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CORPORATE DIGEST
PERSPECTIVE
CONTENTS Issue 49 Oct 2011
p6 p6
Volatile Times
p16 The Malaysian Dilemma
p4 p4
text : Wong Ming Tek
text : Joshua Lim
text : Predeeben Kannan
p14
p22 p22
Petronas Dagangan Shows A “Stellar Performance”
p14
Supply Chain’s Gradual Recovery And New Myvi Model Bode Well For The Automotive Industry In 2H11 text : Birdy Law
p20
Sunway Suffers Jittery Debut Despite Strong Expectations
text : Michael Tee
San Miguel Close To Securing ESSO Malaysia’s Downstream Activities text : Joshua Lim
p24 Possible Mild Recession In Europe But Markets Overreacted text : Yeoh Mei Kei p26
FINANCIAL PLANNING
Double-Dip Recession Lessons From History text : The Fundsupermart.com Research Team
Sizing Up Your Confidence Level
p36
How Will You Leave Your Legacy?
text : Carol Yip
text : Lee Khee Chuan
OTHER FEATURES
p38
p38 Sweets-Laden Budget Needed Both Politically And Economically text : Yang Ming Wan
p34
p18
HEADLINERS
p32
2 CENTS WORTH
compiled : Michael Tee text : Editorial Team
[1]
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IN THE SPOTLIGHT p11
SI Conference 2011: The Quest For Investment Success
www.sharesinv.com
text : Daxx Chong & Ong Qiuying
PUBLISHER Pioneers & Leaders (Malaysia) Sdn Bhd &R 1R $
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p11 OTHER CONTENTS
Research Executives Choo Hao Xiang Jade Lee Louis Kent Lee Gerald Teo
Research Assistants $QG\ &KRU 'D[[ &KRQJ Ong Qiuying Simeon Ang Chief Translator: Catherine Mak
p41
Market Indices
p52
Highest Margins
p43
Foreign Indices
p53
Highest ROA
Translators: Choo Ai Loon Goh Lih Fang Tan Kim Joo Yong Chia Win
p44
Market Capitalisation / Performance of Recent IPOs
p54
Profit & Loss
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Upcoming Results Announcements / Discount to NAV
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Insider Trades
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Most Active Shares
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p47
Hitting 52-Week High / Hitting 52-Week Low
p57
Main Market
p125 p48
ACE Market
Top Gainers p133
p49
Investment Trust
Top Losers p151
Warrants
p50 p51
Lowest P/E p155
Companies Index A-Z
p167
Warrants Index A-Z
Highest Yield
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[2]
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I
t was another instance of buy on anticipation and sell on news as no new surprises were announced during the widely anticipated two-day FOMC meeting except the warning of a “significant downside risks� to the US economy that spooked investors. The Kuala Lumpur-based benchmark FBM KLCI traded 2.2% down from its previous day close post-FOMC meeting. The Fed, as expected, said it would tilt its US$2.85 trillion balance sheet (also dubbed “Operation Twist�) via buying US$400 billion long-term Treasury securities and selling the same amount of shorter-term notes to lower borrowing costs to revitalise the housing market. Market observers were, however, not too sanguine of any meaningful impact on lending as labour market conditions remain fragile and unemployment rate stays high. Back home, things seem to be looking bright for Petronas Dagangan Berhad (PDB). Being the market leader in the Commercial and LPG sectors and second only to Shell in the Malaysian lubricants market, PDB is “laying seeds� abroad to continue its positive growth trajectory. More in our cover story starting from page 4. Elsewhere, Main Market debutante, Sunway, fell short of expectation to close 11% below its issue price of RM2.80 on 23 August. Though the nervous state of the world economy and the less than expected performance of the Malaysian economy of late had affected share price, the company was valued at a whopping RM6 billion compared to a market capitalisation of RM3.6 billion! Turn to page 14 to find out more.
editorial desk In its September update, the International Monetary Fund had reduced its world output projections to 4% for this and next year as economic woes in the US and fiscal crisis in the EU were taking longer than expected to resolve. The ASEAN-5, which includes Malaysia, is expected to grow by 5.3% in 2011 and 5.6% in 2012 compared to earlier forecast of 5.4% and 5.7% respectively. Following growth of 4.9% and 4% in the first two quarters of 2011, is the 5% growth target on track for the full year? Flip no further than page 16 to learn more. While volatilities is unlikely to go away any sooner, the underlying need for critical investment advice rang loud and clear as evidenced by the better than expected crowd at Shares Investment Conference 2011. Our success is yours, and in appreciation of your support, we have recapped and weaved the essence of each of the seminars by our renowned speakers with details starting from page 11. Fret not if you have missed out on the actions of our renowned speakers. We have made available the conference DVD for your purchase with details at the back cover. Hurry up and order now, while stocks last! Happy reading and wise investing!
CLARIE LIM Regional Research Editor
Information in this guide has been obtained from sources believed to be reliable. However, its accuracy or completeness is not guaranteed. While every precaution is taken to ensure accuracy, the publisher accepts no liability for any error which may arise.
All materials printed in SHARES INVESTMENT are protected under the copyright act. All rights reserved. No part of this publication may be reproduced in any form or by any means without the written permission of the publisher.
The articles are based on the opinions of the various authors and do not represent the opinions of this publication and/or the opinions of the organisation he/she represents.
Information in the publication should not be taken as offer/ advice to buy or sell securities.
In no event is SHARES INVESTMENT liable for all and/or any direct or indirect loss arising from any use or any reliance of any information provided.
:H RXU DVVRFLDWHG FRPSDQLHV DQG RU WKHLU RIĂ€FHUV GLUHFWRUV DQG HPSOR\HHV PD\ RZQ RU KDYH positions in securities mentioned in the publication, and may from time to time, add on to or dispose of such securities.
[3]
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[ CORPORATE DIGEST ] text : Joshua Lim
PETRONAS
DAGANGAN SHOWS A
“STELLAR PERFORMANCE”
T
hings seem to be looking bright for Petronas Dagangan Berhad (PDB). It has consistently been the bestperforming stock in the benchmark FBM KLCI this year. Incorporated in 1982 and listed on the Main Board of Bursa Malaysia Securities in 1994, PDB is the principal domestic marketing arm of Petroliam Nasional Berhad (PETRONAS) and Malaysia’s leading retailer and marketer of downstream oil and gas products. PDB has over the years strived to continuously provide superior products, and services in all its four core businesses of Retail, Commercial, Liquefied Petroleum Gas (LPG) and Lubricants. Today, PDB is the market leader in the Commercial and LPG sectors,
with strong fundamentals to retain and further solidify its position. Now the company has plans to go abroad, targeting the South East Asian market in particular. After having penetrated the Indonesian market, it has now set its sights on the Philippines and Thai markets.
Expansion Based On Positive Growth Trajectory PDB is no stranger in the Malaysian market. It already supplies 51% of the country’s liquefied petroleum gas (LPG) needs, as stated in its 2011 annual report. In an interview with a local news agency recently, the company’s Chief Executive Officer, Amir Hamzah Azizan explained the intentions for expanding abroad:
“We need to start laying seeds … At some point, we will top out. When you top out, then you sit on earnings whatever the normal demand growth is in the country.” Amir is perfectly confident with the move. He is well aware that his company has more than RM900 million in reserves to front any expansionary move. In addition to this, the company has been performing rather well off late. PDB posted a net income of RM869.7 million for the year ended March 31, a rise of 16% from the year before. Over a five-year period, its earnings grew at a compounded annual growth rate of 6.3%. According to PDB, the performance was due to higher sales volume of various types of oil based products amounting to
[4]
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13.5 billion litres and the increase in the selling price due to the higher global oil prices as well as the controlled price increases of retail fuel as the Government gradually cut back on subsidies. There have also been news reports indicating that PDB might be acquiring its Indonesian affiliate, PT Petronas Niaga Indonesia. The Indonesian arm already runs 19 petrol stations.
On The Local Front Back home, the company currently has more than 960 petrol stations in Malaysia and will be adding 30 more by the end of this year. It aims to increase its retail market share from 32% to 40% and from 22% to 28 % in
the lubricant segment over the next five years. It is currently only second to Shell in the Malaysian lubricants market. Besides the strong hold on the retail market sector in Malaysia, there are further plans afoot for PDB to play a key role under the 10th Malaysia Plan and Economic Transformation Programmes. The company’s Chairman, Datuk Wan Zulkiflee Wan Ariffin announced to the media that construction activities generated by the country’s future development projects are abundant and being tapped by its commercial business team. “There will be massive diesel and bitumen requirements as spin offs from construction and road development respectively,” he said recently. Datuk Wan Zulkiflee added that most of its capital expenditure (Capex) of the year ranging between RM350 million and RM400 million will go towards the expansion of its retail network. “We are also embarking on an asset life study in the effort to upgrade our existing facilities. The Capex is also for our project at KLIA 2 that is expected to be completed by the end of next year,” he added. Reiterating Datuk Wan’s statement, Amir added that managing cost would continue to be a challenge but the company would continue to do its best to address it. As part of its effort to improve cost efficiency, Petronas Dagangan recently engaged the 25 metre B-double LPG pallet trailer, the first of its kind in the industry, which allows 65% more storage capacity. The objective was to expand outreach while reducing the number of trips.
Market Performance At the close of trading on Au-
gust 19, 2011, PDB was unchanged at RM17.40, representing a total gain of 49%. This was despite the fact that the FBM KLCI was on a declining path following news of the European debt scenario as well as the US credit ratings cut. Pressure from the jobless rate in the US and uncertainty in the Middle East coupled with the record gold prices, contributed to the decline of the local market at the time. The positive achievements of PDB prompted Amir to announce that the company’s newly introduced dividend policy of paying about 55 per cent of its profits as bonus to shareholders on a quarterly basis was “sustainable”. With signs that the company is on a growth trajectory, CIMB Equities Research maintained its positive view on PDB, with the retail and lubricants sector leading the way. The research house was of the opinion that PDB was largely within anticipation of stronger growth in the next quarters. It added that the interim Dividend Per Share (DPS) of 15 sen also met expectations. “Our target price is unchanged at RM21.60 as we continue to value the stock at a 40% premium over our 14.5x target market P/E to reflect its earnings visibility and growing appeal as a growth and dividend play. The stock remains an “Outperform”, with the potential share price trigger being leadership of the retail and lubricant segments,” the research house added. This article is based on research information from various research houses and news agencies. [5]
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[ PERSPECTIVE ] text : Wong Ming Tek
VOLATILE
TIMES
T
he proportion of companies that reported disappointing earnings in 2Q-11 was quite similar to the 1Q-11 results season while the percentage of those that beat expectations remained low. However, notable disappointments seen from stocks like Tenaga and Malaysia Airlines stemmed largely from specific issues such as sizeable losses. For the quarter, net profit for our stock universe was lowered by 3%
q-o-q largely due to shocking losses at Tenaga and MAS and lower profits from Genting Group (reduced contributions from Singapore and UK). This was partly mitigated by strong bank profits (investment gains). This is the second consecutive quarter of lower profits following the recent peak in 4Q-10. Collectively, net profit for our universe was cut by 4.6% for 2011 and 2.8% for 2012, weighed down by disappointments for several large cap
stocks. In the last four quarters, we saw upgrades for our 2011 earnings. With the cuts, our stock universe earnings growth is 10.9% for 2011 and 14.9% for 2012. Banks and Tenaga (low base this year because of higher cost from gas curtailment) will drive earnings growth. The sum of our 2011 earnings forecast is 5% below consensus largely due to our lower expectations for MISC (weak container rates) and MMHE (delays in order book replenishment).
4 1HW 3URĂ€W *URZWK E\ 6HFWRU T R T JURZWK GHSUHVVHG E\ 7HQDJD 0$6 DQG *DPLQJ DQG $XWRPRWLYH VHFWRUV (RMm)
2Q10
1Q11
2Q11
Banking
3,677
4,012
4,331
% chg y-o-y 18
50 544 206 370 197
70 620 155 283 263
69 562 167 180 219
38 3 -19 -51 11
1,313 191 511 1,356 1,137 1,081 273 1,618 (29) 22 12,874
1,853 368 420 1,045 1,184 326 389 1,538 (153) 23 12,520
193 27 20 -13 31 -76 108 1 -180 60 7
1RQ EDQN ÀQDQFLDO Consumer Industrial Motor Oil & Gas
Conglomerate 632 Construction 290 Concessionaires 349 Gaming 1,195 Plantation 901 8WLOLW\ 1,346 Property 187 Telecommunication 1,519 Transportation 191 Technology 15 Total 11,668
% chg Remarks* q-o-q Bolstered by AMMB and AFG through increased non-interest income from investment 8 gains. NIM continued to be under pressure. Strong hotel and property investment income propelled TAE 0 /RZHU DEVROXWH QHW SURÀW DW *XDQ &KRQJ -9 Losses from Kinsteel compounded by dismal performances from Kossan and Top Glove 8 -36 HP Act, Japan earthquake/tsunami depressed auto sector -17 Dayang and Wah Seong led the pack with strong earnings. For MMHE, KNM, Perdana Petroleum, managing margins remains key challenge 41 Plantations and Industrial segments propelled Sime Darby 93 Lifted by Gamuda and IJM Corp -18 /RZHU TXDUWHUO\ SURÀW IURP 3/86 -23 Dragged by Genting Bhd’s lower Singapore contributions FFB volume rebound and CPO ASPs underpinned stellar earnings 4 -70 Higher gas costs from curtailments caused losses at Tenaga 43 ,QFUHDVHG SURSHUW\ VDOHV IURP 8(0/ XQGHUVFRUHG E\ UHVLOLHQW HIIRUWV IURP WKH UHVW Lower earnings from Digi depressed growth in Axiata and Maxis -5 n.m. High jet fuel costs dragged MAS further into the red Larger contribution from Notion’s camera segment lifted earnings 6 -3
Source: HwangDBS Vickers Research [6]
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Being Selective
Malaysia Earnings Growth by Sector
Financial Consumer Manufacturing/Industrial Motor Oil & Gas Conglomerate Construction Concessionaires Gaming Plantation Power Property Telecommunication Technology Transportation/Logistic
Earnings Growth (%) 2010 2011 2012 31.5 15.1 13.3 10.0 (5.9) 17.1 34.8 18.0 22.2 24.6 16.6 8.0 (14.1) (8.6) 52.1 (36.8) 97.5 6.5 (2.1) 31.5 15.0 6.3 21.4 (0.0) 51.9 9.7 13.9 72.9 24.7 (7.6) 4.2 (26.4) 59.9 147.3 (9.8) 36.3 23.0 3.1 9.5 20.3 25.2 19.1 41.5 (39.2) 29.9
HDBSVR universe
20.1
10.9
Earnings: Different From 2008-09 With the slowdown in economic growth, there could be risks to our earnings projections. In the 2008-09 financial crisis (GDP contracted 1.7% in 2009), our 2009 earnings were cut by 18%. Approximately 31% of this cut related to Sime Darby and IOI Corp – which were adversely affected by the sharp drop in Crude Palm Oil (CPO) prices. Other big cuts came from Tenaga (earnings sensitive to electricity demand) and MAS. In 2008-09, the impact on earnings was compounded by a collapse in commodity prices. Palm oil stocks fell as average CPO prices dropped 21% from RM2,864/t in 2008 (where it reached high of RM4,203/t) to RM2,261/t in 2009. The drop in crude oil prices sparked concerns about order book replenishment opportunities for the oil & gas stocks. Without these factors, the extent of the earnings risk should be less than that of 2008. For banks, the key risk to our for-
14.9
2010 15.1 17.3 12.2 12.2 18.9 28.7 21.9 17.5 14.6 17.4 14.1 14.1 18.0 15.0 22.7
PE (x) 2011 13.2 18.3 10.3 10.5 20.6 14.5 16.7 14.4 13.3 13.9 19.2 15.6 17.4 12.0 37.3
2012 11.6 15.7 8.4 9.7 13.6 13.6 14.5 14.4 11.7 15.1 12.0 11.5 15.9 10.0 28.7
17.0
15.4
13.4
ward earnings would be capital market flows, which would tend to affect banks with higher proportion of market-related activities such as CIMB. In the near term, we do not expect asset quality headwinds. Tenaga’s earnings would be sensitive to GDP growth: every 1% change in GDP would affect forward earnings by 8%. Property, aviation and shipping are other sectors also vulnerable in a slower growth environment. On the other hand, earnings for the gaming and telecommunications sectors should be relatively resilient going by what we saw in 2008-09. For the palm oil sector, Asian demand accounts for 51% of the global market with the US and EU having much smaller shares at 1.9% and 12.5% respectively. In 2009, palm oil consumption grew 3.5%. With potentially slower growth, we would expect the Government to push forward key infrastructure projects such as the MRT to stimulate economic activities. As such, we do not foresee significant cuts for the construction sector.
Since 4 August, the KLCI has dropped 6.4% and is currently trading at 13.4x 2012 earnings and 2.0x book value. In terms of earnings multiples, the KLCI is above its 10-year mean. The current book value is higher than the mean of 1.77x while the low point in 2009 was 1.3x book. With the earnings cut for our stock universe, our year-end KLCI target is lowered to 1,520 points (from 1,730 previously). This also factors in a lower multiple of 14x 2012 earnings from 15x before given the higher risk aversion. Our target implies 2.1x book value and provides 7% upside from current levels. Since the start of the global de-risking in early August, the KLCI has been one of the more resilient markets in the region, falling by 3.6% YTD. We would expect this to continue. In a scenario of heightened risk aversion, we see support at 1,370 points (+0.5 standard deviation book value or 1.9x book). The mean multiple (1.77x book) would imply 1,305 points for the KLCI or 10% lower than current values. In view of the slowdown, we would expect the government to push ahead with infrastructure project awards. As such, we remain keen on the construction sector with IJM Corp, Gamuda, WCT and MRCB as our picks, although high foreign shareholdings could result in high share price volatility. We continue to like names with good domestic drivers and reasonable valuations such as Boustead Holdings (8x forward earnings, 7% yield) and DRB-Hicom (7x earnings, 0.8x book). Alliance Financial Group (AFG) is the [7]
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cheapest banking stock in our coverage. We believe its scalable domestic franchise and non-interest income traction will support earnings growth and ROE expansion.
Positive Catch-Up? The regional markets rebounded this week. The KLCI may register a
positive catch-up performance today following the 3.5 day break for Hari Raya and National Day celebrations. Since the start of the August correction, the KLCI has lost 6.4%. Large caps registered much smaller losses compared to the smaller-mid caps. On average, the large caps in our universe lost 6.5% compared to 11.2% for
smaller-mid caps. Among our large cap Buys, we like UEM Land, Gamuda and IJM Corp as potential rebound trades. In the smaller-mid caps space, we continue to like YTL Land, MRCB and Boustead Heavy Industries which have lost more than 20% in the last three weeks.
Large caps: Best performers
Large caps: Worst performers
Small-mid caps: Best performers
Small-mid caps: Worst performers
Source: HwangDBS Vickers Research
[8]
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Appendix 1: 2Q11 Summary of Results
[9]
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1Q11 Summary of Results (cont)
Source: Bloomberg, HwangDBS Vickers Research Note: This is a summarised version of an article written by Wong Ming Tek together with the Malaysian Economic & Research Team of HwangDBSVickers Research. For the detailed article, please contact the writer at +603 2711 0956 or e-mail at mingtek@hwangdbsvickers.com.my or general@hwangdbsvickers.com.my. [ 10 ]
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[ IN THE SPOTLIGHT ] text : Daxx Chong & Ong Qiuying
SI Conference 2011:
The Quest For Investment Success
I
n the aftermath of recent market upheaval, many were left overwhelmed and are in search for investment advice. Embarking on a trail to seek opportunities, more than 2,000 participants turned up for our Shares Investment Conference 2011 on 17 September. Held at the Raffles City Convention Centre, enthusiastic participants began streaming in more than an hour earlier before the scheduled opening. Hosted by MediaCorp DJ Wong Lee Jeng, the full-day event saw our renowned investment experts – Professor Chan Yan Chong, Hu Li Yang, Li Xin Jing Collin, Louis Wong and Chen Dan Hong – sharing their views on the prevailing market turmoil. Gracing the event was MP for Choa Chu Kang GRC, Low Yen Ling, and the event officially opened with MP Low sounding the ‘gong’. In his opening speech, Prof Chan cast the spotlight on the current market volatility and highlighted the turmoil in the major economies. Specifically, he commented that the US stock market rally painted a false
picture. This is evident from the low economic growth and high unemployment which persisted despite two rounds of quantitative easing. Next, the much awaited panel discussion took the centre-stage with all five speakers offering precious investment advice and opinions.
Panel Discussion: Some Key Takeaways Should We Invest Amidst The Current Volatility? Wong cautioned investors not to be swayed by pessimism and neglect fundamentally-strong stocks that have fallen to attractive valuations. Building on, Hu stressed that with much liquidity from market stimulus, current sell downs offer opportunities. Chen, however, held a less sanguine view as he expected the slump in Chinese ‘A’ shares to continue. China: The Global Market Saviour? Despite China’s US$3 trillion worth of foreign exchange reserve, Prof Chan remarked that altruistic aid is unlikely as China is only keen in strategic assets. Wong elaborated on the multiple challenges China is facing. He tipped investors to monitor ensuing government policies when identifying potential investment. What Are The Risks For The Global Economy? As observed by Wong, the additional liquidity has not encouraged productive investments but had flowed into safe haven assets instead. The resulting inflation, in Li’s view, have fueled public anger and heightened political risk. [ 11 ]
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Apart from the panel discussion, the afternoon series of breakout seminars were met with overwhelming response. Each of our speakers delved deeper into various topics, with many attracting a full house audience. In his seminar, Prof Chan reiterated that much of the liquidity had been pushing the US stock market upwards but little was helping the real economy. Substantiating his point, he cited the nation’s continued falling property prices. Nevertheless, in light of the upcoming US elections, more measures are likely to be introduced to raise economic growth and hiring. On the Eurozone, he noted that Greece is unlikely to fail and the European Central Bank would likely step in to avert a direct default. Over at Hu’s seminar, he touched on the double-dip recessionary fears stemming from the turmoil in the developed economies. He relegated the fears as self-induced and stressed that this could be an opportune time to ‘buy low’. Leveraging on his experience,
Prof Chan & Hu: Sharing their expertise on market trends and investment techniques
August and September are considered the poorest performing months and markets would usually rebound by November, December and January. Putting the journey to a close, participants who attended the gala dinner had an up-close session with
the speakers to have their queries answered. At the end of it all, there was consensus among everyone that they were bringing home a wealth of knowledge and were one step ahead in their quest for investment success.
For readers who wish to experience the event and review the invaluable insights, the complete videography of Shares Investment Conference 2011 is on DVDs now! For more details or to purchase the conference DVD set, please log on to www.sharesconf.asia/dvd, or to contact us at +65 6745 8733. [ 12 ]
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9/22/11 2:42 PM
[ CORPORATE DIGEST ] text : Michael Tee
Sunway Suffers Jittery Debut Despite Strong Expectations
I
n a sign of the times, Sunway fell short of expectations when it closed at RM2.49 on its debut on the FBM KLCI, Tuesday August 23, 2011. It was essentially 31 sen lower than the reference price of RM2.80. Analysts believed it was a sign of the nervous state of the world economy and the less than expected performance of the Malaysian economy of late. So what is the story behind the emergence of Sunway on the local exchange? It was a matter of consolidation of operations rather than a divestment as many were initially suspecting. The story goes that on November 24, 2010, Tan Sri Dato’ Seri Dr Jeffrey Cheah offered to acquire the assets and liabilities of Sunway Holdings and Sunway City. He decided that 80% of the purchase price would be satisfied by Sunway shares and the remaining 20% in cash. The deal was
further sweetened with free warrants (a total of one warrant for every five Sunway shares). The newly-merged entity would be called Sunway and would be relisted on the Main Market of Bursa Malaysia at an issue price of RM2.80 per share. Upon listing, Sunway has effectively become the fourth largest property developer by market capitalisation, with a value of RM3.6 billion. The group has also reorganised its business structure and will focus on three core businesses – namely integrated property, construction and investment. Upon completion of the merger, Tan Sri Dato’ Seri Dr Jeffrey Cheah will still emerge the winner with 45% control of Sunway, with the other major partner being the Government of Singapore Investment Corporation, with a 12.5% stake. There will also be six key management personnel leading each division
under Sunway. Dato’ Tan Kia Loke will be the Senior Managing Director for the construction and quarry division. Kwan Foh Kwai will be the Managing Director for the construction division, with Ngian Siew Siong heading the international property development division, Dato’ Ngeow Voon Yean leading the property investment division, Ho Hon Sang guiding the property development division and Dato’ Yau Kok Seng managing the strategic investment division.
Operational Effectiveness Post-merger, a few elements will come into play. The property development division will emerge as a core operation of the group. The consolidation will see the group’s land bank increase to 2,198 acres of undeveloped land with an estimated gross development value (GDV) of RM14.5 billion. Its construction arm will also
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be a key player in the equation. The group has a large construction division with a RM2.5 billion outstanding construction order book, comprising of RM2 billion worth of local jobs and RM500 million worth of foreign jobs. The group is determined to maintain its order book replenishment at around RM1.5 billion every year. The construction division is expected to contribute 15% of profit before tax. The group’s building material manufacturing arm in China, known as Sunway Global, is also part of the new development strategy. The products produced and distributed by Sunway Global include pipes, pavers and spun piles. Its pipes manufacturing plant is in Anhui and produces 41,000 tons annually. Its pavers manufacturing plants are located in Shanghai and Dongguan and currently produce a total of 1.8 million metres squared of pavers annually. Finally, its spun pile plant is located in Zhuhai and has an annual production capacity of 400,000 tons, with the products supplied to port and shipyard projects. Another focus will be its trading division called Sunway Marketing. It currently has 42 branches in over seven countries, with 70% of pre-tax profit from overseas. Its bestselling products such as hoses and fittings, have established a presence in Singapore, particularly in the oil & gas and the marine sectors, which contribute around 60% of total segment earnings. Prior to the merger, the two different companies, namely Sunway City and Sunway Holdings were effectively competitors with different sets of key performance indicators. The aim of the merger is to encourage cooperation between them. The group is also
looking to unlock merger synergies worth 1-2% of total revenue. Based on FY-2010 proforma revenue of RM3.1 billion, this would translate into savings of between RM30 million and RM60 million annually.
Abundant Opportunities The completion of the merger will see the enlarged group have a sizeable balance sheet, making it easier for its construction arm to bid for overseas jobs. It will also be in a better position to win local contracts. This is clearly evident as Sunway won a contract for the LRT Kelana Jaya line extension phase 2 on August 16, 2011, worth RM569 million. Adding that to the RM353 million worth of contracts secured so far this year, its construction order book replenishment of RM922 million effectively meet 61% of its FY2011 target of securing RM1.5 billion worth of new orders each year. The group is looking to win more projects under the Economic Transformation Programme and the 10th Malaysia Plan to maintain its order book replenishment target. In addition to the LRT project, the group might also benefit from the MRT construction. In the final blueprint, it was evident that the MRT line would be passing through two of Sunway’s property projects – namely Sunway Nexis and Sunway Velocity. The stop at Sunway Nexis will be the Dataran Sunway station, while the stop closest to Sunway Velocity would be the Cochrane station. This would give Sunway more clout to further enhance the value of these projects and give the group stronger pricing power. The group is also expected to start reaping dividends from its venture into China via Sunway Global back in 2008,
as rapid economic growth in China is raising demand for building materials. Sunway was believed to be one of the major suppliers of pavers for Shanghai Expo 2010 and Guangzhou Asian Games 2010. This bodes well for the Group, as it shows it has an established presence in the China market. It is believed that there is stronger potential for its building materials division to prosper going forward. Meanwhile, Sunway’s Chief Financial Officer Chong Chang Choong said that RM300 million has been set aside for the Tianjin Eco-City project in China while the rest will be for projects in Singapore and India. The Tianjin EcoCity project has an estimated Gross Domestic Value of RM5 billion and will be launched in the middle of 2012. It will also be completed between five and seven years.
Fair Valuations Analysts valued the company at RM6 billion based on sum-of-parts (SOP) methodology, or RM3.89 per share. They see a fair value of RM3.50. The target price is based on 10% discount to SOP values for property stocks with larger market capitalisation. Priced at RM2.80 a share, Sunway should trade at 9x FY-2012F PE and 1.1x P/NTA. In terms of contribution to the SOP value, Sunway’s development properties account for the lion’s share at 35%; net debt makes up 16%, construction 15%, REIT, 15%; cash from warrants 8%, investment properties 6%, and the rest from trading, building materials and quarry. The information in this article is sourced from various research houses. [ 15 ]
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[ PERSPECTIVE ] text : Predeeben Kannan
THE
MALAYSIAN DILEMMA
A
fter growing relatively well last year and decently in the first quarter of 2011, the Malaysian economy has clearly slowed down in Q2-2011. Many factors are working against the nations’ economic growth, some due to developments around the world, while some are purely due to fundamentals. After growing 4.9 percent in the first quarter of 2011, the Malaysian economy grew just 4.0 percent in the second. Although Bank Negara maintains that overall GDP for 2011 will still be in the 5 percent range, it would be interesting to see how the third and fourth quarter can produce the necessary growth to achieve such figures. According to most analysts, the challenges that lie ahead for Malaysia includes the general slowdown in worldwide demand for manufactured products, the possibility of a recession
in the US and Europe, as well as the slowdown of the Chinese economy coupled with the stronger Ringgit, which is making the country’s exports more expensive.
The Challenges Ahead Bank Negara Governor, Tan Sri Dr. Zeti Akhtar Aziz highlighted that the assessment of the growth would still depend on other factors. She agreed that the downside risks to Malaysia’s external demand is greater now due to the lower than expected jobs and economic growth in the US coupled with the debt situation in Europe. “If we have a situation where the United States and Europe slipped into a recession or any other trigger factors that could result in the disruption in international financial markets, we will have to make a reassessment … right now, our assessment is very likely, given the performance of the first half,
and that it (the full-year growth) will be closer to 5 percent,” said Tan Sri Dr. Zeti. Another more “local” element that is triggering worries is the strength of the Malaysian Ringgit. The local currency rose more than 6 percent in the last year, and touched a 14-year high in July based on speculation that the central bank will support a stronger currency to reduce the downside risk of inflation. Bank Negara stated that Consumer Price Index (CPI) for July rose 3.4 percent y-o-y, compared with the 3.5 percent y-o-y, previously. In her announcement to the media, Tan Sri Zeti mentioned that the country’s full-year CPI would remain within the target of 2.5 percent to 3.5 percent. She reiterated that the central bank would continue to focus on maintaining the right balance between controlling inflation and supporting the country’s economic growth when deciding on
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the direction of the monetary policy. Early signs indicate a degree of restraint by the central bank. Bank Negara kept its Overnight Policy Rate (OPR) unchanged at 3 percent, at its monetary policy committee (MPC) meeting in July. This took analysts by surprise as they expected the central bank to raise rates to manage inflationary pressure. In defence of this move, Tan Sri Zeti said that the prevailing rate was necessary to support the domestic economic growth. The MPC would meet again this month to decide on the direction of the OPR.
A Realistic Policy Needed In addition to the less than stellar monetary and economic indicators, there are other more pressing matters that concern the Malaysian economy. High up on the agenda is the shortage of skilled workforce. These talents are critical for the nation to achieve its target of a high income nation by the year 2020. Key to this issue is the low wages offered to workers in selective industries such as construction, agriculture and plantations, all of which are strategic sectors to ensure the balanced development of the Malaysian economy in the next decade, if the country decides to be less reliant on volatile industries like manufacturing and the electronics sectors. Over the years, Malaysia has lost some of its best talents to neighbouring countries Singapore, Australia and New Zealand, due to various reasons. One of which could be the lower wages offered to skilled professionals in Malaysia. The other reason could be the stricter immigration laws that make it less appealing for Malaysians married to foreigners to come back
home with their “foreign” families. Another critical factor that has been highlighted by Malaysians, who have lived abroad, is the lack of a level playing field in the Malaysian employment scene. These professionals are unwilling to leave their well paying jobs abroad, without the reassurance of long-term job and personal development opportunities in Malaysia. Based on recent estimates by the World Bank, there are some 1 million Malaysians living abroad, but only a handful of the highly skilled Malaysian professionals return home. The reasons for the difficulty to attract skilled workforce also lies with the fact that the country is not recognised as a hub for skilled employment. In order to change that perception, Malaysia needs to develop and nurture the growth of skilled industries that would attract both Malaysian and foreign talents from abroad, to enable the country to move up the value chain.
Some Positives Remain Despite the many negatives that have been plaguing the Malaysian economy, including the lack of skilled workforce and the unwillingness of Malaysians living abroad to return to their home country, there has been some good news to cheer about. The central bank governor announced that foreign direct investments in Malaysia have increased in the second quarter with gross and net inflows of foreign direct investments higher at RM13.4 billion and RM6.2 billion respectively. She is confident that the trend will continue into the second half of this year, as there will be more aggressive implementation of
the 10th Malaysia Plan as well as the Economic Transformation Programme. Key to the developments in 2011 would be the Iskandar Malaysia (IM) region in Johor. According to the Iskandar Regional Development Authority (IRDA), committed investments in IM have reached RM76billion as at the first half of 2011, with foreign investors accounting for close to 59 percent of the figure. Out of this figure, some 40 percent or RM30billion have already been realised, with more to be realised from the second half of the year, onwards. Fortunately for Malaysia, there are continuous development projects created to spur the local economy even during slowdowns in the global economy. This is in part due to the effective economic development programmes launched by the government since independence. Part of the success also lies with the “creative” nature of the large local corporations in Malaysia, that are always looking for new ways to develop residential and corporate projects that benefit the people as well as attract tourists due to the “unique” designs and trendsetting technologies. For now at least, Malaysia seems to be maintaining the strong “development” mentality. This is reassuring for the country, as it tries to attract global players to invest in the local economy, especially after the dust of the economic downturn has subsided. The views in this article are strictly those of the writer. Predeeben Kannan is Managing Director and Advisor of Probe Research, a media advisory and consultancy organisation. He can be reached at predeeben@gmail.com. [ 17 ]
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[ HEADLINERS ] compiled : Michael Tee Sime Darby To Acquire 30 Percent Stake In E&O In a deal hailed as a good fit for the company, Sime Darby announced that it would be acquiring 30 per cent stake in property developer, Eastern & Oriental Bhd (E&O), for RM766 million or RM2.30 a share, which is valued at a 20 per cent discount to E&O’s estimated Realisable Net Asset Value (RNAV) of RM3.2 billion. The decision to acquire the shares was aligned with Sime Darby Group’s strategic direction to extend its presence in property development and hospitality sectors, beyond the Greater KL region, specifically in Penang and
Johor, said the conglomerate in a statement today. The 30 per cent stake represents 273 million E&O shares and 60 million Irredeemable Convertible Secured Loan Stocks (ICSLS) in E&O, which Sime Darby is acquiring from Datuk Tham Ka Hon, the managing director of E&O and several other major shareholders of the property developer. “The proposed acquisition will provide a springboard for us to expand our property business and the type of products we can offer. E&O is a distinctive brand in the industry
and is synonymous with quality,” said Sime Darby president and group chief executive Datuk Mohd Bakke Salleh. Sime Darby, through its property arm, Sime Darby Property, has 40 years experience in developing awardwinning townships in prime locations within the Klang Valley. Sime Darby Property’s business portfolio comprises Property Development, Property Investment and Hospitality and Leisure in six countries -- Malaysia, Singapore, Australia, the United Kingdom, China and Vietnam.
Bumi Armada Attracting Interest From All Parties Bumi Armada Berhad (Bumi Armada) has proven to be the darling of analysts of late. The company’s strength and good earnings visibility have attracted interest among investors as well, besides it being one of South-East Asia’s largest floating, production, storage and off-loading vessel (FPSO) operators. “We like Bumi Armada for several reasons. It is one of South-East Asia’s largest FSPO vessel providers and is well on its way to becoming the
said in a research note today. OSK Research has maintained a “neutral” call on Bumi Armada. Despite the neutral call, OSK Research said it continues to like the company for its ability to provide one-stop solutions starting from oil and gas exploration to the decommissioning stage. “Also, we believe, more than 70
per cent of its business provides recurring income and a constant cash flow, which is vital especially during the current difficult global operating environment,” it added. MIDF Research has also maintained a “neutral” call on Bumi Armada amid a cautious view over the market outlook and no immediate term catalyst for the company.
world’s number four FPSO player by financial year ending Dec 31, 2014 (FY14)”, said CIMB Research. Meanwhile OSK Research is maintaining the earnings forecast on Bumi Armada financial year 2011-2012 in view of potential earnings surprises in the second half of financial year 2011. It said the surprises would mainly arise from better utilisation of Bumi Armada’s fleet, it
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Banking Sector Performance Slows Down In July The banking sector had a less than stellar performance in July 2011, compared to the preceding month. Loan growth moderated to 0.2% month-on-month (m-o-m) from 1.4% a month ago, and Year To Date (YTD) July loan growth stood at 7.5%. Consumer loan growth was stable at 0.95% m-o-m (YTD-Jul: 6.2%), supported by mortgages (+1.2% m-o-m) and purchase of non-residential property (+1.4% m-o-m). Business loan growth also contracted for the first time this year (-0.4% m-o-m) due to larger repayments in July 2011. Loan applications and approvals fell 5.3% m-o-m and 15% m-o-m after strong showings in retail and business loans the previous month. Similarly, there was a slowdown in deposits (-0.3% m-o-m) as Current Account, Savings Account (CASA) fell 2.0% m-o-m offset by fixed deposit growth of 0.7% m-o-m. Loan-
to-deposit ratio in the system was stable at 78.8%. Asset quality in the system remained strong and net NonPerforming Loans (NPL) ratio stood firm at 2.0%. Capitalisation remained robust with Tier-1 Capital Adequacy Ratio (CAR) and Real Weighted CAR strengthened to 12.5% and 14.3%. CIMB Group Holdings (CIMB) has announced that it expects slower loans growth for financial year 2011 (FY-2011), as it plans to tread more cautiously due to the recent uncertainties globally. Therefore the bank said it will be more focused on liquidity and capital efficiencies. According to AmResearch Sdn Bhd (AmResearch), CIMB’s annualised loans growth of 11 per cent was below the company’s earlier projection of an 18 per cent overall growth in loans. However, the research firm believes that loans growth will likely pick up in 2H-FY-2011, at the back of better
corporate loans expansion based on initialisation of some of the government’s Economic Transformation Programme (ETP). ECM Libra Capital Sdn Bhd (ECM Libra Research) announced that CIMB would be undertaking a major internal reorganisation exercise to streamline its management structures, improve internal efficiencies and enhance customer focus. The research house also noted that the successful implementation of its reorganisation exercise coupled with potentially stronger deal flows could bring down the group’s cost-income ratio from the current 56.2 per cent to 54 per cent. However, ECM Libra Research announced that the Group’s 1H-FY-2011 net earnings grew by 9.3 per cent year-on-year (y-o-y) to RM1.88billion, accounting for 48.4 per cent and 45 per cent of house and consensus fullyear estimates, respectively.
Maybank’s net profit rose 16.6% to RM4.45 billion compared with RM3.82billion, the year before. Meanwhile, Group profit before tax rose 16.8% to RM6.27 billion compared to RM5.37 billion, the year before. Revenue for the 12 months stood at RM21.04 billion compared with RM18.56 billion previously. Group loans grew at its fastest pace in the last decade, touching 21.7%. This was a result of robust overseas loans growth of 29.4%, and a 16.8% rise locally, which was well above the industry average of 13.5%.
Its Islamic banking business income rose 54% to RM1.49billion, while Maybank Investment Bank saw its revenue more than doubled to RM482 million from RM236 million a year ago, on the back of an almost 49% rise in fee-based income to RM292 million. Brokerage activities contributed 43% to its income, while arrangers’ fees made up 21%, underwriting/placement fees, 20% and corporate advisory fees, 7%. Maybank recently bought Singapore brokerage Kim Eng Holdings for US$1.4 billion, as it sought to expand its regional brokerage operations.
Maybank Profits Soars Malayan Banking Bhd (Maybank) posted a 27 percent rise in profits to record RM1.154 billion for its fourth quarter ended June 30, 2011, compared with a sum of RM912.47 million achieved during the same period, a year ago. The rise was the result of strong loans growth as well as decline in allowance for losses on loans. Maybank also experienced strong growth in Singapore and Indonesia as well as across all business segments, but it warned that there might be pressure ahead on margins, due to the weakening global economy and investors’ sentiment.
* This article is written with information sourced from news agencies and research houses [ 19 ]
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[ CORPORATE DIGEST ] text : Joshua Lim
San Miguel Close To Securing ESSO Malaysia’s Downstream Activities
I
n what was dubbed as a major coup by a South East Asian company in the Malaysian petrochemicals scene; Philippines conglomerate, San Miguel Corporation outbid about 20 companies, including 7 Malaysian firms, to secure the 65 percent stake of Exxon Mobil Corporation in Esso Malaysia Berhad as well as other businesses of theirs in the petroleum downstream sector. Under the deal, San Miguel will also buy unlisted ExxonMobil Malaysia Sdn Bhd (EMMSB) and ExxonMobil Borneo Sdn Bhd (EMBSB) and their business of marketing petroleum products, for a combined offer of RM1.82 billion (US$0.61billion). San Miguel began its life as a brewer in 1890, eight years before the Philippines’ independence from Spain, but has since diversified to other industries. It is the country’s biggest food and beverage producer currently. The group currently derives more than 70% of its revenue from non-food and beverages segment and is an extremely diversified conglomerate, with businesses ranging from food and beverages to petroleum, power, energy and infrastructure. San Miguel already owns 68 percent of the Philippines largest oil company, Petron Corporation. It’s Director and Petron Corp President Eric Recto said the group was planning to invest about RM2.98 billion (US$1billion) to upgrade Esso Malaysia’s ageing Port Dickson refinery, increasing the
complexity of the refinery in a bid to produce higher value petroleum and petrochemical-based products. “I think the refinery has a lot of potential, but this will only be achieved with a fair level of investments to replace old machinery and bring in new equipments … The financing would be a 70:30 ratio, where 70% would be derived from financial institutions, with the remaining from internal fundings. Esso Malaysia operations on its own today can actually generate cash flow and the cash flow is able to support the internal funding,” he added. San Miguel also announced that it will spend another RM596million (US$200million) to renovate Esso’s gasoline stations in Malaysia once it completes a planned takeover. This was according to its President Ramon Ang.
Port Dickson Refinery To Be Revived The trend to move out of the downstream business by Exxon Mobil is not something new. Of late, most principal oil companies around the world have been shifting their focus to the exploration and production (E&P) business as high crude oil prices have made upstream activities much more attractive. Downstream operations, on the other hand, show cyclic returns which are negatively impacted by high oil prices. Oil principals such as BP are looking to divest some of their downstream assets while other players such as
ConocoPhillips and Marathon Oil have announced segregation of their downstream businesses. However, San Miguel has plans of its own for Esso’s downstream operations in Malaysia. It is especially focussed on reviving the Port Dickson refinery, the key winning point for its bid to acquire the operations of Esso Malaysia from ExxonMobil Corporation. Quite recently, the company announced that its subsidiary Petron Corp will be improving its refineries in the Philippines. The RM5.36 billion (US$1.8billion) refineries upgrading exercise will include the addition of new equipment like fuel catalytic converter and delayed coker which would eventually allow it to produce 180,000 barrels per day. The company plans to do the same with Esso’s Port Dickson plant so that the improved complexity will allow them more conversion capability to produce higher value products like petrochemicals.
Deal Questioned In Malaysia About a week after the deal was announced, Malaysia’s Domestic Trade, Cooperatives and Consumerism Minster Datuk Seri Ismail Sabri Yaakob had said his ministry would seek the help of the Malaysian International Trade and Industry Ministry to persuade the American oil and gas corporation to consider selling its Malaysian business to local companies.
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Ismail Sabri was reacting to a bid put in by Boustead Holdings Berhad, which is 59 percent owned by the Lembaga Tabung Angkatan Tentera (LTAT) for the stake. However, ExxonMobil’s Vice-President Stafford T. Kelly announced that the proposed sale to San Miguel Corporation of the Philippines was fair and justified. He said that San Miguel, other than giving the best value for all the three entities in the Esso Group, was the only company to include plans to take over and expand the 48-year-old oil refinery in Port Dickson, “Other bidders (including from Malaysia) were not interested in the refinery and they wanted to shut it down,” he said in an audio-conference with the Malaysian media from the United States. He said ExxonMobil mutually agreed with San Miguel that the Philippines’ company would not retrench workers, but in return would expand the human capital, with the locals given first priority. During the bidding process, he said that every party was given enough space to have discussions and evaluation on ExxonMobil, and finally three strong parties were recognised and finalised, with San Miguel being the only foreign company. “A fair level of consideration has been given and San Miguel emerged as the winner,” he said, adding that both parties have signed the sales and purchase agreement. Kelly added that he had spoken to International Trade and Industry Minister Datuk Seri Mustapa Mohamed on the matter. “My boss (ExxonMobil Corp chairman and chief executive Rex Tillerson)
has spoken to the Prime Minister (who is also Finance Minister Datuk Seri Najib Tun Razak) about the sale,” he said. He admitted that the response from the ministers and the authorities were encouraging, given that the transaction was from a foreign company to another foreign entity. Pertaining concerns that a Malaysian company could fall to a company which produces beer, Kelly said the situation was true many years back, but not so currently. “Now the company is a conglomerate and their business is diversified into many segments… Currently, the company derives its revenue mostly from non-food and beverages businesses, which clearly reflects the company’s intention to clear its image as a beer producing firm,” he added. “We are in the midst of finalising the papers for submission for all the three ministries,” he added. Ismail Sabri agreed he was aware of this development, “I have spoken to ExxonMobil Corp’s vice-president Stafford Kelly and told him to consider the sentiments of the Malaysians, who want a local company to run Esso Malaysia… Now that the agreement is signed, there’s nothing much that the Government can do,” he told reporters. Ismail Sabri said Kelly had personally explained to him that Exxon Mobil had to reject a bid from Lembaga Tabung Angkatan Tentera (LTAT) for the stake because it could not match San Miguel’s offer. “He told me that when San Miguel gave the final offer, ExxonMobil had gone back to LTAT in June and allowed them a chance to match San Miguel’s bid. But LTAT couldn’t …“I was also told that LTAT did not have plans to expand
Esso’s Port Dickson refinery, unlike San Miguel. So that’s why they went with San Miguel,” he said. However, the transaction still needs the approval of three key Malaysian ministries, namely the International Trade and Industry Ministry, the Domestic Trade, Cooperatives and Consumerism Ministry and the Finance Ministry. However, Boustead recently clarified its bid by saying it submitted a fair and competitive offer in terms of price in July to ExxonMobil for its downstream assets, which included the 65 per cent stake in Esso Malaysia Bhd, a 100 per cent stake in ExxonMobil Malaysia Sdn Bhd and 100 per cent of ExxonMobil Borneo. The company added that its bid for Esso Malaysia was made on the basis of business continuity whereby the refinery would be operating as usual and that there would not have been any staff lay-offs.
Stock Movement San Miguel’s purchase of the businesses including the 65 percent stake in Esso Malaysia was valued at about RM1.82 billion (US$610 million) or RM3.50 a share of Esso Malaysia. Exxon’s Stafford Kelly added that San Miguel offered a 25 per cent premium on the average price of Esso Malaysia’s shares for the last six months, which was around RM2.80. He added that only after speculations of the sales and purchase agreement did the price shoot up to RM4.95 from the pre-lunch time close of RM4.33 on August 17, 2011. Article written with information sourced from news agencies and other parties. [ 21 ]
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[ PERSPECTIVE ] text : Birdy Law
Supply Chain’s Gradual Recovery And New Myvi Model Bode
Well For The Automotive Industry In 2H11
E
ven though the Malaysian automobile manufac turers have turned in a lacklustre latest quarter of mixed results, analysts believe that with the global supply chain disruption caused by the natural disaster in Japan gradually recovering, and the encouraging demand for the new Myvi, coupled with interest rates expected to remain low, the auto
industry is expected to rebound over the second half of the year. However, analysts also warned that with the volatility in the external economic environment, compounded by the persistently high inflation globally, Malaysia’s domestic economy will feel the impact and consumer appetites will be dampened. Car sales will, in the mean time, be facing the adverse effects of exchange rate fluc-
Stock Prices (RM)
Fair Value (RM)
MBM Resources
3.05
3.25
9.0
DRB Hicom
2.02
2.95
TCMH
4.80
UMW
tuations in the ringgit, among others. In terms of the global automobile market, world renowned rating agency Moody’s analytics predicts that a weaker macroeconomic fundamentals over the next 12 to 18 months will put a brake on the global demand for small cars, which would consequently translate into lower profits for the auto industry. “For this reason, we are adjusting
Price-To-Earnings Price-To-Earnings Ratio(FY11) Ratio (FY12)
Net Asset Value (RM)
Investment Rating
8.0
1.07
Fully Valued
7.5
6.2
0.76
Outperform
5.50
11.2
8.7
1.65
Outperform
7.18
7.35
12.0
10.6
2.00
At market
APM Automotive Holdings
4.88
5.10
7.7
6.6
1.15
At market
Proton
2.70
2.50
16.2
13.6
0.32
Below market
Research Source: Societe Generale
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Car Sales Volume Comparison Car dealer (units)
July 10
June 11
July 11
Monthly (%)
Yearly (%)
7KH ÀUVW VHYHQ months of 2010
7KH ÀUVW VHYHQ months of 2011
Yearly (%)
Proton
14032
13012
12266
-5.7
-12.6
94158
97489
3.5
Perodua
16540
8870
16375
84.6
-1.0
111476
95842
-14.0
Toyota
7688
6316
7934
25.6
3.2
52508
50054
-4.7
Nissan
2930
2463
2548
3.5
-13.0
20436
19944
-2.4
Honda
4588
1959
2608
33.1
-43.2
26732
21854
-18.2
Others
7705
9170
8521
-7.1
10.6
49288
62272
26.3
Total sales
53483
41790
50252
20.2
-6.0
354598
347455
-2.0
Cars
48144
36838
44835
21.7
-6.9
320047
310489
-3.0
Commercial vehicles
5339
4952
5417
9.4
1.5
34551
36966
7.0
Source: Malaysian Automotive Association (MAA)
our outlook for the global automobile market from ‘Positive’ to ‘Stable’. Specifically, we are revising our original demand growth forecast for 2011 from 5.1% to 3.5%, and for 2012 from the original 7.4% to 6.5%.” Malaysia’s domestic automobile market outlook is, however, trending to the contrary. Researchers at Societe Generale Research hold the opinion that with the recovery of the Japanese automotive supply chain and Malaysia expecting to keep interest rates low, the Malaysian car market is expected to perform better in the second half of the year than the first. S ociete G enerale R esearch pointed out that according to the latest quarterly financial reports, only Tan Chong Motor, APM Automotive Holdings and DRB Hicom, from among the 6 closely-watched car companies, posted results that are in line with forecast. One of the main reasons is that the new car loan law that came into force on June 15 has
prolonged the process of new car registrations. M B M R e s o u rce s, U M W a n d Proton posted results that Societe Generale Research called “dismal”. However, as the industry gradually adapt to the new car loan law and the global automotive supply chain gradually recovers (monthly automotive production in July grew by 25.1%), “car sales in 2H 2011 is expected to rebound strongly, driven by pent-up demand.” Statistics showed that car sales over the first seven months of this year hit 347,455; Societe Generale Research is predicting that the total annual vehicle sales will reach 616,000. Another reason why the rosy outlook for car sales is expected in the second half of the year is that the bookings for Perodua’s new Myvi has exceeded 30,000 units. Also, “it appears that interest rates will remain stable over the next six months, and car loan interests are also expected to remain at an attractive level.”
Societe Generale Research predicts that by 2012, the overall Malaysian car sale volume is expected to hit 644,000, which would translate into an annual growth rate of 4.5%. As for the stock prices, auto stocks are still currently off 14% from their 2011 peaks. Societe Generale Research expressed that “in the next three to six months, auto stocks will have relatively limited room to fall any further.” Societe Generale Research identified Tan Chong Motor (TCHM) as the most promising stock to watch, because “it is undervalued but boasts a strong product line, which will allow TCMH to secure a higher market share.” “We are also optimistic about DRB-Hicom, for the company’s profit has reached a new turning point. We are not placing our bet on Proton, because the planned transformation of their wholly-owned subsidiary, Lotus, still carries a high executional risk.”
[ 23 ]
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[ PERSPECTIVE ] text : Yeoh Mei Kei
Possible Mild Recession In Europe But Markets Overreacted
A
ugust 2011 was a month that was full of negative news to the equity markets. First, we saw the downgrade of US’ credit rating by Standard & Poor, and then followed by the deterioration of the European debt crisis. European Central Bank (ECB) data shows that an unnamed bank tapped the ECB 7-day emergency liquidity facility for the first time since February 2011 to borrow EUR 500 million as short-term working capital. This incident has caused a plunge in European equity markets where banking stocks were being sold-off. Credit crunch and liquidity risk may have reoccurred in the European banking system as banks will generally only borrow from central bank (which charges higher borrowing cost) when they have difficulty getting funds from the open market. This can be interpreted by European banks unwillingness to lend among themselves currently as they are worried that the other banks might hold a large amount of PIIGS’s sovereign debt
and suffer huge losses. Under such circumstances, European banks would prefer to keep their capital safely in ECB rather than lending it out. Furthermore, liquidity in the European money market has started to dry up as the European debt crisis has intensified and caused the withdrawal of money market funds from Europe. With banks reluctant to lend and liquidity drying up, the lending activities in the Eurozone have declined quite dramatically recently.
Reluctance To Lend Will Worsen The Economic Growth In Europe Investors fear the credit crunch as it caused the previous economic recession. During the 2008 financial crisis, banks suffered substantial losses due to toxic assets, and the increase in bad debt reduced banks’ lending ability. Now, the fear of counterparty risks and the issues of PIIGS’s sovereign debt have again reduced the willingness of European banks to grant loans to businesses. Small and medium companies will always
be the first to suffer during a credit crunch as they are unable to obtain funding from banks. This could lead the small and medium companies to file for bankruptcy. Unemployment could increase by then, which in turn will hamper the economic growth in Europe. In the worst case scenario, we believe that recession in the European economy may be inevitable.
Possible Short-Lived Mild Recession In Europe Under the situation whereby European countries substantially reduce their government spending, we expect the economic growth in Europe during the period between 3Q-2011 and 2Q-2012 to contract by 1% and thereafter return to the normal growth level. The main reason why we believe that Europe will fall into recession is that European countries are now actively pursuing fiscal austerity measures, and such measures could undermine business confidence and consumer spending. The current situation in Europe is different from the US recession in
[ 24 ]
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Table 1: Revisions to Earnings Forecasts iFAST Estimates Regional Markets Asia ex-Japan
Consensus Forecasts
2011 EG
2012 EG
2013 EG
2011 EG
2012 EG
2013 EG
11.3%
6.7%
18.7%
14.6%
15.4%
12.2%
Emerging Markets
10.2%
9.5%
16.3%
16.8%
13.8%
11.5%
Europe
-23.0%
20.5%
10.8%
8.1%
12.6%
4.7%
Japan
4.5%
-4.4%
27.6%
4.1%
15.6%
22.8%
US
1.3%
7.5%
19.8%
17.0%
12.9%
10.5%
2011 EG
2012 EG
2013 EG
2011 EG
2012 EG
2013 EG
18.9%
15.9%
12.6%
30.4%
10.3%
7.5%
Brazil
1.7%
17.1%
15.8%
14.9%
12.1%
14.5%
China
17.7%
8.7%
17.9%
19.0%
14.8%
13.3%
Hong Kong
9.2%
8.0%
13.8%
12.5%
14.5%
12.6%
India
9.5%
16.0%
14.0%
9.9%
17.0%
12.7%
Indonesia
17.2%
17.5%
13.9%
25.8%
20.0%
15.0%
Korea
16.3%
1.9%
17.6%
16.3%
14.4%
11.8%
Malaysia
-1.0%
8.3%
12.9%
6.9%
14.6%
11.0%
Russia
36.2%
5.7%
5.7%
50.5%
5.7%
0.1%
Singapore
0.9%
-6.4%
35.9%
6.0%
9.2%
13.9%
Taiwan
4.0%
2.8%
25.4%
11.1%
16.2%
8.3%
Tech (MSCI AC World IT)
2.5%
18.0%
20.0%
25.6%
14.4%
12.1%
Thailand
15.1%
12.3%
15.4%
25.8%
14.2%
10.8%
Single Country/Sector Australia
Source: Bloomberg, iFAST estimates; data as of 26 August 2011
2008, in which the US economy was overheated with excessive credit growth. Companies in Europe have been de-leveraging since the beginning stage of recovery and credit growth has now been relatively slow. This indicates that the current financial situation for companies in Europe is healthier as compared to 2008, and companies now have better ability to ride out the challenge of an economic slowdown. As such, we expect the recession in Europe will be short-lived and will not be as severe as the recession in US during 2008.
Corporate Earnings Revised Downward For Slower Economic Growth Over the long term, earnings growth dictates the returns of the
equity market. Previously, we utilise consensus earnings forecasts as a basis for our own estimates. As our economic outlook now differs from the consensus view, this requires some changes to our previous forecasts. We now expect a mild recession in the Europe and slower-than-expected growth in the US, which has negative implications for corporate earnings. We have correspondingly lowered earnings estimates for equity markets under our coverage, attempting to factor in slower anticipated economic growth. Corporate earnings will likely see some negative impact in 2012 as growth stalls in Europe, but we expect the slowdown to be short-lived and, thus, forecast a stronger recovery in earnings for 2013 (the stronger percentage increase relative to consensus
estimates reflects the low base of our 2012 estimates). Most equity markets have experienced a strong correction, but we doubt that the steep downward movement in prices is justified given that valuations were already modest prior to the recent decline. Prices tend to be suppressed when expectations and sentiment are weak, and we expect that investors who can see past the current turmoil will be able to reap substantial rewards when prices become more reflective of the underlying companies’ value in the future.
Yeoh Mei Kei is a Research Analyst at Fundsupermart.com. [ 25 ]
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[ PERSPECTIVE ] text : The Fundsupermart.com Research Team
Double-Dip Recession
Lessons From History
B
ad news have been coming wave after wave, and we have weathered potential crisises one after another since June this year. On 29 June, Greece parliament narrowly approved a fiveyear austerity plan and successfully gained the fifth loan payment of 12 billion Euro from the 110 billion-Euro bailout plan. On 1 August, the gridlocked Congress finally reached a consensus on extending the country’s debt ceiling and a 2.1 trillion deficit reduction plan, to avoid a catastrophic default. However, the sovereign debt crisis in Europe and situation in the US hasn’t improved. Worse still, global equity markets tumbled as investors speculated about a double-dip recession. The New York Times, a conservative newspaper, even claimed that the US economy is poised to enter into a recession again. Is it true then? In this article, we shall look at the past experiences and present some observations on a double-dip recession. We will also be discussing whether the US economy will shrink further.
What We Have Learnt From The Double-Dip Recessions In The Past For those who do not believe a double-dip recession is likely to happen, the general view is that economic recession is the lower turning point (trough) of a business cycle. It usually occurs after a long period of economic expansion which results in excess demand (aggregate demand exceeds long-run aggregate supply). Such pre-conditions do not exist in most countries today, following the 2008 crisis. On the other hand, some may argue that we are paying the price for the lowering of interest rates over the past 30 years by the US Federal Reserve (Fed). The rate cut was to prevent a recession, but it also built a new bubble. The current virtually zero interest rate level means we lack tools to protect us from negative economy shocks. The former argument is correct if we only look at economic data over the past 20 years. However, it is conceptually wrong in a macroeconomics perspective. In fact, every economic cycle is unique as they can occur in
different patterns. According to the National Bureau of Economic Research, from 1850s onwards, there are in total 33 economic cycles in the US. It lasted less than 5 years on average. If we only counted the recent 11 cycles, the cycle duration increases to 6 years. We found that the economic cycle can last as long as 8 years or above and as short as 3 years or below, but both cases are rare. Over the past century, US experienced four short economic cycles. It proved that recession can happen after a short-lived economic recovery. Short economic cycles have also happened in other countries like Germany, Japan, China and Hong Kong in the past. Some of these economies even dipped more than twice – we call this a multiple-dip recession. The latter argument cannot explain the reasons of the emergence of a double-dip recession. We looked at the historical data and found several common causes of past double-dip recessions; namely 1) premature tightening policy, 2) high inflation, 3) deflation and 4) non-economic factors.
Table 1: Long (Above 8 years) and Short (Below 3 years) Economic Cycles over the Past Century Economic Cycle Reference Date Cycle Duration In Months Peak Trough Trough from Previous Trough Peak from Previous Peak January 1913 December 1914 35 36 January 1920 July 1921 28 17 May 1923 July 1924 36 40 February 1945 October 1945 88 93 April 1960 February 1961 34 32 July 1981 November 1982 28 18 July 1990 March 1991 100 128 March 2001 November 2001 128 128 Average Duration In Month 1854-2009 (33 cycles) 56 55 1945-2009 (11 cycles) 73 66 Source: NBER [ 26 ]
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Signs Of Past Double-Dip Recessions 1.
Premature Tightening Policy Premature tightening policy was an important risk factor in past double-dip recessions, especially in US and Japan. A huge lesson can be learnt from Japan in 1990s and 2000s, during which the Japanese asset bubble burst in 1990 and the private sector’s balance sheets were damaged seriously. The first priority of companies and households was to minimise debts instead of maximising profits. Still, Japan’s GDP managed to keep growing almost every year until 1998, thanks to the government’s massive fiscal stimulus. In 1997, the Hashimoto administration announced the country’s first fiscal reform programme in the post-bubble era to reduce the fiscal deficit by 15 trillion yen via raising consumption tax from 3% to 5%, cancelling special income tax and drastically scaling back the government’s expenditure. The economy then proceeded to shrink for five straight quarters amidst the credit crunch, the country’s worst post-war meltdown (see Chart 1). In order to control the fiscal deficit and the debt level, the Japanese government withdrew the stimulus when there were signs of recovery, and the economy sank again because the private sector was still deleveraging. US, on the other hand, should not find the 1930s Great Depression unfamiliar. In an article titled “The Lessons of 1937”, Christina Romer, the former chairwoman of Barack Obama’s Council of Economic Advisers and a scholar of Depression, addresses the risk of a “W-shaped” recession if tightening policies are
rolled out when the recovery remains fragile. The US economy re-entered the recession in 1937 and 1938 and the unemployment rate perked up to 19% when the Federal Reserve doubled its reserve requirements. Consequently, banks reduced lending and the economy contracted. Another example was seen in 1980 when the US economy was hit by high inflation after the 1979 energy crisis. The US government believed inflation was high at that time and introduced measures to control credit expansion. The measures pushed up borrowing costs for banks, resulting in a short recession which ended in July 1980. Thereafter, US experienced a jobless recovery as unemployment rate was stubbornly high. In order to solve the inflation problem when the economy started to pick up, Fed Chairman Paul Volcker raised interest rate drastically to 20% by June 1981. The high interest rate caused the collapse of the real estate market and ultimately led to a double-dip recession (see Chart 2).
2. High Inflation It is widely believed that causes of high inflation include the supply shock of essential commodities (e.g crude oil) and excessive expansion of money supply. Both factors lead to drastic increases in labour cost and price levels. Also, unemployment rate will increase as wages rises above productivity. A high rate of inflation and unemployment are precursors of a double-dip recession. High inflation which led to a recession occurred in 1970s and 1980s respectively in the US (see Chart 2). In 1973, the Organisation of Petroleum Exporting Countries (OPEC) cartel proclaimed an oil embargo until March 1974 and quadrupled the price of crude oil. Another macro backdrop is that the US unilaterally pulled out of the Bretton Woods Accord and took US off the established Gold Exchange Standard in August 1971, allowing the US dollar to float. Shorty, the industrialised nations followed the floating regime and central banks increased their reserves by printing money for the purpose of
Chart 1: Multiple-Dip Recession In Japan
Japan
(%) 3 2 1 0 -1 -2 -3 -4 -5 -6 1990
1992
1994
1996
1998
2000
Source: Bloomberg and iFAST Compilations
2002
2004
2006
2008
2010
iFAST
[ 27 ]
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Chart 2: Multiple-Dip Recession In US
US
(%) 20.0 15.0 10.0 5.0 0.0 -5.0 -10.0 -15.0 1949
1952 1955 1958 1961 1964
1967 1970 1973 1976 1979 1982
iFAST
Source: Bloomberg and iFAST Compilations
“managed floating” (intervention in the foreign exchange market). As a result, the US dollar depreciated and oil price increased. American households soon found that the price of gasoline surged sharply while companies faced higher production costs, hence trigerring an economic contraction. The second bout of high inflation period in early 1980s was discussed above and resulted in inappropriate monetary policies and thereby led to a double-dip recession (see Chart 2). 3. Deflationary Spiral The resultant lower wages led to lower demand, which in turn caused further decreases in price. Among all countries in the world, Japan has the longest history of deflation since the World War II. Deflation has persisted and has been deeply entrenched in Japan over a decade since 1998. One of the key factors is that the sharp deterioration of corporate and household balance sheets after the asset bubble burst in the early 1990s has driven down the number of borrowers
drastically. A company or household suffering from a debt burden is lack of willingness to borrow to expand their consumption or business. With Japanese consumers and companies reluctant to spend and invest, aggregate demand in the economy shrank and thereby put further downward pressure on the price level. Hong Kong also went into a multiple-dip recession during 1998
to 2003 (as shown in Chart 3). After experiencing a prolonged period of economic expansion and excesses, Hong Kong property and stock market collapsed amidst the Asian financial crisis of 1997-1998. Hong Kong recorded a negative GDP growth for five consecutive quarters during the period, one of the worst recessions in history. The city also registered negative GDP growth for four straight quarters after the tech bubble burst in 2001. The city experienced a long period of deflation after the property and stock market bubble burst as deterioration of corporate and household balance sheets affected people’s willingness to spend and invest. Composite CPI yearon-year growth turned negative for 68 consecutive months, from November 1998 until April 2004! 4. Non-economic Factors We have also found some noneconomic factors in the past doubledip recessions. Examples of such include Germany’s unification and SARS. Germany’s economy tumbled
Chart 3: Multiple-Dip Recession In Hong Kong
Hong Kong
(%) 8 6 4 2 0 -2 -4 1990
1992
1994
1996
1998
2000
Source: Bloomberg and iFAST Compilations
2002
2004
2006
2008
2010
iFAST
[ 28 ]
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Chart 4: Multiple-Dip Recessions In Germany
Germany
(%) 3 2 1 0 -1 -2 -3 -4
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
iFAST
Source: Bloomberg and iFAST Compilations
precipitously after the reunion of the two Germanys in October 1990 and experienced a multiple-dip recession throughout the 1990s and early-2000s (see Chart 4). After the unification, Germany’s GDP was dragged down by East Germany which went into a deep recession. The 1:1 conversion rates of East German marks (Ostmark) into Deutsche marks resulted in wages which far exceeded the productivity level in the Eastern region. East German wages increased sharply despite the mounting unemployment rate. Industrial output of East Germany plunged more than two thirds within one year as many factors became obsolete due to the excessive labour cost. The government provided subsides into the Eastern region, around 6% of the country’s GDP in the first five years after unification. The huge cost of unification plus the privatisation of state-owned business in the East lifted the fiscal burden for the German government and pushed the country into a prolonged recession. We have mentioned that Hong
2011
Kong also went into a multiple-dip recession from 1998 to 2003, and the third dip occurred in 2003 when the deadly outbreak of SARS had dramatic ramifications on economic activities in Hong Kong.
No Signs In The Us We do not see the aforementioned signs of a double-dip recession in the US currently.
No Deflationary Pressure Firstly, in contrast to last year’s slowdown, we do not see a strong deflationary pressure in US currently. Excluding volatile food and energy prices, core CPI grew 1.6% year-onyear in June 2011. This was above the 1% threshold for the fifth consecutive month while core CPI was below 1% for the ninth consecutive month since April last year. More importantly, we are seeing a broad-based inflation – all prices of services and goods of the economy except housing prices. Housing is the dominant component in US CPI for all Urban Consumers which weighs 42% of the total basket value (Chart 5). It fell into negative territory since July 2009, obscuring the uptrend of other CPI components. In fact, CPI less food and energy and shelter has been hovering steadily at an acceptable range between 1% and 2% since the economy recovered (Chart 6). It shows that the inflationary risk is greater than the deflationary risk in US, at least at the current moment.
Chart 5: Compositions Of CPI In US Recreation 6% Education 6% Medical Care 7%
Others 3% Food & Beverages 15%
Transportation 17%
Housing 42%
Apparel & Upkeep 4%
Source: US Bureau of Labour Statistics and iFAST Compilations
iFAST
[ 29 ]
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Chart 6: Cpi Less Food And Energy And Shelter
inflation will be caused by the ultra low interest rate and excess liquidity. However, as long as the velocity of money drops, the increase in money supply might not result in hyperinflation. The money multiplier has collapsed as shown in Chart 8. As a rule of thumb, the greater the money multiplier, the higher the money circulation would be. It shows that the increase in monetary base (printed money) has been held in banks’ reserves instead of it being circulated in the banking system. Under this situation, the loosened monetary policy would not result in a high inflation environment.
6.0% 5.0% 4.0% 3.0% 2.0% 1.0%
Housing
Nov-10
Nov-09
Nov-08
Nov-07
Nov-06
Nov-05
Nov-04
Nov-03
Nov-02
Nov-01
Nov-00
-1.0%
Nov-99
0.0%
CPI Less Food & Energy & Shelter
iFAST
Source: US Bureau of Labour Statistics and iFAST Compilations
A 1970s Or 1980s Styled High Inflation Will Not Happen We do not expect a 1970s or 1980s style high inflation to happen. Some investors worry excessive liquidity in the global economy will drive up commodity prices and thereby create a high inflationary environment. However, with the record high US$1.8 trillion in excess reserves (Chart 7), we wonder how the liquidity created by the FED alone could push up commodity prices. In fact, the difference between the increase in printed money since QE1 and the increase in excess reserves is small. Speculation could be another major force of commodity rally but high commodity prices driven up by speculation usually do not last long. Example includes oil price rising from US$88 per barrel to a peak level of US$145 per barrel in 2008. Recently, international oil price came down to below US$90 per barrel. In June 2011, US, major industrialised countries and International Energy Agency unleashed oil reserves to
tame the climbing oil price. It shows the ambition of governments to act against the high oil price. CRB Index which represents commodity prices also plunged more than 10% from its peak in April this year. Stripping out the political events which are hardly predicted, we don’t see a 1970s or 1980s style high inflation environment around the corner in near term. There is an argument that hyper-
No Way To Tighten Policy In The Near Term There is no way that the Fed is going to begin the tightening policy anytime soon. Fed Chairman Ben Bernanke pledged to keep interest rate at exceptionally low levels for two more years. Markets worldwide expected Bernanke to announce QE3 or other forms of monetary easing in the Fed conference on 26 August. US
Chart 7: Record High Excess Reserves
QE1
US$ Trillion 2.8
QE2
2.4 2 1.6 1.2 0.8 0.4 0 1/2/2008
1/2/2009 Excess Reserves
Source: Bloomberg and iFAST Compilations
1/2/2010
1/2/2011
Monetary Base
iFAST
[ 30 ]
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Chart 8: Money Multiplier Has Collapsed
Money Multipler (M2/Monetary Base)
12 10 8 6 4 2
Source: The Federal Reserve and iFAST Compilations
President Barack Obama also unveiled that he is proposing a fresh economic stimulus to revive the faltering recovery, though the amount will not be huge as the two parties in congress just reached a compromise on the debt ceiling impasse.
Evidence Of Recession Emerges In Europe On the other hand, European countries have already taken the aggressive austerity measures and the European Central Bank (ECB) has even started its rate hike cycle. Apart from the debt-laden PIIGS countries, core Euro-zone countries have also prepared for the fiscal tightening policies. French President Nicolas Sarkozy pledges drastic austerity measures to slash France’s budget deficit in order to keep the country’s AAA credit rating. The new austerity plan in Italy was approved in August while Spain’s austerity plan was approved in May this year. In addition, ECB has started its rate hike cycle in April this year and has raised rates twice to 1.5% thus far
Apr-11
Apr-09
Apr-07
Apr-05
Apr-03
Apr-01
Apr-99
Apr-97
Apr-95
Apr-93
Apr-91
Apr-89
0
iFAST
in order to tame the mounting inflation. As such, some evidence of recession has emerged in Europe.
Our View On Double-Dip Recession Premature tightening policy, high inflation, deflationary spiral and non-economic factors are some common causes of double-dip recessions in the past. It should be reminded that every recession could be triggered by some unique factors. These signs are not a must for a double-dip recession and they are only for readers’ reference. However, these signs are in line with our houseview on the economic outlook for US and Europe. We believe Europe will enter into a recession. A set of economic indicators including PMI have already pointed to an economic downturn in the euro zone economies. European policy makers have taken aggressive austerity measures to reduce the fiscal deficit. However, fiscal tightening at a time when the economy and banks are yet to fully recover would dampen
the economy further. In an earlier article “US: What Is The Impact of Zero Percent Growth?”, we have argued that US GDP growth could fall short of the market expectation (2.5%), but it only means a slowdown instead of a full-blown recession. Consumption figures are disappointing in the first half of this year as it was depressed by the high oil and gasoline price. Investment component was also negatively affected by the Japan’s earthquake which resulted in supply chain disruptions. Energy prices have declined since the second half and the supply chain restoration has been improved. Thus, the GDP growth is expected to rebound in the second half. One of the key concerns is the spillover effect of the European debt crisis to US economy. Recent market turmoil is another near-term risk as it may somewhat affect the alreadyweak confidence of businesses’ and consumer’s. However, given that corporate and household has continued to deleverage after the 2008 financial crisis, we don’t expect a serious crisis to come. We also conduct a stress test on US corporate earnings under some very conservative assumptions. The result is very positive - even if growth stalls in the second half of 2011 and revenue growth is muted in both 2012 and 2013, S&P 500 earnings can still be at all-time highs by end 2012. We advise investors to do the following things in a highly volatile market: 1. Stay calm and try not to panic 2. Focus on fundamentals – Valuations’ and Earnings 3. Prepare for buying opportunities [ 31 ]
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Q A Q
[ 2 CENTS WORTH ] text : Editorial Team
Need help with any equity/investment-related questions? You can email them to editorial@sharesinvestment.com, with 'Ask SI M’sia' as the subject header.
Q:
Gold has surged to a record above US$1,900 an ounce, can I still invest in it? Since the beginning of 2011, gold price has climbed more than 34%, hitting US$1,923.70 an ounce on 06 Sep-11, while the Dow Jones Industrial Average is down around 4% during this period. Gold price, which has been benefiting from the recent flight to safety amidst concerns of slowing growth in the US and Eurozone debt crisis, especially with the weakening of the German and French economies, is
A A:
likely to appreciate further. Should the US Federal Reserve embark on another round of quantitative easing, it could offer a potential impetus to gold price. Moreover, as fears over “currency war� resurface, funds may continue to invest into tangible assets such as gold in a bid to preserve value, hence, leading further rally in gold price. However, with gold price rising around 7 times over the past 10 years, you may want to revisit your thinking!
Q A Q: A:
What are your suggestions in measuring the performance of my stock portfolio? The returns from stocks come in two forms, namely capital gain and dividends. For a start, we suggest using the total rate of return as a measure of your portfolio return by summing the stock value and the dividends received as a percentage of the cost of investment. Transaction costs such as broker fees, GST, etc. should be factored into the investment cost. Selecting a benchmark is important to see how well your portfolio has performed compared to the market. Assuming your portfolio contains all local listed companies, you could use the FBM KLCI Index as a benchmark measure. Moving a step further, you could boraden your measurement using the Bursa Malaysia Sectorial Indexes to track the performance of the individual stocks in your portfolio against their respective industries. The information ratio is commonly used to measure the success of portfolio managers. You could incorporate this metric as a measurement of your investment results and also measure your performance against that of the investment managers with the same strategy. The formula of information ratio is the difference between your portfolio return and benchmark return, divided by the tracking error. Although it may sound like a lot of work, a thoroughly measured portfolio will aid in your investment decision-making in the long term. Develop as part of your investment habits to constantly test, review and measure your portfolio results under all market conditions. Keep in mind that investing is a lifelong learning process.
[ 32 ]
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[ FINANCIAL PLANNING ] text :
Carol Yip
Sizing Up Your
Confidence Level Mischievous Inner Voice
Carol Yip
T
he world’s financial markets are a volatile place to be in these days, so how’s your confidence level doing? Making a lot of trades in the market, lately? Or are you standing aside after taking a beating? Do you think you can book some profits or are you feeling a little unsure? Has your confidence been affected by the never-ending stream of news pertaining economic turmoil, debt crisis, riots, natural disasters, company mergers and buyouts? It seems that the list of uncontrollable inputs just goes on and on. There’s lots of ‘noise’ out there influencing our decision-making processes. But we have an inner voice that makes our final decisions. Unless we know exactly what to do, our inner voice can easily play the devil’s advocate. Just spend a moment to reflect upon some of your past decisions. Very likely, you will notice that inside you, there lurks ‘a mischievous inner voice’ that is forever cajoling you into an inflated sense of your own powers.
Sometimes that little voice can lead you astray. The less skilled or experienced you are at something, the harder your inner voice works to convince you that you are brilliant at it. And that’s good, up to a certain point. By fibbing to ourselves, we can give a much-needed boost to our self-esteem. None of us are perfect, and daily life brings us into constant collisions with our own incompetence and inadequacies. If we listened to all the negative feedbacks – and didn’t create what psychologists call ‘positive illusions’ – our self-esteem would go through the floor. Investing in shares works the same way. How else could you ever get back on track with your share investments if your self-esteem is affected by the recent financial market downfall? A pinch of confidence encourages us to take risks – often sensible. And that’s normal. But, you will never make the most of your investment potential if you think you have far more potential than you actually do. One way to achieve everything you’re capable of is to accept what you are not capable of. That’s surprisingly hard for investors to do, and it counteracts all the “positive-thinking”
gurus have to say. There have been studies done to track what happens when typical investors listen to their inner voices. More often than not, investors will wildly overstate how well they have done in the past. Studies suggested that most people are kidding themselves when they claimed to have beaten the market. “Everybody wants to believe that they’re special and better than average,” said psychologist Don Moore of Carnegie Mellon University. “They think they can beat the market with their own special something. And it’s remarkable how this illusion persists even in the face of evidence to the contrary.” It’s also perfectly understandable. Most people would much rather listen to the blarney of their inner voice than to measure their financial performance accurately. After all, their inner voice, more often than not, has good things to say. And hearing good things, even from an ‘inner’ voice, makes us feel better! That brings us to a much larger lesson. When you watch the financial news on TV, visit market websites, or read the financial press, you will probably hear things like “down here in the trenches, investing is a contest, a fight, a duel, a battle, a war, a struggle for survival in a hostile wilderness”.
[ 34 ]
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But investing is not you versus “Them”. It’s you versus “your inner voice”. The single greatest challenge you face as an investor is handling the truth about yourself.
between RM3 and RM5. Now crop each number by 25%, yielding a new target range of RM2.25 to RM3.75. This conservative cropping will help keep you from being carried away by your own overconfidence.
Managing Your Inner Voice In reality, there are very few certainties in the financial markets, and your investing brain is designed to exaggerate your abilities, favour the familiar, and imagine far more mastery over the past and future that you may ever have. You must try to control that inflated ego, but still maintain a healthy level of confidence. An investor who has no confidence at all will never invest, since investing requires taking a stand on at least some of the uncertainties that the future always holds. Simply put, your goal is to be aware of the limits of your knowledge. In fact, how much you actually know is of less importance. It’s knowing how to gauge when you have gone beyond your limit – and then learning to step back. Cruelly put, it’s not a problem to know next to nothing, as long as you know that you know next to nothing. Let’s face it, you can always learn. So, here are 3 methods to rightsize your confidence: 1.
Be conservative, discount 25% off After you take a first cut at your estimates of what a stock is worth, crop the share value again. Behavioral finance’s Gary Blesky and psychologist Thomas Gilvich suggested using an automatic “overconfidence discount” of 25%. Apply it to both the high and low end of the range, making the upside smaller and the downside bigger. For instance, you think a stock is worth
2.
Track your inner thoughts Unless you are a very experienced investor and know exactly what you are doing, it’s important to document your reasons for investing before you buy. Otherwise, your inner voice will very likely start playing its little tricks on you. Memory researcher Elizabeth Loftus has shown that your recollections of how you felt earlier about an investment decision can be easily “contaminated” by what happens later. So, if you make your diary entry after the fact, your memory of your original motivation will be affected by what has happened since the original decision. Psychologist Baruch Fischhoff, who has studied overconfidence for more than 30 years, suggested using an investing diary. Keep a record of what was on your mind when you make a prediction, and try to make those predictions as explicit as possible. Think in probabilities, and include a price range and date. For example, ‘I think there is a 70% chance that this stock will be at RM2.35 to RM3.00 within 6 months from now (not forgetting to apply the 25% overconfidence discount to your target price). Then, write your investing theory in the following sentence: ‘I think this investment will go up because……” Then, tuck your diary entries away for 6 months. Go back and see how accurate your predictions were, whether you tended to underestimate or overestimate, and how good your theories were. You’re looking to
see whether the share prices went up for the reasons you specified. That will help you learn whether you were right, or just lucky. And that, in turn, will help keep your inner voice in check. Furthermore, with the benefit of true hindsight, you now will be able to ask what kind of additional information would have raised your probability of being right or resulted in a more accurate price target. 3.
Ask questions like a three-year old It is always safer to make a habit of asking questions, especially the “Why?” question over and over again to test the limits of your own knowledge and capabilities. It is also advisable to ask the “Why?” question to someone who is recommending an investment idea to you; including your financial advisors. If your financial advisor says you should put some money into a mutual fund specializing in China stocks because “China is the place to be,” ask “Why?” If he or she answers, “Because it’s going to be the world’s fastest growing economy,” ask, “Why?” again. If he or she replies, “Because China will continue to have low manufacturing costs” ask “Why?” again. Chances are, you’ll never get to a fifth “Why?” People who don’t really know what they’re talking about can rarely answer “Why?” more than twice. If you can’t either, that’s the signal that you don’t yet have enough knowledge to make an informed decision. So, if you want to be a sharp investor, it’s a good idea to act like a threeyear-old with a curious mind. Keep asking those questions! And keep on learning! [ 35 ]
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[ FINANCIAL PLANNING ] text :
Lee Khee Chuan
How Will You
Leave Your Legacy?
T
he most basic tool in estate planning to leave your legacy starts with a well-worded and comprehensive will.
However, a marriage (but not divorce) automatically revokes a Will unless the Will had been made in contemplation of marrying a particular
stead of a probate, and will be granted to such person or persons as the court deems fit to administer the estate. The procedure is the same as
Integrated approach to estate planning dictates that other legal instruments such as trust & buy-sell agreements are also needed to complete the estate plan. This week we will look at what a comprehensive will should contain.
person and a clause is added to that effect.
applying for letters of administration. The difference is that the deceased’s estate will be distributed according to the Will and not according to the law of intestacy. To avoid this situation, a trust corporation can be appointed instead. A trust corporation will not die, or become incapable or unwilling to act. Furthermore, the administration of the estate will be much smoother given the professional dimension.
What Should A Will Contain? 1.
Opening Clause There should be an opening clause in which you identify yourself. If you have an alias or are commonly known by another name other than that stated in your identity card, it is advisable to include those names in the Will. Another important thing that should be included in the opening is the date on which the Will is being made. The general rule is that a later Will takes precedence over any other Wills made earlier. 2.
Revocation Clause After the opening, there will usually be a revocation clause in which you state that you revoke all other earlier Wills that you have made.
3.
Appointment Of Executors The next consideration is to appoint a competent & trusted executor for the Will. The executor will be responsible for the administration of the deceased’s estate. You may appoint up to four executors. It is advisable to appoint substitute executors. In the event that the executor dies before the testator or the executor is unable or is unwilling to carry out his or her duties, the substitute will be called upon to act. Your choice of executor or executors is of the utmost importance. Besides appointing someone you can trust, you should also make sure that your executors are willing to act before appointing them. Being an executor can be a demanding task and one can be put under a lot of pressure by the beneficiaries. If there is no executor who is capable or willing to act, or if all the executors have predeceased the testator, letters of administration with a Will annexed will have to be applied for in-
4.
Appointment Of Trustee Trustee(s) should be appointed if your children are still young and cannot be trusted with too much money. A testator can choose to confer powers on his trustee(s) that are not provided for under the law (that is, the Trustee Act) - for example, the power to carry on business after his death or to invest in projects beyond those authorised by the law. There are many other powers that you might want to confer on your trustee(s) for the purpose of managing your estate. These matters would have to be discussed with your competent estate planner. Again, a trust corporation can be appointed as your trustee.
[ 36 ]
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5.
Appointment of Guardians A guardian or guardians should be appointed for your children, who are still minors if your spouse predeceases you or both of you were to die at the same time. 6.
Asset Distribution Specific instructions can be given on the type of gift to be distributed, to whom the gift is to be distributed, and in what proportions. For these arrangements to be made properly, it is best to seek professional advice when writing your Will. 7.
Residuary Clause A residuary clause should also be included to dispose of any assets that you did not dispose of specifically in the Will. Without such a clause, your other possessions will be distributed according to the law of intestacy and your wishes may not be fully realised. 8.
Special Instructions You may want to include personal messages to your beneficiaries or loved ones. Such messages are also known as “Terms of Endearment” which may include religious connotations and prayers, advice to the beneficiaries or simply loving words to the family. This is also a useful way of leaving a lasting mark because there have been cases where a person may pass on suddenly without having the opportunity to say anything to the family members and loved ones. 9.
Special Requirements You should ensure that you have given or provided reasonably or adequately for the maintenance of the
following persons, if any:(a) Your spouse. (b) Any daughter who is unmarried or who, by reason of some mental or physical disability, is incapable of maintaining herself. (c) Any son who is below the age of 21. (d) A son who, by reason of some mental or physical disability, is incapable of maintaining himself. If you have not attended to the above, the court may vary your will to make reasonable provision for such persons upon an application made to it. What constitutes reasonable provision will depend on the circumstances. For example, if the case concerns a millionaire’s wife who is accustomed to a life of luxury, his leaving her only RM1,000 under the Will may not be deemed reasonable. 10. Testamentary Trust Apar t from merely leaving straight forward instructions on the distribution of your assets, there could be situations where you would want the distribution of certain assets to be staggered over a period of time. This is because your beneficiaries may not be ready to handle a large amount of money, or do not have the necessary skills and experience. In this case, you can set up a testamentary trust in your Will by leaving a set of instructions as to how the asset is to be distributed and over what period. For example where it concerns minors, and the inheritance involves a large amount of money, the instructions can be made to transfer the money to a trustee and stagger the distribution as given in
the example below:at age 18, 20% of the amount; at age 20, 20% of the balance; at age 22, 20% of the balance; at age 24, 20% of the balance; at age 26, 20% of the balance; By staggering the distribution in whatever combination, you eliminate the fear that all the money may be squandered or lost at one time. Hence, the beneficiary(s) concerned will benefit by learning how to handle the inheritance. 11. Review and Updating As a Will only takes effect upon the testator’s death, the testator may have acquired more assets since the day he or she made the Will, or some of the beneficiaries may have predeceased him or her. It is also important to note that a separation or divorce will not revoke a Will. It is a prudent practice, therefore, to rewrite your Will when there are major changes in your life pertaining to your social and financial positions. Lee Khee Chuan is a qualified financial advisor. He holds a B.A. from National University of Singapore and is a Chartered Financial Consultant ( ChFC ), Certified Financial Planner™ ( CFP™ ) and Chartered Life Underwriter ( CLU ). He is a pioneer who introduced the INTEGRATED approach to estate planning. His article entitled “ An Integrated Approach to Estate Planning “ had been published by Financial Planning Association of Malaysia ( FPAM) in its quarterly journal in Oct. 2009. Lee is also frequently quoted in Personal Money & Smart Investor magazine. For more information, please visit: www.lkcestateplanning.com. [ 37 ]
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[ PERSPECTIVE ] text : Yang Ming Wan
Sweets-Laden Budget
Needed Both Politically And Economically
T
he 2012 Budget that Prime Minister and Finance Minister Datuk Seri Najib will unveil on October 7 is almost certainly candies-laden. The only question that remains is how widely can our Government afford to distribute these sweets. Najib had already made clear that the 2012 Budget he is proposing will help to ease the burden of the lowertiered income families. The Government has also made cutting the cost of living one of the key national performance areas. A Special Working Committee led by Deputy Prime Minister Tan Sri Muhyiddin has already started hammering out a proposal to lighten the burden on the people’s lives.
Pre-GE Budget From both political and economy aspects, this is almost certainly the last Budget before the next general election. It will surely take advantage of the languishing external environment, and our economy’s need for a booster shot in our domestic demand, to distribute political candies. The general election must be held latest by 2013. If we remembered that UMNO had recently postponed its party election to no later than October next year, it would mean that the general election will not be held any later than that critical month. Therefore, the general election will be held any time within 12 months after the Budget is announced next year.
Prime Minister Najib belted out his swift and public response to target the living expenses of the urban lower-tiered income families, as well as his unambiguous statement that the Government will not ignore their plight and their disgruntlement with the ruling party. The political element in his gestures are of course the key issue at stake here, but the implications of the limping external economic environment and the importance of stimulating domestic demands among urban dwellers cannot be ignored.
Low-Income Group Constitutes 60% Of The Population In handing out ‘candies’ through
[ 38 ]
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the Budget, the Government’s biggest challenge is how to effectively reduce the burden on the people without encumbering our nation financially. It needs to avoid transferring the people’s burden to the government, for that would destroy our economy and the people would then have to pick up the tab eventually. Therefore, while we introduce citizen-friendly measures to reduce their burden, there must also be measures to stimulate economic growth. In our September issue, I wrote an article about the government’s “Key economic challenge of lowering the cost of living,” that in the midst of a weak external economic environment and a wave of protests by city dwellers about the high cost of living, the government must work against time to lighten the burdens of the lowerincome group and expand the urban consumers group in order to stimulate economic growth. The Government has clearly stated that urban households with an aggregate income of not more than RM3,000 would fall under the lowincome category. According to a Bureau of Statistics survey released in 2008, out of a total of 5.8 million Malaysian households, a staggering 3.4 million or 60% of them have household incomes of less than RM3,000.
Household Spending Inching Towards RM3,000 The Government’s decision to use RM3,000 as a demarkation line for lowincome families is actually in line with the living expenses under the current economic situation. According to the average monthly household spend-
According to a Bureau of Statistics survey released in 2008, out of a total of 5.8 million Malaysian households, a staggering 3.4 million or 60% of them have household incomes of less than RM3,000. ing trend released by the Bureau of Statistics in end-August, the average expenditure for a Malaysian family in the 2009/10 period has increased by 12.1% as compared to 2004/05, which in real money would mean an increase from RM1,953 to RM2,190 per month. With the average monthly expenses approaching RM2,200, this means that for a family that earns no more than RM3,000, their expendable income comes up to less than RM800. Taking into consideration the income gap between urban and rural families, urban household expenditure would probably be nearing or even at RM3,000 per month. That means a family that does not earn this much would be living a very deprived life. If the Government only gives the “candies” to the urban low-income groups, that would not be very practical. In fact, even if the benefits are all given to households whose monthly income is below RM3,000, the Government will still be faced with serious challenges in its implementation.
Allow A Higher Budget Deficit To Lighten The People’s Burden The Government must be prepared to face financial pressure if it is
going to give out “candies”. It would now seem that the gradual removal of the subsidy scheme is not going to go ahead as originally scheduled. Instead, this subsidy scheme must ultimately be expanded instead. In the first half of the year, the federal government’s recurrent subsidies expenditure has already breached the RM10 billion mark to hit RM12 billion, an increase of 42% over the RM8.5 billion of the same period last year. If this subsidies expenditure growth continues into the second half of the year, our full year expenses will probably exceed RM30 billion, approaching the historical peak of RM35.2 billion in 2008. Adding the “candies” aimed at reducing the people’s burden to next year’s Budget, I am afraid we will be staring at yet another record high subsidies expenditure. As subsidies expenditure balloons, it looks like the Najib administration will find it a challenge to fulfil its promise of lowering budget deficits. Of course, as long as the people’s living expenses are reduced and the economy receives a healthy dose of stimulus for a better and longer-term growth, allowing a bigger budget deficit may not necessarily be such a bad thing after all. [ 39 ]
MSHE_38-39_Perpective1.indd 39
9/23/11 11:16 AM
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Bursa Malaysia previously offered 3 boards, Main Board, Second Board and Mesdaq. Bigger and well-established companies FOR YOUR INFO were listed on Main Board whereas smaller ones were listed on Second Board. Mesdaq catered mostly to technology and high growth companies.
With effect from 3rd August 2009, Main Board and Second Board have merged to form a single board named Main Market for established companies whereas Mesdaq has transformed into ACE Market, acronym for Access, &HUWDLQW\ DQG (IÃ&#x20AC;FLHQF\ $&( 0DUNHW LV RSHQ WR FRPSDQLHV of all sizes and economic sectors and sponsor-driven.
,Q D ELG WR DOORZ FRPSDQLHV HIÃ&#x20AC;FLHQW DFFHVV WR FDSLWDO and investments and to make Bursa appealing to companies, both local and foreign, the Securities Commission and Bursa Malaysia have launched a series of reforms to bring existing equity guidelines in line with other regional bourses.
Rules and processes for equity fund raising are streamlined to provide greater certainty, shorter time to market and lower regulatory costs. Corporate based proposals such as acquisitions (excluding reverse takeovers), disposals, placements, rights and warrants issuance will no longer need the Securities Commissionâ&#x20AC;&#x2122;s approval.
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