Friday, February 29, 2008


How Green Was My Valley

Green Packet Bhd reported 24% higher revenue of RM122.84mil for the year ended Dec 31 (FY07). Despite the higher revenue in FY07, Green Packet's pre-tax profit fell almost 90% to RM30.99mil against RM58.56mil in FY06. Puan said the drop in earnings towards the second half of last year was due to a slowdown in sales in China and continued heavy investment to build the converged telecommunications business of its unit, Packet One Networks (M) Sdn Bhd. It was also attributed to share of losses from non-core businesses via associated companies and higher provision of costs made in the discounted telephony subsidiaries.

What is it about the colour green? First Evergreen, now this Green Packet. The massive share buyback activity by Green Packet is destined to fail (please search for article on Share Buybacks). My mate Moolah has trashed them to death already, check out his posts on Green Packet at:

http://www.whereiszemoola.blogspot.com/

Revenue has jumped from RM98.9m in 2006 to RM122.8m. Net profits has dropped from RM50.1m in 2006 to RM33.0m in 2007. Where are the trouble spots:

1) Development costs has surged from RM8.5m to RM27m

2) Other long term investments has ballooned from RM14.8m to RM34.4m

3) Inventories has surged from RM3.3m to RM13.5m

4) Other receivables has risen from RM9m to RM20.3m

One good thing though, their cash balances has risen from RM63.8m to RM176.4m - hence the share buybacks, I guess.

Indicators are strong that they are at another stage of development. However there is a disconnect between the previously lofty valuations and strategic plans. Investors are not buying the plan. Hence the sell down, hence the buyback. Avoid just like Evergreen but for different reasons.



Not-So-Green

Evergreen has attracted positive coverage from analysts, who maintain "outperform" and "buy" calls with target prices ranging from RM2.80 to RM3.23. In 2007 , it reached a year-high of RM2.10 on May 23, 2007, against a low of RM1.14 on Feb 12, 2007. Now it trades at just RM1.32. What gives? Its supposed to double in 2-3 years time?
Evergreen has just announced its results 4Q2007 ended 31/12/2007. For QE31/12/2007, Evergreen's net profit increased by 52.4% y-o-y from RM17.3 million to RM26.4 million on the back of a 24.0%-increase in turnover from RM137 million to RM170 million. However, when compared with the immediate preceding quarter, the net profit has dropped by 25.8% on the back of 16.1%-decline in turnover. The lower net profit was attributable to the increase in log prices as well as hike in glue prices and freight charges. No reason was given for the decline in turnover. It is possible that the drop in turnover is attributable to a fire in its Johor plant in mid-September that had partially damaged some production facilities.Evergreen's presence in diversified markets allows the company to spread its risks and avoid being exposed to a market downturn in countries like Japan or the US. Also, the company is poised to tap growth in many different countries.


For the nine-month period, Evergreen achieved a 36.4% gross margin, up 7.3 percentage points year on year, due to higher prices for medium density fibreboard. The fire, at one of Evergreen's production lines in Johor last September, affected 10% of its production. Its no secret so, the fire is an anomaly and should not affect investors' opinion.

For FY2007, Evergreen's net profit increased by 98.2% from RM59.8 million to RM118.5 million, while its turnover has increased by 38.5% from RM528 million to RM732 million. Its trading at less than 6x current year's earnings and only 4.5x next year's earnings. Something is not right. Evergreen is such an easy stock to love. Look at the margins and PER but there must be even bigger reasons why people are not buying, why institutional investors not biting? Its not for a lack of coverage also: DBS and Citigroup are among the long time promoters of the stock. What about issued shares, at 480m, its adequate enough to attract decent sized funds. The controlling shareholder holds 42.3% and LTH holds 7.0%. Free float is good. No issue there. Cost of glue and electricity could be rising as they are the main cost factors but with such sterling margins above 30%, that should not be an issue going forward. Medium density fibreboard prices has risen from an average of US$260 pcm to US$305 in 2007, and the trend is firm to flat this year. Maybe the weaker USD is creating some pressure on margins as 85% of revenue are priced in USD. Economic slowdown in US and Japan could be a negative for the company. Rising methanol, oil, freight costs and bunker fuel costs all add up. At current share price, the company is likely to pay 7.5 sen in dividend in FY08 and 9.0 sen in FY09, which translates into a very attractive dividend yield of 5.5% and 6.6% respectively. For yield players, that's excellent with strong upside for the stock price as well.

The only nagging thing is there shouldn't be such a mis-priced stock in our midst unless there is something sinister. Hence I wouldn't advocate jumping in at present levels as everything is too attractive. In horse racing when a 3 to one chance moves out to 10 to one, it usually doesn't win 99 out of 100 times. Evergreen is getting more attractive by the day, unfortunately, that does not make me feel good at all.

Thursday, February 28, 2008





Exodus - A Gem



Even though the film is more than a year old, its worth mentioning. The still young filmaker Edmund Pang Ho Cheung (that's him in the smaller photo) has continued to dazzle with his latest offering Exodus. This is a black comedy, with his minimalist style of framing. The storyline starts off absurdly but in the end things that at first seem ridiculous may actually be worth a second look. The film got lots of nominations and deserve every one of them.

Malaysians watching this on the big screen will get a whole load of dialogue deleted owing to its profanity ladened character played by Cheung Ka Fai. Simon Yam was extra brilliant as the jaded cop locked in a docile and sterile marriage.

The film's pace is slow but engaging and a lot like one of my favourite movies from HK, PTU. Irene Wan Pik Har, the over exposed and under-rated actress, finally got the meaty role of her life - she was arresting.

To get a grasp on Edmund Pang's talent, have a look at his best previous work - You Shoot, I Shoot and Isabella.




Wednesday, February 27, 2008


Krugman On US Housing

Paul Krugman said the housing slump in the US could take up to two years to work through, and that up to 20 million mortgages could be underwater if house prices decline by 30% between now and 2010 – which Krugman believes could well occur.


Housing is illiquid and people are reluctant to sell, factors which will prolong the pain. In contrast, stock collapses tend to be short and violent, points out Krugman. Political considerations could also draw out the process, such as freezing foreclosures, or bailing out homebuyers. It took six years for the South California housing bubble to work itself out in the early 1980s, said Krugman, who believes the national housing bubble of recent years is much worse. He noted that real estate prices in California had given up all their gains by the end of the recession.
“The recession in the US could be L-shaped or U-shaped, but it won’t be V-shaped like the Asian financial crisis,” said Krugman, “because the US seems to intent on adopting some of the same strategies as Japan adopted in the 1990s.” In other words, rather than permit a savage purging of the system, the policymakers might decide to ‘buy time’ rather than solve the problem. The housing bubble inflated to historically unprecedented proportions between 2004 and 2007, aided by securitisation and collateralised debt obligation (CDO) techniques, said Krugman.

A common ratio of judging the severity of housing bubbles is the price:rent ratio, which is the average cost of ownership divided by the rental income the house would fetch as a buy-to-let property. The higher the figure, the worse the bubble. At its peak, the price-to-rent figure was 1.5 in Southern California. In the national market in 2005, it was 2.3, said Krugman.
“The inevitable collapse of the housing bubble has lead to the worst outlook in the housing market since the Great Depression,” said Krugman, pointing out that housing starts have collapsed to their lowest level since 1991.

The housing market was seriously weakened by the sale of sub-standard mortgages, encouraged by securitisation and CDO techniques. Nobody knows the final bill, but Krugman guesses banks may have lost up to US$1 trillion on such products. The decline in house prices may wipe US$8 trillion off GDP, and much of that will be financed by the financial system (the lender) rather than the borrower, estimates Krugman.


Banks do not appear to be in fatal trouble, says Krugman. But stress in the system is showing up in the shadow banking system, where new institutions have adopted banking functions, such as extending credit, but away from the sharp eye of the regulator. Krugman says that auction rate securities are a good example of how the stress can appear in obscure but important parts of the financial system.

Auction rate securities, with their weekly auctions, appeared to offer liquidity and high yields to investors, but the market froze when investors panicked and headed simultaneously for the exits. As a result, the Metropolitan Museum of Art in New York and certain student loan bodies have seen the rates they are paying on their loans shoot up. Such crises have led to a wave of bankruptcies of shadow banking institutions, which Krugman described as a “stealth banking crisis”.

The only reason the US did not sink into recession last year is because of the export recovery off the back of the drastically weaker dollar, says Krugman. However, further credit bombs will be exploding for a while yet, for example in the commercial real estate market, he estimates. Krugman was sceptical that interest rate cuts will help get the economy back on track. The Federal Reserve has far less ammunition to cut rates than in previous recessions. The Fed started cutting rates when they were only 5.5% last year. In the last two economic crises, rates were around 8% before the Fed started to cut rates. “The problem is that the economic situation looks worse this time, but there is less scope for interest rates to be cut,” he comments. To cut rates by the same extent as in the last recession, estimates Krugman, rates would have to fall to zero – the same level as they were in Japan for many years after the bubble started to collapse in 1990. That leaves the Bush administration’s tax rebate checks, being posted to every citizen to stimulate the economy. But Krugman believes this cash did not go to the poorest members of society, who would be sure to spend it. Better off people will simply save it, he estimates.

Krugman believes it would have been wiser to spend the money on food stamps and more generous unemployment benefits.
One option could be to carry out a huge infrastructure building programme, which would be another similarity to Japan. But if the Republican Party wins the next election with Senator John McCain becoming president, Krugman believes it is unlikely this would happen.

Recent US housing figures reported for January 2008:

-Median existing-home price was US$201,100 in January, down 4.6% from a year ago
-Total housing inventory rose 5.5%
-At the end of January, existing homes available for sale were 4.19 million, a 10.3-month supply at the current sales pace (up from a 9.7-month supply in December).
-Single-family home sold at an annual rate of 4.34 million in January. This is 22.4% below January 2007.
-Existing condominium and co-op sales dropped 6.5%, and are 30.2% below the year ago levels. The median existing condo price (US$220,400) is only 1.0% lower than January 2007.
-Existing-home sales in the Northeast fell 3.6 percent to an annual rate of 810,000 in January, and are 25.7 percent below a year ago. The median price in the Northeast was US$270,800, up 3.1 percent from January 2007.
p/s Paul Robin Krugman is a liberal professor of economics and international affairs at Princeton University. He is also an author and a columnist forThe New York Times, writing a twice-weekly op-ed for the newspaper since 2000. Krugman is well known in academia for his work in trade theory, which provides a model in which firms and countries produce and trade because of economies of scale and for his textbook explanations of currency crises and New Trade Theory. He was a critic of the New Economy of the late 1990s. Krugman also criticized the fixed exchange rates of the island Asia nations and Thailand before the 1997 Asian financial crisis, and of investors such as LTCM that relied on the fixed rates just before the 1998 Russian financial crisis. Krugman is generally considered a neo-Keynesian, with his views outlined in his books such as Peddling Prosperity. His International Economics: Theory and Policy (currently in its seventh edition) is a standard textbook on international economics without calculus. In 1991 he was awarded the John Bates Clark medal by the American Economic Association. He is among the 50 best economists in the world according to IDEAS/RePEc.

Tuesday, February 26, 2008


Citigroup's Not In The Clear Yet

Analysts at Goldman Sachs said they expect additional write-downs of about US$1 billion to US$12 billion each for several major United States brokers in the first quarter, with Citigroup forecast to record the highest write-down of about US$12 billion. Citigroup according to many, has not been as aggressive as many of its peers in marking down the value of assets such as residential mortgage-backed securities, commercial mortgage-backed securities and leveraged loans.

The analyst who got things right before the sxxx hit the fan, Meredith Whitney, (the Oppenheimer & Company banking analyst), reduced her 2008 earnings estimate for Citigroup by 70 percent on Monday. She also said the bank needs to sell as much a US$100 billion in assets to shore up its balance sheet.

In addition to their financial problems, guide, Citigroup’s board still did not appear to learn from past mistakes. In Vikram Pandit, the board has chosen someone just like Chuck Prince in that both have:

  • No banking experience;

  • No lending experience;

  • No CEO experience;

  • No management track record;

  • No vision.

Vikram has been pussy-footing since he landed the job. His initial moves revealed that he is betting the credit crisis will improve over the next 6 months so that he does not have to write down much more. That looks unlikely. Now he will be pressured to sell some units. Citigroup will look like a pale shadow of its former self in order to come out of this still standing.

Friday, February 22, 2008


Best Concert DVD Ever!

Though my Mandarin is only so-so, I have always loved the old Mandarin songs. Although it was kinda romantic to listen to the scratchy originals, it was better to find good current singers giving these oldies a sound rendition. Paula Tsui Siu Foong dabbled in them a bit. To sing these old songs, one had to have a certain kind of voice, the timbre needs to be just right. Many years ago I discovered Tsai Chin and she was certainly born in the wrong era - but thankfully for us, she is with us now. She has the voice.

I have many of her albums and a few of her concerts. Then I came across her latest offering (remember the cover so you don't buy the wrong edition). It was her concert in HK in 2007. Its a journey of great Mandarin songs through the years, and she threw in a few of her own good songs too. Its a 3 DVDs set. Its certainly the most polished concert performance. The songs selection was right on. Not many singers can perform for 3 hours straight with no props or dancers. She was engaging and even funny at times. A solitary figure with great orchestration. Can watch over and over again. I have some of her other concerts DVDs and they are not as good. This DVD was the best buy for years. You don't need to be a senior citizen to enjoy it.

p/s her upcoming concert at Genting, selling fast, extra shows added:

http://www.genting.com.my/en/live_ent/2008/tsaichin/default.htm


Thursday, February 21, 2008


Primus Pleases Itself

The Edge: What is it in EON Capital that makes Primus Pacific Partners pay a hefty RM9.55 a share, a near 60% premium on its trading price, to gain a non-controlling one-fifth of the bank and financial services holding company for a hefty RM1.34 billion?

His other pertinent points:
1) why is it that other shareholders, apart from DRB-Hicom, which sold that stake to Primus, don't get to participate in that largesse?
2)
Permitting some shareholders to benefit and exit from a listed company with a high price without the same benefit to all other shareholders is inherently unfair and smacks of insider dealings, which are unhealthy for the development of an equitable equity market. That's a situation that must not continue.

http://whereiszemoola.blogspot.com/

p/s apologies to Moolah, the article cited was written by P Gunasegaram and not Moolah... should have known that cause you and I rarely disagree ... ; )

Primus agreed to pay DRB-Hicom Bhd RM1.34 billion cash, or RM9.55 a share, for its strategic 20.2% stake in EON Capital Bhd, the parent of EON Bank. Primus major shareholders are the Taiwan-based Fubon Financial group, the Qatar Investment Authority and the Kuwait Investment Authority. Fubon is a financial services group in Taiwan engaged in corporate and investment banking, financial markets, consumer finance, wealth management, investment management and insurance.

Early last year, Newbridge Capital Ltd, the Asia-focused arm of US buyout firm Texas Pacific Group had courted DRB-Hicom and both parties came to a preliminary agreement. The two obtained Bank Negara Malaysia approval to start negotiations but the transaction did not go through. It was speculated that Newbridge was worried that it would be holding the largest block of shares but without any management control. Well, it didn't seem to bother Primus. It was considered very unlikely that Bank Negara would allow another foreign party (other than Singapore's interest in Alliance Bank) to control another bank in Malaysia. Primus has to either take the deal or leave like Texas Pacific.

EON Capital Bhd and its banking unit have proposed to issue up to RM655 million unsecured subordinated bonds together with 93.8 million warrants to fund the expansion of its operations.

The country’s seventh-largest bank said yesterday the proposal was to strengthen its balance sheet and place it in a significantly stronger position in the Malaysian and international markets.

“In addition, it will allow EON Bank Group to lock in a lower effective funding cost and would enable the EON Bank Group to better plan its cash flow requirements,” the company said.

The announcement came just a day after Hong Kong-based investment company Primus Pacific Partners proposed to acquire a 20.2% stake in EONCap for RM1.34 billion or RM9.55 per share from DRB-Hicom Bhd. This was 55% over the closing price of RM6.20 that day. EONCap said yesterday EON Bank would issue up to RM655 million nominal value of 4.75% unsecured subordinated bonds while EONCap would issue of up to 93.80 million 2008/2013 warrants. The bonds and the warrants will be attached and issued to primary subscriber(s) or investor(s) on a bought-deal basis. The bonds would not be listed on Bursa Malaysia Securities Bhd or any other stock exchange. The warrants would be based on 93.80 million shares in EONCap and exercisable at any time up to the fifth anniversary of the date of issue. The exercise price is RM7.

The acquisition price translates to an implied FY07 and FY08 price-to-book value (PBV) of 2.2 times and 2.0 times respectively, which was reasonable vis-à-vis recent banking mergers and acquisitions (M&A) transaction in the region. So, there is a strong argument that Primus did not overpay, rather the market price for EON Cap was under-priced. Primus cannot collect from the open market more than 5% without triggering approval requirements.

To be fair to Primus, I think they would have EASILY been able to do a G.O. at RM9.55 for the rest of the shares but that probably would NEVER get past Bank Negara. So, we cannot and should not question whether Primus is acting on some other devious agenda.

What P Guna said is correct, there have been TOO MANY substantial share deals to "favoured parties" at sharply higher premiums to market prices, and that they get a waiver to make a G.O. Now, that is what should not be allowed to happen. Remember the MAS deal, etc... these questionable deals should never have a place in a transparent equity market. The so-called waivers granted is based on discretion, on so called "national interest" argument - bailout say bailout lah... ALL shareholders deserve the same offer price when it triggers the takeover limit.

In Primus case, they did not trigger the takeover limit, so no argument here. It is a willing buyer, willing seller, also no issue here. We cannot force a buyer of a 10%-20% stake to make a mandatory G.O. or even only pay market prices. We cannot say that's the limit you can buy at for a substantial stake. Hence I would have to disagree with P Guna on his second point above. No markets in the world currently forces a buyer of 10%-20% stake to also offer a G.O. Have to play by the rules, that's true transparency.



Hypothetically Speaking


Got this in the mail, had to tweak it a bit, its hypothetical what!!! What if Subject B was to behave like Subject A.




Subject A
Subject B
Pretend to be drunk
"I talk rubbish when I drink wine."

"I can even pretend to talk to President Bush."
"I get horny when I drink wine."

"Then I pretended to be screwing my personal friend."

Insist that the meeting was pure coincidence
"I bumped into former CJ at Changi Airport on my way to New Zealand."

"It was a chance encounter."
"I bumped into my 'personal friend' in Batu Pahat, at Hotel Katerina, inside Room 1301."

"Then after I bumped into her, I bumped into her again and again and again lah."
Don't admit to being the person in the video clip
"It looks like me, sounds like me."

"But I will not say 100% that it's me."
"It looks like me, sounds like me, fucks like me."

"But I will not say 100% that it's me."
Flat out deny you are guilty
"I was not speaking to Tun AF on the phone."
"I am still a virgin, don't play-play."

Asia Snapshot

Though the table above is a ytd up to only end September 2007, it does shed many insights.

* Malaysia’s ringgit only gained 3% against the USD in the said period but has risen more over the last 5 months. Hence the ringgit basically did some catching up in recent months, with more upside in store. Bank Negara has been too cautious in allowing the ringgit to rise over the past two years. That is why despite the gains vis-à-vis the USD, the ringgit has not been gaining much ground against other Asian currencies, especially the bath, including the Sing dollar, the euro, the pound and the Aussie dollar. Have you been traveling recently, the ringgit does not go far unless its HK or the States (USD), anywhere else its the same as it was two years ago. Let's remember that we have saved up tons in foreign reserves. Yes, Bank Negara is deliberately improving our competitiveness via a weak ringgit. Trouble is we get tons of inflation this way. Hence I see a bigger upside for the ringgit vis-a-vis other Asian currencies and also the developed nations' currencies. About time.

* Thailand is in danger zone. Have you seen the baht over the last 12 months? Look at the inflow of FDI, but most are speculating in Thai property. Given that Thai stocks are still in single digit forward PER, there is some justification for the inflow. However, the baht's strength is looking speculative, and certainly won't help its competitiveness. It was exactly this kind of openess in its capital account that led Thai baht to implode first in 1997. Thankfully the rest of its neighbours are not allowing such excesses this time around. Any implosion may rattle the region but won't bring the rest along with it.

* Save for China and India, Singapore stock gains were much higher than the rest. Korea had the same experience. Why? One, their stocks were more regional and international in exposure. Two, they were bigger beneficiaries of hedge / private equity funds. Going forward, there will be a curtailment of these funds activity due to the sub prime less now spreading to some of these leveraged funds. Hence we may see more volatility on the down side for these guys.

Wednesday, February 20, 2008


Investing Paths

Everyone who starts investing will try to understand the stock markets by talking with others who have been investing. Then we all move on to reading books by the Grahams, Lynchs and Buffetts of the investing world. Probably after losing more money, we will gravitate towards the technicals and charting gurus: the waves, oscillators, fibonaccis, RSI, momentum, etc. So what do we end up with?

Some of us stick to a tried and trusted way of investing, or just something we are comfortable with, or something we can understand. So which groupie do you belong to?

Fundamental Analysis – This group basically looks at the cause-effect in investing variables. This can be broken up into two groups, namely, top-down or bottom-up. The former refers to getting the macro picture and capital flows correct. This will give the investor a proper perspective on country and currency exposure. If you get the country and currency correct, it doesn’t really matter much about picking the right stocks. Get the big picture wrong and it matters little whether your have picked some great value stocks – great value stocks would remain just that, great value, not performing stocks.

Then there are those who would swear off the big picture volatility analysis, seeing stocks as basically long term companies doing a certain kind of business. The bottom-up investor would stay focus on picking undervalued stocks and based on the theory that holding a good long term stock would eventually outperform in the long run, riding out the volatility.

A financial analyst or business analyst would be doing things from a bottom-up perspective. Breaking down product lines, revenue streams, debt levels, cash flow analysis, product outlook, business model, margins and sustainability of earnings, among others.

To be fair, most fundamentals investors employ both approaches in some way or other. A top-down person would need to be more well versed with economics while the bottom-up needs to appreciate the nuances of accounting. People in this camp wants everything to be explained, the cause-effect. If they did not spot the correction beforehand, its because they haven’t been giving adequate attention to certain investing variables.

Put another way:
Top-Down Investing People with a bit of economics knowledge but scared shitless about accounting Bottom-Up Investing People who knows a bit about accounting but hates fiction

Then there are the ones who embraced technicals and charting religiously. These are basically pattern seekers, they try to find pattern from historical prices. To me, these are people who have basically given up trying to understand stocks. They are basically saying there is not much point trying to understand fundamentals, its either too hard or that it doesn’t matter much really in the end. On the other hand, the patterns and data may yield more than just trends, they believe that the human psychology and the way people invest are already reflected in past data: and they tend to repeat themselves. If you are able to decipher trends, breakouts and supports: you are golden.

To be fair, there are some who employ a mish-mash strategy of fundamentals and charting in investing. Here, I am not trying to say which is the better option as most reported studies tend to come to the conclusion that it is very difficult to beat the market in the long run. People like Buffett and Lynch are explained as minor aberrations to the data. This doesn’t sound good for the average investor, does it!

Big investment houses employ highly paid quants to do analysis and highly evolved econometric models to squeeze anomalies (returns) from the market place. Quantitative finance might sound like rocket science but even they are not infallible. Just look at the LTCM and Goldman Sach’s in-house hedge fund experience.

Hence, we cannot roll our eyes if a seasoned trader said that he/she relies on market rumours or whispers to make his/her stock selection. A bull market has the effect of making almost everyone think that they have harvested the ability to be brilliant stock pickers. A bull market only made it easier to pick performing stocks.

It is probably the mystique of being successful in investing that keeps investors baffled yet attracted to the field.
I am terribly sorry that I am not able to provide a better alternative to the above. I do feel that there are strengths and weaknesses with each of the investing strategy.

If I may try to add some value, is to encourage young investors to pay more attention to behavioural finance in addition to the stuff in textbooks. It is important to understand the madness of crowds. Another point is to read up more on investing variables, examine their cause-effect relationship, and then rank them in your head in order of importance. The trouble is you can read books and watch the business programs but you will be inundated with information overload. We have to learn to rank and sift the b.s. from the things that address the issues at hand properly.

To extend on the cause-effect on investing variables, we need to go further down the chain of events. Its like a good chess player and a grandmaster. A good player may be able to think 3 or 4 moves ahead but a grandmaster can go much farther. I do think by stretching your analysis, it gives you an edge.

We need all the help we can get. As Soros rightly put it, "More importantly, it is how much money you make when you're right about the market and how much you lose when you're wrong. " To do that: we need to get the big picture right; we need to get the exit, entry and cut loss prices right; and we need to pick the right stocks with corresponding valuation and growth implied, and note them when the variables start to deteriorate. We need all the tools that will help us achieve that.


Astro Boy Returns!

Really has not been posting about stocks specific. Was looking at one stock's movements over the past 2 weeks - a bit too obvious I thought, so here goes. This was posted back in October 2007. The bounce back to RM4.00 basically confirmed my suspicion - its on, the privatisation.

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. If it bid just RM4.50, there will be a lot of hoo-hah as that was the IPO price, hence can expect a bid of between RM4.60-4.80. Better to take it private and relist in 2009 when Indian earnings start kicking in.


Tuesday, February 19, 2008


Malaysia, A Safe Haven?

Back in 2005 and 2006, when most emerging markets were shooting through the roof, the KLSE underperformed and was widely ridiculed by local and international investors. 2007 saw KLSE doing a bit of catching up. Since the sub prime mess and the debilitating credit implosion, KLSE has managed to weather the stormy waters a lot better than other Asian markets. Since the beginning of the year, KLCI has only shed around 6% while Shanghai and Hang Seng have lost nearly 20%, even the Kospi has lost about 13%. Safe haven?

Why have we held up better? Elections, that's b.s. ... Its the currency, and then its the commodities.

Currency. Even thoough most currencies appreciated against the USD, Malaysia is one of the very few which has a staggering foreign reserves per capita, alongside with Taiwan and Singapore. Bank Negara under Zeti, has been under appreciated by all and they rightly have taken a low profile. Its not easy trying to rid yourself of the "cowboy central bank" reputation thanks to the people fiddling with risks back in the 80s and 90s.

Growth has been steady and inflation while being very hard to control, is not too bad compared to other nations. International investors looking at our balance sheet do think that the ringgit's upside is as good as the yuan. As the yuan is not internationally convertible, the ringgit's not too bad an exposure. If only we have a bigger ringgit bond market, then you can see some real action. The ringgit should break 3.0 against the USD this year. I see 2.9 as very achievable.

Needless to say, palm oil and oil prices have been very strong - both posting strong net benefits to our economy.

Other reasons include the fact that our big companies does not have a strong international exposure (though they really should)... none of our banks have any exposure to US subprime materially. Plus our economy rely a lot on US MNCs manufacturing in our country and then re-exporting back to US and other markets. US slowdown would not be reflected as such in KLCI as they are not listed locally.

Having said all that, I would not be buying stocks yet. Overall global macro picture still not sound.


Friday, February 15, 2008


Gone Walkabout

Just managed to get myself to some sort of internet access as you might have guessed, I have gone walkabout .... wanted to be there when many people say "sorry". Readers visiting this site, sorry that I have not been posting of late. Am now in Sydney for holidays, and the last few days, drove to Maitland and stayed near Barrington Tops, in one of the lodges. Great, phone signal also don't have. Despite it being summer, its very cool as its in higher altitude and it has been raining on and off. Some of my relatives went fishing as there is a river which passes by the lodge. In the day time, we go visiting vineyards in the region. Didn't really want to do Hunter Valley again. Came across a really good boutique winery in Camyr Allen. They have a beautiful sweet verdelho wine (a kinda sweetish Sauvignon Blanc), got many bottles, only A$16 at the winery, you can add 50%-80% for outside retail prices. Plus the other find was that they also did a liquer from the overipen grapes, it looks and smells like cognac, but tastes like plum, caramel liqueur - great over crushed ice... and only A$36 if you go and purchase at the winery, double that outside if you can get it as they make only 750 bottles a year.


Been reading financial papers on and off, same old, nothing has changed, every bit of good news is being discounted quickly. Market sellers not finished with selling. Bye for now.


Monday, February 11, 2008


Lessons From 'Thomas Edison'


1) HK police must not be over vigilant in nabbing the culprits. Police arresting people must prove they had "done something". The police cannot kowtow to public pressure just because the victims are celebrities.

2) If you arrest anyone, please arrest the source of the photos, not the second or third source. The groups of people forwarding or resending the photos have not done anything illegal per se. Yes, they may have behaved "badly" and have "questionable judgment and lacked empathy", they are idiots but not criminals.

3) While we sympathize with the affected celebrities, I totally agree with Lisa Wang who said that "if you don't want people to see, don't take those pictures in the first place". Even when the motive at first is for private use, if you are dumb enough to take these pictures, shit happens. Using the "private use" as an excuse does not win any real sympathy from the public.

4) Most are just fearful that some of the victims may do "something silly". Shit happens, grow up, move on, its not the end of the world. I have seen many naked women in pictures and books and magazines - I don't think I remember even 99% of them now. Nudity is nudity. If you fear people may now fantasize about you now that there are nude pictures of you - grow up, most are already fantasizing about most pretty girls, whether they have seen them naked or not. Nothing has changed.

5) What they did was natural, not unnatural. What they did was between two consenting adults, do not put your own religious standards to judge them. Celebrities or not, they owe the rest of the world NOTHING.

6) They are celebrities. If you don't like what they did, don't support them anymore. If you can see beyond the superficial, and like them for their talent, you should continue to support them. Some of them may not be working anymore in the industry, but hey, thousands of workers get fired every day as well. At the end of the day, its a mind over matter thing. If you don't mind, it doesn't matter. I mean the female victims should look at Hsu Chi, Loletta Lee and Vivian Hsu - we have seen them very naked, but they are doing well in the industry. Sure, they get paid to do the movies, its almost the same thing. If they can do it and live, so can you.


"Modesty is a vastly overrated virtue."
- John Kenneth Galbraith

"We are all naked in the eyes of the Lord!"
- Peter Boyle

"We are so narrow minded that we show war, murder, rape, etc. on TV, but we do not allow to show one of the most wonderfull creations (the human body) in its natural form."
- Mario Roman

"If everyone were nude, there would be no war..."

"Pornography tells lies about women. But pornography tells the truth about men."
- JohnStoltenberg

"It is an interesting question how far people would retain their relative rank if they were divested of their clothes."
- Henry David Thoreau




Saturday, February 09, 2008


Intelligent Commentary

I have been corresponding with a fellow reader for sometime, and he has kindly consented for me to publish his essay below but not his name: (my comments in blue)


Dali-san,

You postulated credit implosion is started with excessive money growth driving assets beyond its fair value. Financial institutions will have to go through the balance sheet cleansing process, therefore monetary policy may not the best tool for this. It also very difficult to use fiscal policy to solve this problem. The root is lack of transparency to mark down what they have on their balance sheets. Like Buffet said, many of them are mark to myth, not even close to mark to model.

Since many of these assets are tie to value of the housing properties, the speed of cleansing will depend on the speed of housing prices fall. This will take sometime to sort out. Recent UBS announcement of massive write down did not send the stock price to hell, I wonder why?
(I think there were early sellers, and on news, the actual selling will be limited. I have been harping on the European banks' results in the coming days - I believe there will be surprises, bad ones, but the impact will not be in the banks' share prices, but rather the implications for the spread and reach of the credit bubble implosion).

Global liquidity is still a plenty, as long as there is source of capital replenishment, the financial institutions will be able to go on with business as usual? Some argue these institutions are too big to be allowed to fail. People on this side of the pond and middle Eastern are flush with cash to buy US assets. It is more of confidence issue than liquidity. Subprime loan is about US $ 1.5 trillion? Can the world support a few more hundred billions? I don't think it is an issue, except the creditors faith will be tested to the extreme.
( That is why I am also critical of Bernanke's rate cuts because its as if his prime motive is to save the stock market from collapsing. A central bank is to ensure low inflation, steady economic growth - stock prices and excesses should not bother the Fed. When the Fed cut aggressively, it pours more money on the problem when the problem can only be cured with proper correction. By easing too much, you go back to the root of the problem, thus not curing the illness but only suppressing it).

The rise of Chinese and Indian consumptions will continue to offset slower growth or mild recession in the States. The rest of the world economy has decoupled to certain degree but stock market has not decoupled yet. Chinese economy growth is depending around 20% export to the States in 2007. Many Malaysia still dare not drive up plantation stocks despite run up of soft commodities prices, still have colonial mentality?
(No colonial mentality in palm oil, its an open market, foreign funds are welcomed to buy as much as they like, Malaysians are just a small subset of investors, not supposed tp dictate prices).

My thesis is fundamental and price begin to diverge but not at screaming buy level yet. I will never argue with the market, if it decided to fall more, let it fall - regardless they get the why correctly. Sub-prime, credit implosion or recession, I think the market is having a confirmation bias. As soon as they find some confirmations, they will just sell, sell, sell. If you look at the volume, you won't find extreme volume on the way down or up. There is no extreme short selling yet, what does it tell us?
(It tells us that we are still unsure of what is bringing down the markets. Many still don't think its a credit bubble implosion, which is very much severe than a housing correction only).

Worldwide stock market is not extremely overvalued, dramatic valuation collapse is not happening soon. People constantly doing rotation play. What does it tell us? Single digit PE valuation is also unlikely to happen. I think one just need to sit tight and wait for pessimism to wane.

Friday, February 08, 2008

More Exciting Photos Of Edison & Gillian


Thursday, February 07, 2008


What funds would not like you to know

ARE funds (mutual/unit trust/actively managed funds) the way to go to invest for the long term? There are numerous glossy and enticing advertisements by funds trumpeting excellent returns, but at the same time warning that past performance is no guarantee for future performance.

In the US, more than US$10 trillion is held by nearly 10,000 mutual funds. If you take out money market funds and bond funds, about US$5 trillion is in stocks. Is funds investing safe and does it provide superior returns (relative to the relevant benchmark indices)?

Majority does not beat benchmark indices

Did your fund portfolio beat the benchmark? Congratulations, for you are in the minority. In the book, Wall Street Versus America by Gary Weiss (formerly with Business Week), he said “if you had shares in an equity mutual fund on January 1, 1984, just as the bull market was taking off, and held on to it until December 31, 2003, the chances are better than 90% that your fund failed even to match the performance of S&P 500 stock index”.

Can you imagine – 90%? Even the betting tables at Genting Highlands offer better odds. If you are going to put your money to work by investment pros, you should expect superior performance. Isn't it difficult to believe that only 20% of funds have managed to beat the benchmark?

The fees charged put most funds on the back foot. Actively managed funds usually incur trading costs – front- and back-end loads, advisory fees, advertising campaigns, and commissions payable to sales and distribution channels. We are not even talking taxes yet. The fees accruing to unit trust sales forces in Malaysia is a good example, hence it is very difficult to locate funds that actually provide superior returns from the personal EPF investing scheme.

Another issue affecting returns is churn rate, i.e. the number of times the total portfolio value was bought/sold in a year. Some have a churn rate of less than 50% but some can register churn rates of more than 200%. The higher the churn rate, the higher the fund's brokerage and related fees. On the other hand, a lower churn rate is no guarantee for better performance.

Soft-dollaring

Some funds have a high churn rate because it keeps the brokers/dealers happy, and some would get “soft-dollaring” arrangements if their transaction volume reaches certain predetermined levels (e.g. free terminals, research, online subscription services, computers, monitors, cables, network support, printers, maintenance agreements, etc.)

Depending on the country they are operating in, some of these soft-dollaring are not shown as savings to the actual fund but rather to the fund company's operational revenue and expense columns.

(Soft-dollaring is a new fangled way of referring to kickbacks. While “hard-dollars” refer to expenses coming out of the fund company's pockets, “soft-dollaring” involves using client's cash to pay for things.).

Certain funds even allow their broker to charge “higher commissions” (especially through OTC trades or off-market trades where prices can be negotiated) to get better soft-dollaring deals from the brokers.

Scandals

In the US you have the late trading and market timing scandals in mutual funds. There have been many cases involving sales incentives for brokers to push in-house funds. Some fund managers have been known to receive kickbacks in the form of a percentage of transaction orders given to certain brokers. Front running by fund managers themselves ahead of placing big orders is also a problem (of course by using nominee accounts).

Corporate governance

A fund's board of directors is supposed to look after investors' best interests. Still, some of these fund boards operate too much like an old-boys network. We need stricter oversight. We need the chairman and at least 3 out of 4 members of the board not to be affiliated in any way to the fund management company.

This needs to be strictly enforced. A strong board is possibly the best hope for those who invest in these funds to ensure that these fund management companies “go the right way”.

In many cases, a fund's quick growth can hinder performance. The bigger the fund, the harder it is for a portfolio to move assets effectively. For example, a small-cap fund, which started with RM300mil may register superior performance in the first couple of years.

The company will advertise this fact to lure more investors into the fund. If the fund size expands to RM1bil, it will become increasingly difficult to match the returns of the past as locating decent sized exposure will be more difficult and the fund manager would have to hit more “home runs” now than previously.

Attrition of funds

A large fund management company will launch many funds, sometimes in the same sector or country exposure. If they launch three country funds in Year 1, and another three similar funds in Year 2, and so on, the savvier funds companies will put different stocks into each of these funds. Hence, you may notice that some funds provide superior performance while others do not. As a result, the company may close out the underperforming funds and let the “superior funds” run.

After a few years, these big funds management companies will always be able to tout “superior funds” for advertising purposes. Nobody will bring up funds that have been closed down.

The Journal of Finance (March 1997) reports a comprehensive study by Mark Carhart on mutual funds over the period from 1962 to 1993. He states that “by 1993 fully one-third of all mutual funds had disappeared.” If you were to take into account the attrition, then the 90% under-performance figure by funds cited earlier might have even been worse.

Individuals or committee?

At the risk of sounding like a broken record, investors need to ask insightful questions before deciding which funds to plough their hard-earned money into. Needless to say, the merry go-round performance of fund managers affects their long-term performance. Many funds say that investment decisions are deliberated and made by a committee, thus reducing the dependence on any individual.

Truth is, there are individual fund managers who outperform but it wouldn't serve the fund management company's interest to emphasise that fact, for what if he/she leaves the company? Your query as an investor is – who are the fund managers at the company? How long have they been with the company?

You should even ask for their bio-data and resume. A fund management company with fund managers on short tenures may indicate a general failure to lure and keep good staff. It's a realistic business. To chalk up superior and consistent performance, the company needs a dedicated team led by proven fund managers for a prolonged period. Otherwise, investors may find that they have forked out their savings for some 20 year-olds to play and experiment with!

Random walk

Many investors have wised up to most of the factors that I've mentioned above, hence the proliferation of indexed-funds over the last 5 years. Most of them would rather just trail the index performance as they do not want to be slugged with exorbitant fees. Indexed funds have a much lower fee structure, hence their popularity.

But the fact that 90% fail to outperform their benchmarks lends a lot of weight to the random walk theory which imputes that you cannot consistently outperform the market over the long run. That being the case, instead of active management (which is deemed eventually to be futile under random walk theory) the best way is to track the index.

With that, perhaps one should not rule out too hastily the pros of self-investing as long as they read up adequately and understand the market dynamics and investing fundamentals.

It's either that, or choosing wisely which fund management company to go with.

Wednesday, February 06, 2008


Corporate Credit Risk

Readers of this blog will be aware that there are not many exciting posts of late. Well, its because I am still bearish and still awaiting for the credit bubble implosion to play itself out. We have the European banks turn, and then the AAA rating for certain insurers in jeopardy, and now the corporate bonds - more specifically the leveraged buyout bonds market.

WSJ - A new problem is rippling through credit markets: Many of the corporate loans used to finance giant buyouts in the past few years are reeling in secondary market trading, making it virtually impossible for banks to unload other commitments they have made. The loans of First Data Corp., which was taken private in September by Kohlberg Kravis Roberts & Co. for about US$28 billion, were sold into the market this past fall at a 4% discount to their par value; they now trade in the market at a steep 11.5% discount to par value. Loans of Freescale Semiconductor Inc., taken private by a consortium of private-equity firms in December 2006 for about US$28 billion, are trading at a 15.5% discount to their original value; Tribune Co., which was taken private in April by investor Sam Zell for US$8.2 billion, issued loans now trading a 26% discount.

The loans are known by investors as "leveraged loans," used by companies often with low credit ratings to raise money, often for buyouts. They are issued by banks and sold to investors like junk bonds, though leveraged loans tend to be safer because their investors get paid off in a bankruptcy before junk-bond investors. Double-digit declines in the market value of these loans are very unusual, and a big problem for many banks, which sit on a pipeline of US$152 billion in loans that they have promised to make but have yet to sell to investors. With the prices of existing loans tumbling, investors have little incentive to buy new loans unless they are sold at steep discounts, something banks are reluctant to do.

The result: More assets building up on bank balance sheets, growing tensions among rival bankers who had grown accustomed during the buyout boom to cooperating with each other and a deepening crisis in the market for buyout debt. The crisis started last summer, when investors turned up their noses at billions of dollars in buyout debt, just after many buyout firms and their bankers made commitments to history-making megadeals. Many investors say January was the worst performance for this market since those summer months.

Finance professor Edward Altman projects that high-yield, or "junk," bonds will default by a rate of 4.64% this year. That would be the highest rate since 2003 and a nine-fold increase from the 0.51% rate in 2007, which was the lowest rate since 1981. High-yield debt is typically used by lower credit-quality companies to fund operations and acquisitions.

Mr. Altman, whose so-called Altman-Z score is the market standard for predicting bankruptcy, sees as much as US$53 billion in high-yield debt defaulting in 2008, up from US$5.5 billion in 2007. Mr. Altman's study takes into account a company's original credit rating when it received its financing, historic default rates, the size of debts outstanding, and other factors.

Already in January, Mr. Altman estimated defaults hit US$3.2 billion, about 60% of the total for all of 2007. New high-yield issues totaled a near-record of US$141 billion in 2007, but almost US$100 billion of that was in the first six months of the year before the credit market slowdown took fuller hold. In a recent Federal Reserve survey of senior bank-loan officers, one-third of U.S. banks and two-thirds of foreign banks said they had tightened lending on commercial and industrial loans. Half the banks said they widened the spread between their cost of funds and what they charge corporate borrowers.

Besides the tight credit market, bond defaults could also be driven up by the large amount of high-yield debt coming due. As companies look to roll over this debt, they will either have to pay higher interest rates or will be shut out entirely by lenders. Mr. Altman estimates about US$160 billion in leveraged loans and about US$30 billion in high-yield bonds will come due this year, a similar amount in 2009, followed by even more between 2010 and 2013.

Comment - The pricing is quite bad and these kind of pricings usually indicate that the companies are near bankruptcies, but in reality they are not. Is this a mis-pricing, maybe... maybe the market has overpriced the level of risk into these type of leveraged deals. Leveraged deals require a swift improvement in margins and good revenue growth to be worthwhile for all those invested in these deals. The risk which is being priced in probably took into account a slowing economy, which would severely hamper revenue growth plans. Hence even with strong gains in margins, it might not be sufficient to compensate for the slowdown effect. The unexpected slowdown, and a tighter credit refinancing market would be a near term and mid term obstacle for many of these leveraged buyout deals. Even with rates being reduced, lenders seem to be unwilling to lend at the reduced rates now and in the near future - this is partly why I regarded the rate cuts by the Fed to be not a cure-all for a credit bubble implosion. Yes, you reduced the rates but the lenders are not willing to lend at the new rates, or even higher rates. This will have a snowballing effect. Unfortunately, we will have to go through more volatility and probably downside before things get better.



House Of Cards Tumbling

I have never been a fan of Macquarie Group from Australia. There is something inherently wrong with the business model. The company acquires lots of infrastructure related assets such as tolls and airports, repackage them and sells to investors for yield and capital appreciation. Trouble is the bulk of the buying is done in house with money pre-raised from investors. These are then packaged into separate funds under the umbrella of Macquarie - assets are shifted, sold for revaluation gains within the funds. At every level and every transaction there are annual fees, transaction fees, advisory fees, placement fees, profit sharing kickers. etc. Its a big fee charging machine. As long as the assets go up in value they can keep doing it, and to magnify returns they usually leverage up most of the funds. The simple strategy was that if you could borrow at 6% but the yield for the asset is 8% per year, they will gear up to enlarge returns. The credit bubble implosion is the prick they needed to bring down this house of cards. Shares in Macquarie Group fell more than 8.5 per cent today after Australia's biggest investment bank announced the impending retirement of chief executive Allan Moss.

Mr Moss, who led to bank to dizzying heights of success, leading the operation to be nicknamed `the millionaires factory', will leave the bank in May. Allan Moss has been front and centre and the market does not like surprises. Allan has been the poster boy for excess-CEO compensation, better known as the A$33 million-dollar-a-year man. By 3pm, Macquarie shares were down 6.5 per cent, tumbling A$5.73 to A$61.43, while the broader market was down 2.73 per cent.

His decision to stand down will come in yet another record year for profits at Macquarie which are expected to hit A$1.8 billion for its latest financial year, an increase of 23 per cent, the group said today in a dual announcement about its current performance and Mr Moss's retirement. The rise in Macquarie's earnings will deliver yet another huge tranche of bonuses for Mr Moss and his fellow senior executives which between them totalled around A$200 million last year. It is likely that Mr Moss could receive between A$36 million to A$38 million this year in his swansong year. He is also a significant individual shareholder in Macquarie with a stake worth A$25 million at today's prices.

Mr Moss will be replaced by the head of Macquarie's powerhouse investment banking division, Nicholas Moore, whose salary and bonuses came in just below that of his soon-to-be predecessor, at A$32.89 million. Mr Moore's division provides 50 per cent of the profits earnt by the group and is the biggest operation within the Macquarie empire which now straddles the US, Europe and Asia as well as Australia and the Pacific. Profits over that period have grown 30 times which has made Macquarie one of the country's Australia's most successful companies.
Macquarie's dominance of the local investment banking market and its swallowing of a whole tranche of different businesses in Australia and abroad - such as Sydney Airport, toll roads, water and energy providers - has not been without controvesy. Such purchases have often been followed by a hike in prices paid by customers as Macquarie has sought to squeeze more income from those companies to cover the prices paid by the bank and aid its own stellar profit growth. Last year, the shares almost touched A$100 each as equity markets broke through record levels. Macquarie is the top dog globally leveraging on the credit bubble and jumping on the bandwagon of inflating asset prices.

The house of cards has just started falling, from A$100 to A$60, I expect it to hit A$25 sometime this year as it should be the best example of credit mess unwinding.


Tuesday, February 05, 2008



Wishing All A Safe, Healthy & Prosperous Chinese New Year ....

Monday, February 04, 2008



Sofia Confidential

Been to a few places in Europe but now for something completely different. New business directions have caused me to arrive in Sofia, Bulgaria. Its among the newer outposts for outsourcing and private equity deals. I was under the impression that it would look something like Prague (which I love) but its nothing like that. The taxi ride to the city center reminded me of East Germany, 5 years before the fall of the Berlin wall! Bulgaria has had a tough history after being under Turkey for so long and then kinda under the shadows of Russia, and only recently liberated in 1989. As the country has been bombed before, its difficult to find nice dated architecture, except for some cathedrals. Coming out of the planned socialistic economy, most of the buildings are drab and bleak.


One thing though, the people seemed nice, at least the cab drivers and sales people do not even try to rip you off. Weather wise, its a killer. Its 8 degrees C in the day and -8 at night, and I said "harsh winters huh"... and they replied its spring time. Could be worse, could be in Russia.


I also have the unique feeling of probably being the only Chinese, Malaysian or even Asian in the city after walking around for half a day. Its a weird feeling. Always try the KFC of each new country I visit as its a good way to compare produce. The chickens are smaller here, and they tend to fry them much longer till they are dark brown. Chicken tastes a bit bland, like in Australia.

On the plane from Vienna to Sofia, I felt a bit like in the middle of making Bourne's Identity. Guys around me looked a lot like the gangsters in the movie. But anyway, its looking like a place moving up the ladder fast, should be using full Euro conversion within 3-4 years. People are nicer, and not as angry or rude as in Hungary or the Slovakia / Balkan belt. But still, Bulgaria is not a place for romantic escapades.

Sunday, February 03, 2008


Bursa's Soul Mate

There appears to be considerable speculation on Bursa Malaysia Bhd's intention to form an equity tie up with a foreign strategic partner. If that is the case, we assume, it will involve a much bigger stock exchange operator.

Second Finance Minister Tan Sri Nor Mohamed Yakcop was reported to have said that foreign companies can purchase a stake in Bursa Malaysia Bhd and that it was in “some tentative discussions” to divest a stake in the company to a foreign party. Well, my humble opinion on the matter is this – “Don't do it.”

Ten percent of Bursa is not a small thing. The matter needs to be given some serious thought and consideration. A 10% stake is like small change to a major foreign operator. On the other hand, for Bursa, it could have a major impact and as such, it needs to strategise well before any such stake sale. After that, what happens if the petrodollars-rich Dubai counterparts come along and propose an idea for say, a MENA-Asean exchange? Another 10% sale? Then LSE could chime in with another great idea, and another 10%?

It's not just the stake; each sale would bring in certain ramifications, which may preclude other attractive opportunities with other exchanges.

The surge in valuation of almost every exchange in the world over the last two years was due to an appreciation of the stock exchange's market monopoly and the growth in global trading. Exchanges trying to gobble up one another is a sign of “too much of a good thing” going after “another good thing”.

A need to flex

Bursa has yet to flex its potential and leverage on its platform. Exchanges buying up each other is a significant development. By staying still, Bursa could be relegated to a very minor player on the global stage. Going to bed with a much bigger operator however may not be the sole solution.

There may be a better way for Bursa to expand without involving a stake sale. The best possible solution is to do a coordinated venture with another exchange, for example the Singapore Stock Exchange – with or without a share swap. Perhaps the trading systems of both countries could be harmonised to allow brokers and remisiers to buy and sell Malaysian and Singapore shares.

The prospects of such a tie up are enormous for both sides. It will improve transactional fees both ways by boosting volume as it allows Malaysians to buy Singapore stocks and vice versa. The fact that the stocks on Malaysia and Singapore are quite distinct and different will be a major plus point for pushing the deal forward.

A Bursa-SES or SES-Bursa (I can see them at loggerheads for a very long time just over the naming rights) will more than just increase the consolidated volume and variety of stocks.

The consolidated volume would push the joint exchanges onto the global platform more. There would be instantly better recognition and size. This is a case of 1+1=3.

Can it work?

The question is can both parties put aside their differences (that includes pride as well) and make such a plan workable?

Both sides have to put their pride aside to make this workable. Liquidity would improve for all. Working out the fee sharing between the exchanges would be another hurdle. Other related clearing and custodian issues will arise but they are not insurmountable – its been done many times throughout the world. This is just a plan to allow for trading by brokers into Malaysia and Singapore shares seamlessly, not a merger.

It just makes sense. Both economies do substantial economic trades with each other.

The proximity makes it a natural fit. The different make-up in each country's popular sectors promotes choice and alternatives. If the Bursa and SGX were largely dominated by institutional buyers and sellers, then the plan might not yield that much synergy as institutional players have access to all markets wherever they may be sitting in the world.

The fact that both markets have substantive private investors is the nexus for the plan.

While the individual investors can go through the hassle of opening separate accounts in both countries, it's the seamless convenience that will bring about the cross border trading and investing activity.

Remember the CLOB issue, though still a sore point with most Singaporeans - the existence of CLOB made it a natural setting for Singapore investors to trade Malaysian shares. This plan basically expands on that without the potholes. The synergies can go on and on. Nobody really loses out.

There could be some foreign broker to local broker orders that could be lost e.g. a Merrill Lynch order could be routed via a Singapore broker to buy Malaysian shares, but wake up, its happening already. That point is moot.

By having the size, the joint exchanges can deliberate on more hefty issues, or better and more varied ETFs, or more derivative instruments. Instead of one broker screen, you have two. Remisiers should be happy with more choices to offer their clients.

At the end of the day, both exchanges will still be independent. The share swap can just be a token 10% if done at all. The exchanges can still decide on the kind of instruments they want on their exchange, or their own requirements for IPOs, their own regulatory system, etc. Not much would change on that front.

The big question is - Is there political will to push this idea through? Bursa and SGX are like soul mates being kept apart by bickering in-laws. But pondering on such a potential tie up is indeed, great fodder for thought.


Friday, February 01, 2008











Microhoo Or Yahsoft


Microsoft Corp. on Friday offered to buy search engine operator Yahoo! Inc. for US$44.6 billion, in an effort to better compete with online advertising giant Google Inc. Microsoft
said its "compelling" offer of US$31 a share, half cash and half stock, represents a 62% premium on the closing price of Yahoo US$19.18on Thursday.

In a brief statement, Yahoo said its board of directors "will evaluate this proposal carefully and promptly in the context of Yahoo's strategic plans and pursue the best course of action to maximize long-term value for shareholders."

Yahoo shares jumped 57% to $30 in preopen U.S. trades. Microsoft shares were down 5%, while Google stock dropped 6%. Google poses a clear long-term threat to Microsoft's business, but Microsoft and Yahoo together would make a significant competitor who could fight back.

Google dominates the Internet-search business with a 56.3% market share, according to the latest report by ratings agency Nielsen Online. Yahoo! (17.7%) and Microsoft (13.8%) combined for a market share of 31.5% in December.Microsoft had tried to buy Yahoo last year, but Yahoo balked. The sharp decline in Yahoo's stock - it recently touched its lowest point since October 2003 - made a potential purchase more inviting for Microsoft. Earlier this week, Yahoo posted a sharp drop in fourth-quarter profit and said it would trim its workforce.

Microsoft said the combination would create a more "efficient" company with annual savings of US$1 billion, driven by research and development critical mass, operational efficiencies and increased value for advertisers.
Yahoo has more than 500 million unique users and over 4 billion daily page views.

There are the risks of a "culture mismatch" and potential employee attrition would have to be managed carefully. Microsoft said it would offer significant retention packages to Yahoo engineers, key leaders and employees across all disciplines. The software behemoth expects the deal to get regulatory clearance and to be completed in the second half of 2008.

Comment - About time this happened. As good as Google is, I don't think I want to be in a business world where Google is the highly dominant player, much like what Microsoft was for the last 20 years. The other thing I loved was the professional secrecy in the way the bid was announced - I don't think you will see that in Malaysia with a stock being offered at a 60% premium to closing price. If it was in Malaysia, the stock would have risen close to US$30 prior to the announcement: I wonder why!