Friday, June 30, 2006

World Cup 2006 Update
Quarter Finals

Germany vs Argentina
At the start of the tournament, only 20% of Germans surveyed believed that their team can win the cup. I am certain the figure is up to 80 or 90 percent by now. The trouble is, Germans are playing well and may have peaked too soon. If its the spectacular to win the match, then Argentina has more flair and firepower. Neutral on this game, slightly favouring Argentina to win as this team is the least cynical of all Argies teams for the past 20 years. When you have the skill and ability, you need not resort to cynical play.

Italy vs Ukraine
I was a neutral on Italians before. The grave injustice in their match with Australia makes me wish I was a Buddhist, then karma should prevail and have the Italians playing well this match and then losing to a very dubious penalty to Ukraine. Italy can go home for all I care.

England vs Portugal
The team that coached itself. What is the value of having Ericksson? If he plays Rooney as a lone striker again, England should lose. If they play a 4-4-2 with Rooney and Crouch upfront, England will win. England needs Crouch to hold the ball up for flicks and allow others to run into spaces. Needs Joe Cole and Lennon at wings to run at defenders and draw Portugal's defence wide. Hargraves should not play. Same with Carrick. Although I was brought up following the Red Devils, England should lose thanks to Ericksson, unless he follows what I have written... lol... Its a match, more for England to lose, rather than Portugal to win.

Brazil vs France
The old foggies got lucky, nothing to write home about Vive La blues shyyytt... Go home and eat your innards and fine cheeses. You stink. I mean, you stunk, and you stink.

Rise Of Buyout Funds & Implications
Companies Cash Hoard Targeted Soon

Kohlberg Kravis Roberts is looking to collect US$15.5 billion this year for what will be the biggest takeover fund ever formed - topping the loot raised by fellow barbarians Stephen Schwarzman, David Bonderman and Leon Black. Schwartzman's Blackstone Group, Bonderman's Texas Pacific Group and Black's Apollo Management are all raising new war chests that are likely to be filled with more than US$14 billion EACH. KKR's new fund will give it the firepower to pursue bigger takeovers of better-known corporations. The firm, founded in 1976, has already controlled some of the world's most iconic companies including Toys 'R' Us, Texaco and Gillette. The billions flowing into private-equity funds this year have many betting that KKR's record US$31 billion leveraged buyout of RJR Nabisco in 1988 will be shattered.

This week, four buyout firms including Texas Pacific agreed to shell out US$900 million each for Spanish-language broadcaster Univision. New York-based KKR has made tons of money for its investors, and its current buyout fund, formed in 2002, has paper gains of nearly 400 percent. If you were to total the amount of funds raised for buyouts this year alone, you know that these funds will have to make big acquisitions. Its silly to do 20 smaller deals to invest the fund size, its better to do 2 or 3 deals to matches your fund size. Having said that, opportunities will dry up in the US and Europe and thats why a number of the buyout funds have already set up shop with offices in Asia over the past 2 years. Even if 10% of the funds raised by the top 5 were to get to Asia, that would be substantive.

Carlyle Group plans to double the size of its new Japan buyout fund to 200 billion yen (US$1.7 billion) as investors seek to profit from Japan's economic expansion. The fund size might pale in comparison to KKR, Texas Pacific or Blackstone but we have to remember that this is a country specific fund. The firm's second Japan fund will be the biggest targeting acquisitions in the world's second-largest economy. Overseas funds including Fortress Investment Group and RHJ International spent US$2.9 billion buying Japanese companies so far in 2006, betting the nation's fastest economic growth in 15 years will boost corporate profits. Takeovers in Japan almost doubled to US$125 billion last year. Combined net income for 2,250 Japanese companies rose 35 percent to 36.5 trillion yen in the year ended March 31 2006. Japan's economy expanded 3.2 percent in the same period.

Buyout funds profit by selling stakes in their acquisitions through initial public offerings after cutting costs and shedding assets to boost earnings. The early bird should be applauded for its risk taking strategy to step in when no one dared - Ripplewood Holdings LLC, a New York- based fund, reaped an almost fivefold return when it sold two- thirds of Shinsei Bank Ltd., the first Japanese lender acquired by overseas investors. Carlyle's capital raising follows its announcement earlier this month of a US$668 million fund to invest in Asia, and is four times the 50 billion yen raised for its Japan Partners fund in 2001. It's more than double the 82.5 billion yen raised by Mark Chiba's Longreach Group in April. Carlyle and other investors in mobile wireless firm Willcom Inc. plan to sell some of their holding in a 100 billion yen initial public offering early next year, people familiar with the plan said in April. Carlyle, Kyocera Corp. and KDDI paid 220 billion yen for 90 percent of the company in October 2004, with Carlyle taking a 60 percent stake. Carlye last year sold Asahi Security Co., a provider of cash-management services acquired in 2002, and Colin Corp., a failed Japanese maker of blood pressure monitors purchased in 2003.

Carlyle, as a whole group, and New York-based Riverstone Holdings LLC in April raised US$4.5 billion to purchase oil drillers and suppliers of solar and renewable power. Buyout funds gathered a record US$134 billion last year, more than twice the amount amassed in 2004.

I am sure the top management of well managed companies are smiling to themselves, waiting for that phone call from Texas Pacific or KKR. You would find many of the companies being willing sellers are many of the top management have huge options and even parachute agreements (forced out due to a new controlling owner). Most of these buyout funds would however, negotiate an even more attractive package to ensure key top managers stay to improve the company's fortunes. No wonder many CEOs are smiling.

Its also a very good time to do buyouts because never in the history of US companies when you have some many top companies sitting on so much cash in the bank. After enjoying 16 straight quarters of double-digit earnings growth, industrial companies in the Standard & Poor's 500 have stuffed their corporate piggy banks with US$642.7 billion in cash. Not only is that a record, it's a big enough chunk of change to throw off some serious interest revenue which adds to companies' profit. Interest revenue generated by the cash held by industrial companies in the S&P is expected to soar 64% this year after gaining 38% in 2005.

The higher interest payments are coming at an opportune time. S&P 500 companies' earnings are expected to rise just 7.6%. The added interest income might be just enough to help some companies stay above the 10% growth mark. Top companies with the big stash include:
ExxonMobil - No company in the USA has more cash than the world's No. 1 oil company. It has approximately US$36.5 billion in cash. That's more than the annual gross domestic product of Iceland. Interest generated by its cash pile hit US$946 million in 2005, up 162% from 2004 and 313% from 2003.
Goodyear Tyre - Goodyear's cash stack of US$1.8 billion doesn't rank in the top 10. But it's a staggering amount considering the company's market value is US$2.3 billion.
Microsoft - Despite paying a US$32 billion one-time dividend in 2004 and starting an annual dividend in 2003, the company still has US$34.8 billion in cash and short-term investments.


Other notables include Johnson & Johnson with US$17.2 billion, Pfizer with US$15.5 billion (that could be doubled with the recent sale of their comsumer product unit), Cisco with US$15 billion, Motorola with US$14.6 billion (thanks to its superior Razr phone, the amount show grow at a faster pace), Aetna Insurance US$14.4 billion, Merck with US$12.4 billion, IBM with US$12.3 billion and Hewlett-Packard with US$11.9 billion.

A company having lots of cash makes for a great takeover target. Of the lot, HP looks like a sitting duck. Even Motorola is attractive should the controlling family wants to exit. Now, no one is safe from a takeover, just being big is no longer a defense. All in, the enormous amount of cash hoarded by so many companies, coupled with the sizable funds raised by buyout firms, and the rise of hedge funds - all are underpinning the buy side of the companies.

Thursday, June 29, 2006

Understanding Bubbles

The present day financial markets are very jittery, almost all asset classes are in some kind of frothiness, and having to come to terms with higher rates by Federal Reserve. Are prices in each of these assets over priced? Is the market shaky? Should everyone exit into cash? Let's look at a few asset classes that seems bubblish. I would also rate them on a scale of 1-10 for bubble effect (1 - very safe and a tad undervalued; 5 - fairly valued; 8 - overpriced; 10 - soap in mouth). Isn't it amazing that we have so many presumably "bubbles" in the present financial markets!!! The so called unconfirmed "bubbles" are there because underlying all these financial assets are pretty solid fundamentals - keep that in mind.

China Economy - Seems to be overheating. 1Q2006 growth was a spectacular 10.3% and industrial production rose 18% in May, the fastest rate in 2 years. Trade surplus in May topped US$13 billion. A year ago in May, it was just a surplus of US$9 billion. Not only that, moneysupply jumped 19% year on year in May. Banks have lent out US$26 billion in May, doubled the level a year ago. The authorities know they have to rein in the economy and cueb easy money, but they cannot overdo it. They can raise interest rates substantially which might totally derail the economy - not a feasible option. The other is to rein in the property boom, which is causing a leveraged velocity effect in liquidity. Beijing have introduced various decrees to contain the luxury real estate market, the impact is slow. The safest way is for Beijing to allow the yuan appreciate faster, not an entirely appetising option but probably the best of all evils. We can expect the yuan to be allowed to increase more tthis year. The Chinese economy cann collapse as the impact would be felt across all continents. Now, China consumes 20% of global aluminum supply, 30% of global steel and coal and 45% of global cement supply. One can imagine the domino effects on a major correction. The positive is the fact that foreign players have been allowed to invest in China banks, as in my blogs on China banks, that should go a long way to address the looming bad debt situation before it explodes. (Bubble Rating 7/10)

Commodities - Driven by demand from China and India primarily but also a jump in hedge fund investing. commodities were way overpriced and has corrected. The main thing is that prices are underpinned by demand from China, so we would not see a devastation here. (Bubble Rating 6/10)

US Dollar - Way overpriced and could fall substantially. Do read my blog on why US dollar remains strong amidst all the negatives (23 Jan 2006 "US Dollar On Prozac & Levitra"). For all intents and purposes, the dollar have more triggering factors to fall especially when the interest rate cycle is viewed by most as having peak. The next rate increase should just about do it. We can expect another 5%-10% drop in the dollar for the rest of the year. (Bubble Rating 9/10 but will stay bubblish for a long time)

US Housing - Again, underpinning the American economy, and have stayed firm and even overheated in many regions. One thing we must understand is that while officially Americans do not have much of a savings rate compared to other nations, a lot of the actual savings is hidden in their properties, and that is an area which is not usually accounted for as savings. Much like the real estate in Britain and Australia, there is a strong underpinning in the housing market. Yes, there is speculation but overall, it does not look that bad. Firm prices are holding up consumer confidence. Even if the dollar takes a dive, the US housing sub sector should remain firm and hold the economy up. (Bubble Rating 6/10)

Emerging Equity Markets - Countries which benefitted from a strong rise in their equity prices for the past 2 years - e.g. India, Turkey, Indonesia, South Africa... - also saw bigger losses over the last 2 months as funds exited on rates fears. The rise and rise of hedge funds have forced them to seek better opportunities in unfamilar markets. There are some solid fundamentals there too, there is a renergising of these emerging economies, a stepping up in their level of global competitiveness, and a general redistribution of wealth effect on strong currencies. Hence I do not forsee a fleeing of hot money never to return, but rather better discernment when the hot money returns. (Bubble Rating After The Recent Correction 7/10)

Hedge Funds Effect - Too many chasing too few assets? Plus you can even add the huge private equity units to the equation. Will hedge funds exit trigger collapses in asset classes? The simplified fear is based on the thinking that most hedge funds act alike - they don't. They are those who go short, long, etc.. To fear something because they are big is to assume they act as one - they are in a dog eat dog environment. (Bubble Rating Effect 5/10)

Oil - Been blogging too much on oil. If oil goes pass US$95, all bets are off, go cash. All arguments point to the fact that oil prices are not bubblish but just demand/supply disequilibrium. Will stay firm, be lucky to get a 5% ease for the rest of the year. (Bubble Rating 4/10)

MOST IMPORTANT POINT TO NOTE - In all these asset classes, there is an interplay among them. They swing accordingly to interest rates, in particular the rates set by Federal Reserve as a benchmark. Why are we not seeing a more severe correction with Fed funds rate at 5% (and going to 5.25% over the next couple of days)?? Given the scenario 10 years ago, equity prices would have doubled the recent correction quantum. The Fed funds rate, akin to the risk-free rate, is viewed together to the earnings return or potential return investors can get from equities or any of their other asset classes. The difference needs to be ample to justify giving up the risk free rate - its risk free! The reasons why this time around with rates approaching 5.25%, we are not seeing greater calamity are:
1) Corporate earnings growth is good
2) US dollar is not a favoured place to park funds

The second reason is more important. More investors are choosing not to park their funds in dollar even at these "highish" rates as they fear that the real return over the near term might be reduced by its potential dollar weakness. That is a big factor why big funds and investors are not exactly lured by the high Fed funds rate. They are affected in the way they perceive it as an interest rate cycle phenom, and try their best to read into the peaking of the cycle and NOT as an alternative to park their funds for risk-free purposes.

That being the case, I am quietly confident that things will be more positive after the funds rate have reached 5.25%.

p/s any investment house wants to hire a strategist???

Wednesday, June 28, 2006

World Is Getting Smaller 2
M&A Deals Shaping Our World

Phelps Dodge - Inco - Xstrata - Falconbridge
Xstrata, the Swiss-based mining company who’s hopes to buy Falconbridge of Canada, began to fade when the copper miner Phelps Dodge agreed to acquire Falconbridge and its rival Canadian nickel producer Inco in a US$40 billion deal. Xstrata is not expected to abandon its pursuit of Falconbridge -– the Swiss company will emerge a winner either way, thanks to the premium it would receive on the 20 percent stake it holds in Falconbridge. By accepting Inco’s new offer, Xstrata will realize a profit of about US$2 billion on its Falconbridge investment, which it made last August. If it increases its bid for Falconbridge, then Inco and Phelps Dodge will probably counter it. BHP Billiton and Rio Tinto will have another heavyweight rival if the industry-transforming $US58 billion ($79 billion) merger between North American copper producer Phelps Dodge and nickel miners Inco and Falconbridge proceeds. The formation of a North American giant would rival the other two giants , BHP Billiton and Rio Tinto. This could lead to raids on other large miners such as Anglo American, Alcoa, Alcan or Teck Cominco. The Phelps Dodge deal points to the fact that it is more effective to be a buyer than a builder. BHP or Rio would probably stay away from the the North American battle, but many said their Anglo-Swiss rival, Xstrata, would attempt to thwart the giant deal. A BHP-Inco merger has been all but ruled out due to anti-trust concerns and while Rio is keen on adding a nickel division, its management team is regarded as too conservative to buy in at the top of the commodities cycle. And Phelps Dodge's copper assets are seen as too high-cost. .... What if the world's top 5 commodities are controlled by two or three companies .... hmmm... don't wonder, we are there already!

NYSE - Euronext - Tokyo Stock Exchange
The NYSE Group’s chief executive, John Thain, said he expects to have the agreement to purchase Euronext in front of the shareholders of both companies for a vote in the autumn and the merger closing in early 2007. Mr. Thain also repeated that he did not see anything in the modified rival offer from the Deutsche Borse to require the N.Y.S.E. to sweeten its deal with Euronext.
“We’re not going to change our proposal. We have a signed deal. We have a contractual deal with Euronext. So I expect us to move forward,” Mr. Thain told reporters. Last week, the Deutsche Boerse's supervisory board modified some structural details of its proposed offer, but left the financial terms of the bid unchanged. Thain said the deal makes sense and cited comments from Tokyo Stock Exchange head Taizo Nishimuro earlier this month that a merger between the NYSE and Euronext would create an attractive potential partner for the TSE. When asked if the combined NYSE-Euronext entity would be interested in future merger opportunities in Asia, Thain said it would be, but expects any partnerships to be a couple years down the road. This wave of consolidation would definitely force the proud but small Asia-Pacific bourses to start talks on "merging or combining their resources". As mentioned before, HKSE will never cede to Singapore Exchange. So, in all likelihood, a KLSE-SES tie up should be contemplated with a possible link up with Tokyo or Australia SE. These exchanges may have no choice but to link arms in order to survive.


Palm Wooing Research In Motion (RIM)
Gadget lovers love Palm. Research in Motion's got the lawsuits. Might this be a match made in heaven? A buzz is starting to build around the possibility that Palm and RIM might announce plans to merge soon. The two well-known mobile computing companies do complement each other. Palm has been searching for ways to connect with enterprise customers for years, finally agreeing to use Microsoft's Windows Mobile operating system on one of its Treo phones to improve its corporate chances. Office workers across the country have been dealing with management-by-BlackBerry for several years, but isn't a major player in the consumer market. But trade combinations that seem drawn from the fantasy sports world don't usually happen in the business arena. With a market capitalization of US$1.86 billion, Palm's an option for a company like RIM, which has a market cap of US$12.4 billion and more than US$700 million in cash. Earlier this year, a major investor in Palm wrote a letter to the company urging a sale to a larger company like RIM while Palm was still an attractive company. Freed from its legal battles with NTP over the patents to the BlackBerry technology, RIM might be looking to make a move, but it faces a fresh legal challenge from Visto, another wireless e-mail vendor. Buying Palm might be a way to reduce the legal battles as RIM could adopt and reinvent using Palm's technology to better its product. It will also act as a hedge should there be more legal battles on infringement on the BlackBerry.

Global Demand For Biofuels & Malaysia
Carotech and Golden Hope

The growth in global demand for oilseeds such as palm and soy will exceed increases in production in the year to October, reducing stockpiles and sustaining prices, Oilworld trade publication said. Consumption will rise 17 million tons to 396 million tons, while production will increase 6 million tons to 392 million tons. The forecast production growth of 1.5 percent compares with an average annual growth rate of 4.2 percent in the preceding 10 years. The longer-term outlook is for a price appreciation in oilseeds and vegetable oils owing to increased demand for energy. Fundamentals have changed due to the boost in production of biodiesel and the resulting increase in vegetable oil demand. Governments worldwide want to increase biofuel use to curb reliance on fossil fuels, and curtail emissions of so-called greenhouse gases. The European Union has set a biofuel target of 5.75 percent of all gasoline and diesel sold by Dec. 31, 2010. Biodiesel is based on vegetable oils obtained from crushing palm, rapeseed and soybeans, or animal fat. Ethanol can be made from cereals, sugar beet and sugar cane.The price of soy oil, the world's most consumed vegetable oil, has risen by about a fifth this year to US$26.12 a pound on the Chicago Board of Trade. Soy meal futures have fallen 11 percent in the same period to US$174.70 a ton on the same board because of increased supply.

The U.S. is the world's largest producer of soybeans, followed by Brazil. Palm oil, the world's most traded vegetable oil, has gained 3.4 percent since the year started to 1,463 ringgit (US$397) a ton in Malaysia, the world's largest producer of the commodity. Palm oil may rise to an average US$475 a ton, or 1,749 ringgit, for the July 2006-June 2007 period, 10 percent more than the previous 12-month average. Oilseeds are crushed to produce oil, usually for cooking fats, and meal, largely for animal feed. Besides oil from oilseeds, world demand for oil is met through tallow, grease, and fish oil, among others. Demand for 17 oils and fats in the year starting October will rise 8.3 million tons, or 5.7 percent, to 153.1 million tons. That's faster than the growth in production, forecast at 7.03 million tons, or 4.8 percent, to 152.87 million tons. The forecast gain in tonnage is the lowest in three years. This would deplete inventories to 15.42 million tons from 15.7 million tons in the year that started October 2005.

Biofuel stocks continue to ignite interest in the US. VeraSun Energy Corp, an ethanol producer, made its debut on the New York Stock Exchange in the middle of the month and surged and surged. VeraSun's share price closed 30% higher from its initial public offering (IPO) price on its listing day. The listing exercise of VeraSun raised US$420mil (RM1.5bil) that will enable the company, which already operates two large ethanol plants, to build two more. Upcoming IPOs of other ethanol companies are therefore also expected to draw large sums of fresh capital to finance their expansion. VeraSun now has a market capitalisation of almost US$2bil. It's not all hype. The company reported a net profit of US$13.6mil in its first quarter, and it has large new capacities in the works. There is, however, much discussion in the US over the economics in the production of ethanol, extracted from sugar-rich crops, to replace petrol. The differences of opinion centre on huge government subsidies for corn - the feedstock for ethanol in the US - and some studies that claim that in the production of ethanol, fuel input is higher than the fuel output. According to these estimates, the amount of energy needed by tractors on the cornfields and in running the factories exceeds the output of ethanol. This energy loss does not occur in the production of biodiesel - the fuel that can replace petrodiesel.

This is, therefore, not an issue that Carotech Bhd faces. Carotech's second plant in Ipoh has just been completed and should be full production next month, just in time to contribute to its next financial year that starts on July 1. This new plant doubles Carotech's capacity, measured by crude palm oil input, to 90 tonnes a day. Next, it will construct seven new biodiesel plants in Lumut that will raise its capacity by 300 tonnes, or four-fold, to a total of 390 tonnes a day. Its expansion is not likely to end there. It may pursue continuous expansion, especially as the growth of biofuel demand is a global trend, it has a competitive production technology, and it will have the support of the capital markets.

The Malaysian government has approved 32 biodiesel-related projects worth 2.7 bln rgt which will churn out 3 mln tonnes of biodiesel. About 62 pct of the approved projects were domestic investment while the rest were from overseas including Australia, India, Indonesia, Singapore, Canada, Japan, Italy and the US. These projects, however, are still in various stages of implementation such as site acquisition, land purchase, loan application and plant construction and machinery installation. Golden Hope plans to build a biodiesel plant with an annual capacity of almost 400,000 tons, which will start operations in 2008. the plant is expected to generate a total net profit of 147 mln rgt, based on a net profit projection of 368 rgt for every ton of biodiesel. Golden Hope Plantations Bhd (GHope) hopes to hit a total annual production capacity of 390,000 tonnes of biodiesel when four of its planned facilities are up and running. In a press briefing yesterday, group chief executive Datuk Sabri Ahmad said about RM250mil would be invested in the four plants three in Malaysia and one in the Netherlands. Its first plant, Golden Hope Bioganic Sdn Bhd in Banting, which has begun commercial production of biodiesel, is expected to produce 30,000 to 35,000 tonnes annually. “It's a small amount compared with some plants that produce 60,000 to 100,000 tonnes a year, but it makes our quality control much easier,' he said.Sabri indicated that there already was interest in its product and the first shipment would go to “a big customer in Japan,' with a shipment of 2,000 to 3,000 tonnes per month. GHope will also be setting up another plant in Carey Island, Klang, together with the Malaysian Palm Oil Board. An allocation of RM20mil has been set for the plant, which is expected to produce 60,000 tonnes of biodiesel a year. Commercial production will begin next April. Sabri said the company was also in talks with a public-listed European company to set up a biodiesel plant in Rotterdam, which would have a capacity of 100,000 tonnes a year. The plant will cost GHope about 25mil euros. It will also build another plant near the port of Bintulu in Sarawak, in a joint venture with what he termed as “a big group?

I believe biofuels will be more than just a passing fad. These are the early birds, while others are still adopting a wait and see attitude. Should the biodiesel platform takes hold, this will create a very strong underpinning of the market price for palm oil. We may actually see a the entire sector being rated up over the next 2 years. It is best to follow the ethanol companies which are lining up to list, to see how they perform. Should consumers adopt the product and it be better distributed (and currently enjoys tax benefits too), we could see a revolution in the way palm oil is priced.

Tuesday, June 27, 2006

Research Ratings
Goldman On The Right Track

Finally, the things which has caused my disillusionment with equity research are being rectified. Goldman Sachs has disallowed its equity analysts to be fence-sitters anymore by banning "outperform" and "underperform" recommendations. These two are basically to cover their asses for stocks that are likely to beat or unable to beat the index. These two categories of recommendations are generally ignored by users cause its inactionable. Goldman is now insisting on unambigious "buy" and "sell" tips for which the analysts will be held accountable. Goldman Sachs' analysts will be obliged to set price targets (that's a must) for all companis they cover. If the analyst were to change his/her recommendation, he/she will have to publish an evaluation of their tip (how well or poorly the tip has performed - fantastic move). I always believe more accountability will cause analysts to work harder and question their convictions deeper. Too many analysts are just playing the game by hiding behind safe words and recommendations, being good at being wishy-washy, talk turtle around financial terms with little real world experience, no value added pentrative comments but rather run of the mill captions, ... etc...

This move by Goldman brings it in line with the forward thinking Merrill Lynch research methodology, but the other are sticking to the old method. Stricter "buys" and "sells" may be partly to appease hedge funds (who tend to trade a lot more) but its definitely a step in the right direction.

Plus, the best move is that Goldman analysts are to cite the catalysts that would move the stock to the perceived level. Just like my affinity for "trigger factors", an undervalued stock will stay undervalued for the longets time if we cannot forsee the trigger factors.

A lot more analysts will have to leave Goldman as the moves basically raises the passing grade from 60/100 to 85/100... and some will not be able to cut it. Now, more investors will be paying much closer attention to the recommendations coming out of Goldman and Merrill as these analysts are basically staking their careers on these recommendations.

World Is Getting Smaller
M&A In The Works

This will be a regular thing looking at M&A deals in the works. Not just any potential big deal, but ones which gradually shapes our world.

EMI Buying BMG Music
EMI, the world’s third largest music company, is seeking private equity backing to mount a US$1.5 billion - US$2 billion bid for Bertelsmann’s BMG Music Publishing. Venture capital backing would allow EMI to retain the resources to bid separately for Warner Music, though its initial US$4.2 billion offer (for Warner Music) was rebuffed last month. Although EMI is only the world’s No 3 recorded music business, it is the world leader in music publishing, the part of the industry that specialises in song copyrights. BMG is the No 3 publisher. This method of M&A by EMI is loosely based on Sony Corporation’s US$4.85 billion purchase of the MGM film studio last year. Sony put together a consortium to buy MGM. Sony runs MGM, but put up only US$300 million of equity. Yet EMI faces stiff competition. Last week BMG’s owner, Bertelsmann, of Germany, said that it had received 14 expressions of interest in its wholly owned music publishing arm, which it has put up for auction. BMG Music Publishing generated revenues of €372.4 million (£256 million) last year and generated an unspecified “double digit” return on sales. Music publishing has become sought after by venture capitalists as the costs of marketing are born by the recorded music side of the business. The rise and rise of big private equity funds means the deal will be carried out, and probably EMI will end up overpaying.

Fiat To Buyback Ferrari
Fiat, the Italian car maker that was languishing close to bankruptcy two years ago, is on the verge of buying back a prized stake in Ferrari. Fiat is expected to pay 800 million euros to 850 million euros (US$1 billion to US$1.07 billion) for 29 percent of Ferrari, leaving a 5 percent stake in the hands of Abu Dhabi’s state-controlled Mubadala Development Company . A clause in the original sale contract allows Fiat to pay a discounted price until September this year. The turnaround in Fiat's fortunes has been largely due to the success of the new Punto, over 200,000 of which were sold in the first three months of this year. Last year, Fiat declared a €1.4bn profit, after a €1.5bn loss in 2004. That was mainly thanks to a series of disposals and an agreement with several lending banks to swap €3bn of debt for equity. Fiat has €8.8bn of cash, which is mostly funded from bond issues. To be able to buy the stake in Ferrari without changing its debt position, Fiat has been concentrating on selling assets. Fiat has close to 30 percent of the Italian car market and is one of the country's largest companies. It also owns a large part of Juventus, which is about to stand trial for allegedly attempting to rig football matches in the Italian league.

Johnson & Johnson To Buy Consumer Unit Of Pfizer
Johnson & Johnson, the drug maker, will buy the consumer product unit of Pfizer, which includes household brands like Listerine and Sudafed, for US$16.6 billion. The deal would add Johnson & Johnson’s stable of brands — which includes Tylenol, and Neutrogena — with Pfizer’s lineup including Rolaids antacid, Benadryl allergy medicine, Rogaine baldness treatment, Zantac antacid, Bengay analgesic and Lubriderm skin lotion. Johnson & Johnson beat a whole host of predators for the unit, which was put up for sale in February. The other bidders had included GlaxoSmithKline, originally tipped to win the auction, and a British household cleaning products maker, Reckitt Benckiser. At US$16.6 billion, Johnson & Johnson would be paying a hefty price tag; when the auction had begun, most analysts had pegged the sale price at about US$14 billion. Pfizer said it wanted to sell or spin-off its consumer products unit as it tries to focus on prescription drugs, its most profitable business line. The consumer unit had US$3.9 billion in sales last year, a 10 percent increase from 2004, and an operating profit of US$670 million. That's a very rich 25x historical PE, but its still worth it as it is very difficult and costly to build a global brand name that is accepted.

Banking Irregularities In China

Mainland auditors have uncovered more than 61 billion yuan (HK$59.3 billion) worth of irregularities at the Agricultural Bank of China, the country's third-largest state-owned commercial bank. The central government announced Monday that the National Audit Office, during its investigation into the bank's 2004 financial statements, found 51 cases of criminal wrongdoing involving 157 people, with fraud cases totaling 8.7 billion yuan. Auditors also found 14.3 billion yuan in improperly handled deposits and 27.6 billion yuan in illegal loans, along with other irregularities involving another 10.9 billion yuan. Bank employees were found to have embezzled from accounts and altered deposit documents. The majority of fraudulent loans were for automobile and property development financing, with some employees colluding with outsiders to defraud the bank. In one case, 460 million yuan worth of auto loans were made to a Beijing company without proper checks being made over the firm's repayment capabilities. Auditors have been uncovering a string of cases of fraudulent lending and other abuses at China's state-owned banks as they are scrutinized in preparation for selling shares to private investors. So far, the Agricultural Bank of China, which has more than 31,000 branches throughout the mainland, is the only one among the four major state- owned lenders that has not moved toward raising capital by selling shares on foreign stock exchanges.

The Bank of China and China Construction Bank now trade on the Hong Kong stock exchange, while the Industrial and Commercial Bank of China, the mainland's largest lender, is planning a listing later this year. Agricultural Bank - listed by Fortune magazine as one of the World Top 500 companies, with assets at the end of 2004 exceeding four trillion yuan - is considered to be in unusually poor shape, with questionable financial controls and huge portfolio of bad loans. China CITIC Bank, which is eyeing a Hong Kong listing this year, has launched an investigation after a credit officer stole 40 million yuan from a client's account. The employee from the Pudong branch of China's seventh-largest commercial lender by assets allegedly used fake seals to syphon the cash from a fixed deposit of 50 million yuan ahead of its September 2006 expiry.

This brings us to the problematic Chinese banks - easy to criticise but let's get a proper perspective on things. A recent study by Ernst & Young estimated that China's total bad debt liabilities stood at US$911 billion, and not the official figure of US$400 billion touted by the government. Even at US$911 billion, while huge, it is surmountable provided Chinese banks continue to improve on their risk and credit management practices. It would have been a time bomb waiting to explode if the authorities did not open up the bigger banks to foreign shareholdings. The last 3 years have seen numerous foreign banks / government investing agencies / private equity firms buying minority stakes in the bigger Chinese banks - the bigger implication is that by opening up to these new shareholders, Chinese banks would have a much greater chance to manage and whittle down the overall bad debts and eliminate the doomsday scenario. Global investors should be glad that this has basically averted a massive crunch or correction badly needed within China's financial system.

Snippets, Snipes & Snides
23 - 27 June 2006

Transmile, DHL & Pos Malaysia
All 3 are better than average companies. Transmile Group Bhd signed a new agreement with DHL International to tap the fast growing overnight air express business in the Asia Pacific region and beyond. The new five-year strategic alliance agreement, with a provision for a further five years, would see Transmile's business with DHL booming with the use of more planes and routes throughout its network. With cargo volume handled by Transmile at Subang for its last financial year 100% higher than the previous year, and with the airfreight carrier seeing a big increase in capacity with the delivery of its wide-body MD11 planes, Transmile is expecting DHL to be a big customer for Transmile this year. The agreement, which allows Transmile to better manage its costs with DHL, would see both carriers cooperating to identify new and lucrative sectors in the high premium market. The agreement with DHL, which would account for about 30% of Transmile's business, would lead to substantially more revenue being generated for Transmile this year. DHL currently uses about five Transmile planes and the agreement will see more planes being used. On of the attraction of DHL was the landing rights the Malaysian carrier had, especially within Asia and inter-continental flights to the US. The agreement was timely as DHL was expecting the weight of cargo from the Asian region to grow by three-fold over the next decade. Transmile has the rights to fly to many countries in Asia, in particular China and India. Apart from that, another key route is the trans-Pacific flight between Hong Kong and the US. The agreement will also see DHL use more of Transmile's routes. The limiting factor now with Transmile was the size of its fleet – 20 aircraft but with only four wide-body MD11. Transmile planned to double or triple the size of its fleet. Obviously DHL was supposed to buy Pos Malaysia's stake in Transmile, that would have a been very silly for Pos Malaysia. Cargo and packages delivery would have ensured an leveraged stream of earnings for Pos Malaysia that focuses on the same delivery chain. To lock in substantial gains on Transmile now would be very short sighted indeed, especially since Robert Kuok only recently controls Transmile. You can expect more investments and an expansion of regional business.

Buffet Says Yes
Warren Buffet has often been criticised on the side for not giving his wealth to charity. Many many years ago, Warren told a reporter that he would not want to give to charity then as he could give a lot more later on compounded. Got to give it to the man. Warren Buffett, estimated to be worth US$44 billion, will give away 85 percent of his wealth starting in July, most of it to the Bill and Melinda Gates Foundation. ``I know what I want to do and it makes sense to get going,'' Buffett said. More than 83 percent of the B shares will go to the Gates Foundation, the world's largest philanthropic organization at US$30 billion. If you have been blessed materially, one can only live on so much wealth, not to plan for intelligent giving is highly irresponsible and almost immoral. The basis for charity should be to reduce the inequity in the lives of those less priviledged than yours. Next on the list, the richest family but also the most stingy ones you can find - the Walmart people. Yes, they do some charity work, but its in drips like 100,000 here or there when each family member is worth at least US$10 billion. While it is not entirely fair for me to say how they should spend their god-given wealth, ... they should realise that wealth means responsibility, and substantial wealth means substantial responsibility.

World Cup Update
Holland deserved to go out for cynical play, so too for Italy. Australia outplayed Italy for most of the match, and was robbed. That wasn't a penalty at all. Italians were lucky. Sven Ericksson does not know what football strategy is, totally wasted Rooney for an entire match chasing lost causes playing him as a lone forward. Rooney should play in the hole with Crouch (probably England's best player) upfront. England also need wingers to pull out the defenders, start with the speedy Lennon and Joe Cole on the wings. Forget about the right footed only Hargraves. No more shots for Lampard as he has obviously been frucking around too much thus affecting his shooting. Spain looked good so far cos they have been playing second rate teams, still the team is gelling. France has nothing much to lose now that they have been blasted left right and center - maybe with no expectations, they can play better.

Friday, June 23, 2006

Better Discernment & Interest Rate Hike Cycle

The present correction in equities, currencies and commodities have a lot to do with interest rate cycle perception. The present Fed funds rate is 5%. Most big investment houses think that the hike will top out at 5.5%, thus spelling the end of the cycle. However, recent data have prompted some of the bulge bracket houses to up their estimation of the top of interest rate hike for the Fed funds at 5.75% - 6%. Companies which have upped their forecast recently include Lehman Brothers, JP Morgan, Credit Suisse and Barclays Capital.

While the few cited companies are big, they are still not the big swinging dicks yet, unless a rerating is made by more influential houses such as Goldman Sachs, Merrill Lynch or Citigroup - there would not be much reverberations. Still, it is worthwhile to note the developments. Methinks, the "second tier" research houses have jumped the gun here. It is hard to fault them really, if you work for Credit Suisse or Lehman Brothers, you are basically just shy of the top tier, and for your company to be noted, you have to stand out or push the envelope even further. No point revising your prediction after Goldman or Merrill have upped their forecast, then you are just a "follow the leader" second rate player. To stand out more, you take riskier stands, you extrapolate data further than necessary or safe, you make conclusions faster than necessary ...

The Fed should up Fed funds by 25 basis points in a few days time. Markets will be calmed by this and rally. Should Bernanke swallow his balls and up it by 50 basis points to 5.5%, I betcha you would see a mega rally in equities as that would signal to all players that there is a high likelihood that rate hike cycle peak has arrived. If it has reached the top, it can only go down. One of the worst thing Bernanke could do is not do anything. If there was no rate hike, I believe the equity markets will drop another 3 to 5 percent in value. Thats the silly thing about markets, you can study all the finance and economics in university, and you'd find that the market and players are forward discounting thus forcing you to arrive at a proper conclusion but then reversing it due to it being "discounted".

I am still a believer that the rate hike will top out at 5.25% or 5.5% the most. The reason being at 5.5%, the consumers will ease by themselves and the housing will also contract by themselves. At those rates, the percentage of income that goes towards mortgage repayments or credit cards would tilt them over. Hence Bernanke would not, should not, have to raise rates further following that.

Following the correction in almost every asset class, there is real discernment and judgment plays in investors who decide to plough back into the markets. Emerging markets as a whole went charging up for most of the last 12 months, and that include their currencies. The whole conspiracy to weaken the US dollar succeeded. In May, the commodity price bust saw many emerging markets' currency faltering as well, as speculators who exited the markets also converted back to dollars, euros, yen and pounds. However not all currency suffered the same fate, certain emerging markets' currency held up very well, in fact continued to gain ground against the dollar. They all have one thing in common, they all have substantial surpluses (i.e. good balance sheet). Currencies which maintained good strength include the Brazilian real, Malaysian ringgit and South Korea won. There are bigger implications, not just on currency front, in that these currencies would lead to better rating on its equity markets, as there is not a sufficiently deep enough bond market in their currency. The perception of extra returns on currency will also help investors' yield calculations for the country's respective equities.

The reverse is true, countries which have widening or growing external deficits were continued to be sold down even as I write this. Big sliders include the New Zealand dollar, Turkish lira, Icelandic krona and South African rand. The South African rand fell to a two year low yesterday. Better discernment among investors is a welcomed relief.

Thursday, June 22, 2006

The Invincibility Of IRIS

Despite being the butt of my sacarstic remarks and dark humour, Iris continued on its merry ways today after being released from being designated. Somehow for Iris, its more like being released from prison. Iris is like the woman your mother warned you about. Like smoking, drinking and womanising ... despite the warnings, many will succumb to the lures. Fast women, fast cars, fast money ...

Looking at their fundamentals, it is not exactly unattractive, at least there are some fundamentals - unlike Aokam or Fountain View. As for NTA, at least it is around RM0.20 (even though stock has shot up to RM1.15 today). As for 2006 PER valuation, though it might be close to 90x, it does not take much to halve it as the profits are miniscule to start with. If I am forced to look at the positives:
1) EBIT margin are steady at 14%
2) Potential for the company's electronic identity cards and e-passports contracts from markets such as Turkey, Somalia and Indonesia

Looking at the total paid up of 914 million shares, just the morning session today saw 75 million shares traded with buying support at every level totalling over 30 million should anyone really wants to throw shares at them. Looks like a cornered vehicle. Though it sounds absurd, but the bloody share looks to have a lot more upside now that its no longer designated. Plus the fact that the company have been scrutinised like hell, and the company's senior management giving in depth interviews in between ... this drama is far from over ... Buy if you must, but of course the risks are equally as high. Beware of the man with monkeys! (Read blog On "The Parable Of Vonage & Iris")

Questions For Dr.M
By P. Gunasegaran, Group Exec Editor, The Edge

(It is only fair to have a balanced view, below was the timely piece in The Edge, ... people who live in glass houses...)
Datuk Seri Abdullah Ahmad Badawi is only in his third year as Prime Minister but his pre­decessor Tun Dr Mahathir Mohamad already has four questions for his administration to answer. They relate to Proton’s sale of MV Agusta; the exit of the former Proton chief executive officer; approved permits for cars; and scrapping of the bridge project. While we would like to hear a better explanation from the government than what has been given so far, Abdullah should not be the only one answeringquestions. I am sure we all have questions for Mahathir too — on how he ran the country for 22 years. Here’s a list of 22 questions or rather 22 groups of questions we would like to ask Mahathir, one for each of his 22 years in power:

1) On clean government. You came to power in 1981 and introduced the slogan “bersih, cekap dan amanah” (clean, efficient and trustworthy). What did you do to further that? Did you make the Anti-Corruption Agency more independent and effective? Did you ensure that the police and judiciary did their job properly and reduce corruption in their ranks? Did you ensure that ministers and chief ministers not have income beyond their legal means? How many big guns were prosecuted for corruption offences during your long tenure? What happened to “bersih, cekap dan amanah”?
2) Press freedom. Your criticism of the government got plenty of coverage in the local media whereas during your time, criticisms against you by two former prime ministers were muted in the mainstream newspapers. Editors in Umno-linked newspapers too were removed during your time for not toeing the line. What did you do to advance the cause of responsible press freedom?
3) Proton. You went ahead with the national car project in 1983 despite a number of experts disagreeing with you, especially with respect to lack of economies of scale. Isn’t it true that Proton’s profits over the last 20 years came out of vastly higher prices that the Malaysian public has to pay to subsidise Proton, resulting in considerable hardship for Malaysians who need cars because of the poor public transport system? More lately, why was it necessary for Proton to buy a stake in a failed Italian motorcycle manufacturer when it could not even produce cars competitively?
4) Heavy industries. Why did you push into heavy industries such as steel and cement in the 1980s, ignoring studies which suggested developing natural resource-based industries instead? They caused major problems and billions of ringgit in losses.
5) Population. Why did you encourage a population of 70 million for Malaysia and change the name of the National Family Planning Board to the National Population Development Board? How do you expect poor people to take care of five, six or more children? What kind of quality of life can they provide their children?
6) Immigration. Why did you allow hordes of people to immigrate, mainly from Indonesia, in such an unregulated way that there are as many or more illegal immigrants than legal ones now, accounting for some two million or more people? Did you not realise that this would cause serious social problems?
7) On his first deputy. Some five years after you came to power, there were serious rifts between you and your deputy Datuk (now Tun) Musa Hitam. What was the cause of these problems and was it because you were heavy-handed and did not consult your ministers?
8) On the first serious Umno split. When Tengku Razaleigh Hamzah and Musa took on Tun Ghafar Baba and you at the Umno general assembly of 1987, it caused a serious split in Umno, with you winning by a very narrow margin (761 to 718). Why did you not seek to heal the rift in Umno post the elections? Instead, you purged Umno and its successor Umno Baru of those who opposed you, causing an unprecedented split in Malay unity.
9) Operasi Lalang. Why did you have to resort to this move in October 1987, when you used wide powers of detention under the Internal Security Act to detain over 100 people, close down four newspapers and cause a wave of fear throughout the country? Was it to consolidate your tenuous hold on power then by using an oppressive law?
10) Judiciary. What was your motive to take action in 1988 to remove the then Lord President and several Supreme Court judges from their positions under allegations of judicial misconduct, a move which was heavily criticised by the Bar Council and other bodies? Was it because you needed more compliant judges whose rulings would not threaten your position of power in a number of cases in court? Was this the first step in dismantling the judiciary’s role as a system of checks and balances against the legislature and the executive? What have you to say to repeated assertions by many, including prominent ex-chief justices, who maintain that this led to the erosion of judicial independence?
11) Education. You presided over the education system at an important part of its transformation first as Education Minister in the 1970s, then as Prime Minister. Would it be correct to surmise therefore that you were also responsible for its decline during those years? Why did you not spend more money and resources to ensure that our education system was excellent and continued to improve but instead spent billions on other showpiece projects? Why did you allow our national school system, which is the ideal place to develop ties among young Malaysians, to become so divisive that today, 90% of those who attend national schools come from only one race while the rest have opted out?
12) Former finance minister Tun Daim Zainuddin. Why did you give this one man so much power? And you have not given a satisfactory explanation why he left government the second time round. Did it have anything to do with the forced consolidation of banks? Why did the government buy back Malaysian Airline System (MAS) at RM8 a share in 2000 from Tan Sri Tajudin Ramli when the market price was less than half that?
13) Cronyism and patronage. Did you not encourage cronyism and patronage by dishing out major projects to a few within the inner circle? People such as Tan Sri Halim Saad (the Renong group — toll roads, telecommunications and so on), Tajudin (mobile telephone group TRI and MAS), Tan Sri Amin Shah Omar (the failed PSC Industries — multi-billion ringgit naval dockyard contracts) and Tan Sri Ting Pek Khiing (Ekran — the Bakun Dam), to mention just a few?
14) Privatisation. Why did you allow privatisation to take place in such a manner that the most profitable parts of government operations were given away? Toll roads had guaranteed toll increases and compensation in the event traffic projections were not met. Independent power producers had contracts that guaranteed them profits at the expense of Tenaga Nasional.
15) Tun Ghafar Baba. Although Ghafar had the highest number of votes among Umno vice-presidents when Tun Hussein Onn became Prime Minister in 1976, you, who got the lowest number of votes, were chosen as Hussein’s deputy. Yet, when you called upon Ghafar to be your deputy in 1986 when you fell out with Musa, he obliged, helping you to win the Umno presidency. Yet, you and your supporters did little to back him up when he was challenged for the deputy presidency in 1993 by Datuk Seri Anwar Ibrahim. Can we say that you stabbed him in the back? And what about Hussein, the man who picked you as his successor? He died not as a member of Umno as he had refused to join your Umno Baru.
16) Datuk Seri Anwar Ibrahim. Did you move against him because he was a threat to your position in 1998? Did you use the entire government machinery at your disposal to get him sentenced? Do you think he got a fair trial? Don’t you think the country suffered terribly because of nothing more than a power struggle involving the two of you?
17) Kuala Lumpur International Airport. Was it really necessary to spend RM10 billion on a showpiece airport at Sepang when Subang airport could have been so easily expanded?
18) Putrajaya. What is the justification for spending RM20 billion on a grandiose government city at a time when office space was available in Kuala Lumpur? Could the money not have been put to better use, such as improving educational resources?
19) Government-linked companies. Why did you not make efforts to improve the performance of GLCs? Why did you allow funds such as the Employees Provident Fund and Kumpulan Wang Amanah Pencen to take up dubious investments? These have led to hundreds, if not billions, of ringgit in losses to these funds.
20) Islamisation. At the end of your tenure after your falling out with Anwar, you criticised the extreme elements in Islam of taking control of government institutions and doing things that divided Muslims from non-Muslims. But isn’t it true you started it all with your “Menyerap Nilai-Nilai Islam Dalam Pentadbiran Negara” policy of 1981 when you lured Anwar into Umno to help you promote it? And why did you declare that Malaysia was an Islamic state when it is clearly enshrined in our Federal Constitution as the wishes of our founding fathers that Malaysia should be a secular country given our multi-racial and multi-religious composition? Were you trying to reverse the policy of the nation’s founding leaders?
21) Approved permits. You blamed International Trade and Industry Minister Datuk Seri Rafidah Aziz for the AP fiasco. As we recall, you appointed her and kept her at the ministry since 1986 until you stepped down in 2003 and never once complained or took action over the issuance of APs by the ministry. Indeed, she was embroiled in some controversy over bumiputera share allotment but you stood by her. So why make it an issue now? If you say you were not aware back then, what does that tell us?
22) Money politics. Why did money politics (vote buying) in Umno become such a big issue during your tenure as Umno president? Why were you so powerless to do anything about it when the solutions were so simple? There are other questions, of course, but this is our list of 22. In the same way that Mahathir hopes the government will answer his questions, we hope that Mahathir will answer ours.

Wednesday, June 21, 2006

World Cup 2006 Update
21June 2006

Best Performers To Date Ranked
1 Argentina
2 Germany
3 Spain

Grand Under-Achievers Ranked
1 France
2 England
3 Brazil

Generally, teams that make the finals do not play that well in the early phases, as it stands Argentina looks unstoppable and Brazil's attacking is not fully functional and its defending is suspect. Spain as usual will let everybody down during the second round but the might of Torres may see them fight for a semis berth. Germany has the weight of expectations but a semi final berth is likely. Italy and Netherlands needs to improve and should improve in time for a late charge.

Proton, Bridge, APs, Sand In Face & Stuff Like That
By Raja Petra Kamarudin

(Generally, I would stay away from political commentary, but this is too good to pass up plus it involved some listed companies, written by Raja Petra Kamarudin, enjoy and learn).
So it is now official. Dr Mahathir and Abdullah are at war. And the Menteri Besar of Perlis, Shahidan Kassim, has offered to play the role of mediator to bring the two Umno giants back together again. Shahidan would have better luck in trying to reconcile Anwar Ibrahim and Dr Mahathir -- and this in itself is an impossible task.

Today, Dr Mahathir is experiencing what Abdullah endured almost 20 years ago. The hand kissers steer clear of Dr Mahathir like he is the plague. Speaking his name is taboo. Even whispering his name is high risk. Better one pretends that the man named Dr Mahathir Mohamad never existed if one values one's future in Malaysian politics. Today, Dr Mahathir is discovering the error of his ways. Dr Mahathir is trusting to a fault. And it is this trust and his bad judgment of character that will be the epitaph on his headstone. And he trusted many who eventually brought him to ruin. In the corporate world we have Abdullah Ang, Tan Koon Swan, Eric Chia, Francis Yeoh, Vincent Tan and many, many more. These are of course the Chinese corporate bosses. The Malays no less let him down as well. One just has to look at names like Daim Zainddun, Tajuddin Ramli and this gang of Merry Men from Sherwood Forest to fill pages and pages of one's address book. In the public sector are also names that were unknown to the uninitiated until Dr Mahathir brought them up and thrust them into the limelight. Today, these people are also biting the hand that used to feed it. The Francis Yeohs of Malaysia who used to swoon at Dr Mahathir's feet today throw millions in deals the way of Khairy Jamaluddin, the man of the hour. Those like Ani Arope condemn Dr Mahathir though no one knew who the hell he was until he was elevated to the position of the CEO of TNB. And Ani Arope was one pompous ass when he thought he was Dr Mahathir's blue-eyed boy. Today, he of course runs down the master he once served and exploited to boot.

Anyway, Dr Mahathir has had enough of the subtle sabotage and innuendoes meant to run him down. He is now fighting back, and when he fights back he fights back mean -- as the Rulers, the Judiciary, his Deputies, and many more have learnt the hard way. When Dr Mahathir fights, he asks for no quarters and gives none as well. Dr Mahathir knows how to fight only one way: the last man standing. And those who cross swords with him better be prepared for a 'till death do us fight' or else back off now while they still can.

Today, Dr Mahathir's biggest regret is appointing Abdullah as his successor. Dr Mahathir's second biggest regret is appointing Najib Razak as Abdullah's successor-in-waiting. Of course, he has many other regrets as well, past, present and future ( dulu, kini dan selama-lamanya), but all these others will need to be relegated to the back seat for the moment as he handles his current and two biggest regrets.Najib has just openly declared his support for Abdullah. So it is now Abdullah-Najib against Dr Mahathir. But it is also Abdullah-Khairy against Dr Mahathir. Does this mean then that it is now Abdullah-Najib-Khairy against Dr Mahathir, or is it two separate battle fronts; one comprising Abdullah-Najib and another Abdullah-Khairy? But how would Najib and Khairy come to terms when they are a threat to each other? Can Abdullah be actually thinking of two Deputy Prime Ministers? Will the Second Deputy Prime Minister be Khairy? Or will it be Anwar, then when Najib goes up to become Prime Minister, Khairy takes his place as Second Deputy Prime Minister? Sound far fetched? I am sure you said the same about Malaysia Today's other 'theories' as well before this. But then, how else would Abdullah accommodate Najib, Anwar and Khairy? You just cannot squeeze three people into two positions unless you create a third position? And why Anwar, you may ask. Well, how else to fend off Dr Mahathir's attacks? Are Najib and Khairy alone sufficient? Certainly not! Dr Mahathir can eat Khairy for breakfast, Najib for lunch, and Abdullah for dinner. Only with Anwar in the equation will it be a 'fair' fight -- four against one.

But what is Dr Mahathir's beef? What is he so hot and bothered about? We have in fact addressed all this in the previous episode of The Corridors of Power. Anyway, in case you did not catch our drift then, let us take you through some of the issues again. Dr Mahathir's first beef is about the supply of sand to Singapore. He had banned the export of sand back in 1997 -- so, 'legally', sand cannot be exported to Singapore or anywhere else for that matter. Abdullah then announces the cancellation of the bridge three weeks after it is announced in Parliament that the bridge would go on at all costs. And the reason given for the cancellation of the bridge is because Singapore wants the supply of sand thrown in as a package. Dr Mahathir then discovers that it was not Singapore that demanded the supply of sand be included as a package in the bridge deal but Malaysia that offered it without Singapore even asking for it. Then Dr Mahathir discovers that the sand suppliers are top guns in Umno Johor who stand to make billions from the deal. The King of Sand Suppliers is an Umno Youth leader who contested the Muar Youth Head post but lost by one vote. Since he lost by only one vote they wanted a re-contest but the Umno Youth Chief offered him RM300,000 if he would agree to withdraw and not challenge the incumbent. Needless to say, while the incumbent is Hishammuddin Hussein's man, the challenger, the biggest sand supplier in Johor, is Khairy's nominee.

The bridge was aborted not because Singapore wanted the supply of sand thrown in, as what they say. It was aborted because the Johor State Government opposed the extraction of sand from its territory, especially if it was going to be supplied to Singapore. Johor wants the bridge, but it does not agree to the supply of sand. But then the supply of sand had already been packaged in the bridge. So, the only way to get out from the supply of sand clause was to cancel the bridge. And they had to blame the cancellation of the bridge on Singapore, so they said that Singapore wanted the supply of sand thrown in; that is why they want to cancel the bridge. That is Dr Mahathir's first beef.To make matters worse, work on the bridge had already started, so they now have to pay compensation of RM100 million to Gerbang Perdana Sdn Bhd. And who is Gerbang Perdana and why are they so powerful that RM100 million has to be paid to them? This is another thing that riled Dr Mahathir. Not only will Malaysia not be getting the bridge, but RM100 million has to be paid for not getting the bridge. Anyway, you will have to be patient for now. We will reveal in due course the movers and shakers behind Gerbang Perdana and how far the host of Umno's recent 50th Anniversary celebration may be involved in this whole thing, so stay tuned.

Next on Dr Mahathir's list of grouses is the AP issue, and at the top of the AP issue is the awarding of car import permits to a company called Autostadt Asia Sdn Bhd. Malaysia Today has in fact revealed this issue in an earlier article called Remember The Good Old Days on 20 February 2006. This is what we said then:
Now that Dr Mahathir has 'gone to war' with Rafidah, Abdullah Badawi cannot possibly remove her as the Trade Minister, or even demote her to a lower ministry of little significance. If Abdullah Badawi gets rid of Rafidah, then he would prove Dr Mahathir right. Abdullah has to appear like he decides the cabinet positions and not Dr Mahathir. So, in spite of whatever scandals and controversies Rafidah may have, Abdullah has to retain her just to spite Dr Mahathir and show everyone who is boss. Furthermore, the AP controversy that Dr Mahathir raised was not actually targeted at Rafidah alone though it appears like Rafidah was the target. Rafidah was just the catalyst or smokescreen. The real target was Abdullah Badawi, and he knows this beyond any shadow of doubt.


Remember when the controversy first exploded last year and they identified a few 'AP Kings' by name? Well, the 'King of AP Kings' is no other than the cousin of Abdullah Badawi's son-in-law, Khairy Jamaluddiin. And we are talking of hundreds of millions here. Malaysia Today has already written on this matter in great detail so we will not repeat what we said -- but for those who have not read the reports yet, you can see them in our archives: Special Report On The AP Kings. But this was still not the main issue. Dr Mahathir was not upset that a few Malays were becoming super-rich by becoming beneficiaries of APs, though they may be linked to Abdullah Badawi's or Rafidah's family -- as his family members also enjoy the benefit of APs. We must read between the lines when Dr Mahathir lamented that the APs were 'killing' Proton. In what way are the APs killing Proton when the class of cars being imported are not in direct competition to Proton? What Dr Mahathir was trying to say, without directly saying so, is that someone who managed to get his hands on some APs has torpedoed a deal Proton was sealing with a foreign car manufacturer that would have been Proton's saviour. In 2004, Proton entered into negotiations with Volkswagen to formalise a joint-venture with a view that Proton would manufacture their cars in Malaysia plus get technical assistance and transfer of technology from Germany. However, Zulkifli Ishak went to meet VW to negotiate the VW franchise for Malaysia. VW said they will consider the proposal but only if Zulkifli can arrange for the APs to import the cars into Malaysia. On 29 April 2005, Zulkifli and his partner, Ahmad Rashdan Amir Hamzah, set up a company called Autostadt Asia Sdn Bhd (company number 689924-A) with a paid up capital of RM500,000 and with both of them as Directors. Ahmad Rashdan, however, does not hold any shares in the company. The shares belong to Zulkilfi (499,999) while Zulkifli's wife, Annie Tajul Arus, holds the one remaining share. They then applied for APs specifically for VW vehicles and got them -- though the company was dormant, did not have any business address, and did not yet have the franchise for VW. These APs were shown to VW who then agreed to appoint Autostadt Asia Sdn Bhd as the Malaysian franchise holder for VW. This would be better than having to sell VW vehicles through Proton plus having to transfer the technology to Malaysia. Of course, in the meantime, Proton was still talking to VW not knowing that the franchise had actually been hijacked. Dr Mahathir was hoping the deal with VW would transpire whereby Proton's arse would be saved and its future look brighter than it does now. Imagine Dr Mahathir's horror when he found out that Autostadt Asia had 'stolen' VW from Proton. But what made him really fly off the handle was when he found out that Autostadt Asia's shareholder, Annie Tajul Arus, is Rafidah's niece, and Zulifilfi is Annie's husband, a husband and wife outfit related to the Trade Minister. And that was why, last year, Dr Mahathir fired his shot against APs and alleged that it was detrimental to Proton's health. And we all know what happened recently. VW announced that it was aborting the deal with Proton. They did not even officially inform Proton who had to read about it from the newspapers. VW, in a way, told Proton to go jump in the lake. VW does not need Proton anymore to penetrate the Malaysian market. They have their own Ali Baba, Autostadt Asia Sdn Bhd, which is actually funded by a Chinese businessman. Of course, there are more issues than these, but all these are now already public knowledge so we really do not need to go into too much detail on what is available in the public domain. What we want to raise are the unsaid or 'silent' issues, those that are the hidden agenda for everything that is being said and done. There is one more thing, the Ani Arope public confession on the way the IPPs were thrust down his throat. This is actually the 'Ani Arope Bear Trap'. They are just waiting for Dr Mahathir to respond to Ani Arope. Then they will boil him in oil. We will not reveal anything just yet. We will see whether Dr Mahathir responds to Ani Arope or not in the next few days. If he does, then they will fry him alive. If he does not, well, then we will reveal in the next episode of The Corridors of Power what they had planned for Dr Mahathir. It is actually a very ingenious strategy and certainly one that will damage Dr Mahathir quite badly (not 'slight bruise' as what Dr Mahathir said in his press conference). Whether this story they are going to spin is fact or fiction is not for us to say. The point we are making here is that it is a very convincing story that even a person like Dr Mahathir would be hard-pressed to rebut or deny. And only someone with a very brilliant mind would be able to come up with this ingenious and most convincing yarn. Anyway, stay tuned, and in the next episode we will reveal how they plan to cook Dr Mahathir's goose and turn the hunter into the hunted.

p/s Raja Petra Kamarudin's Malaysia Today site can be accessed at:
http://www.malaysia-today.net/

The Parable Of Vonage & Iris

Once upon a time in a quaint town called Vonage & Iris, a man appeared who announced to the villagers that he would buy monkeys for $10. The villagers seeing that there were many monkeys went out in the forest and started catching them. The man bought thousands at $10 and as supply started to diminish, the man said that now he would buy the bloody monkeys at $20. This renewed the efforts of the villagers and they started catching monkeys again. Soon the supply diminished even further and people started going back to their farms. The offer rate was increased to $25 and the supply of monkeys became so tight that it was considered lucky to even see a monkey let alone catch it. The man now announced that he would buy monkeys at $50!

However, since he had to go to the city on some business matters, his assistant would now buy on behalf of the man. In the absence of the man, the assistant told the villagers: "Look at all these monkeys in the big cage that the man has collected. I will sell them to you at $35 and when the man comes back, you can sell it to him for $50." The villagers coughed up with all their savings to buy the monkeys. Then they never saw the man nor his assistant, only monkeys everywhere ...

Not Even One Pro Understands The New FTSE Bursa Indices

The Star Biz page is often the much sought after for the top business news of the day in Malaysia. The front page today reads "Funds Cool To FTSE Bursa Index". Most fund managers are not expecting significant adjustments to their investment portfolios when the first phase of the FTSE Bursa Malaysia Index series kicks in next week. Hwang-DBS Investment Management Bhd chief executive officer and executive director Teng Chee Wai said: “We do not anticipate significant adjustments in the portfolio management, especially for the local fund industry, as most domestic fund managers are active stock pickers. Unlike their foreign counterparts, most local managers are not benchmark ‘huggers’.” He said most of the company's funds were equity-based and benchmarked against the KL Composite Index (KLCI). As such, the new indices would not have much effect on the company's overall portfolio management. Sharing similar views, CIMB-Principal Asset Management Bhd chief executive Noripah Kamso said the new indices would only affect funds that were benchmarked on the indices that would no longer be used. “As most of our equity funds are benchmarked against the KLCI, we will not be reassessing our funds portfolio at this point in time,'' she said.

The introduction of the free float-based FTSE Bursa Malaysia Index series, in collaboration with international index provider FTSE Group, is part of Bursa's efforts to boost the exchange's appeal among global institutional investors. The first phase, to be launched on Monday, will consist of six new indices: FTSE Bursa Malaysia (FBM) Emas, FBM 100, FBM 30, FBM 70, FBM Small Cap and FBM Fledging. The remaining indices would be added to the exchange in stages by year-end or probably by the first quarter of 2007.

Apex Investment Services Bhd chief executive officer Tan Keah Huat said the company's investment team was in the process of analysing companies that it would invest in to ensure better returns for its investors. According to Tan, since most of Apex Investment's funds are equity-based, there would not be much adjustment to the current portfolio. On the impact of the new indices on the fund management industry, Noripah said: “The indices will have both positive and negative impact. On the one hand, the indices will more accurately and transparently track the trading liquidity of the index constituents (stocks included in the index). “On the other hand, there are higher costs involved for future funds that may use these indices as benchmarks.” Teng said the key consideration for adopting the new indices would be the cost. The initial guidance by Bursa and FTSE on the cost of using the indices seemed to be on the high side, he added. The indices would also benefit the fund management industry as they would provide a better reflection of the global standards since they were structured to take into consideration the liquidity and free-float of each stock, he said.

My Take - OMG, I cannot believe that none of those interviewed understood the underlying purpose of FTSE in having these indices!!?? (shock)... Who needs another index to track stocks .... you can break it up to 100 different indices, so what, but that's missing the point. I think people at Bursa and FTSE would be choking on their coffee and muffins this morning when they read the comments. The biggest trend over the last 5 years, and the best product for Nasdaq has been Exchange Traded Funds. It is only natural that we see LSE trying to play some catch up with Nasdaq. Even though Nasdaq has bough a substantial piece of LSE, it does not control LSE. ETFs are an aggregation of a particular sector, groupings of stocks that reflect some sort of exposure to a certain sector or country. Each ETF would then have to buy a certain sum of the indexed stocks within and than trade as a basket. Depending on the attractiveness to the investors, an ETF may be cap at US$100 million or even US$500 million if its a much sought after ETF. For an ETF to work, it must be sizable so that there is good volume. People, thats the crux of having the new indices.... the attempts at warbling about non-existent implications, and the fact that the journalist and editor let it through speaks volumes of the overall lack of appreciation of things financial.

Malaysia - Notable Corporate Developments

Astro Passing Critical Mass
Astro All Asia Networks plc's net profit for the first quarter ended April 30, 2006 has more than doubled to RM90.48 million from RM39.81 million a year ago mainly due to better margins and lower finance cost, after offsetting share of losses from associates and overseas investment. Revenue rose 11% to RM523 million from RM473.2 million a year earlier on the back of higher subscription and advertising revenue, while earnings per share increased to 4.7 sen from 2.07 sen. In a statement on June 20, Astro said earnings before interest, tax, depreciation and amortisation (EBITDA) improved 65% to RM151 million, reflecting higher revenues and the benefit of a one-off reduction in subscriber acquisition cost of RM19.9 million. It said EBITDA margin improved to 28.9% from 19.4% a year earlier. Astro said its pay-TV roped in 98,400 new accounts during the first quarter. Net of churn, the company added 38,500 residential subscribers, bringing our residential base up to 1.82 million or 34.1% of Malaysian TV homes. Churn, or the number of customers who disconnected the service, fell to 59,900 from 77,800 in the previous quarter. As in recent quarters, a significant portion of the net additions came from the Malay-speaking market, which now makes up 46% of our subscriber base. Penetration of the Malay-speaking sector is still low, at 30% compared with 47% for Chinese and 61% for Indian, and with broader penetration into the mass urban market, average revenue per subscriber was marginally lower at RM78.70.
Astro said its radio business continued to expand its reach and market share, despite increasing competition. It said according to the latest survey, its eight FM stations reached 11.3 million out of 14.2 million listeners. It added that its radio adex share improved to 84% from 76% in the preceding quarter, while radio revenues rose 11% to RM33.2 million from RM30 million a year earlier. Astro said its service in Indonesia was launched by PT Direct Vision (PTDV) on Feb 28 under a trademark licensing agreement. It said the terms of the joint venture and shareholder agreement were being restructured to comply with the country's new guidelines and the completion date had been extended to July 31. As of April 30, 2006, the group had incurred total costs of RM96.1 million, which includes capital and operating expenses and other services extended to PTDV.

My Take - Astro passing the critical mass level of subscribers, and hence should be accorded a premium in valuation. The "near monopoly" will be translated in quality earnings via substantive margins, thanks to the no-show by touted competitor in MiTV. The Indonesian venture will be a good additional source of revenue to come despite hiccups in the early part of the game. Already, current subscribers and its growth rate will put positive cash flow at a growing rate to the company. Some analysts will still view Astro with guarded opinions citing declining ARPU - please, which cable company commands higher ARPU when they goes past critical mass, this is not like a phone company, the ARPU is silly as a measure. Astro has a monopoly in Malaysia, not by force but by managerial ability - how do you rate the earnings quality and predictability of Nestles, Rothmans, Japan Tobacco, Petronas Gas ... tell me why Astro's earnings should not be ranked the same. The product is a necessity, an additction of sorts. The superior management should be able to push through the Indonesian venture - hard to see them fail despite some teething problems. As for delays in launching Measat-3 satelite, its atecnicality not a fundamental factor. As for those who think that the Indonesian venture will be dilutive - thats why they are analysts and not CEOs, for fearing the early stages where earnings will be diluted, can they also remember the losses suffered by Astro when they first started in the first 2 years - thats pretty dilutive. You do not go into a new market and expect non-dilution in earnings, you have to strategise, invest and replicate your operations so that more revenue streams can be channeled. Pisses me off when anaysts say "earnings dilutive" when they also fail to mention corporate strategy. If Astro did not venture to Indonesia, the same fuckers would have said, "limited growth" in Malaysia - get a fucking life and start justifying your big pay packets. The 52- week high was RM5.90, compared to its current price of RM4.60. The stock should be upgraded in most analysts write-ups. This makes the covered warrant very cheap indeed at 16 sen.


HELP Finally To List

Selangor Properties Bhd’s private education subsidiary Help International Corporation Bhd (HIC) is offering the public six million shares under its proposed listing on the Second Board. Under the proposed listing, HIC would undertake a public issue of 14.78 million new shares at a price to be determined later. Of the remaining IPO shares, 8.78 million shares will be reserved for directors and employees of HIC group and persons who have contributed to its success. The proposed flotation is expected to be completed by the last quarter of the year. Selangor Properties and several vendors also proposed to undertake a restricted offer for sale of 13.15 million HIC shares, of which Selangor Properties’ portion is 10.14 million shares or such numbers to meet the 30% bumiputera shareholding requirement. As part of the pre-IPO, HIC proposed to acquire the entire equity interest in Selangor Properties’ 74.89% subsidiary Help University College Sdn Bhd (HUC) comprising 22.29 million shares for RM45.61 million via the issue of 74 million new HIC shares at 62 sen each. HIC will then acquire HUC’s subsidiaries for cash equivalent to their respective net tangible asset except for Help Executive Advanced Training Sdn Bhd, which will be bought at RM1. Selangor Properties said HIC would then be its 74.89%-owned subsidiary. The HUC group posted a net profit of RM6.6 million for the year ended Oct 31, 2005 against RM5.69 million a year earlier.
My Take - Everyone was clamouring for them to list back in the mid-90s, would have had doubled the current valuation. Still, the premier higher education operator. Systematic with a very solid infrastructure. Astute quality control, and attracting the better crop of students amidst the numerous pretenders and competitors. Everyone should try to subscribe for their IPO and just lock it up. Short supply of free float looks very likely.