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.

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.

Saturday, November 16, 2019

Positive trend from trade war should be coming through PIE Industrial and VS Industry

The early impact of trade war can be seen now. While companies are scrambling to reorganize their supply chain, within the short run we see deterioration of international trade. Yesterday, Malaysia announced a 4.4% GDP growth - not bad given the circumstances. Export sector has seen a drop expectedly. As discussed in my previous article, we will see some companies benefiting from the trade war while others may suffer. I foresee those that are benefiting in the long run would be

  • PIE Industrial
  • VS Industry
  • Globetronics
  • Pentamaster has shown a surprisingly positive results
While those whom will be immediately impacted are:
  • Inari Amertron
  • KESM
  • Unisem
  • Carsem (MPI)
  • Aemulus

The announcement provided by Statistics Department which is not a surprise,

Malaysia’s exports of goods in the third quarter of 2019 recorded a decrease of 1.9 per cent to RM247.0 billion as compared to RM251.8 billion registered in the same period last year. The main products which attributed to the decrease were electrical & electronic products and crude petroleum that shrank by 4.9 per cent and 43.9 per cent respectively.

For PIE, it announced a better 3rd quarter results yesterday against previous quarter of 2Q19 as well as last year's quarter of 3Q18. While its profitability improved (due to foreign exchange gain, lower administrative costs, reversal of impaired collection), its revenue dropped a little.

It is a decent result given the circumstances. It is expected as US imposed additional tariff starting on 1 September 2019 causing companies to scramble to readjust. We seen the results impacting some companies but still VS and PIE are not affected as much. In the long run they will gain.

What is more important as has been provided by PIE is a guidance on what it expects for 2019 and beyond as below. From what we read, PIE may not increase its revenue substantially, but potentially the profit margin will increase. It is more selective in its business orders - something which one can do when times are better. It is better times potentially for Malaysian EMS companies. We see the same through VS Industry.

Current Year Prospect - PIE Industrial (3Q19)

The major source of revenue and profit of the Group is from its manufacturing segment (99%). For EMS activities (80%), orders are expected to increase in the long run from existing customers and potential new customers through its fully built-up vertical integrated manufacturing facilities which have been improved in operation for the past 5 years. Due to the beneficial effect of USA-China trade war, this division is expected to receive more orders from new overseas customers in 2019. This division will cancel certain new low-margin, high-volume products since beginning of 2019 and focus on profitable projects from potential new customers. The serious shortage of certain electronics component in 2018 is expected to be smoothen in coming quarters. However, any drastic fluctuation of Ringgit Malaysia against USD will be the main factor affecting its performance in the near future. 

I see better performances for these companies in the EMS sector throughout next few years as the global trend is changing and for the better.

Friday, November 15, 2019

Interestingly Ekovest's venture into Musang King may have its leads

It started when Ekovest bought into PLS Plantation, acquiring a 23.42% from its Chairman, Lim Kang Hoo. This was a related party transaction and it looked particularly bad when it was the company one controls buying the shares from himself.

Secondly, it looked like a rescue of PLS Plantation. Immediately, after the purchase from LKH, Ekovest continuously bought more PLS shares from the market. Now, Ekovest owns 30.44% of PLS Plantation. First of all, PLS did not seem to be an interesting stock. One would wonder, why would a company that has good business concessions in Setiawangsa Pantai Expressway, DUKE and traditionally a decent construction outfit be keen in diluting itself into plantation. It is neither a strong palm oil stock nor any other plantation business for that matter. At around the same time, PLS announced that it was moving into durian plantation. It acquired a company called Dulai Fruits.

Wow! How is one to value a durian plantation business? Palm oil is difficult enough for a small to medium sized company. PLS was not profitable for last few years. Then durian? Worse, durian is seasonal. The only thing I can think of is the company's strong affiliation with China given it has business dealings with large companies there through Bandar Malaysia and Lim Kang Hoo's partnership with large developers from China through IWCity. China's Chinese adore durians - at the moment. The thing I learned about when I was in China recently - the typical supermart in China would sell durians - Thai's durian. We do not even see durians so commonly available in Malaysia. Also, Malaysia was only allowed to export whole durian fruit only recently. How then Chinese were able to taste Malaysian Musang King previously. I learned about this from a Singaporean in China. We used to export our Musang King via Thailand. That was how bad the situation.

Just recently, Navis Capital invested RM400 million into a Malaysian durian exporter, Hernan Corp. Navis being a long established private equity firm must have done research about durians. They must have seen a trend and China's appreciation of Malaysian durians. And this trend is not a passing trend - as like the bird's nest and arowana. China to me has changing habits. It seems that their reverence over durian may last longer, hopefully forever.

BFM's had an interview with the CEO of Hernan Corp. It is good knowledge for me, not just on perspective of durian business but also perhaps why Ekovest is into the business of Musang King. Perhaps, Lim Kang Hoo by going himself, he is not able to leverage on the durian trend on the large scale basis, and it needs to be done quick, as well.

For durian planters, it takes 5 years for any to start yielding results. That is the bad part. Bursa's investors do not like to wait for 5 or more years - I learned that from WCE. The good part is durian plantation is not an open competition situation. I believe that only a few countries can have that position given the costs of land, position, climate and costs. It can be a moat if done right as competition can be curtailed.

Now, it may not look that bad. Especially given that Bandar Malaysia is alive and back - the construction division will have continuous deal way past SPE while the plantation and toll concessions will bring the long term consistent revenue - ideally.

Wednesday, November 13, 2019

FAA's downgrade of Malaysian aviation - Impact to Malaysia's aviation

By now we would have read that the FAA downgrade of Malaysia's aviation safety rating has nothing to do with the airlines, but rather on the regulatory functions.  This has caused concerns over some of us, when does not know how it is going to impact our aviation sector. One director went further by saying that the FAA would not have done check on us until Airasia X had its flight to Honolulu. In fact, since 2003, the FAA had not had a check on us. Is it a blame on Airasia X, or he is just saying a fact.

That same person runs Time Dotcom. I think he may have said a factual matter, but does it matter? Should it be because of a flight route initiated to Honolulu, we should now be putting our house in order - safety that it?

As a customer to airlines and the aviation industry, we have been bombarded by continuous price increases over the last few years. We created MAVCOM in 2015 which some say overlaps the function of CAAM. We even pay RM1 to support MAVCOM each time we take a commercial flight. I am sure given the continuous increase in passenger traffic, they should be sufficiently covered financially. It is ironic, that the users are the one that usually covers the expenses of these guys whereas their functions should be improving the infrastructure and profile of Malaysia as an aviation and tourism hub. The winner has been MAVCOM and the country but the users are the one who pay.

When we have CAAM whose salary scale follows the government and it is supposedly insufficient to entice the experienced people to stay, we have MAVCOM as well, whose role is still unclear.

How does this impact Malaysia? We have built a solid industry. I think it is time to be more vigilant and have the input from the right group of people for our aviation to grow.

Saturday, November 9, 2019

Surin Upatkoon's new holding structure in WCE: Cleaner, better

I have been asked on the new structure for the second largest shareholder of WCE: Surin Upatkoon. What are the impact? Is he relinquishing his stake in WCE etc.?

Well, as a start his original stake in WCE is through several organizations i.e. a complex holding via 5 companies namely, Cypress Holdings Limited, Pinjaya Sdn Bhd (Malaysia), Hanton Capital Limited, Cedar Holdings Limited, Kularb Kaew Company Limited

The shareholding was as depicted below:

With the exercise, it seems that the shareholding is now cleaner i.e. as below:

As in the announcement, Hanton Capital, a company resided in a tax haven, Virgin Islands has sold its 99.9% stake of Pinjaya directly to Tan Sri Surin Upatkoon.

Well, I prefer this as it is cleaner and the actual shareholder is now back into Malaysia.

What makes it change then, as sometimes business people would prefer a more complex structure.

That could be due to several reasons:

  1. He just want a cleaner structure (surprisingly)
  2. Because of the rights issue, he may use bank financing to fund part of his subscription. Banks usually prefer a cleaner structure especially when they are the one financing the purchase.
  3. If one is to notice above, the holding is brought back to Malaysia. As toll business has gone riskier due to the threat of government's plan of toll elimination, I believe foreign financiers are more reluctant to finance it. The financing may be dependent on local banks and they do not want to be seen financing a company with complex web of structure.
If Surin relinquishing his holdings in WCE? I think not at all, especially when he privatised MWE partly because of this. 

Is there an impact on WCE? Minimal. But I prefer this structure better.

Free warrants and its futility

Free warrant feels like this. If we give it the first time, the children (meaning the ones that are still immature) will like it - feels like free ang pows. Precisely. But soon, the children will also realise that the free ang pows that we give is just a paper money which is worth less when we print our own money.

If we give out too many times just like what Vivocom did - in total 5 times and see what happened to its share price. Vivocom used to be the master of the free warrants and seems like one person - a sifu - is a biggest proponent of free warrants.

I wrote an article about Vivocom, during its most active period.

What is free warrant?

It is printing money. Only one country in this world can do it in large quantities and can get away with it. Uncle Sam. Even then, they are rethinking.

One person used to say this,

You can fool all the people some of the time, and some of the people all the time, but you cannot fool all the people all the time.

But it seems that recently, Buffettology is also under fire by some people. Nothing wrong and harmful.

PLUS's press statement shows they are out of touch with their customers

PLUS largely operates along the North-South Highway and also the urban areas where its highway passes through Damansara right down to Klang (NKVE) while its Elite Highway passes through part of Shah Alam and connects to KLIA/KLIA2 from Damansara. PLUS obviously has the best highway in the country besides LDP in the urban areas.

Recently, it came out with a practice by not allowing motorists to do their top-up through its booths but instead pushing the motorists to top up counters at various counters at the side of the highways. I am not against the move as it does smoothen the traffic as queues do create unnecessary traffic along the toll booths. However on the other hand, practices like this creates complains from the toll users as some of them could not use the convenience of the booths for top ups, whereas they have to stop at stops to do the top ups.

The CEO of PLUS, came out and defended the company's move as it claims that motorists, due to this practice, top-up a higher amount each time whenever on average. It sounds as the right thing to do. However, if we try to understand the reason for some of them to do micro top-ups of RM10 and RM20, we can see and understand the financial situation of these people. A lot of these guys are also Grab or e-hailing drivers. In a few instances, the Grab drivers even asked me for cash to top up their pre-paid cards.

I think in many cases nobody wants to do micro top-ups if they can afford to but they just do not want their money to be tied down to the cards. That's what it is, in general.

Hope that a large company like PLUS can be more empathetic.

Thursday, October 31, 2019

What Paul Krugman says about debt

Paul Krugman, the controversial Nobel Prize economist, who coincidentally penned an article about capital control and advice Asian countries on the matter one day before Malaysia had its capital control on 1 Sep 2018 - and the rest is history - politically and economically for Malaysia.

He has this to say about debt and its misconception (piece written on The New York Times) and I think this has its relevance to the Malaysian economy today although it was pointed towards the US.


People still don’t understand debt

By Paul Krugman
Opinion Columnist (29 Oct 2019)

Today’s column is about our trillion dollar deficit, which nobody seems to care about. The thing is, this lack of concern is justified: There’s no good reason to believe that the current budget deficit is doing significant harm.

What did do a lot of harm was the deficit hysteria that dominated establishment discourse the last time we had a deficit this big, which also happened to be a period during which the economy was deeply depressed, and the stimulus from deficit spending was actually a good thing. It should have been obvious that obsessing about deficits in 2012 was a huge mistake. What’s relatively new — and something I couldn’t get into at length in the column — is the realization that government debt isn’t much of a problem even at full employment.

One reason people find this hard to understand is that they make an analogy between the nation as a whole and an individual family. This leads to sober-sounding warnings that budget deficits amount to stealing from our children, in the same way that spendthrift parents are squandering their heirs’ inheritance.

This analogy, however, is all wrong. Debt is money we owe to ourselves — that is, for the most part it obliges one group of Americans, taxpayers, to make payments to another group of Americans, bondholders. It doesn’t directly make the nation poorer, at all. (O.K., there’s a small caveat: some debt is held by foreigners. But it’s not quantitatively important.)

Now, there might be indirect ways in which debt makes us poorer. To pay interest, the government might have to spend less or collect more taxes than it would have otherwise. And this could hurt growth — for example, high taxes could reduce incentives to produce and invest.

What economists have come to realize, however, is that even these indirect costs of debt may be negligible.

Why, after all, must a government raise taxes to deal with a higher level of debt? The usual answer is that if it doesn’t, the debt will snowball: the government will have to pay more in interest, which will cause the debt to rise further, leading to even more interest payments, and so on.

But nobody cares about the absolute value of debt; what matters is the ratio of debt to the tax base, which for the federal government is basically the whole economy, i.e., G.D.P. And a rise in the debt/G.D.P. ratio doesn’t snowball — it melts! Why? Because the interest rate on federal debt is normally lower than the economy’s growth rate.

Sunday, October 27, 2019

I doubt trade war will end soon and what we should do about it

In a forum I attended, one senior director of a large semiconductor multinational based in Penang told us not to look too much into the situation. That was May, few months later Trump increased tariffs for the same Chinese products by another 5%. For people who have been thinking that Trump is the bad guy, perhaps we should rethink. All the presidential candidates that have been asked on this topic, either they have tried to avoid this question or they have answered that they would have addressed the trade friction differently. Basically, they would also put pressure onto China.

Historians called this as "Thucydides's Trap", where it basically occurs when one up and coming super power emerges, challenging the reigning power that be, then the theory is a war can't be avoided. Thankfully, for several times war had been avoided and these seems to be avoided more recently example when US's economy exceeded Great Britain in 1900th. Today, who would allow a disastrous nuclear war where it would have a lose-lose proposition for the world.

China's GDP is expected to surpass US in the next decade and to many, it is a matter of time, not whether it will happen. China is promoting hard on Made in China 2025 policies where the plan extends up to 2049 - the 100 year anniversary of the Chinese Communist Party's reign over China. That also seems to be the date where silently China is planning for its military strength to exceed US.

Let me ask this question. Who would have expected this situation to happen even say 10 years ago? With the situation, do we think US will sit still?

If it is not Trump, the next President of United States - whether by 2021 or 2025 - does that person want to be remembered as a president where his office be seen historically as the one succumbed to another new power. Is there also a reason why China has allowed Xi Jinping to remain as president beyond the traditional 10 years?

So, are we naive enough to think that US will let this one go past them although the trend seems to put them in the losing situation.

China knows this and they can be seen to try their level best to address this. At the back of their mind though, they are willing to suffer in the short term but allowing their position to be stronger in the long run. In business, the Chinese businessmen are much short term in their actions, but when comes to the government, the Chinese government is hugely long term in their planning. US is the one which is not able to plan and act long term - because their financial and political system do not allow them to do that. Trump is up for election soon and he has to have actions that is based on that 2020 election, i.e. creating positions for his voter base while President Xi can afford to sit and wait.

Well what do we as Malaysians can expect to see and take advantage of

Two words. Trade and Technology

If we are dependent on consumption to drive our economy, I think that has been the story for the past 18 years. Today, it is much harder to drive consumption when our private debt is at 80+%. What we can hope for is the growth to be consistent while allowing other components of the GDP (i.e. Investment and Trade {Export - Import}) to drive through our economy. The government sadly has been focusing on balance of wealth - not wrong - but to drive equal prosperity, one country has to be prosperous first. How to distribute wealth when we do not have them? If we are not careful, the word prosper would not even be there as global competition today is so extreme that many countries can surpass us especially through trade.

Now Trade. We have learned about the Malacca history. Malaysia is lucky to be geographically strategic. Remember, the early days who were the ones trading in Malacca? Indians and Chinese. We happen to have those culture and people who speak the languages, hence the Indian and Chinese culture are a benefit rather than the a con. The vernacular schooling system could turn out to be an advantage rather than seemed to be a disadvantage. The only thing which Malaysia can't seem to let go is the pride factor.

Anyway, our government - past and present, know trade is important but how they do the execution is all that matters. If in the past Vietnam was at war, today it is in the most active in its investment policies. The Indonesian president seems to be inviting people of the right background to helm its important trade posts, although how it executes is key. So are China and India themselves. The Malaysian position today is not the same as the Malaysian of 25 years ago when we were knocking onto the door among the "Tiger" economies.

To claim that we can go back to our good old days of being seen as a prospective "Tiger economy" is just a saying if we do not focus on TECHNOLOGY.

Today, what US is afraid of China is not so much of its economic strength. US is more wary of China's technology prowess. The growth of Huawei and China's high-speed train technology, for example awakens many countries globally. And that country is hungry. Very hungry, and for a huge country it seems to be able to work in tandem to achieve its goal.

While we see China having its enterprise Alibaba claiming and coming here to teach Malaysians how to do e-commerce, we as a country have stagnated in our technology prowess and that area of investments especially. Just 20 years ago, the China government was hugely grappling with a new technology and phenomenon called the "Internet" as it was afraid of its effect towards freedom of speech. Today, that country is thriving out from that while we are still wondering what happened to our Multimedia Super Corridor.

To move Malaysia in the right direction, we have to revisit back what we try to do with our technology companies. While we invite Gojek here, we have to invest into a Gojek competitor. We have to do much more than giving RM300,000 to a Cradle recipient company and leave them with just the money. The worse that a Malaysian company has done is when our companies - GLCs included - having and giving more trusts to another company from abroad rather than providing a platform for our local companies to succeed. Sometimes having meritocracy in our procurement may not be a good thing especially when we do not allow our own companies to try and fail.

Malaysia today, seems to be running out of idea to expand our economy on especially the capital market - so much so that we are planning to list Petronas Carigali. Well, to list an oil and gas exploration business, we are not looking forward. We do not have the next new story.

We have to give encouragements and opportunities to more Vitrox-es and Penta. We have to give more capital opportunities to technology companies. LEAP is not doing its job given the acronym as it is too restrictive when comes to trade for example. The middlemen at the end of the day are the ones that make money as raising RM3 million can costs RM1 million.

We really have to move fast as if we are not careful, Bursa may not even be relevant.

Saturday, October 26, 2019

Why the fundamentals for WCE does not change much

When I bought this share 6 years ago, I was looking really long term. Today, that mindset does not change. Sure enough, today the project faces some blip - not entirely due to the current government as they have promised the elimination of toll but also because there was a dispute over the alignment prior to that. Now, let us review what actually had happened and probably I will go through the bad news first.

Early delays

The alignment for Phase 7 had been changed as earlier the concessionaire faced a dispute from the government then on the alignment. Since then, it has been solved (after the change of government). This has caused delay in that phase and since it is a 50 + 10 year concession, the affect does not change much. Probably the biggest change was the cost of land acquisition has increased.

Threat over toll elimination by current government

I have written a piece on this after the change of government on May 9. So far, what is negative since then for WCE is that they have yet to collect toll despite completion certain sections. What was sort of promised by the government i.e. to eliminate tolls and force it onto the concessionaires i.e PLUS, Gamuda etc. did not happen. In fact, Gamuda's concessions is being bought at a fair price. In the event WCE is being forced to sell, they would be selling at a fair price as well.

Anyway, as we can see the government may not have the funds to purchase many of the concessions. Hence, it is possible the government is using Khazanah to purchase them. My question is this, if the idea of the current government is to privatise businesses, then this action acts on the opposite. Khazanah buying the concessions, would also mean they are collecting toll as well. Anyway, in the event Khazanah is buying, I think it is a a fair price of the concession, hence much higher value than what is being traded at - for WCE.

PLUS is being reviewed i.e. reduced toll rates

As in the Budget 2020, the government has promised that the toll rates for PLUS is reduced at least 18%. Well, it shows how profitable PLUS is. Despite not increasing the toll rates every 5 years, it can now afford to reduce the rates. Given the situation, I am not sure who will get (to purchase) the concessions, but surely we as EPF contributor is affected by the reduced rates collection.

The affect to WCE is probably minimal as I do not think over a long distance (from Shah Alam to Penang) driving the drivers would bother over few ringgit savings.

Increased value in land purchase

To me, this is the biggest negative, as it affects the pocket directly. Anyway, as mentioned in the prospectus, the land purchase deals 95% of them have been completed. What is done is done. WCE is disputing some of the acquisitions in court and it seems to be able to win a portion of it.

The increase in equity injection would affect the calculation of IRR in the project - assuming it is decently profitable around 10%. Any increase in equity would change the IRR and if we can remember the project has a IRR hurdle where in the event the concession's profits exceeds certain threshold, it is supposed to share a higher portion of the profits with government.

In the long run, hence the additional injection would not change much fundamentally given the IRR scenario.

Partial completion of the highway

This is the good part. It shows that the project is on the way and WCE is able to complete it. There is no reason to not believe they are capable of constructing despite the small situation over at Phase 4.

This project which has been talked about for so long is now really moving. The biggest beneficiary is Perak especially Lumut and I am sure many are waiting for the completion.

It is a long term project

Again, whatever the share price changed in the short term, there is little impact. At the moment, WCE has yet to collect toll so the financials that we see on quarterly and annually basis is no relevance. The biggest relevance is the costs and progress of construction.

Losses in the first few years

I have been asked on this, and would like to clarify. Profit and losses is not the main basis for calculation, as it is accounting (little bit deep to write in this article). What is important after the project is the cashflow. As an example, PLUS today on paper is making losses and I have read the Minister in past gladly presented the loss making fact (this loss actually is good for PLUS owners given the tax planning situation).

Let me put this in perspective, if it is making losses, why are there so many wanted to offer the purchase of PLUS?

Post 2038

There is potentially one big factor when PLUS is taken out of the tolls collection. Although PLUS is a parallel highway to WCE, there are various trends which is positive for WCE. One of them Pulau Indah port. WCE is closer to Pulau Indah, and the government is developing those areas. It is encouraging the expansion of the ports or even a new one. By then, given the development, WCE will have its own additional strength. As mentioned in past by the management, WCE's strength is its flat terrain which is a bonus for heavy vehicles.

I believe the traffic is so heavy by 2038 that, PLUS will be quite badly congested that we would have needed an alternative highway anyway. Hence WCE. I have also seen the maintenance of a non-tolled highway in Malaysia - which is not a good sight.

Friday, October 25, 2019

What the results of Vitrox and Unisem are telling us

When I write this article, I guess some have yet to realise the consequence of how the trade war will affect some of the companies.

Just read here.

Vitrox and Unisem, among the larger listed semiconductor companies in Malaysia just announced poor results.

Vitrox, which has been one of more better performing companies in Malaysia over the last few years, just announced a close to 40% drop in revenue against the similar quarter last year. Unisem is worse, it just registered a poor quarter, moving into losses.

Vitrox's case, I think the recent quarter is more of a everything just went awry in a quarter where, many companies would want to reduce their purchases of machineries due to the uncertainties. As for Unisem, it is a packaging house (OSAT) which provides assembly for customers who sells chips to the final product assembler.

As mentioned in my previous article, the value chain for Unisem would not augur well for this type of companies i.e. Inari, Unisem, MPI. Unisem has foreseen this and in the last year, it partnered with a Chinese company to address this situation.

The system or box build guys will have a different situation in the long run as one can see in VS Industry's result.

Monday, October 21, 2019

Will the value of Grab drop because of this?

We know that Grab has put its focus on Indonesia, so much so that the Malaysian founder Anthony Tan moved to Indonesia as his base. This is because for Grab, Indonesia is such a huge market that it cannot ignore. Singapore has lured to be the first base - but the country's size and market is not attractive enough despite the $$$ offered. Malaysia has tried to reach out to him for several endeavors but I have been made to understand that he ignored Malaysia as he thinks that Indonesia will make him his billions. Not the wrong thoughts. Until...

Well, then the latest news, is that Grab's biggest competitor in South East Asia, Gojek's founder has been asked to join Jokowi's cabinet. We know who is the preferred son then. Do we believe that Gojek's founder is going to be impartial?

Well, the moral of this story is there is no such thing as adopted country or adopted sons.

Back to Malaysia, if the country is not supporting its own business people, so who do we expect to get support from. Indonesia's Jokowi has done so much for its own business people, such as the current ambassador to Malaysia is actually the owner of Lion Air and indirectly Malindo. There is this thinking that at one point of time, Malaysia's government does not mind to bring Lion Air into Malaysia to suppress Airasia. If MAS cannot do it, bring another competitor. If one country is not strong enough, borrow the strength of our neighbor.

Moral of the story, if they are vocal, shut them down, invite our neighbors to stop our own people. It is allright to do that. After all, our neighbor's children are better.

Malaysia is the best. One of our Ministers, went all the way to invite Gojek into Malaysia, with red carpet and open all doors. There is no better country who invite foreign businesses with open arms than Malaysia. We are the most meritocratic when we do not need it. When we need it, we did the opposite.

Lessons learned. No country is fully open for business. They will support theirs - i.e. their people born and bred. Huawei (China), Samsung (Korea), Lion Air (Indonesia), Boeing (US), rapeseed oil (EU). Do these companies or industry serve as an example?

What then, Malaysia?

Sunday, October 20, 2019

Why Airasia is winning its local fight and that's hugely important

I have not written on Airasia for a long while, as over the last 18 months, its business has taken a strategic operational direction change. The group has moved into not owning its planes largely, getting hugely aggressive in its digital initiatives. I have to admit, it is hard to measure its digital initiatives when in the market we have Grab which was valued at $14 billion while Airasia as a whole is barely $1.5 billion.

At the same time, Airasia which is operating in markets such as Malaysia, Indonesia, Thailand, Philippined, India and Japan is growing aggressive. By not owning planes, it has rooms to grow more aggressively as long as it can keep its operational cashflow strong. This is what Airasia has been able to do despite growing strong. As an example, its operational cashflow for last 2 quarters combined was RM1.252 billion. Assuming it can keep up to the trend, the business is operating at close to 3x Price / EBIDA or Price / Operational Cashflow.

Without the high spending on capital expenditure as it now do not buy planes, the price it is trading at is hugely attractive. As a result, I am not sure why most analysts are putting down the price of the company.

Airasia's biggest tradeoff actually is the weak Asian currency (except for Thai Baht) as its leasing and fuel costs are in USD. The good part is that all its competitors are facing the same situation. Scoot, one of its closest competitor may have a slight advantage as SGD seems to be stronger and its parent flies globally where it can earn USD and Euro.

However, those are not the biggest factor to Airasia. I seem to think that Airasia, with its management can control its ownself if it is operating in an environment that is based on free competition i.e. open skies. Airasia, unfortunately is not operating in this environment. To sum up its founder closely, Airasia is operating in a hugely regulated environment. To make matters worse, the airports operations in this region is largely monopolised and regulated.

In the past, and up until today, Airasia's largest base is KLIA2 and it is not getting the support from its airport partner. If I am a Tesco, and I rent 95% of the space and bring 97% of the traffic to my property owner. However, I am consistently in dispute with my owner, how would investors think. My owner consistently would like to increase my fees. I have no other options as airport operations license is given to only one operator.

Even then, I am still able to turn a decent profit. We have MAVCOM which was created in 2015 and it seems to think Airasia's business concept is the same as other airlines. MAHB seems to be able to understand Outlet Mall concept as it ties up with Mitsui to operate one, but when comes to airports it is not able to think so. Emirates and Qatar Airlines does not mind paying for a premium service equivalent airport, but Airasia does not mind the no-frills airport. The food outlets are the added convenience - not as a mean to attract traffic. This thinking is conveniently ignored by MAHB.

The National Transport Plan is working to readdress the situation. It is recognizing the impact of a low frills airline and has plans to consolidate the regulators i.e. Civil Aviation Authority of Malaysia (CAAM) and MAVCOM.

Hopefully that is a beginning for a locally developed airline that one that is able to expand overseas to have a good local base. Just like many huge international companies getting their government to support them in their own countries so that they are strong enough to grow beyond its home.

Saturday, October 19, 2019

Market is idiot to treat all semiconductor companies the same

The world's semiconductor market is a $400 billion market. Thank goodness, some of the Malaysian companies and economy is in the play. A large part of the Malaysian semiconductor industry though is dependent on foreign companies such as Intel, Agilent, First Solar, Infineon. The real serious local companies only comprise of not more than 100 companies. The ones that are listed on Bursa Malaysia and seriously in play may not exceed 20.

Just take a look at China's exports below, which electronics have been the largest by far. The trade war is about semiconductor and its related industries (or larger context, technology per se) war. Electronics and electronics related products probably comprise 40% of its exports. 
"The following export product groups categorize the highest dollar value in Chinese global shipments during 2018. Also shown is the percentage share each export category represents in terms of overall exports from China.
  1. Electrical machinery, equipment: US$664.4 billion (26.6% of total exports)
  2. Machinery including computers: $430 billion (17.2%)
  3. Furniture, bedding, lighting, signs, prefab buildings: $96.4 billion (3.9%)
  4. Plastics, plastic articles: $80.1 billion (3.2%)
  5. Vehicles: $75.1 billion (3%)
  6. Knit or crochet clothing, accessories: $73.5 billion (2.9%)
  7. Clothing, accessories (not knit or crochet): $71.4 billion (2.9%)
  8. Optical, technical, medical apparatus: $71.4 billion (2.9%)
  9. Articles of iron or steel: $65.6 billion (2.6%)
  10. Organic chemicals: $59.8 billion (2.4%)"
If US, and probably Europe in the future is to reign on China's strength in technology related sector, a large sum of these businesses is going to move to countries that are to pick them up.

Vietnam is going to be the largest beneficiary. Singapore will not. Malaysia will benefit partially, but we need to know which company will benefit from it. If we look below, we are just playing every company in the semiconductor list. I have seen that the market have been excited about the better pick up in Iphone 11 sales, hence Inari's shares have picked up. Are we looking that short term? Is Inari mainly only produces its chips for IPhone?

Let's look at where in the value chain is Inari. Who does Inari sells to? And to which value chain it is in. Inari sells to Broadcom, Osram largely. These companies a portion of it sells to companies in China or Chinese companies and they are most of the time assembling their products in China. These products are sold to US and many parts of the world. That's why packaging companies are assembling semiconductors in package format. Many of Broadcom's components are not substitutable. If there are, high chance it is another US or European company.

But, China is working very very hard to make themselves. I cannot see Inari to be exciting as they are supporter of American based companies. China, if they can will try to avoid.
Let me put in this perspective. No semiconductor company if they are substantial in size, can be just dependent on one country. I have heard of China, because of the threat from the trade war has asked its companies to support Chinese companies first. Hence, the Chinese manufacturers are looking within then only external. Usually, in this scenario if they can find substitute, they will buy local. Only when there is no substitute, they will have no choice but to buy foreign. On the other hand, foreign companies that have been having products manufactured in China, will want to look for other alternatives.
Why I like box-build companies
Unlike Inari for example, which is dependent largely on Broadcom, many of these box build companies are more spread out when comes to its customers base. They can build for US. They can also build for Europe. When US is threatening to impose 25% tariff, and they have done it, many companies will look beyond China because the final product after VS Industry or PIE Industrial have produced will be shipped to US. That is where the 25% is imposed - after VS has manufactured and put them in the corrugated carton box - and later sent to US.
Today, if I am a big size manufacturer and doing assembly out of China, some of these companies may want to approach me. 
If I am a company that my product is sent to China for it to be assembled, I may be suffering. If I am doing something where my work or product can be replaced by some Chinese companies, I may be suffering as well - since China is working on "Buy Chinese goods first".
Remember, we have to know which part of the value chain our Bursa companies are.

Tuesday, October 8, 2019

Lin See Yan's take on our economy

I find that this morning's interview by BFM with Lin See Yan on the current state of the economy is pretty straight forward.

Here's the link.

Saturday, October 5, 2019

PLUS is already owned by the public

I have read on the news on PLUS where the government prefers it to be acquired by the public. As it is, PLUS is already owned by the public. PLUS is owned 51% by Khazanah, 100% MOF company, and 49% EPF. We know already whose money is EPF.

Why restructure the ownership when it is perfectly fine with the ownership. The reason why potentially some government is looking at private sector is because of efficiency. I do not think PLUS is efficiently run - although this comment is up to argument.

If everything is preferably public sector to manage, then the country is getting closer to being leaning to socialism. As it is, we have been facing assets where it is too much owned by the government - and I thought the last promise in election was to reduce that.

Friday, September 27, 2019

Performance of VS Industry will give us where some of the businesses will be heading

I have in the past mentioned about focus on businesses that has sales to overseas or in short exports. This however does not include stocks dealing in palm oil as it has other challenges themselves. When I mentioned these, I was more of referring to the Guan Chong's of this world, the semiconductor stocks such as Globetronics, MPI, Unisem, Vitrox, Pentamaster, PIE and maybe rubber gloves - although I am seeing some oversupply position among the rubber gloves makers in the short term.

Anyway, as we know - the world is transitioning. We are seeing the clash of two superpowers - US and China. When two superpowers collide, are we the pelanduk (mousedeer) that will die in between (a Malaysian proverb - Dua Gajah bertarung, pelanduk mati in tengah-tengah).

Malaysia, coincidently is not taking sides - particularly in business. We are exporting to both countries. We do business with both countries - business and politically.

In dealing with trade wars, we have to be really in the know what type of companies and business we are dealing with. Semiconductor company - in this particular case - VS Industry - a downstream player - also called a box builder. It is one of the largest South East Asian owned box maker - i.e. the one that assembles, value adds and helps one of its customers, Dyson to manufacture its vacuum cleaners. Dyson for your knowledge does not own a single factory - just like Nike's model - or closer Apple.

In this article, I am not going to mention in detail the business of VS but what it has announced recently and where some of our companies in Malaysia will be heading - not the next few quarters alone but the next few years at least. As a summary, VS Industry has businesses in three countries - Malaysia, China and Indonesia (as below latest results - 4Q19).

Malaysian revenue comprise of 80% of its total revenue. Surprisingly, revenue from Indonesian operations has dropped while unsurprisingly revenue from China dropped even further. As we can see, Malaysia is highly profitable and China is making losses. Indonesia is barely breaking even. China's losses as it has mentioned is because the company seems to be downsizing in that country - not surprising. VS is taking a financial hit in China as it seems that they are focusing harder in Malaysia.

So, what we are seeing is a business where Malaysia is somewhat strong in among our competitor countries like Singapore, Indonesia, Thailand and China (which overtook us by far in the last 2 decades). As below is the explanation as provided by the management of VS which I tend to believe and agree. (no point rewriting them as I can make use of the wonders of cut and paste)

As mentioned above, we know already given that if we do some "reading and watching" and if we know the geopolitical and cross border business perspective, it is the start of where we see what we may see more in the near and medium term future.

More and more businesses are looking out of China - still the factory for the world, and Vietnam and Malaysia will get more queries. The above performance, I see as just the beginning - for VS and few more companies in Malaysia. This is the reason why I am betting on PIE Industrial. PIE, to me could be even better as it is largely only Malaysian operation and does not have operations in China - the setback that we see through VS. The weakness for PIE though is that it is smaller than VS and it is Taiwanese controlled.

Given that if I have time, I will share more of my opinion on export businesses in Malaysia and the trade which I have been spending a lot of time and my current dealings in.

I am though a little bit not satisfied that we start to see this trend as above through VS and several more, but I do not think the "G" i.e. "government, side is doing enough. There are opportunities I think with this trend, moving forward. VS, by the way is doing quite well as a company and management given that they are managing the transitioning - it is not easy.

Wednesday, September 4, 2019

Sold Armada

I have decided to sell Bumi Armada largely because I do not know how to value this company at the moment.

As mentioned before, the previous reaction towards the company was because of over-reaction on its balance sheet and projects difficulties faced.

This has never going to be a long term holding, though, hence the sale. Additionally, since WCE is coming on stream for its additional rights, this sale is to allow cash accumulation.

Friday, August 30, 2019

The PLUS asset should remain where it is now

Frankly, with proposals by various parties on the toll assets - where it is reported there are a total 15 highways in proposal and under review. Among them, the Gamuda, IJM and PLUS's highways. Let me put these thoughts from the 3 proposals perspective:

1) proposal by MOF to buy the 4 highways controlled by Gamuda - which we know is the government's money, although Tony Pua's argument is that the government does not need to come out with extras. That's what he said. But he also claimed that Malaysia's debt has exceeded RM1 trillion. Buying the Gamuda's highway will add the debt no doubt, despite it is ring-fenced against the proceeds from the toll collection. The idea is buying over the assets will increase the country's debt no doubt. Additionally at a time where we are promoting privatisation for Malaysia, this act is in the opposite which is nationalisation of assets. This is also against PH's manifesto.

2) proposal by Khazanah - it is reported that Khazanah has submitted a proposal to purchase 15 highways owned by Gamuda, IJM and including the PLUS highway. Among them, the largest in contention is the PLUS asset. As we know, PLUS is already controlled by Khazanah through its 100% unit - UEM. In my opinion, Gamuda and IJM can manage these assets better than Khazanah. Can Khazanah have other ways besides not collecting toll? If yes, I would like to listen. The largest asset among the many is the PLUS asset which is around RM30 billion or more. Can Khazanah afford to reduce the toll collection fee? The other 49% owner of PLUS highway is owned by EPF which is the bulk of Malaysians money anyway - the owner is the one which will use the assets anyway. Why pass to the government. As an EPF contributor, I would prefer this asset. Can EPF find any better alternative after this sale? Also, this exercise seems like a left pocket - right pocket exercise as IJM and Gamuda are largely owned by the Malaysian institutional funds anyway. Why give more fees to the investment bankers and for them to take home more bonuses next year? Isn't that what we do not want? Giving money to the rich again for doing nothing much but shuffling assets.

3) proposal by Maju - Maju is a private party. In the past, its proposal was backed by Evercore - a large Private Equity. Maju as it is, is not very rich. Tun Mahathir's past has shown that he was willing to support entrepreneurs if they are willing. (Think Yahaya Ahmad, and many more) However, tolled highways are not difficult assets to manage, as long as managed well - unlike building a car. Hence, there is a huge probability that foreign PEs will make a killing as Maju itself may not have the capability financially to do this. Why give a large part of EPF's earnings for example to parties like Evercore and several more? They do not bring any additional value to us besides again shuffling papers.

All in all - I feel that it should remain status quo as the assets are owned largely by Malaysian institutions. This is just like what we like to term "Small little problem, but we go and dig (create) for more problems."

Thursday, August 22, 2019

The next wave of stocks will be companies that have dealings overseas

Ever since 2016 and 2018, i.e. 2 major events, the drop in oil price generally and change of government from BN to PH, we are seeing major shifts in the way we should look at companies. In my context, as I am talking about listed stocks, these are the shifts that we should be looking at. In those 2 events in 2016 and 2018, there have been transitions. Firstly, because of the drop in oil prices, our country's dependency on one major commodity to finance a large part of our budget is diminishing. Although in 2019's budget that has been brought back as the MOF has asked for more money from Petronas to support the GST repayment - this will not be a yearly event, but rather a one off situation.

Secondly, because of the gradual decline of Malaysia against other competing countries, our policies and actions have been focusing on B40 and to a lesser extent M40. Note that I am not saying that Malaysia is declining but against other regional competing countries, we are not better off. Obviously, for businesses - with the focus on the poorer group, the country will face difficulties to drive the businesses that have been largely dependent on local consumptions and investments.

Malaysia's private debt to GDP is one of highest in the world - around 82% (2018) and from here we know that the push by our policy makers previously for consumption driven economy is not going to be as strong as previously. One can only spend so much either from our own's income as well as from our borrowings. We must be mindful that personal debt must be paid off.

On the other hand, the new government of PH is looking at reducing its government budget over the longer run. The current government as in its previous message of RM1 trillion debt is looking at reduced government spending.

So how does a PH government continues to drive the economy or at the very least maintain the GDP growth of 4.5% to 5%, you might ask - as government spending is to be lessen while consumption is curtailed.

Some of the drive that I see is the government's strategy of putting more spending power into the median and average income earner - and those are the M40s and B40s. In today's many economic policies globally - when the disparity of income widens, many governments today are trying hard to reduce that. Malaysia is no different. However, for many Malaysian businesses, we are neither here nor there. These challenges in addressing the needs of the B40s, will cause the government to not do any positive fiscal actions for larger companies in Malaysia. One can see it through the increase in gaming tax on Genting Malaysia as well as introduction of traveller's levy. They need to bring in more income hence the focused taxes.

So, in short, because the government needs to squeeze more money from the larger corporations and pass them to the lower income group, I do not see the Composite Index (which comprises of normally Top 30 companies) to be exciting. Most probably, the best it can move on to is 1800 level over the long run - until 2022. This is because, I do not see much growth potentials from these group of companies.

With all the gloom, where would the growth be then?

Businesses that are dependent on overseas dealings and where there are transactions involving international transacts.

One of the small positives which I am seeing - but have yet to bear fruits is the drive for automations (they term it Industry 4WRD or Industry 4.0) and they try to get more investments money to the SMEs. Both are interlinked in some cases.

SMEs as in any other businesses will not invest when they do not see potentials. The local consumption story is a much lesser potential as there will not be as strong local spendings as in the past. Just to give an example, the furniture retailer in Malaysia will not invests much when the housing market is slowing - and that has links to the private debt as many just cannot afford to increase their borrowings anymore.

What has potentials then? Despite the slow down in global economy, I do see Malaysia's trading economy situation (i.e. our trade internationally) NOT to be highly impacted. As it is, Malaysia is still a middle income nation and there are positive trades when a country just do good trades. From my study of the impact of Trade War, I see Malaysia to be positively impacted once the situation becomes clearer. Nations still need to trade whether there are trade frictions or not. At the current situations, many companies or businesses that are dependent on international supply chain are busy reallocating their supply chain. What does this means? A company like Wal-Mart or Amazon for example, will consider Vietnam or Cambodia as an alternative manufacturing site - and they are doing this much more aggressively.

Malaysia is not Vietnam. The higher value add of the supply chain - there is a potential it may land in Malaysia. When US imposes tariffs (whether they do it for long term or by 2020 it is solved) onto China, things are going to change anyway. As it is, China's costs advantage is diminishing. There will be a different type of engagement between China and US in the next 20 years.

Malaysia as a trading and manufacturing hub will be benefiting if we are fast and certain in our actions. That is if we know the right thing to do. The government must put more effort to drive these businesses and entrepreneurs.

On the perspective of stocks, I foresee companies that have international engagements will see more and more international engagements. Some of them are getting ready for more deals and businesses as it is.

I am identifying some of these companies for investments. Let me know if you come across any of them. There are rooms for discussions.

Monday, July 29, 2019

Why PIE Industrial is a stock for the trade war

By now, many would have known what the term trade war is about. It started during the Trump's administration which felt that to reign the growth of China, one of the method is to rebalance the trade deficit faced by US against China. Since the admittance of China into WTO, US has faced trade deficits against China and it felt that the unfair support provided by the Chinese government towards its exporters is the main culprit. Whereas, many has also felt that the reason why US has become so petty is because of the growth of China as a world superpower especially given that China is now quite strong technologically in some areas which is of concern to US.

Of course, the US government felt that the way to control the growth of China is through imposition of tariffs of up to 25% on $200 billion worth of goods from China. Since the late 20th Century, China has been steadily growing as the world's manufacturer, and this trade war is set with the intention to reduce that dependencies on China. Funnily, China which is now the second largest economy globally is already planning for this since the beginning of this 2010 decade. Since Xi Jinping has taken the helm in 2012, he has largely been trying to drive China to be a consumer and technological power.

In any case, Malaysia having been one of the larger semiconductor based products manufacturer would have been affected by this "trade war" disruption as many companies especially whom are dependent on China as a supply based are now reevaluating themselves. To this end, I can say all the semiconductor companies would be affected one way or another. To see this clearly, we have to understand in which value chain would many of these E&E companies would play. The diagram below, would provide a good indicator although there are other ways to slice that presentation.

Many of the products that are exported to US would be at the end of the value chain, i.e. box build and this is where the 25% tariffs is being imposed on. Box build basically means the phones, routers, switches, accessories etc that are assembled and exported. Malaysia is not a big exporter of final value chain products but rather the component exporters - pretty much at the Intel, Broadcom, Osram and Inari level.

At the moment, due to the disruption caused by the tariff, the component sellers are affected as most definitely many buyers are reducing their purchases due to the wait-and-see attitude from the negotiations between the Trump and Xi's trade team.

In any case, I see that the trade war is something which is not only due to Trump but is coming nevertheless. US as a country would not allow China to surpass them as it has been dominant since World War 2 -  i.e the world's superpower without much competition for 75 years.

This phenomenon will see changes in terms of supply chain. I do see some Malaysian companies getting larger orders as they have been building themselves as the system builders (box-build).

One of them is PIE Industrial - a final system exporter. Ironically, the company has not been doing that well for the last few years due to several reasons - such as shortages of supply and lost of customers. This trade war will see difference as in the management discussion (2018 Annual Report) provided below.

I have decided to buy 4500 units of PIE.