Monday, November 30, 2009

Asian Citrus - Who Is At Fault?

Just as I was touching down in HK, I learn of a recent HK listing that went totally apeshit!! The new listing was a company called Asian Citrus. It was not really a new listing more as the introduction of a dual listing, it was already listed on AIM in London, and this HK listing is more of a homecoming of sorts, led by CLSA Asia Pacific Markets. Now the funny thing was the company went for a 1 into 10 share split on 2 November 2009, and that was already reflected in its London share price. The stupid thing was that NOBODY adjust the NAV figure for the split for its HK dual listing of its shares. Prior to the share split, its NAV was RMB 37.30 per share. After the share split, the NAV per share data for its HK listing prospectus was also the same at RMB 37.30 per share.

~ 1.0 Chinese yuan / renminbi = 1.13 HKD

As there are no new issued shares in this listing, so the initial sellers must have been people who had transferred their shares from the London market, in which case they should have been well aware that the London market was trading on a post-split basis and had closed the previous day at 45.75 pence, equivalent to HK$5.89. Technically, the IPO price for HK should be HK$5.89, and it should trade at a slight premium in HK exchange owing to the fact that it will be more liquid.

If you were trading on Thursday, you will find those screens giving company information that Asian Citrus had a NAV of RMB 37.30 and not RMB 3.73. The info provider cannot be blamed as they are just inputting information from the prospectus. The company itself cannot be faulted as its the investment banking unit that collect the fees for doing this kind of work. The company may have to share some of the blame if the CFO / CEO of Asian Citrus never reviewed the document, or if the CFO / CEO was asked to signed off on the document and they actually did.

On Thursday 26 Nov, the stock had opened at a high of HK$51.25 (in the pre-market auction session) and had been falling all morning in HK. The stock was suspended at HK$19.94 at 11:57am, after registering a turnover of 12.72m shares for HK$291.06m in value, or an average HK$22.88 per share. When trading resumed on Friday, it crashed to a closing price of HK$7.10.

The listing of ASIAN CITRUS 00073.HK stock by introduction was managed by CLSA Asia-Pacific Markets. I believe all who bought or sold can get all their losses being reimbursed by CLSA, as I can see the manager of the issue being mainly fully responsible for the documentation. Of course those who lost money will want compensation, what about those who profited, will they be asked to return the gains? I think asking those to made the gains to cough back out the money will be very very hard to do. Its a willing buyer, willing seller, and if I see a willing buyer at HK$51, and I sold, the transaction is legal.

However, the buyers who bought at HK$30-HK$51 are very likely to have RELIED on the NAV figure in doing that trade. One may argue that they should have used the London last traded price as a benchmark. That is a very weak argument as that goes on to impose so many "information hurdles" on what the actions of a fair minded normal person. A normal person is likely to look at the posted or printed NAV, because many recent China linked companies have been benchmarked to its NAV, either as a slight discount to a slight premium. At RMB 37.30, it is so easy to lure a buyer to bid at HK$40 at least as most China related listing usually trade at more than its NAV.

Heads will have to roll, unfortunately. HK Exchange has been VERY SLOW to tackle the matter. CLSA, understandably, has been very quiet, maybe busy consulting or pummeling their in-house fengshui master for NOT alerting them to this major pitfall, ... so bloody close to end of the year, ... thereby fucking up all their Asia bonus plans ... (shit, I have to forfeit the deposit on the new Cayman).

p/s photo: Anjelica Lee Sin Je

Business Commentary As I Am Traveling

No time for long posts, but I will try to record down interesting observations pertaining to business and commerce. Still in HK, contrary to popular perception, this financial center has many layers to it. The ultra rich (listed company owners and property owners) basically get to enjoy all the perks. HK is a place where its good to be rich. The ultra rich population probably is just the top 1%-2%. Then there is the upper middle class. To qualify, you basically has to have paid up at least one property and be invested / paying off one or two more properties - that will put you in the net assets region of HK10m-HK30m. I think that makes up another 10% of the population. I think I have to qualify here, its 10% of households, and not an absolute number of people.

Its crazy I know, but if your net worth is below HK10m, I don't even consider you as upper middle class, because you are not living as upper middle with your net worth below that in HK. If your net worth is between HK1m-HK10m, you are middle class. That grouping probably makes up another 20% of households. If your household net worth is less than HK1m, you should be living in government flats, busily saving to put down payment on a private property - this grouping should total about 50%. Included in this group are those who are still battling the negative equity aspect from the last financial crisis.

What about the rest? The rest are barely making ends meet, and its a significant grouping, with a large number of them being recent immigrants. Many are just around the poverty line, and would be receiving some sort of subsidy or monthly allowance from the government.

Of course, this is not a scientific data collection but rather from my observations from having been in HK many times over the past 10 years. Its a brutal society when it comes to money. Its unapologetic in its pursuit of money, and when you have it almost all your other character failings an be overlooked. The funny thing is that even the poor would still be wanting to work and live in HK, rather than complaining and protesting of the wide disparity of income between the poor and rich. Here is one place where the poor and striving will work hard willingly, grumble a bit about where they are but will not blame the place or the rich because they somehow embody and breathe the spirit of capitalism - its OK to be poor, but at least its a place that give me a shot at being rich if I work hard, get the right opportunities, and/or the other cards fall in the right places for me.

p/s photo: Rachel Kum

Saturday, November 28, 2009

Important View On Dubai World Factor In Equity Strategy

Well, just as swiftly foreign money came into emerging markets, just as swiftly will they leave, and not even on something direct. An indirect scare out of Dubai seems to be enough reason to take the chips from the table. On Wednesday, Dubai World, the government investment company behind some of the emirate's most ambitious projects, said it was seeking to delay repayment on a tranche of its debt. The company has $60bn of liabilities from its various companies including Nakheel, the property firm behind the Palm Jumeirah, the world's biggest artificial island, and the Nakheel Tower, the world's tallest building at 1km high. It also owns DP World, the ports operator that bought P&O Ferries. Nakheel is due to make a $3.52bn Islamic bond repayment, plus charges, on December 14.

Traders feared that the request for a six-month standstill was a sign that the Dubai Government was struggling with its other debts – and that the full impact of the financial crisis globally may not yet be over. British bank stocks, that are among the most exposed in the world to the Middle East, were hard-hit. Royal Bank of Scotland slumped 7.75pc, Lloyds Banking Group lost 5.75pc and HSBC fell 4.4pc – all three are among nine banks who were book runners on an outstanding $5.5bn syndicated loan to Dubai World in June 2008. HSBC's interim accounts showed that the bank had a $15.9bn exposure to the whole of the United Arab Emirates.

The concerns for UK banks also hit sterling, which fell to its weakest point in a month against the euro and a basket of currencies, while gilt futures leapt to a six-week high, propelled by renewed fears about credit quality. Property shares fell sharply amid concerns of a fire sale of Dubai's UK assets, which include the Grand Buildings in London. Dubai has also been a major buyer of UK property.

The risk of corporate default in Dubai clearly shows that contagion risks have not disappeared and that perhaps the market has turned a little complacent about risk. Foreign money flew out of emerging markets yesterday and the cost of borrowing shot up as investors sweated over the prospect of a state-owned Dubai company defaulting and sending another round of shock waves through the global banking system.

Banks in Europe and North America are heavily exposed to the Middle East, and Dubai in particular, with its $80 billion of debt. The cost of borrowing money increased sharply with the increased risk in financial markets. Credit default swap rates (CDS) rising on debt issued out of the Middle East and emerging markets rose, and borrowing costs on Dubai's five-year loan jumped to 5.4 per cent, up 2.24 per cent in two days.

If you look at the emerging nations' stock market performances it gives you a feel of how quickly Western capital will flow out of these nations on default fears. That said, we have to acknowledge that this is largely not long term funds anyway. These funds will find some obscure reasons to get out, if it wasn't this Dubai World situation, it will be some other obscure factor. Thats part and parcel of the high risk of having carry trades into your system. You can complain when they exit, but somehow the same people never seem to complain when they arrive??!! (ala Mahathir).

If nothing is resolved for Dubai World in the next few days you could expect more of the same next week. Uncertainty will breed fear, in other words. However methinks the risk of contagion is relatively low this time around - plus it came at a time when most equity markets were quite robust, and were actually looking for a reason to correct. This would be a good reason to correct - but I would have to say that its a buy on weakness this time around, rather than a "go for a few months holiday" kind of correction. I think markets should have a few more days of weakness, and a good strategy would be to slowly build up positions.

One big thing which most of the Western media have neglected is the role of Abu Dhabi/UAE in this - many seemed to just gloss over this. Abu Dhabi won't allow Dubai's state-owned companies default on debt payments as the global banking crisis limits their access to funds. Dubai and Abu Dhabi are interdependent and one can't be isolated from the other. Abu Dhabi Investment Authority is the world's largest sovereign wealth fund with assets of between $250 billion and $850 billion, according to the International Monetary Fund. The emirate owns more than 90 percent of the U.A.E.'s oil reserves, nearly 8 percent of the world's proven total.

Take all that into account, the risk of contagion and another credit crunch was low. Because seriously, the Middle East is not the engine of growth or a crucial part of the recovery we are seeing in the global economy. The sums that the affected banks will have to bear are not overly large, they can be written down safely, yes these banks' share prices will take a hit, but its nowhere as bad as the subprime situation.

p/s photo: Haruna Yabuki

Thursday, November 26, 2009

The Best Singing Voice Ever - Nat King Cole

I was flabbergasted when at a social setting some of my colleagues did not know who Nat King Cole was. I said he was my all time favourite singer and probably had the best singing voice ever. He died before I was even born but talent and greatness will be discovered and rediscovered by future generations. Many people will know of the song When I Fall In love, which has probably been re-recorded to death by various artistes, like I said before, if you are not going to be able to add something new to the song, forget it. The original version still is the best. There was no one who could do "phrasing" quite as splendidly as him, its clear, you never need lyrics sheet, and its almost like a lyrical musical poetic recitation.

He was born on March 17, 1917, Montgomery, Alabama, U.S.—died February 15, 1965, Santa Monica, California. His full name is Nathaniel Adams Cole. American musician hailed as one of the best and most influential pianists and small-group leaders of the swing era. Cole attained his greatest commercial success, however, as a vocalist specializing in warm ballads and light swing.
The other song that everybody loved during Christmas, yes The Christmas Song was also by Nat King Cole. But my favourite has to be Stardust, exceptional tune delivered as Nat King Cole only could. If you try to collect his albums like me, its a hazardous task, he has released so many, over 40 I believe. Plus he will try to sing in other languages as well, his Spanish was good, and I have included his brilliant rendition of Dahil Sayo when he performed in Manila, shocking and the sending the audience into wonderment, a truly magical moment, you can feel it even just listening to the audio version. The Japanese version of L.O.V.E. was cute as well.

China Is Aware That There Is A Bubble

As China is facing the prospect of large capital inflows from investors betting on RMB appreciation in 2010, policymakers have made it easier for mainland Chinese to invest abroad. This may be adding to the massive fund inflows other regional markets have experienced in 2009, especially China’s SARs. China’s rapid credit growth and loose monetary policies are also encouraging the trend.

  • WSJ: A bubbly property market in Hong Kong and record gambling revenues in Macau are partially a result of capital leaking out of China through “under-the-table transfers.” GaveKal Dragonomics says that the scale of the “shady money” coming from China’s loose credit and stimulus measures “is becoming slightly embarrassing for Beijing.” Capital controls are supposed to regulate the amount of money flowing to the SARs, but offshore bank accounts and other channels allow money to flow relatively freely. (11/23/09)
  • Michael Casey, WSJ: “[A] booming China is importing easy money from the Fed at a time when it least needs it, and is then exporting the same to its similarly undeserving neighbors.” (11/18/09)

Measures Taken to Increase Capital Outflows

  • On November 11, the State Administration of Foreign Exchange (SAFE) said it would expand a program that allows individuals to exchange up US$5,000 per-day to non-financial institutions. This helped to spark a rally in China’s B-shares, which are mainland shares denominated in foreign currencies. (Bloomberg, 11/13/09)
  • In October SAFE announced US$1.5 billion in new quotas under the qualified domestic institutional investors (QDII) program, which allows mainland funds to be invested in overseas assets. These were the first new quotas granted in 17 months.
  • In July 2009, SAFE eased rules on the use of foreign exchange by Chinese firms, which will allow companies to borrow in foreign currencies on the mainland, invest with their foreign exchange revenues, and seek new funding sources.
  • China's outbound direct investment reached US$55.6 billion in 2008, nearly double the amount in 2007, but much lower than the US$92.4 billion of inbound direct investment. In 2009, the gap looks may narrow. Through Q3 2009, the Ministry of Finance reported US$32.8 billion in non-financial outbound FDI, up slightly from the same period last year. Meanwhile, FDI to China decreased 14% y/y over the same period.
  • Mainland Chinese are limited to converting US$50,000 per-year into foreign currency, but investors often pool the quotas of family and friends to get around the limits.

p/s photo: Maggie Wu

Wednesday, November 25, 2009

2012 - How To Offend Everyone

The movie 2012 tells of the annihilation of the world as we know. It seems the Mayans kept many calendars, including one known as the “Long Count Calendar.” This calendar will reach the end of a 5,100-year-long epoch on December 21, 2012. My, my, got exact date some more, better move some things from my schedule then...

Coincidentally, the Tang Dynasty prediction in ancient China also foretold that the Earth would undergo a complete makeover, which could be interpreted as the end of the existing world, in the Year of Dragon (2012). Meanwhile, NASA satellite data have shown that the oceanic ice in the Arctic Circle this summer is only half its coverage four years back. A NASA scientist has said, "At this speed, the Arctic Ocean will be totally depleted of ice at the end of 2012 summer."

As the headline said, how to offend everyone. If the Mayan calender is correct, basically almost everyone dies, maybe a few will survive if they were living in a cave or under some other contraption. If 2012 is correct, then Buddhism as we know also vanishes, so many are still waiting to be reincarnated, as we all know how far we all are from being a buddha or reach total enlightenment. Say they were a few survivors and they somehow manage to procreate, so the reincarnation cycle still holds true, but man... can you imagine the queue to get reincarnated!!!

What about the Christians, well we were waiting for Revelation, but where is the rapture? Surely many Christians were "taken away" at the same time as non-believers, that cannot be right. The Jewish folks are no better, supposedly chosen people, dang... where is the first coming of Christ?

If 2012 were right, then were the atheists proven correct? Maybe, but you buggers also had to perish. Maybe being right didn't sound so appealing now. Does it make you feel better to be right and dead before your time is up? Well, for some people, to be right is more important than to be alive.

Back to reality, the Mayans, themselves, said very little about this date, though records show they certainly did not believe the world would end at that time. Many of their descendants today have complained that the current 2012-related hysteria is simply a “gringo invention.” In addition, the Bible powerfully warns against astrology and other occult practices for divination of future events (e.g., Deuteronomy 18:10-12; Jeremiah 10:2)—warnings that today’s 2012-obsessed individuals ignore, or perhaps have never heard.

Though this posting is tongue in cheek, we must remember that even with everybody dead, we all still have our souls to contend with... so where is you soul going to, and what will it be doing the rest of the time?

How to know if you have a soul. Do this one time, stand in front of the mirror and stare at yourself, you do it long enough (say 5-10 minutes) you will realise that what you see is a shell and that its your soul that lives and breathes, and that your soul can actually inhabit any shell, form or appearance, and you should know that that doesn't die off.

Take care of your soul.

p/s photo: Miho Kanno

HK IPOs Sizzling Hot

HK's IPO market has surpassed other financial centers by the proverbial mile this year. The liquidity arriving into HK from China and from the US carry trade have helped fuel the boom. The thing that sets this event apart is the proximity to the recent global crisis, and the pent up demand to raise cash by many large companies. Again, as I have warned before, I am quite uncomfortable with the upcoming UC Rusal IPO, a highly questionable and large IPO. Things could be derailed very swiftly if things do not go as planned.

The Standard: Hong Kong is now the world's premier destination for initial public offerings, having raised US$13.82 billion (HK$107.79 billion) in the first 10 months of the year.

Shanghai along with the increasingly hot Brazilian stock exchanges as well as New York were left in the wake of Hong Kong by the end of October, according to the World Federation of Exchanges after its latest month-by-month review.

Hong Kong was ranked top as the largest listing market by fund-raising size, the federation revealed. In taking the No 1 spot, it knocked the Shanghai exchange from the perch it had occupied for three straight months since July. Shanghai's IPO take for the year now stands at US$12.37 billion.

Yet funds being raised are still comparatively modest when compared to the 2006 and 2007 golden years - a period that was brought to a crashing end by the financial tsunami. In each of those years, the Hong Kong exchange counted more than HK$300 billion, driven by heavyweight listing candidates such as Industrial and Commercial Bank of China (1398). That raised HK$124.9 billion in 2006.

Hong Kong is now seeing investment capital pouring into the listing market "as there is no other way to go due to the low interest rate," said Bright Smart Securities general manager Nelson Chan Kai-fung.

The number of offerings this year to yesterday was 62 percent up on last year. Forty-seven companies have turned to Hong Kong this year for flotations, and two-thirds of them were listed in the July

-November period, according to Hong Kong Exchanges and Clearing (0388). "I believe the number of listing candidates will continue to climb in early 2010," said Prudential Brokerage's Mark To.

Companies are eager to cash in on market liquidity "before the central banks tighten monetary policy in the wake of economic recovery," To added. The surge in listings is also expected to continue next year because the SAR is considered a main beneficiary of efforts by the mainland to maintain its momentum. Indeed, brokers see China as the economy with the most growth potential. "The world is looking to tap the China market, and Hong Kong is the place which enables other economies to have access to it," To said. "Nearly 99 percent of the listing candidates generate income from the mainland."

Chan has a similar reading on the potential for the Hong Kong market. He believes it will draw more listing candidates from other countries, helped by an intense effort by HKEx to attract overseas firms.

Continuing the trend, UC Rusal, the world's biggest aluminum maker, is likely to be the first Russian firm to list in Hong Kong. It has a listing hearing on Thursday. It hopes to dual list 10 percent of its shares in Hong Kong and Paris this year - a move with an estimated value of US$2 billion.

p/s photos: Zhou Weitong

Tuesday, November 24, 2009

The Nasties Of Hot Money In Asia

Is there "hot money" in the system? Yes, the Fed's and ECB's low interest rates policy has already started the USD carry trade a few months back, and it could add a Euro carry trade to its banner soon. So, where do you think the money is headed or has been residing? Its Asia. The easy way to see where it has been headed over the past few months is to look at Asia's strongest currency this year. At the top of the heap was the Indonesian rupiah, followed by the Korean won and then the Indian rupee. So much so that the central banks at South Korea and Indonesia have expressed strong concerns over the inflow of hot money into their system. Beware of the current gains you have been seeing in stocks, property and currency in these two countries. They could just as easily disappear overnight. It also appears that the new favoured son by these carry trades is Taiwan.

Hence, we may well appreciate the efforts of Bank Negara a bit more over the past 18 months because Zeti refused to join in the bandwagon to "allow" the ringgit to appreciate too much. Rightly or wrongly, much of the hot money bypassed Malaysia and the ringgit because the ringgit is still not "that accessible and free-floated". By maintaining a disciplined approach, Bank Negara has basically staved off any future problems that may have to do with hot money moving too fast into the system and then too fast out of the system.

Many have been wondering why the Malaysian markets did not rise by as much as their regional peers. In fact Malaysian stock market has been in the bottom quartile in performance when compared to other Asian bourses. A huge part of the answer lies in the currency issue just discussed. Safe to say that taking that point further, we may argue that much of the rise in asset prices in other Asian markets may have been mostly "inflated" by the liquidity rush.

Is the region in grave danger of a collapse when these funds exit? What would cause the funds to exit? Well, if the Fed starts to raise rates, not likely over the next 6 months at least. Well, if there is a fresh war or political instability somewhere that causes people to rush to the reserve currency, and/or a massive jump towards risk aversion. The key I guess, is to monitor the rumblings and big trades in USD and the interest rate policy discussions.

On November 10, 2009, Taiwan's Financial Supervisory Commission barred foreign investors from parking their money in time deposits after bringing funds into the country. Plus, foreign investors will not be allowed to extend the deposit maturity beyond three months. Until now, foreign investors were allowed to deposit 30% of the inflows in time deposits for three months with a possible extension for another three months. Portfolio investors can still invest 30% of the net inflows in government bonds, money market instruments, money market funds and derivatives. As of October 2009, foreign investors had parked US$15.5 billion in Taiwan dollar accounts, almost five times the level considered appropriate by the central bank. The central bank has voiced concerns that beside investing in Taiwanese stocks, foreign investors were putting money into Taiwan Dollar deposits to earn interest plus currency arbitrage given the appreciating Taiwan dollar.

The move follows large capital inflows into Taiwan's dollar accounts recently which is putting upward pressure on the Taiwan Dollar and hurting export competitiveness. The central bank has been intervening in the FX market and had recently hinted at capital controls to contain currency strength.

This need not be an explosive issue as it seems that the central bankers in the affected countries are aware of the situation. The danger is when the central bankers do not have the political will to act as they should, or they act too slow to temper the liquidity inflow. One can easily reduce the inflow with various measures, so as to minimise the ill-effects of withdrawal of these kind of hot money.

Funnily, the US Federal Reserve Bank of Philadelphia president Charles Plosser said that the capital flows into Asia are a result of a stronger recovery in the region. He added that the flows are not such that he would consider them to be threatening or inconsistent with fundamentals. OMG, the danger is when enough people in high places in Asia believe that diatribe. These are not long term FDI, its short term, its a play on currency outlook and interest rate differentials, is short term - how in the world can Plosser say its not threatening. It can move asset prices up by 30%-50% in 6 months, and we know its seriously never going to be long term, so when they exit, how can Plosser say that it won't be threatening???!!!

p/s photos: Reon Kadena

Monday, November 23, 2009

Party Pills On The Rise

Now, read the headline again. That was the front page headline in The Star today. I do find it exasperating to read mainstream media because I always have to categorise them in my mind first as genuine news reporting, or opinions, or half truths or just plain propaganda. Hence reading msm is not an enjoyable task anymore.

I had to write about the headline in The Star today, because you see the word "party" you naturally think its another story about politics. When you read on its actually about designer drugs and drug use among the youth and young adults.

Imagine if it WAS about backbenchers in certain Malaysian political parties!!! I had to laugh when I saw the headline because if its about political parties, ... its damn funny man .... ; ) ... Party Pills On The Rise... of course, you know why they are called "pills"... because they are a bloody nuisance, they are supposedly good for you but damn hard to take, and fucking hard to swallow and to keep down. Now thats funny!!!

p/s photos: Agnes Monica

Why I Like Kim Hin (A Lot)

Another one which is part of the recovery story. This is is even better that the couple that I have featured recently. Kim Hin had a troublesome spot a few years back but has "revamped its thinking and strategy" to be a an out-and-out transparent, diligent and professional company. The first couple of years, not many believe that the tiger has changed its stripes. I have been monitoring the company, on and off, and I must say, I am giving it near full marks. They did not simply play their shares anymore like before. I mean, look at the 52 week high-low, its just 84 sen and 1.15.

Its been moving this morning and I am already typing as fast as I could. Please do not think that I am whacking the shares before posting. Kim Hin Industry is an investment holding company engaged in manufacturing and distribution of ceramic floor, homogeneous and monoporosa tiles. The company through its subsidiaries is involved activities that include trading of building materials, property letting, property and investment holding; and wholesale and retail of ceramic tiles. Kim Hin primarily operates in Malaysia, China and Australia. It is headquartered in Sarawak. The company recorded revenues of MYR251.5 million in the fiscal year ended December 2008. Its net profit was MYR4.2 million in fiscal 2008. Thats fine and dandy because it was the difficult 2008. To even come out in the positive is an achievement to cost control and product acceptance.

Basically, there is only one big catalyst:

For the 2Q ended June 2009, its revenue was RM63m and net profit was RM9.48m (note that the whole of 2008 its net profit was just RM4.2m. The !Q2009 was still difficult for them, the carry on effects of the financial crisis, which saw only a net profit of RM1.37m.

Those who monitor quarterly results (they should, especially when you are looking for srong recovery stocks) will note that they released their 3Q2009 figures on 18 Nov. It was outstanding. Revenue was RM65.3m and net profit was RM11.9m!!! If you take in the first 9 months of 2009, its total net profit came to RM19.82m or a net EPS of 13.77 sen. If you assume they make a similar sum for 4Q 2009, basically you can add another 6 sen to the figure, making it a net EPS of 20.77 sen.

Now 20.77 sen is very significant for a stock that trades below RM1.30. A PER of around 6x. Its net asset per share is RM3.08. Its got RM87.2m cash in bank, and about RM40m in liabilities. All that will become very significant when you consider they only have 154.9m shares. That translates into:

Net cash per share of 30 sen
Net tangible asset of RM3.08
Share price below RM1.30
Net EPS (likely) for 2009 of 20 sen

In a recovery, this stock should see a similar surge in business over the next 2 years at least. The stock and figures sell by itself.

The above were views on stocks and sectors that I like, 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.

Should The US Really Desire A Strong Yuan

The yuan has basically rise by 20% over the last 12 months against the USD. Still, many have been calling for a dismantling of the yuan's peg. The peg, they argue, offers China a competitive advantage by making its products cheaper in U.S. markets, thus allowing Chinese firms to gobble up market share and steal jobs from U.S. manufacturers. The thought is that were China to allow its currency to rise, American manufactures would regain their lost edge, and both manufacturing firms and the jobs formerly associated with them would return. Well, that is the partial truth - the fact is the majority of China's exports are actually US products, owned by US companies manufacturing in China, then exporting it to other countries. China's voracious export machinery is due in part to the foreign investments, or better known as outsourcing. If it wasn't China, it would India, or some other Asian country or Latam country. That argument does not hold water.

One can also argue that the outsourcing movement has allowed many companies in the US and Europe to "save on costs" and hence report sustainable margins growth. To allow for a free floating yuan, say gaining another 30% against the USD over the next 12 months, could see those cost savings being shaved considerably. It won't help the US much as the companies will just look to produce the same goods and/or services somewhere else cheaper. It will be a long time before they say, let's go back and do this in the US, not when your basic manufacturing labour cost between $15-30 an hour.

While the peg certainly is responsible for much of the world's problems, its abandonment would cause severe hardship in the United States. The US economy is very dependent on life support provided by an endless flow of debt financing from China. These purchases are the means by which China maintains the relative value of its currency against the dollar. As the dollar comes under even more downward pressure, China's purchases must increase to keep the renminbi from rising. By maintaining the peg, China enables the US to continue spending more than they have and avoiding the hard choices necessary to restore the US long-term economic health. Conversely, a much stronger renminbi may actually result in China purchasing a lot less Treasuries as their surpluses figure would start dwindling down - so who is going to fund the US printing press when that happens?

Contrary to the conventional wisdom, when China drops the peg, the immediate benefits will flow to the Chinese, not to Americans. Yes, prices for Chinese goods will rise in the United States - but so will prices for domestic goods. As a corollary, the Chinese will see falling prices across the board. As anyone who has ever been shopping can explain, low prices are a good thing. In addition, credit will expand in China while it contracts in the US. As demand falls for both dollars and Treasuries, prices and interest rates in the United States will rise. Rising rates will restrict the flow of credit that is currently financing government and consumer spending. This change will finally force a long overdue decline in borrowing. Which is not really a bad thing, but it could derail the jobs outlook in the US for a prolonged period - a move that can be deem as political suicide at this point in time, and considering where we are following the financial crisis.

On the flip side, in the long run, the US economy will benefit from the abandonment of a system that guarantees our dependency and inevitable downfall. De-pegging will force the hand of US politicians toward pursuing realistic policies. The Chinese will come to their senses eventually because it is in their interest to do so. Meanwhile, the longer the peg is maintained, the more indebted the US become, and the more their industrial base shrivels. In short, the longer they wait, the steeper the fall for the US.

If Wal-Mart were a country it would be China's eighth-largest trading partner. Some 70% of the products sold in Wal-Mart have Chinese components. Billions of dollars of purchasing power would be taken from American consumers if the renminbi were to appreciate. While China's economy enjoyed 8.9% growth in the gross domestic product in the third quarter of this year, the country's continued economic strength is not guaranteed if the American consumer stays in a funk.

A fact not appreciated by many observers is that China is no longer an export-led economy. It is still important but not as big as perceived, exports still account for 20% of its economy. Already 10,000 factories have shut in export hubs like Guangdong. The ones that remain often exist on paper-thin margins of 2% to 3%. Even a small currency appreciation would cause thousands more factories to shut and leave millions more unemployed. That is something Beijing will not allow to happen.

The biggest currency problem in the world is not a weak yuan but a weak dollar. That is the issue President Obama should focus on. Foreign governments hold the dollar in vast quantities because it has been seen as stable. China and Japan alone hold over $3 trillion worth. As the dollar plummets, many nations are abandoning it, fearing further erosion in their portfolios. They have done so as quickly as possible but carefully as well, knowing that if they move too fast the dollar will fall even faster.

Rather than wasting time pushing China to strengthen the yuan, Obama and the Fed should figure out how to strengthen the dollar by paying down the US debts. A strong dollar, not a strong yuan, is the right debate.

p/s photo: Yang Mi

Friday, November 20, 2009

Love's Tapestry Coming Out On 18 December 2009

Really looking forward to another great local album. Remember 2V1G, the brainchild of Leslie Loh, and now he has assembled Roger Wang again but pairing his virtuosity with Gina Panizales (born and raised in Iloilo City, Philippines, but has been a regular performer in Malaysia). 2V1G was in Chinese, this is in English I believe and judging from the weekly updates from Leslie, this will be another excellent album by these talented and passionate mostly-Malaysians. Date of release 18 December 2009.
Updated: After the Solianos gig, I went with Leslie to his car to get a listen to the copy of Love's Tapestry. I must say that I am honoured to be among the first few to get a sampling. The songs were ballads from the 70s and 80s mainly, but taken down to a tender level, interspaced with the delicate guitar playing of Roger, coupled with the mature vocals of Gina, giving each song a fresh take. If you grew up in the 70s and 80s, you will love this album. Songs that you listened to when you slow danced, when you fell in love or were infatuated with someone, songs you listened to when you made the best friends ever, at a time where nobody wanted to rip you off, take advantage of you, a time when you made real friends ... The first song was the enchanting Fallen, given a samba feeling, and as Leslie said, the album starts off with falling in love and works itself into a loving relationship and the end comes heartbreak. My favourites include Just Tell Me You Love Me, a sublime and tender take on the England Dan & JF Coley classic - its more nuanced, slower and delicate than the original. The other has to be Still, originally by the Commodores, which I thought was too sparse as it left a lot of dead sound in the original - Gina's heartbreaking rendition added layers to the song coupled with Roger's sublime guitar play. The other worthy of mentioning was Roger's only instrumental piece, the Beatles' Here, There & Everywhere, the guitar phrasing and mood plucking was absorbing to say the least. Can't wait for the real thing ....

Click here for more information:

On-line purchases, please go to:

We all know Roger Wang well (link on my webpage on the left column), to get a listen of Gina's voice, go to the link below where she has loaded a few songs from her first album "Finally".

p/s: Leslie & I will be meeting up tonight to see The Solianos at NoBlackTie. In case you were wondering, the Solianos just happen to be the best grouping of family musicians Malaysia has ever had.

Demystifying Hell - Exothermic Or Endothermic

I was reminded of the funniest email I got a few years back. It must have made its way a couple of times around the world and re-enter my mailbox again. It had to be a true story because it would take so much effort to think up one from scratch.

The following was an actual question given on a University of Washington chemistry mid term. The answer by one student was so 'profound' that the professor shared it with colleagues, via the Internet, which is, of course, why we now have the pleasure of enjoying it as well.

Bonus Question: Is Hell exothermic (gives off heat) or endothermic (absorbs heat)?

Most of the students wrote proofs of their beliefs using Boyle's Law (gas cools when it expands and heats when it is compressed) or some variant.

One student, however, wrote the following:
First, we need to know how the mass of Hell is changing in time. So we need to know the rate at which souls are moving into Hell and the rate at which they are leaving. I think that we can safely assume that once a soul gets to Hell, it will not leave. Therefore, no souls are leaving.

As for how many souls are entering Hell, let's look at the different religions that exist in the world today. Most of these religions state that if you are not a member of their religion, you will go to Hell. Since there is more than one of these religions and since people do not belong to more than one religion, we can project that all souls go to Hell. With birth and death rates as they are, we can expect the number of souls in Hell to increase exponentially. Now, we look at the rate of change of the volume in Hell because Boyle's Law states that in order for the temperature and pressure in Hell to stay the same, the volume of Hell has to expand proportionately as souls are added.

This gives two possibilities:
1. If Hell is expanding at a slower rate than the rate at which souls enter Hell, then the temperature and pressure in Hell will increase until all Hell breaks loose.
2. If Hell is expanding at a rate faster than the increase of souls in Hell,then the temperature and pressure will drop until Hell freezes over.

So which is it?

If we accept the postulate given to me by Teresa during my Freshman year that, 'It will be a cold day in Hell before I sleep with you,' and take into account the fact that I slept with her last night, then number two must be true, and thus I am sure that Hell is exothermic and has already frozen over.

The corollary of this theory is that since Hell has frozen over, it follows that it is not accepting any more souls and is therefore, extinct.... leaving only Heaven, thereby proving the existence of a divine being which explains why, last night, Teresa kept shouting 'Oh my God.'


p/s photo: JJ

Stock Take On Highlighted Counters & Returns

Time to do stock take since I have said the risk-reward ratio has turned sour, plus my 1,280 target for the year has been reached. Hence I will have been more aggressive in reducing positions. Below was the link to the previous stock take:

IJM Land, in at 1.81, supposed to wait for the 30% before, now 2.62... 44% take half profit, let the rest ride... but have a stop-loss(gain) at 2.50.
Now at 2.27, stop-loss gain triggered, out of stock at 2.50.

CIMB, in at 10.30, now at 12.44... 20%, will hold for the 30%.
Breached 13.00, very close to 30%, enough for now. Out.

QL Resources, in at 3.34, now at 3.46... wait for bonus.
Closed at 3.89, 16% gain, not enough, this one is safe enough to hold for its bonus.

Sep 7: Kurnia Asia 0.58, went to 0.76 (+31%), now at 0.70, took half profit, let the rest ride, stop-loss (gain) at 0.64.
Closed at 0.72, riding to 0.76 two weeks back. Up stop-loss gain to 0.69.

Sep 16: TAS Offshore: in 0.78, had a run to 0.89, back to 0.80, still ok.
Dwindled to 0.76, cut loss here, seems not to be panning out as I thought.
Sep 17: Ann Joo, in 2.30, now at 2.70, +17%, will wait for 3.00.
Closed at 2.89, so close to my 3.00, but cannot be too fixated some times, take all profit, can't complain with 25% in 2 months.

Sep 28: Hock Seng Lee, in 1.02, went to 1.20, now at 1.15, can wait till Budget news out then sell.
Excellent results, trying to recover, closed at 1.15. Not going to wait as the anticipated catalysts have appeared and the stock is finding it hard to scale up, too many stale sellers waiting above 1.20. Out.

Sep 29: TAE, in 1.45, hold for TA Global exercise.
Still comfortable with this, thinks that TA Global will fly and so too will TAE.

Oct 7: Evergreen, in 1.01, now 1.07, some ways to go.
Went above 1.50 strongly, 40-50% gain in 2 months, what more you want, out for now even though I think this is good to 1.80 but risk-reward not that good and had to reduce stocks.

Oct 8: CSC Steel, in 1.08, now 1.23 (+13.8%), strong accumulation by institutional funds, will keep.
Took my 30% or thereabouts at 1.38. Out for now.

Oct 9: BRDB, in 1.72, now 1.90, small position, will wait till volume breaks out.
Volume breakout never came, looks like a need to hold for a few more months, owing to big picture not that conducive, out.

Oct 12: Fajarbaru.
In at 1.20, did try to move but sluggish much like HSL, cut.

Oct 14: Weida.
In at 0.76, also sluggish 0.67, cut loss.

Oct 16: Efficient e-Solutions.
In at 0.235, went up a bit, but back down 20.5, cut at 0.22.

Though not a "Why I Like" stock, I did mention Magna Prima as a stock to watch, it has gone from low 2.00 to above 3.00 since then, no position.

Oct 20: Success Transformers.

In at 1.18, went to 1.32. Close at 1.21. Took 1/3 profit at 1.30. Will hold for Seremban Engineering IPO.

Oct 26: Notion VTec.

In at 0.505, 5 into one exercise. Now holding at 2.57. This one I will hold for the placement announcement and mid term.

Nov 6: Salcon.
In at 0.565, sold 1/3 at 0.605. Holding well, will keep the rest for my 30%.

Nov 13: Inch Kenneth.

In at 0.445. Volatile, sold 1/3 at 0.52. Closed at 0.475. Recent posting, will hold.

Nov 17: Supportive.
In at 1.03. Also volatile, sold 1/3 at 1.14. Closed at 1.09. Recent posting, will hold.

The above were views on stocks and sectors that I like, 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 photo: Maggie Wu

Hoopla Over Maxis & Market Mood

I am happy that Maxis did not get whacked by retailers to stratospheric levels. I really think private investors have grown up a lot. They listened, they read, most of them know this Maxis is not the Maxis of old. I hope they also appreciate that the mobile penetration rate is vastly different from what it was ten years ago. I also hope they did not get fixated at the previous privatisation / sale at around RM15 (I think, I forgot). Most importantly, they refused to pay above fair value (deemed as having a properly competitive dividend yield) for what is basically a 70% dividend stock. By that, I mean they did not "take out the institutions" or gave them more gains than necessary. We all deserve a pat on the back. The players have grown up - if you lose enough money, you will learn, we all do.

What about the liquidity drain that Maxis was supposed to effect on the bourse? Yes, I have heard some selling their other shares to ready funds to buy Maxis, thankfully they have been few and far in between. Is there liquidity being soaked, yes of course, its not a small issue. A lot of funds had to rebalance their portfolio to accommodate Maxis. Due to the very tiny issue to the public, not an excessive amount of funds was tied up. In fact, the sluggish markets over the last ten days can be attributed to this liquidity being drained, or it actually scared many players into not participating in the markets owing to the fear of a possible down trending market.

So, if the US and China markets continue to behave, will the next few days be OK for local bourse? Most would believe that with Maxis out of the way, the markets should resume its uptrend to try for 1,300 ... will they be proven right. The markets have reached my target of 1,280 for the year. To me, it could overshoot that but it will be difficult to breach 1,300 this year, regardless of how well the US and China markets are performing. To conclude, the risk-reward is not particularly attractive. I have been scaling down holdings, and sticking to very selective stocks with near term catalysts only - in other words I would stay very selective and stick to diligent stock picking. As it is, I am finding it increasingly difficult to pick stocks to feature - the markets is trying to tell me something.

I do think there will another good round come January/ February 2010, but it will have to come down a bit first for that rally to occur. You cannot possibly have a good run for more than 3 months, it will over extend itself and be tired. One should always read markets like they view an athlete, they will show signs of fitness, strength, confidence, or weakness, tiredness, sluggishness etc. They way to read the signs is to monitor the top volume and top gainers, is there constant rotation or the same names, are the leaders moving with good catalysts or just simply goreng stuff. There will always be goreng stocks, the stronger they can do it, the stronger the underlying willingness of the market to participate, but when these stocks fail to attract followers, the answer is obvious. I would stick strictly with stock picking mode only and reduce mid-term or long term stocks.

p/s photos: Jessica C. (Wacoal's top model)

Thursday, November 19, 2009

Why I Like Yungkong Galvanising Industries

As the global economy recovers, it is also timely to look at stocks that were hurt by the downturn in global trade. As mentioned during my talk, you cannot outrun a crisis, but if there is little capital being decimated, and your business structure is in place, you should recover splendidly eventually. Evergreen was a prime example. I have just discovered another in Yungkong.

Yung Kong Galvanising Industries (YKGI) manufactures and sells galvanized and coated steel products. YKGI subsidiaries are involved in the manufacture and sale of galvanised and steel products, furniture hardware and accessories. The group primarily operates in Malaysia, where it is headquartered in Kuching.

The group recorded revenues of MYR479.3 million (approximately $144.4 million) in the fiscal year ended December 2008, an increase of 3.8% over 2007. The group's operating profit was MYR19.6 million (approximately $5.9 million) in fiscal 2008, a decrease of 44.2% compared to 2007. Its net profit was MYR1.2 million (approximately $0.4 million) in fiscal 2008, a decrease of 91.5% compared to 2007. Naturally Yungkong felt the harsh realities of the global turmoil, and its chairman explained their situation splendidly with clarity and purpose, facing the harsh realities head on.

Dato' Dr Hii Wi Sing in their Dec 2008 annual report said: "Yung Kong Galvanising Industries Berhad (YKGI) experienced a year of unavoidable and unpredictable norm with an unprecedented steep rise and followed by the deepest slump in prices for most commodities, including our raw materials and products. This happened so abruptly and sharply. Normal market principles become invalid and inapplicable during this plunge, and economies and markets crashed of tsunami scale. Massive consolidation occurred and everyone is rushing to cash out faster than the others. The great expectation of a bumper year for 2008 for our operations was abruptly terminated much earlier than the management’s anticipation, thus reversing most of our Group’s record pretax profit (PBT) of RM23.66 million achieved in the first half of the year to RM4.80 million for our financial year ended 31 December 2008. This is a stark comparison to RM20.56 million achieved in 2007. The weak result was due to a writedown (RM10.70 million) of inventory to their net realizable value and provision for doubtful debts of RM1.74 million. Our profit was further dampened by FOREX loss amounting to RM5.80 million caused mainly by the unexpected strengthening of the US dollar against the trend of most economists and professionals’ general consensus and predictions."

Catalyst #1 Earnings Recovery - This is the key catalyst. For the quarter ended June 2009, it recorded a revenue of MYR82.3m and a net profit of MYR1.92m. I expect even stronger results for the rest of 2009. Another good indicator is their inventories level, which stood at MYR91m as at end of 2008 and has been whittled down to MYR70.8 by end June 2009. Now you will blink if you miss this, for the quarter ended September 2009, net profit for that quarter jumped to MYR7.14m. Thats a strong recovery trend. Owing to the fact that they had a poor 1Q2009, total net profits to date as of end Sep 2009 came to MYR3.12m. It would be silly to incorporate the 1Q 2009 loss to the full year as that would not paint a fair picture of the current state of affairs. Assuming they make another net profit of MYR7m for 4Q2009, total net profits for the year would still be above MYR10m. On 195.5m shares, that works out to be a net EPS of 5.1 sen. At the current price of 46 sen, that comes to a PER of 9.1x.

Catalyst #2 Absurdly Cheap Even For A Cyclical Stock - As I said, if you annualise the third quarter alone MYR7.14m x 4 = MYR28.56m net profit theoretically. That works out to a massive 14.6 sen EPS. Divide that with its share price of 46 sen gives a PER of just 3.15x. A load of comfort here. Even if you take into account the full conversion of its warrants, the share base comes to 237.9m giving a net EPS of 12 sen, still less than 4x PER.

Longevity & Long term partner - On 9 May 2008, Yungkong celebrated the 25th anniversary of the signing of the Joint Venture Agreement between Yung Kong Co. Bhd, Sarawak and Marubeni Corporation (MISI), Japan for the operation of YKGI in 1983. The launching of their Klang’s operation was held on 10 October 2008, thus signifying the completion of the current phase of development in making YKGI an integrated steel coil coating company in Malaysia.

The net asset per share stands at 72 sen, no worries there. Yungkong is symbolic of the kind of cyclical recovery stock you want to hold for the medium term. My anticipated 30% should not be difficult to attain.

The above were views on stocks and sectors that I like, 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 photo: Jessica C.(top model for Wacoal)

Wednesday, November 18, 2009

The Malaysian Brain Drain & More Contractors Please!!!

This article is too important not to be read by more people. It is written by Koon Yew Yin. Who??? Well, if you like Mudajaya, IJM or Gamuda, Mr. Koon was one of the founders for all three companies. We certainly do not need more contractors - we must ensure that our resources are put into creating value to industry and economy, not creating layers after layers of profits being hived off.

The article was taken from Center For Policy Initiatives:

Article by Mr. Koon can be linked to:

I wish our government would take to heart what Mr. Koon has been saying. If you talk about 1Malaysia, this is the 1Malaysia most of us are thinking about - I don't know about the one some minority have in their minds. If you think the contractor article was timely, have a read of his piece on the Great Malaysian Brain Drain penned in July. We all share his sentiments.

Note on the Author

I am a 76-year-old chartered civil engineer and one of the founders of the three larger construction companies listed in Bursa Malaysia. These are Gamuda Bhd, Mudajaya Group Bhd, and IJM Corporation Bhd.

I was a member of the Board of Engineers, Malaysia for three terms. I was also on the Sirim Board responsible in writing the Malaysian standard specifications for cement and concrete. In addition, I was the Secretary General of Master Builders Association, Malaysia for nine years.

These days, I am completely retired. My intention in writing this article is honourable. Many people may not like reading what I have written and the truth may be difficult to accept. Nevertheless, this is my considered analysis for the benefit of my country, the Bumiputera contractors and the construction industry.

Written by Koon Yew Yin
Wednesday, 18 November 2009

It is an indictment of our system that IJM is able to compete internationally for contracts but yet is required to work as a sub-contractor to Bumiputera companies on the North-South Highway in Malaysia.

On Oct 25, 2009 our Second Finance Minister Ahmad Husni Mohamad Hanadzlah said that government has vowed to cut down on wasteful spending to lower its budget deficit and all major public projects must go through the open tender system.

Earlier, the Auditor-General’s report for 2008 revealed continuing financial management weaknesses at every level of the government. Delays in project completion seem to be a perennial problem and the lack of oversight by various ministries and departments in the procurement of goods and services continue to cost the government hundreds of millions of ringgit.

These statements indicate perhaps that our Prime Minister Najib Razak may want to reverse his announcement on January 9 in Kuala Teregganu that the government would always look after Class F contractors. (Non- Bumiputeras cannot register as a Class F contractor).

The government had in fact already set aside RM900 million, which was RM300 million more than last year, for works to be undertaken by Class F contractors this year.

Producing competitive Bumiputera contractors

As reported on May 1, 2005, Malaysia had one contractor for every 614 persons. Most likely there are more contractors by now. This ratio is again likely to be amongst the highest in the world and is obviously costing the public a significant amount of money besides affecting our overall economic performance.

I would like to pose a few questions which may appear unkind or insensitive but nonetheless need to be asked.

Out of hundreds of high-rise buildings in Kuala Lumpur does anyone know of any Bumiputera contractor who has won any of the building contracts through an open competitive tender process? Out of hundreds of kilometers of highway in Malaysia, can any Bumiputera contractor who won any part of the highway contracts through open tender be identified?

The answer to the above questions unfortunately is in the negative. The evidence is that all the government’s well-intentioned efforts in trying to produce competitive Bumiputera contractors since 1957 have failed.

Why this has happened needs to be openly discussed rather than swept under the carpet. In this note, I share my experiences as a contractor and my knowledge of why Bumiputera contractors have failed in the past and what needs to be done by the government to correct this unhealthy situation.

Facts of life in the contracting business

Contracting is a very difficult business yet it is so easy to register as a contractor.

To register as a Class F contractor one has only to show that he has RM5,000. He does not even require a pass in Lower Certificate of Education (LCE). But it will take at least 10 years to learn how to overcome all the inherent difficulties and become competitive and efficient. Continuously giving out lucrative and over-priced contracts without open tenders will only make the recipients less competitive.

Secondly, studies have shown that there are more failures and bankruptcies in contracting than in any other business, and also almost all construction projects are NOT completed within the original scheduled time.

The delay will cost the contractor more and that is why you can often see uncompleted buildings and abandoned projects which have been undertaken by inefficient contractors. There are many reasons for this peculiar phenomenon.

1. Open tender system

Although this system is the best way to ensure completion of any project/contract at the lowest price, it is the most difficult obstacle any contractor has to face in the real competitive world. He must know his business very well and be efficient to face the open competition all the time. Like a good athlete, he has to keep fit and constantly be aware of the market conditions and his competitors.

There is a classic saying, ‘a cheap thing is not good and a good thing is not cheap’. But contractors always have to produce good work at the cheapest price.

In order to submit the cheapest tender, the contractor must be very optimistic in all his assumptions to get the cheapest rates. He must assume that he will not encounter any cash flow difficulties and that he will always get his progress payments on time to pay his creditors.

He must also assume that he will not encounter any difficulty in getting all the required materials on time to avoid any delay and also that there are ample workers for him to pick and choose from.

Furthermore, he must also assume that the heavens will be kind to him and he will not meet any inclement weather during construction. Invariably, many of these assumptions are proven wrong and thus completion delayed, and the infrastructure will cost more to complete than provided for in the contract.

2. The importance of teamwork

Teamwork is important in all business endeavours. It is more so in the contracting business. Every contractor must realise that his success is not going to be determined by his own knowledge, talent or abilities. It is going to be determined by his ability to develop a great team. Those who are closest to him will help determine the level of his success.

Every efficient contractor must have a reliable team comprising managers, sub-contractors, material suppliers, foremen and skilled workers. All the team players must cooperate with one another, bearing in mind that the main contractor’s survival depends on their contribution. Their main goal must be saving cost. If they cannot complete the contract within the tender price, all of them will also be affected.

3. Construction material pricing

There was no material price escalation clause in the conditions of contract before I became the Secretary General of the Master Builders Association. During the unprecedented oil crisis, building material prices shot through the roof. As a result, many contractors could not complete their contracts for schools and other projects. After several appeals the Public Works Department (PWD), now known as Jabatan Kerja Raya (JKR), eventually allowed only cement and steel for price variation reimbursement.

This was only a partial solution as hundreds of other items were excluded.

Without a protective price fluctuation clause for the other items, contractors are exposed to risk. At the same time, knowing that they have to undercut their competitors during the tender process, contractors would normally under-price to achieve the lowest tender. Invariably, most materials would increase in price due to inflation and other reasons. Contractors require many years of experience to be able to anticipate such price changes and to make adequate provisions for them whilst at the same time not overpricing their tenders and losing the bid.

4. No contract is exactly the same

No two high-rise buildings in KL are the same.

Construction of a building, a bridge or a stadium is always akin to making a prototype. The process is much more difficult than manufacturing any product where there is repetition. For example in making cars, the first prototype and the initial few cars may be more difficult to make but once everyone gets used to the routine, the manufacturing process will normally proceed smoothly.

However, in the construction of buildings or any civil engineering works, there is very little repetitive work. Every construction site is different and most of the people involved have never worked together before.

On top of this, there may also be inexperienced supervisory staff that can create a lot of difficulties for the contractors. Invariably, by the time all parties get used to the routine, the scheduled time is over.

5. Financing

Most contractors do not have sufficient capital to finance their undertakings.

Contractors generally do not have fixed assets like most manufacturers. They usually do not have land and buildings but, instead, they have construction equipment. Unfortunately, banks do not accept these moving assets as collateral for a loan. Without bank financing, contractors will obviously find it more difficult to undertake their business.

Beginning at the bottom: The key to success

I have provided some insight into why contracting is not a business that is as easy or profitable as it is commonly perceived to be.

There are other factors explaining why or how some of the most successful tycoons associated with the building or construction industry have managed to get where they are.

Firstly, it should be noted that the majority of listed companies were started by Chinese merchants most of whom incidentally did not have tertiary education. For example, Lim Goh Tong of Genting began his working career as a scrap iron dealer and a contractor; and Yeoh Tiong Lay of YTL Corp. started off as a small contractor.

Generally, Bumiputeras are not interested in working long hours in managing small businesses earning marginal profit. Because of the NEP, many have hopes of securing permits or concessions for big deals so that they can become instant millionaires. There are relatively few Bumiputeras involved in small and medium-scale enterprises (SMEs).

More Bumiputeras should follow the humble footsteps of the Chinese to become traders and merchants for building materials and similar goods. The business skill they can learn from these humble beginnings will carry them a long way. I am very sure some of them will eventually become good contractors and successful businessmen if they learn the trade at the bottom and not try to parachute into the contracting business.

The importance of skilled workers

Although there are already many Bumiputera engineers unable to find employment, most of the universities are still producing more and more engineers every year. But without a sufficiently skilled workforce, all the engineers in the world would not be able to complete a single project.

There are so few Bumiputera construction foremen, carpenters and other skilled workers. If you were to go into any building construction site, you would see the truth of what I am saying. How many Malay carpenters have you seen in KL?

Without skilled Bumiputera workers, it would be more difficult for Bumiputera contractors to succeed. In fact, most of the Chinese contractors started as apprentices and rose from the bottom to become successful contractors. More Bumiputeras should be encouraged to work as apprentices in construction sites. This is a necessary good practice to produce really good Bumiputera contractors.

The role of trade schools

There should be more trade schools and more Bumiputeras should be encouraged to learn construction skills like carpentry, welding, plumbing, bricklaying, etc. Very soon, skilled tradesmen will be able to earn more than degree holders as is the case in Australia or England.

The government should build more trade schools and not hesitate to offer scholarships to Bumiputeras to be trained in these trade schools. Presently, the construction industry is not short of engineers but it is very short of skilled workers and supervisors. If more Bumiputeras are properly trained in various crafts and blue collar skills, some of them will go on to become good contractors.

Time and more time

They say Rome was not built in a day. It is easier to produce engineers, doctors and other professionals than to produce efficient and competitive contractors who do not need government financial aid. Just giving out lucrative contracts to Bumiputeras is not the answer; in fact it is counter-productive as it simply makes them more inefficient and less competitive.

IJM Corporation Bhd has taken more than 40 years to attain a competitive level of competence. The record shows that IJM has secured on competitive tenders five toll road concessions in India. Three are currently in operation and two are under construction. The total length of the roads exceeds 1,000 kilometres, longer than our North-South Highway.

In addition, IJM completed a toll bridge in Kolkata and sold its interest for RM65 million profit after a short period of three years. IJM is also a very reputable LRT builder, having to date completed 15km of the elevated sections of the New Delhi Metro and it was recently awarded another 8km.

Based on open competitive tender, IJM won the contract to build the tallest building, a prominent future landmark for the Delhi Municipality, in New Delhi.

It is an indictment of our system that IJM is able to compete internationally for contracts but yet is required to work as a sub-contractor to Bumiputera companies on the North-South Highway in our own country.

Conclusion: Half-baked contractors are not in our national interest

Contracting is one of the most, if not the most, difficult business and it takes a very long time to produce competent contractors.

It is very dangerous to quickly produce half-baked ones as they will soon find themselves in financial difficulties and require bailouts. The bankruptcy record shows that a large number of debtors are Bumiputera contractors with many of them unable to pay back the loans given by government-controlled financial institutions.

The government must change its methods and policies which have proven unworkable. There is no urgency in producing more Bumiputera contractors as many of the key industries e.g. the banks, plantations, motor vehicles, taxis, rice etc are already under the control of Bumiputeras.

Our government must not be narrowly communalistic and should make use of all the groups, irrespective of race, that are more efficient in the contracting business.

Giving out contracts without a full tender process is akin to corruption. I urge the government to stop this corrupt practice and to utilize the savings from these enormous sums to implement the options suggested above.


The Great Malaysian Brain Drain

JULY 11 – There is a boy I know who scored 10 A1s. His mother is a primary school teacher and Andrew has two younger brothers. His father, a civil servant, had already passed on by the time the son sat SPM in 2006.

Armed with his excellent result, Andrew applied for a scholarship to study mechanical engineering. The government rejected his application. Petronas rejected his application too. Can you imagine how disappointed and frustrated he was?

As soon as I learned of Andrew’s difficulty, I offered him financial assistance to do accountancy in Utar. He has been scoring top marks in every exam to earn a scholarship from the university. Although Andrew is now exempted from paying fees, I still bank him RM400 a month to cover cost of living.

I have given assistance and allowances to more than 40 poor students to study in Utar in Kampar, Perak. Andrew is typical of their calibre; he prefers to get what is his due on merit, and his university has seen fit to waive his fees.

On my part, I expect nothing from those that I’ve supported except for them in future to help young people in similar circumstances, and to hope that they will all stay back in Malaysia so that they can lend their talents to building up our nation.

There are others with deeper pockets who have extended a helping hand to our youngsters. One of them offers the cost of school and exam fees, hostel accommodation, RM5,800 a year for expenses, RM1,200 settling-in allowance, and transport/air ticket. Furthermore, the recipient is not bonded. In other words, the giver asks for nothing back.

I’m talking about the pre-university Asean scholarship extended to Malaysians by ‘the little red dot’ Singapore.

Of course, Singapore is not doing it for purely altruistic reasons. The country is giving these much coveted Asean scholarships to build up her national bank of talent.

Some Malaysians accuse them of ‘poaching’ the creme de la creme of our youngsters. I don’t look at it as poaching. Their far-sighted government is doing it in their national interest.

And why not? Singapore can afford it. It has three times our GDP per capita. On another comparative note, the GDP per capita of Taiwan and South Korea are 2.5 times and double ours respectively. Before the NEP’s introduction in 1970, the four countries were at parity.

The big question is why are we surrendering our assets which Malaysian parents have nurtured but the state neglected?

Tens of thousands of young Malaysians have left our shores on the Asean scholarship. I am not sure if Singapore is willing to give out the figure.

But I am pretty sure the Malaysian authorities do not give two hoots about this, whatever number they may have arrived at. If they do, there seems to be no policy change to stem the outflow.

Malaysia is optimistically indifferent to the continuous brain drain, little caring that it is detrimental to our aspiration of becoming a developed country (I hate to say this) like Singapore.

Behaving like a failed state

Consider this startling statistic: There are more Sierra Leonean doctors working in hospitals in the city of Chicago than in their own homeland. More Malawian nurses in Manchester than in Malawi. Africa’s most significant export to Europe and the United States is trained professionals, not petroleum, gold and diamond.

The educated African migration is definitely retarding the progress of every country in Africa. Today, one in three African university graduates, and 50,000 doctoral holders now live and work outside Africa. Sixty-four per cent of Nigerians in the USA has one or more university degrees.

If we carry out a study, we are likely to find a very large number of non-Malay graduates emigrating to Singapore, Australia and other countries that is proportionately similar to the African exodus.

However the compulsion is different, seeing as how some African countries are war-torn and famished, which is certainly not the case with Malaysia.

The push factors for our own brain drain lie in NEP policy and this needs to be addressed with urgency.

State Ideology: Be grateful you’re Malaysian

Try putting yourself in the shoes of an 18-year-old. This young Malaysian born in 1991 is told that Umno was very generous in granting citizenship to his non-Malay forefathers in 1957. Thus as a descendant of an immigrant community – one should be forever grateful and respect the “social contract”.

Gratitude is demanded by the state while little is reciprocated. Under the NEP – and some say this policy represents the de facto social contract – every single Vice Chancellor of every single Malaysian public university is Malay.

Promotion prospects for non-Malay lecturers to full professorship or head of department are very dim, hence we have the dichotomy of non-Malays predominant in private colleges while correspondingly, the academic staff of public institutions proliferate with Malays.

The civil service is staffed predominantly by Malays, too, and overwhelmingly in the top echelons. The government-linked corporations have been turned into a single race monopoly.

Hence is it any surprise that almost all the scholarships offered by government and GLCs seem to be reserved for Malays?

Youngsters from the minority communities see that Malays are the chosen ones regardless of their scholastic achievement and financial position. Some are offered to do a Master although they did not even apply (but the quota is there to be filled, so these disinterested Malays are approached).

Our lesson today is ...

How the government apparatus conducts itself and the consequences of its policy implementation will upset an individual’s innate sense of justice.

The government pays about RM1.8 billion in annual salaries to teachers. A child is taught moral studies in class but he learns in life that adults condone and conspire to immorality by perpetuating the unfairness and injustice which impacts on Malaysia’s young.

On the other hand, the favoured group is given more than their just desserts without either merit or need. When one is bred to think that privilege is only his rightful entitlement, we would not expect this young person to pay back to society in return.

Our Malaysian education system has been flip-flopped, pushed and pulled this way and that until standards dropped to alarming levels. The passing mark for subjects in public exams have fallen notoriously low while the increasing number of distinctions have risen fatuously high with SPM students notching 14As, 17As and 21As.

With top scorers aplenty, there will not be enough scholarships to go around now that the Education Ministry has decided to put a cap on the SPM, limiting takers to 10 subjects.

The human factor

It’s unrealistic that the education system can be effectively overhauled. Even tweaking one aspect of it, such as the language switch for Math and English, created havoc.

It’s not that our educational framework is so bad as, after all, a lot of study and planning did go into it.

It’s only when the politicians dictate from on high and overrule the better judgment of the educationists – Dr Mahathir Mohamad being case in point – that we slide deeper into the doldrums.

The politicisation of education and the hijacking of the country’s educational agenda has clearly cost us heavily in terms of policy flip-flops and plummeting standards, and the loss of a good part of our young and talented human resources.

Matters become worse when Little Napoleons too take it upon themselves to interfere with teachers. For instance, the serial number assigned candidates when they sit public exams. Why is a student’s race encoded in the number? What does his ethnicity have to do with his answer script?

There is further suspicion that the stacks of SPM papers are not distributed to examiners entirely at random (meaning ideally examiners should be blind to which exam centres the scripts they’re marking have originated from).

A longstanding complaint from lecturers is that they are pressured to pass undergrads who are not up to the mark, and having to put up with mediocre ones who believe they are ‘A’ material after being spoilt in mono-racial schools.

Letting teachers do their job properly and allowing them to grade their students honestly would arrest the steep erosion of standards.

And, unless we are willing to be honest brokers in seeking a compromise and adjustment, the renewed demonising of vernacular schools is merely mischievous.

Either accept their existence or integrate the various types of schools.

But are UiTM and its many branch campuses throughout the length and breadth of the country, Mara Junior Science Colleges and the residential schools willing to open their doors to all on the basis of meritocracy if Chinese, Tamil, and not forgetting religious schools, were abolished? Not open to a token few non-Bumiputera but genuinely open up and with the admission numbers posted in a transparent manner.

Finally, there are teachers genuinely passionate about their profession. There are promising teachers fresh out of training college who are creative and capable of inspiring their students. It’s not only Form 5 students who have been demoralised. Teachers are human capital that we seem to have overlooked in the present controversy.

Conclusion: Ensuring fairness for the future well-being of our young

A segment of Johoreans cross the Causeway daily to attend school in Singapore. Many continue their tertiary education in Singapore which has among the top universities in the world. Eventually, they work in Singapore and benefit Singapore.

Ask around among your friends and see who hasn’t got a child or a sibling who is now living abroad as a permanent resident. I can’t really blame them for packing up and packing it in, can you?

It’s simply critical at this juncture that we don’t let our kids lose hope and throw in the towel.

The system might be slow to reform but mindsets at least can be changed easier.

It starts with the teachers, the educationists and the people running the education departments and implementing the policies.

Please help Malaysian youngsters realise their full potential. Just try a little fairness first. –

Note on the Author

I am a 76-year-old chartered civil engineer and one of the founders of the three larger construction companies listed in Bursa Malaysia. These are Gamuda Bhd, Mudajaya Group Bhd, and IJM Corporation Bhd.

I was a member of the Board of Engineers, Malaysia for three terms. I was also on the Sirim Board responsible in writing the Malaysian standard specifications for cement and concrete. In addition, I was the Secretary General of Master Builders Association, Malaysia for nine years.

These days, I am completely retired. My intention in writing this article is honourable. Many people may not like reading what I have written and the truth may be difficult to accept. Nevertheless, this is my considered analysis for the benefit of my country, the Bumiputera contractors and the construction industry.