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.