Stepping Into 2010 - A Lookback

Another year has passed, I cannot believe that I am still blogging after 4 years. Thanks to the growing readership, that has kept me motivated. Many still ask why I blog.



The Equaliser

Casual conversations can sometimes elicit the roll of our eyes, and sometimes I have to stop myself wanting to explain an investing issue further among friends as it could drag on and on. However, when you can add logic and persuasion into an investing issue, we must not hoard knowledge or information. There are again two types of people in the world when it comes to knowledge and information dissemination. Group one are those who will try and get by by hoarding as much knowledge and information for their advantage (what the rest don't know would benefit me, I have leverage and the edge). Group one are also those who are likely to "lord over people" with their "extra knowledge and information". For example, they are the ones who may have a passion for wines and would read up voraciously on it, and in social settings will snigger and gently shake their heads at any faux pas or shallow commentary on certain wines - that's lording over people. Get me away from these types. No one is better or should be compared based on what they know, who they know, what jobs they do, how much they earn, ... we just are. Nobody will know everything, can the same wine expert tell me the difference between a Montecristo Edmundo and a Trinidad Robusto Extra? Or what's a kimedashi, okuridashi and oshidashi in sumo? So why lord over people in the first place?



My favourite word in English / French is "egalite" or egalitarian. Meaning: asserting, resulting from, or characterized by belief in the equality of all people, esp. in political, economic, or social life. I don't lose out if others benefit, its all in your mindset, which is why I blog, I believe the internet is The Great Egalite, the great equaliser. Of course, equality is a desired quality to aspire to, and true equality must not be based on a desired quality as reality may dictate that the flip side is true. True equality can only be pursued when you are convinced that ITS TRUE, just existing gives you the "rights", that should be the entire argument and basis. Or if you are spiritually minded, the maker maketh, hence I am. No one can or should make another person anything "less". My blog welcomes group two types; if you are in group one, well ... seriously you are not welcomed.

Too many people buy and sell shares with minimal information or analysis. Although what I write may not be solid gold all the time, I hope it helps to keep track of things that all investors should be paying attention to. I hope people benefit from my blog. In exchange, the blog helps me to channel my aspirations as a writer, to channel my anger and frustrations at things that are "silly", people that are "incompetent", talk about ideas that are great and pummel those that should be vilified.


p/s photos: Nozomi Sasaki

KPJ - Revisited

KPJ did well for the last few days. In fact, it did very well for the whole of 2009. The company is soundly managed with good fundamentals, as was stated in my previous posting on KPJ.

http://malaysiafinance.blogspot.com/2009/12/why-i-like-kpj-healthcare-lot.html

Timing was correct, took me by surprise that it announced the ex-all date so soon. Here comes the interesting bit. The ex-all date is 6 January 2010. If you take the remaining days left:

30 Dec Wed
31 Dec Thu
4 Jan Mon
5 Jan Tue
6 Jan Wed
7 Jan Thu

Technically, the savvy traders who did not want to pick up shares but get a slice of the bonus / splits / free warrants, could buy on Thursday 31 Dec and would just make the ex-all date of 6 Jan. However, the company has also announced that the shares will be suspended on Monday, 4 Jan to make way for the split first. If we were to understand this correctly, why would you suspend 2 days before the ex-all? Does it mean that on Tuesday 5 Jan the shares would trade on a split basis (i.e. if shares were at RM6.40 before Monday 4 Jan, it will trade at RM3.20 on 5 Jan Tuesday?

Just read the announcement: "Please be advised that the trading of KPJ shares will be suspended with effect from 9.00 a.m., Monday, 4 January 2010 in order to facilitate the Share Split. The suspension will continue until the completion of the same." The last phrase that the suspension will continue until the completion of the same, can be read as indefinite. If they take longer than one day, they can.

What the announcement was not clear is whether the shares will only be suspended for that ONE day on Monday 4 Jan. It could be that the shares could go suspended till 6 Jan for the ex-all. If that is the case then the last two days to buy to get the "loot" will be today and tomorrow only!!!

If its the first scenario, whereby the shares come back on 5 Jan on a split basis at RM3.20 ... who do you think will be SELLING? Nobody, that's who! Why would you want to hold for the split only to sell after the split - when everybody knows the real action is in the bonus shares and free warrants. Hold another day for the 1-for-4 bonus and 1-for-4 free warrants. Which means on the Tuesday 5 Jan, KPJ share price could be in for another jump, if this scenario holds true.



I don't know for sure which scenario will play out but it will be very interesting to watch. Bursa, please make sure companies make announcement properly, if its suspended for ONE day, say so. If its indefinite, say so. Btw, holders of KPJ should be sleeping soundly and be ready for a great start to the new year. The free warrants are looking mighty attractive now and should trade around RM1.00 after ex-all.

Subject	:	KPJ - NOTICE OF BOOK CLOSURE
Contents	:	1) Subdivision of every existing one (1) ordinary share of RM1.00 each in KPJ Healthcare Bhd ("KPJ" or the "Company") into two (2) new ordinary shares of RM0.50 each in KPJ ("Shares") ("Share Split") 2) Bonus issue of up to 105,525,308 new ordinary shares ("Bonus Shares") of RM0.50 each ("Shares") in KPJ Healthcare Bhd ("KPJ" or the "Company") to be credited as fully paid-up, on the basis of one (1) Bonus Share for every four (4) Shares in KPJ after accounting for subdivision of every existing one (1) ordinary share of RM1.00 each in KPJ into two (2) new Shares in KPJ. 3) Issue of up to 131,906,635 free warrants ("Free Warrants") in KPJ Healthcare Bhd ("KPJ" or the "Company") on the basis of one (1) Free Warrant for every four (4) ordinary share of RM0.50 each in KPJ ("Shares") after accounting for subdivision of every existing one (1) ordinary share of RM1.00 each in KPJ into two (2) new Shares in KPJ and bonus issue of up to 105,525,308 Shares on the basis of one (1) new Share for every four (4) Shares in KPJ. Kindly be advised of the following : 1) The above Company's securities will be traded and quoted [ "Ex - All" ] as from : [ 6 January 2010 ] 2) The last date of lodgement : [ 8 January 2010 ] 3) Retention Money : Where securities are not delivered in time for registration by the seller, then the brokers concerned :- a) Selling Broker to deduct [ 1/3 ] , of the Selling Price against the Selling Client. b) Buying Broker to deduct [ 20% ] of the Purchase Price against the Buying Client. c) Between Broker and Broker, the deduction of [ 1/3 ] of the Transacted Price is applicable.

Subject	:	KPJ-Suspension of trading arising from proposed share split of each ordinary share of RM1.00 in KPJ into two (2) ordinary shares of RM0.50 each ("Share Split")
Contents	:	Please be advised that the trading of KPJ shares will be suspended with effect from 9.00 a.m., Monday, 4 January 2010 in order to facilitate the Share Split. The suspension will continue until the completion of the same.

p/s photos: Chrissie Chau

Delving Further Into HK Equity Market

Hong Kong has been trying to court new listings as it deepens its equity market, which has been increasingly dominated by mainland China listings in recent years. Hong Kong exchanges have been putting a particular emphasis on companies from the Commonwealth of Independent States (CIS), including Russia and Kazakhstan, as well as Mongolia.

Ernst & Young notes that the Hong Kong Stock Exchange will be the top fundraising exchange in 2009, with US$17.7 billion raised, or 18.7% of the global total. In 2010, Hong Kong could raise as much as US$47 billion in IPOs.

The aluminum company Rusal was set to be the first Russian company to list in Hong Kong in December 2009, but its listing was deferred due to concerns about its outstanding debts and corporate governance issues. The Hong Kong Securities and Futures Commission granted approval in December, but the stock will trade in lots of 200,000 shares to prevent retail investors from potential losses. The FT's Lex says "regulating by a nudge and a wink" could backfire by encouraging retail investors to lever up to buy the stock.

Inflows from China and accomodative monetary policy stemming from Hong Kong's U.S. dollar peg have added to the liquidity in Hong Kong's market in 2009. Hong Kong's monetary agency has been intervening heavily in the FX markets to maintain the peg, with only some of its interventions sterilized. In H2 2009, new public offerings have picked up strongly after a credit-crisis-induced lull.

In 2008, Hong Kong outstripped the fundraising capabilities of Tokyo and Toronto and was second only to Shanghai in pre- and post-IPO fundraising. However, fundraising abilities fell sharply in 2008 and early 2009 compared to 2007. Hong Kong also attracts both local and international retail investors. The development of Hong Kong Depository Receipts (HDRs) opened up the possibility of new listings from Russian, Indian and Middle Eastern companies. In 2007, foreign investors accounted for 43% of the market turnover and foreign and domestic institutional investors accounted for 65%.

In 2009, Hong Kong's equity market has jumped sharply on expectations of improvement in economic conditions in China and a huge surge in domestic liquidity. Abundant liquidity has attracted new listings in H2 2009 and narrowed the valuation gap between shares that trade in Hong Kong and China. As liquidity conditions are likely to remain into 2010, some analysts suggest that the equity market could rally further. However, any sign of tightening could spark a correction.

A s of December 8, the Hang Seng Index has surged 95% from a four-month low on March 9 and 53% YTD. Shares in the benchmark are valued at 17.4 times estimated earnings, compared with an average of 13.7 times during the past five years. Hong Kong-listed Chinese stocks traded at a 17% premium over China-listed shares as of December 8, according to the Hang Seng China AH Premium Index. This is below the 31.5% average since 2006.

In the Hong Kong Monetary Authority’s most recent quarterly report (December 2009), the central bank said that a reversal of the region’s massive fund inflows could spark “sharp corrections” in domestic asset markets. Hong Kong's H-share market (mainland companies listed in Hong Kong) has not fallen as sharply as the mainland market. This seems to suggest that H-share investors are more optimistic than mainland investors about any coming tightening in Chinese monetary policy. However, it probably is more a reflection in the differences in liquidity between the markets. A-shares are facing liquidity constraints that H-shares should avoid.


The Hong Kong stock market has benefited from strong growth in China and a large boost in liquidity. Monetary authorities have been intervening in foreign currency markets to defend the upper bound of the Hong Kong dollar's (HKD) peg against the U.S. dollar (USD), which has required selling local currency for USD. This boost to liquidity looks to continue as the overnight bank rate remains close to zero. A return to growth in Chinese exports would help Hong Kong equities as well. In H1 2009, 16 companies listed in Hong Kong to raise a total of US$2.6 billion. An additional 19 companies planned IPOs in H2 that could raise US$23 billion. Several of these IPOs slumped on their first day of trading in September/October 2009, with China South City tumbling 30% on its debut. The long list of planned IPOs remaining in H2 may fetch lower than expected valuations as investor appetite for new shares appears to be waning.

The gap between A-shares (listed in Shanghai and Shenzen) and H-shares (listed in Hong Kong) has fallen since February 2009. As of September 22, A-shares trade at an 18% premium over H-shares, down from a 59% premium in February 2009 and high of 90% hit in early 2008. As of September 22, stocks listed in Shanghai and Shenzhen (CSI-300 index) have fallen 17.3% from their August 4 peak on concerns about liquidity. Shares in Hong Kong (Hang Seng index) have gained 4.4% over the same time frame. Mainland shares are down because of a slowdown in bank lending, tighter credit restrictions and a release of previously locked-up shares. Hong Kong is not affected by these dynamics, and its liquidity comes mostly from global funds which are not facing liquidity constraints. Citi expects the gap to widen in the last two months of 2009.

Capital controls are the main impediment to arbitrage between A-shares and H-shares. In spite of a halving of mainland share values over the eight months to July 2008, China's three markets (Shanghai, Shenzhen and Hong Kong) still account for 9.6% of the world’s total stock market capitalization (unadjusted for free float). That is well behind the US, at 30%, but puts it ahead of Japan, at 8.3%. While Hong Kong's position is secured and Shanghai is increasingly the venue for high-profile listing, Shenzhen continues to struggle to reinvent itself, for example with a new SME exchange.


p/s photos: Sharon Xu

Why Do Stocks ....

From Paul Kedrosky's wonderful site again. This time we see how wise Google is. We should call it Google the Oracle. If you type in search box: "Why do stocks ...?"

You get the wonderful array of questions we all want to know answers to. Brilliant!

"Why are Canadians ...?"

If you type in "Why do Malaysians...", you will get prompts:

Why do Malaysians march
Why do Malaysians say la

If you type in "Why Malaysians...", you will get the following prompts:

Why Malaysia can't (sic) go (to) Israel
Why Malaysia GDP fall
Why Malaysia internet so slow
Why Malaysia was formed
Why Malaysia was not an Islamic state
Why Malaysian (sic) migrate


Funny indeed...

Why I Like Unisem

The market for much of 2009 was a stock picking market. It wasn't a fantastic bull run for Malaysian equities (unlike other markets) as we still under performed most of our peers. If you pick the right stocks, the buying can be well sustained as investors picked those which recovered faster or had more prospects. In line with finding stocks that have been victims of the downturn, but are gradually finding their feet, ala Evergreen, a much hammered sector has been semicon. I think anything below RM1.65 would be a great entry level for a 1-4 month hold. My anticipated 30% should be highly visible in line with better fundamentals and news flow.



"Unisem’s 9MFY09 core profit was ahead of expectations as we expect a stronger 4Q. The key features of the 3QFY09 results were revenue expansion in the seasonally strong quarter and the improving margins from better operating leverage." - according to a recent report by CIMB. The chip industry looks to be on a firmer footing with six consecutive months of growth in chip sales, a rising book-to-bill ratio to 1.17 times in Sept 2009 from the lows of 0.47 times in Jan, a normalising inventory situation as well as better results and outlook for the tech majors.

Unisem's recovery prospects is much better than the rest thanks to its China links. Unisem’s near-term earnings remained intact backed by still resilient chips demand arising from China’s stimulus package, higher demand for its higher-margin WLCSP and module packages and continuous cost-cutting measures. Thanks to the fiscal stimulus package and the vast consumer market in China, Unisem expects revenue from the Chengdu plant to grow exponentially at 100% in FY10 compared with 60-70% in FY09. A growing bunch of fabless IC design houses are outsourcing all of their requirements. iSuppli has projected 17.8% growth in the Chinese semiconductor market to US$80.1bn in 2010. It is likely that China plant will supplant Ipoh as the largest contributor to the top and bottom lines in two years’ time.

The operations in China generates the highest EBITDA margin of around 35-40% vs. 26% for the entire group due to the more cost-efficient and newer equipment in place there, along with a growing emphasis on higher-margin packages. It has budgeted US$25m-30m for capex in China in FY10 and will complete Phase 2 by FY10.

Growing demand for PCs and mobile phones from the Asia Pacific region, which now makes up 50% of global chip sales from only 30% in 2001, should offset to a large extent the anticipated sluggish recovery in demand from the US.

Currently at just 8x 2010 earnings, this is a prime example of a cyclical stock, and now the timing is pretty spot on to load up on Unisem.





For the recent 3Q figures for period ended Sep 2009, it recorded a revenue of RM283.5m, however the first two quarters had almost a zero contribution to net profit. Recovery in bottom line only just started in 3Q2009. For 3Q its net profit came to RM25.5m, bringing the total for the 3 quarters to RM25.87m. Management is quite confident that the pickup in order flows that was experienced in 2Q and 3Q would sustain till the end of the year and going into 2010. At the group level, Unisem’s management is guiding for a 5-8% qoq increase in revenue for 4Q09, primarily driven by its Ipoh and Chengdu plants, and for EBITDA and profits to grow in tandem. Contribution from China is expected to increase to between 30-40% by 2010 and potentially be become the largest contributor to earnings by 2011, as the group opines that there is still significant room for growth there.

The above were views on stocks and sectors that I like, not an invitation to buy or sell. It serves as a blogging activity of my investing thoughts and ideas, this does not represent an investment advisory service as I charge no subscription or management fees (donations are welcomed though). The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis, or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

p/s photos: Ishihara Atsumi

A Bitter After-Taste To DSC Solutions Listing (Holiday Reading For Bursa & Kenanga Investment Bank)

There have been discussions at Investalks.com on this topic. Someone commented that DSC may have been pushed up because its NTA was RM2.27. If you read the prospectus closely, you will get that figure but that was based on a pre-IPO pre- enlarged share issuance exercise. Read page 11 of the prospectus, you will find that the proforma consolidated NTA after the public issue and bonus issue will be just 13.16 sen.

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I think this is too important a posting to be relegated to the bottom of my posting listings. So, I have put it at the top again. I think Bursa and Kenanga Investment Bank must have been praying that nobody writes about this. Hey... none of the mainstream media picked this up at all???!!! WTF!!!

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Well spotted by Alex Lu on his popular nexttrade blog site was the quite clumsy listing of DSC Solutions. Let me say here first that the company should have been better advised by the lead manager Kenanga as well as by Bursa. But first, read up to see what the hoo-hah was about:

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http://nexttrade.blogspot.com/2009/12/dscsol-were-investors-not-aware-of.html

Tuesday, December 15, 2009

DSCSOL- Were investors not aware of the Bonus Issue?

DSC Solutions Berhad ('DSCSOL') is involved in the provision of AIDC solutions, software & engineering services. AIDC stands for Automatic Identification & Data Collection. AIDC allows companies to improve their business processes by changing from a manual to automatic data collection systems. This will enable the production of faster & more accurate reports- aiding management in its decision-making.

For its listing purposes on the ACE Market of our exchange, DSCSOL made a Public Issue of 12.578 million shares at an issue price of RM0.50. After the IPO (but before its listing), it carried out a Bonus Issue of 1-for-1. This effectively reduced its IPO price from RM0.50 to RM0.25. The stock was listed on Dec 9.

From the 15-minute chart below, we can see that the share price jumped on the first day of listing and thereafter it steadily sold down. I hope the reason for the bullish action on the first day of trading was not due to investors' misreading the Prospectus or that they were not aware of the Bonus Issue. If so, it could lead to a mispricing of the stock. The making of a Bonus Issue after the IPO closure & before the listing of the stock on the exchange is a practice that should be discouraged.


Chart: DSCSOL's 15-min chart as at Dec 15, 2009_9.24am (Source: Quickcharts)

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If you click on the chart, you will see that there were two groups of players at the very beginning of the trading day, one group thinking the IPO price was effectively 0.50 and the other knowing that it was 0.25. Naturally within the first couple of minutes, the share price had a trading range of between 40 odd sen and 60 sen, a highly unusual spread of activity given the actual IPO price was 0.25. From 40 sen to 60 sen itself meant a jump of 50% in valuation.

It opened at 47 sen went towards 40 sen, which to the promoters was already a highly spectacular IPO given that it was priced at 25 sen. But noooo, that's not enough, there were sufficient players in the market place who thought that the shares were "under water" (that its IPO was priced at 0.50) and should surely be shored up by promoters soon. Oh, yes, whoop-dee-dah .. it went on a merry way for the rest of morning session, trading as high as 91.5 sen - I would like the person who bought at 91.5 sen to try and seek compensation from Bursa and Kenanga. I doubt he/she will succeed, but I think the case needed to be heard by more people so that more investors do not get "conned" unintentionally.

The actual announcement from Bursa's website:

Initial Public Offering (IPO)

Reference No GR-091119-27659

Company Name	:	DSC SOLUTIONS BERHAD (ACE Market)
Stock Name	:	N/A
Date Announced	:	19/11/2009

Subject	:	PUBLIC ISSUE OF 12,578,000 NEW ORDINARY SHARES OF RM0.10 EACH IN DSC SOLUTIONS BERHAD (“DSC SHARES”) AT AN ISSUE PRICE OF RM0.50 PER DSC SHARE PAYABLE IN FULL ON APPLICATION COMPRISING: • 500,000 NEW DSC SHARES AVAILABLE FOR APPLICATION BY ELIGIBLE DIRECTORS, EMPLOYEES AND BUSINESS ASSOCIATES OF DSC SOLUTIONS BERHAD AND ITS SUBSIDIARY COMPANIES; • 11,078,000 NEW DSC SHARES FOR PLACEMENT TO SELECTED INVESTORS; AND • 1,000,000 NEW DSC SHARES AVAILABLE FOR APPLICATION BY THE PUBLIC AND BONUS ISSUE OF ONE (1) NEW DSC SHARE TO BE ISSUED AND CREDITED AS FULLY PAID-UP FOR EVERY ONE (1) DSC SHARE HELD AFTER THE PUBLIC ISSUE IN CONJUNCTION WITH ITS LISTING ON THE ACE MARKET OF BURSA MALAYSIA SECURITIES BERHAD.

Notice how casual and matter of fact the phrase "AND BONUS ISSUE OF ONE (1) NEW DSC SHARE TO BE ISSUED AND CREDITED AS FULLY PAID-UP FOR EVERY ONE (1) DSC SHARE HELD AFTER THE PUBLIC ISSUE" was inserted as part of the announcement. OMG... that announcement IS NOT NORMALLY DONE, hence it must be highlighted properly, be reminded and alerted properly...

.

Look at the above chart, yes everybody wised up following the euphoria that the company's IPO price was really just 25 sen. Well, whoever got the shares or traded smartly, got the benefit of this near catastrophe. The shares has since slid from the 70 odd sen to the current low 30 sen... but to the owners, its a bloody fantastic price still given that its IPO price was just 25 sen. As nice as it was, the company owners did not get the benefit of the volatility because they were not allowed to sell any shares within the lock up period.

Who is going to stand up for all the investors who BOUGHT from 40 sen to 90 sen and still holding - we have to ask what kind of information were they relying on ... because we know that all investors genuinely thought that the price you paid for the IPO shares WILL BE the IPO share reference price - ask 100 people, see how many would disagree. Hence their confusion and/or reliance on available information is understandable. Don't do the "buyers beware" argument because that is dipshit-lawyer-ball-less-tactic ... that is seeking to be protected from claims, ... what we are here is to try to BE FAIR, BE REGULATORS THAT HAVE THE CONCERNS OF INVESTORS AT HEART, ... did we really do that here???

a) Nobody is saying that Kenanaga or Bursa or DSC "intentionally" conned the public. It is exactly that the same group of people who had no bad intentions, and that they also did not have market attuned instincts and market savvy knowledge - because if you have, you would HAVE KNOWN and PREDICTED that there will be substantial pockets of investors in the market place who DO NOT EVEN READ the prospectus closely. Please do not hide behind the guise of "its all there in the prospectus" to absolve your responsibility. Do not get lawyer-ing with me. We all know what "we should have done", please .... look at the evidence and tell me that nobody was mis-informed. It might have been mostly their own fault, but did the authorities and the promoters and lead manager did "enough" to alert investors, I would at least double-underline with red ink that there will be a one-for-one bonus issue AFTER the IPO but before the listing, and that the effective IPO price upon listing will be 0.25 and not 0.50 - what will it cost you all to do that in bold, in red, in the front page of the prospectus, and as well on the Bursa circulars and announcement page.

b) Accept that this bonus issue after the placement of shares but before listing WAS HIGHLY UNUSUAL and NOT THE NORM. Once you accept that, make steps TO ENSURE THAT ALL INVESTORS ARE SUFFICIENTLY INFORMED, ALERTED TO THAT FACT ... something which did not happen with DSC. You don't want this negativity with the newly launched ACE Market, do you??

c) Kenanga Investment Bank and mgmt of DSC, may I ask what was SO FUCKING DIFFICULT to sell 24m shares at 25 sen instead of 12m at 50 sen and then just list???? Why do the fucked up post IPO 1 for 1 bonus??? Why complicate matters? I know, the next time I get to list my company, I will sell 30m shares at 0.50, then prior to listing do a 5 for 1 bonus issue, and laugh all the way to the bank ... this makes the actual IPO at 0.10 but most will still think its at 0.50.

Am I the only one (with Alex) to see this big dis-service to investors? Imagine people buying Maxis new shares on trading day at RM16-17, thinking its good value, when actual IPO price was RM5 ... just because this was a smallish company does not alter the mechanics. If it happened to the Maxis IPO, all hell would have broken loose.

Well, at the end of it all, no one will apologise... Bursa will not, Kenanga Investment Bank will not ... because apologising is tantamount to acknowledging that they were "at some fault" - thus triggering lawsuits. Yusli, please don't say anything NOW, don't come out to say "Buyers Beware" shit now, it will piss everybody off. Do your internal investigation, and put in measures to prevent such occurrences again.

I have said it hundreds of times ... Bursa is stocked with TOO MANY LAWYERS, TOO MANY PEOPLE WITH INSUFFICIENT MARKET SAVVINESS, INSUFFICIENT MARKET SENSE .. if you did have that one fucker who is market savvy, that person would have alerted all to this... "hey, this could blow up, let's do a special reminder or special announcement, or send a special circular to all traders and remisiers to advise their clients before they buy or sell that the effective IPO price is 25 sen".

Nothing, nada, zilch ...

p/s photo: Some companies need to be "purged" of some employees like the photo would suggest

A Blessed Christ-mass

Me doggie and I wish all readers of this blog ... a blessed Christ-mass ...

yup, she's 8.5 months old now.

Best Cigars Smoked In 2009

Now onto cigars. Whether is coincidence or not, my two picks happened to be not Cuban. That is quite surprising given that Cubans have always ranked higher in my view and is a class above the rest, and makes up the majority of my smokes (favoured labels include Bolivar and San Luis Reyes). So here goes, my two best cigars for 2009: La Gloria Cubana's Series R and ... Padron's 1964 Anniversary Series.

The first one is Padron's 1964 Anniversary Series, especially the Exclusivo Maduro. This firm box-pressed cigar has a silky black wrapper. It has a perfect draw and burn, delivering rich, peppery smoke that has a heavy nutty flavor. A medium to full-bodied cigar.

Size: 5 1/2 x 50
Cigar Shape: Robusto
Cigar Filler: Nicaragua
Cigar Binder: Nicaragua
Cigar Wrapper: Nicaragua
Country of Manufacture: Nicaragua

Hell, actually the entire range of the Anniversary series are very good.


The next cigar is La Gloria Cubana's Series R. Packed in dark mahogany, cabinet-style boxes, La Gloria Cubana Series R cigars deliver their extra-bold bouquet as soon as the box is opened. Their full-bodied flavor comes from a special blend of long Dominican and Nicaraguan filler, superb Nicaraguan binder and a wonderfully aged and extra flavorful Ecuadorian wrapper. The result is a rich, full-flavored smoke. There is a natural range for Series R as well as a Maduro range for Series R. The maduros are 8.8 out of 10 in my books but the naturals rate a 9.4/10. Go for the Number 5 and Number 6.

Best Wine Tasted In 2009 - Luis Felipe Dona Bernarda

Well, its not just one wine but rather a series. Luis Felipe Edwards wines are wonderful. They started in 1976 and are from Chile. Don't just go and grab any Luis Felipe wines. They have been producing various collection, to name a few Bebibilidad, Hilltop, Gran Reserva ... but the best has to be the Dona Bernarda. The wine was aged in French oak for 18 months. The 2004, 2005, 2006 and 2007 from Colchagua Valley are unbeatable in value and drink-ability. Frankly, the year of production is pretty consistent year in year out. Never been disappointed with my 3 different bottles this year.

=

Remember the bottle has the face of a woman on it.

Doña Bernarda was made since 1997. They skipped the vintage 1998 because they didn't reach the required quality. It had more than 85 % of Cab. Sauvignon until 1999. From 2000 they don't state the variety on the label, since it is a blend from different ones. It has been always mainly Cab. Sauvignon, but we they have used Malbec, Cab. Franc, Petit Verdot and Carmenere.

Technical Data: 65% Cabernet Sauvignon, 30% Petite Verdot, 5% Cabernet Franc. Aged 18 months in French new oak barrels.

Description:Deep dark red color, This wine shows pleasant aromas and flavors of dried plum, blackberry and violets, followed by chocolate and mocha notes from its aging in oak barrels. A full-bodied wine yet a very soft mouth, with a great length.

The wine must be allowed to breathe for at least 30 minutes. ... ripe and shall I say delicious, so much so that you can almost eat it. Sigh .. I know I am partial to distinctive and "loud" wines rather than the subtle French wines, but what to do.

Best Album In 2009 - Rebecca Pan's My Indie Music

For the last few days of 2009, I shall be featuring things I really enjoyed for the year of 2009. I will be featuring the best wine I tasted for the year, the best cigars I smoked, the best film, etc... First off the block, the best music album for the year, in any language, is Rebecca Pan's (Poon Tik Wah) project (its a project as she was instrumental in conceptualising, but only sang a few of the songs) My Dream, My Way, My Indie Music.



What was so enticing was the concept. Rebecca, a hugely popular singer in her younger days, and still lives and breathes music in her blood. I think she is 79 by now. Its hard to see someone in her 70s still getting enough support to put out an album, but it must be due to her passion that made it happened.

The album is full of exciting indie music performers, which she must have invited (and they must have accepted gleefully). All except one guest artiste, Eason Chan is there as well and he certainly is not an indie artiste, delivering a heart stopping and fun Chinese Blues.



I doubt you can get the album in Malaysia, sigh... thanks guys, for broadening our appreciation of great music, these bloody record shops and chains ought to be cut down to size. When they filter what we can buy, they basically filter what we can listen to. They can say that its a smallish market to bring in independent music artistes, then we will all end up buying and listening to over-promoted, over-hyped, over-marketed albums only.

Rebecca has appeared in Days of Being Wild and In The Mood For Love, both stylised movies by Wong Kar Wai. I brought that up because her music would always fit in brilliantly in any Wong Kar Wai movies - its moody and reflective in her ballads, spirited and sunshiny in her fast tempo numbers, and always sung with passion.

Rebecca basically had the entourage reprising some of her famous songs albeit with a refreshing treatment. The CD comes with a hardcover 88 page book, with glorious photos of her yesteryears, describing the backdrop for each song, and interspersed with photos of the indie stars who are part of the album. Its a brilliant concept, hard to execute well.

Some of those who appeared in the album: PixelToy, Ketchup, Chet Lam, my little airport, at17 and Pancakes. The songs are done in English and/or Mandarin to great effect. The melodious songs have been recrafted and are vibrant to the ears.


(yes, that's her, Rebecca Pan on the album cover, a photo in her heydays... )

Nee Nee Wo Wo by PixelToy was cheery and fun. Chet Lam was devastatingly intimate singing Essence of Love and I've Seen You In My Dreams, the latter a touching duet with Rebecca and easily the best song in the album. Rebecca showed why she is a legend by also singing in French, J'attendrai and the haunting mandarin version of Siboney Amor.

I have been listening to the album at least a couple of times a week for the past 2 months and I am not tired of it at all. Its infectious and full of heart. Easily the best album I have listened to in 2009. The only bad track was by my little airport singing the English hit I Wonder Why, seriously, I could have sung better. Try and buy it when you are in HK, or get someone to buy it for you, or buy it online.

"Nee Nee Wo Wo" (1961) by PixelToy
"Solid Gold Rickshaw" (1967) by Ketchup
"Essence of Love" (1966) by Chet Lam
"Mágica Luna" (1961) by the pancakes
"Bengawan Solo" (1962) by at17
"I've Seen You in My Dreams" (1974) by Rebecca Pan & Chet Lam
"The Protest" (1974) by Gayamyan
"I Wonder Why" (1968) by my little airport
"J'attendrai" (1961) by Rebecca Pan
"Chinese Blues" (1962) by Eason Chan
"My Hong Kong" (1965) by Rebecca Pan & HK Indies
"Siboney Amor" (2009) by Rebecca Pan

My Prediction For The #1 Biz News In 2010 - CIMB Merges With Public Bank

OK, remember you heard it first here, here during the last few days of 2009. So when it pans out, remember me ok ... We still have ten banks in Malaysia, and that is still way too many banks, we should really just have 5, probably we will end up with 7. The markets are buzzed with Hong Leong Bank thinking of snatching EON Bank and/or Affin Bank. Well, the latter two should not be around by end of 2010, and that's pretty much a given. So called anchor banks that have no capacity or resources to be competitive in an open environment will have to sell.

(click on image to enlarge for viewing)

My best prediction and also the biggest shebang for 2010 is that CIMB Bank will merge with Public Bank. If you read the roadmaps closely and do the usual deduction analysis, its very likely going to happen. It makes sense on so many levels. Maybe Goldman Sachs should hire me to close this deal with these two banks (send me an email: malaysiafinance@gmail.com).

A couple of months ago, there were rumours that the two Chinese banks, namely Public Bank and Hong Leong Bank, were going to merge. It is unlikely to pan out as Public Bank is "too important" an asset, coupled with a possibility that there could be regulatory or political resistance, and that there appears to be a more viable case to go with CIMB. I see the main hurdle to a Public Bank-Hong Leong Bank merger being that Bank Negara would never want the biggest bank (by virtue of the merger) to be controlled by ONE individual. Apparently Hong Leong Bank has also been not so willing to go higher on the pricing front. The replication of businesses are too great as well.

Why CIMB & Public?

1) Fit - It fits into each other's strengths. One is in investment banking and has very decent regional exposure while Public is very commanding in consumer banking. Very good loan-deposit fit.

2) Flagship Entity & Size - The two merged would actually see CIMB-Public becoming possibly the biggest banking group in Southeast Asia, possibly nudging aside DBS Banking Group as well. The importance of size cannot be discounted. The forward thinking Nazir with Khazanah and EPF backing it all the way should see this as a necessary strategic consolidation. Get our best two banks to go and conquer the region. When you have a brood of kids and you are not very rich, pick the smartest kid or the one you like best and that one gets to go to college - CIMB Bank should be the "flagship entity" to plant the country's flag in the region.

3) Teh's Stake - Teh of Public Bank has no seeming successor from his family to take over the shares. When he is no longer around, the controlling stake may be viewed as a negative rather than as a positive. If no family member is keen to follow up, its better to NOT just be a strategic silent shareholder - eventually they may be "guided" to dispose the shares one way or another - why not lay down the strategic future of Public Bank in "safer hands". Its a sure way of protecting and maintaining Teh's legacy in the banking industry.

4) Asset Management - One of the main jewels of Public Bank is Public Mutual, something CIMB has been trying very hard to build/buy with minimal success. Imagine transplanting the Public Mutual exemplary record across the region. This can be turned into a massive fee generating machinery via its regional branches.

5) Public Bank's Capital Constraints - This is something which is not discussed often enough by Public Bank's shareholders. In recent years, tons of money has been paid out in dividends, but of late that has be constrained as PB needs to bolster up its capital adequacy ratio despite being a highly profitable entity. I doubt very much that Teh wants to do a rights issue. Public Bank's Tier 1 capital is at a precarious 8.6% and it needs to meet global standards soon. The Basel Committee is expected to announce several measures to strengthen banking regulations by end 2009. These include (a) raising the quality, consistency and transparency of Tier 1 capital base (with the predominant form to be common shares and retained earnings), (b) introducing a leverage ratio as a supplementary measure to the Basel II framework and (c) implementing a framework for countercyclical capital buffers above the minimum requirement, including constraints on capital distributions. If adopted by Bank Negara, and I don't see why not, Malaysian banks will have less room to raise Tier 1 debt securities and pay generous dividends, resulting in lower ROEs in the longer term. This is what Public Bank is facing as a hurdle for the future.

6) Staff Retention & Culture - I think there is a much better fit with CIMB than with Hong Leong Bank. CIMB pays much better for performers and critical functions, and I sense a possibly higher approval rating by Public Bank's staff if the merger was with CIMB than with any other bank.

7) Playing Devil's Advocate - Can Public Bank go it alone without Teh at the helm in the future? Yes, but that is not the question at hand. The main question is the floating controlling stake. Let's take another tack and imagine a Public-AMMB vehicle, I can see issues with who controls what and the culture is definitely very different. The same goes for Public-RHB but to a lesser extent. One can see that both versions would yield minimal synergies. When you consider CIMB-Public, it crystallises as a beautiful plot, Public's side continues to dominate the consumer banking, throw the asset management stuff (Principal) into Public Mutual, consolidate Public Bank's overseas holdings under CIMB's regional management, leverage on the better loan-deposit ratio for much better margins in various products., etc...

8) Ownership Streamlined - A merger between the two is much easily digestible and acceptable as it won't be controlled by an individual. The merged entity would see Khazanah and EPF being up there as the main shareholders. There would be an even better free float and liquidity and the merged entity would surely rank as one of the more important Asian banking groups by international funds and institutions.

CIMB vs Public Bank (F) Comparisons
a) Tier 1 Capital 12.1% vs 8.6%
b) CY2010F PER 14.1x vs 13.3x
c) PB Value (2010) 2.1x vs 3.2x


Why Now? Why Not In 2009, 2008 or 2011?
Well, we can rule out 2008 owing to the global crisis. In 2009, you cannot really do the deal properly in CIMB's viewpoint because the valuations of CIMB was too low to make it work.

CIMB 3.57bn shares / RM45.8bn
Public Bank 3.53bn shares / RM38.6bn

One would have noted that CIMB outperformed the banks over the last 12 months by a wide margin. Just look at the market cap comparison now. It would have looked very different at the beginning of the year. How can I say something, without having to say it quite so plain and in the face?!!

HowTo Do It?
Back to Hong Leong Bank, it would have been a smaller bank trying to take over a much larger entity. To maintain control, Quek would have had to put in loads of cash to do the deal. In CIMB-Public scenario, you should just do a share swap. A one for one swap would anger CIMB minority shareholders. However, the key is to assuage the Public Bank minority shareholders, hence they deserve some sort of premium. I would propose a 1,000 Public Bank in exchange for 900 CIMB shares deal. That would still be a good premium, and CIMB shareholders would be very pleased to have the strongest consumer bank into their fold. That way, post merger CIMB shares would probably go even higher, thus placating those Public Bank shareholders who have switched to CIMB shares.

Key Issue: The biggest obstacle is not getting enough Public Bank shareholders to agree to do the swap. I have two additional measures to ensure that the PB shareholders will go through with the swap, but that will only need to be revealed if someone hires me to consult.

Valuation wise, CIMB's price-book ratio has increased rapidly over the past 18 months, but it will never be able to match Public Bank's prohibitive 3.2x PB ratio. Everybody should acknowledge that Public Bank deserves the premium from its better metrics in consumer banking, so a 10 for 9 share swap, though seemingly favouring Public Bank shareholders, would have to be the way to proceed to secure the deal.

Post Deal
The new entity would have 6.747bn shares, and assuming the new entity's share price at RM13.00 = RM87.7bn market cap. DBS Group has a market cap of $24.4bn = RM83bn ~ with that kind of boasting rights, you just HAD to do the deal!!!

Khazanah with 27.86% in CIMB earlier, would now have 14.74% in the new entity. EPF with 16.04% in CIMB and 12.8% in Public Bank, would now have 14.52% in the new entity.It would not surprise me if both Khazanah and EPF were to keep buying Public Bank shares in the open market "during the deal" as that would really help facilitate the deal further.

Recent historical banking M&A - Acquirer & Acquiree PBV (x)
Mar‐07 ANZ & AMMB 1.8
Apr‐07 Bank of Tokyo‐Mitsubishi UFJ & BCHB 2.7
Nov‐07 Bank of East Asia & Affin 1.0
Feb‐08 Primus Partners & EON Cap 2.1
May‐08 Abu Dhabi Commercial Bank & RHB Cap 2.2

Average 2.0


p/s photo: Sharon Xu

The Impending USC Rusal's Time Bomb, SFC Should Wash Its Hands Clean

Readers of this blog will know how much I frown on the proposal to list Rusal on HKSE. Well, they rejected the first proposal, then Rusal went to appoint two prominent HK figures onto its board. After repeated attempts, the world's largest aluminum maker Rusal was allowed to put forward its Hong Kong flotation plan under the prerequisite that the deal should not have a public offering tranche.

To ensure that retail investors would not put themselves at risk to heavily indebted Rusal in the secondary market, the SFC also boosted the board lot size which may result in an entry price of as much as HK$1 million per lot.

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Bloomberg: Rusal has said it plans to sell a 10 percent stake to help repay $17 billion of borrowings. The share offering will be led by Zurich-based Credit Suisse Group AG and BNP Paribas SA of Paris, with banks from BOC International Holdings Ltd. to VTB Group also helping to manage the sale.

The exchange’s listing committee withheld approval for Rusal’s IPO application at a meeting on Nov. 26 and asked the company for more information, including details on its debt restructuring. Earlier this month, Rusal signed an accord with creditors in Russia’s largest corporate debt restructuring.

A subsequent review by the exchange, on Dec. 7, again failed to approve Rusal’s bid. The bourse asked the company to explain how it would repay a $4.5 billion loan from Russian state-owned lender Vnesheconombank.

The loan will be refinanced by OAO Sberbank, the Financial Times reported last week, citing unidentified people.

Sberbank, VTB

Rusal was rushing to secure approval in Hong Kong before the end of the year to avoid redrafting its 1,000-page IPO prospectus, which would delay the share sale until April, the FT also said, citing an unidentified Hong Kong exchange official.

The company’s borrowings almost doubled last year after Rusal bought 25 percent of Moscow-based OAO GMK Norlisk Nickel, Russia’s biggest mining company, for $7 billion in cash and a 14 percent Rusal stake. Commodity prices subsequently collapsed, with aluminum tumbling 36 percent in 2008 on the London Metal Exchange.

Rusal had a net loss of $6 billion last year, Vedomosti newspaper reported in October. The company was forced to take the $4.5 billion loan from Vnesheconombank in October 2008, the biggest state-led bailout of any Russian company.

Russia’s two biggest banks, OAO Sberbank and VTB, both state-controlled, will buy shares in the IPO alongside state-run VEB, RIA Novosti reported this month, citing Russian President Medvedev's chief economic aide.

The stakes Sberbank and VTB will buy won’t be significant enough to require approval from the lenders’ supervisory boards, Arkady Dvorkovich told reporters in Moscow, according to RIA.

Rusal is also in talks with potential investors including China Investment Corp., the nation’s sovereign wealth fund, and Singapore’s Temasek Holdings Pte, the Hong Kong Economic Journal said in October.

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What a very silly ruling by SFC. Either you allow the listing or you don't. You cannot be seen to be protecting the small investors by suddenly making this one company with a huge board lot. By doing so, SFC has over--stepped its jurisdiction. Its role is to regulate, ensure all required market information are properly disclosed and disseminated. If you think a company is not fit to be listed, then don't approve. If you approve, then let the market players decided to buy or sell the stock. You do not go around trying to steer certain investors away by changing board lots - its like saying that Rusal gets the OK to list but hint, hint, its very dangerous.

It is not the SFC role to say this is a good or bad company. Its like our Securities Commission - can you imagine if the SC were to come out and say Company A is looking to be going into PN17 in 6 months time - well, you can't say that. SC can only put a company into PN17 when it has failed certain financial conditions.

If Rusal is deemed fit to list, then there should not be any contraints UNTIL they have breached the "regulatory conditions". You don't pre-empt these things. Its very very bad. I wonder who the fuck is inside the SFC committee - you must be able to distinguish your roles and your capacities clearly, regulate and enforce, you are not a research house. You cannot "flag" a company as "suspicious" even before its listing, and yet still allow it to be listed!

As long as there are proper disclosures, and there are a lot in an IPO, why should Hong Kong retail investors and even individuals who could participate in the institutional tranche be discriminated against? The world's largest aluminum maker is seeking US$2 billion (HK$15.6 billion) from a dual listing in the SAR and Paris. Whether to conduct a retail public offering should be a matter of choice for all listing applicants.

The SFC's unprecedented move is "bizarre" as "the general public can buy the shares in the secondary market, so excluding them from the primary offering does nothing to protect them. The SFC should stick to the principles of a disclosure-based market. Market watchers are worried that the regulator's action could set a bad precedent, hurting Hong Kong's image as an international financial center.

SFC concerns over Rusal is factually correct as I think Rusal is a dubious company, but its not their jurisdiction. They can only approve or reject the listing. Since "pressure" has mounted for them to approve Rusal's IPO, they should just leave it at that. Buyers beware!

p/s photo: Goto Makino

What's Up With AFG

For those who tracks the market closely, they would have noticed the surreptitious uptrend in AFG. However, when you pick up most of the research on the stock, its usually a Neutral rating or Under perform tag on it. Hence it is likely to bought up NOT on fundamentals alone. It is one of the ten anchor banks, but also the smallest one. It is obvious that Bank Negara still wants more consolidation and it would not surprise me if there are only 7 banks left standing by end of 2010.

Back to AFG, its main stake is held by Temasek and there have been word that Bank Negara does not want a sovereign wealth fund to hold a banking stake. Apparently moves are in place to switch the stake to DBS Bank. DBS Bank is the last of the 3 main Singapore banks without a proper "exposure" in Malaysia. In one fell swoop, DBS Bank could have about 80 branches. The good thing about having DBS Bank is that there will be a more decisive way to manage the bank, either via capital injections or acquisitions. In fact, if DBS Bank gets in directly, you can be sure that they will pick up even more shares from the open market. Upside is there because its still below 2.0x PB value as it was considered to be a smallish bank in Malaysia, its who persona changes if DBS Bank was to emerge.

It would be thought to be difficult to allow DBS Bank into Malaysia but I think there are already like-minded high powered people who think its better to open up both ends. If one were to visit Singapore, you will find CIMB preparing itself to up the ante in Singapore. Things are opening up and its good for both sides.

p/s photo: Meisa Kuroki

China Banks' Risk Profile

The bulk of market capitalisation in Asian equity is in bank stocks. China has been leading the way, and the banks' health should be monitored closely. We know of the rampant bank lending that has been on going for the past 12 months. Now we need to know the extent of the potential bad debts and how that would play out in 2010. We already know that bad debts for credit cards have already doubled year on year and that is an ominous sign.

China's banks posted strong profit growth in Q3 2009 as new lending continued to surge. The jump in new lending meant that non-performing loans decreased as a percentage of assets. Regulators started to tighten lending standards in Q3, which along with the need to meet new capital adequacy requirements, could eat into profits. However, a shift toward longer-term loans and of savers into demand deposits may increase the net-interest margin for banks, which fell through Q3 2009 due to lower interest rates.

Capital Adequacy Ratios

Fitch warned that due to "major ongoing weaknesses in loan classification and disclosure of off-balance-sheet exposures" China's banks' capital positions are probably worse than they appear. The banks have used an increasing amount of off-balance-sheet transactions to bundle loans and sell them to investors, which represents a "growing pool of hidden credit risk." These transactions free up space on the banks' balance sheets so that they can increase their lending without lowering their capital adequacy ratios.

China’s Banking Regulatory Commission denied reports that it would raise the minimum capital ratios to 13% in 2010 from 10-11% now, but it said that banks would need to develop “medium-to-long-term plans” to replenish capital after the lending binge of 2009. As of September, all of the largest banks except the Bank of China had capital ratios over 12%. The shift toward longer-term loans from Q2 2009 has boosted the net interest margins of China’s banks, but the loans also come with higher risk weightings, pushing down their capital ratios. In order to maintain their 12% capital adequacy ratios, China’s 11 largest listed banks would need to raise an additional RMB368 billion (US$43 billion) in capital, according to calculations by BNP. Core capital adequacy ratios at the banks fell to 8.9% at the end of September 2009, from over 10% at the end of 2008.

In August 2009, the WSJ reported that the China Banking Regulatory Commission was considering a ruling that subordinated debt held by other banks would no longer count as supplementary capital. Estimates suggested that as much as 51% of subordinated debt issued by banks (RMB210.0 billion in H1 2009, three times the total amount for 2008) was held by other banks. In October, regulators issued a ruling that was significantly easier for banks to meet: Only subordinated debt acquired after July 1, 2009 would need to be deducted from Tier-2 capital. This will make it more difficult to replenish capital by issuing subordinated debt but does not require significant changes as a result of the ruling.

When the government recapitalized the banks in the late 1990s, it formed asset management companies (AMCs) to purchase non-performing loans from the banks, which were funded through bonds held by the banks. The AMCs have had very low recovery rates on the NPLs, and their bonds may have to be rolled over or written off. The government opted to allow at least one of the recapitalization bonds that allowed China's banks to become commercial enterprises to be rolled over for another decade. A US$36.2 billion bond held by Cinda Asset Management was to come due at the end of September, but was rolled over for another ten years. Writing off the principle due would have cost CCB more than half of its net assets, and the remaining bonds, which come due in 2009/10, are expected to be rolled over as well.

From October 2009, insurance companies will be allowed to invest in the property market. This will allow state-owned banks to transfer underperforming commercial property holdings to insurers at book value, and insurance companies will not have to write down the property values because they will be booked as long-term assets. This lets insurance companies diversify their assets to better match the duration of their liabilities but also protects banks' balance sheets.

Central Huijin, a division of China's sovereign wealth fund, said that it would continue to buy shares in China's three largest banks to reassure investors and stabilize their share prices.

How Much Will Non-Performing Loans Increase?

The increase in NPLs may come in mid to late 2010 given that they tend to peak 12-18 months after a credit boom. However, the revival in property markets and increase in mid- to longer-term loans may limit the deterioration of assets.

The surge in NPLs would be limited to RMB400 billion (US$58.5 billion) in 2010, but another RMB250 billion (US$36.6 billion) in NPLs could emerge in 2011. If credit is tightened more in 2010, NPLs would jump higher.

The Banking Regulatory Committee is raising minimum capital adequacy requirements from 8% in 2008 to 11% by 2010, but the PBoC controls the reserve requirements, blunting the regulators’ ability to control loan growth.

FT Dragon Beat: If 1/6 of the RMB20 trillion in bank lending to be issued from 2008 to 2010 goes sour, then the government's liability would be RMB3.3 trillion, which is about the same as all the nonperforming loans recognized so far.


p/s photo: Freida Pinto

CGI With A Soul, Avatar Stuns the Eye, Seduces the Heart

It takes a lot for me to really like CGI ladened movies. I have to qualify that I am one of the few who hated the Star Wars numer-olgy series. I like animation cause it does not pretend to be anything but cartoons even with better CGI. I tolerate the Transformers cause its action, but it has no soul. I am not a keen sci-fi fan as well, except when it has a good heart, like Close Encounters of The Third Kind and Contact. I loved The Matrix series, it is SF, CGI and a very deep story to tell. Hence after all the hullabaloo over the $230m James Cameron spent on the movie Avatar, and taking more than a decade to make, I seriously wanted him to succeed since it obviously is a work of passion as he is filthy rich already from Titanic.

Cameron made sure the story is there first and foremost, and its a great story. Any great movie story teller, like Spielberg will know that you want the audience to identofy and empathise with the main characters, and Cameron does that very well. Both the real world and the world of Pandora moved in and out brilliantly. The CGI was outstanding, the details, the wings flapping, surrounding sounds and every yips and shrieks and rustle of leaves were there. The alien world was well thought out, and I especially loved the long ponytail which acts as a USB port of sorts - what a wonderful concept.



The movie is grand and ambitious and yet it touches on issues of mother nature, devastation, displacement, culture, belief systems, ... and yet making obvious statements such as "if we want what they have, they become our enemy". In that sense it is also a movie for our times, its a "green" movie in many ways. It more than entertain like a normal movie, the visuals leave you in awe... I can't wait to see in again in 3D and maybe even IMAX.

James Cameron has turned one man's dream of the movies into a trippy joy ride about the end of life -- our moviegoing life included -- as we know it.

-- Manohla Dargis, New York Times

Avatar is an entertainment to be not just seen but absorbed on a molecular level; it's as close to a full-body experience as we'll get until they invent the holo-suits. Cameron aims for sheer wonderment, and he delivers.

-- Ty Burr, Boston Globe

For all the grandeur and technical virtuosity of the mythical 3-D universe Cameron labored for years to perfect, his characters are one-dimensional, rarely saying anything unexpected. But for much of the movie, that hardly matters.

-- Claudia Puig, USA Today

James Cameron's Avatar is the most beautiful film I've seen in years.

-- David Denby, New Yorker

It extends the possibilities of what movies can do. Cameron's talent may just be as big as his dreams.

-- Peter Travers, Rolling Stone

Why I Like KPJ Healthcare (A Lot)

Normally, it would take a lot to be convinced of a GLC (kind-of, since its Johor Corp at the helm). KPJ has shifted from a bunch of weak holders to much stronger shareholders. There has also been a significant jump in the strategic thinking of senior management. I would have to say that KPJ ranks right up there in terms of GLCs that are being managed very professionally and adopting global best practices. KPJ’s extensive network now includes 26 private specialist hospitals consisting of 20 in Malaysia, 3 in Indonesia, 1 in Bangladesh and 2 in Saudi Arabia.



Recent developments:
a) The opening of Tawakal hospital, which was initially scheduled in 4Q09, will be slightly delayed. Construction has already been completed, awaiting CF in Dec 2009 and hospital license thereafter. The hospital will hence only commence its operation in Feb 2010.
b) Indonesia hospital under management was hit by Sumatera earthquake. The hospital in Padang (Rumah Sakit Selasih), owned by Johor Corp, was hit by the recent earthquake in Sumatera.
c) There is still an operating loss from its new Penang Specialist Hospital, which was opened in the middle of this year as it usually takes around 2-3 years for a new hospital to turn profitable.

Regional Mindset - Recently, the Group was appointed by a Vietnamese firm to undertake feasibility studies to set up a private hospital in Vietnam and there is a chance of KPJ being awarded the contract to manage the hospital if the project materialised. Depending on the terms and conditions, the Group might also take up a small stake in the project. The Group is also eyeing opportunities for hospital management in China and Philippines. KPJ should not face any difficulty expanding its hospital management services abroad since foreign partners are satisfied with KPJ‘s good track record in Malaysia supported by the group’s physical resources, financial strength and competent human capital resources in undertaking hospital management challenges.

Preparing To Corner Medical Tourism - KPJ is currently evaluating the proposal for Ampang Puteri Specialist Hospital to apply for international healthcare accreditation from Joint Commission International (JCI) in order to boost its reputation as an international hospital. Accreditation from JCI and several other international organisations has been used as a quality benchmark and selling point by international hospitals in attracting medical tourists. KPJ is also tapping on the lucrative medical tourism market in light of Malaysia fast becoming known as an affordable healthcare hub in Asia. According to the online investment news service NuWire Investor, Malaysia ranks third amongst the world’s top medical tourism destinations, after Panama and Brazil. The number of medical tourism patients has tripled since 2003 to 341,288 patients in 2007, while for the first nine months of 2008, more than 282,000 foreigners sought
medical treatment in Malaysia.

Catalyst #1: Discount Or Premium - This stock is mainly covered by local research houses, which is a pity because its operational performance and strategic execution will entice many foreign funds. Many have their buy recommendations on the stock with a price target of RM6.00. That is based on 12x-13x PE on our FY10 EPS estimate, which is a 30% discount to regional peers’ valuations. Now, why do we need to put a discount on KPJ???????????? Considering its growth potential, its excellent de-gearing exercise, its strategic management to nurture human resource, its careful acquisition strategy, it ability to turn around loss making hospital operations ... and its plans to go regional to leverage its business model... why should it be at a discount, in fact if anything, it should be at a premium. Assuming zero discount, the target price would be fairly valued at RM7.80.

Strong Dividend Yield - As explained during my talk, I like stocks with a good consistent dividend yield. That shows that major shareholders are willing to stick to holding the stock for longer term capital appreciation, and in exchange would still enjoy decent dividend yields so that they need not sell down their shares. Its dividend yield of 7% to 8% is attractive, supported by its resilient business model. According to a recent press report, KPJ’s MD indicated that the company is likely to close a deal with another one or two hospitals. Continuous expansion in hospital network will sustain KPJ’s long term growth.

Catalyst #2: Timing Couldn't Be Better - NOTICE IS HEREBY given that an Extraordinary General Meeting ("EGM") of KPJ Healthcare Berhad ("KPJ" or the "Company") will be held at the Tanjung Puteri 303, Persada Johor International Convention Centre, Jalan Abdullah Ibrahim, 80000 Johor Bahru, Johor, on Monday, 21 December 2009 at 12.30 p.m.

KPJ HEALTHCARE BERHAD ("KPJ" OR "COMPANY") - PROPOSED ACQUISITION BY MAHARANI SPECIALIST HOSPITAL SDN. BHD. (MSHSB), A WHOLLY-OWNED SUBSIDIARY OF KPJ, OF MAHARANI SPECIALIST HOSPITAL BUILDING FROM PROPERTY BASE DEVELOPMENT SDN. BHD. (VENDOR) FOR A CASH CONSIDERATION OF RM22,000,000 (PROPOSED ACQUISITION)
The Board of Directors of KPJ ("Board") wishes to announce that the Company's wholly-owned subsidiary,MSHSB had on 16 December 2009 entered into a conditional Sale and Purchase Agreement ("SPA") with the Vendor for the proposed acquisition of a piece of freehold land on which is erected a partially completed building ("Maharani Specialist Hospital Building") for a cash consideration of RM 22,000,000 ("Purchase Consideration").

Interesting Purchases By Directors - Company director, Datin Paduka Siti Sa'diah Sh Bakir, on 3 December 2009, bought 109,000 shares in KPJ, bringing her stake to 424,100. Company director, Tan Sri Dato' Muhammad Ali Hashim, on 1 December 2009, bought 72,400 shares in KPJ, bringing his stake to 281,800 shares. Company director, Hj Ahamad Bin Mohamad, on 1 December 2009, bought 10,000 KPJ shares, bringing his stake to 57,100. Johor Corp, on 2 December 2009, bought 200,000 shares in KPJ, bringing its stake to 106.223m shares.

Turnaround Record - The Group has maintained its track record by nurturing 3 out of 4 of its “sick” or unprofitable hospitals back to break even this year. Four of KPJ’s hospitals rang up losses in 2007, namely Kuching Specialist Hospital, KPJ Kajang Specialist Hospital, Perdana Specialist Hospital, Kota Bharu and Kota Kinabalu Specialist Hospital. This year the Group had once again proved its mettle in turning around “sick” or unprofitable hospitals to break even this year, except for Kota Kinabalu Specialist Hospital. As a result, we should expect some margins improvement at the Group level. The main reason Kota Kinabalu Specialist Hospital remains in the red is the preference for government hospitals and low health insurance coverage there. However, the hospital is expected to break even in 2009.

Strategic Thinking On Human Resource Management & Supply Chain - KPJ is targeting around 1800 students for its nursing colleges by the end of this year. Over the long term, KPJ aims to have around 8000 students, with a 10% contribution to the Group’s bottomline. Upon the completion of its KPJ Penang Specialist Hospital in Bukit Mertajam by year-end, the existing Bukit Mertajam Hospital will be converted into a nursing college catering to students from the northern region. Although the earnings contribution from nursing education is expected to be relatively small, the colleges provide KPJ with a reliable and consistent supply of professionally-trained nurses. This is a clear advantage for KPJ given that the sector is facing a shortage of doctors and nurses.

Degearing & Clever Usage Of REIT To Unburden Balance Sheet - This can be said to be a smart way of deploying and managing capital. Seriously once a hospital is profitable and has a good business model, it will be able to pay down the rental easily as part and parcel of doing business. That being the case, there is no need to own the building. Using REIT this way forces hospital management to operate on a more transparent costing model, forces more efficiencies in terms of managing its capital and expenses. KPJ has announced the disposal of its remaining building assets into Al-Aqar REIT at a total consideration of RM296.4m, which will be satisfied via the issuance of 123.025m new units in Al-Aqar and a cash consideration of RM179.5m. Apart from unlocking the value of its assets, the disposal will also enable the Group to finance its expansion strategy without straining its balance sheet, particularly its gearing, as around RM157m of the cash proceeds will be used to repay bank borrowings.

REIT's Special Dividend - Although KPJ will have an effective holding of 55% in Al-Aqar REIT upon the completion of the proposed disposals, it will maintain its holding at associate level by actively looking for a strategic investor to take up some of its shareholding in the REIT. Management has indicated that the Group is in the midst of negotiating with several foreign investors with special focus on Middle East investors given the Islamic nature of the REIT - well, considering what happened over there, we can say talks are in limbo. In the event that KPJ is unable to find a suitable partner in 6 months, it will reduce its holding in the REIT to associate level by distributing it as dividend in-specie to its shareholders. Hence, it looks like shareholders could be in for a special dividend in REIT shares soon.

	Individual Period		Cumulative Period
	Current Year Quarter	Precending Year Corresponding Quarter	Current Year to Date	Precending Year Corresponding Period
	30/09/2009	30/09/2008	30/09/2009	30/09/2008
	RM'000	RM'000	RM'000	RM'000

Revenue	361,487	329,736	1,071,009	944,804
Profit/(Loss) before Tax	37,029	30,087	104,503	90,377
Profit/(Loss) after Tax and Minority Interest	26,807	21,312	73,522	63,189
Net Profit/(Loss) for the Period	29,966	22,686	80,572	67,846
Basic Earnings/(Loss) per Shares(sen)	12.88	10.31	35.40	30.56
Dividend per Share(sen)	10.00	7.00	10.00	7.00
			As At the End of Current Quarter	As At the Preceding Financial Year End
NTA per Share(RM)			2.8400	2.7700

Catalyst #3: Earnings Visibility - Their year end is 31 December. For the first 3 quarters this year, it has registered a net profit of RM80.57m or a net EPS of 35.4 sen. If you assume the 4Q will be the same as 3Q, then add another 12.88 sen to that = 48.28 sen. Considering that it still has much upside with some loss making hospitals, coupled with two new hospital acquisitions this year, earnings should be much better next year.

Catalyst #4: Corporate Actions - This ties in with the timing thing, the whole shebang should be approved and underway. PROPOSED SHARE SPLIT INVOLVING THE SUBDIVISION OF EVERY EXISTING ONE (1) ORDINARY SHARE OF RM1.00 EACH IN KPJ INTO TWO (2) ORDINARY SHARES OF RM0.50 EACH (SHARES) IN KPJ HELD BY THE ENTITLED SHAREHOLDERS OF THE COMPANY ON AN ENTITLEMENT DATE TO BE DETERMINED AND ANNOUNCED LATER (PROPOSED SHARE SPLIT); PROPOSED BONUS ISSUE OF UP TO 105,525,308 NEW SHARES (BONUS SHARES), TO BE CREDITED AS FULLY-PAID UP BY THE COMPANY, ON THE BASIS OF ONE (1) BONUS SHARE FOR EVERY FOUR (4) SHARES HELD BY THE ENTITLED SHAREHOLDERS OF THE COMPANY AFTER THE PROPOSED SHARE SPLIT ON AN ENTITLEMENT DATE TO BE DETERMINED AND ANNOUNCED LATER (PROPOSED BONUS ISSUE); AND PROPOSED ISSUE OF UP TO 131,906,635 FREE WARRANTS IN KPJ (FREE WARRANTS) ON THE BASIS OF ONE (1) FREE WARRANT FOR EVERY FOUR (4) SHARES HELD BY THE ENTITLED SHAREHOLDERS OF THE COMPANY AFTER THE PROPOSED SHARE SPLIT AND PROPOSED BONUS ISSUE ON AN ENTITLEMENT DATE TO BE DETERMINED AND ANNOUNCED LATER (PROPOSED FREE WARRANTS ISSUE). THE PROPOSED SHARE SPLIT, PROPOSED BONUS ISSUE AND PROPOSED FREE WARRANTS ISSUE SHALL COLLECTIVELY BE REFERRED TO AS PROPOSALS.

So, say you bought 10,000 shares at RM5.60 = RM56,000. After the exercise you will get 20,000 shares plus 5,000 bonus shares (it says after the share split). Plus 5,000 free warrants. Its current paid up is 209.736m shares. Even assuming the share price does not jump, the free warrants itself will give you a tremendous fillip. Better liquidity is a strong plus.

KPJ announced that the exercise price for its free warrants has been fixed at RM1.70. This represents a 15% discount to the theoretical ex-all price based on the 5-day volume weighted average market price. Based on the exercise price of RM1.70, the warrants should trade at RM0.50-0.75 at a minimum.






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p/s photo: Sharon Xu