shares investment malaysia edition issue 49

CONFERENCE 20112011

Seminar

Professor Chan Yan Chong (Singapore/Hong Kong, China)

Mr. Li Xin Jing Collin (China/Singapore)

Mr. Chen Dan Hong(China)

Mr. Hu Li Yang(Taiwan)

Mr. Louis Wong(Hong Kong, China)

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I S S N 1 7 9 3 - 7 2 8 0

The Malaysian Dilemma Sunway Suffers Jittery Debut Despite Strong ExpectationsDouble-Dip Recession Lessons From HistorySweets-Laden Budget Needed Both Politically And Economically

PETRONAS“STELLAR PERFORMANCE”DAGANGAN SHOWS A

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(incl GST)

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MSH_FC_BC_#49.indd 3 9/22/11 2:33 PM

[ 1 ]

p4 Petronas Dagangan Shows A “Stellar Performance” text : Joshua Lim

p14 Sunway Suffers Jittery Debut Despite Strong Expectations text : Michael Tee

p20 San Miguel Close To Securing ESSO Malaysia’s Downstream Activities text : Joshua Lim

p6

p22

p38

CONTENTS Issue 49 Oct 2011

PERSPECTIVE

p6 Volatile Times text : Wong Ming Tek

p16 The Malaysian Dilemma text : Predeeben Kannan

p22 Supply Chain’s Gradual Recovery And New Myvi Model Bode Well For The Automotive Industry In 2H11 text : Birdy Law

p24 Possible Mild Recession In Europe But Markets Overreacted text : Yeoh Mei Kei

p26 Double-Dip Recession Lessons From History text : The Fundsupermart.com Research Team

p38 Sweets-Laden Budget Needed Both Politically And Economically text : Yang Ming Wan

CORPORATEDIGEST

FINANCIALPLANNING

p34 Sizing Up Your Confidence Level text : Carol Yip

p36 How Will You Leave Your Legacy? text : Lee Khee Chuan

p4

p14

OTHERFEATURES

p18 HEADLINERS compiled : Michael Tee

p32 2 CENTS WORTH text : Editorial Team

MSHE_1-2_content_49.indd 1 9/23/11 11:44 AM

[ 2 ]

SHARES INVESTMENT (MALAYSIA) is published once a month. We welcome contributions from readers, as

([email protected]) should you also have any queries, remarks or suggestions.

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p41 Market Indices

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p44 Market Capitalisation /Performance of Recent IPOs

p45 Insider Trades

p46 Most Active Shares

p47 Hitting 52-Week High / Hitting 52-Week Low

p48 Top Gainers

p49 Top Losers

p50 Lowest P/E

p51 Highest Yield

p52 Highest Margins

p53 Highest ROA

p54 Profit & Loss

p55 Upcoming Results Announcements / Discount to NAV

p56 Entitlements (cd, xd, cb, xb…)

p57 Main Market

p125 ACE Market

p133 Investment Trust

p151 Warrants

p155 Companies Index A-Z

p167 Warrants Index A-Z

IN THE SPOTLIGHT

OTHERCONTENTS

Supported byMember of

p11 SI Conference 2011: The Quest For Investment Success text : Daxx Chong & Ong Qiuying

p11

MPH Distributors

Tel: (603) 7958 1688

9/23/11 11:00 AM

[ 3 ]

It was another instance of buy on anticipation and sell on news as no new surprises were announced during the widely anticipated two-day FOMC meeting except the warning

of a “signi!cant downside risks” to the US economy that spooked investors. The Kuala Lumpur-based benchmark FBM KLCI traded 2.2% down from its previous day close post-FOMC meeting.

The Fed, as expected, said it would tilt its US$2.85 trillion balance sheet (also dubbed “Opera-tion Twist”) via buying US$400 billion long-term Treasury securities and selling the same amount of shorter-term notes to lower borrowing costs to revitalise the housing market. Market observers were, however, not too sanguine of any meaning-ful impact on lending as labour market conditions remain fragile and unemployment rate stays high.

Back home, things seem to be looking bright for Petronas Dagangan Berhad (PDB). Being the market leader in the Commercial and LPG sectors and second only to Shell in the Malaysian lubricants market, PDB is “laying seeds” abroad to continue its positive growth trajectory. More in our cover story starting from page 4.

Elsewhere, Main Market debutante, Sunway, fell short of expectation to close 11% below its issue price of RM2.80 on 23 August. Though the nervous state of the world economy and the less than ex-pected performance of the Malaysian economy of late had a"ected share price, the company was valued at a whopping RM6 billion compared to a market capitalisation of RM3.6 billion! Turn to page 14 to !nd out more.

Information in this guide has been obtained from sources believed to be reliable. However, its

accuracy or completeness is not guaranteed. While every precaution is taken to ensure accuracy,

the publisher accepts no liability for any error which may arise.

The articles are based on the opinions of the various authors and do not represent the opinions of

this publication and/or the opinions of the organisation he/she represents.

In no event is SHARES INVESTMENT liable for all and/or any direct or indirect loss arising from

any use or any reliance of any information provided.

All materials printed in SHARES INVESTMENT are protected under the copyright act. All rights

reserved. No part of this publication may be reproduced in any form or by any means without the

written permission of the publisher.

Information in the publication should not be taken as offer/ advice to buy or sell securities.

positions in securities mentioned in the publication, and may from time to time, add on to or dispose

of such securities.

deskIn its September update, the International

Monetary Fund had reduced its world output pro-jections to 4% for this and next year as economic woes in the US and !scal crisis in the EU were tak-ing longer than expected to resolve. The ASEAN-5, which includes Malaysia, is expected to grow by 5.3% in 2011 and 5.6% in 2012 compared to earlier forecast of 5.4% and 5.7% respectively. Following growth of 4.9% and 4% in the !rst two quarters of 2011, is the 5% growth target on track for the full year? Flip no further than page 16 to learn more.

While volatilities is unlikely to go away any sooner, the underlying need for critical investment advice rang loud and clear as evidenced by the better than expected crowd at Shares Investment Conference 2011. Our success is yours, and in ap-preciation of your support, we have recapped and weaved the essence of each of the seminars by our renowned speakers with details starting from page 11.

Fret not if you have missed out on the actions of our renowned speakers. We have made available the conference DVD for your purchase with details at the back cover. Hurry up and order now, while stocks last!

Happy reading and wise investing!

CLARIE LIM

Regional Research Editor

editorial

MSHE_3_Editorial.indd 3 9/23/11 11:01 AM

[ 4 ]

Things seem to be looking bright for Petronas Dagan-gan Berhad (PDB). It has consistently been the best-

performing stock in the benchmark FBM KLCI this year.

Incorporated in 1982 and listed on the Main Board of Bursa Malaysia Securities in 1994, PDB is the principal domestic marketing arm of Petroliam Nasional Berhad (PETRONAS) and Ma-laysia’s leading retailer and marketer of downstream oil and gas products. PDB has over the years strived to continu-ously provide superior products, and services in all its four core businesses of Retail, Commercial, Lique!ed Petro-leum Gas (LPG) and Lubricants.

Today, PDB is the market leader in the Commercial and LPG sectors,

with strong fundamentals to retain and further solidify its position. Now the company has plans to go abroad, targeting the South East Asian market in particular. After having penetrated the Indonesian market, it has now set its sights on the Philippines and Thai markets.

Expansion Based On Positive Growth Trajectory

PDB is no stranger in the Malay-sian market. It already supplies 51% of the country’s lique!ed petroleum gas (LPG) needs, as stated in its 2011 an-nual report. In an interview with a local news agency recently, the company’s Chief Executive O"cer, Amir Hamzah Azizan explained the intentions for expanding abroad:

“We need to start laying seeds … At some point, we will top out. When you top out, then you sit on earnings whatever the normal demand growth is in the country.”

Amir is perfectly con!dent with the move. He is well aware that his company has more than RM900 mil-lion in reserves to front any expan-sionary move. In addition to this, the company has been performing rather well o# late. PDB posted a net income of RM869.7 million for the year ended March 31, a rise of 16% from the year before. Over a five-year period, its earnings grew at a compounded an-nual growth rate of 6.3%. According to PDB, the performance was due to higher sales volume of various types of oil based products amounting to

PETRONASDAGANGAN SHOWS A“STELLAR PERFORMANCE”

[ CORPORATE DIGEST ] text : Joshua Lim

MSHE_4-5_CD.indd 4 9/23/11 11:02 AM

[ 5 ]

13.5 billion litres and the increase in the selling price due to the higher global oil prices as well as the con-trolled price increases of retail fuel as the Government gradually cut back on subsidies.

There have also been news re-ports indicating that PDB might be acquiring its Indonesian a!liate, PT Petronas Niaga Indonesia. The Indo-nesian arm already runs 19 petrol stations.

On The Local FrontBack home, the company cur-

rently has more than 960 petrol sta-tions in Malaysia and will be adding 30 more by the end of this year. It aims to increase its retail market share from 32% to 40% and from 22% to 28 % in

the lubricant segment over the next "ve years. It is currently only second to Shell in the Malaysian lubricants market. Besides the strong hold on the retail market sector in Malaysia, there are further plans afoot for PDB to play a key role under the 10th Malaysia Plan and Economic Transformation Programmes. The company’s Chair-man, Datuk Wan Zulki#ee Wan Ari!n announced to the media that con-struction activities generated by the country’s future development projects are abundant and being tapped by its commercial business team.

“There will be massive diesel and bitumen requirements as spin offs from construction and road develop-ment respectively,” he said recently.

Datuk Wan Zulki#ee added that most of its capital expenditure (Capex) of the year ranging between RM350 million and RM400 million will go towards the expansion of its retail network. “We are also embarking on an asset life study in the e$ort to up-grade our existing facilities. The Capex is also for our project at KLIA 2 that is expected to be completed by the end of next year,” he added.

Reiterating Datuk Wan’s state-ment, Amir added that managing cost would continue to be a challenge but the company would continue to do its best to address it. As part of its e$ort to improve cost e!ciency, Petronas Dagangan recently engaged the 25 metre B-double LPG pallet trailer, the "rst of its kind in the industry, which allows 65% more storage capacity. The objective was to expand outreach while reducing the number of trips.

Market PerformanceAt the close of trading on Au-

gust 19, 2011, PDB was unchanged at RM17.40, representing a total gain of 49%. This was despite the fact that the FBM KLCI was on a declining path following news of the European debt scenario as well as the US credit ratings cut. Pres-sure from the jobless rate in the US and uncertainty in the Middle East coupled with the record gold prices, contributed to the decline of the local market at the time.

The positive achievements of PDB prompted Amir to announce that the company’s newly introduced dividend policy of paying about 55 per cent of its profits as bonus to shareholders on a quarterly basis was “sustainable”.

With signs that the company is on a growth trajectory, CIMB Equities Research maintained its positive view on PDB, with the retail and lubricants sector leading the way.

The research house was of the opinion that PDB was largely within anticipation of stronger growth in the next quarters. It added that the interim Dividend Per Share (DPS) of 15 sen also met expectations.

“Our target price is unchanged at RM21.60 as we continue to value the stock at a 40% premium over our 14.5x target market P/E to reflect its earnings visibility and growing ap-peal as a growth and dividend play. The stock remains an “Outperform”, with the potential share price trigger being leadership of the retail and lubricant segments,” the research house added.

This article is based on research infor-mation from various research houses and news agencies.

MSHE_4-5_CD.indd 5 9/23/11 11:02 AM

[ 6 ]

The proportion of com-panies that reported dis-appointing earnings in 2Q-11 was quite similar

to the 1Q-11 results season while the percentage of those that beat expectations remained low. However, notable disappointments seen from stocks like Tenaga and Malaysia Air-lines stemmed largely from speci!c issues such as sizeable losses.

For the quarter, net pro!t for our stock universe was lowered by 3%

q-o-q largely due to shocking losses at Tenaga and MAS and lower pro!ts from Genting Group (reduced contri-butions from Singapore and UK). This was partly mitigated by strong bank pro!ts (investment gains). This is the second consecutive quarter of lower pro!ts following the recent peak in 4Q-10.

Collectively, net profit for our universe was cut by 4.6% for 2011 and 2.8% for 2012, weighed down by disappointments for several large cap

stocks. In the last four quarters, we saw upgrades for our 2011 earnings.

With the cuts, our stock universe earnings growth is 10.9% for 2011 and 14.9% for 2012. Banks and Tenaga (low base this year because of higher cost from gas curtailment) will drive earnings growth. The sum of our 2011 earnings forecast is 5% below consensus largely due to our lower expectations for MISC (weak container rates) and MMHE (delays in order book replenishment).

VOLATILETIMES

[ PERSPECTIVE ] text : Wong Ming Tek

(RMm) 2Q10 1Q11 2Q11 % chg

y-o-y

% chg

q-o-q

Remarks*

Banking 3,677 4,012 4,331 18 8 Bolstered by AMMB and AFG through increased non-interest income from investment gains. NIM continued to be under pressure.

50 70 69 38 0 Strong hotel and property investment income propelled TAEConsumer 544 620 562 3 -9Industrial 206 155 167 -19 8 Losses from Kinsteel compounded by dismal performances from Kossan and Top GloveMotor 370 283 180 -51 -36 HP Act, Japan earthquake/tsunami depressed auto sector Oil & Gas 197 263 219 11 -17 Dayang and Wah Seong led the pack with strong earnings. For MMHE, KNM, Perdana

Petroleum, managing margins remains key challengeConglomerate 632 1,313 1,853 193 41 Plantations and Industrial segments propelled Sime DarbyConstruction 290 191 368 27 93 Lifted by Gamuda and IJM CorpConcessionaires 349 511 420 20 -18Gaming 1,195 1,356 1,045 -13 -23 Dragged by Genting Bhd’s lower Singapore contributionsPlantation 901 1,137 1,184 31 4 FFB volume rebound and CPO ASPs underpinned stellar earnings

1,346 1,081 326 -76 -70 Higher gas costs from curtailments caused losses at TenagaProperty 187 273 389 108 43Telecommunication 1,519 1,618 1,538 1 -5 Lower earnings from Digi depressed growth in Axiata and MaxisTransportation 191 (29) (153) -180 n.m. High jet fuel costs dragged MAS further into the redTechnology 15 22 23 60 6 Larger contribution from Notion’s camera segment lifted earningsTotal 11,668 12,874 12,520 7 -3

Source: HwangDBS Vickers Research

MSHE_6-10_Perpective2.indd 6 9/23/11 11:03 AM

[ 7 ]

Earnings: Different From 2008-09

With the slowdown in economic growth, there could be risks to our earnings projections. In the 2008-09 !nancial crisis (GDP contracted 1.7% in 2009), our 2009 earnings were cut by 18%. Approximately 31% of this cut related to Sime Darby and IOI Corp – which were adversely a"ected by the sharp drop in Crude Palm Oil (CPO) prices. Other big cuts came from Tenaga (earnings sensitive to electricity demand) and MAS.

In 2008-09, the impact on earn-ings was compounded by a collapse in commodity prices. Palm oil stocks fell as average CPO prices dropped 21% from RM2,864/t in 2008 (where it reached high of RM4,203/t) to RM2,261/t in 2009. The drop in crude oil prices sparked concerns about order book replenishment opportunities for the oil & gas stocks. Without these factors, the extent of the earnings risk should be less than that of 2008.

For banks, the key risk to our for-

ward earnings would be capital market #ows, which would tend to a"ect banks with higher proportion of market-relat-ed activities such as CIMB. In the near term, we do not expect asset quality headwinds. Tenaga’s earnings would be sensitive to GDP growth: every 1% change in GDP would a"ect forward earnings by 8%. Property, aviation and shipping are other sectors also vulner-able in a slower growth environment.

On the other hand, earnings for the gaming and telecommunications sectors should be relatively resilient go-ing by what we saw in 2008-09. For the palm oil sector, Asian demand accounts for 51% of the global market with the US and EU having much smaller shares at 1.9% and 12.5% respectively. In 2009, palm oil consumption grew 3.5%. With potentially slower growth, we would expect the Government to push for-ward key infrastructure projects such as the MRT to stimulate economic activities. As such, we do not foresee signi!cant cuts for the construction sector.

Being SelectiveSince 4 August, the KLCI has

dropped 6.4% and is currently trading at 13.4x 2012 earnings and 2.0x book value. In terms of earnings multiples, the KLCI is above its 10-year mean. The current book value is higher than the mean of 1.77x while the low point in 2009 was 1.3x book.

With the earnings cut for our stock universe, our year-end KLCI target is lowered to 1,520 points (from 1,730 previously). This also factors in a lower multiple of 14x 2012 earnings from 15x before given the higher risk aversion. Our target implies 2.1x book value and provides 7% upside from current levels. Since the start of the global de-risking in early August, the KLCI has been one of the more resilient markets in the region, falling by 3.6% YTD. We would expect this to continue.

In a scenario of heightened risk aversion, we see support at 1,370 points (+0.5 standard deviation book value or 1.9x book). The mean multiple (1.77x book) would imply 1,305 points for the KLCI or 10% lower than current values.

In view of the slowdown, we would expect the government to push ahead with infrastructure project awards. As such, we remain keen on the construction sector with IJM Corp, Gamuda, WCT and MRCB as our picks, although high foreign shareholdings could result in high share price vola-tility.

We continue to like names with good domestic drivers and reasonable valuations such as Boustead Holdings (8x forward earnings, 7% yield) and DRB-Hicom (7x earnings, 0.8x book). Alliance Financial Group (AFG) is the

Malaysia Earnings Growth by Sector

Earnings Growth (%) PE (x)

2010 2011 2012 2010 2011 2012Financial 31.5 15.1 13.3 15.1 13.2 11.6Consumer 10.0 (5.9) 17.1 17.3 18.3 15.7Manufacturing/Industrial 34.8 18.0 22.2 12.2 10.3 8.4Motor 24.6 16.6 8.0 12.2 10.5 9.7Oil & Gas (14.1) (8.6) 52.1 18.9 20.6 13.6Conglomerate (36.8) 97.5 6.5 28.7 14.5 13.6Construction (2.1) 31.5 15.0 21.9 16.7 14.5Concessionaires 6.3 21.4 (0.0) 17.5 14.4 14.4Gaming 51.9 9.7 13.9 14.6 13.3 11.7Plantation 72.9 24.7 (7.6) 17.4 13.9 15.1Power 4.2 (26.4) 59.9 14.1 19.2 12.0Property 147.3 (9.8) 36.3 14.1 15.6 11.5Telecommunication 23.0 3.1 9.5 18.0 17.4 15.9Technology 20.3 25.2 19.1 15.0 12.0 10.0Transportation/Logistic 41.5 (39.2) 29.9 22.7 37.3 28.7

HDBSVR universe 20.1 10.9 14.9 17.0 15.4 13.4


[ 8 ]

cheapest banking stock in our cover-age. We believe its scalable domestic franchise and non-interest income traction will support earnings growth and ROE expansion.

Positive Catch-Up?The regional markets rebounded

this week. The KLCI may register a

positive catch-up performance today following the 3.5 day break for Hari Raya and National Day celebrations.

Since the start of the August cor-rection, the KLCI has lost 6.4%. Large caps registered much smaller losses compared to the smaller-mid caps. On average, the large caps in our uni-verse lost 6.5% compared to 11.2% for

smaller-mid caps. Among our large cap Buys, we like

UEM Land, Gamuda and IJM Corp as potential rebound trades.

In the smaller-mid caps space, we continue to like YTL Land, MRCB and Boustead Heavy Industries which have lost more than 20% in the last three weeks.

Source: HwangDBS Vickers Research

Large caps: Best performers Large caps: Worst performers

Small-mid caps: Best performers Small-mid caps: Worst performers


[ 9 ]

Appendix 1: 2Q11 Summary of Results


[ 10 ]

Note: This is a summarised version of an article written by Wong Ming Tek together with the Malaysian Economic & Research Team of HwangDBSVickers Research. For the detailed article, please contact the writer at +603 2711 0956 or e-mail at [email protected] or [email protected].

Source: Bloomberg, HwangDBS Vickers Research

1Q11 Summary of Results (cont)


[ 11 ]

[ IN THE SPOTLIGHT ] text : Daxx Chong & Ong Qiuying

In the aftermath of recent market upheaval, many were left over-whelmed and are in search for investment advice. Embarking on

a trail to seek opportunities, more than 2,000 participants turned up for our Shares Investment Conference 2011 on 17 September. Held at the Ra!es City Convention Centre, enthusiastic participants began streaming in more than an hour earlier before the sched-uled opening.

Hosted by MediaCorp DJ Wong Lee Jeng, the full-day event saw our renowned investment experts – Pro-fessor Chan Yan Chong, Hu Li Yang, Li Xin Jing Collin, Louis Wong and Chen Dan Hong – sharing their views on the prevailing market turmoil. Gracing the event was MP for Choa Chu Kang GRC, Low Yen Ling, and the event o"cially opened with MP Low sounding the ‘gong’.

In his opening speech, Prof Chan cast the spotlight on the current market volatility and highlighted the turmoil in the major economies. Speci#cally, he commented that the US stock market rally painted a false

picture. This is evident from the low economic growth and high unem-ployment which persisted despite two rounds of quantitative easing.

Next, the much awaited panel dis-cussion took the centre-stage with all #ve speakers o$ering precious invest-ment advice and opinions.

SI Conference 2011:

The Quest For Investment Success

Panel Discussion: Some Key Takeaways Should We Invest Amidst The Current Volatility?

Wong cautioned investors not to be swayed by pessimism and neglect funda-mentally-strong stocks that have fallen to attractive valuations.

Building on, Hu stressed that with much liquidity from market stimulus, current sell downs o$er opportunities.

Chen, however, held a less sanguine view as he expected the slump in Chinese ‘A’ shares to continue.

China: The Global Market Saviour? Despite China’s US$3 trillion worth of foreign exchange reserve, Prof Chan re-

marked that altruistic aid is unlikely as China is only keen in strategic assets. Wong elaborated on the multiple challenges China is facing. He tipped investors

to monitor ensuing government policies when identifying potential investment.

What Are The Risks For The Global Economy? As observed by Wong, the additional liquidity has not encouraged productive

investments but had %owed into safe haven assets instead. The resulting in%ation, in Li’s view, have fueled public anger and heightened

political risk.

MSHE_11-12_Advertorial.indd 11 9/23/11 11:04 AM

[ 12 ]

Apart from the panel discus-sion, the afternoon series of breakout seminars were met with overwhelming response. Each of our speakers delved deeper into various topics, with many attracting a full house audience.

In his seminar, Prof Chan reiter-ated that much of the liquidity had been pushing the US stock market upwards but little was helping the real economy. Substantiating his point, he cited the nation’s continued falling property prices. Nevertheless, in light of the upcoming US elections, more measures are likely to be introduced to raise economic growth and hiring. On the Eurozone, he noted that Greece is unlikely to fail and the European Cen-tral Bank would likely step in to avert a direct default.

Over at Hu’s seminar, he touched on the double-dip recessionary fears stemming from the turmoil in the de-veloped economies. He relegated the fears as self-induced and stressed that this could be an opportune time to ‘buy low’. Leveraging on his experience,

August and September are considered the poorest performing months and markets would usually rebound by November, December and January.

Putting the journey to a close, participants who attended the gala dinner had an up-close session with

the speakers to have their queries answered.

At the end of it all, there was con-sensus among everyone that they were bringing home a wealth of knowledge and were one step ahead in their quest for investment success.

Prof Chan & Hu: Sharing their expertise on market trends and investment techniques

For readers who wish to experience the event and review the invaluable insights, the complete videography of

Shares Investment Conference 2011 is on DVDs now!


MSHE_11-12_Advertorial.indd 12 9/23/11 11:05 AM

CONFERENCE 20112011

Supported by :

Securities Investors

Association (Singapore)

In Collaboration with :Event Sponsor : Platinum Sponsor :

Education Partner : Media Partner :

Alpha Asia Holdings Pte LtdNUS Economics Society

On behalf of Asia Investment Forum and Shares Investment, we would like to express our heart-felt

appreciation for your support and participation in making the conference a success!

Event Organizer :

ASIA INVESTMENT FORUMNon-Pro!t Social Arm of Pioneers & Leaders Group

MSHE_ThankYouAd.indd 1 9/22/11 2:42 PM

[ 14 ]

[ CORPORATE DIGEST ] text : Michael Tee

In a sign of the times, Sunway fell short of expectations when it closed at RM2.49 on its de-but on the FBM KLCI, Tuesday

August 23, 2011. It was essentially 31 sen lower than the reference price of RM2.80. Analysts believed it was a sign of the nervous state of the world economy and the less than expected performance of the Malaysian econ-omy of late.

So what is the story behind the emergence of Sunway on the local exchange? It was a matter of con-solidation of operations rather than a divestment as many were initially suspecting. The story goes that on November 24, 2010, Tan Sri Dato’ Seri Dr Je!rey Cheah o!ered to acquire the assets and liabilities of Sunway Holdings and Sunway City. He decided that 80% of the purchase price would be satis"ed by Sunway shares and the remaining 20% in cash. The deal was

further sweetened with free warrants (a total of one warrant for every "ve Sunway shares).

The newly-merged entity would be called Sunway and would be re-listed on the Main Market of Bursa Malaysia at an issue price of RM2.80 per share. Upon listing, Sunway has e!ectively become the fourth larg-est property developer by market capitalisation, with a value of RM3.6 billion. The group has also reorganised its business structure and will focus on three core businesses – namely integrated property, construction and investment. Upon completion of the merger, Tan Sri Dato’ Seri Dr Je!rey Cheah will still emerge the winner with 45% control of Sunway, with the other major partner being the Government of Singapore Investment Corporation, with a 12.5% stake.

There will also be six key manage-ment personnel leading each division

under Sunway. Dato’ Tan Kia Loke will be the Senior Managing Director for the construction and quarry division. Kwan Foh Kwai will be the Managing Director for the construction division, with Ngian Siew Siong heading the international property development division, Dato’ Ngeow Voon Yean lead-ing the property investment division, Ho Hon Sang guiding the property development division and Dato’ Yau Kok Seng managing the strategic investment division.

Operational Effectiveness Post-merger, a few elements

will come into play. The property development division will emerge as a core operation of the group. The consolidation will see the group’s land bank increase to 2,198 acres of unde-veloped land with an estimated gross development value (GDV) of RM14.5 billion. Its construction arm will also

Sunway Suffers Jittery Debut Despite Strong Expectations

MSHE_14-15_CD.indd 14 9/23/11 11:06 AM

[ 15 ]

be a key player in the equation. The group has a large construction divi-sion with a RM2.5 billion outstanding construction order book, comprising of RM2 billion worth of local jobs and RM500 million worth of foreign jobs. The group is determined to maintain its order book replenishment at around RM1.5 billion every year. The construc-tion division is expected to contribute 15% of pro!t before tax.

The group’s building material manufacturing arm in China, known as Sunway Global, is also part of the new development strategy. The products produced and distributed by Sunway Global include pipes, pavers and spun piles. Its pipes manufacturing plant is in Anhui and produces 41,000 tons an-nually. Its pavers manufacturing plants are located in Shanghai and Dong-guan and currently produce a total of 1.8 million metres squared of pavers annually. Finally, its spun pile plant is located in Zhuhai and has an annual production capacity of 400,000 tons, with the products supplied to port and shipyard projects.

Another focus will be its trading division called Sunway Marketing. It currently has 42 branches in over seven countries, with 70% of pre-tax profit from overseas. Its bestselling products such as hoses and !ttings, have established a presence in Singa-pore, particularly in the oil & gas and the marine sectors, which contribute around 60% of total segment earnings.

Prior to the merger, the two dif-ferent companies, namely Sunway City and Sunway Holdings were e"ectively competitors with di"erent sets of key performance indicators. The aim of the merger is to encourage coopera-tion between them. The group is also

looking to unlock merger synergies worth 1-2% of total revenue. Based on FY-2010 proforma revenue of RM3.1 billion, this would translate into savings of between RM30 million and RM60 million annually.

Abundant OpportunitiesThe completion of the merger

will see the enlarged group have a sizeable balance sheet, making it easier for its construction arm to bid for overseas jobs. It will also be in a better position to win local contracts. This is clearly evident as Sunway won a contract for the LRT Kelana Jaya line extension phase 2 on August 16, 2011, worth RM569 million. Adding that to the RM353 million worth of contracts secured so far this year, its construction order book replenishment of RM922 million e"ectively meet 61% of its FY-2011 target of securing RM1.5 billion worth of new orders each year. The group is looking to win more projects under the Economic Transformation Programme and the 10th Malaysia Plan to maintain its order book replenish-ment target. In addition to the LRT project, the group might also bene!t from the MRT construction. In the !nal blueprint, it was evident that the MRT line would be passing through two of Sunway’s property projects – namely Sunway Nexis and Sunway Velocity. The stop at Sunway Nexis will be the Dataran Sunway station, while the stop closest to Sunway Velocity would be the Cochrane station. This would give Sunway more clout to further enhance the value of these projects and give the group stronger pricing power.

The group is also expected to start reaping dividends from its venture into China via Sunway Global back in 2008,

as rapid economic growth in China is raising demand for building materials. Sunway was believed to be one of the major suppliers of pavers for Shang-hai Expo 2010 and Guangzhou Asian Games 2010. This bodes well for the Group, as it shows it has an established presence in the China market. It is be-lieved that there is stronger potential for its building materials division to prosper going forward.

Meanwhile, Sunway’s Chief Finan-cial O#cer Chong Chang Choong said that RM300 million has been set aside for the Tianjin Eco-City project in China while the rest will be for projects in Singapore and India. The Tianjin Eco-City project has an estimated Gross Domestic Value of RM5 billion and will be launched in the middle of 2012. It will also be completed between !ve and seven years.

Fair ValuationsAnalysts valued the company at

RM6 billion based on sum-of-parts (SOP) methodology, or RM3.89 per share. They see a fair value of RM3.50. The target price is based on 10% discount to SOP values for property stocks with larger market capitalisa-tion. Priced at RM2.80 a share, Sunway should trade at 9x FY-2012F PE and 1.1x P/NTA.

In terms of contribution to the SOP value, Sunway’s development properties account for the lion’s share at 35%; net debt makes up 16%, con-struction 15%, REIT, 15%; cash from warrants 8%, investment properties 6%, and the rest from trading, building materials and quarry.

The information in this article is sourced from various research houses.

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After growing relatively well last year and de-cently in the !rst quarter of 2011, the Malaysian

economy has clearly slowed down in Q2-2011. Many factors are working against the nations’ economic growth, some due to developments around the world, while some are purely due to fundamentals.

After growing 4.9 percent in the !rst quarter of 2011, the Malaysian economy grew just 4.0 percent in the second. Although Bank Negara main-tains that overall GDP for 2011 will still be in the 5 percent range, it would be interesting to see how the third and fourth quarter can produce the neces-sary growth to achieve such !gures.

According to most analysts, the challenges that lie ahead for Malaysia includes the general slowdown in worldwide demand for manufactured products, the possibility of a recession

in the US and Europe, as well as the slowdown of the Chinese economy coupled with the stronger Ringgit, which is making the country’s exports more expensive.

The Challenges AheadBank Negara Governor, Tan Sri Dr.

Zeti Akhtar Aziz highlighted that the assessment of the growth would still depend on other factors. She agreed that the downside risks to Malaysia’s external demand is greater now due to the lower than expected jobs and economic growth in the US coupled with the debt situation in Europe.

“If we have a situation where the United States and Europe slipped into a recession or any other trigger fac-tors that could result in the disruption in international !nancial markets, we will have to make a reassessment … right now, our assessment is very likely, given the performance of the !rst half,

and that it (the full-year growth) will be closer to 5 percent,” said Tan Sri Dr. Zeti.

Another more “local” element that is triggering worries is the strength of the Malaysian Ringgit. The local cur-rency rose more than 6 percent in the last year, and touched a 14-year high in July based on speculation that the central bank will support a stronger currency to reduce the downside risk of in"ation.

Bank Negara stated that Con-sumer Price Index (CPI) for July rose 3.4 percent y-o-y, compared with the 3.5 percent y-o-y, previously. In her an-nouncement to the media, Tan Sri Zeti mentioned that the country’s full-year CPI would remain within the target of 2.5 percent to 3.5 percent. She re-iterated that the central bank would continue to focus on maintaining the right balance between controlling in"ation and supporting the country’s economic growth when deciding on

THE MALAYSIAN DILEMMA

[ PERSPECTIVE ] text : Predeeben Kannan


[ 17 ]

the direction of the monetary policy. Early signs indicate a degree of

restraint by the central bank. Bank Negara kept its Overnight Policy Rate (OPR) unchanged at 3 percent, at its monetary policy committee (MPC) meeting in July. This took analysts by surprise as they expected the central bank to raise rates to manage in!a-tionary pressure. In defence of this move, Tan Sri Zeti said that the pre-vailing rate was necessary to support the domestic economic growth. The MPC would meet again this month to decide on the direction of the OPR.

A Realistic Policy Needed In addition to the less than stellar

monetary and economic indicators, there are other more pressing matters that concern the Malaysian economy. High up on the agenda is the shortage of skilled workforce. These talents are critical for the nation to achieve its target of a high income nation by the year 2020. Key to this issue is the low wages o"ered to workers in selective industries such as construction, agri-culture and plantations, all of which are strategic sectors to ensure the bal-anced development of the Malaysian economy in the next decade, if the country decides to be less reliant on volatile industries like manufacturing and the electronics sectors.

Over the years, Malaysia has lost some of its best talents to neighbour-ing countries Singapore, Australia and New Zealand, due to various reasons. One of which could be the lower wages o"ered to skilled professionals in Malaysia. The other reason could be the stricter immigration laws that make it less appealing for Malaysians married to foreigners to come back

home with their “foreign” families. Another critical factor that has been highlighted by Malaysians, who have lived abroad, is the lack of a level play-ing #eld in the Malaysian employment scene. These professionals are unwill-ing to leave their well paying jobs abroad, without the reassurance of long-term job and personal develop-ment opportunities in Malaysia.

Based on recent estimates by the World Bank, there are some 1 million Malaysians living abroad, but only a handful of the highly skilled Malaysian professionals return home. The reasons for the difficulty to attract skilled workforce also lies with the fact that the country is not recognised as a hub for skilled employment. In order to change that perception, Malaysia needs to develop and nurture the growth of skilled industries that would attract both Malaysian and foreign talents from abroad, to enable the country to move up the value chain.

Some Positives RemainDespite the many negatives that

have been plaguing the Malaysian economy, including the lack of skilled workforce and the unwillingness of Malaysians living abroad to return to their home country, there has been some good news to cheer about. The central bank governor announced that foreign direct investments in Malaysia have increased in the second quarter with gross and net inflows of foreign direct investments higher at RM13.4 billion and RM6.2 billion respectively. She is confident that the trend will continue into the sec-ond half of this year, as there will be more aggressive implementation of

the 10th Malaysia Plan as well as the Economic Transformation Programme.

Key to the developments in 2011 would be the Iskandar Malaysia (IM) region in Johor. According to the Iskandar Regional Development Authority (IRDA), committed invest-ments in IM have reached RM76billion as at the #rst half of 2011, with foreign investors accounting for close to 59 percent of the #gure. Out of this #gure, some 40 percent or RM30billion have already been realised, with more to be realised from the second half of the year, onwards.

Fortunately for Malaysia, there are continuous development projects created to spur the local economy even during slowdowns in the global economy. This is in part due to the effective economic development programmes launched by the govern-ment since independence. Part of the success also lies with the “creative” nature of the large local corporations in Malaysia, that are always looking for new ways to develop residential and corporate projects that benefit the people as well as attract tourists due to the “unique” designs and trendset-ting technologies. For now at least, Malaysia seems to be maintaining the strong “development” mentality. This is reassuring for the country, as it tries to attract global players to invest in the local economy, especially after the dust of the economic downturn has subsided.

The views in this article are strictly those of the writer. Predeeben Kannan is Managing Director and Advisor of Probe Research, a media advisory and consultancy organisation. He can be reached at [email protected].


[ 18 ]

[ HEADLINERS ] compiled : Michael Tee

In a deal hailed as a good !t for the company, Sime Darby announced that it would be acquiring 30 per cent stake in property developer, Eastern & Ori-ental Bhd (E&O), for RM766 million or RM2.30 a share, which is valued at a 20 per cent discount to E&O’s estimated Realisable Net Asset Value (RNAV) of RM3.2 billion.

The decision to acquire the shares was aligned with Sime Darby Group’s strategic direction to extend its pres-ence in property development and hospitality sectors, beyond the Greater KL region, speci!cally in Penang and

Sime Darby To Acquire 30 Percent Stake In E&O Johor, said the conglomerate in a state-ment today.

The 30 per cent stake represents 273 million E&O shares and 60 million Irredeemable Convertible Secured Loan Stocks (ICSLS) in E&O, which Sime Darby is acquiring from Datuk Tham Ka Hon, the managing director of E&O and several other major shareholders of the property developer.

“The proposed acquisition will provide a springboard for us to ex-pand our property business and the type of products we can offer. E&O is a distinctive brand in the industry

Bumi Armada Attracting Interest From All PartiesBumi Armada Berhad (Bumi Ar-

mada) has proven to be the darling of analysts of late. The company’s strength and good earnings visibility have attracted interest among inves-tors as well, besides it being one of South-East Asia’s largest floating, production, storage and off-loading vessel (FPSO) operators.

“We like Bumi Armada for several reasons. It is one of South-East Asia’s largest FSPO vessel providers and is well on its way to becoming the world’s number four FPSO player by financial year ending Dec 31, 2014 (FY14)”, said CIMB Research.

Meanwhile OSK Research is maintaining the earnings forecast on Bumi Armada f inancial year 2011-2012 in view of potential earn-ings surprises in the second half of financial year 2011. It said the sur-prises would mainly arise from better utilisation of Bumi Armada’s fleet, it

said in a research note today. OSK Research has maintained a “neutral” call on Bumi Armada.

Despite the neutral call, OSK Research said it continues to like the company for its ability to provide one-stop solutions starting from oil and gas exploration to the decom-missioning stage.

“Also, we believe, more than 70

and is synonymous with quality,” said Sime Darby president and group chief executive Datuk Mohd Bakke Salleh.

Sime Darby, through its property arm, Sime Darby Property, has 40 years experience in developing award-winning townships in prime locations within the Klang Valley.

Sime Darby Property’s business portfolio comprises Property Develop-ment, Property Investment and Hospi-tality and Leisure in six countries -- Ma-laysia, Singapore, Australia, the United Kingdom, China and Vietnam.

per cent of its business provides re-curring income and a constant cash flow, which is vital especially during the current difficult global operating environment,” it added.

MIDF Research has also main-tained a “neutral” call on Bumi Ar-mada amid a cautious view over the market outlook and no immediate term catalyst for the company.

MSHE_18-19_Headliner.indd 18 9/23/11 11:29 AM

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Maybank Profits Soars

The banking sector had a less than stellar performance in July 2011, compared to the preceding month. Loan growth moderated to 0.2% month-on-month (m-o-m) from 1.4% a month ago, and Year To Date (YTD) July loan growth stood at 7.5%. Consumer loan growth was stable at 0.95% m-o-m (YTD-Jul: 6.2%), sup-ported by mortgages (+1.2% m-o-m) and purchase of non-residential prop-erty (+1.4% m-o-m). Business loan growth also contracted for the !rst time this year (-0.4% m-o-m) due to larger repayments in July 2011. Loan applications and approvals fell 5.3% m-o-m and 15% m-o-m after strong showings in retail and business loans the previous month.

Similarly, there was a slowdown in deposits (-0.3% m-o-m) as Current Account, Savings Account (CASA) fell 2.0% m-o-m o"set by !xed de-posit growth of 0.7% m-o-m. Loan-

corporate loans expansion based on initialisation of some of the govern-ment’s Economic Transformation Programme (ETP).

ECM Libra Capital Sdn Bhd (ECM Libra Research) announced that CIMB would be undertaking a major internal reorganisation exercise to streamline its management structures, improve internal e#ciencies and enhance cus-tomer focus. The research house also noted that the successful implemen-tation of its reorganisation exercise coupled with potentially stronger deal $ows could bring down the group’s cost-income ratio from the current 56.2 per cent to 54 per cent.

However, ECM Libra Research an-nounced that the Group’s 1H-FY-2011 net earnings grew by 9.3 per cent year-on-year (y-o-y) to RM1.88billion, accounting for 48.4 per cent and 45 per cent of house and consensus full-year estimates, respectively.

Banking Sector Performance Slows Down In July

Malayan Banking Bhd (Maybank) posted a 27 percent rise in pro!ts to re-cord RM1.154 billion for its fourth quar-ter ended June 30, 2011, compared with a sum of RM912.47 million achieved during the same period, a year ago. The rise was the result of strong loans growth as well as decline in allowance for losses on loans. Maybank also expe-rienced strong growth in Singapore and Indonesia as well as across all business segments, but it warned that there might be pressure ahead on margins, due to the weakening global economy and investors’ sentiment.

Maybank’s net pro!t rose 16.6% to RM4.45 billion compared with RM3.82billion, the year before. Mean-while, Group profit before tax rose 16.8% to RM6.27 billion compared to RM5.37 billion, the year before. Revenue for the 12 months stood at RM21.04 billion compared with RM18.56 billion previously. Group loans grew at its fastest pace in the last decade, touching 21.7%. This was a re-sult of robust overseas loans growth of 29.4%, and a 16.8% rise locally, which was well above the industry average of 13.5%.

to-deposit ratio in the system was stable at 78.8%. Asset quality in the system remained strong and net Non-Performing Loans (NPL) ratio stood !rm at 2.0%. Capitalisation remained robust with Tier-1 Capital Adequacy Ratio (CAR) and Real Weighted CAR strengthened to 12.5% and 14.3%.

CIMB Group Holdings (CIMB) has announced that it expects slower loans growth for !nancial year 2011 (FY-2011), as it plans to tread more cautiously due to the recent uncer-tainties globally. Therefore the bank said it will be more focused on liquid-ity and capital e#ciencies.

According to AmResearch Sdn Bhd (AmResearch), CIMB’s annualised loans growth of 11 per cent was below the company’s earlier projection of an 18 per cent overall growth in loans. However, the research !rm believes that loans growth will likely pick up in 2H-FY-2011, at the back of better

* This article is written with information sourced from news agencies and research houses

Its Islamic banking business in-come rose 54% to RM1.49billion, while Maybank Investment Bank saw its revenue more than doubled to RM482 million from RM236 million a year ago, on the back of an almost 49% rise in fee-based income to RM292 million. Brokerage activities contributed 43% to its income, while arrangers’ fees made up 21%, underwriting/place-ment fees, 20% and corporate advisory fees, 7%. Maybank recently bought Sin-gapore brokerage Kim Eng Holdings for US$1.4 billion, as it sought to expand its regional brokerage operations.

MSHE_18-19_Headliner.indd 19 9/23/11 11:29 AM

[ 20 ]

[ CORPORATE DIGEST ] text : Joshua Lim

In what was dubbed as a major coup by a South East Asian company in the Malaysian pet-rochemicals scene; Philippines

conglomerate, San Miguel Corpora-tion outbid about 20 companies, including 7 Malaysian !rms, to secure the 65 percent stake of Exxon Mobil Corporation in Esso Malaysia Berhad as well as other businesses of theirs in the petroleum downstream sector. Under the deal, San Miguel will also buy unlisted ExxonMobil Malaysia Sdn Bhd (EMMSB) and ExxonMobil Borneo Sdn Bhd (EMBSB) and their business of marketing petroleum products, for a combined offer of RM1.82 billion (US$0.61billion).

San Miguel began its life as a brewer in 1890, eight years before the Philippines’ independence from Spain, but has since diversi!ed to other industries. It is the country’s biggest food and beverage producer currently. The group currently derives more than 70% of its revenue from non-food and beverages segment and is an extremely diversi!ed conglomerate, with businesses ranging from food and beverages to petroleum, power, energy and infrastructure.

San Miguel already owns 68 per-cent of the Philippines largest oil com-pany, Petron Corporation. It’s Director and Petron Corp President Eric Recto said the group was planning to invest about RM2.98 billion (US$1billion) to upgrade Esso Malaysia’s ageing Port Dickson re!nery, increasing the

complexity of the re!nery in a bid to produce higher value petroleum and petrochemical-based products.

“I think the re!nery has a lot of potential, but this will only be achieved with a fair level of investments to re-place old machinery and bring in new equipments … The !nancing would be a 70:30 ratio, where 70% would be derived from !nancial institutions, with the remaining from internal fundings. Esso Malaysia operations on its own today can actually generate cash "ow and the cash "ow is able to support the internal funding,” he added.

San Miguel also announced that it will spend another RM596million (US$200million) to renovate Esso’s gasoline stations in Malaysia once it completes a planned takeover. This was according to its President Ramon Ang.

Port Dickson Refinery To Be Revived

The trend to move out of the downstream business by Exxon Mobil is not something new. Of late, most principal oil companies around the world have been shifting their focus to the exploration and production (E&P) business as high crude oil prices have made upstream activities much more attractive. Downstream operations, on the other hand, show cyclic returns which are negatively impacted by high oil prices.

Oil principals such as BP are look-ing to divest some of their downstream assets while other players such as

ConocoPhillips and Marathon Oil have announced segregation of their down-stream businesses.

However, San Miguel has plans of its own for Esso’s downstream op-erations in Malaysia. It is especially focussed on reviving the Port Dickson re!nery, the key winning point for its bid to acquire the operations of Esso Malaysia from ExxonMobil Corpora-tion.

Quite recently, the company an-nounced that its subsidiary Petron Corp will be improving its re!neries in the Philippines. The RM5.36 billion (US$1.8billion) refineries upgrading exercise will include the addition of new equipment like fuel catalytic con-verter and delayed coker which would eventually allow it to produce 180,000 barrels per day. The company plans to do the same with Esso’s Port Dickson plant so that the improved complexity will allow them more conversion capa-bility to produce higher value products like petrochemicals.

Deal Questioned In Malaysia

About a week after the deal was announced, Malaysia’s Domestic Trade, Cooperatives and Consumerism Min-ster Datuk Seri Ismail Sabri Yaakob had said his ministry would seek the help of the Malaysian International Trade and Industry Ministry to persuade the American oil and gas corporation to consider selling its Malaysian business to local companies.

San Miguel Close To Securing ESSO Malaysia’s Downstream Activities

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[ 21 ]

Ismail Sabri was reacting to a bid put in by Boustead Holdings Berhad, which is 59 percent owned by the Lembaga Tabung Angkatan Tentera (LTAT) for the stake. However, Exxon-Mobil’s Vice-President Sta!ord T. Kelly announced that the proposed sale to San Miguel Corporation of the Philip-pines was fair and justi"ed.

He said that San Miguel, other than giving the best value for all the three entities in the Esso Group, was the only company to include plans to take over and expand the 48-year-old oil re"nery in Port Dickson,

“Other bidders (including from Malaysia) were not interested in the refinery and they wanted to shut it down,” he said in an audio-conference with the Malaysian media from the United States.

He said ExxonMobil mutually agreed with San Miguel that the Phil-ippines’ company would not retrench workers, but in return would expand the human capital, with the locals given "rst priority.

During the bidding process, he said that every party was given enough space to have discussions and evalua-tion on ExxonMobil, and "nally three strong parties were recognised and "nalised, with San Miguel being the only foreign company.

“A fair level of consideration has been given and San Miguel emerged as the winner,” he said, adding that both parties have signed the sales and purchase agreement.

Kelly added that he had spoken to International Trade and Industry Minister Datuk Seri Mustapa Mohamed on the matter.

“My boss (ExxonMobil Corp chair-man and chief executive Rex Tillerson)

has spoken to the Prime Minister (who is also Finance Minister Datuk Seri Najib Tun Razak) about the sale,” he said.

He admitted that the response from the ministers and the authorities were encouraging, given that the trans-action was from a foreign company to another foreign entity.

Pertaining concerns that a Malay-sian company could fall to a company which produces beer, Kelly said the situation was true many years back, but not so currently.

“Now the company is a conglom-erate and their business is diversi"ed into many segments… Currently, the company derives its revenue mostly from non-food and beverages busi-nesses, which clearly re#ects the com-pany’s intention to clear its image as a beer producing "rm,” he added.

“We are in the midst of "nalising the papers for submission for all the three ministries,” he added.

Ismail Sabri agreed he was aware of this development, “I have spoken to ExxonMobil Corp’s vice-president Sta!ord Kelly and told him to consider the sentiments of the Malaysians, who want a local company to run Esso Ma-laysia… Now that the agreement is signed, there’s nothing much that the Government can do,” he told reporters.

Ismail Sabri said Kelly had per-sonally explained to him that Exxon Mobil had to reject a bid from Lembaga Tabung Angkatan Tentera (LTAT) for the stake because it could not match San Miguel’s o!er.

“He told me that when San Miguel gave the "nal o!er, ExxonMobil had gone back to LTAT in June and allowed them a chance to match San Miguel’s bid. But LTAT couldn’t …“I was also told that LTAT did not have plans to expand

Esso’s Port Dickson re"nery, unlike San Miguel. So that’s why they went with San Miguel,” he said.

However, the transaction still needs the approval of three key Ma-laysian ministries, namely the Inter-national Trade and Industry Ministry, the Domestic Trade, Cooperatives and Consumerism Ministry and the Finance Ministry.

However, Boustead recently clarified its bid by saying it submit-ted a fair and competitive offer in terms of price in July to ExxonMobil for its downstream assets, which in-cluded the 65 per cent stake in Esso Malaysia Bhd, a 100 per cent stake in ExxonMobil Malaysia Sdn Bhd and 100 per cent of ExxonMobil Borneo. The company added that its bid for Esso Malaysia was made on the basis of business continuity whereby the refinery would be operating as usual and that there would not have been any staff lay-offs.

Stock MovementSan Miguel’s purchase of the

businesses including the 65 percent stake in Esso Malaysia was valued at about RM1.82 billion (US$610 million) or RM3.50 a share of Esso Malaysia. Exxon’s Sta!ord Kelly added that San Miguel o!ered a 25 per cent premium on the average price of Esso Malaysia’s shares for the last six months, which was around RM2.80. He added that only after speculations of the sales and purchase agreement did the price shoot up to RM4.95 from the pre-lunch time close of RM4.33 on August 17, 2011.

Article written with information sourced from news agencies and other parties.

MSHE_20-21_CD.indd 21 9/23/11 11:09 AM

[ 22 ]

[ PERSPECTIVE ] text : Birdy Law

E ven though the Malaysian automobile manufac-turers have turned in a lacklustre latest quarter

of mixed results, analysts believe that with the global supply chain disrup-tion caused by the natural disaster in Japan gradually recovering, and the encouraging demand for the new Myvi, coupled with interest rates expected to remain low, the auto

industry is expected to rebound over the second half of the year.

However, analysts also warned that with the volatility in the external economic environment, compound-ed by the persistently high inflation globally, Malaysia’s domestic econo-my will feel the impact and consumer appetites will be dampened. Car sales will, in the mean time, be facing the adverse effects of exchange rate fluc-

tuations in the ringgit, among others.In terms of the global automo-

bile market, world renowned rating agency Moody’s analytics predicts that a weaker macroeconomic fun-damentals over the next 12 to 18 months will put a brake on the global demand for small cars, which would consequently translate into lower profits for the auto industry.

“For this reason, we are adjusting

Supply Chain’s Gradual RecoveryAnd New Myvi Model Bode Well For The Automotive Industry In 2H11

Stock Prices (RM) Fair Value (RM) Price-To-Earnings

Ratio(FY11)

Price-To-Earnings

Ratio (FY12)

Net Asset Value

(RM)

Investment

Rating

MBM Resources 3.05 3.25 9.0 8.0 1.07 Fully Valued

DRB Hicom 2.02 2.95 7.5 6.2 0.76 Outperform

TCMH 4.80 5.50 11.2 8.7 1.65 Outperform

UMW 7.18 7.35 12.0 10.6 2.00 At market

APM Automotive Holdings 4.88 5.10 7.7 6.6 1.15 At market

Proton 2.70 2.50 16.2 13.6 0.32 Below market

ResearchSource: Societe Generale


[ 23 ]

our outlook for the global automobile market from ‘Positive’ to ‘Stable’. Spe-cifically, we are revising our original demand growth forecast for 2011 from 5.1% to 3.5%, and for 2012 from the original 7.4% to 6.5%.”

Malaysia’s domestic automobile market outlook is, however, trend-ing to the contrary. Researchers at Societe Generale Research hold the opinion that with the recovery of the Japanese automotive supply chain and Malaysia expecting to keep interest rates low, the Malaysian car market is expected to perform better in the second half of the year than the first.

Societe Generale Research pointed out that according to the latest quarterly financial reports, only Tan Chong Motor, APM Automo-tive Holdings and DRB Hicom, from among the 6 closely-watched car companies, posted results that are in line with forecast. One of the main reasons is that the new car loan law that came into force on June 15 has

prolonged the process of new car registrations.

MBM Resources, UMW and Proton posted results that Societe Generale Research called “dismal”.

However, as the industry gradu-ally adapt to the new car loan law and the global automotive supply chain gradually recovers (monthly automotive production in July grew by 25.1%), “car sales in 2H 2011 is expected to rebound strongly, driven by pent-up demand.”

Statistics showed that car sales over the first seven months of this year hit 347,455; Societe Generale Re-search is predicting that the total an-nual vehicle sales will reach 616,000.

Another reason why the rosy outlook for car sales is expected in the second half of the year is that the bookings for Perodua’s new Myvi has exceeded 30,000 units. Also, “it ap-pears that interest rates will remain stable over the next six months, and car loan interests are also expected to remain at an attractive level.”

Societe Generale Research pre-dicts that by 2012, the overall Malay-sian car sale volume is expected to hit 644,000, which would translate into an annual growth rate of 4.5%.

As for the stock prices, auto stocks are still currently off 14% from their 2011 peaks. Societe Generale Research expressed that “in the next three to six months, auto stocks will have relatively limited room to fall any further.”

Societe Generale Research iden-tified Tan Chong Motor (TCHM) as the most promising stock to watch, because “it is undervalued but boasts a strong product line, which will al-low TCMH to secure a higher market share.”

“We are also optimistic about DRB-Hicom, for the company’s profit has reached a new turning point. We are not placing our bet on Proton, because the planned transformation of their wholly-owned subsidiary, Lotus, still carries a high executional risk.”

Car Sales Volume Comparison

Car dealer

(units)

July 10 June 11 July 11 Monthly (%) Yearly (%)

months of 2010 months of 2011

Yearly (%)

Proton 14032 13012 12266 -5.7 -12.6 94158 97489 3.5

Perodua 16540 8870 16375 84.6 -1.0 111476 95842 -14.0

Toyota 7688 6316 7934 25.6 3.2 52508 50054 -4.7

Nissan 2930 2463 2548 3.5 -13.0 20436 19944 -2.4

Honda 4588 1959 2608 33.1 -43.2 26732 21854 -18.2

Others 7705 9170 8521 -7.1 10.6 49288 62272 26.3

Total sales 53483 41790 50252 20.2 -6.0 354598 347455 -2.0

Cars 48144 36838 44835 21.7 -6.9 320047 310489 -3.0

Commercial vehicles

5339 4952 5417 9.4 1.5 34551 36966 7.0

Source: Malaysian Automotive Association (MAA)


[ 24 ]

August 2011 was a month that was full of nega-tive news to the equity markets. First, we saw

the downgrade of US’ credit rating by Standard & Poor, and then followed by the deterioration of the European debt crisis. European Central Bank (ECB) data shows that an unnamed bank tapped the ECB 7-day emer-gency liquidity facility for the first time since February 2011 to borrow EUR 500 million as short-term work-ing capital. This incident has caused a plunge in European equity markets where banking stocks were being sold-o!.

Credit crunch and liquidity risk may have reoccurred in the Euro-pean banking system as banks will generally only borrow from central bank (which charges higher borrow-ing cost) when they have difficulty getting funds from the open market. This can be interpreted by European banks unwillingness to lend among themselves currently as they are wor-ried that the other banks might hold a large amount of PIIGS’s sovereign debt

and su!er huge losses. Under such circumstances, European banks would prefer to keep their capital safely in ECB rather than lending it out. Further-more, liquidity in the European money market has started to dry up as the European debt crisis has intensi"ed and caused the withdrawal of money market funds from Europe. With banks reluctant to lend and liquidity drying up, the lending activities in the Euro-zone have declined quite dramatically recently.

Reluctance To Lend Will Worsen The Economic Growth In Europe

Investors fear the credit crunch as it caused the previous economic recession. During the 2008 "nancial crisis, banks suffered substantial losses due to toxic assets, and the increase in bad debt reduced banks’ lending ability. Now, the fear of coun-terparty risks and the issues of PIIGS’s sovereign debt have again reduced the willingness of European banks to grant loans to businesses. Small and medium companies will always

be the "rst to su!er during a credit crunch as they are unable to obtain funding from banks. This could lead the small and medium companies to "le for bankruptcy. Unemployment could increase by then, which in turn will hamper the economic growth in Europe. In the worst case scenario, we believe that recession in the European economy may be inevitable.

Possible Short-Lived Mild Recession In Europe

Under the situation whereby European countries substantially reduce their government spending, we expect the economic growth in Europe during the period between 3Q-2011 and 2Q-2012 to contract by 1% and thereafter return to the normal growth level. The main rea-son why we believe that Europe will fall into recession is that European countries are now actively pursuing fiscal austerity measures, and such measures could undermine business con"dence and consumer spending.

The current situation in Europe is di!erent from the US recession in

Possible MildRecession In EuropeBut Markets Overreacted

[ PERSPECTIVE ] text : Yeoh Mei Kei


[ 25 ]

2008, in which the US economy was overheated with excessive credit growth. Companies in Europe have been de-leveraging since the begin-ning stage of recovery and credit growth has now been relatively slow. This indicates that the current !nan-cial situation for companies in Europe is healthier as compared to 2008, and companies now have better ability to ride out the challenge of an economic slowdown. As such, we expect the recession in Europe will be short-lived and will not be as severe as the reces-sion in US during 2008.

Corporate Earnings Revised Downward For Slower Economic Growth

Over the long term, earnings growth dictates the returns of the

equity market. Previously, we utilise consensus earnings forecasts as a ba-sis for our own estimates. As our eco-nomic outlook now di"ers from the consensus view, this requires some changes to our previous forecasts. We now expect a mild recession in the Europe and slower-than-expected growth in the US, which has negative implications for corporate earnings. We have correspondingly lowered earnings estimates for equity markets under our coverage, attempting to factor in slower anticipated economic growth. Corporate earnings will likely see some negative impact in 2012 as growth stalls in Europe, but we expect the slowdown to be short-lived and, thus, forecast a stronger recovery in earnings for 2013 (the stronger per-centage increase relative to consensus

estimates re#ects the low base of our 2012 estimates).

Most equity markets have ex-perienced a strong correction, but we doubt that the steep downward movement in prices is justi!ed given that valuations were already modest prior to the recent decline. Prices tend to be suppressed when expectations and sentiment are weak, and we ex-pect that investors who can see past the current turmoil will be able to reap substantial rewards when prices be-come more re#ective of the underly-ing companies’ value in the future.

Yeoh Mei Kei is a Research Analyst at Fundsupermart.com.

Table 1: Revisions to Earnings Forecasts

iFAST Estimates Consensus Forecasts

Regional Markets 2011 EG 2012 EG 2013 EG 2011 EG 2012 EG 2013 EGAsia ex-Japan 11.3% 6.7% 18.7% 14.6% 15.4% 12.2%Emerging Markets 10.2% 9.5% 16.3% 16.8% 13.8% 11.5%Europe -23.0% 20.5% 10.8% 8.1% 12.6% 4.7%Japan 4.5% -4.4% 27.6% 4.1% 15.6% 22.8%US 1.3% 7.5% 19.8% 17.0% 12.9% 10.5%Single Country/Sector 2011 EG 2012 EG 2013 EG 2011 EG 2012 EG 2013 EGAustralia 18.9% 15.9% 12.6% 30.4% 10.3% 7.5%Brazil 1.7% 17.1% 15.8% 14.9% 12.1% 14.5%China 17.7% 8.7% 17.9% 19.0% 14.8% 13.3%Hong Kong 9.2% 8.0% 13.8% 12.5% 14.5% 12.6%India 9.5% 16.0% 14.0% 9.9% 17.0% 12.7%Indonesia 17.2% 17.5% 13.9% 25.8% 20.0% 15.0%Korea 16.3% 1.9% 17.6% 16.3% 14.4% 11.8%Malaysia -1.0% 8.3% 12.9% 6.9% 14.6% 11.0%Russia 36.2% 5.7% 5.7% 50.5% 5.7% 0.1%Singapore 0.9% -6.4% 35.9% 6.0% 9.2% 13.9%Taiwan 4.0% 2.8% 25.4% 11.1% 16.2% 8.3%Tech (MSCI AC World IT) 2.5% 18.0% 20.0% 25.6% 14.4% 12.1%Thailand 15.1% 12.3% 15.4% 25.8% 14.2% 10.8%Source: Bloomberg, iFAST estimates; data as of 26 August 2011


[ 26 ]

Bad news have been coming wave after wave, and we have weathered potential crisises one after another

since June this year. On 29 June, Greece parliament narrowly approved a !ve-year austerity plan and successfully gained the !fth loan payment of 12 bil-lion Euro from the 110 billion-Euro bail-out plan. On 1 August, the gridlocked Congress !nally reached a consensus on extending the country’s debt ceiling and a 2.1 trillion de!cit reduction plan, to avoid a catastrophic default.

However, the sovereign debt crisis in Europe and situation in the US hasn’t improved. Worse still, global equity mar-kets tumbled as investors speculated about a double-dip recession. The New York Times, a conservative newspaper, even claimed that the US economy is poised to enter into a recession again. Is it true then? In this article, we shall look at the past experiences and pres-ent some observations on a double-dip recession. We will also be discussing whether the US economy will shrink further.

What We Have Learnt From The Double-Dip Recessions In The Past

For those who do not believe a double-dip recession is likely to happen, the general view is that economic reces-sion is the lower turning point (trough) of a business cycle. It usually occurs after a long period of economic expan-sion which results in excess demand (aggregate demand exceeds long-run aggregate supply). Such pre-conditions do not exist in most countries today, fol-lowing the 2008 crisis. On the other hand, some may argue that we are paying the price for the lowering of interest rates over the past 30 years by the US Federal Reserve (Fed). The rate cut was to prevent a recession, but it also built a new bubble. The current virtually zero interest rate level means we lack tools to protect us from negative economy shocks.

The former argument is correct if we only look at economic data over the past 20 years. However, it is con-ceptually wrong in a macroeconomics perspective. In fact, every economic cycle is unique as they can occur in

different patterns. According to the National Bureau of Economic Research, from 1850s onwards, there are in total 33 economic cycles in the US. It lasted less than 5 years on average. If we only counted the recent 11 cycles, the cycle duration increases to 6 years. We found that the economic cycle can last as long as 8 years or above and as short as 3 years or below, but both cases are rare. Over the past century, US experienced four short economic cycles. It proved that recession can happen after a short-lived economic recovery. Short economic cycles have also happened in other countries like Germany, Japan, China and Hong Kong in the past. Some of these economies even dipped more than twice – we call this a multiple-dip recession.

The latter argument cannot ex-plain the reasons of the emergence of a double-dip recession. We looked at the historical data and found several com-mon causes of past double-dip reces-sions; namely 1) premature tightening policy, 2) high in"ation, 3) de"ation and 4) non-economic factors.

Double-Dip Recession Lessons From History

[ PERSPECTIVE ] text : The Fundsupermart.com Research Team

Table 1: Long (Above 8 years) and Short (Below 3 years) Economic Cycles over the Past Century

Economic Cycle Reference Date Cycle Duration In Months

Peak Trough Trough from Previous Trough Peak from Previous Peak

January 1913 December 1914 35 36January 1920 July 1921 28 17

May 1923 July 1924 36 40February 1945 October 1945 88 93

April 1960 February 1961 34 32July 1981 November 1982 28 18July 1990 March 1991 100 128

March 2001 November 2001 128 128Average Duration In Month

1854-2009 (33 cycles) 56 551945-2009 (11 cycles) 73 66

Source: NBER

MSHE_26-31_Perpective3-1.indd 26 9/23/11 11:12 AM

[ 27 ]

Signs Of Past Double-Dip Recessions1. Premature Tightening Policy

Premature tightening policy was an important risk factor in past double-dip recessions, especially in US and Japan.

A huge lesson can be learnt from Japan in 1990s and 2000s, during which the Japanese asset bubble burst in 1990 and the private sector’s balance sheets were damaged seriously. The !rst priority of companies and house-holds was to minimise debts instead of maximising profits. Still, Japan’s GDP managed to keep growing almost every year until 1998, thanks to the government’s massive !scal stimulus. In 1997, the Hashimoto administration announced the country’s first fiscal reform programme in the post-bubble era to reduce the !scal de!cit by 15 trillion yen via raising consumption tax from 3% to 5%, cancelling special income tax and drastically scaling back the government’s expenditure. The economy then proceeded to shrink for !ve straight quarters amidst the credit crunch, the country’s worst post-war meltdown (see Chart 1). In order to control the !scal de!cit and the debt level, the Japanese government with-drew the stimulus when there were signs of recovery, and the economy sank again because the private sector was still deleveraging.

US, on the other hand, should not find the 1930s Great Depression unfamiliar. In an article titled “The Lessons of 1937”, Christina Romer, the former chairwoman of Barack Obama’s Council of Economic Ad-visers and a scholar of Depression, addresses the risk of a “W-shaped” recession if tightening policies are

rolled out when the recovery remains fragile. The US economy re-entered the recession in 1937 and 1938 and the unemployment rate perked up to 19% when the Federal Reserve doubled its reserve requirements. Consequently, banks reduced lend-ing and the economy contracted.

Another example was seen in 1980 when the US economy was hit by high in"ation after the 1979 energy crisis. The US government believed in"ation was high at that time and introduced measures to control credit expansion. The measures pushed up borrowing costs for banks, resulting in a short recession which ended in July 1980. Thereafter, US experienced a jobless recovery as unemployment rate was stubbornly high. In order to solve the in"ation problem when the economy started to pick up, Fed Chairman Paul Volcker raised interest rate drastically to 20% by June 1981. The high interest rate caused the col-lapse of the real estate market and ultimately led to a double-dip reces-sion (see Chart 2).

2. High In!ationIt is widely believed that causes of

high in"ation include the supply shock of essential commodities (e.g crude oil) and excessive expansion of money supply. Both factors lead to drastic in-creases in labour cost and price levels. Also, unemployment rate will increase as wages rises above productivity. A high rate of in"ation and unemploy-ment are precursors of a double-dip recession.

High in"ation which led to a re-cession occurred in 1970s and 1980s respectively in the US (see Chart 2). In 1973, the Organisation of Petroleum Exporting Countries (OPEC) cartel proclaimed an oil embargo until March 1974 and quadrupled the price of crude oil. Another macro backdrop is that the US unilaterally pulled out of the Bret-ton Woods Accord and took US o# the established Gold Exchange Standard in August 1971, allowing the US dollar to "oat. Shorty, the industrialised na-tions followed the "oating regime and central banks increased their reserves by printing money for the purpose of

Chart 1: Multiple-Dip Recession In Japan

iFASTSource: Bloomberg and iFAST Compilations

Japan3

2

1

0

-1

-2

-3

-4

-5

-6

(%)

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010


[ 28 ]

“managed !oating” (intervention in the foreign exchange market). As a result, the US dollar depreciated and oil price increased. American households soon found that the price of gasoline surged sharply while companies faced higher production costs, hence trigerring an economic contraction.

The second bout of high in!ation period in early 1980s was discussed above and resulted in inappropriate monetary policies and thereby led to a double-dip recession (see Chart 2).

3. De!ationary SpiralThe resultant lower wages led to

lower demand, which in turn caused further decreases in price.

Among all countries in the world, Japan has the longest history of de!a-tion since the World War II. De!ation has persisted and has been deeply en-trenched in Japan over a decade since 1998. One of the key factors is that the sharp deterioration of corporate and household balance sheets after the as-set bubble burst in the early 1990s has driven down the number of borrowers

drastically. A company or household su"ering from a debt burden is lack of willingness to borrow to expand their consumption or business. With Japanese consumers and companies reluctant to spend and invest, aggre-gate demand in the economy shrank and thereby put further downward pressure on the price level.

Hong Kong also went into a multiple-dip recession during 1998

to 2003 (as shown in Chart 3). After experiencing a prolonged period of economic expansion and excesses, Hong Kong property and stock market collapsed amidst the Asian #nancial cri-sis of 1997-1998. Hong Kong recorded a negative GDP growth for #ve con-secutive quarters during the period, one of the worst recessions in history. The city also registered negative GDP growth for four straight quarters after the tech bubble burst in 2001. The city experienced a long period of de!ation after the property and stock market bubble burst as deterioration of corporate and household balance sheets a"ected people’s willingness to spend and invest. Composite CPI year-on-year growth turned negative for 68 consecutive months, from November 1998 until April 2004!

4. Non-economic FactorsWe have also found some non-

economic factors in the past double-dip recessions. Examples of such in-clude Germany’s uni#cation and SARS.

Germany’s economy tumbled

Chart 2: Multiple-Dip Recession In US


US20.0

15.0

10.0

5.0

0.0

-5.0

-10.0

-15.0

(%)

1949 1952 1955 1958 1961 1964 1967 1970 1973 1976 1979 1982

Chart 3: Multiple-Dip Recession In Hong Kong

Hong Kong8

6

4

2

0

-2

-4

(%)

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010



[ 29 ]

precipitously after the reunion of the two Germanys in October 1990 and experienced a multiple-dip recession throughout the 1990s and early-2000s (see Chart 4). After the unification, Germany’s GDP was dragged down by East Germany which went into a deep recession. The 1:1 conversion rates of East German marks (Ostmark) into Deutsche marks resulted in wages which far exceeded the productivity level in the Eastern region. East German wages increased sharply despite the mounting unemployment rate. Indus-trial output of East Germany plunged more than two thirds within one year as many factors became obsolete due to the excessive labour cost. The government provided subsides into the Eastern region, around 6% of the country’s GDP in the !rst !ve years after uni!cation. The huge cost of uni!cation plus the privatisation of state-owned business in the East lifted the !scal bur-den for the German government and pushed the country into a prolonged recession.

We have mentioned that Hong

Kong also went into a multiple-dip recession from 1998 to 2003, and the third dip occurred in 2003 when the deadly outbreak of SARS had dramatic rami!cations on economic activities in Hong Kong.

No Signs In The UsWe do not see the aforemen-

tioned signs of a double-dip recession in the US currently.

No De!ationary PressureFirstly, in contrast to last year’s

slowdown, we do not see a strong de"ationary pressure in US currently. Excluding volatile food and energy prices, core CPI grew 1.6% year-on-year in June 2011. This was above the 1% threshold for the !fth consecutive month while core CPI was below 1% for the ninth consecutive month since April last year. More importantly, we are seeing a broad-based inflation – all prices of services and goods of the economy except housing prices. Housing is the dominant component in US CPI for all Urban Consumers which weighs 42% of the total basket value (Chart 5). It fell into negative territory since July 2009, obscuring the uptrend of other CPI components. In fact, CPI less food and energy and shelter has been hovering steadily at an acceptable range between 1% and 2% since the economy recovered (Chart 6). It shows that the in"ationary risk is greater than the de"ationary risk in US, at least at the current moment.

Chart 4: Multiple-Dip Recessions In Germany


Germany3

2

1

0

-1

-2

-3

-4

(%)

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

Chart 5: Compositions Of CPI In US

MedicalCare7%

Housing42%

Apparel &Upkeep

4%

Food &Beverages

15%

Others3%

Recreation6%

Education6%

Transportation17%

iFASTSource: US Bureau of Labour Statistics and iFAST Compilations


[ 30 ]

A 1970s Or 1980s Styled High Inflation Will Not Happen

We do not expect a 1970s or 1980s style high in!ation to happen. Some investors worry excessive liquid-ity in the global economy will drive up commodity prices and thereby cre-ate a high in!ationary environment. However, with the record high US$1.8 trillion in excess reserves (Chart 7), we wonder how the liquidity created by the FED alone could push up com-modity prices. In fact, the di"erence between the increase in printed money since QE1 and the increase in excess reserves is small. Specula-tion could be another major force of commodity rally but high commodity prices driven up by speculation usu-ally do not last long. Example includes oil price rising from US$88 per barrel to a peak level of US$145 per barrel in 2008. Recently, international oil price came down to below US$90 per barrel. In June 2011, US, major industrialised countries and International Energy Agency unleashed oil reserves to

tame the climbing oil price. It shows the ambition of governments to act against the high oil price. CRB Index which represents commodity prices also plunged more than 10% from its peak in April this year. Stripping out the political events which are hardly predicted, we don’t see a 1970s or 1980s style high in!ation environment around the corner in near term.

There is an argument that hyper-

in!ation will be caused by the ultra low interest rate and excess liquidity. However, as long as the velocity of money drops, the increase in money supply might not result in hyperin!a-tion. The money multiplier has col-lapsed as shown in Chart 8. As a rule of thumb, the greater the money multi-plier, the higher the money circulation would be. It shows that the increase in monetary base (printed money) has been held in banks’ reserves instead of it being circulated in the bank-ing system. Under this situation, the loosened monetary policy would not result in a high in!ation environment.

No Way To Tighten Policy In The Near Term

There is no way that the Fed is going to begin the tightening policy anytime soon. Fed Chairman Ben Bernanke pledged to keep interest rate at exceptionally low levels for two more years. Markets worldwide expected Bernanke to announce QE3 or other forms of monetary easing in the Fed conference on 26 August. US

Chart 6: Cpi Less Food And Energy And Shelter6.0%

5.0%

4.0%

3.0%

2.0%

1.0%

0.0%

-1.0%

iFASTSource: US Bureau of Labour Statistics and iFAST Compilations

Nov-

99

Nov-

00

Nov-

01

Nov-

02

Nov-

03

Nov-

04

Nov-

05

Nov-

06

Nov-

07

Nov-

08

Nov-

09

Nov-

10

Housing CPI Less Food & Energy & Shelter

Chart 7: Record High Excess Reserves


QE1 QE22.8

2.4

2

1.6

1.2

0.8

0.4

0

US$ Trillion

1/2/2008 1/2/2009 1/2/2010 1/2/2011

Excess Reserves Monetary Base


[ 31 ]

President Barack Obama also unveiled that he is proposing a fresh economic stimulus to revive the faltering recov-ery, though the amount will not be huge as the two parties in congress just reached a compromise on the debt ceiling impasse.

Evidence Of Recession Emerges In Europe

On the other hand, European countries have already taken the aggressive austerity measures and the European Central Bank (ECB) has even started its rate hike cycle. Apart from the debt-laden PIIGS countries, core Euro-zone countries have also prepared for the !scal tightening poli-cies. French President Nicolas Sarkozy pledges drastic austerity measures to slash France’s budget de!cit in order to keep the country’s AAA credit rat-ing. The new austerity plan in Italy was approved in August while Spain’s austerity plan was approved in May this year. In addition, ECB has started its rate hike cycle in April this year and has raised rates twice to 1.5% thus far

in order to tame the mounting in"a-tion. As such, some evidence of reces-sion has emerged in Europe.

Our View On Double-Dip Recession

Premature tightening policy, high in"ation, de"ationary spiral and non-economic factors are some com-mon causes of double-dip recessions in the past. It should be reminded that every recession could be triggered by some unique factors. These signs are not a must for a double-dip recession and they are only for readers’ refer-ence. However, these signs are in line with our houseview on the economic outlook for US and Europe.

We believe Europe will enter into a recession. A set of economic indicators including PMI have already pointed to an economic downturn in the euro zone economies. European policy makers have taken aggressive austerity measures to reduce the !scal de!cit. However, !scal tightening at a time when the economy and banks are yet to fully recover would dampen

the economy further.In an earlier article “US: What Is

The Impact of Zero Percent Growth?”, we have argued that US GDP growth could fall short of the market ex-pectation (2.5%), but it only means a slowdown instead of a full-blown recession. Consumption !gures are disappointing in the !rst half of this year as it was depressed by the high oil and gasoline price. Investment com-ponent was also negatively a#ected by the Japan’s earthquake which resulted in supply chain disruptions. Energy prices have declined since the second half and the supply chain res-toration has been improved. Thus,$the GDP growth is expected to rebound in the second half.

One of the key concerns is the spillover e#ect of the European debt crisis to US economy. Recent market turmoil is another near-term risk as it may somewhat a#ect the already-weak con!dence of businesses’ and consumer’s. However, given that cor-porate and household has continued to deleverage after the 2008 !nancial crisis, we don’t expect a serious crisis to come.

We also conduct a stress test on US corporate earnings under some very conservative assumptions. The result is very positive -$even if growth stalls in the second half of 2011 and revenue growth is muted in both 2012 and 2013, S&P 500 earnings can still be at all-time highs by end 2012. We advise investors to do the following things in a highly volatile market:1. Stay calm and try not to panic2. Focus on fundamentals – Valua-

tions’ and Earnings3. Prepare for buying opportuni-

ties

Chart 8: Money Multiplier Has Collapsed

iFASTSource: The Federal Reserve and iFAST Compilations

Money Multipler (M2/Monetary Base)12

10

8

6

4

2

0

Apr-8

9

Apr-9

1

Apr-9

3

Apr-9

5

Apr-9

7

Apr-9

9

Apr-0

1

Apr-0

3

Apr-0

5

Apr-0

7

Apr-0

9

Apr-1

1


QAQA

[ 32 ]

QA[ 2 CENTS WORTH ] text : Editorial Team

Q: Gold has surged to a record above US$1,900 an ounce, can I still invest in it?

A: Since the beginning of 2011, gold price has climbed more than 34%, hitting US$1,923.70 an ounce on 06 Sep-11, while the Dow Jones Industrial Average is down around 4% during this period.

Gold price, which has been bene!ting from the recent "ight to safety amidst concerns of slowing growth in the US and Eurozone debt crisis, especially with the weakening of the German and French economies, is likely to appreciate further.

Should the US Federal Reserve embark on another round of quantitative easing, it could o#er a potential impetus to gold price.

Moreover, as fears over “currency war” resurface, funds may continue to invest into tangible assets such as gold in a bid to preserve value, hence, leading further rally in gold price.

However, with gold price rising around 7 times over the past 10 years, you may want to revisit your thinking!

Q: What are your suggestions in measuring the perfor-mance of my stock portfolio?

A: The returns from stocks come in two forms, namely capi-tal gain and dividends. For a start, we suggest using the total rate of return as a measure of your portfolio return by summing the stock value and the dividends received as a percentage of the cost of investment. Transaction costs such as broker fees, GST, etc. should be factored into the investment cost.

Selecting a benchmark is important to see how well your portfolio has performed compared to the market. Assuming your portfolio contains all local listed compa-nies, you could use the FBM KLCI Index as a benchmark measure. Moving a step further, you could boraden your measurement using the Bursa Malaysia Sectorial Indexes to track the performance of the individual stocks in your portfolio against their respective industries. The information ratio is commonly used to mea-sure the success of portfolio managers. You could incor-porate this metric as a measurement of your investment results and also measure your performance against that of the investment managers with the same strategy. The formula of information ratio is the di#erence between your portfolio return and benchmark return, divided by the tracking error.

Although it may sound like a lot of work, a thor-oughly measured portfolio will aid in your investment decision-making in the long term. Develop as part of your investment habits to constantly test, review and measure your portfolio results under all market condi-tions. Keep in mind that investing is a lifelong learning process.

Need help with any equity/investment-related questions? You can email them to [email protected], with 'Ask SI M’sia' as the subject header.

MSHE_32_CentsWorth.indd 32 9/23/11 11:14 AM

Ad.indd 5 9/22/11 2:40 PM

[ 34 ]

[ FINANCIAL PLANNING ] text : Carol Yip

The world’s !nancial markets are a volatile place to be in these days, so how’s your confidence level doing?

Making a lot of trades in the market, lately? Or are you standing aside after taking a beating? Do you think you can book some pro!ts or are you feeling a little unsure? Has your con!dence been a"ected by the never-ending stream of news pertaining economic turmoil, debt crisis, riots, natural disasters, com-pany mergers and buyouts? It seems that the list of uncontrollable inputs just goes on and on.

There’s lots of ‘noise’ out there in#uencing our decision-making pro-cesses. But we have an inner voice that makes our !nal decisions. Unless we know exactly what to do, our inner voice can easily play the devil’s advo-cate. Just spend a moment to re#ect upon some of your past decisions. Very likely, you will notice that inside you, there lurks ‘a mischievous inner voice’ that is forever cajoling you into an in#ated sense of your own powers.

Mischievous Inner VoiceSometimes that little voice can

lead you astray. The less skilled or experienced you are at something, the harder your inner voice works to convince you that you are brilliant at it. And that’s good, up to a certain point. By !bbing to ourselves, we can give a much-needed boost to our self-esteem. None of us are perfect, and daily life brings us into constant collisions with our own incompetence and inadequacies. If we listened to all the negative feedbacks – and didn’t create what psychologists call ‘positive illusions’ – our self-esteem would go through the #oor.

Investing in shares works the same way. How else could you ever get back on track with your share invest-ments if your self-esteem is a"ected by the recent !nancial market downfall? A pinch of con!dence encourages us to take risks – often sensible. And that’s normal.

But, you will never make the most of your investment potential if you think you have far more potential than you actually do. One way to achieve ev-erything you’re capable of is to accept what you are not capable of. That’s sur-prisingly hard for investors to do, and it counteracts all the “positive-thinking”

gurus have to say.There have been studies done to

track what happens when typical inves-tors listen to their inner voices. More often than not, investors will wildly overstate how well they have done in the past. Studies suggested that most people are kidding themselves when they claimed to have beaten the mar-ket. “Everybody wants to believe that they’re special and better than aver-age,” said psychologist Don Moore of Carnegie Mellon University. “They think they can beat the market with their own special something. And it’s remarkable how this illusion persists even in the face of evidence to the contrary.” It’s also perfectly understandable. Most people would much rather listen to the blarney of their inner voice than to measure their !nancial performance accurately. After all, their inner voice, more often than not, has good things to say. And hearing good things, even from an ‘in-ner’ voice, makes us feel better!

That brings us to a much larger les-son. When you watch the !nancial news on TV, visit market websites, or read the !nancial press, you will probably hear things like “down here in the trenches, investing is a contest, a !ght, a duel, a battle, a war, a struggle for survival in a hostile wilderness”.

Sizing Up YourConfidence Level

Carol Yip

MSHE_34-37_FinancePlan.indd 34 9/23/11 11:14 AM

[ 35 ]

But investing is not you versus “Them”. It’s you versus “your inner voice”. The single greatest challenge you face as an investor is handling the truth about yourself.

Managing Your Inner VoiceIn reality, there are very few cer-

tainties in the !nancial markets, and your investing brain is designed to exaggerate your abilities, favour the familiar, and imagine far more mastery over the past and future that you may ever have. You must try to control that in"ated ego, but still maintain a healthy level of con!dence. An investor who has no confidence at all will never invest, since investing requires taking a stand on at least some of the uncer-tainties that the future always holds. Simply put, your goal is to be aware of the limits of your knowledge.

In fact, how much you actually know is of less importance. It’s know-ing how to gauge when you have gone beyond your limit – and then learning to step back. Cruelly put, it’s not a problem to know next to nothing, as long as you know that you know next to nothing. Let’s face it, you can always learn. So, here are 3 methods to right-size your con!dence:

1. Be conservative, discount 25% o!After you take a !rst cut at your

estimates of what a stock is worth, crop the share value again. Behavioral !nance’s Gary Blesky and psychologist Thomas Gilvich suggested using an automatic “overcon!dence discount” of 25%. Apply it to both the high and low end of the range, making the up-side smaller and the downside bigger. For instance, you think a stock is worth

between RM3 and RM5. Now crop each number by 25%, yielding a new target range of RM2.25 to RM3.75. This con-servative cropping will help keep you from being carried away by your own overcon!dence.

2. Track your inner thoughtsUnless you are a very experienced

investor and know exactly what you are doing, it’s important to document your reasons for investing before you buy. Otherwise, your inner voice will very likely start playing its little tricks on you.

Memory researcher Elizabeth Loftus has shown that your recollec-tions of how you felt earlier about an investment decision can be easily “contaminated” by what happens later. So, if you make your diary entry after the fact, your memory of your original motivation will be a#ected by what has happened since the original decision.

Psychologist Baruch Fischho#, who has studied overcon!dence for more than 30 years, suggested using an invest-ing diary. Keep a record of what was on your mind when you make a prediction, and try to make those predictions as ex-plicit as possible. Think in probabilities, and include a price range and date.

For example, ‘I think there is a 70% chance that this stock will be at RM2.35 to RM3.00 within 6 months from now (not forgetting to apply the 25% overcon!dence discount to your target price). Then, write your invest-ing theory in the following sentence: ‘I think this investment will go up because……” Then, tuck your diary entries away for 6 months. Go back and see how accurate your predictions were, whether you tended to underes-timate or overestimate, and how good your theories were. You’re looking to

see whether the share prices went up for the reasons you speci!ed. That will help you learn whether you were right, or just lucky. And that, in turn, will help keep your inner voice in check.

Furthermore, with the bene!t of true hindsight, you now will be able to ask what kind of additional information would have raised your probability of being right or resulted in a more ac-curate price target.

3. Ask questions like a three-year oldIt is always safer to make a habit of

asking questions, especially the “Why?” question over and over again to test the limits of your own knowledge and capabilities.

It is also advisable to ask the “Why?” question to someone who is recommending an investment idea to you; including your !nancial advisors. If your !nancial advisor says you should put some money into a mutual fund specializing in China stocks because “China is the place to be,” ask “Why?” If he or she answers, “Because it’s go-ing to be the world’s fastest growing economy,” ask, “Why?” again. If he or she replies, “Because China will con-tinue to have low manufacturing costs” ask “Why?” again. Chances are, you’ll never get to a !fth “Why?”

People who don’t really know what they’re talking about can rarely answer “Why?” more than twice. If you can’t either, that’s the signal that you don’t yet have enough knowledge to make an informed decision.

So, if you want to be a sharp inves-tor, it’s a good idea to act like a three-year-old with a curious mind. Keep asking those questions! And keep on learning!


[ 36 ]

[ FINANCIAL PLANNING ] text : Lee Khee Chuan

The most basic tool in estate planning to leave your lega-cy starts with a well-worded and comprehensive will.

Integrated approach to estate planning dictates that other legal instruments such as trust & buy-sell agreements are also needed to com-plete the estate plan.

This week we will look at what a comprehensive will should contain.

What Should A Will Contain?1. Opening Clause

There should be an opening clause in which you identify yourself. If you have an alias or are commonly known by another name other than that stated in your identity card, it is advisable to include those names in the Will.

Another important thing that should be included in the opening is the date on which the Will is being made. The general rule is that a later Will takes precedence over any other Wills made earlier.

2. Revocation ClauseAfter the opening, there will usu-

ally be a revocation clause in which you state that you revoke all other earlier Wills that you have made.

However, a marriage (but not divorce) automatically revokes a Will unless the Will had been made in con-templation of marrying a particular person and a clause is added to that e!ect.

3. Appointment Of ExecutorsThe next consideration is to ap-

point a competent & trusted executor for the Will.

The executor will be responsible for the administration of the deceased’s estate. You may appoint up to four executors. It is advisable to appoint substitute executors. In the event that the executor dies before the testator or the executor is unable or is unwill-ing to carry out his or her duties, the substitute will be called upon to act.

Your choice of executor or ex-ecutors is of the utmost importance. Besides appointing someone you can trust, you should also make sure that your executors are willing to act before appointing them. Being an executor can be a demanding task and one can be put under a lot of pressure by the bene"ciaries.

If there is no executor who is capable or willing to act, or if all the executors have predeceased the testa-tor, letters of administration with a Will annexed will have to be applied for in-

stead of a probate, and will be granted to such person or persons as the court deems "t to administer the estate.

The procedure is the same as applying for letters of administration. The di!erence is that the deceased’s estate will be distributed according to the Will and not according to the law of intestacy. To avoid this situation, a trust corporation can be appointed instead. A trust corporation will not die, or become incapable or unwilling to act. Furthermore, the administration of the estate will be much smoother given the professional dimension.

4. Appointment Of TrusteeTrustee(s) should be appointed if

your children are still young and can-not be trusted with too much money. A testator can choose to confer powers on his trustee(s) that are not provided for under the law (that is, the Trustee Act) - for example, the power to carry on business after his death or to invest in projects beyond those authorised by the law.

There are many other powers that you might want to confer on your trustee(s) for the purpose of managing your estate. These matters would have to be discussed with your competent estate planner. Again, a trust corpora-tion can be appointed as your trustee.

How Will YouLeave Your Legacy?


[ 37 ]

5. Appointment of GuardiansA guardian or guardians should be

appointed for your children, who are still minors if your spouse predeceases you or both of you were to die at the same time.

6. Asset DistributionSpeci!c instructions can be given

on the type of gift to be distributed, to whom the gift is to be distributed, and in what proportions. For these ar-rangements to be made properly, it is best to seek professional advice when writing your Will.

7. Residuary ClauseA residuary clause should also be

included to dispose of any assets that you did not dispose of speci!cally in the Will.

Without such a clause, your other possessions will be distributed accord-ing to the law of intestacy and your wishes may not be fully realised.

8. Special InstructionsYou may want to include personal

messages to your bene!ciaries or loved ones. Such messages are also known as “Terms of Endearment” which may include religious connotations and prayers, advice to the bene!ciaries or simply loving words to the family.

This is also a useful way of leaving a lasting mark because there have been cases where a person may pass on sud-denly without having the opportunity to say anything to the family members and loved ones.

9. Special RequirementsYou should ensure that you have

given or provided reasonably or ad-equately for the maintenance of the

following persons, if any:-(a) Your spouse.(b) Any daughter who is unmarried or

who, by reason of some mental or physical disability, is incapable of maintaining herself.

(c) Any son who is below the age of 21.(d) A son who, by reason of some

mental or physical disability, is incapable of maintaining himself.

If you have not attended to the above, the court may vary your will to make reasonable provision for such persons upon an applica-tion made to it. What constitutes reasonable provision will depend on the circumstances. For example, if the case concerns

a millionaire’s wife who is accustomed to a life of luxury, his leaving her only RM1,000 under the Will may not be deemed reasonable.

10. Testamentary TrustApar t f rom merely leaving

straight forward instructions on the distribution of your assets, there could be situations where you would want the distribution of certain assets to be staggered over a period of time. This is because your bene!ciaries may not be ready to handle a large amount of money, or do not have the necessary skills and experience.

In this case, you can set up a testamentary trust in your Will by leaving a set of instructions as to how the asset is to be distributed and over what period.

For example where it concerns minors, and the inheritance in-volves a large amount of money, the instructions can be made to transfer the money to a trustee and stagger the distribution as given in

the example below:- at age 18, 20% of the amount; at age 20, 20% of the balance; at age 22, 20% of the balance; at age 24, 20% of the balance; at age 26, 20% of the balance;

By staggering the distribution in whatever combination, you elimi-nate the fear that all the money may be squandered or lost at one time. Hence, the bene!ciary(s) concerned will bene!t by learning how to handle the inheritance.

11. Review and UpdatingAs a Will only takes e"ect upon the

testator’s death, the testator may have acquired more assets since the day he or she made the Will, or some of the bene!ciaries may have predeceased him or her.

It is also important to note that a separation or divorce will not revoke a Will. It is a prudent practice, therefore, to rewrite your Will when there are major changes in your life pertaining to your social and !nancial positions.

Lee Khee Chuan is a quali!ed !nancial advisor. He holds a B.A. from National University of Singapore and is a Char-tered Financial Consultant ( ChFC ), Certi!ed Financial Planner™ ( CFP™ ) and Chartered Life Underwriter ( CLU ).

He is a pioneer who introduced the INTE-GRATED approach to estate planning. His article entitled “ An Integrated Approach to Estate Planning “ had been published by Financial Planning Association of Ma-laysia ( FPAM) in its quarterly journal in Oct. 2009. Lee is also frequently quoted in Personal Money & Smart Investor maga-zine. For more information, please visit: www.lkcestateplanning.com.


[ 38 ]

The 2012 Budget that Prime Minister and Finance Min-ister Datuk Seri Najib will unveil on October 7 is al-

most certainly candies-laden. The only question that remains is how widely can our Government a!ord to distrib-ute these sweets.

Najib had already made clear that the 2012 Budget he is proposing will help to ease the burden of the lower-tiered income families. The Govern-ment has also made cutting the cost of living one of the key national perfor-mance areas. A Special Working Com-mittee led by Deputy Prime Minister Tan Sri Muhyiddin has already started hammering out a proposal to lighten the burden on the people’s lives.

Pre-GE BudgetFrom both political and economy

aspects, this is almost certainly the last Budget before the next general elec-tion. It will surely take advantage of the languishing external environment, and our economy’s need for a booster shot in our domestic demand, to distribute political candies.

The general election must be held latest by 2013. If we remembered that UMNO had recently postponed its party election to no later than October next year, it would mean that the gen-eral election will not be held any later than that critical month. Therefore, the general election will be held any time within 12 months after the Budget is announced next year.

Prime Minister Najib belted out his swift and public response to tar-get the living expenses of the urban lower-tiered income families, as well as his unambiguous statement that the Government will not ignore their plight and their disgruntlement with the rul-ing party. The political element in his gestures are of course the key issue at stake here, but the implications of the limping external economic environ-ment and the importance of stimulat-ing domestic demands among urban dwellers cannot be ignored.

Low-Income Group Constitutes 60% Of The Population

In handing out ‘candies’ through

Sweets-Laden Budget Needed Both Politically And Economically

[ PERSPECTIVE ] text : Yang Ming Wan


[ 39 ]

the Budget, the Government’s biggest challenge is how to e!ectively reduce the burden on the people without encumbering our nation "nancially. It needs to avoid transferring the peo-ple’s burden to the government, for that would destroy our economy and the people would then have to pick up the tab eventually. Therefore, while we introduce citizen-friendly measures to reduce their burden, there must also be measures to stimulate economic growth.

In our September issue, I wrote an article about the government’s “Key economic challenge of lowering the cost of living,” that in the midst of a weak external economic environment and a wave of protests by city dwell-ers about the high cost of living, the government must work against time to lighten the burdens of the lower-income group and expand the urban consumers group in order to stimulate economic growth.

The Government has clearly stat-ed that urban households with an aggregate income of not more than RM3,000 would fall under the low-income category.

According to a Bureau of Statistics survey released in 2008, out of a total of 5.8 million Malaysian households, a staggering 3.4 million or 60% of them have household incomes of less than RM3,000.

Household Spending Inching Towards RM3,000

The Government’s decision to use RM3,000 as a demarkation line for low-income families is actually in line with the living expenses under the current economic situation. According to the average monthly household spend-

ing trend released by the Bureau of Statistics in end-August, the average expenditure for a Malaysian family in the 2009/10 period has increased by 12.1% as compared to 2004/05, which in real money would mean an increase from RM1,953 to RM2,190 per month.

With the average monthly ex-penses approaching RM2,200, this means that for a family that earns no more than RM3,000, their expend-able income comes up to less than RM800. Taking into consideration the income gap between urban and rural families, urban household expenditure would probably be nearing or even at RM3,000 per month. That means a fam-ily that does not earn this much would be living a very deprived life.

If the Government only gives the “candies” to the urban low-income groups, that would not be very practi-cal. In fact, even if the bene"ts are all given to households whose monthly income is below RM3,000, the Govern-ment will still be faced with serious challenges in its implementation.

Allow A Higher Budget Deficit To Lighten The People’s Burden

The Government must be pre-pared to face "nancial pressure if it is

going to give out “candies”. It would now seem that the gradual removal of the subsidy scheme is not going to go ahead as originally scheduled. Instead, this subsidy scheme must ultimately be expanded instead. In the "rst half of the year, the federal government’s recurrent subsidies expenditure has already breached the RM10 billion mark to hit RM12 billion, an increase of 42% over the RM8.5 billion of the same period last year. ########################

If this subsidies expenditure growth continues into the second half of the year, our full year expenses will probably exceed RM30 billion, approaching the historical peak of RM35.2 billion in 2008. Adding the “candies” aimed at reducing the peo-ple’s burden to next year’s Budget, I am afraid we will be staring at yet another record high subsidies expenditure.

As subsidies expenditure bal-loons, it looks like the Najib administra-tion will "nd it a challenge to ful"l its promise of lowering budget de"cits. Of course, as long as the people’s living ex-penses are reduced and the economy receives a healthy dose of stimulus for a better and longer-term growth, allowing a bigger budget de"cit may not necessarily be such a bad thing after all.

According to a Bureau of Statis-tics survey released in 2008, out of a total of 5.8 million Malay-sian households, a staggering 3.4 million or 60% of them have household incomes of less than RM3,000.


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