Petronas Profit FYE March 2006
This bit of news probably won't make the Malaysian papers... cause it has been barred???!! But, the irrepressible Dr. M has revealed Petronas' profit figures. As a state-owned unlisted entity, Petronas is at no liberty to reveal financial figures. However, Dr. M happens to be Petronas adviser, so... Anyway, Petronas recorded a record pretax profit of about RM80 billion (US$22 billion) for FYE March 2006. Last year's pretax profit figure was a paltry RM58 billion (and a net profit of RM35.6 billion).
Naturally, Dr. M's deliberate revelation has a lot more to do with making things tough for "you-know-who". The recent fuel price hikes did not go down well with most Malaysians, although most know that we cannot live with a heavily subsidised fuel policy forever ... many cringe at the mega profits registered by Petronas (the oil does not belong to the government... it belongs to the people).
Last year Petronas paid RM31 billion in taxes, dividends and royalties to the Malaysian government. The figure should be a lot higher this year since Petronas has registered a 37.9% jump in pretax profits. The fuel price hike was to save RM4 to RM5 billion a year in subsidy - that is OK, but shouldn't that come from Petronas?!! I mean, you can remove the subsidy so that we can learn to live with "market prices" but give back to the people via lower car prices or special dividends. The public should not be made to shoulder the burden alone, especially when the industrial side did not see a similar removal of subsidy quantum.
While I am not a fan of Dr. M, the handling of the fuel subsidy and Petronas gains by the government could have been a lot better.
Taking Stock Of Stocks
Refresh Your Page/Mind
Every now and then, particularly when markets are not behaving entirely the way you think they should, it is good to refresh your mind and re-justify your opinion, much like when you refresh your web page or flushes the toilet bowl...
Things affecting the market, my comments in blue:
a) Bernanke hints at raising rates during the 28-29 June meeting by the Fed
This is not something out of the ordinary, or something we could not forsee..., we all could see the need for Fed to at least raise rates another 25 basis points. Whether the upcoming hike is the last for sometime is a crucial debating point. Judging from the release of employment and housing figures so far, this upcoming rate hike could be very very close to the end of a rate hike cycle. The markets are basically trying to discount the end-June rate hike, and as more economic figures are released leading up to end of the month, I believe they will confirm that the rate hike cycle will come to an end. We can safely expect markets to start bouncing even before the rate hike. The rate hike will be a non-event. What is even more dangerous is if the Fed DOES NOT hike rates because that will send jitters to markets owing to the uncertainty of the rate hike cycle.
b) Greenspan warns that oil prices is now finally hurting the economy, and that continuing worries about terrorism and war have been a major factor in supporting high oil prices. He also believed that hedge funds have been driving up oil prices in speculation but added that that is beneficial over the longer term as that will dissuade a heavy reliance on oil
Oil is the one factor which could really derail global equities. The main reason why stock prices have held up so well despite the near doubling in oil prices is that most of the demand has been to produce real tangible improvements in production and productivity, and the bulk of it has been absorbed within the margins and not passed on to consumers (except fuel for cars). However, the equation cannot stand forever, especially if it surges to another new high, say US$90-100. However, we should not be too bothered as any surge in oil prices from here on will only have the effect of slowing down the real economy (which again puts less pressure on global demand), hence any further price surge will be quite temporary.
c) Sharp corrections in commodities prices have knocked the steam off markets
Yes, that is true, and the fact that the markets worldwide have managed to take in the correction to the overblown commodities price correction shows the depth in funds and quality of the bull markets this time around
d) Hedge funds have suffered heavy losses in commodities and some emerging markets (such as India, Turkey and Indonesia) and are licking their wounds
Yes, but they have had a spectacular last 18 months, one month does not kill them
e) Shanghai Composite just tumbled 5.3% yesterday, the biggest one day drop in 4 years on concern that the end of a ban on new share sales will sap demand for existing equities
A correction that is based on demand-supply, but the reality is that the rule introduction will be very good for the longer term. Maybe this will help quell their overblown housing boom too. No big deal.
The thing is, the concerns are all forseeable, things like rate hikes, oil prices ... but they cannot jump out of our sphere of reasoning, i.e. if rates or oil prices extends their runs, then we are in trouble. Why do we even have a bullish stock market in the midst of such a threatening macro scenario???
Justification: - Almost every single stock market is near their all time highs ... I believe the stock valuations in the US are attractive, there is a lot of companies with loads of cash which would stem any sharp corrections. The realignment in US dollar is benefitting the emerging markets in terms of wealth redistribution and pumping growth without imported inflation (thanks to stronger currencies). A resurgent Asia after the 1997-2003 financial crisis and other disastrous events. Asia has basically seen a dramatic shift in its competitive paradigm, things that can be outsourced have shifted, and economies have redefined their competitive edge, there is better transparency, accountability and defensibility in their fiscal and monetary policies. Hence to me, all this is a temporary rest, not a prelude to further weakness in equities.
Refresh Your Page/Mind
Every now and then, particularly when markets are not behaving entirely the way you think they should, it is good to refresh your mind and re-justify your opinion, much like when you refresh your web page or flushes the toilet bowl...
Things affecting the market, my comments in blue:
a) Bernanke hints at raising rates during the 28-29 June meeting by the Fed
This is not something out of the ordinary, or something we could not forsee..., we all could see the need for Fed to at least raise rates another 25 basis points. Whether the upcoming hike is the last for sometime is a crucial debating point. Judging from the release of employment and housing figures so far, this upcoming rate hike could be very very close to the end of a rate hike cycle. The markets are basically trying to discount the end-June rate hike, and as more economic figures are released leading up to end of the month, I believe they will confirm that the rate hike cycle will come to an end. We can safely expect markets to start bouncing even before the rate hike. The rate hike will be a non-event. What is even more dangerous is if the Fed DOES NOT hike rates because that will send jitters to markets owing to the uncertainty of the rate hike cycle.
b) Greenspan warns that oil prices is now finally hurting the economy, and that continuing worries about terrorism and war have been a major factor in supporting high oil prices. He also believed that hedge funds have been driving up oil prices in speculation but added that that is beneficial over the longer term as that will dissuade a heavy reliance on oil
Oil is the one factor which could really derail global equities. The main reason why stock prices have held up so well despite the near doubling in oil prices is that most of the demand has been to produce real tangible improvements in production and productivity, and the bulk of it has been absorbed within the margins and not passed on to consumers (except fuel for cars). However, the equation cannot stand forever, especially if it surges to another new high, say US$90-100. However, we should not be too bothered as any surge in oil prices from here on will only have the effect of slowing down the real economy (which again puts less pressure on global demand), hence any further price surge will be quite temporary.
c) Sharp corrections in commodities prices have knocked the steam off markets
Yes, that is true, and the fact that the markets worldwide have managed to take in the correction to the overblown commodities price correction shows the depth in funds and quality of the bull markets this time around
d) Hedge funds have suffered heavy losses in commodities and some emerging markets (such as India, Turkey and Indonesia) and are licking their wounds
Yes, but they have had a spectacular last 18 months, one month does not kill them
e) Shanghai Composite just tumbled 5.3% yesterday, the biggest one day drop in 4 years on concern that the end of a ban on new share sales will sap demand for existing equities
A correction that is based on demand-supply, but the reality is that the rule introduction will be very good for the longer term. Maybe this will help quell their overblown housing boom too. No big deal.
The thing is, the concerns are all forseeable, things like rate hikes, oil prices ... but they cannot jump out of our sphere of reasoning, i.e. if rates or oil prices extends their runs, then we are in trouble. Why do we even have a bullish stock market in the midst of such a threatening macro scenario???
Justification: - Almost every single stock market is near their all time highs ... I believe the stock valuations in the US are attractive, there is a lot of companies with loads of cash which would stem any sharp corrections. The realignment in US dollar is benefitting the emerging markets in terms of wealth redistribution and pumping growth without imported inflation (thanks to stronger currencies). A resurgent Asia after the 1997-2003 financial crisis and other disastrous events. Asia has basically seen a dramatic shift in its competitive paradigm, things that can be outsourced have shifted, and economies have redefined their competitive edge, there is better transparency, accountability and defensibility in their fiscal and monetary policies. Hence to me, all this is a temporary rest, not a prelude to further weakness in equities.
HK Property Investing, The OZ Way
Macquarie's Dominance
Property investor Macquarie Global Property Advisors, a unit of Australia's Macquarie Bank, will spend as much as US$4 billion (HK$31.2 billion) on investment properties in Asia in the next 12 months. About US$1 billion of the total will be targeted at Hong Kong. The fund is called the MGP Asia Fund II. The fund has invested US$1 billion in Asian properties in the past 12 months.
Portfolio strategy is long-term investment in Grade A offices, large retail malls, luxury residential property and industrial properties, with targeted rental yields of 20 percent. MGPA is particularly bullish on the outlook for Grade A offices in HK and expects rents to jump 50 percent this year.
Overseas funds have been active in snapping up HK investment properties over the last 6 months, more than doubled the amount over same period a year ago. MGPA last month bought the Low Block of Grand Millennium Plaza in Central for HK$2.38 billion. In March, it purchased Vicwood Plaza, a 38-story commercial and retail complex in Central, for HK$2.6 billion from Morgan Stanley Real Estate Fund, which had bought the building in May 2003 for HK$842.8 million. MGPA's first foray into Hong Kong was in August 2001 when it bought 56 Repulse Bay, a luxury residential development in Island South, from Sino Land. Last week, the fund said the development was sold out, with 52 out of 53 houses snapped up by wealthy buyers. It had spent "hundreds of millions of dollars" renovating the houses for resale. With revenues of over HK$3 billion, profit from the project was "in excess of HK$500 million.
Many have theorise on Macquarie's ability in almost every facet of investing. I remember when I was working in Sydney back in the late 80s and Macquarie was just a small potato, really small potato. It had been lumbering around for sometime as a bit player. It was definitely not first tier, not even second tier investment banking outfit. It took the top few managers to change the culture. They basically created things/products out of ideas alone, constantly challenging the way things have been done. A stickler for professionalism and ROI. Performers were rewarded and a fee based culture was built as they did not have the backing of a really big capital base. They now manage everything from tolls to airports to REITs with the same mantra and culture, as long as you can control and manage 90% of the risks, everything else is documentation.
Macquarie's Dominance
Property investor Macquarie Global Property Advisors, a unit of Australia's Macquarie Bank, will spend as much as US$4 billion (HK$31.2 billion) on investment properties in Asia in the next 12 months. About US$1 billion of the total will be targeted at Hong Kong. The fund is called the MGP Asia Fund II. The fund has invested US$1 billion in Asian properties in the past 12 months.
Portfolio strategy is long-term investment in Grade A offices, large retail malls, luxury residential property and industrial properties, with targeted rental yields of 20 percent. MGPA is particularly bullish on the outlook for Grade A offices in HK and expects rents to jump 50 percent this year.
Overseas funds have been active in snapping up HK investment properties over the last 6 months, more than doubled the amount over same period a year ago. MGPA last month bought the Low Block of Grand Millennium Plaza in Central for HK$2.38 billion. In March, it purchased Vicwood Plaza, a 38-story commercial and retail complex in Central, for HK$2.6 billion from Morgan Stanley Real Estate Fund, which had bought the building in May 2003 for HK$842.8 million. MGPA's first foray into Hong Kong was in August 2001 when it bought 56 Repulse Bay, a luxury residential development in Island South, from Sino Land. Last week, the fund said the development was sold out, with 52 out of 53 houses snapped up by wealthy buyers. It had spent "hundreds of millions of dollars" renovating the houses for resale. With revenues of over HK$3 billion, profit from the project was "in excess of HK$500 million.
Many have theorise on Macquarie's ability in almost every facet of investing. I remember when I was working in Sydney back in the late 80s and Macquarie was just a small potato, really small potato. It had been lumbering around for sometime as a bit player. It was definitely not first tier, not even second tier investment banking outfit. It took the top few managers to change the culture. They basically created things/products out of ideas alone, constantly challenging the way things have been done. A stickler for professionalism and ROI. Performers were rewarded and a fee based culture was built as they did not have the backing of a really big capital base. They now manage everything from tolls to airports to REITs with the same mantra and culture, as long as you can control and manage 90% of the risks, everything else is documentation.
Snippets, Snipes & Snides
1 June - 6 June 2006
The Goldman Sachs Factor
We have Paulson being appointed by Bush. Don't forget about Robert Rubin a few years back, also from Goldman Sachs. Forget Da Vinci Code. If you want to get to grips with a real conspiracy, take a look at all the Goldman Sachs staffers taking over important economic positions around the world. The U.S. Treasury, the Bank of Italy and the Bank of England have all recently poached key policy makers from the world's most profitable securities firm. While no one would dispute that New York-based Goldman Sachs is a money-making machine full of alpha-brains, it isn't healthy for so many decision-makers to be drawn from one source. U.S. President George W. Bush has just appointed Goldman Sachs Chief Executive Officer Henry Paulson as his new Treasury secretary, one of the most powerful economic jobs in the world. In January, Goldman Sachs Managing Director Mario Draghi became the new governor of the Bank of Italy. In Britain, David Walton, who was chief European economist for Goldman in London, last year joined the Bank of England's Monetary Policy Committee, which sets U.K. interest rates. In Canada, Mark Carney, formerly managing director in Goldman's Toronto office, is now a senior official in that country's Finance Ministry. It's not just economic jobs, either. Gavyn Davies went from Goldman to become chairman of the British Broadcasting Corp. for a few years. When someone was needed to run London's preparations for the 2012 Olympics, where did they turn? Goldman of course. Paul Deighton, a chief operating officer at the securities firm, was appointed in December. So, the danger is a very powerful "old boys network" is being formed across Europe-US. It could have benefits but the risks are also there for the leverage to be mis-used and abused.
Lion Forest & Lion Industries
The deal has been announced and it was unfortunate that it coincided with a big fall from Wall Street. That does not account for the big fall in both counters. Companies need to wise up on the need to communicate more effectively. The terms of the deal mirrors the announcement to the exchange, nothing more was added. Management have to realise the importance of good PR. The deal provides a lot of cash - what you are going to do with the cash will provide good information for investors. Coming out to say they are looking for good investments only make people think that Lion group will dump money back to the staving Silverstone and steel operations - both highly unattractive to investors. Plus more should be communicated on Lion Forest where they will have to cough up a certain sum to pay back the loan, and how Lion Forest minority shareholders will get a similar cash back. The bigger danger lies in Lion Industries, there is no covenant to force the company to issue a special dividend back to shareholders, Lion Industries can do what they want with the funds, chances are they will keep it in their various capital-intensive investments or the new Kimtrans. There should have been a more clearly laid out plan together with the announcement of the deal on what they planned to do with the funds (knowing full well that investors will fear the worst if they just say "looking for new investments"), shouldn't the companies have planned a bit better to assuage the fears of investors... or they just couldn't care less.
Google To Get Into Spreadsheets
Excel, probably the most important item bundled by Microsoft, will be challenged by Google' new offering. Google will introduce a spreadsheet program, continuing the internet search leader's expansion into territory long dominated by Microsoft. The big thing is that the spreadsheet will be "online". Consumers and businesses basically will get a free alternative to Microsoft's Excel application - a product typically sold as part of the Office software suite that has been a steady moneymaker for years. To avoid swamping the company's computers, Google's spreadsheet initially will be distributed to a limited audience. Google's spreadsheet isn't as sophisticated as Excel. For instance, the Google spreadsheet won't create charts or provide a menu of controls that can be summoned by clicking on a computer mouse's right-hand button. The program's main goal is to make it easier for family, friends or co-workers to gain access to the same spreadsheet from different computers at different times, enabling a group of authorised users to add and edit data without having to email attachments back and forth. That's where Google attempt this time will fail miserably - the indispensability of Excel is its all-encompassing ability to contain the simple stuff to the mind blowing multi-layered figures. The options to convert into charts and tables are so important as its the basis for a powerful presentation on PowerPoint. Google's offering comes nowhere near that - I predict that Google will get eggs on their face this time but they will be back to challenge Excel again later. You have to challenge Excel if you want to dismantle Microsoft's monopoly. But not this time Google, not yet. The one big asset of Google is offering the spreadsheet online and allowing multiusers across various locations to edit, update the spreadsheet. Now Google has to incorporate the other strong points of Excel, and it will be a mind blowing product. Although distributing software over the internet gives more people greater access to programs, the approach requires trusting a custodian like Google to save and protect the information from unauthorized users. That's a leap many security-conscious companies are unwilling to make and something consumers may be reluctant to do amid rising concerns of government snooping. The spreadsheet represents Google's latest software application to be tethered to an internet connection instead of a single computer's hard drive. Google acquired an online word processing application called Writely in March and rolled out a calendar service a few weeks later. All of those free programs pose a possible threat to Microsoft, which established itself as the world's largest software maker by selling its Windows operating system and complementary applications that run on the platform.
1 June - 6 June 2006
The Goldman Sachs Factor
We have Paulson being appointed by Bush. Don't forget about Robert Rubin a few years back, also from Goldman Sachs. Forget Da Vinci Code. If you want to get to grips with a real conspiracy, take a look at all the Goldman Sachs staffers taking over important economic positions around the world. The U.S. Treasury, the Bank of Italy and the Bank of England have all recently poached key policy makers from the world's most profitable securities firm. While no one would dispute that New York-based Goldman Sachs is a money-making machine full of alpha-brains, it isn't healthy for so many decision-makers to be drawn from one source. U.S. President George W. Bush has just appointed Goldman Sachs Chief Executive Officer Henry Paulson as his new Treasury secretary, one of the most powerful economic jobs in the world. In January, Goldman Sachs Managing Director Mario Draghi became the new governor of the Bank of Italy. In Britain, David Walton, who was chief European economist for Goldman in London, last year joined the Bank of England's Monetary Policy Committee, which sets U.K. interest rates. In Canada, Mark Carney, formerly managing director in Goldman's Toronto office, is now a senior official in that country's Finance Ministry. It's not just economic jobs, either. Gavyn Davies went from Goldman to become chairman of the British Broadcasting Corp. for a few years. When someone was needed to run London's preparations for the 2012 Olympics, where did they turn? Goldman of course. Paul Deighton, a chief operating officer at the securities firm, was appointed in December. So, the danger is a very powerful "old boys network" is being formed across Europe-US. It could have benefits but the risks are also there for the leverage to be mis-used and abused.
Lion Forest & Lion Industries
The deal has been announced and it was unfortunate that it coincided with a big fall from Wall Street. That does not account for the big fall in both counters. Companies need to wise up on the need to communicate more effectively. The terms of the deal mirrors the announcement to the exchange, nothing more was added. Management have to realise the importance of good PR. The deal provides a lot of cash - what you are going to do with the cash will provide good information for investors. Coming out to say they are looking for good investments only make people think that Lion group will dump money back to the staving Silverstone and steel operations - both highly unattractive to investors. Plus more should be communicated on Lion Forest where they will have to cough up a certain sum to pay back the loan, and how Lion Forest minority shareholders will get a similar cash back. The bigger danger lies in Lion Industries, there is no covenant to force the company to issue a special dividend back to shareholders, Lion Industries can do what they want with the funds, chances are they will keep it in their various capital-intensive investments or the new Kimtrans. There should have been a more clearly laid out plan together with the announcement of the deal on what they planned to do with the funds (knowing full well that investors will fear the worst if they just say "looking for new investments"), shouldn't the companies have planned a bit better to assuage the fears of investors... or they just couldn't care less.
Google To Get Into Spreadsheets
Excel, probably the most important item bundled by Microsoft, will be challenged by Google' new offering. Google will introduce a spreadsheet program, continuing the internet search leader's expansion into territory long dominated by Microsoft. The big thing is that the spreadsheet will be "online". Consumers and businesses basically will get a free alternative to Microsoft's Excel application - a product typically sold as part of the Office software suite that has been a steady moneymaker for years. To avoid swamping the company's computers, Google's spreadsheet initially will be distributed to a limited audience. Google's spreadsheet isn't as sophisticated as Excel. For instance, the Google spreadsheet won't create charts or provide a menu of controls that can be summoned by clicking on a computer mouse's right-hand button. The program's main goal is to make it easier for family, friends or co-workers to gain access to the same spreadsheet from different computers at different times, enabling a group of authorised users to add and edit data without having to email attachments back and forth. That's where Google attempt this time will fail miserably - the indispensability of Excel is its all-encompassing ability to contain the simple stuff to the mind blowing multi-layered figures. The options to convert into charts and tables are so important as its the basis for a powerful presentation on PowerPoint. Google's offering comes nowhere near that - I predict that Google will get eggs on their face this time but they will be back to challenge Excel again later. You have to challenge Excel if you want to dismantle Microsoft's monopoly. But not this time Google, not yet. The one big asset of Google is offering the spreadsheet online and allowing multiusers across various locations to edit, update the spreadsheet. Now Google has to incorporate the other strong points of Excel, and it will be a mind blowing product. Although distributing software over the internet gives more people greater access to programs, the approach requires trusting a custodian like Google to save and protect the information from unauthorized users. That's a leap many security-conscious companies are unwilling to make and something consumers may be reluctant to do amid rising concerns of government snooping. The spreadsheet represents Google's latest software application to be tethered to an internet connection instead of a single computer's hard drive. Google acquired an online word processing application called Writely in March and rolled out a calendar service a few weeks later. All of those free programs pose a possible threat to Microsoft, which established itself as the world's largest software maker by selling its Windows operating system and complementary applications that run on the platform.
Cathay Breathes Dragon Fire In SIA's Face
Shares of five companies, including Cathay Pacific Airways and Air China, were suspended from trading Monday amid a pending takeover of Dragonair by Hong Kong's flag carrier, Cathay Pacific. Share trading was also halted Monday for China National Aviation Co, the largest single shareholder of Hong Kong-based Dragon Airlines, as well as Dragonair's other stakeholders, Swire Pacific and CITIC Pacific. Such suspensions are commonplace once rumors of an acquisition or merger begin to affect trading in relevant shares. Cathay, which holds a 17.79% stake in Dragonair, sees the acquisition as a vehicle to grab a bigger share of the fast-growing mainland aviation market. Dragonair at present flies to 23 Chinese destinations from Hong Kong, operating more than 300 flights a week, while Cathay - which especially covets the lucrative Hong Kong-to- Shanghai route - is limited to directly servicing Beijing and Xiamen. Simple logic is Cathay needs a network into China; Dragonair's got one. Its a wonder it took Cathay Pacific that long to buyout Dragonair. Dragonair's other Asian destinations include Bangkok, Taipei and Tokyo, while it also offers freighter services to Europe and the Middle East, as well as to New York and Shanghai.
Cathay will be able to operate mainland and Hong Kong routes, while Air China will be able to expand its international market through holding Cathay's shares. Air China, which holds a 66.36% controlling interest in CNAC - Dragonair's parent company - would likely acquire shares in Cathay Pacific as part of the deal, therefore becoming Cathay's third-largest shareholder after Swire Pacific and CITIC Pacific. Conversely, Cathay holds a 10% stake in Air China, and the cross-shareholding is expected to strengthen ties between the two carriers, helping the Beijing-based airline to gain valuable management expertise needed to compete more effectively internationally. Cathay's long-contemplated takeover of Dragonair will likely involve revamping the shareholding structures of several major players in the regional aviation sector, including Cathay, Air China, CNAC and CITIC Pacific.
To gain sole ownership of Dragonair, Cathay would need to purchase CNAC's 43.29% stake, along with CITIC's 28.5% and Swire Pacific's 7.71%, as well as the 2.71% held by other minor shareholders. Dragonair is estimated to be worth about HK$12.2 billion. Air China is looking at privatizing Hong Kong-listed CNAC after Cathay's takeover of Dragonair. The airline operation from Dragonair and Air Macau will lower the CNAC group's earnings due to high oil prices. However, the problems will be solved if Cathay buys out Dragonair.
Meanwhile, the Hong Kong government would have to rearrange traffic rights owned by two separate airlines if Cathay takes full control of Dragonair. Dragonair's traffic rights would have to be transferred to Cathay Pacific if the operation and management of Dragonair is under Cathay. It is the first matter that the Economic Development and Labour Bureau will need to cope with.
Dragonair might also cancel some money- losing routes after Cathay's takeover. In 2003, Dragonair said only five of its mainland destinations were profitable. Cathay estimates that Dragonair had a 30% profit margin on the Hong Kong-Shanghai run, and 15% on the service to Beijing.
The takeover has the effect of propelling Cathay Pacific as the premier Asian airline at the expense of SIA. Even though SIA would have loved to buy Dragonair, there is no possible way for that to happen with the inter-related China interest affecting China skies. It could only happen if Cathay made its move, and the entire deal would not have happened without the presence and initiative by Larry Yung from Citic Pacific.
Shares of five companies, including Cathay Pacific Airways and Air China, were suspended from trading Monday amid a pending takeover of Dragonair by Hong Kong's flag carrier, Cathay Pacific. Share trading was also halted Monday for China National Aviation Co, the largest single shareholder of Hong Kong-based Dragon Airlines, as well as Dragonair's other stakeholders, Swire Pacific and CITIC Pacific. Such suspensions are commonplace once rumors of an acquisition or merger begin to affect trading in relevant shares. Cathay, which holds a 17.79% stake in Dragonair, sees the acquisition as a vehicle to grab a bigger share of the fast-growing mainland aviation market. Dragonair at present flies to 23 Chinese destinations from Hong Kong, operating more than 300 flights a week, while Cathay - which especially covets the lucrative Hong Kong-to- Shanghai route - is limited to directly servicing Beijing and Xiamen. Simple logic is Cathay needs a network into China; Dragonair's got one. Its a wonder it took Cathay Pacific that long to buyout Dragonair. Dragonair's other Asian destinations include Bangkok, Taipei and Tokyo, while it also offers freighter services to Europe and the Middle East, as well as to New York and Shanghai.
Cathay will be able to operate mainland and Hong Kong routes, while Air China will be able to expand its international market through holding Cathay's shares. Air China, which holds a 66.36% controlling interest in CNAC - Dragonair's parent company - would likely acquire shares in Cathay Pacific as part of the deal, therefore becoming Cathay's third-largest shareholder after Swire Pacific and CITIC Pacific. Conversely, Cathay holds a 10% stake in Air China, and the cross-shareholding is expected to strengthen ties between the two carriers, helping the Beijing-based airline to gain valuable management expertise needed to compete more effectively internationally. Cathay's long-contemplated takeover of Dragonair will likely involve revamping the shareholding structures of several major players in the regional aviation sector, including Cathay, Air China, CNAC and CITIC Pacific.
To gain sole ownership of Dragonair, Cathay would need to purchase CNAC's 43.29% stake, along with CITIC's 28.5% and Swire Pacific's 7.71%, as well as the 2.71% held by other minor shareholders. Dragonair is estimated to be worth about HK$12.2 billion. Air China is looking at privatizing Hong Kong-listed CNAC after Cathay's takeover of Dragonair. The airline operation from Dragonair and Air Macau will lower the CNAC group's earnings due to high oil prices. However, the problems will be solved if Cathay buys out Dragonair.
Meanwhile, the Hong Kong government would have to rearrange traffic rights owned by two separate airlines if Cathay takes full control of Dragonair. Dragonair's traffic rights would have to be transferred to Cathay Pacific if the operation and management of Dragonair is under Cathay. It is the first matter that the Economic Development and Labour Bureau will need to cope with.
Dragonair might also cancel some money- losing routes after Cathay's takeover. In 2003, Dragonair said only five of its mainland destinations were profitable. Cathay estimates that Dragonair had a 30% profit margin on the Hong Kong-Shanghai run, and 15% on the service to Beijing.
The takeover has the effect of propelling Cathay Pacific as the premier Asian airline at the expense of SIA. Even though SIA would have loved to buy Dragonair, there is no possible way for that to happen with the inter-related China interest affecting China skies. It could only happen if Cathay made its move, and the entire deal would not have happened without the presence and initiative by Larry Yung from Citic Pacific.
NYSE / Euronext & Asian Exchanges
NYSE Group Inc. agreed to buy Euronext NV for 7.78 billion euros (US$9.96 billion), forming the first transatlantic stock exchange and edging out a rival bid by Deutsche Boerse AG. NYSE executed a swift swoop for the Paris-based Euronext, Europe's second-largest stock exchange. NYSE Euronext, as the combined company will be called, would unite the 214-year-old New York Stock Exchange with bourses in Paris, Amsterdam, Brussels and Lisbon and Europe's second-largest futures market. The new exchange will handle about US$2.1 trillion in stock trades a month, twice as much as Nasdaq Stock Market Inc. The agreement, which the companies are calling a merger of equals, requires approval by shareholders from the companies and regulators in the U.S. and Europe. Thain (NYSE) said he met last week with regulators from both side of the Atlantic to build support for the deal. ``Both of the regulatory organizations are operating in quite a co-operative way,'' Thain said. ``They are both very receptive. They are both supportive'' of the combination.
The combined company would be based in New York, with European operations run from Euronext's offices. The SEC would have regulatory oversight over only the U.S. equity and options market, while the group of regulators that currently oversee Euronext will retain responsibility for the European market. However, it's never final until the deal closes. Problem number one is with the regulators, and number two is that Euronext shareholders might think the NYSE deal is not good enough for them, and might start agitating for a better deal, or to get a new offer from Deutsche Boerse.
What this technically means is that for good/large non-US companies thinking of a listing or a dual listing, it will be a choice of between NYSE/Euronext or LSE/Nasdaq. Assuming the US entities are roughly equal in strength and attractiveness, the LSE still has a lead as a destination for big foreign listings. The London location is a big asset for Nasdaq to have. Surely, NYSE would have preferred to have LSE but Euronext is the next best thing.
While takeovers and mergers of exchanges are all the rage in Europe and US, it is highly unlikely that the same will be seen in Asia. It is almost unthinkable to see any of these exchanges willing to give up its independence or share authority with each other, can you?? - Hong Kong SE, Singapore SE, Kuala Lumpur SE, Tokyo SE, Thailand SE, Jakarta SE ... is it an Asian thing??? Does that mean capitalism is defined differently in Asia?? The reasons why Asian exchanges will not be able to merge/sell compared to their European / American counterparts cuts at the very ability to understand how Asia works - in fact, this question should be asked of every single European/American expat wanting to work in Asia - their ability to answer it well shows how much they know of Asia and how Asia works. Or, they could read my blog...
The exchanges in Asia are more than just a free standing institution that governs the listed companies and its regulation. Asian exchanges is closely linked to their respective governments. While they are expected to deliver on the same platform on transparency, listings, governance and even profitability issues ... Asian exchanges are like a mascot for their financial standing. A bit like their own currency, there is more pride in it than value backing the currencies. Hence to sell down or share authority would be close to accepting that they are not good enough to regulate on their own, that they have ceded power to map its financial future ... None would be pragmatic enough (maybe Singapore) to consider the intrinsic benefits of linking up and merging.
I still say that KLSE and SES should merge but because of the above factors, that is unlikely to happen. However, they can have a JV of sorts by exchanging maybe 10% of their shares with each other, and allowing both exchanges to buy and sell on both countries' shares on one single platform - automatically doubles the number of listed companies, almost double the number of participants, double the choices, enormous cost savings, plus the shares listed on both exchanges differs quite a bit (little replication) ... and yet allow for the companies to be regulated / approved by their respective exchanges - thats as close as a marriage you will get for Asian exchanges... a bit like a gay / same-sex marriage, don't you think! Not quite a merger of equals, but it will do for now.
NYSE Group Inc. agreed to buy Euronext NV for 7.78 billion euros (US$9.96 billion), forming the first transatlantic stock exchange and edging out a rival bid by Deutsche Boerse AG. NYSE executed a swift swoop for the Paris-based Euronext, Europe's second-largest stock exchange. NYSE Euronext, as the combined company will be called, would unite the 214-year-old New York Stock Exchange with bourses in Paris, Amsterdam, Brussels and Lisbon and Europe's second-largest futures market. The new exchange will handle about US$2.1 trillion in stock trades a month, twice as much as Nasdaq Stock Market Inc. The agreement, which the companies are calling a merger of equals, requires approval by shareholders from the companies and regulators in the U.S. and Europe. Thain (NYSE) said he met last week with regulators from both side of the Atlantic to build support for the deal. ``Both of the regulatory organizations are operating in quite a co-operative way,'' Thain said. ``They are both very receptive. They are both supportive'' of the combination.
The combined company would be based in New York, with European operations run from Euronext's offices. The SEC would have regulatory oversight over only the U.S. equity and options market, while the group of regulators that currently oversee Euronext will retain responsibility for the European market. However, it's never final until the deal closes. Problem number one is with the regulators, and number two is that Euronext shareholders might think the NYSE deal is not good enough for them, and might start agitating for a better deal, or to get a new offer from Deutsche Boerse.
What this technically means is that for good/large non-US companies thinking of a listing or a dual listing, it will be a choice of between NYSE/Euronext or LSE/Nasdaq. Assuming the US entities are roughly equal in strength and attractiveness, the LSE still has a lead as a destination for big foreign listings. The London location is a big asset for Nasdaq to have. Surely, NYSE would have preferred to have LSE but Euronext is the next best thing.
While takeovers and mergers of exchanges are all the rage in Europe and US, it is highly unlikely that the same will be seen in Asia. It is almost unthinkable to see any of these exchanges willing to give up its independence or share authority with each other, can you?? - Hong Kong SE, Singapore SE, Kuala Lumpur SE, Tokyo SE, Thailand SE, Jakarta SE ... is it an Asian thing??? Does that mean capitalism is defined differently in Asia?? The reasons why Asian exchanges will not be able to merge/sell compared to their European / American counterparts cuts at the very ability to understand how Asia works - in fact, this question should be asked of every single European/American expat wanting to work in Asia - their ability to answer it well shows how much they know of Asia and how Asia works. Or, they could read my blog...
The exchanges in Asia are more than just a free standing institution that governs the listed companies and its regulation. Asian exchanges is closely linked to their respective governments. While they are expected to deliver on the same platform on transparency, listings, governance and even profitability issues ... Asian exchanges are like a mascot for their financial standing. A bit like their own currency, there is more pride in it than value backing the currencies. Hence to sell down or share authority would be close to accepting that they are not good enough to regulate on their own, that they have ceded power to map its financial future ... None would be pragmatic enough (maybe Singapore) to consider the intrinsic benefits of linking up and merging.
I still say that KLSE and SES should merge but because of the above factors, that is unlikely to happen. However, they can have a JV of sorts by exchanging maybe 10% of their shares with each other, and allowing both exchanges to buy and sell on both countries' shares on one single platform - automatically doubles the number of listed companies, almost double the number of participants, double the choices, enormous cost savings, plus the shares listed on both exchanges differs quite a bit (little replication) ... and yet allow for the companies to be regulated / approved by their respective exchanges - thats as close as a marriage you will get for Asian exchanges... a bit like a gay / same-sex marriage, don't you think! Not quite a merger of equals, but it will do for now.
Astro & Scomi Covered Warrants
An Early Valuation
Both are decent companies, but Scomi would be more exciting and should have a much higher beta (volatility) which bodes better as a covered warrant. Astro's growth and prospects appear limited from here on with the exception of its Indonesian ventures (which is still in a shambolic stage still). The thing to be very careful here is that these covered warrants only have an 8 month to expiry period, pretty short, so the timing is very crucial here. Once the bull rears its head, these covered warrants will fly because the premium is very low while the gearing is pretty good. The reverse will occur should there be market weakness but if you get in early (e.g. below 30 sen), your downside is limited by the absolute price. Don't think these CWs will fall below 20 sen for Scomi and 25 sen for Astro unless the index craps below 850. As cynical as it may sound, it is highly likely (and in the long term interest of) the lead managers will try to ensure that these early batches of covered warrants do perform well (as best they could without flouting the laws). By ensuring that, it will serve them well as an expanding and enlarging franchise, and revenue stream. While I am not suggesting outright manipulation... but there are one hundred and one ways to skin a cat (think fund management, research, special placements, etc...).
Astro CW
Terms - 2 CW for 1 Astro share
Exercise Price - RM4.65
Current Share Price - RM4.80
Current CW Price - RM0.27
The premium would be = (0.27 x 2) + 4.65 / 4.8 = 8.12%
Gearing (Leverage) would be = 4.80 / (0.27 x 2) = 8.8x
Scomi CW
Terms - 1 CW for 1 Scomi share
Exercise Price - RM1.15
Current Share Price - RM1.20
Current CW Price - RM0.22
The premium would be = 0.22 + 1.15 / 1.20 = 14.1%
Gearing would be = 1.20 / 0.22 = 5.45x
Naturally the Scomi CW looks more expensive with a higher premium and much lower gearing than Astro CW. Both are actually "cheapish" for now. All things being equal (with no price fluctuations) Scomi CW should be fairly valued at RM0.24 (compared to the current price of RM0.22). While Astro CW should be fairly valued at RM0.33 (compared to the current price of RM0.27). The market has priced the Astro CW too cheaply, even after taking into account the lesser stock volatility. Even if you take in the prospects, the Astro CW is still too cheap.
An Early Valuation
Both are decent companies, but Scomi would be more exciting and should have a much higher beta (volatility) which bodes better as a covered warrant. Astro's growth and prospects appear limited from here on with the exception of its Indonesian ventures (which is still in a shambolic stage still). The thing to be very careful here is that these covered warrants only have an 8 month to expiry period, pretty short, so the timing is very crucial here. Once the bull rears its head, these covered warrants will fly because the premium is very low while the gearing is pretty good. The reverse will occur should there be market weakness but if you get in early (e.g. below 30 sen), your downside is limited by the absolute price. Don't think these CWs will fall below 20 sen for Scomi and 25 sen for Astro unless the index craps below 850. As cynical as it may sound, it is highly likely (and in the long term interest of) the lead managers will try to ensure that these early batches of covered warrants do perform well (as best they could without flouting the laws). By ensuring that, it will serve them well as an expanding and enlarging franchise, and revenue stream. While I am not suggesting outright manipulation... but there are one hundred and one ways to skin a cat (think fund management, research, special placements, etc...).
Astro CW
Terms - 2 CW for 1 Astro share
Exercise Price - RM4.65
Current Share Price - RM4.80
Current CW Price - RM0.27
The premium would be = (0.27 x 2) + 4.65 / 4.8 = 8.12%
Gearing (Leverage) would be = 4.80 / (0.27 x 2) = 8.8x
Scomi CW
Terms - 1 CW for 1 Scomi share
Exercise Price - RM1.15
Current Share Price - RM1.20
Current CW Price - RM0.22
The premium would be = 0.22 + 1.15 / 1.20 = 14.1%
Gearing would be = 1.20 / 0.22 = 5.45x
Naturally the Scomi CW looks more expensive with a higher premium and much lower gearing than Astro CW. Both are actually "cheapish" for now. All things being equal (with no price fluctuations) Scomi CW should be fairly valued at RM0.24 (compared to the current price of RM0.22). While Astro CW should be fairly valued at RM0.33 (compared to the current price of RM0.27). The market has priced the Astro CW too cheaply, even after taking into account the lesser stock volatility. Even if you take in the prospects, the Astro CW is still too cheap.
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