Published October 13, 2009

Shares of Three-A gain on Wilmar placement

Kuok-controlled Wilmar to own nearly 17% of M'sia food supplies maker

By PAULINE NG
IN KUALA LUMPUR

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SHARES of raw food materials maker Three-A Resources rose 12 sen or 13 per cent to RM1.06 yesterday as investors continued to bet the company's fortunes would rise significantly with Wilmar International as a partner opening doors in China.

The increasingly well-known Malaysian company has become the envy of firms small and big following its announcement last week that Singapore's Kuok-controlled Wilmar plans to subscribe to its private placement of some 62 million shares for 75 sen a share or some RM42 million cash (S$17.2 million). Post placement, Wilmar would own nearly 17 per cent of the company which was listed in 2002 on the Mesdaq market and only promoted to the main board last year.

Its fortunes appear to have brightened with China looming big in the equation. Who better to ride on than Wilmar - a major distributor of rice, sugar and cooking oil in China - and its extensive network in China?

Although Three-A already has customers in China which are supplied from its factory in the Klang Valley where it makes liquid and powder caramel, glucose, vinegar, soya protein and maltodextrine - a gluten-free starch sweetener - for sauces and mixes, analysts expect Wilmar to also help with the establishment of new plants in China to expedite deliveries and enhance customer relations.

Three-A had said the proposed private placement and funds raised would enable both companies to 'collectively venture into any future overseas investments'.

Still in a bit of a shock, Three-A's deputy executive chairman and managing director Fang Chew Hann conceded in an interview with The Edge that even in his wildest dream he would not have imagined Wilmar, which raked in profits of S$1.5 billion in 2008, knocking on its doors. 'We've a chance to sail on this big ship ... But we're small, we'll sit in one corner,' its executive director Fong Chu King added.

The Fang (Fong) family currently controls some 44 per cent of the company but would end up with nearly 37 per cent after the share placement. Another big shareholder, Malaysia's Pilgrim Fund, would own 4.6 per cent post-placement.

Since its listing, Three-A's profits has about tripled from RM4.4 million in 2002 to RM12 million last year. The new shares are expected to result in a dilution of earnings, but the company anticipates the planned investment overseas would contribute positively to future earnings.

Given its issued share capital of 369.6 million shares post-placement, its market cap is less than RM400 million - still too small for analysts to track the company although that could change in the near future.

Published October 13, 2009

When in doubt, regulators should query?

By JAMIE LEE

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FEW would bat an eyelid to see two Singapore-listed companies queried for unusual movements in their share prices. But what may raise the eyebrows is that they were queried - not by their home regulator, Singapore Exchange (SGX), but by regulators in the foreign jurisdictions in which their securities are also traded.

And this raises interesting questions over the different approaches taken by SGX and its peers overseas.

Shares of Singapore Telecommunications (SingTel) in Australia lost 12 Australian cents, or 4.59 per cent, between Oct 5 and 7 this year, prompting the Australian Securities Exchange (ASX) to send a 'price query'.

Comparatively, shares of SingTel in Singapore shed 11 cents, or 3.47 per cent. SGX, however, did not query SingTel on the share movement.

One can argue that in this case, the share price movement was not significant enough to prompt a query and might have been an overreaction by ASX. The drop in SingTel shares in Australia was also more drastic on a percentage basis than in Singapore.

But here's a second case. At the end of September, Medtecs International Corporation - which is also listed in Taiwan - was asked by the regulators there to explain the reason behind the 364 per cent jump in the stock's average closing price over a six-month period.

The Financial Supervisory Commission of the Executive Yuan of Taiwan deemed these to be 'unusual fluctuations' of the stock and asked Medtecs to clarify after the company applied to convert ordinary shares into Taiwan Depository Receipts.

Shares of Medtecs here took a similar joy ride, surging 600 per cent since the start of the year. The jump in the share price of the surgical mask maker, however, was not queried by SGX.

So how can one view the different approaches of the regulators?

SGX can argue that it makes its own conclusions on whether to query companies. It does not need to mirror the actions of the other regulators and perhaps saw rational reasons for the share price movements.

Also, it could be said that the Taiwanese query on Medtecs was prompted by the company's application for share conversion, which could demand more scrutiny.

In Medtecs' case, there is nothing on record showing its response to the Taiwanese query. In an update last week, the company only said that the Taiwan regulator is no longer suspending its application to convert its shares there. Investors can only assume, like perhaps SGX did, that the positive increase in the sale of masks during the H1N1 scare was the sole factor which boosted the company's share price.

But SingTel's response to ASX shows that investors may benefit when companies are queried.

The telco told ASX that the stock movements may be linked to the fall in the share price of Bharti Airtel - its subsidiary in India - given the increased competition in the Indian mobile telecommunications market. Entirely plausible, since this has been the talking point for SingTel. And as obvious as the explanation may seem, it is still useful to investors because it is put on record by the firm instead of being left to second-guessing by the market, as would be in the case otherwise. Investors are free to decide if the threat faced by Bharti is as serious as the share movement suggests, or if it's something to be ignored.

But at least they are appropriately alerted. And they are also told there was no other reason driving the stock down.

What these two cases have done is create perceptions that SGX's peers are more proactive when it comes to queries, even if it might be an overreaction. Their position seems to be - when in doubt, query.

SGX, on the other hand, seems more prepared to rationalise on behalf of the companies. But that should really be left to the companies to do themselves.

Published October 13, 2009

China, India banks favoured to win new M'sia licences

Third commercial licence likely to be won through beauty contests of other hopefuls: observers

By S JAYASANKARAN
IN KUALA LUMPUR

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THE much anticipated move by Bank Negara to grant three new commercial bank licences may happen as soon as next year, say banking executives.

One is likely to go to an Indian consortium, another to one from China, and the third to the winner of a beauty contests of other hopefuls.

This measure is part of a slew of proposals to liberalise the financial sector that was announced by Prime Minister Najib Razak earlier this year.

The premier said then that Bank Negara would issue nine new banking and insurance licences by 2012 and that foreign equity thresholds would be raised immediately - from 49 per cent to 70 per - in investment banks, Islamic banks, insurance companies and takaful (Islamic insurance) operators.

Besides the three commercial bank licences, other licences that will be up for grabs include two new Islamic banking licences (minimum capital: US$1 billion); two commercial bank licences for foreign players with 'specialised expertise' and two takaful licences.

The liberalisation reflects Malaysia's intent to strengthen its services sector to become a key driver of growth and make its economy less dependent on export-oriented manufacturing.

It also marks Malaysia's adherence to its commitments to the World Trade Organization, first spelt out for financial services in Bank Negara's 2001 financial sector master-plan, which essentially promised the sector would be liberalised by 2011.

Since then, the central bank has said almost 90 per cent of what was spelt out then has been or is being implemented.

Opening up the financial sectors highlights Bank Negara's confidence that Malaysia's nine local banks can survive new competition, after they consolidated and restructured almost a decade ago.

The central bank has said the local banks are adequately capitalised and have a 70 per cent market share. There are another 13 locally incorporated foreign banks.

On new banking licence candidates, the Indian bank in question is likely to be a consortium of three banks - Bank of Baroda (40 per cent), Indian Overseas Bank (35 per cent) and Andhra Bank (25 per cent). They are said to want to set up an entity called India BIA Bank in Kuala Lumpur.

Chinese contenders could include Bank of China, which already has a representative office in Kuala Lumpur, and Industrial and Commercial Bank of China.

The third licence up for grabs could go to any party.

Britain's Barclays is also said to be interested in a Malaysian licence, but sources say it is not clear whether other European bank will apply.

They also said it is possible that Japanese and Australian banks could submit bids.

The minimum capital adequacy required by a new entrant would be close to US$500 million, and all the newcomers would be allowed at least five branches each.

Kuala Lumpur would also be flexible on the hiring of expatriate staff by the banks.

Published October 13, 2009

Sing$ falls as MAS offers cautious take on economy

Final demand in S'pore's key export markets yet to recover decisively

By OH BOON PING

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(SINGAPORE) Amid uncertain domestic and international economic conditions, the Monetary Authority of Singapore yesterday retained its neutral policy stance and left the width of its undisclosed Sing-dollar trading bands unchanged.

The news drove the local currency to a four-day low against the greenback, after it had chalked up significant gains in the past week.

Explaining its decision, MAS said it sees continuing weakness in the global environment and 'while there could be some upward pressure on consumer prices emanating from higher global oil and food prices, underlying domestic cost pressures will be contained'.

The news came despite Singapore's GDP rebounding 0.8 per cent in the third quarter based on the latest figures from the Ministry of Trade and Industry.

GDP jumped 14.9 per cent quarter on quarter, returning to growth after three quarters of annual contraction.

But MAS reckons this pace of expansion is not sustainable, saying that while prospects for external economies have improved, final demand in Singapore's key export markets, such as for IT products, is yet to recover decisively.

'Significant challenges remain in the transition to private sector-driven growth as governments prepare to exit their expansionary policies,' it said.

'Household spending, particularly in the US, continues to be constrained by the weak labour market, sluggish income growth, and lower housing wealth. Businesses also remain cautious in their investment decisions.

'Against this backdrop, the Singapore economy is likely to settle at a more gradual pace of expansion. GDP growth in 2010 is expected to be slower than in previous post-recession periods.'

Soon after the MAS statement was released, the Sing dollar sank to 1.3996 per US dollar - down more than 0.25 percent from Friday's close of 1.3954. The local unit had advanced more than 3 per cent since the start of the year.

MAS reckons prices will be supported by external factors, especially higher oil and food commodity prices, for the rest of 2009 and into 2010. But still, it predicts Singapore's CPI inflation is likely to be zero this year and one to 2 per cent next year.

Barclays economist Leong Wai Ho said there appears to be a clear focus on the medium-term inflation risk, and MAS seems to be closely watching the impact of weather patterns on food prices.

OCBC economist Enrico Tanuwidjaja said any policy tightening will probably come only next April, if 'global economic and inflationary conditions demand'.

Mr Leong believes that as inflation pressure continues to build up, the Sing dollar should drift towards the top edge of the trading band.

MAS has eased monetary policy twice since 2003 - in October 2008 and in April 2009 - to support Singapore's export-dependent economy after it fell into recession for the first time in six years.

Although not unexpected, yesterday's decision to keep policy unchanged came amid market talk of imminent rate hikes in Asia, after Australia raised its key interest rate by 25 per cent basis points last week.

Indonesia's central bank kept interest rates unchanged for a second month on Monday, while the US Federal Reserve left the rate for overnight loans between banks at a record low of between zero and 0.25 per cent on Sept 24.

Published October 12, 2009

Bahrain firm eyes KL bank stake

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(MANAMA) Bahrain's Unicorn Investment Bank is interested in buying Dubai Group's stake in Malaysia's Bank Islam and plans to issue sukuk in Saudi Arabia before the end of the year, its chief executive said yesterday.

Dubai Group, an investment vehicle owned by the ruler of Dubai, said on Oct 1 it is reviewing its options for the 40 per cent stake in Malaysia's second largest Islamic bank as it shifts its focus closer to home.

'We could be interested,' Majid al-Sayed Bader al-Refai said when asked whether the Islamic investment house was interested in the stake. He didn't elaborate whether Unicorn was in talks with the Dubai-based bank.

Unicorn already tried to acquire a stake in the bank in 2006. It said in 2008 it planned to spend around US$2 billion on acquiring banks, including in Asia. Mr Al-Refai said yesterday banking valuations had dropped considerably since then, likely lowering the amount Unicorn would spend on buys.

'We're in strong discussions with two to three institutions,' he said. 'We're interested in the Gulf and Malaysia', he said when asked where these institutions were located.

The emerging US$1 trillion Islamic finance industry has grown on a five-year long oil boom that ended last year and has yet to see its first wave of consolidation. It lacks lenders large enough to compete with the Islamic windows of global conventional banks in investment banking and debt arranging services.

'It is our intent to launch a sukuk in Saudi-Arabia during the fourth quarter,' Mr Al-Refai said. He declined to provide an amount. Mr Al-Refai had said in April Unicorn planned to launch a US$425 million sukuk during the second or third quarter. The Gulf Arab sukuk market is slowly recovering after being hit by the global liquidity freeze with Kuwait Projects Co's US$500 million sukuk issued last week being the first private sector issue to international investors from the region this year. - Reuters

Published October 12, 2009

MALAYSIA INSIGHT

Keeping foreign IPO taps flowing

Bursa's challenge is to ensure value creation to excite investors

By PAULINE NG
KL CORRESPONDENT

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THE Malaysian stock exchange last week saw fit to issue a statement defending the integrity of its listing process following a spate of news reports on the dismal performance of foreign initial public offerings on the local bourse.

The perception that foreign companies chose to list on the local exchange because they were unable to get listed elsewhere is 'inaccurate,' Bursa Malaysia said.

After courting foreign listings for a few years, it landed its first this year in Xingquan International Sports Holdings - a China IPO - subsequently followed by another Chinese company.

Unfortunately, the IPOs of both sports shoes makers are languishing. Xingquan issued its shares at RM2.10 per share, but they are now RM1.40 or a third lower. Multi Sports is in the same boat, some 37 per cent off its issue price of RM0.85.

With a number of China IPOs still in the pipeline, the local bourse is understandably concerned. 'In a downturn situation, the resilience of our market and fair market valuations have been key factors that attracted these Chinese companies to choose Malaysia as their capital raising platform.

'The government's pro-business stance, its enhanced ties and cordial relationship with China has also helped to provide confidence to these Chinese companies and profile Malaysian capital market in the international stage,' it stressed last week.

It would not be fair to take their slide as an indication of what lies ahead for future China listings, but their performance could give pause to those looking to follow in their footsteps.

These firms are usually smaller Chinese ones, far behind the listing queue in China's gradual liberalisation of its capital markets, which has prompted companies by the hundreds to tap public funds for expansion purposes.

The ones that get ushered to the top of the queue are the cream of the crop. Witness for example, Malaysia's red carpet rollout for Maxis's planned re-listing. The telco, which is selling a third of its existing shares to the public, is expected to raise at least RM11 billion (S$4.5 billion). In its share sale, Xingquan raised about RM200 million.

Bursa is right in that it is not fair to stereotype Chinese companies as lacking quality 'based on the perception of what happened in other parts of the region.'

Indeed, Xingquan and Multi Sports - two of the six listings so far this year - remain profitable. And to be fair, only one IPO - that of integrated crane specialist Handal Resources - is in the money, while the others remain depressed or flat. The IPO trend could also be true of other markets.

Which is why Maxis's return to the market has caused such a splash. A known quality and brandname, its IPO is expected to make investors money - or at the very least, subscribers know they are unlikely to lose money. Hence companies like Maxis are afforded higher valuations, better premiums.

Retail investors tend to be sceptical of China companies, probably because they are afraid of being burnt, said a fund executive who bought Xingquan shares because he believed in the 'China growth story' and the fact that it has its own brandname.

He also believed - irrationally he conceded - that because it was 'Malaysia's first foreign listing' its success would be ensured. He is still willing to consider China IPOs, but as with most, will set his criteria even higher.

Whether giving lower valuations to these firms - at least until they establish a sound track record - would make for more attractive IPOs is debatable.

But with foreign investors focused on only selective, liquid big caps - if they are looking at the Malaysian market at all - smaller cap firms will have to rely on local investors.

Borderless trading, however, has made this group even smaller. In the age of instant gratification, the younger set especially, are gravitating towards higher beta markets for what they perceive to be faster and more exciting returns.

Because it's a trend faced by all markets, the authorities have their work cut out. There are no easy answers, but one solution presumably is to ensure enough value creation in one's market so that it doesn't fall off the radar of investors and that they remain excited. Concerns that the local bourse could be sliding further down in the scale of relevance remain very real.

And if investors remain indifferent, never mind China IPOs - few companies will get the valuations they think they deserve.

Published October 12, 2009

No time to lose in arresting decline of warrants

By R SIVANITHY

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BY ANY standard, the performance of stocks over the past seven months has been spectacular, with the Straits Times Index (STI) having risen some 80 per cent in that time. And, in a rising and increasingly active market, it would be logical to expect leveraged plays like structured warrants to play a big part. Certainly, in the years following the 1999-2000 dotcom crash and the 2001/2002 recession when markets recovered strongly, turnover in warrants shot up exponentially - from $1.5 billion in 2004 to an all-time high of $28 billion in 2007.

This time around, however, although the market has once again been on a non-stop uptrend since March and investors are betting on a similar economic recovery taking grip, the warrants story is vastly different; volume is dwindling and if present trends continue the segment could find itself back at where it was in 2005 or 2006, with all the good work of the past 3-4 years wiped out.

According to figures provided by SG Securities last week, average daily third-quarter turnover in warrants was just $42 million, down 31 per cent from 2008's Q3 figure of $62 million. Average daily turnover in the underlying stock market in the meantime jumped 35 per cent to $1.73 billion.

Disappointing figures

The sequential comparison also isn't too encouraging. While the Q3 underlying market volume grew 2.7 per cent over Q2, warrants business plunged 28 per cent. For the first nine months of 2009, warrant turnover came to $9.2 billion - which, if we use a simple extrapolation, means the full-year figure would be in the region of $12 billion. That would be 43 per cent down from 2008 and in the region of 2006's $14 billion.

These are disappointing figures and speak of a once-promising segment that is now in decline. The loss of business has forced the exit of several issuers from the market, while other major players such as SG and Deutsche Bank have closed operations here and retreated to Hong Kong, leaving Macquarie the only big player with a local presence.

Since warrants play an important part in the financial landscape of any aspiring financial centre (in Asia, warrants are thriving in Hong Kong, Taiwan and South Korea), it's important that steps are taken to arrest this decline. In order to do so, it's essential to first understand why the business has been hit as badly as it has.

One reason is the emergence of seemingly more attractive alternatives such as Contracts for Differences (CFDs), an off-market leveraged product which resembles a futures contract that has reportedly enjoyed phenomenal growth this year. Similarly, anecdotal evidence is that although Hong Kong's warrants market hasn't suffered as badly as Singapore's, volume there has also dropped because of the introduction of a novel structured product known as 'callable bull-bear contracts' (CBBCs).

Problem is, while the appearance of CFDs here and CBBCs in Hong Kong could have played some part in cannibalising business from the warrants segment, neither instrument is directly comparable to warrants and both possess different features. Clearly, there must be deeper issues at work.

According to warrant experts, the main problem is increased risk aversion among retail brokers who, because their clients were badly hit when they traded warrants during the downturn last year, are now actively discouraging those clients from taking warrant positions any more. As one source said: 'You have to put up a margin to play CFDs, but you don't need any margin to play warrants. So if you're a broker looking to manage your client risk, you're better off recommending CFDs.'

This heightened risk aversion has also led many houses to deny Internet traders access to warrants; compare this to the situation in Hong Kong, where clients in China (a base that could run into the tens of millions) can trade Hong Kong warrants online. And the penny stock resurgence of the past 4-5 months meant that the relatively small number of risk-averse retail traders who ventured back into the market since March have preferred to punt these low-priced counters rather than equivalently priced warrants. We say 'relatively small number' because dealers and issuers have said that a significantly large part of daily volume over the past six months has come from house accounts, institutions and dealers trading among themselves, with retail players playing only a fringe role.

Contra trading

Finally, according to at least one senior warrants source, the contra trading system (which allows traders to offset their purchases and sales within three days without any initial outlay) presents a huge structural obstacle to the development of the segment. 'If retail traders can already enjoy leverage via the contra system, then what incentive is there for them to use warrants to gain leverage?' is the not unreasonable argument.

The good news is that the Singapore Exchange (SGX) is aware of these issues and is working hard with brokers and issuers to address them.

To be sure, it's a difficult task - how, for example, does one encourage remisiers to get their clients to take on more risk via warrants without asking those clients to pay an upfront margin? Or, for that matter, imagine the public outcry if contra trading were to be stopped. However, all concerned must press on and solutions must be quickly found.

The ultimate goal must be to restore the segment onto the growth trajectory it enjoyed before 2008's downturn because warrants are too important a feature of any advanced financial market for Singapore to lose.

Published October 12, 2009

Apple to give others a bite at the iPhone?

But SingTel's default monopoly may stay if other telcos reject Apple's conditions

By WINSTON CHAI

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THE iPhone may be the apple of Singapore Telecom's eye. But its rivals may not share quite the same taste for the much-hyped touch-screen handset.

BT understands that Apple has been in discussions with other local operators about selling the iPhone, but talks remain deadlocked because of several contentious issues in the reseller contract.

Requirements to commit to high sales volume and revenue-sharing terms are believed to be making SingTel's rivals think twice before putting pen to paper.

'As long as the iPhone adoration continues, Apple wields the market power in the telco relationship, and will always be a tough negotiator,' said Aloysius Choong, a research manager with IDC Asia-Pacific. 'But in the coming years we should see the company shift towards a market- share focus, especially as it builds out its mobile portfolio.'

The impasse leaves SingTel with a default monopoly on the iPhone even though exclusivity is not a condition spelt out in its pact with Apple.

Singapore's largest operator was given first bite at selling the iPhone 3G in Singapore in August 2008 and this privilege was extended to the latest model - the iPhone 3GS - this July.

When contacted, Apple, StarHub and MobileOne declined to confirm whether talks have taken place.

But recent developments suggest Apple is increasingly leaning towards a multi-operator play to meet its aggressive sales targets for the iPhone.

This is the case in the UK, where O2's two-year iPhone stranglehold was broken last week when Apple agreed to let Orange and Vodafone sell the device.

In some markets, such as Australia, Canada, Hong Kong and India, multiple operators were given the right to sell the handset right from the start. And the iPhone's maiden outing in China is via a non-exclusive deal with China Unicom.

According to Morgan Stanley analyst Kathryn Huberty, Apple's market share could more than double if it adopts a multiple- operator approach in the top six iPhone markets that are still exclusive.

'We believe Apple's market share could rise to 10 per cent on average in a multiple-carrier distribution model, from 4 per cent today,' she said in a research note.

'We expect Apple to broaden iPhone carrier distribution over the next two years and believe this opportunity is under-appreciated by the investment community.'

While Apple's touch- screen gadget has undoubtedly been a worldwide consumer hit, its impact on an operator's bottom line is subject to debate.

Last month, Denmark's Strand Consult released a controversial report claiming the iPhone has had a negative impact on telcos worldwide.

The market analysis firm said its research showed none of Apple's operator partners have benefited from a sales, profitability or market- share standpoint.

And with Apple increasingly widening its distribution, Strand Consult believes existing iPhone partners stand to lose even more. 'These operators will lose the differentiation that the iPhone provided as more and more operators in each market start offering the iPhone,' the firm said in a 105-page analysis.

'When we examine an operator like SingTel in Singapore, their figures speak for themselves, and despite the fact that they state their iPhone customers give higher APRU (average revenue per user), the money SingTel has spent subsidising the iPhone has been extremely poor business for its shareholders,' Strand Consult said.