The M'sian X-Files - Intricacies Of The New FBM KLCI

There is a lot of new information that one can get on the new index, which will help us to understand the index and the markets better. It will also help to get a better grasp as to the "integrity of the FBM KLCI" when it rises and falls.

a) Its just 30 counters instead of the old KLCI which had 100 counters.

b) The new index addresses issues such as liquidity and free float, and let's face it funds in general are really looking at just the top 30... heck throw in another 20 stocks and that's their universe.

c) There is a good chance that the 30 stocks will start to be traded at a premium to the rest as these are the must haves for all indexed funds, by all the big and small local funds, and by most of the foreign fund managers managing Asian portfolio so as to not be under performing the Asian benchmarks.

d) Having said that, part of the rise in the FBM KLCI over the last 2 weeks may be attributed to some of these sustained 'enforced buying' activity rather than by genuine equity players.

e) The new index is a skewed index. Banks and plantations alone have a total weighting of 55%. If you have banks, plantations and telco = 63%. If you add banks, plantations, power, gaming and telco = 85%. So, technically a fund manager need only look seriously at these FIVE SECTORS alone to do well, forget about the rest.

f) The new index will also affect how research houses form their analyst teams. They must cover the 5 sectors, there are 9 sector that are not covered by the new index. It is very likely that analysts in the following sectors better start covering a more important sector in order to stay relevant. The following are the 9 sectors that are deemed as "irrelevant", "need not exist", "unimportant to the Malaysian economy", "unnecessary to look at in order to gauge the overall health of the economy": technology, transportation, property, timber, insurance, construction, building materials, hotels and industrial products. Go figure!

g) The new index will make it that much "easier" for the index to be controlled - conspiracy theorists will agree with me whole-heartedly that this is to allow PNB-EPF-MOF-EPU to control the index better. So, the next time we see a major market correction, we may be able to withstand it better with the new index as all it takes is to mop up the 30 stocks ... even though those stocks outside of the top 30 may be seeing their share prices tumbling like a rock. Managed perception more important la... than real effects to the economy. Hey, like that, we may never ever see a major correction in the FMB KLCI... ever... especially if we keep launching new big funds to mop these buggers up. But I am only guessing here.

h) Now let's consider the sin stocks, gaming and tobacco, they account for 12% of the new index. This is an important consideration as most of the big local funds will not be touching these stocks. Can you "not be in control of the 12% of the index" and still manage funds that is compared to the FBM KLCI benchmark? If these 12% of the new index starts a bull run on its own, most of the local funds will be under performing the new index. Can you all see a danger here??? Staring at you in the face!!! The danger is ... if there ever occurs a situation where you get the gaming and tobacco stocks to be in a strong bull run outperforming the rest of the new indexed stocks ... could we safely say that the EPU-MOF will not be strong-armed or "influenced" by certain parties to "whack down the sin stocks" with excessive punitive measures ( additional gaming and duties above and beyond what is normally expected in a financial year)???

g) If you take Khazanah, Petronas and PNB as the investing triumvirate ... the 3 already control 12 out of the 30 stocks in FBM KLCI. If you are a nasty anti-government critic, you have enough loose thoughts to take this factor to the next level. I am not saying its a negative or a positive, but its a fact that is worth remembering. Be careful, as the greater the influence one has, the greater the responsibility to be prudent, transparent and professional.

h) Though most fund managers will want to stick to the FBM 100 as the benchmark for their performance, it will not be so easy. The drivel, the propaganda and focus have all been set to make FBM KLCI the index to watch, and because it was kinda close to the level where the old KLCI was, most will tend to take to this new index. Its much harder if you switch from a 1,100 index level to a 9,500 one ... kudos to the planners.

i) Of course detractors will point to the fact that the venerated Dow Jones Industrial Index is only made up of 30 stocks, and is an often quoted barometer, even though most professional funds benchmark their performance to the broader S&P 500. The big difference is that it will be a hundred times easier to try to "manipulate" the FBM KLCI than the Dow Jones Industrial Index. Actually, pick just any two stocks in the Dow Jones, I am VERY SURE the market cap of any two stocks will be bigger than total market cap of ALL stocks listed on Bursa - in fact just any ONE stock in the top 10 of DJIA will be enough to cover the entire market cap of Bursa. Not to belittle FBM KLCI but to put things in perspective.

Can I have my Datukship now??!! (yea, I don't really need one or want one... but I want to get on and off my plane faster la...).


p/s photos: Yukie Nakama

Why DIGI Is The Country's Biggest Telco

Malaysia must be one of the most open economies in Asia. Why..., we even have a 50.8% Norwegian owned company being the biggest telco in the country!!! Which Asian country can boast of such openness?!!! As things stand now, the market cap are as follow:

DIGI $4.57bn
Telekom Malaysia $3.2bn
TMI $3.4bn

Of course, the comparison is a technicality owing to the recent split by TM into TMI and Telekom Malaysia. Still, its a big deal no matter how you cut it. Here are some interesting facts and reasons why DIGI is 'number one':

a) DIGI is still technically the third largest mobile operator but is number one in market cap.

b) DIGI smartly concentrated on the prepaid market, money upfront, no delinquencies. Others probably thought that the prepaid market was beneath them. DIGI understood the importance of the foreign workers market, others probably thought the number of foreign workers was closer to the official estimate of 2m, when the real figure is probably closer to 5m when you include the illegals.

c) DIGI properly understood branding, who does not love the yellow fat man. I still cringe whenever I see Celcom's big big poster "Widest, Fastest, Clearest... Undisputed #1". The simple tag line probably was thought up by a bunch of high school kids because thats the mentality behind the tag line - its naive and cringeworthy. Being number one or the best in every category is best accorded by someone else, it pisses people off when you toot your own horn. If that is branding, the people at Celcom needs to grow up or hire better people.

d) The using of celebrity endorsement by Celcom is a hit and miss. Why Wang Lee Hom??? Some high ranking marketing chick in Celcom probably likes him a lot!!! He carries zero brand attachment for Celcom. Harith Iskandar was much better - it makes it fun to be identified with Celcom. Peterpan??? Gawd, you mean for the Indonesian foreign workers???

e) DIGI's emergence as the #1 in market is all the more credible after being "forced" to go to bed with TimedotCom - let's put it as DIGI's national service.

f) After solidly controlling the prepaid market, it now can focus on grabbing market share in the postpaid side, especially via their 3G rollout. Maxis and TMnet broadband uncertain and inconsistent service leaves the market very very open to a potentially better provider. Let's not make it a local or foreign argument here, I am just highlighting the better player, and lets learn from the better player and not try to defend on other silly platforms. Even izzi provides a vastly superior broadband / wireless service now compared to Maxis and TMnet.

g) You cannot just hype up on marketing and branding, it has to be supported by a strong level of service. TM did well with their BlueHyppo thingee, the hippo is lovable and cute, but users wished that the image is attached to good qualities... sigh. Hence the yellow man would have been a useless marketing ploy for loyalty and identity if it wasn't supported by a good level of service - its the expectations and predictability of service being met or surpassed.

h) DIGI does not hire useless consultants and pays them millions of ringgit a few times a year, unlike... Consultants only mask the underlying truth, that the company's staff are generally "not up to the mark". Using consultants is also a MBA way of diverting responsibility for big decision making issues. Using consultants usually means there is a dire lack of qualified staff in the most imporatant category - load and efficiency management for one. Using consultants will in the end mean there is very little transfer of technology or capability, but the need to always go back to them and pay them millions everytime a glitch needs to be fixed.

i) If you breakdown the management systems at all telcos, you will find that DIGI has a vastly superior CRM system that better tracks subscribers, defaulters, client drop-offs, service accountability, response time rates on downtime or complaints, etc... Of course DIGI has the support from Telenor which probably has better expertise at designing a much more elaborate CRM or client management system. One must invest in a proper CRM before you start thinking of other areas - seriously folks!!!

j) To be fair, the capex burden on DIGI is a lot less stressful than for the rest. DIGI has a more nimble business model with little legacy baggage.

k) Exceptional focus on ebitda margins, always within 40%-50%, pretty exceptional.

l) A motivated staff force. Treat your staff well, empower them to create and achieve and they will respond likewise. Staff morale is a priority, so is loyalty and pride in company. When you have huge pockets of staff in your company who regard employment as a safe haven till retirement - the entire thing weighs down the company.

p/s photos: Wang Rouyi