Thursday, February 18, 2010

March Rally?

Its funny how fast things turn from being very negative a few weeks back to "what was that all about". Now, its as if we are back on the launching pad. I think its pretty funny how the bears all suddenly woke up and starting blabbing the same diatribe they had for the past 12 months, when the situation suits, but will quietly go back into their slumber when the situation does not suit their arguments. I have mentioned before that the recent "correction" is more of a necessary pullback rather than a genuine correction on markets being too frothy. All bull runs need periods of relief. The thing to learn from all this is that in most cases when there are sharp swing upwards or downwards, everybody will go looking and searching for reasons to explain, and they usually are the wrong reasons. When something happens in the markets, its already in the prices, buying could have been too heated, causing a buyers exhaustion, leading to an increase in shorts... blah-blah... I would subscribe to market psychology at work rather than the usual fundamentals explanation.

Back to the markets, the Tiger got off on the right foot. Are we in for a run? Let's look at potential catalysts. The Government is expected to launch the New Economic Model end-Feb or early-Mar, which will outline plans to raise income levels and economic growth to achieve developed nation status by 2020. The New Economic Model will likely also be the over-arching theme for the Tenth Malaysia Plan (10MP) to be launched in June 2010. Parts of the information below were culled from a RHB research piece.

The New Economic Model is “aimed at shifting onto a high growth path and high income economy, driven by creativity, innovation and high value-add services”. We believe the plans include: 1) Value-added manufacturing; 2) Higher value services; 3) Renewable energy. The concepts will be more attractive to smaller listed companies as the net effect on them will be greater. Hence I see renewed sustained interest in the smaller caps - which I have been featuring a lot over the past few months. Some beneficiaries of a government push for more innovation will bring up similar names such as QL Resources (biomass-based power generation), ETI Tech (battery management systems), D&O (LED technology), myEG (innovation in government services), Adventa (downstream rubber activity) and Carotech (biodiesel).

Malaysia’s resource-based companies will be asked to raise the focus on downstream manufacturing activities, while existing manufacturers will be asked to move up the value chain. Plantations and glove makers are already involved in downstream activities. The Government will want to promote the service industry including financial, telecom and hospitality.

As for the telecom companies, the market is currently dominated by the main incumbents, TM, Maxis, Celcom and Digi. Nevertheless the industry is already moving towards new services including high-speed broadband, HSPA and 4G, while new entrants for Wimax are rushing to increase coverage and roll out services. Keep an eye on Green Packet and YTL-e Solutions.

The Government will address the long-term sustainability of power supply in the face of depleting natural gas resources in Peninsular Malaysia and rising costs of coal. Petronas has stated that it will not supply natural gas to the first generation IPPs after their PPAs expire in 2015-2016, and this will effectively remove 4,100MW of installed capacity from the system. The Renewable Energy Act will formalise the Feed-in Tariff (FiT) that renewable energy producers are paid for supplying power to TNB. This potentially could create a new source of income for households, building owners as well as businesses that generate electricity for their own use from biomass and waste material. This will have to be balanced by the Energy Ministry’s proposal to raise electricity tariffs by 2%, which will be collected in a Renewable Energy fund to be managed by professional fund managers and used to pay for the incremental generation costs arising from the FiT.

The 1Malaysia Development Bhd (1MDB) recently announced that it would jointly invest in Sarawak’s economic corridor (SCORE, or Sarawak Corridor Of Renewable Energy) with the State Grid Corporation of China. This should lead to more investments in energy-related infrastructure.

Over the last two years the world’s four largest solar cell manufacturers have been given 15-year pioneer status to invest in Malaysia. The four manufacturers are investing in plants in Kulim (First Solar), Melaka (Sunpower), Selangor (Q-Cells) and Sarawak (Tokuyama) amounting to around RM13.8bn in total.

Some of the notable jvs in recent times: Khazanah Nasional has been instrumental in bringing Denmark’s Legoland, and the UK’s Newcastle University and Pinewood Studios to Iskandar Malaysia. Dialog Vopak – World’s largest tankage operator now has a 30% stake in Kertih Terminals. Dialog Trafigura – One of the world’s largest commodities trading companies has a 20% stake in Tanjung Langsat Port tankage facilities. SapuraCrest Acergy – World’s largest oil & gas pipelay company has a 50% stake in Sapura3000 pipelay barge. SapuraCrest Seadrill – Major international offshore drilling contractor has a 49% stake in drilling rigs, and a 23.6% stake in SapuraCrest. Sunway City Singapore Government Investment Corporation (GIC) has a 48% stake in Sunway Pyramid mall and 21.3% stake in Sunway City.

Some related plays with respect to the theme above could include:
MPI - which has developed XMLP (smallest MLP package) that would be used in the smaller mobile phones
and handheld devices.
Unisem - which has developed SLP packages that improve the functions per unit density for mobile phones and portable instruments.
Hai-O - Surprisingly and unknown to many, Hai-O Energy holds the patent for a high-intensity heat-transfer technology which could be applied to O&G, power and solar energy sectors, as well as to reduce electricity costs. The technology could potentially save 40-50% of electricity costs.
D&O - Often overlooked company has developed energy-saving LED products that have higher lumen per watt capacity (i.e. brightness), and used in the automotive and flat panel television industries.
ETI Tech - which has developed an efficient battery management system for Polymer Lithium ion batteries for mid- (electric scooters, mobile base stations) and high-end applications (power grid).
MyEG Services - which has a stranglehold on e-Government service, has developed and implemented the e-Government services including electronic delivery of driver and vehicle registration, licensing and summons services and utility bill payments. Could be a major player in implementing the new GST.
Hartalega - Easily the best glove maker as having the most technologically-advanced glove company, where the productivity in terms of gloves production per hour is approximately 31,500 pcs/hour, as compared to Top Glove’s rated capacity of about 25,000 pcs/hour.
Evergreen - In the process of utilising palm oil shells together with rubber wood for its MDF. Reduce dependency on rubber wood and may even reduce the cost of producing MDFs as palm oil shells are cheap and abundant.
QL Resources - Currently developing a technology which could transform EFB (empty fruit bunch) into high quality pellet form, which can be used as biomass energy to replace fossil fuel.
Carotech - The company is the first and largest integrated plant in the world to commercially extract tocotrienol complex, mixed carotene complex and phytosterols from virgin crude palm oil/palm fruits, via a patented extraction process. The patented process also produces palm methyl ester as a byproduct and sold as biodiesel.

p/s photos: Astor Fong

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