Friday, February 26, 2010

Now The Truth Is Out!!!

Now the truth is out, note the similarities ... both established in 1892. The resemblance of the fighter cock is uncanny. Ayam = Liverpool, or as one of my learned friends would say: I like football, I like Pool Liver. Now we know the often heard war cry in local stadiums: kaki ayam!!!

Thursday, February 25, 2010

Transmile - Catching Falling Knives & Accounting Lessons

Operating expenses per quarter RM70.9m (1Q2009), finance cost RM8.087m (1Q2009).
Operating expense per quarter RM36.8m (2Q2009), finance cost RM6.998m (2Q2009).

Operating expense per quarter RM39.5m (3Q2009), finance cost RM7.3m (3Q2009).

Operating expense per quarter RM263.6m (4Q2009), finance cost RM6.9m (4Q2009).

Naturally one can see that the 4Q operating expense was irregular. It would seem that the company has brought down normal operating expense to around RM35m per quarter. The additional losses were due to impairment losses in selling their assets.

Transmile said an impairment loss of RM8.2 million on its narrow body aircraft was recognised in operating expense in the current quarter to reflect the fair value based on published aircraft value as at January 4. An impairment loss of RM178 million on its wide body aircraft was also recognised to reflect the fair value less cost to sell.

Why the hoo-hah, why the sharp sell down in the shares? Don't people read company announcements? The planes were ALREADY reclassified during the quarter ended June 30, 2009, the company said in notes accompanying its 2Q2009 results.
“Following the decision of the board to dispose of the wide-body aircraft, the planes are now classified as assets held for sale in the current quarter,”

Transmile has some RM570 million in debts owed to term note holders and bondholders. Transmile’s outstanding debts comprise a US$66.9 million (RM235 million) syndicated term loan, US$65.6 million 1% guaranteed convertible bonds and RM105 million medium-term loans. In its 2008 annual report, Transmile notes that the four McDonnell Douglas planes (MD11s) were not classified as assets held for sale as it was “highly improbable” that the disposal could be completed within a year.

With the reclassification in 2Q2009, it is fair to assume that the company is optimistic of selling the planes now that the operating and credit environment is more favourable than in the previous year. The reclassification means that Transmile has convinced its auditors that it can find buyers for those planes in the near future. So, now the planes were sold and the impairment loss recognised, why jump up and down????

2009 4Q
Rev 46.6m Losses 212.9m Loss PS 78.9 sen NTA 8 sen
2009 3Q

Rev 30.5m
Losses 14.8m Loss PS 5.56 sen NTA 87 sen
2009 2Q

Rev 38.5m
Losses 0.227m Loss PS 0.17 sen NTA 93 sen
2009 1Q

Rev 35.5m
Losses 42.5m Loss PS 16.2 sen NTA 93 sen

Impairment losses basically says that what was reflected as assets or as NTA did not really match up when the assets were finally sold. As you can see from the NTA valuation progression over the last four quarters, it stood at 93 sen. If all the net assets that made up the 93 sen were sold into the market, technically you will get back 93 sen net cash. In fact, many companies are actually worth a lot more than their NTA, maybe they did not revalue some of their assets as frequent as necessary.

However, in this case, there are a few very troubling questions in my mind, and should be in many investors' as well:

a) Obviously, the 93 sen NTA was largely made up of the assets which were sold at a huge loss. Accounting standards should start requiring companies to reflect "impairment loss" accumulated as a charge on NTA to better reflect the real underlying NTA.
If you do not see the grave implications of NTA dropping from 93 sen to 87 sen and then to 8 sen all within 2 quarters of reporting, somebody needs to see a doctor.

b) This is very serious because many investors rely on the company's NTA in making a reference valuation point when deciding whether to buy a company's shares. If Pintaras Jaya has a NTA of RM3.00 and its trading at RM1.60, I know I have a lot of comfort level, .... because I can "rely" on the published and audited NTA figures. I can rely on the figures because its in the published financial statements, you cannot turn around and say
"caveat emptor mate", its just financial statements - you cannot say to me, "Bro (I hate that word), you shouldn't put all your eggs in the basket based on the NTA".

OMG MF, the NTA went from 93 sen to 8 sen in the blink of an eye. We only saw a very minute move down from 93 sen to 87 sen in the 3Q figures. Not all investors know that they should incorporate provisions for impairment losses when looking at NTA - there should really be more clarity in this matter.

c) One may argue that the NTA is but one of many indicators that investors should rely on. Am I barking too much over a small matter? Eeerrr NNNOOOOOOO ... because in cases like Transmile, where there was some crisis and the company is trying its best to find its footing, e.g. work out a reasonable business model and manage their debts ... most investors will RELY EXTENSIVELY on NTA as the benchmark because the likelihood of it being SOLD or WOUND UP is very high. Hence investors would look to seek out bargains or comfort levels based on the NTA.

That's the accounting lesson. Now for bottom pickers ...

a) The air cargo player now still serves over 20 routes in the region with its fleet of B727 and B737 planes. It has also retained DHL, TNT, FeDex and UPS as clients. By selling the planes, it goes some way to addressing their debt problem.

b) If you look at their revenue stream, its pushing to break RM40m a quarter convincingly and may get to RM50m soon. Looking at the cost side, taking out most of their finance cost, their operating expenses could be capped at RM40m a quarter but now you have "leasing charges" which could bring total expenses to RM45m a quarter.

Technically, if they keep improving a little bit more, Transmile could start making RM5m a quarter tax free (based on so much losses in the books) = RM20m a year. RM20m / 270m = 7.4 sen a share ... possible. Bottom fishing potential???

c) One should not look at their NTA anymore as the company has shifted from a an asset owner to a company that leases. Its no big deal as MAS and many other airlines have done the same. Its a different business model. The question is will Transmile survive??? Look at their current clientele, they still have DHL, TNT, FeDex and UPS ... WHY??? Why would these mega companies still do business with Transmile after the internal fiasco?

d) PN17 is a given and I do not see them not coming out of it. I do think some of the selling could be because investors fearing PN17 stocks cannot be margined, but seriously, who puts Transmile stocks under margin accounts.

Firstly, Robert Kuok is still there. Secondly, Robert Kuok is still there and rectifying and revamping the business model. Thirdly, Robert Kuok is still there and the clients know that Kuok has no part in the fiasco that caused the company's downfall. Fourthly, and most importantly, Transmile has very special landing rights in certain strategic locations.

I think the markets over-reacted on the sell side. I think Transmile is fairly value around 60 sen really (now 36.5 sen). They did NOTHING to deserve the sell down. The selling of planes was part of their restructuring plan. Now the business model looks more workable and I am more confident they can turn a profit by 2H2010.

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 photo: Ririn Dwi Ariyanti

Gossiping About Sentosa RW IR Casino

- S$100 per entry for Singaporeans or S$2,000 annual fee. Still 5 were caught trying to slip through and were charged. The fee of $100 is per entry per 24 hours. That means if you entered the casino at 0001 min past midnite, it will expire 2359 the same date. To remain inside the casino, another $100 is required for the next 24 hours. If you overstay 1 min, you can be fined $1000.

- Donnie Yen was spotted to be trying his luck in the first couple of days.

- The casino's net gains per day for the first few days was S$3.5m. I will be that 4 out of 5 patrons walk out losing money.

- Yes, somebody forgot about the foreign workers loophole, hence many were dressed very casually and can be found sleeping around on the floors - kinda puts a damper after spending S$6bn on that thing. Guess they will have to plug that loophole or we will see Sundays at Kota Raya Kompleks being replicated at the casino.

- Apparently a substantial number of the visitors came from China.

- It is uncomfortable and hot to watch the shows in Universal Studio. Surely you shouldn't have shows being performed outside - like no one knew that we are all on the bloody equator matey. The heat is likely to deter visitors. They already had failures in Haw Par Villa, Tang Dynasty City and other theme parks - did not not learn from past experience?

- Some people spotted a car at the Genting carpark with the back open. A maid and 2 kids sitting behind eating. Where were their parents? Your guess is as good as mind. This cannot be encouraged, its quite sad.

- Yes, some people got in wearing slippers.

- Some already rate the Universal Studios theme park as a lot better than HK Disneyland, but it doesn't take a lot to do that, really.

- The casino says that 70% of staffers at the casino are Singaporeans or Singapore PR holders, although most who went there would like to disagree.

- An Indonesian man who lost all the S$1,000 he had with him at the Sentosa casino was jailed for four weeks after pleading guilty to stealing a handphone from an undergraduate at Changi Airport.

A man dressed as a Chinese God of Fortune walks inside the newly opened Resorts World Sentosa casino.

- At least three quarters of the casino is operational. But seriously, the 15,000-square-metre casino will not be able to cater to 20,000 people at any one time even when fully opened. We have to be admit that the crowds in the opening weeks may not be fair to the casino as it will result in too many people, too many players and not enough tables.

- 8 lions for the lion dance, 11.18am for the official opening, 12.18pm for the casino doors to be opened to the public.

- Lim Kok Thay was Mr Cool as he played the first game in the house – a game of baccarat – which he lost to much laughter and ribbing from all present.

- The theme park is spread on 24 hectares of land and features a total of 24 rides and attractions. The prime among these are the Battlestar Galactica Ride which is a multi-track coaster, and a replica of the famous Revenge of the Mummy Attraction. The mummy ride is presently only available at Universal Studios Hollywood and Orlando. One major highlight will be the Shrek 4D attraction, an awesome experience in which viewers are taken into the world of Shrek virtually and physically. Another highly anticipated ride in sci-fi city is the Transformers ride. The park is divided into total seven sectors which include Sci-Fi City, New York City, Egypt, The Lost World and The Hollywood. 6 hotels are also there which have a combined room count of 1800 rooms.

- Not spotted during the first few days in Sentosa, the analysts who put up BUY calls on Genting Singapore.

Brilliant photos can be found at this link, OMG, the Universal Studios facade looked exactly like the beautiful Disneyland of old. Having said that, back in the casino there seems to be spots of "poor design and aesthetics" in some of the architecture, design and taste. There were spots of brilliance such as the Botero (I think it was, or maybe a look-alike) and chandeliers. Overall Universal Studios theme park looked a lot better.

Wednesday, February 24, 2010

Every Decade Sure To Have Their Very Own "Dr. Doom"

We usually will laud the bullish experts who got things right. Many will despise the naysayers, the bearish buggers who seem to be always pessimistic. However, some of them have been prescient in their big calls, and deserve to be applauded. You will find them being tagged as the Dr. Dooms, and every decade seems to have a major one. As a Dr. Doom, they will shout loudest when they feel strongly about something going wrong, but usually you will not hear from them when markets turn bullish - not that they do not like bull runs, but its their attention to detail and them usually having a very high disposition to fear that will cause them not to issue buy signals even they see them. Hence when its bullish, and they are quiet, its good. When its bullish and they keep getting louder, its bad.

Not all of them are as good as the title may hint at. I have rated them out of 10, 10 being excellent.

Dr. Henry Kaufman - Dr. Doom of the 1970s & early 80s (my rating 8.5/10)

He was well-known during the 1970s and early 1980s for the interest rate forecasts he wrote for Salomon, and for their bearish views, generally predicting that bond prices would decrease (interest rate would increase). Thus, he earned the nickname "Dr. Doom." Dr. Henry Kaufman is the president of Henry Kaufman & Company, Inc., a firm specializing in economic and financial consulting. He was previously a managing director at Salomon Brothers and was a member of the executive committee in charge of the firm's four research departments.

Dr. Kaufman was also a vice chairman of the parent company, Salomon Inc. Before joining Salomon Brothers, he was in commercial banking and served as an economist at the Federal Reserve Bank of New York. Unwittingly, this Dr. Doom also triggered a major market rally after years of doom and gloom predictions, Kaufman’s prediction on August 17, 1982 that interest rates would fall sparked a stock market rally that can be dated as the beginning of the 1980’s bull market.

Dr. Kaufman's book, On Money and Markets, A WallStreetMemoir, was published in June 2000. In 1987, Dr. Kaufman was awarded the first George S. Eccles Prize for excellence in economic writing from the Columbia Business School for his book, Interest Rates, the Markets, and the New Financial World.

Dr. Kaufman received his bachelor's degree in economics from NYU in 1948, an M.S. in finance from Columbia University in 1949 and a Ph.D in banking and finance from New York University Graduate School of Business Administration in 1958. He also received an honorary Doctor of Laws degree from New York University in 1982, and an honorary Doctor of Humane Letters degree from Yeshiva University in 1986 and from Trinity College in 2005.

Kaufman is known among the insiders in the financial community as a genius at contrarian investing. During the 1970s downturn in New York City he was the buyer of last resort for Con Edison bonds, which resulted in huge gains. Kaufman was buying Con Edison Bonds at 30 percent of face value when the city was told no help was coming from the federal government to keep the lights on in New York. Of course the bonds never defaulted, and the returns were in mega millions to Kaufman.

Kaufman was the largest shareholder of Apple Bank of New York along with many other holdings. He was the financial controller of all of the $320 million Maurice Kanbar received for selling Skyy Vodka and created $190 million in additional profits from this account. One of the investments was buying 32 percent of downtown Tulsa, Oklahoma, at distress prices starting in 2005. Tulsa is one of the few cities that has weathered the U.S. real estate crisis and actually has increased in value. He also was the funding source of capital for Heine Herzog (Mutual Shares which merged with Franklin Templeton), the largest over-the-counter market maker in the U. S. Kaufman also bought buildings in Soho at $30 square foot in the distress times of the 70s and became a legend in value investing when the market climbed to $200 a square foot. His latest venture was going big into Costa Rica real estate last year, let's see if its going to be another winner for him.

Latest Mantras: Kaufman thinks the banks should be broken up ... "A much better approach would be to prohibit any financial institution from remaining or becoming too big to fail. This would require that regulators downsize large financial conglomerates. In this process, the prime targets for divestiture should be financial activities that pose risk to the stability of the deposit function as well as operations that pose conflicts of interest.

Our financial system is at a crossroads. We can either succumb to the forces that are shifting markets toward greater government back-stopping and socialization. Or we can create a structure in which no institution is too big to fail, and a financial system that is supervised effectively by a modernized central bank."

"Why are we so poor at managing our key economic institutions while at the same time so accomplished in medicine, engineering and telecommunications? Why can we land men on the moon with pinpoint accuracy, yet fail to steer our economy away from the rocks? Why do our computers work so well, except when we use them to manage derivatives and hedge funds?"

Kaufman warns: "The computations were correct, but far too often the conclusions drawn from them were not." Why? Selfish, myopic politicians and bankers.

Dr. Marc Faber - Dr. Doom of the 1990s and present time (my rating 6.5/10)

Dr Marc Faber was born in Zurich, Switzerland. He went to school in Geneva and Zurich and finished high school with the Matura. He studied Economics at the University of Zurich and, at the age of 24, obtained a PhD in Economics magna cum laude.

Dr. Doom

Between 1970 and 1978, Dr Faber worked for White Weld & Company Limited in New York, Zurich and Hong Kong.

Since 1973, he has lived in Hong Kong. From 1978 to February 1990, he was the Managing Director of Drexel Burnham Lambert (HK) Ltd. In June 1990, he set up his own business, MARC FABER LIMITED which acts as an investment advisor and fund manager.

Dr Faber publishes a widely read monthly investment newsletter "The Gloom Boom & Doom Report" report which highlights unusual investment opportunities, and is the author of several books including “ TOMORROW'S GOLD – Asia's Age of Discovery” which was first published in 2002 and highlights future investment opportunities around the world. “ TOMORROW'S GOLD ” was for several weeks on Amazon's best seller list and is being translated into Japanese, Chinese, Korean, Thai and German.

Latest Mantras: Marc continues his bashing of the governments of all developed and overleveraged nations, which he claims will sooner or later default on their obligations. This could be the most scathing critique of the fiat-money system to date, which is the primary cause for the facility with which governments have accumulated untenable debt loads.

"In the developed world we have huge debt to GDP, in terms of government debt to GDP and unfunded liabilities that will come due, and these unfunded liabilities are so huge that eventually these governments will all have to print money before they default."

Faber also said he is turning from a bull to a bear on stock markets in 2010 because there was too much bullish sentiment and whenever there’s a mid-term election then it becomes negative for stocks, “Everybody was looking for further gains in stocks.”

Marc Faber says "the average life span of the world's greatest civilizations has been 200 years ... Once a society becomes successful it becomes arrogant, righteous, overconfident, corrupt, and decadent ... overspends ... costly wars ... wealth inequity and social tensions increase; and society enters a secular decline."

Robert Shiller - Dr. Doom of 2000s (my rating 9.5/10)

Shiller received his B.A. from the University of Michigan in 1967, S.M. from MIT in 1968, and his Ph.D from MIT in 1972. He has taught at Yale since 1982 and previously held faculty positions at the Wharton School of the University of Pennsylvania and the University of Minnesota, also giving frequent lectures at the LSE. His book Macro Markets won first annual Paul A. Samuelson Award.

In 1981 Shiller published an article titled "Do stock prices move too much to be justified by subsequent changes in dividends?" He challenged the efficient markets model, which at that time was the dominant view in the economics profession. Shiller argued that in a rational stock market, investors would base stock prices on the expected receipt of future dividends, discounted to a present value. He examined the performance of the U.S. stock market since the 1920s, and considered the kinds of expectations of future dividends and discount rates that could justify the wide range of variation experienced in the stock market. Shiller concluded that the volatility of the stock market was greater than could plausibly be explained by any rational view of the future.
In 1991, he formed Case Shiller Weiss with economists Karl Case and Allan Weiss. The company produced a repeat-sales index using home sales prices data from across the nation, studying home pricing trends. The index was developed by Shiller and Case when Case was studying unsustainable house pricing booms in Boston and Shiller was studying the behavioral aspects of economic bubbles. The repeat-sales index developed by Case and Shiller was later acquired and further developed by Fiserv and Standard & Poor, creating the now famous Case-Shiller index. His book Irrational Exuberence (2000) – a NYT bestseller, and now you know where that phrase came from (no its not Greenspan) – warned that the stock market had become a bubble in March 2000 (the very height of the market top) which could lead to a sharp decline.

Writing in the Wall Street Journal in August 2006, Shiller again warned that "there is significant risk of a very bad period, with slow sales, slim commissions, falling prices, rising default and foreclosures, serious trouble in financial markets, and a possible recession sooner than most of us expected.” Robert Shiller was awarded the Deutsche Bank Prize in Financial Economics in 2009 for his pioneering research in the field of financial economics, relating to the dynamics of asset prices, such as fixed income, equities, and real estate, and their metrics. His work has been influential in the development of the theory as well as its implications for practice and policy-making. His contributions on risk sharing, financial market volatility, bubbles and crises, have received widespread attention among academics, practitioners and policy makers alike.

Latest Mantras: Even if there is a quick end to the recession, the housing market’s poor performance may linger. After the last home price boom, which ended about the time of the 1990-91 recession, home prices did not start moving upward, even incrementally, until 1997. Even the federal government has projected price decreases through 2010. As a baseline, the stress tests recently performed on big banks included a total fall in housing prices of 41 percent from 2006 through 2010. Their “more adverse” forecast projected a drop of 48 percent — suggesting that important housing ratios, like price to rent, and price to construction cost — would fall to their lowest levels in 20 years.

Remember a decade ago with "Irrational Exuberance?" Now he's warning: "Bubbles are primarily social phenomena. Until we understand and address the psychology that fuels them, they're going to keep forming. We recently lived through two epidemics of excessive financial optimism, we are close to a third episode, only this one will spread irrational pessimism and distrust -- not exuberance."

Nouriel Roubini - The Latest Dr. Doom, although he is not comfortable with the tag (my rating: 7.5/10)

Nourel Roubini is an economist and professor at New York University. He was one of the only people to accurately predict the current global economic crisis. Roubini started predicting a possible financial meltdown in 2004, and received the nickname "Dr. Doom" after a 2006 IMF meeting. Roubini, once an obscure economist, has become an in-demand analyst due to his uncannily accurate and pessimistic predictions.NY Times: Dr. Doom (August 15, 2008)

BOAO, CHINA - APRIL 18: (CHINA OUT) Nouriel Roubini, professor of economics and international business at New York University, attends the Boao Forum for Asia (BFA) Annual Conference 2009 on April 18, 2009 in Boao, a scenic town in south China's Hainan Province. The BFA Annual Conference 2009 opened here on Saturday with the theme of "Asia: Managing Beyond Crisis." Nouriel Roubini

Roubini hasn't always been right in his predictions: In an August 2008 interview with Barron's, he said as many as 1,400 U.S. banks could fail. That number has been closer to 200, and it doesn't appear that the Federal Deposit Insurance Corp. and state authorities will have to shutter anywhere near the number he predicted.

He warned that the Federal Reserve and other government central banks are fueling a massive new asset "bubble" that -- while not in imminent danger of bursting -- will someday do so with calamitous consequences.

Here is Roubini's argument: The Fed is holding short-term interest rates near zero. Investors and speculators borrow dollars cheaply and use them to buy various assets -- stocks, bonds, gold, oil, minerals, foreign currencies. Prices rise. Huge profits can be made. But this can't last, Roubini warns. The Fed will eventually raise interest rates. Or outside events (a confrontation with Iran, fear of a double-dip recession) will change market psychology. Then investors will rush to lock in profits, and the sell-off will trigger a crash. Stock, bond and commodity prices will plunge. Losses will mount, confidence will fall and the real economy will suffer.

"The Fed and other policymakers seem unaware of the monster bubble they are creating," writes Roubini. "The longer they remain blind, the harder the markets will fall."

Like home values a few years ago, asset prices have risen spectacularly. Since its March 9 low, the Standard & Poor's 500-stock index has gained more than 50 percent. An index of stocks for 22 "emerging-market" countries (including Brazil, China and India) has doubled from its recent low. Oil, now around $80 a barrel, has increased 150 percent from its recent low of $31. Gold is near an all-time high, around $1,090 an ounce. Meanwhile, the dollar has dropped against many currencies. Half of Roubini's story resonates.

...... So, Roubini's new bubble remains unproved. But this doesn't invalidate his warning. We've learned that there's a thin line between promoting economic expansion and fostering bubbles. With hindsight, lax Fed policies contributed to both the "tech" bubble of the late 1990s and the recent housing bubble, though how much is debated.

I don’t believe in gold. Gold can go up for only two reasons. [One is] inflation, and we are in a world where there are massive amounts of deflation because of a glut of capacity, and demand is weak, and there’s slack in the labor markets with unemployment peeking above 10 percent in all the advanced economies. So there’s no inflation, and there’s not going to be for the time being.
The only other case in which gold can go higher with deflation is if you have Armageddon, if you have another depression. But we’ve avoided that tail risk as well. So all the gold bugs who say gold is going to go to $1,500, $2,000, they’re just speaking nonsense. Without inflation, or without a depression, there’s nowhere for gold to go. Yeah, it can go above $1,000, but it can’t move up 20-30 percent unless we end up in a world of inflation or another depression. I don’t see either of those being likely for the time being. Maybe three or four years from now, yes. But not anytime soon.”

Latest Mantras: The shorting of USD is the “mother of all highly leveraged asset bubbles” now in progress. Shorts in the US dollar are being built up to unprecedented levels, and are being used to finance the purchase of every asset class, especially in energy, commodities, and precious metals. This bubble will be pricked by a huge snap back rally in the greenback, the exhaustion of Fed support measures, a growth surprise in the US leading to an early Fed tightening, or a real double dip recession. The inevitable collapse will make the last financial crisis look like a cake walk, and take all markets, especially equities, down to new lows.

Tuesday, February 23, 2010

Market Direction Updated

Readers may remember me having said that I think the Malaysian market should outperform the rest of the Asian markets in 2010. I still stand by it. I also said that the FBM KLCI has the potential to touch 1,500 this year as a high. Now, that has been clouded somewhat. For the benefit of those who will be attending the upcoming talk on 6 March, I will be discussing two critical macro developments which I see may shake global markets to its core in 2Q2010. Together with my guest chartists, we will delve into target support levels on those scenarios.

Investing in stocks nowadays is no longer a buy and hold strategy. We must be prepared to consider the timing of waves and major breaks. Not just Malaysia, now almost every markets are trend driven markets because of the sheer force and size of leveraged funds and big trading prop computer models.

See you at the talk ... it should save you loads of money and sleepless nights ...

Views On Malaysia Market Outlook In 2010

  • Malaysia’s stock market, the Kuala Lumpur Composite Index (KLCI), rallied in 2009 as the global economic recovery, the revival of risk appetite and the government’s stock market liberalization attracted foreign investment. Nevertheless, compared to other equity markets in Asia, the KLCI’s performance was less stellar, given prospects of weak economic recovery in Malaysia, political instability and risks to corporations amid a credit crunch and weak exports. After peaking in mid-January 2010, the KLCI declined through early February as global cues shifted foreign investor confidence. Malaysia’s stock market dropped 1.9% YTD as of early February 2010. Going forward, investor sentiment in Malaysia’s stock market will depend on domestic conditions–the recovery of domestic consumption and global export demand, trends in commodity prices, the removal of political uncertainty and progress on fiscal consolidation and promised financial market liberalization and economic reforms.
  • The P/E ratio decreased to 20.4 in early February 2010 from 22.7 in January. The estimated P/E ratio for 2010 was 15.3 in early February 2010, attractive compared to other countries in Asia.
  • In January 2010, foreign investment registered a net outflow. According to Bursa Malaysia, foreign institutional investors bought 6.1 billion ringgit (MYR), while they sold MYR7.1 billion. However, foreign retail investment in Malaysia’s stock market was unchanged in January.
  • Local institutional investment registered a net inflow in January, while local retail investment posted a slight net outflow. Bursa Malaysia said that local institutional investors bought MYR11.2 billion and sold MYR9.8 billion in January, while local retail investors sold MYR9.1 billion and bought MYR9.0 billion.
  • To boost foreign investment, the government on June 30 deregulated the foreign investment committee and decreased the required equity allocation to ethnic groups to 12.5% from 30%.
  • After falling to a decade low of 14 in 2009, initial public offerings (IPOs) will pick up in 2010 due to government efforts to relax investment rules in the stock market. According to Bursa Malaysia, the securities commission as of early February 2010 had already approved almost 20 IPO applications. Malaysia’s government also plans to list 10-15 government-related companies in the stock market in 2010.


  • Richard Lin, a chief investment officer at Great Eastern Life Assurance, told The Star that Malaysia’s stock market would be volatile in Q1 2010 and might experience a correction in H1 2010 due to the uncertain global economic recovery. Investors will continue to focus on China’s monetary tightening and rising sovereign debt issues, he said. (02/08/10)
  • On February 8, 2010, Analyst Yvonne Voon at Credit Suisse told Bloomberg that robust IPOs in the pipeline and an increase in market activity would prompt a stock market rally in 2010.
  • Yong Win Ng at Citi expects Malaysia’s equity market to outperform in 2010 compared to other Asian equity markets, which are expected to become bear markets. A relatively low share of foreign investment and captive domestic institutional fund participation in Malaysia’s stock market will alleviate downside pressure in 2010.

p/s photos: Wang Yi Bing

Monday, February 22, 2010

Facebook Buys Malaysia's Octazen Solutions

(Excerpts culled from , , )

Facebook has bought up under-the-radar Octazen Solutions in what the company says is a “small talent acquisition.”

Facebook spokesperson Larry Yu described the buy as a “talent acquisition,” saying Octazen’s two employees have joined Facebook as engineers. As he put it in a company statement on the acquisition he sent via email:
“We’ve admired the engineering team’s efforts for some time now and this is part of our ongoing effort to add experienced, accomplished technical talent to help drive the company forward in its efforts to be the central way for people to connect and share information.”

Elanne Kwong (20090221-141445)

Octazen’s software helps sites like Facebook grow by making it easy for users to invite their contacts on other services. When Octazen receives an email address and password it fetches a list of contacts and puts them in an array for customers to use and store (and hopefully not abuse!). Octazen has taken down most of its site in light of the acquisition, but archived versions show it charged for software licenses between $39 and $200 per domain server plus a yearly update fee.

Octazen describes itself on its website as a “webmail contacts importer” and Facebook was already using the firm to “grow its number of users by encouraging them to invite their email contacts.”

This is Facebook’s first acquisition since it purchased social sharing service FriendFeed over the summer in a deal that was also described as mainly being driven by a desire to add talent.

However, unlike FriendFeed—which continues to operate separately seven months later—Facebook has already moved to shut Octazen down; an on the Octazen website says the company is winding down operations and will no longer accept new customers.

What exactly has Octazen been up to? The company is mostly about above-board contact importing from one service to another – signing in to Gmail from Facebook, for example, to import your contacts there and add them as Facebook friends. Much of this is done via OAuth and APIs, but Octazen is known to dive much deeper for data.

One example – Octazen will sometimes collect and store user credentials directly, and sign into large social networks and other sites as if they were the user, say multiple sources. Then they’ll download the address book and social graph. A percentage of your friends on that service might be users of the service (now Facebook) paying Octazen, and you’ll be asked to friend them. But there’s a big question about what happens to the rest of the data as well, and if Octazen is storing a shadow social network in violation of terms of service to recommend user connections down the road. And they may look deeper at data than they should – at email header information, for example, to get a better understanding of who you communicate with the most.

But the most unnerving part of Octazen, say our sources, is the fact that they are very, very good at scraping data at scale without being detected. They may hit a service using lots of different IP addresses, for example, and remain undetected. Octazen could, they say, scrape very public sites like Twitter, where the social graph is on each profile, in a way that Twitter wouldn’t know it’s happening.

Facebook already uses Octazen to mysteriously determine your long lost friends and suggest that you re-connect with them (leading to scores of emails into our inbox that Facebook is somehow reading emails or otherwise getting data they shouldn’t be).

The big question is why Facebook would need to acquire a company located half way around the world if all they were doing is standard address book imports via OAuth and APIs, or proprietary but well documented protocols like Facebook uses. The implication is that these guys have serious expertise in data gathering at scale that may sometimes be in violation of the terms of service of the sites being harvested.

This is obviously just one side of the possible story, albeit based on hard evidence of Octazen’s shady prior practices and via multiple sources. But until Facebook explains this acquisition in more detail, we don’t have much more to go on.

Here are three reasons All Facebook wrote as possible reasons for acquiring Octazen:

Simple Talent Acquisition

Facebook needed a team which could constantly monitor changes to third-party email providers to ensure that they retain the ongoing viral growth. Octazen, a company Facebook has already been working with, provided this ability and will help ensure that Facebook’s contact importer will function through part of the company’s most critical growth phase: the race to 1 billion users.

While the company didn’t need to acquire the company, locking in the developers behind Octazen for at least a few years will ensure that Facebook has the developers’ full-time attention (despite not having oversight of the developers who are based in Malaysia and will remain there).

Protect Their Viral Growth

There is a small chance that Octazen currently has information which is extremely proprietary which helps ensure Facebook’s contact importer continues to function. In order to protect that knowledge, Facebook locked in the developers and bound them into an agreement in which their technology could not be used for any other organizations. That would explain the following statement on the Octazen Solutions website:

The Octazen team wanted to let you, our valued customers, know that the company recently received an offer to acquire most of the company’s assets and to employ those assets in a different direction. After carefully evaluating this offer, our team believes this is a wonderful opportunity of which we must take advantage.

As a result, effective immediately, Octazen will no longer accept new service contracts or renew existing service contracts, and will enter a transition period to wind down operations.

A Simple Present Value Calculation

Facebook may have been paying significant fees to the Octazen solutions company. Given that they knew they would be paying those fees for at least the next 3 to 5 years, Facebook decided to do a simple financial calculation and figure out the present value of the future outgoing cash flows to maintain the contact importer. Add a little on top of the present value and you’d get Facebook’s acquisition price which just made financial sense.

(I guess all Malaysians would like to know what price they paid the two guys. Its obviously a talent acquisition plus they probably have something they are doing which may be better exploited and protected at a place like Facebook. It would not be a big sum for sure or else, they couldn't tie the two down to work at Facebook. I am thinking in the region of US$10m, with contractual periods to work hand in hand with Facebook team of engineers).

p/s photo: Elanne Kong

Luxchem, Another Gem In The Making

The principal activities of Luxchem are manufacturing and trading of unsaturated polyester resin and related products, import and distribution of chemical and pertochemical products. It is principally an investment holding company
with two subsidiaries - Luxchem Polymer Industries Sdn Bhd and Luxchem Trading Sdn Bhd. Three of Luxchem’s subsidiaries are ISO9001:2000 certified. This provides quality assurance to Luxchem’s customers.

The industrial chemical supplier and unsaturated polyester resin (UPR) manufacturer currently it has seven distribution and marketing centers, of which six are in Peninsular Malaysia and one in Singapore. Luxchem supplies over 400 types of industrial chemicals (basic industrial chemicals, plastic in primary forms and synthetic rubber including UPR) to some 800 customers from industries that use rubber and plastics in the production process. The large client base limits Luxchem’s customer & industry specific risks and provides Luxchem strong bargaining power. Luxchem’s customers are spread out into 10 different manufacturing industries. The diversity enables Luxchem to mitigate risks arising from a particular industry while still exposing itself to any of the industries’ growth.

The Group produces Malaysia's most comprehensive portfolio of unsaturated polyester resins under the brand name POLYMAL. Luxchem is a convenient one stop supply centre that supplies 400 types of chemicals and 100 different grades and types of UPR. Luxchem is currently focusing on its UPR segment. It has a wide number of applications and is a potential growth area. Moreover, this segment has a high barrier to entry due to the high capital investment and level of technology required.Today, LCB exports to Thailand, Singapore, Indonesia, Vietnam, Philippines, China, Australia and the Middle East.


1Revenue 83,66073,000305,308331,615
2Profit/(loss) before tax 6,9293,49025,52123,580
3Profit/(loss) for the period5,1012,73218,97117,973
4Profit/(loss) attributable to ordinary equity holders of the parent5,1012,73218,97117,973
5Basic earnings/(loss) per share (Subunit) 3.903.3014.6015.00
6Proposed/Declared dividend per share (Subunit)

Net assets per share attributable to ordinary equity holders of the parent ($$)0.79000.7100

The company registered excellent results for 2009 with a net profit of RM18.9m or a net EPS of 14.6 sen. Luxchem has also declared a total of 7 sen dividend for 2009. At RM1.03, the stock trades at a ridiculous 7x 2009. It pays very good dividends, what more you want.

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.

Saturday, February 20, 2010

Genting Singapore Over-owned Stock

Well I think investors should only be holding Genting Singapore right up before it opens. Now it is tumbling hard and fast to find its true fair value.

Singapore's future over the next five to 10 years is an "optimistic" one, said Minister Mentor Lee Kuan Yew, and the tourism sector will reflect that. Mr Lee said the two integrated resorts (IRs) have hired about 16,000 Singaporean workers, and tourist arrivals will shoot up. With a laugh, Mr Lee said: "They want to gamble. I don't understand why they want to lose. You surely will not win."

In reference to Resorts World Sentosa, which opened its casino on Sunday, Mr Lee said "the boss counted S$3.5 million" on the first day and S$3.7 million on the second day. Those are basically "gross gains" to the casino before taking off expenses. Those are decent figures but bear in mind these are euphoric days which will probably not be repeated. A better guide would be to take a 50% discount on that, I mean not everyday is a holiday and not everyday is the grand opening and most days people need to work at their day jobs. S$1.8 x 365 = S$657m, not bad but you also need to whack off expenses = a good figure but not enough to support the lofty share price above S$1.00. Most houses had estimated revenues of at least S$1.2bn-S$1.8bn. Even when you add in hotels and theme parks, its going to be a stretch.

Amidst concern over visitors, Genting Singapore Plc., owner of Singapore’s first casino, fell for the fourth day. At close, the stock lost 1.1% to 94 Singapore cents. It was down by 11% since Resorts World Sentosa opened its gambling facility on February 14.

The stock continued to be sold down and slid to a near six month. It is now down 28 per cent from a record high of $1.30 it hit on Dec 31. The counter has been traded heavily since its casino opened over the Chinese New Year holiday period, with 366 million shares changing hands on Friday following 369 million done on Thursday. This is more than triple the average daily volume of 105 million shares of Genting traded over the past six months. This shows that many big institutional funds are squaring off their positions. Its an over-owned stock. What that means is that those who really wanted to buy, would have owned the stock by now. Most were waiting for the euphoria hoping it would send the share price above S$1.50 and selling into the wave. Well the wave did not come, the buying dried up, its a one way trend now.

Genting Singapore has the worst performance on the benchmark Straits Times Index, as it has drooping 28%, this year, which has retreated 4.9%. Robin Goh, a Resorts World spokesman told that the casino, an S$6.6 billion venture, had 60,000 patrons in the first three days.

Resorts World said that is expecting to open the Theme Park in early March. According to the company website, four of the hotels have been released last month and two more have been scheduled to open after 2010.

According to Bloomberg consensus, Resort World Sentosa will be the world’s most profitable casino by 2011, implying Singapore will be generating twice the revenues of Malaysia.

The consensus forecasts seem aggressive, as they assume every single visitor to Singapore would visit either of the integrated resorts once and that every eligible Johorean would go twice to the resort. Furthermore, estimates counts on every Singaporean above 21 years of age visiting the casino five times a year and outspending the average visitor in Macau. Estimates have projected that each visitor to Resorts World Sentosa would spend US$100, which is 51% higher than that typically spent at Genting Malaysia’s casino (US$66) and higher than the average spend at the Venetian Macau (US$84). That does not include the additional S$100 entry levy that each Singaporean must pay when they enter the casino. According to consensus, Resorts World Sentosa and Marina Bay Sands in their first full year of operations will achieve combined gross gaming revenue equivalent to 50% of Las Vegas at about US$4bil. That is quite an optimistic view.

Yes, Malaysian will visit the two casinos in Singapore maybe once every two years, but that will be it. Resorts World Malaysia still has its market day trippers (72% of visitors) to remain loyal. Resorts World Sentosa’s hotel rates are 7 times those of Genting Highlands. A trip to Singapore or Sentosa nowadays is as expensive as a trip to Australia or Japan to Malaysians. Go figure. I think Genting Singapore will find a base around S$0.85.

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.

Friday, February 19, 2010

SGX To Trade New Fuel Oil Contract - Wake Up Bursa!

With Singapore's status as the world's largest bunkering port and the world's third largest oil trading hub, SGX said the new contract will further enhance the country's attraction as an international oil pricing centre. The contract is based on the Residual Marine Grade 380 ISO 8217, primarily bunker fuel oil supplied to ships. Physical delivery will be through free-on-board or inter-tank transfer at exchange-designated Singapore oil installations. The minimum trading contract size is 100 metric tonnes per lot and the minimum deliverable size will be 2,000 metric tonnes or 20 lots.

Market-makers and liquidity providers will be available for this contract, SGX says.

According to Lam Yi Young, chief executive of the Maritime and Port of Authority of Singapore (MPA), the new contract is expected to attract demand from local and international participants. "SGX's fuel oil futures contract will encourage greater participation in Singapore's marine fuel market both from local and international shipping and bunkering communities," he says.

The Simex contract was for fuel oil with a viscosity of 180 centistokes, widely considered the global benchmark.

However, the two previous offerings failed to take off. The Simex contract was later withdrawn; CME Group still lists its fuel oil contract though volumes have failed to ignite.

So despite Singapore being home to the world’s busiest port in terms of shipping tonnage, what went wrong? Elena Sing, SGX’s head of commodities, says it is simply a matter of timing. She told Futures and Options World inthat market participants had approached the exchange asking for the contract, especially firms that could not access the over-the-counter market.

“The Simex contract was in existence nearly 20 years ago,” Sing says. “Back then there was limited storage space, whereas now Singapore has extensive storage capacity. There are also a far greater number of market participants.”

Sing concludes: “The market is ready for this new futures contract.”

SGX’s optimism is shared by others in Singapore. Chong Lit Cheong, chief executive of International Enterprise Singapore, says: “Singapore has been one of the leading physical commodities trading hubs in Asia Pacific, in particular for the oil trading sector. The launch of SGX’s FO 380 contract will undoubtedly further strengthen our value proposition to the global oil trading community.”

The regional head of commodities at a futures commission merchant in Singapore says: “We’ve had quite a lot of interest from our customers. Those clients are mostly already active in the oil market, rather than the hedge funds.”

However, success for the contract is far from guaranteed, say industry insiders. The 180 centistoke standard, rather than 380, is the global benchmark, and that although Singapore is a hub for oil trading, much of that trading is entrenched in New York, particularly the Platts-linked OTC contract.

The settlement process is extremely complicated. SGX says it will match buyers and sellers by volume, before loadings are fixed. For unmatched volumes, parties will settle their trades against the monthly closing price for the contract.

With firms like Shell, BP and Singapore Petroleum Co, as well as traders Vitol, Glencore, Chemoil, Hin Leong, PetroChina, shipper Maersk and bunker supplier Equatorial Marine all involved in forming the contract, such large players may provide the liquidity so sought after by non-physical players in the oil market.

The contract will have two daily trading sessions: 9am to 7pm and 8pm to 10.55pm. The 7pm closing price will be the price for the day’s settlement. The monthly settlement is the average settlement price for the last five days of the month.

Comments: Despite two false starts, SGX kept at it and by bringing in the major players as "consultants" in setting up the contract, it should have a better chance at success. This brings us back to Bursa, where foreign funds have been staying away for the past 16 months. The palm oil futures USD contract has not yet borne fruit. Could we be in danger of losing the palm oil futures stranglehold soon?

Sometimes, just because something is chugging along does not mean we can do nothing. We need to enlarge the pool of palm oil traders and lure more and more big companies to trade the existing RM or USD contracts. Only by being bigger will the contract stay put. If we do nothing, I am very sure SGX will try to launch a USD palm oil contract in the near future.

After selling 25% of our derivatives unit to CME Group, we have yet to see tangible benefits!!??

Yes, we can sit and say that KL is not a financial center and will face a lot of obstacles. We need to be proactive. We should nurture our niche markets, be it in Islamic finance or palm oil, or even rubber and tin. We do not seem to have a roadmap or a cohesive strategy. We do not seem to have a bigger picture appreciation of the evolving needs and demands on these so called "home advantage" products. As in many things in Malaysia, we do not have a proactive mindset, we have a poor strategic mindset about most things, we have a high propensity to churn out brilliant power points but that is usually not complemented by a similar record in proper execution, and we usually do not spend enough time on details and crossing the T's and inking the dots.

p/s photos: Sandra Dewi

Fed Raises Discount Rate

WASHINGTON (MarketWatch) -- The Federal Reserve announced late Thursday that it was raising its discount rate in order to push banks to borrow from the private market for short-term credit. In a statement, the Fed said it would raise its discount, or primary credit rate, to 0.75% from 0.50% effective on Friday. Fed chairman Ben Bernanke signaled last week that the Fed was mulling the move. Fed watchers had expected the move to come at the next Fed meeting in March. Today's action shows a sense of urgency on the part of the Fed officials. The Fed said the move is intended to "normalize" their operations as the financial crisis winds down. The change is not a tightening and does not signal any change in monetary policy, the Fed said.


Fed Funds Rate Versus Discount Rate - the federal funds rate is the interest rate at which private depository institutions (mostly banks) lend balances (Federal funds) at the Federal Reserve to other depository institutions, usually overnight. It is the interest rate banks charge each other for loans.

The interest rate that the borrowing bank pays to the lending bank to borrow the funds is negotiated between the two banks, and the weighted average of this rate across all such transactions is the federal funds effective rate.

The federal funds target rate is determined by a meeting of the members of the FOMC which normally occurs eight times a year about seven weeks apart.

Another way banks can borrow funds to keep up their required reserves is by taking a loan from the Federal Reserve itself at the discount window. These loans are subject to audit by the Fed, and the discount rate is usually higher than the federal funds rate. Confusion between these two kinds of loans often leads to confusion between the federal funds rate and the discount rate. Another difference is that while the Fed cannot set an exact federal funds rate, it can set a specific discount rate.


That said, the discount rate will effectively move the fed funds rate in the same direction. This move by the Fed was predicted back in January, and as argued, this is a bullish sign rather than a negative one.

Wednesday, January 20, 2010

Bernanke's Likely Weapon Of Choice

This is my prediction for Bernanke. He will raise fed funds rate very very soon. Just because of that, it does not mean that it will be bad for equity markets.

But lets go back to why it will happen very soon (by February I think). Most developed nations' central banks have been reluctant to move the low interest rates regime up because the Main Street has been showing nascent growth. What Bernanke wants to see are corporate spending on R&D and hiring - both not really evident yet. Despite the tons of liquidity being poured into markets, many banks are just sitting by idling.

The Fed has had to maintain a low fed funds rate for obvious reasons, but look at the chart, banks are earning very decent net interest margins by lending to the system, and not to clients. High ranking officials have been calling the banks to lend more aggressively, but that does not seem to be working.

Erika Sawajiri

Bernanke's hands are being tied a lot more now that many of the banks which received funds from the government are returning it - that means the government will have a lot less leverage to "move the banks" toward certain persuasions.

It looks like Bernanke will have little choice but to close the gap and raise fed funds rate. When net interest margins start to shrink, then the banks will have to put the money to work. The summary from all this deduction is that don't be worried when Bernanke raises fed funds rate, in fact it is a new bullish sign.

p/s photo: Erika Sawajiri

Thursday, February 18, 2010


Usually the ones I like won't be right at the top of the volume list, so this is a first. Eti Tech Corporation is a battery management systems company that is involved in the research and development, design and marketing of battery management systems for rechargeable energy storage solutions using polymer lithium-ion based energy cells for electronic applications. Its products include nano mobile charger, green genset and portable power pack for notebook personnel computer. The company primarily operates in Malaysia, where it is headquartered in Kulim.


ETI has mapped out its development plans to move from the lowpower storage solutions towards medium- and high-power storage applications. Recognising the growing demand for EV amid global concerns for greenhouse gas emissions, ETI is currently developing Lithium-ion Polymer (LiPo) based automotive batteries for electric scooters and EV. Even our beloved Proton is building an electric vehicle soon. ETI is actually in a strong position to provide the battery solution.

In the other segment, ETI is capitalising on the replacement market for lead acid batteries and small diesel generators in various retail, commercial and industrial applications e.g. in the telecommunications, leisure and catering industries which may depend on mobility or locations where there is no ready supply of electricity. The recent launch of “Green Genset” to replace diesel generators such as those used by the food catering industry, is only an early indicator of the company’s growth plans.

Catalyst #1: It is already more than just a R&D outfit as they have been profitable for 3 years already, and earnings will jump significantly in 2010 owing to a good market acceptance of their products, thus providing an enlarged earnings platform. FY10-11 earnings are slated to grow 75% and 48% p.a. respectively driven by: 1) contribution from higher-margin medium-power battery systems; and 2) stronger demand for its low-medium battery system due to the launch of new ‘Green Genset’.

Catalyst #2: ETI has entered into an MOU with ZAP to develop and incorporate its LiPo (lithium polymer) batteries for ZAP’s full range of electric scooters (Zappy, Zapino and ATV). ZAP plans to replace its electric scooter’s lead acid battery with LiPo batteries as Lithium powered scooters have been proven to achieve higher driving range/charge as well as higher speed (vis-à-vis lead acid battery technology). ZAP is a pioneer in electric transportation since 1994, and it manufactures and sells electric cars, scooters, bicycles and other vehicles to 75 countries.

Catalyst #3: Distribution, Design & Assembly - Under the MoU, ZAP will award ETI the rights to design and assemble its electric scooter/EV for Malaysia and the Middle East market. ETI would need to identify and appoint a local motorcycle assembler (i.e. Modenas, Naza and Honda) for the design and manufacturing of the electric scooter. ZAP aims to assemble its electric scooter/EV (powered by LiPo batteries) given the China’s quality and reliability issues. Note that
currently, ZAP’s electric scooters/EVs are assembled in US, Uruguay and China. This development would raise ETI’s profile in the EV (electric vehicle) battery market and thus enable it to penetrate into more lucrative EV markets going forward.

Catalyst #4: Strategic Shareholder, Niche Player & Patented - ETI’s venture into EV battery system has attracted investments from the Al-Yousuf group (which holds a 15% stake in ETI itself), given the potential synergistic benefits for its investment in electric car manufacturer, ZAP. A pioneer in electric transportation since 1994, ZAP manufactures and sells electric cars, scooters, bicycles and other vehicles to 75 countries.

Apart from ETI, there are only a handful of EV battery system players in the world i.e. BYD (China), Ener1 and A123 Systems (US), as well as NEC, Sanyo and LG (Japan and Korea), although auto companies like Toyota, Honda, Nissan and General Motors are aggressively trying to develop their own mass-market EV models. In mid-20008, ETI filed patent applications in Malaysia for the EV Battery including the industrial design and software-driven cell balancing system and method (i.e. the BMS).

Right Management - KK Lee is managing director and the major shareholder. ETI’s technical division is led by executive director and chief technology officer, YK Khor, who has worked for Rolls Royce plc developing military aircraft and Formula 1 racing car parts, as well as chief engineer of National Semiconductor (M), engineering group head for Sony Corporation (M) and engineering director of Flextronics Technology (M). He manages a team of 14 engineers from various multinational companies including Sony, Nortel, Motorola and Intel.

Catalyst #5: Strong financial metrics. The following are the strong metrics for 2007,2008, 2009 and 2010 (estimate) -
Gross margin (%) 31.4 / 32.7 / 38.2 / 43.7
EBITDA margin (%) 27.3 / 28.6 / 34.7 / 40.4
Net profit (RM million) 20.1 / 21.7 / 39.2 / 58.0

Major Shareholders: (%)
Lee Kah Kheng 17.2
Dennis Chuah 15.8
Al Yousuf LLC 15.0
Emirates Investment & Development Co 6.55
Chng Kong San 5.8

Following its attractive 2 for 1 bonus in October last year, the share price went on a sharp correction from 84 sen to nearly 40 sen. That could largely be due to over-exuberance buying prior to the bonus and possibly coincided with a sell down by Emirates Investment & Development which used to hold a lot more than just 6.5%. That out of the way, I see ETI regaining their lost ground in the coming weeks.

Catalyst #6: Potential New Market Leader - The New Economic Model will likely also be the over-arching theme for the Tenth Malaysia Plan (10MP) to be launched in June 2010. 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. Safe to say that ETI will be one of the main beneficiaries, and judging from their volume breakout, ETI could very well be the new market volume leader if a rally based on the New Economic Model comes into fruition.

The risks to ETI is that many of their ventures are still in the early stages, which can go nowhere or elevate their earnings platform positively. That is part and parcel of investing in small caps, but it looks good considering its debt free, profitable and with numerous catalysts in the pipeline.

p/s photos: Ririn Dwi Aryanti

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.

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