own. Countries that do not enjoys cheaper car prices??!!

To further emphasise how high car prices are for the general public in Malaysia, we have the Approved Permits (APs) which are basically rights for special car import permits. It used to be sparingly issued to some royalty or people coming to live in / coming back to Malaysia. A decade ago, the APs got issued in abundance - to magnify the distortion in prices, AP holders can import cars from overseas (reconditioned or new) and pay all the necessary taxes and duties, and still end up making tons of money selling to Malaysians. Why issue so many APs when car prices are artificially held up already. Its like raising the price of cigarettes to an artificially high US$8 a pack and at the same time giving APs to certain well connected groups to import on their own. These people, after paying all the taxes will still make supernormal profits selling at US$7.80! Where is the logic of the NAP? The fact that APs have been changing hands at RM30,000 to RM40,000, after the holders just paid a few hundred ringgit for it, further pisses the entire nation (except those connected enough to get those APs).

It is still OK for the average citizen in HK or Singapore as many do not own cars as the public transportation system is good. However, the situation is very different in Thailand and Malaysia, you need a car to move around. Even the massively subsidised fuel prices do not come anywhere close to curtailing the negative effects caused by the high car prices. While Thailand's fuel prices are slightly higher than Malaysia, at least when you drive in Thailand, you don't have to pay toll. Try driving from Johor to Kedah, and compare that from south of Thailand to Bangkok. For more than 1,000 miles in Thailand leading to Bangkok, not one toll station. So, what is so precious about Malaysia that we have such notoriously high car prices, low fuel prices but tolls everywhere... all on a per capita that is in the bottom half of the world, but with car prices at the top ten percent in terms of cost in the world??!!

Cars are a necessity not a luxury in those two countries. As for Malaysia - the opportunity cost, loss in purchasing power, loss in economic wealth, impairment in the strive for efficient utilisation of resources - just to protect the unimpressive (inefficient) local car manufacturers, is just too much to bear. Get this over and done with already!

People, cars have always been one of the worst type of investment you can get into, the depreciation value starts accelerating the moment the car moves out of the showroom. Whether you drive the car or not, it will still lose value with every passing minute. When the governments of these countries imposes high taxes and duties on cars, they are basically eroding the purchasing power and allocation of resources of their citizens. Its high time the price of cars need to come down a lot further in Asia-Pacific.

Thursday, March 30, 2006

Have A Good Read
Interesting Business Books for First Half Of 2006

I have a confession here, I don't read fiction. Not that I don't like good novels, just that there is so much good non-fiction in business journalism, and the fact that I have to get through so many business magazines and breezing through some research reports, that there is just little time left to read well. My all time favourite business books are easy to size up, as they are standouts by themselves. Everyone with a hint of interest in the business world MUST read the following two books (my all time favourite reads):

1) Liar's Poker by Michael Lewis
From the eyes of a trader at Salamon Brothers during the most heady times in the 80s. How financial product success brings power, how power leads to excesses and poor management. Very funny and a genuine writer at heart. The characters are so flamboyant, colourful and charismatic, and real at the same time.

2) Barbarians At The Gate: The Fall of RJR Nabisco by Bryan Burrough and John Helyar
Riveting account of the tussle for RJR Nabisco. Corporate greed and ineptitude at RJR Nabisco was never seen again until Eisner joined Disney. The rise of KKR and their mindset, the egos and the lucrative fees. Real life much better than fiction, man. The start of leverage buyouts, now the RJR Nabisco deal looks tame by comparison.

For the first half of 2006, I would recommend the following biographies / business books:

Hedgehogging by Barton Biggs
Gives a good account of what hedge funds are and how they operate. in addition, his perceptions on various investment strategies were enlightening. Lots of colourful stories about "real investment pros" and how people always try to compensate money for lack of integrity, grace, class and character. Great read.

Rock Solid: The Corporate Career Of Tan Chin Tuan by Lee Su Yin
Read about the life and philosophies of the late OCBC Chairman. A surprisingly fair minded person for such a successful corporate person. Great strategic thinker and a man of integrity. Good guys sometimes do finish first.

Confessions Of A Wall Street Analyst: A True Story Of Inside Information and Corruption In The Stock Market by Daniel Reingold
Daniel was a top notch telecom sector analyst. Learn about the sordid business of research and investment banking. Right in the middle of companies (destined for destruction) such as Global Crossing and WorldCom. Learn how words are twisted, sales are ruthlessly made and how everyone's for sale at the right price.

Tan Chin Nam: Never Say 'I Assume' by Tan Chin Nam & Larry Parr
Great read, loved the fact that at least this one is still alive. Knows how to do business, and knows how to enjoy life too. Great horse lover. His discourse on his close relationships with some heavies are worth more than the price of the book already. Those not in the know, TCN is the owner /founder of Tan & Tan Developments, IGB, GoldIS, Wah Seong and is responsible for MidValley Megamall and the Sierramas enclave. Also the builder for Desa Kudalari (probably Malaysia's first condo) and the Shangrila Hotel in Singapore.

Wednesday, March 29, 2006

Temasek & GIC Singapore - "Cain & Abel", "Donny & Marie" or.. ?



Temasek has been hogging the headlines for the past few weeks, and seems not to be shying away from the over-exposure. First, the situation with the purchase of Thailand's Shin Corp, and before the dust even settles, Temasek announced the purchase of the much sought after 11.55% stake in Standard Chartered from the Khoo family. So what's with Temasek, and how come GIC is so laidback compared to Temasek? Ask every person in Singapore, and probably 9 out of 10 could not tell you the difference between Temasek and GIC - saying that the PM's wife (Ho Ching) runs Temasek does not count, OK! Even the rural PAS members in Kelantan know that!

Temasek is the investment arm of the Singapore government. Initially important stakes were held by Ministry of Finance (in various sectors such as shipbuilding and manufacturing). Temasek is owned by one shareholder, Singapore's Ministry of Finance. The Government of Singapore Investment Corp (GIC) invests only the government foreign reserves. Hence GIC does not have a history of building up GLCs (government linked companies) like Temasek does. So naturally, Temasek is more powerful, owing to the stable of important GLCs in its grasp. However, the big difference is that GIC acts more like a proper portfolio manager, with proper allocations into real estate, currencies, commodities and bonds while Temasek seemingly answers to no one and engages in accumulation of strategic companies.

Temasek basically rides on its hold on big and important GLCs such as Singapore Telecom, DBS Bank (involved in the recent failed bid for Korea Exchange Bank), Singapore Airlines, PSA (involved recently in the failed bid for Dubai Ports), Singapore Power, Neptune Orient Lines, etc.. Plus it also owns my favourite place in Singapore, the Zoological gardens and holds a stake in Singapore Pools, the only legal betting company in Singapore. Though more than half of Temasek's holdings are in Singapore, eventually they want to see only one-third of that in Singapore. Hence the strong investment drive to go international.

Temasek is like a fully cloaked woman, mysterious... mainly because it need not report its financials publicly. However, to satisfy the legal requirements in issuing bonds to raise money from the public, it disclosed its financials in October 2004. For year ended March 2004, it reported a net profit of S$7.4 billion on revenues of S$56.5 billion. The 2004 report stated that Temasek managed S$900 billion (US$565 billion). Standards & Poor assigned Temasek with a AAA rating.

As for GIC, it was established in 1981 to manage the country's foreign reserves. They now have 6 offices worldwide. Its assets under management is dwarfed by Temasek, holding just slightly above US$100 billion. GIC acts more like a professional investing outfit and has a very long established relationship with the magnificent investment firm, the Capital Group. The Capital Group has a remarkable track record, beating S&P 500 for each of the past 30 years in each of its 6 funds.Now the Capital Group has more than US$750 billion under management. GIC places a lot of its funds under Capital Group's management, emphasised by the fact that GIC is Capital Group's biggest single client.

After PSA's failed tussle with Dubai Ports for P&O, GIC has just stepped in with Goldman Sachs and Borealis (Canada) to launch a takeover bid for Associated British Ports for S$5.6 billion (US$3.5 billion).

There is no doubt that there is a difference in perception with regards to Temasek and GIC. GIC is viewed as a very professional portfolio manager, quiet achiever... and somehow Temasek seems to be secretive and professionally ruffling more feathers wherever it goes. It may be that Temasek is a bit too arrogant in its dealings, not taking care and time to appreciate the nuances of investing in certain companies. It may also be that the stakes Temasek has been acquiring are more strategic in nature (than GIC's more prudent value/risk/return investment process). When I say strategic, it could mean having significant exposure to the banking and telco sector of developing Asian countries, etc... Still, Temasek could do with a bit better PR, the secrecy and "not-granting-of-interviews" just adds to the fear and and unknown side of things every time Temasek steps into a country to invests. The people of that country just don't know what Temasek stands for, is it an economic conquering ship, what will their strategy be, why are foreign interests controlling important assets, etc...? When no information is available, Temasek becomes an easy target for niche groups to use Temasek as a punching bag for their own causes.

Could Have Been Better

1) Temasek could have handled the Shin Corp deal a lot better. Temasek failed to recognise the sensitivity of Thai people, the potential backlash on Thaksin, the growing tide of resentment against Thaksin - it spells of arrogance by Temasek. Instead of doing a majority sale deal, could have broken it up in 2 or 3 tranches to assuage fears. Say 20% now and another 20% 12 months later if Shin Corp meets some targets, and the balance 2 years down the road. Plus it would have given more time to find a new owner for the stake in Thai AirAsia, instead of being seen as scrambling to find a new buyer right after the deal. Since Shin Corp became a foreign controlled entity, it no longer can own the controlling stake in Thai AirAsia. Now the stake was sold (finally) to Asia Aviation. It appeared that Temasek did not realise the contravention till after the deal has been sealed. Some knuckles needed to be rapped here.

2) The visibility issue is too threatening. People not from Singapore do not differentiate between Temasek and GIC, or the GLCs of Singapore for that matter. Even though you argue till the cows come home, authorities will still regard the whole grouping as one. Hence the visibility issue, the rapid flow of deals - just makes other people nervous every time GIC or Temasek or some Singapore GLC announces a takeover deal. Having the money is one thing, being seen as "new economic lords" taking over important assets of respective countries is an issue that needs addressing. Just because Temasek is satisfied with its own investment policies and transparency issues does not mean the deals will be well received. Especially when deals are occuring within the Asian backyard. Time to be the good neighbour.

For instance, these are the big deals in recent months. Just imagine youself as a person living in an Asian country other than Singapore, how would the rapid succession of these" deal flows / failed deals" affect you, or are you unaffected by them?
- PSA tussles with Dubai Ports to buy P&O for 2 billion pounds.
- Temasek purchasing a 5% stake in Bank of China for US$1.5 billion
- Temasek purchasing a 5% stake in China Minsheng Bank
- Temasek purchasing a 5.1% stake in China Construction Bank
- GIC bidding for Associated British Ports
- The Reserve Bank of India rebuffing Temasek from raising its stake in ICIC Bank (India's largest private sector bank) because the central bank viewsTemasek and GIC as related entities, and both companies cannot collectively own more than 10% of ICIC Bank
- GIC buys the Oakwood Appartments in Roppongi, Japan. The latest addition after purchasing Oakwood Akasaka, Oakwood Aoyama and Oakwood Shirokane. GIC also owns the Shidome City Center, Shinagawa Seaside Towers and Kawasaki Tech Centre. GIC also has a US$1 billion investment in ProLogis Properties which invests in high quality logistics facilities in Japan
- GIC bought the Intercontinental Hotel in Paris for 315 million pounds. GIC also bought the prime Chifley Tower and Chifley Plaza in Sydney, and the Royal Pines Resort in Gold Coast, Australia
- GIC is a key investor in China International Capital Corp (CICC), China's first joint venture investment bank
- Temasek buying Shin Corp from Thaksin's family
- SingTel buying 32% of India's Bharti Telecom (India's second largest mobile operator)
- SingTel buying 45% of Pacific Bangladesh Telecom for US$118 million
- DBS Bank failed attempt to buy Korea Exchange Bank
- DBS Bank buying a 37% stake in Indian financial firm Cholamandalam
- Temasek buying an 11.5% stake in Standard Chartered Bank
- Temasek putting in a bid together with Blackstone Capital (Merrill Lynch now) and the Carlyle Group for a strategic stake in Air Sahara
- Temasek's failed tussle with Taishi Financial to by a 22% stake in Taiwan's investment company Chang Hwa
- Temasek tripling its stake in Pakisatan NDLC-IFIC Bank
- Temasek buying a 30% stake in Vietnam's Pacific Airlines
- Temasek buying a strategic stake in India's Mahindra & Mahindra

Is it an envy problem, I think its more than that. Singapore may think of the twin terrors as "Donny & Marie" but to the rest its a bit like "Cain & Abel" but not quite. I think its closer to "Aykyrod & Belushi"! One is saner than the other but both are still dangerous...

Tuesday, March 28, 2006

Asian Currency Unit - Needs To Take Off
Rebalances Economic Power To Asian Economies

China has just overtaken Japan as the world's largest holder of foreign exchange reserves with US$853.7 billion at the end of February. China's reserves rose a sharp US$26.3 billion in January to 845.2 billion dollars, then added another US$8.5 billion in February. Japan's reserves at end of February stood at US$850.06 billion. China's foreign exchange reserves have grown remarkably in recent years - more than doubling from US$403.3 billion in 2003, thanks to strong fund inflows and a burgeoning trade surplus. This news comes at a time when plans to launch an Asian Currency unit (ACU) to help develop regional bond markets and promote regional monetary cooperation seems to be stalling.

The plan to launch the ACU is an important step to wrest some economic power to the Asian side. Of course the ACU will never be a a public currency like the Euro, but it is crucial to develop a substantive bond market based on the ACU. Right now, when you have billions of surplus cash in your central banks, you can either invest in bonds denominated largely in US dollars. Even soft loans to third world countries or those issued by IMF/World Bank are usually in US dollars. If you read my blog on the domination and reserve currency status of the dollar, you will appreciate that we need to diversify from that. Having a deep ACU bond market will bring prominence to Asian currencies and finances.

Right now, the members involved are quibbling over two things: the weighting of their respective currencies; and the inclusion/exclusion of some currencies. The weighting issue is a simple one, and should be easily resolved once the egos are set aside. It should be based on either a trade weigted index or GDP formula.

The tougher issue is determining who is in and who is out. Taiwan, though should be in, will definitely be out because you need China's yuan to be involved. HK dollars should be in, but will not be owing to its linkage to China (plus its a fully pegged currency anyway, get over it already). Difficult regime such as Cambodia should not be in, but will keep trying via the Asean route. Brunei should be in, even though it is small, plus it is already part of Asean. So, Cambodia is the sticky icky one. The ACU is supposed to be the Asean nations plus the big 3, which include Japan, China and South Korea. Wonder why India isn't included?

The ACU will allow for big bond issues to be distributed and traded. It will foster a new asset class in terms of Asian currency bond exposure and will excite big bond funds. The volatility of certain currencies will only add curry to the flavour. If it is big and deep enough, certain Euro central bankers and certain Asian countries may be able to diversify their portfolio of excess cash into ACUs. The ACU will generate even more excitement with respect to single Asian country currency bonds. For example a company or a country could issue a dual bond, 5 billion ACU (hypothetically) at 4% and a RM5 billion at 6%, thus allowing some diversification, risk management, exposure assessment of usage of funds, etc... If a smaller Asian country's currency is under "attack", the country may choose to borrow in ACUs instead of a more dominant or prohibitive US dollar, or as an option to a higher-cost Euro bond.

The main benefit in my view will be the "more intimate cooperation and consultation" on monetary and fiscal policies of member countries in the ACU. Strength in numbers. Keep us seperate, each Asian country is much weaker.

Monday, March 27, 2006

Stock Market Capitalisation - A Reality Show


Finding Your Space In The World

Sometimes when we talk about financial markets, we miss the bigger picture of how things are. One could be the minister of finance or a big hedge fund trader or a big shot analyst... in various countries in Asia or Australia for that matter, we tend to get lost and self absorbed in our own world, exaggerating our importance. Many Asian investors and management often wonder why foreign investing institutions or foreign investors do not buy more shares of Asian companies. Some government authorities try their darndest to drum up interest among the foreigners. Maybe if we look at comparative market capitalsations, we will get a better picture.

Market capitalisation is calculated by multiplying the number of outstanding common shares of the firm and the current price of those shares. The term capitalisation is sometimes used as a synonym of market capitalisation; more often, it denotes the total amount of funds used to finance a firm's balance sheet and is calculated as market capitalisation plus debt (book or market value) plus preferred stock. Below are the approximate total market cap of the "domestic listed companies only" on the respective exchanges as at end-2005 (or figures as close to end-2005):

NYSE US$13.3 trillion
Nasdaq US$3.6 trillion
Tokyo Stock Exchange US$4.6 trillion
London Stock Exchange US$3.1 trillion
Euronext US$2.7 trillion
Deutsche Bourse US$1.2 trillion

In Asia-Pacific, the HKSE's figure was US$1.05 trillion. The Jakarta Stock Exchange has a paltry figure of US$50 billion. The Singapore Exchange at US$203 billion. The Taiwan Stock Exchange at US$480 billion. The Bombay SE comes in at US$592 billion. The KLSE at US$190 billion. The Thailand SE at US$142 billion.

The 10 largest US companies listed on NYSE according to market cap:

1) Exxon Mobil US$365 billion
2) General Electric US$347 billion
3) Citigroup US$230 billion
4) Bank of America US$212 billion
5) Procter & Gamble US$197 billion
6) Pfizer US$193 billion
7) Wal-Mart US$188 billion
8) Johnson & Johnson US$179 billion
9) AIG US$170 billion
10) Altria US$150 billion

Bearing in mind, I didn't even venture to include some of the big companies on other exchanges such as Microsoft US$279 billion, BP Plc US$236 billion, Royal Dutch Shell US$206 billion, HSBC US$190 billion, Petro China US$182 billion, Toyota US$174 billion, etc..

Just looking at the exchanges value and market cap of some of the biggest companies, theoretically speaking the ENTIRE KLSE is only as big as HSBC!!! Which means HSBC can basically own all the one thousand over companies listed on KLSE in exchange of their shares!


Either Citigroup or Bank of America could do the same for all the domestic companies listed on Singapore Stock Exchange. When just ONE company can account for your entire country's exchange market capitalisation - that's a reality check. That should give us a better sense of where we are in the economic world. I mean the CEO would almost be able to proclaim himself/herself as KING/QUEEN of the country - if I "control" all the companies on the Singapore Stock Exchange, that is a pretty powerful position, even PAP would have to give way man!!!

This game is quite fun, say Exxon mobil could just borrow a little bit more and then it could take over all the companies listed on Taiwan Exchange. General Electric should do this, it could buy out all the companies on KLSE and Thailand Stock Exchange in exchange for GE shares. instead of running GE from a tiny building, you could run companies over two decent sized countries, with lots of island resorts to boot.

In the US they have their own categories of stock size. A small cap is defined as having a market cap of below US$1 billion (RM3.7b / S$1.62b / HK$7.8b / A$1.34b) - and that's a SMALL CAP in the US!!! Mid-caps have a capitalisation of between US$1 billion to US$5 billion. Large caps are those exceeding US$5 billion.


So on that "US based categorisation", the following are a selection of the biggest companies from HK, Malaysia and Singapore:

a) Maybank US$9.7 billion - Large Cap
b) Sime Darby US$3.2 billion - Mid Cap
c) Genting Bhd US$3.5 billion - Mid Cap
d) EON US$0.55 billion - Small Cap
e) Hutchinson Whampoa US$35 billion - Large Cap
f) Bank of East Asia US$4.7 billion - Mid Cap
g) New World Development US$2.47 billion - Mid Cap
h) DBS Group US$13.4 billion - Large Cap
i) Great Eastern Holdings US$3.6 billion - Mid Cap
j) Singapore Press US$4.2 billion - Mid Cap
k) City Developments US$3.3 billion - Mid Cap
l) Siam Cement US$8 billion - Large Cap
m) Thai Airways US$2.1 billion - Mid Cap
n) Bangkok Bank US$3.9 billion - Mid Cap
o) Bank Mandiri US$3.3 billion - Mid Cap
p) Astra International US$2.6 billion - Mid Cap

This blog is not meant to shame or embarress, but rather a constant reminder to all investment pros in Asia, that we have to work harder in order to make a similar level of money. The scaling and leveraging in the US or much of Europe offers scaled salaries. If you manage ten M&A transactions in Asia-Pacific (except in China, I guess), it would not yield even half of one good size M&A transaction fees in the US.

Plus to those who scream and yell, why don't they invest in Asia-Pacific ... well, Asia-Pacific is so SMALL, if you are managing a US$500 million fund, you might allocate US$100 million to Asia - how many countries will you have to cover just to manage 20% of your portfolio. While on the other hand, I can cover 40% of my portfolio in US stocks and the other 40% in big European stocks. Somehow stocks listed in the big bourses in Europe tend more to act and look similar (e.g. London, Paris, Germany) but each exchange in Asia-Pacific is a different animal on it own and require more work to understand before acting.

Friday, March 24, 2006

Mis-Steps By Khazanah, Bursa & GLCs
Things That Make Me Mad

In less than 24 hours after my glowing write up on the reintroduction of short selling, I have been inundated with disappointing news of what transpired over the last 2 days involving the headlined companies and institutions. Sigh...

Short Selling - Apparently after PM Badawi made the announcement, almost every single CEO of the local funds got a phone call telling them that short selling is not "permitted" for local institutions. So, short selling is only for foreign institutions, where is the logic?? Why handicap the local funds? Of course, the actual rules and regulations have yet to be announced, please.... be logical and have a bit of brains and allow short selling for ALL, including members of the public. You cannot have one set of rules for some, and another for the other group - this is not NEP, this is supposed to be a world class financial capitalistic market place!!!

KPIs - Apparently people in the Bursa were running around like a chicken without a head as GLCs suddenly announced their KPIs. Are KPIs material information? How should the Bursa view them? I mean, the Bursa is organising the bloody conference with CIMB, surely they would be informed that KPIs would be presented and talked about during the conference. GLCs were instructed to announce the KPIs prior to the conference so that they would not breach any rules with regards to talking about material market moving information. The Bursa should have been smarter by knowing what KPIs are, and whether they represent material information into the market in the first place - then they would not have to had so many emergency meetings.

Execution Risk - This is what I call a lack of execution ability. Haphazard management of things and events, failure to be detail oriented, management by crisis (no crisis, no management). Surely, parties involved in the planning of the conference and the subject material should have covered the bases better than what happened in the last 48 hours. Buck up people, work doesn't mean just showing up.

Some Horrible KPIs - Some of the KPIs are decent but some are just meaningless. Let me criticise the bad ones first: Golden Hope - ROE of between 8%-12%, why the big gap, its a 50% gap, that is not a KPI, that is a very forgiving rule of thumb (there is nothing KEY or PERFORMING about that), its like telling your son to get between 50-75 marks out of 100!!!; then there is MRCB - obviously an underperformer for the past 3 years, being set revenue and PBT growth of 50% - the figure is so high it renders it meaningless, already by setting such a high rate, it tells me you are talking of a very low base to start with, so the KPI would be meaningless, MRCB could very well make 50% or 100% or even 300%, it wouldn't surprise anyone coming from such a low meaningless base.

Going Private - Then Azman Mokhtar had the nerve to go and say that some GLCs may be taken private, and that share sales of GLCs by Khazanah is unlikely. First, the share sales, please refer to my previous blogs on share sales. Secondly, taking companies private. When do we take companies private??? When the real instrinsic value is way below market valuation, or in simpler terms when market cap is way below NTA, or when earnings multiples is grossly low compared to future earnings growth, or a combination of those factors.

ARE THERE ANY GLCs BEING UNDERVALUED CURRENTLY??

No, there are plenty of GLCs underperforming, overvalued, very fat, inefficient - thats why the KPIs were introduced, am I right or ... am I right!!? Then nothing is undervalued, then why do you go and talk about taking them private?? In which case, taking any of the GLC private would be admitting that they are beyond help, that they cannot muster any more investors' interest, that they cannot borrow from banks anymore .... so, please.... sigh.... I am so sad and angry... I don't know what else to say.

p/s Well after the ranting, there is ONE stock under Khazanah that should be taken private, its Faber (please read blog on Faber as one of my top buys of 2006). Even though it may save a lot of embarressment to take MAS or Proton private, the bill could be too much at a time when Khazanah wants to invest abroad. Of course Khazanah could take a couple of the construction stocks private, but why, they are low brow construction stocks, nothing much to restructure, they are cheap because its a cyclical industry they are it. As for CIMA, sell the company already, there are bids on the table. So, its unlikely to be UEM World or Opus. ..... So, is Azman saying he is going to take Faber private? Looks like the best possiblity.

Thursday, March 23, 2006

Short Selling In KLSE


Wise, Farsighted Or A Mistake

The government introduced several measures to enhance the local bourse including allowing large Malaysian companies with foreign operations and foreign owned companies with foreign assets of at least RM1 billion in market capitalisation to seek listing on Bursa Malaysia, enabling dual listings and reintroducing short selling. The government said the measures were aimed at bolstering the stock market to be a world class capital market. Other than that, to realign the regulatory framework, the securities and futures laws are to be reconsolidated into a single omnibus legislation.The consolidation of these two laws would enable the introduction of a single licensing framework for market participants.

Besides that, regulated short selling (RSS) and securities borrowing and lending (SBL) will be reintroduced, the government said. To attract global talent, the processing of visas and work permits for foreign individuals in all aspects of the financial services sector would be centralised at the respective regulators, namely, Bank Negara Malaysia and the Securities Commission.

RSS is a big decision and will be applauded and criticised by many. The naysayers will be highlighting that the market may not be deep enough. Participants may not be sophisticated enough. When authorities are claiming that GLCs are cheap, why would they go and derail that - as when shorting, most foreign institutions will be aiming for GLCs anyway. The timing is bad as we are trying to entice more buying not selling activity. Will result in more manipulation.

I am very much for RSS. My reasons:

1) Better valuation - You cannot keep a market artificial. By having RSS, you have a market that rewards and punishes good fundamentals and bad valuation. Valuation will be clearer and more transparent.
2) More activity - Right now, you can only participate in the market provided you have ONE view, you must be bullish. In general, markets will only have two to three mini bullish phases a year. In total, you would be happy to get 3 months of bullish activity - you can kiss goodbye the other 9 months. Remisers and dealers would now be more open to having two views instead of just one.
3) Restrict over-manipulation - Syndicates will have to do more legwork when ramping stocks. Last couple of weeks could have been a great opportunity to short sell the poultry stocks, or even some questionable highly traded Mesdaq stocks.
4) Investors can hedge and have more strategies - Now even the individual investor can act like a hedge fund. Say, I like property stocks ahead of the 9MP, but think that the activity is overdone in poultry. Go long on one side and borrow to short the other. This gives more choices and strategies, and can reduce risk. Of course if you are an idiot and go the other way, you would double your losses - but there are more choices now... or is it more ways to hang yourself?! But if you are a poor investor, you will eventually lose all your money anyway with or without RSS - RSS will be good for the good investor.
5) Investors' intelligence - This will propel the public to learn more and study more about stocks in general. You have to form real opinions and not just rely on hearsay. As it is more exciting, investors will indulge more. Just as in horse racing, if you only have WIN bets, its dull. But if you have QUINELLAS (forecasting the first 2 horses) or TRIFECTAS (forecasting the first 3 horse in the same order), you get more activity. The cynics who say that RSS is just for institutions because the man on the street would not be savvy enough is wrong. Yes, they may have to learn, but they will. If we stop introducing new things to the market for fear of ignorance - then nothing new will be added, its a myopic view. Then, warrants or futures would never be introduced in the first place. We just have to make sure there is sufficient information out there - know what free float is, what open shorts' balance (open interest) is, know what is squeezing the shorts, understand that you need to incur interest and related cost to borrow stocks to short, know what breakeven is in a trade, etc...
6) GLCs - It will put the GLCs on the backfoot. As Khazanah is still in the initial stages of reviving the GLCs, having RSS will delay any plans Khazanah might have to sell down their stakes. Only until GLCs are performing well will Khazanah have the luxury option to sell down some stakes. Increasing the free float at a time when a company is still struggling is an invitation to shoot oneself in the foot. (As argued before in my previous blogs, I am a big believer in Khazanah selling down their stakes to improve liquidity).
7) Bad timing? - Well, there can never be an excellent time, can it? Just do it already. Just make sure the lending procedures and interest charges are competitive and attractive for both side. For stock owners, they could make some money by depositing shares to lend.
8) Hedge funds - If all parties work well, we could see more hedge funds being very active in the KLSE. In fact, this move will put a lot of pressure on the neighbouring bourses to do likewise.

For those who think that share prices should be encouraged to go up, not down - that is a naive and shallow opinion. Stocks do not just serve to make you money. You participate in the growth potential of each stock. Stock markets DO NOT OWE US A LIVING. When you get it wrong, you get it wrong. Already without RSS, investors still lose so much money, why not give this a chance. Prices go up and down, now at least you can profit when you bet it on the way down correctly.

Fly Me To The Moon


Banned Airlines By E.U.

When you have the planes keep diving into the Red Sea or having pilots that don't take-off and land properly, you say enough is enough. Various EU countries have come up with their own list of banned airlines from their skies. While we in Asia are still generous to "errors/poor standard practices" by certain airlines (I mean a couple of pilots playing mahjong and putting the plane on auto-pilot is macho-bravissmo right?), it might be good for us to pay heed to traveling on the following banned airlines, particularly when you are on a budget or when you are the adventurous type.... Now, where is my Citation when I need it the most?!!

AIRLINES BLACKLISTED & BANNED
By France
Air Koryo (North Korea)
Air Saint-Thomas (US Virgin Islands)
International Air Service (Liberia)
Air Mozambique (Mozambique)
Transairways (Mozambique)
Phuket Airlines (Thailand)

By Belgium
Africa Lines (Central African Republic)
Air Memphis (Egypt)
Air Van Airlines (Armenia)
Central Air Express (Congo)
ICTTPW (Libya)
International Air Tours (Nigeria)
Johnsons Air (Ghana)
Silverback Cargo Freighters (Rwanda)
South Airlines (Ukraine)

Each of the European countries have their own list of banned airlines, and pressure to reveal them have been mounting in order for the public to be aware of the airlines censured. In a few months time a more complete list of banned airlines by EU-wide-unified should be finalised. Right now, there is a bit of confusion over which airline can still fly here or there ... no wonder they end up diving into the Red Sea.

Malaysia's Natural Resources & Its Future


Summertime, and the living is easy....

Malaysia is a lucky country as it has bountiful natural resources from rubber, palm oil, oil & gas, timber, etc... Maybe its the fact that things are so easy, that we have been lazy and have not been efficient and effective in using our natural resources. I tend to liken Malaysia to Australia - back in the 60s-70s, Australia was a very resource rich country (and still is). When a country can just dig up stuff and sell for tons of money, its easy. Surprisingly, Australia has managed to transform itself from a resource reliant country to one which has a pretty good work ethic, all in a matter of 10-15 years. Now, you find companies such as Macquarie Bank, Toll Corp, BHP ... going at it with international players, and winning.

The funny thing is, maybe not so funny, countries that lack natural resources have to dig deep to perform in the business world. Places such as Japan, Hong Kong, Singapore and even Taiwan are good examples. When Country A produces oil for next to nothing, and Country B produces lots of cow/beef at a very low cost, it will be very hard for say Singapore to jump in and participate in the business transaction. Hence a resource lacking country would have to add value to business transactions in order to partake in the economic world or else Singapore would not get a slice of the action. Examples the resource lacking country could do: buy the beef from Country B, add-value to it, either pre-cook it a certain way; or cure it then can it; or buy in bulk from many producers so that you have a solid inventory management and distribution system to other countries; or devise ways to lend money to Country A and B to expand; or help develop accounting systems for both countries... you get the drift. When you have nothing, you have to work real hard in order for people to play with you and give you some money.

Not just the people, the governments also become lazy. Sometimes I wish we had less natural resources in Malaysia, so that the country can wake up faster. Whe things are plentiful and easy to get, it is easy to get complacent and wastage happens frequently. There is also a lack of urgency to implement technology or do value-added stuff as profits are there and nobody is getting fired. Summertime, and the living is easy... and senior management will not be so vigilant in their controls and oversight also.

The fuel oil situation is a prime example. We get so used to a fuel oil subsidy for so long, we think we are eternally entitled to it. If we tell neighbouring countries we used to pay just RM1.50 (US$0.43) per liter and now we have to pay RM1.94 (US$0.52) per liter of fuel, they'd be envious. Ask the average Malaysian or even politician in the country if they know how much oil reserve life we have left in Malaysia.... probably 9 out of 10 cannot even guess to the nearest 5 years. We only have crude and oil condensate reserves of 4.8 billion barrels , which is about a reserve life of 20 years. Of course, we could make more discoveries in the future, but that is uncertain. In fact, Malaysia could turn to be net importer of fuel oil by 2015. As for gas, we are much better here as we have a reserve life of 33 years - and judging from our geography, we are more likely to discover bigger and more extensive gas wells in the future.

Petronas, to be fair to them, is easily the best run GLC, and is probably the top ten Asian companies in terms of management ability, strategy and execution ability. Knowing the limited reserves within our shores, the company has ventured well and beyond to capture more reserves. By utilising the profits, Petronas now has almost 60 energy ventures in 26 countries. Petronas has ventured into difficult areas such as Sudan, Egypt, Chad, Niger, Turkmenistan... to look for oilfields and LNG work.

We cannot undo the good work Petronas has done for the country... PLEASE, no more getting Petronas to build the Formula 1 strip and then fund a F1 team, or the world's tallest building (although the KLCC is pretty good and make economic sense actually), or to build Putrajaya, etc... Many of us heave a big sigh of relief that Badawi has no mega-project which uses funds from Petronas - that in itself is a fact we need to applaud!

Malaysia as a country has so much potential, we have the abundance of natural resources. We have among the better brains, just go to any major universities in the world and see how Malaysians (or Asians in general) perform. We speak English and in many cases Mandarin/Tamil, enabling us to be effective in two of the more important economies in the world for now and the next 10-20 years at least. Where we are now is okay, but we could so very easily jump up the economic and development ladder.

Yes, the removal of subsidies will hurt, but everyone needs to do away with that eventually for Malaysia to compete well and fairly. Even the subsidised natural gas to independent power producers have to go. These subsidies cannot go all at once. A masterplan has to be drawn up with a proper timeline. If subsidy for fuel and natural gas is reduced by 10% every year from 2008 onwards till zero - I think companies and the public can adjust accordingly. The additional revenue to the government budget will be needed to improve salaries and amenities, boost value-added services, lower taxes, etc... Its about time we extract the maximum benefits from our natural resources. Meritocracy has to come into play in more areas of the economy. Do not have sections of the economy to be always on crutches. I don't want to see in the next 5 years, Malaysians having to use 3 ringgit to get 1 Sing dollar. .... how to go to the bloody new Singapore casinos then??!!

Wednesday, March 22, 2006

Casino Royale In Singapore
and then there were 4...

Thanks to the debilitating requirements set by the Singapore government, the race for the two casino integrated resorts (IR) licenses now comes down to 4 parties. They are, in no order of preference:
a) MGM Mirage / CapitaLand
b) Las Vegas Sands
c) Harrah Entertainment / Keppel Land
d) Genting / Universal Studios / Ong Beng Seng / Star Cruise

The latest estimated cost is roughly RM7.4 billion (US$2 billion) for the slightly more sought after Marina Bay site, and RM5.5 billion (US$1.5 billion) for the Sentosa island site. One of the main considerations will be capitalisation. On this factor, MGM/CapitaLand has the edge as it has a combined cash hoard of US$1.65 billion. However, MGM also has a relatively high gearing itself of 3.8x, and that actually is more important than the cash hoard. You don't want a company to be stretched or strained on cash committments as the IRs are for a very long period - that will play a role in the final decision.

As for Harrah/Keppel Land, though they have only a combined cash hoard of US$1 billion, Harrah's gearing is only 1.9x. The other factor is that Harrah is the world's biggest gaming company too. That cannot hurt. Harrah also has new casino projects coming up in Europe and the Bahamas, while MGM has projects coming up in Detroit and Macau. The Macau factor will not be in MGM/CapitaLand's favour. It will be seen as a hedge bet for MGM to have Singapore as they already have Macau. The Macau casino is a big thing for MGM, and the Singapore authorities certainly do not want an IR that is run as an inferior project to Macau.

Genting has zero gearing, but Star Cruise, which is in the same bid team for the Marina Bay site, is quite highly geared. As for Las Vegas Sands, it now stands alone after the pullout by City Developments. The pullout is not a good sign as City Development is a company with solid reputation in Asia-Pacifc, not just Singapore. Sands has some cash and its gearing is not that high compared to the other two American companies. However Sands' owner is very old (72 actually)... and that certainly will be an important factor if I was in the deciding committee. I want to deal with some one who agreed to the terms of the deal for sometime to come, not having to renew the entire process should he passes on. Strong controlling ownership resting on one person does not bode well for the company's chances no matter how you cut it. Seventy two might not be very very old in corporate circles but it is when you are in a dictator like company. Plus Sands already have a decent exposure in Asia via Macau, a US$265 million casino which opened there in 2004.

Though the cost have spiralled to levels which will make these two IRs to be the world's most expensive casinos, I do think that the balance sheet and income statement will work out eventually. We are talking about prime locations, a kind of very hot and sweaty Monaco, low crime-rate, very high tourism hit rate, expensive (but which big modern city isn't) ... now you give it the entertainment pizzazz ala Las Vegas in a controlled environment, I do think the sums will work out well. Right in the middle of Asian fanatic gamblers, cannot go very wrong. Macau, Genting Highlands, Cambodia or even the Philippines casinos tend to attract a lot of the "grind market". High rollers tend to make their way via junkets for long trips to Australia or Vegas for classier treatment and better service. Now the two IRs should capture this market and more. The few who have pulled out from the bidding process over the past couple of months probably looked too closely to financial projections and cost/returns - it is hard to factor in the above cited positives. A telling example would be Sands' casino in Macau, it cost US$265 million and was opened in 2004. They made back the entire sum in one year. Now the casino, hotel and the land is basically free. So successful was that venture that Sands has ramped up investment by betting US$6 billion on the Cotai strip in Macau which will see a 7 hotel-casino between Macau's two islands, Taipa and Coloane. All the more reason why Sands is likely to fail in getting the IR - plus, it probably wouldn't bother Sands one bit not getting it.

Let's look at the tourism appeal which will also link up the entertainment and architechtural style. MGM looks to have won the battle here but Genting has scored nicely with Universal Studios for the Sentosa site - that has a "family appeal" as compared against a more adult-oriented only entertainment concept.

It looks very likely that Genting will get the Sentosa IR, especially with the Universal Studio link up. A Disney-like atmosphere would be wasted on Marina Bay, but better utilised at Sentosa where a more family oriented environment can be cultivated. Genting is listed in KLSE and Genting International recently listed in Singapore Exchange - allowing Singapore public easy access to participate in the earnings and growth of Genting. The similarity in culture and proximity of Genting to Singapore bodes well for both. Can also stop the flood of Singaporeans migrating to Genting Highlands every weekend. Both MGM and Harrah are more into MICE (meetings, incentives, conventions and exhibitions) concepts as part of their casinos - that will work only for the Marina Bay site. Hence if they don't get the Marina Bay, they might as well forget about bidding for Sentosa site.

That leaves the 3 fighting for the Marina Bay site. If it was an American Idol like competition, Sands is likely to have the lowest vote first thanks to the cricket-score-like age of its controlling owner. Nothing personal.

However, the process is now centered on the Marina Bay project, and the winner will be announced soon. Only then will the evaluation process start for the Sentosa project. Parties not successful in the first project can decide to resubmit for the Sentosa project.

As for the Marina Bay results, its like a toss up between Harrah/Keppel Land and MGM/CapitaLand. The fact that there is a Singapore company involved can only help. Again, pushing Sands further down the track. Though many may favour the MGM/CapitaLand bid winning, I personally think that Harrah /Keppel Land's bid will win (if you notice in my Imaginative Investing picks, Keppel Land is there). The thing is CapitaLand has been more successful abroad, especially in China, and great tie-ups with WalMart there. To the authorities, the company could have its plate full already, they certainly do not want the company to be over burdened or lose its focus - price of being too successful? Maybe.

Keppel Land is steadier. Quietly, Harrah and Keppel Land have signed a pact with SMG, the world's largest marketer and operator of convention centers, to promote the IR as a destination for international conferences. That is a crucial point as the last thing the authorities want to see is a half empty MICE property in Marina Bay. The less successful on the MICE side, the greater will be the chance for failure for the IR because the government has framed the IRs to be viable more on MICE and entertainment rather than gaming, and Singapore is not yet a very strong destination for MICE at the present moment compared to Hong Kong. Now, you will get a huge supply of floor space for MICE coming onto the market , so to me, this is the telling blow that makes or breaks the camel's back. You cannot afford the MICE side to fail or even perform poorly. The stakes and reputation are too high.

Khazanah and PNB Should Follow Temasek
Further Sale Of SingTel Shares

Temasek continued with its efforts to sell down its stake in SingTel by raising S$2 billion by selling 770 million shares at S$2.66 or a 5% discount from the market price. The sale reduced Temasek's stake in SingTel from 61% to 56.3%. The deal was arranged and placed out by Goldman Sachs. The last sale was in November 2004 when Temasek sold 2% of SingTel.

Of course there could be plenty of reasons for the continued sale: boosting free float; reducing exposure to local assets in preference of overseas assets by Temasek; to help fund the purchase of Shin Corp; part of the trade deal with the US; diversifying away from telecommunications into banks, plantations and drug makers; etc... Still, PNB and Khazanah should take the lead by reducing stakes in government linked companies in Malaysia. As I have frequently argued before, you want more free float, not more control. I can understand if PNB/Khazanah do not want to sell companies if they are performing badly now as they can get better pricing in the future.... but surely not ALL GLCs are badly run.... or am I mistaken? I think Yusli, the CEO of Bursa Malaysia, may be a secret reader of my blog as he said yesterday that he ALSO wanted Khazanah and PNB to start selling down shares to boost liquidity. Hmmm....

Just remember, more free float does not mean lower prices, that's a proven fact in many studies. If you have to maintain stock prices by controlling the free float, that tells a lot about the management:

1) That management is defensive and see investors as competitors for the same pie
2) That management does not wish to share growth prospects and potential with investors till its way over valued
3) That management has a narrow viewpoint with regards to control issues
4) That management is wary of accountability and the ability to meet up to a more open challange to their corporate leadership

Tuesday, March 21, 2006

Modular Techcorp Cancels Deal With Blue-I Network


Justice Prevails

Back in 4 November 2005, I blogged on these two companies, was furious at the blatant disregard for business transaction fairness. I hoped I played a small part in getting them to nix the deal. On 28 February, management of Modular announced that the company would abort the deal with Blue-I. Compelled by minority opposition to the RM21.5 million purchase, the Malaysia's Securities Commission initiated a review of the proposal in November.

Part of what made me so furious is the shallowness in business thinking in coming up with the deal. If I am going to rape the company, I could have designed a much better scheme. These twerps don't deserve to get rich, not enough brain power la.

Yes, after all my complaints that powers higher up were not asking questions, the SC has stepped in well even though this kind of deal does not require SC's approval. You can view my earlier rant on Modular/Blue-I in my blog on 4 November 2005, enjoy!

Revolutionary Products & Market Bubbles

Generally, when there are market bubbles, it will be because of some over-hyped technology or revolutionary product that is predicted to change the world we live in. When these hypes or revolutionary ideas fail to rise to expectations, thats when bubbles deflate rapidly. Back about a year before the dot com bust in 2000, the renowned Barton Biggs (investment strategist for Morgan Stanley then) was at a conference thingee where he was supposed to give an address, sharing the stage with an academic (whose name I have forgotten now) who predicted that the Dow is undervalued and that in 1999/2000 was the last time to buy before it rockets to the next level - 36,000! Now, they were all in the midst of a dot com frenzy and internet-taking-over-the-world stuff. Naturally Biggs got slaughtered by the crowd's response as he mentioned that the dot com frenzy has led to stretched valuations and is bubble-like.

The interesting thing is that the Mr. 36,000 academic (who has sold hundreds of thousand of his book on how not to miss the 36,000 Dow... or something like it) emphasised that the internet is revolutionary and that Biggs and other bears do not understand the technology and implications.

The lesson here is, whenever there are revolutionary products, investors will go overboard and latch onto a group of stocks and deemed them as future kings. Each hype we go through will almost certainly involve thousands of companies jumping on the bandwagon, but no matter how revolutionary, less than 1% will be able to make consistent real long term money from it.

The internet is an excellent example - its impact is wide ranging and touches almost everyone's life in some way. No one can envisage NOT being in contact with the internet one way or another on a daily basis. Still, how many hundreds or thousands companies do actually make super profits. There is Google, e-Bay, and a few others... again much less than 1% from those getting funds from venture capital firms in the late 90s. What Mr. 36,000 missed out on is every new revolutionary product will produce "madness of the crowds". Mr. 36,000 needed to know that market bubbles are NECESSARY whenver new technology or revolutionary product is available - they are necessary as we need large sums of capital to concentrate on exploiting the "value-addedness" available in this new technology - even though less than 1% will survive, we are all better for it in the longer term. We need to try 1,001 things we could do with it.

Just look at when mobile phones took flight, we also had a carnage. Or when 3G was made available, again many firms lost a lot of money. So, market bubbles are necessary, so too is the inevitability of a market correction. The thing is only a very small number of companies will make money, that's the natural law of business and capitalism. You just cannot have thousands of company making supernormal profits owing to a revolutionary product because competitors and new entrants will come for your market share, go for lower margins, make more innovations, get more value-addedness on the product, etc...

Back to the internet, though it is life changing and very pervasive, internet still lags a few other revolutionary products of the past in terms of importance and impact. Okay, lets say electricity, that's a given, so too is the motor car. Another is air-conditioning - we so take air-con for granted as part and parcel of daily life. If we do not have air-con, do you think there will be high-rise buildings more than 5 storeys, or the lead-on effect of migration of population to cities, etc... As impressive as the internet is, there are still a lot of successful people who do not need to use it to get by. I grew up for the first 25 years of my life not needing a mobile phone - why do we need to be able to be reached at any time, anywhere by anyone? Of course now, you cannot imagine living without it. Still that gives the internet and mobile phone a sense of reality in their degree of importance (or lack of) on the revolutionary curve of things.

So the next time you get a sales pitch on the next big thing, beware, there will be a market bubble, and there will be a market correction ... the next big thing could be: the "no-side effects, eat all you want, guaranteed 10kg a month weight loss pill"; or the pill to cure cancer of all kinds; or the new resuscitation machine that can bring life back to any one who has died not more than 24 hours; or the new sugar which has one calorie per teaspoon but does not taste like cardboard on your tongue; or the new mobile phone that charges by itself using sunlight; better still, the car that can run on sunlight as they have made solar cells small, light and efficient enough; or the revolutionary Viagra in a tube, just rub it on, non-toxic and works within 5 seconds, edible too...comes in strawberries, banana, apples,...." (I think the Viagra idea will be BIG man...).

Monday, March 20, 2006

Understanding Business Mentality In China, Taiwan & HK - The Zhang Zhiyi Experience



Boy, I am so happy to be able to talk about Zhang Zhiyi in my blog on Asian business. Can you imagine that? Zhang had a wonderful 12 months thanks to Memoirs of A Geisha, but suffered enormous criticism over her role, which involved being involved with a Japanese man... in a movie role. I am not even going to go into how low-brow and uneducated an opinion it is to be offended by that MOVIE ROLE. You'd think things would die down..., NO... Zhang appeared magnificently in the recent Oscars, and even presented and she spoke surprisingly well in English. Was that good enough for the media? Apparently not. The media in China, HK and Taiwan have plenty to say about Chinese actress Zhang Ziyi and most of it is downright vicious. Below are excerpts from an article in The Straits Times in Singapore today.

Hollywood was enthralled with Zhang's beauty in Memoirs Of A Geisha, but it was her turn in House of Flying Daggers that captivated my attention. After her role as a presenter in the Oscars, this was what the HK papers had to say, and her gown was magnificent by the way. 'Zhang Ziyi's Armani evening gown made her look so flat-chested it was scary' said HK's Sing Tao Daily said in a headline. She has said previously the venom has to do with Hong Kongers' deeply entrenched bias against mainland Chinese, who are viewed as bumpkins and gold diggers. 'They think, 'How can you be an international movie star? You are only from China.' For them, China is like the countryside,' Zhang said in an interview with The Sunday Times of London in 2004.

Such evidence is found in a 2004 article in HK's Next magazine, a popular weekly known for its hard-charging paparazzi. It printed a photo allegedly showing Zhang squatting down to check out the bottom shelf in a store. A caption read: 'Miss Zhang displays the special trait of our motherland's compatriots: spreading her legs wide and squatting down.' People can often be seen squatting in China in crowded places - such as railroad stations - where the ground is too dirty for sitting and there is limited public seating. Zhang's rapid rise and ongoing success may also have bred envy. Many Hong Kong publications made sure their knives were extra-sharp for the Oscars, where she presented the award for best editing. A headline in Apple Daily ripped into her English: 'She still can't change her English with a Beijing country accent. She didn't pronounce the 'r' in the winning movie Crash properly.' This one really irked me, when do you find an average HK person speaking English well?? So what if she's got a Beijing accent, she's from Beijing isn't she? Nobody faults Antonio Banderas for speaking English with a Spanish accent!!! Or Gerard Depardieu for speaking English with the clipped French accent?? Does Apple Daily's editor even understand what is good English and what is accent? I mean, seriously, Zhang's intonation and pronounciation are so much better than Jackie Chan - do we see any HK papers savaging Jackie's English??

Sing Tao Daily said she read her cue card with 'quivering lips' and her pronunciation of Crash sounded more like that for the toothpaste Crest. The Ming Pao Daily noted that she forgot to hug or shake hands with the award winner, though it conceded that her English was improving. Hong Kong writers also savaged her Giorgio Armani outfit, a black beaded bustier with a crystal-encrusted grey skirt. 'Lacking in youthful vigour,' read a photo caption in the Oriental Daily News. Apple Daily hissed: 'Zhang Ziyi two decades behind the times.'

'Zhang Ziyi's English rolls off her tongue,' said Taiwan's Liberty Times. Another Taiwanese newspaper, the Min Sheng Daily, said 'Zhang Ziyi's English is no longer poor'. In China, there is still a strong undercurrent that they cannot accept that she has to "sleep" with a Japanese man, even though it was in a movie. Playing a Japanese woman already stirred open some wounds which have not healed properly for many years. China found it hard to "celebrate" with Zhang's new found international stardom but have toned down the viciousness of late.

Business Lessons

1) Though most HKers would not like to admit it, deep down there is a feeling of resentment against how fast some of the Chinese from mainland have gotten rich. HKers feel that they have progressed much faster economically and up the developed country curve, and to make less money than them is an insult. This mentality prevails even when certain HK companies go to the mainland to expand - beware and be aware.

2) HKers not only begrudge the rich ones from mainland but also abhorrs how crudely they spend their money in HK especially - no class as they say. But most HKers also know they needed cash from China to fund the down trodden economy in HK for the past few years. HKers can't wait for the good times to roll again so that they can pass crass remarks and shoo the mainlanders back to where they belong.

3) When doing business in China, you are either with them or against them. If you fallout with the Chinese, well its not going to be a "agree to disagree" mantra. You cannot afford to have a fallout as some entrepreneurs have found out the hard way. Many would want to hedge their fortunes by parking funds elsewhere whenever possible. There is an under current of uncertainty that you could find yourself in the wrong side of the turning tide of political sentiments too swiftly in China.

4) Taiwan politicians will fight like mad with politicians in China in the media, but business wise, China has been quite open in welcoming Taiwanese investors. Much of the open war of words is to appease the masses of both sides for championing nationalistic interests. But business has been going to and fro, especially from Taiwan to China in a big way for a very long time. Thus, you will usually find that anything China says will find the Taiwanese going the opposite way, mainly to spite the other party. You don't like Zhang Zhiyi, I think she is adorable. Hence when doing business with either Taiwan and China, you do not go extolling the virtues of Taiwan to China or China to Taiwan. Just do the business, even though they may actually agree with you opinions about the other country, its best not to say them out loud.

As the above are generalisations, they are bound to be exceptions. Generalisations applied harshly on everything will lead to prejudice and unjust discrimination. Generalisations are just tools for use to learn a bit more about something, not a divining rod.

Strategic Stakes Taken By International Funds


Malaysian Companies To Watch

The following are significant stakes taken up by some international funds with a decent investing record in Malaysia. I will also rate the attractiveness of their investment out of ten. Bears watching.

Newton Investment Management Ltd is a big UK based fund. The fund has bought 42 million shares, a stake of 8.2% in Bursa Malaysia (the exchange). Its last reported purchase was for 305,000 shares on March 3. The fund's buying could a be a momentum play following the takeover bid by Macquarie for London Stock Exchange last year. That was rebuffed and was topped by Nasdaq by offering nearly a bid nearly 80% higher than Macquarie's a few weeks back. Bursa is making good money despite being so-so managed currently, so the potential for higher returns are good. Readers of this blog know how I feel about Bursa's management - probably ruling myself out for a job offer from Bursa. Good medium term investment by Newton Investment Management Ltd. (Rating 7.5/10)

The Capital Group, one of the largest mutual funds in the US, has been buying shares in IJM Corp Bhd. It last reported buying 403,100 IJM shares last week, which raised its stake to 9.9% in IJM. Capital Group owns many stocks in this country, including a substantial stake in property developer SP Setia Bhd. The move by The Capital Group to load up on construction and property probably has a lot to do with the broad view that these are main beneficiaries of the 9th Malaysia Plan, especially IJM, I think SP Setia's favoured more due to their township in the offering and their clever buildup of strategic landbanks. SP Setia's offering of Setia Pearl Island in Penang is a very much sought after project. (Rating 6.5/10)

Fidelity, billed as the largest mutual fund in the US, has been active in buying Mah Sing shares this year. Firstly, Mah Sing almost has to come back from the dead a few years ago. The company still suffers an image problem in Malaysia among investors. However, kudos to management for really rebranding the company. Its recent launches of Damansara Perdana and Aman Perdana in the Klang Valley were good value and attractive. Even bigger kudos for Fidelity to have the guts to look past reputation and on fundamentals alone. (Rating 8/10)


Pelikan International Corp Bhd has the Arisaig Asean Fund Ltd as a substantial shareholder, which bought Pelikan shares right up to last week. Arisaig Asean Fund, listed on the Irish Stock Exchange, is also a large shareholder of Uchi Technologies Bhd. Now, Uchi is a firm favourite among many analysts for the past few years, and Arisaig would have made a lot of money from their stake in Uchi. I expect similar results from Pelikan, albeit taking a bit longer than Uchi. Pelikan is the result of a LBO. Strange because 95% of revenues come from outside of Malaysia, main factory is in Voehrum, Germany, and the company is now Malaysian owned. The CEO and management is still saddled with a huge debt and is working hard to penetrate markets to payoff the funding. Europe accounts for the bulk of their stationery product market, but has made in-roads into Asia, Latin America and Eastern Europe. The brand is sound, currently trades at low PERs, good yield, more and more long term funds are buying long terms stakes in the company. A deal with Parkson Retail in China brought immediate exposure for Pelikan in 37 outlets in China. (Rating 6/10)

Hedge fund Level Global Investors L.P. bought 10.4 million shares, a stake of 5.2%, in Jobstreet Corp Bhd last month. Global Investors' interest could have been attracted by Jobstreet's mid-teens' PE whereas its counterparts in the US, Australia and China are traded at PEs of over 30 times. A consolidation will come soon in Asia. Better funded job sites such as Monster.com could so easily swallow up the company, or a company like Google would not be averse to latch onto Jobstreet for its market visibility in Asia-Pacific. Still, Jobstreet remains a "only-if" play, i.e. price will shoot up only-if someone buys the company. (Rating 6/10)

Aberdeen Asset Management has bought a 5.92% stake in one of my favoured Imaginative Investing picks, Pos Malaysia. The bulk of the shares was only acquired in the first 2 months this year. Mail and courier revenue are still on an uptrend, we expect courier services to be a major jewel that is still not yet recognised by investors. Once you have wired the hotspots and delivery points, you cost per courier delivery is close to nil but these are premium services you can charge for. No one can match Pos Malaysia's breadth and width in delivery points, others can only replicate a small part of it. You have the platform, now the kicker is Pos Malaysia's 20.3% stake in Transmile Holdings. Transmile now acts like a feeder to international courier and cargo services for Pos, in and out of Malaysia. Since Robert Kuok has taken over Transmile, its performance has been spectacular, thanks to Kuok's way of doing business. Hence both companies I like very much. A brilliant move by Aberdeen's Hugh Young. (Rating 9.5/10)