Monday, February 10, 2020

Sold Gamuda-WE

I have sold Gamuda-WE. Obviously it was at a loss as the construction sector has changed fundamentally since the change of government.

Overall, the total portfolio has to be re-visited at not much due to the corona virus as this is an uncontrollable event but because of the change of government - which is a controllable event. Hence, the danger in Malaysia is not an event which is not controllable but the biggest danger in Malaysia is people.

Anyway, Genting and Genting Malaysia (despite whatever it is) now seem interesting as it has dropped because of much fear rather than true fundamentals.

Sunday, February 2, 2020

Airasia: The bigger issue is from China, not Europe!

To me the bigger issue for Airasia is AAX and the coronavirus situation in China. The Airbus situation is something which is not totally unexpected. Let me put through my thoughts on this.

Firstly, China is a big market for Airasia and other airlines in this region. We do not know how worse the situation can be as air travel or any other mode of travel can be affected for the short term. Many countries have barred Chinese travellers be it from Hebei province (Wuhan especially) or the entire China. Economy will be affected because of this, not just China but other countries that trade with China.

Airasia has mentioned, SARS was bad for the company and today, it is having much more flights in and out of China. To me, the one which is affected even more is AAX - already it is not in good financial situation but because AAX's flights are the ones with more than 4 hours flight hours, they fly to more Chinese cities than Airasia. For Airasia, if I am not mistaken at the most, the flights that uses the A320s are to Hong Kong, Shenzhen, Macau and perhaps Kunming. AAX's routes fly right up to Tianjin (close to Beijing).

What is beneficial to Airasia now is the price of fuel has dropped significantly since the Wuhan virus outbreak was deemed to be worse than initially thought.

What about the penalty on Airbus?

Well, I am not surprise. This is not that I am supporting the way it was done. I am NOT. The issue seems to be the sponsorship for Caterham (which was a big mistake by the founders).

The article by Focus Malaysia made it sounds like the arranger pocketed the money from the purchase deal. I believe it is not, the deal probably was a sponsorship deal towards Caterham. I have searched for a connection between Airbus and QPR, but could not find any.

In any case, we should be mindful of how the EU works. This is opportune time to really penalise a huge organization such as Airbus given the 737MAX issues that Boeing face. As the aircraft business is a duopoly, what Boeing faces is benefiting Airbus - hence probably the EU and now UK (which is officially no longer part of EU) takes this opportunity to put a huge fine on Airbus. How come they did not penalise Airbus earlier and does this kind of case need 5 years to be taken action upon?

Airbus is not just a plane manufacturer but also a designer and producer of military equipment, planes to many countries (especially EU countries). Do we really believe that EU is serious on penalising a company that it supports and relies on. Airbus is a company created through the European Union's initiative. They probably subsidize the company many times the penalty. This is politics. During good times, fine can be part of the tax initiatives. During bad times, they will provide subsidies.

At the moment, Airbus is in a leading position, hence it will not give that much incentives to companies to purchase its planes as Boeing now is "injured". As a perspective, do we now see Airasia doing deals (in the last 2 years) with Airbus? None besides the upgrades from A320 to A321. Tony is a dealmaker - and sometimes he overdid it.

In my mind, Airasia is a company that negotiates the purchase of planes to the benefits of the company. When the deal is not so sweet, they backed off. Remember that the founders put in another RM1 billion into the company by buying more shares. Their wealth is tied down to Airasia more than the USD50 million behind the scene deal.

MACC is pinning down on the deal, which is not surprising. However, as I believe with Europe trying to be seen as leading on curtailing corruption, their version of what is corrupt may be different to what is in Malaysia for example. To Airasia, as long as the sponsorship deal is above board and given the approval by its Board, it should be acceptable. That is not in EU's playbook. But remember, in bad times, they support their companies all the same.

I believe this is the same issue among many faced by our palm oil companies and seafood producers.

To the authorities here, while Europe or US give us the direction on what is corrupt and what is not, not everything that they do is for our benefits. The size and strength of EU put them on the advantage to define certain issues. But if we play by their book, we are not moving much forward.

This is what is faced by China on the trade war and we should do the same with our companies. I do Not encourage unscrupulous deals by our companies but there are much worse ones that I have seen.

Saturday, December 21, 2019

Broadcom's future and its impact to Inari

A few friends and I were discussing about this and the news came as a surprise as we thought that the RF division of Broadcom or rather then Avago is the cashcow for Broadcom. It is the business unit that enables Avago and its CEO to where it is today. Ask any veteran in the business, when HP split into 3 companies, it was the wireless division which was the one harder to bring up. Of course things changed when Apple introduced Iphone 3 and Avago's filters were monopolizing the industry which later on includes selling the chips to Androids phones.

Anyway, could the news be true as Broadcom has not made any statement. Today's Broadcom is much much more than the old Avago which was barely a $5 billion company. It has so many cashcows and who would want to bet against one of the best fund manager who is also the CEO of Broadcom aka Hock Tan. Broadcom today is building solutions for the cloud which includes semiconductors for servers and it is expanding into software, hence the acquisition of CA and Symantec's enterprise division, a security company. These happened after its much talked about failure to acquire Qualcomm. If that would have happened, the industry would be amazed. I would have been proud of a Malaysian who probably would have been one of the best manager in the recent semiconductor industry.

We also talked about the today's Broadcom or Avago. We hear and know that it is not a visionary company. It is a company that has proven to be able to pick up technologies which has great potentials for the next medium term and make them even more profitable. Those traits has been proven in its deals with LSI Logic, Brocade and ultimately Broadcom itself - through a takeover by Avago. In short, Hock Tan and his team are great deal-makers, executioners, managers and negotiators. On the bad side, they do not really take any deal with a passion. Cutting costs is part of the game - and that involves cutting people. The plan to sell the RF division is one of such, it was its saviour. Now it is not needed anymore. Why? The acquisitions of CA and Symantec have increased Broadcom's debt to exceed $30 billion against its cash of $5 billion.

While Broadcom has great cashflows, it however will want to do something before it can do another deal. Hence, it needs to sell before it can buy big again. Hence, the plan to sell the RF division. Anyway, for the next generation 5G technology, Broadcom's RF may not be at a huge advantage anymore. Several new companies are moving big into it, and it is ripe time to sell. Remember, Broadcom is not that much of a technology visionary but a company which manages its technology dominance very well.

What then will happen to Inari? For those who may not know, the RF business is huge for Inari as compared to its other businesses. It is also probably more profitable. Will Inari continue to still obtain jobs from its new acquirer assuming the business is sold. I would not want to make a guess. However, one thing I can be quite certain is that the relationship would not be the same. One must remember, it was Broadcom which gave opportunities to Inari back in 2006 (around) when Avago then wanted to focus on being a factory-less company. It was looking for companies or entrepreneurs to take over the manufacturing (packaging) business. In fact, at one point of time, Avago was a shareholder of Inari prior to its listings.

The industry knows the relationship between Broadcom and Inari. Will Broadcom give Inari business from its other product line? That is up to Inari to prove itself. One thing as well is that the age of important decision makers from Broadcom which provides the opportunities for Inari is not so bright for Inari's future as they have reached (or almost) retirement age.

The way I look at it, with the share price of Inari trading at 30x PE (after the recent drop) and given that the future is uncertain - it does not look too good. Even if the division is not sold, this news bring reminders to us. A 30x PER which equates to 30 year to get back your money does not provide a good comfort, given the pace of the industry move. Inari will definitely be there but it has to look for other deals which may not be as lucrative but to grow.

My worry is that the cradling stage for the largest Malaysian semiconductor company - by market cap - may be over soon and it has to look after itself and it may not have the strength to do so - if you know what I mean.

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.