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.