China Moving To The Big Stage

Jan. 9 (Bloomberg) -- China took a “big step” toward opening its capital markets by approving stock index futures, paving the way for increased investment in the world’s fastest- growing major economy.



The China Securities Regulatory Commission said yesterday it may take three months to complete preparations for index futures, agreements to buy or sell an index at a preset value on an agreed date. The government also approved margin trading and short selling, when investors seek to profit from declines in shares, according to a commission statement on its Web site.

“They’re taking a big step forward in developing their capital markets and allowing people to express their positive and negative views on stocks,” Invesco said in a statement. Invesco, which invests in China as part of its Asia Pacific business that had $26.8 billion of assets as of Sept. 30. “You’ll have more people participate in the market and thus greater efficiency.”

Increased investment in Chinese equities may help narrow the gap between prices of shares traded in both Hong Kong and the mainland. Companies in China’s benchmark Shanghai Composite Index trade at 33.9 times 12-month trailing earnings compared with 20.9 times for the Hang Seng China Enterprise index in Hong Kong. A potential long-term development is more clarity in the market now that there’s more liquidity in the market for the true valuations of the companies that are dual listed.

China, whose economy grew 8.9 percent in the third quarter of 2009, currently bars overseas investors from trading yuan- denominated stocks and bonds on the mainland except through a so-called qualified foreign institutional investors program, which has approved 94 international firms. Foreign ownership of fund management companies is restricted to 49 percent.

Index futures may help ease fluctuations in the world’s third-largest equity market by value after the Shanghai Composite Index doubled in 2007, then slumped 65 percent in 2008 before rebounding 80 percent last year. Until now, Chinese investors could only profit from gains in equities.

China is going to the direction of freedom for its markets and more flexibility for its investors so it’s good news. More liquidity in the futures leads to more investors as you have a bigger pool of tools. You can be long on the future and short on the stock.



Allowing short-selling in China probably will spur the start of more hedge funds in Asia. Short selling is when investors sell borrowed stock in the hope of profiting by buying the securities later at a lower price and returning them to the shareholder.

Rules for the index futures will deter participation by retail investors, said JPMorgan Chase & Co. Investors will be required to put up 10 percent of a contract’s value to buy, sell or short CSI 300-based futures as collateral, according to rules published on China Financial Futures Exchange’s Web site in 2007. The bourse has been conducting mock trading in the securities since October 2006. The value of the futures contracts will be points of the CSI 300 multiplied by 300 yuan, according to the trading rules the exchange set.

Investors will need to spend 105,000 yuan ($15,379) to buy a single futures contract when the CSI 300 is at the 3,500 level, establishing a “cost barrier to retail participation. These initiatives will provide tools for institutional investors to hedge risks and should reduce market volatility in the long-term. Citic Securities Co., China Merchants Bank Co., Ping An Insurance Group Co., Industrial Bank Co. and Shanghai Pudong Development Bank Co. are the most-heavily weighted stocks on the CSI 300.

Comments: The article basically says it all. As things stand, with so much restrictions on foreign funds participation, coupled with a monolithic broking business (i.e. relatively benign equity margin business and minimal leverage by participants) - China equity markets is already very huge. The combined daily turnover for China exchanges is nearly US$25bn.

In comparison, HK's figure is around US$5.7bn. Seoul's figure is US$3.2bn. Taiwan's at US$3.7bn. Can you imagine when markets in China opens up a little bit more to foreign participation??!! HK is getting a lot of attention from large companies wanting to list overseas because their legal infrastructure and transparency are a lot better and is of global standard. You and I know that China will take a looong time to do both well. To companies, HK is as good as listing and tapping into China funds swell.

Back home, the smaller exchanges have to carve out their own niche. I have said this for the umpteenth time, let investors do day-trading short selling - meaning they have to cover by end of day or face buying in consequences. What's so bad about that? I think it will boost daily turnover by at least 20% on Bursa. What is so bad about selling first, since that same person will have to cover by end of the day. It is not the same as short selling and holding that short for an extended period of time, which presents a higher risk to the markets.


p/s photos: Sharon Xu

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

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

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.






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 photo: Sharon Xu

What The Experts Are Saying About Emerging Markets Part 2

Regional Performance:

Asia (Ex-Japan): Asian equities have outperformed mature markets in 2009 thanks to continuous foreign institutional investor inflows amid diminishing risk-aversion among global investors and relatively resilient macroeconomic fundamentals. Markets had gained 46% YTD as of August 31 (78% since October 2008) with India (68%) and Indonesia (75%) the best performers, and China (39%) and Malaysia (36%) the laggards. Sri Lanka posted an exceptional 131% gain due to the end of a 26-year civil war, a US$2.5-billion loan agreement with the IMF and the government's positive stance on reforms and liberalization. Asian markets have recovered 54% of the losses incurred in 2008 (peak to trough, down 59%).

Latin America (LatAm): LatAm equities has outperformed the other emerging markets' regional indexes by rising 59% YTD to August 31 (99% since it hit bottom in November 2008), with strong performances in Brazil (71%) and Colombia (55%). The laggards are Argentina (41%) and Mexico (34%). Overall, LatAm equities market have recovered 46% of the 2008 crash, after falling 68% peak to trough.

Eastern Europe, Middle East and Africa: Equities market went up 42% YTD to the end of August and 77% since reaching bottom in March 2009. Turkey (66%) and Russia (59%) lead the mark, while Morocco (-3%) and South Africa (16%) have underperformed. Eastern Europe, Middle East and Africa stock markets have recovered 39% of the sharp correction induced by the global crisis, after falling 66% peak to trough.

Recent EM market Dynamics:

• Emerging-market stocks ended higher on November 18, heading for their highest level in 15 months. The gap on yield for developing vs. developed country debt fell due to higher commodity prices and speculation that the U.S. would keep low interest rates until 2012. David Spegel, the head of emerging market strategy at ING Financial Bank NV in New York, says there is “some positive sentiment and upside favoring for high beta countries…Investors are expecting that the Fed will remain on hold for a long time and recognize it as a buying opportunity.” (Bloomberg, 11/18/09)
• WB President Robert Zoellick says the U.S. has a limited ability to stop the USD decline, while IMF head Dominique Strauss-Kahn says the USD has fallen within a normal range, proving resilient to the crisis. Asian authorities “expressed concern that the global stimulus, especially the flood of liquidity pumped out by central banks, could create asset bubbles and inflation, such as in commodities.” (WSJ, 11/14/09)
• According to Citi, "Latin American stocks face the risk of a rebound in the U.S. dollar, in the middle of which could be the region’s steepest rally in almost two decades. The biggest fundamental risk of a decent correction in regional equities is, therefore, a bounce in the dollar…As markets enter 2010, the timing of the first Fed move will come closer and the dollar could bounce, triggering a more severe correction in regional equities." LatAm equities are more likely to suffer a correction early in 2010 than at the end of this year. Citi reiterated its preference for Brazilian over Mexican equities. In the face of debt downgrade risk, Mexican stocks are "underweight." (Bloomberg, 10/27/09)
• Developing-nation stocks headed for a steep three-day slide as concern mounted that central banks may rein in stimulus spending and companies reported lower profits. The MSCI Emerging Markets Index dropped 2%, reaching an accumulated retreat of 4.1% during the week. Stocks in Russia, Turkey, Hungary and Indonesia fell more than 2% while the suffering of large companies in South Korea and Poland was felt in their indexes. During 2009, the MSCI measure for emerging-market equities has rallied 64% as governments pumped about US$12 trillion to spur growth and as signs of recovery drew investors to higher-yielding assets. (Bloomberg, 10/28/09)
  
• "Equity fund inflows into the BRICs have reached US$32.3 billion this year (US$10 billion above 2006). Brazil has been the best performer as equity investors have pumped in US$2.44 billion in October (nearly double that of China at US$1.3 billion) due to its position as one of the world largest commodity producers, strong growth in China and the broader optimism about global economic recovery. The strong data in the developing world and a growing view among investors that these markets are likely to offer the biggest returns as their economic growth outpaces the west have attracted US$63.1 billion in inflows this year. This compares with outflows of US$75.6 billion in developed world equity funds." (FT, 10/23/09)
  
• After India withdrew its monetary stimulus and increased its inflation forecast, emerging-market stocks fell the most in seven weeks as the MSCI Emerging Markets Index declined 1.3%. The yen rose as investors sought refuge. The Shanghai Composite Index decreased 2.8%, the steepest decline among benchmark equity indexes worldwide, after an early drop in metal prices. (Bloomberg, 10/27/09)
  
• Market correction is expected this year as China and other countries cut stimulus funding, since the rally in global markets is basically liquidity-driven, says Peter Westin, the chief strategist at Aton LLC. Earlier in October, Bloomberg reported that investors were throwing money into the riskiest emerging markets at a remarkable pace, buying as if the global financial crisis was over. Emerging-market funds have absorbed more than US$40 billion so far this year, according to fund tracker EPFR Global. "That means that last year's outflow of US$40.1 billion has been completely erased," said Andrew Howell, an emerging-markets strategist at Citi. "We tend to get nervous when inflows surge, suggesting excessive optimism. However, at this point it seems early to get too worried." (Bloomberg, 10/22/09, 10/13/09)
  
• "For veteran emerging-market investor Mark Mobius and executive chairman of Templeton Asset Management... China remains the biggest investment destination for emerging-markets funds...Asia and emerging markets overall remain 'solid long-term investment opportunities.' " However, he recommends caution when it comes to short-term investment due to high volatility in today’s markets. (WSJ, 09/30/09)
  
• Emerging markets now are "too large to be ignored," despite the misconception that emerging economies have small, illiquid and volatile financial markets. Their market capitalization now represents 30% of the world’s market capitalization (as much as that of the U.S.), 50% of the global economy and the world’s top growth prospects, though they have only a 12% share in the MSCI All Country World Index. (FT, 09/28/09)
  
• "Developing-nation equities capped their steepest weekly decline in more than two months on mounting concern that a rally has outpaced economic growth after an unexpected drop in U.S. home sales and factory orders." Markets have not corrected and the economy showed a disappointing reaction to stimulus, says Marc Faber, the publisher of the Gloom, Boom & Doom report. (Bloomberg, 09/25/09)
  
• According to a Reuters report, Latin American stocks reached a new 2009 high on September 22, 2009, while Brazil's currency rose to the highest level in a year after the improvement of the country's ratings. Brazil's real strengthened 1% to 1.799 per USD, its strongest since exactly a year ago. The LatAm stock index rose 1.02% to 3,643.10, and the broader emerging markets' stock index added 1.27%. One day earlier, Bloomberg reported that stocks from developing-nations dropped 0.9% after trading at the highest level relative to profits since 2000, according to the MSCI Emerging Markets Index.
  
• "Emerging market stocks contracted the most this month after Chinese companies reported worse than expected earnings and Russia's economy contracted by a record amount, creating concerns about an economic recovery. The MSCI contracted 1.4%. On August 3 the MSCI closed above 855.47 on for the first time since the collapse of Lehman Brothers in September, as speculations of an easing to the global recession were bolstered by a positive report on U.S. manufacturing and rising commodity prices. In Asia, stock indices were supported by better than expected earnings from energy producers due to higher oil prices." (Bloomberg, 08/13/09)
• "Moody's reiteration...of Mexico's existing sovereign credit rating (Baa1), with a stable outlook, does not alter Citigroup's view that the risk of a ratings downgrade is a threat to Mexican equities later this year. Accordingly, the positive market action in response to the Moody’s announcement (including a rally in the peso through P$13.00/dollar) may be overdone." (Citi, 08/12/09)

p/s photos: Sharon Xu