Money leaves the country on an unprecedented scale

Malaysia's Disastrous Capital Flight

SPECIAL REPORTS
Monday, 11 January 2010

Money leaves the country on an unprecedented scale

Often with the exodus of money goes an exodus of talent as highly skilled persons disadvantaged by race or, as in the case of some Malays, disgusted by local corruption or primitive religious authorities, take themselves and their capital to Australia, Canada, India, China, etc.

Asia Sentinel

Churches are not the only thing to have been going up in flames in Malaysia. Take a look at the nation's foreign exchange reserves. They fell by close to 25 percent during 2009 according to investment bank UBS even though the country continued to run a huge surplus on the current account of its balance of payments. Says UBS: "Question: which Asian country had the biggest FX losses in 2009?" The answer is Malaysia and by a very large margin; we estimate that official reserves fell by well more than one quarter on a valuation-adjusted basis". It describes the situation as "bizarre" and contrasts Malaysia with other countries with large current account surpluses – Thailand, China, Taiwan, Singapore, and Hong Kong – which have seen their reserves increase – as should be expected.

In short there has been an exodus of money from Malaysia on a scale which surpasses that which occurred during the Asian crisis. Nor is this just a mirage. The decline is also reflected in a sudden decline in base money supply – even while, thanks to Bank Negara, broader M2 has continued to grow modestly.

Who is responsible for this massive outflow? And where has it gone? The questions cannot be answered from the data and probably will not be by a government that knows its own state-controlled enterprises, headed by Petronas, may probably be responsible for part of it. The more certain reason however is the outflow of local private capital has been taking place on an unprecedented scale in response to political instability, massive official corruption and discrimination against non-Malays.

This capital bloodletting has as yet attracted little attention because Malaysia's foreign debt levels had declined dramatically since the Asian crisis and its reserves reached very healthy levels. So the outflow has not disturbed the financial markets, and Bank Negara has easily been able to keep interest rates low and the currency strong.

But unlike 1998, when the exodus of hot foreign money was a major contributor to the crisis, foreigners cannot be blamed. There is little speculative interest in the ringgit and the Malaysian bourse has rather fallen off the map as far as foreign institutional money is concerned. The BRICs, India, China, Russia, Brazil have taken the merging market lead once dominated by Southeast Asia.

Nor is there much evidence that the Middle East money which was supposed to be flowing into Muslim Malaysia, into holiday apartments or Johor's massive Iskandar development zone, has been much in evidence. Malaysia's one recent success, the development of its sukuk (Islamic bond) market may have caused more capital outflow than inflow. At any rate any overall net inflow of foreign capital whether into bonds, equities, factories or real estate has been dwarfed by the exodus of Malaysian money.

The latter is reflected in the weakness of private sector investment, which now trails public investment. Indeed it explains why the economy remains weak despite very healthy prices for most of Malaysia's commodity exports. The nation has been running a current account surplus of more than 10 percent of gross domestic product for the past decade and hit about 17 percent of GDP in the year just ended. Initially this surplus was needed to pay down debt accumulated during the mid-1990s Mahathir boom years and to rebuild foreign exchange reserves to healthy levels.

But subsequently it became simply a consequence of the weakness of private investment. Domestic investors were discouraged by the corrupt and warped system and foreigners moved to China and elsewhere. GDP growth has become ever reliant on government stimulus – again racially biased in its allocation -- financed by a persistently large budget deficit.

Meanwhile, publicly controlled capital has been rushing overseas. Petronas has been spending its billions in profits around the world as it attempts to become a major global player – at the expense of Malaysian citizenry in general and the oil and gas producing states in particular. Other government-controlled entities such as Malayan Banking Bhd have been bidding top dollar for foreign assets – such as Bank Internasional Indonesia.

Often with the exodus of money goes an exodus of talent as highly skilled persons disadvantaged by race or, as in the case of some Malays, disgusted by local corruption or primitive religious authorities, take themselves and their capital to Australia, Canada, India, China, etc.

The 2009 reserves loss may have had some specific cause which will not be repeated. But it has merely served to underline a dismal trend which has been in evidence for the best part of a decade. Malaysia has so far been saved from itself by the commodity price gains of the past five years – with even the late 2008 collapse now largely reversed. Oil and palm oil may be off their peaks but both are now double their prices of five years ago.

It is better not to imagine what will happen to Malaysia if prices collapse to 2004 levels and stay there. Better now to address the real reasons behind capital outflow and lack of private investment.

http://www.malaysia-today.net/index.php?option=com_content&view=article&id=29559:malaysias-disastrous-capital-flight&catid=21:special-reports&Itemid=100135

Investors need to watch out for possible market corrections of at least 10%

Investors need to watch out for possible market corrections of at least 10%
By Ryan Huang/ Jonathan Peeris, Channel NewsAsia,
Posted: 14 December 2009 2054 hrs


SINGAPORE: Online financial services firm CMC Markets said investors hoping to enter the stock markets before year-end should be wary of a possible correction of about 10 per cent.

CMC said recent rallies have run ahead of fundamentals. And there are also concerns about when central banks will withdraw stimulus measures from the global financial system.

Stock markets may have rallied and shown signs of stabilising in recent months, but CMC Markets believes there should be caution going into 2010.

For one, it said, the recent stock market rallies have been fuelled by the weakness of the US dollar and Japanese yen. And when these currencies stabilise, the stock rally may falter.

Then there is the question of how markets will react to central banks eventually pulling back the massive stimulus for the global economy.

CMC believes there are significant headwinds ahead for markets.

Ashraf Laidi, chief market strategist, CMC Markets, said: "First of all, the fallout from the Dubai story is really not over yet and just starting. The question really depends upon the extent to which these various entities that are part of the Dubai Holdings umbrella may be forced sell some of their UK and US-based property."

CMC said other problem areas include the current credit tensions inside some Eurozone countries like Greece and Spain. There are also signs of weakness in the commercial real estate sector in the UK and the US.

Mr Ashraf Laidi added: "I think currencies like the Malaysian ringgit and the Singapore dollar could be boosted by a concrete improvement in interest rates.

"I think the real estate sector in these regions probably cannot be described to be in a bubble as others can. I think that services and activity in financial services here and the demand is really taking a life of its own."

CMC also sees a bright spark in gold as a long-term investment. It said while gold prices may dip in the next two quarters, the yellow metal may hit a high of US$1,500 an ounce in the second half of next year. - CNA/vm

http://www.channelnewsasia.com/stories/corporatenews/view/1024760/1/.html

Malaysia’s next export: Maids?

Malaysia’s next export: Maids?
By Lee Wei Lian

Malaysians could soon find themselves filling the same roles as these Indonesian migrant labourers. —

KUALA LUMPUR, Nov 24 — The nation’s mismanagement of talent could have serious repercussions not only on its ambitions to become a high income economy on par with that of developed nations but could also lead it to fall further behind even its counterparts in the region.

Head of research at Corston-Smith Asset Management, Lim Tze Cheng, recently did a tour of South East Asian countries and came away sufficiently impressed that he feels Malaysia may soon be found lagging behind its neighbours that it was once ahead of.

He cited a recent visit to the Philippines, a current major supplier of maids, where he visited a company, International Container Terminal Services Inc (ICTSI) and he drew comparisons to local port champions Westport and Port of Tanjung Pelepas.

He said that ICTS now draws 50 per cent of its revenue from eight profitable ports outside the Philippines, and noted that no Malaysian port company can boast of similar achievements.

“I give it a 70 per cent chance that Malaysia will be exporting maids in 20 years. I wouldn’t be surprised if that happens unless we get our act together,” he said.

Lim says that the issues plaguing Malaysia includes its “problematic” education system and distressingly low ability to retain talent.

“Whoever manages to excel in our education system will be courted by Singapore,” he points out.

Lim is not the only one who is worried about Malaysia’s talent issues and there has been warnings from other parties as well including the World Bank and the Malaysian Employers Federation (MEF).

MEF executive director Haji Shamsuddin Bardan says that Malaysia is currently a net exporter of talent with outflows exceeding inflows.

According to Haji Shamsuddin, Malaysia has only about 38,000 expatriates as compared with seventy to eighty thousand in the 1990s even while some 785,000 Malaysians are working abroad, two out of three of which are professionals.

“Our ability to attract expatriates is quite challenged,” he said.

If Malaysia falls further behind our neighbours in the next twenty years, it wil be a case of history repeating itself.

Lim points out that Malaysia in the 1970’s was once economically on par with Korea.

“Electronics will be dominated by Thailand and Philippines, plantations by Indonesia, financial services by Singapore and our oil could be depleted in 20 years,” Lim predicts.


Malaysia’s future? Bangladeshi workers wait at an airport carpark turned immigration depot in KLIA. — Reuters pic

“The (Malaysian) economy seems to be caught in a middle-income trap - unable to remain competitive as a high-volume, low-cost producer, yet unable to move up the value chain and achieve rapid growth by breaking into fast growing markets for knowledge and innovation-based products and services,” the World Bank said recently.

Prime Minister Datuk Seri Najib Razak appears aware of the problem and has been stressing the need for the country to embrace innovation to escape the “middle-income trap” as well as attract overseas talent, Malaysian or otherwise.

He noted recently as an anecdote that half of the medical specialists working at the Mt Elizabeth hospital in Singapore were Malaysians and two weeks ago hosted a dinner for about 100 Malaysians in Singapore and told them that the government would make Malaysia a better place to live and work in, to bring back its citizens who are residing overseas and also attract global talent to the country.

“We will create more opportunities, more excitement and more buzz in Malaysia to attract the Malaysian diaspora and expatriates to the country,” said Najib.

Lim says that revamping the education system could take years and one fast way to lure talent was to open the Malaysia My Second Home programme to talented individuals such as scientists and researchers instead of limiting it to just retirees.

Haji Shamsuddin says that the government needs to put in place the right policies and structures to retain local talent.

“Otherwise, we become a training ground for others,” he said.


http://www.themalaysianinsider.com/index.php/malaysia/44439-malaysias-next-export-maids

High-income goal needs ‘reality check’

High-income goal needs ‘reality check’

Tags: 10MP | Developed high-income nation | GDP growth | High income goals | Kenanga Research | Per capita income | reality check | Wan Suhaimie Wan Mohd Saidie | World Bank

Written by Financial Daily
Thursday, 12 November 2009 11:00

KUALA LUMPUR: The country’s high-income goals needs a reality check and it would be a very challenging task to become a developed, high-income nation by 2020, said Kenanga Research.

“It’s a deceiving notion to believe that in order for Malaysia to achieve a developed nation status, its GDP needs to grow by only an average of 6% till 2020.

“For one, our average GDP growth needs to consistently expand by at least 8% annually to meet the current World Bank’s minimum classification to achieve a high-income nation [per capita income of US$17,000 or RM57,460],” the research house said in a report yesterday.

This was assuming that Malaysia’s population would grow at an average of 2.1% annually and the ringgit appreciated at a steady rate of 5% per annum against the US dollar, the research house said.

It added that this was a simplistic assumption, which does not take into account the rapid changes in global trade and TECHNOLOGY [] as well as the gradual socio-politico shift domestically and abroad.

“Plus, the World Bank’s minimum requirement may be adjusted even higher over time, not to mention the possibility of a devaluing US currency,” it said.

Economists said the success of the private-sector-led growth under the 10th Malaysia Plan (10MP) would be viewed in totality against the backdrop of a challenging global economic backdrop.

They said existing weaknesses in the US economy, the world’s largest, would still be a key factor in dictating Malaysia’s economic fortunes going forward. This is despite the rise of China as a major source of demand for local exports.

“Though China’s economic influence is catching up and growing steadily, it may not be sufficient to offset any demand shortfall in the advanced economies. At this juncture, a more realistic long-term growth trend for Malaysia would be between 4% and 5%,” economist Wan Suhaimie Wan Mohd Saidie wrote in the Kenanga report.

He said unless Malaysia took a more aggressive stance to stem human-capital loss and sluggish private-sector investments, it would be difficult for the country to rise above its minimum growth potential of 6%. “It’s going to be tough,” he said.

The 10MP is deemed crucial because the five-year plan from 2011 till 2015, is the second last blueprint before the 11MP from 2016 to 2020, in facilitating the nation’s goal of achieving developed-nation status by 2020.

Hence, policymakers have decided to table the 10MP earlier in June 2010, six months ahead of the initial year for the national initiative. Previous plans were usually tabled during the first year of their implementation.

A key theme is competitive private-sector-led growth to spur the country’s economic fortunes while the government functions as an effective facilitator.

As such, private-investment growth is expected to increase by 10.5% a year, surpassing public investment expansion of 0.7% during the five-year plan, translating into an annual real gross domestic product (GDP) growth of 5.5% during the 10MP compared with the projected 3.2% growth under the 9MP.

Policymakers have identified the services, manufacturing, and agriculture sectors as main growth drivers under the 10MP.

In a note yesterday, CIMB Investment Bank Bhd head of economics Lee Heng Guie said, while global dynamics were not within the country’s control, policymakers had to ensure that domestic resources were optimally utilised via the better management of government funds.

“The execution risk and leakage have to be brought down to the lowest possible point to ensure the resources are optimally allocated.

“Fiscal resources should be deployed for socio-economic development, education, human-capital formation as well as to promote a sustainable eco-friendly environment,” Lee said.

Meanwhile, Kenanga Research also said it would not be a surprise if the goods and services tax (GST) were to be announced as part of the 10MP.

It said the gradual reduction and realignment of both personal income tax and corporate tax rates was a step closer towards converting Malaysia’s current tax regime to the GST system, which had been postponed indefinitely since it was first announced in the 2005 budget.

Kenanga Research said the broader tax base was expected to be able to increase the government’s coffers and would likely more than compensate the shortfall in corporate and individual tax collections.

“Singapore and Australia are role models of successful GST regimes and they are less prone to declining income during an economic downturn,” it said.


This article appeared in The Edge Financial Daily, Nov 12, 2009.

THIS is the first of a two-part report by Deutsche Bank.on Malaysia

Listing Petronas, or parts of it, could reinvigorate investor interest

Tags: Barisan Nasional | Datuk Seri Najib Razak | Deutsche Bank | FIC | GLCs | Khazanah | KWAP | Listing Petronas | Low free float | LTAT | MoE | MSCI index market cap | NEP | New IPOs | PNB | Umno

Written by Financial Daily
Thursday, 15 October 2009 10:54

THIS is the first of a two-part report by Deutsche Bank. The first part contains two key messages — 1. Why listing Petronas (or parts of it) is critical for the market and 2. A bold start by Datuk Seri Najib Razak, but largely ignored by the market. The second part, on the challenging valuations and stocks picks in Malaysia, will be published tomorrow. (Note: The Deutsche Bank report is dated Oct 4, 2009)

Restructuring the market
The market is fully aware of how Malaysia has been marginalised as an investment destination since the Asian crisis. And as an analyst, it is all too tempting to write yet another report highlighting what is wrong with the market. Instead, in this report, we have taken a hard look at what can be done to revive interest in this market. First, let us address the challenges.
• Low free float relative to the regional markets — with North Asian markets swamped with new issuances, Malaysia runs the risk of market weightings easing further than it already has. More needs to be done to liberalise ownership structures in ‘nationalistic’ assets and/or the government should consider reducing their stakes in GLCs.
• Lack of new IPOs — the government must consider listing Petronas and, if not in its entirety, the LNG and refinery businesses alone could make a significant difference.
• Fund flows into Malaysia are still lagging the region and Asean. This is the most underowned market in Asia


(1) Addressing the market’s low free float
One of the biggest challenges for Malaysia is this — the low level of market free float versus other markets in the region.

Here are a few numbers to ponder: government-related agencies (Khazanah, PNB, Petronas, KWAP, LTAT, MoF, etc.) collectively own about 28.4% of the market (based on MSCI universe). If one includes EPF’s stakes in various companies, this figure goes up to 39.4%, based on our estimates.

Although EPF (Employees Provident Fund) is considered free-float, it does provide some perspective as to how tightly domestic funds have a dominant presence in the market. Therefore, this explains Malaysia’s weighted free float of only 49%, at the lower end of the region and lower than that of Indonesia and Singapore.


What needs to be done?

• Khazanah stake reduction. Khazanah should reduce its stakes in companies where they have ownership dominance. Indeed, we estimate that Khazanah’s exposure in the market represents 8% of MSCI Malaysia component stocks.

This may not be much, but Khazanah’s stakes are meaningful in large-cap companies such as Tenaga, Axiata (RM3.15, hold, target price RM2.79), etc.

The positive news is that Khazanah recently ‘signalled’ its intention to improve market free float when it disposed of 5% of Malaysia Airports Holdings Berhad (MAHB, RM3.47, NR) via a private placement.


PNB loosens its grip on key stocks
Although PNB’s mandate (largest government managed unit trust funds) is very different from that of Khazanah, a reduction in its dominance in large caps, such as Sime Darby (RM8.54, hold, target price RM7.60), would also help to improve free float.

This outcome is quite unlikely given PNB’s need for consistent dividends from its major investments. The market’s free float could improve if Khazanah gradually reduced its stakes in their key holdings.


(2) Increasing IPOs and listing Petronas (or at least the downstream businesses)
The region is awash with new IPOs, and Malaysia desperately needs a few large IPOs to draw attention back to the market. Equity raising is anticipated to be higher (as a percentage of market cap) versus the last two years, but this is mostly with the inclusion of Maxis’ relisting. Much more needs to be done. Indeed, just to keep up with the region, Malaysia has to expand the depth and breadth of the market at a higher rate. Here are our suggestions:


What needs to be done to improve the IPO pipeline?
• To improve the depth and breath of the market, Malaysian companies with foreign subsidiaries should be encouraged to list on Bursa (RM8.17, sell, target price RM3.30). Bursa should encourage companies, such as Sime Darby, YTL Power (RM2.17, hold), etc to list their profitable businesses in Malaysia to raise funds for future investment plans.
• Encourage the government to list Petronas. If the government is not willing to list its prized exploration and production division (E&P), the LNG and refinery divisions are substantial enough on their own to make a significant difference to the market. After culling through various scenarios and possible options, this is the most effective means for addressing a large part of the market’s structural issues.
• Encourage Malaysian entrepreneurs to list their businesses in Malaysia (and not in HK or Singapore). With the recent liberalisation rules on bumiputra shareholdings relating to pre- and post-IPO structures, such an option should now be met with less objections. Promoters are now able to stay in control, with up to 75% (post IPO) vs 45% under the previous structure.


Petronas is large; could potentially raise Malaysia’s weightings from 3.8% to 6.4%. In a country report on Malaysia by IPE.com (dated Jan 30, 2009), it was stated that Petronas could be worth US$207 billion (RM912.6 billion) assuming 15x forward PER. This is almost the same as Malaysia’s entire market cap of US$257 billion.

Based on this and assuming that only 25% of Petronas is listed, Malaysia’s free-float adjusted weightings in MSCI Asia ex-Japan could rise from 3.8% to 6.4% based on our estimates.

This is a material change, and one we believe the government should consider. It would transform the Malaysian market and would allow the government to unlock value in Petronas but still maintain control, in our view. This could also help raise US$52 billion (25% listing) in order to help narrow the government’s fiscal deficit.


Conclusions: Petronas is critical to lifting market profile and size
• The listing of Petronas could almost double the total market cap of Malaysia, to US$464 billion from US$257 billion currently.
• If listed in its entirety, Petronas alone would be 40% of MSCI Malaysia’s weighting (assuming 25% free float).
• Petronas is such a behemoth entity that a mere 10% release of its equity interest will result in an increase of Malaysia’s MSCI index market cap from US$76 billion to US$101 billion with the index weighting rising to 4.99% from 3.84% currently.
• While the listing of Petronas as a whole entity remains uncertain, a plausible scenario would be for Petronas to list its downstream subsidiaries such as gas/LNG and refineries while preserving its upstream E&P. The current outlook for LNG is positive, thanks to an increase in the current and future global demand for a cleaner, greener energy source. Malaysia is currently the third-largest LNG producer in the world.
• A partial listing of Petronas’ gas/LNG and refineries alone would also create a dramatic impact on the market. Just a 25% injection of Petronas gas/LNG and refineries equity stakes combined would push Malaysia’s MSCI index market cap to US$123 billion and index weighting to 5.95% by itself.
• Combining the Petronas possibility and Khazanah’s 25% uniform reduction of holdings, Malaysia should have an MSCI index market cap of US$130 billion and weighting of 6.28% within Asia ex-Japan. This combination can provide the catalyst that would allow Malaysia to command a more meaningful weighting and one that is on par with Singapore.
• Petronas will be a critical component in determining how sizeable Malaysia can become in the MSCI Asia Pac, ex Japan Index, we believe. Divesting the holdings from Khazanah and possibly other GLCs is certainly a good start. However, if the intention is for Malaysia to be able to tip the scale, and PNB is certainly unlikely to scale back its holdings, any strategy or attempt has to include Petronas as part of the equation. This is absolutely essential.


(3) Fund flows into Malaysiastill lagging
Fund flows into Asia ex-Japan rebounded in late August/early September, largely led by India, Korea, and Singapore. Again, Malaysia lagged. This would explain why foreign ownership in the market has barely changed since the start of the year. Malaysia’s weightings and fund flows are in sharp contrast to Indonesia.


Najib’s first six months
Surprising his critics: delivering punchy initiatives so far...
Najib’s first six months in power as prime minister have been closely watched by all. So far, so good — he had a positive start despite inheriting a weak economy, a fractured coalition party, a disenchanted voter base, and an unloved market facing significant structural challenges.

Three significant market-related initiatives were introduced by Najib. Critics may argue that these capital markets initiatives were late in a regional context. We do not disagree with this view, but in the context of Malaysia’s national economic policy (NEP), these changes should be viewed as bold. No other prime minister has attempted to address these issues.

• In June, the Foreign Investment Committee (FIC), which oversees mergers, acquisitions and equity stakes (viewed largely as an administrative roadblock by many), was abolished. Pre-IPO bumiputra ownership was also reduced from 30% to 12.5%, with no requirement post-IPO or for future fund raising.
This, in our opinion, was positive as it provided clarity on ownership rules and should allow promoters of companies to maintain a comfortable majority (75% vs. 45% previously) post-IPO.
The re-listing of Maxis may be an important step in forcing investors to reconsider the Malaysian market again. The positive ownership liberalisation measures will take time to translate into greater depth and breadth in the market. Unfortunately, Malaysia faces stiff competition in the region.
• Foreigners are now able to own 100% of a commercial property asset if acquired from a non-bumiputra controlled entity. Also, ownership in selected sub-sectors of the financial industry was liberalised too; eg, foreigners are now able to own 70%-100% of a local fund management entity, 70% of local stockbrokers vs 40% previously.
• CONSTRUCTION [] jobs are finally hitting the economy. The lack of policy implementation was one of the weaknesses of the previous administration. The good news is that contractors’ feedback so far tells us that government infrastructure jobs have been awarded and the knock- on effect is beginning to have an impact on the real economy.


... but much still needs to be done; politics still a dominant issue
Politics matters more than ever for this market, especially when investors’ confidence in Indonesia’s political backdrop has improved significantly over the last 12 months. There has never been a time when all political parties are at odds with their own identity.
The ruling coalition party, Barisan Nasional (BN), remains fractured, with Umno trying to find the right balance between embracing structural change to stay relevant to its increasingly young voters and on the other hand, being seen to be protecting Malay rights, where applicable.

Rebuilding confidence and renewed aspirations in the ruling coalition party
Najib has made some strides in trying to rebuild confidence and political momentum within the party.
The recent proposal to abolish the nomination quota structure for Umno elections was a significant milestone for the party and it sends a clear message that the party has little choice but to reform. But BN has other challenges too, especially with other key component parties like MCA and MIC squabbling internally.


Challenges within the opposition party, too
The opposition coalition too has its own challenges. PKR component parties have aired their internal disagreements publicly on issues perceived to be minor. Datuk Seri Anwar Ibrahim, the opposition leader, appears to be distracted by his court proceedings.

Eighteen months since the March 2008 general election, Malaysians are still unsure what PKR truly stands for given the absence of a manifesto and a much-needed shadow cabinet. Critics argue the opposition party may well be squandering a rare opportunity to gain greater support.


All eyes on the outcome of the Bagan Pinang by-electionon Oct 10
The Bagan Pinang by-election, the ninth since the general election, is an important bellweather to determine how BN has fared since Najib became prime minister. The polling date was for Oct 10 and BN was tipped to regain the seat as it is the clear incumbent supported by sizeable postal votes. If BN loses, this would be negative for the market. BN won the Bagan Pinang by-election by an increased majority of 5,435 votes.


A positive start; much more required
Najib has surprised the market so far by delivering much-needed market reforms in his first six months. The market will now be watching to see if these initiatives can be implemented effectively. Much still needs to be done to lift investor confidence in Malaysia.

This will certainly take time to take effect, especially given the competitive environment for capital across the region. In fact, we believe Malaysia has to work doubly hard to win back investors’ “mind share” in order to keep up with the dynamism of structural reforms in the region.


This article appeared in The Edge Financial Daily, October 15, 2009.

Malaysia a stock-pickers’ market

Malaysia a stock-pickers’ market

Tags: Deutsche Bank | Stock-pickers | Valuations

Written by Financial Daily
Friday, 16 October 2009 11:23

THIS is the continuation of a report by Deutsche Bank which appeared yesterday. This last part of the report looks at the challenging valuations and the stock picks in Malaysia.

Overshadowed by Asean markets
Still expensive — does not deserve a premium rating
Structural and political challenges aside, the market’s near-term obstacle is its stretched valuation. The market is currently trading at a 3%-11% premium to the region at 17.7x and 15.2x PER 2009E and 2010E, respectively.

This appears to be at the upper end of the market’s post-Asian crisis valuation range of 12.5-18x forward PER. On a P/B basis, the market is trading at 2-2.1x for the same period, again at a 5%-11% premium against the region.

Within an Asean context, Malaysia trades at the highest PER valuation and offers the second lowest, after Indonesia, net dividend yield at 3% for 2010.

Not surprising then that Indonesia and Thailand have both enjoyed net fund inflows given a combination of attractive valuations (Thailand at 11.5x PER 2010 and Indonesia at 13.8x PER) and strong revision ratios.

In fact, despite mixed political news flow in Thailand, the market continues to maintain a high level of foreign ownership at c. 33% (vs 21% in Malaysia). The positive news is that earnings risk has abated since 1Q.

However, in a regional context, Malaysia is in sharp contrast to say a market like Korea where earnings revision has been strong. Malaysia lags in EPS and target price revision momentum. This clearly explains why the market is still placed in the region’s low beta “bucket”.


Significant improvement in 2Q; earnings expectations raised
Of the 21 Deutsche Bank-covered stocks which reported, 61% were in line with expectations, 29% above and 10% below. The results were far better than the first quarter.


Financial sector came through unscathed — positive; PLANTATION [] sector rebounds
The star of the reporting season was the banking sector. Most of the banks reported stronger-than-expected earnings driven largely by higher non-interest income and lower loan loss provisions. Again, this tells us that the Malaysian credit cycle is turning out to be less severe than anticipated.

The plantation sector too had a reasonable quarter after what was a very weak 1Q production season given the effects of severe floods in East Malaysia. 2Q was supported by stronger CPO prices and production lifting, though marginal.

The gaming companies did not have a weak quarter as many had originally expected. Domestic consumption trends held up. There was slight weakness in results from companies like DiGi.Com (RM21.66, hold, target price RM19.80) which had the slowest quarter in more than six years) and KNM (75 sen, buy, target price RM1.10) which faced margin pressure.

The trajectory for earnings recovery is now far more convincing after the 2Q reporting season. We believe the lumpy writedowns as a result of diminution in value of major investments are now largely behind the market. Leading indicators in the economy have also been encouraging with a bottoming in industrial production, electricity sales, and loan approval and applications.


Post-2Q results: EPS growth at -8.6% and 17% for 2009 and 2010
Prior to the reporting season, we were forecasting EPS growth of -7.1% for 2009 and 9.9% for 2010, respectively. Today, these forecasts have been revised to -8.6% and 17.4%, respectively. The stronger growth outlook for 2010 was largely due to EPS revisions for the financial, plantation, CONSTRUCTION [] and gaming sectors.


Domestic liquidity; top-down index target suggests 13% upside
Domestic funds like the Employees Provident Fund (EPF) and PNB have been actively buying in the market, especially where foreign interest has waned. This explains why foreign ownership in the market has stayed flat at around 20%-21% despite the recovery in the market.

This trend is likely to persist in the near term, thereby keeping market valuations lofty. Our 12-month bottom-up index target for Deutsche Bank’s universe of stocks suggests an MSCI target of 453 (0.4% upside) and an FBM KLCI target of 1,213 (+0.4%). This compares against the consensus bottom-up target of 1,234, which suggests upside of 2.2%. We believe the key difference between the Street and our estimates is our slightly more conservative view on GDP growth estimates, currently at -3% and 4% for 2009 and 2010, respectively.

Putting this in the context of Asia, our regional strategist, Niklas Olausson, expects MSCI Asia ex-Japan to reach 522, suggesting upside of 18.2%.

With most markets expected to offer upside of more than 15%, Malaysia is naturally an underweight, along with Hong Kong, India, and the Philippines. The implied top-down valuation of 17.2x 2010 PER is at the upper end of Malaysia’s historical trading range. By using our bottom-up approach, with an implied valuation of 15.3x PER, this puts Malaysia in the “fair” territory, the mid-range of its post-Asian crisis PER band.


Local news flow can drive interest in the market despite demanding valuations
There have been times when the market outperforms the region momentarily on domestic news flow, ignoring valuations. In recent years, market-friendly initiatives, such as the first stage of GLC restructuring, have ushered renewed interest in the market.

Similarly, the property market liberalisation in 2007 prompted a re-rating of the smaller- to mid-cap sectors. We think a similar re-rating is likely to occur if and only when the market is convinced of three key issues.

First, that Barisan Nasional is gaining traction with the voter base, hence providing the market with renewed confidence that the corporate landscape or regulatory environment does not run the risk of significant changes under a new party. Secondly, sustainable signs that structural changes made are bearing fruit. Thirdly, potential sizeable new listings to force attention back into Malaysia, as discussed earlier.


Positioning into the final quarter of 2009/early 2010
We believe most would agree that Malaysia has been a difficult market for most of 2009. Often the market has been referred to as “Asia’s rounding error”, “Asia’s lost child” and “Asia’s most unloved market”, etc. And indeed it has been the worst-performing market in Asia ex-Japan year to date. (My comment:  Probably the best piece of news in this article.)

But we also argue that it does not mean the entire market is a write-off. Far from it, we believe. In fact, Malaysia has always been a stock-pickers’ market. We believe it is important to select stocks for the final quarter of 2009 or early 2010 with the following pointers in mind:

• To focus on companies with growth prospects outside Malaysia, and especially those with an increasingly strong Asean/regional footprint; for example CIMB, Genting and IJM Corp.

• To focus on companies that have structurally transformed themselves by utilising improved systems and infrastructure to take advantage of a more robust economic environment next year; for example, AMMB.

• Returns being the priority of top management and having the ability to execute on the plans. Many Malaysian companies place significant emphasis on enhancing shareholders’ return but very few actually execute on them with a structured plan. Companies that have articulated their returns policies, and where we have a high degree of comfort of execution are Public Bank (though a hold), KL Kepong (has consistently paid 50% dividend payout ratio in the last four years) and CIMB.

• To focus on companies that continue to generate strong cash flows and are still dominant in their industry, ideally not heavily reliant on the domestic market for growth; for example KLK.

• Avoid companies that are heavily reliant on government contracts — political news flow is likely to stay volatile in the near term.

• Quality stocks tend to hold their valuation premiums, defying fundamentals at times — largely due to scarcity reasons and often, liquidity. These include companies such as Public Bank, IJM Corp and IOI Corp (RM5.21, hold, target price RM5.05).


Risks to our underweight call on the market:
The biggest risks to our Underweight call on the market fall into three areas.

The first risk is better-than-expected macro indicators as a result of the second stimulus package and improvements in domestic consumption trends. The second risk is that market liberalisation/structural change measures surprise the market. The last risk is a sudden collapse in neighbouring markets, such as Indonesia, prompting a sudden surge of liquidity into low-beta markets such as Malaysia.


This article appeared in The Edge Financial Daily, October 16, 2009.