Jeffrey Cheah, Pusing-boy Masterstroke!!!

Malaysian Insider: Sunway is expected to have potential market capitalisation of over RM3.5 billion, revenue of over RM3.3 billion and assets of over RM8 billion said Cheah. This comes as UEM Land and Sunrise have proposed to merge and IJM Land and MRCB have signed an MOU to explore a merge. The Sunway founder said that the merger was due to right market conditions and the need for size rather than as a response to the latest industry developments.

“I am not fearful of being taken over,” he said. “The size of the new company makes a difference rather than 2 separate entities. Size brings us opportunities. We will have access to larger markets and the ability to bid for projects with higher value, particularly in international markets," said Cheah.

He added that the larger merged entity should boost the company’s profile.

“We aspire and now with this merger, we are well-positioned to become a truly Asian brand, through one name and one identity,” he said.

Cheah and his daughter, Sarena Cheah Yean Tih, are the owners of Sunway and will have a stake of about 44 per cent stake in the company after the merger. They currently have direct and indirect stakes of approximately 43.68 per cent of SunCity and 46.53 per cent of Sunway Holdings. The Government of Singapore Investment Corporation will emerge as the second largest shareholder in Sunway with a 12 per cent stake.

The merger is pending shareholder approval and the acquisition will be satisfied by cash and shares and warrants in Sunway. Following the acquisition, Sunway Holdings and SunCity will undertake a capital repayment exercise to distribute proceedings to shareholders.

Sunway Holdings meanwhile reported a RM48.5 million net profit in the third quarter ended September 30 on the back of RM411.5 million in revenue.

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So how will the proposals be greeted? The structure and terms seem a bit convoluted, that can be understood only by the bloody lawyers and bankers who were part of the advisory team. I read and re-read it a few times, I will try to explain what "I think" they meant, but I could be wrong.

Offer Valuation for existing shares
a) Sunway Holdings 2.60
b) Sunway Holdings warrants 1.50
c) Sunway City 5.10
d) Sunway City warrants 1.29

The value will be exchanged at 2.80 new shares in the Newco, plus they will get 20% of it in cash, plus a 1 free newco warrant for 5 newco shares.

If I understand correctly, lets take the example someone owning 10,000 of each securities:

a) 10,000 Sunway Holding shares x 2.60 = RM26,000. 80% of it will be converted into Newco shares = 80% x 26,000 / 2.80 = 7,428 Newco shares. 7,428/5 = 1,485 Newco warrants. Cash 0.52 x 10,000 = RM5,200. Hence the owner will now get the highlighted components.

b) 10,000 Sunway Holding warrants x 1.50 = RM15,000. 80% into Newco = 80% x 15,000 / 2.80 = 4,285 Newco shares. 4,285/5 = 857 Newco warrants. 0.30 x 10,000 = RM3,000. Hence the owner will now get the highlighted components.

If I am correct, this is a highly attractive deal and a swift one as well as the last date for submission is 23 December 2010. It is attractive because:
- it values Sunway City relatively cheap at just below 1.0x Book Value (not even RNAV) when the big boys get at least 2.0x
- it values Sunway Holdings relatively cheaply considering the 20%-30% year on year EPS growth for the next 3 years
- the cash component basically is a generous capital/dividend repayment which would ensure a great acceptance rate
- the capital repayment extends to everyone, including warrant holders
- the free warrants is a good kicker
- its a swift deal, which will see the Newco being traded within 2 months

The merged entity will kick off trading at 2.80, do you think it will go up or down from there? Together, at 2.80, it will trade at around just 7x current year's earnings.Where the prices will go will depend on where investors think the newco will trade at when requoted.I think 3.20-3.50 is fair. So if you think likewise, where will you be buying the shares and warrants up to??? I provide the platform and ideas, you do the math.

In a brilliant masterstroke, Jeffrey and his advisors have basically revalued his two flagship companies closer to a genuine valuation. The often said drawback of his shares as lacking in liquidity can be almost eradicated now.

Both Sunway City and Sunway Holdings suffer from gross undervaluation. Please re-read my posting on both a couple of days ago. Hence the present offers still present very decent upside for the merged entity.

I think from the 3 property deals so far, UEM Land-Sunrise, IJM Land-MRCB and Sunway City-Sunway Holdings... If I can present in simple math: UEMLand-Sunrise is 1+1=3; IJM Land-MRCB is 1+1=2.5; Sunway Holdings-Sunway City is 1+1= 3.5 ... Jeffrey's deal is far superior. It now only unlocked value, it gives back a healthy bonus cash dividend which does not stretch the balance sheet, it prompts the market to give the companies a better valuation and sustains it. No one is left out, no minority should complain at all.

Susilo Ensures More Stability & Better Economic Prospects

# July 8: Exit polls show that current President Susilo Bambang Yudhoyono won the Presidential elections by winning twice as many votes as his competitors. Yudhoyono got over 60.9% of votes which gives him the majority count to defeat the two opponents and lead to a single-round victory. Indonesia held its second direct election after ending the authoritarian rule. His competitors included former President Megawati Sukarnoputri and the President's deputy Jusuf Kalla who won over 25% and 12% of votes respectively.
# Yudhoyono's win will seal political stability and will be a positive for the booming equity and currency markets. He has selected Boediono (the former central bank governor) as his running mate, raising credibility in running credible macroeconomic policies. Improving regulation, reforming labor laws and tax policies to raise foreign investment will be his challenges. Continuing with his anti-corruption and anti-extremism approach, and targeted policies for the poor will also boost investor sentiment.
# Given Yudoyono's Democratic party's majority win in April 2009 Parliamentary elections, he will have enough support to implement policies. President Yodhoyono's Democratic Party won over 20% seats in the April 2009 Parliamentary elections which is enough to nominate Yodhoyono as the Presidential candidate without forming a coalition. Parties had to secure at least 20% of seats in the House of People's Representatives (DPR, the legislature) or 25% of the vote to be eligible to nominate presidential candidates for election in July 2009.
# Factors benefiting Yudoyono: Under Yudoyono's rule, GDP growth has risen from 5% in 2004 to 6.5% in 2008 which has benefited job growth and consumer spending. Indonesia is among the few Asian countries to avoid a recession in 2009 and having strong domestic demand. Capital inflows into stock and debt market have boosted these asset markets and raised investment. FDI has improved. Resource sectors and rural incomes have benefited from the recent commodity boom. Government has used fiscal stimulus measures (tax incentive for firms, spending on infrastructure, public services, job creation) to reduce impact of recession on the economy and job losses. Government cut fuel prices in January 2009 and has offered targeted financial support for the poor. The ruling party and President Yudhoyono have encouraged a democratic and secular system and tried to reduce extremism and violence. Yudhoyono has also helped reduce corruption.
# Reform challenges: Foreign investment in resource based sectors has been a point of debate due to impact on poor and social implications. Domestic and foreign investment is also deterred by regulations and red tape, poor infrastructure and investor protection, especially in commodity sectors. This has constrained the much needed foreign investment and technology transfer to develop the commodity sector. Labor laws have led to high structural unemployment and deterred investors. Tax system is also a negative for investors. Fuel subsidies burden the fiscal deficit.
# Indonesia has the potential to achieve higher growth rates provided Yudhoyono emerges with a strong mandate to cut regulations that hinder companies and investment.
# The election has helped consolidate democracy in Indonesia. Yudhoyono and his Democratic Party (PD) is the strongest force in parliament. This will deepen and quicken the pace of reforms and help Indonesia attain higher growth.
# Yudhoyono is considered positive for business and foreign investment, partly on perception of anti-corruption strategy and tendency to appoint qualified policymakers.
# Reform expectations could prove unrealistic. The PD will still require the support of other parties to pass legislation, ensuring that policy-making frustrations will persist during Yudhoyono's second term. Yudhoyono has pledged to double infrastructure spending, privatize state-owned companies and improve Indonesia's attractiveness to foreign investors, which can raise Indonesia's medium- and long-term growth. This will also require additional investments in infrastructure, curtailing corruption and bureaucracy, regulatory reform and stabilization of the currency markets.
# The result of presidential elections will not be a big event for the market as the market-friendly incumbent was expected to return. Nevertheless, removing political uncertainty will further boost capital inflows.
# Yodhoyono seems to have made the best of the tools at his disposal. Small fiscal deficit can provide more fiscal stimulus. Strong private consumption, buoyed by tax cuts and handouts, supported GDP growth in Q1 2009. Rupiah, appreciated against the U.S. dollar since November 2008, has been steadied by various stand-by-loans and currency swap agreement. Stock market has boomed in 2009.
# Golkar and PDIP parties might unify and pose challenge to Yudhoyono, not in the presidential race, but as a challenging opposition to legislative reforms in parliament.
# As long as Indonesia continues to be led by secular parties and leaders who do not pose threat to ethnic minorities (e.g. Chinese business establishment), the investor community is unlikely to be concerned.


p/s photos: Pace Wu Pei Ci

Asset Class Returns As At 30 April 2009

For the month of April 2009, REITs finally recovered and outperformed other asset classes, but on a year to date basis, it is still the worst performer, having lost more than 50%. There is indications that things might be bottoming in US real estate. Despite a large number of foreclosures still, there were more bidders for those auctions. Home builders in the US have staged a similar rebound last month. Emerging market stock have outperformed other equity markets, still on a year to date basis, the losses were still bigger than developed markets and the US equities. What is more interesting is the very flat performance of commodities. The bottoming of markets may tie in with a working down of inventories in commodities. I expect commodities to outperform the other asset classes in the coming months.







p/s photo: Pace Wu Pei Ci

FASB's Move & The Aftermath

OK, we can have our disagreements over what is fair value accounting. But since its been passed and will come into effect as soon as the second quarter, lets look at the real effects on companies and markets. The first area is to look at the Credit Default Swaps for the affected banks. CDSs are basically insurance one can buy to insure against a certain company going bust. Hence if I bought Bear Stearns, and it went bust, the writer/issuer will be paying me the full sum I insured/hedged.

Now, with the new FASB ruling, the CDSs of the banks will reflect whether there was real effect or just a cosmetic effect on these banks' risk of failing following the new rules.

- Citi is in about 40 bps but is just back to where it was on Tuesday
- Bank of America is lower by 50 bps
- Wells Fargo is lower by 30 bps
- JP Morgan is lower by 15 bps, all back to one week lows
-Morgan Stanley and Goldman Sachs are each in about 30 bps

Well, the effect is only minimal at best. The ones in real danger would be Citi and Bank of America, hence the narrowing of risk would be more pronounced there. Other banks which may have a lot less toxic assets in their books, would only see a very marginal reduction in risk. That means that the new rules DOES NOT really help to put the shaky banks out of the risk of possibly going bankrupt. It was the same level of riskiness as things were a few weeks ago.

That would be a correct consequence because the treatment of the "impairment" may be changed but the substance of the impairment is still in the books - hence the risk of failing should be the same or nearly the same as before.

The difference, the really big difference as I have mentioned yesterday is in the capital adequacy side. They will not need to hold so much capital or raise much new capital. That lightens the bank's dilution danger, and eliminates the big danger of failing badly should they fail to get a truckload of new funding over the near term. The supposed new capital is to plug the hole in the toxic assets write downs, and will not actually help to fund business activities going forward. If they do not sell the toxic assets, they will not be taking the loss in effect - hence I like the amortisation rule of the losses. Thus the reduced need to raise new capital will NOT affect existing operations going forward.

Its not like the new capital will be used for expansion, it was dead money to plus a hole in the balance sheet. Another consequence will be that many of the banks that received the TARP money will be looking to repay the sums back much quicker. Again, a confidence issue will work its way to boost optimism in the eyes of investors. You cannot imagine how much liquidity still resides on the bylines. Its a confidence issue and moving market back up by 10%-20% over a few weeks is not that strange in extreme market conditions.

Will the markets rally be shortlived? I think this one's got some legs. This bear market crisis was predicated on a significant loss of confidence in the entire financial system. What has come out of the G-20 and the new FASB ruling showed a more sobering and concerted view to address the issues. We are not out of the woods in terms of real economic activity, jobs will still be lost.

However, stock markets are forward discounting models, hence in the eyes of investors, the real economy are looking brighter 1Q2010 and 2Q2010, it is with that foresight that that the Dow Jones could scale above 9,000 and try to consolidate there over the next few weeks. Will we revist the lows??? ... pretty unlikely.

p/s photo: Pace Wu Pei Ci