Let's Take A Walk With The New "Apek" On The Block

I will go through the entire exercise of reading the prospectus and noting the important points of this China-company listing on Bursa, K-Star Sports. This way, we all can discuss on how we should be evaluating the whole thing.

Yes, you guessed it correctly, its another shoe maker. Why is it that shoe making industry is the only industry being keen to list on Bursa? That's another question for another time.

K-Star will offer 15.32 million new shares at an issue price of RM2.15 per share with 3.4 million shares allocated for the Malaysian public and the rest of 11.92m for selected investors. OK, the size of the offering is not too big at all. The thing to watch out for is the placement to selected investors - if its a huge allocation to selected investors compared to the public, then maybe the promoters and lead underwriters are NOT THAT CONFIDENT on the issue at all. A large sized placement to selected investors may be negative as well, remember MultiSports and Mr. Quek.

Some may think that its a good thing that its all new shares issued. I think if its an ACE company, then that is OK, but for an established company churning decent profits, that is myopic and naive. You should have some sort of moratorium but you should also be upfront with shares that owners might want to sell. I would rather that they sell 20% of their shares to the public and 5% to selected investors - and then the rest of the shares be placed on a moratorium for 6 months, and only sell another 10% from 7-24 months. That way, they can go and concentrate on running the business but with some sort of buffer on being listed. You cannot and should not deny entrepreneurs from some cashing out after having growing the company to a listing.

The IPO exercise is expected to raise RM32.94mil out of which RM9mil will be used for raising the company's production capacity, RM5mil for sales and marketing network expansion, RM4.5mil to enhance product design and development capabilities, RM3mil on branding and advertising efforts and the rest for working capital and listing expenses.

The company, scheduled for listing this May 31, recorded a revenue of RM294.4mil and a pre-tax profit of RM45.54mil last year (StarBiz made an error in taking the RMB figures for RM). Here is the key, it makes RM45.54m a year, and yet it is only raising RM32.94m??? There is absolutely no need to get listed, is there? Generally, a company should be making much less than what it is trying to raise - that way, it is to channel additional capital to fund growth. When you already make more than what you are trying to raise, you MUST HAVE OTHER BIGGER OBJECTIVES on your agenda.

Hence, the bullshit about increasing capacity, marketing network expansion, enhancing product design, branding and working capital are all plain bullshit (and it smells too).

I am not saying you cannot list when the amount you are raising is a lot less than your annual profit but you got to be more upfront-la, not so many idiots running around. I would be a lot happier if the company says that its also to allow for some early investors to cash out - there is nothing wrong with that at all, but don't try to pull a fast one. We all need entry and exit strategies, and its an accepted process for capital to invest and divest, so that the process can be repeated, its the whole mantra of investing and capitalism.ol

K-Star has been in the apparel industry for twenty years and its product range include athletic footwear and leisure wear. They are also the original design manufacturer (ODM) and original equipment manufacturer (OEM) for international brands including Umbro, Diadora, Kappa, Le Coq Sportif, Die Wilden Kerle, Canguro Cosby and Bridgestones, as well as PRC footwear brand, Double Star. This is good stuff, proven deliverables across a wide section of reputable clients. It has four production lines and produces four million pairs of shoes in-house annually.

Back to valuations, RM45.54m based on 89m shares is a net EPS of 51 sen. At IPO price of RM2.15 thats a remarkably cheap PER of 4.2x. However, we should do a comparison: Xinquan, for year ending June 2010 should be making 35.7 sen, at RM1.17 it is trading at 3.27x PER. Why do you want to list on Bursa when you get PER valuations between 2x-5x???

Look at the 2010 PER valuations for similar China sports apparel companies: Anta in HKSE 17x; Dongxiang in HKSE 15x; Li Ning in HKSE 19x; Hongxing in Singapore at 8x. The key difference besides the different exchanges is the size of the companies. Anta, Dongxiang and Li Ning all have a market cap of above $3bn. Even Hongxing in Singapore has a credible market cap of $338m. Xinquan's market cap is just $103m. As for K-Sports, its market cap on listing 89m x 2.15 =RM191.4m / 3.2 = $60m.

Realistically, I think Xinquan is more interesting because if you ascribe an 8x PER (like in Singapore) for Xinquan, its market cap would be close to Hongxing. But even at 3.2x PER Xinquan only paid out 5.3 sen in dividend, presenting a yield of just 4.7%. If you are really generating so much cash flow and you are concerned on your share price, then maintain a strong dividend policy. Xinquan should make RM109m for year ending June 2010 and is only likely to pay out 5.3 sen gross dividend. They have 307.3m shares but they are paying only RM16.3m in dividends. Do this, declare that you will pay 50% of net profits as annual dividends. RM109m x 0.5 = RM54.5m = 17.7 sen. At RM1.17, thats a gross dividend yield of 15%. Once you declare a firm dividend policy, watch your share fly. I am sure using 50% of net profits is more than sufficient to grow the business.

K-Star directors said in the prospectus that they intend to pay 10%-20% of profits in dividend. At RM45.54, assume 20% = RM9.1m / 89m = 10.2 sen. At RM2.15 thats a yield of 4.7%. So tell me what K-Star is doing that is any different from Xinquan??? The controlling shareholder will retain 58.4% of shares upon listing, the key again is who holds the rest?

One hint, the conversion of a S$6.105m loan into 13.32m K-Star shares. This amount may be fluid and could be early sellers, maybe.

Sales to two major customers, namely Xiamen-Waitu Import Export and Qingdao Double Star Celebrity Industrial accounts for 40% of sales. I need not tell you that that is a significant risk, but still acceptable. Other financial metrics such as inventory turnover period of 13 days and receivables turnover period of 80 days are quite positive.



Overall, its valuations are attractive but will suffer the same fate as the rest. Initially you probably have to clear 15.32m + 13.32m shares = 28.64m shares. After that, maybe the share price can find some traction.

I would strongly advise that these companies come out and declare 50% profits payout as dividends; and Bursa put in my recommended moratorium on the owners and promoters. Only then will confidence be back in these shares, and you need confidence to be back if we are to be a viable alternative. You can have hundreds of meetings and brain storming sessions - these will be your best weapons.

Let's be honest here, even if we do all the right things, these shares will probably get between 7x-10x PER valuation max because:
- they will always be benchmarked to those listed in Singapore and HK
- the discounts for smaller China companies listed overseas are justified judging from the "shenanigans" concocted by some of the red chips in Singapore
- they list in Malaysia usually because someone had the bright idea of either cleaning up the books and/or inject fresh capital to dress up the company and/or hammering together a few smaller companies to make it listable and/or ... you get the drift ... when that's the case, usually the ideas man would want to cash out quick

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

New York Roadshow By JP Morgan

J.P. Morgan's Malaysia Corporate Access Days

November 5-6 (Thu-Fri)

Grand Hyatt New York, 109 East 42nd Street at Grand Central Terminal, New York

• Roundtable discussions, presentations and Q&A sessions with Malaysian government officials and regulators
• 1x1 meetings with participating Malaysian corporates

Senator Tan Sri Amirsham Abdul Aziz, Chairman - National Economic Advisory Council
Dato' Ooi Sang Kuang, Deputy Governor, Bank Negara Malaysia
Dato' Yusli Mohamed Yusoff, CEO, Bursa Malaysia

Participating Corporates

Air Asia (AIRA MK) - Dato Kamarudin Meranun, Group Deputy CEO

Axiata Group (AXIATA MK) - 1. Dato' Sri Jamaludin Ibrahim, President & Chief Executive Officer / 2. Dato’ Yusof Annuar Yaacob, Group Chief Financial Officer

Bursa Malaysia (BURSA MK) - Puan Nadzirah Abd Rashid, CFO

IJM Corporation (IJM MK) - Datuk Krishnan Tan Boon Seng, Chief Executive Officer & Managing Director

Public Bank (PBK MK) - Mr. Leong Kwok Nyem, Chief Operating Officer

Sime Darby (SIME MK) - 1. Azhar bin Abdul Hamid, EVP, Plantation / 2. Mohamad Hishammudin bin Hamdan, Group Head, Strategy & GBD / 3. Shariman Alwani bin Mohamed Nordin, Gp Head, Value Mgt & IR

S P Setia (SPSB MK) - 1. Ms. Wong Sheue Yann, Head, Corporate Services - Group Corporate Services / 2. Mr. Cheong Heng Leong - Manager, Investor Relations - Group Corporate & Finance Division

YTL Corp Berhad (YTL MK) - Tan Sri Dato' Dr Francis Yeoh, Group Managing Director

p/s photo: Chrissie Chau

Chewing The Fat About Cowboys & Indians

I have a few friends who work at senior positions at Bursa and Securities Commission, not trying to do name dropping, just the facts. We always end up up with heated debates on issues surrounding the markets. The latest was a friend's concerns over the cowboy-ness of our markets.

A cowboy market can be termed as a market that is full of syndicates and massive rampings and "lootings" by unscrupulous players. My friend was concerned about that and wanted to look for ways to rein them in with their own lassos. I basically told my friend that you need some "cowboy-ness" in every market. When I forced my friend to come out with cowboy names, names such as SAAG, Huaan, Mulpha, Mobif, Compugates... were mentioned. The theory goes that these counters would have less than 100,000 shares traded normally and can be considered to be dead ducks for most of the year. Suddenly out of the blue, these counters can register daily volumes in excess of 10 million a day! Surely they were rigged!!!

What are syndicates but the collusion among a few players. If the intention is to control the counter, ramp it up and dump, then its sinister and illegal, and should be prosecuted. When they do not really have control, i.e. a relatively large free float, like KNM, you cannot say these counters are controlled even though there may be syndicates behind these counters. Many syndicates do have the controlling shareholders behind them - if you think syndicates do not exist, please go fly a wau bulan.

I am not asking the Bursa or SC to ignore some of the more unscrupulous activity. I am basically voicing out that you need some element of cowboy-ness in every market. If the counter has sufficient liquidity and a good free float, and it appears to be high on volume list, its best to let things be. If the counter appears to be controlled - e.g. more than 50%-70% being tied up and the rampings seems rampant, then by all means query the company. The trouble is 99.9999% of all companies queried will answer that they are not aware of any news, developments or business activities that would have led to such irrational activity in their share's volume and price.

The SC and Bursa SHOULD look closely when certain groups of players buy and sell the same shares among themselves, and when that level is more than say 50% of total volume traded in a day. The SC and Bursa should have the ability to look at trades breakdowns to get at those information. But that alone is not a sufficient "bad factor".

Buying and selling can also be pure day trading, which cannot and should not be faulted. Heck, even EPF buys and sell the same shares in the same day.

The SC and Bursa are there to maintain some sort of integrity in the market and to make sure the public are not duped. It is better to have "share gains threshold" before launching a thorough investigation into the manipulation or syndicate activities. I would propose that:

a) put a company on your red alert list if a stock gains more than 50% in value over a 4 week period

b) an investigation should be launched if the said gains is also accompanied by: massive "private placements" activity; and/or certain individuals or groups recording same buys/sells activity that accounts for more than 50% of daily volume

Other than that, it is better to let cowboys be cowboys, you need that element to bring back the crowds. Its a necessary part of a healthy functioning market. Btw, I also told my friends that there are now way tooo... many lawyers working at Bursa and the SC, trying to monitor and run the local markets. Its not healthy, its too legalistic... and most importantly, most lacked market savvy-ness and an appreciation of market nuances, which are paramount in order to govern effectively and successfully. In the end, you will end up with just one of the two, effective but not successful, or successful but not effective.




p/s photos: Kanjiya Shihori

Short Selling In KLSE

Wise, Farsighted Or A Mistake

The government introduced several measures to enhance the local bourse including allowing large Malaysian companies with foreign operations and foreign owned companies with foreign assets of at least RM1 billion in market capitalisation to seek listing on Bursa Malaysia, enabling dual listings and reintroducing short selling. The government said the measures were aimed at bolstering the stock market to be a world class capital market. Other than that, to realign the regulatory framework, the securities and futures laws are to be reconsolidated into a single omnibus legislation.The consolidation of these two laws would enable the introduction of a single licensing framework for market participants.

Besides that, regulated short selling (RSS) and securities borrowing and lending (SBL) will be reintroduced, the government said. To attract global talent, the processing of visas and work permits for foreign individuals in all aspects of the financial services sector would be centralised at the respective regulators, namely, Bank Negara Malaysia and the Securities Commission.

RSS is a big decision and will be applauded and criticised by many. The naysayers will be highlighting that the market may not be deep enough. Participants may not be sophisticated enough. When authorities are claiming that GLCs are cheap, why would they go and derail that - as when shorting, most foreign institutions will be aiming for GLCs anyway. The timing is bad as we are trying to entice more buying not selling activity. Will result in more manipulation.

I am very much for RSS. My reasons:

1) Better valuation - You cannot keep a market artificial. By having RSS, you have a market that rewards and punishes good fundamentals and bad valuation. Valuation will be clearer and more transparent.
2) More activity - Right now, you can only participate in the market provided you have ONE view, you must be bullish. In general, markets will only have two to three mini bullish phases a year. In total, you would be happy to get 3 months of bullish activity - you can kiss goodbye the other 9 months. Remisers and dealers would now be more open to having two views instead of just one.
3) Restrict over-manipulation - Syndicates will have to do more legwork when ramping stocks. Last couple of weeks could have been a great opportunity to short sell the poultry stocks, or even some questionable highly traded Mesdaq stocks.
4) Investors can hedge and have more strategies - Now even the individual investor can act like a hedge fund. Say, I like property stocks ahead of the 9MP, but think that the activity is overdone in poultry. Go long on one side and borrow to short the other. This gives more choices and strategies, and can reduce risk. Of course if you are an idiot and go the other way, you would double your losses - but there are more choices now... or is it more ways to hang yourself?! But if you are a poor investor, you will eventually lose all your money anyway with or without RSS - RSS will be good for the good investor.
5) Investors' intelligence - This will propel the public to learn more and study more about stocks in general. You have to form real opinions and not just rely on hearsay. As it is more exciting, investors will indulge more. Just as in horse racing, if you only have WIN bets, its dull. But if you have QUINELLAS (forecasting the first 2 horses) or TRIFECTAS (forecasting the first 3 horse in the same order), you get more activity. The cynics who say that RSS is just for institutions because the man on the street would not be savvy enough is wrong. Yes, they may have to learn, but they will. If we stop introducing new things to the market for fear of ignorance - then nothing new will be added, its a myopic view. Then, warrants or futures would never be introduced in the first place. We just have to make sure there is sufficient information out there - know what free float is, what open shorts' balance (open interest) is, know what is squeezing the shorts, understand that you need to incur interest and related cost to borrow stocks to short, know what breakeven is in a trade, etc...
6) GLCs - It will put the GLCs on the backfoot. As Khazanah is still in the initial stages of reviving the GLCs, having RSS will delay any plans Khazanah might have to sell down their stakes. Only until GLCs are performing well will Khazanah have the luxury option to sell down some stakes. Increasing the free float at a time when a company is still struggling is an invitation to shoot oneself in the foot. (As argued before in my previous blogs, I am a big believer in Khazanah selling down their stakes to improve liquidity).
7) Bad timing? - Well, there can never be an excellent time, can it? Just do it already. Just make sure the lending procedures and interest charges are competitive and attractive for both side. For stock owners, they could make some money by depositing shares to lend.
8) Hedge funds - If all parties work well, we could see more hedge funds being very active in the KLSE. In fact, this move will put a lot of pressure on the neighbouring bourses to do likewise.

For those who think that share prices should be encouraged to go up, not down - that is a naive and shallow opinion. Stocks do not just serve to make you money. You participate in the growth potential of each stock. Stock markets DO NOT OWE US A LIVING. When you get it wrong, you get it wrong. Already without RSS, investors still lose so much money, why not give this a chance. Prices go up and down, now at least you can profit when you bet it on the way down correctly.

Problems With Bursa Malaysia

The Bursa people did a press conference yesterday, trying to address the poor investor interest in Malaysian stocks. The following are factoids regarding Bursa's strategy, their understanding of the real problems, and whether their priorities have been misplaced.

1) Yusli, the CEO, said that the Bursa expects to maintain its 2006 financial results around the same level as last year. In 2005 the Bursa reported a credible net profit of RM81.3 million on revenues of RM257.6 million, and declared a hefty dividend.
My Take - That's what you get when you give your CEO and senior executives large chunks of shares/options in Bursa shares. It will make them think that financial results and cash back in "my pocket" are the most important things in running an exchange. (Please read my blog on Bursa and what's wrong with their corporate strategy) - its high time to refocus priorities on other more pressing issues, its not just a net profit thing for the Bursa. A lot of remisers, dealers and brokers who depend on the Bursa DO NOT have Bursa shares to help cushion the fall, like some.

2) Yusli also trumpeted that local and foreign funds could return to Malaysian stocks, and to do that, one of the first thing will be showcasing 30 companies in a big joint conference hosted by the Bursa, CIMB and UBS on March 22 to 24. Yusli added that there will be GLCs and plantation firms. "We have some really good companies and we want to tell as many investors as possible".
My Take - Most institutional investors KNOW THE 30 companies a lot better than the CFOs/CEOs doing the presentation already!!! Not investing in Malaysian companies is not due to a lack of awareness or lack of intimate knowledge of the companies per se, good investors also know why they should not be investing after doing their own research. It is so naive to think that a few conferences like these will perk up buyers - my, I didn't know how good these companies were, I should buy now.... really Yusli...

3) Yusli did mention that after speaking to big foreign investors, they did mention that the Bursa needs to have more big, quality and liquid stocks.
My Take - Okay man, here are some real issues. BIG - how to be big, well similar GLC could merge; good GLCs and other listed firms with proper expertise could venture overseas to by up regional stakes (Malaysian market is too small to grow into anything decent if a company stays local).
QUALITY - That is being addressed by Khazanah on its GLCs, have to wait and see if the strategy pans out. As for other listed non-GLCs, quality is there but there is a big complacency around many of those companies. Many are happy to be Jaguh Kampung (backyard champs) and stay that way, they are happy making their RM30 -100 million. Companies to emulate: Tanjong, YTL Power, IJM, IOI Corp, etc...
As for LIQUIDITY, this is one thing the Bursa can do more effectively. Khazanah can take the lead, too many companies are holding about 45%-55% of their shares. There is no need to do that. Believe in sharing growth values. Have the confidence to operate with just 34% stake or thereabouts. More transparency, accountability will put more pressure on strategic decisions and management decisions, but that's the way forward. Studies in the past have shown that companies who have placed out shares from a high majority stake to just a controlling stake, actually saw their share price rise, and activity level also rose despite the greater free float. Greater free float means more big institutions can then consider buying them as there will be sufficient liquidity to move in and out. Khazanah should really take the lead, reduce stakes and place them out.

Part of the reason for the under-performance by Malaysian stocks last year was the tight control on the ringgit. Many funds were in agreement to load up on ringgit based assets last year in anticipation of a stronger ringgit or revaluation. That did not occur, and wasted a lot of investors' time. Malaysia is such a small market, you don't want to get disappointed by a small market. Its like a guy, if he got rejected by a supermodel, that's kinda ok, but to be rejected by a 4' 11" pork chop, that's another thing. Stop making the ringgit artificially weak, the authorities are only helping to make the plantation companies look better than what they really are.

Sometimes we are just like a piece of pork chop, in Cantonese, a very average looking girl. The corporate results are not outstanding, liquidity is a problem, not enough big companies. Companies that do well are actually helped by the ringgit, what if the ringgit is allowed to appreciate from here. Other bourses offer more upside. Malaysian stock prices while not expensive is not cheap either. Liquidity in the system is decent but countered by firming interest rates. Property prices have been stagnant.

Sometimes no one will want to date your daughter, and you will feel sad about it. Every dog has its day, nobody stays down forever. The KPIs to be announced by the GLCs should be looked at closely. Not so much what they reveal, but how and what Khazanah will be doing with performers and non-performers - that will be the crucial thing. Of the GLCs such as plantations, banks, conglomerates, utilities and services - the one sector that is "easier to navigate" and control is utilities - I suspect real improvements and changes will be more evident in utilities - hence TM and Tenaga should see more upside activity, if there happens to be any.

Bursa - Look Deeper To See The Warts

As reported in The Star Biz today (16/2/06): Bursa Malaysia Bhd reported a net profit of RM81.3mil for the year ended Dec 31, 2005, surpassing the RM60.3mil it forecast at the time of its initial public offering (IPO) in February last year. The company announced a final gross dividend of 10 sen a share following an interim gross dividend of 10 sen that was paid earlier. These are apart from the capital distribution of 83 sen a share in December. Yusli Mohamed Yusoff Chief executive officer Yusli Mohamed Yusoff pointed out that Bursa produced a total shareholder return of 88% for investors who successfully subscribed to the shares at RM3 each last year. This outstanding total shareholder return is based on the dividends paid and payable for its 2005 financial year, cash distribution and appreciation in its share price that closed at RM4.68 yesterday. Yusli said improvements in the financial results were achieved in spite of the “challenging market conditions” last year. One aspect of these conditions was a significant withdrawal of retail investors from trading or investing in stocks. Yusli said retail participation in the market formed only 29% of trading value – an eight-year low – compared with 71% by institutional investors last year. As a group, individuals accounted for only a third of total turnover versus about 50% in previous years. “We would like to draw retail investors back into the market,” he added. In doing so, Bursa will work closely with the brokerages. The research sponsored by Bursa for small listed companies, for instance, was working well. Chief operating officer Omar Merican said more products would be introduced for retail investors who formed a growth sector of customers. The country has a young population and each year, there are half a million new investors. “They should shift their savings into good investments,” he said. Yusli observed that as investors' sentiment improved, market velocity improved from 25% last year to 30% up to Feb 10. “We hope the current volume of trading can be sustained,” he said.

The financial results were good. However, an exchange's priority is more than just EPS or total return on assets. The board and management have to put into place startegies, product development, improve market monitoring & surveilence, championing the integrity of the markets and protecting minority interests. So, a proper report card will look at many facets of operations, and more so, the management's awareness of growth factors needed to elevate the Bursa to the next level. Here are some of the other important factors that should be addressed by the Bursa and how well they have been faring:

a) Number of IPOs - While that is a function of the underlying economy, it is nonetheless the role of Bursa to facilitate a steady stream of good IPOs to excite investors. It is a quandry, the Bursa should have a good pipeline of listings and at the same time do more have more checks and QCs to maintain the integrity of the exchange in terms of companies allowed to be listed (2005: C)

b) Funds Raised - One of the main functions of an exchange is to facilitate companies to raise funds. It could be in the form of an IPO, or promotion of new instruments such as REITs. Bursa should also have closer dialogue and working relationship to speed up approvals/rejections on applications for issuance of new shares/rights or other forms of fund raising. A speedy turnaround allows for a more effective exchange (2005: B)

c) Companies Regulation & Governance - An exchange in concert with the Securities Commission should be keeping regulatory standards of Malaysia on par with market's best practices. So far so good, albeit a tad excessive. Quarterly reporting already places too swift a turnaround doing just numbers collating with little value add. Over-regulation imposes a higher running cost for certain departments, and at the same time over-burdens the board and management with mundane issues when they could be focusing on more important ones. Ask any board and management if they think the current system should be lightened - probably 99% would want things to be lighter by 20%-30% (2005: B)

d) New Instruments - An exchange should not just introduce new instruments every so often unless it is thought to provide the market with more breadth, and the market participants have the ability to trade the instruments as informed investors. The introduction of REITs is a welcomed move as it will allow for investors to park their funds at annuity-like assets, a good alternative to fixed deposits, and at the same time allow property owners to cash out a portion of their holdings to be parlayed into other projects (thus boosting the underlying economy). However, the exchange have been slow to introduce structured warrants or covered warrants, and the brokers have been very slow in moving to promote these instruments. Covered warrants have been a big hit in HK and Singapore, no reason why it would not be successful in Malaysia - needs more promotion and leadership from the Bursa. Another product that suffered a similar fate is equity linked (EL) instruments, which is a lot better than straight out short selling as EL instruments allows for yields to be captured with an equity linked bet, which could be a put or a call or both. Again, leadership is lacking from the Bursa. Of course, not all products is right for the Malaysian market, e.g. I personally do not think the market has the depth for stock specific put and call options (2005: C)

e) e-Integration - Assimilation into the new world of internet. Neither here nor there, it looks as if the Bursa will see how the internet impacts on them rather than see how they can leverage on the advantages of the internet to better position the exchange. Internet based brokers are left to live and die on their own, again, a more deliberate form of leadership is needed in this area. Is internet broking the future for broking or isn't? Then, play the cards accordingly, Bursa (2005: D)

f) Market Regulation - This is regulation with respect to intervention by the Bursa on market based activity. Whatever the Bursa did or didn't do, they will be cursed. When they don't intervene, they are accussed of allowing excessive speculation and ordinary investors to be scalped. When they do intervene, they are accussed of interfering with free market foces, buyers beware adage is often quoted to support this backlash against the Bursa. My opinion is that, rules and parameters must be made clear on the outset - we already have limit ups and limit downs per session - these are in place to cool sentiment one way or another. If a stock goes limit up for two or three sessions over a two or three day period, the Bursa will usually step in by demanding that buyers pay with cash for the stock - this is a good and effective enforcement and regulation tool, and the Bursa should be more aggressive with this on stocks that have been overly exuberent (not backed by fundamentals). The recent warning given by the Bursa on TH Hin on its overactive behaviour should be a percursor to implementing the ruling on cash buying only. Things like Fountain View can be very difficult to stop, like who is to say Farm's Best is not another Fountain View?? But we have not seen any additional market warnings on stocks such as Farm's Best, Nasioncom or Iris, just check out their gains for the past 1 month!!! The Bursa needs to be more consistent - an internal rule or guideline must exist, such as if any stock is up by more than 70%-100% over a one month period (of which all the mentioned stocks would come under that qualification) would have a public warning to investors (like the one issued on TH Hin). Continuance upward movement after the warning would be followed by the cash buying only ruling (if the stock is being bought by genuine buyers on fundamentals, then paying cash should not be a problem, plus it will eliminate all those who buy on gearing so that they will not be caught badly in any correction) (2005: C)

g) The 3 Boards & Relevance - The existence of rules pertaining to the attractiveness of the Main Board, Second Board and Mesdaq must be reviewed annually. Are the paid up rules too low for Main and Second Board? Are Mesdaq listings too easy? The Second Board in particular are in dire straits and nothing much has been done to it. The market activity in Second Board stocks for the past 2 years have been pathetic, many companies which should have been delisted are still hanging around in Second Board. The rate of delisting must be speeded up to clean up the respective boards. I am not too worried about Mesdaq rules being too easy, yes, companies will fail, and fail at quite a high rate in Mesdaq, but that's the beauty and purpose of Mesdaq, these are growth potentials. We will see more companies failing in Mesdaq over the next 2 years but the Bursa should be firm to maintain the essence and integrity of having Mesdaq, to tweak the rules to a more difficult level would erode a lot of the important characteristics of a growth companies' board. As for the paid up of Second Board (RM40 million), that should stay, no point lifting it as most of the problems Second Board companies faced stem from "self-speculation & indulgence" during the heady days of 1995-1996, and has very little to do with the RM40 million paid up thing. Main Board's minimum paid up should be increased to RM100 million or RM150 million to distance itself from the other two boards (2005: C-)

h) Working With Intermediaries - Bursa should do a lot more in working with intermediaries as they would be able to add a lot of value and speed up the supply-chain to benefit the Bursa and investors. Working closer with MDC, venture capital firms, merchant bankers, trustee & custodian companies, private bankers, MITI, brokers, minority interest groups, accounting bodies, internet financial portals, other exchanges in the region and globally, research/institute of higher learning, etc... will ensure more effective turnaround of ideas and implementation of value-added practices into the market place (2005: C)

i) The Singapore Equation - ask any broker in town, who among them wants to do inter-broke business (trades passed from overseas brokers to local brokers) as the margins are almost non-existent. I believe both exchanges have been talking but let's get a move on it as it has been dragging on for way too long. Allow brokers for both countries to buy and sell shares on each other's exchanges. Immediately, you will find both broking firms on both sides getting a lot more business, doubling the number of companies one can buy/sell/market. Both exchanges will get enormous gains from the additional fees from additional trades. It will add so much more depth and market participants. The Singapore brokers would gain more than the Malaysian brokers as more Singaporeans would want to buy Malaysian stocks than vice-versa, but that is a narrow minded view to take. The benefits has multiplier effects for everyone involved. Let's integrate the trading systems of both countries already! (2005:C-)

Conclusion - So, we need to have the Bursa to look at other areas as cited above as it is not sufficient to report good financial results when the overall market is lacklustre - that only means that the Bursa got good profit margins on overcharging on various fees, but the market participants are not reporting similar good financials, why? The Bursa should plough back a certain portion of fees charged to improve the state of the markets (as cited above) that it manages. You gotta take care of the angsa that gives you the telurs, don't just gloat about how nice the telurs "you made".

KLSE'S Low Market "Velocity"

A fellow professional and a close friend asked me today about KLSE's low market velocity. I was stumped at first because I did not know that a stock market has velocity. Velocity of money, I have heard of, but in a stock market?? Maybe its the time difference and distance when the client bangs his head against the wall after buying shares?!!

As an after thought, I think I understood his usage of the term. Its the low volume turnover on a daily basis relative to the market capitalisation. OK, granted that the fundamentals for 2005 have not been overly exciting but there are other Asian bourses which can register decent daily volume relative to their overall market capitalisation even in dull periods. Why not the KLSE??

My take:

a) Developed countries favour mutual funds investing rather than personal investing. For example, US investors are generally averse to invest in stocks themselves. Mutual funds are a preferred choice for most. As institutional funds control the market, it will have good volume. Many banks and brokers own funds management unit, and it is good for business that things "move". Malaysia's fund management industry and size is still in its infancy.

b) In more established Asian bourses, like HK and Singapore, their spread of private investors is probably similar to Malaysia. However, private investors in HK and Singapore are more likely to follow research reports and corporate news before buying or selling (especially in Singapore). Of course, there are also private investors in Singapore & HK who will jump in on hearsay and speculate on rumours, but the situation is more aggravated in Malaysia. Followers of market fundamentals will find more reason to do bottom fishing even during flat or sluggish markets. Those who don't, will tend to wait till the next bull rally comes along. The KLSE was flattish the whole of last year, can you blame the private investors for taking the year off!

c) Private investors will only be in the market when activity is bustling and simmering or boiling even. When a market is flat and/or sluggish, you can bet that most private investors in Malaysia will be out. Even bottom fishers are in the minority in Malaysia because bargain hunters after buying the stock may have wait a terribly long time before any upsurge activity can be traced. The KLSE is too much geared towards a "bull market only" participants. Activity kind of slack off considerably without leads.

d) Part of the contributing problem is the inability to short stocks - then people will really read research reports to look for bad eggs!! If stocks don't move up, nobody can or should make money. A proper stock market should allow investors to reward and punish companies according to their performance. It is of little use to "protect" companies against short sellers, just like a parent blinded by love for his "under-developed child". Let the child grow up. If a company do not want to be targeted by short sellers, get your books in order, plan your strategies properly, get decent returns, rid the company of fat, etc...

e) Commission rates still too high. If you compare with HK, the overall commission and additional rates charged per transaction by the KLSE is still high. More activity will go hand in hand with good effective transaction costs.

f) Free float restricted. Particularly from good companies. Good companies on KLSE are a dime a dozen. There is no reason to hold onto 55% or more shares of your company even if it is doing well. A good owner must hold onto the mantra that investors must be rewarded for investing in my company. A good free float should be at least 35%-45% of total shares. The lack of shares will dissuade a lot of institutional investors from putting your stock on the radar. Right now, there are not many stocks on the radar of big fund managers, so is it any wonder then that activity in volume traded is lower when compared to regional markets. If owners of good companies places out more shares deliberately, just by doubling the number of companies on the radar of big funds will bump up volume activity substantially.

So, I guess the extending of T+3 to T+7 or T+10 is part of the Bursa's scheme to encourage market velocity. As explained in my blog before, T+10 or T+7 is good, but they are bull market instruments, i.e. will be only effective when a bull market is present. Still, a good move, but the Bursa should try and get at the root of the problem.

p/s I think there are currently only 20-25 Malaysian companies on the radar of big funds, and that is out of over 1,000 listed firms.

T+7.... Fears, Myths & Benefits

Some people were aghast at the Bursa for allowing broking firms to offer T+7 facility to their clients. Are we luring back the risks of the early/mid 90s? Here's my take:

T+7 is no big deal. In actual fact, Maybank Securities offered an even better T+10 back in, wait for it, August 2003. Mayban Securities introduced T+10 facility, a short-term financing facility, which provides longer contra period. Collateral requirement, margin calls and force-selling terms remained the same but the extra days for the transaction would be free from contra charges. Besides Mayban Securities, TA Securities Bhd and Botly Securities Sdn Bhd had also introduced a T+6 settlement facility.

Extending contra period will not add substantial risk to the market. Whether it is T+7 or T+10, the risk is mitigated as all brokers will have their clients come up with some form of collateral/deposit. Unlike the days back in early/mid 90s when you can actually buy RM100,000 worth of stocks from each of your 3 remisers with zero collateral on a job thay pays you RM3,000 a month. Go figure!!! Of course we were doomed to be bloated, filled with hot air, waiting for a prick to come along (pardon the pun)! This extension thing is just another form of financing, and believe you me, it is cheaper than the rates you pay for carrying on the credit amount on your credit card. So, in actual fact, we are not going back to those heady days. Even if a person were to go crazy, he would still have to come up with some form of collateral, probably 30%-50% of what his overall exposure is. There will be certain stocks that the brokers will declare as off-limits for financing every now and then if speculation gets too heady. The conservative brokers will also have price limits on certain stocks for financing. So many have learnt their lesson, its a good move, not a silly one.

A necessary bull market instrument. T+7 or T+10 are only good when their is a bullish sort of market. When it was flat like the last 12 months, nobody will use it much. You only want to gear up when there is a bull run. In a normal market, you'd be lucky to get two short bullish periods a year, usually lasting 3-6 weeks each time, so go figure.

Brokers leveraging earnings. Brokers offering this facility should appear on your BUY list whenever a bull run comes around as they will be able to leverage on the earnings platform.

Need To Quicken The PN4/PN17 Process Even More

As reported in The Star (10/11/05) a public listed company that is financially distressed and makes little effort to restructure within the new time frame set by Bursa Malaysia faces de-listing. If, in the past, Bursa has been lenient in extending time for companies to restructure, that would no longer be the case. A specific time frame, for instance eight months, will be given. If nothing is done in that time, the exchange would no longer be “generous’’ in allowing extensions.

In the past, the exchange had often been lambasted for being too slow and too lenient in its actions to penalise companies that did not conform with listing requirements, e.g. negative shareholders’ funds. Previously, companies that were financially distressed were categorised under Practice Note 4 and given a lot of time to regularise or restructure.
There were times when up to two years' grace period was granted by Bursa for companies to restructure while minority shareholders of those companies held on to their shares.

Since the 1997 Asian financial crisis, Bursa has de-listed only 27 firms but it was a long and winding process.

Under the "new" PN17, companies are give 8 months to be successful in regularising their financial situation during the time set, failing which they would be de-listed fairly quickly. Some companies that ceased to be PN4 are now in financial trouble again. If PN4 companies that are restructured get into trouble again, and if the situation is not rectified, they would then fall into the PN17 category. If still nothing is done, they would be de-listed.

When discussing the PN4/PN17 companies, we need to bear in mind the following:

a) companies are still allowed to trade even when they were on PN4, and if I remember correctly, there were "hot stocks" even within the PN4 circle, and some did attract substantial trading volume and price movements - i.e. it has been too long for companies that were classified in PN4, stayed there. If a company is in PN4, there must some urgency in restructuring its financial affairs and NOT allowed to be languishing for over 2 years - its like being held in lock-up but not locking the door at all

b) the lack of urgency (before) also helped create a false sense of security among investors. Just ask any share investor on the street and they would say that PN4,..."no difference la.." ... "can still make money if got action.."

c) USUALLY it is those companies with dubious financials that would engage "syndicates" to financially engineer their stocks (and vice versa) - a bit like.. well.. last chance to really make some money here. Specky stocks can attract big players, big syndicates and big traders because everyone thinks that there is no danger of financial calamity or that the authorities would even act on them, and even if they did the process will take such a long time anyway. If a syndicate knew that a "bad stock" could very well land itself in PN4 anytime, and that once in PN4 it would scare the bejeezus out of all investors (thus removing all volume) - I doubt very much that big syndicates would want to "play those stocks" as they could be left holding a huge chunk of a "suddenly-PN4ed" counter to the grave.

So, all in all, a bit over due but better late than never, and please stick to the proposed time frame - 8 months means 8 months, no ifs or buts... there have been just too many ifs and buts allowed in our country, just look at the application deadline for the new MYKAD, or the shifting goal posts for Universal Brokers...

Oh, btw good job Bursa...

Rebuttle To 'King Of Emerging Markets' On Liquidity

The KLCI traded sideways for the past few weeks. One after another, foreign research units have downgraded Malaysian equities in preference for other bourses (e.g. Merrill Lynch, UBS and CLSA). Mark Mobius is the closest thing "emerging markets" will get that resembles Donald Trump. The traveling emerging markets' hero could easily pass as a "baddie" in a James Bond movie. Yet, what he says is followed closely by the international media... cos ... there is no one who champions the emerging markets quite like Mobius. The savvy self-promoter does very well for himself and his company (Templeton Emerging Funds Inc) - the firm probably lets him have a high profile as that would bring in the business, no doubt.

The Edge did an interview with Mobius (Oct 17, 2005 issue) and he highlighted a few interesting factors to explain why foreign funds are shying away from Malaysian stocks.

MM: " lack of liquidity ... need to grow the market... need to privatise the pension funds.."

Dali: There is only so much Malaysian markets can grow. Do you know how small we are. Take any ONE of the Top 10 market cap stocks in the US, any ONE is bigger than the entire listed market cap of the 1,000 odd listed companies. We are small, our base is small. Any credible foreign fund would probably only look at the top 25 market capitalised stocks as they are sufficiently big enough and liquid enough to move in and out. You CANNOT just ask us to grow our markets. To even have 20-30 stocks that are big enough to satisfy international fund managers' requirements is a task in itself. So, don't just open your mouth and say we need to grow and need more stocks with liquidity WHEN you should know better than others that "big companies" are hard to come by or be nurtured on a base population of 24 million.

On privatising our pension funds, I think we need to protect more the retirement funds of Malaysians, rather than provide additional revenue for foreign fund managers (who may or may not improve on overall long term returns). I am sure Mobius would like us to privatise more of our pension funds...

Two Sides To LIQUIDITY
On the liquidity issue, well again that boils down to the size of a normal big company in Malaysia. It takes time to grow an international company. You do not expect the MISCs and Petronas or Maybanks to just give up more shares just to satisfy the foreign funds investing requirements??!! Having said that, Mobius do have a point here, Government linked corporations and other top 50 market cap firms need to consider allowing more shares in the hands of the public in order to provide sufficient liquidity. There is not much point in holding over 50% of shares to maintain control when 40% will do. In fact recent studies have indicated that large companies (especially government linked firms) have outperformed the market over an extended period AFTER they have reduced their shareholding (creating more free float in the markets). If big boys cannot get in and out easily, they won't be interested.

Liquidity is not so simple. Do we just want to boost liquidity so that more foreign funds can invest in certain stocks? If that's the case - pray tell, what is the rationale for doing that, what benefit can we gain from getting foreign funds to invest. Do they somehow result in higher valuations (possibly), but so too will the fall be greater (when they pull out)... We want foreign direct investments NOT share traders, FDIs will result in employment and long term committment to the local economy. There is no difference in having Templeton as a holder of Malaysian stocks than say EPF. Unless we are saying that there are INSUFFICIENT local funds buying/holding Malaysian shares - which I don't believe to be the case. EPF could easily lift the active investing level in local shares substantially without hurting the overall risk portfolio.

Sure, foreign fund managers will belittle and crticise the short comings of investing in the Malaysian markets. Some are constructive but some should be IGNORED especially when the main beneficiaries of their talk is foreign funds themselves. We need to appreciate things that are beneficial to Malaysia like FDIs, and capital/bond raising for Malaysian corporates and the government.