Saturday, October 31, 2009

Scary Friday, Or Is It Just Halloween

On Thursday, the Dow went up 200 points, nobody made a fuss. The Dow went down on Friday and everybody starts asking question. I am not saying its not important, but markets do go up and down. We have to look at the actual catalyst that caused the down movement. Is it part and parcel of trading volatility or something bigger and more sinister? There is nothing sinister, its just part and parcel of a healthy robust market. The folks at Bespoke looked at the number of times the Dow went down by more than 2% on a Friday. The following Mondays saw an average decline of 0.73%, nothing much to shout about. Markets were sold down on lower consumer sentiment, apparently on the ending of the cash for clunkers program. It will take a lot more to drag down this market - e.g. another major bank failing, otherwise, it should be business as usual. The key thing from the Bespoke table, if you noticed, was that the last two Mondays saw losses of more than 2% as well - the thing to remember is that both those days were right in the midst of the financial turmoil, and during a period when VIX was rattling at very high levels. The same table can yield one level of information for some but if you look at things with a critical eye it will reveal even more information.


Dowdown Bespoke: What an ugly day. Today marked the 142nd time since 1900 that the Dow went down at least 2% on a Friday (when the following Monday was not a holiday). On the following Monday, the Dow has averaged a decline of 0.31%, with positive returns 49% of the time. Since the bear market that started in October 2007, this has happened 6 other times (see table at right). On the following Monday, the Dow has gone down 4 out of 6 times for an average decline of 0.73%. The last two times we've had a >2% decline on Friday, the following Monday has lost 2.42% and 2.63%. Let's hope Monday's trade is a little better than that!

p/s photo: Susu (seriously... an up and coming Thai-Chinese singer)

Friday, October 30, 2009

See you tomolo ........

Thursday, October 29, 2009

Bank Negara's Monetary Policy

    After cutting rates by 1.5% during November 2008-March 2009, Bank Negara has kept interest rates unchanged starting Q2 2009. Since cutting rates too low has its risks , the central bank has focused more on improving "credit access" in the economy. Deflationary pressures, large output gap, low resource utilization and a sluggish recovery will help the central bank to remain on hold until sometime in 2010. But deflationary pressures might ease in H2 2009 due to commodity prices and fading base effects of 2008, preventing further rate cuts.

    Will Bank Negara Remain on Hold for Now?

  • October 28, 2009: Bank Negara maintained the interest rate unchanged for the fifth consecutive month at 2.0% to support economic recovery since price pressure are still low.
  • BNM October Monetary Policy Statement: The current monetary policy is “appropriate” and will “support” economic activity as domestic economic conditions are improving with policy support, and inflation and inflation expectations are expected to remain “contained” in the coming months. BNM sees strong improvement in the labor market, domestic demand, financing activity and external trade, and these developments are expected to continue into 2010. Without any unexpected external impact, inflation in 2010 will turn positive, but remain “subdued”.
  • BNM sees limited impact of low interest rates and the risk of fueling asset bubbles. It is rather focusing on credit measures to improve liquidity in the financial system. Fiscal stimulus, past interest rate cuts and government and central bank credit measures are improving credit flow in the economy (especially for smaller firms) and slowing the pace of job losses.
  • The contraction in manufacturing activity and exports has eased since June 2009. The pace of economic contraction has eased since Q2 2009.
  • The recovery is expected to be very sluggish due to slow recovery of exports and foreign investment inflows. Excess capacity and large output gap will persist through 2009 and most of 2010. This might lead the central bank to keep interest rates on hold for a long time and be one of the last central banks in Emerging Asia to raise rates.
  • But BNM would remain vigilant about rising oil and commodity prices during the global recovery, especially as the base effects of 2008 food and oil prices start fading in Q3 2009. Going forward, improvement in private demand, lag impact of fiscal stimulus and liquidity impact of portfolio inflows might reduce deflationary pressures.
  • However, further rate cuts are not expected. Low rates pose risk of capital outflows and downward pressure on currency amid declining interest rate differential with other Asian countries and the U.S.. This is exacerbated by risks to the debt ratings. Currency has showed some gains from April 2009 since when the rates have to kept on hold.
  • Analyst Wei Zheng Kit, Citigroup: The central bank will not increase interest rates until H1 2010. BNM might be the last central bank to tighten the monetary policy in Asia.
  • Economist Vishnu Varathan, Forecast Singapore: Since economic recovery in Southeast Asian countries is weaker than India and South Korea, Malaysia will not hike interest rates earlier than these two countries.
  • Analyst Tetsuji Sano, Nomura: If global oil prices continue to increase, the government may hike domestic gasoline prices. On a year-on-year basis, the CPI will continue to remain in negative territory. The central bank is expected to keep current key rate unchanged at least until Q1 2010 as economic recovery is still "nascent". Even after the central bank begins to increase interest rate, the real interest rate will stay below zero if the CPI remains around 2.3% in 2010 and 3.3% in 2011.
  • EIU: Malaysia is in a mild and short-lived deflation owing to falling global oil and non-oil commodity prices and base effects of 2008. However, the central bank will keep interest rates at around 2% for the rest of 2009 and probably until H1 2010.
  • Morgan Stanley: Deflation will continue until the end of 2009. The central bank will start raising interest rates in H2 2010.
  • Are Deflationary Pressures in Malaysia Fading?

  • The Consumer Price Index (CPI) declined 2% y/y in September 2009 for the fourth straight month of deflation after falling 2.4% in August 2009 and 2.4% in July 2009 due to relatively lower petrol and diesel prices. Yet, the pace of deflation has been slower led by the moderation of the decline in transport and food, clothing and food wear prices. On a month-on-month basis, CPI increased to 0.3% m/m in September 2009 after rising 0.2% m/m in August 2009. (Department of Statistics Malaysia, 10/23/09)
  • Deflationary pressures are due to high base effects of Q2 2008, decline in food and oil prices relative to 2008, government subsidies for flour, sugar and bread.
  • Deflation will persist due to output gap, excess capacity in manufacturing and rising unemployment. Sluggish recovery in 2010 implies that inflation will remain low until early 2010.
  • A risk is that the base effects of 2008 will start fading by Q3 2009 and might raise inflationary pressures due to recent increase in oil and commodity prices.
  • Inflation peaked in Q3 2008 at 8.4% y/y on high food and fuel prices and electricity tariffs.
  • BNM: Inflation and inflation expectations are expected to remain “contained”. Without any unexpected external impact, inflation in 2010 will turn positive, but remain “subdued”.
  • Analyst Wei Zheng Kit, Citigroup: Deflation has bottomed in August 2009 and positive momentum will continue to increase CPI. A year-on-year CPI may enter positive territory in 2009, but the central bank will hold interest rate unchanged in October 2009.
  • Economist Intelligent Unit: Inflation will stay in slightly negative territory in H2 2009 due to the decline in global oil and non-oil commodity prices and base effects from 2008. However, lower global commodity prices are positive for growth, which could strengthen domestic demand. Inflation will pick up in 2010 as global commodity prices increase.

p/s photos: Li Xiao Lu

Wednesday, October 28, 2009

Where Are We Again In This Financial Crisis & Recovery?

I have posted this chart before from Paul Kedrosky's excellent site. As the chart only looks at the recovery from the aligned lows of each crisis, the first year's recovery was most pronounced, and as usual when it recovers the naysayers during each of these periods were vocal. What is more significant is that the recovery carried on into the second year just by looking at the various charts - and that to the naysayers would be unthinkable at the moment. Markets have a nice way of shocking us - are we all drilled to look at the wrong indicators? I am still thinking 10,800 to 11,000 is easy for the Dow by year end. I would term the most appropriate indicators for each of these crisis were:

a) how much cash was thrown into the system - this crisis wins it hands down
b) how widespread / global were the effects - looks about the same for all except the depression
c) how concerted was the global effort - this crisis wins hands down again
d) how did interest rates behave or were managed - the tech crisis saw Greenspan dropping rates quicker than a bullet (and was the start of the financial mayhem in properties, packaged loans, and the leveraged derivatives on those assets); this time, most of the global central banks are still keeping rates very low coupled with massive stimulus left, right and center.

As argued before, its not that the central banks want rates to be low as that will fuel the property side for the less affected countries, and indirectly push liquidity into stocks when risk aversion mood drops - but its for the greater good because corporate spending, hiring, investments in R&D are not recovering fast enough. Hence they all will tolerate a seemingly higher and hard to justify stock market valuations for the sake of the real economy. The real economy is expected to catch up to equity valuations, maybe they will, maybe they won't. But when you keep rates low enough and you have glimmers of recovery, that will set the momentum.

Are we putting ourselves into another bubble, ... yes... but this one will last some time yet. Its the making of a bubble, we are nowhere near boiling point yet.

Tuesday, October 27, 2009

New York Roadshow By JP Morgan

J.P. Morgan's Malaysia Corporate Access Days

November 5-6 (Thu-Fri)

Grand Hyatt New York, 109 East 42nd Street at Grand Central Terminal, New York

  • Roundtable discussions, presentations and Q&A sessions with Malaysian government officials and regulators
  • 1x1 meetings with participating Malaysian corporates
Senator Tan Sri Amirsham Abdul Aziz, Chairman - National Economic Advisory Council
Dato' Ooi Sang Kuang, Deputy Governor,
Bank Negara Malaysia
Dato' Yusli Mohamed Yusoff, CEO,
Bursa Malaysia

Participating Corporates

Air Asia
(AIRA MK) - Dato Kamarudin Meranun, Group Deputy CEO

Axiata Group (AXIATA MK) - 1. Dato' Sri Jamaludin Ibrahim, President & Chief Executive Officer / 2. Dato’ Yusof Annuar Yaacob, Group Chief Financial Officer

Bursa Malaysia (BURSA MK) - Puan Nadzirah Abd Rashid, CFO

IJM Corporation (IJM MK) - Datuk Krishnan Tan Boon Seng, Chief Executive Officer & Managing Director

Public Bank (PBK MK) - Mr. Leong Kwok Nyem, Chief Operating Officer

Sime Darby (SIME MK) - 1. Azhar bin Abdul Hamid, EVP, Plantation / 2. Mohamad Hishammudin bin Hamdan, Group Head, Strategy & GBD / 3. Shariman Alwani bin Mohamed Nordin, Gp Head, Value Mgt & IR

S P Setia (SPSB MK) - 1. Ms. Wong Sheue Yann, Head, Corporate Services - Group Corporate Services / 2. Mr. Cheong Heng Leong - Manager, Investor Relations - Group Corporate & Finance Division

YTL Corp Berhad (YTL MK) - Tan Sri Dato' Dr Francis Yeoh, Group Managing Director

p/s photo: Chrissie Chau

Monday, October 26, 2009

Morgan Stanley Global Research Upgrades Malaysia

The influential Morgan Stanley Research has upgraded Malaysia and Egypt last week in the much followed Asia Strategy Report. Below are excerpts from the report:

Key changes in our country quant model this month are:

Upgrading: Malaysia and Egypt from equal-weight to overweight;
Downgrading: Peru and Chile from equal-weight to underweight.

Overweight countries are: China, Brazil, Taiwan, India, Israel, Poland, Malaysia and Egypt;
Underweight countries are:

Strong points for Malaysia in our model include a #1 currency ranking and #4 business cycle ranking. Relative P/Book has fallen to 1.0x due to recent under performance. Malaysia also gains in our model ranking this month, moving from #8 to #6. Strong points for Malaysia in our model include a #1 currency ranking (a combination of fundamental upside and a stock market consisting mainly of domestic demand, Malaysia ringgit earning stocks).

Malaysia ringgit is making steady progress against the US dollar.We also rank Malaysia’s business cycle score in the top quartile of EM countries in the model. Exports seem set to
trend up strongly from here, and Malaysia is one of the EM countries most geared to a recovery in global trade and commodity prices.

Due to recent under performance, the P/BR relative of MSCI Malaysia to the EM benchmark (now 1.0x) has fallen significantly. Malaysia is one of the least technically overbought markets in the asset class, ranking #5 on this metric. Moreover, the median GEM fund is running a significant underweight of 132 bps versus the benchmark, substantially higher than the average for the last five years.

Why I Like Notion VTec (Tons Of Catalysts, Another 3A?)

There are very few companies that can map out growth and expansion strategies properly, particularly if you manufacturing in precision engineering. You need to deliver, be consistent, be a critical part of the supply chain, and deliver well and on time. Then you need to manage your cost well and hope to reach critical mass in whatever you are producing. Track record alone will ensure more business from the big players. The big guys will always want to whittle down their main suppliers, and they need to feel comfortable that they are reliable and can deliver (again).

Just like Success Transformers, Hai-O and Efficient e-Solutions, Notion Vtec has also made the Forbes Asia "Best Under A Billion" list. The list featured the best 200 companies from the 24,155 listed companies in the Asia-Pacific region.

Over the last 2 weeks Notion V Tec has had a strong run up. Is it just participating in the "me-too" smaller caps rally, or is there something more substantial. Notion VTec is one of biggest high precision engineering specialists in Malaysia with 2 manufacturing plants in Klang, Selangor, which it has expanded a few times since its IPO in 2005. Presently, it has about 1,300 employees, and 80% of its factory workers are foreigners. The company has 960 CNC machines at the 2 production facilities. It has obtained ISO 9001: 2000, ISO140001: 2004 and ISO / TS16949 certification.

Notion VTec derives the bulk of its revenue from the hard disk drives (HDD) and digital camera industries. Its key customers are MNCs such as Western Digital, Hitachi and Nikon. Its key products camera cam barrels, digital camera body lens ring, HDD anti-disk, HDD disk clamps, HDD spacer rings and so on (refer to Appendix I for details on key products). Other industries with a lower sales contribution are the automotive, consumer electronics and air conditioning sectors.

Its top customers are the biggest players in the HDD and digital camera industries the likes of Western Digital, Hitachi and Nikon, as such, Notion VTec’s business will be reflective of the performance of the two industries.
HDD division (44% of group’s revenue) is seeing continuous strong demand from its key customer namely Western Digital. Demand for storage has been very firm on the back of rising digitalization. Compare that to Seagate which is still mired the problems associated with the acquisition of Maxtor.

Camera (46% of group’s revenue) is also seeing uptick in demand. As price points moved lower (for the SLRs), demand elasticity kicked in with higher volume being experience in the SLRs space. Nikon being its major customer (which commands some 40% of global SLRs) is once again loading up Notion for its quality and strong execution.

Notion VTec is in the midst of finalizing the acquisition of a production facility (23,000 sq ft) for a sum of RM5m in Thailand. The new facility will gear up to produce camera components for its key customer – Nikon beginning 1QCY2010. Plans are afoot to expand the production floor space to 100,000 eventually.

Catalyst #1 - New 2.5inch form factor: The project will involve the supply of base plates with contribution likely to hit RM4m per month (ASP USD1.25 x 1m pieces per month) or RM48m per annum on proforma. Initial ramp will be circa 100,000 per month rising to 1m eventually (tentatively by June 2010). Previously concentrating only at the 3.5inch form factor, the new client offers a golden opportunity for the group to tap into the higher growth form factor which includes notebooks and other mobile devices. The new 2.5inch project should propel group to hit revenue of RM1 billion in the near future. Using 600m units HDD per annum as a reference and 5% market share for the group, number of units will work out to be 30m pieces, that will translate into additional earnings of RM60m or 8.5sen EPS. Considering it is making just RM36m in net profits now, that is a quantum leap.

Catalyst #2
- Notion VTec has just been qualified by a new HDD customer, Samsung, to produce 2.5” HDD components. This is one factor which would propel Notion VTec to a higher growth platform in FY10 and FY11. Without this qualification, the company would only at best grow organically in tandem with the industry’s growth rate. This qualification by Samsung allows Notion VTec to mass produce 2.5” HDD components for the first time. Before this project, 90% of its HDD components is for the 3.5” HDD segment. Samsung has ordered the company to start mass production on 2.5” HDD components by November. Notion VTec is the second supplier for this particular component.

Catalyst #3 - Margins defensability: While Notion VTec’s consistently high margins of 25% since FY04 is impressive, it also stands out as being able to turn in the highest margins among its public listed peers in Malaysia. Notion VTec’s high volume products such as disk clamps, anti-disk and spacers for HDD are very profitable as each clamp and spacer only weighs 2 to 5 grams respectively, and so its material content is limited to less than 25% of its cost. By making its tools and fixtures in-house also brings down costs further. As for the digital camera segment, since the company started supplying high volumes of cam barrels to Nikon in 2007 and other digital camera makers prior to Nikon, the pricing pressure has been mitigated by the continuous introduction of new camera models, which enables Notion VTec to price its components at better levels.

Revenue 104.5m (2007); 146m (2008); 165m (estd.); 214m (2010 estd.)
Net Profit 26.6m (2007); 32.9m (2008); 36.7m (2009 estd.); 45.5m (2010 estd.)
EPS (sen) 4.5 (2007); 4.7 (2008); 5.2 (2009 estd.); 6.5 (2010 estd)
DPS (sen) 2.9 (2007); 1.4 (2008); 1.3 (2009 estd.); 2.0 (2010 estd.)

What's interesting was that the company still pays out decent dividends (considering its 703m shares issued). Herein lies the key, it is likely that the controlling shareholders want to hold onto their stakes, and as such they would probably "want" to live on the dividends. That is likely because if you look at the planned capex, its aggressive. Obviously, management is confident about their prospects. Notion VTec has budgeted for the second highest capex of RM50m for FY10 since its IPO in 2005. A sum of RM20m will be used for the Klang plant while RM30m will be spent for constructing the new Thailand plant. So far, RM20m in capex has been spent for 9MFY09 and another RM20m is expected to be spent on 103 new CNCs in 4QFY09. Hence, the total capex of RM45m for FY09 means that Notion VTec is expected to incur high capex for 3 consecutive years, at least until FY10. That to me, is a very good indicator.

Shares Issued: 703m

Major shareholders:
K.I. Permodalan Felda 15..0%
Choo Wing Hong:: 14.4%
Thoo Chow Fah: 10.9%
Choo Wing Onn: 10.6%

Revenue breakdown by key customer
FY08 / FY09e
Western Digital 30% / 36%
Hitachi 9% / 5%
Nikon 33% / 31%
PMG Klang 7% / 5%
Others 20% / 23%

Catalyst #4 - The company has just announced that they have approval to issue and place out 10% additional shares. This should be the biggest kicker. It all ties in with the capex expansion plan. While there have been whispers, I also do not want to over-speculate. Just think for a moment if the 10% is placed out to one of their top 3 clients - that will go a long way to securing long term business and gain a lot more market share of order from that client alone. The 10% if placed, say to Nikon, will not hinder its relations with other customers because its not a substantial stake, but it will elevate Notion VTec to a higher level of acceptance by other customers (if its good enough for Nikon, its good enough for me).

If its Nikon or Western Digital, could this have the same effect as Wilmar had on 3A Resources? Probably not as fantastic because the 3A situation is being transformed in its scalability by latching onto Wilmar's reach and distribution. In Notion's case, although it will be good, it will not be as exciting in terms of "scalability", but still very very good. If you note their corporate actions, they will be doing a 5 shares into one exercise, ex Nov 3 I think, that is a very good move to solidify the share base and capitalisation - hence it is likely that they will announce the placement just prior to the ex-date.

NOTE: The above opinion is not an invitation to buy or sell. It serves as a blogging activity of my investing thoughts and ideas, this does not represent an investment advisory service as I charge no subscription or management fees (donations are welcomed though). The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis, or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

p/s photos: Goto Maki

Sunday, October 25, 2009

Comments On October Budget

As a Malaysian business and finance site, I guess I am expected to post some comments on the Budget. You may or may not like Najib, but as a Finance Minister, I think he has the best grasp of economic and finance issues compared to the Finance Ministers we have had for the past 20 years. Normally we see funds being thrown about and that's that. He has obviously been well advised, most of the measures are well defined with timelines and deadlines.

The strategy is to focus more on what we do well, what we have inherent strengths. The overall bigger picture is to ensure higher incomes for all - i.e. moving up the value add curve. The budget was very responsible, Najib could have taken the easy route and spend and spend with abandon. There are still a lot issues naturally if we wish to move up the value curve - the most pressing has to be the subsidy mentality. We need a complete overhaul of how we view the subsidy, we need to set timelines to gradually eradicate it except for the most basic and necessary products - at the same time, these removal / reduction of subsidies need to be balance in that the most affected will not suffer too much.

The overall budget will be taken positively by most foreign research houses, it provided strong soundbites, says the right things. I would say that the stock market should surprise most with a good performance.

* Government to reduce maximum individual income tax rate from 27% to 26% for chargeable income group exceeding RM100,00. Personal relief increase from RM8,000 to RM9,000 in 2010. This means that each individual taxpayer will enjoy an increase of RM1,000 in disposable income.* Govt to allocate RM899m for tourism industry in 2010, attract more participants from UK, Japan, Korea under Malaysia, My Second Home. (The man on the street always on the lookout for more take home pay. While that is a narrow perspective, more cash is always good, and judging from our high-ish tax rates compared to the rest in the region, this is a good move.)

* Govt to speed up implementation of high speed broadband at total cost of RM11.3b,of which RM2.4 billion is from government and RM8.9 billion from Telekom Malaysia. (Very important. It smacks at our overall competitiveness. Crucially there is a dateline to rollout in KL by March next year, and the rest of the country a gradual rollout by 2012.)

* Govt proposes individual taxpayers be given tax relief on broadband subscription fee up to RM500 a year from 2010 to 2012. (Good move.)

* Govt to allocate RM9b for infrastructure, of which RM4.7b for road, bridge, water, sewerage projects and RM900m for rail. (Good addition to the "earlier stimulus package", did not go overboard.)

* Govt to look into micro insurance, takaful coverage. Premiums from as low as RM20 per month for small traders, coverage from RM10k to RM20k.

* Flexible brokerage sharing between stockbrokers, remisers. Flexible brokerage at 40% for remisers. To be fully liberalised in second stage by Jan 1, 2011. (Will allow more aggressive brokers to snatch remisiers. Expect Singapore houses to be more aggressive here.)

* Allow 100pct foreign equity stake in corporate finance, financial, planning companies from at least 30pct local stake now. (Good move although many have been doing these deals out of the country anyway.)

* For upstream petroleum companies, income tax for yr assessment 2010 based on 2009 income can be paid over 5 years. (Allows for better reinvestment and cost/revenue matching.)

* Govt to impose 5pct tax imposed on gains from disposal of real property from Jan 1, 2010. However, it will be retained for gifts between parent and child, husband and wife, grandparent and grandchild. This tax exemption will also be given on disposal of residential property once in a lifetime. (Property companies will not be pleased with the reintroduction of RPGT, but its a pre-emptive move, considering the "better leverage to borrow from Account 2 of EPF" for purchases. 5% is fair and will keep a lid on things, a hint on things that Bank Negara may be keeping rates low for a few more months. Low rates, which is necessary to keep ample liquidity in the system, is targeted to boost lending to business and create/save jobs. An indirect nasty would be channeling it to push property prices higher - the RPGT is to keep things on a more equal footing.)

* Govt proposes RM50 service tax on each principal credit card, charge cards, including free cards. RM25 for supplementary cards by January. (Could AEON Credit be affected, guess so, we really need just one card people, any more than that is license to fuck ourselves up.)

* Govt to impose RM10,000 for each approved permit to open AP holders, for distribution of AP in 2010. (Not good enough, needs to place a timeline to scrap it, say within 3 years, and the levy needs to be closer to market price of RM30,000.)

* Govt to implement fuel subsidy management system in early 2010, using MyKad, to ensure targeted groups will benefit.

* Govt to reduce maximum individual income tax rate from 27pct to 26pct, personal relief increase from RM8,000 to RM9,000 in 2010. (Cannot complain but we need the top rates to come down some more to incentivise entreprenuers. If the money makers are not making money, the ones below will not do well.)

* Govt to launch scheme for EPF contributors to use current, future savings in account 2 to get higher financing to buy higher value house or additional houses. (Need deatils but generally positive.)

* Govt to issue 1Malaysia sukuk totaling RM3b, for Malaysian aged 21 and above. 3yr maturity, with 5pct annual rate of return

* 1Malaysia retirement scheme for self-employed, run by EPF. For every RM100 contribution, govt to contribute 5pct, maximum RM60.

* Personal tax relief raised to RM7,000 from RM6,000 now for EPF contribution and life insurance premiums. (We should have a timeline, RM1,000 increase every year till RM10,000.)

p/s photos: Noon Wongsawan

Saturday, October 24, 2009

In Chinatown, Sound of the Future Is Mandarin

Its not just in New York, but in many other Chinatowns as well. Back in Sydney all I could ever hear 20 years ago was Cantonese. Over the past five years, you can hear Mandarin speakers competing for airspace with Cantonese. If you look at the immigration trend, it looks like Mandarin will win out in the end.Cantonese is older.

Mandarin is official. The written language is "borrowed" by the Cantonese and many words when read by Cantonese speakers are pronounced differently than when spoken, a result of the written language begin borrowed from Mandarin.

What is the difference between a dialect and a language? As someone once noted, a language is a dialect with an army and a navy! Language standards are set for political and economic reasons, not linguistic ones. Thus, Mandarin prevails. It is interesting to pointed out that when the Republic of China was founded in 1911 or so, the original founders such as Dr.Sun were of Cantonese descent. They had a 'home turf' advantage to establish Cantonese as the national language. In at least one of the ancient Chinese dynasties, a form of Cantonese was the lingua franca. By a random twist of historical fate, Mandarin was the language of the very last dynasty by the beginning of the 20th Century. After that the Chinese equivalent of "The War of Northern Aggression" was waged and won in 1949. Those two events enabled Mandarin's flimsy claim to be the "true" Chinese. The point is that there really was no one official authentic Han Chinese language. Sweeping away Cantonese and other Chinese languages isn't going to bring unity. The Beijing government and the Northerners hardly consider the people of the South to be fully Chinese. Standardizing on Mandarin merely makes things in the South more transparent and manageable to the central government.

Btw, Cantonese is a language and not a dialect, and you can include Fujianese, Teochew ... and the rest as well. The word "dialect" is often used to belittle a language that is in a weak position with respect to another one (for instance, people in the Spanish-speaking part of Spain often call Catalan a "dialect", and indigenous people in Africa, South America and Asia are also often said to be speaking X or Y "dialect"). The opposite also sometimes occurs: a dialect is called a "language" in order to separate it from its origin and avoid admitting what it really is. An example of this would be the movement in Spain to call "Valencian" a language, so as not to admit that it is a dialect of Catalan.


Published: October 21, 2009

He grew up playing in the narrow, crowded streets of Manhattan’s Chinatown. He has lived and worked there for all his 61 years. But as Wee Wong walks the neighborhood these days, he cannot understand half the Chinese conversations he hears.

Paul Lee, a longtime resident of Chinatown, near his home on Mott Street. He said that Cantonese “may be a dying language.”

Cantonese, a dialect from southern China that has dominated the Chinatowns of North America for decades, is being rapidly swept aside by Mandarin, the national language of China and the lingua franca of most of the latest Chinese immigrants.

The change can be heard in the neighborhood’s lively restaurants and solemn church services, in parks, street markets and language schools. It has been accelerated by Chinese-American parents, including many who speak Cantonese at home, as they press their children to learn Mandarin for the advantages it could bring as China’s influence grows in the world.

But the eclipse of Cantonese — in New York, China and around the world — has become a challenge for older people who speak only that dialect and face increasing isolation unless they learn Mandarin or English. Though Cantonese and Mandarin share nearly all the same written characters, the pronunciations are vastly different; when spoken, Mandarin may be incomprehensible to a Cantonese speaker, and vice versa.

Mr. Wong, a retired sign maker who speaks English, can still get by with his Cantonese, which remains the preferred language in his circle of friends and in Chinatown’s historic core. A bit defiantly, he said that if he enters a shop and finds the staff does not speak his dialect, “I go to another store.”

Like many others, however, he is resigned to the likelihood that Cantonese — and the people who speak it — will soon become just another facet of a polyglot neighborhood. “In 10 years,” Mr. Wong said, “it will be totally different.”

With Mandarin’s ascent has come a realignment of power in Chinese-American communities, where the recent immigrants are gaining economic and political clout, said Peter Kwong, a professor of Asian-American studies at Hunter College.

“The fact of the matter is that you have a whole generation switch, with very few people speaking only Cantonese,” he said. The Cantonese-speaking populace, he added, “is not the player anymore.”

The switch mirrors a sea change under way in China, where Mandarin, as the official language, is becoming the default tongue everywhere.

In North America, its rise also reflects a major shift in immigration. For much of the last century, most Chinese living in the United States and Canada traced their ancestry to a region in the Pearl River Delta that included the district of Taishan. They spoke the Taishanese dialect, which is derived from and somewhat similar to Cantonese.

Immigration reform in 1965 opened the door to a huge influx of Cantonese speakers from Hong Kong, and Cantonese became the dominant tongue. But since the 1990s, the vast majority of new Chinese immigrants have come from mainland China, especially Fujian Province, and tend to speak Mandarin along with their regional dialects.

In New York, many Mandarin speakers have flocked to Sunset Park, Brooklyn, and Flushing, Queens, which now rivals Chinatown as a center of Chinese-American business and political might, as well as culture and cuisine. In Chinatown, most of the newer immigrants have settled outside the historic core west of the Bowery, clustering instead around East Broadway.

“I can’t even order food on East Broadway,” said Jan Lee, 44, a furniture designer who has lived all his life in Chinatown and speaks Cantonese. “They don’t speak English; I don’t speak Mandarin. I’m just as lost as everyone else.”

Now Mandarin is pushing into Chinatown’s heart.

For most of the 100 years that the New York Chinese School, on Mott Street, has offered language classes, nearly all have taught Cantonese. Last year, the numbers of Cantonese and Mandarin classes were roughly equal. And this year, Mandarin classes outnumber Cantonese three to one, even though most students are from homes where Cantonese is spoken, said the principal, Kin S. Wong.

Some Cantonese-speaking parents are deciding it is more important to point their children toward the future than the past — their family’s native dialect — even if that leaves them unable to communicate well with relatives in China.

“I figure if they have to acquire a language, I wanted them to have Mandarin because it makes it easier when they go into the workplace,” said Jennifer Ng, whose 5-year-old daughter studies Mandarin at the language school of the Church of the Transfiguration, a Roman Catholic parish on Mott Street where nearly half the classes are devoted to Mandarin. Her 8-year-old son takes Cantonese, but only because there is no English-speaking Mandarin teacher for his age group.

“Can I tell you the truth?” she said. “They hate it! But it’s important for the future.” Until recently, Sunday Masses at Transfiguration were said in Cantonese. The church now offers two in Mandarin and only one in Cantonese. And as the arrivals from mainland China become old-timers, “we are beginning to have Mandarin funerals,” said the Rev. Raymond Nobiletti, the Cantonese-speaking pastor.

Kindergarten students at the New York Chinese School, where Mandarin classes now outnumber Cantonese three to one.

At the Chinese Consolidated Benevolent Association, which has been the unofficial government of Chinatown for generations and conducts its business in Cantonese, the president, Justin Yu, said he is the first whose mother tongue is Mandarin to lead the 126-year-old organization. Though he has been taking Cantonese lessons in order to keep up at association meetings, his pronunciation is sometimes a source of hilarity for his colleagues, he said.

“No matter what,” he added, laughing, “you have to admire my courage.”

But even his association is being surpassed in influence by Fujianese organizations, said Professor Kwong of Hunter College.

Longtime residents seem less threatened than wistful. Though he is known around Chinatown for what he calls his “legendarily bad” Cantonese, Paul Lee, 59, said it pained him that the dialect was disappearing from the place where his family has lived for more than a century.

“It may be a dying language,” he acknowledged. “I just hate to say that.”

But he pointed out that the changes were a natural part of an evolving immigrant neighborhood: Just as Cantonese sidelined Taishanese, so, too, is Mandarin replacing Cantonese.

Mr. Wong, the principal of the New York Chinese School, said he had tried to adjust to the subtle shifts during his 40 years in Chinatown. When he arrived in 1969, he walked into a coffee shop and placed his order in Cantonese. Other patrons looked at him oddly.

“They said, ‘Where you from?’ “ he recalled. “ ‘Why you speak Cantonese?’ ” They were from Taishan, he said, so he switched to Taishanese and everyone was happy.

“And now I speak Mandarin better than Cantonese,” he added with a chuckle. “So, Chinatown — it’s always changing.”

Friday, October 23, 2009

Obama Tightens The Screws On Firms That Were Bailed-out

PRESIDENT Barack Obama's administration is poised to order cash salary cuts of 90 per cent on average for top executives at firms that received the biggest government bailouts, according to media reports yesterday.

The seven companies that received the most government assistance at the height of the US financial crisis will each be required to cut the salaries of their 25 best-paid executives. The firms are AIG, Bank of America, Citigroup, General Motors, GMAC, Chrysler and Chrysler Financial.

Smaller companies and those that have repaid the bailout money, including Goldman Sachs and JPMorgan Chase, are not affected. These banks last week reported record quarterly profits and have set aside tens of billions to reward their staff. Goldman, for example, has earmarked US$16.7 billion (S$23 billion) for compensation so far this year, or more than US$500,000 per employee.

For the affected seven firms, the biggest cuts will be to the cash portions of the 175 employees' salaries, which will be slashed by an average of 90 per cent, and will mostly fall below US$500,000, the Wall Street Journal said.

- The 175 executives targeted by 'pay czar' Kenneth Feinberg are not only the highest-paid but also considered among the most talented and productive from seven companies that have received billions of dollars in taxpayer money.

Their base salaries will be slashed by an average of 90 per cent.

- That applies to the five top executives and the next 20 highest-paid employees at Bank of America Corp., American International Group Inc., Citigroup Inc., General Motors, GMAC, Chrysler and Chrysler Financial.

- Another 525 employees at the companies will also face new curbs on pay from Mr Feinberg, but those details have not yet been released.

- The government did not want to make executives return compensation already received this year, but the reduced pay levels will be the base for making decisions on salary in 2010.

- The executives will still be subject to compensation limits as long as their companies are receiving support from the government's US$700 billion (S$975 billion) bailout fund. Their total compensation was being cut in half, on average.

- Cash salaries will be limited to US$500,000 for more than 90 per cent of affected employees. Personal expenses for such perks as company autos and corporate jets will be capped at US$25,000 without approval from Mr Feinberg's office for higher payments.

- The pay restrictions for all seven companies will require any executive seeking more than US$25,000 in special benefits - things such as country club memberships, private planes and company cars - to get permission for those perks from the government. -- AP

How Sustainable Is China's Growth

  • China's economy expanded 8.9% y/y in Q3 2009, bringing the year-to-date growth rate up to 7.7% y/y. Industrial production (value added) expanded 12.4% y/y in Q3, up from 9.1% in Q2. Investment continues to drive growth with fixed asset investment grew by 33.4% through Q3, 6.4 percentage points above the rate posted the year previous. Consumption has held up, with retail sales climbing 15.1% through Q3 in nominal terms, or 17% in real terms. CPI fell 1.1% through Q3 but has climbed on a monthly basis. Exports and imports are likewise climbing on a m/m basis. (National Bureau of Statistics, 10/21/09)
  • The Outlook for Q4 and Beyond

  • The pace of growth slowed in Q3 to about 9.5% on an annualized q/q basis in Q3 from an estimated 16% pace in Q2. Industrial production growth picked up to 13.8% in September from 12.8% in August and 10.8% in July. Retail sales accelerated slightly to 15.5% y/y, roughly similar to August's 15.4% growth and consumer prices have continued to climb on a m/m basis falling only 0.8% y/y in September (from -1.2% in August).
  • Premier Wen Jiabao: "China’s economic rebound is unstable, unbalanced and not yet solid. We cannot and will not change the direction of our policies when the conditions aren’t appropriate.” (via FT, September 2009)
  • Minggao Shen and Ken Peng of Citi note that "domestic demand is still the main driver of current economic momentum in China. Retail sales are again accelerating after holding steady in the spring.The 15.4% y/y growth received large support from the housing boom, as construction materials sales grew 36.6%y/y, up from 25.8% in July" while other goods were merely stable. However, a pickup in exports (they fell on an absolute and seasonally adjusted basis from July) is needed for further growth momentum as other stimulus may have already peaked (09/ 11/09)
  • Economist Lu Ting, Bank of America-Merrill Lynch: Growth could reach 9% in Q3 and 10% in Q4. (via Bloomberg)
  • Flemming Nielsen of Danske Bank forecasts that "sequential growth in industrial production in China is slowing, despite the year-on-year growth in industrial production in August to around 13.0% y/y from 10.8% y/y in th previous month. This development will be consistent with GDP growth easing to around12% q/q in Q3 from more than 16% q/q in Q2. " (09/07/09)
  • Q2's reacceleration

  • Chinese growth accelerated to 7.9% y/y in Q2 2009, from 6.1% in Q1 (the slowest in more than a decade) as Chinese investment and bank lending continued to accelerate, and retail sales held up. Government spending and bank lending have contributed to faster growth despite weak exports. Q2's growth which analysts suggest was 12=16% on a q/q basis came was the first acceleration after seven quarters of deceleration. Investment (35.3%) and industrial production (10.7%) saw further increases on a y/y basis in June 2009, while construction rose for the first time in a year.
  • Economist Ken Peng, Citi: The annualized q/q pace of growth was around 11.8% from Q2, but the weakness in consumer prices indicates China is not out of the woods.
  • National Bureau of Statistics: Of the 7.1% real GDP growth in H1 2009, 6.2 percentage points (ppts) came from investment, spending contributed 3.8ppts and net exports took away 2.9ppts. (via Citi)
  • How Sustainable Is China's Recovery?

  • IMF: Expansionary fiscal/monetary policies, a rebound in capital markets/inflows, and the growth impulse from restocking helped China's economy to recover. The IMF forecasts 8.5% real GDP growth in 2009 and 9% growth in 2010. "With the recovery gaining strength, the policy challenge is to determine when and how to withdraw policy support while ensuring a successful transition to more balanced medium-term growth."
    (October 1, 2009)
  • World Bank: Very expansionary fiscal and monetary policies kept the economy growing respectably with a 7.2% growth rate is expected for 2009. China may not grow in the high double digits until the global economy recovers. Market-based investment will lag, and consumption will slow, meaning that the boost to growth may not carry through to 2010. (June 2009)
  • OECD: Because of China's policy responses, Chinese GDP growth is forecast to be 7.7% in 2009 and 9.3% in 2010, an upward revision from March forecasts of 6.3% in 2009 and 8.5% in 2010. (June 2009)
  • Morgan Stanley: "On a seasonally adjusted basis, the economy experienced a 5% rebound in Q1 2009, after the first q/q contraction (-0.5%) in almost eight years. Aggressive policy stimulus should bring further recovery in H2 2009, making China among the first to emerge from the global downturn. The recovery should be relatively 'job-rich' but 'profit-deficient,' especially in H1 2009, with those exposed to government-supported capex programs likely benefiting most."
  • Bank of Finland: "The massive increase in lending associated with the stimulus package could lead to imbalances in the Chinese economy, which might make economic policy more difficult and constrain growth. The current stimulus measures have only reinforced the investment- and export-orientation of the economy, while domestic demand continues to play a minor role." (September 2009)
  • ADB suggests China is not rebalancing away from investment-led growth, but is shifting investment sectors. China runs the risk of entrenched inflation and overheating in some sectors.
  • In Q1, government stimulus boosted investment and consumption held up, despite a fall in real incomes. Final consumption, investment and net exports contributed 4.3, 2.0 and -0.2 percentage points to GDP, respectively.

p/s photos: Kim Ahep

Thursday, October 22, 2009

Banks Bonuses & The Surrounding Anger

Who isn't appalled by bankers' bonuses!!! The underlying resentment is that they needed tons of taxpayers' money to steady their ships, and now that things are better, they want things back to normal?!

The general public is pissed off as there was no penalty when banks were raking in big profits pushing the very instruments that caused the financial decimation, if the financial crisis was caused by something or someone else, we may understand, but the culprits were themselves ... and when things go belly up, they go pleading to the governments for help, with a wink, wink... hidden threat that "if you don't, things will be a lot worse for everybody". You cannot hold the people to ransom, heads you win, tails you also win but a bit later.

Goldman has provided forty over percent of profits for bonuses to be paid in January 2010. Granted, Goldman is a different kettle of fish as they largely avoided the CDOs fallout, in fact they even profited from it by shorting the relevant instruments. Goldman also make most of its profits from proprietary trading, so one cannot really begrudge their hefty bonuses.

By right, its the shareholders who should be voting or complaining, if they wish to. If shareholders are not complaining, seriously, the rest of the world should not... really!!??
You can do what you like if you are a private company. When you are listed, you have added responsibilities. Naturally, one could say if a company behaves badly, shareholders should sell their stocks. If Warren Buffett were to pay himself 50% of all profits, I am sure Berkshire Hathaway shareholders would try and burn down his house, and sell down the shares.

So, where is the reality and principles involved here.
I would tend to side with market forces on this. As a listed company, I do think shareholders have a role to play - if you think Goldman pays too much bonuses, then sell the shares, why protest.

The other side of it is, if you actually relied on taxpayers money to keep afloat when things are bad, then you are not really just a normal listed firm, you are a firm that have been "bailed-out" by the people... when you most needed it. If you can operate without any help from the government or the people, then by all means do what you like. But when you are intrinsically somehow dependent on the people to save your butt every time you fuck up royally, then you have to NOT pretend that you deserve all the profits you made because its the people that sustained and resurrected the fucking markets for you.

Shareholders may not be so legalistic as to SELL on principles alone, unfortunately we are not in an egalitarian society, even though that would a lot nicer. Hence on principle, on fairness and the greater good ... banks should be more circumspect and practice self-restraint, because seriously... the next time you buggers go to the well, we are going to say fuck you too, and let a few more of you go belly up like Lehman.

The trouble with all this is that investment banks have become too big, and their flow on effects and consequences are very nasty if any of them fail. The G20 should try to cut them down to size. Bring back the Glass Steagall, separate the investment banks from the consumer banking side. Then limit the exposure each bank have to each investment bank in terms of funding. Then kill off the OTC markets on derivatives, all derivatives MUST be transparent, listed and properly regulated. There must be a regulator with teeth to watch the capital requirements on these transactions. Regulation on hedge funds must be increased manifold - sigh... I hate to be a financial policy strategist, its such a thankless task.

Anyway, at least some firms are trying to behave better, read the Finance Asia article on bank bonuses:


FinanceAsia: Credit Suisse on Tuesday announced revised compensation practices effective January 1, 2010, that will also be applicable to 2009 bonuses.

Credit Suisse is changing the mix of bonus and salary payable to managing directors and directors, such that fixed salaries will be a larger component of the overall payout for employees at these senior levels. Vice-presidents and below will not be affected. Bonuses up to $100,000 will continue to be paid in cash. Higher amounts will be subject to deferral.

For deferred compensation Credit Suisse is introducing two new instruments: scaled incentive share units (sisu) and adjustable performance plan awards (appa). Deferred compensation will be paid half in sisu and half in appa. Up to 50% of bonuses for MDs and directors will be payable in these two forms.

Sisu are similar to the incentive share units that Credit Suisse has been using for the past three years. Sisu are linked to a base share amount on a four-year pro-rata basis, which vests annually. The difference is that the holder is also entitled to additional shares, which vest after four years based on Credit Suisse's average share price over a four-year period as well as the return on equity (ROE) the bank has achieved. If Credit Suisse's average ROE over the four-year period is higher than a pre-set target, the number of additional shares will be adjusted upwards, and if it is below the target, the number of additional shares will decrease.

The appa has a notional cash value and vests pro-rata over three years. This is also linked to ROE -- it has a notional value that adjusts upward annually using Credit Suisse's ROE for that year as a multiplier. If the employee works in an area of the bank that has made losses, the appa will be adjusted downwards. For divisions that earn revenues, payouts will be linked to financial contribution. For shared services and support functions, payouts will be based on the financial performance of Credit Suisse as a whole.

This Swiss bank is also introducing minimum share ownership requirements for members of management committees and for the executive board, presumably to ensure that the net worth of senior decision-makers is linked to the performance of the firm.

Credit Suisse said the new guidelines are consistent with discussions at the Group of 20 summit which was held in Pittsburgh in September.

"At a time of strong focus on executive compensation, we are announcing a compensation structure that enables us to strike the right balance between paying our employees competitively, doing what is right for our shareholders and responding appropriately to regulatory initiatives and political as well as public concerns, " said Brady Dougan, chief executive officer of Credit Suisse Group.

Compensation for bankers is becoming a heated debate, especially in the US, where much of the population is reeling under recessionary conditions.

Earlier this year Morgan Stanley outlined a compensation plan that pays bonuses to executives over three years based on defined performance parameters for the individual and the firm.

On its third quarter earnings call on October 15, Goldman Sachs told analysts, according to a transcript posted on seekingalpha, that it was providing $5.4 billion, or 43% of revenues, for compensation and benefits for its 31,700 employees. Goldman highlighted that this was just a provision and bonus decisions would be made at year-end, but said the "accrual reflects our record year-to-date revenues in 2009".

"We're also cognisant of what's going on in the world and the pressures we're under and so we're going to try and balance those things as we work through the end of the year and we'll make our decisions as we get to year end based on the overall performance of the firm and our people," said David Viniar, Goldman's chief financial officer on the call. The third-quarter accrual was below the $6.6 billion, representing 49% of revenues, that Goldman provided for compensation in the second quarter.

Last month, at a Handelsblatt Banking Conference, Goldman Sachs CEO Lloyd Blankfein acknowledged that much of the controversy and anger regarding banker compensation was "understandable and appropriate". Blankfein went on to outline the principles governing compensation at Goldman Sachs, which include paying senior people mostly in deferred equity and evaluating performance over time to avoid excessive risk taking.

p/s photos: Melissa Surihani

Shedding Some Light On SILK

Sometimes a stock will take on wings and you cannot find any credible research on the counter. SILK is one of them. Its only asset is the Kajang Ring Road, and owing to high financing cost, it registered losses of RM37.3m on revenue of RM40.9m for the year ended June 2009. The key is to read its annual report carefully. Just concentrate on the highlighted below from the annual report:

For the period ended 31 July 2009, SILK Holdings Berhad (“SILK” or “the Group”) recorded a loss before tax of RM 37.3 million on the back of an improved revenue of RM 40.9 million. This marks a reduction in loss before tax of 47.1%, compared with the pre-tax loss after excluding one-time gain of RM 70.5 million. Revenue improved 23.6% to RM 40.9 million from RM 33.1 million recorded for the previous financial year. In addition, the financial performance was also augmented by the significant improvement in the Group’s ability to manage costs. Although the Kajang SILK Highway is maturing and requires increasing levels of maintenance, the Group has managed to peg these expenditures to that of the prior year.

The improved results have enabled the Group to meet its debt obligations during the period. During the financial period, Sistem Lingkaran-Lebuhraya Kajang Sdn Bhd paid the minimum annual Ijarah Rental obligation of RM39.4 million together with an Excess Funds payment of RM 9.2 million to its Sukuk Mudharabah lenders.

At the operating level, SILK’s subsidiary, Kajang SILK Highway recorded traffic volume of 39.3 million vehicles for the period under review. Average Daily Traffic Volume improved to 99,170 vehicles per day, which is a 14.2% improvement over the Average Daily Traffic Volume of 86,850 vehicles per day recorded in the previous financial year. After excluding the nonrecurrent items from the loan restructuring, this improvement consequently resulted in an increased operating profit before interest of RM 25.1 million in 2009 compared to RM 20.4 million recorded in the previous financial year.

SILK has during the course of the period under review, carried out various strategic and tactical initiatives aimed at strengthening the foundation for future growth.

Approval of the Regularisation Scheme
SILK had announced on 24 November 2008, that it intends to undertake a Regularisation Scheme to address its status under Amended Practice Note 17/2005 of the Listing Requirements of Bursa Securities (“PN17”). As a company under PN17, the Group had limited options as to how to move forward. It was also at great risk of being delisted, which would have been detrimental to all its shareholders. Doing nothing and remaining status quo also clearly not
an option. It had to have a meaningful strategy to generate new sources of cash and revenue. Unfortunately, at the time, SILK had neither cash, nor cash generating assets. Borrowing to acquire cash generating assets is also not possible, given its PN17 status. As such, the main priority was to implement a series of actions that would enable SILK to address these issues quickly, effectively and efficiently and thereafter to apply for the upliftment of the PN17 status. The Regularisation Scheme is comprised of several components including proposals designed to reconstruct SILK’s balance sheet and recapitalise the Company. The proposed acquisition of a new business in a growth industry is to provide future growth opportunities to the Group. Further details relating to the Regularisation Scheme can be found in the Group’s Circular to Shareholders dated 8 April 2009. The High Court has also approved SILK’s propose Par Value Reduction exercise on 28 August 2009. SILK is currently in the midst of implementing the various aspects of the Regularisation Scheme and expects this to be completed by the fourth quarter of 2009.

Strengthening of managerial resources
As SILK progresses, its human capital requirements, particularly at the managerial level, will also evolve accordingly. Given this, during the period under review, SILK took the conscious step to strengthen its managerial resources, particularly those that are core to the Group’s operations. The Group foresees that this strengthening will be an ongoing process, with emphasis on enhancing the talent pool of critical functions. SILK firmly believes that the step taken to strengthen the managerial resources is a necessary and prudent long-term investment for the Group.

SILK’s improved financial performance for the period ended 31 July 2009 is a clear reflection of the power of perseverance, as well as the need to continuously change, refocus one’s priorities and adapt to changing situations.

Existing highway business
SILK in its present form, with the core business in highway operations is expected to continue to incur accounting losses in the immediate to medium term. This is consistent with the nature of an infrastructure company, which has a long gestation period. At the operating level, efforts are being taken in the immediate term to contain and manage operational costs, including
detailed identification of critical and non-critical costs and optimising of highway maintenance works. On a longer term basis, other measures being considered include:-
i) Improving traffic flow by promoting development along the highway;
ii) Working closely with adjacent highway concessionaires to improve connectivity and increasing traffic throughput;
iii) Improving non-toll revenue including:
(a) advertising and promotion revenue; and
(b) development of rest and service areas and to provide commercial activities including petrol stations

New business
As part of the strategic objective to enhance the financial performance of the Group, the Board has identified the oil and gas sector as the additional business driver for SILK. The initial investment in this sector is via the acquisition of AQL Aman Sdn Bhd (“AQL”), the holding company of Jasa Merin (M) Sdn Bhd (“Jasa Merin”), an offshore marine support services company, to the oil and gas sector. Having reviewed the oil and gas industry, the Board of SHB is of the view that there are continuing prospects in the Malaysian market for Offshore Supply Vessels (“OSV”).
Malaysia currently has approximately two hundred and fifty (250) offshore oil and gas platforms. The planned development work for the Malaysian oil and gas industry is estimated to require approximately sixty (60) to seventy (70) new platforms over the next three (3) years. For every oil and gas platform, an estimated two (2) to three (3) AHTSVs and/or SSVs are required for transportation and logistic support. This would translate to an estimated additional demand for at least one hundred and twenty (120) new offshore vessels for the period.

The demand of OSVs is dependent on the level of activities in the oil and gas industry. At the exploration and development stage, high fuel prices would encourage development and exploration activities undertaken by the oil and gas majors and hence increase the demand for offshore support services. Where fuel prices are low, it is expected that the oil majors are likely to reduce or postpone some of the activities, given the substantial capital outlay involved.

However, with oil and gas being a depleting commodity and therefore scarce, it is expected that oil and gas prices will continue to experience an upward movement over the medium to longer term. Given that the majority of Malaysia’s oil and gas exploration, development and production activities are offshore, this is expected to translate into continued and increasing demand for offshore marine support services. Also, given the high cost of mobilisation and demobilisation, the impact of fluctuation in oil prices during the period on the level of exploration and development activities will be somewhat tempered.

However, in the event there is a major decline in the fuel price that is sustained over a longer period such that it is not economical for oil and gas majors to continue with the exploration and development activities, this will affect the demand for offshore support services.

In the case of AQL Group however, the risks of impact from fluctuating oil and gas prices is further mitigated as its vessels are mainly chartered to oil and gas majors on time charter contracts ranging from one (1) to ten (10) years. In addition, in view of the large foreign participation in the Malaysian offshore support services sector, with an estimated 60-65% market share of OSVs, the prospects for local OSV operators to penetrate further into the market are considered bright. In view of the above, AQL Group is in a good position to benefit from the continuing opportunity in the oil and gas sector. In this respect, AQL Group is currently pursuing a renewal and expansion program with the acquisition of six (6) new vessels which have been contracted for construction and are expected to be delivered during 2010 to 2012.

From a realistic perspective, it will clearly take time, significant effort and continued support from all stakeholders for SILK to achieve what it has set out to accomplish. The task is not insurmountable if everyone in SILK, from the Board to Management to our employees, along with the support of all the shareholders work together to take the Group to greater heights.


Well, it looks like the company's prospects are being revived into oil and gas. Normally, I would not look too much into these kind of aspirations, but the key is to assess who is taking charge. One of the very few business figure I like is at the helm. Dato’ Mohammed Azlan Bin Hashim is the Executive Chairman (Non-Independent). Dato’ Mohammed Azlan bin Hashim was appointed to the Board of SILK as Non-Executive Director on 4 June 2008 and was subsequently appointed Executive Chairman on 24 June 2008.

A Chartered Accountant by profession, he graduated with a Bachelor of Economics from Monash University, Australia. He is a Fellow Member of the Institute of Chartered Accountants, Australia, member of Malaysian Institute of Accountants, Fellow Member of Malaysian Institute of Directors, Fellow Member of the Institute of Chartered Secretaries and Administrators and Honorary Member of The Institute of Internal Auditors, Malaysia. He has extensive experience in the corporate sector including financial services and investments. Among others, he has served as Chief Executive / Executive Director of Bumiputra Merchant Bankers Berhad, Group Managing Director of Amanah Capital Malaysia Berhad, Executive Chairman of Bursa Malaysia Berhad (formerly known as Kuala Lumpur Stock Exchange), Group, and Chairman of Proton Holdings Berhad. Current directorships in public companies and other organisations include Khazanah Nasional Berhad, Labuan Offshore Financial Services Authority, D&O Ventures Berhad and Scomi Group Bhd. He is also Chairman of Universiti Darul Iman Malaysia and is currently a Member of the Investment Panel of the Employees Provident Fund.

Sometimes when you don't really know the horse, you can still bet on the jockey. Its a trade, its a punt, yes it is speculative ... there nothing much to go on, but I think SILK will go somewhere with Mohammed Azlan at the helm. Sometimes you just have to make a call based on the minimal information you have - not for everybody I guess. The counter has only 180m shares, even at 0.45, its market cap is just RM81m - doesn't take much to turn it around. Anyway, the Kajang Ring Road should be cash flow positive in 3-5 years time.

p/s photos: Lee Ji Ah

Wednesday, October 21, 2009

Can I Get My Honorary PhD Now?

Which tech company is most cash rich: Apple, Microsoft or Google? Having tons of cash in reserves gives them a lot of clout, always on the lookout to buy companies that can add value to its R&D or product mix. The reason why they have so much cash is that they have the structure or products or patents that keep generating massive amounts of free cash flow to the reserves. Now, why would they not give it back to shareholders? We can debate this till the cows come home - a company, in particular a tech company, needs the cash to invest in R&D, to keep pushing the line on innovative products, they need the cash to compete with new technologies or disruptive technologies, and when they cannot compete... they can use their cash to buy the competition out.

One good thing about these 3 companies, there will not likely be a rights issue anytime soon. You invest in a company for growth, not for dividends.

The chart below from Gridstone looks deceptive if you only look at absolute cash holdings. One should look at the number of shares issued and the actual Cash Per Share. Even that is not good enough, to throw a better light at it, the net cash per share should be cited as a percentage of the most recent market share price.

Total cash at at Oct 2009: $21.99bn
Shares Issued: 316.5m
Market Cap: $174.6bn
Cash per share: $69.43
CPS/Mkt Px: 12.6%

Total cash as at Oct 2009: $29.9bn
Shares Issued: 8.9bn
Market Cap: $234.97bn
Cash per share: $3.356
CPS/Mkt Px: 12.7%

Total cash as at Oct 2009: $24.22bn
Shares Issued: 895.82m
Market Cap: $178.0bn
Cash per share: $27.039
CPS/Mkt Px: 13.6%

Here lies the interesting finding, the cash on hand for each of these companies IS NOT AS RANDOM as you might think. There is obviously some "finance strategic" modeling behind it. Cash per share as a percentage of its share price CANNOT possibly be between 12.6% to 13.6% among these 3 companies by chance, obviously they benchmark against each other for competitive reasons.

Benchmarking is just one aspect, could this be the "optimum" cash holding level for companies that have a high propensity to do M&A as a major part of their corporate strategy? Looks that way as having that optimum cash cushion will allow them to act very fast, either in paying cash upfront in a desperate bidding war, or even raising double or triple that cash level from short term lending - which banks will not lend to these 3 companies with such a cash backing? All said, each of these are primed to ACT should they come across a significant major company for sale. Imagine Apple or Google buying Nokia ... Nokia has a market cap of $49.27bn. Say they pay a 30% premium to take over the company, it would cost $64.05bn in value. They need a warchest to at least buy up 51%-100% in case all shareholders accept their offer. No problem, with their cash back, they can easily raise the funds within hours literally.

Lastly, the reason why they such a similar level of cash per share as a percentage of their share price is to FEND OFF the vultures. They can use the cash to buy back shares if they want to, and cancel them as well. By benchmarking with each other, none of the companies would appear to be "too attractive" to vultures - imagine if one of the company has a ratio of 25% instead of 12.5%-13.6%, private equity mega houses may gang up to raid the companies or greenmailing them.

Can I get my honorary PhD now?


p/s photos: Elanne Kong Yuk Lam

VIX About To Breach The 20 Level After 287 Trading Days Above That

Why do we look at VIX indicator? As the market tanked, experts kept citing the VIX as a reflection of "risk aversion". Bespoke Group has written an interesting article as VIX is about to breach the 20 level - that is significant as the markets has never traded at 20 for 287 trading days. Is VIX as important when it is LOW? You bet your sweet ass it is. As volatility hit lows in February 2008 and again in October (the S&P 500 was breaching highs), and then in May and August of 2008. These were all market highs. Beware low volatility.

Bespoke Investment Group: The VIX volatility index slipped below 21 earlier today and currently stands at 21.15. This is the closest the VIX has gotten to 20 throughout the entire bull market, and marks a 75% decline from the closing high of 80.86 seen during the financial crisis.

The VIX has now been above 20 for 287 consecutive trading days, which is the longest streak since 1990 when our daily VIX data begins. In the bottom chart, we provide a historical look at the VIX along with all of its streaks of daily closings above 20. We've only seen two other periods where the VIX was above 20 for 200 straight trading days or more, and those ended at 239 days in June 1999, and 236 days in May 2003. In terms of market performance following these long periods of high volatility, the S&P 500 was on the verge of making a mutli-year peak when the VIX broke below 20 in 1999, but it did very well in the months and years following the drop below 20 in May 2003.



p/s photo: Jennylyn Mercado