The Next Big Thing For Asian Exchanges (ex-Japan)
Exchange Traded Funds

ETFs are investment products that hold a pool of securities and are designed to generally correspond with a specific Index. Investors can buy and sell ETFs just like stock, through their broker, throughout the trading day. ETFs offer the advantage of trading an index portfolio with the ease of stock trading. Investors can purchase ETF shares on margin, short sell shares, or hold for the long term. Investors also achieve market exposure consistent with the Index on which they are based, through one security. ETFs are also designed to be cost efficient because they are based on an Index, rather than being actively managed. Designed to follow the NASDAQ-100 Index, QQQ tracks one-hundred of the fastest growing technology and non-financial services companies listed on The NASDAQ Stock Market. It is the most actively traded ETF in the world with 80-90 million shares traded daily.

Other popular ETFs on Nasdaq include: Nasdaq-100 Equal Weighted index, Nasdaq-100 Technology Sector Index, Nasdaq Biotech Index Fund, Basket of Listed Depository Receipts Emerging Markets 50 ADR Index, BLDRS Asia 50 ADR Index, BLDRS Europe 100 ADR Index, etc...

ETFs are extremely popular for players on Nasdaq. In just one exchange they can go long, short on almost any and every sector/index in the world. Of course I am kidding, but their options are quite enormous. They have energy ETFs, industrials, midCaps, smallCaps, US Energy, TelecomStocks, 20-Yr Treasuries, MSCI HK ishares, etc.. You need a sufficiently deep pool of players for ETFs to work well. In fact, ETFs on Nasdaq allows a lot of retail players and smaller funds to buy exposure to Asian stocks via country based ETFs, even sector based Asian exposure. Saves them from investing directly. So, in a way, Asian based ETFs suck away at actual real activity by foreign investors buying and selling directly in Asian stocks. A factor that must be taken into account when we try to tabulate trends on foreign participation in Asian exchanges.

Both HKSE and Singapore Stock Exchange have been working furiously over the past 2 years to come up with similar ETFs on their exchanges. To that end, SGX has edged ahead of HKSE. SGX's street TRACKS Straits Times Index Fund have done well. SGX has also launched the FTSE SGX Asia Shariah 100 Index (stocks that are shariah-compliant from Japan, Singapore, Taiwan, Korea and HK) - this will form a good kick-off when they actually launch its Asia Shariah 100 ETF. ETFs for exchanges like HK and Singapore cannot be domestic-themed, it has to have a broad appeal, an Asian appeal as well. The structure of a good ETF is derived from its indexation. The sooner an exchange can aggregate various sector, regional, country specific indices, the faster will be the rollout period.

In HK, they unknowingly launched their most successful ETF when the government bought stocks heavily to support the Hang Seng back in 97. Then, loaded up with primarily HK stocks, the government did not want to unload the whole chunck back onto the market. So, in November 1999, they launch the Tracker Fund of HK, possibly the most successful ETF in the world with US$4.3 billion in units raised. ETFs are better because they can be traded in and out (and even shorted) on low cost unlike most unit trusts.

Both HKSE and SGX have to realise that real ETFs allows themselves to be shorted, and that is a big attraction. That has to be dealt with properly by the two exchanges. The sooner an exchange can come up with a decent array of ETFs, the better the chance of being successful. It is not difficult, here are a few proposed ETFs: 1) Asia-15 Airline Fund 2) Asia Low Cost Carrier ETF 3) Asia 30 Power Plants ... plus an array of Asian country indices as ETFs.

There are now close to 200 ETFs in the US with around US$200 billion in capitalisation. In Canada its closer to US$8 billion in ETFs. In Europe there are about 130. Japan has the second largest ETF market with close to US$30 billion in value.

Both HKSE and SGX have been dragging their feet in venturing big time into ETFs. The potential is there for either of the premier Asian financial HQ to propel themselves ahead of the pack... with an Asian flavour. ETFs allow an exchange NOT to be only reliant on domestic companies for interest and investing options. Just design brilliant ones, using Asia as a platform. Any of you two want to hire me?

Companies That Are Truly Global

In an article by Gordon Redding, the director of INSEAD's business school’s Euro-Asia Centre, he debunked myths about how a present day truly global MNC should look like. The thing is they come in many different forms now. Culture and historical economic evolution of respective countries have played a big part in shaping what can be termed as global MNCs of today. One main thing about a global MNC is the internationalisation of the brand/image - it has to lose its distinct domestic beginnings. He classifies these truly global MNCs which dominates global business into six broad groups:

1 The large multi-divisional, multinational firm found in Britain and the United States
2 The continental European large-scale business, such as Volkswagen and Nestlé
3 The European industrial “cluster”, such as the textile firms of Emilia Romagna
4 The Japanese keiretsu, the networks of interlinked firms still predominant in the world’s second-largest economy (although the links have been weakened substantially due to the prolonged recession of much of the 90s)
5 The Korean chaebol, unique combinations of government and family firms, such as Samsung and LG (their links have been heightened and sharpened with the government's vigilence in clearing corruption and mismanagement from the chaebols - these companies should come out stronger than before)
6 The Chinese private company— the “clans” of vertically integrated small firms that work so well in what is now “the workshop of the world” (an outsourcing web of relationships but this is the weakest of the so called global MNCs category)

In defining who is truly global, Redding have identified only nine companies that are truly global—in the sense that less than 50% of their business is in their home territory and more than 20% is in each of the other two out of the three major regions: America, Asia and Europe. They are: IBM; Sony; Philips Electronics; Nokia; Intel; Canon; Coca-Cola; Flextronics and LVMH, the French luxury-goods business. A couple of the more interesting companies which I think will make the list over the next 5 years owing to their defined corporate strategy include Samsung and Goldman Sachs. Food for thought!

The Devil Does Not Wear Prada
Da Vinci Code Reloaded

Thanks to my Baptist background, good in theology failed practical, ... the almost ridiculous but captivating story in Da Vinci Code has brought much warmth and happy thoughts. While I believe the DV is a great story, it is a story, and I am thankful for the interest it has stirred up - at least some will seek more information for the truth. Anyway, that's not why "The Devil Does Not Wear Prada" (isn't that the best headliner... ever) is written. This blurb was written following the article in Wall Street Journal yesterday on the Pope's accessories.

It seems that product placement advertising has overstepped the normal boundaries of TV shows and movies as the Catholic church leader Pope Benedict XVI has been seen spotting many fashionable items as part of his daily fashion wear. The Pope has been seen with an Apple i-Pod, a sexy pair of reddish-orange set of Prada shoes, some walking shoes by Geox and he wears Serengeti sunglasses. I am pretty sure its all complimentary, well freebies are freebies ... or is the new Pope more fashionable, a closet fashionista? Well, of all closet cases, that would be the mildest.

Still Got Them Cowboys In West Australia
Old Boys' Scratchback Mountain

I thought these kind of things happened back in 70s or 80s even, but the Western Australian premier has stirred up stuff not seen since Joh B Pietersen days in Queensland. Rio Tinto (giant and well connected) accidentally allowed the lease on Shovelanna iron ore deposit to lapse last year due to a late courier delivery. The tenement lapse was picked up by the young and hungry Cazaly Resources. Cazaly even got funding from the reputable Investec and an offtake agreement from BHP Billiton. Cazaly planned to develop the mine within 3 years and will be giving the state government approximately A$17 million in royalties a year. Naturally, Cazaly's shares shot through the roof from a paltry A$0.29 to a high of A$2.12 over the last 7 months.

Now, Rio Tinto had the bloody thing for 20 years and have not drilled a flrrucking hole there and probably won't for another 10 years because the company's nearest infrastructure is some 100 km away. After Cazaly got the site, Rio Tinto filed a rare protest to the WA government arguing it was in the public interest for Rio to keep the deposit. In February, WA premier Alan Carpenter said he had discussed the issue at length with Rio's CEO Leigh Clifford during a courtesy call to Rio's London office (starts getting interesting ... London of all places, what a courteous gesture by a premier). Last Friday, WA's Resource Minister John Bowler announced that the WA government has decided to hand back the Shovelanna deposit to Rio Tinto. Bowler could not be located by the press for the last 48 hours.

These kind of things should not be happening in a developed nation's investment arena. Deadlines are set to be met. Courier delays are incidental to business, many things happen that are out of our control, to wait till the last day to submit is plain silly. Cazaly Resources' shares has plunged A$1.45 to A$0.65, after hitting a low of A$0.41. Too many investors have been burnt badly by this debacle. Its one thing to lose money when thing go awry, but this is not fair as investors had put faith in the state government upholding the letter of the law, and in fairness Cazaly Resources did only what is right and available to them. The sad thing is that the integrity of the legal system and the letter of the law had gone to the dogs. The premier and resource minister have a lot to answer for, if only they can be located, ... it is just too obvious and silly a decision to undertake, akin to political suicide. Only in Western Australia? Gee, and I thought Bond and Rivkin were dead ... maybe there is reincarnation after all.

Danger Ahead, China Real Estate

Property prices in China continued to rise in the first quarter of 2006. In Beijing, prices rose by 19.2% in 2005. The odd thing is that the amount of unsold housing also shot up by an even bigger margin of 31.6% to 13.7 million square meters. Overall, in China the amount of unsold real estate rose by a staggering 23.8% in the first quarter of 2006 compared to the same period a year ago. The area of unsold property developments reached 123 million square meters. Now, 23.8% is only meaningful if we know what is a heart stopping rate for property developers. Generally they would start to check themselves into the hospital once the rate goes past 10%-12%, you start writing the will at 15%. So, we are in very dangerous territory here.

Yes, no one can doubt that the underlying demand is there and will be there for a long time. Its the affordability factor which is ridiculous. Only a very small portion of China residents can afford most of the properties, and the market is largely dominated by foreign investors. Again that is further amplified by the fact that most of the buyers also own a few similar investments in China. Rents are struggling to keep as demand from expatriate postings starts to dwindle slightly. Expat postings comes and goes. Once the big events and projects are finished, rental yields will not be able to keep up at the current rates. Even current rentals are not realistic as many do not see rent yields as being necessary because they are in it for the capital gains - recipe for you-know-what.

When more than 70% of the population in the big east coastal areas cannot afford the properties, its not a good sign. The trouble about bubbles is that its easier to spot but harder to prick. To time a correction is almost ludricous. Despite the amount of rising unsold real estate, we also have a massive 1.03 billion square meters of real estate UNDER CONSTRUCTION in China during the first quarter. That figure is up by 23.3% from the same period a year ago. As if that was not enough, in the 1Q2006, property developers invested another 280 billion yuan (US$35 billion) in construction projects.

Another sign that I came across which could start deflating the Shanghai property bubble was the surprising rating given by Standard & Poor / Moody's on Shanghai Real Estate's (SRE) bond issue. SRE is a leading developer in Shanghai's financial hub, and has proposed a US$150 million (HK$1.17 billion) bonds. It was rated as non-investment, or junk status, as rating agencies were concerned about the company's narrow focus and limited cashflow. Standard & Poor's assigned a "BB-" long-term corporate credit rating to the seven-year bonds, three notches below the investment grade, while Moody's Investors Service assigned a similar "Ba3" rating. The ratings reflect the key challenges faced by Shanghai Real Estate, including its lumpy operating cash flow, resulting from its single business focus on property development. The significant geographic concentration on Shanghai alone did not help and the company's rising leverage was a big concern. Leverage is not just an option in Shanghai for property developers. Leverage is a necessary tool to compete. Developers there have to get the biggest projects and complete them the fastest, and try to sell them all yesterday. To enable the retail side to buy, many developers have innovative financing schemes to help the buyers/speculators - hence leverage is not an option in Shanghai property market. SRE said last month its 2005 profit surged 234% to HK$301 million, from HK$90 million a year earlier. The company plans to use the net proceeds from the proposed bond sale to replenish its land bank, rating agencies said. It has a land bank of 1.4 million square meter gross floor area in Shanghai, which the company estimates will be sufficient for its development for the next four to five years. However, S&P did say that SRE's low cost of land bank, good locations of its developing properties, and expertise in the industry are offset by its high concentration risk, small- scale operations, and lack of stable recurring income. After the bond sale, SRE's EBIT will fall to about 3x interest expense in 2007 from 10x in 2005. The thing is, cases like SRE are being replicated many times over all across Shanghai - when your earnings starts coming down from 10x of interest expense to just 3x, its a worry. There is not sufficient cushion for even a minor blip.

Even an aggressive REITs boost for commercial China properties may not save them as most of the yields are not sufficiently high enough, plus the bulk of the problem is in residential, which is not REIT-able (my newly coined term). Its going to happen but if you cannot stand the heat, a massive reduction in exposure is recommended. To stay away from China properties when you have made millions may be very difficult. It just takes one event to trigger the domino effect, and the one event could be anything, from the raising of interest rates or a small developer absconding or a developer stretching capital too far or buyers forfeiting their deposits.... it will happen and my guess is it will be way before the Olympics, not after.

Onerous Sarbanes-Oxley To Allow Exemptions

Following from my earlier blogs on Sarbanes-Oxley, now we have the SEC advisory committee with their recommendations on Sarbanes-Oxley. The restrictive and prohibitive Sarbanes-Oxley has diminished the number of foreign companies wanting to list on US exchanges. Inadvertently leading to a boom 24 months period for London Stock Exchange, and the Luxembourg Exchange to a certain extent. The recent negative opinions given by Alan Greenspan, Bob Greifeld (CEO Nasdaq) and The Economist on SOX basically were three additional long nails into SOX's coffin.

These are still recommendations, and it will take a good amount of political and intellectual will to begin implementing the proposals, the most controversial of which exempts many smaller companies from doing full-blown audits of their books and records. The SEC panel is planning to make two broad recommendations. First, companies with a market value of less than US$128 million will be completely free of the SOX law’s auditing requirements (currently the cut off is US$75 million). In addition, the panel will propose that companies with a market cap of US$128 million and US$787 million be freed from some, but not all, of these mandates.

What is so onerous about SOX? First, its the qualitative aspect, when it is qualitative, its like an unending task. Company's board and execs have to certify the quality of firm's reports. Improving the independence, hiring and firing rules with regards to external auditors. Another, and this is cumbersome, is the disclosure of internal controls structure. SOX was rushed out of the gates owing to public dismay and outcry over the demise of Enron and WorldCom, but this has not cure the correct problems, but rather brought on more inconvenience. What SOX has missed out on is that the GAAP available is already sufficient for auditor and accounting firms to do their reviews properly. Enron and WorldCom were allowed to get away for as long as they did because the auditors were asleep, or unquestioningly accept reasons given by clients too readily. First things first, get the accounting bodies to reprimand and think of ways to put in more prohibitive charges should an auditing firm messes up its work. More onus and impairment charges should be leveled on the partners of accounting firms - that way, no one will be taking a dive, and I bet you "real auditing work" will be carried out.

As a percentage of overall compliance cost, it makes sense to exempt the smaller companies. Small companies happen to be the engine of the country’s economic growth. They’re getting killed by a law that doesn’t differentiate between a Fortune 500 company and one with a market value of US$200 million. As a result, this law has become a free lunch for the auditors. Plus the new US$128 million figure is "low enough" to attract mid-sized foreign companies back to list on US exchanges.

The SOX is broadly supported by Democrats and unions, and it will take some political will to implement the recommendations in full as it could lead to politcal suicide for those pushing the buttons. SOX is the straw that kinda breaks the camel's back in terms of management having to spend too much time with compliance stuff rather than doing proper managerial stuff.

Short Sellers Get Short Strawed
The Ugly Child Only A Mother Could Love

When the peerless 60 Minutes TV show picks your group as subject matter, you know it cannot be pleasant. The 60 Minutes team in the States did a scathing overview on short sellers and its negative effects on companies and prices. Some companies have resorted to suing short selling funds for the negative publicity and driving down share prices. Online retailer Overstock.com and drugmaker Biovail have both filed lawsuits against analysts and short sellers for allegedly conspiring to push down their company's share prices. Analysts get drawn into the flak as being in cahoots with the short selling hedge funds.

That kind of defensive strategy by management is not laudable. Management fearing short sellers (or that their stock options may get deeper underwater) should just go and produce the numbers to deflect criticism, and not waste resources to do so much PR. There will always be analysts who will call a buy or sell, at any point in time. To try and sue contrarian analysts, who might be in the minority is useless. Unless the management has solid evidence that the analyst has been citing false data or making silly conclusions based on misguided assumptions. Otherwise, management should leave them kids alone.

As for collusion, well, it happens more often than we care to admit. Not just fund managers with analysts, but also journalists. This is an area where the SEC or regulatory bodies should play their role. Back in 2002, Gotham Partners, a hedge fund started by Bill Ackman, published a critical report about bond issuer MBIA Inc. Gotham also disclosed that it was short the company's stock on the first page. MBIA's management was livid and pressed New York Attorney General cum-sheriff Eliot Spitzer to investigate for possible market manipulation. Nothing came of the investigations. Surprisingly, in a major turnaround, last year Spitzer and the SEC lauched a probe into MBIA instead on the very specific issues that were raised by Gotham's report. Sucker punched!

Management should not fear short sellers. To me, short selling is a clarifying solution, like rain on a muggy day, a clean-blue flush around the toilet bowl, it clears the crap out. If there is nothing negative for the short sellers to hold onto, why would they want to short sell in the first place? Short selling funds can be a nuisance to management, so too can aggravated minority shareholders, they are part and parcel of corporate management - deal with it already! Short sellers takes overpricing and bubbles out of stocks and industry. It pricks holes in bubbles before they get too big. It wakes up management to act more diligently to enhance shareholders' returns. Of course there are cases where short selling funds use their position to veto certain corporate actions, thus putting the company at "ransom" - that's the kind we need to wipe out. Everything else is fair go!

Good short sellers and analysts are messengers of mismanagement, discrepencies and under/over-valuation of companies. You cannot restrict them in what they can or cannot do. Companies and management are increasingly under a larger microscope, and that is what management resents - but its good for shareholders, hence short sellers are here to stay.

In Biovail case, the company said that hedge fund SAC Capital Advisors conspired with research firm Gradient Analytics to write and circulate unflattering reports. A Banc of America Securities analyst was also named in the suit because of negative reports he wrote on Biovail. Overstock.com case is similar but involved hedge fund Rocker Partners and Gradient Analytics (again). Lets' look at this objectively, both companies are not solid companies to start with - Overstock.com has not had profits since 1999 while Biovail has been facing increasing competition from generics for one of its key drugs. So, a sell report is not surprising at all. As to whether there was conspiracy... that is hard to prove because generally if a company's fundamentals are bad, whats the odds of more than a few pros coming to similar conclusions to sell the stock. Even if there was real conspiracy, it would be very difficult to convict unless there is real evidence in print or voice.

Management at Biovail and Overstock.com are like mothers who complain why no guys want to date their ugly daughters. Don't yell at the shallow guys, do something about your daughters' looks!

Single Stock Futures - Great Introduction

This is even better that regulated short selling as it has less variables and outlay, for about the same effect. The difference is the time limit, which still can be overcome by rolling the futures contract. Naturally, the leverage is the big thing. To me, single stock futures are akin to warrants, only less cumbersome. At least we don't have to worry about gearing, beta, time to expiry, in/out of money and volume issues. Mind you, these single stock futures will also have similar variables but they are not as decisive or delicate as for warrants.

It is likely that there will not be any expiry but settlement end of each day. The outlay is likely to be about 20% of normal exposure or a gearing/leverage ratio of 5x. An investor would only have to worry about topping up the required margin as these contracts will be marked to market at the end of each day. Single stock futures could very well decimate the potential for short selling. The KLSE is not deep enough a market to support two quite similar intruments. Bursa Malaysia is introducing SSFs on April 28, with 10 stocks as a start. The 10 form part of a list of 42 stocks shortlisted for SSFs.

Kicking off this first tranche are Bursa Malaysia, AirAsia Bhd, AMMB Holdings Bhd, Berjaya Sports Toto Bhd, Genting Bhd, IOI Corporation Bhd, Maxis Communications Bhd, RHB Capital Bhd, Scomi Group Bhd and Telekom Malaysia Bhd. The stocks were selected based on the structured warrants guidelines. Bursa has also obtained the commitment from 50 quasi market makers to play the role of market makers for the SSFs, and expects that number to swell to 100.

While the SSFs is a good thing, it does nothing for market fundamentals. What it does is to give investors things to do if they are bearish on the market/certain stocks. If they are savvy enough, they could do a market neutral hedge fund of their own - this means picking stocks correctly regardless of whether the market goes up or down. If I was creating a market neutral hedge fund, I would go long on Bursa Malaysia and Genting. At the same time, I would go short on Air Asia and RHB Capital. So technically, no matter in a very bullish market or a deep correction, the fund would still come out evens. The returns from the fund would come from picking the stocks that will move up more compared to the ones we shorted. (While I like Air Asia as a company, their share price is prohibitive, no room for mistakes).

Investors will have to appreciate beta or volatility, the volatility between Petronas Gas and Genting is quite wide a berth. The more volatile a stock is, the better it is as a stock future. That is one area which Bursa has missed out. Pick large caps but also stocks with high beta as a preference. A Petronas Gas stock future would yield very low turnover and interest.

A Shift To Small Caps

If we look at the senior employees of General Electric, Intel, Citigroup or Microsoft... they are a sober bunch. What a difference a few years make. The main difference being their sluggish stock options. In the 90s, they were making millions from stock options. However, its a bit mind boggling as these astute big caps are making good profits and even decent growth considering their size. What they couldn't understand is why their share prices haven't moved in tandem. The last 3 years have been "good not spectacular" for stocks in general, surely something must be amiss.

If we take the average 3 year return for big caps in the US, it registered a very decent 17% return a year. However when you compared that to small caps of US stocks, the figure is even better at 27%. What is even more shocking is the spectacular returns of international stocks (which can be termed as small to mid caps) of 32%. When you have these figures staring back at you, what has changed?

Investors are preferring smaller stocks, or rather they have more credible options than the safety of big blue chips. A big instigator for this movement is the rise and rise of hedge funds. Hedge funds need to extract higher returns, and to attack a big cap is ardous, lengthy and may need very sizable capital to effect "noise". A lot more hedge funds have replicated their operations in developing markets, as they are smaller in size and a rush of hedge funds onto their shores will have a multiplier effect on equity prices there. The higher the returns of small caps and international stocks, the more investors will be lured to move some of their holdings away from the safety of the big blue chips. What we will find for the next 2 years at least is the big blues paying their senior execs bigger bonuses, and much much less in share options.

Big blue chips have one thing going for them, most are sitting on very large cash holdings. Once the hedge funds and private equity buyout funds have finished with their pickings in international markets, they will refocus on the big blue chips - demanding for higher dividends, share buybacks and cancellation, or deploy the funds in a more meaningful manner. However that kind of task is generally drawn out, just look at Kerkorian and his battle with General Motors. Hedge funds don't have that kind of patience but private equity does. The main reason why there isn't a bigger shareholder revolt against big blue chips holdings so much cash is that equity returns in general have been more than decent over the past 3 years - once that starts to dip, the knives will be out.

Calpers / Wilshire Associates

Dumb & Dumber

Calpers is the California pension fund. Not many would care what they do, but somehow over the last few years Calpers have been very vocal about what they buy and what they don't buy. Calpers practices responsible investing, or so they think. They avoid companies which treats employees or minority shareholders unfairly and stays away from regimes that they do not support. Throwing their weight around, it appears that the people behind Calpers are trying to enhance their jaded lives by living vicariously through Calpers. Calpers can be branded as ultra-conservative and belligerent (my system is the best system), much like the in-your-face Californians who will yell and question why you smoke in public.

In order to throw their weight around, Calpers needed better research and analytics to support their platforms and causes. They hired Wilshire Associates. Based on Wilshire's ranking systems, Calpers have recently decided to return to the Jakarta Stock Exchange. The news further fueled the rise in Indonesian stocks, which had already been rising steadily in recent months. Calpers had stopped all investing in Indonesia in 2003.

Calpers usually will make a big hoo-hah in their annual announcement of who's in, who's out, in their emerging markets investing strategy. Now most investment pros won't be bothered much with what they have to say. In fact, Calpers' strategy is being regarded as a good lagging indicator, rather than a more important leading indicator. Hence it may be toppish for Indonesian stocks!?

Calpers political voice box movement is tiring and incorrect. Wilshire Associates' analytics is highly questionable. For example, the decision to get back into Indonesian stocks was based on a rating of 2 (out of 3) given by WA on market worthiness. WA also ranks the following countries 2 out of 3: Turkey, Malaysia, Argentina and India. Investment pros in emerging markets would wince and roll their eyes at those scoring. That's paying a lot of money for a good deal of generalised B.S. When you pay for analytics, you are supposed to get all the nuances, value added distinction and analysis. I think from the report, its a very shoddy piece of advisory and research work.

WA also did a scoring on "creditors' rights", and had given Indonesia a BETTER score than Brazil, Malaysia, Hungary and Poland. To continue writing, I would have to use words that would generally not appear in any dictionary but in everyone's vocabulary. So, enough said.

China Construction Bank Eyeing Bear Stearns

After Lenovo's audacious move to buy the PC business of IBM, now we have rumours that China Construction Bank might be buying a stake in Bear Stearns. This is a reversal of normal moves by big investors such as Goldman Sach, Morgan Stanley, JP Morgan and Temasek - who have all been buying small stakes in Chinese banks to obtain a piece of the action in China's financial markets. China Construction Bank, a big boy in China, does the unconventional thing by considering a buy in reverse. Savvy! Hmm... jokes aplenty... A Chinese Bear Stearns ... would a name change to Panda Stearns be in the offing? CCB buying Bear Stearns... gives an entirely new meaning to the term Chinese Wall in investment banking.

Now, what we would not like to see is another blowout like the Dubai Ports World's acquisition of US ports operations. There better not be any over-gregarious US senators voicing displeasure over the potential acquisition. That is highly unlikely given that many US investment banks have been taking up strategic stakes in many Chinese banks over the last 3 years. Bear Stearns has a market capitalisation of around US$17.5 billion. Bear Stearns share price rose a bit more yesterday to close at an all time high. The thing is Bear Stearns does not have the financial muscle like Morgan Stanley or Goldman Sachs to pony up extras cash for stakes in Chinese banks - hence doing it this way solves the problem.

Pirated DVDs/VCDs Tycoons' Operations

A Fictional Account

It is a widely known fact that Malaysia is the production and distribution center for pirated DVDs/VCDs for most parts of Asia, and even as far as Souh Africa (I have a friend who can confirm that the sellers in South Africa got their supplies from Malaysia). If you think about it, to run such an empire is no easy task. I believe the mastermind behind it all would have (could have) been a very successful business person in the legit world too.

Think of all the things to manage:

1) Ensuring master copies are somehow diverted to you by hook or crook. This will mean obtaining the lucrative master copy even before it gets anywhere near the theatres. Not an easy task. Payoffs and important contacts needed to be made globally.

2) Ensuring your production center has the latest technology and speed efficiency in stamping out copies. A link-up post production unit will have to be handy with printing of covers and boxes. May have to outsource the plastic covers and boxes to a reliable source - calls for open tender every 3 months to get best prices.

3) Always be the wholesaler, appoint a master distributor for each region and get a cut of sales. For example, it may cost 15-30 sen (US 4-8 cents) for each DVD. Add in packaging, it could come to RM0.50 to RM0.60 per piece. A master distributor could take it on consignment basis - which means paying only what is sold (saves on capital) but will have to share more with the mastermind. A master distributor may be able to retail DVDs at RM8-RM10 per piece. The youths with multi colored hair may get anywhere between RM1 - RM2 per piece, with the master distributor (usually small time gangster heads) getting RM1-RM2 per piece also. Mind you, each master distributor will have a few hundred youths backing him up. Whether you buy from the front end of Jalan Alor/Petaling Street or the middle part of the streets, its the same team. At the end, the master wholesaler will get RM3-RM4 per piece. Mind you, he will have to write off a large portion of the DVDs left unsold, so his net could just be RM2 per piece.

4) Sales to overseas distribution points would be done at less than RM1 per piece net (free of shipping and delivery) as there are no returns and the sales are immediate. Poor sales items would be knocked down to half price to clear stocks. Failing that, you will sell them 3 for RM10, sure no problem, particularly at Berjaya Times Square or Sungei Wang Plaza.

5) Certain master distributors would be more savvy and appoint people with actual shops to sell their wares instead of on the streets. This cultivates customer loyalty and service. Many will have loyalty cards for redemption purposes (you are not the only ones, Starbucks!).

6) Certainly for the entire system to work, a lot of people will have to be on the payroll. Warnings of raids are known beforehand. Shops selling these stuff seldom gets raided or closed. I wonder why...

In fact, I have a sneaky feeling that I might know the mastermind behind all this.... and they are probably not from Malaysia, surprisingly. Its certain film tycoons (and triad heads) from Hong Kong. The reason being, all movies will get pirated and out to the retail market at the same time as the picture is released - except for a group of films from HK, by a certain production company. Strangely, these select films will eventually get pirated but not at least 3-4 weeks after it has been shown in the cinemas. Next time you are in Malaysia, keep an eye on certain HK movies, the ones that you cannot even get a pirated one if you offered to pay RM30 - then check out the people behind them. Problem is, many films are still financed by triad's money in HK. But why Malaysia and not in China - well, if you get caught or the authorities decides to clampdown on your activities, in Malaysia they will not shoot you and ask you to pay for the bullets.

Oh, yes.... and this is a fictional account ... in case I get rubbed off.

The New Corporate Raiders
The Burger King Story

Back in the 80s, when Kholberg Kravis Roberts ruled the world, companies were at their mercy. KKR would usually ante up 10%-30% of their own money and borrow the rest to buy out big companies. KKR would then round up a team of management and give them some equity to turnaround the company, at the same time selling bits and parts of the company to pay down debts to a more manageable level. Usually, they end up taking them private to do this, but not all the time. It will take anywhere from 5-10 years for each project to be completed. While it is easy to rubbish KKR as corporate raiders, they do add value, improve margins and processes before exiting.

Now, the new KKRs are the private equity buyout funds. Only, the strategy they employ is more pragmatic, risky and places the burden more on banks and minority shareholders. This group of corporate raiders tend to be more short term oriented, do not add much value, and exit as fast as they could. Some of the notable private equity groups include Texas Pacific, Apollo Management, DLJ Merchant Banking, One Equity, Bain Capital, Goldman Sachs Funds and even a reinvented KKR.

Texas Pacific, Bain Capital and Goldman Sachs Funds bought Burger King from Diaego in 2003. They managed to knock down the asking price from US$2.26 billion to just US$1.5 billion. All in, the three put up just US$325 million and borrowed the rest. They hired a top notch CEO to produce good figures. Last year, they arranged for Burger King to borrow an additional US$350 million so that Burger King could pay the new owners a special dividend of US$367 million – so that took care of their initial investment. They also got another US$30 million to cancel out a management contract of US$9 million a year to the three owners.

Now Burger King is slated to go for an IPO which will raise US$600 million, but a listed Burger King will have over US$1 billion in debt, which is more than double that of McDonalds and Yum Brands. The debt is effectively rated as junk status. For comparison, Burger King’s profit margin is just 2.4%, while Wendy’s at 5.9% and McDonalds clears at 12.7%.

To put in the “good figures” new CEO Brenneman closed low producing outlets quickly, introduced a number of new food items, opened smaller sized outlets/franchises, and advertised like hell (NFL games). To maintain good “same store sales figures”, the CEO pushed struggling franchisees to close their stores ruthlessly. In the end, the losers are the buyers of listed Burger King and the lenders.

Hence, a smart private buyout fund would target companies that can “easily be turnaround or have their figures re-worked”. Any company can be listed provided the figures are worked cleverly to ramp up revenue. If the company has a good product or brand name, it should be easy to refinance halfway in the process to allow for new owners to pay off their initial investment. Hence their risk is zero even before bringing it to an IPO. Too many of them have employed this tactic - getting the company to borrow to pay the new owners special dividends, way before the turnaround process is complete. This loophole needs to be looked at and controlled.

You cannot fault them for acting in such a pragmatic fashion if the lenders are willing. The investment bankers are also willing to bring such crap listed in order to increase market share of new listings. Hence more new listings via this route will be of poorer quality – all signs of a market that is taking on higher risk. Naturally all these would eventually fall flat as a secular market correction catches them or they self-implode once they cannot make debt payments. Welcome to the new decade of greed and mismanagement.