The Good, The Bad & The Fugly
Lessons From Bangkok

The Good

Willingness to rectify rules immediately when it does not look to be going the way they thought it should. Many govenrments would have hung on a day or two too long, or longer.

The Bad

Foreign investors sold 25bn baht of shares or US$690m in value the day it fell 15%. Even when it recoup 11.2% the following day, foreign investors were still net sellers to the tune of 2.8bn baht. Hence most of the bargain hunters were Thai local funds and retail players rather than foreign funds. That being the case, it would be difficult to see how the SET can sustain its stock prices recovery. Who will come in to take the share from the Thais? Shit happens, but we should try and learn from them. It will take time to regain foreign investors' trust.

The Fugly

Pridiyathorn, a former central bank governor, and now the finance minister and economic policy maker, was believed to have given his blessing to the capital controls that he vigorously defended. But after declaring that the measures would not apply to capital inflows for equity investment, he said: "A lesson has been learnt, but no one needs to be responsible for this".

Hmm... so no head on the block, reminds me of ancient history of capital punishment, when a certain village wants to behead someone, the entire village would pull on the rope attached to a lever which then causes the axe to fall, thus blood is on everyone's hands and on no one's at the same time. Taking responsibility is a good thing, not a bad thing. Admitting to fault is strong not weak. It clarifies and clears doubts, and then let's move on. It builds trust rather than uncertainty. However the environment must be such that admission of faults do not paralyses the person, the environment must be strong and transparent enough to recognise good deeds and genuine mistakes, and react accordingly. There must be room for mistakes and also room for improvement. Striving for perfection or the existence of "career/political suicide" issues only highlights how backward the management environment is.

Mai Pen Rai

Bloomberg: The Finance Ministry late yesterday in Bangkok reversed the Bank of Thailand's move requiring banks to lock up 30 percent of new foreign-currency deposits for a year on funds earmarked for stocks. The restrictions sent Thailand's SET Index tumbling 15 percent, wiping away US$23 billion in market value and prompting declines in emerging markets globally. PTT Pcl, Thailand's biggest energy company, plummeted 17 percent yesterday, while Bangkok Bank Pcl, the largest lender, sank 16 percent. Shares of companies in the 458-member SET Index now trade at 9.91 times forecast earnings, the cheapest of any country in the MSCI emerging markets index. The benchmark slid to a more than two-year low of 622.14 after overseas investors dumped a net 25.1 billion baht (US$699 million) worth of shares, the largest such sell-off since at least Jan. 4, 1999, according to data compiled by Bloomberg. The drop erased all of the SET's gains this year. The index is now 13 percent lower than at the start of 2006. ``The stock market has fallen too much today,'' Finance Minister Pridiyathorn Devakula said yesterday. ``This is the side effect of the central bank's measure, but we have fixed it already.'' The requirements stay in effect on other investments, including bonds and property, he said. Asian stocks have advanced this year as growth in the region's emerging markets drew funds from overseas investors. Funds investing in shares of developing countries had a net inflow of US$1.65 billion in the week ended Dec. 13, figures from Emerging Portfolio Fund Research showed. The net fund inflow was the biggest since the weekly period ended May 10, when they drew US$2.86 billion.

Central banks in Malaysia, the Philippines and Indonesia said that they wouldn't implement capital restrictions to control their currencies. The Thai rule came after the baht appreciated 16 percent in 2006 to a nine-year high against the dollar, threatening exports and economic growth. The baht had its biggest two-day decline in Asian trading since April 2005, following yesterday's measures. The currency climbed 0.22 percent against the dollar to 35.90 as of 1:09 p.m. in New York on Dec. 19. Emerging-market stocks plunged 25 percent in 26 days between May and June on speculation higher interest rates would damp economic growth and reduce the appeal of riskier assets.

After slumping to its low for the year on June 13, the MSCI emerging markets index has recouped all its losses, climbing to an all-time high on Dec. 18. For the year, the measure has gained 25 percent, compared with a 14 percent rise in Standard & Poor's 500 Index. In the past five years, the MSCI emerging markets index has advanced an average of 26 percent each year, more than quadruple the 6.2 percent average gain the S&P 500.

My Lima Sen - The U-Turn was basically a Britney Spears' admission - "Ooops, I did it again!". But investors need to remember that it is still in force for property and bonds. Especially property, so this is not that bad a thing. The Dow continued on its merry ways, and investors would be silly to think that this morning you can plough all your savings into the markets. Regional markets will spike up especially Thailand but I think the Thai market WILL weaken FURTHER after the first hour or so because the act of clamping down on inflows and outflows of currency IS possibly the most distressing thing you can inflict on foreign investors (second to doing something ala to the CLOB by Malaysian authorities). Hence even if you reverse the decision, damage has been done already. I tell you, Malaysia till today IS STILL PAYING FOR THE CURRENCY CAPITAL CONTROLS thing even though we have lifted it. You cannot slap people in the face and ask them to continue to give you money, then say "no hard feelings", then slap them again.

In a way the controls implemented by Thai central bank did its thing even though part of it was reversed. It already scare the shit out of all speculators. So, u-turn or no u-turn, after the slight recovery today, many will continue to exit the Thai market, and the regional bourses would be affected slightly. So don't get overly confident.

Central bankers have to learn that managing the currency and funds flow is a very tedious thing. Speculation has to be managed way before it gets too hot, and there are a hundred and one ways to massage the thing before it reaches breaking point. Don't just suddenly whack the kid with an acid dipped cane when all you have been doing all along is some verbal rebuke.

Mai Vee Vella Sarm Lap Koun
Dejavu 1997?

As reported in Bloomberg: Thai stocks plunged after regulators yesterday told banks to lock up 30 percent of new foreign- currency deposits for a year to curb speculation. The baht dropped the most in three years. The benchmark Stock Exchange of Thailand index slid as much as 8.9 percent, the heaviest in more than three years, and the baht almost doubled yesterday's 0.8 percent drop after central bank Governor Tarisa Watanagase said she was ``confident'' the measures will reduce inflows. The currency, Asia-Pacific's best performer, had surged 16 percent this year before yesterday as overseas investors bought the nation's stocks. ``Foreign investors will rush to take money out as they're afraid the baht may weaken further,'' said Visit Tantisuthorn, Secretary General of the Government Pension Fund, the country' biggest fund with more than US$7.8 billion in assets. ``It'll help exporters and the country's trade balance.'' The baht climbed this year to a nine-year high yesterday amid optimism the economy will accelerate after a Sept. 19 coup ended a political deadlock that curbed spending and confidence. Exporters including Thai Union Frozen Products Pcl, the world's second-biggest tuna canner, on Nov. 16 asked the central bank to stem baht gains that are undermining their competitiveness. The baht lost as much as 1.5 percent, the biggest fluctuation of any currency today, to 36.08 against the dollar. It traded at 35.66 at 10:03 a.m. in Bangkok. It last fell more on Sept. 14, 2003. The Stock Exchange of Thailand index slid the most since February 2003. Starting today, overseas investors buying the baht will only be able to invest 70 percent of what they transfer and recoup all of their funds if they keep the money in Thailand for more than a year. Those who withdraw the reserved amount in less than a year will be fined 33 percent of that 30 percent portion.

My Lime Sen: Rather than conjuring up memories of 1997, this time around, the Tahi central bank acted well. The speculative funds kept pouring in over the last 6-9 months, with silly speculation that foreign investors were busy snapping up expensive villas and plush condos in Thailand. All pure speculation, in fact the speculators turned it up a few notches over the last 3 weeks despite uncertainty with the political junta government and the ouster of Thaksin. The currency controls into Thailand are not as severe and they thought they could do another round of 1997.

It may temporarily affect regional equity markets, but in actual fact, its an excellent medicinal dosage to keep the baht from being excessively manipulated. Having said that, nothing much will happen with regional stocks ahead of the holidays, maybe some window dressing come 28/29 December but wait for end of first week of January to replenish positions.

REIT Me My Rights

gsg said...
i do believe that with the malaysian govt at this right juncture doing the right things to lure/improve foreign interest in malaysia, will eventually do the necessarily to make malaysia competitive in terms of REITs.....so yes, it will be something to watch for,.....the smart companies are waiting for the right time to REIT their assetsany suggestions on which in KLSE will benefit?

I do agree that REITs will be a big theme in 2007 for Malaysia. Malaysia only have less than RM4bn in REITs while Singapore has a stupendous RM52bn. The issue is Malaysian commercial properties are not all-REITable immediately, maybe just 5% of the total passes the basic criteria required. However, more savvy player will be able to reinvent, refurbish existing commercial properties to a REITable state. We can also expect players to come in and buy up existing big commercial properties and do it up to a REITable state, or like CapitaLand - buy some, build the rest. The key players:

a) Singapore's CapitaLand Group, which is already managing 14 REITs in Singapore and 4 outside of Singapore. The company has already announced a US$250m or RM890m Malaysia Commercial Development Fund, in a jv with Maybank. This will be the seed capital which should see a gross development valued at US$1bn. This will result in a sustainable completion plan of properties for an eventual REIT. The project will complement the existing REITable properties CapitaLand has in mind. Initially the fund will buy about RM200m of existing properties for immediate injection.

b) Resorts/Genting/Landmarks - There should be a bigger REIT here after the failed SungeiWang REIT.

c) Some of the real estate fund managers will try to tap into the REITs market by placing out shares or doing an IPO.

d) Other big groups a bit stretched for cash will be the first to enter the fray, such as Lion Group and Sunway. Others who do not need it so much will come much later.

e) A number of big government fund management units could very well develop Islamic REITs as a by product. With a number of big sized Middle Eastern banks in Malaysia, we can look forward to a useful listed exchange for these product if we play our cards right.

In actual fact, any of the top 20 companies in market capitalisation will have sufficient properties to consider selling/merging the properties into a REITable state. Look for independent managers such as Macquarie to piece together a few different owners' properties to a REITable state.

Hello Tourism Minister!
Not My Area Of Responsibility La...

Malaysia's recently opened low-cost airline terminal is to be expanded and upgraded next year in response to complaints about overcrowding and a lack of facilities. "We will be providing better amenities and more chairs for the comfort of those using the LCCT (low-cost carrier terminal)," Malaysia Airports CEO Bashir Ahmad told The Star newspaper. Bashir said that Malaysia Airports has been holding talks on the project with AirAsia which is so far the only airline to use the terminal. The Star likened the scene at the terminal to a "disaster relief centre", with weary travellers sitting on trolleys, lying asleep on the floor or slumped over tables at fast-food outlets. The low-cost facility which is designed to handle 10 million passengers a year opened in March, just before neighbouring Singapore launched its own no-frills terminal in a race to secure the burgeoning budget sector. From the start, the Malaysian terminal, a warehouse-style building located 20 kilometres (13 miles) from Kuala Lumpur International Airport, has been criticised for expensive food and a lack of seating. There was also dismay that the high-speed train which connects far-flung KLIA with the city does not run to the new terminal and construction on an extension line is yet to start. However travellers continue to flock there and aviation industry analysts say the facilities are a boost for budget airlines which face a constant battle to reduce costs.

My Lima Sen - Oh, yea... 2007 is a very very big VISIT MALAYSIA YEAR! I can understand if the LCC Terminal was rushed to completion in order to be launched before the Singapore's LCC Terminal, so there were bound to be hitches. Now, how long does it take for hitches to be unraveled? Hmmmm ....

Let's look at other pathetic hitches which marrs our Tourism water-face. Why am I still being pestered when I arrive back at KLIA by illegal/private taxi operators - how long do we have this problem, how long have we been highlighting this issue - it makes us look Third World (the senior government officials wondering "what does Third World look like", look in the mirror). Third World mentality - problems and issues do not get rectified or solved professionally, always gaps and holes appearing even in solutions carried out, things do not get done on time or at all, need lotsa kicking from the top before things get done at the bottom, poor productivity at all levels, sub standard facilities and infrastructure, no proper masterplan or strategy, and very very poor execution skills, incompetent people at important positions...

The other airport involves the handling of the limos and taxis ferrying passengers from KLIA. You got the concession, do it well la... if passengers have to queue for more than 30 minutes with no sight of taxis, something is very wrong somewhere. So who is in charge? The Malaysia Airports guy would say that they have given out the concession, so not their jurisdiction ... meanwhile the Datuk with the concession is nowhere to be found as no one is really running the concession day in day out ... whispers had it that certain operators wanted passengers to use their overpriced vans instead, so the limos and taxis have been asked not to show up ... if that is true ... sigh, worse than Vietnam or Cambodia man...

The other aspect which pisses off many tourists is the devious taxi drivers with special meters, or those who don't use meters and quote RM50 for a 10 minute trip. If we can have police speed traps and Mat rempit traps, why can't they also check all the taxis at the same time for tampered meters and ask passengers if the driver had just quoted a price instead of using the meter. Having said that, taxi drivers are way underpaid, so cannot exactly blame them for trying to make more money. Increase flag fall to RM3.00 and per km rate by 30%, then implement strict adherence to rules and meter usage.

These are just 3 things which will piss off any goodwill generated by our tourism campaigns. Tourism should be a top 3 industry for Malaysia, so we should handle it well. First, appoint a more hard nose Minister. We have top beaches, top beach resorts, world ranked spas and hills resorts, excellent eco-tourism in east malaysia, now serviced by cheap LCCs, with AirAsia we can be a must stop centerpoint for tourists wanting to go regional (use KL as a base and then go to East Malaysia, Thailand, Cambodia and Indonesia cheaply), Malaysia has a huge natural advantage being the preferred place of travel for Middle East tourists and must leverage on that.

This is important, please somebody high ranking, do something ....... The above things need immediate rectification, the LCC Terminal situation is quite dire, how long do you think it will take to address the problems?? Or, do we just brush it of as doing it ala Malaysian style la .. eventually will get done la, why the hurry , ...don't like it, don't come la...

Wake Up BURSA!

As I was trying to do a review of the covered warrants, I had great difficulty trying to come up with essential information on these covered warrants.

a) If you check the newspapers, Star and NSTP - Star has a 52 week high low, closing warrant price, +/-, volume traded, exercise price and expiry date. No mention on the conversion ratio. Conversion ratio is very important as investors would need to use the formula to calculate premium and gearing.

NSTP shows the week's high and low, closing warrant price, change, year issued, maturity year and exercise. OMG, biz editor at NSTP, please wake up! Why show us maturity year, no use punya info. Plus year issued, why, why do we need that info. Does anyone at the NSTP biz desk understands warrants. The most important info one MUST have:
- warrant price
- conversion price
- maturity date
With these 3 data, only then can an investor work out the premium and gearing. Mother share prices are available everywhere, so no bother there. But as you can see, the NSTP info is sorely lacking, very amateurish indeed.

Of course The Edge provides the infomation on premium, gearing and even delta. As for conversion ration, some yes, some no. Anyway, as the warrant and/or mother share price move, one must be able to calculate the Premium and Gearing by themselves - there is NO LIVE INFO the last I heard.

b) Not happy at not getting the conversion ratio, I moved to the website of Bursa... go to company's announcements, no luck, covered warrants issued by difffering merchant banks not by company itself. Go to Call Warrants page, no good, only report monthly outstanding call warrants. One actually has to go to the correct bank/broker company announcement page, search for the right date, then read through the offering prospectus to GET THE CONVERSION data.

Tell me Mr. Bursa, can you tell me in 1 minute, what is the conversion rate for the following Call Warrants - Genting, IOI Corp, MISC, Tenaga... see how long it takes for you to come up with the info...

Why does this happen? Poor execution, having the wrong people at the wrong jobs, having inept people doing important jobs ... If the Bursa does not even allow investors to get the said information in a quick and precise manner, either the Bursa does not understand how important the information is, or couldn't care less - either way, NO GOOD!

Why bother going on roadshows asking people to invest or complain on why local investors are still speculative driven only WHEN you do not provide important trading information, important BASIC information for people to trade with an informed mind. Does that mean that Bursa people do not want to provide the info; or does not know whether it is important; or doesn't even know shit about a WARRANT, and YOU WANT TO LAUNCH SINGLE STOCK SHORT SELLING??!!!

Already only a minority even knows how to calculate PREMIUM and GEARING or even understand why they are important... and you encourage merchant banks to keep issuing these fucking papers to be placed out through remisiers and dealers.... when most end buyers do not have a fuckin' clue, and it takes me fuckin' 30 minutes to find the conversion ratio for one covered warrant... and I am a professional in the investment field. Buck up, bucko!

p/s that's why my Culling The Covereds posting was cut short, was so frustrated... sorry for the fuckin' language but I cannot express myself well enuff, limited vocab la, sometimes I think to swear gives the right measure of weight on the level of "pissed-off-ness" ... yes, you are right, I cannot tolerate incompetence and stupidity ...

Culling The Covereds (Part 1)
Call Warrants Review

Air Asia-CA 10/2007
Warrant Px 0.225
Mother share 1.46
Conversion Px 1.96
Premium 49%
Gearing 6.5x
Verdict: Premium very high, not the best (B-)

BToto-CA 3/2007
Warrant Px 0.54
Mother share 4.66
Conversion Px 4.43
Premium 6.6%
Gearing 8.6x
Verdict: Great gearing and low premium. Even though time to maturity is near, but like I say, a market's best chance for a bull run is in the 1st and 4th quarters, so not much point holding onto a warrant expiring in the 2nd and 3rd quarters (A)

Bursa-CA 4/2007
Warrant Px 1.51
Mother share 7.80
Conversion Px 6.07
Premium -2.8%
Gearing 5.1x
Verdict: Discount, ok maturity into 1st quarter, ok gearing, but nobody believes me when I say Bursa shares can go to RM9.00, even though I always blast the Bursa (A+) please ignore this opinion as it was based on one for one conversion (which was wrong)

Well, ty Tangee888, see what i mean, the bloody Bursa covered is 2 to convert into one share, hence my calculations were wrong!!! So, I'm just gonna leave the original posting to reinforce my point. The proper calculation and verdict would be:
Premium: (2 x 1.51) + 6.07 / 7.80 = 16.5%
Gearing: 7.80 / 3.02 = 2.58x
Verdict: OMG, this warrant is quite expensive and the gearing is quite low too. I think its some kind of karma that the Bursa-Covered is the one to give me the problems - all the more ironic!! (C)

Commerz-CA 11/2007
Warrant Price 3.18
Mother share 7.85
Conversion Px 4.59
Premium -1%
Gearing 2.4x
Verdict: Good time to maturity left but gearing is pathetic, totally loses out on what makes a warrant. Even though no premium, not a good play (C)

Investment Themes - Malaysia

sopskysalat said...
dali, given the many investment theme being played, going into 2007, oil and commodities may continue to be in focus. looking into the domestic scene, the boom in property sector happening in singapore and malaysia may well put the construction into the limelight with many const. co. being badly battled down for the past 4 years or so. infrastructure deal are popping everywhere. therefore, isn't it time to seriously consider const. co. again? my view is yes. what's yours?

Usually, I am averse to construction as it is cyclical, and in Malaysia's case, a lot depends on who you know rather than what you can do. Still, there have been winds of change over the last 3 years, as projects dried up and the better ones had to venture overseas to secure a better portfolio. Those who stayed back and keep begging for crumbs are not the ones to buy and hold. Leverage on your expertise, we can do a lot of thing well, even in construction, and our cost structure is undemanding compared to construction firms in the region.

However, due to the "inefficient operations" of many construction companies, we should see a lot more M&A activity as only the big ones will survive in the end. IJM and Roadbuilder will win favours with local and foreign investors, and will get bigger and better. Others who have their heads above water include: Gamuda and YTL Corp. As for those who will benefit with M&A buzz activity: MTD Capital, UEM Builders, UEM World and MRCB.

The dominant themes for the 2007 first quarter should still be plantations (I think CPO prices have a lot more upside), followed by M&A activity in banks (Affin, RHB Cap) and companies involved in REITs (not those listed already but those having the capacity to piece together/buy a good portfolio for REITs). I believe there will be significantly more foreign participation in REITs in the coming months. Do not think that REITs is a small thing. Just have a look at Singapore (and to a certain extent HK as well), REITs have been flourishing there. More importantly, REITs frees up huge amounts of capital to be reinvested in other areas of the economy. This adds a huge impetus to the velocity of money swishing in the system. We need SC, Bank Negara and the Minister of Finance to work together on this to remove the "obstacles" dampening the growth of REITs in Malaysia asap... (the tax issue, the repatriation of dividends, etc... foreign participation, equity issue, etc..). Believe you me, we do this one well, watch the domino effect.

For Whom The Tolls Toll
Probably My Least Popular Posting

As reported in Reuters:
Malaysia will announce on Thursday a sharp rise in road toll rates to help trim state subsidies, in a move that could spark a public outcry and raise inflation. Tolls will go up by as much as 60 percent and will affect users of five highways in and around the capital, Kuala Lumpur. The new rates take effect on Jan. 1. A spokesman for the Works Minister confirmed that an announcement would be made at a news conference at 3.15 p.m. (0715 GMT) on Thursday. He declined to give details. Under toll concession agreements that critics say favour operators, the government has to reimburse operators if traffic volumes and revenues fall short of pre-agreed projections. Works Minister S. Samy Vellu said recently the government would have to fork out 2 billion ringgit (US$565 million) in compensation to five highway operators if toll rates were not revised. The operators include listed firms Gamuda Bhd and Lingkaran Trans Kota Holdings Bhd. Litrak operates the 40 km Damansara-Puchong highway, where the toll is to rise 60 percent, to 1.60 ringgit from 1 ringgit now. The real toll is 2.10 ringgit, so the government is still subsidising 50 sen for each user. Residents along the densely populated stretch had protested strongly against an initial proposal to levy a toll of 1.50 ringgit, forcing the government to fix it at 1 ringgit. Some 418,000 vehicles used the highway daily on average, reflecting a 14.5 percent compounded annual growth rate for the past seven years, rating firm RAM said in a review of Litrak. Government officials told the briefing that one reason for the shortfall in toll collection was due to motorists switching to alternative non-toll roads, the source said. The toll hikes, however, will not apply to Malaysia's biggest toll-road firm, Projek Lebuhraya Utara-Selatan (PLUS), a PLUS spokeswoman said. PLUS' rate increase is fixed at 10 percent every three years and the next increase is not due until January 2008. Malaysia's annual inflation was 3.1 percent in October year-on-year, down from a 7-year-high of 4.8 percent in March.

My Lima Sen:
a) Its a good move, I know the Bandar Utama and Taman Tun residents will yell and scream, but hey, you can afford it.
b) Why are we jumping up and down on something which has been written in contract to the companies?
c) There is only so much a country can do to subsidise infrastructure, would you mind paying even higher taxes?
d) Of course if you harp on the enormous wastage in bribery, inefficiency and misallocation of resources... that is a completely seperate issue. Toll roads would not be built if there was no toll. You think this is your grandfather's road aaahhh?
e) You use, you pay, if not then the rest of the nation is shouldering the toll for you, including the pakciks and grandfathers back in Ulu Langat or Kuala Lipis.
f) WE CANNOT KEEP SUBSIDISING the economy or even pockets of the economy. Be it in petrol prices or otherwise. That would create an inefficient allocation of cost and resources. Of course we cannot withdraw all subsidies all at once, we have to do it gradually. Live with it.
g) If we can withstand a 33 sen increase at the petrol pump, this is nothing.
h) While this may sould like a propaganda piece from the government, somebody must always see things from a bigger perspective.
i) No point saying how much money we make from oil and gas, or lose to corruption, or misallocation of resources - say that during a seperate platform. Just on toll roads alone, voice your dissatisfaction based on toll roads issue alone.
j) Its good for the toll companies as their cash flow is more assured instead of up in limbo.
k) In the long run, the government is just preparing the nation to live with the "real cost of living", and for companies to "operate on real cost of production". Its kinda neat if you think about it.... about time man!!

pssstt ... don't I sound like KJ??!!... lol... if only he was talking sense, if only...

Patient's Condition

Nurse, pass me the anal thermometer .... two straight days of hammering, now everyone who was cheering "Malaysia Boleh" last week has turned cynical. Some gleefully shorting the index waiting for a pickup at 1,050.

Prognosis: The selldown on Tuesday and Wednesday was good for the patient, he had gorged on durian and stout, plus two packets of nasi lemak. Needed to do a body cleansing you know, detoxification ... now, nurse, did the patient vomit blood??

I see, no cold sweat on his forehead also, nothing to worry about.

Seriously, the Tuesday and Wednesday activity was largely due to contra plays, just check the volume late last week. It couldn't continue as the contra plays would just get bigger and bigger. The huge buys on Sime and PNB companies was not due to the Credit Suisse report, it was just the prop trading desk of Credit Suisse buying a huge position in those stocks - which is still a very good sign, the play is on for Malaysia stocks.

How can it be bad, we have a strong platform for the index with the merger to be passed for Sime and the related counters. Banks are still very attractive. Tenaga and Telekom have their favours. Plantations still going strong. If Typhoon Durian gets worse or any kind of natural disasters hit plantations, CPO prices would go through the roof even more. Some funds exited US stocks in favour of Asian exposure, just look at the liquidity surges in HK and Japan. Its swishing in Asia.

The contra plays got hit. but there are buyers and it looks solid. I don't think the index will even go anywhere near 1,050. Too many corporate exercises in the pipeline. Accumulation in Proton-C is just too obvious, with or without market weakness. Kuok's merger plans looks very good for PPB. Even the higher tolls have a positive spin on it for the related stocks, not heavy enough to derail the local economy. Ringgit looking for further headway, no way funds are leaving local shores just yet. Its December, time to play till March at least, baby...

ooh... nurse, take the thermometer out from the patient ...

The Fed & US $$$

The Federal Reserve opted to keep US interest rates on hold for the fourth meeting running, fretting about inflation but also warning that a housing downturn is now substantial. The Federal Open Market Committee (FOMC) decided to keep its key fed funds interest rate pegged at 5.25 percent.

My guess is that if the US dollar did not weaken so much over the last 2-3 weeks, the Fed WOULD HAVE LOWERED INTREST RATES BY 0.25 percentage points. However, the dollar weakness basically left the Fed with little choice but to maintain rates in order to maintain some stabilising platform for the dollar to stand on. A drop in rates by the Fed could very well send the US dollar down another 2%-3%. That would have been two uppercuts to the jawbone of the US domestic economy - a risk not many are willing to stomach.

The Fed has held interest rates steady for four meetings since it halted a run of 17 quarter-point increases in August. The Fed acknowledged that the downturn in the US' housing market had become more significant of late. But with the world's biggest economy showing signs of slowing, some experts say the Fed must consider the downside risks, and consider cutting rates in 2007 to avert a serious downturn. It appears that the Fed only have two options going ahead for the next 6 months, stay put or lower. The way housing is going, a lot will ride on the year end retail sales and unemployment figures. If both sets of figures showed weakness then the Fed will ease, with or without a weak dollar. It is pointless to protect the US dollar at the expense of a recession in the US. Having said that, I think the US economy is a lot more stronger than what the housing figures are showing. Bearing in mind that the US housing boom have basically been on a tear for the longest time, an easing in housing is largely anticipated, in particular when you consider that the US equity markets have been booming as well for the last 12 months, thus taking away some of the limelight and attention from property.

The strong undertone will be reflected in good bonuses in US companies and the good employment figures. Too many experts have been overhyping the slight weakness in housing and extrapolating it to other areas of the economy.

The weaker US dollar is about time. It brings more benefits than risks to the US and world economy - the reasons will be too long to elucidate here, but its all over my historical blogs. Hence we are actually at the crossroads, chances are rates will stay put for the next 2 sessions by the Fed as economic figures to be announced over the next 2 months will show underlying strength, still good for the US equity markets either way actually because we are not looking at a recession , and also not at an overheated or overvalued equity market anyway.

The FOMC voted 10-1 to keep rates steady, with Richmond Fed chief Jeffrey Lacker again dissenting in arguing for another quarter-point rate hike. The one person arguing for a rate hike is a major pointer - he could be asking for a hike based on underlying strength of the US economy or to protect the downward spiral by the US dollar. Methinks its both.

No matter how you cut it, 99% of economists and experts think that the US dollar is overvalued. But why the sudden downshift in the dollar. In my past blogs on US dollar, the recycling of dollars is holding up the dollar. The biggest cohorts are the world's central banks and OPEC nations. These buggers keep holding trade surpluses largely in dollars thus keeping the dollar overvalued and basically financing American's insatiable consumption.

In the latest quarterly report just released by Bank of International Settlements (BIS), the truth came out on explaining why the dollar fell.Many oil producing nations held much less US dollars inpreference for the Euro and yen in particular. Russia and OPE increased their holdings of Euros from 20% to 22%. The other notable insights was that Qatar and Iraq have cut their US dolar holdings by US$2.4bn and US$4bn respectively. Even Ecuador and Indonesia have cut their US dollar holdings by US$2.3bn and US$1.9bn respectively. Surprisingly, one of the strongest ally of the Americans, Saudi Arabia, also cut its holdings of US dollar by US$3bn. While these are minor adjustments, it is nonetheless very significant and these small moves would reverberate worldwide and prompt even more central bankers to reweight their currency portfolio.

Overall, this is a very good move for the global economy, and would actually reduce the risk of imploding of the US economy. It is better to have 2 or 3 minor corrections a year in US dollar than a 25% devaluation in one whack. At least some air has been released from the balloon.

No Malice Intended!

simon_alibaba said...
comeon guys,just let it go...... i am as wrong as you guys.good luck to tan sri lim! this deal is paramount important to him than to us.let see how he develop it?

ali,
do not take this to mean i don't want genting to get the project... i think its a coup and will actually strengthen m'sia-sing ties ... i even said those who bot the covered on friday deserved to get paid, however, the mother share looks shaky yesterday and today and even taking it at 33, the covered is way way overpriced... people need to know that and appreciate the valuations ... whether it happens to be genting or not ... so it is not a slight on the lims, they have done very well for themselves and i think the london clubs purchase was even more significant ... so even though i predicted kerzner would win, i was wrong on genting's chances but i am still glad ... btw... the snetosa thing was a pure joke and not to blast anyone ... lol

but you cannot just dismiss the sentosa old name thing, its got a lot of fengshui attached to it, just go and read the postings by Zentrader .... come to think of it, the Sentosa IR bidding has a lot of cloudy bad luck tainting the entire process ... Kerry Packer of PBL died (part of the Melco bid) ... Kerzner's CEO died ... hmm... the plot thickens ... just how bad is the fengshui??

my friend called me just now to ask if i lost a lot of money at genting highlands last week (i don't like casinos per se, only those with real poker tables as in Sydney, Adelaide and Melbourne) owing to the postings on genting and sentosa .. told him the same storyline as above ... i said that it could have been worse ... can you imagine if sentosa's old name was Belakang Mari ... omg ... that would have been "light up my ass hair funny"...

Jenting-Cover Your Belakang

Investors went nuts on the covered warrants, please let the math dictate your investing policies. Conversion for Jenting-Covered is 10 covered warrants to buy ONE Genting share.

Jenting-Covered price RM1.15
Conversion price RM25.54
Expiry May 2007
Mother share RM33.00

Premium = (10 x 1.15) + 25.54 / 33.00 = 12.2%
If the share trades at RM32.00, the premium swells to 15.7%

Gearing is the troubling thing here, usually covered warrants have excellent gearing to compensate for the short maturity period, hence you would find great leverage in the region of 8x or even 10x gearing. However in Jenting-C's case, the gearing is = 33.00/11.50 or just 2.8x. Do not be fooled by the low price of the covered warrant at RM1.15 as that is not the gearing. If you took RM1.15, the the gearing would look at a ridiculous 28x.

For gearing that is less than 3x with less than 6 months to maturity, it should trade very close to zero premium. That means the really FAIR value for the covered warrant is only between 85-95 sen and not anywhere above RM1.00. You have been warned.

The One Thing The Media Missed On Sentosa Island

Sentosa Island, what a charming name in Malay. I mean, did the name came by accident. In Malay, "sentosa" means peaceful or tranquility. Ta-dah ... Sentosa was the new name for the island, renamed by smart Singapore government officials. Does anyone have a clue of its old name? I think, if they stuck with the old name, there WOULD HAVE BEEN LOUD GUFFAWS heard around the region.

The previous name for Sentosa Island was Pulau Belakang Mati. Literally it translates to "Stabbed In The Back Island" or "Died In The Rear Island". I cannot fathom anyone wanting to name an island with that name. Can you imagine a casino with the name Belakang Mati Casino - man, talk about bad fengshui - Masuk Hidup, Belakang Mati (Enter Alive, Die In The End ..) could be the slogan then. The thing is the words "Belakang Mati" are so vague, it could literally taken to mean so many things, for example:

a) Stabbed in the back
b) Died in the rear or back alley
c) An unfortunate homosexual incident
d) Standing in the queue and finding out those behind have somehow died
e) Possibly a very good punchline to a good Bengali joke
f) Something died around your anal area

Whatever it is, I seriously cannot find any positive connotation with the name used. It would have been cool though to have Belakang Mati Integrated Resort emblazoned in bright lights!! "Belakang Mati hotel reservations, may I helpthch chew?"

p/s for a more politically correct history and opinion on Sentosa, please visit the following site of a fellow blogger which also posted on Sentosa Island:
http://zentrader.blogspot.com/

Derivatives Is A Whore

swifz said...
Hi, I just finished the book "Fiasco: The Inside Story of a Wall Street Trader". The last chapter touches about how Japanese companies uses derivatives to create profit out of nothing. Can you please comment on that?

Firstly, I don't really want to plug the book, which to me was a mediocre effort. It is easy to label derivatives as the bad guy. It is not the gun but the one who pulls the trigger - you know the analogy, and the relevant question is also why do we need guns in the first place!?

The gun analogy is quite close actually, derivatives were designed to MINIMISE risk. However, the array of product offerings have been so enormous that almost everyone forgot the main aim of derivatives in the first place. Now, it is mainly a leveraged bet, little capital waiting for th big home run.

You cannot blame derivatives, you can only blame the people buying them for not being informed enough. You cannot really blame the sales trader as its always "buyers beware", you cannot expect salesmen to act with a certain degree of morality, that is wishful thinking. If they can ram it up your ass, they will. Most of the derivatives implosion at companies involved CFOs, CEOs and CIOs who were ill equipped to understand risk and actual exposure of these instruments. Many did not have a proper investing policy and guidelines to follow.

Did Japanese companies ramp up profits by issuing derivatives? You cannot assume that. Back in the hey days (mid-late 80s), Japanese warrants was the way to go. But these were part of a Convertible Bond, which they detach the convertibility part and trade them as warrant. Warrants were so hot that they usually start trading between 18%-20% of actual conversion value. Which is to say a company borrowing a US$200m convertible bond with a 3% coupon, will beable to pocket US$200m, and also get a kicker by selling the warrants to the broker at e.g. 10%-15%. So, yes, money was easy but things get inflated in a super bull market.

So why are derivatives like a whore? If you do not buy them, you can take the high moral ground and look at them disdainfully. If you depend on the whore for your livelihood, e.g. pimps, rent-seekers (i.e. traders, brokers, merchant bankers) ... you couldn't care shit.

Japan's Fortunes

sopskysalat said...
hello, although nikkei has underperformed the market as a whole against the asia equity, going forward, there is much interest rate risk. you are still confident of the nikkei 225 going to hit new high?

Other Asian bourses have rallied ahead of the Nikkei and Topix. The uncertainty has more to do with the US dollar-yen relationship, the oil price uncertainty, the domestic economy's uncertainty, and the direction of interest rates by Bank of Japan. Its also not so much that Japan is a hard sell but rather the other Asian bourses are an easier sell.

Corporate earnings - Capex increased 11.9% in 3Q2006 which is still decent. Meanwhile, profit growth remained strong at 15.5%, for the 17th-straight quarter of gains. Its the 17th straight quarter, let that sink in first. Mind you, the last 4 quarters had been clouded with much higher oil prices. Since oil prices have started to dip appreciably since August, corporate profits' growth should continue for the next few quarters at least. What is even more important is that margins will be enhanced with weaker oil prices.

Domestic Economy - Wages were unchanged in October and have been disappointing, increasing less than US$100 this year. However, this next phase of rally for the Nikkei will not be led by domestic economy, so its not a big issue.

US Dollar/Yen - The uncertainty overhanging both currencies are now largely removed with US dollar's recent correction. The yen, while at a stronger level, is now much more acceptable as there is a large uncertainty removed.

Interest Rates - This is the biggest stumbling block for investors, that BOJ will be raising rates, of course they will raise rates, when you at at zero and 0.5%, where else can you go?? In fact, the rise is a strong indication of the underlying strength of the economy and the currency. Both important factors.

The number of huge private equity firms setting up shop in Asia and Japan is a big leading indicator to more market action. All said, we should be looking at 19,000 sometime in 2007. All hail the new leader.

Big Picture Recheck

Equity markets, as expected, continued to bloom..., any scary movies in the near future?? Let's just examine a few notable developments in recent weeks affecting the big picture.

US Dollar - Sharp weakness, may be due to anticipation of lowering of rates by Fed. Fed may be tempted to do that soon due to the weakening housing starts and higher inventory. Particularly if the Christmas sales figures come in flat. How does that affect Asia? It used to be bad, now not so much. Most Asian currencies are willing to be a bit stronger to wave off imported inflation, and many considers it still OK to be a bit stronger without hurting competiveness or exports. The weaker dollar would ease pressure on Chinese yuan to appreciate at a faster pace. Bernanke would be welcoming on the easier US dollar. Paulson's hand is possibly evident here as he knows the US policy makers may be banging their heads against the wall asking the Chinese government to appreciate their currency faster, and at the same time, he knows the Chinese side have their hands tied in moving the yuan higher owing to possible consequences such as bad-debts implosion, unemployment and a hard landing if yuan rises too fast. So, good development for most everybody.

Democrats - Markets is not too bothered with Democrats holding a stronger hand as mainly the healthcare, oil giants and CEO paypackets/hedge funds regulations would be adversely affected. With the exception of healthcare, the other 3 things may actually benefit the markets. Non event.

Asia Rising - There is a strong perception growing that Asian bourses will have an excellent year in 2007, and may actually perform better than developed equity markets. Currency gains is the kicker also. All in, the underlying support will be from the continuing double digit corporate profit growth in most Asian bourses. The shackles of being tied to US economy is not so strong this time around. Weakness in US economy may not affect exports that much as there is better diversification and globalisation of global trade with the emergence of China/India and a stronger EU, plus better trading ties with South American nations.

Japan - The sumo loving nation may be under the radar for most of 2006 but I expect the Nikkei and Topix to lead the charge of Asian bourses over the next few weeks and months. Capex increased 11.9% in the quarter ended Sept. 30. Meanwhile, profit growth remained strong at 15.5%, for the 17th-straight quarter of gains. That is very significant because oil prices only started to fall in August, so we should be looking at fantastic profit growth figures for 4Q2006 and 1Q2007 just on the lower fuel price alone. The flow on domino effect being reversed by the sharp correction in oil prices makes Japan stocks pretty interesting.

Top Holdings By Top Hedge Funds

There was a revealing article in Barron's which identifies five top-notch hedge funds whose investment moves are closely watched by the industry, revealing their top holdings and some recent transactions:

David Tepper's Appaloosa Fund:
(1) Oracle Corp.
(2) Micron Technology Inc.
(3) Applied Materials Inc.
Other big holdings: Cisco Systems Inc., Microsoft Corp., Texas Instruments Inc., NASDAQ 100 Trust Shares ETF, AMR Corp., UAL Corp., and Continental Airlines Corp.
My Take - This lends credence to the belief that NASdaq is primed for a much better few months ahead than the S&P 500. It seems there is a growing consensus among fund managers that Nasdaq is due for big rally in the weeks. ahead.

David Einhorn's Greenlight Fund:
(1) Ameriprise Financial Inc.
(2) Microsoft
(3) Hospira Inc.
In May Einhorn talked about his affinity for Microsoft, saying that buying Microsoft at US$23 was like getting Alex Rodriguez for a merely average price in a fantasy-baseball draft.
My Take - The appearance of Microsoft in the above two funds may be surprising but the yield is very good. Hedge funds cannot keep betting on turnarounds and the "big play", they also need to put in the solid returns as a base to its overall returns.

Steve Mandel's Lone Pine Capital Fund:
(1) Brookfield Asset Management Inc.
(2) Google Inc.
(3) Comcast Corp.
Mandel cut his Google position by 25% in Q3, suggesting it may be getting too rich for him. He added to Comcast and Qualcomm Inc., sold Research In Motion Ltd. and America Movil SA de CV, and established a position in Schlumberger Ltd.
My Take - This is a big swing dick kinda manager, holding Google for the longest time till it surpassed US$500 and then only cutting down its stake only slightly.

Ed Lampert's ESL Investment:
(1) Sears Holdings Corp.
(2) AutoZone Inc.
(3) AutoNation Inc.
The three comprise Sears Holdings' CEO's entire portfolio. Barron's says many hedge-fund managers own Sears out of admiration for his retailing skills.

Activist investor Carl Icahn:
(1) Time Warner Inc.
(2) ImClone Systems Inc.
(3) American Railcar Industries

Ed Lampert and Carl Ichan are invetsors who will get their hands dirty in trying to turnaround the companies, and generally the returns may/may not be there for 2-4 years.

Why no Asian or European stocks? First, the size of funds under management prohibits them from considering stock with market cap of less than US$5 billion at least. If you have US$2 bilion under mgmt, you are not going to be bothered to buy stakes of US$20-30 million and monitor 100 companies. You want to be able to make fewer bets and focus on just 10-15 stocks throughout the year. If you were to place a US$100m buy on a stock in KLSE, how many stocks can you buy without moving it substantially? Hmm ... thats RM360m = or 31m Maybank shares = 12m Genting shares = 30m Resorts World = 48m Public Bank (and foreign to boot). So you cannot even fathom buying those sizes, even over a two week period. Secondly, it has to be your own backyard, invest in things you know best. Its different if you were in private equity as you have a better chance of succeeding venturing overseas as you have a much longer time frame. As active normal fund managers, to invest overseas involves currency exposure and the need to get in and out swiftly. At those portfolio size, you would be loathed to plunk US$300m on Nokia and hoping for right timing as the stock needs to perform within a 12 months period for my hedge fund profit sharing business. If market tanks, I may be stuck not being able to sell down wthout pushing the price down substantially. Liquidity. Even in Europe the liquidity is not as strong as in the US.

Takafulofshittystuff

As reported in theedgedaily today:
"Syarikat Takaful Malaysia Bhd chief executive officer (CEO) Md Azmi Abu Bakar failed to get re-elected as a non-executive and non-independent director of the company at its AGM on Nov 29. Md Azmi, 42, was appointed as CEO on Sept 15, 2005 and prior to the appointment, he was the chief operating officer from 2003. He took over as CEO from Datuk Mohd Fadzli Yusof, who also failed to get re-elected as a non-executive and non-independent director. Syarikat Takaful said the resolutions to re-elect them were rejected by the shareholders. It said the resolution to adopt the audited financial statements for the year ended June 30, 2006 was carried, but the auditor KPMG Desa Megat & Co had modified its report with an "except for" qualification. It did not elaborate on the qualification."

There is obviously something not right. If you were to glean through the NSTP BIz Times today you will find interesting sentences which kinda points to what is inherently wrong about having less than professional managers, or seeming pros who does not act like one.

Shareholders were shocked when the company disclosed that there were RM200m "unreconciled differences" in its financial statements ended June 30 2006. However the company's auditors, KPMG Desa Megat & Co, issued a modified report just before the AGM took place.
My Lima Sen - Unreconciled Differences, that only makes sense in a divorce case, if its an accounting thing, its not good. The auditors would have been trying to reconciled the differences for the longest time, and probably the accounting partners would have had to rolled up their sleeves when they also could not reconcile them - still unreconciled at AGM, very bad form. UR means you don't know where the balances went to, or things just went missing.

Syarikat Takaful Malaysia Bhd chairman Tan Sri Hadenan A. Jalil assures shareholders that there is no need to be alarmed over some irreconcilable items which the auditors brought up at the company AGM yesterday.He said there was no evidence of misuse of funds or other wrongful acts. It will not affect the performance of the company in terms of profits.
My Lima Sen - Accounting is a simple concept, its man-made, every credit must have a debit entry, left hand right hand. When it doesn't balances, and the accountants cannot find them .... there implies something grossly not right, and very poor controls, apparently nobody knows where is the RM200m. My god, even my mum would scream if RM20 was missing from her shelf! Whether there was misuse of funds or CBT we don't know, but we can be sure that the company have VERY POOR CONTROLS. Can someone from the company even admit to that? Even if the differences were to be on the credit side - that doesn't detract from poor operational controls.

The chairman added that the company's accounting system was changed from a cash to accrual accounting is also to be blamed for the differences.
My Lima Sen - That statement reveals a lot about what is wrong with a lot of senior management. If it was a Japanese company, the chairman and CFO would have committed seppukku already. Here we find the chairman grasping at straws, Takaful is NOT THE ONLY COMPANY or THE FIRST COMPANY to change from cash to accrual system in the history of corporate accounting. Just admit that the CFO was not up to speed and apologise on behalf of the less than perfectly-qualified accounting staff and overall poor supervision. Apologise for not being able to be aware of prevailing problems and inability to rectify them within a reasonable time frame. The failure to "acknowledge inferior performance", "inability to admit fault or what is lacking", "the persistence of coming up with slogans and excuses to mask inferior performance", "the inability to anticipate problems and plan ahead properly" - in one zorro slash of the sword, that's largely what's lacking in professional management in most GLCs.

Composite Index Reality

Its 11am and the Composite index is up a significant 14 points to 1078. However, everyone knows the underlying tone is not as strong as what the index is showing. What I am saying is, the market is good and there is good undertone to it but just not as strong as what the index is throwing off.

The index will have a very good chance this few days to tests the 1,100 level because:
a) the mega merger automatically pushes up a few index component stocks and will ensure that it stays there for some time owing to the merger proposals and premium pricing, as the deal is expected to take 12 months to complete, in a way the index will have a strong support level from these group of companies.
b) the view on plantations has been positive 6 months back on biodiesel, now most believe the palm oil prices will continue to surge ahead as biodiesel plants are actually up and running and even exported, bringing forward the reality, even the recent slump in oil prices did not deter from the feasibility of biodiesel.
c) the ringgit is still and undervalued currency and the weker USD over the last few days will only prompt more international investors to plonk their money here in Asia for better stock returns and currency exposure, the strongish ringgit will be able to deter imported inflation somewhat which is another positive for investors.
d) the mega merger may be seen as the beginning of a move to drive M&A activity for GLCs and other governemnet controlled companies, and this will be a very good thing as it will force better productivity and reduce duplication and harness economies of scale, we now have NSTP/Utusan, maybe more construction firms later
e) better openess by Bank Negara on the Anz Bank stake in AMBank is a very positive move and will improve market perception a long way, if only we can redress the REITs thing by waiving NEP equity participation for foreign controlled REITs, watch the surge of funds moving in if we do that.

Some Investing Pointers

1) Out of the blue - When someone ask you about a stock "out of the blue" (just like simon-alibaba below), gotta be suspicious. Especially if its a stock not on everybody's lips. Especially if its from someone who does not play stocks often as their sources have a higher hit rate.

2) Opening lower on huge volume - Look at MBf Corp today, top volume stock with a closing price yesterday of 21 sen. The stock opened at 16 sen and reached a high of 18.5 sen. You don't even have go looking for news, a stock that opens much lower on good volume, you can forget about bottom fishing. Its a very poor bet to buy now. Most investors have a big drawback, and that is Good Recent Memory, Poor Long Term Memory. Recent memory means we make recent experiences as a reference point - i.e. we are aware MBf Corp has risen and traded above 20-22 sen for the past few days, hence a pullback to 16 sen. looks bloody attractive. Poor Long Term Memory, sigh, remember 1997, ok too far back, were you aware that MBf Corp spent a long time around 10-12 sen with volumes being collected over the last 8 months, go back and check the charts. Nobody will sell you so much lower for no good reason.

3) Sporadic Shifting Themes - Yes, we are in a bull market, but you can easily spot weakness when players are rotating from one type of counters to another day by day. If the switching is rapid, it indicates weakness. For example, the market when breaching 1,050 was a bit shaky, and there was some sell off in plantations but undertone was still strong and players switch from counter to counter with no strong theme - when there is no strong theme but undertone is still firm, most players will look for leads in the newspapers - when that happens, we should withdraw and not join in. Looking for leads from newspapers is like going to Lucky Garden morning market and listening to the vegetable seller for tip of the day.

4) Judging strength of bull market - Again, look at the themes. There must be some themes you can quickly come up with. If you can't, then there is little strength left. Now, everybody can rattle off things like Plantations, M&A activity, GLCs being merged for efficiency and economies of scale, more openess with Bank Negara/ANZ, stronger ringgit/weaker USD and funds leaving more established exchanges in favour of Asian bourses. Plus a very mix of speckies and solids on the top 20 volume like now. Remember the market at 950-960, almost 90% are speckies and that is only a trading market (means have to cut swiftly on any signs of weakesness).

Ranhill Baby

simon_alibaba said...
do you have any call on Ranhill Utilities or RUBHD?

What a nice name... Ranhill ... sounds so British. Ranhill Utilities is not on any brokers' watch list, i.e. no coverage, i.e. nobody will touch the stock. Let's be fair and have a view on Ranhill Utilities. Its 100% subsidiary, SAH Holdings holds the water supply concession in Johor - some hoo-hah with the state government to restructure the concession. The project IRR is about 18%.

The only stock that research houses cover within the umbrella of Ranhill is Ranhill Berhad (the other listed counters are Ranhill Power and Ranhill Utilities). Surprise, surprise, the only exciting counter of the 3 is Ranhill Utilities. The Ranhill Power is also good but is plagued with land acquisition issues in Sabah. Both the power and unitilities units contribute nearly 50% of turnover for Ranhill Berhad. At operating profit level, the figure is even more ridiculous as the two account for 95% of Ranhill Berhad's profit.

So, the first thing to do, throw Ranhill Berhad out of your buy list. Of the other two, Ranhill Utilities is a better bet, but because there is scant coverage, it is difficult to move the stock, you will have to hold and wait because the company is controlled by Ranhill Berhad - so RB have not much incentive to improve the share price of RUB, RB would probably use the balance sheet and cash flow of RUB to finance their expansion (not a good thing). RB has ventured to very high risk areas for their construction projects, e.g. Libya... OMG.

Looks like Ranhill group needs a good advisory team... quick. Sell down stake in RUB, let RUB fund its own expansion into water projects on its own balance sheet. RB should refinance its own projects and cut ties with RUB and RPower. Right now, the best any of the companies can do is what the weakest link shows. Nobody is willing to embrace the stronger units.

Kinsteel, Looking Good
Whats Driving The Profitability

If you were to check Kinsteel's share price and volume traded for the past couple of months, there is nothing to suggest anything "sinister" or devious was syndicate involvement. The share is pretty clean. The company reported a ridiculous RM422m net profit for the 9 month preiod. That's largely due to recognition of negative goodwill (don't ask... go take an accounting class). What is a more relevant figure is the net profit after minority interests which came in at RM49.6 million for the 9 months. That was still a huge jump of over 200% from the same period last year's net profit figure of RM16.4m. The cumulative EPS for the 9 month totals a staggering 42.5 sen (mother share rose to RM1.40 today from the previous day's close of RM1.18).

The overall improvement was due to the enlarged group which resulted in strong upstream activities, and overall improved demand from the region. ... That's basically bulls shit stuff. Kinsteel on its own is a decent company. In 2004 it made a pretax profit of RM26.2m from revenue of RM453m. In 2005, the pretax profit was RM20.5m from revenue of RM550m. However, cash flow was in the negative territory slightly, not a major concern but dissuades the company from expansion plans. In steps Maju Group, this is actually a very good backdoor listing for the revived Perwaja Steel.

The key was on 7 October 2005, the company entered into a conditional Strategic Alliance Agreement with Equal Concept ( Maju subsidiary) to acquire a 51% interest in Perwaja Steel. At the same time, Kinsteel will use a SPV named Perfect Channel, to acquire a 51% interest in Gurun Assets from various Maju subsidiaries (Maju Rebar Coatings, Maju Steel Centre, Perwaja Rolling Mill and PS Water). However, no liabilities will be assumed by Kinsteel.

Here lies another key: the purchase of Perwaja Steel is for RM197.6m, which will be satisfied via an issuance of 60m new Kinsteel shares at RM1.36 and a cash settlement of RM116m. The deal is a sweet deal for Kinsteel and also leveraged on Perwaja's strengths and masks its deficiencies.

Not many are aware but Perwaja is the biggest producer of hot briq iron and DRI at 1,200,000 MT. The nearest competitor is Amsteel at 750,000 MT. Perwaja also towers in Billet/Bloom at 1,300,000 MT production capacity equalling Southern Steel's capacity, while Amsteel has a 1,050,000 MT capacity there.

While I thought the deal was sweet for Kinsteel and Maju, the swiftness of results after consolidation took me by surprise. The big question for all is whether there is more upside... The key is in the issuance price to Maju, its at RM1.36. The stock basically was ignored for the past few months despite the proposed deal. Now that that is sealed and done, the company just went about reporting the actual financial figures and let the market do the rest. The stock jumped today from RM1.18 to RM1.40. The 9 month EPS figure is already at 42.5 sen. Even giving that a 4 times PER is already RM1.70. Again the issuance at RM1.36 to Maju is very critical as it already assumes a huge undervaluation in most cases of share issuance, thus more upside is very likely. In addition, there was no hanky panky in stock price and volume for past few months and that would also suggest that no one will be selling for a long time.

The warrants are even more attractive. Conversion price at RM1.00 and expiring in only 2011. Even at 61 sen, the premium is only 61+100 / 140 = 15% premium, and a healthy gearing at 2.3x. Assuming RM1.70 as a short term target and giving it a 10% premium, the warrant would then go to 86 sen minimum. Bodes well for all kind of players, just wished I had looked more closely at Kinsteel earlier, however, it looks like still not too late to venture in.