SC To The Fore

I am an admirer of Datuk Zarinah, the head of Malaysia's Securities Commission. While there have been certain things it could have done better (such as the long non-suspension of Transmile), overall the SC has been more proactive. As in any normal markets, accounting frauds, accounting irregularities and even outright CBT are part and parcel of the overall scene. Recently we have "special situations" at Nasioncom, Transmile and even Southern Bank. Now, probably the biggest hole relative to the company's market cap, we have Megan Media. Kudos to Where Is Ze Moola who has been harping on Megan's problems long before the situation became public. Megan Media Holdings Bhd., a Malaysian maker of computer storage products, said the Securities Commission has started an investigation into its accounts after the company discovered irregularities in a unit.

A probe into a unit showed ``substantial irregularities'' that may lead to a RM456m asset shortfall at the division. The financial position of Memory Tech Sdn., owned by Megan Media, has been ``materially misstated,'' Megan Media said, citing a preliminary report by accountant Ferrier Hodgson MH Sdn. The company said today it may consider legal proceedings to recover funds lost. The company has suspended its financial controller. The accounting probe discovered there was a ``deliberate falsification'' of performance, it said.

Since Zarinah's tenure, the SC has been more proactive. I know there have many phone calls to many companies and individuals behind the scenes from the SC, either to guide, question, warn, caution, remind these "special issues" people/company. The SC has done a lot of work behind the scenes, so its not fair to assume that they only appear when companies are already blotting the radar.

I believe the Sc has shown much more independence and now appears to NOT need "approval" to proceed with prosecution. This is an excellent opportunity to further elevate the status of KLSE in the eyes of global investors. Much will depend on: "how fast the SC prosecutes"; how successful are the prosecution; the level of transparency in the wrongdoings; the protection accorded to minority shareholders; and the proper punishment being meted out (not slaps on the wrists again, please). Another area which requires more attention is "profit guarantees" in propspectuses. Many do not meet these guarantees and we do not see much repercussions. Another issue worth mentioning is Mesdaq companies where the risk is much higher, and the profit projections seemingly much more "wildly optimistic" to lure in investors. I think a proper liability scheme should be shared by the investment bank bringing these questionable Mesdaq companies to list only to implode within 2 years: as that makes a mockery of the prospectus, profit projections and integrity of the business model. Investment banks should be made to earn their fees.

Ball Is Rolling - H-Shares

As mentioned in my previous posting, one of the driving factors why I view the recently listed China covered warrants favourably is the likelihood of them being brought back to mainland for listing. The mainland regulator has just opened the door for more Hong Kong- traded red chips to list on the domestic bourses. The net income requirement has been lowered to HK$2 billion over three years, from HK$1 billion annual profit. According to a draft document obtained by the Beijing-based Caijing magazine, new rules for red-chip listings have been finalized. The new requirements could make 22 red chips eligible to list in the mainland.

The major difference between the new draft rules and those that the state is that the net profit requirement has been relaxed. The criterion which prohibited companies whose parent is listed on the domestic market from selling shares has been removed by the China Securities Regulatory Commission.

These changes will make 22 Hong Kong- listed red chips eligible to apply for a domestic share issuance. In addition to blue chips China Mobile (0941), China National Offshore Oil Corporation, or CNOOC (0883) and BOC Hong Kong (2388) - seen as frontrunners for listing - other enterprises such as Shanghai Industrial (0363) and Lenovo (0992) will now be eligible. China Overseas Land (0688), which also becomes eligible, abandoned plans for a domestic float last month since the parent company is listed in Shanghai and would not meet prevailing criteria. Among other requirements, companies aiming to return to the domestic market are required to have been listed in Hong Kong for at least a year, with market capitalization of HK$20 billion or more. Half of their business and net profit should be generated from the mainland.

The CSRC has been encouraging big-cap red chips to return to the domestic market, as it seeks to improve the quality of the bourses. Initially, the CSRC aims to attract only large corporations and may not encourage small enterprises. Once things have been planned by Beijing, the rest just falls into place, the companies will have to toe the line. The CSRC sees this as a major step to improve choices for mainland investors - one of the main reason why Shanghai and Shenzen bourses are so frothy: the lack of good companies. The H-shares are regarded as a few rungs better run than those in the mainland, and would be given a better pricing when they go back.

I would expect the shares to move up gradually as this process gathers speed. This gives the China Mobile and PetroChina covered warrants another kicker.

China Covered Warrants - Essentials

p/s did not factor in the exchange rate earlier, end result still good

PetroChina-C1
5 covereds to buy one share
Conversion Price: RM10.40 / HK$10.40
CA Price 0.195
Expiry 9 months from issue date
Yesterday's Closing Mother Share: 10.72
Premium: 5 x 0.195 = 0.975 + 10.40 / 10.72 = 14%
Gearing: 10.72 / (0.975 / 0.43) = 4.76x
Verdict: Good value, good upside, low premium

ICBC-C1
2 covereds to buy one share
Conversion Price: RM4.38 / HK$4.38
CA Price 0.175 Expiry 9 months from date of issue
Yesterday's Closing Mother Share: HK$4.10
Premium: 2 x 0.175 = 0.35 +4.38 / 4.10 = 27%
Gearing: 4.10 / (0.35 x 0.43) = 5x
Verdict: Good leverage, good value

ChinaMobile-C1
50 covereds to buy one share
Conversion Price: RM76.10 / HK$76.10
CA Price 0.16
Yesterday's Closing Share Price: HK$72.85
Premium: 50 x 0.16 = 8.00 + 76.10 / 72.85 = 30%
Gearing: 72.85 / (8.00 / 0.43) = 3.9x
Verdict: The best stock for upside, leverage still good, good value

The 3 covereds traded unlike the last bunch on Malaysian stocks where premiums went haywire and leverage does not make any sense. Due to the uncertainty, lack of information and understanding: these covered are priced nicely. Before investors get all panicky over the correction in Shanghai and Shenzen, these covered are pegged to the H-shares traded on HKSE: a very different thing altogether. Please re-read all postings on H-shares in my previous postings. The key here is that H-shares always traded at a huge discount to their counterparts in China. Before the big run, the discount has been averaging slightly above 20%. However, when the China markets went berserk over the last 12 months, this discount has shot up to over 40%. You cannot arbitrage because H-shares is convertible only in HK and vice-versa. This, as explained before, is a reflection of how frothy the China markets were. For example, ICBC in Shanghai-A closed yesterday at 5.08 yuan, even not taking into account the stronger yuan, the discount in the H-share in HK is 5.08/4.10 = 24%. Not all H-shares are listed back in mainland China, so the H-shares is indicative only. Thus you can say that the excesses in Shanghai and Shenzen are not translated totally into H-shares in HK. So, investors are not necessarily buying into the bubblish China market by buying these covereds.

There are two more important factors why investors should gobble up all the 3 covereds at current prices:

a) QDII (please read previous postings on QDII and China divesting out of USD) - Beijing has allowed more funds to invest outside of China via QDIIs, this is to allow for a valve for funds to move outside of China. First destination is buying into H-shares listed in HKSE, especially PetroChina and China Mobile, as they are not yet listed in Shanghai or Shenzen. They have just allowed US$400m and more will come.

b) There have been strong calls from Beijing for some of the H-shares to move back their listings to Shanghai. China Mobile and PetroChina will be under great pressure to do so. A move as such will move both shares much higher in anticipation of higher valuation back in Shanghai.

Hence, you heard it here first, all 3 covereds are good value. Strong buy and hold regardless of whether Shanghai tanks or not. This is probably the most significant blog posting for a long time.

Kudos to OSK for being first off the blocks to put these covereds here. Can start issuing more as appetite will grow by leaps and bounds.

Note to Yus-baby/Bursa/OSK/CIMB - From just this posting, I found it quite cumbersome to calculate the premiums and gearings, don't even mention coming up with implied volatility. Please try to ensure that investors can ACCESS information easily to value these issues easily, or have a live board monitoring the live prices of the respective shares in HKSE, and a table indicating the premium, gearing and implied volatility. Maybe you guys should have planned ahead instead of throwing these issues into the market and expect all investors to be savvy and informed. We all know how difficult it is to get live share prices from other exchanges. Please take note.

Some Quick Comments On Certain Stocks

DNP - OK, gone way past what I would be comfy with. NTA around RM2.00, even a generous RNAV would make current price of RM3.00 tough to stomach. New project launches may excite but land bank insufficient for now to be a complete long term property player. Privatisation, maybe, as I think they have accumulated way past 75% already. Danger of price collapsing quite low then. Upside also quite limited, even with a privatisation bid. Better stocks elsewhere.

YTL - Exercise not over. Delicate and sometimes obtruse collection strategy. As with owner's philosophy, hard to make money from his stocks, gotta buy and hold. Can hold, OK.

Transmile - RK and Pos seem to have reached a range for collection RM5.50-RM6.80. So, not much excitement now as the restructuring and rebuilding will take years. Hence, the stock is unlikely to go higher than the stated range for the medium term. Look elsewhere.

Bandaraya - Did highlight the stock, but past the RM2.50 level already. Just like DNP, upside limited. Look elsewhere.

Overall, local investors have still shied away from the current markets. The bull is not so convincing. Despite all markets holding well while China markets tumble, it does not add much momentum, that's a worry. Chances are better for a downtrend for immediate future.

More On ETFs

The brilliant thing about ETFs is its like a unit trust or mutual fund. Most funds have an expense ratio of 0.75%-2% p.a. and it comes out of your returns. ETFs have a much lower expense ratio between 0.1%-0.8%). The other thing is that one does not have to trouble themselves with tax and dividend issues as the ETFs will use the funds to buy more shares. You can trade in and out of ETFs like stocks. ETFs are good if you can pick the right sector or country exposure, without having to do actual stock picking: which can be time consuming and hard to get right. ETFs are made for genuine top-down investors.

Examples of current ETFs on Nasdaq:

Sector ETFs

Steel USA ETF

US Oil Fund ETF

Oil Equipment ETF

Semiconductor ETF

Natural Gas Fund ETF

Gold Trust ETF

Base Metals ETF

Precious Metals ETF

Silver Trust ETF

New Types

Hedge Fund ETF

Corporate Credits ETF

Fixed Income ETF

Global Water ETF

Quant ETF

Overbought/Oversold Currency ETF

Dividend Paying ETF

Dermatology ETF

Clean Energy ETF

There are hundreds, if not thousands of ETFs on Nasdaq alone. Then there are the country specific ETF, yes there are Malaysia ETFs on Nasdaq. So, back to the Bursa, its not as simple as it sounds. Size is an important factor and then depth of market. When you can get the size right and product is unique/viable, the buyers will come. Chicken or egg? Best solution, Asia based regional sector ETFs have the best chance of succeeding in Asian bourses. It will be deep enough in size and attractive in terms of exposure for international investors.

ETFs For KLSE?

There are discussions underway, apparently, as to whether to launch ETFs on KLSE. Now, is that a good move? ETFs has taken off in a very big way on Nasdaq. ETFs or Exchange Traded Funds are basically a basket of stocks. Say I were to start a Palm Oil ETF and cap it at RM500m, basically I would select stocks from a number of palm oil companies, say IOI Corp, KL Kepong, Guthrie, PPB Oil Palm and Kulim. The way each fund is structured would be up to the issuer. I could prorate according to market cap or just by equal percentage of funds or something in between. I would not use market cap as the ETF would then be an IOI Corp tracker. But if I were to use 30% IOI Corp and the rest divided among the other 4 it might make more sense. Then basically I would issue 500m shares at RM1 to sell or place out to funds and the public. Would such kind of funds find a market in KLSE?

ETFs work for Nasdaq cause there is sufficient market participation and demand for unique product for diversification. It also allow Nasdaq investors to buy stock or exposures into areas where it might be difficult to invest direct. Just to name some possible examples: Alternative Energy Power Europe ETF; South American Large Cap Banks ETF; etc... In USA the number of available stocks and sectors are enormous, and ETFs can aggregate them into nice parcels for direct exposure.

ETF can be used only if it enhances investing in Malaysia. One of the big worry among international funds about investing in Malaysia is size. ETFs can get around that. Say Palm Oil ETF, just make it a decent size, say RM2bn. But with such a size, you would have to include a lot of companies, maybe even palm oil related companies listed in Singapore and Indonesia. The impact is there would be a shrinking of free float in those companies, but you get a highly regarded, liquid representation which funds can move in and out. Malaysia cannot do many ETFs with those guidelines, maybe an Oil & Gas ETF but not much more. If its a small ETF (anything less than RM250m), it will not be attractive for funds and I doubt very much whether the public would be interested. If there is scant intrest, the share price would trade below NAV, which would further dim interest in the instrument, and would die a natural death very quickly.

The available sectors ready made for ETFs in Malaysia are not sufficient to contemplate the idea. It would make sense for Nasdaq to keep listing these type of unique ETFs on Nasdaq where the interest and depth of markets are better. If more such ETFs are available in USA or London, it would help those who would not have direct investments into KLSE to buy Malaysian type companies and/or exposure at the appropriate time. ETFs in the end are just tracker stocks. If London and Nasdaq were to issue ETFs on Palm Oil with a cap of US$300-500m, a lot of free float would be soaked up from the Malaysian stocks, and you don't really need permission from KLSE to do that.

In conclusion, ETFs on KLSE will fail miserably. Do not get caught doing it just because it was successful elsewhere. Its size. You can get the big enough ETFs without negative repercussions, then go do it. If its small ETFs (RM100-200m), then forget it.

If Yus-baby is thinking of ETFs with a regional theme, say Asian Airlines ETF or Asian Power ETF, and is confident of issuing RM1bn size funds, then its worth considering, and do it fast cause SGX will be a better place to do these things but have been dragging their feet. SGX issued an ETF on their index and another on bonds and did not get much activity, size is a concern. Live and learn.

Transmile, Nasioncom: Good Or Bad For KLSE

One word, good. Two words, pretty good. I am not talking about the transgressions here. I am talking of the effects and perceptions. Institutional funds know that corporate shennanigans are ever-present when you have listed firms, stock markets and lotsa cash. Hence corporate shocks such as these two should never be regarded as shocks but as natural rotten apples in a barrel. You will have one or two bad ones in a barrel, we cannot be so naive as to think we can keep it totally clean. Corporate scandals are part and parcel of ALL markets. The effects and perceptions by investors are much more important.

If this was played out a few years ago, especially in the 90s, I can bet you that these events would have died a natural death after a while. Chances are nobody will be prosecuted. The swiftness in action by SC on Nasioncom is highly commendable, and a marked improvement in the rising professionalism in our regulatory bodies. The long drawn out affairs with Soh Chee Wen and Repco Lau, which resulted in xxxx-all are symptomatic of how corporate shennanigans are treated way back then.

The handling of Transmile could have been better by the SC and the Bursa, but still not too bad. The allowed trading period for Transmile during days when there is no concrete information was not good at all. Billions were wagered, won and lost based on hearsay, rumours and pure speculation. However, if the big guys were to stop trading for a very long time, some might question the validity of a long suspension - investors need to move in and out. Its a difficult balance but I'd rather the Bursa and SC suspend the stock, even for 2 or 3 weeks pending the results of the new audit, that would have been better, because we are talking about a material matter.

Despite all that, the transparency and openess, and SC being on top of matters over Transmile, constant urgings and finally the leadership to force the issue for the company to come out with even preliminary findings - was on balance good. Foreign investors would see these developments as a sign of better market regulation, better openess and transparency.