Tuesday, July 31, 2007



PetroChina Update

Shares of PetroChina, the world's second largest oil company, continued to ease as investors panicked after Warren Buffett unexpectedly reduced his stake in the oil giant, sparking fears he may cut his stake further. Hong Kong stock exchange filings show that Buffett's Berkshire Hathaway reaped HK$210.3 million by selling 16.9 million PetroChina shares at an average price of HK$12.441 apiece on July 12, trimming its stake to 10.96 percent from 11.05 percent. It marked the first time Buffett had lowered his stake in PetroChina since 2003, when his investment became public knowledge. Some speculate that Buffett's divestment was motivated by profit taking after the stock hit a record high of HK$12.44 on July 9.

The shock over the sale by Warren is a bit silly when he is just selling down just a small portion of his stake. As Berkshire Hathaway still holds a very significant 10.96% in PetroChina, people need not worry. There could be so many reasons for him selling that is not related to future prospects for PetroChina.

A resolution on divestment was discussed at Berkshire Hathaway's annual general meeting in May, as PetroChina, through state-owned parent China National Petroleum Corp, was seen as too closely linked to Sudan, whose government has been blamed for the violence in Darfur. But the proposal was defeated after Buffett said he disagreed with the resolution as any divestment would not help improve the situation in Sudan. It is more likely that the sale was due to the stock's high valuation rather than the pressure from activists.

Despite the recent run up in Chinese shares, PetroChina still currently trades at just 14x 2007/2008 earnings. The company should be one of the first to move back to for a full Shanghai listing - I mean you are talking of a company which should make RMB175bn in 2007, that's RM80.27bn or US$23.3bn. The company is run very well by savvy pros. Their oilfields reserves are OK, cost may nudge higher but still a very attractive asset base. The covered warrants should be bought on weakness, esp the c1 and c3 expiring early next year.


Stock Calls & Differentiation

ccdev said...
bro, read in zemoola's blog that RHB and TA got sell/underperform on this counter. Wonder why? Does anyone have a copy of the report from the brokerage houses?

Salvatore_Dali said...
ccdev, i get access to almost all research reports... when i started to highlight the stock, i believe it was at 1.70 and there were so many sells or underperform... by ta, aseam, hwang, affin, rhb ... i think there was only one buy report by citigroup... so most were wrong since beginning of the year, and continue to be wrong ... research reports are only as good as the ability to identify the real catalysts,...
... missing out on trends or themes is not an excuse... sticking to a proven valuation modelling technique does not absolve misreading a sector or a stock, ....... the market is fluid and so too must be our reading ability of trends, stock specifics and unique catalysts ... if everything is predictable according to history, then there is no need for analysts ... at the end of the day, good analysts stand out because they have an ability to see what the markets WILL BE DOING, what the markets WANTS to SEE in the near future ... and whether that is reasonable in itself ... one can do good analysis on the stock but still make the wrong calls, there are many factors which weighs heavily on stock price movements beside just "earnings growth rate" or "free cash flow growth rate / PER growth rate" etc... the ability to pick out the real catalysts from the pretend factors is an art

Monday, July 30, 2007


UMW, The Undiscovered O&G Play


The principal activities of the Group are import, assembly and marketing of passenger and commercial vehicles and related spares and manufacturing of original/replacement automotive parts; manufacturing and trading of oil pipes and providing various oil and gas services including drilling and pipe-coating. UMW manufactures automotive parts and offers after sales service. The company is also engaged in the manufacturing and trading of a wide range of light and heavy equipment such as LG agricultural equipment, asphalt pavers, Toyota forklifts and others. These are for use in the agricultural, industrial and construction sectors. The company also manufactures and supplies equipment and parts to the oil and gas industry. Through its subsidiary, UMW has about 28% market share in the non-national motor vehicle market. Also through its associate, the company has an overall market share of 28.8% in the national motor vehicle market. UMW's subsidiary is 51% owned UMW Toyota Motor Sdn Bhd. It is engaged in the import and distribution of Toyota vehicles. In addition, Perusahaan Otomobil Kedua Sdn Bhd (PERODUA), a 38% associate of UMW, manufactures, assembles and distributes about 127,478 units of motor vehicles annually. To note, PERODUA is the second national carmaker in Malaysia.


That part, everybody knows, now what most investors are in the dark is their oil & gas forays. In 2006 UMW made a net profit of RM76.5m from o&g division. In 2007, that division should bring in RM118m in net profit. That is expected to reach RM200m in 2008. For 2007, UMW as a whole is expected to post a net profit of RM430m, and RM540m in 2008. Thats 27.4% in 2007 and 37% in 2008. That figure should jump close to 60% of overall net profits in 2009. No matter how you cut it, the oil & gas side is already bubbling over. Compared to even Sapuracrest, the UMW's oil and gas division is already making more net profit than Sapurcrest entire. Thanks to senior management's foresight, they have secured their manufacturing and fabrication side with a low cost platform esp in China and India years back. At that time, oil and gas was not frothing like now in Malaysia.


The growth are its pipe manufacturing ventures in China, namely Wuxi Seamless Pipe, Shanghai BSW and Zhongyou BSS Petropipe. In Malaysia, its tw new jack-up rigs are good money spinners as well. They have made in-roads in Vietnam, and should be a beneficiary of the Sabah-Sarawak pipeline project as well. In India, the contribution is small at the moment but a good presence there. UMW has a significant jv with United Steel Allied Industries Pvt Ltd which should propel he company into India's oil & gas ventures - the iitial investment cost UMW RM66.8m. UMW also have oil & gas ventures in Australia, Thailand and Turkmenistan. All said the company has a very credible and wide platform servicing the oil & gas players.


The attraction of buying and keeping UMW now is very high. I see this being a two-three bagger within 6-12 months. For 2007 the EPS should hover around 85 sen and rising to RM1.05 in 2008 with a good chance of scaling to RM1.40 in 2009. That's very comforting already. PNB cannot ignore the success of oil and gas within UMW esp when it makes up a very significant portion of earnings. They will have to spin it off via a seperate listing which will unlock enormous values for UMW shareholders, and it makes good business sense to do that. At current prices, an aggressive share split and/or bonus would also be in order. Want another IOI Corp or DIGI share price run up ... buy and keep UMW and hold till all the above unfolds. Bearing in mind, their strategy has also shifted to bid for Malaysian oil & gas contracts, upside surprises are aplenty... and this being a PNB controlled company to boot. Probably the top buy and hold company around with so many oil & gas pretenders running havoc. Stick to the real pros with a very solid oil & gas services platform.


Sapuracrest


Petronas Carigali has extended the contract to Sapuracrest's tranportation and installation of offshore facilities that was awarded btw 2004-2006 for a further 3 years, ending in March 20010. Contract value has gone up by 50% to RM3bn. The works will be for the fields offshore of Terengganu, Sabah and Sarawak which include the Angsi, Samarang, Sumandak, Bekok and Bertam fields. The works would involve the installation of subsea pipelines and the transportation and installation of drilling, production and wellhead platforms. Hence contracts secured year to date have reached RM3.8bn. This include the extension of Exxon Mobil's RM200m contract for installation works at Tapis, Guntong and Jereh fields off Terengganu and aother RM606m contract from Murphy Oil for the instllatin and commissining of the 140km gas ipeline transportation from the Kikeh fields to the Labuan Gas Terminal. This will boost Sapuracrest's order book to RM6bn which will carry them for at east the next 3 years.


For 2008 the company should be making a net profit of R70m before jumping to RM170m in 2009. EPS will be around 6.2 sen and 15.1 sen respectively. I would expect Seadrill to continue buying shares even past the 20% threshold, and more contracts coming in soon. I see little resistance to the share prce hitting RM4 sometime this year. Considering the many oil and gas stocks already doubling or even tripling in share price with very small contracts to boast of, Sapuracrest is looking to be still my top pick from oil and gas plays.

Friday, July 27, 2007


Some Panic Selling

Once markets get a bit tired of rising, they will decide to play around with volatility. Volatility happens when more big players take their chips off the table. Yesterday's correction was significant for the manner which it was sold down. At one point the Dow was down 430 points, highly significant.

What can we blame this on, the usual suspects: tight credit markets, a continuing housing slump, and the price of oil, which shot up past US$73-a-barrel for the second time ever. Same old, same old, I wouldn't be too disturbed with the sell factors. Price of oil, we all know its headed for US$80.

Subprime worries, we are seeing the end consequence, not the beginning of a slide. Some companies are bound to fail, some hedge funds are bound to lose money. More poor housing data only underlined the mortgage worry. Sales of single-family homes dropped 6.6% to a seasonally adjusted annual rate of 834,000 units, the Commerce Department said. Inventories stayed about even, and the median price of a new home fell 2.2% to US$237,900. The data failed to meet even low expectations. Like I mentioned before, this is more a sign of the end of the cycle rather than the height of the collapse - investors are getting antsy for the wrong reasons, if you ask me.

Tighter interest rates, well at least it will put some discipline to the leverage buyout formulas. So, what's so bad? Companies are still holding the most ever cash hoard in the history - they will buy out other companies for growth, and/or buyback shares to improve earnings. Earnings wise, most companies will still coming in beating estimates nicely - let's be clear here, markets are NOT OVERVALUED. Superhero Treasury Secretary Henry Paulson said subprime issues will be largely contained, helped markets gain ground back towards the afternoon session.

Ninety-seven percent of S&P 500 stocks fell in what may be may be the big drop on this week's rollercoaster. The S&P fell 35.42, or 2.33% to 1482.66. Twenty-nine of the stocks that make up the Dow Jones Industrial Average closed lower for the day. The Dow dropped 311.50, or 2.26% to 13473.57. The Nasdaq Composite Index fell 65.94, or 2.49% to 2582.23. The all around selling indicates a lack of liquidity to accommodate the sellers, hence the exaggerated sell off.

The yen carry trade could be a small factor as well, because the yen has hit a 3-month high against the dollar. Some unwinding of the yen carry trade is good, at least the bubble won't get to be so big. An orderly unwinding is preferred. You cannot stop a train, some unwinding of yen carry trade will hurt smaller markets but I don't see the selling pressure growing.

So, what has changed?

a) Subprime - Fears went up, but a broader viewpoint would show that we are at the end of the cycle.

b) Corporate profits - Still good.

c) Interest Rates - Up a bit, making leveraged buyouts harder to stomach. Support from private equity may diminish slightly.

d) Yen carry trade - Some unwinding, not panic buttons yet. BOJ not upping rates anytime soon. Yen's strength more due to USD weakness.

e) Liquidity - Still very ample and very good.

f) Emerging markets - Risk of implosion close to nil. Excessive surpluses provide good support. Consumer spending and imported inflation negated by stronger local currencies.

g) The US consumer - Jobs market still very tight despite subprime worries. As long as you have a job, the rest falls into place. We should be really worried when the unemployment starts to rise.

h) Corporate Liquidity - Still at historical highs, more share buybacks and buyouts by corporates.

i) Government Liquidity - Remember the Asian governments liquidity exercising their buying rights to divest away from USD assets. New factor in the works.

Don't worry, be happy!

Thursday, July 26, 2007


MS Emerging Markets Strategy Update


While Morgan Stanley has been relatively more cautious on global equities, they have made their latest Emerging Market strategy weightings, which was very interesting. MS have reduced weightings on two large markets which have led the index this year, cutting Brazil from O/W to E/W and China from E/W to U/W.

Still bullish, MS have raised recommendation on three large markets: Malaysia and Israel to O/W and Mexico to E/W.

Other markets downgraded were Poland to E/W and on Czech Republic to U/W while raising Philippines to E/W. Still bullish, MS remain O/W on Thailand, Taiwan, Korea and Hungary and U/W India, Indonesia, Argentina, and South Africa.

Tuesday, July 24, 2007


The Big Sale

Asian governments, especially those flushed with cash and no longer content with the meager returns to be had on safe but low-yielding investments like Treasuries, are becoming increasingly aggressive players on the equity front. It used to be just Singapore via Temasek and the GIC. They now have a new partner in China. The governments of China and Singapore agreed to invest as much as US$18.5 billion in return for stakes in the big British bankBarclays Plc. In doing so, Chinese lender China Development Bank and Temasek could play a role in the outcome of the biggest bank-takeover battle ever. That increasingly bitter contest pits Barclays against a consortium of European banks led by Royal Bank of Scotland Group PLC in seeking to acquire Dutch banking giant ABN Amro NV. Mind you, Temasek already controls Standard Chartered Bank Plc as well.

The Barclays deal is the latest in a string of investments in U.S. and European companies by governments in Asia and the Middle East. In May, the Chinese government invested US$3 billion in Blackstone Group on the eve of the U.S. private-equity giant's initial public stock offering. And last week, an investment fund controlled by the government of Qatar made a US$21.8 billion takeover approach for British supermarket chain J Sainsbury Plc. While potentially boosting their investment returns, such deals expose the government-controlled funds and other entities involved to risks that range from simple investment losses to political backlash.

There is an obvious trend in Asian governments getting sick and tired of holding overvalued USD assets, especially Treasuries. The recent sell down in USD is probably the start of a wave. There is greater reluctance to hold USD. Looking at the purchases, many tend to avoid US assets inpreference for European assets.

Judging from the size of available funds, its the Chinese new investing agency which will make bigger noises from here on. The close ties between Beijing and Singapore should see more initial hand holding with Temasek in scouring for big corporate deals. Two aggressive investing agencies with substantial firepower, that's likely to drive prices higher, especially for very decent sized assets. In a way, this will more than compensate for the reduced role in leveraged buyouts due to higher interest rates.

China Development Bank plans to invest as much as US$13.5 billion in Barclays, in what could become the largest overseas investment by a Chinese company to date. The planned investment is part of a broader deal that also includes as much as US$4.97 billion in funding from Temasek, and would enable Barclays to buttress its bid for ABN Amro. Should Barclays succeed in acquiring the Dutch bank, the deal ultimately could leave China Development Bank with a stake of about 8% in the newly enlarged Barclays, making it by far the biggest shareholder. Surprise, surprise, China's earlier investment in Blackstone Group has brought synergies. Guess who is advising China Development on the Barclays deal, yes, its Blackstone Group.

While this deal involved China Development, there will be an actual China state investment agency, which will be up and running come September. It will be called China Investment Co. Ltd, and will be tasked to make more profitable use of China's US$1.2 trillion in foreign currency reserves. The Finance Ministry will sell 1.55 trillion Chinese yuan (US$200 billion) in special government bonds in three to four tranches by next March to fund China Investment Co.

Judging from the funds available to these Asian governments (including those from the Middle East), the pool of candidates for investing purposes are not plenty. They can possibly only look at the top 500 in global market cap to plonk down US$10 billion or thereabouts for a substantial stake. That is exactly the strategy for Dubai International Capital (with US$6 billion under management), and they have had to navigate around another landmine - political backlash on senstive geopolitical assets. Dubai International just recently bought a major stake in HSBC Plc and then a 3% stake in Airbus maker European Aeronautic Defence & Space Co. , followed by a 3% stake in of India's ICICI Bank Ltd.

Political backlash on sensitive assets is nothing new. Last year, Dubai Ports ran into trouble when it tried to a British ports operator that operated several American ports ran into political obstacles. China's CNOOC also faced a brick wall when it tried to buy U.S. oil producer Unocal Corp.

Temasek now manages about US$85 billion in assets. Just imagine the firepower with China Investment Co.'s initial US$200 billion. Malaysia has been over building its reserves, now standing at well over 11% of GDP. Our need to reinvest back in the country is high, but at the same time a more aggressive strategy to invest in good regional companies will ensure for a well-rounded reinvestment plan.



MS Gets Bearish


Morgan Stanley has warned that current jitters on the global credit markets could spread to equity markets. Stock market corrections - after an increase in the cost of debt - historically follow six months later, suggesting that the current rally on Wall Street and European bourses may be more fragile than it looks.
(the key words are "could spread", I love how non-committal highly paid people are remunerated to say wishy-washy stuff)


The current rally on Wall Street and European bourses may be more fragile than it looks. A rise in the interest rate spread between risky debt and benchmark treasuries knocks away a key support for share prices by raising the cost of money for leveraged buyouts, but there is often a long delay before investors react. A study by MS found that credit spreads began to widen on average six months before every stock market correction of 10pc or more over the past 20 years. The current widening began in February, picking up speed over the past three weeks. If history is any guide, this could point to a global stock market slide as soon as August. Morgan Stanley's model suggests a 14pc fall, or 2,000 points off the Dow.
(that's the most important line of thought from the entire document, credit spreads widen for 6 months on average before actually collapse of equity markets)

"This is not the first time that equity markets take their time to react to bad news," said the bank's chief Europe strategist, Teun Draaisma. "The fundamentals have deteriorated. Equities have reached all-time highs despite higher rates, wider spreads, higher oil, Chinese tightening, and a stronger euro. There is a widespread belief in continuation of good global growth without inflation. While we are not expecting a recession for another two to three years, we believe chances are high that this belief will be seriously tested soon."

Mr Draaisma added that ever clearer signs of "stagflation" would soon start weighing on confidence. The current pattern looks similar to the relentless rise in spreads from February to September 2000 when the stock markets finally tipped over. Mr Draaisma said the iTraxx Crossover index measuring risk appetite for high-yield bonds touched bottom at around 170 in February. It has since jumped to 320 - mostly this month - implying at 150 basis point rise in the cost of raising capital.

Morgan Stanley said the trigger for a stock market fall could be a sudden unwinding of yen "carry trade" from Japan, a major source of global liquidity. The Bank of Japan in expected to raise rates a quarter point to 0.75pc in August. The worst stock market falls have been -58.4pc after the dotcom bust, -34.3pc in October 1987 and -30.8pc in a two-month shake-out after Russia defaulted in 1998, as measured on the MSCI Europe index. Morgan Stanley said its "value indicator" shows that the median stock in Europe is now selling at a record high price-to-earnings ratio of near 20. This measure includes smaller and mid-size companies. The price/earnings ratios on big blue-chip companies are much lower, hence the widespread belief that stocks are "cheap". Mr Draaisma's study found that worst performing stocks at times of widening spreads are financial and industrial groups. Among the worst losers in previous bouts have been Man Group (-39pc), Swedbank (-38pc) and Barclays (-35pc). The best defensive stocks have been consumer staples such as Carrefour (+41pc), Unilever (+41pc) and Nestle (+39pc).

(the big corrections over the past 20 years: dotcom - excessive run up in a single sector, not evident in present times; October 87 interest rate jumps and dollar decline - dollar is declining but it actually boosted purchases of US equity in return; Russia default in 98 - risk of default by an emerging market has reduced sharply over the past 3-5 years ... as for widening credit spreads, it does not hit corporations that badly as listed corporates are at an all time high holding cash balances, it may affect the leveraged buyout companies, so we will have smaller deals that are less leveraged, not an entirely bad thing ... end conclusion - good reading material but MS is probably wrong).


Mega First, The Undiscovered Gem

Mega First Corporation Bhd (MFCB) is an investment holding company engaged in power generation, property development, manufacturing and quarrying. Through its 60% owned subsidiary, Shaoxing Mega Heat and Power Co Ltd, MFCB owns and operates a power plant in Shaoxing, China, with electricity and steam generating capacities of 42MW and 290 tonnes per hour respectively. The company also owns and operates a power plant in Tawau, Sabah.

Meanwhile, MFCB is also involved in developing residential properties, namely Taman Bertam Jaya in Malacca and Taman Mawar in Sepang, Selangor. The company also undertakes commercial development in Ipoh. Through its subsidiaries in Malaysia, UK and South Africa, MFCB is engaged in the engineering, designing and manufacturing of automotive and transport components and the manufacturing and trading of security seals. Lastly, the company undertakes quarrying activities and is involved in the manufacture of quicklime, hydrated lime and calcium carbonate products via its 99.6% owned subsidiary, Syarikat Cheng Sun Quarry Sdn Bhd and its 38.5% owned associate, Rock Chemical Industries (Malaysia) Bhd.

Power earnings is driving the company and the kicker is the upcoming Laos power project. Mega First is considering taking in a partner to undertake the proposed RM1.05 billion hydroelectric project in Laos given the huge cost involved. The Laos plant is expected to supply power to the Thailand, Cambodia and Vietnam power grids due to its location in southern Laos. It would be set up on a build, operate and transfer basis for a 25 to 30 year concession period. Mega First had already signed a memorandum of understanding with the Laos government for a 240mw hydroelectric power plant along the Mekong River. The feasibility studies are being finalised with a report to be out very soon. Though operating in places such as Cambodia or Laos could be deem as risky, and may explain why there are not many institutional followers of the stock: not many are aware that the controlling shareholders (Goh family) have been running a huge beer brewing and distribution business from Cambodia for the longest time. Hence its like operating from their backyard.

Another kicker is the potential reactivation on its 50:50 copper mine JV with Australian mining company Perilya Ltd in Ranau, Sabah. The copper mine project had had been shelved some five to six years ago as world copper prices then did not make it feasible. With the current high prices, feasibility studies would be undertaken on setting up a mine in Ranau.
Based on just 236m shares, the company is expected to register a net profit of RM58m in 2007 (it recorded a net profit of RM46.1m in 2006). That works out to an EPS of 24.5 sen. You can do the math, its really simple. A stock that already garners more than 63% of its earnings from power sector should be rated more like one. NTA per share is a solid RM1.47. The attraction of the upcoming Laos plant will put that power earnings ratio even higher. Looking for RM2.50 by year end.

Friday, July 20, 2007


AZRB, New Favourite Son

Ahmad Zaki Resources Bhd’s (AZRB) share price surged to a historic high of RM4.50 as investors were upbeat on the company’s acquisition of a 20.8% stake in Eastern Pacific Industrial Corporation (EPIC). The acquisition of the EPIC stake would provide AZRB with a larger exposure to the East Coast Corridor. The acquisition of the stake from Lembaga Tabung Haji for RM82.56 million or RM2.40/share via cash settlement was at a 25% discount to its estimated fair value of RM3.00 on EPIC.

The East Coast Corridor was earmarked for the development as the hub of Malaysia's petrochemical industry. Remembering that EPIC is actually the defacto state government oil & gas vehicle: this makes it even more incredible that AZRB got to buy that stake. My new favourite son! With increasing O&G offshore activities at the port, AZRB would gain an even larger exposure to the East Coast boom via its 20.8% stake in EPIC and its 100%-owned cash-cow O&G bunkering services at the Kemaman Port. This would allow AZRB to diversify its earnings from the cyclical construction arm.

The history of the AZRB Group began on 17 February 1982. Its first contracting job was landscaping works for a housing project owned by Terengganu State Economic Development Corporation in Kemaman, Terengganu. In April 1984, the company secured its first major contract, which was the construction and completion of an external drainage system for the gas export terminal at the Kemaman Port. Since then, AZRB has successfully secured contracts from government and semi-government agencies and the private sector. These include, amongst others, Jabatan Kerja Raya Malaysia, Majlis Amanah Rakyat, Yayasan Islam Terengganu, Kuala Lumpur City Centre Berhad, KLIA, Majlis Perbadanan Petaling Jaya, University of Malaya and International Islamic University of Malaysia.

The group made RM24.15 million net profit on a RM442.6 million revenue last year. Its construction division has ventured into India and Saudi Arabia. At home, it bid for construction packages under the East Coast Expressway, Phase 2 project and managed to win three deals totalling RM324 million. Last year, AZRB's oil bunkering activities at Kemaman port contributed RM9.6 million profits on RM52 million revenue. Apart from its business in oil and gas, two years ago the company bought over PT Ichtiar Gusti Pudi, a company permitted to grow oil palmtrees on a total area of 20,500ha in Indonesia including cultivation rights of 8,297ha of palm oil in west Kalimantan. So far they have planted 2,200ha. By year-end the area should expand to 4,000ha. The palm oil division should start contributing from 2010.

AZRB's unbilled orderbook stands at RM1.4 billion. Its overseas projects are the RM397.4 million Al-Faisal University constructionproject in Riyadh, Saudi Arabia and RM117 million upgrading andmaintenance of IT Expressway in Chennai, India. Both are scheduled to be completed at the end of the year. As at end 2006, AZRB has a cash reserve of RM145 million with total borrowings standing at RM63.9 million. It recently won a contract from the Public Works Department for the construction of packages 5A, 6 and 9C of Projek Lebuhraya Pantai Timur in Terengganu worth RM324.134 million. Obviously, AZRB's ties with Terenggannu are more than excellent.

The company is a lot like Ranhill. Its share capital is only 66.81m. What it is doing well is reinvesting its construction profits into the much higher margin oil & gas sector. Judging from such a small paid up, it does not take much to for the share price to double or triple from here, with EPIC's kicking in for oil & gas side. Conservative EPS (without the EPIC linkages) for FY2007 is around 43 sen already. Looking for an initial target of RM6.00. Companies like AZRB and Ranhill are the new-breed bumi companies with strong management and entrepreneurial ability, not shy to make full use of ties and connections, no alibaba mentality, just grow the business with an expansive strategy based on core competencies.

Thursday, July 19, 2007


Sime Ready To Rumble

As reported in theedgedaily: Synergy Drive Bhd is a step closer to its multi-billion ringgit merger exercise involving Golden Hope Plantations Bhd, Kumpulan Guthrie Bhd and Sime Darby Bhd group of companies, after obtaining the Securities Commission's (SC) approval.
Synergy Drive secured the approval on Monday to proceed with the mega merger exercise, it said in a statement yesterday. The eight companies involved in the merger are
Golden Hope, Kumpulan Guthrie, Sime Darby and their respective subsidiaries — Mentakab Rubber Company (Malaya) Bhd, Highlands & Lowlands Bhd, Guthrie Ropel Bhd, Sime Engineering Services Bhd and Sime UEP Properties Bhd.
Synergy Drive will acquire the entire businesses and undertakings, including all assets and liabilities of the eight companies, to be satisfied by the issuance of redeemable convertible preference shares (RCPS). "Shareholders can immediately convert the RCPS receivable as purchase consideration to Synergy Drive shares valued at RM5.25 per share or redeem them for equivalent cash," it said.
Synergy Drive also sought the SC's consent for the listing of Synergy Drive on the Main Board of Bursa Malaysia Securities Bhd. The listing is set to take place in November. In the statement, Synergy Drive chairman Tan Sri Md Nor Yusof said: "With the approval from the SC secured, we look forward to shareholders' endorsement for the merger at the respective extraordinary general meetings which are slated for August."
Upon completion of the merger, Synergy Drive is expected to have a combined workforce of about 107,000 people and five core businesses, namely plantations, property, heavy equipment, motor vehicles, and energy and utilities. The company will potentially emerge as the second largest company on Bursa with a market capitalisation of some RM48.5 billion, based on the market capitalisation of the eight companies as at June 15, 2007. "This represents an increase of RM18.3 billion or 60.8% to shareholders since the announcement was made in Nov 27 last year by CIMB," it added.

The majority of research houses has Sime Darby as a SELL at RM10.00. However, let's look at the major driving trends with the emergence of Synergy Drive:

a) SD will have 55% non-plantation activities, in particular, their aggregation and strategy for their property township development will be a big kicker for this landbank giant.

b) SD will 45% revenue from plantation, and even simple synergies such as sharing planting systems, mills, aggregation of purchasing and sharing of facilities will start to bring meaning to being big.

c) The sheer size of SD's plantation makes its a crucial "plantation exposure" and/or benchmark.

d) The huge advantage SD has over the rest is liquidity. SD is expected to be the third biggest company on the Bursa after Tenaga Nasional and Maybank. Expected market cap will be nearly RM49 billion on listing date.

e) We can expect SD to be the frontrunner in the following deals: Bakun project, submarine cable to transport 1,600MW to the peninsular; following the surprise sale of its 29.3% stake in Jaya Holdings for S$301.1m, it is very likely that SD will try for Ramunia again (or some other similar vehicle to replant their foot into oil & gas)

f) There are more "inefficiencies" in many of the smaller companies under the wing of SD that can be harnessed or reworked.

The timing is very good esp when you look at the property landbank and plantation acreage of SD, the two most attractive sector following oil & gas. SD will be the one stock an international fund manager can hold to get the broadest exposure into Malaysia, with liquidity.

Wednesday, July 18, 2007



Lessons In Globalisation - Astro On-Demand

I think TVB serials got distributed back in the early 70s and I still remembered being glued to The Bund which starred Chow Yuen Fatt. Free TV and paid TV battled the airwaves. At the end of the day, its the software which counts. Ananda Krishnan was smart enough to snap up some 20% of TVB a few years back. You have the delivery methodology, you don't want to be held ransom by the software side.


Now picture this, you have slogged hard to be the main distributor for TVB serials and programs in Malaysia, or pick any country for that matter. (Through the years, there have been many change of hands in the role as main distributor as the business is actually not that lucrative.) When Astro was launched, you have "old TVB series" acting as the main attraction to lure subscribers. Now with Astro On-Demand, you are basically crushing the business of the TVB distributors. Of course, Astro couldn't care less as a profit making entity. However, there is such a thing called "equitable severance" - where TVB and Astro acknowledge the contribution, sacrifice and loss of earnings by the places licensed to distribute TVB programs.


The way it is going, why would anyone go to rent the dvds from the distributors anymore? Its funny how Astro keeps showing the hilarious advertorial on the guy trying to sell pirated dvds. The way Astro is making life hell for TVB distributors, Astro is directly responsible in turning probably all these distributors to selling pirated dvds later on anyway.


When companies grow big and expand, and control upstream and downstream, that's the effects of globalisation - the mamas and papas get shut down. Astro knows its draw card, its their delivery system, and they can do so much more (only if the government allows them the leeway): live horse races; interactive betting; home shopping network; internet access; etc... For distributors who have been slaving 5, 10 years only to find their livelihood curtailed - well, there better be some "equitable severance payments" for each year of service (I know Ralph Marshall and Ananda both are rolling their eyes now.) Did we trampled on people on our way to the top? Somehow companies nowdays will throw millions to buy better "corporate social responsibility" image/status: while here is something that they can set right themselves - how we do business reflects a lot on ourselves.



Astro On-Demand?? NOT!

The person responsible for coming up with the name On-Demand ought to be sacked. The superiors above the person responsible ought to be sacked as well. Because, and I assume all are graduates here, apparently nobody at Astro understand what "On Demand" is. The channel 931 onwards are supposed to broadcast at the same time the series is being released in HK. Well, its On-Demand, provided you demand it at the advertised time only!

On-Demand is NOT A NEW THING. If you had stayed in some hotels over the past few years, you can access Video On-Demand as some places. It really means I come back at 11pm, take a bath and order the movie I want, and it starts to play from the beginning within 3 minutes -
that is on demand.

I wouldn't want to make a big fuss about it but the amount of advertorial in papers and through out all Astro channels kinda grinds on me nerves. Please rename the channel/concept, call it Astro Simulcast or Astro LiveLink, even these two suggestions off the top of my head are a lot better than a lie. On-Demand is a lie... its like TGV calling their movie theaters On-Demand movie theaters: yes, its on-demand provided you want to watch at 6.45pm, 9.00pm or 10.45pm??!!

Tuesday, July 17, 2007


Oil & Gas Hype

SapuraCrest Petroleum Bhd’s subsidiary TL OffShore Sdn Bhd has won a US$175.8mil (RM542m) contract from Murphy Sabah Oil Co Ltd.
The contract was for the provision of engineering, procurement, construction, installation and commissioning of the 140km Kikeh gas pipeline, which would transport associated gas from Murphy’s Deepwater Kikeh Field to Labuan Gas Terminal. Kikeh Field, located about 1,300m offshore Sabah, is the first deepwater development in Malaysia. SapuraCrest said the deepwater pipelay would be executed using Sapura 3000, owned by SapuraAcergy Group, its 50% joint venture company with the Acergy Group. The project is scheduled for completion in the first quarter of 2008 and is expected to contribute positively in the current year ending Jan 31, 2008.

All the hooplah over oil & gas stocks for the past 12 months have yielded a lot of hot air. Many oil & gas related stocks have seen their share prices more than doubled, and the size of the contracts secured are those types that are less than RM100m in value. SapuraCrest has quietly showed progress and notching milestones along the way. Can expect new substantial shareholder to continue to give SapuraCrest a leg over the rest. More big contracts on the way for SapuraCrest.

Sunday, July 15, 2007


Resorts In Play

A significant moment on selling down Star Cruises to CMY. This really puts Resorts in play for the next 6 months. I still suspect Stanley Ho is eying some sort of participation with Genting or Resorts. Briefly, the sell down to CMY will see almost all research houses booting their target price for Resorts from RM4.10-4.30 to RM4.80-RM5.00. Thats because the sale will remove part of the drag on earnings growth.

All up, cash available for dividend, should they decide to do so, can amount to a dividend of 60 sen per share. CMY did not make his billions by buying dormant money losing stakes.

CMY has been a very big buyer of Resorts for the last 2 weeks. Resorts can and should distribute its 6% holdings in Genting International to Resorts shareholders. This way it eliminates direct links with Genting International (i.e. Singapore authorities). Following the distribution, Resorts could be better placed to consider any deals with Stanley Ho. The 6% value in Genting International is worth more than RM600m in value.

Friday, July 13, 2007



Resorts World, Not The Full Picture Yet

At current prices, Resorts World is about RM20 prior to the share split exercise. The huge jumps in volume sent many scurrying around to look for answers. First bit of news was that Genting Bhd has reduced its shareholding in subsidiary Resorts World Bhd 49.98 percent. This follows two measures it has taken. One is the exchange of US$199.5 million - from the US$300 million one percent guaranteed exchangeable notes due 2008 issued by Genting's wholly-owned subsidiary Prime Venture (Labuan) Ltd - into existing RWB ordinary shares. The other is the conversion of RM655.4 million of the RM1.1 billion nominal value convertible notes issued by RWB into new shares. Genting deputy chairman Tun Mohamed Hanif Omar in a statement to Bursa Malaysia said Genting's percentage shareholding in RWB will continue to be reduced progressively until the exchangeable notes and convertible notes are fully redeemed. Although the company's shareholding in RWB has fallen to below 50 percent RWB will continue to be consolidated as a subsidiary of the company as the company continues to have control of it.




This could be a prelude of things to come. Why would Genting want to dilute down its holdings in Resorts World? To accomodate a new controlling shareholder? Or a new substantial shareholder? Genting / Resorts still sorely lack sufficient exposure to the new Macau strip. Stanley Ho still wants to hedge his bets for his family now that he is near the "exit door". Stanley may not be entirely comfortable or confident of his children being able to ensure his empire continue to flourish for the next 50 years. Genting does not want to irk Singapore anymore, but by reducing Resorts, in the event of new shares issued by Resorts to the new shareholder, Genting may see its stake diluting even further - thus distancing further from ties with Stanley Ho (if indeed Stanley is involved). By getting a stake in Resorts and Star Cruises, it widens Stanley's empire plus being able to close ties with the two most important gaming giants from Asia may ensure synergies for the future - mostly to buy some insurance for his kids when he is gone.



Methinks there is a huge rerating going on for Resorts. At the end of the day the stock is just like a good annuity, churning cash from the single casino. Not much else. Some think that it may give out a big dividend. Well, its cash per share is not much, we are talking som over 5 billion shares here. The likely catalysts for the current run:



a) Sales of 36% stake in Star Cruises. Star Cruises has been cancerous for Resorts World, doing the yearly dilution on earnings and always requiring additional capital. If Star Cruises is removed with a decent price, Resorts world be rerated nicely. But who would buy? The key could be in the recent appointment of D Chua as head of Star Cruises. Good ties with Stanley Ho, and the botched deal with Genting/Sentosa and Stanley Ho could very well see Stanley Ho taking up Star Cruises. It does make sense for his empire as well. Plus Stanley Ho likes big ships.



b) The nature of such a transaction. If it was a clean cash sale, it will be good for Resorts but not very very good. If the transaction involved a share exchange with any one of the Ho's family vehicle operating the new Macau casinos - things would be very very different. Finally Resorts could be in for a complete makeover.



I strongly suspect its this development which is driving the share price. Volume looks very genuine. Worth a punt. Buy and hold till actual news is announced. Resorts-CC looks extremely good now.

Thursday, July 12, 2007


Asia 2H 2007

Some salient points:

a) A diversion away from US denominated assets over the subprime worry, which gives rise to a likely rate cut by Fed in 2H 2007, which translates to a weak USD outlook 2H

b) A big realignment in global bond yields and sovereign debt at the moment, no big thing

c) Despite strong inflows into Asian equities over the last 18 months, valuation in Asia are fair and not overvalued

d) Danger in some Asian currencies being subjected to heavy inflows but not matched by sufficient reserves to withstand currency volatility, e.g. Thai baht, Indian rupee

e) US spending outlook critical for sustaining Asian equity momentum, despite subprime worries, US labout conditions still tight, and Fed's likely rate cut will keep momentum in Asian equity

f) Swift measures by China to create outlets for its liquidity kept Chinese stocks tame for the time bring but significantly boosted the fundamentals for HK via QDII and H-share activity

g) Significant investing upgrades for stocks in South Korea, Taiwan and Japan in 2H 2007. It seems international houses will want to see funds being kept in Asia for the next 12 months at least. China and India seem to be out of favour for the time being but funds still wishing to have Asia exposure

h) Markets doing significant catching up of late include Thailand and Taiwan
i) Subprime worries seem to have peaked to many people
j) USD continued weakness seems to be a blessing indisguise for many investors - net effect US stocks cheaper and will see more funds flowing there for bargains
A check of the chart above showed the percentage gains by the respective Asian indices (ex-China) from 1 Jan 2006 till 2nd week of July 2007:
1) India - Sensex +58.8%
2) Malaysia - KLCI +53%
3) HK - Hang Seng +52.6%
4) Singapore - STI +52.9%
5) Taiwan - TWI +44.7%
6) Thailand - SET +16.3%
7) Japan - Nikkei +9.9%
The remarkable thing from the relative returns was the aggregation and convergence of returns by the top few bourses: India, Malaysia, Singapore, HK all showed almost the same returns over the specified period. Everyone's a hero, everyone's a winner. As mentioned before, its only natural for Thailand to catch up to the rest.
There seems to be a lot of catching up to do for Japan, which is my favourite market for the next 6-12 months. However, we cannot assume that to be the case because the fundamentals governing Japan is quite different from the rest of Asia. Asian currencies are all on an uptrend, accumulating surpluses, benefitting from China's role in the new economy, enjoying the benefits of globalisation... except Japan, which has seen its yen being a huge obstacle to attracting better returns for the Nikkei. The yen carry trade has been a big factor, keeping the yen weak.
However, I am of the opinion that the prolonged undervaluation of the yen has actually allowed for a build up of growing profits and better competitiveness among Japanese companies. These pent up forces will burst forth very soon via massive profit upgrades. The once benign domestic consumer forces has indicated over the past few months that its about to breakout as well.
Top Tier Markets For 2H 2007
Japan
South Korea
Taiwan
Thailand
Still Good For 2H 2007
Malaysia
HK
Singapore

Wednesday, July 11, 2007


Market Excess Spillover

While I am a firm believer in the China story, the stock market gains there needs to be continually reassessed. Many bulls would cite the huge profit growth in store for many listed companies as the main pillar driving higher valuations. The above chart from WSJ is very revealing. Just look at "investment income as a percentage of net income of listed companies". Listed companies flushed with cash usually invest in other Chinese listed firms. On a sharply rising market, the "unrealised / realised gains" will be substantial. Now if 24% of a listed company's net income comes from these holdings, I'd be very worried.

The oft cited profit growth need to be adjusted for the stock market effect. Savvy investors should strip out these type of gains to get a better hold of fundamentals. Imagine a 30% crash, what will happen to the write downs affecting these so called profits.

There are normal earnings and quality earnings. Investment gains from investing in listed companies does not constitute as quality earnings. Quality earnings has to be predictable, preferably from organic growth, non-volatile and recurring.

Good analysts will strip out these gains as one-off type and not include as part of normal operational gains. You cannot assess PER and PER growth properly using these one-off gains. It would be better if the gains are realised, i.e. securities held are sold off to obtain cash. Smart companies would have a "properly outlined strategy" with regards to these type of investments. This is so that analysts and investors do not have to second-guess management's motives and objectives. A company can end up with 50% of net profit from playing the stock market, what then? If a company likes to play the market so much and think they are so good at it, they should set up a separate listed entity in fund management.


Baht Is Going On?

Foreign purchases of Thai stocks have pushed the currency to the highest since the Asian financial crisis, eroding overseas earnings of the nation's food producers and manufacturers. Thai baht had the biggest gain in more than five months on speculation that exporters accelerated buying of the currency after it rose beyond 34 to the dollar. In NY, the quote for the baht went as high as 31.36 to the dollar. The baht has gained some 8% against the dollar so far this year. The appreciation of the baht stemmed from capital inflows by investors in the stock market. To get a sense of perspective, the yuan has only risen by 7% against the dollar since July 2005.

Capital inflows were affecting the entire region any move by the central bank to weaken the baht against the market trend could spur even greater inflows and speculative activity. In any case, regulators expected the baht to weaken in the second half of the year as exports slow and the current account surplus shrinks.

The SET has been one of the hottest markets in the region this year, with the main market up 23% over the past three months. We have to remember that last year the country was held back by problems with the army leadership and Thaksin. That left SET out in the cold and the index under performed most of its neighbours. Now its their revenge. From January to July 6, a total of US$22 billion in capital has poured into Asia, helping push many regional markets to all-time highs. The Stock Exchange of Thailand alone has seen foreign investors hold a net buy position of 120 billion baht for the year to July 9. Exports have been the main engine for economic growth this year, rising some 18% in US dollar terms for the year to date.

Dr Tarisa said the central bank would target the interest rate policy at inflation rather than exchange rates, adding that the relationship between interest rates and currency rates was uncertain. ''There is no certainty that an interest rate cut would result in fewer inflows,'' Dr Tarisa said. The central bank's Monetary Policy Committee will meet next week to decide whether to change its one-day repurchase rate, now set at 3.5%. A regulatory change on Monday allowing foreign investors to borrow baht locally to settle offshore hedging positions had not affected exchange rates.

Bank of Thailand governor Tarisa urged exporters to refrain from panic selling of US dollars as the baht took its advance to almost 3 percent in July. Anything to do with the baht will trigger a sense of unease among other smaller Asian nations. Many will still remember the 97 implosion started by the Thai baht free fall. Japan, meanwhile, said it had doubled the amount of foreign currency reserves it makes available to Thailand to shield against a possible financial crisis. As mentioned before, Japan is really a good friend (read Additional Lessons From 97 Implosion), now Japan did not even wait for things to become problematic before jumping in to help calm the waters. Under the bilateral arrangement, Japan will now offer up to US$6 billion from its foreign exchange reserves to Thailand in the event of a currency crisis. A similar currency crisis like 97 is very unlikely because the fundamentals in Thailand and rest of Asia are quite different. Still, its good to monitor the situation.

Tuesday, July 10, 2007


Nextnation, Not Good

Wisdomwise wrote on Nextnation, which I had posted something a week back, and again today. Am reposting the comments for readers of this blog:

A week back:
Salvatore_Dali said...
i had highlighted this company before as the fundamentals looked solid, but the way the share has been trading for the past 2 months, esp following its bonus looks very bad... methinks something inside is rotting ala megan cos the only way the share can keep falling is insider selling all the way.... cut loss
2:39 PM

this morning:

Salvatore_Dali said...
finally out, huge jump in receivables ... after a good rebound this morning I expect the stock to slide to oblivion... when receivables jump like that, for a services based company, its not a good sign... the share price has been weakening since a few months back, only explanation is insiders are selling, they know how "good" the receivables are and how hard it is to retrieve them ... services rendered are gone, most need not reorder services if they don't pay ... not as if you are supplying cement, steel bars, etc... not good, not good at all..
10:43 AM

The company also announced to Bursa Malaysia that its wholly-owned subsidiary, Nextnation Network Sdn Bhd, had accepted a credit facility of up to RM10mil granted by Malaysia Debt Ventures Bhd for overseas expansion. That smells like teen spirit to me... gone bad! Why not a bank? A bank will gladly give you a credit facility... unless they don't want to. Why would you want a facility by MDV unless terms are better or the terms are easier to meet? Either way, not good.

Assuming RM67m in receivables taking more than 12 months to be recouped: you are already losing 4% in interest = RM2.68m a year. Plus assume a 6% cost on RM10m facility (MDV may not charge them anything but its still a cost) = RM0.6m. Add them up = RM3.28m. In 2006, the company made a net profit of RM16.714m. The "additional opportunity cost in lost profit" is almost 20% of 2006's net profit. The most important thing is the rise in receivables from RM39.6m to RM67m = RM27.4m = is 64% higher than the entire net profit for 200
6.

p/s a very important posting from one of the readers:

Yew Leun has left a new comment on your post " Nextnation, Not Good":


Content/ringtone providers (i.e. nextnation) in the past makes money by spamming sms messages and downloads to mobile phones and a lot of end users have been unwillingly charged and there is nothing they can do about it. But since MCMC cracked down on spamming, these companies' profit has been greatly affected. from the business model standpoint, unless they can come out with new business plans, we are not going to see any turnaround on their bottomline and share prices.



Coastal Is Clear

I have highlighted very few specific stocks of late because good ones are hard to locate. However, in light of my view that oil & gas is in for a spectacular 6-12 months ahead, its time to dig deeper. I think small-mid caps such as Coastal Contracts & Ramunia are worth buying for safekeeping.

In 2000-2004 there were 91 deepwater fields being developed. For 2005-2009, there are approximately 195 deepwater fields scheduled for development. Sustained high oil prices can only support the growth in this area. Aker Kvanaer has recently set up a US$100m subsea manufacturing center in Port Klang. The place can assemble a complete range of subsea systems equipment including Christmas Tree, a set of valve spools and fittings connected to the top of an oil well to direct and control the flow of formation fluids. Aker has completed the first Kikeh subsea tree and control module, their setting up in Port Klang is a vote of confidence on the excellent outlook for deepwater development. Currently there are 9 deepwater and 2 ultra deepwater blocks under production-sharing -contracts, while 10 exploration blocks will be available for data review. As mentioned, Kikeh will start the ball rolling followed by Gumusut and Kakap in 2010. Malaikai, Kebabangan and Jangas should start in 2011.

We can expect a deepwater hub being set up in Malaysia looking at the projects ahead. Contractors, fabricators and engineering firms will want to invest to tap into these deepwater developments.
Ramunia will benefit big time based on its rig building capacity, Korean technology and expertise, and high-end offshore structures. Sime Darby will be very much aware of this, and so too is Petra Perdana / QLC - should be the next M&A play soon. Coastal Contracts will be favoured thanks to its highly scalable shipbuilding capacity and potential entry into fabrication of offshore structures. Coastal should be an M&A candidate as well. Other big players who want a foothold into oil & gas could not find a better vehicle than these two to gain entry into a lucrative and vibrant sub-sector of oil & gas. Bsically, these two ties in very well with my strongly promoted SapuraCrest (deepwater drilling rigs & fluids.)

p/s although Sime Darby has walked away from buying Ramunia months back, it was due to greedy pricing by Ramunia owners, as the oil & gas long term development plans gets revealed, there will be more companies willing to pay the high premium demanded by Ramunia's owners ... hence I feel strongly Sime will be back to talk as deepwater prospects look too big and too good to miss out for a company like Sime Darby


CTOS, No Sympathy

There are two camps on the witch hunting into CTOS. Those who have no sympathy that they are in trouble with the authorities. The second camp are family, relatives and friends of the people at CTOS. Why so miserable-one?

There are certain businesses you don't want to be in for a variety of reasons. You may not want to start a brothel for moral reasons and that it degrades women folk (unless the brothel is a gender-less one, then you degrade everyone.) Some may not want to go into fengshui or fortune telling, as it may be 80% gift of gab (white lies) and 20% of some semblance of logic.

Playing the stock market, some investors would never choose to short the futures even ahead of predictable calamity, or in the face of calamity, or when markets are all plunging rapidly - because to them, sometimes you don't want to be making money when people's lives are being decimated.

Certainly in all the above, one can still venture into those areas and try to make money, but you won't have sympathy from others when you get in trouble. CTOS is a lot like that. Though it supposedly provides financial status information per se, it basically makes life harder for those who are already facing an uphill battle. Be it in late in servicing car payments, or getting your car confiscated already only to find bank account also frozen, then having to fight bankruptcy proceedings, at the same time cannot open new bank accounts which your new employer requested - CTOS provides an essential service which makes life very hard for those in financial distress already. CTOS has also been very arrogrant, look at the way the company frames its press release - sue-lah... yes the govenment will squash you if you act like a gangster. CTOS has also been blase` about updating records of people who have cleared their liabilities - some more have to go tell them, if not your record stays.

Its very much like finding yourself in front of the gates of Hell with Satan demanding upfront rent money to enter. I mean, you are in Hell already, some more have to pay to get in!?

Monday, July 09, 2007


Mutual Fund Performance: Pacific Ex Japan Funds

Fund performance is as of the close of business July 05
Top 10 Pacific Ex Japan Funds (ranked by one-year performance)

Assets Returns
(Size In US$Millions) 1 YR% /3 YR% / 5 YR% / YTD%

T Rowe Price Int:Asia (3,114.3) 73.06 / 183.13 / 246.69 / 30.89
Fidelity SoEast Asia (2,833.4) 68.50 / 200.55 / 253.80 / 34.00
DFA Asia Pac Small Co (120.7) 66.30 / 152.52 / 297.86 / 36.39
iShares:MSCI Malaysia (1,113.7) 64.90 / 93.11 / 129.48 / 30.75
Guinn Atkin:Asia Focus (54.5) 63.10 / 159.72 / 237.99 / 32.95
iShares:MSCI S'pore (1,912.8) 60.1 / 141.48 / 200.49 / 22.1
Fidelity Adv Korea;A (34.4) 59.43 / 240.25 / 228.10 / 38.11
JPMorgan:Asia Eq;A (13.9) 56.97 / 135.93 / 151.90 / 25.58
Fidelity Adv Em Asia;A (87.3) 56.56 / 180.99 / 211.61 / 24.04
TCW:Asia Pacific Eq;I (29.0) 55.57 / 137.24 / 162.71 / 25.02

The above compilation for Asia based funds (excluding Japan) is very interesting indeed. Among the hundreds of funds investing in Asia, these are the creme de la creme. My important conclusions:

a) Brand name power - There is strength and reliability in brand name power. Names like T Rowe Price and Fidelity topped the charts for a variety of reasons. They are more able to attract and retain talent. They have a more extensive and solid management structure to monitor, provide oversight and push through ideas. They have a better supporting structure in economics, currency strategy, big picture strategy, quant people, sophisticated data mining channels, and by virtue of their size, they always get the analysts' first call.

b) When looking at these kind of tables, it is best to leave out those with small asset size. It is much easier to perform well with fund size of under US$50m. I would use that as the minimum benchmarking.

c) iShares - iShares are indexed ETFs designed and run by Barclays Global Fund Advisors. They do very well for their set out objectives. They have two funds in the top 10 because they are indexed country funds. Two out of the top ten performing funds are indexed funds - lends weight to the belief that active fund management generally fails to outperform the index. Those that do are really anomalies rather than the majority.

d) Assess your own investments. Did they outperform the index? How many sleepness nights did you have to endure to get your 50% return? You have no one to scold if you lose 20% of your funds in bad stock selections. Let someone else do the worrying for you. T Rowe Price and Fidelity 's 3 year and 5 year record can't be beat - let them do the worrying for you. They have better weapons to fight the war of attrition. If you MUST do some personal investing because you just have to do it: why not park 60% or 70% of total funds with a solid house with at least 3-5 year track record, and keep the rest for your own investing purposes.
We can outperform the index and even top fund managers over certain periods, eventually over the long haul it evens up a lot. I think people will have a lot less stress by invetsing most of their funds in a good mutual fund. As more than 70% of EPF withdrawers finish spending their lump sum within the first 3-5 years, reinvesting the bulk of retirement funds in a couple of solid funds will ensure for better protection, longer drawdown period or provide for a strong annuity.



Gems From The Pool Of H-Shares Warrants

Now that I got your attention ... There are some great buys available on some of these H-shares covered warrants listed on KLSE. I shall not bore you with my outlook on H-shares, QDII etc... I have ranked the best buys taking into account their valuation and stock fundamentals as well:


Top Tier Buys

a) China Mobile - C3

b) HK Exchange-C1 (this one not H-share)

c) Petrochina -C1

d) Petrochina - C3


Secondary Buys

a) CCCC - C1

b) ICBC- C3

c) China Mobile - C1

d) China Life - C1


Should just buy and hold these suckers till expiry.


Asian Real Estate

Or Why Malaysian Real Estate Is So Cheap

The Star highlighted the relative property values in the region. Basically the entire series of articles was to highlight how "cheap" Malaysian property prices were. As higher end prices zoomed to stratosphere in Singapore, there was some spillover into KL and Penang high end as well. In the table compiled by JLW and OSK on regional comparisons among luxury condos are the current average psf in ringgit (usd):

Kuala Lumpur 560 (164)
Singapore 4,616 (1,357)
Bangkok 714 (210)
Jakarta 425 (125)
Hong Kong 5,563 (1,636)
Shanghai 1,225 (360)
Beijing 646 (190)

What would be useful is to look at GDP per capita to get a gauge on income per person. Its not exacting but a good indicator (in USD).

Malaysia 10,400
Singapore 29,700
Thailand 8,300
Indonesia 3,700
HK 36,800
China 6,200

Now it would be easy to look at GDP per capita in usd / psf in usd to get some interesting ratios:

KL 63.4x
Singapore 21.9x
Thailand 39.5xx
Indonesia 29.6x
HK 22.5x
Shanghai 17.2x
Beijing 32.6x

The lower the ratio, the more unaffordable it would be. Obviously, KL sticks out like a sore thumb, its "cheap" and "affordable" no matter how you cut it. What's interesting is how expensive and unaffordable the luxury condos are in "poorer nations". Which is to say when it gets to highly unaffordable levels, safe to say that the bulk of purchasing involved foreign buying and/or speculation.

Still, why is Malaysia so cheap la? Is this the best buy story for the decade? Well the short answer is NO. The long answer is also NO. And here's why:

KL real estate is one of the cheapest in Asia - another reason why 5 star hotels in Malaysia are also among the cheapest in the world. One can understand if Malaysian real estate values lag those of more developed nations such as Singapore, Hong Kong, Seoul or Tokyo... but KL even lags Indian cities, Bangkok and certain places in Jakarta. We can understand why Shanghai or Beijing would be more expensive too compared to KL - population, out-sourcing and investment.

A "poor" country can have high city real estate values - hence a big factor is city population. You need to cram a lot of people into a tiny space, then real estate values will soar - take New York, Tokyo, HK, Singapore, Bangkok, Shanghai, Shenzhen, Jakarta, Karachi, Mumbai ... many are in the region of 10-30 million city population. KL has about 5 million but it is also quite spread out. So, another factor is it has to be CRAMPED - or rather business activity CBD has to be cramped. If you want KL prices or Penang prices to shoot higher, ask the politicians to double the population of KL or Penang. We have to have people bumping into each other all the time while walking on sidewalks, then our property prices will surge. We have to double the time we spend travelling to work, then our property prices will surge. Good tradeoff?

Another factor for high real estate values is whether you are a financial center. Is your city a crucial outpost to doing business in the region - HK, Shanghai, Singapore, Tokyo, New York, etc... KL is neither here nor there. What about Bangkok? It certainly is not financial center. Well, it has a super duper population (have you seen the weekend exodus from Bangkok every Friday). Even though it is not a financial center, it is the center for a country with a very decent population size. If your capital city is the center of a country with a decent population, you can be assured of good commercial real estate values - e.g. Thailand, Taiwan, India, South Korea. Decent population size means critical mass achieved in many areas, esp domestic demand. We need Malaysia to move quickly from 26 million to at least 60 million. Mahathir was right after all - throw away your condoms and let's procreate like there is no tomorrow, so that we can have a better tomorrow!

Then you can have some good ripple on effect on real estate values. If you are not a financial center, you can still command high rates if high-value services businesses are aplenty. Hence Singapore's commercial real estate will have a very strong long term uptrend as it does not depend on its reputation as a financial center/port/MICE biz like HK but moves higher up the value-added curve by encouraging designers/inventors in animation, biotech, education, etc. Does KL look like a city with good high value added industries? Hmmm... I can think of Islamic Finance as the one area where we could adopt the "blue ocean strategy". Our MSC achieved only 10% of what we set out to do. Our main revenue comes from oil & gas, plantations and other soft commodities - they are not high value add industries with the exception of oil & gas.

Good amenities and public infrastructure would not be a bad thing, look at Tokyo, HK, Singapore or even New York - but infra is not that crucial in giving higher real estate values. If you look at the capital cities of the high GDP per capita countries such as Oslo, Stockholm, Helsinki, ..etc.. you will find that good infra is a good thing but does not necessarily translate to stratospheric real estate prices. Infra wise, KL is better than Bangkok, Jakarta, Mumbai but we still lag their real estate prices.

Lack of good quality commercial space will also spruce up real estate values. Just look at Indian cities, cities in Vietnam or even Jakarta. We in KL, unfortunately builds okay buildings cheaply as land is cheap and plentiful. I mean, KL commercial just keeps getting drawn wider and wider. First the CBD, then the city kind of move wider to include PJ, then it moves out to Shah Alam, now Klang. Too much cheap flat land. Now, we are extending into IDR as well. The picture is so clear. Commercial real estate value in Malaysia will lag the rest of Asia, even some cities in Vietnam (my gawd), and it will not change until the fundamentals change.

Foreign investors and/or foreign speculation can drive real estate values up. But they need to be convinced of more upside. Just consider the factors cited, Malaysia does not look like having good upside or remotely standing a chance of catching up to their neighbours, so why would foreign property investors dive in? We may see some interest in IDR as there could be some decent upside in store but its limited at best.

At the end of the day, cheap real estate is not a bad thing. It improves our affordability. It helps to attract FDI in particularly for industries where land is a big cost factor. There is NO Asia average median real estate pricing where we all gravitate to. We will stay where we are in the pricing curve unless one or more of the factors above changes significantly for Malaysia. Short answer NO, long answer also NO.