National Service Part Deux

Saw Rocky Bru's latest postings on the speculations and movements involving the senior management of GLC top dogs:

Rocky Bru: Ismee Ismail, the group managing director and chief executive of Tabung Haji, is tipped to leave for TNB while Che Khalib, the current Tenaga boss, is said to be eying a Petronas job. Like I said, it's market talk. We've also heard that Amokh or Azman Mokhtar, the Khazanah boss himself, is keen on Hassan Merican's job. Never mind if Hassan's shoes may be many sizes too large, even for both of them combined! I won't rule out anything, especially after learning the other day that Kalimullah Masheerul Hassan had proposed to the NSTP Board to bring in Kamal Khalid, the PM's 4th Floor chief operative, as the new CEO! And when the Board turned this down, Kali, who is the outgoing NSTP deputy chairman and editorial advisor, had then proposed that a position of Deputy CEO be created for the PM's special officer! I'm not sure if Kamal even knew that his name had been dropped like that. Syed Faisal Albar, Kali's trusted friend, left NSTP to head Pos Malaysia. Syed Faisal's right hand man, Jezilee, is leaving his COO post at NSTP for the equivalent in Pos Malaysia. A couple of other top execs from NSTP are expected to leave and join Syed Faisal at Pos Malaysia, too, leaving Anthony Bujang, the new NSTP chief executive, a big hole to fill. Kamal Khalid may still find an executive's position in Media Prima (the international side, I heard). Another 4th Floor op, Zaki Zahid, is expected to head for MRCB. If this was a game of chess, someone's moving around his pieces in a desperate attempt to save the old King's reign. Perhaps Nor Mohamed Yakcop, the MoF ll, can shed some light on these moves, starting with his friend's attempt to put Pak Lah's chief press attache as the NSTP boss.

Comments:

a) Did we not learn anything from the past 12 months? Why are these senior management jobs only available to a select group of people? Why are these jobs only "given" or "appointed" when "kingmakers" make their chess moves?

b) I don't know about you, but there are very few Louis Gerstners in the world (Gerstner came from American Express, and then McKinsey, followed by his remarkable stint as CEO of RJR Nabisco, that food and ciggies giant, before ending up at IBM and then building up IBM a few levels higher in terms of strategy and sustainability of operations). But apparently, we have truckloads of Louis Gerstners running around in Malaysia. Apparently we have a huge number of them being able to run a newspaper one day, and then the national postal company, and then the national utility company, heck maybe even the national oil company.

c) These jobs ARE NEVER advertised. These positions need to be advertised and the selection process be transparent - come on, did we learn anything on transparency at all over the past 12 months? How do you think the young and upcoming smart, diligent bumiputra graduates are going to feel? They feel like crap because these jobs only circulate among those young upstarts who know the right Datuks and Tan Sris. Naturally you are creating a new multi level caste system among the bumiputras. (I am not even going into the bumi/non-bumi issue in GLC CEOs, just at least be fair and transparent to bumiputras from all ranks and "classes").

d) There has been a silly predisposition towards "giving" plum jobs to the people who have the right degrees. I think good degrees from high ranking universities are all good things to start with. Look at all the investment bankers from Stanford, Yale, London School of Business, Oxbridge, Harvard... yes, the degrees can only get you so far - a degree only tells me you know how to read and write in English, and maybe do a power point presentation - that's it. This kind of "preselection" in appointing top candidates in GLCs is OK, but do not let it be the determining criteria. That's because this preselection criteria naturally benefits the well to do and connected. I am not saying that you cannot go to Harvard on government scholarships, its rare.

e) The musical chairs have to stop. One must evaluate the requirements of CEOs carefully and appoint candidates that have proven themselves. I do not see how the NSTP top dogs for the past 5 years have proven themselves, but they still get posted to good jobs.

f) Khazanah and the powers to be seem to think that you can be the CEO of any industry as long as you manage by the metrics and ratios set up. As long as you have enough data on anything, you can manage them - that seems to be the new school of thought that is pervading the corridors of MBAs and the likes. Yes, I agree that a good CEO can probably shift to manage in another industry provided that he/she has a good handle on the new industry critical success factors and critical industry developments. We are operating AS IF ALL our top management have that ability... come on!!!

g) The corridors of power must not be arrogant. They must be open and be accountable to the people. I like some of the transparency measures and metrics management imposed by Khazanah over the last 5 years. I am also aware that Khazanah may be more than willing to push the envelope in transparency and accountability but is always "asked" to go a certain way by hundreds of "politically connected or politically important" people - by imposing strict transparency procedures, it moves the entire process beyond the reach of these so called "kingmakers". Do not ruin it all by leaving this stone unturned. It is the spinal cord of what is wrong with the system, it is the pink elephant in the room that pisses the broader nation, it is the 64,000 dollar question that everybody do not want to confront. Its just not cricket!

p/s photos: Shu Qi

My NS Strategy Advice For Valuecap

The Edge Daily wrote a good piece on Valuecap. Here are the main points:

a) Valuecap Sdn Bhd, the asset management company owned by Khazanah Nasional Bhd, Permodalan Nasional Bhd and the Pensions Trust Fund Council, will receive an injection of RM5 billion to invest in undervalued companies on the Kuala Lumpur Stock Exchange. The money, which doubles the size of Valuecap’s capital, is on loan from the Employees Provident Fund (EPF). Valuecap, which was set up in 2002 to add liquidity and volume to the market, has met these objectives.

b) Is Valuecap’s record of its return on investment matches the EPF’s benchmark. However, currently, Valuecap is believed to have about RM4.9 billion worth of investments in 70 companies. And it has been reported that since its inception to September 2007, Valuecap has paid out a total of RM135 million in dividends. Better public disclosure will help to ascertain whether this passes the standard tests for financial performance.

c) A check with the registrar of companies shows that it is in the black and has assets of RM7.5 billion. So Valuecap has some value. But what is the return that EPF will get on the RM5 billion?

d) Since it involves two government-related entities, disclosures must be made every year on the returns. Also, Valuecap should detail the stocks it has in its portfolio just like some of the listed small-cap funds. At the moment, nobody really knows the stocks in Valuecap’s portfolio.

e) The Valuecap story illustrates the importance of transparency in financial reporting to boost investor confidence and the need for clarity about the correct economic stimulus package to move the market sentiments in the right direction.

The blogging community has tried to capture more information on Valuecap's Holdings: copied from http://bursa-chat.blogspot.com/

UAC Bhd 3,222,700 4.33 %

Amway(M) Holdings Bhd 6,958,100 4.23 %

MBM Resources Bhd 10,010,200 4.14 %

Hume Industries Bhd 6,596,400 3.45 %

PPB Group Bhd 40,452,900 3.41 %

IOI Property Bhd 28,267,500 3.4%

KLCC Property Holdings Bhd 30,957,800 3.31 %

Petronas Dagangan Bhd 32,436,400 3.27 %

YTL Cement bhd 14,955,092 3.05 %

Uchi Technologies Bhd 11,318,200 3.03 %

Chintek Plantations Bhd 2,646,000 2.9 %

United Plantations Bhd 5,975,800 2.87 %

Star Publications (M) Bhd 21,148,500 2.86 %

JTI International Bhd 7,144,400 2.73 %

Boustead Properties Bhd 6,672,150 261 %

Bintulu Port Holdings Bhd 10,121,100 2.53 %

Shell Refining Company Bhd 7,589,300 2.53 %

British American Tobacco Bhd 6,505,200 2.28 %

Axis REIT 5,400,000 2.11 %

Quill Capital Trust 4,302,000 1.1%

OSK highlighted 11 potential targets on the Kuala Lumpur Composite Index (KLCI) that Valuecap may go for — MISC, Petronas Gas, DiGi, British American Tobacco, Petronas Dagangan, MAS, Sime Darby, Maybank, IOI, AMMB and MMC.

Comments: From available information, Valuecap performed well. From the list of portfolio companies, it appears that the financial decision making is above-board (i.e. free from being "forced" to invest in "linked or influential" companies). Hence all the more reason to be totally transparent in their undertakings, staffing and investing policies. Its EPF money, hence its the public's money, NOT the government's. If you lend money to someone, you have a right to know how it is going to be spent on.

We also need to know the terms of the agreement between Valuecap and EPF on the disbursement of loan. Are there minimum performance criteria? How are dividends treated or repatriated? What is the time frame for the loan? Can EPF recall the loan at its own discretion, just like EPF can redeem funds mandated to other fund managers. We must have clear arms-length terms. If the government has learnt anything from what the people want over the past 12 months, its more transparency, clarity, stewardship and purpose in policies and management of resources.

In my view, the establishment of Valuecap is OK and justifiable. It is very much in the same platform as HKMA's massive Tracker Fund (although it did not start off as a tracker fund or ETF). When there are massive volatility and imbalances in global capital flows, the establishment of such funds are justifiable and forward looking. You do not want the broader economy to be affected disastrously by such vagaries.

We have to acknowledge that for economies that are highly correlated to fortunes of their own stockmarkets, the establishment of such vehicles are justifiable and proper. Malaysia has one of the highest GDP that is listed among all capital markets. Hence the correlation and flow on effects of the stockmarket is extremely high for the local economy. If that figure is much lower, like many European developed countries, the need to intervene with such vehicles may not be deem as necessary.

My final point is what is the "exit strategy" or "long term strategy" for Valuecap. What happens when you dissolve the fund? You get the same amount of scrips being flooded back into the market. Yes, you can argue that 5 years down the road, when the KLCI is at 1,800 or higher and sentiment has improved, Valuecap may be able to selldown its positions gradually. But that strategy is defeatist in every sense. You will still have to restart another Valuecap the next time a similar situation were to occur in the future - its not a solid strategy.

My advice (and this is worth millions in fees, which I am waiving) is to list Valuecap as an ETF. The strategy should be to break it up into 3 equal tranches. Assuming the portfolio value reaches RM15 billion in a few years time, thats three very sizable ETF. I would recommend to list one in Nasdaq, where the bulk of global ETFs are traded. The other ETF should be listed in Tokyo, while the final one in Malaysia. Do not be blinkered in trying to list all on Bursa on the basis of misplaced pride alone.

The strategy would basically "take the free float" out of the stockmarket, thus ensuring long term sustainability and investing interest. By listing in Tokyo and Nasdaq, you are basically selling all the shares to foreign investors, but the shares do not get back to the market place at all. An ETF will hold the same amount of shares throughout its life, investors will buy and sell the ETF like a share but shares held inside the ETFs would not flow back to the market place.

The strategy basically makes it possible to "trade" Malaysian shares like an index almost 24 hours a day. From Bursa trading hours to US trading hours and then Tokyo trading hours.

Sigh, if I was a Binafikir partner, I would at least get a few million in advisory fees for this.

p/s photo: Christine Mendoza

Reassessing Indonesia (Part 2)

The largest local groups with annual revenues of more than US$1bil include:

Salim: consumer goods, agriculture / US$7.3bil

Sinar Mas: pulp and paper, agriculture / US$4.7bil

Djarum: cigarette, Bank Central Asia, Cipta Karya Bumi Indah / US$3.7bil

Gudang Garam: cigarette, plantations, paper packaging / US$3.5bil

Bakrie: coal, Bakrie Brothers / US$3.1bil

Lippo: regional property developer, healthcare, financial services / US$2.7bil

Raja Garuda Mas: pulp & paper, plantations, energy / US$2.4bil

Triputra: coal, agro-industry, manufacturing / US$2.3bil

ABC: consumer goods, battery / US$2.1bil

Saratoga Capital: coal, Adaro, CPO, infra / US$1.9bil

Para: consumer goods, property, mining, financial services / US$1.6bil

Sampoerna: agro-industry, telecommunications, forestry and property / US$1.4bil

Ometraco: animal feed / US$1.2bil

If we were to include state owned companies, they will include:

Pertamina: energy / US$43bil

PLN: infra / US$12.7bil

PT Telkom: telecommunications / US$6.6bil

Bank Mandiri: banking / US$2.7bil

Bank BRI: banking / US$2.6bil

Bank BNI: banking / US$2.1bil

If we were to compare the Malaysian companies with annual revenues of at least US$1.8bil (RM3.4bil), they include:

1) Tenaga Nasional US$6.8bil

2) Sime Darby US$6bil (pre-merger)

3) Petronas Dagangan US$5.7bil

4) Telekom Malaysia US$5.2bil

5) Maybank US$4.4bil

6) MAS US$4.3bil

7) MISC US$3.3bil

8) UMW US$2.9bil

9) Public Bank US$2.8bil

10) Bumiputra Commerce US$2.6bil

11) IOI Corp US$2.6bil

12) Genting US$2.4bil

13) UEM World US$2bil

14) RHB Capital US$1.8bil

15) PPB US$1.8bil

The big difference is that many of the biggest companies in Malaysia are GLCs but Indonesia’s list comprises mainly entities owned and run by entrepreneurs.

The Arab Connection

Petrodollars have been making a beeline to the shores of Indonesia in recent years. There is an underlying motive to help fellow Islamic countries. Indonesia has the most populous nation in Asia following China and India, and has enormous untapped potential. The biggest investment to date is by Saudi Arabia’s Bin Laden group which invested US$4.3bil into 500,000 ha of planned rice estates in Merauke, Papua.

The world class Emaar Property (Dubai) will be building an 1,200 ha integrated resort project in Lombok, West Nusa Tenggara. The projects is estimated to be US$2.6bil. Emaar is the builder of the Burj Dubai tower, the world’s tallest building. Emaar also plans to invest in other sectors such as rice plantations in east Indonesia, power plants in South Sumatra, and a satellite town in either Purwakarta or Jonggol.

Another Dubai investor is Ras Al Kheimah Investment Authority (RAKIA) which is planning to develop a US$400mil 130 km railroad connecting Palembang and Tanjung Api-Api port in South Sumatra.

Qatar Invetsment Authority has committed US$1bil in infrastructure related projects. Another investor from the same company, Qatar Bahrain Company, has committed US$400mil to a power plant project.

Dubai Drydock and Dubai World have planned to invest US$500mil in a ship building yard.

Sensitive Treatment of Investors

However, the Indonesian government seems to have a different set of rules for its neighbours, Malaysia and Singapore. Singapore has had to deal with request to lower or eliminate stakes in one of their telecommunications holdings.

In Malaysia, Maybank’s brush with the regulators over its BII purchase looks laughable. Perhaps, the Indonesians do not want to lose so many key strategic assets to Malaysia and Singapore. It’s a bit like how Australia hates to lose to New Zealand in rugby and cricket, and well, almost everything else. Misplaced nationalistic pride? Pettiness? Venting frustrations and displeasure over the treatment of Indonesian workers in Malaysia and Indonesia (maids, construction, palm oil)?

Maybe that’s why when Arab investors buy strategic assets, there is so much less negative press. For example, Qatar Telecom has acquired a 40.8% stake in PT Indosat for US$1.8bil. Saudi Telecoms has also bought a 51% stake in PT Natrindo, another telecommunications giant which operates the country’s newest cellular phone system.

Middle East investors have been big in Malaysia over the last five years. But is the tide turning in favour of Indonesia? I think not. Malaysia is still a preferred destination as the infrastructure and business logistics are comparatively simplified and easier. Till today, Indonesia is still working out the double taxation agreement between Indonesia and Middle East governments. But the gap is closing.

The Legacy Issues

Just like Malaysia, Indonesia practises a lot of subsidy. Subsidies account for 11.7% of the government spending in 2007, (US$13.6bil or 2.1% of GDP) and are expected to rise to over 13% in 2008. Government spending on infrastructure is expected to increase ahead of next year’s elections. Indonesia plans to sell US$12.8bil bonds in 2008 to fund infrastructure and fiscal deficit.

The good news is that the ratio of government debt towards GDP in 2009 is expected to drop to 30% from 54% in 2004. President Susilo Bambang Yudhoyono said Indonesia, which had fully repaid its foreign debt to IMF, continued to enjoy an increase in its foreign exchange reserves. In July this year the foreign exchange reserves have reached over US$60bil.

The Corruption Eradication Commission (KPK) has carried the people’s wishes as it aggressively pursues powerful political figures, and even plans to take on the House of Representatives. KPK chairman Antasari Azhar has in the past eight months overseen arrests on corruption charges of five members of parliament, a former national police chief and ambassador to Malaysia, a senior government prosecutor, and three central bank officials, including the governor.

The Main Factor

What prompted me to write about the need to reassess Indonesia was the entrepreneurship that resides in the many mega business entities, which were mentioned earlier. A country’s economic success can be charted by sound long-term financial, social and economic policies €“ e.g. Singapore and HK. Or it can rise up thanks to an open economy and strong entrepreneurship in its people €“ e.g. HK, China.

To be fair, while the Indonesian government is headed in the right direction, it still has some way to go. What is more significant is the level of entrepreneurship that resides in the very big companies in Indonesia.

There is a big difference to a professionally trained CEO helming a big company in Singapore and someone who is building a billion dollar empire from Indonesia. It used to be that to be very rich in Indonesia, you need very strong ties to the right people. While that is still important, there has been a significant change in the way Indonesian companies have been growing over the last five years.

Was it due to the end of the Suharto-era? Was it due to a more democratic process? Are there more opportunities now for more people instead of a select few? Maybe all of the above, and throw in a suggestion that many Indonesians are just simply superb businessmen.

Let’s just examine a few of the major business groups:

* Lippo: It is not only big in Indonesia but in Asia as well. Its property arm, Lippo Karawaci, currently has US$2bil in projects and assets under management. Its strategy is to grow that to US$10bil over the next five years. Its recent major succeses include the US$880mil Kemang Village and the outstanding US$1.2bil St Moritz development in west Jakarta. In healthcare it plans to add 15 new hospitals around the country. To ensure they have things covered up the value chain, it has tied up with international institutions in Singapore, Australia and Universitas Pelita Harapan.

The company owns the largest landbank in the country, and will be developing new townships modelled after the highly successful Kemang Village and Lippo Cekarang, in Tanjong Bunga water front project in Makassar. It has two REITs in Singapore with US$900mil total in assets under management, with a target to bring that to US$5bil in 5 years.

* Salim: Helmed by Anthony Salim. Has the world’s largest instant noodle maker in Indofood Sukses Makmur, and the HK-listed First Pacific Co. Over the last three years he has increased its palm oil plantations by 224,000 ha to 387,000 ha though not all is planted with palm oil yet. Compare that with arguably Indonesia’s largest CPO planter Astro Agro Lestari which has only 300,000 ha. By 2015, Salim aims to produce 1 million tonnes of CPO a year. Salim is also the industry leader in cooking oil, margarine and flour.

* Sampoerna: Sold the country’s second largest clove cigarette maker to Altria for US$5.2bil in 2005. However, the family has quickly bounced back, redeployed the cash to acquire stakes in agriculture, telecommunications, mining and property. Its Ceria telecommunications brand saw subscribers growing from 300,000 in 2007 to more than 700,000 this year with a target of 1 million by end of 2009. Sampoerna has expanded into forestry as well, owning controlling stakes in Sumber Graha Sejahter, Sumalindo Lestari Jaya and the Singapore listed Samko Timber. In property, the company owns Sampoerna Strategic Square, a 3.2 ha development with two towers of 32 floors each.

If you wish to do business in Indonesia, you cannot go wrong by talking to Benny Subianto. Probably, the closest the country has to a version of Warren Buffett. Not many would recognise his name, but he was the founder of two monster companies in Astro Agro Lestari and United Tractors, and he also played a big role in Astra International. In 2003, Benny started his own investment firm Persada Capital Investama. PCI has interests in Interra Indo Resources, and was an early substantial shareholder in the highly successful Adaro. His current portfolio include Adaro, Kirana Megantara, Sapta Indra Sejati and Truputra Agro Persada - all corporate giants or giants to be.

I can go on and on and list the achievements of Eka Widjaja (Sinar Mas), Budi Hartono (Djarum), Aburizal Bakrie (Bakrie Brothers), Teddy Rachmat (Triputra), Chairul Tanjung (Para), Handojo Santosa (Ometraco), Eddy Katuari (Wings), Paulus Tumewu (Ramayana Lestari Sentosa), Jakonb Oetama (Kompleks Gramedia), Kartini Muljadi (Tempo Scan Pacific) and Tomy Winata (Artha Graha). They are just a handful of the many highly adventurous and risk taking businessmen, and they are very good.

If we were to compare, we will find that these Indonesian business leaders tend to do a lot more corporate deals every year. They tend to make big investments more frequently. They are also not averse to selling assets for the right price.

Many have made money from their successes in Indonesia. Many will now have their eyes to parlay their expertise to conquer parts of Asia. That is the one major thing which large Malaysian companies have been able to do much better. Can they translate their success into other countries? It would take a brave person to think that they will not succeed.

SOEs Privatisation The Kicker

There are 37 state owned enterprises slated to be privatised. Though there had been some obstacles, we will see five going for IPO soon: Krakatau Steel, Bank Tabungan Negara, National Plantation Enterprises III, IV and VII. Just imagine Tenaga and Telekom Malaysia being listed in one year. That alone would charge up its corporate scene and equity markets. Just spreading the list of 37 over five years would propel global investors interest to no end in Indonesian equities. The choices would increase and these giants would allow for good liquidity as well.

Hence if the government continues to play their cards right, the outlook for Indonesia is bright indeed over the next few years.

p/s photos: Tavia Yeung-Yi (one of the better up and coming talent)

Reassessing Indonesia (Part 1)

Malaysia and Singapore have a unique relationship. We are like squabbling in-laws, but we know we cannot and will never divorce each other.

You live with the tension and exchange of barbs. The ties between Malaysia and Indonesia are quite different. The animosity at times can boil over. Grudges are harboured and allowed to fester. There is a genuine fear of, and sometimes loathing for, each other.

Most of that is at the political and policy levels. Many Malaysians and Indonesians love to visit each other’s country. Indonesia to Malaysians in general, is a bit of an underachiever. Naturally, Malaysia to Singaporeans, is also a bit of an underachiever.

It’s time to reassess Indonesia. In many ways, the country is moving in the right direction business-wise.

Recently, Qatar and Indonesia set up a US$1bil fund to invest in energy and infrastructure. Qatar is the world’s largest exporter of liquefied natural gas (LNG), while Indonesia is third. Both countries are also members of the Organisation of the Petroleum Exporting Countries (OPEC), though Indonesia has just opted out.

Qatar will contribute 85% of the funds for the new fund and Indonesia the remainder. Qatar’s state investment fund, the Qatar Investment Authority (QIA), has teamed up with Abu Dhabi state enterprise International Petroleum Investment Co in March to launch a US$2bil fund.

The QIA has also set up joint funds with Oman and Dubai.

Indonesia is pro-Western, much like Malaysia, and could be a model for a modern Muslim nation, provided nationalist Islam (not radical Islam) doesn’t become too powerful a force in Indonesian society.

Following the aftermath of the Sept 11 attacks, many were outspoken on the various failings of Muslim nations. Indonesia is a dominantly Muslim nation, with the largest Muslim population in the world, but it also has small but strong Hindu, Christian and Buddhist communities.

Malaysia has generally enjoyed a better perception in the eyes of international travellers and global investors.

Indonesia has had to contend with thorny events such as the Bali bombings and the East Timor massacre. If investors are to be influenced just by these events, they would be doing Indonesia and themselves a disservice.

There is still pockets of “nationalistic fervour” among the political voices in Indonesia.

Health Minister Siti Fadilah Supari commented in April that regional governments in Indonesia should be on their guard whenever they dealt with international investment proposals.

She said the following should be considered by provincial governors and regents in respect of foreign investment plans:

· Would the international investors take control of Indonesian resources?

· Would the foreigners be prepared to be on an equal footing with Indonesian partners, or would they adopt a lordly, colonialist stance?

· Would a particular foreign investment benefit Indonesians or harm them?

· To what extent would Indonesians gain from the investment? Foreign investors often lie about this matter.

For example, South Kalimantan’s coal needs were less than 1 million tons per year and there was an electricity shortage crisis. Yet, at the same time, 70 million tons of coal was taken out of the province and sold internationally.

Indonesia has been beset by an autocratic regime for a long time. We need to reassess the country now as the country is certainly moving away from the authoritarian system to a more democratic one.

It is still taking baby steps but press freedom and the media’s brutal honesty and bravery has paved the way for a more civil society. This is an important aspect of a decentralised power system, which accords more voice to a wider spectrum of leaders and the disenfranchised.

Meanwhile, according to an AT Kearney study of the top 25 most attractive investment destinations in the world, Indonesia ranks 21st. The rankings for 2007 are based on a survey of 1,000 CEOs around the world. In 2006, Indonesia did not make the top 25. Thanks to a well-respected Finance Minister in Sri Mulyani Indrawati, there has been significant economic liberalisation.

Quasi-monopolies have not been protected and are expected to compete with new foreign companies.

The boom in commodities over the last five years has helped the country infuse more strength into its underlying economy. Indonesia is at or near the top in palm oil, rubber, base metals, coffee and cocoa.

Sustainability of global investments

Corporate investors across all regions are concerned about the sustainability of the global economic order. Is Indonesia the flavour of the month only because of the commodities boom? I think not, as most experts can see a sea of change enveloping the country.

The commodities boom only hastens the benefits of such changes.

The country is confident enough to implement several years of mandated increases in minimum wages. While some industries may have shifted or closed operations because of these new rules, these measures have also forced investors and businesses to move up the value-add curve.

There has also been a decentralisation of budgetary systems, which has allowed local leaders to better manage resources and spending to their localities.

Over the last three years, Indonesia has managed to enjoy more stability politically, in its currency and in economic viability. This lessens the discount on businesses in valuation models, thus resulting in better confidence among foreign investors going forward.

Corruption is still a problem but one can easily see a more transparent era for Indonesia. More bigwigs have been hauled up and tainted politicians have lost their seats with greater frequency.

Major business entities

Since beginning of 2007, there has been more than US$20bil in mergers and acquisitions and capital raising, which drove the corporate sector to new levels.

The corporate sector is no longer dominated by seasoned players from the Suharto era. If you put the top business groups next to Malaysia, the latter pales in comparison.

The Salim group tops the ladder with US$7.3bil (RM24.8bil) in revenues annually and is in agriculture, distribution, property management, financial services and telecommunications in Indonesia, Hong Kong, China and Singapore.

Next is the Sinar Mas group with revenues of US$4.77bil (RM16.2bil), which was forced to sell Bank Internasional Indonesia (BII) following the 1997 financial crisis but has since rebuilt itself in banking with the acquisition of Bank Shinta.

The Sinar Mas group can be said to have been most affected by the 1997 financial implosion as their Asia Pulp & Paper had a staggering debt load of US$14bil. Following years of negotiations and restructuring, the company has thrived. It is also the biggest national player in palm oil, with land bank of more than 1 million hectares.

I could go on and on, but a summary of local companies with annual revenue of at least US$1bil each would be better for now (major assets/annual revenues):

Salim: consumer goods, agriculture/US$7.3bil

Sinar Mas: pulp and paper, agriculture/US$4.7bil

Djarum: cigarette, Bank Central Asia, Cipta Karya Bumi Indah/US$3.7bil

Gudang Garam: cigarette, plantations, paper packaging/US$3.5bil

Bakrie: coal, Bakrie Brothers/US$3.1bil

Lippo: regional property developer, healthcare, financial services/US$2.7bil

Raja Garuda Mas: pulp & paper, plantations, energy/US$2.4bil

Triputra: coal, agro-industry, manufacturing/US$2.3bil

ABC: consumer goods, battery/US$2.1bil

Saratoga Capital: coal, Adaro, palm oil, infrastructure/US$1.9bil

Para: consumer goods, property, mining, financial services/US$1.6bil

Sampoerna: agro-industry, telecommunications, forestry and property/US$1.4bil

Ometraco: animal feed/US$1.2bil

Khazanah Nasional Bhd has a hefty profile in Indonesia. The businesses under Khazanah has an annual revenue of US$1.8bil. Its stakes include those in Bank Lippo, Bank Niaga, Excelmindo Pratama and infrastructure joint ventures (JVs).

Surprisingly, Temasek’s holdings in Indonesia has only a total annual revenue of US$1.5bil. It has stakes in Bank Danamon, BII, and various property and energy JVs.

Still, the key point here is the number of business entities that have substantial revenues. How many Malaysian businesses have combined revenue of more than RM3.4bil annually? Size matters, especially when they are headed in the right direction with the proper masterplan.

State-owned enterprises (SOEs)

The government has also planned to privatise a number of SOEs, which in itself is a grand plan to better manage resources, inject competition and promote efficiency in government. All in, 37 SOEs have been identified for privatisation and/or restructuring. There has been some delay in that certain factions of the government have been delaying the process.

Last year, 10 SOEs were scheduled for privatisation. However, only five are now ready to go to IPO this year: Krakatau Steel, Bank Tabungan Negara, and National Plantation Enterprises III, IV and VII. Needless to say, intense lobbying by the affected SOEs and maybe even “vested interests” must have been a large part of the delay.

Still, it’s hard to deny that the country is moving in the right direction.

p/s photo: Son Ye Jin

Khazanah's Report Card

Wow, what an ambitious article. Who is even qualified to make a call on Khazanah (K) with the amount of brain power on hand? Anyway, I jest, it is important to consider the "performance" of Khazanah regularly now since it has been helmed by Azman Mokhtar because of the timeline of objectives it has taken on. These objectives will have a big impact of the performance of KLSE/KLCI and how the Bursa will be viewed by the global investment community.

Key themes of Khazanah Nasional's mandate as a strategic investment house include: a) Creating sustainable value; b) Raising national competitiveness; c) cultivating a culture of high performance. These are to be achieved via four strategic pillars; namely,
- Legacy investments: streamline, restructure, nurture
- GLC transformation: Increase shareholder and strategic value
- New investments: New sectors, cross border
- Human Capital Management: Active leadership management

1) Legacy investments - Well, Azman and his team was not responsible for what is on Khazanah's portfolio. He can only do with what he has been given. If one were to examine the full portfolio, one can already make some "smart investing decisions". Let's just consider the healthcare sector - Khazanah has a 10.87% stake in Apollo Hospitals, a 36.6% stake in Faber and a 28.9% stake in Pharmaniaga. Naturally to consolidate all operations under one management would allow for better synergies and cost savings. So, which vehicle would you use to absorb the rest (as a rule of thumb, you should use a less attractive vehicle to issue shares when buying assets), but in this case we have to bear in mind that control is of utmost importance. This is what is likely to happen: take Faber private because Faber is trading way under fair value, can probably succeed by buying at RM0.70 or RM0.80, still way undervalued. Once K has 100% of Faber, inject both AH and Faber into Pharmaniaga for shares. This will propel K's holdings in Pharmaniaga enormously. Why not the reverse, you might ask, well its a bit like a very attractive girl going out with a guy - injecting 100% of Pharmaniaga into Faber is like a guy asking the attractive girl out (iffy and the real impact may/may not be exciting); but injecting 100% Faber into Pharmaniaga is like an attractive girl asking you out (cannot lose and there are bound to be boasting rights!). As an investing strategy - collect Faber as much as you can; once they announce the privatisation deal, start unloading Faber but buy Pharma - this is however a very, very long term thing to play out, 1-2 years at least but it should happen. I cannot believe Azman will let these 3 stakes to be left alone like that. When you know what value, synergies and efficient usage of capital are - you will tear your hair out if you can put those things into place.

On the transportation sector, we can see that K only has a 0.53% stake in MISC. If I was Azman, I'd be pretty disappointed with that. Don't know how yet, but if I was driving the K ship, I will be looking to buy more MISC, at least triple the holdings. MISC is important and strategic, in fact, Petronas should be the one selling down some of it. As for MAS, that is a big headache as K has 69.34% - like I have mentioned before, the best way out for MAS is to take a stake in Air Asia and work together to sort out matters (please read blog on Air Asia).

As for auto sector, the 42.74% stake in Proton is definitely political soccer ball. If one is an objective analyst, you don't want Proton to go it alone, it doesn't have the critical mass of market demand. I believe Azman will invite a JV partner to come in, even lose control if that's what it takes. Proton could be a good recovery play once they have a JV partner. Proton as it stands would be a good regional production, sourcing and distribution channel for one of the top 10 car makers.

As for technology sector, its 19.96% stake in D'nonce is neither here nor there - get rid of it already. Other things to get rid of becaus ethey are too small include: 9.9% stake in Parkson Retail (profitable though); 0.16% stake in RHB Capital; 17.2% stake in Ho Hup; and the excruciating 24.85% stake in Parkmay. A place such as K should have a certain number of top managers for it to function effectively. One person can maybe manage/oversee 2-4 companies or 1/2 sectors well. If you have ten top people, you should want them to look at stakes of at least RM200 million and above. Having one person to manage four companies of very small stakes (say RM40 million worth) will be a waste of resources no matter how much value he/she can add to the RM40 million. So, get rid of the small value stakes even if they are profitable.

2) GLC Transformation - The GLC transformation is unique as K got involved with not just companies under K but all government linked companies. The changes in top management insituted and the implementation of specific KPIs for each company/sector is well and good. Still need to see how this all pans out. It is important to see what Azman will do when certain heads fail to attain their KPIs - that will give a better indication of the effectiveness and follow through program.

3) Human Capital Management - This ties in with the how K works with the leaders of the companies under its helm and other GLCs. So far so good, some brave appointments made and some even braver decisions to let certain people go. Internally, K has a slight problem - there are roughly 16 director/executive director positions within K. If we were to take out the functionary duties such as HR/financial controller/IT/legal, the 16 positions would be down to 14. The thing is, Azman used to be the Director / Head of Research for UBS in Malaysia. Guess how many of the 13 positions are filled by very senior alumni of UBS... 3, so including Azman it will be 4. Well, we work with who we know best, but we must also be careful not to be regarded as an unofficial subsidiary of UBS. We should not give the impression that K could care less about what the world thinks or possibility that people might talk - even though we have done everything transparently. This is something Azman will have to look at, perception is also important sometimes, you can do without the vicious whispers.

4) New Investments - New sectors and cross borders. This is about time, and though some may say K is following the footsteps of Temasek, so what. As a small country with a population that is way deficient under the "critical mass measuring tape", we need to secure significant stakes to ensure whave a finger in some of the future's important big pies. This will diversify our country's holdings, hence our wealth, hence our economic viability and dependency. Just imagine if all we have to depend on are oil & gas and the natural resources of timber, rubber and oil palm. What if all these market prices halve in ten years time - it could happen, there could be advances made in science and technology to come up with viable and cheaper substitutes? Our country's economic destiny cannot be tie in with just our resources, we need to spot "growth sectors of the future" that we may not be very strong in or have the natural factors to compete (no population for demand), and then invest accordingly.

To do that, K will be selling some stakes. I have touched upon that before but not all stakes are attractive to buyers. If you have to sell something tomorrow, K will probably be able to offload some of its: 55.22% UEM World; 10.56% DRB-Hicom; 30.04% TimedotCom; 21.48% Astro; 44% Time Engineering; 40.17% Telekom; 37.35% Tenaga; etc... Certain stakes are okay to be lowered, certain stakes K would not even consider selling, these are good, important stakes such as 17.32% Pos Malaysia; 3.65% Maybank; 6.23% EON... to name a few. The few that will probably be sold down (not all just part of it) and would be of interest to foreign investors:
a) Tenaga Nasional
b) Telekom Malaysia
c) UEM World
d) DRB-Hicom
e) Astro
It is also likely that K will tap the global bonds market for funds to buy stakes in foreign companies. K should not have a problem raising US$1-2 billion as it has a net worth of around US$12 billion, you need that as a starter.

Some investors might fear that if K sells down some of its stakes, that would lead to a drop in their share prices as well. Well, that is not the case in reality. In fact, as the "controlling party" sells down shares in a decent company, the share price actually performs better with better liquidity as that attracts more institutional buyers. The main objection foreign funds have for not buying Malaysian stocks is lack of liquidity, not that they don't like the company, but that they need to get in with a certain size to make it count, and need the volume to get in and out when he/she chooses. In fact, I am willing to bet that the KLCI wil tread on higher ground once more details are revealed on K's selling down its stakes and the overall global investing community will receive the news positively.

I believe the bulk of the new investments overseas will be targeted at the IT side of things, because that's where we are weak in. I also believe that Azman and his team will need to work much closer with the people from BI Walden (highly successful venture capitalists in the US and Asia, and they have some highly astute professionals at the top of their company) for link up work. K has a 34.09% stake in BI Walden Ventures Ketiga.

So, the report card for Khazanah - before Azman was appointed: C-. The period under Azman Mokhtar: B+.