Malaysia's Debt - Deconstructed

Nobody is spooking anyone by revealing the level of debt the country is facing. Before we can properly address the debt, we have to be honest and come clean. No point pussyfooting here. Some said that that jolted the markets. While the stock market is an important aspect for a open trading country like Malaysia, volatility in the market cannot be minimised at the expense of the greater good. I believe most Malaysians would not mind suffering over the short term as long as the good of the country is being prioritised.


There are rules in placed where federal government’s debt-to-GDP ratio should be lower than the 55% self-imposed debt limit. If the previous government deliberately misled or went over that limit, as it appears to be so, there should be "censures" and a deliberation on possible legal consequences for the mismanagement and misinformation.

(not trying to trivialise the matter, but have a look at our current standing among the rest of the world, while I balked at 80% of GDP figure, it is nowhere near critical or unmanageable)

Finance Minister Lim Guan Eng put the ratio at 80.3% of GDP, or about RM1.09 trillion in debt as at end-2017. There are just too much off balance sheet items. Not all of the debt is bad. The majority based on viable and economically beneficial projects. Nonetheless, you don't want to be servicing RM70b a year in interest year in year out (assuming an estimate of 6%p.a.).

One, must reduce the overall commitments. 

$Hypothetically - Plugging leakages, eliminating wastage, better revenue collection ~ RM30b.

$Renegotiation or cancellation of certain big projects ~ RM100bn

$Reclaiming Stolen Funds/Assets - Again, the figures could be fluid ~ RM20bn.

Listing of Petronas - This is a brilliant idea. Last year's profit was RM45bn. Using 20x = RM900bn market cap. Government sells 25% = RM225bn. Although I am against selling vital resources, but we can get local funds to take up 7%, and let retailers to take up another 3%. The company pays decent dividends. When our country's balance sheet is better, we may even consider buying back and taking Petronas private later on. ~ RM225bn

$ indicates plausible figures, that may vary substantially, one way or another; nonetheless, these are all "positive" newsflow to come in the months ahead. The new government is right to get all the bad news out first. Then only we know what we are dealing with. So far, the figures are not good but in my view, much more manageable, and trust me when I say it could have been a lot worse.

 (the key is to look at the colour representing each country)

There are plenty of ways to raise funds, some of the less popular ones include a temporary tax on palm oil and log exports. Reintroduction of SST. 

Basically, a country has just 3 ways to raise funds: Taxation, Borrowing and Printing of money. Without going into details, none of the 3 can be considered as options as things stand now.

EPF/KWAP - The best "net cash flow" entity in the country are EPF, KWAP and the like. EPF alone has about RM800bn in investible funds and that figure has a net growth in contributions alone of around RM15bn a year. If you factor in the compounded growth rate from returns, it should be a RM1 trillion vehicle in 2-3 years.

As things stand, EPF already has a problem finding sufficient investible local currency assets. There are a lot of companies under Ministry of Finance.

To date, MOF (Inc.) holds direct majority shareholding in 66 companies as below:

MOF (Inc.) Majority Shareholding Companies
#	Company
	MAJORITY
1.	1Malaysia Development Berhad (1MDB)
2.	Amanah Raya Berhad (ARB)
3.	Astronautic Technology (M) Sdn Bhd (ATSB)
4.	Bank Pembangunan Malaysia Berhad
5.	Bank Pertanian Malaysia (Agrobank)
6.	Cradle Fund Sdn Bhd
7.	Cyberview Sdn Bhd
8.	Export-Import Bank of Malaysia Berhad (EXIM Bank)
9.	FELCRA Berhad
10.	Halal Industry Development Corporation Sdn Bhd (HDC)
11.	IJN Holdings Sdn Bhd
12.	Indah Water Konsortium Sdn Bhd (IWK)
13.	Inno Bio Ventures Sdn Bhd (IBV)
14.	Institut Terjemahan dan Buku Malaysia Bhd (ITBM)
15.	Jambatan Kedua Sdn Bhd (JKSB)
16.	JKP Sdn Bhd
17.	Keretapi Tanah Melayu Berhad (KTMB)
18.	Khazanah Nasional Berhad
19.	Kumpulan Modal Perdana Sdn Bhd (KMP)
20.	Malaysia Debt Ventures Berhad (MDV)
21.	Malaysia Digital Economy Corporation Sdn Bhd (MDeC)
22.	Malaysia Kuwaiti Investment Corporation Sdn Bhd (MKIC)
23.	Malaysia Rail Link Sdn Bhd
24.	Malaysian Bioeconomy Development Corporation Sdn Bhd
25.	Malaysian Venture Capital Management Bhd (MAVCAP)
26.	Mass Rapid Transit Corporation Sdn Bhd (MRT)
27.	MIMOS Berhad
28.	MyCreative Ventures Sdn. Bhd.
29.	MyHSR Corporation Sdn Bhd
30.	Pembinaan BLT Sdn Bhd (PBLT)
31.	Pengurusan Aset Air Berhad (PAAB)
32.	Perbadanan Nasional Berhad (PNS)
33.	Petroliam Nasional Berhad (PETRONAS)
34.	Prasarana Malaysia Berhad
35.	Prokhas Sdn Bhd
36.	Rangkaian Hotel Seri Malaysia Sdn Bhd
37.	Sarawak Hidro Sdn Bhd
38.	Sepang International Circuit Sdn Bhd (SIC)
39.	SIRIM Berhad
40.	Small Medium Enterprise Development Bank Malaysia Berhad (SME Bank)
41.	SRC International Sdn Bhd
42.	Suria Strategic Energy Resources Sdn Bhd
43.	Syarikat Perumahan Negara Bhd (SPNB)
44.	Technology Park Malaysia Corporation Sdn Bhd (TPM)
45.	UDA Holdings Bhd
	MAJORITI – SPECIAL PURPOSE VEHICLE (SPV)
46.	1Malaysia Sukuk Global Berhad
47.	AES Solutions Sdn Bhd
48.	Aset Tanah Nasional Bhd
49.	Assets Global Network Sdn Bhd
50.	DanaInfra Nasional Berhad
51.	East Coast Rail Link Sdn Bhd
52.	GovCo Holdings Berhad
53.	K.L. International Airport Bhd (KLIAB)
54.	Malaysia Development Holding Sdn Bhd
55.	Malaysian Sovereign Sukuk Sdn Bhd
56.	Pembinaan PFI Sdn Bhd
57.	Pengurusan Danaharta Nasional Berhad
58.	Perwaja Terengganu Sdn Bhd
59.	Piramid Pertama Sdn Bhd
60.	Pyrotechnical Managers Holding Sdn Bhd
61.	SDE Solutions Sdn Bhd
62.	Syarikat Jaminan Kredit Perumahan Berhad
63.	Syarikat Jaminan Pembiayaan Perniagaan Berhad
64.	Syarikat Tanah & Harta Sdn Bhd
65.	Turus Pesawat Sdn Bhd
66.	Wakala Global Sukuk Berhad

  Subsidiaries owned by MOF (Inc.) companies such as Khazanah and PETRONAS are also considered MOF (Inc.) companies through indirect ownership.

A study should be made of the companies to see which are generating decent returns, that are steady and predictable. Looking at the list, MOF will probably have to restructure some of the companies to come up with a vehicle or two that are investible by EPF and the like. 

Sell those assets to EPF/KWAP/PNB. It kills two birds with one stone. We will raise funds to pay down debts, while our local pension/savings funds get an asset that gives a decent return back to Malaysians.

Legalising Sports Betting - This will be seen as an unpopular vote but it is the right time to bring this up in the new era of transparency and social pragmatism. You can choose to ignore it but a substantive portion of the grey/hidden economy involves illegal betting. We have legalised gaming with Genting, 4D, lotto and horse racing. The country has taken up archaice and greedy taxation laws to those legal units - thereby bringing about the rise of illegal gaming outfits. 

If you tax the revenue at 30%, the remaining pool will have a lot less to offer the winners. Its this gap that gives the illegals a huge edge. They can offer 10%-20% discount on your bets and still come out ahead.

A revamp of betting rules, taxation on revenues, and bringing to legality sports betting is needed. Currently the service tax from legalised gaming runs between RM3-6bn a year. While it is hard to estimate the illegal markets, suffice to say it is at least double or triple the legal size. Hence we could be talking an additional revenue of RM6-15bn a year. It is definitely worth studying further. Like it or not, the gambling is already happening, the country might as well benefit from it.

Conclusion: It is not a debilitating task to whittle down our debt figure. The 80% figure while monstrous, is nowhere what many other countries are already facing, and for most of them the outlook is much bleaker. Bad news first, flow of good news will come later.

Recharging The Economy: Paying down debt is one thing. Cutting spending does not help. Does it means that the government will be curtailing investment into the economy? Short answer is NO. Here are just a few suggestions and there could be hundreds of ways to do this.

a. Luring long term foreign investment in specific industries, in specific locales.(Hint: eco-tourism).

b. Improve the velocity of money by energising the small caps market with a RM4bn fund (please read previous post).

c. Increase re-participation of insolvent members of country by adopting a better insolvency laws platform, such as the ones in Singapore/HK where bankruptcy is canceled after 4-5 years (please read previous post).

d. Encourage start ups from the region to locate their HQ in Malaysia via incentives, ease in visa requirements, support from local start up funds, etc.

Open Letter - Some Recommendations To New Government

Investing Funds

I have spoken on this in the past. We have about 1,100 listed companies and the majority are the market capitalisation of RM500m. We already have a situation whereby local pension funds are finding it tough to investable vehicles locally. Hence the need to invest an increasing amount overseas. Thats all fine. However most funds cannot invest in small caps, hence you find many decent small caps not having the support of long term funds on their register. Yes, there are plenty of under performing and even dubious small cap counters. But we are not helping matters by ignoring the small caps.

Part of the reason why so many small caps have to resort to "manipulative" share price activities to "make money" is due to a lack of genuine long term funds participating in small caps. If the situation is remedied, we can see an explosion of interest in good small caps. In the longer term, small caps will alter their behaviour to pursue good financial management goals to attract these long term funds.

We don't even need a huge fund. EPF can allocate RM4 billion for a small caps local fund unit, targeting listed companies below RM500m market cap. Say there are 600-700 listed vehicles that qualify to be investable. Assuming 200 are "performers" .. we are talking roughly RM20m position in each. the flow on effects will be enormous. Retail investors will be better persuaded to follow "good" small caps. Small caps with a decent growth story will find it easier to seek for more capital for growth and expansion. Velocity of money will translate to a more robust small caps market. In turn, the appetite among other small caps yet unlisted, will find Bursa to be a better location to get listed. This will go a long way to losing good potential listings to other jurisdictions such as HK's GEM.


Judiciary

AG: A most important post. A shoo-in by most would see Ambiga as a popular choice. However, the real world is not so simple. As much as we would like to see all things transparent, and all things above board. we have to be mindful that the real world involves personalities and politics. There are plenty of gray areas. While we need somebody who is respected and capable, we also need someone is able to move us gradually from gray to not to gray, and to white or shades of white. Being too idealistic may show us up as a growing nation not so prepared for the full truth. I can see somebody who is more politically astute while holding the rightful credentials assuming the post. Do we take baby steps or do we have the political will to take the plunge. Hence I would understand if Ambiga is not chosen, but I wish she will be the final choice. 


EPU

Rafizi Ramli to head EPU. Enough said.


Old Habits Die Hard

Can we eradicate corruption and cronyism outright in a flash. Again, idealistically impossible. Even in the case for Hongkong, which was a grand beacon for eradicating corruption via the establishment of ICAC and the spring cleaning of the police force - eventually it took more than 5-10 years for things to take root before anti-corruption became part of the larger business culture.

To that end, to facilitate culture change: MACC must be one armed with teeth; needless to say the judiciary/AG must be free from influence; the Whistleblower Act must be revamped to protect whistleblowers. Once the machinery and laws are in place, it will permeate itself into the workings of all dealings. Full eradication will still be years away but we need to set it on the right path.


Safety Nets 1

As a caring nation, we must have some sort of unemployment benefits or unemployment insurance. As things stand, once we lose our employment, we are left to fend for ourselves. Unemployment can arise when there are structural changes to the industries a country can support. We cannot and should never be locked in a low cost exporting country.

Employer and employees can contribute a small sum to fund the Unemployment Benefits fund. Simple workable rules can be adopted from proven schemes in other countries. One should at least have worked more than 1 year to qualify and benefits if suddenly unemployed, 3 months full salary, 3 months half salary. It is important that safety nets not be a crutch but a helping hand to ease the burdens somewhat.

To that end, we must limit the number of foreign workers and start them at a higher basic pay, say RM1,500-1,800 a month. Enough about protecting our low cost production industries, or else we will never move up the economic transformation curve for higher wages and higher value add industries. No point producing graduates if the better jobs are not forthcoming. 

Of course, there will be those who argue that graduates we are producing do not measure up - its a chicken and egg thing. Now that we can evolve, with a renewed perspective on education, parallel changes must be enacted across other spectrums such as industries, workforce composition and attracting the "right type of foreign investments".


Safety Nets 2

Our bankruptcy laws are archaic, and unnecessarily favours the banks/finance companies.The trouble with our system is that bankruptcy runs in perpetuity (i.e. almost never ending till you die). Unlike in HK, Singapore and many forward thinking economies where you only have 4 or 5 years to pay down your debt and after that you are free from the debts.

Why is it so important to implement a limited period for bankruptcy?

1) Being bankrupt means you are also literally removing around 5-8% of the working public and 5-8% of households from participating in the real economy. Cannot do business, cannot get loans, even job hunting may be a problem every now and then.

2) The Malaysian archaic system overly favours the banks and financial lending institutions. When its in perpetuity, the banks can clamp down on you for the rest of your life. We have to make banks and other lenders also responsible for their part in giving out the loans. Look, even creditors to EU give haircut once Greece is in trouble. That is why banks in Malaysia can be so bloody aggressive with credit cards, they know they have a very long recourse to make your life a living hell.

3) The 250,000 figure (back in 2013, the present figure could be around 400,000) will jump soon. Why? Just look at the way they are dishing out the study loans under PTPTN. Look at the surge in personal loans by non bank institutions, look at the aggressive credit card schemes. When you give out RM30,000 or RM40,000 or RM50,000 to someone and their job is only likely to pay them RM2,000-2,500 when they graduate, if they graduate, and if they can find a job then, ... you are going to have huge problems. Plus, we haven't got to the credit card users yet.

4) Even people who end up in jail for a few years and come out, they are free ... not if you are a bankrupt, man, they will drag you till you go to your grave.

5) The onus needs to shift back to the banks and other institutional lenders for a more balanced and equitable solution. For far too long have the banks been operating giddily under such a protective umbrella in their favour. There has to be a fairer distribution of risk for lending and borrowing. I am not suggesting that debtors need not pay, I am saying you need to give them a limited timeline.

6) When you take out 5-8% of the household from the real economy in perpetuity, it has a lot of indirect repercussions: cannot get study loans for children, making it very difficult to reverse their position as their job prospects may be affected as some companies frown on their status, etc. Needless to say, these 5-8% will also NOT play a part in the real economy in an effective manner - talk about dropping an anchor on the economy, it weighs heavily especially if its in perpetuity.

To that end, I would suggest to make the threshold for making a person bankrupt to be raised to RM50,000, and that automatic cancellation be enforced after 4 years.

Safety Nets 3

Is our civil service bloated? Probably. However I would suggest that we slow the hiring of new people for civil service and adopt a redeployment and retraining of existing civil servants to rectify the problem. as a caring nation, we cannot just effect changes with a swift cut without giving due recognition to the consequences. It is also the past governments' fault that they are in such a situation, not the people working there. 

It is a known fact that it is "easy" for civil servants to obtain loans from certain banks/finance companies. Unfortunately, instead of helping them, this has more often than not, burdened them further. The on-going automatic deduction from salary to pay down loans has to be revamped.

Electoral Issues

Easy peasy. Make everyone who is 21 and over automatically registered as voters. Redraw boundary lines using population sizing - each Parliamentary seat to make up between 50,000 to 100,000 voters. Less than 50,000 will be merged to nearest constituency, more than that spillover to nearest constituency. Same for state seats. Plus all the other Bersih proposals for improvements in the electoral system.

Sabah & Sarawak

Needs better autonomy. Better sharing of oil royalties. A special investing committee to look into bringing the right industries and value-add industries to East Malaysia. A more cohesive approach to build up eco-tourism there as there are plenty of opportunities to harness economic activity from that.

Twilight Zone

Malaysia is not in a twilight zone. Things cannot happen without good reason, and people cannot just disappear without the truth being uncovered. The high profile deaths/murders over the past 10 years cannot just be swept under the carpet.

Inflows and Outflows - Talking Points

Suffice to say, most market commentators got their predictions wrong, following Pakatan Harapan's victory. Below was the market poll of their views:


*Market Poll*

JP MORGAN - Medium Term Sell

RHB - Negative/Sell

UBS - FBMKLCI  1504-1655

MORGAN STANLEY - Underweight

FIDELITY - Downward bias

NOMURA - Underweight
FX - 12 months Ringgit 4.20-4.30 

ALLIANCEDBS - Buy on dips

DBS - Downside Risk

CAPITAL ECONOMICS - Sell

IHS Markit - Sell

Even my favourite business magazine, covered their asses with a premature salvo. The issue arrived in my mailbox on Tuesday 8 May, the issue was dated 30 April ...

Again, we do not fathom why people get paid big bucks to write nonsense. You get the election results wrong, ok I can understand cause you may not get the pulse of the nation. Or you believed in the machinery of the previous government. Or you believed that the shennanigans, gerrymandering, scare tactics were sufficient to brush aside the power of democracy.

Not getting the election results right is one thing, not getting the reaction of the markets is less forgivable. Again, the old adage that most people get by in life by using "anchor and adjust" decision making theory. You only anchor at the previous point and adjust based on your perceptions or persuasions. There is no room for "insights" and intelligence because thats how the average get by. 

So, how should we interpret the foreign net outflows:

May 14    -RM682.6m

May 15    -RM837.3m

May 16    -RM320.7m

May 17    -RM384.4m

May 18    -RM251.2m

There were naturally a lot of counters which went limit down on massive volume. There were also some counters which went limit up, but these were much fewer, and less robust compared to the selling that enveloped "limit down counters".

The KLCI went negative only briefly before restoring near parity, and even went up later. 

This is my view: its not so much the net outflows, but to look at the net outflows as a percentage of actual volume traded daily. You will find that net outflows was around 10%-20% of actual volume traded. That basically told us that local institutions, and more so, retail investors, were back in taking up the slack. The net outflow figures should not be too alarming when you look at the overall picture.

False Optimism?: Would this heightened activity and positivity from local funds and retail investors be termed as "being overly optimistic"? Short answer: NO. Long answer: Definitely not! All things being equal, all the debts, excesses, mismanagement, etc... were there before and after the elections. How would a Pakatan Harapan government BE WORSE in rectifying those missteps??!!

This is my p/s view: Look at the foreign net outflow, I suspect it was not a true reflection of the mentality of foreign funds participation. I suspect a substantive amount of selling that came from "foreign funds" were some bigwigs of the past government trying to extract funds out of the country as the very platform holding up their ability to plunder in the past was shakier than a 93 year old man's walking stick (no offence to Tun). 

Hence, reading between the lines, I think there is a gradual build up of genuine foreign funds coming in based on the smart/immediate steps taken by Tun M and his team.

a) Council of Elders - an immediate steadying of the ship; a brilliant move to bring back proven performers; getting Robert Kuok was a masterful move as there are a lot of substantive deals with China that needs to be renegotiated, and to pacify relations owing to some questioning of China's motives and investing strategy; an immediate strategic review and recalibration of the roles of major investing bodies...

b) Fast Action - to restore the 3 pillars of good governance, the legislative, executive and judiciary

c) Market Friendly - Tun M and Tun D, both knew how important the stock market is to the country; they have been making the right sounds and whistles

I expect certain companies will be "forced to sell" at low prices to rid of cronies of the past. It is very critical not to have a BN 2.0 infiltrating the system. Either by way of "new members joining PH for the wrong reasons" or "tainted business folks kissing new asses for survival".

Grey To Bright Gold: It will be a bit grey on the newfront initially as tallies of mismanagement, debts and hidden mistakes are brought to light. Expect a generous uptrend as assets are retrieved, savings shored up by more professional management, a more robust and transparent market for business deals, and just better management of our vast resources. Our resources just need to be managed better for the country to swiftly move back on the track of glory.

Diary Of An Election - Malaysia Boleh?

Malaysia Boleh?

I will be honest here. I used to cringe .. a lot... whenever I hear shouts of "Malaysia Boleh"... anywhere, even at sporting events. I mean, its actually a meek war cry .. imagine soldiers shouting that while charging the enemy. Doesn't quite cut it.

That is until 9 May 2018. Don't even need to shout it because in our hearts of hearts, those two words were emblazoned and burned into our memory and conscience forever. 

Malaysia Boleh - we not only did something for our country, we are actually the shining light of democracy to the world now. No other nation can say they have a change in government, without bloodshed or riots. 

Even in the eye of blatant bias all along the voting process, negative bias treatment of candidacy and opposition parties, excessive gerrymandering, hastily enacted rules and laws to frustrate all on the opposing side ... 

Despite.., in spite of ..., Malaysia changed the government by muscling democracy to more than just bare popular vote threshold. With odds so stacked against us, we not just prevailed... we faced it hard, looked them in the eyes, doubled down, and ...we did not just win, WE TRIUMPHED. Malaysia Boleh... oh yes, we can, and we did. 

Like another writer said, now we are a beacon for democracy for the rest of the world to follow. Malaysia, a population of less than 30m..., showed the world you can achieve proper democracy with non-violence, if you want it hard enough, and you need to unite in ONE VOICE.

THE DIARY

It’s been an exhausting yet exhilarating 12 hours. My thumb has never had such a workout. I felt like I was holding Beyoncé’s and Taylor Swift’s handphone. The number of messages might indicate that I was in running for the most popular person on earth. 

What was most exhausting was trying to ensure the messages were roughly true. Even more exhausting was trying to pacify friends who were losing heart. It was all so busy, I forgot to eat. 

Then half an hour ago, a close cousin asked via WeChat about the progress. As I changed tack to type a personal response, tears flowed freely as I typed “my country has changed government”. I don’t know why, maybe I do.  I am sure many of you do too. This is not like winning Thomas Cup joy .. this was a struggle by so many for our country for so long. 

I cannot thank the legions of opposition leaders and members enough who had to endure so much for so long. The general public just stood under the umbrella they provided. The umbrella of justice and fairness, they had a voice for us as we went along our lives. Hidup Malaysia!

A Brilliant Deal For Axiata, Celcom and PUC - Malaysia's Largest Listed Internet Commerce Entity

Next week on 26th April, PUC will be holding its EGM to approve the acquisition of a 33% stake in Pictureworks, which comes with guaranteed profits for two years. PUC sprang a surprise just prior to the important EGM by disclosing the deal with 11th Street. In one fell swoop, we basically have the largest listed internet commerce entity in Malaysia. 

Can anybody say that internet commerce will not grow even more significantly in Malaysia over the next 2, 5, 10 years? Well, how can anyone "participate" in that growth in a listed vehicle? Now you have it.

Ask yourself, can you buy a stake in Lazada or Shopee or even Zalora??? Yes, maybe when they actually list. Plus when they do, you can be sure the valuations will be astronomical (in the billions of USD).

Lazada, is backed by Ant Financial and Alibaba. Enough said.

Shopee is backed by Garena Group. Garena is backed by Tencent.


Celcom Planet Sdn Bhd is a joint venture between ADS and SKP, which owns and operates an e-commerce platform known as 11Street Malaysia, and is one of the largest e-commerce companies established in Malaysia. 11Street Malaysia was originally a leading e-commerce company in South Korea, operating under the management of SK Planet Co., Ltd. which expanded its operations to Malaysia to grow and expand the e-commerce industry in the country. From 2015 to 2017, 11Street Malaysia reported an achievement of more than 300% growth in gross merchandising value (“GMV”), 160% growth to over 13 million product listings, and 200% increase to 40,000 sellers registered on its platform. As of 31 December 2017, 11Street Malaysia recorded a GMV of approximately RM427million for financial ended 31 December 2017, and total monthly unique visitors (“UV”) of 13.5million for the month of December 2017. 

The Investment Amount translates to an implied valuation of 100% equity interest in CPSB ranging from MYR333.33 million to MYR375.00 million (the “Implied Valuation”).

How expensive was the deal? If you were to take the historical Gross Merchandising Value of RM450m, it means PUC is coming in at a staggeringly cheap P/GMV of 0.6x. How cheap is that? Well, similar deals in the same tech sector have been in the 1.5-2.0x.

Why would Axiata/Celcom do such a deal? One, that the management of PUC has the ability and vision to take 11th Street to the next level. If you look at the new ownership structure, the original shareholders will still hold much hight stakes than PUC in 11th Street, so nobody's cashing out.

I believe some of the RM90m will be used to pay down debt at 11th Street. The burn rate at 11th Street has passed the initial setup stage. They are recording good growth and good revenues, hence any synergies and cost savings will go swiftly to the bottom line. 


PUC shall be appointed as a preferred partner of 11Street Malaysia provided that it shall offer competitive terms to 11Street Malaysia for the following (“Synergistic Collaboration”):- a. 11Street Malaysia’s marketing needs, especially in digital marketing; b. 11Street Malaysia’s payment gateway requirements for all its eCommerce services with PUC’s flagship digital services platform (“Presto”) being nominated and implemented as the Company’s preferred payment platform on all of its eCommerce services; and c. 11Street Malaysia’s technology needs for its eCommerce infrastructure and platform.

This is key to the transaction, elevation of PUC as the management and preferred partner. Obvious immediate synergies in e-marketing and e-advertising, the usual rice bowls for PUC. The management of PUC will be directing and putting in place the future direction of 11th Street, which is critical in being part of a listed entity. 

PUC wishes to announce that the Company had on 12 April 2018 incorporated a wholly-owned subsidiary in Malaysia, namely PUC Ventures Sdn Bhd (“PVSB”), under the Malaysian Companies Act 2016 (“Incorporation”). PVSB is incorporated as an investment holding with an initial issued share capital of RM1.00 comprising one (1) ordinary share. It is intended that PVSB identifies opportunities to invest or acquire equity interests in and/or enter into strategic alliances / joint-ventures with companies which are principally involved in electronic commerce (“e-Commerce”) businesses, electronic payment services, financial services, technological services, and related businesses including but not limited to media services, airline and accommodation services related (“Target Segments”), which are synergistic and complementary to the existing businesses of PUC and its subsidiaries.

This announcement which came last week would actually be quite significant. The establishment of PUC Ventures would indicate that Pictureworks and 11th Street and e-Wallet and Presto etc... would not be just a mish mash of investments by PUC. It speaks of a bigger cohesive agenda by PUC going forward. I believe PUC is mapping itself as a smaller Meituan or Tencent.

CONCLUSION

a) Valuation wise - PUC looks particularly compelling - just taking into account the impending absorption of the proposed stake in Pictureworks, which is very undemanding. Added to the guaranteed profit for two years, Pictureworks has a very good chance to be listed in HKSE Gem, which will translate to a substantive "potential value unlocking" if/when Pictureworks lists. Just follow the steady roster of clientele of Pictureworks: Malaysia, HK, China, Singapore... but largely in China, which bodes well for a China/HK listing (comfort level based on source/location of revenues).

b) Valuation wise - As indicated above, the P/GMV for the 11th Street deal makes a lot of sense for PUC. Should they be able to bring up the revenues of 11th Street from 2017's RM427m to a billion ringgit within 2-4 years, that would certainly make it highly attractive to list or be sold to even bigger whales at a valuation closer to 2.0x P/GMV. As always, 11th Street is a highly sought after asset platform, hence the permutations for a sale or joint venture or seperate listing are always on the table. Another potential kicker in PUC's inherent value, which they bought at a very reasonable valuation.

c) A COUP - If you were to believe the media, JD.com and Alibaba were also trying hard to buy 11th Street. Of course both have bigger firepower and money, but then it would immediately lose its Malaysian roots. I think thats part of the broader strategy by Axiata/Celcom, to bring in a local champion and bring about much higher valuation, maybe a Malaysian "unicorn" in the making.
https://www.lowyat.net/2017/143327/report-alibaba-jd-com-competing-acquire-11street-malaysia/

d) Institutional Funds - Fund managers now can no longer ignore PUC. It is a "must have" being the biggest listed internet commerce entity. That should see an upsurge in institutional holders. 

e) Data Science & A.I. - The bigger picture going forward. I think PUC is one of the very very few tech based companies that understand the whole ecosystem of the new world and the new future. PUC Ventures would be the vehicle to jumpstart alliances and investments. Just gauging its corporate moves for the past years and a half would paint a company and leadership that understands the really "big picture".

Trade Wars - Sense & Sensibilities

My view: I like it that China has retaliated tit for tat, because there is no way a trade war will be good for either country. The fact that China did that will actually hasten the "end" to the trade wars quickly. Trump will now have to sit down and negotiate a kinda truce. 

The emerging markets selldown has been way overdone, a kneejerk reaction which has lowered average PE valuations of emerging markets to a 2 year low. I agree with strategists who called this a great opportunity for "all-in" into emerging markets, buying on this dip.


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Some of the talking heads on the same issue (as reported by Bloomberg):

Simon Smiles, chief investment officer at UBS Wealth Management for ultra-high net worth clients, said the potential market overreaction gives further reason for money managers to buy into weakness.

“We’re all-in, in terms of the growth impulse, in terms of the relative valuations and that’s against a backdrop of being constructive on risk assets more broadly," he said on Bloomberg TV, adding that UBS is overweight emerging-market equities and hard-currency debt.

Gene Frieda, global strategist at Pacific Investment Management Co.:

• "The market reaction is confused, reflecting the fact that it has no historical narrative on which to fall back. Today’s Chinese actions were not surprising, but the market response shows how confidence has been diminishing"
• "You cannot separate tweets against tech firms from tariff actions against China. This is a material change relative to the first quarter, when the market was bulletproof to bad news"
• Frieda said most probable scenario is a negotiated settlement before the first round of tariffs kick in on both sides. Yet second-most probable is that round one happens with the goods that have now been put on the table
• China has a strong desire to deescalate the situation
• Argentina and Brazil could be "unintended beneficiaries" from soybean tariffs

Anders Faergemann, senior fund manager at PineBridge Investments in London:

• Increased tensions may actually benefit emerging-market assets as markets could dial down their optimistic view of global synchronized growth and ultimately global yields will come down. That would add to the return outlook for spread products such as EM, he said
• "Valuations have already adjusted sufficiently to compensate for the increased equity volatility and EM spreads are better value now"
• "As long as China’s retaliation to the U.S. provocation remains within reason, which is our base case, fixed income should benefit and the appeal of EM remains strong and it stands to benefit from investors returning to a 2017 frame of mind"
• Faergemann favors the Mexican and Colombian pesos in this scenario as markets seem to be overestimating political risk associated with their upcoming elections

Anastasia Levashova, a fund manager at Blackfriars Asset Management in London:

• A trade war will have a mixed impact on EM countries as China buying less soy, avocados and wine from the U.S. means they’ll buy more from developing nations. On the other hand, no one knows where it will escalate, she said.
• More important indicator of direct competition between the U.S. and China was the launch of renminbi crude oil futures, a clear trend of strengthening their own currency and trade balance

Kathy Jones, chief fixed-income strategist at Charles Schwab:

• "It looks like a mixed bag for EM. On the one hand, it could benefit agricultural producers like Brazil and Argentina, but I doubt that is enough to offset the concerns about slowing global growth and protectionism"

Sebastien Barbe, head of emerging-market research and strategy at Credit Agricole CIB

• "It fuels the risk of a trade war, but we are not there yet. China has intensified its rhetoric, but I think we are still in a hard negotiation”
• If risks continue to intensify, Asian currencies would probably be most affected as some countries would be hit given supply chains and considering economies are more open to trade than other developing regions

Sean Newman, an Atlanta-based money manager at Invesco Advisers:

• Although trade war fears should be taken seriously, it isn’t a factor in his long-term outlook for emerging-market assets
• "We like buying here but are conscious that trade tweets may present some downside risk," noting Trump’s tweets on Monday, where he "hated Nafta in the morning and wanted a deal by the afternoon"

Greg Saichin, chief investment officer for emerging-market bonds at Allianz Global Investors

• "I still believe this is a negotiating stance for the U.S. -- somewhat justified, somewhat politically driven by the mid-term elections in November. The Chinese understand this"
• "Up to this point, Mexico was getting all the collateral damage given the negative NAFTA rhetoric. Now I’m not so sure. If this escalates into a full blown trade war then global growth will decrease with negative repercussions for oil and metals"
• Marginal producers for oil and metals, or competitive producers with high fiscal break-evens will be negatively impacted, he said. Frontier markets such as Ghana, Angola, Mozambique, Zambia and Ecuador, which rely on these commodities as a primary source of foreign-exchange generation, could be particularly hurt.

Alejandro Cuadrado, global head of FX at BBVA in New York:

• Cuadrado says he doesn’t share investor fears yet and hasn’t altered his long-term outlook for emerging-market currencies.
• He favors the Colombian and Argentine pesos for their carry

Uber/Grab and Uber/Didi - Further Examination Of The Deal

Grab is now well on its way to a lucrative IPO following the Uber deal. The deal makes so much sense for all. Uber divested its China ops to Didi and got a substantial stake, the same with Grab. By opting out of the fight, basically it elevated both Didi and Grab into highly listable vehicles.

Mega-potential tech IPOs are getting better at financial acumenship.  Its not always market share. The key is by opting out, Uber need to spend so much  less to burn in those regions. What you do not burn, it goes straight to the bottom line. Secondly, you get equity stakes that elevate your inherent "assets",  which will further lift your own valuation. Thirdly, the moves will allow Didi and Grab to attain much better IPO valuations. Fourthly, it will lock up "regions" for each of them, so as to not needing to fight them tooth and nail in every corner of the globe.

However, this strategy should only work if there are truly just the two of you in a market. If you wish to duck it out more when its a duopoly, it will be a long and expensive fight as both sides keep raising new funds to quash the other side.

I am surprised that there has been no government intervention in these deals because they are really duopolies which are taking advantage of the market conditions at the expense of consumers. I DOUBT VERY MUCH these type of deals will pass in an E.U. setting. Kudos to them to negotiate such deals in "monopoly/duopoly friendly" jurisdictions.

I'd do the same thing if I was any of them, I would also speed up to list before "new rules" comes in on duopolies to prevent any kind of "collusion" (seeming or apparent) or to give rise to "the erosion of a competitive market" or actions "that are not in the interest of the consumer". An immediate group which will not like the deal- the drivers.

SINGAPORE: Uber Technologies Inc. has reached an agreement to sell its South-East Asian ride-hailing business to rival Grab and could announce the deal as early as Monday morning in Singapore, people familiar with the matter said.

The agreement – which includes all of Uber's operations in South-East Asia as well as Uber Eats in the region – gives Uber a stake of between 25% and 30% in the new combined business, they said, asking not to be identified ahead of an official announcement.

The deal, which Bloomberg outlined earlier this month, marks Uber's operational exit from yet another major market and hands a victory to Grab.

SoftBank Group Corp, a major backer of Grab and Uber as well as China's Didi Chuxing, has pushed consolidation to improve the profitability of a global ride-hailing business that bleeds billions of dollars a year. New entrants and the strength of second-place regional players such as Lyft Inc in the U.S. has complicated those efforts.

The deal represents another major retreat from international markets for Uber.

Travis Kalanick, Uber's former chief executive officer, sold Uber's business in China in 2016 in return for a 17.5% stake in Chinese ride-hailing leader Didi Chuxing. Then Uber agreed to sell its Russian business to Yandex – just before after Dara Khosrowshahi took over as chief executive.

Khosrowshahi has been pushing to clean up the company's financials in preparations for an initial public offering next year. Pulling out of markets like South-East Asia would boost profits at a company that has burned through US$10.7bil (RM41.92bil) since its founding nine years ago.

Khosrowshahi signalled during a trip through Asia last month that he is committed to key markets such as Japan and India.

Grab, which has more than 86 million mobile app downloads, currently offers services in more than 190 cities across Singapore, Indonesia, the Philippines, Malaysia, Thailand, Vietnam, Myanmar and Cambodia. – Bloomberg

Read more at https://www.thestar.com.my/business/business-news/2018/03/25/sources-grab-seals-deal-to-take-over-ubers-southeast-asian-operations/#t51Wg2XxfseS85Te.99