Saturday, May 30, 2020

Where do we look for Malaysia in the new normal

I started my career at almost the similar timeframe as September of 2019 in this crisis, but 22+ years past. During then, the market was really hot especially among the second boards (then there was a second board which later was merged into the Main Board). Back then, I was tasked to maintain a group of 40+ loan accounts and look for new ones. I remembered the 2 earlier business accounts that I met up with which was my first time to Batu Pahat and Muar, situated in southern Malaysia were furniture makers. Both of them were doing relatively well. One whose business was selling to the entire country with lorries delivering furniture comprising from simplest of low costs RM30 furniture to sofas. The other was doing purely exports, run by a Taiwanese family.

Of course, 6 months later the Asian financial crisis hit Malaysia. We knew about it but my lack of experience caused me to not know what to do and expect as it was my first real experience of what a crisis was. In a matter of hours Malaysian Ringgit was devalued by easily double digit percentage. The business community whom were caught did not know what to do. So was the entire nation. I can vouched however, there is a huge difference though during then compared to today. During then, the banks would have pulled back the banking lines that were unutilised as they feared of facing more exposures. (Today, quickly BNM imposed a 6 months moratorium on payment for the businesses - This would have given some breather although we have yet to see the impact after that 6 months)

Of course, when RM plunged - it was a tale of two stories for the furniture makers. The one that was selling within the country saw its sales plunged (and later went under receivership) while the one that was doing exports later on became very big and it subsequently got listed and has a huge operations in Vietnam today. We know the main reasons as sales was in USD through exports to US and Europe while the local one was holding a combined foreign and local costs while sales was a mere fraction of what it used to be when the crisis hit.

Today, that situation we faced 21 years ago has its similarities. BNM and the Finance Ministry this time would not have the challenge of defending the Ringgit but we have an economy that was almost on standstill for 2-1/2 months - especially on buying the non-essential items (furniture is one of them). We are going to face worse as time passed when people are now more careful on their spending. That spiralling effect of less-spending would cause local domestic economy to suffer. This time around though, the sales to US for some goods will not enjoy a similar profile as the US, UK, Japan, China's Main Streets are also suffering the same.

However, as one can vouched, this crisis (as people call it will turn to a new normal - and that new normal does not look good for Malaysia) is going to change the business landscape. What is the new normal then? It is going to be more of the digital normal - which means usage of services, purchases of goods are almost borderless. Today, I am sitting at home working using cloud services provided by Google and Amazon. My company is buying more servers with components and equipment made by Intel, AMD, Cisco just to address this period. There is this imagination that the new normal would also mean many globally would subscribe to services and products that are provided by just a handful - Amazon, Google, Microsoft, Facebook, Netflix, Alibaba, Tencent, ByteDance. Many people are buying goods direct from China through Lazada and Shopee - I am not sure our government realise this but the retail market share is more and more getting away from Malaysian companies.

Where do we go then? It is going to be late if we want to compete against the Amazon(s) and Alibaba(s). Rubber glove is a good situation for Malaysia but it is not the new normal. It is the current normal and it may go away. We as a country has to build and encourage up a group of businesses that will be trading globally. Rubber gloves gave us some business safety net. We have a country which geographically and infrastructure-ly built for international trade. The Trade War which is back after 3 months of hiatus - we Malaysia is going to take advantage of it. We are going to use Klang, Johor's ports as an advantage.

Already some of the businesses that are resilient - we can see is made out of this infra and positioning. Those names are Scientex, Dialog, Guan Chong (maybe even MSM) - mainly comprise of producers, traders and manufacturers of essential and daily used items. We have to get Malaysian companies to be strong with digital exposures.

What we have tried to do through our digital initiatives did not really bear much fruits. We were followers. If in US or China a digital business model is successful, we tried to copy them. This is not taking advantage of what we are strong in. Malaysia is a nation which is exposed to the world. US and China, when they built on an idea - they have a huge internal consumption to test on those ideas. We do not have that. I am sure when Spotify was created it was not meant for the Swedish market.

So where do we go in terms of the stock market? All things are not lost. We have enough of these companies and entrepreneurs. When I was exposed to the rubber gloves makers back in 2000, those companies were nowhere near what we imagine they are today. We can recreate many of these similar companies in many different industries. Scientex is one huge example. So was Press Metal. Back 18 years ago, I was not impress with the company - again I am mistaken.

I think this crisis, which is yet to show its true-devil self, would still present opportunities and the way to look for it is less of the inward looking ones but search for the ones that would go outward of this country.

6 comments:

Anonymous said...

Hi Felicity,

What is your thoughts on the article written by JC regarding the WCE?

https://klse.i3investor.com/blogs/PilosopoCapital/2020-05-25-story-h1507833761-_CHOIVO_CAPITAL_Why_Highways_are_a_Gruesome_Industry_WCE_Holdings_Berha.jsp

He argues that revenue projection by RAM is on the high side while he believe realistically it should be much lower at 200mil in 2022. Understandably the Discount dividend model hinges on lot of assumptions hence sensitive to slight deviation of any of the assumptions. However, I could not quite refute his lines of thoughts that it is in fact not that lucrative even at this price level hence wondering what is your view?

felicity said...

The starting and growth number is important. People will take time to discover the highway. By 2022, the highway will be almost complete except for 1 or 2 sections. I don't think the starting number is below RM200 million as well as the growth of less than 2% Anyway, there is no point disputing over it. Many of the interstates highway are profitable such as PLUS, ECE. This highway is to serve areas that are underserved and there is no alternative to this actually. The point on profitability is not of major concern as in the project like this it is the DCF. Even in the project negotiation for a so called public private, they are using DCF rather than PNL. If we look at DCF, the current price is extremely cheap. Of course unless the highway becomes not profitable.

Anonymous said...

Thanks Felicity for your insights!

felicity said...

I actually only had the opportunity to read the entire article. Like he said the trick is in the projections. If the number starts from RM200 million obviously it is going to be low, and if we put around 2% growth, the project will be a loss.

Coincidentally, my starting number is very close to the average of RM463 million for first full year of operations. I think it is closer to that. My average growth - inclusive of the price increase every 5 years is 5%. With that, the value of the company could be in the range of RM7 - RM8 billion. Today's valuation is around RM1 billion.

Although the article is already very detailed, there are much more than that e.g. the company issuing a murabahah which helps in lowering the IRR. Furthermore, the project is 50+10 years, which makes a lot of difference as if it does not meet certain IRR (which I believe to be 9%), it can collect another 10 years.

The art in getting the cashflow right is important.

kirinnizam said...

Hi Felicity,

I guess we can take a look on packaging business(not plastic packaging but parcel or delivery boxes). I think for 5 years they can sustained this new environment as people are concentrating on services and digital. Not to mention boxes are paper, so at least it is still safe compare to plastic which is harmful to environment.

Just my humble thought.....though...
Nizam

Anonymous said...

our back end semiconductor players will become very big players 5 years down the road.