Saturday, October 26, 2013

The untold stories on GST

At long last GST is really being introduced. I remember it was put under study during the Daim days as Finance Minister, put to thought few years ago and only now due to budget pressure, GST is finally here to come.

We know that government cannot operate without taxes, hence a tax structure needs to be efficient. GST is regarded as consumption tax, which means the more a person consumes, the higher the tax the person is paying indirectly.

Now comes the argument that it is taxing the poor and the lower middle income. It is but this is where we face problems as over 80% of the nation's population are not paying any direct taxes in the form of income tax. How is that? While I see lots of people in the middle income group who I know are paying taxes, I am also seeing people whom are rich which I am seeing may not be paying high taxes as well. They are not employees of a company. They may be working on their own and may be underdeclaring their income or the nature of the tax structure does not require them to pay much taxes.

Put that in the context of stocks investment. If a person has say RM5 million in shares and on average he gets return of 10% per year. He gets RM500,000 per year in return or about RM40,000 a month. Besides the stamp duty through transactions, that person is barely paying any taxes. Compare that to a person whom gets salaries of RM40k per month, I am sure the monthly income tax he pays is around RM8k - RM9k a month. In the eyes of the government, the person under employment is contributing to the government's revenue but not so much to the other person whom is not working but yet could be reaping income just as high as the other who is working. GST is a way which will tax the other non-working individual who is probably enjoying the ride. Hence, the current tax structure (before GST) is friendly to a person who has rich parents whom can provide an initial endowment of RM5 million for him to invest as opposed to the other who has been working hard by getting employed. In this sense, which tax structure is helping the rich and which is helping the hard working individual.

Tax structure has to change as over time the person who is working would be feeling that he has to do something about it. Worse still in a lot of cases, the working person could be regarded as a highly skilled employee and the opportunity to work elsewhere could be available, and that could possibly happen where he moves abroad to a country which is more friendly to his taxes - Singapore, Hong Kong?

GST is not a regressive structure but rather a progressive structure. How is it that another 300,000 between monthly income of RM3,000 to RM4,000 will not be paying income tax if it is regressive. They are being taxed elsewhere through consumption rather than through working. A regressive tax is when one is working but taxed highly whereas the one who is not working (but yet rich enough not to) and not taxed. That deters people from working hard.

A progressive tax is also where it will also cause the small and medium businesses whom may have been underdeclaring their revenue to keep up to speed in their declaration as only through correct declaration, they can claim back the GST paid. If you under declare, you will not be able to clear back your GST paid,

Efficiency - GST is much more efficient in terms of income for the government.

Let me provide a scenario. For now with GST, it now replaces sales and services tax. But over time, I would like to even see it grow and replaces (not entirely) excise and import duties. These 2 duties are highly confusing as even in the example of a PC, it is not taxable. But another example, media devices is taxed (around 25% - 30%). In today's world, PC and media devices are greyed to the extent that it may be difficult to put a distinction to what is a media device and PC and in a PC one can pretty much turn it into a media player. Manufacturers are taking advantage of this loophole.

Another example is import prices. Goods are taxed on the price of the item paid by the importer, but these invoices can be distorted by working together with the suppliers. Say a BMW car can actually be priced at USD20,000 but in the invoice it is declared at USD15,000, hence the importer is only paying at taxes for USD15,000. But in GST system, it will not happen as the importer which is actually paying USD20,000 plus the GST will charge more than the actual price he paid for importation of the car. The final taxes which is to the final consumer will be the determinant of how much the government gets - not the import duty.

There are many reasons where GST will also reduce corruption (especially through the customs) etc as in the above cases, we have heard of customs working together with the importers, distributors on the actual duties for the items imported. These monies which does not go to the government but rather individuals and companies who cheat is revenue lost to the government.

Now, which are you supporting? A tax structure to help the rich to continue getting richer and could be through cheating or a tax structure to help the government's improving its revenue? If you pick the second, there is no doubt GST has to hold.

Thursday, October 24, 2013

1000 days and counting

Never in my mind would a 1000 days fund of RM50k (despite its size) be gaining 225%. Convert that into average return per year, it is gaining about 82.5% per year. Again as a reminder, it is a long term fund. I have never been thinking of it of being short term in my purchases and most (in fact all) of the holdings are testament of that. 2 are in apparel, 1 in retailing, 1 distribution, 1 job search company, 1 manufacture and sells toilet paper, 1 airport management company and the other is in tolled highway in which case the road is yet to be built and ready in probably 5 years time.

Those portfolio does not sound sexy at all. None are in the high growth sector such as biotech, oil and gas exploration or services, banks etc. I have never really tried IPOs. In fact, except for Oldtown, all the companies that I have bought into have already been in the market for a long time - at least more than 5 years. These are companies which we can track. IPOs are harder to track as we seldom get to know the management and businesses in detail as more often than not, we need to know how companies and its management behave.

The performance of 225% return would not be replicated, over the next 1000 days. In fact, the way I am thinking of it is a 4 year old kid going to college by the time she is 18, how much would she need. Would a RM50k investment be turned into a RM300k today's equivalent in tomorrows dollars? If that is the case, I am halfway there. Some people when their kids were born, they bought into insurance which would have costs substantial. Insurance is a kind of hedge (or rather protection) in case they are not around to provide for the education.

The fund is pretty much the same. The portfolio is consisting of companies which in the case I am not managing it, anyone who takes over do not really need to do much, but just let it be around. One of the performance which I like to highlight is the dividend's return. It has easily beaten the return (by more than 100%) in case I put in the funds into a fixed deposit which returned 3.2%. Who says dividend typed of funds would not provide a good capital appreciation.

The fund is also somehow a success for the short to medium term for me to proof that if we put our thinking cap into investments, i.e. looking at the logic and not being too greedy, there is money to be made from the market. What we need is to apply our knowledge, observe, learn from experience and be a little bit brave, which is investing and not just saving.

Anyway, tomorrow is the first time, the CEO of the country is presenting a budget post election (his own carriage) and I think what is needed is for Malaysia to be brave. And I am in full support of GST. Be brave!

Hospital Asia: Go for it

I know that Airasia was a revolution in addressing the high cost in travelling. I also remember how, the then Minister of Transport was pointing towards international routes subsidizing local routes for MAS, until Airasia came. Now, the high costs in health is a much much more important issue which we need to address. Airasia may have been faulted for adding other costs to its airline tickets which I am feeling a little bit annoyed on, but you have helped to create a new type of service and more competition.

I am not so sure, how this idea will be attempted but, yes healthcare is too expensive and many practitioners are too greedy, unethical to only focus on profits.

Go for it, compete hard against the likes of IHH, Sime Darby, KPJ. I would love to see how this group can lead the way. Compete the hell out of these guys!

Friday, October 18, 2013

Rebalancing portfolio

I have realised that over the past few months, DKSH has now comprised of more than 30% of the portfolio. As I am not going to pump in more cash into the fund, I have decided to sell 2000 units of DKSH and buy an additional 7500 units of Keuro.

If the proposal from Keuro maintains, 16,000 units of the shares in total will cause me to allocate some additional RM13k for the subscription of the rights - price not fixed yet. Yes, I am going to subscribe for the Keuro's rights as I am anticipating that it will be offered quite soon.

Over the last 2 months, Keuro has changed hands and Chan Ah Chye is no longer the substantial shareholder of the company he founded. Through that, Talam Transform is under a different control as well, in case some might not know.

Keuro now, has 2 major shareholders in the name of IJM and MWE - both equally around 25%. There are also some large shareholders whom are holding through foreign entities which we do not know. Keuro is a company which will need to raise funds to support its WCE project. As mentioned in my past articles, buying Keuro is a risk as it does not have much of a revenue and profit track record over the last few years as well as in the near future, except for the Rimbayu project.

I am betting that at its market cap of around RM720 million, it should be worth much more upon the completion of West Coast Expressway (WCE). All in all, this is a stock for the long haul and will be very dependent on WCE.

Tuesday, October 8, 2013

Anything fishy here?

Sometimes you can be afraid if there is an abrupt change in auditors. And in this case it is really sudden given the circumstance as reported. And the guy who has nominated for the new auditor has been selling in large quantities.