Sunday 27 September 2009
New capital requirement of a growing company
A hypothetical example to understand the above more clearly. The following reasonable assumptions can be made based on this example:
Sales to Assets Ratio = 2x
Profit after Tax to Sales = 6%
Debt to Equity Ratio = 1.2
Dividend Payout Ratio = 0.5
Sales in Year 0 = $10 million
Growth Rate = 10% pa
Simplified Balance Sheet ($M)
At End of Year 0
Assets 5.00
Financed by:
Shareholders' Equity 3.33
Borrowing 1.67
Simplified P&L Statement ($M)
For Year 1
Sales 11.00
Profit after Tax 0.66
Dividend 0.33
Retained Profit 0.33
Simplified Balance Sheet ($M)
At End of Year 1
# Assets 5.50
Financed by:
@ Shareholders' Equity 3.66
** Borrowing 1.84
Notes on Balance Sheet at Year 1
# Increase at the same rate as sales
@ = 3.33 (at Year 0) + 0.33 (Retained Profit of Year 1)
** By difference = 5.50 - 3.66
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Under the normal circumstances, a company should be able to finance its additional purchase of assets from either
(1) The company is improperly managed such that it is either not very profitable (or even losing a lot of money) such that the incoming cash is not adequate to support the need to purchase more assets. Or owing to poor management of its assets, it now requires a lot more assets to support its operations.
(2) The company is moving into another line of business which is large relative to its current size and it requires a great deal of additional capital to start up the new venture.
(3) The company is in a very fast growing business. In fact, it is so fast growing that retained earnings and new borrowing alone are insufficient to sustain the growth.
In order to be a prudent investor, we must analyse the situation of the company which has announced a rights issue carefully to see which category it falls into in the first place.
Sales to Assets Ratio = 2x
Profit after Tax to Sales = 6%
Debt to Equity Ratio = 1.2
Dividend Payout Ratio = 0.5
Sales in Year 0 = $10 million
Growth Rate = 10% pa
Simplified Balance Sheet ($M)
At End of Year 0
Assets 5.00
Financed by:
Shareholders' Equity 3.33
Borrowing 1.67
Simplified P&L Statement ($M)
For Year 1
Sales 11.00
Profit after Tax 0.66
Dividend 0.33
Retained Profit 0.33
Simplified Balance Sheet ($M)
At End of Year 1
# Assets 5.50
Financed by:
@ Shareholders' Equity 3.66
** Borrowing 1.84
Notes on Balance Sheet at Year 1
# Increase at the same rate as sales
@ = 3.33 (at Year 0) + 0.33 (Retained Profit of Year 1)
** By difference = 5.50 - 3.66
- From the above example, by maintaining the D/E ratio at around 1:2 (3.66 = 2 x 1.83), the company has no difficulty in financing a 10 percent increase in sales in one year.
- By having a zero dividend payout, it can in fact grow at 18 percent per year without increasing its D/E ratio.
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Under the normal circumstances, a company should be able to finance its additional purchase of assets from either
- retained earnings or
- new borrowing or
- a combination of the two.
(1) The company is improperly managed such that it is either not very profitable (or even losing a lot of money) such that the incoming cash is not adequate to support the need to purchase more assets. Or owing to poor management of its assets, it now requires a lot more assets to support its operations.
(2) The company is moving into another line of business which is large relative to its current size and it requires a great deal of additional capital to start up the new venture.
In order to be a prudent investor, we must analyse the situation of the company which has announced a rights issue carefully to see which category it falls into in the first place.
Why Companies Have to Make Rights Issue?
To put it bluntly, a company only needs to make a rights issue when it is short of money.
A business, any business, requires investment in various forms of assets in order to carry out its operations. A company is usually required to continually buy new assets in order to carry on its business either because its old assets have to be replaced or its expanding business requires more assets. To buy new assets, it will need new capital.
A company can obtain necessary money to purchase its assets from any one of three sources or a combination of all three.
Under the normal circumstances, a company should be able to finance its additional purchase of assets from either retained earnings or new borrowing or a combination of the two. There are many examples of very fast growing businesses in Malaysia that have prospered without recourse to issuing rights (for examples: Nestle and BAT )
But, companies may have to raise new capital by making rights issues under three types of abnormal circumstances. These three cases are:
(1) The company is improperly managed such that it is either not very profitable (or even losing a lot of money) such that the incoming cash is not adequate to support the need to purchase more assets. Or owing to poor management of its assets, it now requires a lot more assets to support its operations.
(2) The company is moving into another line of business which is large relative to its current size and it requires a great deal of additional capital to start up the new venture.
(3) The company is in a very fast growing business. In fact, it is so fast growing that retained earnings and new borrowing alone are insufficient to sustain the growth.
In order to be a prudent investor, we must analyse the situation of the company which has announced a rights issue carefully to see which category it falls into in the first place.
Depending on which category of rights it is issuing, we can then carry out a further analysis to decide whether the rights issue is a good or a bad one.
A business, any business, requires investment in various forms of assets in order to carry out its operations. A company is usually required to continually buy new assets in order to carry on its business either because its old assets have to be replaced or its expanding business requires more assets. To buy new assets, it will need new capital.
A company can obtain necessary money to purchase its assets from any one of three sources or a combination of all three.
- It can borrow the money,
- retain part or all of its profit or
- it can sell new shares.
Under the normal circumstances, a company should be able to finance its additional purchase of assets from either retained earnings or new borrowing or a combination of the two. There are many examples of very fast growing businesses in Malaysia that have prospered without recourse to issuing rights (for examples: Nestle and BAT )
But, companies may have to raise new capital by making rights issues under three types of abnormal circumstances. These three cases are:
(1) The company is improperly managed such that it is either not very profitable (or even losing a lot of money) such that the incoming cash is not adequate to support the need to purchase more assets. Or owing to poor management of its assets, it now requires a lot more assets to support its operations.
(2) The company is moving into another line of business which is large relative to its current size and it requires a great deal of additional capital to start up the new venture.
(3) The company is in a very fast growing business. In fact, it is so fast growing that retained earnings and new borrowing alone are insufficient to sustain the growth.
In order to be a prudent investor, we must analyse the situation of the company which has announced a rights issue carefully to see which category it falls into in the first place.
Depending on which category of rights it is issuing, we can then carry out a further analysis to decide whether the rights issue is a good or a bad one.
- Through examining each type of rights issue, an intelligent investor can tell the wolves from the sheep.
- Pricing the rights also requires proper evaluation.
Not all right issues are the same; ought to treat them with a bit more suspicion
Many companies are making rights issues in this recent bull market..
Whenever a company announces that it is making a rights issue, the market in Malaysia/Singapore, on the whole, does not react adversely especially when the right issues are accompanied by a bonus issue.
In Britain and more in particular, the US, the market seldom reacts so kindly to rights issues.
Though not all rights are automatically bad, local investors could do with a good dose of cynicism and ought to treat rights issues with a bit more suspicion.
If we blindly follow the market without knowledge what we are doing, we can so easily be taken advantage of.
In order to understand why the Western investors are so suspicious of rights, we must go back to the first principle and try to understand:
Whenever a company announces that it is making a rights issue, the market in Malaysia/Singapore, on the whole, does not react adversely especially when the right issues are accompanied by a bonus issue.
- The price of the company's shares usually moves up and seldom does one come across cases where rights are badly undersubscribed.
In Britain and more in particular, the US, the market seldom reacts so kindly to rights issues.
- Most rights issues are treated with great suspicion.
- The market usually takes a "wait and see" attitude and will only react favourably if it is convinced that the new capital obtained from the rights issue is put to good use and that the profit of the company can increase as a result of the rights issue.
- In fact, the market in the US is so suspicious of rights issues that it is most unusual for a large US corporation to make a right issue.
Though not all rights are automatically bad, local investors could do with a good dose of cynicism and ought to treat rights issues with a bit more suspicion.
- Local investors ought to be aware of the fact that not all rights issues are the same.
- Each rights issue should be treated on its own merit and if it is truly good, then there is a case for bidding up the price of the shares and taking up the rights issues.
If we blindly follow the market without knowledge what we are doing, we can so easily be taken advantage of.
- Opportunists, insiders and rumour-mongers are abound in the local market.
- Here, as with everywhere else, Caveat Emptor (Latin for "let the buyer beware") is the key.
In order to understand why the Western investors are so suspicious of rights, we must go back to the first principle and try to understand:
- what is so bad about a right issue and
- the reason a company has for making a rights issue.
The concept of valuing a share according to its dividend
Hypothetical Company A:
EPS 30 cents (1987) 36 cents (1988)
DPS 15 cents (1987) 18 cents (1988)
Annual increase in dividend 20%
Assuming the intrinsic value of the share = 25 times its dividend (i.e. the dividend yield of a share should be 4%), what should be the correct price of a share of Company A in 1987 and 1988?
Correct market price:
1987: 25 x 15 cents = $ 3.75
1988: 25 X 18 cents = $ 4.50
The intrinsic value of Company's A shares increased from $3.75 to $4.50 in a year, thus giving a capital gain of 75 cents or 20% on the 1987 price.
To recapitulate:
Question: "But why should the price go up just because the dividend of a share has increased?"
Summary:
The concept of valuing a share according to its dividend is a very alien one to most of the investors.
Most would find it difficult to accept and may even think that it is too simple a concept to be true.
However, the dividend yield approach works well as an investment tool over the long term.
It is beyond doubt that over the long run, the price of a share is dependent on the amount of dividend it pays out. The higher the growth rate of the dividend, the higher the growth rate of the share.
EPS 30 cents (1987) 36 cents (1988)
DPS 15 cents (1987) 18 cents (1988)
Annual increase in dividend 20%
Assuming the intrinsic value of the share = 25 times its dividend (i.e. the dividend yield of a share should be 4%), what should be the correct price of a share of Company A in 1987 and 1988?
Correct market price:
1987: 25 x 15 cents = $ 3.75
1988: 25 X 18 cents = $ 4.50
The intrinsic value of Company's A shares increased from $3.75 to $4.50 in a year, thus giving a capital gain of 75 cents or 20% on the 1987 price.
- This is exactly the same as the increase in dividend.
- So long as the dividend of Company A goes on rising, its intrinsic value would continue to rise, thus providing its shareholders with continuous opportunity for capital gain.
To recapitulate:
- This does not mean that the market price would indeed be at these levels.
- It merely means that the price would be oscillating around these prices in the respective years.
Question: "But why should the price go up just because the dividend of a share has increased?"
- The reason is quite simple. If the price does not go up while the dividend keeps on increasing, the dividend yield of the share will become higher and higher.
- Since the shares of Company A are traded in the same market as many other shares, its shares cannot sell at a dividend yield that is much higher than its competitors. If its dividend yield is very attractive (i.e. very high) it will attract more buyers and its price would go up.
- Similarly, there is no reason at all why the price of a share should rise unless it has a prospect of paying more dividend in the future. Otherwise, its dividend yield would get out of place compared with the other shares.
- This is why all too often, the speculative shares which are bidded up to stratospheric levels will eventually decline to their previous level.
Summary:
The concept of valuing a share according to its dividend is a very alien one to most of the investors.
Most would find it difficult to accept and may even think that it is too simple a concept to be true.
However, the dividend yield approach works well as an investment tool over the long term.
It is beyond doubt that over the long run, the price of a share is dependent on the amount of dividend it pays out. The higher the growth rate of the dividend, the higher the growth rate of the share.
Saturday 26 September 2009
Importance of dividend yield in the evaluation of the worth of a share.
Shares should sell at prices which will provide their owners with a reasonable return.
As an investment, shares have 3 characteristics:
1. They are relatively illiquid.
2. The return is uncertain.
3. A large part of the return is in the form of capital gains.
Even the most inexperienced investor is aware of the last characteristic.
Question: We should buy shares in accordance with their expected dividend yield (DY). "If we buy a share for its dividend, why should its price go up so that we can get capital gains?"
Question: "Why should the price of a share, any share for that matter, go up in the first place?"
Here are some reasons for share not to go up:
Share price should not go up as a result of reorganization.
Share price should not go up as a result of share split or bonus.
Share price should not go up as a result of property injection.
Share price should not go up as a result of rights issues.
There is only one good reason why a share's price should go up in the first place:
If one accepts the dividend yield approach to share valuation, the only reason why the price of a share should increase is that the share
As an investment, shares have 3 characteristics:
1. They are relatively illiquid.
2. The return is uncertain.
3. A large part of the return is in the form of capital gains.
Even the most inexperienced investor is aware of the last characteristic.
Question: We should buy shares in accordance with their expected dividend yield (DY). "If we buy a share for its dividend, why should its price go up so that we can get capital gains?"
Question: "Why should the price of a share, any share for that matter, go up in the first place?"
Here are some reasons for share not to go up:
Share price should not go up as a result of reorganization.
Share price should not go up as a result of share split or bonus.
Share price should not go up as a result of property injection.
Share price should not go up as a result of rights issues.
There is only one good reason why a share's price should go up in the first place:
If one accepts the dividend yield approach to share valuation, the only reason why the price of a share should increase is that the share
- now pays a higher dividend than before or
- has the prospect of paying a higher dividend.
- That is, the intrinsic value tends to be a constant multiple (i.e. so many times) of the dividend.
- "How many times?" - this is a very complex subject which will be looked at later.
Dividend yield prevents investors from being side-tracked by irrelevant events.
The Malaysian/Singaporean stock market can be characterised by the occurrence of events which are of no real benefit to the existing shareholders and yet which excite them greatly.
This is referring to the large numbers of bonus announcements, rights issues, property injections, take-overs and mergers which have made their appearnace in many years.
Most of these events are of little, if any, real economic benefit to the existing shareholders of the companies involved. Despite this, the price of shares of a company involved in an event of this nature tends to rise sharply. These events are, in the main, irrelevant and some of them may even be damaging.
According to the dividend yield approach to share valuation, a share can have increased value only if there is a likelihood that its dividend will rise faster than originally expected.
In what way can events like bonuses, rights, mergers and reorganizations in themselves improve the future dividend picture of a company. If these events cannot lead to such an increase, the share surely does not deserve a higher valuation.
Here is an often quoted advice to first time share buyers:
A cow for its milk,
Bees for their honey,
And shares, by golly,
For their dividend.
This is referring to the large numbers of bonus announcements, rights issues, property injections, take-overs and mergers which have made their appearnace in many years.
Most of these events are of little, if any, real economic benefit to the existing shareholders of the companies involved. Despite this, the price of shares of a company involved in an event of this nature tends to rise sharply. These events are, in the main, irrelevant and some of them may even be damaging.
According to the dividend yield approach to share valuation, a share can have increased value only if there is a likelihood that its dividend will rise faster than originally expected.
In what way can events like bonuses, rights, mergers and reorganizations in themselves improve the future dividend picture of a company. If these events cannot lead to such an increase, the share surely does not deserve a higher valuation.
Here is an often quoted advice to first time share buyers:
A cow for its milk,
Bees for their honey,
And shares, by golly,
For their dividend.
Dividend provides a "floor" for shares during bear markets
Stock markets of the world, especially the Malaysian/Singaporean market, are not readily predictable. They can collapse so easily into a "bear pit" with little warning.
If we wish to protect our hard earned capital, we must be defensive in our investment approach.
One of the best defence is to buy shares with reasonable dividend yield (i.e. a yield of between one-third to half of the expected long run deposit interest rate).
If we buy a share becasue it pays a reasonable dividend, our loss is likely to be small even during periods of sharp market decline.
For example, we can buy a share which pays 30 cents dividend at $5.00 a share and this gives us a dividend yield of 6%. If the marekt goes into a sharp decline, the amount this share can fall to is limited by the fact that it pays a 30 cents dividend. If the price is to fall as low as $3.00, it will be giving a dividend yield of 10% which is an excellent return compared to what one can get from fixed deposit and with the additional opportunity to capital gain thrown in.
Most people can see that at that price, the share is probably a good bargain and it is therefore unlikely to fall lower. From experience, a dividend yield of 10% seems to be the floor below which most stocks will not drop.
In sharp contrast, shares which pay low or no dividend at all do not seem to have any bottom and price decline can hit 90% or more.
If we wish to protect our hard earned capital, we must be defensive in our investment approach.
One of the best defence is to buy shares with reasonable dividend yield (i.e. a yield of between one-third to half of the expected long run deposit interest rate).
If we buy a share becasue it pays a reasonable dividend, our loss is likely to be small even during periods of sharp market decline.
For example, we can buy a share which pays 30 cents dividend at $5.00 a share and this gives us a dividend yield of 6%. If the marekt goes into a sharp decline, the amount this share can fall to is limited by the fact that it pays a 30 cents dividend. If the price is to fall as low as $3.00, it will be giving a dividend yield of 10% which is an excellent return compared to what one can get from fixed deposit and with the additional opportunity to capital gain thrown in.
Most people can see that at that price, the share is probably a good bargain and it is therefore unlikely to fall lower. From experience, a dividend yield of 10% seems to be the floor below which most stocks will not drop.
In sharp contrast, shares which pay low or no dividend at all do not seem to have any bottom and price decline can hit 90% or more.
Dividend provides a link with reality
When the market is truly "hot", few of us can remain rational as we tend to be swept along the general atmosphere of optimism.
But the dividend yield of a share keeps us in close touch with the real world.
Anyone who closely watched the dividend yield of a share would have realised that the price level was totally unreal. A good dividend yield stock presently giving a dividend yield of 0.4% due to rising share price, it would be better to sell the share and invest the proceed in other assets or leave the money in fixed deposit.
In the established stock markets of the world, the dividend yield usually has a steady relationship with fixed deposit and its interest rate.
It is normal for dividend yield to fluctuate at around one-third to half of the long-term fixed deposit interest rate. This means that when fixed deposit interest is around 6% per annum, stock should sell at a price to provide a yield of 2% or 3%.
Take a look at the yield provided by local shares during bull markets, the dividend yield is usually so low as to be meaningless.
Furthermore, one should not forget that some fixed deposits and fixed deposits in National Savings Bank are tax free in Malaysia while dividend has a withholding tax applied at source.
But the dividend yield of a share keeps us in close touch with the real world.
Anyone who closely watched the dividend yield of a share would have realised that the price level was totally unreal. A good dividend yield stock presently giving a dividend yield of 0.4% due to rising share price, it would be better to sell the share and invest the proceed in other assets or leave the money in fixed deposit.
In the established stock markets of the world, the dividend yield usually has a steady relationship with fixed deposit and its interest rate.
It is normal for dividend yield to fluctuate at around one-third to half of the long-term fixed deposit interest rate. This means that when fixed deposit interest is around 6% per annum, stock should sell at a price to provide a yield of 2% or 3%.
Take a look at the yield provided by local shares during bull markets, the dividend yield is usually so low as to be meaningless.
Furthermore, one should not forget that some fixed deposits and fixed deposits in National Savings Bank are tax free in Malaysia while dividend has a withholding tax applied at source.
Dividend is a sure thing
All too often, investors and speculators pay too much attention to profit forecast.
It is amazing that so many of the Malaysian companies have the courage to make profit forecast for many years into the future. What is even more amazing is that so many of the investors seem to believe these forecasts absolutely.
It is difficult to make a profit forecast a year ahead, let alone five years or even ten years. Such profit forecasts can only be regarded as extremely shaky.
Dividend is real and it is something which the shareholders can put to some use.
Most companies keep dividend at a level which they can afford to pay out irrespective of whether it is a good or a bad year and is hence a great deal more certain than profit forecast.
It is amazing that so many of the Malaysian companies have the courage to make profit forecast for many years into the future. What is even more amazing is that so many of the investors seem to believe these forecasts absolutely.
It is difficult to make a profit forecast a year ahead, let alone five years or even ten years. Such profit forecasts can only be regarded as extremely shaky.
Dividend is real and it is something which the shareholders can put to some use.
Most companies keep dividend at a level which they can afford to pay out irrespective of whether it is a good or a bad year and is hence a great deal more certain than profit forecast.
Why is dividend important?
The most important reason is dividend is the only benefit from which a shareholder can obtain from a company under the normal circumstances.
Earnings, per se, is hardly of any use to him directly and the assets are only of value if the company is liquidated which is unlikely in a great majority of cases.
Apart from the above reason, dividend is important for the following reasons:
(1) Dividend is a sure thing.
(2) Dividend provides a link with reality.
(3) Dividend provides a "floor" for shares during bear markets.
(4) Dividend yield prevents investors from being side-tracked by irrelevant events.
A cow for its milk,
Bees for their honey,
And shares, by golly,
For their dividends.
Earnings, per se, is hardly of any use to him directly and the assets are only of value if the company is liquidated which is unlikely in a great majority of cases.
Apart from the above reason, dividend is important for the following reasons:
(1) Dividend is a sure thing.
(2) Dividend provides a link with reality.
(3) Dividend provides a "floor" for shares during bear markets.
(4) Dividend yield prevents investors from being side-tracked by irrelevant events.
A cow for its milk,
Bees for their honey,
And shares, by golly,
For their dividends.
Friday 25 September 2009
Boustead
Share Price Performance
High Low
Prices 1 Month
3.590 (25-Aug-09) 3.470 (04-Sep-09)
Prices 3 Months
4.100 (16-Jul-09) 3.470 (04-Sep-09)
Prices 12 Months
4.660 (30-Sep-08) 2.180 (28-Oct-08)
Volume 12 Months
39,296 (30-Oct-08) 51 (24-Sep-08)
Last Updated: Friday ,September 25 2009 3:30 pm
Bursa Malaysia Summary
Composite: 1215.66
Quek and Chua invest US$150mil in HK IPO
Friday September 25, 2009
Quek and Chua invest US$150mil in HK IPO
By YEOW POOI LING
PETALING JAYA: Tycoons Tan Sri Quek Leng Chan and Tan Sri Chua Ma Yu have agreed to take part in the initial public offering (IPO) of Wynn Macau Ltd on the Hong Kong Stock Exchange by investing US$80mil and US$70mil respectively.
Quek’s investment is via Guoco Management Co Ltd and GuoLine Group Management Co Ltd, which are indirect subsidiaries of Hong Leong Co (M) Bhd, while Chua’s vehicle is CMY Capital Markets Sdn Bhd.
It is learnt that these Malaysian parties are going in independently. Chua is an investor and the attraction in Wynn is purely seen as a China play.
Chua was unavailable for comment.
In the listing document, Wynn Macau said CMY’s stake could amount to almost 5% of the offered shares while Guoco and GuoLine could collectively hold 5.3% based on a mid-point offer price of HK$9.30 and assuming the over-allotment option was not exercised.
Wynn Macau, owned by US-based Wynn Resorts, is among the biggest gaming operators in Macau and caters mainly to high-end clientele. The IPO involves floating 1.25 billion shares at HK$8.52-HK$10.08 each.
Other investors include Hong Kong tycoons Walter Kwok and Thomas Lau, as well as fund management company Keywise Capital Management (HK) Ltd.
Quek, the sixth richest man in Malaysia based on Forbes Asia Malaysia Rich List 2009, is not new to the gaming business. His Hong Kong-listed entity, Guoco Group Ltd’s subsidiary, has gaming operations in Britain.
Chua, on the other hand, owned a stake in Star Cruises Ltd briefly in 2007.
Macau is the world’s largest gaming market based on gross gaming revenue and the only place in China with legalised casino gaming.
Last year, Macau attracted 22.9 million visitors, mostly from Hong Kong and mainland China. The gaming market generated HK$105.6bil in gross gaming revenue, double the amount of Las Vegas Strip. For the first six months, Macau generated HK$49.9bil in gross gaming revenue. In 2008, Wynn Macau took a 16% of Macau’s table revenues and a daily gross win per gaming table of about HK$119,000. Its listing, targeted for Oct 9, will make Wynn Macau the first American company to list on the Hong Kong Stock Exchange.
A local research house said the IPO would unlock the value and boost the valuations of Wynn Resorts.
“Currently, the simple average price-to-earnings (PE) for 2010 of gaming companies listed on the Hong Kong Stock Exchange is 66.9 times versus Wynn Resorts’ PE of 74.1 times in the United States. If Wynn Resorts’ PE were to expand, it would also boost valuations of regional gaming companies,” it said.
Wynn Macau is currently adding new VIP areas with 35 more high-limit slot machines and 29 VIP table games at the private gaming salons. These are expected to open in the first quarter of 2010.
A new resort, Encore, is also under way, which costs about HK$5bil and is expected to open in the first half of next year. These expansions should increase Wynn Macau’s VIP table games by 44%.
Meanwhile, Wynn Macau is still awaiting approval for its application to lease a 52-acre site in Cotai for the development of an integrated casino and a five-star resort.
Macau’s gaming business was hurt when China, in May 2008, limited travel by its citizens to Macau to once a month, and later extended the limit to once every two months.
However, there have been reports that the Chinese Government was easing restrictions, starting from those in Guangdong province travelling to Macau.
http://biz.thestar.com.my/news/story.asp?file=/2009/9/25/business/4776752&sec=business
Comment: What planning needs to be in place to graduate into their league?
Quek and Chua invest US$150mil in HK IPO
By YEOW POOI LING
PETALING JAYA: Tycoons Tan Sri Quek Leng Chan and Tan Sri Chua Ma Yu have agreed to take part in the initial public offering (IPO) of Wynn Macau Ltd on the Hong Kong Stock Exchange by investing US$80mil and US$70mil respectively.
Quek’s investment is via Guoco Management Co Ltd and GuoLine Group Management Co Ltd, which are indirect subsidiaries of Hong Leong Co (M) Bhd, while Chua’s vehicle is CMY Capital Markets Sdn Bhd.
It is learnt that these Malaysian parties are going in independently. Chua is an investor and the attraction in Wynn is purely seen as a China play.
Chua was unavailable for comment.
In the listing document, Wynn Macau said CMY’s stake could amount to almost 5% of the offered shares while Guoco and GuoLine could collectively hold 5.3% based on a mid-point offer price of HK$9.30 and assuming the over-allotment option was not exercised.
Wynn Macau, owned by US-based Wynn Resorts, is among the biggest gaming operators in Macau and caters mainly to high-end clientele. The IPO involves floating 1.25 billion shares at HK$8.52-HK$10.08 each.
Other investors include Hong Kong tycoons Walter Kwok and Thomas Lau, as well as fund management company Keywise Capital Management (HK) Ltd.
Quek, the sixth richest man in Malaysia based on Forbes Asia Malaysia Rich List 2009, is not new to the gaming business. His Hong Kong-listed entity, Guoco Group Ltd’s subsidiary, has gaming operations in Britain.
Chua, on the other hand, owned a stake in Star Cruises Ltd briefly in 2007.
Macau is the world’s largest gaming market based on gross gaming revenue and the only place in China with legalised casino gaming.
Last year, Macau attracted 22.9 million visitors, mostly from Hong Kong and mainland China. The gaming market generated HK$105.6bil in gross gaming revenue, double the amount of Las Vegas Strip. For the first six months, Macau generated HK$49.9bil in gross gaming revenue. In 2008, Wynn Macau took a 16% of Macau’s table revenues and a daily gross win per gaming table of about HK$119,000. Its listing, targeted for Oct 9, will make Wynn Macau the first American company to list on the Hong Kong Stock Exchange.
A local research house said the IPO would unlock the value and boost the valuations of Wynn Resorts.
“Currently, the simple average price-to-earnings (PE) for 2010 of gaming companies listed on the Hong Kong Stock Exchange is 66.9 times versus Wynn Resorts’ PE of 74.1 times in the United States. If Wynn Resorts’ PE were to expand, it would also boost valuations of regional gaming companies,” it said.
Wynn Macau is currently adding new VIP areas with 35 more high-limit slot machines and 29 VIP table games at the private gaming salons. These are expected to open in the first quarter of 2010.
A new resort, Encore, is also under way, which costs about HK$5bil and is expected to open in the first half of next year. These expansions should increase Wynn Macau’s VIP table games by 44%.
Meanwhile, Wynn Macau is still awaiting approval for its application to lease a 52-acre site in Cotai for the development of an integrated casino and a five-star resort.
Macau’s gaming business was hurt when China, in May 2008, limited travel by its citizens to Macau to once a month, and later extended the limit to once every two months.
However, there have been reports that the Chinese Government was easing restrictions, starting from those in Guangdong province travelling to Macau.
http://biz.thestar.com.my/news/story.asp?file=/2009/9/25/business/4776752&sec=business
Comment: What planning needs to be in place to graduate into their league?
How to manage your taxes in challenging economic times
Friday September 25, 2009
How to manage your taxes in challenging economic times
KPMG CHAT - By NICHOLAS CRIST
IN the current challenging economic environment, management of taxes is increasingly important. Failure to implement effective tax management can result in lost opportunities and the imposition of tax penalties.
Cash tax management
At the micro level there should be effective cash tax management. Tax instalments for corporate taxpayers should be as accurate as possible so that they don’t pay tax unnecessarily to the Inland Revenue Board (IRB), or find themselves exposed to under-estimation penalties.
Variations to instalments can be made automatically in, broadly, the sixth and ninth months of the financial year.
Further, the Income Tax Act gives the discretion to the IRB to consider applications for variations by taxpayers outside of the above months. Where profits are falling, taxpayers should consider seeking this discretionary relief.
Default by debtors
As profits are generally recognised for tax purposes on an accruals basis, businesses may be paying tax on amounts they have yet to receive. A challenge for businesses will be their ability to collect outstanding debts.
The critical issue is whether debts are bad or doubtful of recovery, or whether the debtor is simply a slow payer.
For tax purposes, the distinction is important as provisions for debts which are paid slowly will not qualify for a tax deduction.
Notwithstanding the above, bad or doubtful debts may still qualify for a tax deduction provided a number of conditions are met, and these are reflected in the IRB’s Public Ruling No. 1/2002.
To claim a deduction for a doubtful debt, taxpayers must among other things, be able to demonstrate that each debt has been evaluated separately; a general provision of say X% after Y months will not qualify. There must be evidence to show how the doubtfulness of each debt has been evaluated.
Regard must be paid to the period for which the debt has been outstanding; the financial status of the debtor; the debtor’s credit record and experience of the particular trade or industry.
These requirements must be supported by documentation and this will be key to substantiating a doubtful debt deduction.
Deteriorating inventory
Where business has slowed down, inventory may accumulate and hence the risk of deterioration (and fall in value) increases.
Where for accounting purposes a provision for deterioration in value is made, this will not qualify for a tax deduction. However, subject to various conditions, a specific write-down of inventory may qualify for a tax deduction.
Taxpayers who wish to claim a deduction have to demonstrate that the write-down is accurately calculated and represents a permanent fall in value. Again, keeping detailed records is the key to support a claim for a tax deduction.
Default on contracts
In deteriorating conditions, it may be necessary for businesses to terminate contracts which might require payment of compensation.
To determine the issue of deductibility, the starting point is to consider the nature of the contract being terminated.
Where the contract being terminated is revenue in nature, for example the purchase of inventory, this would suggest, at an initial level, that a tax deduction might be available.
Where, however, the contract is capital in nature, for example the purchase of machinery, a tax deduction for any compensation payable is unlikely to be available.
Defaults on loans
A particular concern is whether borrowers will default on loan obligations.
Where a default arises it may be necessary to work out a compromise between the creditor and the borrower which might involve the borrower being released from part of its financial obligations.
It is necessary to determine whether a release could be subject to income tax.
The Income Tax Act provides that where a tax deduction has been obtained for an amount represented by the release, the release is subject to tax.
A similar result also arises where the amount released relates to the purchase of an asset on which capital allowances have been claimed.
Where, however, the amount released has not been claimed as a tax deduction, the release should not, normally, be subject to income tax.
Retrenchment costs
Businesses that are particularly hard hit may find themselves with little option but to retrench employees. Where the retrenchment exercise is carried out in conjunction with the closure of a business, a tax deduction, based on case law, would not be available.
A different view is, however, likely to be reached where retrenchments are incurred for the purposes of enabling a business to be saved from extinction.
In the current economic environment, effective management of all costs including taxes is vital. From the tax perspective, businesses need to be aware of eligible deductions and ensure that adequate supporting documentation is maintained.
·The writer is executive director, KPMG Tax Services Sdn Bhd.
http://biz.thestar.com.my/news/story.asp?file=/2009/9/25/business/4778387&sec=business
How to manage your taxes in challenging economic times
KPMG CHAT - By NICHOLAS CRIST
IN the current challenging economic environment, management of taxes is increasingly important. Failure to implement effective tax management can result in lost opportunities and the imposition of tax penalties.
Cash tax management
At the micro level there should be effective cash tax management. Tax instalments for corporate taxpayers should be as accurate as possible so that they don’t pay tax unnecessarily to the Inland Revenue Board (IRB), or find themselves exposed to under-estimation penalties.
Variations to instalments can be made automatically in, broadly, the sixth and ninth months of the financial year.
Further, the Income Tax Act gives the discretion to the IRB to consider applications for variations by taxpayers outside of the above months. Where profits are falling, taxpayers should consider seeking this discretionary relief.
Default by debtors
As profits are generally recognised for tax purposes on an accruals basis, businesses may be paying tax on amounts they have yet to receive. A challenge for businesses will be their ability to collect outstanding debts.
The critical issue is whether debts are bad or doubtful of recovery, or whether the debtor is simply a slow payer.
For tax purposes, the distinction is important as provisions for debts which are paid slowly will not qualify for a tax deduction.
Notwithstanding the above, bad or doubtful debts may still qualify for a tax deduction provided a number of conditions are met, and these are reflected in the IRB’s Public Ruling No. 1/2002.
To claim a deduction for a doubtful debt, taxpayers must among other things, be able to demonstrate that each debt has been evaluated separately; a general provision of say X% after Y months will not qualify. There must be evidence to show how the doubtfulness of each debt has been evaluated.
Regard must be paid to the period for which the debt has been outstanding; the financial status of the debtor; the debtor’s credit record and experience of the particular trade or industry.
These requirements must be supported by documentation and this will be key to substantiating a doubtful debt deduction.
Deteriorating inventory
Where business has slowed down, inventory may accumulate and hence the risk of deterioration (and fall in value) increases.
Where for accounting purposes a provision for deterioration in value is made, this will not qualify for a tax deduction. However, subject to various conditions, a specific write-down of inventory may qualify for a tax deduction.
Taxpayers who wish to claim a deduction have to demonstrate that the write-down is accurately calculated and represents a permanent fall in value. Again, keeping detailed records is the key to support a claim for a tax deduction.
Default on contracts
In deteriorating conditions, it may be necessary for businesses to terminate contracts which might require payment of compensation.
To determine the issue of deductibility, the starting point is to consider the nature of the contract being terminated.
Where the contract being terminated is revenue in nature, for example the purchase of inventory, this would suggest, at an initial level, that a tax deduction might be available.
Where, however, the contract is capital in nature, for example the purchase of machinery, a tax deduction for any compensation payable is unlikely to be available.
Defaults on loans
A particular concern is whether borrowers will default on loan obligations.
Where a default arises it may be necessary to work out a compromise between the creditor and the borrower which might involve the borrower being released from part of its financial obligations.
It is necessary to determine whether a release could be subject to income tax.
The Income Tax Act provides that where a tax deduction has been obtained for an amount represented by the release, the release is subject to tax.
A similar result also arises where the amount released relates to the purchase of an asset on which capital allowances have been claimed.
Where, however, the amount released has not been claimed as a tax deduction, the release should not, normally, be subject to income tax.
Retrenchment costs
Businesses that are particularly hard hit may find themselves with little option but to retrench employees. Where the retrenchment exercise is carried out in conjunction with the closure of a business, a tax deduction, based on case law, would not be available.
A different view is, however, likely to be reached where retrenchments are incurred for the purposes of enabling a business to be saved from extinction.
In the current economic environment, effective management of all costs including taxes is vital. From the tax perspective, businesses need to be aware of eligible deductions and ensure that adequate supporting documentation is maintained.
·The writer is executive director, KPMG Tax Services Sdn Bhd.
http://biz.thestar.com.my/news/story.asp?file=/2009/9/25/business/4778387&sec=business
Structural weakness could dampen M'sian long term growth
Friday September 25, 2009
Structural weakness could dampen M'sian long term growth
By LEONG HUNG YEE
PETALING JAYA: Malaysia is poised to be the largest beneficiary of higher commodity prices from positive terms-of-trade and commodity revenue supporting the public sector, according to Morgan Stanley Research.
“Beyond the cyclical uptick, we think structural weakness remains present which could put a dampener on longer-term growth prospects.
“However, we note that policymakers have been taking measures to liberalise the economy. Continued execution and acceleration will be needed to fully turn around the structural story, in our view,” it said in an Asean economics report.
The Malaysian market has generally fallen by the wayside amid structural issues in the economy. As a result, its asset market had ironically developed a defensive nature, outperforming during market downturns, and underperforming during market upturns, Morgan Stanley said.
“Despite this, from a macro perspective, we still expect Malaysia to deliver reasonable growth outlook in 2010,” it added.
Morgan Stanley’s 2009 and 2010 forecasts of contraction of 3.5% and a growth of 4.3% year-on-year respectively were below consensus’ contraction of 3% for 2009 but in line with the 4.3% growth for 2010.
“We see 2011 growth at 4.8% year-on-year. Interestingly, we note a dichotomy in terms of market sentiment. Whilst certain quarters of the market have been eager to get bullish on Singapore given the global rebound, we do not sense the same sentiment with Malaysia despite Malaysia being the second most exposed to global trade within Asean as well as a commodity play,” it said.
Morgan Stanley said the global backdrop and the political climate were two key risks for Malaysia.“Malaysia’s manufacturing exports are already under structural pressures, losing global competitiveness. Separately, the coordination within the federal government given the two-party system and the coordination between the federal and state governments would be key to watch in terms of how it would affect the workings of the public sector economy,” it said.
The research house said foreign interest in Malaysia had been waning. Net foreign direct investments (FDIs) in certain economies in the region (China, India, Singapore and Thailand) continued to climb higher, net FDI in Malaysia had generally trended down from the peak in the early 1990s, and was now dipping into negative territory.
On the upcoming Budget 2010, it expected it “to be less expansionary in terms of fiscal deficit.” “However, we still see Malaysia as likely to have one of the highest fiscal deficits within Asean for 2010.”
Commenting on policy measures, Morgan Stanley said Bank Negara was “relatively dovish.”
It said the absence of a strong credit cycle previously created more room for leverage.
“Policymakers also have the highest propensity for pump-priming within Asean.” Meanwhile, Credit Suisse Group said Bank Negara had become more confident the country was recovering from the global recession.
The central bank’s view was that the signs of an economic recovery seemed evident but it was only unsure on whether the economic rebound would be modest or sharp.
http://biz.thestar.com.my/news/story.asp?file=/2009/9/25/business/4778483&sec=business
Structural weakness could dampen M'sian long term growth
By LEONG HUNG YEE
PETALING JAYA: Malaysia is poised to be the largest beneficiary of higher commodity prices from positive terms-of-trade and commodity revenue supporting the public sector, according to Morgan Stanley Research.
“Beyond the cyclical uptick, we think structural weakness remains present which could put a dampener on longer-term growth prospects.
“However, we note that policymakers have been taking measures to liberalise the economy. Continued execution and acceleration will be needed to fully turn around the structural story, in our view,” it said in an Asean economics report.
The Malaysian market has generally fallen by the wayside amid structural issues in the economy. As a result, its asset market had ironically developed a defensive nature, outperforming during market downturns, and underperforming during market upturns, Morgan Stanley said.
“Despite this, from a macro perspective, we still expect Malaysia to deliver reasonable growth outlook in 2010,” it added.
Morgan Stanley’s 2009 and 2010 forecasts of contraction of 3.5% and a growth of 4.3% year-on-year respectively were below consensus’ contraction of 3% for 2009 but in line with the 4.3% growth for 2010.
“We see 2011 growth at 4.8% year-on-year. Interestingly, we note a dichotomy in terms of market sentiment. Whilst certain quarters of the market have been eager to get bullish on Singapore given the global rebound, we do not sense the same sentiment with Malaysia despite Malaysia being the second most exposed to global trade within Asean as well as a commodity play,” it said.
Morgan Stanley said the global backdrop and the political climate were two key risks for Malaysia.“Malaysia’s manufacturing exports are already under structural pressures, losing global competitiveness. Separately, the coordination within the federal government given the two-party system and the coordination between the federal and state governments would be key to watch in terms of how it would affect the workings of the public sector economy,” it said.
The research house said foreign interest in Malaysia had been waning. Net foreign direct investments (FDIs) in certain economies in the region (China, India, Singapore and Thailand) continued to climb higher, net FDI in Malaysia had generally trended down from the peak in the early 1990s, and was now dipping into negative territory.
On the upcoming Budget 2010, it expected it “to be less expansionary in terms of fiscal deficit.” “However, we still see Malaysia as likely to have one of the highest fiscal deficits within Asean for 2010.”
Commenting on policy measures, Morgan Stanley said Bank Negara was “relatively dovish.”
It said the absence of a strong credit cycle previously created more room for leverage.
“Policymakers also have the highest propensity for pump-priming within Asean.” Meanwhile, Credit Suisse Group said Bank Negara had become more confident the country was recovering from the global recession.
The central bank’s view was that the signs of an economic recovery seemed evident but it was only unsure on whether the economic rebound would be modest or sharp.
http://biz.thestar.com.my/news/story.asp?file=/2009/9/25/business/4778483&sec=business
Recession or not McDonald's increases dividend for the 32nd year
Updated: Friday September 25, 2009 MYT 7:55:44 AM
Recession or not McDonald's increases dividend for the 32nd year
OAK BROOK, Illinois: McDonald's Corp. said Thursday that its board has raised its quarterly dividend 10 percent to 55 cents. It will be paid on Dec. 15 to shareholders of record as of Dec. 1. The increase brings its yearly dividend to $2.20 and its total quarterly dividend payout to about $600 million.
The previous quarterly dividend was 50 cents.
The company said it has raised its dividend every year since paying its first dividend in 1976.
The most recent increase puts the company at the high end of its goal to return between $15 billion to $17 billion in cash to shareholders over a three year period that started at the beginning of 2007, the company said.
McDonald's also said it would delist its stock from the Chicago Stock Exchange, where it had its secondary listing.
It decided to leave the Chicago exchange because of low trading volume there.
After Oct. 30, it will be listed only on the New York Stock Exchange.
McDonald's shares rose 58 cents to close Thursday at $56.12.
The stock added another 3 cents after hours following the dividend increase. - AP
http://biz.thestar.com.my/news/story.asp?file=/2009/9/25/business/20090925075349&sec=business
Comment:
At the price per share of $56.12, the yearly dividend of $2.20 translates into a DY of 3.9%. This is equivalent to a dividend multiple of 25.5x.
A company giving increasing dividends year on year will see its share price trending upwards in unison.
Given the low interest rates for fixed deposits and low treasury yield, investing into this stock provides a better return comparatively. Those with a long term investing horizon need not worry about the price volatility of the share. The long term gains from dividends and capital gains seem safe and predictable as long as the company continues to perform as it did in the past.
Recession or not McDonald's increases dividend for the 32nd year
OAK BROOK, Illinois: McDonald's Corp. said Thursday that its board has raised its quarterly dividend 10 percent to 55 cents. It will be paid on Dec. 15 to shareholders of record as of Dec. 1. The increase brings its yearly dividend to $2.20 and its total quarterly dividend payout to about $600 million.
The previous quarterly dividend was 50 cents.
The company said it has raised its dividend every year since paying its first dividend in 1976.
The most recent increase puts the company at the high end of its goal to return between $15 billion to $17 billion in cash to shareholders over a three year period that started at the beginning of 2007, the company said.
McDonald's also said it would delist its stock from the Chicago Stock Exchange, where it had its secondary listing.
It decided to leave the Chicago exchange because of low trading volume there.
After Oct. 30, it will be listed only on the New York Stock Exchange.
McDonald's shares rose 58 cents to close Thursday at $56.12.
The stock added another 3 cents after hours following the dividend increase. - AP
http://biz.thestar.com.my/news/story.asp?file=/2009/9/25/business/20090925075349&sec=business
Comment:
At the price per share of $56.12, the yearly dividend of $2.20 translates into a DY of 3.9%. This is equivalent to a dividend multiple of 25.5x.
A company giving increasing dividends year on year will see its share price trending upwards in unison.
Given the low interest rates for fixed deposits and low treasury yield, investing into this stock provides a better return comparatively. Those with a long term investing horizon need not worry about the price volatility of the share. The long term gains from dividends and capital gains seem safe and predictable as long as the company continues to perform as it did in the past.
Market Correction
Short term traders should be careful.
Long term investors can buy into good quality stocks when these shares correct 10% to 15% from their high prices. Be ready to buy when the market corrects significantly. There are still many good stocks selling at good valuations.
Long term investors can buy into good quality stocks when these shares correct 10% to 15% from their high prices. Be ready to buy when the market corrects significantly. There are still many good stocks selling at good valuations.
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