Friday, September 28, 2007


Burmese Chess

Outrage, but what can be done?

Kenji Nagai, 50, a journalist for Tokyo- based video and photo agency APF News, is the first foreign victim of the crackdown. The death prompted Japanese Prime Minister Yasuo Fukuda to say: "Something deplorable is happening there." The Associated Press said soldiers fired automatic weapons into a crowd of protesters.

In scenes of naked defiance and anger that the heavy-handed tactics have failed to crush, ordinary people screamed abuse at soldiers and cried openly as they exchanged news of deaths and injuries. "You are eating food given to you by the people. Yet you kill people and you kill the monks!" an elderly man screamed at soldiers downtown".

JOINT EUROPEAN UNION-UNITED STATES STATEMENT
We are deeply troubled by reports that security forces have fired on and attacked peaceful demonstrators and arrested many Buddhist monks and others. We condemn all violence against peaceful demonstrators and remind the country's leaders of their personal responsibility for their actions. We call on the authorities to stop violence and to open a process of dialogue with pro democracy leaders including Aung San Suu Kyi and representatives of ethnic minorities. We urge China, India, Asean and others in the region to use their influence in support of the people of Burma. We urge the country's authorities to receive an early visit by the UN Secretary General's envoy Ibrahim Gambari. We call on the Security Council to discuss this situation urgently and consider further steps including sanctions.

US PRESIDENT GEORGE W BUSH
Americans are outraged by the situation in Burma, where a military junta has imposed a 19-year reign of fear. The United States will tighten economic sanctions on the leaders of the regime and their financial backers. We will impose and expand a visa ban on those responsible for the most egregious violations of human rights, as well as their family members. We will continue to support the efforts of humanitarian groups working to alleviate suffering in Burma, and I urge the United Nations and all nations to use their diplomatic and economic leverage to help the Burmese people reclaim their freedom.

UK PRIME MINISTER GORDON BROWN
I hope the Security Council will meet immediately, meet today, discuss this issue, and look at what can be done. And the first thing that can be done is that the UN envoy should be sent to Burma and I hope he is in a position to go, and make sure the Burmese regime directly is aware that any trampling of human rights that takes place will have the whole eyes of the world upon them and will not be acceptable in the future.

FRENCH PRESIDENT NICOLAS SARKOZY
I will show France's support. We do not accept violent repression. I am following the situation in Burma with great concern. I call for spontaneous, peaceful protests, which are expressing fair social and political demands, not to be repressed by force.

LOUISE ARBOUR, UN HIGH COMMISSIONER FOR HUMAN RIGHTS
The fact that the protests are visible is already a measure of protection... These demonstrations have attracted much more media coverage than in the past and that gives hope that there will not be completely unacceptable reprisals.

JAVIER SOLANA, EUROPEAN UNION FOREIGN POLICY CHIEF
We want this situation to stop. We would like the get a process of negotiation and normalisation of the life of Burma. And we already have sanctions imposed on the authorities and we will be in a position to increase the level of sanctions when the situation deteriorates.

CHINESE FOREIGN MINISTRY
China has consistently implemented a policy of non-interference in other countries' internal affairs. As Burma's neighbours, we hope to see stability and economic development in Burma. We hope and believe that the government and people of Burma will properly deal with the current problem.

RUSSIAN FOREIGN MINISTRY
We consider any attempts to use the latest developments to exercise outside pressure or interference in the domestic affairs of this sovereign state to be counterproductive. We still believe that the processes under way in Myanmar do not threaten international and regional peace and security. We expect the country's authorities, as well as the participants in protest marches, to exercise mutual constraint not to allow further destabilisation of the situation.

INDIAN FOREIGN MINISTRY
The government of India is concerned at, and is closely monitoring, the situation in Myanmar [Burma]. It is our hope that all sides will resolve their issues peacefully through dialogue. India has always believed that Myanmar's process of political reform and national reconciliation should be more inclusive and broad-based.

THAI PRIME MINISTER SURAYUD CHULANONT
I'm trying my best to convince the Burmese: "Don't use the harsh measures." At the least they should try to avoid the violent action from the government side. As a Buddhist and as a soldier, I can say that it will be very difficult for the Burmese government to use violence to crack down on the monks. It will be against the way of life of the Buddhists.

SINGAPOREAN FOREIGN MINISTRY
Singapore is deeply concerned by reports of clashes between protesters and security forces in Yangon [Rangoon]. We urge the Myanmar authorities to exercise utmost restraint. We call upon all parties to avoid provocative actions and to work towards reconciliation and a peaceful resolution of the situation.

JAPANESE FOREIGN MINISTRY
We urge the government of Myanmar to respond calmly to the demonstrations. We also strongly urge that the government of Myanmar take seriously the wishes of the people as evidenced by the demonstrations and begin talks with a view to achieving reconciliation and democratisation.

MARTY NATALEGAWA, INDONESIAN PERMANENT REPRESENTATIVE TO THE UN
We are seriously following these developments very closely. We are concerned by it. We are calling on the authorities to exercise maximum restraint and desist from any acts that could cause further violence. Indonesia's approach has always been one of engagement, not necessarily meaning that we are less concerned about the situation therein. We are just convinced that the best way to go is through engagement and encouragement.

AUSTRALIAN FOREIGN MINISTER ALEXANDER DOWNER
I don't think the United Nations is likely to be the vehicle for change, for international change on Burma. I think really you have to work through China and the Chinese, because China is the country that has the greatest degree of influence over the Burmese leadership.

ITALIAN PRIME MINISTER ROMANO PRODI
The international community must mobilise to uphold respect for human rights everywhere in the world and to ensure liberty to express people's own opinions and dissent in a peaceful way.

SPANISH FOREIGN MINISTRY
We join those who have asked the authorities in Myanmar to exercise maximum control because violent repression of the recent protests could have very serious consequences.

"The Burmese government should not stand in the way of its people's desire for freedom," said White House national security spokesman Gordon Johndroe.

The Main Chess Players:

China, Burma's biggest trading partner and chief ally, issued its first public call for the regime to show restraint. ASEAN foreign ministers demanded the junta immediately stop using violence. India has joined in to voice displeasure but has been supplying military aid to the junta. Russia and Thailand are also major players.

Their Interests:

Gas Pipeline, Natural Resources & Militaristic Control - Both India and China want access to Burma's gas. Based on experience from previous oil and gas projects in Burma, the construction of overland pipelines to transport the gas will involve the use of forced labor, and usually result in illegal land confiscation, forced displacement, and unnecessary use of force against villagers. Revenue from gas sales would also serve to entrench the brutal military rule in the country.

Do China, India or the foreign companies involved care about the process, they just want the gas. Some of the foreign companies involved include: ONGC Videsh Ltd (OVL), which is a subsidiary of India’s Oil and Natural Gas Co. (ONGC); the Gas Authority of India Ltd (GAIL); and Korea Gas Corporation (KOGAS) of South Korea.

Burma’s gas business helps sustain military rule in the country and currently comprise at least 30 percent of the country’s exports. Estimates of the gas yield of the Shwe deposits range between US$37-52 billion, and could lead to a gain in revenues to the Burmese government of US$12-17 billion, or US$580-824 million per year over 20 years. In 2006, government revenue was US$2.18 billion. The junta spends the bulk of Burma’s resources to maintain its enormous army, and has some of the lowest social spending of any country in the world.

In landmark lawsuits, Burmese villagers sued the US oil and gas company UNOCAL (now Chevron) and France’s Total for complicity in gross human rights abuses committed by the Burmese military. The lawsuits centered on charges that the companies knew about and benefited from the Burmese army’s use of torture, rape, and unlawful land seizures to remove villagers from areas slated for development, and also the military’s use of forced labor to facilitate the pipeline construction. The lawsuits were settled after the companies agreed to make large payments.


The major actors involved in the current development of Burma’s gas fields are also among the junta’s main military backers. These include: China, which has sold over US$2 billion worth of weapons since 1989; India, which has recently sold artillery pieces and offered helicopters and special forces training; and Russia, which has supplied Burma with fighter jets, helicopters and other military hardware. Earlier this year, China and Russia vetoed a UN Security Council resolution which would have addressed the grave human rights situation in Burma.

ASEAN / India - What kind of grouping is this? Its like a grouping of gangsters if you look at their non-interference policy in each country's political affairs. Gangster groups have alliances just like ASEAN, they acknowledge each other's territory but please don't cross the line, no matter what we do - be it pillaging or raping or random killings. The so call engagement policy or gentle diplomacy have yielded zilch results. No more high-level visits or persuasions. Its been more than 10 years, the people of Burma who voted for a separate government deserves better. Why do we still go to bed with 'Hitler'? How can we keep talking to the junta when they have such appalling human rights abuse track record?

And you would think that India would be a much more enlightened nation with their record in social justice, why are you working with the junta still? For ASEAN and India in particular, its NOT ENOUGH to voice displeasure, you owe it to your conscience and the wishes of your countrymen to do more. There cannot be such dastardly and despicable acts in our own backyard, and for us to pretend nothing is wrong.

A Proper Road Map - All should pressure the junta to resolve the Burmese problem. You need an exact timeline for democratic election, and a proper platform for elected representative, plus a reduced role for the military. It needs a proper schedule of release of political prisoners, and relief plans for the minorities. The Burmese government has broken every significant promise of transition to democracy that it has made in the past. The international community should insist on concrete actions, not words.

In order for the junta to back down, sanctions are a start, not just from the US or EU but especially from ASEAN. You won't be able to get China, Russia or India to agree on this, so forget about them. Of course there are valid arguments against sanctions as it will alienate the Burmese people from proper aid. Still, it will have to get worse for the innocents before its going to get better.

THE WHOLE WORLD IS WATCHING!!!


Astro Boy!

The once-golden boy, dragged through the mud with their adventure in Indonesia, finally made the top ten volume stocks. This is more than aweek after the announcement that they are pulling out of Indonesia. If it was the Indonesia factor, the stock would have reacted much earlier. Hence there is a better than 50% chance we are seeing another privatisation from the AK's stable. Following up on my prediction of another privatisation possibility for Tanjong Plc - if all comes through almost all of AK's companies will be like him, very private.


Factors For Privatisation


a) Easier to do price hikes and whack the Malaysian subscribers as a private entity.

b) Pay TV and ARPU moving in the right direction again.

c) Cut out the cancerous Indonesian operations, limited downside.

d) Starting up in India, less problematic and better potential.

e) Earnings will drop enormously in 2007 and 2008, improvements will occur only in 2009.

f) The Indonesian experience brought on the realisation that: gestation period of a major project will weigh heavily on stock's performance; the start up period will not see improvements in bottom line - all strong factors to take the company private.
g) Management thinks that Astro is under appreciated by investors, not many willing to take a long term view on the stock.

h) Management thinks that the share price does not reflect the critical mass of subscribers in Malaysia.
i) After all the hoo-hah, the share price is still way below the IPO of RM4.50, why bother to list?
j) Does the company want to go through another 2 years of depressed share price (akin to the Indonesian experience) with their Indian operations?

A privatisation should see a bid of RM4.50 as a minimum because that's the value of just the Malaysian operations. Tag on a 10% premium and you have a doable exercise. Better to take it private and relist in 2009 when Indian earnings start kicking in.


Thursday, September 27, 2007



Arise Burma!

A Brief History - Democratic rule ended in 1962 when General Ne Win led a military coup d`etat. He ruled for nearly 26 years. In 1974, the military violently suppressed anti-government protests at the funeral of U Thant. In 1988, unrest over economic mismanagement and political oppression by the government led to widespread pro-democracy demonstrations throughout the country known as the 8888 Uprising. Hundreds of demonstrators were massacred by security forces, and General Saw Maung staged a coup d'état and formed the State Law & Order Restoration Council (SLORC). In 1989, SLORC declared martial law after widespread protests. The military government finalized plans for People’s Assembly elections on 31 May 1989. SLORC renamed Burma "Myanmar" in 1989.

In May 1990, the government held free elections for the first time in almost 30 years. The National League for Democracy (NLD), the party of Aung San Suu Kyi, won 392 out of 489 seats, but the election results were annulled by SLORC, which refused to step down. Led by Than Shwe since 1992, the military regime has made cease-fire agreements with most ethnic guerrilla groups. On 23 June 1997, Burma was admitted into ASEAN. In November of 2006, the International Labour Organization announced it will be seeking charges against Burma over the continuous forced labour of its citizens by the military at the International Court of Justice.

On September 22, 2007 the Buddhist monks have withdrawn spiritual services from all military personnel in a symbolic move that is seen as very powerful in such a deeply religious country as Burma. The military rulers seem at a loss as to how to deal with the demonstrations by the monks as using violence against monks would incense and enrage the people of Burma even further, almost certainly prompting massive civil unrest and perhaps violence. However, the longer the Junta allows the protests to continue, the weaker the regime looks. The danger is that eventually the military government will be forced to act rashly and doing so will provoke the citizenry even more.

"Hey, Fxxxxxg Junta, ... The Whole World Is Watching!!! "


About Time - To keep on oppressing the people by completely ignoring their democratic wishes, that alone is highly objectionable. To detain Aung Sun Suu Kyi under house arrest for 11 out of the last 17 years is unforgivable.

Already, to admit Burma as part of ASEAN is controversial enough - the non-intervention policy among fellow ASEAN members is absolutely pathetic. Are we so blind to simple social justice, simple human rights and decency ... that we cannot voice our protests against such blatant acts, or are the fellow ASEAN members fearful that the daggers you throw may actually be aiming back at them some time later? ASEAN is like China: defending a policy of engagement with Myanmar - well, isn't that a bloody success after 10 years of engagement! The US and EU have called for the UN Security Council to consider sanctions; India is calling for a political overhaul ... what are the neighbours doing??? Dumb silence is a nod for oppression and injustice!

Even the peaceful monks have had enough. The people of any nation can only take and endure so much. Ruling governments anywhere & everywhere in the world must be made aware of the long-suffering conditions endured by their people. Their desperate lives in desperate times, will result in desperate measures.

While we all should support the people of Burma, we also must call upon our own governments to look within themselves, whether they are there for the well being of their people, and are they heeding the voices of the nation. You can only pull a string so far before it snaps.

Suppression, Lack of Transparency & Oppression = Immorality

Latest News, 10am 27 sep - Security forces in Burma raided several Buddhist monasteries today, arresting hundreds of the monks who have taken part in the biggest protests against military rule in 20 years, witnesses said. At least 200 monks were detained in pre-dawn raids on two monasteries in Burma's main city Rangoon, a day after tens of thousands of protesters defied warning shots, tear gas and baton charges meant to quell the demonstrations. Troops also swooped on at least two monasteries in north-eastern Burma, where large anti-government protests have been held in the past week. Up to 500 monks were arrested at the Mogaung monastery in Yankin Township and another 150 detained at the Ngwe Kyaryan monastery in South Okkalapa Township, witnesses said.

Tuesday, September 25, 2007


Hold Till Maturity?

Received an email from Celine Weng-Tse Chung, who asked the following questions:

1) By holding the covered warrants(cw) to maturity, rather than flogging them - what is the mentioned
full bang benefit?

2) I appreciate that by buying cw we have the rights but not obligations to exercise our rights. In the case of say, the 1st of your Top Buy pick, CCCC-C1 - upon maturity, should the investor decided to exercise his rights, herein what do the investor "buy" ?

Reply - Reasons why I suggested to hold these covered warrants till maturity are:

a) I think the China A-shares and H-shares have more upside from current levels come December 2007 and April 2008.

b) The biggest worry on any kind of warrants is the depreciating "time value" and the corressponding premium it NEEDS to work off before becoming profitable. However, if you look at the recommended covered warrants, the premium are usually less than 10%. That is cheap to me esp after you factor in the leverage of btw 4x-10x. With that kind of gearing, it is very easy to work down the premium and be "in the money". Which is why, by holding to maturity, I expect many of these to be "in the money" come November.

c) The danger in holding warrants till maturity is the level of "out of money", or the premium it commands as the maturity date gets closer. If you are still out of the money with less than 1 month, the price of the warrant goes very quickly to 1 sen and then zilch, you lose everything. As I expect most of the recommended covereds to be in the money come November, there is a huge comfort level in buying and enjoying the ride till maturity.

Just imagine you are now holding HKEX-C3, the exercise px is HKD133.88 and the current share price is already above HKD200, plus you still get a gearing of 5x. Its great esp if you got the C3 below RM1.50 as the C3 is at RM2.20. Come maturity in April 2008, if the price of HKEX reaches HKD240, can you imagine the price of the C3 come March 2008. Another great example is holding China Mobile-C3.

d) Upon maturity, you will get the difference between the exercise price and closing market price of the mother share, after taking into account the various currency translations and commissions.

Monday, September 24, 2007



Water Pipes Leaking

Family of Four said...

Basis is required when you say that water-play is unsustainable.

KPS may not have too much upside but the penny stocks will catch up. This is especially so for KHSB and JAKS if the Langat II award gets issued by November.

Reply: I did say it was a One Liner Advice. One liner means no elaboration, its just a view, my personal view. Whether you choose to believe me or not is unimportant. I don't have to justify everything, people read the blog because they understand how I write and my persuasions. But for you, I will elaborate a little... if you are a regular reader, you will find that I have recommended ZILCH on water plays, be it KHS or Jaks or KPS. Certain projects I can stomach but when it comes to these type, where shares run so much ahead of fundamentals, I like to ignore them. Too much emphasis is based on "inside information" about who gets what. Even when they get it, what was once lucrative will be come marginally profitable after all the slicing and dicing for u-know-what... Trade them at your own peril. Sell on news, better still, sell before the news. Why do you think the announcements have been delayed and delayed again, cannot figure how to cut the cake up in various slices and still leave the final product looking like a cake to show the public???















On the left Kublai Khan, on the right Genghiz. Surprisingly many people can tell the difference, and were quick with the correct answer. Stock tip, which was deliberately left out of the list below: BOC-C1, buy up to 0.16.

a) Exposure to US subprime and CDOs caused BOC to provide RMB1.15bn. The coverage was very low considering it was just 1.6% of total exposure but mgmt was confident their subprime investment were at the top bracket in terms of quality.
b) Just released 1H2007 figures saw net profit jumping by 52% year on year to RMB29.54bn. This figure was at the high end of estimates. Its one of the better bets because its exposure to domestic business is excellent. Little reliance on "investment income". Revenue base well spread, earnings from the booming stockmarket, though jumping 72% y-on-y, makes up only 13.3% of operating income.
c) Many houses upgraded their estimates and target prices. Looking at 2.7x PBR 2007 as target price by March 2008 = HK$5.25.



Major Update: China & HK Covered Warrants

They have outperformed outrageously for the past 4 weeks. Below were the recommendations on Sep 7 and their actual performance to date. Bold are the current market prices and the performance to date in percentage. Naturally, if you annualised the returns, the figures would be enormous, but you shouldn't for trading purposes.

Category: Ridiculously Cheap Covered Warrants & Excellent China/HK Exposure
CCCC-C1 / 0.425 / 31 Jan 2008 0.46 +8.2%
CCCC-C3 / 0.115 / 4 Apr 2008 0.165 +43.4%
HKEX-C3 / 0.575 / 4 Apr 2008 2.45 +326%
HSBC-C1 / 0.155 / 4 Jan 2008 0.26 +67.7%
HSI-C1 / 0.40 / 29 Feb 2008 0.645 +61.2%
HWL-C1 / 0.275 /13x 2 Jan 2008 0.44 +60%
Sinopec-C1 / 0.105 / 31 Jan 2008 0.17 +62%


Category: Cheap Covered Warrants & Good China/ HK Exposure
CNOOC-C1 / 0.105 / 25 Feb 2008 0.225 +142%
China Mobile-C4 / 0.40 / 28 Mar 2008 0.49 +22.5%
ICBC-C1 / 0.195 / 29 Feb 2008 0.25 +28.2%
ICBC-C3 / 0.18 / 2 Jan 2008 0.25 +38.8%
Petrochina-C1 / 0.185 / 29 Feb 2008 0.31 +67.5%
Petrochina-C3 / 0.165 / 17 Jan 2008 0.29 +75.5%
Shenhua-C1 / 0.125 / 25 Feb 2008 0.295 +136%

Some of the returns have been incredible over less than 4 weeks, but some were abberations rather than genuine fundamental purchases. The jump in HK EXchange was an example. It makes you look better than in reality. You take those in your stride, don't think you are superman now, take in the lows with the highs. When you lose money in a bear market, not all is your fault, when you make tons in a bull market, a lot of credit does not go to you as well.

The key now, I guess is to ascertain if the China & HK covereds ARE STILL worth buying or holding.

Company / Price / Premium / Gearing / Maturity

Top Buys, Hold Till Maturity For Full Bang

CCCC-C1 / 0.475 / -5% / 8x / 31 Jan 2008

CCCC-C3 / 0.17 / 12% / 11x / 4 Apr 2008

Sinopec-C1 / 0.17 / 12% / 11x / 31 Jan 2008

Buys, Hold Till Maturity For Full Bang

China Mobile-C4 / 0.485 / 1% / 5x / 28 Mar 2008

CNOOC-C1 / 0.235 / 6% / 4x / 25 Feb 2008

HKEX-C3 / 2.51 / 2% / 5.6x / 4 Apr 2008

HSBC-C1 / 0.26 / 15% / 25x / 1 Apr 2008

HSI-C1 / 0.665 / -3% / 15x / 29 Feb 2008

HWL-C1 / 0.44 / 5% / 8.5x / 1 Feb 2008

ICBC-C3 / 0.25 / 5% / 5x / 1 Feb 2008

Petrochina-C1 / 0.31 / 10% / 4x / 29 Feb 2008

Petrochina-C3 / 0.30 / 10% / 4x / 17 Jan 2008

Shenhua-C1 / 0.30 / 5% / 3.4x / 25 Feb 2008

Important News On These Covereds:

a) A thirst for quality stocks among mainland investors has allowed the A shares of several Hong Kong-listed mainland companies to command high offering prices. China Shenhua Energy (1088) said yesterday that its A shares will sell in the range between 34.99 yuan and 36.99 yuan apiece, raising about 66.58 billion yuan. The mainland's biggest coal miner plans to sell 1.8 billion A shares.
It will use the proceeds to expand its mines, power production, railroads and harbors, and also to fund acquisitions. The Beijing-based coal company will list following offerings by China Construction Bank (0939) and China Oil Services Limited (2883).
The price range on Shenhua's A shares is equal to a discount of 12.05 percent to 16.8 percent when compared with its closing price of HK$43.6 Friday. Current discount between A-shares and H-shares is more than 40%, which means successful subscribers of Shenhua's A-shares IPO should see returns of 45%-60% on listing day.

b) Petrochina confirmed that it will be reviewing (again) its plan to sell shares in Shanghai. Positive news. It is crucial that the upcoming A-shares listing be successful, or even wildly successful as that is required to pave the way for more A-shares offerings in the future. It is a crucial part of Beijing's strategy to bring back more shares (and hence options/ alternatives) to soak up the liquidity within mainland China.

c) Shenhua will list following offerings by China Construction Bank (0939) and China Oil Services Limited (2883). The CCB and COSL IPO price discounts to H-shares were 10 percent and 13.75 percent respectively when compared with the two stocks' Friday closing prices. For its 500 million A shares, COSL has set a price of 13.48 yuan, which is at the top of its indicative range of 12.88 yuan to 13.48 yuan per share. China Construction Bank's A-share price has been set at 6.45 yuan per share, also at the top of its indicative range of 6.15 yuan to 6.45 yuan per share. CCB's A shares will debut Tuesday, and there is widespread expectation that the shares should reach 8.5 yuan easily. Chances are high that it may scale to 10 yuan, which would bring about a huge jump in companies with upcoming listings such as COSL, Shenhua and Petrochina. Mark down tomorrow as a crucial trading day.

p/s a good stock tip is the prize for the first ten to identify the man in the picture above


One-Liner Advice


G Plus - Another con job.

Idaman - Con job in the making.

China Covered Warrants - Hold till maturity.

L&G - Speculative buy with good reason.

PLUS - Surprisingly on radar screen.

Oil & gas stocks - Very good to buy and hold.

Water plays - Down the drain, unsustainable.

Palm oil - Go long again.

Sunday, September 23, 2007


Just A Minute

The recent announcement that Chinese from the mainland will be able to invest directly in all stocks listed on HKSE brought some euphoria. The plan was supposed to start with Tianjin, but somehow Beijing got scared due to the overwhelming positive reaction to the news. Now they have tweaked the program. Short term, HK's market may weaken today but should rebound by end of the day. There will now be a limit on the amount of money that can be put on board the investment "direct train". Some of the more bullish strategists thought that some 800 billion yuan (HK$829 billion / US$106 billion) or more could pour into Hong Kong through the pilot program. They will have to scale that down considerably.

Although there will be no limit on how much any individual can invest, there will be "tight controls" on the total amount invested through the scheme, China Banking Regulatory Commission chairman Liu Mingkang told the Financial Times. Liu did not say what level the quota would be set at. Mainland regulators are worried about controlling the risk for mainland investors. Rather than seeing the negative side of things, I think they are just taking incremental steps to implement the scheme, to ensure that any risk will be at a manageable level. The earlier announcement created very bullish waves in HK, which surprised Beijing. I think the scheme will develop and grow as there is a dire shortage of good investments for the excessive liquidity in Shanghai and Shenzhen.

Some analysts thought the newly- announced cap reflected internal conflicts within the government about whether the "direct train" pilot scheme would prove too popular, weakening other methods for channeling funds outside the mainland like the Qualified Domestic Institutional Investor scheme.

Friday, September 21, 2007


The Long & Short Of It

Magazines like to capture the trends of the day. To go long is to really like something, its worth accumulating, hoarding or holding. To go short is the opposite - don't like it, waiting to implode, basically the risk of downside are magnified compared to the upside. These long and short calls are basically for the near term outlook, less than 6-12 months.


US Dollar - Very Short

Malaysian Ringgit - Long

US Stocks - Long

China A-Shares - Long

China H-Shares - Very Long

Bernanke - Long

Greenspan - Short

Giant Casinos Operating In Macau - Very Short*

Singapore IR Casinos - Long

Malaysia High End Properties (more than RM1.5m) - Short (pls refer to my blog on why Malaysian real estate will under perform)

Malaysia Mid-High End Properties (between RM700k-RM1.49m) - Very Short (its a long term affordability view)

IDR - Long

The Other "Corridors" - Short (for now)

Heroes - Very Long

Who Wants To Be A Superhero - Very, very Short (Monkeywoman???)
Hedge Funds - Short

Soft Commodities - Long

US Housing - Short

UK Housing - Very Short

People With Dogs - Long

People Who Are Dogs - Short

Jose Mourinho Going To Spurs - Specky Long

Jose Mourinho Going To AC Milan - Very Genuine Long

Jose Mourinho Going To MU - Very, very "Sell Your Grandma" Short

All Blacks To Win Rugby World Cup - Very Long

Wallabies To Win The Rugby World Cup - Long

Springboks To Win The Rugby World Cup - Short

England To Win The Rugby World Cup - Very, very Short

Kilkenneys - Short

Guinness Draft - Long

Blended Whiskey - Short

Single Malts - Long

Oil & Gas - Very Long

China Covered Warrants On Bursa - Very Long

Property Stocks In Bursa - Start To Short

Palm Oil Stocks In Bursa - Long Again

Leslie Cheung - Always Long

Britney Spears - Pretty Short


* I am pretty negative on the gaming giants operating in Macau. Sure, you get a mega number of visitors, esp from mainland to Macau. Three things why I am very bearish:


a) The average length of stay per vistor was less than 2 days - does not tally with the number of hotel rooms being built.

b) The cost incurred and the expected returns are geared towards the gaming returns - unlike Vegas or other casinos in the world, the Macau casinos see 90% of their revenue from one game type i.e. baccarat. This skewing of revenue streams from a game which has a very low house favouring odds spells danger. The aggressive competition among the operators results in high-comp and high-commissions to junkets, which further reduces the net take on baccarat games. Watch the smaller casinos fall first, followed by a couple of big ones reporting losses in 2008. You want your revenue base to be well diversified, not concentrated on one game. The competition to lure the high rollers will be enormous, and will cut into earnings no matter how you see it. Sands did very well last year because it was the first of the big boys. Bye bye Mr Ho.

c) The big gaming companies have over-invested into Macau. Over-investment results in low-capacity or low utilisation, which brings down IRRs. Over-investment = over-crowded = heavy competition = discounting and under-cutting = tears.

Thursday, September 20, 2007


Asia's Own Warren Buffett

He's ranked in the top 30 in terms of the world's richest man. Lee Shau Kee made his fortune in real estate. Yesterday the Hang Seng Index charged past the 25,000-point barrier to close at an all-time record of 25,554.64. Lee had much earlier predicted the 25,000 level after his 22,000 level was breached. If you missed out on making a killing last month, listen again - Lee has now raised his earlier 25,000 year-end target for the index by 3,000 points to 28,000.

Lee still does not think the market was overbought when the HSI soared nearly 1,000 points and that the rise was due to a boost from the higher-than-expected interest rate cut by the US Federal Reserve. "If you guys had followed my tactics half a year ago ... you would have earned enough to quit your reporter's job," Lee told the media. Lee, 79, chairman of Henderson Land Development (0012), said in March the HSI would reach 22,000 points by year-end. On August 24, he revised his prediction to 25,000. He also forecast the Hang Seng China Enterprises Index would reach 15,000 this year, and the H-share index surpassed that mark yesterday, closing at 15,255.49. Now he has revised his target upward to 20,000.

"The HSI will go up and down for a couple of months, then it may gain momentum again and rise steadily. Perhaps, the HSI will reach 28,000 points by the end of 2007, and will test the 30,000 level around the Chinese New Year next year ... if there are no special political events or whatever."

After reviewing his three "basic laws" of stock investment - choose the country, the industry, then the stock - he was keen to share his insight on the impact of the rate cut on carry trades.

"The rate cut will push down the US dollar and, in turn, the Hong Kong dollar ... you should look at a currency of higher value," said Lee, whose net worth has been put by Forbes magazine at US$17 billion (HK$132.6 billion). Last year his net worth was supposed to be just US$13 billion. He has made tons from the strong markets. Of his portfolio, he tends to have at least half his net worth in stocks, bonds and notes - give or take US$10 billion exposure.

"I have bought Australian dollars, which have 7 to 8 percent yield. To get capital, you borrow Hong Kong dollars, which costs 4 to 5 percent. Then you make a profit [from the interest difference]. In addition, you'll gain from appreciation of the Aussie dollar." He recommends short-selling Japanese bank stocks or property stocks in the United States - the "worst country" to invest in. Investment banks will be happy to help you short-sell, provided "you have a few hundred thousand dollars worth of stocks on hand."

Best tidbit, Lee Shau Kee's second son's name is Martin Lee Ka Shing. Yes, the same name as the "superman" of Cheung Kong & Hutchinson Whampoa fame. Lee Shau Kee is now the second richest man in all of China, Taiwan and HK. The second son married a TVB small time starlet Cathy Tsui. Juicy gossip - Tom Cruise & Katie Holmes wedding cost US$5m; Donald Trump & Melanie Knauss wedding cost US$4m. Lee junior & Cathy's wedding cost US$13m! In addition, Lee Shau Kee gave two luxury apartments to Cathy's parents valued at HK$100m (US$12.8m) ... Its good to be the king!

To be fair, he did say that Chinese shares trading on mainland markets are at an “unreasonable” premium to those in Hong Kong, threatening to create a bubble, back in May 2007. True to form, his bullish calls have been in HK stocks and H-shares in HKSE. Btw, he is a great philantrophist also, especially in higher education. Of course some will quibble over how much more charity he can/should do, he is still better than a lot of wealthy people.

Wednesday, September 19, 2007


Deciphering The Fed's Changing Views

August 7: "Economic growth was moderate during the first half of the year. Financial markets have been volatile in recent weeks, credit conditions have become tighter for some households and businesses, and the housing correction is ongoing. Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters, supported by solid growth in employment and incomes and a robust global economy."

(Still thinks economic expansion will continue, and hence keeping inflationary pressures at bay would be a big priority. Strong belief in the resilience of firm US jobs market and a strong global economy helping things along)

August 17: "Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward. In these circumstances, although recent data suggest that the economy has continued to expand at a moderate pace, the Federal Open Market Committee judges that the downside risks to growth have increased appreciably. The Committee is monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets."

(More concerns on subprime mess due to leverage effect and the fact that no one knows how many hedge funds were affected. No panic yet but genuine care taken to try and ensure the mortgage business and credit lending does not seize up. Hints that the Fed might take extravagant steps to stave off recessionary repercusiions)

September 18: "Economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally. Today’s action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time."

The statements last night were an eye-opener, much like seeing Pakistan beat Australia in the 20-20 cricket tournament in South Africa las night. There is an open admission that the subprime and housing correction may get worse before things improve. The key word in the above para is "forestall" or rather "to help forestall". This shows acceptance of a dire situation. This implies accepting that pockets of the US economy will be affected, and more importantly, clearly shows that the Fed is very committed to cut rates even more aggressively in the months ahead, if necessary. That is probably the key message from the Fed last night.

As usual, everyone should gear up for a robust last quarter. The markets should get their groove back.


Fair Commentary

Everyone is entitled to his/her opinion of anything, I guess. But if we are to voice them publicly, say in a blog, we have to make sure they are logical, well argued, substantiated, etc... Blogs that try to promote openess, accountability and transparency in our government must not be overzealous in their commentary.

For example, you cannot simply link sustained low volumes in the Bursa to a poorly received Budget, its not that simple. Stock markets are open channels and it tries to digest information from all corners. It is a forward discounting machine. A Budget is only a small portion of an overall financial blueprint for government allocations. There are tons of factors more important to the markets, such as: the subprime mess; the Fed's pending rate cut and its quantum; the implosion among hedge funds; the collapsing USD; the yen carry trade; the trande sanctions against China; etc... So, we cannot simply pick ONE topic and link it directly to the depressed bourse as we like.

Take another example: "Just seven months ago, on February 9, The Star had screamed on its pages: Good Times Are Back. Then, Abdullah Badawi -- yet another bloke not trained in business and finance -- was clamouring for the boar to charge at 1,350. Anyone could do the same if RM40 billion of Petronas money is pumped into the stock market, and insiders can make a cash-out to feed the war-chest. Ain't it?"

What's wrong with the above sentiment? Let's face it, you may or may not like Badawi, but he was right on target in predicting the 1,350 level. We have to be fair. I totally think that a PM should NEVER give out market predictions as it does not fall under his scope of duties, and that may compromise the integrity of his position - but that's another thing altogether. The serious mis-statement was "anyone could do that if RM40bn is pumped into the stock market ..." This is an unfair and superficial statement. The writer is assuming that the market CAN BE "manipulated" - if we can, why did we endure such a long "holiday" in 97/98/99 following the Asian financial implosion? Surely we can scrape together RM50bn to buy into the market and make things better. If we can so easily move markets, why did we spend 2004 and 2005 below 1,000 level for such a long time while every other regional bourse outperforms the KLCI? We have to stop the conspiracy theorising, it only applies to certain things, not all things.

For a market to move, we need a confluence of factors. Liquidity must be there, earnings growth relative to interest rate outlook must look good, country balance sheet recovering, etc... The announcements of the various "corridors" are just a small number of a very big pot of other catalysts bolstering our markets. The global picture favours equity, and KLCI is on the global investment radar screen because: government balance sheet has improved significantly over the past 8 years; unwittingly we have one of the highest foreign reserves/capaita in the world now; more firms have expanded successfuly into other Asian markets; soft commodities have been on a tear for the past 4 years; our valuations have been lagging in the past; the ringgit looks to have much higher chance of reaching 3.00 than 3.50 against the USD over the next 12 months; the smaller Asian economies have been able to reposition their industries alongside the China machinery, rather than compete against the behemoth; etc.. Hence to say that RM40bn of wishy washy proposals / injections can move heavens and earth is myopic and makes the entire argument reeking of excess-biasedness (if that's a word), which in the end deflates what we want to say.

Fair is fair, we need fair commentary. There is enough propaganda in the papers already, we need to at least rise above that in order for serious blogging to be respected.

Tuesday, September 18, 2007




Tuesdays With Greenspan


Alan Greenspan launched his new book yesterday, perfectly timed. Its titled The Age of Turbulence and has every biz commentator trying to get a soundbite on it.

An excerpt from the book, “The great problem inherent in capitalism [is] that creative destruction is often, and by a great many, viewed simply as destruction. Capitalism creates a tug-of-war within each of us. We are alternately the aggressive entrepreneur and the couch potato, who subliminally prefers the lessened competitive stress of an economy where all participants have equal incomes,” Greenspan writes.

The Wall Street Journal asked Greenspan “Many people, including some former colleagues of yours from that period, believe the Fed kept interest rates too low for too long, thereby contributing to the housing bubble and problems in subprime mortgages. Do you agree?” Greenspan agrees with the “too low, too long” charge. “We kept them too low for too long because we were effectively creating an insurance against [deflation]. The problem in making choices is that you recognize that if you miss, you can end up with interest rates too low, too long,” he replies.

As part of Greenspan's book contract, I think he has to go to all the interviews and tv shows to talk about his book.

Greenspan says basically that his critics under-estimate the dangers to the banking system and the broader economy in the early years of this decade, in trying to justify his keeping interest rates so low for so long. Greenspan raised rates in 2004. But only after he held interest rates at historically low level for three years, while the bubble, the housing bubble was forming. That was the growing perception in trading rooms nowadays - that Greenspan was largely the unwitting architect for the current subprime mess. And during that 3 years Greenspan made 13 rate cuts in that period of time. "It was our job to unfreeze the American banking system if we wanted the economy to function. This required that we keep rates modestly low," Greenspan says.

In an interview with The Financial Times, Greenspan makes lots of inflation hawkish noises and notes that he weighs the data differently from those such as economist Martin Feldstein who have called for aggressive rate cuts. “You have got to be a lot more careful in lowering rates in response to crises, ” he says. Greenspan also makes some bleak predictions about the US housing market, telling the FT that the downturn is likely to be worse than many expect. Greenspan said he would expect ‘as a minimum, large single-digit’ percentage declines in US house prices from peak to trough and added that he would not be surprised if the fall was ‘in double digits'.

As if this was a conspiracy by all media to try and help Greenspan sell his book, Newsweek is putting Greenspan on their cover this week. This is bigger than Harry Potter's next movie!!! Greenspan's views on the “moral hazard/bailout/subsidy” question about Fed cuts - “To the extent that [the Fed] interferes with the economy, we do help some of the people who are involved in rather questionable financial activities. The problem basically is that if you do effective monetary policy and stabilize the economy, you will raise all asset prices—those that are assets owned by prudent investors, but also the prices of assets of those who have taken very silly risks and should be punished as a consequence. There is no simple solution. If we do something which works for the society as a whole, we will inadvertently and undesirably bail out, if you want to put it in those terms, the people who have taken silly risks,” This is the one big contention among all investors, should the Fed step in to bail out less-than-prudent investment decisions made by some? To take the narrow road and say everyone should bear the risks and consequences of their actions is myopic and unwise. Take LTCM, should the Fed not have bailed them? That's because the consequences of leaving them to act out the consequences brings about far greater damage to the global economy, which may result in some nations losing tons in wealth and may find it near impossible to recover. Should all Asian nations be left to die and unwind on its own following the 97 crisis?? After all, it is Asia's problems right?

By keeping interest rates too low for too long, Greenspan encouraged a borrowing-fueled speculative binge, which has now given way to a credit squeeze. But his greatest failing was towards the end of his reign where he failed to crack down on the mortgage industry, he allowed subprime hawkers to peddle dubious loans.

So, would I go and buy his book, probably not. I have read books about him and by him before and never came away knowing much more. Its just amazing the way the media & investors alike would put Greenspan on a pedestal, and for what? Basically he made a career in a job whose main responsibility is to pick (a), (b) or (c). The first being to lower rates, the second to raise rates, and the third to do nothing. If you are really unconvinced, just do (c). If people keep pestering you one way or the other, just follow the tide.

The reputable Bob Woodward in the Washington Post probably summed up best when he said "As I've said many times before, the Federal Reserve is far less important than most people realize. I think the fact that it's so secretive helps keep the illusion alive,”.

Monday, September 17, 2007


Possibly The Best Commercial Ever


Just when you think Yasmin Ahmad cannot really create something better than her previous works, well here's possibly the best commercial I have ever seen. Its realistic, funny, endearing ... hope, yearning, innocence and genuine affection all in a minute or so.




Thursday, September 13, 2007


Tanjong Plc, Stirred Not Shaken

I have been intrigued by the share price movements in Tanjong Plc for the past two weeks. Volume is not there but the price movements tell me something is stirring in the pot of gold. At a time where fund managers are likely to be NOT accumulating positions or trying to move to neutral on all equities, the movements in Tanjong is all the more interesting. I do not have any inside information or winning whispers, all I am concluding is from the price movements in light of present market conditions. When you are old enough or have lost enough money, that's the kind of "wisdom" you get I guess ; ) ...

Without babbling further, the interest could be due to:


a) a separate listing of its power assets, which would unlock enormous values

b) a privatisation, ala Maxis


c) sale of gaming business, not that hot anyway as their hands and feet are tied in that business by the government


A separate overseas listing is likely, as that will bring better valuations and better access to capital. It is now the second largest IPP in Malaysia with 1,490MW capacity. Internationally it has a capacity of 1,565MW. Moving ahead, the international business will expand to a total capacity of 2,354MW by year end.

Growth lies in international, esp developing countries. Its recent acquisitions were in Egypt, Sri Lanka, Bangladesh and Pakistan. By listing it will bring about better matching of revenue and expenses.
The power business brings in 80% of the group's operating profit.

The overall valuation of the company has been dragged down by the ambitious but precarious Tropical Island leisure business in Europe, and the flattish under-performing gaming side due to unfavourable government regulations. As at the time of writing power assets in Tanjong gets a 9.5x PER rating while most regional power plays get between 12x-14x.


The attraction in an overseas listing will be huge because there are not many power plays with such a strong and diverse portfolio in Asian developing countries. The diverse portfolio is very important as it brings about familarity in operaing in various countries, and the ability to leverage on the developing economies' growth & sustainability of demand.


As a better ploy, I would personally advise AK to take the company private at RM22.00 and then relist the power assets. That's because I think the power assets can be worth a lot at IPO level, hence better to gobble the free float. Plus the embarrassment that is Tropical Island, can be put away from prying eyes until the tide has turned. Why I would take it private - it now has RM1.4bn cash with a net gearing of just 0.8x. Usaha Tegas collectively has 31%. To mop up the odd 65% = 403m x 0.65 x 22.00 = RM5.7bn. No shortage of lenders for buying a company with RM1.4bn in the bank, plus AK's got lotsa dough following the Maxis exercise.

In fact, I think the privatisation offer could still be good up to RM24.00. Tanjong's assets and balance sheet is a dream for big private equity firms.
Everyone thinks that option (a) is a certainty, but option (b) looks more interesting to me, plus it will still take care of option (a) albeit just a bit later than planned.

Tuesday, September 11, 2007


HKEx Shares Surged

Yus-baby probably got all excited yesterday while watching the strong surge in the share price of HKEx, wondering whether there will be some rub-off onto Bursa shares. HKEx shares jumped 20.3% yesterday to close at HK$190.10 with 40m shares in volume traded.

The jump was due to information released that the HK Monetary Authority had collected a 5.88% stake in HKEx worth HK$9.93bn. Indications are the HKMA will continue to add to that stake.
That adds to the already significant portfolio of HK shares under HKMA to nearly HK$160bn in value.

There are valid concerns over the HKMA holding such a huge block of HK shares. What started as a collective effort to support and/or invest has now mushroomed to a significant level. It is understandable to see HKMA mopping shares to avert a liquidity crisis or rescue a sharply plunging market. It is also necessary to OFFLOAD those positions carefully when the time is right to place them off. The HKEx Tracker Fund was a good thing which allowed investors to have an indexed like fund in portfolio of a decent size.


Now it looks to be adding to the equity portfolio again. The more you add when markets are good means the less you can do when markets are at depressed levels. Hence the HKEx stake is obviously NOT to boost sentiment, but rather a strategic stake acquisition: the likelihood of future integration and alliance with mainland stock exchanges. That being the case, it is very likely that the HKMA will buy more HKEx shares and /or even privatise the company ahead of the integration. After proper integration, a subsequent all-encompassing listing of a truly China Exchange. The H-shares listings and the QDIIs new rules, plus the new rules to allow individuals to invest directly in HK listed shares are all flagposts to a more cohesive exchange.

This does make HKEx to trade at lofty levels (almost like Stemlife). HKEx now trades at a PER of 54x, NYSE Euronext at 36x and Nasdaq at 30x. About half of their PERs are due to the fact that they are near monopolies in their respective markets. That being the case HKEx, though expensive, may still go higher.
All the purchases under HKMA comes under the Exchange Fund, whose primary objective is to defend the value of the HK dollar. Concerns are rising that this new purchase of HKEx shares does not tie in with the Exchange Fund's purposes. Why would HKMA do that unless they were instructed (by Beijing) to act above and beyond the objectives of the Exchange Fund. Some deeper questions need to be asked here.

Friday, September 07, 2007


Really Useful Signs






Wednesday, September 05, 2007


Update On China Covered Warrants

These are volatile buggers and need to be monitored always. In the first few weeks when they were introduced, they were priced expensively and traded even more so. Somehow after the global tussle with subprime, almost all China covered warrants are cheaply traded (each warrant has an intrinsic value, usually priced in terms of its implied volatility and time value). Some are so ridiculously cheap, you'd think they are selling them at Petaling Street!

Company / Warrant Px / Premium / Gearing / Maturity

Category: Ridiculously Cheap Covered Warrants & Excellent China/HK Exposure

CCCC-C1 / 0.425 / 0% / 6x / 31 Jan 2008

CCCC-C3 / 0.115 / 8% / 15x / 4 Apr 2008

p/s CCCC-C3 is a lot better and cheaper as a buy & hold than C1

HKEX-C3 / 0.575 / 0% / 12x / 4 Apr 2008

HSBC-C1 / 0.155 / 7% / 40x / 4 Jan 2008

HSI-C1 / 0.40 / 0% / 24x / 29 Feb 2008

HWL-C1 / 0.275 / 7% / 13x 2 Jan 2008

Sinopec-C1 / 0.105 / 12% / 16x / 31 Jan 2008


Category: Cheap Covered Warrants & Good China/ HK Exposure

CNOOC-C1 / 0.105 / 15% / 6.7x / 25 Feb 2008

China Mobile-C4 / 0.40 / 4% / 6x / 28 Mar 2008

ICBC-C1 / 0.195 / 3% / 6x / 29 Feb 2008

ICBC-C3 / 0.18 / 0% / 6.5x / 2 Jan 2008

Petrochina-C1 / 0.185 / 8% / 6x / 29 Feb 2008

Petrochina-C3 / 0.165 / 7% / 6x / 17 Jan 2008

p/s Petrochina will be trading soon in Shanghai Exchange (within 2-6 weeks) and the IPO is priced close to the H-shares, I anticipate a jump of at least 40%-50% in the first few days of trading. This will spur buying of the H-share of Petrochina as well as its NYSE listing shares. Owing to the unique deliniation of investor pool - the Shanghai will trade at a huge premium to the H-share in HK, and you will find the NYSE trading at a discount to the H-share. The first 3-tiered share price for one single stock. Hence, for a strong speculative buy, the Petrochina covered warrants are the way to go.

Shenhua-C1 / 0.125 / 7% / 6.8x / 25 Feb 2008

Tuesday, September 04, 2007


About Time

Most Singaporeans would have heard of Corrine May and her music. For the rest of the world, here's Corrine! This Singapore-born, Berklee College of Music-educated songwriter & singer sounds like an amalgamation of Sarah McLachlan, Sting and an updated Joni Mitchell. She composes all her songs (almost). She released Safe In A Crazy World in 2005. Her first entitled Corrine May as well was released in 2001. Just recently, her new album was released, Beautiful Seed.

Corrine won the Carole King & Carole Bayer Sager Songwriting contest back in 2000, and the rest, as they say, is history.

When you write your own melodies and lyrics, and sing as well, and you happen to be that good - that's very very good indeed. Should check out her albums when in Singapore (she's already very big in Singapore and California, and should conquer the rest soon). Failing that, check out her Corrine May titled album at cdbaby.com , esp Fly Away, Same Side Of The Moon and If You Didn't Love Me.

http://cdbaby.com/cd/corrinnemay










Chicken Without Sexual Life

You have to get there early to enjoy one of China's hidden treasures, broken English. The authorities knowing full well that there are a lot of inadvertently funny translations into English, are acting speedily to rectify the matter. Road signs, shop signages, menus, etc... sigh, you have to go early to enjoy them or else they would have been corrected already.

This is not purely to laugh AT them, but to laugh WITH them. Everybody will make the sincerest of mistakes owing to the country coming to grips with the demands of globalisation. Its easy when you only have ONE language to contend with, but for the rest of the world, its juggling 2-4 languages and dialects - so native English speakers, don't laugh too loud.


To start off, here are a couple of menus from. See if you can guess what the real menu items are. Oh, btw... Chicken Without Sexual Life - Spring Chicken.

Monday, September 03, 2007


Morgan Stanley (again), My Fav Strategists

Asia/Pacific Equity Strategy

Start Buying Asia-Pac: +10% by Year-End
August 21, 2007

By Malcolm Wood, Ryan Tsai, Corey Ng

We see six reasons to buy Asia-Pac: This has been the largest bull market correction in 20 years, valuations are moderately attractive, earnings momentum and fundamentals are positive, the fallout from the US credit squeeze should be limited, Asia liquidity conditions are still strong, and sentiment has turned pessimistic. We have also raised our year-end index target by 3%, to 480.

Estimating the US Fallout: Impact on Asia Should Be Limited. The credit squeeze should keep growth sluggish in the US. The squeeze should deepen the housing downturn, slow job growth and lift the saving rate. Asia has four offsets to mitigate the US impact: re-directing exports, and gaining export market share; strong economic momentum and fundamentals; the liquidity boom; and potential political stimulus. We would avoid Asia stocks with large US exposure.

Country Strategy - Overweight China, Hong Kong, Malaysia and Singapore. In a context of slowing G7 growth and Fed rate cuts, our preferred markets are China and Hong Kong. In China we see significant upside earnings potential, while Hong Kong should benefit from lower US rates and China capital inflows. We raised Thailand to a neutral weight, given its progress toward elections. We reduced Australia, where liquidity is tight, and valuation unattractive. India stays underweight despite an improving rate outlook, given political uncertainty, high valuation and poor earnings revisions. In our model portfolio we overweight banks, insurers, consumer, property and telcos.


Chinese PER & Earnings Growth

At the end of August, 852 Shanghai-listed companies and 487 Shenzhen-listed firms reported their earnings for the first half of this year. The aggregate net profit of the Shanghai companies was 290.3 billion yuan (US$38 billion), up 69.2 percent year on year, while their aggregate income was 2.69 trillion yuan, up 24.9 percent. Shenzhen-listed firms reported a combined 99.23 percent increase in aggregate net profits at 47.52 billion yuan, while aggregate income was up 28 percent at 754.52 billion yuan.

Blue-chip companies reported the best performance, with their aggregate net profits accounting for 77.4 percent of the total in Shanghai. The aggregate net profit of the top 30 Shenzhen firms jumped 77.23 percent to 27.47 billion yuan, 57.8 percent of the total for all listed firms. Companies in the financial, non-ferrous metals, excavation and real estate sectors performed well. Seventeen Shanghai-listed companies in the financial sector enjoyed a combined net profit growth of 74.1 percent.

That's the often uttered fundamental factor in explaining high PERs accorded to China firms. Its the sustainability and quality of growth which are needed to be examined further. Now, a simple analysis would show a disparity in Revenue & Net Profit growth patterns. Herein lies the pandora's box.

Revenue Growth / Net Profit Growth

Shanghai 24.9% / 69.2%

Shenzhen 28% / 99%

You cannot have such disproportionate jumps - but you can I guess, if the employees all agree to have their salaries reduced by 40% every year; or you can manufacture a product 30% cheaper with every progressive year. Some disproportionate jumps can be explained via "extraordinary gains" such as asset sales, disposal of subsidiaries at a profit or even "revaluation gains" of land and buildings - all of which are one-off and non-operating, hence non-important (sic).

The magic elixir is investment income contributed most to profit jumps. The total investment income was 10.4 billion yuan on the Shenzhen exchange, 15.33 percent of the total. I believe the proportion for Shanghai listed firms could even be higher, closer to 25% of total. That may not sound like sizable but this is the actual percentage following a 70%-99% jump in base value. In other words, the investment income in 2007 as a % of 2006 total net profit should be in the region of 35%-45%!!!

Sure, the operating performance is still solid after you strip out investment income from their net profits, but it goes a long way to challenge the sustainability of earnings growth and the quality as well. Investment income is NOT recurring income, it could be huge losses (really big ones) in one of two financial years ahead though.

To be fair, what we have in China corporate profits is part earnings driven and part investment income driven. When investment income make up a sizable portion of net profits, many silly decisions get made:

a) over reliance on trading and investments
b) misallocation of capital towards trading and investment at the expense of funding organic growth, necessary capital investments and r&d expenditure

c) over-reliance on local investments will cause many to stay domestic, and not consider to go global to expand their reach

d) the exponential domino knock-on effects of a 30%-40% correction will be very severe, and could cause many companies to kill off otherwise healthy businesses

Just a reminder, just a reminder ... till then, China bull is alive and well... still. But don't paint the bull up more than what it deserves to be, just a bull, who will die someday.