Happy Merdeka Day everyone, local observations

Not much in the news, but I was out on the town in Penang and saw relatively little celebrating going on except for mat rempits and police chasing them down. Traffic was noticeably lacking.

Upscale, large establishments were generally quiet compared to the relaxed, laid back, and more reasonably priced entertainment areas. Clearly this year will be a hard as the economy is still stagnant.

Shopping malls were full as many days of rain have the tendency for people to postpone their shopping trips. Add to that the Merdeka day sales, shopping malls showed their resiliency. I could not even get a parking spot in the shopping mall's garage.

Axiata investment opportunity follow up

After reading the CIMB report on Axiata, they point out that 50% of revenues come from Celcom and another 40% from the Indonesia subsidiary. I conclude there is probably little investment opportunity because revenues largely rely on a recovery in exports and Asia. Sure if Asia recovers exceptionally well, Axiata will go up but so will lots of other stocks. But most likely, Axiata is priced correctly at this time and not much of an opportunity as I first thought.

2009 Q2 US GDP

I've been looking at some of the Q2 numbers for US GDP and I was probably expecting somewhere along the lines of -1.0 GDP.

Federal expenditures are compensating for the drop in fixed investment. More so than is needed, helping to give the GDP numbers a boost. I find that state spending has rebounded rather strongly, surprisingly.

The good news is that the free fall in the fixed investment area seems to have stopped. But we still have weak CRE spending at -15% as anticipated.

Equipment will probably not drive a recovery unless something happens like companies get more credit. Credit spreads are quite narrow but still doesn't mean much if banks won't loan money out.

Overall Fixed investment looks like it will continue to put downward pressure on GDP. The key now will be to watch out for residential construction spending. I feel nonresidential equipment spending will increase while structure spending will decrease, having a net result of zero. The subcategories will cancel each other out. So, now we will need to have residential construction spending go down to zero for Fixed investment to have a neutral effect on GDP. I don't foresee this happening for at least six months as there is too much inventory on the market still.

It looks like we could have positive GDP next quarter as the expenditures from the government and the recent cash for clunkers probably boosted consumption a good amount. If consumption is positive, GDP will probably be positive.

Axiata Q2 pre-tax profit up 57.9pc

From The Business Times:

AXIATA Group Bhd's pre-tax profit for the second quarter ended June 30, 2009 rose 57.9 per cent to RM878.621 million from RM575.382 million in the corresponding quarter of 2008.

Its revenue increased eight percent to RM3.163 billion from RM2.930 billion previously.

For the six-month period, its pre-tax profit fell to RM1.070 billion from RM1.214 billion in the corresponding period of the previous year.

Revenue, however, rose to RM6.030 billion from RM5.651 billion previously.
In a filing with Bursa Malaysia, Axiata said its revenue for the second quarter, grew due to the higher contribution from Celcom and Axiata (Bangladesh) Ltd (AxB).

In local currency, Axiata said its Indonesian operations recorded a positive quarter-on-quarter revenue growth.

But in terms of ringgit translated results, XL’s revenue in the current quarter declined by two per cent against that of the corresponding quarter in 2008 due to the depreciation of the Indonesian rupiah against ringgit.

In local currency, its Sri Lankan unit, Dialog, and Telekom Malaysia International (Cambodia) Company Limited (TMIC) recorded a quarter-on-quarter revenue decline of 3.5 per cent and 17.4 per cent respectively.

A downward tariff revision by Dialog in the fourth quarter 2008 continued its adverse effect on revenue in the second quarter of 2009, it said.

TMIC’s operations continued to be challenging with nine operators in the market.

The major operators face intense competition on pricing and new operators are offering free SIM cards and minutes to capture market share, it said.

The strengthening of the ringgit against domestic currencies of operating companies (OPCO) has unfavourably affected the Group’s translated revenue in the second quarter 2009.

At constant currency, the second quarter 2009 revenue would have registered a growth of 8.6 per cent, it said.

On prospects, it added the macro backdrop for 2009 is one of weakening economies and uncertainty.

It stated that as such, the Group would adopt a prudent approach by focusing on cost management whilst continuing to lay the foundation towards achieving long term aspirations of becoming a regional champion.

The Group also indicated it would continue to have a strong focus on continued operational efficiencies at the major subsidiaries whilst preserving the momentum of sequential improvements.

Bangladesh is an anomaly for a country export oriented south east Asia. Personal consumption takes up 75% of GDP. Personal consumption generally isn't as volatile as exports. Therefore it does make sense that Bangladesh would not be as affected in the downturn and would rebound strongly.

Sri Lanka has been trying to get itself out of a civil war and may also have incredible growth potential. Cambodia is more of the typical run of the mill export oriented south east asian economy and therefore has suffered. Overall for Axiata, it is hard to say, I haven't looked deep into where their revenue comes from. Although, it's hodgepodge of companies may actually perform better than at first glance.

Most people will say, Axiata's southeast Asian telecoms will all do horrible. South East Asia is hit the hardest in the crisis. But looking at the favorable outlook for Indonesia, Sri Lanka, Bangladesh, Axiata might perform better than expected.

Malaysia Q2 GDP shrinks 3.9pc on year

From The Business Times:

Malaysia’s economy contracted by 3.9 per cent in the second quarter from a year ago, less than expected, and pace of decline slowed from a 6.2 per cent drop in the first quarter, signalling the start of a slow recovery for this export-dependent country.

Economists in a Reuters poll had forecast gross domestic product would drop by 5.1 per cent due to poor demand for Malaysian exports, which account for 110 per cent of gross domestic product.

Central bank Governor Tan Sri Dr Zeti Akhtar Aziz told a press conference that the budget, due in October, would see a revision to government forecasts that the economy would shrink 4-5 per cent for the full year and that the drop would be less than that.

“We expect gradual recovery, and that this would be sustained,” she said.
Asia’s economies are still feeling the effect of the global economic downturn and Indonesia’s economy grew 4 per cent in the second quarter from a year earlier, while Thailand contracted 4.9 per cent, easing from a 7.1 per cent drop in the first.

Malaysia is Asia’s only exporter of oil and gas and also has large commodity exports and the prices of both have fallen sharply from a year ago.

The government has said that it expects growth to pick up in the second half of 2009 with positive growth in the fourth quarter as a RM67 billion package of government spending and loan guarantees spread over two years kicks in.

The 6% rate of contraction in Q1 overshot due to inventories not being replenished. Q1 had a inventory loss of RM14 billion. Q2 inventories look more normal compared to the last eight quarters at a loss of RM 4 billion.

The good news is we will have inventory replenishment going on and will push up future GDP numbers. It could go to -3% in the following quarters. The bad news is we don't have a lot of upside until about 4Q of 2009. I expect negative growth for Q3 and maybe even growth for Q4.

Malaysia Q2 GDP seen down 5.1pc on year

From the Business Times:

Malaysia’s economic recovery looks set to lag that of its peers, with economists saying gross domestic product likely shrank by 5.1 per cent in the second quarter from a year ago, a Reuters poll showed.

In addition to a steep fall in exports, Malaysia has seen capital spending stagnating as well as an inventory destocking to the tune of US$15 billion in the first quarter, retarding a recovery, according to a recent report from BNP Paribas.

Malaysia posted its first drop in output in seven and a half years when first quarter GDP fell 6.2 per cent from a year ago, and the poll of 12 economists showed that Malaysia’s central bank would hold rates at 2 per cent until there was firm evidence of an economic recovery.

The central bank’s next policy meeting is on today, with the GDP data to be released on tomorrow.
Malaysia’s central bank and the government are expecting growth to return only in the fourth quarter, whereas in Indonesia growth has already picked up and is expected to return in Thailand when it reports second quarter data next week.

Japan, Hong Kong and Singapore also pulled out of recession in the second quarter, but the recovery is seen as fragile as long as consumer demand in Asia’s key Western markets remains weak.

“While central bankers are often prompted to ’take away the punch bowl just as the party gets going’, the degree of uncertainty and prolonged nature of the recovery could prompt Bank Negara Malaysia to leave the rate (steady) until end-2010,” said Standard Chartered Economist Alvin Liew said.

Economists say that a fiscal stimulus package of RM17 billion this year has yet to have a major impact and the economy has also sunk into deflation with consumer prices falling 2.4 per cent year-on-year in July.

The central bank has cut rates by a cumulative 150 basis points in its recent easing cycle in a bid to ease the domestic fallout from the global financial crisis.

Malaysia is Asia’s third-most trade dependent country. June exports fell by 22.6 per cent on an annual basis but rose 5.1 per cent increase from May on a seasonally unadjusted basis.

I think the -5.1pc is a reasonable number. We are still seeing massive drop in exports and last year's Q2 gdp growth was incredibly high at 6.6%. We still have a ways to fall numerically speaking.

Malaysia GDP 2007-2009 from The Department of Statistics

Pinpoint Funds Beat Peers With China Stocks, Bonds. The power of China's command economy

From Bloomberg:

Pinpoint Investment Advisor Ltd., a hedge fund manager of $560 million, returned as much as four times its Asian peers this year through July with profits from a rebound in Chinese stocks and debt securities.

The $70 million Pinpoint Opportunities Fund, which gained 85 percent in the period, invested about half its assets in convertible and high-yield bonds, including those of Chinese property developers, said Duanmu Yongshan, Pinpoint’s Hong Kong- based chief marketing officer. The $300 million Pinpoint China Fund returned nearly 51 percent in the period, he said.

Stock-focused hedge funds, the hardest hit in Asia amid last year’s market slump, are leading the recovery in 2009. The Eurekahedge Asia Long/Short Equities Hedge Fund Index returned 19 percent this year through July, the best-performing strategy among eight tracked by the Singapore-based data provider. The index fell 22 in 2008, the worst since at least 2000.

“We think fundamentals will play an increasingly more important role relative to liquidity for the second half,” said Duanmu in an interview on Aug. 24.

The China Fund, which targets companies with a market value of more than $2 billion in Greater China, bet on a recovery in Chinese property and banking stocks it bought, he said. He declined to name specific companies.

One thing we can learn when we look over this fantastic bull run (although I believe the market still will retract.) is that most people underestimated the power of China's ability to get its banks to lend. When China says its going to do something. The speed of which it can achieve that goal is unbelievable. US has been trying to get its banks to lend for the last year plus and still to no avail.

China Loan Growth

The FBM KLCI only a reference, incomplete and important information left out, FBMKLCI volatility.

From The Edge Malaysia:

THE 100-stock KLSE Composite Index (KLCI) was replaced by the FBM KLCI from July 6 onwards. As the new index replaced the old index, it commenced from the same level where the old index ended. This is made possible by choosing a base such that the market cap of the FBM KLCI divided by the new base equalled the KLCI.

The old KLCI used the total market capitalisation or market value (denoted by MVold) of all the 100 component stocks divided by a base (denoted by Bold). MVold is computed by multiplying the number of stocks issued by the share price. For the closing value of the KLCI, the closing prices of component stocks were used. In this way, stocks with the higher number of shares will have a higher influence on the index for every 10 sen change in price. Looking from another angle, stocks with higher market capitalisation will have higher impact for every 1% change in price. In this way, KLCI is said to be size-weighted as bigger stocks having bigger market value will have stronger influence on the direction of the index.

When the KLCI was instituted in 1977, the base was chosen such that the index commenced at 100 points. Over the years, due to changes in number of shares issued, the base was adjusted regularly.

The new FBM KLCI does not use all the shares issued in computing the index. It only uses a portion of the shares issued depending on the freefloat in each of the component company.

Prior to July 6, the KLCI closed at 1,108 points, and this is computed by the formula:

1,108 = MVold/Bold

As the formula used to compute the index remains the same, the ratio of MV/B for the FBM KLCI should also be 1,108 after taking over from the KLCI. The new index, the FBM KLCI, has its own market value, MVnew, based on certain weightings of the 30 component stocks and the corresponding closing share prices such that,

1,108 = MVnew/Bnew

A simple rearrangement shows that:

Bnew = (MVnew/MVold) x Bold

FBM KLCI — new benchmark

From July 6, 2009, onwards, FBM KLCI becomes the key benchmark representing Malaysian stock market. Everyday, commentators and newspapers worldwide will quote the performance of the FBM KLCI to denote the performance of the Malaysian market. When we look at other foreign bourses, we will also look at the performance of the key benchmark like the Hang Seng Index for Hong Kong, the Nikkei 225 for Japan, the ST Industrial for Singapore etc.

Using a single benchmark to denote the performance of a market is a simple and convenient method to monitor a stock market. It provides the direction and relative performance of a market compared with other bourses. However, investors should always take note that a benchmark is as good as what it contains.

For the new FBM KLCI, it is a much narrower 30-stock index compared with the predecessor, the KLCI, which encompassed a more extensive 100 stocks covering a wider range of sectors. Some of the sectors not included in FBM KLCI are CONSTRUCTION [], property, timber, IT etc.

Performance comparison

It is not uncommon to compare a portfolio return with a reference benchmark. The most convenient benchmark is the FBM KLCI which is also a fully-invested portfolio with no cash component and have different weights on each of the 30 component stocks. From the explanation above, it is now clear that the FBM KLCI may not provide meaningful comparison for most investors due to different sets of stock invested. While the FBM KLCI contain the biggest stocks listed on Bursa Malaysia, many individual investors will likely have a small portion invested in these stocks.

While it is true that more money are invested in big-cap stocks and the return of big-cap stocks are important, retail investors are unlikely to be invested only in the big-cap stocks alone. Even most fund managers will not restrict themselves to the 30 stocks in the FBM KLCI. Unless a fund is an index fund linked to the FBM KLCI, most funds will have a much wider spectrum of stocks to invest in. As such, many fund managers find the FBM KLCI to be too narrow for benchmarking purposes.

Use relevant benchmark

A portfolio should compare against a relevant benchmark depending on the objective of the fund and type of stocks to be invested in. Unfortunately, there is no perfect benchmark for most funds. The next alternative is to use the closest possible index as the reference index.

This article by Philips Capital fails to emphasize the effect of free float. They barely glance over a critical part of the the FBM KLCI that all investors need to know. The index is weighted by free float factor. This is why in the index, BCHB is the most heavily weighted stock although it doesn't have the largest market cap.

Why is free float market weight important? Well, if I have a 100 billion market cap company with 15% of shares in free float, how does the index treat it? My company is only considered a 20 billion dollar market cap company in the new index.

If I have a 20 billion dollar company with 75% or more shares in free float? It's considered a 20 billion dollar company in the new index due to the free float methodology. Free float market weight makes a HUGE difference. If I do not consider free float and build based on market cap, my effort to recreate the index will be completely wrong! Furthermore, the top 10 stocks would only compose of 61% or so of the index weight, compared to the 70% officially listed on the FTSE website in June.

Not only is the index composed of fewer companies to 30 as correctly mentioned, it weighs heavily the companies with the largest number of free floating shares, which happens to be the top 10 stocks of the FBMKLCI.

What else would you like to know? 4 out of the largest 10 stocks of the FBMKLCI have a 1-year-beta of over 1 as reported on Bloomberg. In addition, 2 of the stocks have the beta listed as undefined but am reasonably sure the beta is over 1. Sime and Axiata are incredibly volatile stocks. When you have 6 stocks in the top 10 with a beta of over 1, with a heavier weighting on the top 10, you can be reasonably sure the free float market weighted index will be much more volatile compared to the normal market weighted index.

Warren Buffett needs to realize when he's a jerk, he should come clean.

I'm referring to a blog post by Rolfe Winkler:

Buffett was kind enough to respond to my letter, thanking me for it and inviting me to his company’s annual meeting. I was hooked. Today, Buffett remains famous for investing The Right Way. He even has a television cartoon in the works, which will groom the next generation of acolytes.

But it turns out much of the story is fiction. A good chunk of his fortune is dependent on taxpayer largess. Were it not for government bailouts, for which Buffett lobbied hard, many of his company’s stock holdings would have been wiped out.

Berkshire Hathaway, in which Buffett owns 27 percent, according to a recent proxy filing, has more than $26 billion invested in eight financial companies that have received bailout money. The TARP at one point had nearly $100 billion invested in these companies and, according to new data released by Thomson Reuters, FDIC backs more than $130 billion of their debt.

Without FDIC’s debt guarantee program, even impregnable Goldman would have collapsed.

And this excludes the emergency, opaque lending facilities from the Federal Reserve that also helped rescue the big banks. Without all these bailouts, the financial system would have been forced to recapitalize itself.

Banks that couldn’t finance their balance sheets would have sold toxic assets at market prices, and the losses would have wiped out their shareholder’s equity. With $7 billion at stake, Buffett is one of the biggest of these shareholders.

He even traded the bailout, seeking morally hazardous profits in preferred stock and warrants of Goldman and GE because he had “confidence in Congress to do the right thing” — to rescue shareholders in too-big-to-fail financials from the losses that were rightfully theirs to absorb.

Without FDIC’s debt guarantee program, even impregnable Goldman would have collapsed.

And this excludes the emergency, opaque lending facilities from the Federal Reserve that also helped rescue the big banks. Without all these bailouts, the financial system would have been forced to recapitalize itself.

Banks that couldn’t finance their balance sheets would have sold toxic assets at market prices, and the losses would have wiped out their shareholder’s equity. With $7 billion at stake, Buffett is one of the biggest of these shareholders.

He even traded the bailout, seeking morally hazardous profits in preferred stock and warrants of Goldman and GE because he had “confidence in Congress to do the right thing” — to rescue shareholders in too-big-to-fail financials from the losses that were rightfully theirs to absorb.

Keeping this in mind, I was struck by Buffett’s letter to Berkshire shareholders this year:

“Funders that have access to any sort of government guarantee — banks with FDIC-insured deposits, large entities with commercial paper now backed by the Federal Reserve, and others who are using imaginative methods (or lobbying skills) to come under the government’s umbrella — have money costs that are minimal,” he wrote.

“Conversely, highly-rated companies, such as Berkshire, are experiencing borrowing costs that … are at record levels. Moreover, funds are abundant for the government-guaranteed borrower but often scarce for others, no matter how creditworthy they may be.”

It takes remarkable chutzpah to lobby for bailouts, make trades seeking to profit from them, and then complain that those doing so put you at a disadvantage.

Elsewhere in his letter he laments “atrocious sales practices” in the financial industry, holding up Berkshire subsidiary Clayton Homes as a model of lending rectitude.

I find Buffett a little mean spirited and also not realizing how moronic he sounds here. All these other companies are also fighting for their survival, yet Buffett says these guys should be shown the door. He's one to talk as his companies have benefited from bailouts. There's enough to go around for everyone, Buffett. Have a little common courtesy and integrity.

Here's an analogy: If I got unemployment benefits and cashed the checks, then I found a job and no longer needed unemployment benefits, then I criticize the fact that those people are moochers who are getting benefits, I'd be wrong to criticize because I took the help. If I didn't cash the checks, I'd be fine. Buffett in this analogy took the cash and is wrong to criticize.

I've got nothing personal against Buffett, but I agree wholeheartedly that Buffett shouldn't be talking and keeping his mouth shut.

UMW 2Q net profit slumps 47% to RM79.4m, a look into the auto segment

From The Edge Malaysia:

Automotive-oil and gas company UMW HOLDINGS BHD []'s second quarter net profit slumped 47.6% to RM79.43 million from the RM151.73 million a year ago, as spending by consumers and industrial sectors shrank.

The company said on Aug 21 group revenue of RM2.58 billion for 2Q ended June 30, 2009 was RM987.1 million or 27.7% lower than RM3.568 billion a year ago.

"Decline in spending by consumers and industrial sectors due to the global economic downturn resulted in the lower revenue recorded by the automotive, equipment and manufacturing and engineering segments," it said.

UMW said group profit before taxation for 2Q of RM185.5 million, was doen 47.4% or RM169.5 million from RM355.0 million. The weakening of the ringgit against the US dollar and yen also affected profit margins.

"Despite the challenging economic environment, the O&G segment registered a positive variance for both revenue and profit before taxation for the second quarter as contributions from our new local and overseas investments started to flow in," it said.

Delving deeper into the numbers, taking a look at the auto segment, we see the revenues dropping some 25% from 5 billion last year to 3.745 billion. This is a 25% drop in revenues.

This is a genuine catastrophe for UMW. I don't see them recovering so fast as I mentioned a few days ago in the article about Proton. The Toyota part of sales will overwhelm the revenues, although it does have its low cost manufacturer in Perodua.

The fallacy of diversifying products is one line protects you from less risky lines. UMW has gone into the arguable more risky oil sector while expecting its revenue from autos to hold up. The acquisition my prove to be horrible for shareholders.

Actually, they should have acquired a slightly less riskier business line, to balance out the risk that auto revenues should fail. It's widely known that the auto industry is quite a risky industry by itself. This is a lesson for UMW not recognizing what kind of company they are.

PLUS Q2 profit up on higher revenue, lower cost

From The Star:

Toll highway operator PLUS Expressways Bhd’s net profit rose 5.7% to RM281.32mil for the second quarter ended June 30 compared with the previous corresponding period on higher toll revenue and lower operating costs.

Its revenue increased 4.6% to RM72.24mil. For the first half, its net profit gained 3.4% to RM559.87mil while revenue was up 3.6% to RM1.51bil.

The company said in a filing with Bursa Malaysia that toll collection was 3.3%, or RM18.6mil, higher than the same quarter last year due to higher contribution from Projek Lebuhraya Utara-Selatan Bhd (PLUS), which operates among others the North-South Expressway.

PLUS’s toll compensation recoverable from the Government increased to RM2.18bil as at June 30 this year from RM1.91bil as at end-December 2008. It said total revenue for the quarter under review was also higher due to higher toll compensation of RM15.4mil.

PLUS managing director Noorizah Abd Hamid said in a statement that despite the economic downturn, traffic volume for all expressways for the first half had shown good growth.

She said from January to June, PLUS achieved traffic growth of 4.6%, Elite 3.5%, Linkedua 9% and Konsortium Lebuhraya Butterworth-Kulim 0.3% compared with the same period last year.

Cost-reduction initiatives would “continue to be a primary focus for the group” and would encompass all efforts to manage costs and enhance process efficiencies, including prioritising expenditures and embarking on various cost reduction initiatives, she added.

Things seem to be looking good for toll operators. Revenues seem unaffected by the recession. Volume for traffic for the north-south highway showed plenty of growth. This indicates that most parts of the country are seeing the effects of recovery.

Mah Sing Q2 net falls 38 pc y-o-y, housing may be slow to recover

From The Business Times:

PROPERTY developer Mah Sing Group Bhd (8583) posted a 38 per cent drop in its fiscal second-quarter net profit from a year ago, as last year's gain was boosted by a large property sale.

Its net profit was RM23 million in the quarter to June 30 2009, which is a slight improvement compared to first-quarter net profit of RM22.6 million.

"The group believes the property market is gaining momentum for a likely up cycle in the second half of 2010," Mah Sing said in a statement to Bursa Malaysia yesterday.

The company's revenue for the second quarter was RM167.2 million, down from RM195.4 million a year ago.

Sales for the period were driven by residential property projects like Kemuning Residence, Hijauan Residence and Aman Perdana in the Klang Valley, and Sierra Perdana and Austin Perdana in Johor Baru.

For the first six months, Mah Sing made a net profit of RM45.7 million against RM59.6 million in the same period a year earlier.

Revenue was down 5.5 per cent to RM317.5 million.

However, the company has made sales of RM543 million in the first seven-and-a half months this year, which is more than its full-year target. This was mainly due to the sale of a building in its Southgate project in Kuala Lumpur for RM226 million.

It has also yet to book RM818 million of sales of residential and commercial properties as at June 30 this year.

"The strong take-up for our projects is evidence that the property market is resilient, and niche products with good branding coupled with the right concepts and designs in prime locations will continue to do well," group managing director Tan Sri Leong Hoy Kum said in a separate press release.

I'm not too sure if the last statement makes sense. but for a high volume property developer like Mah Sing, they can't make money on niches alone. I don't see property sales being a driver for real estate recovery. Growth in Property stocks will be anemic at best.

In this environment, positive loan growth alone won't see property developer's sales accelerate. Developers need a full blown bull market economy to realize their profit potential. People feel we are in a recession and will probably forgo the more discretionary and pricy items such as housing and jewelry.

Proton's Q1 Net rises, an interesting investment opportunity

From the Business Times:

Proton Holdings Bhd's (5304) net profit in the first quarter to June 30 2009 rose marginally to RM54.55 million from RM52.03 million a year ago despite the slightly lower sales volume.

Group revenue increased 8 per cent to RM1.85 billion from RM1.71 billion, the national carmaker said in a statement yesterday.

The improved performance was attributed to a better mix of products although it was affected by a 2 per cent sales drop to 39,888 units during the quarter.

Still, the drop was less than the 11 per cent recorded by the overall industry during the period.

Proton sold 69,977 vehicles from January to June this year, accounting for 27 per cent of the total industry volume.
In June alone, its market share increased to 31 per cent on strong demand for the Exora multi-purpose vehicle.

"We have seen a strong take-up for the new Exora with its attractive value-for-money features," Proton chairman Datuk Mohd Nadzmi Mohd Salleh said in the statement.

He said Proton's gross profit of about RM59 million in the first quarter helped reverse the pre-tax loss of RM374 million in the preceding quarter.

Domestic sales volume rose 12 per cent compared to the preceding quarter, he added.

Proton managing director Datuk Syed Zainal Abidin Syed Mohamed Tahir noted signs of recovery in the world automotive industry and improved consumer demand.

"Our prospects of better domestic sales volume and market share are encouraging, driven largely by sales of the increasingly popular Exora.

"Internationally, the group will focus on introducing the Exora in the Asean region," he said.

To be clear, this is not an investment recommendation. Here, we are in the midst of a global financial crisis, and I doubt anyone is feeling richer. But in Malaysia, loans are still growing at a reasonable pace and thus consumer spending. Exports are still down horribly.

Proton is one of those companies which produces cheap cars. Consider them the Air Asia of the car industry, with the exception that Air Asia has a much better reputation than Proton. So we are in this precarious situation in the economy where we are bottoming out, we're not getting much growth, but loan growth in Malaysia has kept on going compared to some other coutnries. So what is an investor to do?

If you can stomach the deficiencies of the national car maker, Proton fits in the sweet spot of the current situation. In the position of the economy we are in now, the lower cost goods producers will likely see their revenues stable or modestly increase as people trade down to cheap goods.

There is a caveat here, however. If loans were decreasing in growth, Proton would surely see declining revenues despite being one of the lowest cost producers for cars. The auto industry is quite dependent on people getting loans. Proton fits this bill as their revenues have been relatively stable and loans are still increasing in growth.

Now that we have established some positives, let me say, Proton doesn't have a lot going for itself. The government wants to wean Proton off its tax subsidies and the ASEAN agreement on car taxes will eventually see the tax advantage currently enjoyed by Proton reduced to zero.

UMW would not be an ideal play even though they have a 38% stake in low end car producer Perodua due to its other brand, Toyota, taking up a large percentage of overall sales for the conglomerate. UMW's results would be horribly skewed by its Toyota segment, a generally premium brand in the Malaysian auto industry.

MIER asks the government to look into tax reform, why the VAT won't get implemented so soon

From the Business Times:

THE government must look seriously into tax reform and announce it in the upcoming Budget 2010, says a senior economist.

"I think we need a serious tax reform in the country. We need to introduce a goods and services tax (GST) or value-added tax (VAT) as soon as possible," Malaysian Institute of Economic Research (MIER) executive director Prof Emeritus Datuk Dr Mohammed Ariff Abdul Kareem said.

Mohammed Ariff believes tax collection this year will fall short of government target.

"If tax collection is lower than the planned target and expenditure is higher than the proposed amount, then the chances are, we are going to run into a bigger deficit than the 7.6 per cent the government is hoping for.

"The deficit will probably touch or exceed 8 per cent this year, but the problem will be far worse next year because this year's tax collection will be based on last year's collection and next year's will be based on this year's," he said in an interview in Kuala Lumpur yesterday.

With growing government expenditure, including development expenditure and declining revenue, we may have a double-digit ratio of debt to gross domestic product (GDP).

"Of course this is a wrong time to introduce GST, simply because the economy is contracting, but it is important that we plan now for the introduction later.

"We should have a clear timetable. We don't seem to have one at this moment," Mohammed Ariff said.

The government should aim to implement VAT by 2012, at the least, when economic recovery is hopefully in place, he added.

"We need a lead time to prepare. We cannot just implement it overnight. We need at least two to three years preparation."

He noted that those countries which had introduced VAT took two to three years of preparations.

"This is because VAT is a very complicated and complex tax. It is collected at different points in a long supply chain. We also have to reimburse tourists who have paid the tax when they leave the country.

"Tourism is such an important activity. We have to put in place an impeccable machinery first."

Mohammed Ariff said VAT needed serious planning.

"I think the government should start doing it now. It should think of introducing VAT by 2012 but start the ball rolling by preparing for it. Don't think about it after economic recovery because we need two to three years of preparations."

Malaysia has already planned to implement the VAT for quite a long time. The infrastructure should be in place, ready to go but we all know our government, the right hand doesn't know what the left hand is doing, so don't get all hyped on the VAT so soon. Plus, with the precarious economic and political situation, a VAT would probably be something that the current government won't risk.

Malaysia ready for Retail bond market, why I don't think so, pricy stock transaction fees.

From the Edge Malaysia:

Malaysia is ready to open up the bond market to retailers towards providing another alternative investment option for the individual investors, said CIMB Group’s deputy chief executive officer (group treasury and investments) Lee Kok Kwan.

With the persisting low interest rate environment, the discussion about opening up the bond market to retail investors has been heating up, although not everyone is in agreement that it should be done.

Criticisms range from the affordability of bonds to the complexities involved in bond trading, which can arguably be beyond the grasp of the average retail investor.

Bonds, with their fixed return rates, are typically considered safer investing instruments than equities, although the relative ratings of the instruments must be taken into consideration.

Moreover, the fact that the United States subprime and the eventual global economic crises originated from structured investment products has also cast further scepticism on the viability of opening up the fixed income market to the general retailer.

Speaking to The Edge Financial Daily recently, Lee said the next major step forward for the local debt market would be to implement retail-side service. “The next big step is the retail bond market,” Lee said. “Typically, you don’t want to let retailers invest in credit ratings that are too far down the credit curve to protect them because they are not in the same position as a big unit trust or big fund manager to study the credit terms.

“You would want to have some minimum standards and credit rating they can buy into. Having said that, once you allow them access into the bond market, the yield is much higher than bank deposits.”

As with most other countries, interest rates in Malaysia have come off since the onset of the economic crisis. Presently, the 12-month rate for fixed deposits in almost all major banks has been set at 2.5%, 50 basis points higher than the benchmark overnight policy rate (OPR) set by Bank Negara Malaysia.

Although the stated return of Malaysian Government Securities (MGS) might not be that much higher than FD rates — the three-year benchmark MGS maturing on August 2012 has a coupon rate of 2.509% — investors could see greater returns through the trading of their bondholdings.

Moreover, there is an argument to be made that the papers of some corporates, or private debt securities (PDS), which are highly rated — AA or higher — are safer investment instruments than some of the equities available on Bursa Malaysia presently.

In addition to better returns, access to the bond market also allows retail investors to diversify their investment portfolio, which is presently limited to the equities market, unit trusts and banking products.

“In countries where savings rates are very high, there’s a need for it,” Lee said. “In the US, where the country’s savings rate is very low (about 6%), you don’t need it — you can route it all through the mutual funds. The individual deposits in the bank system here are about RM500 billion.”

There have been some criticism from certain quarters that retail investors simply cannot afford to invest in bonds, which are presently sold in RM5 million denominations. While the process of dividing up the denominations might be straightforward, Malaysian Rating Corporation Bhd (MARC) CEO Mohd Razlan Mohd said the cost might be prohibitively high.

“It’s a function of cost. At what cost do you want to open it up? In theory, we should let the bonds be traded in smaller denominations. But the cost might be prohibitively high to divide up the bonds and it would become costlier for bond issuer who has to pay Bank Negara Malaysia to maintain the system,” he said.

Razlan added that existing bond funds already provided the same kind of diversification and exposure to bonds, although he cautioned that the viability of those funds would depend on the bond manager.

Lee demurred. He said the bond market did not need to incur additional costs, but could use the same existing platform of the equities market.

“When you develop a retail bond market, you don’t want to create unnecessary costs. Just piggy-back on the stock exchange infrastructure and use the same platform. Instead of quoting equities, you list the bonds there. Instead of dividends, you have a coupon. Singapore to some degree has done this, which has worked quite well.”

Hong Kong and Singapore currently have a system that allows the purchase of bonds denominated in one thousand units of their local currency through automated teller machines (ATMs). The banks providing the service take a cut from the transaction, of a few basis points, as their service fees. Supporters of the move also say that the introduction of retail investors will lend greater depth to the bond market as it provides greater diversification in the investor base. This would then boost stability and allow for greater trading in the secondary market, which will also improve the pricing mechanism.

Currently, only high net-worth individuals with RM3 million or more can directly purchase bonds.

The fact that retail investors are interested in purchasing bonds is plainly evident from the overwhelming response to the RM2.5 billion three-year Sukuk Simpanan Rakyat issued by Bank Negara Malaysia in January, which was fully taken up within two days.

The bond market here should be traded in smaller denominations. But there are other absurdities at work in the market. For instance, the liquidity of bonds here is non-existent. What happens when an investor wants out of a bond fund?

The bond fund uses its existing supply of cash or tries to find other investors to take the spot of the one that just left. I'm not an expert, but when a person leaves, does he get cash worth the Net Asset Value of the bond fund? Because if the fund were to actually take his portion and sell it on the market, the fund might not get the NAV price as desired. So who loses out? the one that left or the remaining investors of the bond fund? I say the losses are subsidized between the remaining investors of the bond fund.

The big problem with bonds here is that the minimum cost of a corporate bond is RM250,000. The average household income in Malaysia is about RM3200 based on a 4% growth rate from 2004 data from the Department of Statistics compounded to 2008. Here, I assume 70% urban/30% non urban population distribution (from the CIA world fact book).

Assuming this average income, it's hard to see how an individual investor could ever hope to buy the cost of a bond. I doubt very much so that the average Malaysian household will get to RM250,000 based on salary alone. Even if they were to put away a portion of their income (20%), they would probably be able to save RM500,000 at the end of 30 years and buy only two bond issues. That's an absurd number. Forget about diversifying bonds on your own.

Theoretically, there are not a lot of reasons why they should trade in such large amount per unit. First of all, debt issues aren't huge compared to stock market listings. If investors can buy in smaller lots for stocks, why can't they do the same for bonds? The banks just have to write checks from the bond payouts to a larger pool of investors which shouldn't cost that much. It's more bond holders to handle, but financially, it does not cost that much more.

But alas, the market here in Malaysia is much more developed for stocks than for bonds. First of all, when I tried to sign in to the BPAM website, guess what? I couldn't even register properly. It wouldnt' even send my verification link to my email address. That's just horrible. There is very little information on bonds out there. Most of it is centered around stocks.

While i'm on this subject of criticism of capital markets in Malaysia, the transaction fees for purchasing and selling stocks are incredibly high. In order to buy and sell a single stock, the transaction fees are 1.4% (.7 to buy, .7 to sell). Effectively, this makes liquidity in the market horrible. In countries like the US where transaction fees are $10 per trade so (RM35 to buy, 35 to sell), with just a trade size of RM5000, the US will be on the same price as Malaysia. Over RM5000, it will be even cheaper!

They should have a cap on the transaction fees because this policy is making liquidity poorer by taxing large transactions. They will try anything and everything under the sun to increase liquidity, but capping the transaction fees. It's obvious the reason why, profits. All these stories about increasing liquidity by having the FTSE index the markets are merely cosmetic.

US recovery to happen in 2012, MIER director looks to US recovery for Malaysia's hopes

From the Business Times:

THE recovery of the US economy, the key to the world economic revival, will probably happen in 2012, says Prof Emeritus Datuk Dr Mohamed Ariff Abdul Kareem, executive director of Malaysian Institute of Economic Research (MIER).

"Recently, there were some signs indicating that the crisis is easing, but it is still on. What I am saying is the world economy is still contracting at a slower pace.

"The US, in particular, showed some signs of let-up in the sense that the second quarter registered a much lower contraction than expected," he said in an interview.

The forecast was -1.5 per cent growth in the US but it turned out to be -1 per cent but the fact remains that the economy is still contracting.

Mohamed Ariff said the story is pretty much the same every where else.

"Europe is also contracting, albeit at a low and slower pace. The situation is the same in Japan, South Korea and many East Asian countries.

"This has led some people to say the worst is over and that there are also the so-called 'green shoots' (indicators of economic recovery) here and there which are very promising.

"But to me, the worst will be over when the economy stops contracting. (Currently), the global economy is still contracting.

"Of course, there are a few cases like India and China, where growth is positive. Indonesia is also having positive growth but their growth is way below the big crisis level," he said.

Mohamed Ariff said China showed some improvement in the second quarter, registering 7.9 per cent growth, above the 7 per cent growth forecast.

He said the recession may end but the recovery will not begin. "A recovery to me is getting back to growth trajectory which I think probably will take two to three years. So 2012 is probably the best bet for the world economy to be back on track."

Mohamed Ariff also warned that there are serious limits to stimulus packages that a country can put up and there are also interest rates that have been pushed down.

As to where Malaysia fits in this kind of a global picture, Mohamed Ariff said Malaysia is a trade-dependent country, noting that 3 per cent growth in the US will "help our economy a lot more than the double-digit growth in China".

"This is because China's growth does not spill over to the rest of the world like the US does. So this is why I think China's growth is largely internalise.

"It is not externalise like in the case of the US. This is why I think we really have to wait until the US economy recovers," he added.

Looks like someone in the economic board here in Malaysia is on board. Compare this with Mr. Tan Teng Boo who proclaims China's growth will bring Malaysia out of a recession. It's straight forward math, if one part of your growth engine takes a big hit, other parts need to make up for it. But if that part is a very significant part of your growth engine, the other parts need to make up a lot more in percentage terms to cover the loss.

Last I checked with 20% y-o-y in trade decreases, China wasn't making up for it.

Air Asia posts better than expected results, not to speculate in oil markets for now.

From the Edge Malaysia:

Air Asia has beaten expectations in its second-quarter (2Q) results, posting a net profit of RM139.18 million in an operating environment where many airlines are in the red.

Its chief executive officer Datuk Seri Tony Fernandes anticipates even stronger earnings in the current third quarter ending Sept 30, in view of the robust sales in July and August.

Yesterday, the low-cost carrier announced its 2Q net profit, which was significantly higher than the RM9.42 million in the previous corresponding period. Its core operating profit soared to RM128.42 million, up 328% year-on-year (y-o-y) from RM29.98 million.

Fernandes said via teleconference that the performance actually exceeded his own expectation.

“I am very pleased with the results. In the first half (of 2009), we are one of the few airlines around the world that posted true operational profit,” he added.

AirAsia’s operational profit rose to RM399.96 million, up more than twice the RM154.47 million reported for the same period last year.

He added that the dramatic increase in its earnings was largely due to AirAsia’s strategy of cutting passenger fares, which were offset by higher volumes. Cost cutting such as the removal of administrative fees also helped, he noted.

Fernandes said that average passenger volume had grown 24% to 3.52 million passengers from 2.84 million y-o-y, while fares had come down by 19%. Its load factor remained unchanged at 75%.

Meanwhile, ancillary income had increased by 3% to account for about 14% of its profits. AirAsia’s margins, he added, were an industry-leading 21%.

“This shows that our strategy of lowering the price works,” Fernandes said, adding there had been no impact from its competitor’s sales campaign.

As for its operations overseas, AirAsia’s Thai operations managed to narrow losses to RM8.2 million. Indonesia AirAsia also reported a loss of RM21.8 million although it managed to grow its passenger load by 47%.

Fernandes said AirAsia’s overseas operations were poised to become an important contributor to the group’s bottom line, noting that the “tide has changed”. The delivery of new Airbuses to the two destinations would help to turn those businesses around, he added.

Commenting on the delivery of new aircraft, he said AirAsia might further defer delivery of another eight aircraft in 2011 if the proposed new LCCT terminal is not ready by then.

Due to the insufficient space at the current LCCT, the low-cost carrier has decided to postpone the delivery of eight aircraft next year.

Fernandes added that he expected most of the growth next year to come from Thailand and Indonesia. AirAsia is also developing its Penang hub to ease the congestion in Kuala Lumpur.

As to whether AirAsia would hedge its fuel given the present level of US$70 per barrel, Fernandes said: “No, there’s too much volatility.”

“We spoke with two major oil companies and they said that supply and demand does not match the current price. There’s so much volatility and we don’t want to play in that game yet.”

For the second quarter, AirAsia wrote back some RM18 million to RM20 million as banks released collaterals AirAsia had deposited as security against its hedges. The figure also included savings from lower handling fees charged by airports.

That's good. At least Air Asia probably fired their oil hedging strategist. The main problem is that they need to hedge to survive, and not hedge to speculate. Any paper profits derived from hedging short term, has a chance of hurting them in the long run. Even at 70 dollar oil, unhedged, Air Asia can still make a profit.

Anyways, I hope Air Asia won't return to its old ways, but we will have to see. Quoting "we don't want to play in that game yet" doesn't exactly inspire confidence.

A look into the life of a trader

From the Wall Street Journal:

Steven Schonfeld has nothing to worry about from the new U.S. executive-pay czar. The 50-year-old owner of trading firm Schonfeld Group Holdings LLC is living it up like the financial crisis never happened.

He says he made $200 million last year and just moved into a mansion near the Long Island Sound with its own nine-hole golf course. He has spent $90 million on the home, he says, and is currently erecting a poolside cabana designed to look like the Cove Atlantis resort in the Bahamas. "I don't think it's putting anyone's face in it," he said recently while showing a visitor around the property. "I live in this house."

Many of Wall Street's A-list firms are retrenching, but plenty of B-list firms like Mr. Schonfeld's are prospering and hiring. In Mr. Schonfeld's 27 years in the business, his small, little-known firm never had much success hiring traders from Wall Street's biggest firms -- until the financial crisis battered the industry last year. Since then, he has hired more than 20 traders from big banks, and he wants a dozen more.

Mr. Schonfeld isn't trying to rein in the every-man-for-himself culture that churned out big profits on Wall Street during the boom but even bigger losses at some firms during the bust. He provides seed money for new hires and gives them freedom to decide how to trade. Traders keep a percentage of their profits. His best ones make $5 million to $10 million a year, he says.

The firm, founded in 1988 with six employees, hasn't always focused so heavily on trading. Over the years, it also has handled trades for day traders and institutions, among other things. These days, it is betting more of its own capital than it once did, just as firms such as Morgan Stanley dump businesses that don't fit the lower risk profiles it adopted when it converted to a bank-holding company last year.

Last year, Mr. Schonfeld's trading strategies -- some are based on short-term market moves -- generated 35% of the firm's profits, says Mr. Fishman. Schonfeld Group expects revenues of $250 million to $350 million this year, down from $590 million in 2008, when volatile markets generated better trading opportunities. Mr. Schonfeld says he expects profit growth to bounce back as the firm's newly hired traders get established.

Mr. Schonfeld got his start on Wall Street in 1982 as a broker at Blinder, Robinson & Co., which got into trouble over its sales practices for penny stocks. He says he steered clear of those securities. In 1987, he left for Prudential-Bache Securities Inc. and began trading, but soon quit to trade his own money full time.

In the 1990s, he built a business around training day traders. When the Internet bubble burst, he acquired several struggling rivals. In 2006, he sold a majority stake in the day-trading business, but held onto the traders who were operating with the firm's capital.

Mr. Schonfeld developed a reputation for obsessing about statistical probabilities and making rapid-fire decisions. He sleeps just four or five hours a night, and often emails trading ideas to lieutenants between 3 a.m. and 5 a.m. At one dinner with traders, he said that anyone who looked at the menu for more than 90 seconds was in the wrong business.

In mid-2007, Mr. Schonfeld noticed that many traders using math-based strategies were notching losses. Figuring such losses wouldn't persist for long, he began trying to lure such traders away from big firms, an effort that gathered steam as Wall Street's troubles deepened last year.

In January, Ashwin Kapur, 33, left a Barclays PLC trading desk in New York to join Schonfeld. A veteran also of J.P. Morgan, Credit Suisse Group and Royal Bank of Scotland Group PLC, he is working on a trading system to exploit discrepancies between prices in stocks and derivative contracts such as futures and stock options. Schonfeld executives say they plan to bankroll the venture, called Systematic Trading LLC, with as much as $250 million in capital, and will split any profits with Mr. Kapur. If there are losses, the firm will have to bear them.

Mr. Kapur initially will have less capital to trade with than he did at Barclays. But he says he could earn more money because his compensation won't be affected by Barclays's various nontrading businesses. Working at Schonfeld "directly ties my take-home to my performance," he says. His contract entitles him to a few million dollars in bonuses if he generates consistently positive returns.

Mr. Schonfeld is rarely seen in the firm's Manhattan office. He runs his own trading strategies from the company's headquarters in Jericho, N.Y., near his mansion in Old Westbury.

Three or more times a week he keeps right on wagering at the gin-rummy table after the markets close. Playing cards, he said, is a lot like playing the markets. He doesn't like to play games where he doesn't have an "edge," he explained one recent afternoon as he stepped into a card-playing room in his home to sit down with five other players.

Wearing a gray sweater, faded jeans and white Nike sneakers, he settled into a chair embroidered with playing cards. Michael Sall, author of the book "Gin Rummy: A Predator's Guide," says Mr. Schonfeld can match up with the best gin-rummy players in the U.S., sometimes walking away with six-figure winnings.

The game broke up for dinner, and Mr. Schonfeld's chef served veal medallions and halibut. (At high-end restaurants, Mr. Schonfeld has been known to order one of everything on the menu, with his party leaving much of the food uneaten.) Over dinner, Mr. Schonfeld mused about, among other things, the odds of getting the same two gin partners twice in a row in a six-person game (10%, he says), and the chances that the Dow Jones Industrial Average will rally after a sharp decline (55%, he says).

Mr. Schonfeld has also become an avid golfer. No one is allowed to use his golf course if Mr. Schonfeld, a nine-handicap player, isn't at home. "It's not a private golf course," he explains. "It's a personal golf course."

I thought it would be interesting to do a post of the life of a trader. Apparently most, if not all traders use some kind of mathematical model to trade. The amount of money traders can make is incredible and the job is taxing to some degree. In another article, some of the mathematical trading models are developed by autistic people.

Apparently, a strong grasp of math and probability are prerequisites for the job. Some of the algorithms that traders use are incredibly predatory such as baiting other traders and taking their money. Some are self learning and never static. Trading strategies are always changing and can become completely obsolete at any time.

It's super interesting as their job isn't mundane like the typical day job of most people. Their life is a constant up and down depending on whether they make or lose money.

Taiwan-Malaysia trade suffers, asian economies won't recover without US

From the Business Times:

TRADE between Taiwan and Malaysia is expected to be at US$10 billion (US$1 = RM3.50) this year, a decrease from the US$12.3 billion posted in 2008.

According to the Taipei Economic and Culture Office in Malaysia, this is due to the global financial crisis.

"The decrease is not much as the Taiwanese government has been trying to help local manufacturers continue exporting while providing opportunities to promote their products," director of the economic division, Lin Min-Li said yesterday.

In 2008, Taiwan's imports from Malaysia were at US$6.8 billion while exports stood at US$5.5 billion.


Besides that, Lin said the Taiwanese government was also helping and encouraging investors to look at five important markets in South East Asia - the Philippines, Indonesia, Malaysia, Thailand and Vietnam.

"Among the five countries, Malaysia is the most successful for investment. We prefer Malaysia due to the stable political climate, as well as good manufactured products.

"There is still room for Taiwanese investors to come to Malaysia," he added.

According to Lin, Taiwan ranked number three in terms of foreign direct investment in Malaysia for the first five months of this year.

We see a 20% drop in trade between Malaysia and Taiwan. When you look at Malaysia's largest trading partners, Singapore, US, Japan, China, and Thailand, each one of them have based their policies on growth through exports, with the exception of US. Even worse, each one of these countries' largest trading partner is the US. Like I said before, this is exactly the reason US needs to recover first for Malaysia to recover. It takes more than talk to say the world economy has diversified itself away from the US, especially Asia.

US Unemployment, Autos, will a car rebate program work for Malaysia?

With the latest employment report from the US showing some positives, I'd just like to point out that the unemployment numbers have been showing job losses but the unemployment rate has decreased from 9.5% to 9.4%. This number can vary month to month but over a period of a few months, will straighten itself out. I don't think people should be jumping for joy just yet.

Some people have been criticizing auto sales in the cash for clunkers program to be just a subsidy for a short time. This is true for the specific industry, next year, the car sales will certainly fall without the cash for clunkers program. But people have been failing to realize how much economic windfall comes from a single car sale. Getting car sales up could be one of the most cost effective ways to help bring the global economy and American economy on track.

A single car involves thousands of parts from all over the globe. The heavier, more expensive parts will likely be made in the United States. I can think of no single purchase which has positive effect on so many industries than autos. Houses by comparison, involve mainly building materials and have a larger price tag, but the sheer number of components pales to a single car.

This brings me to my next point. It is likely a general rebate program such as the one the US uses in it's "cash for clunkers" program will not work in Malaysia. Why? Malaysia doesn't have a huge auto industry and mainly imports most of its auto component needs. The market is too small. Such a program won't do much to help the Malaysian economy. Also, large components can be made by nearby countries and shipped at a relatively low cost, thus increasing the economic leakage of such a program to other countries.

Of course, they could give an even bigger rebate to the Malaysian car manufacturers. That would work much better. It is important though, that the more expensive components are manufactured in Malaysia. Given the high tax rate of autos here, and that a lot of used cars are still worth quite a lot of money, much higher than RM5000 the government is refunding, it is just too small for people to seriously consider taking up the offer. They should probably up the rebate to 20% of the cost of a new car.

Glovemakers shares up on rising demand

From The Business Times:

OSK Research has an 'overweight' rating on the sector, raising its target prices on some rubber glove stocks

SHARES of rubber glove companies are on a roll right now and will continue to move up, riding on the global outbreak of influenza A (H1N1).

OSK Research Sdn Bhd has an "overweight" rating on the sector, raising its target prices on some rubber glove stocks, in line with recent developments in the industry's spurring demand for rubber gloves.

The local research house organised plant tours to four rubber glove companies last month, namely Top Glove Corp Bhd (7113), Supermax Corp Bhd, Kossan Rubber Industries Bhd and Hartalega Holdings Bhd.

"For Top Glove, we recommend a buy with a target price of RM8.50 from RM7.40 previously and Supermax, also a buy with a target price of RM3.85 from RM2.69 previously," it said in a report yesterday.

"We are also recommending a buy on Kossan, with a target price of RM4.98 from RM4.48 previously as well as on Adventa, with a target price of RM1.87 from RM1.31 before," it added.

While it has revised its target price upwards to RM5.45 from RM4.10 for Hartalega, the research house has downgraded its call to "neutral" from "buy" previously, given that Hartalega's share price has caught up with the valuation.

OSK Research said demand for rubber gloves from the medical industry remains strong, especially from developing countries.

"But glove supply is still short. Since the H1N1 outbreak has been raised to a pandemic level, the governments of developed countries like the US and Europe have urged all healthcare multinational corps to stock up on rubber gloves, which has created short-term demand.

"Over the longer term, demand is expected to come from developing countries like China, India and Russia, which are gradually increasing their use of gloves," it said.

Also, with the US tightening its Food and Drug Administration regulations effective December 2008, the number of glove defects per batch would need to be reduced to qualify for entry to the US market.

This would reduce the supply of rubber glove exports to the US due to the retention of "unqualified"' gloves at the ports and hence create new sales opportunities for the established rubber glove manufacturers, said OSK Research.

Glovemakers have been making the news recently as stocks to own. Lets keep things in perspective. Lets take a look at the number of H1N1 cases as reported by the WHO worldwide. The following charts are based on that data.



First Chart is the average growth rate of H1N1 cases per day. This tells you over each period, the average number of new cases of H1N1 per day. This chart shows we may have hit the peak of new H1N1 cases in early june. The number of new cases per day may have topped out. It has been declining ever since.



The second Chart shows the percent growth rate of H1N1 cases. This tells you how saturated we are in terms of H1N1 growth. As we get further into this epidemic, we will reach saturation compared to a previous time period. This doesn't tell you much about the number of new cases, but as time goes on, we have a decreasing growth rate which means we are getting into a more mature growth and into inevitably into a decline of H1N1 cases.



This is confirmed by the following compounded daily growth rate between each time period in the third graph. The last graph clearly shows we are not having an increasing compounded growth rate. The compounded growth rate per day is declining.

While there will still be demand for gloves due to the H1N1 epidemic, my feeling is that we have already seen the peak in sales, and the euphoria over the glove makers will die down much quicker than most people think. We are already reporting fewer H1N1 cases per day than in June, so the glove makers probably won't do any better than the current quarter in terms of top line growth due to the H1N1 flu.

E&E, gas sales help cushion decline in June exports

From the Business times:

MALAYSIA'S exports fell at a slower rate in June, helped by a slower deceleration in the exports of electronic and electrical (E&E) products and a rise in liquefied natural gas (LNG) exports.

Exports in June fell 22.6 per cent year-on-year, beating a 25.47 per cent contraction forecast in the Business Times poll.

Together, E&E and LNG accounted for 46.2 per cent of the overall exports.

Imports also dropped 20.8 per cent from the same month a year ago, while total trade shrank by 21.8 per cent to RM81.09 billion.

The International Trade and Industry Ministry (Miti) said month-on-month, exports rose 5.1 per cent in June to RM45.1 billion from May, while imports rose 9.4 per cent to RM35.99 billion.

Economists said the decline in the country's exports is easing, but improvement is likely to be gradual because exports still register a sharp drop year-on-year.

"The month-on-month trend shows that the contraction in global demand is stabilising, but we are not expecting a V-shape recovery in exports because major developed economies are still in recession in the first half of the year," RAM chief economist Dr Yeah Kim Leng told Business Times yesterday.

"Some are projecting a recovery or slight growth in the US economy in the third quarter, but not a robust recovery," he added.

Yeah said at a 20 per cent contraction, Malaysia's exports are still better than other Asian countries such as Singapore, Japan and China, whose exports have shrunk between 30 per cent and 40 per cent since the onset of the global financial crisis.

MIDF Research head Zulkifli Hamzah said the month-on-month recovery in exports was in line with regional trend, driven by intra-Asian trade.

"The Western economies of US and Europe are still weighed down by weak demand and overcapacity. As Malaysia is an open economy, a meaningful recovery needs to have the participation of the US and Europe," he said.

Zulkifli said while Asia has the capacity to drive demand, probably until the end of the year, the momentum must be supported by the Western economies. Otherwise, the recovery would not be sustainable.

He really means that Malaysia is an export-oriented economy. We probably won't see the export numbers get much worse, but I believe we are getting used to the news that exports are improving only a little bit. It's not really telling us anything new at this point. Reality will sink in that we have a long ways to go and probably won't see the numbers of last year for a very long time.

Axiata unit proposes rights issue to raise US$300mil

From the Star:

XL plans to raise US$300mil to reduce borrowings

PETALING JAYA: PT Excelcomindo Pratama Tbk (XL) of Indonesia, which is a unit of Axiata Group Bhd (formerly known as TM International Bhd), has proposed a rights issue to raise some US$300mil to reduce borrowings and improve its capital structure.

In a filing with Bursa Malaysia yesterday, Axiata said the rights issue would consist of equity and mandatory convertible notes (MCNs).

The size of equity and the MCNs, final issue price of the common shares as well as the conversion price of MCN will be determined later.

XL’s major shareholders, including Axiata and Emirates Telecommunications Corp International Indonesia Ltd, have committed to fully subscribe to their rights entitlement.

“This financing process demonstrates Axiata’s full support and backing to XL, and will provide XL the financial ability to continue investing in its business and strengthening its market position,” said Axiata president and chief executive officer Datuk Seri Jamaludin Ibrahim in a statement.

XL president director Hasnul Suhaimi added that the cellular operator’s operating performance was strong last year as both revenue and earnings before income tax, depreciation and amortisation grew by almost 50%.

With the proceeds to par down debts, XL will be able to reduce financing costs and improve its balance sheet to allow further investing for growth.

It was reported earlier that the Indonesian mobile operator required about RM2.1bil this year for its capital expenditure and that a rights issue was in the pipeline.

Jamaludin said Axiata was committed to increasing the free float of XL when market conditions improved. Axiata via Indocel Holding Sdn Bhd currently owns 83.8% of XL while Emirates holds 16% and the public 0.2%.

The proposed rights issue is subject to shareholders’ approval at an EGM to be held sometime this year and is expected to be completed by the fourth quarter.

It's simple, with this market being so buoyant, companies have been taking advantage of shareholders' good graces and raising money. We are obviously still in a defensive posture given the amount companies these days are asking from shareholders. I don't want to even mention the more ludicrous rights issue of 20% from Air Asia.

Penang Port Listing to see light of day

From The Business Times:

TERMINAL operator Penang Port Sdn Bhd (PPSB) can finally move forward with plans to privatise and float its shares on Bursa Malaysia as it looks set to hive off its loss-making ferry operation to state infrastructure company Syarikat Prasarana Negara Bhd.

It is understood that Prasarana is ready to take over the ferry operation pending approval from the Prime Minister’s Department.

A takeover is expected this year.

The ferry service between Penang island and Butterworth has been a major hindrance to state-owned PPSB’s listing plans in the past due to the losses incurred, running into some RM13 million to RM15 million a year.

“The listing of PPSB will most likely go through this time.

In the past, PPSB wasn’t able to do so because of the loss-making ferry service, which the approving authorities believed could make the company’s IPO (initial public offering) unattractive to the public,” a source close to the situation told Business Times.

PPSB’s former chairman, Datuk Abdul Latif Abdullah, and automotive logistics provider Konsortium Logistik Bhd were previously reported to have expressed interest in taking over PPSB.

PPSB has been harbouring hopes of hiving off its ferry operation as early as 2004 as it has been dragging down the company’s overall profits from day one.

The problem lies with its fares, which are said to be too low.

In an interview with
Business Times on August 23 2004, Abdul Latif spoke about a plan to hive off the ferry operation to the government but still run it for a fee.

The move was likened to the 2002 Widespread Assets Unbundling exercise of Malaysian Airline System Bhd (MAS), which saw Penerbangan Malaysia Bhd take ownership of the national carrier’s non-profitable domestic operations.

However, the plan fell through.

The public ferry service was absorbed into PPSB as part of its corporatisation deal with the Penang Port Commission (PPC) in January 1994.

Stories like these give me hope that Malaysia is starting to move to a more forward looking, big picture economy and less of the petty politics and handout type that is generalized by so many observers, foreign and domestic.

With the listing, the Penang Port can move forward to upgrade it's infrastructure and help with expediting and importing products for Penang, a major manufacturing center without needing any money from the government. This is the way things should be.

Current Recession worse than thought, '01 Recession milder than expected

From the WSJ online:

The current recession turns out to be worse than previously thought, while the 2001 recession was milder than earlier reported.

Those were two conclusions from wide-ranging data revisions released Friday by the Commerce Department's Bureau of Economic Analysis.

Data for the 2001 recession had shown that the nation's gross domestic product declined 0.2% from the fourth quarter of 2000 to the third quarter of 2001. On Friday, the government said GDP actually grew 0.1% during the recession.

The current downturn is much different. Revisions show that from the fourth quarter of 2007 to the first quarter of 2009, inflation-adjusted GDP dropped at a 2.8% annual rate, compared with the 1.8% drop reported previously. The decline continued in this year's second quarter, producing the worst recession since World War II.

The government initially reports the nation's GDP a month after a quarter's end. That makes the figure a rough estimate. It updates the estimates in the following months, and conducts comprehensive revisions every five years as new data arrive.

Many economists consider a recession to be two straight quarters of declining GDP, but that didn't happen in 2001. Economic activity bounced around in the first nine months of 2001, with a 1.3% decline in the first quarter, a 2.6% rebound in the second quarter and then a 1.1% decline again in the third quarter.

The nation's semi-official recession arbiter, the National Bureau of Economic Research, says the 2001 recession started that March and ended in November, making it among the shortest since World War II. The NBER relied on other economic data -- particularly nonfarm payrolls, which showed a steep decline -- to make that recession call.

I'm looking at this:

Four bad bears by Dshort.com

While the '01 recession was shallower, the accompanying bear market exceeded most bear markets as one of the worst of all time. Only the bear market accompanying the depression was worse. So this begs the question, with the current recession undoubtedly the worse since the Great Depression, will the bear market end earlier or later compared to the '01 recession?

I'll just note though, that the bull market did run up to incredible heights during the '98-'00 bull market compared to the bull market of the last few years. Nevertheless, we still have incredible excesses such as housing, debt, and no savings. Recovery will be muted as savings are being rebuilt. We do have more pump priming going on simultaneously in the world than at any other period in history.

The 1973 oil crisis recession was a lot worse than the '01 recession but the accompanying bear market lasted a much shorter time. Rhetorical question time: Shouldn't the bear market be worse since the accompanying recession was also worse? It should be just by thinking about it. Looking at the chart, apparently that statement doesn't hold. Note that the preceding bull market wasn't huge like the '01 recession. This may be a reason.

When taking a look at the previous bull market to the Great Depression recession, we see a similar run up compared to the '01 recession. The preceding bull market lasted some 8 years and ran up close to 500%.

Generally, based on the bad bear markets chart, it appears that previous bull market excesses have an effect on how long the next recession will be and not necessarily the amount of contraction that takes place during the recession. Take this statement with a bit of salt as we all know markets like to kill theories or past schools of thought. And with this recession, it certainly may not be true.