KLCI back on a high, what now?

J.P.Morgan

Malaysia Strategy

Back on a high, what now?

Malaysia appears to be a safe refuge for foreign investors for now given its strong domestic economy outlook (7.7% 2010E GDP growth JPM forecast) and relatively defensive characteristics, i.e., low volatility and weak correlation with major indices, during this bout of increased volatility in regional markets. In our view, short term uncertainties surrounding the US bank bill, Chinese growth, EU bank stress tests, and European sovereign funding have caused the KLCI to get squeezed upwards alongside other ASEAN markets, with the index now standing above 1350 (which is a 2010 as well as a 29-month high). We see evidence of foreign monies trickling in based on foreign incremental buying and ownership levels.

Looking for the positives. We recap the Malaysia-specific positive drivers we see over the coming months:-

1. 2Q10 reported results which are likely to remain relatively robust (current earnings growth of 23% in 2010 and 16% for 2011);
2. Unveiling of Part 2 of the New Economic Model document (expected in August) which will provide greater granularity on the structural reform policies needed to put Malaysia on a higher growth trajectory;
3. More evidence of greater Malaysia-Singapore cooperation especially in Iskandar, South Johor; 
4. More new IPOs to put Malaysia back on foreign investors’ radar screens 
5. Positive sound bites on the 2011 Budget (14 October) and proposed pump priming agenda as the possibility of a snap general election may emerge in 2011 (although the elections need to only be held by March 2013).

The key risks:

1. policy flip flops by the administration as reforms prove difficult to implement
2. relatively high valuations with market PE of 14.3x and a 15.5% premium to MSCI APxJ which to some extent reflects the optionality of structural reform already.

Thus, despite the apparent low expectations of reform, the question is whether the market can further rerate without being accompanied by strong upward earnings revisions.

Our current end 2010 KLCI target of 1,400 based on a 14x forward PE target stands unchanged. Tactically, we remain positioned in cyclical sectors with our top picks being AMMB, Public Bank, Tenaga, Genting and IJM.

New Fund: AmCommodities Equity Fund

AmMutual sees potential investing in one of the hottest asset classes nowadays - Commodities.

Fundamental characteristic investing in commodity:

1. Commodities outperformed other asset class
2. Low correlation with traditional asset class
3. Commodities are usually used as an inflation hedge
4. Evergreen theme = Increasing Demand vs Diminishing Supply

Category          : Feeder Fund (Global equity)
Offering period : 19 July - 8 August 2010
Min investment : Rm1,000
Min top-up       : Rm 500
Sales charge     : 5%

New Fund: OSK-UOB Asian Advantage Bond Fund

Given the improving corporate credit outlook, OSK believe that investment in corporate debts will offer more attractive yield pick up over government debts. Potential yields compression, lower supply of corporate bonds and ample liquidity in banking system will provide strong support to the bond market.

Summary:

1. Aims to provide potential returns above FD rates (target 5%-5.2% p.a gross return)
2. Aims to provide annual income distribution
3. Aims to preserve capital at maturity (3 years)

Fund Strategy:

The fund is to invest into Asian bonds that are able to offer attractive yield and/or capital appreciation. The manager will adopt a buy-and-hold strategy on the portfolio to lock-in the yield, but has the flexibility to actively manage the investments if required.

Fund features:
Offering period  : 19 July - 31 July 2010
Min Investment  : Rm 1,000
Fund Type         : Bond (close-ended)
Entry Charge     : 2%
Exit Charge       : 1% (if less than 3 years), Nill (if held until maturity)

* This is not a capital-protected fund.
* Disclaimer: This is not a recommendation to buy or sell
Source: OSK-UOB website

What to do when Government cutting subsidies?

What is your first reaction if you were told that prices of petrol, diesel, liquefied petroleum gas, and sugar is going to increase tomorrow?

As usual, many people rushed to nearby petrol stations and grocery store to up their stocks. Meanwhile, business owners is calculating whether they had to increase their prices and in what quantum. Situation which is familiar for you?

  

Instead, as an investor, I’m calculating how much to invest in those counters which I can benefit from these cost-saving measures by government. And, below is the list which in my opinion can help me to counter the painful experience of higher expenses going forward.

Negative:

Toll-operators, food and beverages, consumer sector, auto industry, steel sector

Positive:

IPPs, TNB, and MMC (sugar distributor)

In fact, this is the beginning only and electricity tariff hike is next, and GST will be introduced later in 2012. Let’s get prepare mentally and financially, friend.

World Cup: 7 investment tips

This is the Malaysia version of “Six Investment Tips Away From World Cup: Matthew Lynn”.

South Africa: Turning impossible to possible
 

Being the first in Africa to host the world’s most watched event, it seems impossible for this nation which lacks financial strength and developments. Thanks to Nelson Mandela, South Africa successfully hosted.
 

Tips: Genting shown us the impossible of turning a highlands to world’s acclaimed highest theme park dubbed “City of Entertainment” thanks to Lim Goh Tong.
 

Italy: History counts for nothing
The 2006 champion is the last to fly back in style; however, they are the first this time. A boring team with good track record, Italy was terrible and they deserve the first plane.
 

Tips: Sell Proton. Started off as the nation’s first car maker, Proton’s glorious days are over. Shrinking market share, stripped off the pole position and failed to transform makes it harder and harder to survive now.
 

France: Ego will get you nowhere
Actually, the French ego started since winning the 1998 world cup. The only different was the French team was even worse this time. Players are not respecting the coach Raymond Domenech, then the whole team being eliminated in the first round.
 

Tips: Buy AirAsia. MAS is the one carrying Malaysia’s flag around the world, before AirAsia come on board. Which airline makes us proud now? The answer is very clear-cut.
 

England: Globalization can go too far
I think English Premier League’s team such as MU may beat England team. EPL is too diversifying nowadays until you can’t recognize where the team actually belongs to. Example, Chelsea has far more foreign players than locals. One must not un-root from one’s culture and nations, if success is what you want.
 

Tips: Sell Sime Darby. Being a conglomerate is okay as long as the management team can manage. Otherwise, it was being too diversified. Latest cost-overrun issue is one of the alarm clocks for this huge company.
 

South and North Korea: Isolation doesn’t work
One is superb, another is blunder. Two nations with same culture displaying two kinds of games. North Korea isolated them from the world, hence, causing their own people suffering. In this fast developing world, liberalization is the way.
 

Tips: Buy Axiata. After 3 years of going regional, Axiata starting to reap benefits shown by improving earnings contributed by oversea operations. This is one of the success stories of being open to the rest of the world.
 

Germany: Transform yourself with style
Previously, German team is dull and not creative. However, the transformed German team outperforms Brazilian attacking football and the world love to watch German now.
 

Tips: Buy CIMB. By acquiring banks regionally, CIMB transform itself to region’s most reputable bank, covering Singapore, Hong Kong, Indonesia…

Spain: Keep believing and you’ll get there in the end
 

Finally, I leave it blank the message brought out by Spain, the 2010 champion, because I believe everyone of us can made history and fill-in the given space if self-qualified. Are you or your company?

2010 half-time review

US (Over-cooling)

Companies were holding more cash and other liquid assets, signaling they are still hesitant to spend the cash on hiring or expansion amid doubts about the Europe’s debt crisis. Thus, share buybacks is popular in US listed companies now. Analysts’ were continued surprised by the better than expected earnings posted by US S&P 500 companies. However, they view this is unsustainable for the long-run, judging on postpones of companies expansion plans for future growth. Consequently, continue high unemployment rates in US, and weak domestic consumption in the near term.

China (Over-heating)

Due to overheating concern, China had taken some measures to counter it until Yuan flexibility pledge to bring down import prices, as to inflation rate. Fundamental growth story was still intact, coupled with massive internal savings and foreign reserves. China’s cooling measures will stir up volatility in the near term, but it is a positive move to lowering the risk of overheating. Instead, China should be more concern about the well-fare of their low wages labors, whom starting to rear its ugly head towards businesses.

Commodities

Oil        : Move in tight range of between $70-80 per barrel.

Gold     : In the midst of bull-run? (See picture below)

Genting Malaysia: Related Party Transaction

Yesterday, Genting Malayisa (GENM) has proposed to acquire sister company Genting Singapore’s (GENS) UK casino operations. The entire stake would take RM1.67bn out of GENM RM5.7bn cash pile. Investors and analysts view this development negatively given the high acquisition cost which is not compensated by meaningful earnings accretion. The proposal being a related party transaction (RPT), this would require minority shareholder approval at an EGM.

 

This is NOT the first time…

In November 2008, GENM announced RM248m RPT on the acquisition of Walker Digital Gaming. Hence, the counter lost close to RM2.0bn in market capitalization in just 3 days.

RM248m         RPT = RM2.0bn loss

RM1.67bn       RPT = ???

Genting UK

Despite long established operating track record, it is facing many problems such as:

1. weak and volatile earnings performance
2. hike in gaming duties lately
3. ban on smoking in UK casinos
4. lack of scale to buffer “luck factor” in its VIP market
5. UK’s weak economic condition currently

Analysts view:

The transaction is positive for GENS as it could focus more on Singapore, better on balance sheet, and more room to explore other integrated resorts. Meanwhile, this is definitely negative news for GENM due to paying expensively in order to enter a risky market, with minimal synergy and less efficient use of cash pile. Target price was set at between 2.30 to 2.60.

My view:

GENM should utilized its huge cash pile better, although I know this is very difficult given its largest shareholder – Genting Group. Since pool betting duty has increased from 6% to 8%, would the government increase the casino betting duty next?

Sources: Various