Published July 6, 2009

MALAYSIA INSIGHT
Najib to be commended for his policies, not scorned

Only by dismantling any impediment to portfolio and FDI will M'sia have a fighting chance

By S JAYASANKARAN
KL CORRESPONDENT
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PRIME Minister Najib Razak has shown more mettle than any of his two predecessors where liberalisation of the economy is concerned.

In less than a hundred days in office, Mr Najib has liberalised 27 sub-sectors of the services industry and thrown open the banking and finance industry.

Last week, the premier went further still, emasculating the powers of the Foreign Investment Committee - which has overseen foreign investment in the country for almost four decades - and removing the need for the 30 per cent equity requirement for ethnic Malays in every initial public offering.

This is brave stuff. When Mr Najib liberalised the service sub-sectors he was already risking the wrath of the Malays, the ethnic majority in Malaysia and the core constituency of the United Malays National Organisation (Umno), the political party over which Mr Najib presides.

But the FIC and the 30 per cent Bumiputra requirement have, over the years, assumed sacrosanct significance and evolved into the litmus test of the New Economic Policy, the decades-long affirmative action policy that seeks to catapult the Malays into economic parity with their richer Malaysian countrymen. If the services' liberalisations irritated the Malays, this policy shift could enrage them.

The Prime Minister realises that Malaysia needs to change its economic model as it can no longer rely on its tried and tested method of growing through exports as every developing country is already doing that.

So far so good. Most Umno leaders have dutifully cheered the proposals, albeit in lukewarm fashion. Only Hadi Awang, the leader of the opposition Islamic Party of Malaysia, has rubbished the idea. Meanwhile, the combative former premier Mahathir Mohamad has debunked it, claiming it to be a populist notion that will not work.

Mr Hadi objected on the grounds that the Malays weren't competitive enough. He is clearly playing to the gallery as he would know that when it was given out to individuals, the 30 per cent IPO allocations always went to an elite core of Umno-supporting Malays. The only PAS member who might have benefited would have been those who crossed over from Umno.

Dr Mahathir is simply being disingenuous. When he was premier, he dismantled NEP restrictions twice, during periods when Malaysia faced deep recessions, in 1986 and, then, in 1998. Both liberalisations worked although the 1986 relaxation resulted in a spectacular flood of foreign investment leading to a 10-year economic boom.

That alone says a lot about the nature of this changing world. In 1986, China, India and Vietnam were still nascent economies and Indonesia, Thailand and the Philippines were not as welcoming to foreign investment. But by 1998, the first three were flourishing and the whole of South-east Asia, not to mention the rest of the world, were all competing for the same investment dollars.

In any case, what would Dr Mahathir have Mr Najib do?

The Prime Minister realises that Malaysia needs to change its economic model as it can no longer rely on its tried and tested method of growing through exports as every developing country is already doing that and Malaysia is rapidly losing its cost-competitiveness.

So Mr Najib wants to change the country's growth structure by making the services sector its key driver, accounting for 70 per cent of gross domestic product from its current 54 per cent.

To do that, he has to dismantle any impediment to portfolio and foreign direct investment in the country. Only then can he reasonably hope for Malaysia to have a fighting chance.

In time to come, Malaysia will lose its competitive edge in manufacturing to China, India and Vietnam completely so the country might as well start now in sectors such as services.

Mr Najib is to be commended, not scorned.

Published July 6, 2009

Export sales in later quarters to improve: MAEI

By PAULINE NG
IN KUALA LUMPUR

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THE Malaysian American Electronics Industry (MAEI) has projected that the global economic slump would dampen sales of its member firms by an estimated 27.5 per cent this year to RM54.6 billion (S$22.53 billion).

But the bleakest months appear to be over. Releasing highlights of its annual survey yesterday, MAEI chairman Wong Siew Hai said that its members expect to post higher export sales of 15-20 per cent in the second quarter over the first, and another 10 per cent increase in the third quarter.

The coming quarters are expected to be better because of two main factors: the stimulus packages implemented by governments in Asia, especially China, as well as world-wide consolidation activities that have benefited its members.

'I am happy to report that most companies are now returning to normal working hours. Some limited and selective hiring is also taking place due to the increase in orders,' Mr Wong said, but noted that MAEI members remained cautious as much would depend on the pace of the global economic recovery.

The MAEI outlook is more bearish than the Semiconductor Industrial Association (SIA) forecast of a 22 per cent contraction in sales to US$195 billion this year. SIA expects 2009 to remain weak but believes growth next year would exceed 7 per cent.

The MAEI saw some other positives in the crisis for its members, noting some have recently reported additional responsibilities in areas such as design and development (D&D), procurement, financial services, IT and HR shared services.

An industry committee of the American Malaysian Chamber of Commerce, the MAEI is a big player in the electrical and electronics (E&E) sector and employs over 56,000 workers and contributes nearly 30 per cent of the total value of Malaysian E&E exports.

Its companies are expected to spend RM960 million this year in D&D activities and have invested more than RM3 billion in over the past three years.

Its forecast coincided with the release of Malaysia's export figures for May which showed a 4.5 per cent month-on-month improvement to nearly RM43 billion. This was mainly on the back of higher manufactured exports, including electrical & electronic products. E&E exports in May totalled nearly RM18 billion and accounted for 41 per cent of total exports.

But compared to last May, total exports were down by almost 30 per cent, and indicates global demand is still tight. Month-on-month, imports were also down by 28 per cent, resulting in a trade surplus for May of RM10 billion.

Total trade in the first five months to May fell 25 per cent year-on-year to RM361 billion. In the same period, exports were lower by some 24 per cent to RM205.5 billion, while import contraction was 27 per cent. The total trade surplus up to May was RM50.12 billion.

Published July 6, 2009

Is what's good for FCOT just as good for F&N?

By UMA SHANKARI

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FRASERS Commercial Trust (FCOT) last week announced a series of bold steps to recapitalise the group in a bid to address the refinancing concerns raised by investors and analysts.

Adding fizz: Parent F&N is showing support for the Reit

But while FCOT unitholders will no doubt be following the developments with interest, shareholders of parent Fraser and Neave (F&N) should also take note as the recapitalisation exercise will affect their company directly as well.

FCOT, which has a $1.5 billion property portfolio spanning Singapore, Australia and Japan, plans to raise $213.9 million in a three-for-one rights issue.

It will also acquire Alexandra Technopark from sponsor Frasers Centrepoint (F&N's property arm) for $342.5 million. FCOT will pay for the purchase by issuing convertible perpetual preferred units (CPPUs) - a financial instrument which to date has only been used by banks in the Singapore market.

FCOT announced as well on the same day that it has secured financing for $675 million from a consortium of lenders. The offers of finance are conditional upon the recapitalisation exercise, which now has to be approved by shareholders.

There can be little argument that the outcome of the proposed recapitalisation exercise is something to be desired. The rights issue and acquisition will see FCOT's gearing fall from 58.3 per cent at end-Q1 2009 to 38.5 per cent.

And upon completion of the rights issue, the acquisition and issue of the CPPUs, and the refinancing exercise, FCOT will not have any debt due until 2012.

The trust's gearing hit 58.3 per cent at the end of Q1 2009 as it booked a massive revaluation deficit. And analysts say that more write-downs are likely in the second half of 2009. If the problem is not addressed now, this could push FCOT's gearing to well beyond 70 per cent - past the 60 per cent limit mandated by the Monetary Authority of Singapore (MAS).

While the real estate investment trust (Reit) will still technically not breach MAS guidelines (as the expected rise in gearing will be driven by the deterioration of the asset base rather than by an increase in gross borrowings), the high gearing would have made it very hard for FCOT to refinance its loans - and downright impossible to refinance at a decent interest rate. The fact that the $675 million refinancing arrangement is dependent on the recapitalisation exercise says a lot.

Less easy to swallow is the three-for-one dilution caused by the rights issue. Once the rights issue is completed, FCOT will have some three billion units in the market. The trust will consider consolidating the units in future, management said.

But FCOT unitholders can at least draw comfort from the fact that parent F&N is going all out to show support for the Reit.

Frasers Centrepoint (which has a deemed stake of 22.2 per cent in FCOT now) will take up its entire pro-rata entitlement of the rights units and is also willing to subscribe for up to 32.7 per cent of the total number of rights units.

And in addition to accepting payment for Alexandra Technopark through the CPPUs - which entitles holders to a distribution of 5.5 per cent a year from the Reit - F&N will also undertake the master lease for the 99-year leasehold property for five years and give FCOT an annual rental guarantee of $22 million, which works out to a 6.4 per cent yield.

This makes Alexandra Technopark the property with the highest yield among FCOT's Singapore-based assets. FCOT's Singapore properties have a yield of about 4 per cent currently.

However, what's good for FCOT unitholders may not be so good for F&N shareholders. First, analysts say that F&N could have gotten a better price for Alexandra Technopark if it had sold the property to a third party buyer. Having said that, there are few benchmarks for comparison as there have not been many large investment transactions in Singapore's property market so far this year.

The rental guarantee of $22 million that F&N is giving is also more than what the group will receive from all the CPPUs that it got in return for the property (less than $19 million). The company's deputy group financial controller Hui Choon Kit said that F&N is selling the property to FCOT to support the trust and to strengthen its capital structure.

F&N bought 17.7 per cent of Allco Commercial Reit and 100 per cent of the Reit's manager for $180 million in July 2008. The Reit was renamed Frasers Commercial Trust, and the plan was to inject Alexandra Technopark and two other properties into the portfolio. While F&N has done this now, it may not be on the terms envisaged by some of its own shareholders, and it may face questions on whether the conglomerate is supporting FCOT at the expense of its own interests.

Asked if F&N regretted buying Allco in the first place, Mr Hui admitted that 'it has been a lot more challenging than we had anticipated'. But now, the issues have been resolved and F&N has put the Reit in a stronger position, he said. It remains to be seen if F&N shareholders buy that argument.