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.

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.