Three WiMAX licensees fined, MCMC is a joke

From the Star Business:

Three of the four WiMAX licensees have been slapped with fines for not rolling out their networks on time, industry sources said.

The Malaysian Communications and Multimedia Commission (MCMC) is said to have issued letters on the fines to the WiMAX operators more than a week ago.

The players fined are YTL e-Solutions (RM1.9mil), AsiaSpace (RM1.7mil) and REDtone International (RM200,000) for failure to meet the 25% population coverage by the end of March.

The quantum correlates to the level of coverage achieved as at the deadline. However, all three players are appealing against their fines.

Tan Sri Francis Yeoh, head of the YTL Group, told StarBiz that YTL e-Solutions would appeal against the decision on the basis that the company would be ahead of the next roll-out target of 40% by mid-2011.

“We believe in having an extensive network up and running as we don’t see the point in having incremental coverage.

“We take this business seriously. We will have 60% coverage (more than the needed 40%) by the next deadline,” he said.

Another industry player, who declined to be named, said his company had faced a myriad of issues in rolling out its network, especially in relation to obtaining approvals and the land needed to put up the base stations.

“It takes a long time for these government approvals. And if the land is privately owned, prices can be prohibitive for us. This makes it almost impossible to roll out.

“If we were helped with these issues, then it would be fair to impose a fine on us. But these problems are beyond our control,” he said.

Last December, then Energy, Water and Communications Minister Datuk Shaziman Abu Mansor said the Government would withdraw licences from players who could not show good reasons why they are not able to roll out according to proposed plans.

More recently, Information, Communications, Culture and Arts Minister Datuk Seri Dr Rais Yatim said the MCMC should ensure that providers had delivered on what they had promised.

YTL plans to invest up to RM2.5bil over the next five years for its WiMAX roll-out while AsiaSpace is looking at raising RM300mil, having invested close to RM100mil so far. REDtone is looking at raising RM40mil.

It has also been questioned whether the authorities had been lackadaisical in enforcing deadlines and withdrawing the spectrum rights from those who did not use them.

However, as this case indicates, rolling out a telecommunications network can be fraught with difficulties and complications.

It will be just as challenging to manage that spectrum.

I mentioned before that wimax is basically fool's gold. It's an entry into the already crowded wireless arena. The wimax providers are in fact competing with the established telcos in providing wireless internet services. Furthermore, they are handicapped as they don't have the infrastructure built. Betting people would not gamble on wimax competitors taking a substantial market share from the telcos.

The logistics problem of wimax is a pain and an experienced telecom provider would have an easier time implementing than the current batch. The MCMC is another joke of an telecommunications body. How can they have picked so many failing companies? Not only are there infrastructure problems, but the companies have no experience in telecommunications. If I am a government body, I want someone who will have the best chance to build up capacity for the nation. If that means another telco company winning wimax, then so be it.

In light of all the follies of both companies and the MCMC, the only people who will really be affected is the investors who ponied up the capital for this costly wimax infrastructure. Talk about building bridges to nowhere.

2010 budget reflections, property taxes, financial industry goodies

From the WSJ:

Malaysian Prime Minister Najib Razak promised to curb a burgeoning budget deficit while still supporting economic growth with a personal income-tax cut.

Mr. Najib told Parliament in his 2010 budget speech Friday that the government will cut the individual income tax rate by 1 percentage point to 26%. But in addition to the surprise cut, he announced a 5% tax will be imposed from Jan. 1 on property gains. Mr. Najib also delivered an annual report that forecasts the trade-driven economy will contract 3.0% this year -- better than an earlier forecast of a 4.0% to 5.0% decline -- before rebounding next year to growth of between 2.0% and 3.0%, thanks to previous spending measures and low interest rates.

The government is in the final stages of studying a goods and services tax, Mr. Najib said, but offered no timetable.

The government will fund its 51.12 billion ringgit deficit entirely through domestic borrowings and a shortfall of 40.48 billion ringgit in 2010 will be met "primarily from non-inflationary domestic sources."

The report also predicts average consumer price inflation at 1.0% this year, slower than the forecast of 1.5% to 2.0% made by the country's central bank in March. Exports may shrink 19.2% this year, and may rebound to growth of 5.1% in 2010.

The budget also vows to let foreigners own 100% of Malaysian corporate finance and planning companies, up from 70% now, and relax rules on the sharing of commissions between stock brokers and commission-based dealer representatives.

The WSJ got most of the article correct, but failed to mention property gains are as much as 30% for the first year of ownership reducing gradually until 5% in the fourth year. Taxing unfortunately is quite a blunt instrument, but it will curb the rampant property speculation in Malaysia.

With the average household salary of malaysians being some RM4000 per month, I do not see how most could afford properties of RM300 per square feet. It just boggles the mind. A 300k place would cost about RM2000 in payments and that is not a reality for most Malaysians. 50% of household income is just nuts.

They say our housing markets are strong, but yet they come in with teaser rates just like options arms in the US. News flash, the housing industry encourages a lot of questionable loan practices in Malaysia as well! When the teaser rates adjust, will home buyers be able to pay? 2.5% adjusted to 7%...ouch. comes in at about 70% increase in monthly payments!

Ever since Najib won the election in April, I mentioned that given his affinity to the financial industry through personal ties as well as having a background in economics, the sector would benefit during his tenure. While the budget lacks any "big bang" policy movements for the financial industry, liberalizing regulations is always effective.

MASkargo sees China revenue falling, China's hard asset binge

From the Business Times:

Malaysia Airlines Cargo Sdn Bhd (MASkargo), the air cargo unit of Malaysia Airlines (MAS), has warned that revenue from its operations here could fall 20 per cent this year on lower yields and capacity.

Shanghai is the second biggest contributor to MASkargo's overall revenue, after Kuala Lumpur, accounting for some 30 per cent contribution.

The Chinese station saw revenue drop 50 per cent in the first half compared with the same period last year.

It handled some 50,000 tonnes of cargo last year.
Parent MAS' capacity cuts on passenger flights in the first half of the year also affected MASkargo's bellyhold capacity.

MAS reduced its flights here to eight times a week from 14, while MASkargo trimmed its freighter service to 10 times a week from 13.

Song said that things were looking up now, based on China's trade figures which show signs of a recovery since September. This has enabled air cargo companies like MASkargo to gradually raise their freight rates again.

Quarter-on-quarter, Song expects MASkargo to post 35 per cent revenue growth in the fourth quarter.

The article had me fooled for a moment into thinking MAS will see china freight continue to decline, when in fact, it already has. Mostly, I see a recovery in growth q-o-q as pointed out by the last sentence. This is hardly newsworthy. If the Baltic Dry Index is any indicator, freight rates will not be as good going forward. China has been reported going on a massive commodity buying spree and while they mean good, it is way too early as this economic downturn has still a prolonged period to go.

It would not surprise me, next year, to see the same headline again as China retracts from its recent asset buying spree and realize that they have bought way too early in the economic cycle.

Removal of brokerage fees likely: Kenanga

From the Business Times:

The government is likely to remove or reduce minimum brokerage fees to boost the equity market in the 2010 Budget, according to Kenanga Research.

It will be tricky for the government which has projected to cut 15 per cent of its operating expenditure to maintain a moderately high development in spending, said Kenanga in a statement today.

"Realistically, we expect the operating expenditure to be reduced by no more than five per cent, largely by way of reducing or restructuring subsidies which had ballooned to about 22 per cent of total operating expenditure from just 8.5 per cent in 2007," it added.

The government will need to allocate more than RM50 billion in development expenditure for 2010, said the research house.

The 2010 Budget is also expected to include the removal or reduction on stamp duty for properties above RM250,000 to stimulate property purchases, according to Kenanga

I've left in some other items outside of brokerage fees for those who are interested in the 2010 budget. The reduction in transaction fees are a boon to the financial sector. If they could set the fees at a flat rate instead of a percentage, then the change in plans could benefit many financial companies.

The way of commissioned brokerage should go out of fashion. For those that don't need or want personal brokers taking a share of their profits, they should get the right to lower fees. Not only is it good for the retail investor, but the stock market benefits from higher liquidity resulting from investors worrying less about making up the transaction costs in buying and selling securities.

Public Bank nets RM639m profit in Q3, trouble brewing?

From the Business Times:

Public Bank Bhd (1295), the country's third largest bank, reported a 3.7 per cent higher third-quarter net profit as it earned more from loans, despite a weak economy and even as it has set aside more money to cover potential bad debts.

Net profit for the three months to September 30 2009 came in at RM639 million, although revenue fell 12.7 per cent to RM2.4 billion.

The bank has put aside RM176.4 million of allowances for loan losses, 65 per cent more compared to the same time last year.

Managing director and chief executive officer Tan Sri Tay Ah Lek said Public Bank is on track to achieve a 14-15 per cent loans growth target this year, driven by demand for loans to small businesses, mortgages and car loans.

Despite a difficult economy this year, Public Bank's net profit has expanded consistently in the first nine months this year.

Net profit in the second quarter grew 3.6 per cent to RM611 million from RM589 million in the first quarter, and improved further by 4.6 per cent in the latest quarter.

Loans grew by 14.3 per cent on an annualised basis, while deposits expanded by 19.5 per cent. This compares with the industry's 6.8 per cent growth for loans and 6.3 per cent for deposits.

Public Bank is considered the best bank in Malaysia and is substantially increasing allowance for bad loans. I loathe to see what the other banks in Malaysia have to say. Loan growth profits seem to be what is holding up the bottom line. I imagine that the loan growth will taper off as demand for houses, cars, and mortgages wane from the initial rebound after the financial crisis.

If loan growth profits were to come down and bad loans were to increase, this would not bode well.

Malaysia's economy needs only a mild increase in western countries' consumption to put the country on much better footing, but if that's not helping, I don't know what will.

MIER expects tax cuts in Budget 2010

From the Business Times:

CORPORATE and individual taxes are likely to be reduced by one to two per cent in the 2010 Budget, according to the Malaysian Institute of Economic Research (MIER).

The reduction would not affect the government's revenue, MIER executive director Datuk Dr Mohamed Ariff Abdul Kareem said at a press conference in Kuala Lumpur today.

"Since 2010 will be a better year than this year, then shaving off the tax rates may be offset by increased income base. So I don't think it will affect government's revenue," he said when presenting a report on MIER's economic outlook for the third quarter 2009.

Corporate tax is currently at 25 per cent while individual income tax is at 12 per cent for chargeable income exceeding RM35,000 to RM50,000.

Mohamed Ariff said the tax reduction would have positive impact on the economy as well as investors.

Asked whether such a reduction was in preparation for the introduction of the Goods and Services Tax (GST), Mohamed Ariff said: "It could be."

He said GST taxed on consumption and not income, thus providing an incentive for people to work harder and earn more.

"In Malaysia, there is a need for GST because the number of people paying tax is small, so everybody will chip in. Everybody is contributing because everybody is consuming. So the tax base gets bigger," Mohamed Ariff said.

To me, I don't know if MIER has inside information into the PM's agenda, but a tax cut would be fine in tandem with an imminent GST implementation in the next few years. I'd rather not have a tax cut because the huge stimulus needs to be paid down and the only way that is going to happen is through tax revenues.

I doubt that the "future" revenues from the recovery will be enough to sustain. If the recovery is weak, cutting taxes is a fiscally irresponsible move especially considering government revenues took a nosedive this year.

Maxis IPO could turn off investors

From the Business Times:

But at a fund manager briefing by CIMB in Kuala Lumpur last week, investors questioned why Maxis, stripped of its prized assets in India and Indonesia, deserved to be valued at the figure of two years ago. Malaysia is a fully saturated market in terms of SIM penetration.

“People have talked about 14 to 16 times (price to earnings ratio),” said Aberdeen’s Jalil. “I think at the lower end of the range it does look OK but if it’s in a late teen or something, it might put off certain people.”

Maxis, which earned RM1.14 billion in the first half of 2009, said it plans to pay out 75 per cent of its net profit as dividend. CIMB Research said Maxis had a dividend yield of between 5.3 per cent and 5.9 per cent in 2010, compared to the 4.6 per cent yield of the FTSE Bursa Malaysia KLCI.

But investors were not impressed.

“If I want to buy for yields, I may as well buy a bond, that way I am not subjected to the ups and downs in the market,” said the CIO of a fund management firm. -- Reuters

I concur as well with the article. The yield of 5.3 to 5.9 pc is not bad, but there are other dividend stocks that may be more attractive in less competitive markets. We have a mature telecom market where revenue growth will most likely amount to GDP growth. The only area which it could grow is in data services but that market is also highly competitive.

For instance, gaming and tobacco stocks are excellent yield stocks in less than competitive markets. Their games and cigarettes have built followings. Telecoms can't distinguish their products from one another easily and usually leads to high attrition as one provider offers better deals.

My take is that Maxis will be priced similar to Digi differentiated only by the customer mix they serve. Digi serves the lower end consumer and therefore might be cheaper with lower margins while Maxis might be a little pricier with higher margins.

MAHB to invest big in retail services

From the Business Times:

Malaysia Airports Holdings Bhd (MAHB) is planning a substantial investment to beef up its retail shopping and services to capture the higher revenue potential.

Its chairman, Tan Sri Dr Aris Othman, said a major renovation of its satellite building at the Kuala Lumpur International Airport (KLIA), is nearing completion.

According to Aris, MAHB will now focus on renovations to the main terminal building at the KLIA to enhance and modernise the retail facilities there.

"We realise we cannot rely on airport charges alone as it tends to remain stagnant or low, due to the competitiveness of many airports around the world," he said during the graduation ceremony of 194 airport security staff in Sepang today.
Aris said with the completion of the new low cost carrier terminal (LCCT) by the fourth quarter of 2011, a more enhanced shopping experience would be available.

Works on the new LCCT, he said, will commence next month and the total construction cost is RM2 billion.

He also said there would be no compromise in terms of airport security, despite the economic slowdown.

I actually think the new LCCT terminal will be a huge earnings boost for MAHB. The current LCCT seems built as cheaply as possible wihtout much regards to profit strategy. With the volume of passengers going through the LCCT, the profit potential of the airport is brought down by lack of retail space. The new LCCT should solve this problem and be a huge profit opportunity for MAHB.

Erroneous trade error, symptom of a stodgy Bursa Malaysia

From the Business Times:

Bursa Malaysia Bhd has rejected a request from a market participant to cancel an erroneous trade that caused shares of Kuala Lumpur Kepong Bhd (KLK) to soar yesterday.

Analysts and dealers were stumped when the plantation firm's share price rose 24 per cent to RM17 in the last 10 minutes of trade, on heavy volume, for no apparent reason.

Even a company official seemed surprised by the sudden share movement.

Not long after the market closed, however, Bursa Malaysia said it received a request to cancel a trade for the stock, arising from a "participant's error".

It later told brokers that it had reviewed the request and decided not to approve it.
Dealers believe the dealing error came from a foreign brokerage house.

Bursa Malaysia, in a press statement, said KLK's sudden share price jump was brought about by "matching of market orders at the pre-closing phase of the day".

This resulted in a change in the benchmark FTSE Bursa Malaysia KLCI Index which was not reflected until after the market's close, due to "verification measures" taken on the increase in KLK's share price, it said.

The exchange clarified that the index's closing yesterday was 1,216.45 points.

The huge volume indicates perhaps the dealer bought too many shares, possibly at market price. This could come from a key entry error. For example, say I want to buy 2000 shares, which is 20 x 100. In the box for the order entry, I would need to key in 20. Sometimes I would key in 2000 by accident. This is prone to occur when someone has to key in pre-calculated numbers from a spreadsheet.

It's just not intuitive. If I want to buy 2000 shares, I should put in 2000 in the box right? Bursa should move with the times. They could get rid of the lot system in favor of the US system of buying individual shares. I've always been a fan of dealing with more numbers on the left side of the decimal than right. I think a lot of people would prefer that as well.

Natural gas supplies, effect on Malaysian companies

From Politics Daily:

But natural gas has suddenly emerged as both a factor in this year's energy debate and a potential game-changer on the political landscape for the long term. A few facts, dramatic new supply projections, and a geological map help explain why.

First, natural gas is up to twice as clean as coal and 30 percent cleaner than oil when it comes to carbon emissions that contribute to global warming. Second, because of new drilling technology and shale gas discoveries in the last few years, America now is estimated to have a 100-year supply of natural gas at current consumption levels (see page 7 of the linked document). And third, check out where that gas is located. It's in Rustbelt states where senators are worried about how the energy bills would affect polluting industries, and in conservative states where they are concerned about how the measures would affect the cost of electricity.

Malaysia is a very large producer of natural gas. The companies that would have problems with the currently over abundant resource are MISC and Petronas. Petronas Gas could see some problems if prices keep falling. MISC is exposed through its large LNG shipping fleet. These tankers basically are made for LNG shipments only. They can't easily be converted to anything else. If countries like the US don't need as much gas shipped to them as indicated by their 100 years supply of gas, then MISC will surely suffer.

This oversupply of natural gas has caught many countries by surprise. For instance, the US is now only incorporating natural gas as a big part of their energy plans. They are in the law-writing stages only and infrastructure will take years to come online to make use of this over supplied resource. In the mean time, exporters of natural gas will have problems on what to do with all the supply.

Views about the stock market and economy

First, the most important point we must establish is that of inflation and deflation. We will probably see a period of deflation, the contraction of credit. Recent headlines (1 , 2) point to contracting debt in spite of the government taking on trillions in debt.

Furthermore, with capacity slack we will unlikely see the tightness in production needed for producers to raise prices. The final piece of evidence is that of rents in the United States are decreasing. This will show in the OER which is a huge weighting on the CPI. This will counteract any CPI increase due to commodities.

Most likely, the path of least resistance is that of deflation. But whether consumer prices go up or down a lot is not the main driver of the market. The main driver is the contraction of credit. We're going to see credit contract and a lot of these debts won't be paid off due to people can't pay for their homes and businesses going bankrupt. This debt destruction will suck up all the extra dollars the fed has pumped in and more. We can see this happening already despite government actions to take on more debt.

What does this mean for the markets? Simply, demand for dollars is outpacing supply due to debt destruction. The dollar will most likely increase in value, and thus risky assets will have a hard time in this environment.

In the future, I don't see the Fed able to increase liquidity without backlash. Already the public is skeptical of the Fed creating more dollars so any more money created will be met with scrutiny. Short of another systemic failure or economic recession, I don't see massive credit creation in the future. Keep in mind, the Fed in it's most recent meeting has indicated that it will be stopping purchase of treasury securities, so it seems as if they are starting to slow down the liquidity programs.

Credit given to MAS for working within their means

From The Edge Malaysia:

KUALA LUMPUR: MALAYSIAN AIRLINE SYSTEM BHD [] (MAS) recorded RM2 billion in savings in the past three years and is targeting to reduce costs by another RM700 million this year.

MAS managing director and chief executive officer Tengku Datuk Azmil Zahruddin said on Oct 2 the national carrier would continue to pursue structure cost reduction.

"There is a lot more room for cost savings," he said at a briefing in Kelang Jaya as he update the media on the progress of MAS's business transformation plan.

Azmil explained that a 62-year-old legacy carrier inherited a lot but the aggressive cost savings measures was to get rid of "bad costs such as those that don't add value or give poor returns".

"A significant portion of our savings is returned to customers in the form of lower fares and better services," he explained. "We will continue to invest in good costs," he added, such as inflight food, safety and regulatory requirements and to generate third party revenue.

He said MASkargo aims to return to profitability next year while MAS Aerospace Engineering aimed to achieve revenue targets of RM1 billion by 2010 and RM3 billion by 2013.

On its fleet renewal, he said it would take delivery of 35 firm B737-800 planes with delivery starting in the fourth quarter of 2010. It has another 20 plans on option.

"These planes will be deployed in Malaysia, Asean, South Asia and China," he said.

To MAS' credit, they've not been grabbing shareholder's money like AirAsia recently. Their cost cutting method seems effective and looks to be continuing under the new ceo, Zahruddin. He seems to be picking up exactly where Idris Jala left off. No doubt as a full service carrier, MAS is hurting compared to AirAsia as consumers trade down; but credit is given to MAS for working within their means.