Snippets, Snipes & Snides
11-15 August 2006
Energy Earnings Pushing Indices Higher
A 44% boost in the energy sector has pumped up operating earnings in the Standard & Poor’s 500 to a record US$199.4 billion, up 13.4% from a year earlier, making it the 17th consecutive quarter of double-digit growth. The percentage could have been even higher were it not for the information technology sector, in which nearly two-thirds of issues were negative. The strong second-quarter results, coupled with projected full-year growth projections are likely to help the S&P 500 finish the year up 5%-8%. The surprising energy sector performance is thanks to near- record oil prices and the closing of BP’s Alaska oil field for repair. It had originally projected a 5.7% rise in the third quarter and a decline in the fourth, but is now predicting a 16.8% boost in the current quarter and an increase at the end of the year.
Short Term Jobs In Korea
Fund managers in South Korea tend to focus on short-term goals because most of them don’t stay in their jobs long enough to project for the long term. The firms registered with the Asset Management Association of Korea showed that the average Korean fund manager stayed in the job for 2.5 years, while 28.2% of the total leave within one year and 46% move on within two years. The turnover rate is creating excessive turnover, which in the past year was 1800% at Hyundai Wise Asset Management’s Value Finder Stock Type Fund (somebody's getting some kind of kickback here obviously). Such turnover is bad news for investors, who are encouraged to look at the long term. In addition, for the ongoing search for greener pastures, fund managers may leave when a new management team comes in and is eager to hire managers who share their values.
Bad Air Irks Hedge Funds In HK
A main topic of conversation among hedge funds in Hong Kong has nothing to do with raising funds or volatility; it has to do with air quality that is so bad that it could ultimately have a negative impact on the clogged city’s claim to financial supremacy in the region. A number of HFs are turning their noses up at the city because of the horrible pollution and turning their eyes toward the fresher air of Singapore as a quality-of-life decision. There are hedge fund partnerships where there is an element of strife over air pollution. One partner wants to stay in Hong Kong, while the other partner wants to move to Singapore for the sake of the family. The exodus apparently had already begun. U.S.-based hedge funds Stark Investments and Concordia reportedly are already making the move, and Deutsche Asset Management’s Asian head, Ed Peter, has set up house in Singapore, where Deutsche manages most of its US$28 billion in Asian assets anyway. This all plays in the hands of Singapore, which recently eased legislation and has embarked on an aggressive marketing campaign to attract more financial business and vie for the Asian sector crown. Meanwhile, Hong Kong is making a serious effort to stem the tide of departing pollution-sensitive investment types by improving local emission levels, 70% of which are said to be wafting in from across the China border.
Remember BCCI - The Guy Is Still Not Caught
The FBI is in hot pursuit of Gaith Rashad Pharaon, 65, a Saudi millionaire fugitive wanted in connection with the Bank of Credit and Commerce International (BCCI) financial fraud scandal. He's evaded the feds for nearly 15 years. His yacht was recently spotted off one of the Greek islands, but he wasn't aboard. It's captain claims he was headed for Algeria. There's a large reward for information regarding his whereabouts. Gaith Rashad Pharaon, 65, was once a familiar figure in London business circles. But he is now wanted in Washington for a series of federal and international crimes ranging from fraud to financing terrorism. The collapse of BCCI took almost US$13bn in depositors' money and left 250,000 international creditors unpaid. Many in HK would remember BCCI.
Tuesday, August 15, 2006
Saturday, August 12, 2006
Jesus Is A Democrat
Disillusionment With Christianity
Allow me to indulge in something religious for a while. The alignment of evangelical Christianity in the US with the Republican party irks me no end. For interested Christians, there is a very good book on politics and religion - by an evangelical Christian Randall Balmer. The book is "In Thy Kingdom Come: How the Religious Right Distorts the Faith and Threatens America". Balmer, professor of American religious history at Barnard College in New York, argues that evangelicals have strayed from the teachings of Jesus Christ and their own historical support of progressive causes by aligning themselves so completely with the Republican party.
Back in 1925 in Dayton, Tennessee. William Jennings Bryan was assisting in the prosecution of John Thomas Scopes for teaching evolution in the public schools. That forced the issue out in the open and a taking of party sides came into being. Then there was also the Cold War and the very public friendship between Billy Graham and Richard Nixon that begins in the 1950s when both were anti-communist crusaders. Inadvertently, it reinforced the Republican image with Christians.
Then there was President Carter, an evangelical Christian - and a Democrat. But Carter was elected when there was a big sway by Christians from registering to vote, its the disillusionment effect from what happened a few years before Carter was elected. One of the ironies of recent American history is that in the course of the Carter administration, these same evangelicals turned against Carter and embraced instead Ronald Reagan as their political savior.
The problemas starts to arise when it comes to abortion and gay rights, both the Republicans uses carefully to court Christian votes. But these are just 2 issues, voters should concern themselves with an array of issues such as education, poverty, social justice, anti-war, capital punishment, global responsibility, etc...
It is too easy to cite abortion and gay rights and lump everything Republican as good. I don't know about you, but when I read the New Testament, there is very little about either abortion or homosexuality. Jesus said nothing about either one. Christianity is about after one's heart, mind and soul... not issues driven, why the need to draw lines and boundaries when Jesus came to eradicate the very lines and boundaries in our hearts. Where is the compassion, empathy ... that, I come across a lot more in the scriptures.
Disillusionment With Christianity
Allow me to indulge in something religious for a while. The alignment of evangelical Christianity in the US with the Republican party irks me no end. For interested Christians, there is a very good book on politics and religion - by an evangelical Christian Randall Balmer. The book is "In Thy Kingdom Come: How the Religious Right Distorts the Faith and Threatens America". Balmer, professor of American religious history at Barnard College in New York, argues that evangelicals have strayed from the teachings of Jesus Christ and their own historical support of progressive causes by aligning themselves so completely with the Republican party.
Back in 1925 in Dayton, Tennessee. William Jennings Bryan was assisting in the prosecution of John Thomas Scopes for teaching evolution in the public schools. That forced the issue out in the open and a taking of party sides came into being. Then there was also the Cold War and the very public friendship between Billy Graham and Richard Nixon that begins in the 1950s when both were anti-communist crusaders. Inadvertently, it reinforced the Republican image with Christians.
Then there was President Carter, an evangelical Christian - and a Democrat. But Carter was elected when there was a big sway by Christians from registering to vote, its the disillusionment effect from what happened a few years before Carter was elected. One of the ironies of recent American history is that in the course of the Carter administration, these same evangelicals turned against Carter and embraced instead Ronald Reagan as their political savior.
The problemas starts to arise when it comes to abortion and gay rights, both the Republicans uses carefully to court Christian votes. But these are just 2 issues, voters should concern themselves with an array of issues such as education, poverty, social justice, anti-war, capital punishment, global responsibility, etc...
It is too easy to cite abortion and gay rights and lump everything Republican as good. I don't know about you, but when I read the New Testament, there is very little about either abortion or homosexuality. Jesus said nothing about either one. Christianity is about after one's heart, mind and soul... not issues driven, why the need to draw lines and boundaries when Jesus came to eradicate the very lines and boundaries in our hearts. Where is the compassion, empathy ... that, I come across a lot more in the scriptures.
Friday, August 11, 2006
UBS Study On Price & Earnings Of Cities
Should I Be Thankful?
Having gone through the UBS study on price and earnings of global cities, I am quite convinced on the validity of the assumptions, methodology and conclusions. Firstly, they weighted according to how much it would cost to buy a basket of goods in each city, the breakdown are as follow:
Food/groceries 18%; Beverages/tobacco 5%; Hygiene & healthcare 7%; Clothing 6%; Household and electronic devices 7%; Home/house 18%; Heating/lighting 5%; Transportation 14%; Miscellaneous 20%.
Cost of living index is calculated on the basket of goods containing 154 items (products and services) - that is then reweighted according to the Consumer price index relevant for that specific country. As for earnings, the wages are calculated across 14 selected industries/job types and only takes data from local people and also the prevailing tax rates.
The following are the rankings of PRICES using data but NOT including rentals. The study is based on 71 business cities surveyed. New York city is pegged at 100, meaning if your city is at 95, your city is technically 5% cheaper than New York, etc...
1) Oslo 121.5
2) London 110.6
3) Copenhagen 109.2
5) Tokyo 106.8
7) New York 100
11) Paris 95.6
15) Los Angeles 91.6
19) Amsterdam 87.7
24) Seoul 85.8
27) HK 82.1
30) Sydney 80.4
32) Singapore 76.6
36) Dubai 74
40) Taipei 68.9
51) Jo'burg 59.7
54) Bangkok 55.3
57) Jakarta 51.8
60) Shanghai 50.3
62) Beijing 49.6
67) Manila 46.7
70) Mumbai 38.5
71) Kuala Lumpur 36.8
The PRICES ranking changes substantially if rents were included, and they should be, and especially in major Asia cities: London would become the costliest city with 105.5 with New York being pegged at 100 still. Other cities which moved up the rankings when rent was included were Chicago, Los Angeles, Tokyo, Sydney and HK. But Kuala Lumpur remained the cheapest place at 71st position.
So for WAGES, as long as Kuala Lumpur does not finish at 71st also, Malaysians should be pretty well off, ... right?!! Again using New York as 100:
1) Copenhagen 118.2
2) Oslo 117
3) Zurich 115
5) New York 100
6) London 89.2
8) Dublin 88.3
18) Tokyo 78
20) Sydney 74.6
32) Seoul 44.2
36) Taipei 35.5
38) Singapore 32.3
40) HK 27.4
53) Kuala Lumpur 15.7
59) Shanghai 11.5
66) Bangkok 8.2
67) Mumbai 7
68) Jakarta 6.3
69) Manila 6.3
Most of the Asian cities would move up by another 10 spaces roughly if we were to take net wages instead of gross. On balance, Kuala Lumpur looks great, cheapest but gets paid by a significantly higher relative quantum, mainly we don't have to worry about excessive property prices/rentals. Fuel is still subsidised as are a number of necessities - thanks to super normal revenue from our resources (oil and gas, plantations, timber, etc...). When you put PRICES and EARNINGS side by side, you get purchasing power. Here is the more important ranking, which is Purchasing Power, based on net wages, again with New York pegged at 100:
1) Zurich 115.6
2) Geneva 112
3) Dublin 106.5
7) New York 100
9) Sydney 99
10) Auckland 98.7
15) Oslo 91.2
20) London 86.8
24) Tokyo 81.8
31) Paris 72
35) Seoul 56.2
37) Kuala Lumpur 50.9
38) Singapore 50.8
43) Hong Kong
56) Shanghai 22.9
62) Mumbai 18
65) Bangkok 14.6
67) Manila 13.5
68) Jakarta 12.2
Guess, we should be happy.... now, if we can only get our car prices to be the global average (presently the cost of buying a car in Malaysia and Singapore is about 80%-100% more expensive than the global average).
Should I Be Thankful?
Having gone through the UBS study on price and earnings of global cities, I am quite convinced on the validity of the assumptions, methodology and conclusions. Firstly, they weighted according to how much it would cost to buy a basket of goods in each city, the breakdown are as follow:
Food/groceries 18%; Beverages/tobacco 5%; Hygiene & healthcare 7%; Clothing 6%; Household and electronic devices 7%; Home/house 18%; Heating/lighting 5%; Transportation 14%; Miscellaneous 20%.
Cost of living index is calculated on the basket of goods containing 154 items (products and services) - that is then reweighted according to the Consumer price index relevant for that specific country. As for earnings, the wages are calculated across 14 selected industries/job types and only takes data from local people and also the prevailing tax rates.
The following are the rankings of PRICES using data but NOT including rentals. The study is based on 71 business cities surveyed. New York city is pegged at 100, meaning if your city is at 95, your city is technically 5% cheaper than New York, etc...
1) Oslo 121.5
2) London 110.6
3) Copenhagen 109.2
5) Tokyo 106.8
7) New York 100
11) Paris 95.6
15) Los Angeles 91.6
19) Amsterdam 87.7
24) Seoul 85.8
27) HK 82.1
30) Sydney 80.4
32) Singapore 76.6
36) Dubai 74
40) Taipei 68.9
51) Jo'burg 59.7
54) Bangkok 55.3
57) Jakarta 51.8
60) Shanghai 50.3
62) Beijing 49.6
67) Manila 46.7
70) Mumbai 38.5
71) Kuala Lumpur 36.8
The PRICES ranking changes substantially if rents were included, and they should be, and especially in major Asia cities: London would become the costliest city with 105.5 with New York being pegged at 100 still. Other cities which moved up the rankings when rent was included were Chicago, Los Angeles, Tokyo, Sydney and HK. But Kuala Lumpur remained the cheapest place at 71st position.
So for WAGES, as long as Kuala Lumpur does not finish at 71st also, Malaysians should be pretty well off, ... right?!! Again using New York as 100:
1) Copenhagen 118.2
2) Oslo 117
3) Zurich 115
5) New York 100
6) London 89.2
8) Dublin 88.3
18) Tokyo 78
20) Sydney 74.6
32) Seoul 44.2
36) Taipei 35.5
38) Singapore 32.3
40) HK 27.4
53) Kuala Lumpur 15.7
59) Shanghai 11.5
66) Bangkok 8.2
67) Mumbai 7
68) Jakarta 6.3
69) Manila 6.3
Most of the Asian cities would move up by another 10 spaces roughly if we were to take net wages instead of gross. On balance, Kuala Lumpur looks great, cheapest but gets paid by a significantly higher relative quantum, mainly we don't have to worry about excessive property prices/rentals. Fuel is still subsidised as are a number of necessities - thanks to super normal revenue from our resources (oil and gas, plantations, timber, etc...). When you put PRICES and EARNINGS side by side, you get purchasing power. Here is the more important ranking, which is Purchasing Power, based on net wages, again with New York pegged at 100:
1) Zurich 115.6
2) Geneva 112
3) Dublin 106.5
7) New York 100
9) Sydney 99
10) Auckland 98.7
15) Oslo 91.2
20) London 86.8
24) Tokyo 81.8
31) Paris 72
35) Seoul 56.2
37) Kuala Lumpur 50.9
38) Singapore 50.8
43) Hong Kong
56) Shanghai 22.9
62) Mumbai 18
65) Bangkok 14.6
67) Manila 13.5
68) Jakarta 12.2
Guess, we should be happy.... now, if we can only get our car prices to be the global average (presently the cost of buying a car in Malaysia and Singapore is about 80%-100% more expensive than the global average).
Thursday, August 10, 2006
CCB Wants To Buy Bank of America (Asia)
Bank of America Briefly The World's Biggest
China Construction Bank (CCB), China's third largest commercial bank, is interested in buying Bank of America (Asia), after failing to buy out Asia Commercial Bank in February. CCB is apparently reviewing the financials of Bank of America (Asia), an affiliate of the US-based bank, and an offer has yet to be made. A detailed plan is still under negotiation between CCB's newly-established investment banking department and Bank of America. Bank of America, the parent company, is a strategic investor in CCB, with a 9% stake. Early this year, CCB was linked to a possible buyout of 20% of New York brokerage and investment house Bear Stearns. Bank of America (Asia) has 17 branches in Hong Kong and Macau offering a wide range of consumer and commercial banking products and services. This news comes at a time when Bank of America briefly became the world's biggest bank, surpassing Citigroup yesterday in market cap. Though by the end of the day Citigroup had reclaimed its crown for the time being.
This reflects investors' preference for a growth story, which is giving kudos to Bank of America. Bank of America seems to be hitting on all cylinders domestically. In contrast, Citigroup has run into growth bumps that are taking longer to fix than many investors would like - Chuck Prince's strategy to invest in branches and people comes at a time when othe rbanks are more interested to put in great numbers. Prince's strategy was called into question by substantial shareholder Alaweed - I tend to side with Chuck, I think he is doing the right thing. When you are number one but not by a large margin - you need to distance yourself by getting the better people, as you already have the leverage in almost all other areas (cost of funds, branches, network reach, economies of scales, etc... ).
Being bypassed is not a definitive gauge of Citigroup's long-term prospects, but might be a blow for a bank that prides itself on its size and reach in more than 100 countries.
Bank of America Briefly The World's Biggest
China Construction Bank (CCB), China's third largest commercial bank, is interested in buying Bank of America (Asia), after failing to buy out Asia Commercial Bank in February. CCB is apparently reviewing the financials of Bank of America (Asia), an affiliate of the US-based bank, and an offer has yet to be made. A detailed plan is still under negotiation between CCB's newly-established investment banking department and Bank of America. Bank of America, the parent company, is a strategic investor in CCB, with a 9% stake. Early this year, CCB was linked to a possible buyout of 20% of New York brokerage and investment house Bear Stearns. Bank of America (Asia) has 17 branches in Hong Kong and Macau offering a wide range of consumer and commercial banking products and services. This news comes at a time when Bank of America briefly became the world's biggest bank, surpassing Citigroup yesterday in market cap. Though by the end of the day Citigroup had reclaimed its crown for the time being.
This reflects investors' preference for a growth story, which is giving kudos to Bank of America. Bank of America seems to be hitting on all cylinders domestically. In contrast, Citigroup has run into growth bumps that are taking longer to fix than many investors would like - Chuck Prince's strategy to invest in branches and people comes at a time when othe rbanks are more interested to put in great numbers. Prince's strategy was called into question by substantial shareholder Alaweed - I tend to side with Chuck, I think he is doing the right thing. When you are number one but not by a large margin - you need to distance yourself by getting the better people, as you already have the leverage in almost all other areas (cost of funds, branches, network reach, economies of scales, etc... ).
Being bypassed is not a definitive gauge of Citigroup's long-term prospects, but might be a blow for a bank that prides itself on its size and reach in more than 100 countries.
Tuesday, August 08, 2006
Conversations About Landmarks
Between Myself & Doraidd
Doraidd: hi dali, this is from landmarks ann. to bursa:2.2. Pricing of the Placement Shares - The issue price for the Placement Shares will be at a discount of not more than 10% from the five (5) day volume-weighted average market price of Landmarks Share prior to the date on which the issue price of the Proposed Placement will be determined by the Directors of Landmarks. as i understand it, the issue date is not determined yet and it's determined by the directors and will only be determined after all approvals have been obtained. so wouldnt a lower share price, especially if its a hit-down price, actually benefit NS? lower financial outlay to take up the placements? ie. Incumbents'll set issue date after 5 days of low pricing? (assume all approvals obtained) and if the hit-down is done by the four-seasons, wouldnt that play into north's hands? i'm on hols so my mind may not be up to speed. correct me if i'm wrong.
8:15 PM
doraiddd said...
sorry, when i say issue date, i mean issue price. My blurness - even Issue is starting to not look like an english word at all.
8:20 PM
Salvatore_Dali said...
yes, lower price would benefit NS, but I think if you want to see real upside, you want Syed's camp to control Landmarks. NS lacks the firepower, and while their unlocking of value strategy is ok, I do not like their Bintan island project injection. For Syed's camp, there are numerous things that can take place, the ne Four Seasons in Kl or Concorde can be injected or packaged with the 30% stake in Shangril for a very nice REIT.
10:44 AM
doraiddd said...
...it's been a while since my last hostile.. i'm becoming more of a peace-loving hippie in my old age... BUT if syed and his other 3-seasons want control, then maintain price as high as possible (while still accumulating) and then spike it closer to announcement of issue price (not allowed to be more than 10% lower) then only hit the price down below the placement price after ann, continue to suppress it, then only make GO at a higher than market price (which of cors is still suppressed) make sense? and btw when the southern bank money coming back? i agree - bintan angle suxs big time, and have you seen the size and scale of the unlicensed gambling dens there? who even needs licenses?
11:49 AM
Salvatore_Dali said...
lets look at it his options: 1) call a G.O. now at RM1.75 or RM1.80 - danger as he does not have a controlling stake, the entry price for NS is supposedly btw 1.80-1.90, so they won't sell to him at G.O. level. Neither would the minority holder as they will be holding out for me in anticipation of a catfight. It would also allow the successful placement of the new shares at RM1.54. Plus, Syed will end up having to buy from the mkt at prices higher than 1.80 or 1.90 as chances are very slim that minority will sell to anyone at G.O. level unless its above 2.00.
2) No G.O. yet, need to create problems for the special placement as it is obvious the shares won't be going to NS but to friendly parties. The closer the mkt px is to the placement px, less chance of being a success. NS is treading on hot stones here as they rely on friendly parties to control the company. There are no friendly parties that last a lifetime, just as long as the present value of future cashflows is positive, you are my friend. You can always get a better friend if the present value of future cash flows is a bigger positive figure than your previous friend. I mean, election candidates change parties all the time, especially after the results are known .... unbelievable.Hence I expected the price to drift towards the placement px, but the silly speculative article in NST on a potential G.O. killed a few people today. If there is any G.O., it would be much better to do that after the special placement. Looking at the free float and trading patterns, it is much better to collect from open market than G.O. as there are obviously a lot of willing sellers in an open mart.
2:08 PM
Between Myself & Doraidd
Doraidd: hi dali, this is from landmarks ann. to bursa:2.2. Pricing of the Placement Shares - The issue price for the Placement Shares will be at a discount of not more than 10% from the five (5) day volume-weighted average market price of Landmarks Share prior to the date on which the issue price of the Proposed Placement will be determined by the Directors of Landmarks. as i understand it, the issue date is not determined yet and it's determined by the directors and will only be determined after all approvals have been obtained. so wouldnt a lower share price, especially if its a hit-down price, actually benefit NS? lower financial outlay to take up the placements? ie. Incumbents'll set issue date after 5 days of low pricing? (assume all approvals obtained) and if the hit-down is done by the four-seasons, wouldnt that play into north's hands? i'm on hols so my mind may not be up to speed. correct me if i'm wrong.
8:15 PM
doraiddd said...
sorry, when i say issue date, i mean issue price. My blurness - even Issue is starting to not look like an english word at all.
8:20 PM
Salvatore_Dali said...
yes, lower price would benefit NS, but I think if you want to see real upside, you want Syed's camp to control Landmarks. NS lacks the firepower, and while their unlocking of value strategy is ok, I do not like their Bintan island project injection. For Syed's camp, there are numerous things that can take place, the ne Four Seasons in Kl or Concorde can be injected or packaged with the 30% stake in Shangril for a very nice REIT.
10:44 AM
doraiddd said...
...it's been a while since my last hostile.. i'm becoming more of a peace-loving hippie in my old age... BUT if syed and his other 3-seasons want control, then maintain price as high as possible (while still accumulating) and then spike it closer to announcement of issue price (not allowed to be more than 10% lower) then only hit the price down below the placement price after ann, continue to suppress it, then only make GO at a higher than market price (which of cors is still suppressed) make sense? and btw when the southern bank money coming back? i agree - bintan angle suxs big time, and have you seen the size and scale of the unlicensed gambling dens there? who even needs licenses?
11:49 AM
Salvatore_Dali said...
lets look at it his options: 1) call a G.O. now at RM1.75 or RM1.80 - danger as he does not have a controlling stake, the entry price for NS is supposedly btw 1.80-1.90, so they won't sell to him at G.O. level. Neither would the minority holder as they will be holding out for me in anticipation of a catfight. It would also allow the successful placement of the new shares at RM1.54. Plus, Syed will end up having to buy from the mkt at prices higher than 1.80 or 1.90 as chances are very slim that minority will sell to anyone at G.O. level unless its above 2.00.
2) No G.O. yet, need to create problems for the special placement as it is obvious the shares won't be going to NS but to friendly parties. The closer the mkt px is to the placement px, less chance of being a success. NS is treading on hot stones here as they rely on friendly parties to control the company. There are no friendly parties that last a lifetime, just as long as the present value of future cashflows is positive, you are my friend. You can always get a better friend if the present value of future cash flows is a bigger positive figure than your previous friend. I mean, election candidates change parties all the time, especially after the results are known .... unbelievable.Hence I expected the price to drift towards the placement px, but the silly speculative article in NST on a potential G.O. killed a few people today. If there is any G.O., it would be much better to do that after the special placement. Looking at the free float and trading patterns, it is much better to collect from open market than G.O. as there are obviously a lot of willing sellers in an open mart.
2:08 PM
Chinese Yuan To Rise Faster Soon
Malaysian Ringgit To Keep In Step
There are heavy indications that Beijing will allow the yuan on a more rapid appreciation very soon. It also means the ringgit will keep rising in tandem. If we were to plot the ringgit movements over the past 9 months against other Asian regional currencies, and including the USD, British pound and Euro, it correlates closes with the Chinese yuan. That is no surprise as it is pretty obvious to keen observers that Bank Negara governor Zeti knows that you have to compete with China in the race to globalisation. Though the ringgit could have, should have, appreciated more over the last 6 months, Zeti is keener to keep it in check with the yuan to maintain competitiveness, even if that means creeping inflationary pressures into Malaysian economy.
One may wonder why is Beijing so slow to allow the yuan to appreciate despite pressures and protestations from other major trading partners. China has just again recorded a record trade surplus again for the more recent month, and property prices in major cities are still quite firm. If we look at Beijing, they have actually engineered a gradual increase in the quantum allowed for the yuan vis-a-vis the USD. When the yuan was allowed to rise, the period from July 2005 till end December 2005, the annualised rate of increase was 1%. For the first quarter of 2006, the annualised increase came to 2.2%. The second quarter saw the annualised increase being hiked to 5%. So, although the actual quantum of increase does seem slow, we have to look at the annualised increments because Beijing knows that the appreciation of the yuan is not a 1, 2, 3 thats it, complete ... they know that it will be a very long term appreciation trend, and every quarter, they will be allowing possibly higher annualised increments for at least next 4 quarters at least. Looking at that trend, we should see the third quarter annualised increment to reach the 6%-7% mark.
The strategy with that is that Beijing wants the economy to be comfortable with the currency appreciation and not be jolted by it. China now has too much USD in their reserves, and they also dop not want to see a drastic devaluation in the USD, but it is obvious the central bank has US$941 billion reserves. Even the reserves in USD for South Korea is a tad much at US$200 billion, while Japan has US$250 billion. Hence, for a proper currency strategy mix, China has more reasons to throw some more USD onto the market to raise the yuan and at the same time rebalance the currency mix holdings. When you start to hold too much of one asset, it becomes a liability in managing it, and you be vulnerable to the risks inherent to that asset.
The fact that the gradual increments allowed for the yuan has done nothing to curb the trade surplus would give Beijing more confidence to move the quantum of allowed increase higher for the 3rd quarter of 2006. The more plausible reason why yuan is staying put in China, and at the same time attracting more hot money into yuan, is the perception that the yuan is far from being fairly valued, it is still perceived as very much undervalued. These creates pools of surplus liquidity swishing in the Chinese economy, thus propelling the property markets and secondary financing or mezzanine financing schemes supporting the easy money economy. Beijing certainly knows that, and to solve that problem faster, they would have little choice but to increase the quantum of increase of the yuan. Now it seems, pressures from the US or EU are not necessary, Beijing needs to revalue the yuan rapidly to stop the hot money from creating pockets of bubbles in the economy. Only when the hot money thinks that the yuan is near fair value, will they leave the country. Beijing knows the yuan has to reach that level as fast as possible but at the same time without jeopardising the entire export economy, domestic economy and foreign investment.
Malaysian Ringgit To Keep In Step
There are heavy indications that Beijing will allow the yuan on a more rapid appreciation very soon. It also means the ringgit will keep rising in tandem. If we were to plot the ringgit movements over the past 9 months against other Asian regional currencies, and including the USD, British pound and Euro, it correlates closes with the Chinese yuan. That is no surprise as it is pretty obvious to keen observers that Bank Negara governor Zeti knows that you have to compete with China in the race to globalisation. Though the ringgit could have, should have, appreciated more over the last 6 months, Zeti is keener to keep it in check with the yuan to maintain competitiveness, even if that means creeping inflationary pressures into Malaysian economy.
One may wonder why is Beijing so slow to allow the yuan to appreciate despite pressures and protestations from other major trading partners. China has just again recorded a record trade surplus again for the more recent month, and property prices in major cities are still quite firm. If we look at Beijing, they have actually engineered a gradual increase in the quantum allowed for the yuan vis-a-vis the USD. When the yuan was allowed to rise, the period from July 2005 till end December 2005, the annualised rate of increase was 1%. For the first quarter of 2006, the annualised increase came to 2.2%. The second quarter saw the annualised increase being hiked to 5%. So, although the actual quantum of increase does seem slow, we have to look at the annualised increments because Beijing knows that the appreciation of the yuan is not a 1, 2, 3 thats it, complete ... they know that it will be a very long term appreciation trend, and every quarter, they will be allowing possibly higher annualised increments for at least next 4 quarters at least. Looking at that trend, we should see the third quarter annualised increment to reach the 6%-7% mark.
The strategy with that is that Beijing wants the economy to be comfortable with the currency appreciation and not be jolted by it. China now has too much USD in their reserves, and they also dop not want to see a drastic devaluation in the USD, but it is obvious the central bank has US$941 billion reserves. Even the reserves in USD for South Korea is a tad much at US$200 billion, while Japan has US$250 billion. Hence, for a proper currency strategy mix, China has more reasons to throw some more USD onto the market to raise the yuan and at the same time rebalance the currency mix holdings. When you start to hold too much of one asset, it becomes a liability in managing it, and you be vulnerable to the risks inherent to that asset.
The fact that the gradual increments allowed for the yuan has done nothing to curb the trade surplus would give Beijing more confidence to move the quantum of allowed increase higher for the 3rd quarter of 2006. The more plausible reason why yuan is staying put in China, and at the same time attracting more hot money into yuan, is the perception that the yuan is far from being fairly valued, it is still perceived as very much undervalued. These creates pools of surplus liquidity swishing in the Chinese economy, thus propelling the property markets and secondary financing or mezzanine financing schemes supporting the easy money economy. Beijing certainly knows that, and to solve that problem faster, they would have little choice but to increase the quantum of increase of the yuan. Now it seems, pressures from the US or EU are not necessary, Beijing needs to revalue the yuan rapidly to stop the hot money from creating pockets of bubbles in the economy. Only when the hot money thinks that the yuan is near fair value, will they leave the country. Beijing knows the yuan has to reach that level as fast as possible but at the same time without jeopardising the entire export economy, domestic economy and foreign investment.
Monday, August 07, 2006
Landmarks Special Placement
On Aug 4, the company proposed to place out up to 29.53 million new shares to potential institutional investors to raise funds expeditiously to reduce the debt level. Assuming the issue price per placement share is RM1.54, or a discount of about 10% from the five day volume-weighted average market price up to and including Aug 3, of RM1.71, gross proceeds would be RM45.48 million. It is not the amount of money raised, but rather the tactic which will anger the other camp. There are now two camps, one is the North Symphony also controlling the board. The other camp involves Syed, possibly Ong Beng Seng, and possibly CMY. There was a listing of ESOS last week which saw NS buying most of the shares from employees. The strategy to do a special placement stems from another route taken to maintain control by either placing to parties close to North Symphony.
The Syed camp can either continue to mop up shares but is at a disadvantage really, as that would make the placement highly successful, and Syed may not be able to garner sufficient shares to get board seats or control, but will be left holding substantial shares at highish prices. Syed's camp can let shares go down, like they did today, to hopefully scupper the placements. Since the placement is at RM1.54 or thereabouts, further dips towards that level may make the placement unfeasible. Looking at the equation, the fact that NS has to resort to these tactics to maintain control shows that they lack financial firepower, as making a simple G.O. even at RM1.85 or RM2.00 would be justifiable financially.
Chances for the two camps to come to an agreement is unlikely as their corporate strategy to unlock value from Landmarks are also divergent. I suspect Landmarks will continue to be whacked lower by Syed's camp to scupper the placement. If that fails, Syed's camp would probably have to come in with a G.O., which the NS group will not have the financial resources to match. Syed's camp still does not have more shares than NS at the time of writing, judging from the available information. So, thats the gist of the matter, even when you are on a good thing, bad things can still happen. Price will tumble towards RM1.50 but for medium term view investors, that would be a good entry level as the story is far from over and the fat lady hasn't even hail her cab to the Petronas Philharmonik opera house yet.
On Aug 4, the company proposed to place out up to 29.53 million new shares to potential institutional investors to raise funds expeditiously to reduce the debt level. Assuming the issue price per placement share is RM1.54, or a discount of about 10% from the five day volume-weighted average market price up to and including Aug 3, of RM1.71, gross proceeds would be RM45.48 million. It is not the amount of money raised, but rather the tactic which will anger the other camp. There are now two camps, one is the North Symphony also controlling the board. The other camp involves Syed, possibly Ong Beng Seng, and possibly CMY. There was a listing of ESOS last week which saw NS buying most of the shares from employees. The strategy to do a special placement stems from another route taken to maintain control by either placing to parties close to North Symphony.
The Syed camp can either continue to mop up shares but is at a disadvantage really, as that would make the placement highly successful, and Syed may not be able to garner sufficient shares to get board seats or control, but will be left holding substantial shares at highish prices. Syed's camp can let shares go down, like they did today, to hopefully scupper the placements. Since the placement is at RM1.54 or thereabouts, further dips towards that level may make the placement unfeasible. Looking at the equation, the fact that NS has to resort to these tactics to maintain control shows that they lack financial firepower, as making a simple G.O. even at RM1.85 or RM2.00 would be justifiable financially.
Chances for the two camps to come to an agreement is unlikely as their corporate strategy to unlock value from Landmarks are also divergent. I suspect Landmarks will continue to be whacked lower by Syed's camp to scupper the placement. If that fails, Syed's camp would probably have to come in with a G.O., which the NS group will not have the financial resources to match. Syed's camp still does not have more shares than NS at the time of writing, judging from the available information. So, thats the gist of the matter, even when you are on a good thing, bad things can still happen. Price will tumble towards RM1.50 but for medium term view investors, that would be a good entry level as the story is far from over and the fat lady hasn't even hail her cab to the Petronas Philharmonik opera house yet.
"Oil" Is The Matter With You?
Oil touched US$76 a barrel on Aug 7 after producer BP shut down the biggest oilfield in the United States indefinitely, while anxiety about Middle East supply continued to run high. US light, sweet crude oil was up US$1.24 at US$76.00. London's Brent was up 98 cents at US$77.15 a barrel. Although I have reiterated that the underlying sentiment for equities is bullish, there will be obstacles and road humps along the way - the biggest being oil.
a) BP Plc shutting down indefinitely the Prudhoe Bay oil field in Alaska woll cut production by 400,000 barrels per day (bpd), or 8% of US domestic oil output. The closure was due to the discovery of severe corrosion and a tiny spill from a Prudhoe Bay oil transit line.
b) Tropical Storm Chris, which at one point appeared set to become the season's first hurricane, has failed to regain strength after being downgraded to a tropical depression late last week. One more obstacle down.
c) Tensions in the Middle East rose after Iran again invoked its oil exports for political leverage and Lebanon rejected a draft UN resolution meant to end the war between Israel and Hizbollah. A further spike in oil prices resulting from a broader Middle East conflict would drag an already slowing US economy into recession more easily now than a year ago. Logically, Iran would kill itself if it does anything extreme, but they have to use the oil card to force the ceasefire.
The worst case scenario would be Iran closing the Strait of Hormuz, a bottleneck in the Gulf region between Iran and Oman by which tankers from Kuwait, Saudi Arabia and the United Arab Emirates transit. This can easily propel oil price to above US$150. However, that situation is unlikely to happen as major powers would step in immediately as the oil price would affect everyone. In conclusion, while there are things to be concerned if we extrapolate our fears and dwell on worst-case scenarios, they are unlikely to pan out. The global economy (and bullish equity sentiment) should be able to withstand oil prices up to the US$90-95 before turning bearish.
Iran, the fourth-largest oil exporter, vowed on Aug 7 to expand its atomic fuel work and warned of a harsh response if the United Nations imposed sanctions aimed at halting enrichment. Hopes to move forward on Aug 7 with a draft UN resolution to end the war were dashed after Lebanon asked the Security Council to call for a quick withdrawal of Israeli troops, dividing council members and pushing a likely vote back until Aug 8. Israel views the UN draft favourably as it allows Israel to respond to Hizbollah attacks and did not order it to withdraw its troops from southern Lebanon. As a business blog, we have to monitor the situation as any more escalation, particularly involving Iran, would have to be reviewed judiciously.
Oil touched US$76 a barrel on Aug 7 after producer BP shut down the biggest oilfield in the United States indefinitely, while anxiety about Middle East supply continued to run high. US light, sweet crude oil was up US$1.24 at US$76.00. London's Brent was up 98 cents at US$77.15 a barrel. Although I have reiterated that the underlying sentiment for equities is bullish, there will be obstacles and road humps along the way - the biggest being oil.
a) BP Plc shutting down indefinitely the Prudhoe Bay oil field in Alaska woll cut production by 400,000 barrels per day (bpd), or 8% of US domestic oil output. The closure was due to the discovery of severe corrosion and a tiny spill from a Prudhoe Bay oil transit line.
b) Tropical Storm Chris, which at one point appeared set to become the season's first hurricane, has failed to regain strength after being downgraded to a tropical depression late last week. One more obstacle down.
c) Tensions in the Middle East rose after Iran again invoked its oil exports for political leverage and Lebanon rejected a draft UN resolution meant to end the war between Israel and Hizbollah. A further spike in oil prices resulting from a broader Middle East conflict would drag an already slowing US economy into recession more easily now than a year ago. Logically, Iran would kill itself if it does anything extreme, but they have to use the oil card to force the ceasefire.
The worst case scenario would be Iran closing the Strait of Hormuz, a bottleneck in the Gulf region between Iran and Oman by which tankers from Kuwait, Saudi Arabia and the United Arab Emirates transit. This can easily propel oil price to above US$150. However, that situation is unlikely to happen as major powers would step in immediately as the oil price would affect everyone. In conclusion, while there are things to be concerned if we extrapolate our fears and dwell on worst-case scenarios, they are unlikely to pan out. The global economy (and bullish equity sentiment) should be able to withstand oil prices up to the US$90-95 before turning bearish.
Iran, the fourth-largest oil exporter, vowed on Aug 7 to expand its atomic fuel work and warned of a harsh response if the United Nations imposed sanctions aimed at halting enrichment. Hopes to move forward on Aug 7 with a draft UN resolution to end the war were dashed after Lebanon asked the Security Council to call for a quick withdrawal of Israeli troops, dividing council members and pushing a likely vote back until Aug 8. Israel views the UN draft favourably as it allows Israel to respond to Hizbollah attacks and did not order it to withdraw its troops from southern Lebanon. As a business blog, we have to monitor the situation as any more escalation, particularly involving Iran, would have to be reviewed judiciously.
Friday, August 04, 2006
Enough Already, Stop Bilking The People, Liberalise the KUL-SIN Sector
Both budget carriers, AirAsia and Tiger Airways have been lobbying on their respective authorities to open up the lucrative Kuala Lumpur-Singapore air route, possible one of the top 5 busiest air route in the world. Tiget Airways pleaded to the Civil Aviation Authority of Singapore to once again express its desire to fly to KL. The sector means more to Tiger than AirAsia as Tiger needs the scetor more in order to stop from bleeding red ink, while AirAsia is already profitable without the route. The stupid thing is that even governments cannot automatically dismantle the monopoly, the presigned agreement prevents any changes being made unless they are approved by SIA and MAS. As both are government controlled, the government can easily exert influence to have the monopoly dissolved. The silly return airfare now stands at S$300/RM700.
Back in the middle of 2005, Malaysia said that it will NOT allow more Kuala Lumpur-Singapore shuttle flights ahead of the Asean "open skies" policy which will come into effect in 2008. As reported in The New Straits Times (6/12/05). Malaysia is not in favour because the benefits accruing to MAS from liberalising the route will be limited, according to the authorities. MAS operates 14 flights a day, and SIA, which operates 12 flights, will sustain the virtual joint monopoly to account for 182 of the 213 weekly flights. That's 85% of the market share for the KL-Singapore route.
This monopoly has been going on for way too long. Even toll bridges have an expiry date for collecting tolls. Nowadays, fares for flying from Singapore/KL to Bangkok, Bali, Phuket and sometimes HK are even cheaper than flying between the two countries. Where is the justification?? Already Malaysia and Singapore are among the two places on earth that prices cars most expensively (I'm sure we are both in global top 5). Both airlines operate a total of 26 flights a day. The pricing is dampening real demand. If we were to liberalise the market, we could see return fares plummeting to RM250 return fare at least - the drop would be more than compensated by the jump in traffic. At RM250 return, I think the daily traffic should easily triple on conservative estimates (just have a look at the number of buses travelling to-and-fro between the two countries on a daily basis).
Singapore and Malaysia cannot keep operating this monopoly when there is an economic globalisation and free trade movement. You can still keep the monopoly, but just agree to price it cheaper, say RM350 return - its more than a fair price as the load factors for the KUL-SIN almost surpasss 90% for every flight anyway!!! Certainly we cannot save the red ink for MAS just from the subsidy of this KUL-SIN sector!!?? If you want MAS or SIA to grow up, liberalise the sector, if you cannot fight AirAsia or Tiger Airways on that sector, MAS and SIA should rethink their strategy and costing models, not harp on their governments to allow then to keep milking the people for the company's benefit.
Look at it this way, the people of Malaysia and Singapore are basically subsidising the profits for MAS and SIA, meaning we are basically paying disproportionately to profits and share price profits - isn't it galling when when foreigners holding SIA shares get a slice of our silly subsidy!!?? (I am leaving out comments on foreign shareholders of MAS for obvious reasons... ahem).
Both budget carriers, AirAsia and Tiger Airways have been lobbying on their respective authorities to open up the lucrative Kuala Lumpur-Singapore air route, possible one of the top 5 busiest air route in the world. Tiget Airways pleaded to the Civil Aviation Authority of Singapore to once again express its desire to fly to KL. The sector means more to Tiger than AirAsia as Tiger needs the scetor more in order to stop from bleeding red ink, while AirAsia is already profitable without the route. The stupid thing is that even governments cannot automatically dismantle the monopoly, the presigned agreement prevents any changes being made unless they are approved by SIA and MAS. As both are government controlled, the government can easily exert influence to have the monopoly dissolved. The silly return airfare now stands at S$300/RM700.
Back in the middle of 2005, Malaysia said that it will NOT allow more Kuala Lumpur-Singapore shuttle flights ahead of the Asean "open skies" policy which will come into effect in 2008. As reported in The New Straits Times (6/12/05). Malaysia is not in favour because the benefits accruing to MAS from liberalising the route will be limited, according to the authorities. MAS operates 14 flights a day, and SIA, which operates 12 flights, will sustain the virtual joint monopoly to account for 182 of the 213 weekly flights. That's 85% of the market share for the KL-Singapore route.
This monopoly has been going on for way too long. Even toll bridges have an expiry date for collecting tolls. Nowadays, fares for flying from Singapore/KL to Bangkok, Bali, Phuket and sometimes HK are even cheaper than flying between the two countries. Where is the justification?? Already Malaysia and Singapore are among the two places on earth that prices cars most expensively (I'm sure we are both in global top 5). Both airlines operate a total of 26 flights a day. The pricing is dampening real demand. If we were to liberalise the market, we could see return fares plummeting to RM250 return fare at least - the drop would be more than compensated by the jump in traffic. At RM250 return, I think the daily traffic should easily triple on conservative estimates (just have a look at the number of buses travelling to-and-fro between the two countries on a daily basis).
Singapore and Malaysia cannot keep operating this monopoly when there is an economic globalisation and free trade movement. You can still keep the monopoly, but just agree to price it cheaper, say RM350 return - its more than a fair price as the load factors for the KUL-SIN almost surpasss 90% for every flight anyway!!! Certainly we cannot save the red ink for MAS just from the subsidy of this KUL-SIN sector!!?? If you want MAS or SIA to grow up, liberalise the sector, if you cannot fight AirAsia or Tiger Airways on that sector, MAS and SIA should rethink their strategy and costing models, not harp on their governments to allow then to keep milking the people for the company's benefit.
Look at it this way, the people of Malaysia and Singapore are basically subsidising the profits for MAS and SIA, meaning we are basically paying disproportionately to profits and share price profits - isn't it galling when when foreigners holding SIA shares get a slice of our silly subsidy!!?? (I am leaving out comments on foreign shareholders of MAS for obvious reasons... ahem).
Corporate / Government Bonds Yield Spread As An Astute Indicator For Equities
A Most Important Indicator
Corporate bonds has to offer higher yields than government bonds as the latter is deemed as the risk-free rate. The bigger the spread, the higher the cost of capital for companies. It is also a reflection on the returns demanded by corporate bond holders. If investors perceive a higher default risk, they will demand higher rates and yields on corporate bonds. The US bond market is deep enough as solid indicators, and study of the spreads will tell us a lot about whether the market is in a bullish or bearish phase.
The differentials since 2000 has been between 1.5% to a high of 4% (e.g. say US Treasuries is now yielding 4.8% and corporate bonds is yielding 6.5%, the spread would then be 1.7% - as a rule do not look at A/AA rated corporate bonds as they do not budge much, look at those corporate bonds rated BB/BBB). Generally 2.5% is a normal spread in a neutral market phase, as a general rule of thumb. The spread jumped from 2.5% in early 2002 to reach a peak of 3.8% by end 2003, and that period coincided with a bearish phase for equities. Since then, from early 2003 till the present days, the spread has been on a downtrend. The spread has stayed between 1.6% to 2.0% for the last few quarters. I believe the market is in for a continuance for a bullish phase for at least another year as I would not get edgy or want to quit equities until the spread rises above 2.5%. Once it starts rising, the trend is likely to continue speedily in that direction.
This rule of thumb is worth years of investment losses, a great big picture tool. If we stay true to this rule, you might miss out on the last 10% rally of a bull run but you will save yourself the 30%-40% in correction. The rule also works for spotting end of a bear market. Generally, the spread rising above 3.5% would signal an end of a bear market phase - though at a spread of 3.5% or higher, nothing much will look good, that is why it is so difficult to spot trends turning. Have a nice weekend. Oh, btw, the current spread is around 1.65% and does not look to be trending higher at all. Hence, despite all the worries over oil, inflation, fed funds rate hike, commodities prices, Middle East situation, China's excessive growth and surpluses, the unstable US dollar, etc... the prognosis is for a pretty good bullish phase for sometime still for global equities, just have to ride out the inevitable minor turbulances of over-exuberance of a bull market. We are in a bull market already for the past 16 months, in case some of you have not noticed it!!
A Most Important Indicator
Corporate bonds has to offer higher yields than government bonds as the latter is deemed as the risk-free rate. The bigger the spread, the higher the cost of capital for companies. It is also a reflection on the returns demanded by corporate bond holders. If investors perceive a higher default risk, they will demand higher rates and yields on corporate bonds. The US bond market is deep enough as solid indicators, and study of the spreads will tell us a lot about whether the market is in a bullish or bearish phase.
The differentials since 2000 has been between 1.5% to a high of 4% (e.g. say US Treasuries is now yielding 4.8% and corporate bonds is yielding 6.5%, the spread would then be 1.7% - as a rule do not look at A/AA rated corporate bonds as they do not budge much, look at those corporate bonds rated BB/BBB). Generally 2.5% is a normal spread in a neutral market phase, as a general rule of thumb. The spread jumped from 2.5% in early 2002 to reach a peak of 3.8% by end 2003, and that period coincided with a bearish phase for equities. Since then, from early 2003 till the present days, the spread has been on a downtrend. The spread has stayed between 1.6% to 2.0% for the last few quarters. I believe the market is in for a continuance for a bullish phase for at least another year as I would not get edgy or want to quit equities until the spread rises above 2.5%. Once it starts rising, the trend is likely to continue speedily in that direction.
This rule of thumb is worth years of investment losses, a great big picture tool. If we stay true to this rule, you might miss out on the last 10% rally of a bull run but you will save yourself the 30%-40% in correction. The rule also works for spotting end of a bear market. Generally, the spread rising above 3.5% would signal an end of a bear market phase - though at a spread of 3.5% or higher, nothing much will look good, that is why it is so difficult to spot trends turning. Have a nice weekend. Oh, btw, the current spread is around 1.65% and does not look to be trending higher at all. Hence, despite all the worries over oil, inflation, fed funds rate hike, commodities prices, Middle East situation, China's excessive growth and surpluses, the unstable US dollar, etc... the prognosis is for a pretty good bullish phase for sometime still for global equities, just have to ride out the inevitable minor turbulances of over-exuberance of a bull market. We are in a bull market already for the past 16 months, in case some of you have not noticed it!!
Wednesday, August 02, 2006
KLSE Trading Notes
Palm Oil & Market Themes
Following on my comments that the Federal Reserve seems to have finished with its rate hikes, markets have yet to move ahead. While I am positive on the fundamentals, the timing effect is not there yet. July/August tend to be dull months as many investment pros will be on hols. As explained before, most will gather like a pack of wolves for a push in the final quarter. The setting looks good, we just need oil prices to behave till then, it needs to stay below US$80 pb for the last quarter bull to emerge.
As for KLSE trading activity, the palm oil rally has already been a bit overdone. Its a rally based on palm oil futures, and not a rally based on the biodiesel theme. Investors should be aware that bio diesel is not magic, and is not an avenue that allows for huge margins. Its just one additional sub-sector in the palm oil supply chain. You'd be just as profitable to be in oleochemicals, or producing specialty fats for cosmetics out of palm oil, etc. Of course, Malaysia and Indonesia have agreed to set aside a huge amount for biodiesel. It will create a substantive increase in real demand. The 12 mn MT CPO allocation will be a tad too much for biodiesel to stomach. 12mn MT equals to about 40% of each country's annual production. In all likelihood, only 5 mn MT will be taken up in 2007, this effectively translates to 16.6% of each country's annual CPO production. Now the figure does not look so threathening.
Having said that, organic growth from edible side will provide about 5% annual growth in demand. Add that, you get around 21% real consumption demand growth a year. IOI Corp has already gained more than 45% over the last 12 months. Golden Hope recorded a sluggish 30% over the same period, while KL Kepong notched nearly 60% gain over the last 12 months. Best performer was PPB Oil Palms with a better than 75% gain over the last 12 months. Compare that to the KLCI over the same period, you will have wonderful outperformance. Not that I am saying the sector's rally is finished but rather that the upside is limited. But also the sector won't collapse at all as the fundamentals governing the sector are pretty solid. Strong buys on any kind of dips due to external market shocks.
The shift to smaller and second tier palm oil plays look more exciting as these are solid companies also but just smaller and they have not been re-rated as highly as the big caps, now they are playing a bit of catch up. Probably another 15%-20% upside in store for them, I am referring to trading counters such as Kretam and TH Group. Forget the rest, too small.
As for the other theme play in cables and new Bakun revamped proposal - forget about it already. Its cumbersome and should not be allowed to proceed. Hate Leader, Eden, etc... trade at your own peril.
Palm Oil & Market Themes
Following on my comments that the Federal Reserve seems to have finished with its rate hikes, markets have yet to move ahead. While I am positive on the fundamentals, the timing effect is not there yet. July/August tend to be dull months as many investment pros will be on hols. As explained before, most will gather like a pack of wolves for a push in the final quarter. The setting looks good, we just need oil prices to behave till then, it needs to stay below US$80 pb for the last quarter bull to emerge.
As for KLSE trading activity, the palm oil rally has already been a bit overdone. Its a rally based on palm oil futures, and not a rally based on the biodiesel theme. Investors should be aware that bio diesel is not magic, and is not an avenue that allows for huge margins. Its just one additional sub-sector in the palm oil supply chain. You'd be just as profitable to be in oleochemicals, or producing specialty fats for cosmetics out of palm oil, etc. Of course, Malaysia and Indonesia have agreed to set aside a huge amount for biodiesel. It will create a substantive increase in real demand. The 12 mn MT CPO allocation will be a tad too much for biodiesel to stomach. 12mn MT equals to about 40% of each country's annual production. In all likelihood, only 5 mn MT will be taken up in 2007, this effectively translates to 16.6% of each country's annual CPO production. Now the figure does not look so threathening.
Having said that, organic growth from edible side will provide about 5% annual growth in demand. Add that, you get around 21% real consumption demand growth a year. IOI Corp has already gained more than 45% over the last 12 months. Golden Hope recorded a sluggish 30% over the same period, while KL Kepong notched nearly 60% gain over the last 12 months. Best performer was PPB Oil Palms with a better than 75% gain over the last 12 months. Compare that to the KLCI over the same period, you will have wonderful outperformance. Not that I am saying the sector's rally is finished but rather that the upside is limited. But also the sector won't collapse at all as the fundamentals governing the sector are pretty solid. Strong buys on any kind of dips due to external market shocks.
The shift to smaller and second tier palm oil plays look more exciting as these are solid companies also but just smaller and they have not been re-rated as highly as the big caps, now they are playing a bit of catch up. Probably another 15%-20% upside in store for them, I am referring to trading counters such as Kretam and TH Group. Forget the rest, too small.
As for the other theme play in cables and new Bakun revamped proposal - forget about it already. Its cumbersome and should not be allowed to proceed. Hate Leader, Eden, etc... trade at your own peril.
Tuesday, August 01, 2006
Malaysia's SC Cracking The Right Whip
The many complaints on the lack of quality in many of the IPOs over the past 3 years, in particular those destined for the Mesdaq Board, has finally resulted in some effective and constructive decision making on the part of the Securities Commission. There were 28 initial public offering (IPO) submissions rejected by the Securities Commission (SC) in the first half of 2006. The SC on July 31 published the reasons for its rejection of IPO submissions, expressing concerns on corporate governance issues and the applicants' failure to demonstrate business sustainability. A total of 20 of the rejections involved Mesdaq aspirants while two were vying for Main Board and six for Second Board listings.
The SC received 51 listing applications in the first half. They included four applications that were either withdrawn or returned, and one company deferred its IPO. Notably, seven of the Mesdaq applicants did not qualify as technology-based companies for a variety of reasons, which include absence of technology development and innovation, and high reliance on third parties for components and software tools. Also, a few companies' research and development capabilities were described as uncertain and that the investments were relatively low, indicating low technological barriers to entry into the industries. Some of the companies’ target markets were limited, raising concerns on sustainability of financial performance, growth prospects and the ability to compete. Others failed to exhibit characteristics of a high-growth company based on overall growth in revenue and profitability.
The two Main Board submissions were turned down as they were operating in highly competitive markets with minimum advantage, while the operation of one of them would not result in any new technology transfer to the country. The SC expressed concerns on the financial sustainability of one of them, as it was too dependent on limited contracts, while the other did not comply with the profit track record.
Of the six Second Board applications turned down, the common reasons included operating in highly competitive industries with minimum advantage, poor corporate governance issues and dependence on limited customers. The SC also cited sales restriction in the domestic market, design capabilities not being well demonstrated and products not being patented as reasons for rejection for some of the six.
The reasons cited are valid, and does not encorach into the actual "management or corporate strategy" sphere of the companies concerned. The danger here is the SC getting too vigilant in drawing the boundaries, as that could squeeze the hoop too narrow for companies to pass through. Overall A+ job by the SC so far. No point in having 100 new companies listed every year if 80% fail to garner genuine investors' interest. Better to have 50 good quality companies and having 80% of them performing well on merits (not via financial engineering or orchestration). At least now by setting clear parameters, merchant bankers would know how to better control the pre-selection process for IPO candidates. Some VCs may feel dismayed by SC's actions, but they are needed for the betterment of the market.
The many complaints on the lack of quality in many of the IPOs over the past 3 years, in particular those destined for the Mesdaq Board, has finally resulted in some effective and constructive decision making on the part of the Securities Commission. There were 28 initial public offering (IPO) submissions rejected by the Securities Commission (SC) in the first half of 2006. The SC on July 31 published the reasons for its rejection of IPO submissions, expressing concerns on corporate governance issues and the applicants' failure to demonstrate business sustainability. A total of 20 of the rejections involved Mesdaq aspirants while two were vying for Main Board and six for Second Board listings.
The SC received 51 listing applications in the first half. They included four applications that were either withdrawn or returned, and one company deferred its IPO. Notably, seven of the Mesdaq applicants did not qualify as technology-based companies for a variety of reasons, which include absence of technology development and innovation, and high reliance on third parties for components and software tools. Also, a few companies' research and development capabilities were described as uncertain and that the investments were relatively low, indicating low technological barriers to entry into the industries. Some of the companies’ target markets were limited, raising concerns on sustainability of financial performance, growth prospects and the ability to compete. Others failed to exhibit characteristics of a high-growth company based on overall growth in revenue and profitability.
The two Main Board submissions were turned down as they were operating in highly competitive markets with minimum advantage, while the operation of one of them would not result in any new technology transfer to the country. The SC expressed concerns on the financial sustainability of one of them, as it was too dependent on limited contracts, while the other did not comply with the profit track record.
Of the six Second Board applications turned down, the common reasons included operating in highly competitive industries with minimum advantage, poor corporate governance issues and dependence on limited customers. The SC also cited sales restriction in the domestic market, design capabilities not being well demonstrated and products not being patented as reasons for rejection for some of the six.
The reasons cited are valid, and does not encorach into the actual "management or corporate strategy" sphere of the companies concerned. The danger here is the SC getting too vigilant in drawing the boundaries, as that could squeeze the hoop too narrow for companies to pass through. Overall A+ job by the SC so far. No point in having 100 new companies listed every year if 80% fail to garner genuine investors' interest. Better to have 50 good quality companies and having 80% of them performing well on merits (not via financial engineering or orchestration). At least now by setting clear parameters, merchant bankers would know how to better control the pre-selection process for IPO candidates. Some VCs may feel dismayed by SC's actions, but they are needed for the betterment of the market.
Subscribe to:
Posts (Atom)