Tuesday, November 26, 2019

Subscribed for WCEHB-PA and WCEHB-WF

Due to the fund raising exercise from WCEHB, I have subscribed for all including excess as I have 67,200 units of WCEHB.

In the end, I now have 136,000 WCEHB-PA and 34,000 of WCEHB-WF.

The position is as below.

Click to enlarge

I intend to convert the RCPS into WCEHB in future within the first year.

Sunday, November 24, 2019

Where are our stocks heading? What should our focus be now. Part 2

The government today is pushing hard on automation and investments while reducing unskilled foreign labor although the strategy may not bear as much fruit for the moment.

Why is the government doing this? Before we go deep into the sectors and where should the growth be in Malaysia, let's look at the components of growth in the perspective of Malaysia and where should our focus be.

Let me put the context of economic growth to a simple 4 portions

Consumption (C) + Investments (I) + Government Expenditures + Investments (G) + (Export(X) - Import (M))

Consumption basically depends on the economic strength of the country and also how fast the velocity of the money flows. As a country we have been increasing and to a certain extent dependence on local Consumption for much part of our growth in the last 15 years. One can see through the strength of private consumption, so much so that our private debt to GDP exceeded 80% for quite a number of years now.

Investment (I) refers to in this case corporate private investor invests into the country. They may be foreign or local investor. One trend that we see nowadays is the public-private investment (PPI) initiatives as government will not be able to afford to invest and manage those projects themselves alone. Through an agency such as MIDA, we have also been encouraging foreign investments besides local.

Government (G) is where we see the expenditure of the government both in operational and capital expenditure. Both operational and capital are important as operational is where government employees' remunerations are paid as a consumer as well while developmental expenditure and mainly the investments which are made by government rather than private sectors. Examples of developmental expenditure are building of schools, hospitals, roads.

Lastly, the component of Exports (X) and Imports (M) which is highly relevant for a trading country like Malaysia. For certain industry, Import and Export goes hand in hand. Example trading industry. If there are no value add, then we are merely acting as traders. We import and export the same product. When there are value add for example, buying semiconductor components, materials - enhance them - we export them back into finished goods or more developed components. A strong country will be able to sell services as exports for example Intellectual Properties.

From the above, countries will work on various components in coordination among various departments, ministries. At different stages each country would develop their different components on various speed and level. Example, in the 1950s, US was pretty strong as an export country. Today, it is very a country doing much more Imports. China was such during its developmental years from 1980s until now. Recently, the internal policies have also been developing local consumption.

How do those four segments above interlinked. They are Vastly and Highly interlinked. Without investments for example, be it local or foreign, the Exports component will not be strong eventually. Without investments in ports, roads for example, there would not be further investments in trading, transportation, factories, housing.

Without strength in investments and Exports and Imports, we would not be able to grow our consumption. Malaysia was developing our local consumption sector post financial crisis in 1998/99. The velocity of the consumption will also create more consumption. However, for a country which is limited by its per capita income at a developing nation level, to grow consumption without focus on other components, higher debt will kick in. Too much debt is a problem as we have seen the collapse of the sub-prime housing crisis in US.

Malaysia is now at a stage where consumption is at its high while local private investments (non-GLCs) is tapering for some time now. We need to readjust. There is a need for more local private and foreign investments to promote strength in other segments.

I see that the government is aware of the above sporadically but the issue now is that the coordination is poor. Attempts are being done to balance wealth by assisting the lower income group but without clear strategies to promote investments, it is more of a rebalancing act to increase consumption growth. This can't last.

For Malaysia to grow, it will need private investments. Government sectors should be more of an enabler rather than competitor. This is where we have failed to address. While foreign investors are good for the country, in the longer run, local investors need to be competitive. There should also be a balance here as we tend to be overly dependent and eager to support foreign investors rather than local companies.

Our focus will have to change and I see there is a need for even Bursa to play its role.

Friday, November 22, 2019

Ekovest's acquisition of land from IWH: My take

What the deal is about.

Ekovest buying 2 blocks of land from IWH which IWH does not own until this deal is done, ironically. Hence, IWH is actually acting as a middleman and in return IWH owns 32% of Ekovest. Lim Kang Hoo will increase his shareholding in Ekovest, backdoor through IWH as he is a larger shareholder of IWH through Credence at 63.13%. Ekovest pays about RM200 million for the land and another RM800 million through issuance of new ICPS (Irredeemable Convertible Preference Shares) to IWH. The ICPS which is convertible to Ekovest’s shares at RM1 will allow IWH to be a 32% shareholder of Ekovest.  This will solidify LKH’s ownership of Ekovest. His shareholding (direct and indirect) will increase from 29.8% to 44.4%.

The land was part of the land in the original exercise which failed, in the proposed IWH-IWCITY merger back in 2017. As below, in that proposed deal, the merged entity is to acquire land from the same companies although not from as many sellers.

The deal has nothing to do with Bandar Malaysia, if any yet. We know that IWH together with CREC was awarded with the contract for Bandar Malaysia but details of the project is yet to be announced. The thing I can see is that IWH is now getting closer to Ekovest. Whether it is good or bad, we do not know. I can see that neither IWCITY or IWH are construction companies. Ekovest is. Bandar Malaysia needs lot of these kind of work as the entire development is RM140 billion in GDV. One will need a master developer and master contractor. LKH is not going to let CREC take all.

For Ekovest’s shareholders, the situation is hard to read as we do not know several things:

  1. We do not know much about the deal between IWH and Straits Bay Sdn Bhd and Empomas Holdings Sdn Bhd. Who are the owners? How are the payment made?
  2. Does IWH has to pay cash to these guys? Or will IWH pay them in shares or any other ways?
  3. Why is IWH acquiring these 2 pieces of land? This looks questionable. Land in Johor will not see much development unless they are strategic to any government's projects in the near future. This I am not able to decipher.

One thing that is happening is that the owners of Ekovest are thinking big. It is growing Ekovest in terms of market value at the expense of dilution to minority shareholders. However, for the shareholders which include me, we know that the group is not staying put at 2 highways and a few plots of good land. The elephant in the room as all have been talking about is the old military airport land and its development.

I believe this is not the last of the deals.

Wednesday, November 20, 2019

WCE 2Q19: Commentaries on progress and accounting

WCE has just announced its financial report for 2Q19 which we would have expected as the company has yet to start toll operation. It has just reported a loss for the quarter and that is because it has to account for interest expense for the sections that is completed because it cannot capitalised the interest anymore. (These are accounting treatment but I do not see it starting to pay interest yet)

The higher finance costs can be seen as above. Its explanation is as per below.

Another point of note which we do not see in the previous announcements. This is more important as it foresees it will not be able to register profits for several years in its account as mentioned below due to interest expense which of course would be higher as it is bearing the full loan's interest in the early years as well as usual amortisation costs while waiting for the toll revenue to improve over time. However, we could see that the project to be cashflow positive as mentioned below. (I have mentioned before of losses in the early years while cashflow would be different) Of course these are all projections and forward looking statement.

It also mentioned that it expects to commence toll collection by December 2019. Let's see.

Sunday, November 17, 2019

Where are our stocks heading? Is Malaysia Inc. happening and strategies for our Bursa market. Part 1

At the time of writing, we already know of the landslide victory that BN had with its MCA's candidate winning more than 15,000 votes turning around a lost to a win. This by-election win by BN will bring a more challenging situation for the market at least for the next 1 year - if not beyond the GE 15.

This first part of the writing, I am focusing on Malaysia Inc. - a strategy that was close to Tun Mahathir during his 22 years tenure between 1980 till 2003. During then, we know that many government corporations were turned into corporate companies - from LLN to Tenaga Nasional, STMB to Telekom Malaysia Bhd and beyond which includes Axiata today. Bank Bumiputera through several exercises is a corporate that is now called CIMB.

We also have know of Tun Daim - the mastermind of Mahathir's Malaysia Inc. strategy with several associates which includes Halim Saad (UEM, Renong), Wan Azmi of Land and General, Tajuddin Ramli (the original Celcom owner and later MAS), Samsuddin from Granite Industries and several more. There were of course many businessmen whom have made it through that tenure of Tun Mahathir, as he is a person who is keen to allow capitalism to succeed. Those businessmen are Ananda Krishnan, Tan Sri Gnanalingam, YTL (of course), and to a lesser extent Genting's Lim Goh Tong and his son, Hong Leong's Quek Leng Chan and Tan Sri Mokhtar al-Bukhari.

After 9 May 2018, we would have expected the similar strategy to be revived. Khazanah Nasional among its first move was to sell off a stake in IHH - almost controlling stake - to Mitsui. There were talks of MAS being divested or investors invited, PLUS's stake being reduced or fully sold. Tun M himself had mentioned before he is more keen of government encouraging businesses to excel while the role of the government is to get a share of the profits through taxation.

Well, that strategy has yet to see any movement - at all - except for the IHH's stake sale. Even then, it was a change of shareholdings rather than management. As mentioned above, the Tanjung Piai's results may probably see the strategy which already as it is difficult - to be even more challenging. Mahathir will have groups whom will be objecting to several of his strategies, and he is running out of time. At the moment, nothing concrete is coming and we know that for any corporate moves to make them happen, will take a few years. Tun M does not have that time - more so there are 3 main parties involved (Bersatu, DAP and PKR - the other 2 Amanah and Warisan seems to have lesser say and would probably be more obliging). For any private companies, there is this worry as well  additionally, will the next administration be open to private businesses.

After the 1998 Asian crisis, Khazanah if one can remember was growing and active. Several of its moves were to rescue companies like Time, UEM, Renong and Bank Bumiputera. If Tun M had his way, I believe that rescue were not meant to be for long. However, since then, administration changed twice and government linked companies were getting stronger. There are arguments that with government in business, it is curtailing the growth of private businesses. At the moment, about 15 companies under the KLCI are government controlled. Malaysia especially the GLCs head are already comfortable with GLCs controlled companies.

That situation is going to be hard to change. In the past, we parachuted business owners to own the business - think Tajuddin Ramli with MAS. I believe that will be very hard to happen given the challenge that Mahathir has - case in point PLUS. Khazanah is against it, the Finance Ministry is against it as well. One cannot fault these two entities to be against the purchases though, as PLUS is among the more lucrative assets that the government owns.

This is the reason why KLCI will be a bad performer

With about half of the companies under the KLCI government controlled and the strategies of the government in limbo, many investors rightfully would be staying on the sideline. It does not help when these counters are not cheap in their valuations. The ones that seem to do the supporting are again the government controlled funds. How much can they support as ultimately the one that is important is the financial results? That is also why GLCs cannot afford to slack. If any one of the company is slacking, it may impact KLCI. Example: Telekom Malaysia when a year ago the Minister in charge opened up the fiber broadband to other players. It was the right thing to do, but it affects Telekom and ultimately KLCI.

What do we do then?

We have to basically avoid the large counters especially the ones which are not founder or privately driven. When there are situations whether things will be changing or not is causing the GLC companies to be less attractive. When government is not coming up with a certain and solid direction, employees would be waiting at the side - doing the waiting game. That is not efficient.

If we want to still invest into Bursa, the way forward for now is to look for companies that are less impacted by government policies. And that is the one which I am going to discuss in my future article as Malaysia Inc. policies is not clear and it is not going to help either party.