There is no doubt the economy globally is getting into a recession. Technically, recession is when an economy faces a decline in two consecutive quarters. Most economies are facing lockdowns situation between the end of first quarter and second quarter of 2020. That by itself would have caused a technical recession for the 2 quarters. For some economies that are dependent on foreign purchases of our services, goods (such as Malaysia, Singapore, Thailand), even if we do well for our local economy, lower demand from overseas would cause a recession nevertheless. What is in most economists and government would be not to allow prolonged recession which is what we termed as depression. In short today, the argument is to whether we are moving into a depression or not and how to prevent it.
This time around people have been shocked by the so-called disconnect between the general economy (which we called Main Street) and stock market. In US, while technical unemployment is registering close to 20%, its Wall Street (stock market) is actually registering record numbers (Nasday which is mainly for technology stocks). Many stock markets although have not been registering as good numbers as Wall Streets, it nevertheless has rebounded and seemed to be doing well. KLCI which is the main blue chips stocks in Malaysia, is not at 1,556 points after touching a low of 1,219 on 19 March 2020, days after the Movement Control was announced. Our peak was about 1,878 points, the period when oil price was still registering above USD100. Hence, I would call it that the market is now at midpoint. However, the economy is seemingly going to suffer beyond the mid-point level for the stock market as we suffered a what I would call a double whammy - COVID-19 pandemic and low oil price (our economy is dependent to a large extent on oil).
Now the question is why is the stock market holding up? Here are a few explanations.
Emergence of retail investors
I have been investing in the market for a while. The last time I have seen the huge participation from retail was 1997 - prior to the last major Asian financial crisis. During then, we were trading at what we called T+7, which was we only pay 7 days after we made our trade. Today it is T+2. Hence, during then a lot of people were playing contra - where we do not have to pay for the trade until many days later. Hence, during the trade, if the stock rises, we do not need to pay any money for the purchase. Since the crisis, with EPF (a very large fund) started to come into the stock market, retail players started to dwindle. The market has been largely determined by how EPF and several smaller others wanted the market to be (together with smallish foreign institutional funds).
The emergence of the retail investors seemingly is appearing from the lockdowns. I have started to hear doctors, lawyers, young professionals, executives started exploring the market. I call this healthy as it is obviously a financial lesson for many of them whether they made money or not. (I am not worried of rich doctors losing money in the market and started learning about fundamentals - they can learn fast)
One of the stockbroking license holder which focuses on retail (Rakuten) for the first time experience profits. Now, whether post COVID-19 these retail investors remain. I hope so, as the market is starved of new groups of investors. Imagine, how eager for us to hope for this group while these new investors whom have been looking at other asset classes such as bitcoins, forex are now putting some attentions on stocks. The focus now is for them to make money over the long term rather than losing and leave.
Stocks as alternatives for other investment assets
As mentioned above, while the younger generations have gone into other kinds of investments, this time around those alternatives are not doing well. Those includes commodities mainly and to a smaller extent bonds.
It helps when in US, the largest of the stocks such as Amazon, Microsoft, Netflix are expected to report record numbers. In Malaysia, those are the rubber gloves companies. It does help to spur the stock market economy as there are no substitutes for investing into rubber gloves companies if not investing into the stock market. Similarly, there is no other way to invest into Amazon.
Flush with liquidities
The Federal Reserve of US is throwing $4 trillion or more into the economy. We are far, but we will get some as well. In Malaysia, we are getting hundreds of billions of stimulus cash or other forms. Imagine if the banks tell us we do not have to pay our loans for 6 months, we suddenly have extra cash. That is probably where money will flow into the stock market. At the same time, when we cannot spend outside of our homes, we may buy some goods online, the remaining some would probably go into the stock market. Profits feed more liquidity into the market and this time around the liquidity is into the hands of the small guys rather than the institutionals - which is good.
In addition, when the system is flush with liquidity with the Feds printing money, it also means the cash we hold has come down in value. This encourages even with the complex investment thoughts not to hold cash in the long term as the money they hold would lose value.
I have been chasing where the money has flowed to - however I have missed out that it actually moved from the banks (system) to the hands of the consumers but some of it ended up in the market. I have originally thought that the institutional guys (such as funds) would be keeping funds to pick up the debt instruments. It has yet to really happen.
Market valuation is a not a fix situation
One of the reason I have never put a price onto a stock - although I generally think what a price would be for me to be interested. When interest rates go to zero in US and in Malaysia, dropped by more than 1%, that investments or savings would tend to move somewhere else. The opportunity investments from bonds or fixed deposits would be other asset classes. In finance, we call this risk free rates. So now risk free rates has dropped, so when we do a discounted cashflows, the other alternative asset would increase in price. Example for this, risk free rate drop to 2% - generally this means I am willing to take risk of a straight line PE (better still DY) of 50x (not encouraging the thinking that a 50x PE is a fair value but just as example). In the past, when risk free rate was 4%, that PE I was willing to tolerate was 25x. That is a 1 single X factor increase.
Will this trend last?
I hope it does last long enough. Nothing beats the need to rekindle or beefing up the Main Streets. However, the market itself can play a role as happy investors will translate into happy consumers. This is the way generally the poorer income group (here we call them B40) can get helped besides giving cash alone.
The financial economy (includes capital markets) is also a part of the economy, and we need to get this to be more active.
Showing posts with label investment. Show all posts
Showing posts with label investment. Show all posts
Monday, June 8, 2020
Saturday, May 23, 2020
The rise of the retail traders
What the movement control has managed to give rise is the emergence of the retail traders in Malaysia a number which we have not seen in the past decade. This is a welcome situation on the perspective of balancing the trades as in the past Malaysia's trade have been dominated by the very large pension or savings funds in Malaysia. I have never liked the situation in Malaysia as we were overly heavy on EPF, KWAP, PNB where decisions were focused on a few individuals rather than the masses.
Despite the CMCO, we have seen the largest trade volume in Malaysia on 18 May 2020. Although the Trade value was not the highest, the volume were high. These are probably due to 2 factors, emergence of the new retailers and very active participation from the syndicates. We need both to achieve that.
As an example how much were retailers in the market, see the volume below:
As below, we would see retail participation has increased almost 2x of previous. The institutionals whom would be taking advantage assuming they are better fund managers would also be participating. So, we actually see more liquidity in the market despite the downturn where people are losing their jobs.
The numbers on 16 March was already on the highside. On a normal day, prior to COVID-19, the trades were usually about in the realm of RM1 billion.
During MCO and CMCO, things that never happened, this time around is rather unusual. I hear over the radio, a doctor whom was staying at home during the MCO, who usually would not have the time to do trading, started his stock market activities during then. I have friends whom I was convincing them to invest - many of them successful business person asking for contacts to opening of trading account.
While these people are rich and pretty successful, they are usually small business owners or professionals, whom would not know much about stock market valuations but they are people whom are smart and understand what looks good and what is not. They have some good sense or risk management. They are not that much of gamblers.
Now in this MCO, they are emerging. Question is how long they will stay. At least for now, they have created an account and have their money in the trading account.
If the market really experience downturns, some of these people would leave while some might even stay for a long while. For a while, Bursa Malaysia has been experiencing many delisting exercises as small companies which are not much of an interest to the large funds such as EPF, have seen their share prices being low comparatively to the international markets. These are the ones which retail should have participated but they did not. It remains to be seen whether these retailers would remain.
I am for it. At the end of the day, although there is an opportunity for trades and speculation, I still think investing over a longer horizon prevails. When I mentioned longer term, it means over few years - not over few months like some older person is trying to promote.
Despite the CMCO, we have seen the largest trade volume in Malaysia on 18 May 2020. Although the Trade value was not the highest, the volume were high. These are probably due to 2 factors, emergence of the new retailers and very active participation from the syndicates. We need both to achieve that.
As an example how much were retailers in the market, see the volume below:
 |
| Trade on 16 March 2020 (before MCO) |
As below, we would see retail participation has increased almost 2x of previous. The institutionals whom would be taking advantage assuming they are better fund managers would also be participating. So, we actually see more liquidity in the market despite the downturn where people are losing their jobs.
 |
| Trade on 18 May 2020 (during CMCO) |
During MCO and CMCO, things that never happened, this time around is rather unusual. I hear over the radio, a doctor whom was staying at home during the MCO, who usually would not have the time to do trading, started his stock market activities during then. I have friends whom I was convincing them to invest - many of them successful business person asking for contacts to opening of trading account.
While these people are rich and pretty successful, they are usually small business owners or professionals, whom would not know much about stock market valuations but they are people whom are smart and understand what looks good and what is not. They have some good sense or risk management. They are not that much of gamblers.
Now in this MCO, they are emerging. Question is how long they will stay. At least for now, they have created an account and have their money in the trading account.
If the market really experience downturns, some of these people would leave while some might even stay for a long while. For a while, Bursa Malaysia has been experiencing many delisting exercises as small companies which are not much of an interest to the large funds such as EPF, have seen their share prices being low comparatively to the international markets. These are the ones which retail should have participated but they did not. It remains to be seen whether these retailers would remain.
I am for it. At the end of the day, although there is an opportunity for trades and speculation, I still think investing over a longer horizon prevails. When I mentioned longer term, it means over few years - not over few months like some older person is trying to promote.
Sunday, November 24, 2019
Where are our stocks heading? What should our focus be now. Part 2
The government today is pushing hard on automation and investments while reducing unskilled foreign labor although the strategy may not bear as much fruit for the moment.
Why is the government doing this? Before we go deep into the sectors and where should the growth be in Malaysia, let's look at the components of growth in the perspective of Malaysia and where should our focus be.
Let me put the context of economic growth to a simple 4 portions
Consumption basically depends on the economic strength of the country and also how fast the velocity of the money flows. As a country we have been increasing and to a certain extent dependence on local Consumption for much part of our growth in the last 15 years. One can see through the strength of private consumption, so much so that our private debt to GDP exceeded 80% for quite a number of years now.
Investment (I) refers to in this case corporate private investor invests into the country. They may be foreign or local investor. One trend that we see nowadays is the public-private investment (PPI) initiatives as government will not be able to afford to invest and manage those projects themselves alone. Through an agency such as MIDA, we have also been encouraging foreign investments besides local.
Government (G) is where we see the expenditure of the government both in operational and capital expenditure. Both operational and capital are important as operational is where government employees' remunerations are paid as a consumer as well while developmental expenditure and mainly the investments which are made by government rather than private sectors. Examples of developmental expenditure are building of schools, hospitals, roads.
Lastly, the component of Exports (X) and Imports (M) which is highly relevant for a trading country like Malaysia. For certain industry, Import and Export goes hand in hand. Example trading industry. If there are no value add, then we are merely acting as traders. We import and export the same product. When there are value add for example, buying semiconductor components, materials - enhance them - we export them back into finished goods or more developed components. A strong country will be able to sell services as exports for example Intellectual Properties.
From the above, countries will work on various components in coordination among various departments, ministries. At different stages each country would develop their different components on various speed and level. Example, in the 1950s, US was pretty strong as an export country. Today, it is very a country doing much more Imports. China was such during its developmental years from 1980s until now. Recently, the internal policies have also been developing local consumption.
How do those four segments above interlinked. They are Vastly and Highly interlinked. Without investments for example, be it local or foreign, the Exports component will not be strong eventually. Without investments in ports, roads for example, there would not be further investments in trading, transportation, factories, housing.
Without strength in investments and Exports and Imports, we would not be able to grow our consumption. Malaysia was developing our local consumption sector post financial crisis in 1998/99. The velocity of the consumption will also create more consumption. However, for a country which is limited by its per capita income at a developing nation level, to grow consumption without focus on other components, higher debt will kick in. Too much debt is a problem as we have seen the collapse of the sub-prime housing crisis in US.
Malaysia is now at a stage where consumption is at its high while local private investments (non-GLCs) is tapering for some time now. We need to readjust. There is a need for more local private and foreign investments to promote strength in other segments.
I see that the government is aware of the above sporadically but the issue now is that the coordination is poor. Attempts are being done to balance wealth by assisting the lower income group but without clear strategies to promote investments, it is more of a rebalancing act to increase consumption growth. This can't last.
For Malaysia to grow, it will need private investments. Government sectors should be more of an enabler rather than competitor. This is where we have failed to address. While foreign investors are good for the country, in the longer run, local investors need to be competitive. There should also be a balance here as we tend to be overly dependent and eager to support foreign investors rather than local companies.
Our focus will have to change and I see there is a need for even Bursa to play its role.
Why is the government doing this? Before we go deep into the sectors and where should the growth be in Malaysia, let's look at the components of growth in the perspective of Malaysia and where should our focus be.
Let me put the context of economic growth to a simple 4 portions
GDP =
Consumption (C) + Investments (I) + Government Expenditures + Investments (G) + (Export(X) - Import (M))
Consumption (C) + Investments (I) + Government Expenditures + Investments (G) + (Export(X) - Import (M))
Consumption basically depends on the economic strength of the country and also how fast the velocity of the money flows. As a country we have been increasing and to a certain extent dependence on local Consumption for much part of our growth in the last 15 years. One can see through the strength of private consumption, so much so that our private debt to GDP exceeded 80% for quite a number of years now.
Investment (I) refers to in this case corporate private investor invests into the country. They may be foreign or local investor. One trend that we see nowadays is the public-private investment (PPI) initiatives as government will not be able to afford to invest and manage those projects themselves alone. Through an agency such as MIDA, we have also been encouraging foreign investments besides local.
Government (G) is where we see the expenditure of the government both in operational and capital expenditure. Both operational and capital are important as operational is where government employees' remunerations are paid as a consumer as well while developmental expenditure and mainly the investments which are made by government rather than private sectors. Examples of developmental expenditure are building of schools, hospitals, roads.
Lastly, the component of Exports (X) and Imports (M) which is highly relevant for a trading country like Malaysia. For certain industry, Import and Export goes hand in hand. Example trading industry. If there are no value add, then we are merely acting as traders. We import and export the same product. When there are value add for example, buying semiconductor components, materials - enhance them - we export them back into finished goods or more developed components. A strong country will be able to sell services as exports for example Intellectual Properties.
From the above, countries will work on various components in coordination among various departments, ministries. At different stages each country would develop their different components on various speed and level. Example, in the 1950s, US was pretty strong as an export country. Today, it is very a country doing much more Imports. China was such during its developmental years from 1980s until now. Recently, the internal policies have also been developing local consumption.
How do those four segments above interlinked. They are Vastly and Highly interlinked. Without investments for example, be it local or foreign, the Exports component will not be strong eventually. Without investments in ports, roads for example, there would not be further investments in trading, transportation, factories, housing.
Without strength in investments and Exports and Imports, we would not be able to grow our consumption. Malaysia was developing our local consumption sector post financial crisis in 1998/99. The velocity of the consumption will also create more consumption. However, for a country which is limited by its per capita income at a developing nation level, to grow consumption without focus on other components, higher debt will kick in. Too much debt is a problem as we have seen the collapse of the sub-prime housing crisis in US.
Malaysia is now at a stage where consumption is at its high while local private investments (non-GLCs) is tapering for some time now. We need to readjust. There is a need for more local private and foreign investments to promote strength in other segments.
I see that the government is aware of the above sporadically but the issue now is that the coordination is poor. Attempts are being done to balance wealth by assisting the lower income group but without clear strategies to promote investments, it is more of a rebalancing act to increase consumption growth. This can't last.
For Malaysia to grow, it will need private investments. Government sectors should be more of an enabler rather than competitor. This is where we have failed to address. While foreign investors are good for the country, in the longer run, local investors need to be competitive. There should also be a balance here as we tend to be overly dependent and eager to support foreign investors rather than local companies.
Our focus will have to change and I see there is a need for even Bursa to play its role.
Sunday, November 17, 2019
Where are our stocks heading? Is Malaysia Inc. happening and strategies for our Bursa market. Part 1
At the time of writing, we already know of the landslide victory that BN had with its MCA's candidate winning more than 15,000 votes turning around a lost to a win. This by-election win by BN will bring a more challenging situation for the market at least for the next 1 year - if not beyond the GE 15.
This first part of the writing, I am focusing on Malaysia Inc. - a strategy that was close to Tun Mahathir during his 22 years tenure between 1980 till 2003. During then, we know that many government corporations were turned into corporate companies - from LLN to Tenaga Nasional, STMB to Telekom Malaysia Bhd and beyond which includes Axiata today. Bank Bumiputera through several exercises is a corporate that is now called CIMB.
We also have know of Tun Daim - the mastermind of Mahathir's Malaysia Inc. strategy with several associates which includes Halim Saad (UEM, Renong), Wan Azmi of Land and General, Tajuddin Ramli (the original Celcom owner and later MAS), Samsuddin from Granite Industries and several more. There were of course many businessmen whom have made it through that tenure of Tun Mahathir, as he is a person who is keen to allow capitalism to succeed. Those businessmen are Ananda Krishnan, Tan Sri Gnanalingam, YTL (of course), and to a lesser extent Genting's Lim Goh Tong and his son, Hong Leong's Quek Leng Chan and Tan Sri Mokhtar al-Bukhari.
After 9 May 2018, we would have expected the similar strategy to be revived. Khazanah Nasional among its first move was to sell off a stake in IHH - almost controlling stake - to Mitsui. There were talks of MAS being divested or investors invited, PLUS's stake being reduced or fully sold. Tun M himself had mentioned before he is more keen of government encouraging businesses to excel while the role of the government is to get a share of the profits through taxation.
Well, that strategy has yet to see any movement - at all - except for the IHH's stake sale. Even then, it was a change of shareholdings rather than management. As mentioned above, the Tanjung Piai's results may probably see the strategy which already as it is difficult - to be even more challenging. Mahathir will have groups whom will be objecting to several of his strategies, and he is running out of time. At the moment, nothing concrete is coming and we know that for any corporate moves to make them happen, will take a few years. Tun M does not have that time - more so there are 3 main parties involved (Bersatu, DAP and PKR - the other 2 Amanah and Warisan seems to have lesser say and would probably be more obliging). For any private companies, there is this worry as well additionally, will the next administration be open to private businesses.
After the 1998 Asian crisis, Khazanah if one can remember was growing and active. Several of its moves were to rescue companies like Time, UEM, Renong and Bank Bumiputera. If Tun M had his way, I believe that rescue were not meant to be for long. However, since then, administration changed twice and government linked companies were getting stronger. There are arguments that with government in business, it is curtailing the growth of private businesses. At the moment, about 15 companies under the KLCI are government controlled. Malaysia especially the GLCs head are already comfortable with GLCs controlled companies.
That situation is going to be hard to change. In the past, we parachuted business owners to own the business - think Tajuddin Ramli with MAS. I believe that will be very hard to happen given the challenge that Mahathir has - case in point PLUS. Khazanah is against it, the Finance Ministry is against it as well. One cannot fault these two entities to be against the purchases though, as PLUS is among the more lucrative assets that the government owns.
This is the reason why KLCI will be a bad performer
With about half of the companies under the KLCI government controlled and the strategies of the government in limbo, many investors rightfully would be staying on the sideline. It does not help when these counters are not cheap in their valuations. The ones that seem to do the supporting are again the government controlled funds. How much can they support as ultimately the one that is important is the financial results? That is also why GLCs cannot afford to slack. If any one of the company is slacking, it may impact KLCI. Example: Telekom Malaysia when a year ago the Minister in charge opened up the fiber broadband to other players. It was the right thing to do, but it affects Telekom and ultimately KLCI.
What do we do then?
We have to basically avoid the large counters especially the ones which are not founder or privately driven. When there are situations whether things will be changing or not is causing the GLC companies to be less attractive. When government is not coming up with a certain and solid direction, employees would be waiting at the side - doing the waiting game. That is not efficient.
If we want to still invest into Bursa, the way forward for now is to look for companies that are less impacted by government policies. And that is the one which I am going to discuss in my future article as Malaysia Inc. policies is not clear and it is not going to help either party.
This first part of the writing, I am focusing on Malaysia Inc. - a strategy that was close to Tun Mahathir during his 22 years tenure between 1980 till 2003. During then, we know that many government corporations were turned into corporate companies - from LLN to Tenaga Nasional, STMB to Telekom Malaysia Bhd and beyond which includes Axiata today. Bank Bumiputera through several exercises is a corporate that is now called CIMB.
We also have know of Tun Daim - the mastermind of Mahathir's Malaysia Inc. strategy with several associates which includes Halim Saad (UEM, Renong), Wan Azmi of Land and General, Tajuddin Ramli (the original Celcom owner and later MAS), Samsuddin from Granite Industries and several more. There were of course many businessmen whom have made it through that tenure of Tun Mahathir, as he is a person who is keen to allow capitalism to succeed. Those businessmen are Ananda Krishnan, Tan Sri Gnanalingam, YTL (of course), and to a lesser extent Genting's Lim Goh Tong and his son, Hong Leong's Quek Leng Chan and Tan Sri Mokhtar al-Bukhari.
After 9 May 2018, we would have expected the similar strategy to be revived. Khazanah Nasional among its first move was to sell off a stake in IHH - almost controlling stake - to Mitsui. There were talks of MAS being divested or investors invited, PLUS's stake being reduced or fully sold. Tun M himself had mentioned before he is more keen of government encouraging businesses to excel while the role of the government is to get a share of the profits through taxation.
Well, that strategy has yet to see any movement - at all - except for the IHH's stake sale. Even then, it was a change of shareholdings rather than management. As mentioned above, the Tanjung Piai's results may probably see the strategy which already as it is difficult - to be even more challenging. Mahathir will have groups whom will be objecting to several of his strategies, and he is running out of time. At the moment, nothing concrete is coming and we know that for any corporate moves to make them happen, will take a few years. Tun M does not have that time - more so there are 3 main parties involved (Bersatu, DAP and PKR - the other 2 Amanah and Warisan seems to have lesser say and would probably be more obliging). For any private companies, there is this worry as well additionally, will the next administration be open to private businesses.
After the 1998 Asian crisis, Khazanah if one can remember was growing and active. Several of its moves were to rescue companies like Time, UEM, Renong and Bank Bumiputera. If Tun M had his way, I believe that rescue were not meant to be for long. However, since then, administration changed twice and government linked companies were getting stronger. There are arguments that with government in business, it is curtailing the growth of private businesses. At the moment, about 15 companies under the KLCI are government controlled. Malaysia especially the GLCs head are already comfortable with GLCs controlled companies.
That situation is going to be hard to change. In the past, we parachuted business owners to own the business - think Tajuddin Ramli with MAS. I believe that will be very hard to happen given the challenge that Mahathir has - case in point PLUS. Khazanah is against it, the Finance Ministry is against it as well. One cannot fault these two entities to be against the purchases though, as PLUS is among the more lucrative assets that the government owns.
This is the reason why KLCI will be a bad performer
With about half of the companies under the KLCI government controlled and the strategies of the government in limbo, many investors rightfully would be staying on the sideline. It does not help when these counters are not cheap in their valuations. The ones that seem to do the supporting are again the government controlled funds. How much can they support as ultimately the one that is important is the financial results? That is also why GLCs cannot afford to slack. If any one of the company is slacking, it may impact KLCI. Example: Telekom Malaysia when a year ago the Minister in charge opened up the fiber broadband to other players. It was the right thing to do, but it affects Telekom and ultimately KLCI.
What do we do then?
We have to basically avoid the large counters especially the ones which are not founder or privately driven. When there are situations whether things will be changing or not is causing the GLC companies to be less attractive. When government is not coming up with a certain and solid direction, employees would be waiting at the side - doing the waiting game. That is not efficient.
If we want to still invest into Bursa, the way forward for now is to look for companies that are less impacted by government policies. And that is the one which I am going to discuss in my future article as Malaysia Inc. policies is not clear and it is not going to help either party.
Sunday, October 27, 2019
I doubt trade war will end soon and what we should do about it
In a forum I attended, one senior director of a large semiconductor multinational based in Penang told us not to look too much into the situation. That was May, few months later Trump increased tariffs for the same Chinese products by another 5%. For people who have been thinking that Trump is the bad guy, perhaps we should rethink. All the presidential candidates that have been asked on this topic, either they have tried to avoid this question or they have answered that they would have addressed the trade friction differently. Basically, they would also put pressure onto China.
Historians called this as "Thucydides's Trap", where it basically occurs when one up and coming super power emerges, challenging the reigning power that be, then the theory is a war can't be avoided. Thankfully, for several times war had been avoided and these seems to be avoided more recently example when US's economy exceeded Great Britain in 1900th. Today, who would allow a disastrous nuclear war where it would have a lose-lose proposition for the world.
China's GDP is expected to surpass US in the next decade and to many, it is a matter of time, not whether it will happen. China is promoting hard on Made in China 2025 policies where the plan extends up to 2049 - the 100 year anniversary of the Chinese Communist Party's reign over China. That also seems to be the date where silently China is planning for its military strength to exceed US.
Let me ask this question. Who would have expected this situation to happen even say 10 years ago? With the situation, do we think US will sit still?
If it is not Trump, the next President of United States - whether by 2021 or 2025 - does that person want to be remembered as a president where his office be seen historically as the one succumbed to another new power. Is there also a reason why China has allowed Xi Jinping to remain as president beyond the traditional 10 years?
So, are we naive enough to think that US will let this one go past them although the trend seems to put them in the losing situation.
China knows this and they can be seen to try their level best to address this. At the back of their mind though, they are willing to suffer in the short term but allowing their position to be stronger in the long run. In business, the Chinese businessmen are much short term in their actions, but when comes to the government, the Chinese government is hugely long term in their planning. US is the one which is not able to plan and act long term - because their financial and political system do not allow them to do that. Trump is up for election soon and he has to have actions that is based on that 2020 election, i.e. creating positions for his voter base while President Xi can afford to sit and wait.
Well what do we as Malaysians can expect to see and take advantage of
Two words. Trade and Technology
If we are dependent on consumption to drive our economy, I think that has been the story for the past 18 years. Today, it is much harder to drive consumption when our private debt is at 80+%. What we can hope for is the growth to be consistent while allowing other components of the GDP (i.e. Investment and Trade {Export - Import}) to drive through our economy. The government sadly has been focusing on balance of wealth - not wrong - but to drive equal prosperity, one country has to be prosperous first. How to distribute wealth when we do not have them? If we are not careful, the word prosper would not even be there as global competition today is so extreme that many countries can surpass us especially through trade.
Now Trade. We have learned about the Malacca history. Malaysia is lucky to be geographically strategic. Remember, the early days who were the ones trading in Malacca? Indians and Chinese. We happen to have those culture and people who speak the languages, hence the Indian and Chinese culture are a benefit rather than the a con. The vernacular schooling system could turn out to be an advantage rather than seemed to be a disadvantage. The only thing which Malaysia can't seem to let go is the pride factor.
Anyway, our government - past and present, know trade is important but how they do the execution is all that matters. If in the past Vietnam was at war, today it is in the most active in its investment policies. The Indonesian president seems to be inviting people of the right background to helm its important trade posts, although how it executes is key. So are China and India themselves. The Malaysian position today is not the same as the Malaysian of 25 years ago when we were knocking onto the door among the "Tiger" economies.
To claim that we can go back to our good old days of being seen as a prospective "Tiger economy" is just a saying if we do not focus on TECHNOLOGY.
Today, what US is afraid of China is not so much of its economic strength. US is more wary of China's technology prowess. The growth of Huawei and China's high-speed train technology, for example awakens many countries globally. And that country is hungry. Very hungry, and for a huge country it seems to be able to work in tandem to achieve its goal.
While we see China having its enterprise Alibaba claiming and coming here to teach Malaysians how to do e-commerce, we as a country have stagnated in our technology prowess and that area of investments especially. Just 20 years ago, the China government was hugely grappling with a new technology and phenomenon called the "Internet" as it was afraid of its effect towards freedom of speech. Today, that country is thriving out from that while we are still wondering what happened to our Multimedia Super Corridor.
To move Malaysia in the right direction, we have to revisit back what we try to do with our technology companies. While we invite Gojek here, we have to invest into a Gojek competitor. We have to do much more than giving RM300,000 to a Cradle recipient company and leave them with just the money. The worse that a Malaysian company has done is when our companies - GLCs included - having and giving more trusts to another company from abroad rather than providing a platform for our local companies to succeed. Sometimes having meritocracy in our procurement may not be a good thing especially when we do not allow our own companies to try and fail.
Malaysia today, seems to be running out of idea to expand our economy on especially the capital market - so much so that we are planning to list Petronas Carigali. Well, to list an oil and gas exploration business, we are not looking forward. We do not have the next new story.
We have to give encouragements and opportunities to more Vitrox-es and Penta. We have to give more capital opportunities to technology companies. LEAP is not doing its job given the acronym as it is too restrictive when comes to trade for example. The middlemen at the end of the day are the ones that make money as raising RM3 million can costs RM1 million.
We really have to move fast as if we are not careful, Bursa may not even be relevant.
Historians called this as "Thucydides's Trap", where it basically occurs when one up and coming super power emerges, challenging the reigning power that be, then the theory is a war can't be avoided. Thankfully, for several times war had been avoided and these seems to be avoided more recently example when US's economy exceeded Great Britain in 1900th. Today, who would allow a disastrous nuclear war where it would have a lose-lose proposition for the world.
China's GDP is expected to surpass US in the next decade and to many, it is a matter of time, not whether it will happen. China is promoting hard on Made in China 2025 policies where the plan extends up to 2049 - the 100 year anniversary of the Chinese Communist Party's reign over China. That also seems to be the date where silently China is planning for its military strength to exceed US.
Let me ask this question. Who would have expected this situation to happen even say 10 years ago? With the situation, do we think US will sit still?
If it is not Trump, the next President of United States - whether by 2021 or 2025 - does that person want to be remembered as a president where his office be seen historically as the one succumbed to another new power. Is there also a reason why China has allowed Xi Jinping to remain as president beyond the traditional 10 years?
So, are we naive enough to think that US will let this one go past them although the trend seems to put them in the losing situation.
China knows this and they can be seen to try their level best to address this. At the back of their mind though, they are willing to suffer in the short term but allowing their position to be stronger in the long run. In business, the Chinese businessmen are much short term in their actions, but when comes to the government, the Chinese government is hugely long term in their planning. US is the one which is not able to plan and act long term - because their financial and political system do not allow them to do that. Trump is up for election soon and he has to have actions that is based on that 2020 election, i.e. creating positions for his voter base while President Xi can afford to sit and wait.
Well what do we as Malaysians can expect to see and take advantage of
Two words. Trade and Technology
If we are dependent on consumption to drive our economy, I think that has been the story for the past 18 years. Today, it is much harder to drive consumption when our private debt is at 80+%. What we can hope for is the growth to be consistent while allowing other components of the GDP (i.e. Investment and Trade {Export - Import}) to drive through our economy. The government sadly has been focusing on balance of wealth - not wrong - but to drive equal prosperity, one country has to be prosperous first. How to distribute wealth when we do not have them? If we are not careful, the word prosper would not even be there as global competition today is so extreme that many countries can surpass us especially through trade.
Now Trade. We have learned about the Malacca history. Malaysia is lucky to be geographically strategic. Remember, the early days who were the ones trading in Malacca? Indians and Chinese. We happen to have those culture and people who speak the languages, hence the Indian and Chinese culture are a benefit rather than the a con. The vernacular schooling system could turn out to be an advantage rather than seemed to be a disadvantage. The only thing which Malaysia can't seem to let go is the pride factor.
Anyway, our government - past and present, know trade is important but how they do the execution is all that matters. If in the past Vietnam was at war, today it is in the most active in its investment policies. The Indonesian president seems to be inviting people of the right background to helm its important trade posts, although how it executes is key. So are China and India themselves. The Malaysian position today is not the same as the Malaysian of 25 years ago when we were knocking onto the door among the "Tiger" economies.
To claim that we can go back to our good old days of being seen as a prospective "Tiger economy" is just a saying if we do not focus on TECHNOLOGY.
Today, what US is afraid of China is not so much of its economic strength. US is more wary of China's technology prowess. The growth of Huawei and China's high-speed train technology, for example awakens many countries globally. And that country is hungry. Very hungry, and for a huge country it seems to be able to work in tandem to achieve its goal.
While we see China having its enterprise Alibaba claiming and coming here to teach Malaysians how to do e-commerce, we as a country have stagnated in our technology prowess and that area of investments especially. Just 20 years ago, the China government was hugely grappling with a new technology and phenomenon called the "Internet" as it was afraid of its effect towards freedom of speech. Today, that country is thriving out from that while we are still wondering what happened to our Multimedia Super Corridor.
To move Malaysia in the right direction, we have to revisit back what we try to do with our technology companies. While we invite Gojek here, we have to invest into a Gojek competitor. We have to do much more than giving RM300,000 to a Cradle recipient company and leave them with just the money. The worse that a Malaysian company has done is when our companies - GLCs included - having and giving more trusts to another company from abroad rather than providing a platform for our local companies to succeed. Sometimes having meritocracy in our procurement may not be a good thing especially when we do not allow our own companies to try and fail.
Malaysia today, seems to be running out of idea to expand our economy on especially the capital market - so much so that we are planning to list Petronas Carigali. Well, to list an oil and gas exploration business, we are not looking forward. We do not have the next new story.
We have to give encouragements and opportunities to more Vitrox-es and Penta. We have to give more capital opportunities to technology companies. LEAP is not doing its job given the acronym as it is too restrictive when comes to trade for example. The middlemen at the end of the day are the ones that make money as raising RM3 million can costs RM1 million.
We really have to move fast as if we are not careful, Bursa may not even be relevant.
Thursday, August 22, 2019
The next wave of stocks will be companies that have dealings overseas
Ever since 2016 and 2018, i.e. 2 major events, the drop in oil price generally and change of government from BN to PH, we are seeing major shifts in the way we should look at companies. In my context, as I am talking about listed stocks, these are the shifts that we should be looking at. In those 2 events in 2016 and 2018, there have been transitions. Firstly, because of the drop in oil prices, our country's dependency on one major commodity to finance a large part of our budget is diminishing. Although in 2019's budget that has been brought back as the MOF has asked for more money from Petronas to support the GST repayment - this will not be a yearly event, but rather a one off situation.
Secondly, because of the gradual decline of Malaysia against other competing countries, our policies and actions have been focusing on B40 and to a lesser extent M40. Note that I am not saying that Malaysia is declining but against other regional competing countries, we are not better off. Obviously, for businesses - with the focus on the poorer group, the country will face difficulties to drive the businesses that have been largely dependent on local consumptions and investments.
Malaysia's private debt to GDP is one of highest in the world - around 82% (2018) and from here we know that the push by our policy makers previously for consumption driven economy is not going to be as strong as previously. One can only spend so much either from our own's income as well as from our borrowings. We must be mindful that personal debt must be paid off.
On the other hand, the new government of PH is looking at reducing its government budget over the longer run. The current government as in its previous message of RM1 trillion debt is looking at reduced government spending.
So how does a PH government continues to drive the economy or at the very least maintain the GDP growth of 4.5% to 5%, you might ask - as government spending is to be lessen while consumption is curtailed.
Some of the drive that I see is the government's strategy of putting more spending power into the median and average income earner - and those are the M40s and B40s. In today's many economic policies globally - when the disparity of income widens, many governments today are trying hard to reduce that. Malaysia is no different. However, for many Malaysian businesses, we are neither here nor there. These challenges in addressing the needs of the B40s, will cause the government to not do any positive fiscal actions for larger companies in Malaysia. One can see it through the increase in gaming tax on Genting Malaysia as well as introduction of traveller's levy. They need to bring in more income hence the focused taxes.
So, in short, because the government needs to squeeze more money from the larger corporations and pass them to the lower income group, I do not see the Composite Index (which comprises of normally Top 30 companies) to be exciting. Most probably, the best it can move on to is 1800 level over the long run - until 2022. This is because, I do not see much growth potentials from these group of companies.
With all the gloom, where would the growth be then?
Businesses that are dependent on overseas dealings and where there are transactions involving international transacts.
One of the small positives which I am seeing - but have yet to bear fruits is the drive for automations (they term it Industry 4WRD or Industry 4.0) and they try to get more investments money to the SMEs. Both are interlinked in some cases.
SMEs as in any other businesses will not invest when they do not see potentials. The local consumption story is a much lesser potential as there will not be as strong local spendings as in the past. Just to give an example, the furniture retailer in Malaysia will not invests much when the housing market is slowing - and that has links to the private debt as many just cannot afford to increase their borrowings anymore.
What has potentials then? Despite the slow down in global economy, I do see Malaysia's trading economy situation (i.e. our trade internationally) NOT to be highly impacted. As it is, Malaysia is still a middle income nation and there are positive trades when a country just do good trades. From my study of the impact of Trade War, I see Malaysia to be positively impacted once the situation becomes clearer. Nations still need to trade whether there are trade frictions or not. At the current situations, many companies or businesses that are dependent on international supply chain are busy reallocating their supply chain. What does this means? A company like Wal-Mart or Amazon for example, will consider Vietnam or Cambodia as an alternative manufacturing site - and they are doing this much more aggressively.
Malaysia is not Vietnam. The higher value add of the supply chain - there is a potential it may land in Malaysia. When US imposes tariffs (whether they do it for long term or by 2020 it is solved) onto China, things are going to change anyway. As it is, China's costs advantage is diminishing. There will be a different type of engagement between China and US in the next 20 years.
Malaysia as a trading and manufacturing hub will be benefiting if we are fast and certain in our actions. That is if we know the right thing to do. The government must put more effort to drive these businesses and entrepreneurs.
On the perspective of stocks, I foresee companies that have international engagements will see more and more international engagements. Some of them are getting ready for more deals and businesses as it is.
I am identifying some of these companies for investments. Let me know if you come across any of them. There are rooms for discussions.
Secondly, because of the gradual decline of Malaysia against other competing countries, our policies and actions have been focusing on B40 and to a lesser extent M40. Note that I am not saying that Malaysia is declining but against other regional competing countries, we are not better off. Obviously, for businesses - with the focus on the poorer group, the country will face difficulties to drive the businesses that have been largely dependent on local consumptions and investments.
Malaysia's private debt to GDP is one of highest in the world - around 82% (2018) and from here we know that the push by our policy makers previously for consumption driven economy is not going to be as strong as previously. One can only spend so much either from our own's income as well as from our borrowings. We must be mindful that personal debt must be paid off.
On the other hand, the new government of PH is looking at reducing its government budget over the longer run. The current government as in its previous message of RM1 trillion debt is looking at reduced government spending.
So how does a PH government continues to drive the economy or at the very least maintain the GDP growth of 4.5% to 5%, you might ask - as government spending is to be lessen while consumption is curtailed.
Some of the drive that I see is the government's strategy of putting more spending power into the median and average income earner - and those are the M40s and B40s. In today's many economic policies globally - when the disparity of income widens, many governments today are trying hard to reduce that. Malaysia is no different. However, for many Malaysian businesses, we are neither here nor there. These challenges in addressing the needs of the B40s, will cause the government to not do any positive fiscal actions for larger companies in Malaysia. One can see it through the increase in gaming tax on Genting Malaysia as well as introduction of traveller's levy. They need to bring in more income hence the focused taxes.
So, in short, because the government needs to squeeze more money from the larger corporations and pass them to the lower income group, I do not see the Composite Index (which comprises of normally Top 30 companies) to be exciting. Most probably, the best it can move on to is 1800 level over the long run - until 2022. This is because, I do not see much growth potentials from these group of companies.
With all the gloom, where would the growth be then?
Businesses that are dependent on overseas dealings and where there are transactions involving international transacts.
One of the small positives which I am seeing - but have yet to bear fruits is the drive for automations (they term it Industry 4WRD or Industry 4.0) and they try to get more investments money to the SMEs. Both are interlinked in some cases.
SMEs as in any other businesses will not invest when they do not see potentials. The local consumption story is a much lesser potential as there will not be as strong local spendings as in the past. Just to give an example, the furniture retailer in Malaysia will not invests much when the housing market is slowing - and that has links to the private debt as many just cannot afford to increase their borrowings anymore.
What has potentials then? Despite the slow down in global economy, I do see Malaysia's trading economy situation (i.e. our trade internationally) NOT to be highly impacted. As it is, Malaysia is still a middle income nation and there are positive trades when a country just do good trades. From my study of the impact of Trade War, I see Malaysia to be positively impacted once the situation becomes clearer. Nations still need to trade whether there are trade frictions or not. At the current situations, many companies or businesses that are dependent on international supply chain are busy reallocating their supply chain. What does this means? A company like Wal-Mart or Amazon for example, will consider Vietnam or Cambodia as an alternative manufacturing site - and they are doing this much more aggressively.
Malaysia is not Vietnam. The higher value add of the supply chain - there is a potential it may land in Malaysia. When US imposes tariffs (whether they do it for long term or by 2020 it is solved) onto China, things are going to change anyway. As it is, China's costs advantage is diminishing. There will be a different type of engagement between China and US in the next 20 years.
Malaysia as a trading and manufacturing hub will be benefiting if we are fast and certain in our actions. That is if we know the right thing to do. The government must put more effort to drive these businesses and entrepreneurs.
On the perspective of stocks, I foresee companies that have international engagements will see more and more international engagements. Some of them are getting ready for more deals and businesses as it is.
I am identifying some of these companies for investments. Let me know if you come across any of them. There are rooms for discussions.
Friday, March 1, 2019
Airasia's 4Q18 results shows purchasing power is weak
Airasia is going to be fine. They have positioned themselves to grow when there's space for them to. Although the leasing of planes that they have sold are committed, the commitment is not long. In any case, the way Airasia positions itself, it will need the planes anyway. It has rooms to grow in Philippines, India and even Indonesia and Japan. Whether those new additions will translate into immediate profits is however arguable. Hence, comes to the bigger issues.
I know where and what Airasia is thinking, to an extent. It wants to be the dominant ASEAN airline - forget me saying about low costs airlines as even in Malaysia one can see that they have 58% market share. If that is the number, this means low costs airlines is now mainstream, and full fledged is going out of mainstream. The way Airasia positioned that, to me - in the short run will have some issues. If one is to buy tickets, pricing wise, the competition is scarce especially in Malaysia. To fly to Singapore from KL though, we have additional options for cheap fares.
However, for Malaysia, that option is almost now negligible. Airasia is actually fighting against Airasia in terms of pricing. For example, if I want to fly from Penang to KL around 8pm to 10pm, I have options in terms of pricing - all from Airasia. If I go out of Airasia, then I have to pay considerably more. Hence, Airasia has positioned themselves as such. It has crowd out Malindo and MAS. It plans to also crowd out others in other countries that it operates in - such as Thailand, maybe Philippines in the longer term. For Indonesia, it will be tough as Lion Air is very strong despite the sad event last year.
For 2019 and 2020, what used to not be its strategy for last 2 years, it has brought back into decision. Hedging fuel price. Hence, so far so good. It has hedged 52% of fuel for 2019 at USD63 and 40% for 2020 at USD60. That, by itself shows that Airasia knows what is the price point, people will be willing to buy its tickets. Hence, by eliminating some of the uncertainties in costs, it can strategize better.
Now, then if Airasia is doing that well, why is it announcing such a bad result. To me, it was triple whammy for the last quarter. What supposed to be the most promising quarter usually as it is holiday period, they turned in losses - massive. The first thing was fuel costs. Something went wrong. I know they did not hedge as at last year's policy but it was USD91 jet fuel. The highest Brent crude went was about USD80, then towards November it went down to as low as USD52 in December. I also understand that Airasia sells a lot of their tickets upfront but at USD91 is surprising.
Second thing, of course is the weak currencies throughout ASEAN. A lot of the costs are in USD - from lease to fuel to interests payment.
The third thing, for Airasia is the lease costs which it has to now bear because it has sold a substantial number of its planes and need to leaseback. These are costs which will stay. I do not see our ASEAN currencies to be significantly stronger in the next few quarters. Neither will the lease be going off soon.
However, one BIG thing which I do not put in as a whammy is the weak pricing of its tickets. Its RASK is 14.82 sen for 4Q18 against 15.46 sen in 4Q17. It can say that its total available seats has grown substantially by more than 20%, but that drop is also bad. Suffice to say that the load factor has also gone down from 88% to 84%. As mentioned, usually, this is the period where people travel - many a times for leisure. Hence, its pricing is now elastic, significantly elastic - which is no good. Perhaps, Airasia for regionally has no longer become the airline for leisure but business travel has become a big part of its business. When people take off for holiday or stay at home, its yield suffers - as they have become leisure traveller rather than business traveller, perhaps.
I may be wrong in some part - but the argument of huge disparity of income is potentially true. The richer ones are travelling to Europe, or Japan. The poorer ones are no longer flying for holidays or maybe very petty when comes pricing.
No good for the economy. Airasia will overcome that in the longer run as it now understands demand and readjust. It has readjusted partially, as mentioned above in hedging the fuel price early. But the poor spending behaviour shows that people are very timid when comes to purchasing. What I fear is that the trend that Airasia has shown being a regional airline is that not even Malaysia, regionally people are not having that much freedom to buy.
I have seen in some of the results, not even on Airasia but others. The larger scale of things, we do not know how big will the impact be in the shorter term future. I have mentioned about what's dangerous in the near term, but this is one which is really I am seeing signs that shows what is potentially coming.
I know where and what Airasia is thinking, to an extent. It wants to be the dominant ASEAN airline - forget me saying about low costs airlines as even in Malaysia one can see that they have 58% market share. If that is the number, this means low costs airlines is now mainstream, and full fledged is going out of mainstream. The way Airasia positioned that, to me - in the short run will have some issues. If one is to buy tickets, pricing wise, the competition is scarce especially in Malaysia. To fly to Singapore from KL though, we have additional options for cheap fares.
However, for Malaysia, that option is almost now negligible. Airasia is actually fighting against Airasia in terms of pricing. For example, if I want to fly from Penang to KL around 8pm to 10pm, I have options in terms of pricing - all from Airasia. If I go out of Airasia, then I have to pay considerably more. Hence, Airasia has positioned themselves as such. It has crowd out Malindo and MAS. It plans to also crowd out others in other countries that it operates in - such as Thailand, maybe Philippines in the longer term. For Indonesia, it will be tough as Lion Air is very strong despite the sad event last year.
For 2019 and 2020, what used to not be its strategy for last 2 years, it has brought back into decision. Hedging fuel price. Hence, so far so good. It has hedged 52% of fuel for 2019 at USD63 and 40% for 2020 at USD60. That, by itself shows that Airasia knows what is the price point, people will be willing to buy its tickets. Hence, by eliminating some of the uncertainties in costs, it can strategize better.
Now, then if Airasia is doing that well, why is it announcing such a bad result. To me, it was triple whammy for the last quarter. What supposed to be the most promising quarter usually as it is holiday period, they turned in losses - massive. The first thing was fuel costs. Something went wrong. I know they did not hedge as at last year's policy but it was USD91 jet fuel. The highest Brent crude went was about USD80, then towards November it went down to as low as USD52 in December. I also understand that Airasia sells a lot of their tickets upfront but at USD91 is surprising.
Second thing, of course is the weak currencies throughout ASEAN. A lot of the costs are in USD - from lease to fuel to interests payment.
The third thing, for Airasia is the lease costs which it has to now bear because it has sold a substantial number of its planes and need to leaseback. These are costs which will stay. I do not see our ASEAN currencies to be significantly stronger in the next few quarters. Neither will the lease be going off soon.
However, one BIG thing which I do not put in as a whammy is the weak pricing of its tickets. Its RASK is 14.82 sen for 4Q18 against 15.46 sen in 4Q17. It can say that its total available seats has grown substantially by more than 20%, but that drop is also bad. Suffice to say that the load factor has also gone down from 88% to 84%. As mentioned, usually, this is the period where people travel - many a times for leisure. Hence, its pricing is now elastic, significantly elastic - which is no good. Perhaps, Airasia for regionally has no longer become the airline for leisure but business travel has become a big part of its business. When people take off for holiday or stay at home, its yield suffers - as they have become leisure traveller rather than business traveller, perhaps.
I may be wrong in some part - but the argument of huge disparity of income is potentially true. The richer ones are travelling to Europe, or Japan. The poorer ones are no longer flying for holidays or maybe very petty when comes pricing.
No good for the economy. Airasia will overcome that in the longer run as it now understands demand and readjust. It has readjusted partially, as mentioned above in hedging the fuel price early. But the poor spending behaviour shows that people are very timid when comes to purchasing. What I fear is that the trend that Airasia has shown being a regional airline is that not even Malaysia, regionally people are not having that much freedom to buy.
I have seen in some of the results, not even on Airasia but others. The larger scale of things, we do not know how big will the impact be in the shorter term future. I have mentioned about what's dangerous in the near term, but this is one which is really I am seeing signs that shows what is potentially coming.
Sunday, February 10, 2019
Not all Oil and Gas companies are made the same
I have been reading this week's Edge which discusses about Scomi and the challenges that it faces. Under the title "Scomi Group on the Brink", it highlights the predicament that the group is facing as well as giving us an account of its colorful past where it was a vehicle controlled by Datuk Kamaruddin Abdullah, the son of Malaysian 5th Prime Minister, Abdullah Badawi. Of course, the best period experienced by Scomi was when Badawi was PM. After that, it was downhill for the company.
This gives us a lesson and remind us that it is hard to evaluate O&G companies. Why? To me, many O&G companies in Malaysia need a different type of business connection and it is hard to make out their actual strengths and capabilities. That we have seen - the best opportunity for several of the sons of Malaysian PMs to become successful in business is through this sector. It has been proven before.
Whether they are capable business, it is hard to read. This sector however does allow people whom have connections to either our country's oil business, the federal or state government to succeed. O&G is quite a unique business where in many countries, the assets are state owned. This is similar in Malaysia where the asset is owned by Petronas and ultimately the PM's office control.
This was especially so when oil touched $120 per barrel and at that period Petronas was probably more relaxed in developing Malaysian O&G companies. When oil comes down to $60, it will be a different story. I believe Petronas will be more careful. At this period, it will be the time to separate the boys from the men, as someone would say it.
As an investor, it is important to figure out and try to eliminate what is investible and which one is potentially high risk. The retail business is investible and those include PDB and Petron. Then there are the equipment suppliers, companies like Wah Seong, Favelle Favco. Dialog is another one where they have made it successful in the business and they are proven company.
Then there are those that very hard to read, in terms capabilities especially to our Malaysian service providers which largely only supplies towards local projects. Those include Carimin, Perisai, Perdana Petroleum, Dayang, Icon Offshore and few others.
There are several companies that have made it overseas. Those include Yinson, Bumi Armada, Sapura Energy, Wah Seong, MISC. These are the companies that will provide a good basis for us to make our study as this is an international business and the ones that are able to compete internationally shows their competitiveness. The ones that have more than 80% of their business dependent on Malaysian contracts is just too risky.
The recent rise among O&G companies brought back an early exuberant towards the sector but we must be able to separate which are capable to compete and which ones are not. What has not really happened and to my disappointment is the lack of consolidation among the companies. There have been very little M&As within the sector and I feel that there are just too many companies. Although there will be natural attrition, the amount of consolidation is just too few.
I do think that while there seems to be a pick up in the sector, many of these companies will still find it hard to make ends meet. A run through of what the companies say in terms of prospects for 2019 and near term just shows that the good old days are far and between. It is true though that many stocks have touched their all time low. These provides huge opportunities.
To understand the sector, it is not just about how many contracts Petronas can dish out as I believe they are also very careful nowadays. It is about geopolitical. It is also about the politics of Trump and Saudi with Russia in the fray as well. Even the killing of Khashoggi has its impact on the price of oil. Shale from US plays a big role. How will they impact the strategy among the oil majors and OPEC? What about the global initiatives on alternative energy such as solar, electric car etc?
If one is just promoting based on how many rigs Petronas has, I think it is pure shortsightedness and not thorough in their thinking. In this space, one has to be clear on the macro as well as micro economic situation. Is Hengyuan a retailer and refiner? What would the impact of excess supply from US shale brings to their margin?
What about the companies in the exploration space? Are there new activities and are there oversupply among the players. Can I call it the buyers (companies that awards contracts) market?
There are companies that have some debt issues and such are Bumi Armada, Sapura, Perisai Petroleum, Scomi Energy. Can they overcome that? As I have mentioned, some of them are world class competitors. Will they be back stronger if ever they are able to resolve their debt issues?
Then there are some companies which have taken opportunities as they are late entrants in the business when the oil price collapse. When others were struggling with overcapacity and debt, they had just raised new funds and their balance sheet were fresh and unleveraged. Such companies include Hibiscus, DNEX.
All in all, during times of uncertainty there presents opportunities, but we have to be very careful as not all of them are worthwhile.
This gives us a lesson and remind us that it is hard to evaluate O&G companies. Why? To me, many O&G companies in Malaysia need a different type of business connection and it is hard to make out their actual strengths and capabilities. That we have seen - the best opportunity for several of the sons of Malaysian PMs to become successful in business is through this sector. It has been proven before.
Whether they are capable business, it is hard to read. This sector however does allow people whom have connections to either our country's oil business, the federal or state government to succeed. O&G is quite a unique business where in many countries, the assets are state owned. This is similar in Malaysia where the asset is owned by Petronas and ultimately the PM's office control.
This was especially so when oil touched $120 per barrel and at that period Petronas was probably more relaxed in developing Malaysian O&G companies. When oil comes down to $60, it will be a different story. I believe Petronas will be more careful. At this period, it will be the time to separate the boys from the men, as someone would say it.
As an investor, it is important to figure out and try to eliminate what is investible and which one is potentially high risk. The retail business is investible and those include PDB and Petron. Then there are the equipment suppliers, companies like Wah Seong, Favelle Favco. Dialog is another one where they have made it successful in the business and they are proven company.
Then there are those that very hard to read, in terms capabilities especially to our Malaysian service providers which largely only supplies towards local projects. Those include Carimin, Perisai, Perdana Petroleum, Dayang, Icon Offshore and few others.
There are several companies that have made it overseas. Those include Yinson, Bumi Armada, Sapura Energy, Wah Seong, MISC. These are the companies that will provide a good basis for us to make our study as this is an international business and the ones that are able to compete internationally shows their competitiveness. The ones that have more than 80% of their business dependent on Malaysian contracts is just too risky.
The recent rise among O&G companies brought back an early exuberant towards the sector but we must be able to separate which are capable to compete and which ones are not. What has not really happened and to my disappointment is the lack of consolidation among the companies. There have been very little M&As within the sector and I feel that there are just too many companies. Although there will be natural attrition, the amount of consolidation is just too few.
I do think that while there seems to be a pick up in the sector, many of these companies will still find it hard to make ends meet. A run through of what the companies say in terms of prospects for 2019 and near term just shows that the good old days are far and between. It is true though that many stocks have touched their all time low. These provides huge opportunities.
To understand the sector, it is not just about how many contracts Petronas can dish out as I believe they are also very careful nowadays. It is about geopolitical. It is also about the politics of Trump and Saudi with Russia in the fray as well. Even the killing of Khashoggi has its impact on the price of oil. Shale from US plays a big role. How will they impact the strategy among the oil majors and OPEC? What about the global initiatives on alternative energy such as solar, electric car etc?
If one is just promoting based on how many rigs Petronas has, I think it is pure shortsightedness and not thorough in their thinking. In this space, one has to be clear on the macro as well as micro economic situation. Is Hengyuan a retailer and refiner? What would the impact of excess supply from US shale brings to their margin?
What about the companies in the exploration space? Are there new activities and are there oversupply among the players. Can I call it the buyers (companies that awards contracts) market?
There are companies that have some debt issues and such are Bumi Armada, Sapura, Perisai Petroleum, Scomi Energy. Can they overcome that? As I have mentioned, some of them are world class competitors. Will they be back stronger if ever they are able to resolve their debt issues?
Then there are some companies which have taken opportunities as they are late entrants in the business when the oil price collapse. When others were struggling with overcapacity and debt, they had just raised new funds and their balance sheet were fresh and unleveraged. Such companies include Hibiscus, DNEX.
All in all, during times of uncertainty there presents opportunities, but we have to be very careful as not all of them are worthwhile.
Thursday, January 31, 2019
What's dangerous for 2019
The first month for 2019 is almost going to see its close. While very few of Malaysian companies have reported earnings, US companies are midway through their reporting. From my daily watching and reading, I would say it has been a mix bag. Seldom do I really follow through and be tied down to quarterly earnings. This time though, it has a sizeable threat.
CHINA! and semiconductors.
Several of the companies that are largely dependent on business from China is seeing deterioration. Companies like Nvidia, Intel, Apple, Caterpillar - they have reported earnings or guidance that seems to show that China is slowing down. All of them has indicated that their business has slowed in China. Whether this is wide spread i.e. over the entire China's economy or certain particular economy i.e. semiconductor, construction is unknown. One other factor is also because of the trade conflict between China and US, the Chinese are now being patriotic and they are preferring Chinese brands. This is seen from the market share growth of Huawei's phones as against Apple's IPhones.
However, the other two companies being Intel and Nvidia, despite the trade friction, if the demand is still there, the Chinese companies will still be buying as there are very little alternatives. Intel as we know is largely providing CPUs for PCs, servers and modem chips for Iphones. Nvidia is another chip company whose business supplies to the gamers, data centers, autonomous mobility market.
It is still hard to read how bad the Chinese economy is going to affect the world this year. There are already signals as provided by Alibaba's VP, Micheal Evans a month ago, where he indicated that volume growth has slowed. In China, many economists and businessman are already expecting slowing growth - but to how much? Will there be a recession. Official data from the Chinese government still shows growth of 6% to 7%. Is this true?
What is the impact to Malaysia
Malaysia is a huge trading partner to China especially when it comes to exporting semiconductor components to China, for them to assemble them into full product. Among the companies that exports to China via Malaysia are companies like Intel, Broadcom, Infineon. Malaysian listed companies such as Inari Amertron is a supplier to Broadcom especially for the RF filters. As we have seen, Inari has already been affected somewhat, but not massive.
What about the automation companies like Vitrox, Pentamaster? I presume as we see the trend affecting Intel and Nvidia, there is a possibility that China may see under utilisation of its capacity. With that, there are good chance that these Malaysian companies may see slower growth as well. With the threat of the trade war, many companies are also looking for alternative manufacturing sites. Vietnam, Malaysia, Indonesia, Thailand would definitely be explored. I do not see it to be immediate though as China is working on its under utilisation.
Palm Oil is in danger
The trade war also sees China offering to purchase a vast quantity of soy bean oil to make up for the trade imbalance. As it is, the details are still very vague but considering that if some agreements are to be materialised, soybean will be used as a trading commodity. What's good for soybean farmer in US will not be good for palm oil as they are substitutes. I am very wary of palm as China has not many traded goods to show to the American exporters to make up the imbalance besides cars, Boeing planes, beefs.
A slowing down China towards Malaysia
As it is, at the moment it will be hard to figure out the actual impact. I fear though that the initiatives by Malaysia government to reduce debt will not be able to materialise unless we start to sell national assets especially those held through Khazanah. The government is adamant on reducing debt. Hence, medium term i.e. for the next 3 - 5 years, we will see corporate exercise happening where these assets will be privatised.
CHINA! and semiconductors.
Several of the companies that are largely dependent on business from China is seeing deterioration. Companies like Nvidia, Intel, Apple, Caterpillar - they have reported earnings or guidance that seems to show that China is slowing down. All of them has indicated that their business has slowed in China. Whether this is wide spread i.e. over the entire China's economy or certain particular economy i.e. semiconductor, construction is unknown. One other factor is also because of the trade conflict between China and US, the Chinese are now being patriotic and they are preferring Chinese brands. This is seen from the market share growth of Huawei's phones as against Apple's IPhones.
However, the other two companies being Intel and Nvidia, despite the trade friction, if the demand is still there, the Chinese companies will still be buying as there are very little alternatives. Intel as we know is largely providing CPUs for PCs, servers and modem chips for Iphones. Nvidia is another chip company whose business supplies to the gamers, data centers, autonomous mobility market.
It is still hard to read how bad the Chinese economy is going to affect the world this year. There are already signals as provided by Alibaba's VP, Micheal Evans a month ago, where he indicated that volume growth has slowed. In China, many economists and businessman are already expecting slowing growth - but to how much? Will there be a recession. Official data from the Chinese government still shows growth of 6% to 7%. Is this true?
What is the impact to Malaysia
Malaysia is a huge trading partner to China especially when it comes to exporting semiconductor components to China, for them to assemble them into full product. Among the companies that exports to China via Malaysia are companies like Intel, Broadcom, Infineon. Malaysian listed companies such as Inari Amertron is a supplier to Broadcom especially for the RF filters. As we have seen, Inari has already been affected somewhat, but not massive.
What about the automation companies like Vitrox, Pentamaster? I presume as we see the trend affecting Intel and Nvidia, there is a possibility that China may see under utilisation of its capacity. With that, there are good chance that these Malaysian companies may see slower growth as well. With the threat of the trade war, many companies are also looking for alternative manufacturing sites. Vietnam, Malaysia, Indonesia, Thailand would definitely be explored. I do not see it to be immediate though as China is working on its under utilisation.
Palm Oil is in danger
The trade war also sees China offering to purchase a vast quantity of soy bean oil to make up for the trade imbalance. As it is, the details are still very vague but considering that if some agreements are to be materialised, soybean will be used as a trading commodity. What's good for soybean farmer in US will not be good for palm oil as they are substitutes. I am very wary of palm as China has not many traded goods to show to the American exporters to make up the imbalance besides cars, Boeing planes, beefs.
A slowing down China towards Malaysia
As it is, at the moment it will be hard to figure out the actual impact. I fear though that the initiatives by Malaysia government to reduce debt will not be able to materialise unless we start to sell national assets especially those held through Khazanah. The government is adamant on reducing debt. Hence, medium term i.e. for the next 3 - 5 years, we will see corporate exercise happening where these assets will be privatised.
Monday, January 14, 2019
Should we be fearful or fearless
Seriously, this is one of the better times to buy Malaysian stocks unless we are very sure that 2019 or early 2020 will be recession year(s). 2 years ago, I was short of stocks to pick, this time around it is a different way round.
World Recession
Let me get to a brief discussion on recession (or will there be one) before identifying whether we should buy and what type of stocks to pick. Will the next 12 to 15 months be recession period? US indicators does not seem so, and in fact there is this "grumble by you know who" about the Fed raising interest rates in December. The Fed will not raise interest rates when the economy is tumbling, and in fact they were worried over inflation - and they have mentioned of normalising interest rates (a number where nobody knows what is the optimal). The 10% drop in US stocks last month were largely due to few reasons - fear that the Fed will continue to raise interest rates, program trading and holiday period.
That fear especially where the Fed is going to be "hawkish" has been laid to rest when Powell, the Fed Chairman mentioned that they will delay their plan to raise rates if there is an indication of economic slowdown or more importantly recession.
Now, if US seems to be pretty safe except that the economy is not going to be as expansionary as 2018, what about other countries - such as China and Europe?
Europe and UK have been facing slowdown in growth largely similar to the Japan syndrome for a long time now. Its economy while significant in size has sort of cooled and as such it is not a shock anymore if anything untoward happens to Europe. The larger worry is the second largest economy i.e. China.
China, this time is the biggest unknown. There are a lot of indications that China is slowing down - but to how much? Every economic indicators show that it is going below 7% growth, a territory that has not been seen for more than a decade. Well, what is more worrying about China is whether it is facing credit problem among its industries and property sectors.
We know that China has strong reserves but what we do not know is whether there is the "House of Cards" symptoms facing the industrial sector especially when the Trade War is on the doorstep.
Trade War
While the Chinese government has realised that they cannot depend on capital pushed growth since few years ago, they did see the pushback from US coming so soon.
US under Trump in his 2nd year in office has tried to hit China hard and that has sort of shaken the Chinese - at least among its export industries.
The trade war is a term but in effect, what US wanted to reign on China is towards its technology sector which can be worrying for US' dominance in the future. Today, we are already seeing many of Chinese companies have shown their appetite to grow and invest heavily into technologies. US knows this is a threat and what is mentioned as Trade War is more of a Technology War. As such, through the use of tariffs US is trying to slow the Chinese down. The effort then is for US - at its strongest for within the last decade - to pushback the Chinese businesses.
But sometimes when someone is trying to cause ripples, tsunami may happen. That is the one worrying. In many scenarios, we could not see the tsunamis that is being stirred.
While, the worry is plenty, I foresee that both countries may come to some agreement in the short term as they are interdependent on each other. A much weakened China economically will not be good for Trump who is running for his reelection in 2020.
Malaysia's economy, politics and stocks
The Malaysian stock market is an awkward one as we had just went through a massive government change - first time ever in the history of Malaysia. Many counters which have been providing services and where their businesses depended on government budget will continue to see uncertainties.
A theme that I have continuously trump on is look for quality companies that are run by quality management. More often than not, when there is quality, Malaysian government cannot ignore. (This is the reason why I invested into Gamuda, a company where the Penang state government when DAP was the opposition at the federal side was even willing to award a multi billion contract)
I can understand when a new government (especially after claiming that the country is in very weak financial situation when they take over) is trying to work on its finances.
Imagine this. On its first few weeks, a new management - especially after announcing elimination of GST which will reduce its revenue by RM20 - 25 billion, what will they do? CUT for sure. RM25 billion is significant - for someone who cannot imagine, that is about 7% of the government's expenditure.
Only after they have gotten a better hold of the financial situation, the government can look at its development expenditures. This is because, more often than not operating expenditures are the one harder to get the "snips" as it involves the people's rice-bowl.
While the bulk of the "SNIPPING" have been done last year, this year will continue to be the discovery period i.e. who are the cronies and who are the ones really can deliver based on their capabilities. No government in their right frame of mind would want to create downfall to well-managed Malaysian companies, not when as a country we do not have that many to claim for. A government in its right frame of mind will understand that they need the companies to continue to help build the country whether they are from construction, manufacturing or even plantations.
As a country, we will still need to grow through careful "development initiatives". And that means spending on development. While operating is the one keeping the engine running, development is the one pushing us forward.
For stocks, my take is that while the government is still at discovery mode and learning, we should continue to put money into companies that have delivered and have put effort to learn and grow. Many of these companies are great companies but because of investors' fear their stock price have suffered. We should however know whether some of these companies can be caught by "disruptive" trends.
What about the stocks in which they are not so related to government contracts?
At the same time, due to global economic pressures as well as internal trends, several companies have seen years low. These companies have very little to do with the government - whether it is governed by PH or BN. I could name a few i.e. DKSH, Bumi Armada, Freight Management, Hibiscus, P.I.E. These are companies as we know have dropped because they are part of the "fear factor" in the latest global economic trend. Some of them are more defensive than others but what I noticed is that the 2017 or 2016 stories did not differ much from the 2018 and 2019 stories.
Then why did they drop?
A big part of it is because of us, human being - we are inconsistent in our feeling.
World Recession
Let me get to a brief discussion on recession (or will there be one) before identifying whether we should buy and what type of stocks to pick. Will the next 12 to 15 months be recession period? US indicators does not seem so, and in fact there is this "grumble by you know who" about the Fed raising interest rates in December. The Fed will not raise interest rates when the economy is tumbling, and in fact they were worried over inflation - and they have mentioned of normalising interest rates (a number where nobody knows what is the optimal). The 10% drop in US stocks last month were largely due to few reasons - fear that the Fed will continue to raise interest rates, program trading and holiday period.
That fear especially where the Fed is going to be "hawkish" has been laid to rest when Powell, the Fed Chairman mentioned that they will delay their plan to raise rates if there is an indication of economic slowdown or more importantly recession.
Now, if US seems to be pretty safe except that the economy is not going to be as expansionary as 2018, what about other countries - such as China and Europe?
Europe and UK have been facing slowdown in growth largely similar to the Japan syndrome for a long time now. Its economy while significant in size has sort of cooled and as such it is not a shock anymore if anything untoward happens to Europe. The larger worry is the second largest economy i.e. China.
China, this time is the biggest unknown. There are a lot of indications that China is slowing down - but to how much? Every economic indicators show that it is going below 7% growth, a territory that has not been seen for more than a decade. Well, what is more worrying about China is whether it is facing credit problem among its industries and property sectors.
We know that China has strong reserves but what we do not know is whether there is the "House of Cards" symptoms facing the industrial sector especially when the Trade War is on the doorstep.
Trade War
While the Chinese government has realised that they cannot depend on capital pushed growth since few years ago, they did see the pushback from US coming so soon.
US under Trump in his 2nd year in office has tried to hit China hard and that has sort of shaken the Chinese - at least among its export industries.
The trade war is a term but in effect, what US wanted to reign on China is towards its technology sector which can be worrying for US' dominance in the future. Today, we are already seeing many of Chinese companies have shown their appetite to grow and invest heavily into technologies. US knows this is a threat and what is mentioned as Trade War is more of a Technology War. As such, through the use of tariffs US is trying to slow the Chinese down. The effort then is for US - at its strongest for within the last decade - to pushback the Chinese businesses.
But sometimes when someone is trying to cause ripples, tsunami may happen. That is the one worrying. In many scenarios, we could not see the tsunamis that is being stirred.
While, the worry is plenty, I foresee that both countries may come to some agreement in the short term as they are interdependent on each other. A much weakened China economically will not be good for Trump who is running for his reelection in 2020.
Malaysia's economy, politics and stocks
The Malaysian stock market is an awkward one as we had just went through a massive government change - first time ever in the history of Malaysia. Many counters which have been providing services and where their businesses depended on government budget will continue to see uncertainties.
A theme that I have continuously trump on is look for quality companies that are run by quality management. More often than not, when there is quality, Malaysian government cannot ignore. (This is the reason why I invested into Gamuda, a company where the Penang state government when DAP was the opposition at the federal side was even willing to award a multi billion contract)
I can understand when a new government (especially after claiming that the country is in very weak financial situation when they take over) is trying to work on its finances.
Imagine this. On its first few weeks, a new management - especially after announcing elimination of GST which will reduce its revenue by RM20 - 25 billion, what will they do? CUT for sure. RM25 billion is significant - for someone who cannot imagine, that is about 7% of the government's expenditure.
Only after they have gotten a better hold of the financial situation, the government can look at its development expenditures. This is because, more often than not operating expenditures are the one harder to get the "snips" as it involves the people's rice-bowl.
While the bulk of the "SNIPPING" have been done last year, this year will continue to be the discovery period i.e. who are the cronies and who are the ones really can deliver based on their capabilities. No government in their right frame of mind would want to create downfall to well-managed Malaysian companies, not when as a country we do not have that many to claim for. A government in its right frame of mind will understand that they need the companies to continue to help build the country whether they are from construction, manufacturing or even plantations.
As a country, we will still need to grow through careful "development initiatives". And that means spending on development. While operating is the one keeping the engine running, development is the one pushing us forward.
For stocks, my take is that while the government is still at discovery mode and learning, we should continue to put money into companies that have delivered and have put effort to learn and grow. Many of these companies are great companies but because of investors' fear their stock price have suffered. We should however know whether some of these companies can be caught by "disruptive" trends.
What about the stocks in which they are not so related to government contracts?
At the same time, due to global economic pressures as well as internal trends, several companies have seen years low. These companies have very little to do with the government - whether it is governed by PH or BN. I could name a few i.e. DKSH, Bumi Armada, Freight Management, Hibiscus, P.I.E. These are companies as we know have dropped because they are part of the "fear factor" in the latest global economic trend. Some of them are more defensive than others but what I noticed is that the 2017 or 2016 stories did not differ much from the 2018 and 2019 stories.
Then why did they drop?
A big part of it is because of us, human being - we are inconsistent in our feeling.
Friday, January 11, 2019
The politics of insuring the people
First of all, I have not really been agreeable to the concept of forcing the foreign insurance companies to part with 30% of their shares to locals. Think of it, usually the local organizations that can afford to take up sizeable stakes are those like EPF, KWAP, LTAT. The price for insurers the size of Great Eastern Life, AIG would be high when they sell these 30% stake to our locals. Perhaps the good part is EPF will have additional options to invest into. When we put up conditions like this, it often scares companies from doing business in Malaysia as we now can put up conditions as and when we sees fit.
Pushing these insurance to sell with a dateline is even harder as valuation where both parties can come to agreement is not going to be easy. Anyway, when the government tells us that in Malaysia 80% of the insurance business is controlled by foreign companies, that is also a cause for concern. Besides banks, size matters even more in insurance business. Many large risks are not able to be taken up by smaller business as they sometimes cannot swallow the risks.
However, I am concerned over government working with the insurance companies to cover the B40 group for some level of coverage. First question is, what about M40 and the rests?
Insurance thrives on scale and masses. I would like to think that government is of enough scale to provide the coverage. The taxes and revenues that it collects is supposed to provide the coverage to a target group be it the less able etc. This public private partnership concept may sound good for the B40s but if we look at it through a larger picture, there are many questions than answers. Always when you get something, you forgo something else. This does not sound like win-win.
The question is when Great Eastern (GE) is willing to allocate RM2 billion for coverage for the B40s, is that the price it is willing to pay for it not to dilute its stake. This means that there is a price one can pay to opt out for something. Great Eastern is the largest life insurer in Malaysia. What is the price Prudential Malaysia is willing to pay to get itself off the hook assuming it is smaller than GE, for example?
What about Tokio Marine, AIG, MSIGs of Malaysia assuming they have not met the 30% local ownership threshold?
Then, my other question is whether is this another form of votes buying? We had concerns over BRIMs before as it only targets certain groups. Previously, I thought the message was that focus is more towards the handicaps, less able group while we are going to teach the "able" B40s how to fish rather than giving them the fish. That has been partly what we have been voting for - now there seems there is a change in approach but similar in style.
Pushing these insurance to sell with a dateline is even harder as valuation where both parties can come to agreement is not going to be easy. Anyway, when the government tells us that in Malaysia 80% of the insurance business is controlled by foreign companies, that is also a cause for concern. Besides banks, size matters even more in insurance business. Many large risks are not able to be taken up by smaller business as they sometimes cannot swallow the risks.
However, I am concerned over government working with the insurance companies to cover the B40 group for some level of coverage. First question is, what about M40 and the rests?
Insurance thrives on scale and masses. I would like to think that government is of enough scale to provide the coverage. The taxes and revenues that it collects is supposed to provide the coverage to a target group be it the less able etc. This public private partnership concept may sound good for the B40s but if we look at it through a larger picture, there are many questions than answers. Always when you get something, you forgo something else. This does not sound like win-win.
The question is when Great Eastern (GE) is willing to allocate RM2 billion for coverage for the B40s, is that the price it is willing to pay for it not to dilute its stake. This means that there is a price one can pay to opt out for something. Great Eastern is the largest life insurer in Malaysia. What is the price Prudential Malaysia is willing to pay to get itself off the hook assuming it is smaller than GE, for example?
What about Tokio Marine, AIG, MSIGs of Malaysia assuming they have not met the 30% local ownership threshold?
Then, my other question is whether is this another form of votes buying? We had concerns over BRIMs before as it only targets certain groups. Previously, I thought the message was that focus is more towards the handicaps, less able group while we are going to teach the "able" B40s how to fish rather than giving them the fish. That has been partly what we have been voting for - now there seems there is a change in approach but similar in style.
Monday, January 7, 2019
Why does a Rubber Research Institute need RM2.28 billion?
By now, we would have already read on an issue regarding the Kwasa Land where EPF have bought a 2,330 acre land at RM2.28 billion from Aset Tanah Nasional Berhad (ATNB) whom have presumably acted as a middle man after it has bought them from Rubber Research Institute for RM1.5 billion.
That transaction has become a big "hoohah" as it seems to be that RRI has sold the land at below market valuation. The issue now here is whether - ATNB, a wholly owned subsidiary of MoF - did it shortchange RRI, another wholly owned entity of the government?
Despite we have been hearing of 1MDB, Tabung Haji, I think this issue may not be that big as compared to those (unless the auditors have found mismanagement with the usage of funds from the profit made by ATNB).
I would like to make my thoughts in a different manner.
From the proceeds, what would RRI be needing a RM2.28 billion for? I think during then, even if RRI is to have sold the land for exactly RM2.28 billion, the government would have asked RRI to remit a portion of that money to government's coffer as it does not makes sense for a research institute to hold such an amount of money.
I have tried to find out about RRI. It does not even have a website and when I tried to click on RRI, it linked me to Malaysian Rubber Board. Today, rubber is a very small portion of Malaysia's economy and I do not think the research institute despite its previous contributions will need that kind of amount. Today, the biggest contribution probably from RRI is towards the rubber gloves industry, and perhaps condoms as well.
The bigger question now is that how is the ATNB's money being utilised. I think it is best for the audit be made public as we do not want every shuffling of funds be made an issue!
Frankly, I am more concerned over the low rubber and palm oil price today. Should we, as a nation be less dependent on Palm Oil and what are the efforts to be done to educate us on what to do as it seems palm oil may not come back to its good old days in the near to medium term.
That transaction has become a big "hoohah" as it seems to be that RRI has sold the land at below market valuation. The issue now here is whether - ATNB, a wholly owned subsidiary of MoF - did it shortchange RRI, another wholly owned entity of the government?
Despite we have been hearing of 1MDB, Tabung Haji, I think this issue may not be that big as compared to those (unless the auditors have found mismanagement with the usage of funds from the profit made by ATNB).
I would like to make my thoughts in a different manner.
From the proceeds, what would RRI be needing a RM2.28 billion for? I think during then, even if RRI is to have sold the land for exactly RM2.28 billion, the government would have asked RRI to remit a portion of that money to government's coffer as it does not makes sense for a research institute to hold such an amount of money.
I have tried to find out about RRI. It does not even have a website and when I tried to click on RRI, it linked me to Malaysian Rubber Board. Today, rubber is a very small portion of Malaysia's economy and I do not think the research institute despite its previous contributions will need that kind of amount. Today, the biggest contribution probably from RRI is towards the rubber gloves industry, and perhaps condoms as well.
The bigger question now is that how is the ATNB's money being utilised. I think it is best for the audit be made public as we do not want every shuffling of funds be made an issue!
Frankly, I am more concerned over the low rubber and palm oil price today. Should we, as a nation be less dependent on Palm Oil and what are the efforts to be done to educate us on what to do as it seems palm oil may not come back to its good old days in the near to medium term.
Saturday, November 24, 2018
Why we should look at beyond Price Earnings Ratio
One of the subjective area to look at in evaluating a business or listed company is not its Price Earnings, Price to Net Asset Value but its planning, vision, how it makes use of situation to make itself a leader in the future. Most professional analysts, amateur investors (like me) forget about that.
We more often than not concentrate on concession value, delivery, Price to Net Assets, total book order etc etc. Those are very much Graham and the old Buffett. The new investors including the new Warren Buffett, Softbank, some of the best PEs and VCs in Silicon Valley look way beyond what we see. That is why they were able to figure out Google, Uber, Grab, Facebook, Alibaba and many more.
I have to admit I do not have the capabilities and capacity to be in that realm. I do not have that opportunity as well as my universe of looking at companies does not include the very good startups or visionary companies that remain private.
However, among the local traditional companies, we can possibly decipher which company that look beyond its current as compared to those who do not. There are those we know is is danger of being or already been disrupted. Those are the transportation companies for example, media company such as Media Prima, TheStar for which I am not able to figure out where its future is heading.
The easier intangible investment is one where we see the macro picture - i.e. where disruption of affecting, and then we look at micro level and see at what stage is the position of the company. I will take one example. We know that e-commerce is in the midst of disrupting retailing, we then take several malls and try to figure out its positioning. Will it be disrupted? Is the space they are playing different. One example is IGB REIT. How do we see its future. Company or business like Mid Valley will not be disrupted like a taxi business being disrupted. It may face a slower growth. The much lesser malls may face a harder truth where they may not even survive at all, but perhaps not One Utama, MidValley or KLCC. They will face slowdown but not death in the short term.
Over in this, I would like to highlight 2 traditional companies where if they play it right, they can be part of the disruptor. If they are not, they will also be disrupted.
Airasia
18 years ago, Airasia was a disruptor to the traditional airlines like MAS, SIA. It is so successful, so much so that what we would have thought a business that is hard to survive has in fact caused continuous difficulties to MAS. It is now much bigger than MAS today and I am not able to figure out the survival of MAS beyond the next 3 years - unless there is another round of financial support from Khazanah.
Airasia, however is facing a new challenge. A wave of disruption to disrupt its own business. At the moment, its business model is being copied and airlines that are operating from a bigger airspace may want to eat into its market share. Its vast advantage in costs is also reducing as other airlines are now figuring out how to reduce costs as well.
Hence, it is now facing different challenges as it expands into other countries like India and Japan, 2 countries that are very different when looking at low costs tickets. India already has a very dominant low costs airline which is more competitive than Airasia India - Indigo. It is much larger, probably politically stronger and has more planes and better command of routes. Hence, Airasia in competing has to look at 2nd and 3rd tier cities. Luckily enough, India is such a big country that not one airline can dominate the airspace. It is more like China and US than Malaysia or Thailand.
To compete, I strongly believe that what the management of Airasia led by Tony Fernandes is doing is right. Going digital. By going digital, it is probably going to create that little inch of advantage as it goes regional. When Airasia was at its infant age, it started credit card purchase. That was a small disruption but its other advantages in the digital space was still early. Today, its booking system, checkin and others are ahead of many airlines including SIA - as I tried using Scoot. I happily admit Scoot still lose out to Airasia's booking system despite it not being perfect.
The community today is also more used or susceptible to self booking, payment, checkin etc. That is something which brings advantage to Airasia as it is trying to reduce its manpower per passenger. Airasia's digital strategy is beyond what I can imagine. I believe it is looking how to attract its recurring customer, minimising fuel costs, introducing new routes, new marketing channel, payment system from using its digital initiatives.
Going digital is what Airasia have to continue to invest and its push has to be continually better than others for it to continue to thrive.
Gamuda
Ironically, Gamuda is a company which I now look more in depth after the many situations where its projects was under the threat of being cancelled especially MRT2 underground contract that I now think that it is probably a lot ahead of other construction and developer companies in Malaysia such as IJM and UEM. My previous perception of the company, today I have to eliminate - not because I invested into the company but because now I look at the company more inept. This is because, my investment into Gamuda is still way too small to affect me, personally.
But Gamuda, with its group of management, knowledge depth has to be developed somewhat like Airasia rather than threatened. Most countries that are developed, has strong construction technologies and knowhow. We see that in Korea, Japan, China and previously US. We cannot continually be dependent on foreign technologies when building the country - like what we have done in the past government.
In my reading of several largest construction companies in Malaysia, the other construction companies in Malaysia - like I said even UEM and IJM talks about digital threat and taking advantage of it like how Gamuda sees it. This is unless these other companies do not communicate like how Gamuda does now - but I do not think so.
From here, I strongly believe, because it continuously in the discovery mode - like its investment in tunnelling technology, Industrialised Building System, this mindset is the right mindset for the future of the company. From here, as in any analysis, we should not just look at Gamuda's book order and how many future projects the current government is trying to introduce. We should rather look at how the company get readied itself towards the future.
To understand my writing further, do look at these companies Annual Reports and compare with its industry competitors.
We more often than not concentrate on concession value, delivery, Price to Net Assets, total book order etc etc. Those are very much Graham and the old Buffett. The new investors including the new Warren Buffett, Softbank, some of the best PEs and VCs in Silicon Valley look way beyond what we see. That is why they were able to figure out Google, Uber, Grab, Facebook, Alibaba and many more.
I have to admit I do not have the capabilities and capacity to be in that realm. I do not have that opportunity as well as my universe of looking at companies does not include the very good startups or visionary companies that remain private.
However, among the local traditional companies, we can possibly decipher which company that look beyond its current as compared to those who do not. There are those we know is is danger of being or already been disrupted. Those are the transportation companies for example, media company such as Media Prima, TheStar for which I am not able to figure out where its future is heading.
The easier intangible investment is one where we see the macro picture - i.e. where disruption of affecting, and then we look at micro level and see at what stage is the position of the company. I will take one example. We know that e-commerce is in the midst of disrupting retailing, we then take several malls and try to figure out its positioning. Will it be disrupted? Is the space they are playing different. One example is IGB REIT. How do we see its future. Company or business like Mid Valley will not be disrupted like a taxi business being disrupted. It may face a slower growth. The much lesser malls may face a harder truth where they may not even survive at all, but perhaps not One Utama, MidValley or KLCC. They will face slowdown but not death in the short term.
Over in this, I would like to highlight 2 traditional companies where if they play it right, they can be part of the disruptor. If they are not, they will also be disrupted.
Airasia
18 years ago, Airasia was a disruptor to the traditional airlines like MAS, SIA. It is so successful, so much so that what we would have thought a business that is hard to survive has in fact caused continuous difficulties to MAS. It is now much bigger than MAS today and I am not able to figure out the survival of MAS beyond the next 3 years - unless there is another round of financial support from Khazanah.
Airasia, however is facing a new challenge. A wave of disruption to disrupt its own business. At the moment, its business model is being copied and airlines that are operating from a bigger airspace may want to eat into its market share. Its vast advantage in costs is also reducing as other airlines are now figuring out how to reduce costs as well.
Hence, it is now facing different challenges as it expands into other countries like India and Japan, 2 countries that are very different when looking at low costs tickets. India already has a very dominant low costs airline which is more competitive than Airasia India - Indigo. It is much larger, probably politically stronger and has more planes and better command of routes. Hence, Airasia in competing has to look at 2nd and 3rd tier cities. Luckily enough, India is such a big country that not one airline can dominate the airspace. It is more like China and US than Malaysia or Thailand.
To compete, I strongly believe that what the management of Airasia led by Tony Fernandes is doing is right. Going digital. By going digital, it is probably going to create that little inch of advantage as it goes regional. When Airasia was at its infant age, it started credit card purchase. That was a small disruption but its other advantages in the digital space was still early. Today, its booking system, checkin and others are ahead of many airlines including SIA - as I tried using Scoot. I happily admit Scoot still lose out to Airasia's booking system despite it not being perfect.
The community today is also more used or susceptible to self booking, payment, checkin etc. That is something which brings advantage to Airasia as it is trying to reduce its manpower per passenger. Airasia's digital strategy is beyond what I can imagine. I believe it is looking how to attract its recurring customer, minimising fuel costs, introducing new routes, new marketing channel, payment system from using its digital initiatives.
Going digital is what Airasia have to continue to invest and its push has to be continually better than others for it to continue to thrive.
Gamuda
Ironically, Gamuda is a company which I now look more in depth after the many situations where its projects was under the threat of being cancelled especially MRT2 underground contract that I now think that it is probably a lot ahead of other construction and developer companies in Malaysia such as IJM and UEM. My previous perception of the company, today I have to eliminate - not because I invested into the company but because now I look at the company more inept. This is because, my investment into Gamuda is still way too small to affect me, personally.
But Gamuda, with its group of management, knowledge depth has to be developed somewhat like Airasia rather than threatened. Most countries that are developed, has strong construction technologies and knowhow. We see that in Korea, Japan, China and previously US. We cannot continually be dependent on foreign technologies when building the country - like what we have done in the past government.
In my reading of several largest construction companies in Malaysia, the other construction companies in Malaysia - like I said even UEM and IJM talks about digital threat and taking advantage of it like how Gamuda sees it. This is unless these other companies do not communicate like how Gamuda does now - but I do not think so.
From here, I strongly believe, because it continuously in the discovery mode - like its investment in tunnelling technology, Industrialised Building System, this mindset is the right mindset for the future of the company. From here, as in any analysis, we should not just look at Gamuda's book order and how many future projects the current government is trying to introduce. We should rather look at how the company get readied itself towards the future.
To understand my writing further, do look at these companies Annual Reports and compare with its industry competitors.
Thursday, October 11, 2018
Capital Gains Tax may just kill our competitiveness
Please! Do not shoot ourselves on the foot.
When we did away with GST, I thought the government really meant what it promises. It certainly did not promise introducing various new taxes, though - hence long story short, eliminating GST is a mistake. Capital gains tax (CGT) is not a new kind of tax but for Malaysia and this region it certainly is unusual. All our neighbors and sometimes competitors certainly do not have CGT in their playbook. In fact, we have already lose out to both Singapore and Thailand in terms of our corporate tax rate of 24% against Thailand (20%) and Singapore (17%).
Now, we want to introduce something which is really going to be against business - capital gains tax. Malaysia's economy is an open economy and we most of the times will be competing against other neighboring countries. As an example, to enter the capital market some companies can now decide which market they want to get listed. An IT business that operates regionally, can opt for Singapore rather than Malaysia. Airasia for example can go to Singapore or even Hong Kong if it wants to list its group's business. The decision to pick markets to list on depends on how attractive each market is for the issuer.
Introducing CGT will certainly destroy that. In the long run, these kind of decisions which is to address short term problem will just kill our country's competitiveness for existing investors as well as would be entrepreneurs.
In the field that I am in, there is already concern over weak capital flow for both investors and entrepreneurs to tap on. Having a strong capital market means more Malaysians or regional entrepreneurs willing to tap onto as well as invest into our market, and that means more foreign long term money into the market. Do we not want that?
As it is, we have already complained of why did the most successful startup in our history - one that is valued in excess of $10 billion i.e. Grab moved from Malaysia to Singapore despite both the founders started them in Malaysia and being Malaysians. Singapore is just more attractive for them in many aspects and one of them is their ability to raise funds. By my count, Grab has raised more than $5 billion so far. (For one's visualisation, Grab is easily more valuable than Genting today - and capital market plays a very big role in that)
Introducing CGT is an antithesis to that effort of reversing the drain. The government must understand that to reverse brain drain - it is not just about creating job opportunities but it is also about having a conducive business environment. A conducive business environment also means a having and creating a vibrant capital market. Having CGT is hence sheer short sightedness if it is really being introduced.
More often than not, the capital market is pointed as the playground for the rich. It is not that true. It is more of a place for opportunity creation. People or entrepreneurs that would want to tap onto funding, will depend on a strong, consistent and vibrant capital market. As it is, I am seeing a sign of that being reversed by this new government.
If one reads Billion Dollar Whale, i.e. the story on Jho Low, one of the basic message on that story is that rich people do not play by one country's rule. If Malaysia is not friendly to their investment money, their funds can be transferred anytime anyday in an instance. Hence, does our government think that CGT is to tax the rich?
Before we start taxing them, their invested money will no longer be in the country in a flash. That's how fast it is - and does anyone get it. The super rich that we want to gain more taxes do not need to play by Malaysian rules. It will not be long before the not so rich but rich enough to invest in the capital market will be able to do that as well. Fintech companies will enable that and as it is there are already such business startups.
Despite what we may think, one of the success of Trump's administration is to have a swiping change in its tax structure - corporate tax of 35% reducing to as low as 21%. That effort was mainly to bring back businesses that have been locating overseas back to America and it has been hugely successful.
It is time for this government which we have such high hopes to stop being populists.
When we did away with GST, I thought the government really meant what it promises. It certainly did not promise introducing various new taxes, though - hence long story short, eliminating GST is a mistake. Capital gains tax (CGT) is not a new kind of tax but for Malaysia and this region it certainly is unusual. All our neighbors and sometimes competitors certainly do not have CGT in their playbook. In fact, we have already lose out to both Singapore and Thailand in terms of our corporate tax rate of 24% against Thailand (20%) and Singapore (17%).
Now, we want to introduce something which is really going to be against business - capital gains tax. Malaysia's economy is an open economy and we most of the times will be competing against other neighboring countries. As an example, to enter the capital market some companies can now decide which market they want to get listed. An IT business that operates regionally, can opt for Singapore rather than Malaysia. Airasia for example can go to Singapore or even Hong Kong if it wants to list its group's business. The decision to pick markets to list on depends on how attractive each market is for the issuer.
Introducing CGT will certainly destroy that. In the long run, these kind of decisions which is to address short term problem will just kill our country's competitiveness for existing investors as well as would be entrepreneurs.
In the field that I am in, there is already concern over weak capital flow for both investors and entrepreneurs to tap on. Having a strong capital market means more Malaysians or regional entrepreneurs willing to tap onto as well as invest into our market, and that means more foreign long term money into the market. Do we not want that?
As it is, we have already complained of why did the most successful startup in our history - one that is valued in excess of $10 billion i.e. Grab moved from Malaysia to Singapore despite both the founders started them in Malaysia and being Malaysians. Singapore is just more attractive for them in many aspects and one of them is their ability to raise funds. By my count, Grab has raised more than $5 billion so far. (For one's visualisation, Grab is easily more valuable than Genting today - and capital market plays a very big role in that)
Introducing CGT is an antithesis to that effort of reversing the drain. The government must understand that to reverse brain drain - it is not just about creating job opportunities but it is also about having a conducive business environment. A conducive business environment also means a having and creating a vibrant capital market. Having CGT is hence sheer short sightedness if it is really being introduced.
More often than not, the capital market is pointed as the playground for the rich. It is not that true. It is more of a place for opportunity creation. People or entrepreneurs that would want to tap onto funding, will depend on a strong, consistent and vibrant capital market. As it is, I am seeing a sign of that being reversed by this new government.
If one reads Billion Dollar Whale, i.e. the story on Jho Low, one of the basic message on that story is that rich people do not play by one country's rule. If Malaysia is not friendly to their investment money, their funds can be transferred anytime anyday in an instance. Hence, does our government think that CGT is to tax the rich?
Before we start taxing them, their invested money will no longer be in the country in a flash. That's how fast it is - and does anyone get it. The super rich that we want to gain more taxes do not need to play by Malaysian rules. It will not be long before the not so rich but rich enough to invest in the capital market will be able to do that as well. Fintech companies will enable that and as it is there are already such business startups.
Despite what we may think, one of the success of Trump's administration is to have a swiping change in its tax structure - corporate tax of 35% reducing to as low as 21%. That effort was mainly to bring back businesses that have been locating overseas back to America and it has been hugely successful.
It is time for this government which we have such high hopes to stop being populists.
Sunday, August 26, 2018
Reduce focus on controlling prices. Focus on developing the country's talent
When Dr Mahathir visited China, I presume he must be sad as his vision of turning Malaysia into a highly developed nation and exporting technologies to the world seems far from fruition. He was introduced to Alibaba, DJI - the drones company, Geely - companies that were not even around when we mooted MSC. What was envisioned through the Multimedia Super Corridor back in 1996, has remained a vision. Cyberjaya is now a place where outsource services is more prevalent than companies developing solutions that are used by people from all over the world.
We now invite Alibaba, a company which was created by Jack Ma and his partners after MSC was mooted - i.e. 1997. What rubs salt into the wound is that when Jack Ma visited Dr Mahathir, he told our PM his vision of Alibaba was partly inspired from Mahathir's vision of MSC.
I know of friends who work in Alibaba's Malaysia's office, Lazada which is 80+% controlled by Alibaba. Jack is not interested in developing or help Malaysia. He is interested in developing Malaysia as a trading hub - which is an import and export base. He is much more interested in bringing Chinese goods into Malaysia and the region. In short, Jack Ma is economically colonising us in Mahathir's words and we do not have any other options.
Alibaba and Lazada means reducing opportunities for local entrepreneurs, but we are happy because we are buying cheaper goods through Taobao - an Alibaba equivalent of Amazon. Yes, someone may say there is little choice as we are not opening up, other countries will - such as Thailand and Vietnam.
But do check Alibaba out. Are they hiring any Malaysian developers? Their developers are from China, India and even Vietnam. Malaysia is not a place for them where they think about hiring and training knowledge people - or if this is what we called. In short, we are not a place where they look at our people, but more of a geo location for trade.
Alibaba's vision for Malaysia is no better than Ikea's vision of making this place a distribution centre. Why? Because we are geographically strategic in Asia and South East Asia and our labor costs is right for them. They can't go to Singapore as it is too expensive, but still Lazada is based off Singapore. Why? We must ask ourselves although Singapore's costs is easily 300% to 400% more.
When companies like Lazada, Alibaba, Grab sets up its regional centers in Singapore, what does this mean? We, Malaysia lacks the opportunity to train people who are able to develop strategies, plan, manage. We are only a nation whom develops middle managers for these multinationals. They deploy, but when comes to making decisions, we are not given opportunities, hence not trained well.
I meet a lot of people from big multinationals - Intel, Motorola, HP, Agilent, Flex. Most of the people they hire in Malaysia are just to deliver - little questions ask. Hence, for many years we have the opportunity to develop a team who delivers the small projects, solving non-critical problems but creative and strategic thinking skills is lacking.
Ask any senior employees who have worked in the technology sectors through 1980s, 1990s to today, they are not as optimistic.
Here, I am also questioning the message on trying to reduce prices of goods. Are we serious? We are a country that do lots of imports and exports. For decades, we have been a trading nation. The fishes, meat, fruits, vegetables that we eat, the building materials used to build houses - many of them are imported. Even the labor used to serve us at certain restaurants, build our houses are from foreign countries. How are we to control prices. It is a task which will most probably fail. I have this opportunity to meet a non-politically aligned senior government servant. He was telling me the reason for the country to reduce subsidies is because subsidies more often than not goes to the poor and who are the poor in Malaysia? The B40 or Bottom 40? Not quite so.
Actually, they are the foreign workers. They are the ones that consume the most subsidized goods. Flour, rice, free or subsidized transport. Foreign workers comprise as much as 25% of Malaysian workforce. And we often missed them out in our policy making. Not so much to support them but whatever we subsidise, it goes more often to them than the average Malaysians.
Today the country is promoting Industry 4.0 - a buzzword which means using technologies that are available today and integrate them to bring advantage to manufacturers. In the process, reducing dependence on low skillled workers. It is about using cloud, big data, analytics, AI, robots.
Again, are we serious? If we are serious, as a country we have to seriously do things differently. Often it is about biting some bullets then only we see sunshine. If we are still dependent on low costs foreign labors, the Industry 4.0 will not happen, no matter how much is the incentives. It is about bringing foreign workers - but the ones with talent. It is about not afraid of sending away industries which is dependent on huge low costs labors. Perhaps the rubber gloves industry in Malaysia is not going to be as big as we have today as some are still complaining about the minimum wages which we implemented few years ago. I respect the rubber gloves industry as this is one industry which we have successfully dominate globally but not the low costs labor they continue to use and continually ask for government support for that.
When I invest in some of the stocks in Malaysia, there is a strategy. I invest in companies such as Airasia, Power Root, IJM. Some of these are simple business, but they are the ones that create their own expertise, brands, marketing channels. I like those that, so called "Create their own destinies." especially Airasia - and often I also complain as a country we try to suppress these companies who are building their expertise from within the country.
Seriously, as a country we have to think of supporting companies that directly and indirectly think of Malaysia as a home - which in the past 2 decades we have not. That's how we really develop the needed talent for the country.
We now invite Alibaba, a company which was created by Jack Ma and his partners after MSC was mooted - i.e. 1997. What rubs salt into the wound is that when Jack Ma visited Dr Mahathir, he told our PM his vision of Alibaba was partly inspired from Mahathir's vision of MSC.
I know of friends who work in Alibaba's Malaysia's office, Lazada which is 80+% controlled by Alibaba. Jack is not interested in developing or help Malaysia. He is interested in developing Malaysia as a trading hub - which is an import and export base. He is much more interested in bringing Chinese goods into Malaysia and the region. In short, Jack Ma is economically colonising us in Mahathir's words and we do not have any other options.
Alibaba and Lazada means reducing opportunities for local entrepreneurs, but we are happy because we are buying cheaper goods through Taobao - an Alibaba equivalent of Amazon. Yes, someone may say there is little choice as we are not opening up, other countries will - such as Thailand and Vietnam.
But do check Alibaba out. Are they hiring any Malaysian developers? Their developers are from China, India and even Vietnam. Malaysia is not a place for them where they think about hiring and training knowledge people - or if this is what we called. In short, we are not a place where they look at our people, but more of a geo location for trade.
Alibaba's vision for Malaysia is no better than Ikea's vision of making this place a distribution centre. Why? Because we are geographically strategic in Asia and South East Asia and our labor costs is right for them. They can't go to Singapore as it is too expensive, but still Lazada is based off Singapore. Why? We must ask ourselves although Singapore's costs is easily 300% to 400% more.
When companies like Lazada, Alibaba, Grab sets up its regional centers in Singapore, what does this mean? We, Malaysia lacks the opportunity to train people who are able to develop strategies, plan, manage. We are only a nation whom develops middle managers for these multinationals. They deploy, but when comes to making decisions, we are not given opportunities, hence not trained well.
I meet a lot of people from big multinationals - Intel, Motorola, HP, Agilent, Flex. Most of the people they hire in Malaysia are just to deliver - little questions ask. Hence, for many years we have the opportunity to develop a team who delivers the small projects, solving non-critical problems but creative and strategic thinking skills is lacking.
Ask any senior employees who have worked in the technology sectors through 1980s, 1990s to today, they are not as optimistic.
Here, I am also questioning the message on trying to reduce prices of goods. Are we serious? We are a country that do lots of imports and exports. For decades, we have been a trading nation. The fishes, meat, fruits, vegetables that we eat, the building materials used to build houses - many of them are imported. Even the labor used to serve us at certain restaurants, build our houses are from foreign countries. How are we to control prices. It is a task which will most probably fail. I have this opportunity to meet a non-politically aligned senior government servant. He was telling me the reason for the country to reduce subsidies is because subsidies more often than not goes to the poor and who are the poor in Malaysia? The B40 or Bottom 40? Not quite so.
Actually, they are the foreign workers. They are the ones that consume the most subsidized goods. Flour, rice, free or subsidized transport. Foreign workers comprise as much as 25% of Malaysian workforce. And we often missed them out in our policy making. Not so much to support them but whatever we subsidise, it goes more often to them than the average Malaysians.
Today the country is promoting Industry 4.0 - a buzzword which means using technologies that are available today and integrate them to bring advantage to manufacturers. In the process, reducing dependence on low skillled workers. It is about using cloud, big data, analytics, AI, robots.
Again, are we serious? If we are serious, as a country we have to seriously do things differently. Often it is about biting some bullets then only we see sunshine. If we are still dependent on low costs foreign labors, the Industry 4.0 will not happen, no matter how much is the incentives. It is about bringing foreign workers - but the ones with talent. It is about not afraid of sending away industries which is dependent on huge low costs labors. Perhaps the rubber gloves industry in Malaysia is not going to be as big as we have today as some are still complaining about the minimum wages which we implemented few years ago. I respect the rubber gloves industry as this is one industry which we have successfully dominate globally but not the low costs labor they continue to use and continually ask for government support for that.
When I invest in some of the stocks in Malaysia, there is a strategy. I invest in companies such as Airasia, Power Root, IJM. Some of these are simple business, but they are the ones that create their own expertise, brands, marketing channels. I like those that, so called "Create their own destinies." especially Airasia - and often I also complain as a country we try to suppress these companies who are building their expertise from within the country.
Seriously, as a country we have to think of supporting companies that directly and indirectly think of Malaysia as a home - which in the past 2 decades we have not. That's how we really develop the needed talent for the country.
Monday, August 13, 2018
3 BIG themes in the long short and medium term - Corporatisation Malaysia, Trade War, SST
The past 3 - 6 months have seen huge movement in the policies and changes locally as well as internationally which should change how we are investing in the market here in Malaysia.
Short to Medium Term - no SST on construction materials will benefit construction companies
The exemption of Sales and Services Tax on some of the construction materials will benefit the construction sector immediately. Although the new Pakatan Harapan government has terminated or postponed several mega projects, construction is still a big contributor to the country's economy. Construction is not sexy at all, but is needed to oil the economy - pretty much in most countries. Many projects have continued and some of these projects such as the MRT2, highways which was awarded last few years are still continuing. The exemption on SST towards construction materials will definitely benefit the construction companies whom have secured large contracts immediately.
I see the larger construction companies such as Gamuda, IJM, Gadang, MRCB, Kerjaya Prospek to benefit from here.
The new government is also looking at opening up tender for projects. With this, I would think the companies that have capabilities but all this while have remained second tier will probably get more jobs due to their inherent capabilities rather than connections.
As for the property companies, although it will allow their cost of building to ease, to me the overhang will still see some challenges for this sector. Some of these property companies however has been cheap and their valuation has been much below book value. To decide to invest into this sector however, will need patience.
As for toll highways, the idea for its abolishment is postponed as answered by YB Baru Bian, the Works Minister in this video. Apparently, the RM400 billion total to buyback all the toll highways is quite consistent is almost all the figures which have been shared.
The US - China Trade War
As one know, Malaysia is a huge trading nation in comparative to our size of economy. The Trade War between China and US, if prolonged will have impact to Malaysia and it is not easy to figure out how it works for Malaysian companies. I would think, in the shorter term, as long as Malaysian manufacturers can accommodate some of the demand shifts from Chinese to Malaysian companies, those companies will immediately benefited.
Some of these companies that would have benefited are the electronics manufacturers especially the Electronic Manufacturing Services and Precision Engineering companies. Examples of these are companies like Globetronics, KESM, Salutica.
Whether the Trade War will cause a global inflation and recession, it remains to be seen.
In the longer run, the continuous reduction on dependence on foreign labor will impact some of these manufacturers.
Tun Dr Mahathir as I can see is also a supporter of the technology based companies. Overall, this sector will see some revival, and for me the best way to invest in this sector is to diversify as it is quite hard to pick particular winners. Do be particularly careful though on the ones which are overdependent on certain company as well as those that have been overvalued.
Corporate Malaysia
There could be a major shift when comes to what type of companies to buy - GLICs or privately controlled. In the last 20 years, Malaysian GLICs has outgrown private companies, and I see that is going to be reversed. Firstly, there is a smaller room for these companies to grow further as whatever that can be monopolised or oligopolised would already be done. There is a very few new sectors for these companies to monopolised anymore and where the previous government's policies would not have done so.
In the next 10 or more years, many of these policies is to reverse this. And it started with Telekom Malaysia and Bernas (not listed). I foresee companies like MAHB, TNB to be affected as well. A large part of investments in Malaysian is done by EPF. They probably now have between 15% to 20% of Malaysian stocks in market capitalisation. The only way for them to continue to perform in the past was to continue to buy the large GLICs, and these companies are not cheap. For many years, they have been expensive.
The way forward to buy Malaysian stocks is to look for well run smaller to mid-sized companies and it is more so in the coming years as we try to disentangle ourselves from having large GLICs.
Short to Medium Term - no SST on construction materials will benefit construction companies
The exemption of Sales and Services Tax on some of the construction materials will benefit the construction sector immediately. Although the new Pakatan Harapan government has terminated or postponed several mega projects, construction is still a big contributor to the country's economy. Construction is not sexy at all, but is needed to oil the economy - pretty much in most countries. Many projects have continued and some of these projects such as the MRT2, highways which was awarded last few years are still continuing. The exemption on SST towards construction materials will definitely benefit the construction companies whom have secured large contracts immediately.
I see the larger construction companies such as Gamuda, IJM, Gadang, MRCB, Kerjaya Prospek to benefit from here.
The new government is also looking at opening up tender for projects. With this, I would think the companies that have capabilities but all this while have remained second tier will probably get more jobs due to their inherent capabilities rather than connections.
As for the property companies, although it will allow their cost of building to ease, to me the overhang will still see some challenges for this sector. Some of these property companies however has been cheap and their valuation has been much below book value. To decide to invest into this sector however, will need patience.
As for toll highways, the idea for its abolishment is postponed as answered by YB Baru Bian, the Works Minister in this video. Apparently, the RM400 billion total to buyback all the toll highways is quite consistent is almost all the figures which have been shared.
The US - China Trade War
As one know, Malaysia is a huge trading nation in comparative to our size of economy. The Trade War between China and US, if prolonged will have impact to Malaysia and it is not easy to figure out how it works for Malaysian companies. I would think, in the shorter term, as long as Malaysian manufacturers can accommodate some of the demand shifts from Chinese to Malaysian companies, those companies will immediately benefited.
Some of these companies that would have benefited are the electronics manufacturers especially the Electronic Manufacturing Services and Precision Engineering companies. Examples of these are companies like Globetronics, KESM, Salutica.
Whether the Trade War will cause a global inflation and recession, it remains to be seen.
In the longer run, the continuous reduction on dependence on foreign labor will impact some of these manufacturers.
Tun Dr Mahathir as I can see is also a supporter of the technology based companies. Overall, this sector will see some revival, and for me the best way to invest in this sector is to diversify as it is quite hard to pick particular winners. Do be particularly careful though on the ones which are overdependent on certain company as well as those that have been overvalued.
Corporate Malaysia
There could be a major shift when comes to what type of companies to buy - GLICs or privately controlled. In the last 20 years, Malaysian GLICs has outgrown private companies, and I see that is going to be reversed. Firstly, there is a smaller room for these companies to grow further as whatever that can be monopolised or oligopolised would already be done. There is a very few new sectors for these companies to monopolised anymore and where the previous government's policies would not have done so.
In the next 10 or more years, many of these policies is to reverse this. And it started with Telekom Malaysia and Bernas (not listed). I foresee companies like MAHB, TNB to be affected as well. A large part of investments in Malaysian is done by EPF. They probably now have between 15% to 20% of Malaysian stocks in market capitalisation. The only way for them to continue to perform in the past was to continue to buy the large GLICs, and these companies are not cheap. For many years, they have been expensive.
The way forward to buy Malaysian stocks is to look for well run smaller to mid-sized companies and it is more so in the coming years as we try to disentangle ourselves from having large GLICs.
Saturday, June 23, 2018
RM1 trillion debt: We have gotten the measurement and messaging wrong?
I like less corruption. I like the ability to change the management of the government as long as they are for the people. I like a government that is transparent. I like a government which is more truthful and not trying to spin.
My article here is to put Malaysians into the mindset to think rather than be blindly led. I have always been supportive of this government or the people behind them long before the change. But things have to be put into clear perspective.
Over the last 6 weeks, we have been bombarded with the RM1 trillion debt message. I think no one single day, we have been told and drilled that Malaysia is now a country with huge debt and we have to tighten our belt, and to show patriotism there is a a save the country fund called Tabung Harapan. To be fair, the government has also told us that the fund is not meant to repay all the RM1 trillion debt but it is more of being a message to allow Malaysian to show that we care about the dire situation of this country.
First of all, let me put this question into the mind of all Malaysians. Are we serious with the message of having a ZERO debt country. Name me a country that has zero debt. Singapore? China? US? Japan? South Korea? These are countries which we are taking as our benchmark. Countries which have almost no debt - Norway, Saudi - and we know how their wealth came from. I have not heard from their government that they want to pay off their debt.
(Prof Jomo and Zeti are in the Council of Elders. I would love to hear from them on this perspective, as they have been quiet.) So far the ones that have drilled the high debt message are the politicians - Lim Guan Eng, Tony Pua, Mahathir Mohamed. They still want to win more seats in parliament, please remember. I want to hear from the professionals. The BNM governor, ex and current and others whom have been helping the government.
We mentioned that our debt during then was about RM200 billion. Today, it is RM1 trillion - I am not going to challenge the ones used by Moody's as their record still shows our debt is RM650 billion. In fact, I have not heard from any other government that they are willing to show to people how bad is their debt situation when they are the government. Is this a manner to create confidence? As opposition, yes! Not as the ruling government.
Now, let me give a case study from our past in 1990s and now. One of the barometer to show the difference between those days and today is the wealth of Khazanah. To put into perspective, look at this link to see the history of Khazanah. From its creation in 1994, now Khazanah has Net Worth of RM116 billion and assets of RM157 billion. Back in 1994, it was probably zero in assets.
There is a difference between then and now. TimeDotCom, Malaysia Airport, PLUS Expressway, UEM, Axiata, IHH and many more were under private hands. Today, it is owned by the government and obviously it can be sold. With more assets, there is a chance that there would be more debt. One of the measurement which have been used largely to measure how much debt the country can take is Debt/GDP. Even then as above, it is not the right measurement as countries like China and Singapore for example have huge reserves. They have huge sovereign controlled assets which can be utilised when needed.
Besides Khazanah, there are several more sovereign funds which are owned by the country such as KWAP, Johor Corp. Back then in 1990s these organizations were worse off than today. Example, KFC which is now part of Johor Corp was under private hands and the good company was wrongly mismanaged.
As a country, the private savings is also much healthier. EPF is now having fund size of around RM700 billion. I believe back then it was probably around RM200 billion. The wealth of the people is also the wealth of the country.
Truth be told, our country has progressed but of course as compared to many other countries and even our neighbors, we may not have come out ahead. Generally, the world has moved on to the better. And we have to call spade a spade.
Anyone who is saying I am not fair to this government should read this where I wrote it in 2013. A spade is better off being shown as a spade. So that as the people of this nation we are better off better educated - on the economy.
My article here is to put Malaysians into the mindset to think rather than be blindly led. I have always been supportive of this government or the people behind them long before the change. But things have to be put into clear perspective.
Over the last 6 weeks, we have been bombarded with the RM1 trillion debt message. I think no one single day, we have been told and drilled that Malaysia is now a country with huge debt and we have to tighten our belt, and to show patriotism there is a a save the country fund called Tabung Harapan. To be fair, the government has also told us that the fund is not meant to repay all the RM1 trillion debt but it is more of being a message to allow Malaysian to show that we care about the dire situation of this country.
First of all, let me put this question into the mind of all Malaysians. Are we serious with the message of having a ZERO debt country. Name me a country that has zero debt. Singapore? China? US? Japan? South Korea? These are countries which we are taking as our benchmark. Countries which have almost no debt - Norway, Saudi - and we know how their wealth came from. I have not heard from their government that they want to pay off their debt.
(Prof Jomo and Zeti are in the Council of Elders. I would love to hear from them on this perspective, as they have been quiet.) So far the ones that have drilled the high debt message are the politicians - Lim Guan Eng, Tony Pua, Mahathir Mohamed. They still want to win more seats in parliament, please remember. I want to hear from the professionals. The BNM governor, ex and current and others whom have been helping the government.
We mentioned that our debt during then was about RM200 billion. Today, it is RM1 trillion - I am not going to challenge the ones used by Moody's as their record still shows our debt is RM650 billion. In fact, I have not heard from any other government that they are willing to show to people how bad is their debt situation when they are the government. Is this a manner to create confidence? As opposition, yes! Not as the ruling government.
Now, let me give a case study from our past in 1990s and now. One of the barometer to show the difference between those days and today is the wealth of Khazanah. To put into perspective, look at this link to see the history of Khazanah. From its creation in 1994, now Khazanah has Net Worth of RM116 billion and assets of RM157 billion. Back in 1994, it was probably zero in assets.
There is a difference between then and now. TimeDotCom, Malaysia Airport, PLUS Expressway, UEM, Axiata, IHH and many more were under private hands. Today, it is owned by the government and obviously it can be sold. With more assets, there is a chance that there would be more debt. One of the measurement which have been used largely to measure how much debt the country can take is Debt/GDP. Even then as above, it is not the right measurement as countries like China and Singapore for example have huge reserves. They have huge sovereign controlled assets which can be utilised when needed.
Besides Khazanah, there are several more sovereign funds which are owned by the country such as KWAP, Johor Corp. Back then in 1990s these organizations were worse off than today. Example, KFC which is now part of Johor Corp was under private hands and the good company was wrongly mismanaged.
As a country, the private savings is also much healthier. EPF is now having fund size of around RM700 billion. I believe back then it was probably around RM200 billion. The wealth of the people is also the wealth of the country.
Truth be told, our country has progressed but of course as compared to many other countries and even our neighbors, we may not have come out ahead. Generally, the world has moved on to the better. And we have to call spade a spade.
Anyone who is saying I am not fair to this government should read this where I wrote it in 2013. A spade is better off being shown as a spade. So that as the people of this nation we are better off better educated - on the economy.
Saturday, June 9, 2018
Good start, but it is not just Bernas!
I applaud the government for having the guts to go against a monopoly which was created more than 15 years ago. Almost every time I take rice, I am mindful of the staple of this country is a business that is monopolised by one single company.
I am just hoping that with this the current government can also look at other monopolies as well. The list of those are as follows:
- Astro - being the only one which has satellite license;
- Tenaga Nasional - yes controlled by PNB but we need to allow an open system for power;
- Malaysia Airport - except for Senai airport, all airports have been under the control of this company. Look at what opening on ownership of airports have done for Europe and US. We need to lead the way and I am confident Malaysia today is even more ahead against our neighboring countries;
- Telekom Malaysia and Timedotcom for fiber optic usage. I think their control is the main reason why our internet is expensive. Although the current Multimedia Minister has mentioned of wanting to reduce the costs of broadband by half and increase the speed 2x, these are trends which are happening all over the world. Even without the Minister saying it, it is bound to happen. More need to be done i.e. democratising or relook at the ownership of broadband fiber rather than having Telekom to own the most of it;
- Grab - yes, Grab pretty much has no competitor, the weakness of previous government at the height of election period just do not know what to do when Uber was taken over by Grab. The government today under a much proactive Minister of Transport I hope is doing something about this. We complained about the previous taxi license misuse but Grab is heading that direction;
- relook at e-commerce as it is going to be monopolised by large groups which believe or not will impact Malaysian businesses;
- unit trusts - while it is not monopolised, please look at the charges - perhaps MOF or Minister of Economic Affairs can look at this;
- PUSPAKOM - under Ministry of Transport as well;
- FOMEMA - well Ministry of Health or Human Resource. Why is it we do not have options when we want to hire foreign workers for healthcheck?;
- MYEG - I think this is coming as the shares have largely tracked back. People are expecting things to change I guess as the owners obviously have connections to the previous government?;
- yes buses as well - Prasarana seems to be in huge debt but obviously this structure is not the most efficient.
I am just hoping that with this the current government can also look at other monopolies as well. The list of those are as follows:
- Astro - being the only one which has satellite license;
- Tenaga Nasional - yes controlled by PNB but we need to allow an open system for power;
- Malaysia Airport - except for Senai airport, all airports have been under the control of this company. Look at what opening on ownership of airports have done for Europe and US. We need to lead the way and I am confident Malaysia today is even more ahead against our neighboring countries;
- Telekom Malaysia and Timedotcom for fiber optic usage. I think their control is the main reason why our internet is expensive. Although the current Multimedia Minister has mentioned of wanting to reduce the costs of broadband by half and increase the speed 2x, these are trends which are happening all over the world. Even without the Minister saying it, it is bound to happen. More need to be done i.e. democratising or relook at the ownership of broadband fiber rather than having Telekom to own the most of it;
- Grab - yes, Grab pretty much has no competitor, the weakness of previous government at the height of election period just do not know what to do when Uber was taken over by Grab. The government today under a much proactive Minister of Transport I hope is doing something about this. We complained about the previous taxi license misuse but Grab is heading that direction;
- relook at e-commerce as it is going to be monopolised by large groups which believe or not will impact Malaysian businesses;
- unit trusts - while it is not monopolised, please look at the charges - perhaps MOF or Minister of Economic Affairs can look at this;
- PUSPAKOM - under Ministry of Transport as well;
- FOMEMA - well Ministry of Health or Human Resource. Why is it we do not have options when we want to hire foreign workers for healthcheck?;
- MYEG - I think this is coming as the shares have largely tracked back. People are expecting things to change I guess as the owners obviously have connections to the previous government?;
- yes buses as well - Prasarana seems to be in huge debt but obviously this structure is not the most efficient.
Sunday, February 18, 2018
Shares with stamp duty exemption for 2018
Bursa has provided stamp duty exemption for small and mid cap stocks for the next 3 years starting from 1 March 2018. For each year they have predefined a list of stocks which will qualify for the exemption. Under the definition, small and mid cap stocks are those that are within RM200 million to RM2 billion market cap and for 2018's stocks, the list are for those that are within the market cap as at 31 December 2017.
Here are the list.
I do not know how to make out of the latest move by Bursa but I guess it will slightly enhance the trading activities for the smaller cap stocks.
On investment, it is still advisable to be careful and diligent as trading activities does not make any changes to the fundamentals of the company. Of course some will say it may enhance the business performance of companies like TA, Affin Hwang, Insas etc. but the impact will be minimal considering that the the stockbroking business is rather competitive and the fees that they earn today is a fraction of what they used to earn prior to 2000.
Here are the list.
I do not know how to make out of the latest move by Bursa but I guess it will slightly enhance the trading activities for the smaller cap stocks.
On investment, it is still advisable to be careful and diligent as trading activities does not make any changes to the fundamentals of the company. Of course some will say it may enhance the business performance of companies like TA, Affin Hwang, Insas etc. but the impact will be minimal considering that the the stockbroking business is rather competitive and the fees that they earn today is a fraction of what they used to earn prior to 2000.
Thursday, January 25, 2018
Market expensive? I agree partially BUT...
Where else should one put their money? Cash (which literally means return of about 3% to 4% from deposits), properties which is not cheap now (rental return less than 3% in most cases), bitcoin (are you sure), gold, other commodities, JJPTR equivalent (even more are you sure) etc?
The market has been inundated with headlines - first from the head of EPF - who is a very powerful person due purely to the size of the fund he oversees and second from a fund manager from Affin-Hwang. Think of it this way, the head of Affin-Hwang can be a respected figure but his fund would not cause ripple (not the digital currency) but the action from EPF can cause aftershock to the market. EPF oversees some RM600+ billion or could be as high as RM700 billion of funds. That is some 36% of the capitalisation of Bursa Malaysia.
Of course, EPF has investments all over the place i.e. MGS, private investments, private bonds, but equity forms more than 40% of its holdings (local and foreign). To my calculation of where majority of its equity investments is still in Malaysia - the exposure of EPF in the local equity market is about RM200 billion. That is more than 10% of our market. Considering that many of our companies are either GLCs or family controlled, the 10% really play the king maker role - ala PAS, the political party - i.e, third force.
Hence in this respect, with EPF moving overseas and hunting for deals - I agree but once EPF goes overseas it is now a big fish in a big ocean or five oceans, no more a big fish in Selat Malacca where it does not have much room to manuever. A big fish in a big ocean though will have bigger fishes - even bigger sharks. Then in that respect (with all due respect) it is now a equivalent of Affin Hwang Asset Management in Malaysia. Not easy. That's why EPF is - to some certain extent - still back to Malaysian-related deals such as the Battersea. It is better to do what you know, than to invest in areas which you are not so sure.
Now back to the first topic in this blog. Is our market expensive? If one is to look at KLCI and the type of companies that represent it, I would say very - just like what the Value Partner guy, Cheah Cheng Hye said. In fact, back in late 2016, I have put up a blog (on our KLCI counters) where if I were given a choice to pick from the Bursa KLCI Composite 30, I do not know which companies to pick.
Investments is not just about the PE of today or next year, but how we foresee (with good hindsight) on where these companies will lead themselves into. Based on that same article above, I just do not have good positive view of these companies moving forward. These companies which forms the 30 Composite - AMMB, Axiata, Maxis, Digi, YTL, PDB, Tenaga Nasional - they are not exciting.
(Note: the last 1-1/2 year, there has been movement in the KLCI 30 where Press Metal, Nestle has joined taking over from IJM, Sapura Kenanga, BAT but the two new counters have since became expensive.)
So, is out market expensive? Based on that 30 stocks (which forms about half our our market capitalisation) - yes. Not just on current PE valuation but future valuations of these companies.
One should know, funds (local and foreign) form 2/3 of the movement of stocks almost daily. Many of them are exposed to the KLCI 30 and the mid-cap 70 stocks i.e. the larger capitalised companies. These funds when they make a mention of the market they look at the PE of the market as a whole. (I look at this as well but I like to look much much more micro - which means the individual companies - then only macro)
Our market, on the large part is a bit stale as there have not been much new exciting listings over the past few years. If there are new potential ones, it is more of a repackaging i.e. Sime split into 3 companies, KFC wanting to come back, eDotco - the tower arm of Axiata coming onstream.
As I see it, on the micro level, there are still a portion of attractive companies - which I am not going to discuss here. Because of the general perception that the Malaysian market is not cheap and some of them are avoided or missed out by the funds, they are surprisingly still very good in my eyes. As mentioned above, the global market is now running on low interest rates still and to find investments that secure more than 5% is not easy. It is hard to find companies that are consistently growing and yet traded at less than 10x PE. If you have one and quite confidently see that they will be having that good growth 10 years down the road - you and I have found gems.
Why?
At 8x PE for example and if the company is growing at 10% growth yearly in terms of earnings, one could get easily 15% return yearly over a long term period from its investments based on value - not price. Isn't that better than keeping cash? Of course, there are risks but in today's world keeping cash is risky - if you know what I meant.
HENCE. Do continue to keep looking because there are those types of opportunities still in Bursa. And sometimes being a small fish is perhaps better as I do not really need to eat a lot to satisfy myself.
The market has been inundated with headlines - first from the head of EPF - who is a very powerful person due purely to the size of the fund he oversees and second from a fund manager from Affin-Hwang. Think of it this way, the head of Affin-Hwang can be a respected figure but his fund would not cause ripple (not the digital currency) but the action from EPF can cause aftershock to the market. EPF oversees some RM600+ billion or could be as high as RM700 billion of funds. That is some 36% of the capitalisation of Bursa Malaysia.
Of course, EPF has investments all over the place i.e. MGS, private investments, private bonds, but equity forms more than 40% of its holdings (local and foreign). To my calculation of where majority of its equity investments is still in Malaysia - the exposure of EPF in the local equity market is about RM200 billion. That is more than 10% of our market. Considering that many of our companies are either GLCs or family controlled, the 10% really play the king maker role - ala PAS, the political party - i.e, third force.
Hence in this respect, with EPF moving overseas and hunting for deals - I agree but once EPF goes overseas it is now a big fish in a big ocean or five oceans, no more a big fish in Selat Malacca where it does not have much room to manuever. A big fish in a big ocean though will have bigger fishes - even bigger sharks. Then in that respect (with all due respect) it is now a equivalent of Affin Hwang Asset Management in Malaysia. Not easy. That's why EPF is - to some certain extent - still back to Malaysian-related deals such as the Battersea. It is better to do what you know, than to invest in areas which you are not so sure.
Now back to the first topic in this blog. Is our market expensive? If one is to look at KLCI and the type of companies that represent it, I would say very - just like what the Value Partner guy, Cheah Cheng Hye said. In fact, back in late 2016, I have put up a blog (on our KLCI counters) where if I were given a choice to pick from the Bursa KLCI Composite 30, I do not know which companies to pick.
Investments is not just about the PE of today or next year, but how we foresee (with good hindsight) on where these companies will lead themselves into. Based on that same article above, I just do not have good positive view of these companies moving forward. These companies which forms the 30 Composite - AMMB, Axiata, Maxis, Digi, YTL, PDB, Tenaga Nasional - they are not exciting.
(Note: the last 1-1/2 year, there has been movement in the KLCI 30 where Press Metal, Nestle has joined taking over from IJM, Sapura Kenanga, BAT but the two new counters have since became expensive.)
So, is out market expensive? Based on that 30 stocks (which forms about half our our market capitalisation) - yes. Not just on current PE valuation but future valuations of these companies.
One should know, funds (local and foreign) form 2/3 of the movement of stocks almost daily. Many of them are exposed to the KLCI 30 and the mid-cap 70 stocks i.e. the larger capitalised companies. These funds when they make a mention of the market they look at the PE of the market as a whole. (I look at this as well but I like to look much much more micro - which means the individual companies - then only macro)
Our market, on the large part is a bit stale as there have not been much new exciting listings over the past few years. If there are new potential ones, it is more of a repackaging i.e. Sime split into 3 companies, KFC wanting to come back, eDotco - the tower arm of Axiata coming onstream.
As I see it, on the micro level, there are still a portion of attractive companies - which I am not going to discuss here. Because of the general perception that the Malaysian market is not cheap and some of them are avoided or missed out by the funds, they are surprisingly still very good in my eyes. As mentioned above, the global market is now running on low interest rates still and to find investments that secure more than 5% is not easy. It is hard to find companies that are consistently growing and yet traded at less than 10x PE. If you have one and quite confidently see that they will be having that good growth 10 years down the road - you and I have found gems.
Why?
At 8x PE for example and if the company is growing at 10% growth yearly in terms of earnings, one could get easily 15% return yearly over a long term period from its investments based on value - not price. Isn't that better than keeping cash? Of course, there are risks but in today's world keeping cash is risky - if you know what I meant.
HENCE. Do continue to keep looking because there are those types of opportunities still in Bursa. And sometimes being a small fish is perhaps better as I do not really need to eat a lot to satisfy myself.
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