In Pursuit Of No-Brainer Stocks

By and large, investors will often go past the obvious choices and end up picking dicey stocks to buy. If people ask you for stock tips and you pick Hongkong Bank or Public Bank or YTL Power, they are likely to frown at you as these are obvious choices. But if you give them what CIS would call a “cold case”, they will nod and say thank you.

There is a category of stocks which I will refer to as “no-brainer stocks”. Hongkong Bank, Public Bank and YTL Power shares do not qualify as no-brainer stocks.

There are two that immediately come to mind – Visa and Mastercard – for their solid business models. For every single transaction, they get a cut. They are the top two cards and the bigger they get, the more indispensable they are to retailers and the harder it gets for competition to muscle in.

The more retail outlets they secure, the stronger they get. They assume no debt should card holders fail to pay their bills. Their business is highly scalable and their capital expenditure gets smaller as they grow bigger.

Why not just buy MasterCard and Visa and forget about investing period?

MasterCard’s profit more than doubled in the first quarter as more customers outside the US used their credit and debit cards for purchases. Cardholder spending within the US rose too, but at a moderate pace, indicating that while Americans are increasingly turning to plastic in a weak economy, emerging markets are becoming just as lucrative.

The company earned US$446.9mil or US$3.38 per share for the January to March period. That is up from US$214.9mil, or US$1.57 a share, in the same timeframe last year. Even after excluding the effects of a gain from terminating a customer business agreement and another gain from selling its remaining holdings in the Brazilian company Redecard, MasterCard’s earnings per share totalled US$2.59.

That was above the average analyst estimate of US$2 a share, according to Thomson Financial. Shares rose US$31.48 or 13% to close at US$273.98 last Tuesday after rising to a 52-week high of US$278.72 earlier in the session. The stock is up more than 20% since the beginning of the year. MasterCard Inc is like Visa Inc, in that it processes card payments, but its member banks issue the credit.

Purchase volume with both credit cards and debit cards rose, driving MasterCard’s US gross dollar volume up 8.9% from a year ago to US$259bil, despite a decline in US credit card advances. The problem with investing in MasterCard or Visa is that they pay negligible dividends. Hence your point of entry is important. To negate that, you have to do average cost investing as in buying in regular intervals over a long period of time.

There is the currency risk but that’s the same with any stock. There is also some litigation risk (unfair fees) but that is negligible compared to overall revenue and earnings.

Our very own no brainer

Is there a no-brainer stock in KLSE? Many may not agree with me, but out of the over 1,000 odd companies, Berjaya Sports Toto Bhd (BToto) comes closest to being one.

The principal activities of BToto are investment holding and provision of management services. The principal activities of the group are operations of Toto betting; leasing of online lottery equipment; manufacture and distribution of computerised lottery systems; property investment and development; and investment holding.

Sports Toto offers six games, which are drawn three days a week. The digit games include four D, five D and six D while the Lotto games include Toto four/49, six/42 Jackpot and Super Toto six/49. The company is the sole national lotto operator in Malaysia. It has the largest network of over 680 outlets and the most number of games in Malaysia.

Through its subsidiary, Philippine Gaming Management Corp, BToto supplies and maintains a computerised online lottery system in the Luzon region of the Philippines. BJTOTO also has a 51.5% stake in Berjaya Lottery Management (HK) Ltd (BLM), which is engaged in the management of social lottery operation.

BLM’s 71% owned subsidiary is a manufacturer and distributor of computerised lottery systems. BJTOTO’s other subsidiaries, FEAB Properties Sdn Bhd and FEAB Land Sdn Bhd, are involved in property development.

The new political landscape may cause some to worry about the company’s operations in certain states. BToto has 2% of its outlets in Kedah and together with Perak, it represents 11% of total outlets. If you really want to talk of political risk, then one should also look at it this way – that there is likely to be near zero chance of seeing more competition as well.

Here are some salient points about BToto:

Ebitda margins: 2006 (17.9%), 2007 (18.5%)

Gross dividend: 2006 (53.8 sen) 2007 (45.6 sen)

ROE: 2006 (33.4%) 2007 (45.2%)

Rising free cashflow: 2006 (26 sen) 2007 (30 sen) 2008 (33 sen)

The other players

BToto is better positioned than Magnum Corp Bhd or Tanjong plc due to its Lotto operations. As of 4Q07, BToto has become the new market leader overtaking Magnum for NFO games alone. Despite the poor marketing efforts in bringing the Lotto games to the Malaysian public, the game has gained in popularity, especially among foreign workers.

Lotto games in Australia, Britain and the US have always captured a remarkable share of gaming dollar. There is still a lot of leverage in Lotto games in Malaysia. To capture more market share, BToto needs to come up with bigger minimum guaranteed jackpots (now at RM2mil). I am sure that it will draw more players if the minimum jackpot were to be RM5mil or even RM10mil.

Other than Lotto, BToto has more games than its two rivals namely 5D and 6D. Magnum has only one game (4D) while Tanjong has two games (3D and 4D). If either of them tries to play catch up, they will already have lost the first mover advantage. Plus Lotto and non-4D games have a lower payout than the usual 4D games.

The number of new outlets have been frozen for all players. BToto has a better reach with 681 outlets (45% market share), Magnum has 485 outlets (32%) while Tanjong has 348 (23%). Plus BToto has more outlets in the Klang Valley than Magnum.

Dividend appeal

BToto pays a consistent 8%-9% dividend yield, which if viewed against the deposit returns, is rather impressive. It continues to pay out almost 100% of earnings. If you were to include the annual RM100mil odd share buybacks, the payout ratio improves to 120%. If the company were to declare that it will cancel the shares bought back, then the share price would move to a much higher platform. Chances are, the accumulated shares will be declared as bonuses at the right time. Right now it has more than 96 million shares in treasury.

Berjaya Land, the biggest shareholder of BToto, has been buying more shares in the open market boosting its stake from 48% to nearly 50% in the last couple of months. The biggest risk would have to be management’s track record. BLand is the controlling shareholder. If the huge Vietnam property venture were to run into difficulty, could we see BToto borrowing funds to lend to BLand (again?)?

I assume that the management has learnt its lesson well in that regard. But even if they were to do that, there would be ample time to get out of the stock.

No-brainer traits

No-brainer stocks generally do not require complicated strategic directions from management to perform.

The business model is intact and by virtue of its position in the market place, it basically just reaps the rewards. With these kinds of stocks, one needs to have a long-term average cost investing attitude to reap the long-term benefits.

A no-brainer stock relies a lot less on management input. There should be a lot less execution risks, i.e. new projects or new ventures. Banks are left out of the running because of its dependency on the business cycle. Not to mention, the “unknown risks” such as exposure in new-fangled instruments or exposure to counter-party risks.

It is not going to give you 50% capital return a year. The way to invest is to look at dividend yield relative to stock price.

One should accumulate if the dividend yield goes towards 9% or 10%.

One should take profit if the dividend yield goes down to 5%-6% (implying the stock price has risen).

Again, no-brainer stocks are not meant to give you outstanding returns, it is meant to give you a reasonable return year in year out (8%-10%) with comparable risk.

p/s: photos: Joyce Sialni & Haruna Yabuki

New Terminologies Added To Asian Financial Lexicon

I was chatting with the usual bunch of piggy and doggy friends at Fusion Investor, and we were discussing the Vietnam effect. Somehow I managed to coin two new words for the Asian financial players. When you use the following new terms, please attribute appropriately (ahem):

Vietnami (~ tsunami) Definition: Stocks and market sentiment being caught up as collateral damage due to Vietnam's financial implosion.

Vietnamah (~ tnm, cantonese) Definition : When you are actually holding stocks directly impacted by Vietnam's financial implosion. For example, those still holding Gamuda, B Land, WCT, Scomi, Parkson, SP Setia.

photos: Deborah Priya Henry & Hebe/Selina (S.H.E.)

Vietnam, A Repost

This is worth a repost, mark the date down. Global manufacturers streamed into Vietnam, partly to escape rising wage and land costs in China but also to tap a young and industrious work force who saw a glimpse of prosperity after years of war and stagnation. Foreign companies sought approval to invest US$20 billion in the country last year -- a third more than in nearby Thailand -- adding to the inflationary pressure by driving up land costs, skilled-worker wages and office rents.The central bank widened the range in which the dong could trade against the dollar. The idea was to free the local currency from a sliding U.S. currency and to enable Vietnam to better absorb higher oil costs.

Some local banks refused to exchange dollars, and local stock prices collapsed as banks held on to their dong and refused to lend money to buy shares. The government in March lowered Vietnam's growth target for 2008 to 7% from 8.5% to help focus the drive against inflation. Since then, a global spike in food prices and a poor rice harvest have made things worse. The central bank expects Vietnam's current-account deficit -- the difference between a country's import and export of goods and services -- to hit 7.5% of gross domestic product this year, up from 5% in 2007. The current-account deficit in Thailand was 6.5% of GDP when it was forced to devalue the baht in 1997, triggering the Asian financial crisis. The Vietnamese, meanwhile, have been draining bank accounts and buying gold instead. Some have also started hoarding dollars as a hedge against inflation.

Apartment prices in Ho Chi Minh City, the country's commercial hub, have fallen by half so far this year, local media reports say. Morgan Stanley estimates loan growth has been expanding at over 35% a year and exposure to the property market is about 10% of total loans.

Wednesday, October 24, 2007

Vietnam Calling

If you examine Gamuda's earnings forecast for the next 3 years, much of it relies on the success of its Vietnam property and construction projects. Vietnam is the new India or Colombia, the really exciting emerging market today. Foreign funds have been piling into Gamuda and other Vietnam proxy plays. The valuations are such that nothing much can go wrong. Vietnam, for many Malaysian property developers, has become the land of milk and honey. Today, almost every big player wants a piece of the action.

Well, Gamuda is not the first, in fact Singaporean & South Korean companies have been piling in much earlier. On conservative estimates, there are RM200bn on-going projects that is supposed to be completed within the next 5 years. In Vietnam, obtaining an investment licence is very crucial, because without it, foreign developers cannot commence their projects. Berjaya Land Bhd is the first Malaysian company to be given an investment licence to start work in Vietnam. To date, BLand has identified four major projects in Vietnam, three of which are in Ho Chi Minh City (HCMC) and one in Hanoi. BLand is one of the early birds that have made significant progress in its foray into Vietnam. In Hanoi, it is the first Malaysian company to be given an investment licence to undertake the Thach Ban project. In HCMC, its proposed projects include the Vietnam Financial Centre (VFC) and the Vietnam International University Township in the North West Metropolitan Area, about 19km away from HCMC centre. In the province of Dong Nai, BLand is planning the development of a gated community and three apartment blocks on 20 acres of land, with a gross development value (GDV) of US$120 million (about RM408 million). Together, the GDV of BLand's projects in Vietnam is RM31.9 billion.

Investors do note that BLand does not have a track record in overseas projects. The issue of funding is also cited as a possible constraint. So far this year, some US$13 billion in FDIs had flowed into Vietnam. Indeed, demand for properties thus far has outstripped supply, and a major source of this demand is from the Viet Khieus (overseas Vietnamese).

Besides licensing issues, other potential problems include the relocation of squatters, shortage of skilled labour and lack of transparency in business dealings.

The largest foreign investors is South Korea, followed by Singapore. Vietnamese authorities has a list of FDI amounting to US$50bn seeking and awaiting approval as I write. Last month CapitaLand announced a joint venture to develop 1,200 apartments in HCMC - the fourth project by CapitaLand in HCMC, now it has 2,800 new homes in the pipeline. Keppel Land also announced an even greater number - 20,000 homes in Vietnam.

What is luring so many developers there is the margins and pricing. A US$250,000 link/semi-dee in Malaysia will fetch about US$450,000 currently in Vietnam top locations. Its not cheap. Things are looking good in Vietnam, and with "good things newly discovered" there will be a rush of capital to tap the potential. Just like internet was a big thing in the late 90s, VCs fell over themselves to invest in internet startups to jump on the golden bandwagon. The internet itself is a good thing and yes, there is money to be made from it, but it is also true that more than 95% of all ventures started in the late 90s and early 2000 went to zero very fast. This is typical development in any "gold fields being discovered", and the same is being witnessed in Vietnam. Capital is a big extractor of real value. Even when 95% of internet startups fail, the remainder do extract real value and evolve into viable new businesses.

In Vietnam's case, there doesn't seem to be a solid masterplan to accomodate the capital coming in. The pubescent stockmarket is not financially sound enough to support the FDIs. The credit markets there are also not sophisticated enough for the amount of FDIs coming in. The good thing supporting the long term prospects of Vietnam is their adequate population, which is more than 87m. That is sufficient critical mass for a competitive labour force to be galvanised initially. Later as per capita grows, the domestic economy will fuel itself much like where China and India are at now. GDP growth was 8.17% in 2006, the second fastest growth rate among countries in East Asia and the fastest in Southeast Asia. We have to remind ourselves the country is still a socialistic country trying to move into a market economy. The infrastructure is still inadequate and requires rigorous planning.

Property developers are all looking at 30% margins on their projects. It is achievable if supply ties in with demand. RM200bn or more property coming on stream over the next 5 years is no joke. All is hunky-dory because not much has really reached finished status yet. Everyone is selling off the plan. I am not trying to bash the Vietnam investments, but its not as great as everyone makes it out to be. There are still a lot of unknowns. The dependence on returning expat-Vietnamese to buy is one. Pricey property has to be supported by strong industries and a strong job market, we all know there is still a lot to be done to foster FDIs into long term investments. Hence the 30% margins will look increasingly iffy down the road. I would be more comfortable if companies such as Gamuda and BLand were to tone down their margins expectations, maybe to 20%.

Over-investment is a normal trait into exciting markets / industries - just look at China, the internet, India, Brazil, Colombia - investors still need to guard themselves from over-optimism.

DIY Dividend Yield Stocks

Neoh Soon Chong:

Hi Dali,

Assumptions:

Cash-in-hand: RM100,000

Risk: average risk-taker but not excessive leverage

Expected return: better than Fixed Deposit rate

If an investor has a bearish view on the Malaysian market, wouldn't be easier to profit from market by shorting the KLCI futures (rather than bottom fishing for stocks)? I mean the investor can just buy one futures contact and wait for the market to fall.

I understand investing in futures market is a leverage game. But, just longing/shorting one futures contact is the maximum leverage that the investor is allowed to bear - in the above scenario.

What do you think about this futures strategy versus buying stocks?

Comment: Having open positions in futures requires a very good traders' mindset. Though you may be playing with futures, the danger is there only when you take on the LEVERAGE that is available to you via futures and options. If you don't take the leverage, e.g. if you buy one contract of KLCI at 1,270 ... instead of just putting down RM20,000 why not put down Rm127,000 in deposit - that will take out the leverage. But of course that would be quite silly. You must get a hold of your wanted exposure and work back to your gearing desired, you need to set cut loss levels as well. You need to rollover at the appropriate premium/discount. So, I would say, all things being equal, don't play futures unless you are a really really good trader.

If your aim is just to get better than deposit rates, that is easy. But you should not look at the stock price for a few years, just be happy collecting your dividend yield, and hopefully reinvesting them into the same stock for compounded gains. You maybe getting 2.5% or 3.0% if you are lucky on deposits. You should be happy if there is a 6% dividend yield for you.

Examples of good DY: Berjaya Sports Toto around 8%. Japan Tobacco 7.9%. Uchi Tech 10%. Carlsberg 10%. BAT 8.5%. CCM Duopharma 8%. Amway 7.6%. F&N 7.4%. Guiness 7.5%.

So, there are plenty to choose from. However not all are the same, some may pay good DY now but may not be consistent. Hence pore through the past 5 years at least, look for:
- CONSISTENCY
- A SOLID DIVIDEND POLICY
- SOUND BIZ MODEL THAT GENERATES LONG TERM ANNUAL GROWTH OF AROUND 5% p.a.
- LOOK AT NET CASH FLOW PER SHARE FIGURES

Once you have made your selection, look for right entry price as your entry price will determine your eventual yield. The lower the stock price, the higher the DY. Hence instead of timing the market buy gradually over a period of time, e.g. divide what you want to buy 4 times a year, then buy in 1st week of Jan, 1st week of Apr, 1st week of July and 1st week of Oct (just an example). Over time your DY stock and returns will compound nicely. Of course, keep abreast on all news surrounding the sector and business of that stock - exceptionally irregular developments should mean to get out and be sidelined because these stocks won't fly anywhere. Other than that, normal bear markets or busting of bubbles, you can still stay relatively happy staying put in good DY stocks.

Vietnam Calling, Anyone?

It seems some readers may have gotten the wrong message fm my posting... i'm long term very bullish on vietnam (10-15 years out)...i'm very bearish now 1-3 years because there has been way way over-investments into Vietnam which is unsustainable in demand... the reliance on foreign Vietnamese buying is overdone... they have to contend with subprime issues themselves n foreclosures in the US and in Australia the BLR there is 8.5%, they have a huge burden on their own mortgages... there are not that many very cash rich foreign Vietnamese as one would think. The properties are generally 20-30% more expensive than the ones u get in Malaysia now. Hence the majority of the early buyers have been foreigners, mainly Singaporeans (gulp)..how now brown cow?

If you search Vietnam in my blog you won't find many bullish articles. Let's take stock now. The near euphoria on buildings residential and commercial projects have lured a lot of Singaporean firms and a smattering of Malaysians as well. How now brown cow?

a) Stock market: The Vietnam equity market has now lost half of its value from its 2007 high. Is that significant? Well imagine KLCI trading at 750-800 after hiting 1,500 last year. I think that would curb your spending somewhat. The nearly 8-year-old market jumped 23% last year amid investor excitement about Vietnam's economic potential but has slumped 55 percent so far this year, making it the worst performing market in Asia.

b) Technical Glitch: Trading on Viet Nam's stock exchange will remain suspended for a third consecutive day on Thursday following a computer system problem, officials said on Wednesday. Trading has been halted since Tuesday, but the Ho Chi Minh Stock Exchange and the State Securities Commission said it would resume on Friday if testing showed the system was stable.

c) Inflation & Liquidity: Earlier this month, market liquidity hit its lowest level in two years, an unintended victim of the government's battle to try and reduce double-digit inflation and a liquidity crunch at banks. The government estimated on Tuesday that annual inflation accelerated to 25.2% in May from 21.4% in April, one of the highest rates in Asia.

d) Dong Play-Play: Viet Nam's dong fell to its lowest in more than three months on Wednesday, while the offshore forwards market priced in a 30% depreciation in the currency on worries over inflation and a widening trade deficit. The dong's spot rate stood at 16,216 to 16,221 per dollar by 0413 GMT, after the central bank, set the official exchange rate at 16,069 dong per dollar. That was the lowest since Feb. 20 when it was 16,070 dong per dollar. The State Bank of Vietnam allows banks to trade the currencies only within a band of +/- 1% of the official rate daily on the foreign exchange market. The government has said that during 2008 it would allow a 2% annual appreciation or depreciation of the dong.

The Snake Oil Sales Pitch
Vietnam is one of Asia's most open economies; its two-way trade is around 160% of its GDP, more than twice the ratio for China and over four times that of India. Once a relative newcomer to the oil business, today it is the third-largest oil producer in Southeast Asia, with an output of 400,000 barrels per day. What also makes Vietnam attractive is the potential spending power of its increasing population of 85 million. The interest by foreign investors in Vietnam began following the lifting of the United States trade embargo on the country in 1994. Billions of dollars of trade began to flow in. Its chief trading partners include Japan, Australia, the Asean countries, the US and western Europe.

As a result of land reform measures, Vietnam is now the largest producer of cashew nuts, with a one-third global share. It is also the largest rice exporter in the world. Vietnam has the highest percentage of land allocated for permanent crops, or 6.93% of any nation in the Greater Mekong sub-region. Besides rice, its key exports are coffee, tea, rubber and fishery products.

Foreign investment in the country has grown three-fold while domestic savings have quintupled. To support its strong growth, the World Bank has estimated that Vietnam needs to invest some US$140 billion in infrastructure projects over the next five years.The Reality Show

Vietnam achieved an annual GDP growth of around 8% from 1990 to 1997. Its 8.5% growth forecast for 2007 is achievable given its strong industrial output and focus on administrative reforms, and its ongoing battle against corruption. But having said that, Vietnam is still a relatively poor country, with a GDP of US$280.2 billion, translating to a per capita income of about US$3,300.

Malaysian companies in Vietnam

Scomi Group Bhd says it will focus on markets that have high growth potential such as Pakistan, India, Bangladesh, Vietnam and Indonesia in its next phase of expansion. The Berjaya group has made inroads into Vietnam, setting up a convenience store chain similar to the 7-Eleven that it operates in Malaysia. It is also looking into a US$700 million property project in Ho Chi Minh City, according to news reports.

Gamuda Land Bhd is involved in the Yenso Park, a US$1 billion mixed development project in Hanoi, while the managements of WCT Land Bhd and SP Setia Bhd recently indicated their interest in projects in Ho Chi Minh City. Other companies actively seeking participation in Vietnam's growth story include Kossan Rubber Industries Bhd, United Engineers Malaysia Bhd and PJ Development Bhd.

It is believed that more Malaysian companies will be jumping on the bandwagon in the future to take advantage of Vietnam's economic boom. Local companies that already have operations in Vietnam include APL Industries Bhd, Furniweb Industrial Products Bhd, Kian Joo Can Factory Bhd, Lion Diversified Holdings Bhd (via Parkson Group), Latitude Tree Holdings Bhd, KFC, Public Bank Bhd and Malayan Banking Bhd, among others.

Have fun guys!

p/s photos: Michelle Yip Suen & Flora Chan Wai San

My Trades?

k said...

hello Dali,
Just one question(+ hopefully you'll give me an honest answer...)
Have you put your money where your mouth is + actually bought the shares? or are you waiting for even lower levels?

11:43 AM

Salvatore_Dali said...

k,

you will notice that from my past to present postings... i have been consistent, and I NEVER REVEAL THE TRADES I MAKE .... you buy at yr own peril, I may frontload and front run you all, and I might post and dump shares on you ... so buy, don't buy, up to you ... you buy I am not happier, you lose money, I won't be sad, you make money you won't give me a share ... I am not an investment adviser with a funds mgmt unit or a broker ...

So , buy if you want to, but don't even bother to ask if I have the shares already or intend to buy lower... I am not here to build a Buffett like investing track record. Some shares will make money, some won't. Hopefully you would have read my entire 3 years of blog postings, then you should get a good idea of what I think, how I think and why/when I write about stocks, and whether you can rely on them. 3 years is not long nor short, you can form your own opinion. What I won't be doing is TO JUSTIFY my recommedations - I tell you now, I am sometimes unethical, I am sometimes a bastard, but I try to be a nice bastard most of the time.

I am a scardy shit, I don't reveal my trades because I fear I will be ridiculed when I am wrong, and I also do not want to boast when I make some money.

Cheers, and good luck... my general perception is the mkt is still pretty bad and still looking for 1,150 ... ok!!!

p/s photos: Fala Chen & Ada Choi's wedding

TVB Goes Country

Country Garden (2007) chairman Yeung Kwok-keung has secured a 26 percent stake in Television Broadcasts (0511) by paying Shaw Brothers (0080) - the largest shareholder in the TV station - more than HK$10 billion.

The offer trumped that made by competing bidders, US-based private equity groups Blackstone and Carlyle. Sources close to the deal say Run Run Shaw, chairman of TVB, Hong Kong's most popular TV channel, was determined not to sell the company for anything less than HK$10 billion. Another reason the 100-year-old Shaw agreed to the stake sale is that he believed Yeung, who is well-connected in China, would be able to help the company overcome hurdles in penetrating deeper into the mainland market, thus taking it "to a higher level."

Yeung has amassed funds for the acquisition with help from Lee Shau-kee, chairman of Henderson Land (0012), who loaned HK$3 billion to Yeung to finance his takeover. Lee stressed that none of his loan to Yeung would be converted into shares of the TV station, as the billionaire said "I do not do business I am not familiar with."

Yeung has also used part of his daughter's shares in Country Garden, a Chinese property developer founded by him and listed on the Hong Kong stock exchange last year, as collateral to facilitate his borrowing from Lee.,Yeung transferred his shares in Country Garden, worth almost HK$6 billion based on yesterday's close, to his 26-year-old daughter last year. The daughter has officially taken the mantle as one of the top 3 richest woman in the whole of China.

Adpoting a plan of leveraged buyout, or using assets from the acquisition target to finance borrowing, Yeung also mortgaged the 26 percent stake in TVB to collect a further HK$4.8 billion. That's what I don't like about the deal. Yeung has borrowed from Henderson and mortgaged the shares he bought to secure the deal. That can only mean that adveritsing rates will go up, the TVB stars' pay packages will be very tight in the future (which may lead many to do more mainland Chinese or Taiwanese serials instead). I don't know where you can slash the cost side, you can only try to improve on the revenue side - and that is something Yeung has little clue on. You rock the boat on pay, contract terms with artistes and writers, advertising revenue sharing, salaries - you lose TVB's assets, the people ... and thats where 90% of the value of TVB resides.

You buy Manchester United at a premium, at least you can raise ticket prices and sell more shirts or tour more countries. You buy TVB at a premium and on leverage, what will you do, what can you do ... ask the stars to help sell your Country Garden properties?

Dear Tony Fernandes

I like your entrepreneurial spirit and your business acumen. If you look at my posting on AirAsia a few days back, I like the stock despite the popular trend to sell airlines. You have managed to steer brilliantly during even harder times such as during the SARs and the tsunami - which hit air travel business a lot worse than now.

The aim of this open letter is to ask you to PLEASE STOP ACTING LIKE A FUEL OIL TRADER. You are in the business of running a LCC. One can try to be too smart by timing and trading fuel price, especially since it has been so volatile.

Why You Should Stop Being An Oil Trader:

a) If you bet wrongly, it affects the prospects and valuations of AirAsia.

b) If you get the timing well, save the company a lot of money, it WON'T be applauded by analysts or investors because these are "one-offs".

The jumps in earnings due to slick timing of fuel price will not result in better valuation. In fact analysts will use that fact to downgrade the stock to a discount to other LCCs and major carriers as it remains an uncertainty.

Currently, AirAsia has hedged 30% of its fuel requirements for 1H08. You have wisely covered the liability from the call options up to 3Q09. What must stop is the way AirAsia communicates its hedging strategy: e.g. "the cost of ofsetting the call options was wholly covered by the income from writing various puts".

Still, on the bright side, even if the price of oil goes to US$170, AirAsia should still be profitable - a fact which escapes 99% of the sellers currently.

Singapore Airlines start hedging today for 18 months in the future. Whatever the date in the future is, they will build up 50% cover and they will do it with fairly traditional hedging mechanisms.Cathay Pacific's method as more convoluted. They have put in place a complex structure of swaps, options and three-way options [selling put, buying call and selling another call with a higher strike price]. And that gives them a degree of protection. They are hedged about 30% for 2008 volumes. The head of commodities at one global investment bank names Qantas, All Nippon Airways and Japan Airlines as committed fuel hedgers. Malaysia Airlines, meanwhile, has a conservative policy of benchmarking its fuel hedging ratio against the average hedge ratio of regional airline peers. AirAsia takes a more directional bet as part of its hedging policy.

Yes, AirAsia is not alone in they way it hedges fuel oil. The harder it is, the more convoluted it is to understand, the worse it will be for investors to rate the stock properly. The more conservative it is, you will then take the fuel oil out of the equation. You have a solid business model, solidified by having your own LCC terminal - don't put so many variables into the equation. Final analysis- make it a conservative hedge policy, make it known to all, make it easy to understand and calculate, be transparent, don't make people guess or hope n' pray. You are not paid to make money on fuel price, you are not supposed to and people don't expect you to (even when you own the company).

p/s photos: Han Chae Young & Cherie Ying Choi Yee

From 6 To 3

As the leading mobile services provider in Mainland China, the Group boasts the world's largest unified, contiguous all-digital mobile network and the world's largest mobile subscriber base. The principal activities of the Group are the provision of mobile telecommunications and related services in thirty-one provinces, autonomous regions and municipalities of the PRC.

China Mobile (0941) shares plunged 8.6 percent yesterday on concerns that the giant's monopoly will be shattered by Beijing's telecoms restructuring plan. The central government ordered the nation's six telcos to merge into three in a move to reduce China Mobile's dominance in the world's largest market. China Mobile shares plunged to HK$114.90, down HK$10.20 per share. However, almost all investment banks except Goldman Sachs are bullish on the outlook for China Mobile.

Goldman is cutting its estimates to reflect rising threats going to be faced by the telco. It looks to be heading into a uniquely unfavorable regulatory regime, with policies like inter-operator roaming seriously threatening its many advantages. Merrill Lynch recommends investors buy the stock at the "tempting" level of HK$115 and flashes a "screaming buy" at HK$110. Australia-based Macquarie Bank holds a similar view. "Significant changes to the competitive landscape are at least 12 to 18 months away. So we see substantial share price upside from current levels," the bank said, setting a target price of HK$165 that represents a premium of 43.6 percent on yesterday's close. In the long run, however, the bank expects China Mobile's market share to fall to 67.6 percent in 2012 from the current 73 percent when the restructuring begins to take effect.

But Morgan Stanley believes the other two telecom operators will pose little threat to China Mobile which has nearly 400 million customers in a country with almost 600 million mobile phone users - nearly double the entire population of the United States.

Investors who have bought shares in China Unicom (0762), China Telecom (0728) and China Netcom (0906) are at a funk.

Shares in the three telcos have been suspended for two consecutive trading days, and no notice has been given how much longer investors will have to wait before they resume trading.

Some investment banks say the suspension could even last for a week pending management reshuffles among the companies, while the market is also concerned with what price China Telecom (0728) will pay to acquire the CDMA business from China Unicom (0762).

At the end of the day, the 6 into 3 basically is hastening and bringing forward the way the industry will develop in the future. Only the big will survive. Instead of allowing the 6 to replicate infrastructure, it is more efficient to have just 3. Out of the 3, China Mobile is still miles ahead with or without any partnerships or M&A. As it is a government policy, the M&A will be at fair prices. This 6 into 3 policy actually favours China Mobile big time as no one has their economies of scale. At HK$115, its a great short term, medium term and long term buy.

Despite the rumblings at home, China Mobile was likely to bid for MTN, which has 21 operations in emerging markets in Africa and Middle East - collectively MTN has more than 70m mobile subscribers. China Mobile should make its bid following news that Bharti will buy a 51% stake in MTN for US$19bn - uncomfirmed. However the company has come to say it will not be bidding for MTN - well, wait and see. China Mobile's strategy seems to be to increase global competitiveness and coverage, and at the same time expanding the TD-SCDMA footprint outide China. The TD-SCDMA is a home grown technology which China wants to export, promote and develop - rather than beholden to some foreign technology platform forever. Hence it will want to conquer via acquisitions in areas that are not tied up with WCDMA and CDMA2000 technologies. That means China Mobile will be aggressive in Asia, the Middle East and Africa. Hmmm, TMI looking more attractive by the day.

China Mobile's ROE 26%-30% a year for the last few years and the next few projected years ahead. Net cash position. Trading at 18x 2008 earnings (HK) and 15x 2009 earnings. Even has dividend yield now at 2.4%, to rise to 3% next year.

p/s photos: Fiona Xie & Michelle Saram

Hap Seng Consolidated - Local Fertiliser Play

Thanks to the alert from a reader, I had a look at HapSeng Consolidated, which is normally a plantation play. Had a long look at its fundamentals, and the upswing generated by fertiliser trading alone should be sufficient to push the stock price to a much higher level.

Trading in fertiliser used to have a gross margin of between 3%-13%. The last 6 months saw the figure ballooning to 26%. In terms of EBIT contribution for the 12 months ended March 2008: Fertiliser trading contributed RM71.4m, CPO RM18.6m, Property RM8.4m, Financing RM9.6m and Quarry RM2m. That meant that fertiliser trading accounted for 67% of EBIT. Compared to 2007, the same segment only contributed 10.4% of EBIT. The figure for 2006 was 10.3%.

Is the upswing in fertiliser a short term anomaly? If it is, then the valuation won't perk up too much. Judging from the fundamentals surrounding the sub-sector, it is very likely that the prospects for fertiliser will continue for another 3-4 years at least. Even after peaking, it is likely to stay high.

In 2006-2007 the price of potash hovered around US$200/t, now it has shot up to US$700/t. Hap Seng Consolidated has hovered around the bottom 40% of its normal PER trading band for the past 6 months. I expect that to change and the stock should move up to trade at the 70% or higher historical PER trading band over the next 6 months.

The share closed at RM2.81 with decent volume on Friday. Based on the higher PER band, I can see the share breaching RM4.00 over the next 6 months. Net EPS for the most recent 12 months was 36 sen, a huge jump from 2007's 18 sen. For 2009 that should rise to 40 sen.

Under Hap Seng Sasco Fertilisers Sdn Bhd, the company is a market leader in the trading and distribution of fertilisers and agrochemicals to the plantation industry in Malaysia (approx. 700,000mt of fertilisers and 2m litres of agrochemicals per year). The company has a 50,000tpa NPK granulation plant in Lahad Datu (Naga brand) and a 2m litres p.a. glyphosate plant (Dewana Glyphosate brand). It is the largest supplier of potash in Malaysia. In Indonesia under PT Sasco, it produces 250,000t of fertilisers, and has a 20% market share in Indonesia. CPO plants are generally deficient in potash. High CPO prices and favourable market conditions enhances the usage of potash as well.

Its earnings is also underpinned by good exposure to CPO. In terms of yield per ha, its ranks second to only IOI Corp. It has 25.8t/ha compared to IOI's 26.9t/h. Its forward hedging of CPO sales will expire soon, and should allow the company to get better than the RM2,600/t price currently. Hap Seng Consolidated looks even better than China XLX and Sinofert as the latter two still has to wait for the lifting of the ceiling price to enjoy the full benefits of this upswing. (Reference price RM2.81)

p/s photo: Syafinaz & Song Hye Kyo

The New Economic Order

Bubbles and bear markets are cyclical. But what's different this time around? This time, we have the BRIC newcomers to the party. BRIC is the new fangled acronym for Brazil, Russia, India and China.

BRIC has been playing a highly important role in global economy's growth over the last 7-8 years. This year, Chinese and Indian equities have fallen 30% and 21% in dollar terms respectively. Brazil has gained 7%, Russia matched MSCI world index, falling around 6%.

There is some homogeneity among the BRICs.

At heart, Russia and Brazil are plays on commodity prices, particularly energy while India and China are plays on the ability of countries with low labour costs to grow market share in services and manufacturing divisions. Still as a group, the BRIC plays a highly important role in reshaping the new global economic frontier. By the way, as it stands, BRIC collectively holds about 35% of total global reserves. No joke.

Let's consider a few things they have in common:

a) Huge population – largely owing to globalisation and opening up of economies, outsourcing has ignited the BRIC economies (except for Russia, but that's a whole different story). The lower labour cost saw companies investing in these countries aggressively to lower their production cost. This in turn created a huge new middle class population in BRIC, which in a major way, contributed to the present food crisis as more people could afford better stuff. A richer but substantial middle class has evolved in recent years. This is an important facet of how the economic paradigm is shifting.

b) Drivers and consumers – Again, due to the globalisation movement, these BRIC countries have gained a lot of traction in attracting FDI and reserves. This in turn, generated a lot of projects into real estate and infrastructure spending. They were once drivers of the global economy (by promoting cost savings and production efficiency through outsourcing).

Now that they are wealthier and the governments have better balance sheets, these countries have also become major consumers of goods and services. This another important factor in reshaping the new economic paradigm.

c) Current Account – Brazil, Russia and China are all piling up huge current account surpluses and foreign reserves and their balance sheet look very healthy. They have to contend with excessive growth issues and reducing the inflow of hot money into their currency system. However India sticks out like a sore thumb among the BRICs in that it has a substantial current account deficit. As oil and fertiliser costs go higher, these two items are exacerbating India's deficit problem. However, India still has a high FDI plus their foreign reserves remain high – once either of them gives way, India's currency will start to unravel quickly.

By having a current account surplus, the governments can use forex to contain domestic inflation i.e. by allowing the local currency to appreciate. This is something India does not have the luxury of doing. The looming food crisis will hit India very hard if we were to consider that factor. Hence there are strong reasons to believe that India will be hardest hit among the BRIC nations in facing up to a food crisis.

d) Commodity prices are basically positively correlated to the economic growth of BRIC. There is really no need to have a 100-page dissertation on why commodity prices are currently at stratospheric highs. Sure, there is an element of speculative activity and maybe even a hint of a bubble forming in commodity prices. If you have not heard yet, this year the collective oil demand of emerging markets will exceed that of the US for the first time. That shows the backbone of demand.

But what is also important to note is that many of these emerging market do not really pay for oil. Basically, if growth in BRIC stays from 7%-10% this year and next, commodity prices will continue to be firm – simplistic but probably true.

Between 2000 and 2005, Goldman Sachs estimated that BRICs had contributed some 28% of global growth in US dollar terms, and 55% in purchasing power parity terms. BRIC's share of global trade now stands at 19%, almost double the level back in 2001. What is even more important is that the BRICs trade among themselves a lot more, lending some weight to the decoupling theory.

Back in 2000 intra-BRIC trades made up only 5% of their total trade; the figure now hovers above 11%.The Chinese government shrewdly knows where the action is and a lot of work has been focussed on improving relations with Brazil. In fact, significant results are now flowing through. This will be a big asset when it comes to WTO and Doha negotiations.

Hence, while it is all good and noble to monitor the US housing starts or read Bernanke's mindset or look for leads in US banks recovery, it is probably more important to monitor BRIC's growth trends to get a better read of the macro picture for the rest of 2008 and 2009.

Looming Food Crisis

I have highlighted the looming food crisis as the new monster in the works for financial markets. How BRIC handles this crisis will count a lot towards resource allocation, appearance of market restrictive policies, currency outlook and inflationary outlook – all of which will play key roles in the rating of global equities globally and regionally.

History repeats itself, they will say. In the midst of any bull or bear markets, there will be shouts of “this time it's different”.

Only this time, it WILL really be different. It will be so because there has been a substantial shift in the economic paradigm as evidenced by: the prolonged demise of USD; the rise and rise of BRICs; the massive recycling of petrodollars; the emergence of a substantive new middle class in emerging markets; and the diminishing economic power of the US.

Here's to a new decade of possibilities!

p/s photo: Ella Koon

Sinofert, Another Slam-Dung

This is a top-down analysis. Oil price keeps going up. We also have a food crisis. We have less land for crops. We have converted and diverted a lot of plantation towards biofuels. There is one sub-sector that possibly can "gain" from the above developments. Fertilisers, to be specific. In particular, those that promotes high-yield in crops. Owing to rising prices in soft commodities, governments, enterprises and farmers collectively will use better fertiliser, and more of that even to push up production yield.

Asia Times (22 Apr 2008) - The magnitude and growth rate of demand from China still drives global commodity prices. But in the fertilizer sector, where China this month has had to agree to a price for potash more than double what it paid last year, the inflexibility of Chinese demand for food has made it difficult for the country's negotiators to hang on to the commercial advantages they are accustomed to enjoying from being the world's largest consumer. In an announcement on April 17, it was revealed that Chinese importers of potash have agreed on a price of about US$650 per tonne, delivered from Russia by sea. This is higher than the Indian benchmark price of $625 agreed just weeks ago. It is US$400 per tonne above the price of the expiring Chinese contract, signed a year ago. The term of the new pricing deal is just eight months. The volume of deliveries for this period will be just 1 million tonnes, half of the 2007 contract volume oiver a 12-month period. The global trade in potash is even more concentrated than OPEC for oil, with just two syndicates dominant: Sinagpore-based Canpotex, which manages sales of the three North American majors (Potash Corporation, Mosaic, and Agrium), and Minsk-based BPC, a joint venture combining Uralkali and Belaruskali.

In 2006, Uralkali’s share price ranged between $2 and $2.50, with a market capitalization of about $3 billion. In October 2007, when it was listed on the London Stock Exchange for the first time, the share price was $3.35; market cap about $5 billion. Last Friday, Uralkali’s share price was $9.25, market cap $19.7 billion. On Wednesday, it had climbed to $11, market cap $23.4 billion. In a year, the company has increased its value more than fourfold. Compared with the big Canadians, it has still plenty of upside value to catch up: Potash Corporation is currently capitalized at $58 billion; Mosaic at $57 billion.

Sinofert (Reuters 0297.HK; Bloomberg 297; HK 0297) Principally engaged in the production, import, export, distribution, wholesale and retail of fertilizer raw materials and products, as well as research and development and services in the field of fertilizer-related business and products. Potash Fertilizers: China lacks potash resources, and the production of potash is limited, with 70% of potash demand relies on import. In 2006, the annual potash contract negotiations were not concluded until late July, and as a result, the import of sea-borne potash fertilizers to China was suspended for the first eight months of the year. During this period, the Group made full utilization of the strategic potash inventories to stabilize market supply, and on the other hand increased the business volume of domestic potash and maintained the cutting edge of the Group in the potash business. Despite the negative effect of 1.27 million ton less of imported potash sales due to the prolonged potash contract negotiations, the returns remained basically the same as 2005. Total sales volume was 4.56 million ton, accounting approximately 45% of Chinaˇs potash consumption, and the leading position of the Group in the Chinese potash market was further consolidated.

Nitrogen Fertilizers: Chinaˇs nitrogen production capacity is more than adequate, and nitrogen supply exceeds demand. With the implementation of supply-chain management, the Group has continuously expanded the domestic nitrogen supply channel through strategically investing in nitrogen manufacturers with competitive strengths and signing long-term contracts with core suppliers. In addition, by taking the advantages of the distribution network and financial resources, the Group carried out off-season stocking programs by sourcing nitrogen fertilizers while the prices were at low points. This has enabled the rapid expansion of nitrogen sales and improved profitability. In 2006 the Group realized nitrogen sales of 3.71 million ton, increasing by 105% over the same period of last year. This figure accounts for approximately 8% of Chinaˇs total nitrogen.

12 month high-low HK8.60-4.02) To breach the HK8.60 high, the stock will only trade at 24x 08 earnings.(Reference Price: HK$5.90)

China XLX Fertiliser (Bloomberg CXLX.SP; CXLX.SI Exchange) Back in March 2008 the stock was trading at SG56 cents, yesterday it was at SG96 cents despite the difficult market environment since March 2008. Its 12 month high-low was SG$1.43-0.56, gee March was the low for the stock, should have posted on this a month or two earlier! Despite the 9% jump in coal prices in the last quarter, it is still operating at a very comfortable 25% gross profit margin. Another 10% jump in coal price will only shave 2 percentage points from the gross profit margin. (Reference Price: SGD0.96)

I expect both companies to retest their 12 month high some time this year. As explained in the previous posting, both stocks will be looking forward to a major upcoming catalyst: China government revising the ceiling price upwards to better reflect international price pressures.

p/s photo: Maria Ozawa

Dung Waste It All Away

This is a top-down analysis. Oil price keeps going up. We also have a food crisis. We have less land for crops. We have converted and diverted a lot of plantation towards biofuels. There is one sub-sector that possibly can "gain" from the above developments. Fertilisers, to be specific. In particular, those that promotes high-yield in crops. Owing to rising prices in soft commodities, governments, enterprises and farmers collectively will use better fertiliser, and more of that even to push up production yield.

Already, potash related companies in Canda has shot up by more than 200% over the last 12 months alone. Well, I don't want to go very far, so I searched for "the relevant fertiliser company in the region. Thanks to a fellow reader (Windsurfer), he has highlighted China XLX Fertiliser (CXLX.SI) to me. Did some research, and it looked very interesting indeed. China XLX Fertiliser raised S$154 million from its IPO recently. It offered 200 million new shares at SG77 cents each.

China XLX Fertiliser Ltd is the largest coal-based producer of urea and compound fertiliser in Henan in terms of production capacity. Besides urea and compound fertiliser, it also produces methanol. Both production plants are located at Xinxiang High-advanced Technology Development West Zone, which is served by a comprehensive network of railway lines and highways.

The company is the sixth largest coal-based urea fertiliser producer in China by capacity. The coal-based fertiliser maker produced an annualised 315,000 tonnes of urea fertiliser last year and could more than double that production. XLX's regional and global counterparts are trading at about 18 times forward PE ratio. XLX made a net profit of S$26 million in the last fiscal year, on revenues of S$180 million.

Electricity costs make up 20% of the company's total expenses, while coal - a key raw material - makes up half. Although coal prices have been on an uptrend, XLX said its coal costs have risen by only about 5% over the last three years. As for its core business, making fertiliser based on coal, XLX does not expect rising coal prices to work against its favour. As usual, we are not the first to discover the stock. Back in March 2008 the stock was trading at SG56 cents, yesterday it was at SG96 cents despite the difficult market environment since March 2008. Its 12 month high-low was SG$1.43-0.56, gee March was the low for the stock, should have posted on this a month or two earlier! Despite the 9% jump in coal prices in the last quarter, it is still operating at a very comfortable 25% gross profit margin. Another 10% jump in coal price will only shave 2 percentage points from the gross profit margin. However, there is a price ceiling imposed on urea in China. While the conditions would dictate a raising of the price ceiling - recent developments in China may delay the move, in particular when the government there has just channeled RM64bn in subsidies to storm affected agricultural areas.

The company is highly attractive because of the cited macro factors, plus the fact that there is a high disparity with international urea prices. The international prices jumped by 38% in 2007 alone on the back of increasing grain acreage and rising demand for biofuel feedstock - further driven by higher crude oil prices. Currently if China urea producers were to export their urea fully, they would reap a gross profit margin of around 45%, that's after taking into account the transportation and logistics costs and a further 25% export tax. However, the disparity would further press the Chinese government to raise the price ceiling. Balancing the need to secure adequate domestic fertiliser supply, ensuring farmers' affordability and the disparity with international prices - Beijing would definitely have to raise the price ceiling. Beijing will just have to spend more on subsidies.

Regional competitors include China BlueChemical and Sinofert, both listed in HK. Valuations have gone up, the company is at 17x forward earnings, but the entire sub-sector should see a massive upgrading in the coming months. I would look for its 12 month high to be broken again sometime this year. (Reference price SG96 cents)

p/s photo: Paula Taylor Punlapa

DESTINY!!!

MANCHESTER UNITED
WINNER OF UEFA CHAMPIONS LEAGUE

AirAsia Below IPO Price

Imagine building a business from scratch into one with an enviable regional footprint. Now just on soaring oil and jet fuel prices, a global credit crunch, and fears about decelerating economies and consumer spending: the share price is even below its IPO price level.

In a difficult environment, you would think that the low-cost-carrier model would be far superior to a full service carrier. However, that is not the case. In fact many investors are preferring MAS and Singapore Air to Air Asia's prospects over the next 12-24 months! There has to be a dislocation somewhere.

Low-cost carrier Oasis Hong Kong Airlines has been Asia's only casualty so far in 2008, although Adam Air in Indonesia remains grounded after the withdrawal of key investors. Safe to say that you will be tying your hands if you choose to operate a LCC out of HK or Singapore. Being based out of Malaysia and Thailand naturally give Air Asia enormous cost advantages.

In the United States, no fewer than five airlines have filed for bankruptcy in the past two months. Add in Champion Air, which will halt flights on May 31, and December casualty MAXjet Airways, and the picture there appears bleak for all airlines. Delta Air Lines in the US, itself just one year removed from bankruptcy, agreed to merge with Northwest Airlines in a stock deal worth more than US$3 billion. Both operators had recorded losses in the first three months of the year to take the first quarter deficit among major US carriers to US$1.38 billion.

It is not hard to see why the industry is under pressure. By mid-April, oil prices had reached a record US$115 per barrel, and now US$130. The global average price paid at the refinery for aviation jet fuel was US$145.40 a barrel in the week to April 18, a 78% year-on-year rise, reports the International Association of Air Transport (IATA).

IATA has downgraded its outlook for 2008 as it expects stagflation to hit air traffic demand. It cut this year's operating profit target for the industry 42% from US$21 billion in June 2007 to US$12.1 billion. For Asia, the figure drops 80% over the same period, to US$700 million. The squeeze would kill off a few airlines, but at the same time shrink the competition capacity for those who survive. Hence it is very important to look at AirAsia more closely, a survivor or something less than that.

Many of the LCCs out of Asia have failed to survive after just a couple of years. Some did not even come out of their starting blocks. IATA predicts that overall capacity in the Asia-Pacific region will rise by 8.8% this year against demand growth of just 6.4% – in other words, higher growth in seats than passengers.

For LCCs, some of the critical decisions would be:
to manage fuel cost, manage labour cost, to buy or lease planes, and be properly capitalised. Failure will surely follow if a LCC did any of the above poorly. Seat management should not be a big problem as demand is there in Asia.

Oasis was based out of Hong Kong International Airport – its crew costs, overheads, and ground and handling fees were high – where it was competing against some of the industry's biggest players, including Cathay. It also had to base its crews and its staff in Hong Kong and Vancouver overnight. AirAsia has its own LCC terminal, enough said. Virgin Blue and Air Asia X, 48%-owned by Fernandes, can also rely on a passenger feed network to fill up their planes, whereas Oasis was flying solo.

"AirAsia X arrives in Kuala Lumpur and on its doorstep has 75 [AirAsia planes] flying all over south-east Asia, so it has a natural feed, as opposed to Oasis which was landing in Hong Kong and was not going to have a Cathay working with them," says Fernandes. And Oasis would have had to pay market rates for its Boeing 747-400s, while AirAsia has a working relationship with Airbus. Oasis also offered passengers free meals and in-flight entertainment, and assigned 22% of its seating to business class - not exactly a LCC model.

However, the visible failure of Oasis may have contributed to the downgrading of AirAsia over the last 3 months.

Malaysia Airlines, meanwhile, is in acquisition mode and is in a net cash position of about RM4.4 billion (US$1.3 billion) following a rights and loan stock issue last year.

Competition

AirAsia already has a 49% interest in Thai AirAsia and in Indonesia AirAsia, and Fernandes is eyeing further tie-ups in south-east Asia.

All Nippon Airways in Japan has stated its intention to establish a low-cost carrier, either via joint-venture or acquisition, to fend off competition from budget rivals. Indonesia's Lion Air has said that it will buy stakes or create new carriers in Vietnam, the Philippines, Bangladesh and South Korea and is launching an Australian tie-up with Brisbane-based SkyAirWorld this year.

Meanwhile, Singapore-based Tiger Airways wants to become a pan-Asia carrier and is keen to establish regional bases through franchise partners. It has announced a joint-venture with Incheon City Council in South Korea to launch an Incheon-based low-cost carrier this year.

Then there is Jetstar, whose Australian and long-haul carriers are owned by Qantas and whose Singapore arm is part-owned by Qantas and backed by state investment agency Temasek. Both Qantas and Temasek are committed to the advance of the low-cost carrier market.

In South Korea, Asiana Airlines acquired a controlling stake in proposed low-cost operator Air Busan, while Yeongnam Air, JB Airways and up to four more start-ups are reportedly preparing for launch. And three airlines are entering the Vietnamese market: VietJet Air, Airspeed Up and Phu Quoc Air. Qantas has also bought a stake in Pacific Airlines, which will facilitate cross-border joint-venture operations with Jetstar. The Vietnamese government vetoed a planned joint-venture between AirAsia and state-owned ship-builder Vinashin, but Fernandes clearly fancies the market.

In Thailand, Thai Airways and its low-cost affiliate, Nok Air, are squabbling, and the former is threatening to re-explore operating a wholly owned subsidiary, notes Capa. Meanwhile, One-Two-Go, Thailand's second-largest budget carrier by fleet, is suffering from fuel-intensive aircraft and under pressure following a crash in Phuket last year in which more than 80 people died.

Hedging Fuel Cost

Singapore Airlines start hedging today for 18 months in the future. Whatever the date in the future is, they will build up 50% cover and they will do it with fairly traditional hedging mechanisms.Cathay Pacific's method as more convoluted. They have put in place a complex structure of swaps, options and three-way options [selling put, buying call and selling another call with a higher strike price]. And that gives them a degree of protection. They are hedged about 30% for 2008 volumes. The head of commodities at one global investment bank names Qantas, All Nippon Airways and Japan Airlines as committed fuel hedgers. Malaysia Airlines, meanwhile, has a conservative policy of benchmarking its fuel hedging ratio against the average hedge ratio of regional airline peers.

AirAsia takes a more directional bet as part of its hedging policy. In late 2007, AirAsia management sold call options at US$82.60/bbl for 150,000 barrels per month, and the call options will be triggered if West Texas Intermediate [WTI] crude prices average US$90/bbl for the month. If WTI oil prices stay above US$90/bbl during January 2009 to June 2010, the losses for AirAsia are likely to mount between the spot price and US$82.60/bbl. But Fernandes says AirAsia has taken 80% of those calls out with a hedge to the end of 2009. That seems to have gone over the heads of analysts and investors. Let's repeat, 80% of those calls have been taken out and they have a hedge till the end of 2009.

Based on absolute PER, AirAsia is ridiculously cheap. Trading at just 5x 2007 and 6.2x 2008 earnings. More importantly, its net interest cover is at a manageable 2.7x, but that figure cannot and should not go much lower from here. Its ROE is still at a very respectable 23%.

The over-riding fears would be the fuel cost. Can AirAsia still pass on some of the irrational hikes in fuel cost? AirAsia should be raising fuel surcharge by RM8-12 per pax sometime this year. Considering where AirAsia is now, that should not affect demand even with the hike.

You have two major risks: fuel price and leverage. As shown, these are certainly not debilitating. Bearing in mind AirAsia has already come through even more difficult phases: SARs epidemic and the tsunami-follow on effect on air travel. The two major risks are manageable. The more difficult phases saw a sharp downturn in passengers, which is not happening now. Hence balancing all that, the current share price levels would be an opportunity, not a call to join the bear camps. (Reference price RM1.08)