Are We There Yet

Naturally, friends have been asking if I am bearish now as I have not been writing about the markets of late. Well, first of all, there's nothing much to write home about. Nothing much has changed, I have said most of what I wanted to say. While I am slightly bullish on emerging markets, there is very little impetus for buyers to move in until the big boys stop being so volatile.





Then some would say if this was going to be contained or localised, i.e. much of the hurt and pain being in Europe and the USA. To a large extent, that is true. While I think emerging markets may go a bit ballistic when the dust settles, it is also a scenario which we are likely to see an overbought situation, or rather a premium valuation in store. The danger lies in the inherent inflation within emerging markets. Owing to the very low interest rates in the US, Japan and Europe, the rest of the emerging markets cannot really hike their own rates without causing a stampede for their currencies.


China has already hiked theirs a few times and their markets have suffered. Will the same happen for emerging markets? Unlikely, because with the big boys in disarray, emerging markets will have to maintain their local engines of growth even if it means higher than usual inflationary pressures.





Big Picture Issues


a) Transfer of problems - It is pretty obvious that the subprime mess and other real estate related lending excesses hav been transferred largely from the major banks to their respective governments. Much of the problem is still there. Do governments write them off without needing to care? Not really, you have to pay somehow. You can attempt to rescue as many banks and financial institutions but the mess just gets transferred to a different party. Now we are seeing the problems at the sovereign debt level. 


We wouldn't be having this crisis now if it wasn't for the subprime mess and excessive real estate lending. That was a mess because of many factors but largely because ratings firms such as Standard and Poors made unbelievably stupid mistakes, not once but throughout the last 5 years leading up to 2008. Now they have the audacity to say US ratings should be downgraded (albeit the rating should go down) ... but the gall of it all.





b) The global property scam -  A massive transfer of income to the very rich has occurred while middle class real incomes stagnated. The middle classes only tolerated this because Central Bankers created housing booms to keep the impoverished middle classes borrowing and spending to give them the illusion of prosperity and stop them from revolting. 


How do you do that? You do that by keeping interest rates very low, keep printing money, keep the system very liquid - some have gone to equities but by and large the biggest beneficiaries have been property markets throughout most of the world. Yes, you see obvious bubbles in Singapore, HK, parts of China, Canada, Australia and even certain places in Malaysia. We thank our lucky stars that our property markets did not go through the same correction as the major developed nations - but is that because we did not have a massive contraction in liquidity brought on by a financial scare? 


How is this scam hurtful? Well, you propel property prices higher and higher with low interest rates and excess liquidity. It serves to fan the flames of property prices higher, causing a bull run for the prices, causing people to chase and get some action before its too late. 


Its never a zero sum game. Much of the froth in pushing prices higher has to be in much much bigger mortgages that people are taking to participate in the run. As long as the public can pay down their mortgages, you won't see foreclosures or a major correction. You and I know that prices have basically gone out of reach of the young and working. 



However we need a boom and bust to deflate this thing. The boom will come via stock markets, which is why I believe other emerging markets which have not seen similar troubles like the US, Japan and Europe will see liquidity being funnelled there. There is the boom and there will be the bust, which I expect towards 2H 2012.

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Clarity On AFG

Follow up on AFG call as many have inundated me with "why ah... why ah...", and 99% of the time I do not entertain such emails. I have my bad picks and my good ones, you roll with it. In the case for AFG, it was a combination of a few factors



One, its the nature and characteristics of the stock, each stock has its own character, would you believe. That's because, each stock has its own set of controlling shareholders, substantial shareholder, type of institutional shareholders, the usual amount of free float, the usual amount of average traded volume, the usual daily range of price volatility ...etc. Two, its the potential catalysts available and news flow. Three, its the valuations matrix, is it cheap, why is it cheap ... is it expensive, will it get more expensive, etc.

Hence when you know the character of a person well, and they suddenly behave out of the ordinary (and they usually don't, not in the manner which it did) ... you know that person has done drugs, found religion ... or something like it.

Needless to say, AFG ticks all the boxes for me. But Buffett would probably have been buying this stock for the past 6 months because the valuations were compelling, and would probably sit on it for another 2-4 years waiting for fuller valuations. As I do not have the same fund size as Buffett, I am forced to adopt a momentum-fundamentals investing philosophy - i.e. trying to catch them just as they are about to take off. Call it timing or whatever, its a difficult thing to do.



Herein are the probable explanations cum catalysts:

1) Temasek Pares Down Stakes In Chinese Banks - State-linked Singapore investment firm Temasek Holdings said Wednesday it had sold partial stakes in two of China's biggest banks, Bank of China (BOC) and China Construction Bank (CCB).

"This sale is part of our portfolio rebalancing, which we do from time to time," Temasek spokesman Jeffrey Fang said in a statement. "Temasek continues to hold substantial positions in Chinese banks."

The firm raised $3.62 billion from share placements in the banks -- two of China's "Big Four" lenders -- through holding units, Dow Jones Newswires said, quoting a source familiar with the deal. Temasek unit Fullerton Financial Holdings Pte Ltd sold 5.188 billion shares in Bank of China through placements, raising $2.42 billion. And Cairnhill Investments (Mauritius) Pte Ltd and Crescent Investments (Mauritius) Pte Ltd, two other Temasek units, sold 1.502 billion shares in China Construction Bank to raise $1.2 billion.

Temasek had a 6.76 percent stake, or 16.91 billion shares, in CCB as at December 31, 2010, according to the lender's 2010 annual report. CCB declined to comment but Dow Jones calculations indicate Temasek's stake in China's second-biggest lender has been reduced to around 6.2 percent after the sale. For BOC, Dow Jones quoted the bank's spokeswoman Zhao Rong as saying that Temasek will be left with a 2.2 percent stake in the lender after the transaction. Temasek previously had a 4.06 percent stake in the lender, according to BOC figures.

"We have received notification from Temasek on transferring Bank of China's shares to other institutional investors," Zhao said.

By the end of trade in Hong Kong BOC shares fell 3.63 percent and CCB was down 3.24 percent. The sales come amid concerns about Chinese banks' debt exposure after China's National Audit Office said local governments owed $1.65 trillion as of the end of 2010, of which a big proportion could go sour. However, that announcement -- the first time China has given an overall figure for local government debt -- was followed by a warning Tuesday from ratings agency Moody's that the debt could have been understated by about $541.6 billion. The agency also said a lack of a plan to tackle the bad loans meant it could downgrade its outlook for Chinese banks to negative.

Song Seng Wun, a Singapore-based regional economist with CIMB Research, said the move by Temasek does not mean it has lost faith in the Chinese banking sector.

"They are not exiting the Chinese banks, they still have stakes in these entities. They could have exited completely but the fact that they still have stakes suggest they are rejigging the portfolio."

(Why is this a catalyst? First, there has a been a change in top management of Temasek. It is a portfolio shift for sure. Temasek had ventured under previous top management into various top banks, and got bitten terribly. If I was running Temasek, and I already have a substantial stake in a top banking player from Singapore and in Asia in DBS Bank, why do I think I am a better "manager of banks in picking other banking stocks"? Why don't I reinforce my resources to support and foster expansion for DBS Bank?

It also sends different signals to your CEOs of the portfolio of companies under your care. Imagine Buffett invested heavily in IOI Corp, and then later on taking on smaller stakes in Wilmar and KLK. It may make some sense but what kind of strategy is that for a long term controlling shareholder.

Hence, the move may be one of two things. Reducing China banking stakes in light of potential bad loans. Two, refocusing on core banking stocks. I think its more the latter).

2) You Help Me, I Help You - Its no secret that Bank Negara does not want a sovereign entity holding a near controlling stake in a local bank. Its no secret that Daim also wants to sell at a good price. Its no secret that DBS Bank has been dying to get a decent exposure in Malaysia, the only territory they are not in when its so close to base and so lucrative as well.

Since everybody wants to sell and there are ready buyers, probably even willing to pay a premium, why no deal? Well, its because DBS Bank is a Singaporean bank. Yes, UOB and OCBC have exposure in Malaysia but can you count the number of "allowed branches" they have. If EPU were to OK the deal, DBS Bank would not just be a bit player, it will have over 120 branches immediately - and that is an "issue" people. I am sure Maybank and CIMB would NOT want that scenario to play out.

Well, Temasek can probably say they do not want to sell to anyone except DBS Bank, thats why its been taking so long. Why now then?

Between Malaysia and Singapore, everything can be settled as long as we talk. I bring A, B, C to the table, you give me E, F, G la... This may be just postulation, eerrmmm .... we have the KTM land given back, and we have a multi billion investment into Iskandar region by Singapore inked last week. The timing of AFG's move up coincided pretty well I must say.



3) Compelling Valuations - Even if nothing happens, AFG is a huge laggard. Even with the uptick over the last 3 days, its still barely 1.4x P/B when the rest are at 2.0x or higher. Hence AFG is a no brainer, good dividend yield, potential M&A, making higher highs. Any M&A deal will have to be at the minimum 1.6x-1.7x or at least RM4.90. But I am just postulating and I have been wrong many times.

NOTE: The above opinion is not an invitation to buy or sell. It serves as a blogging activity of my investing thoughts and ideas, this does not represent an investment advisory service as I charge no subscription or management fees (donations are welcomed though). The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis, or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

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Ishak, Ishak

The Edge & StarBiz: The unfolding saga in Kenmark Industrial Co (M) Bhd has taken an interesting twist with former managing director of KFC Holdings (M) Bhd (KFCH) Datuk Ishak Ismail swooping in to acquire a large block of shares.



Over the past few days, Ishak had acquired a total of 37.69 million shares representing a 21.14% stake in Kenmark, whose share price had collapsed following the absence of its top officials and the cessation of its business.

Unioncity Enterprises Ltd, a company linked to Ishak, acquired 27.69 million shares on Tuesday and the following day saw another 10 million shares acquired by BHLB Trustee Bhd on behalf of Ishak’s family.

Based on the closing prices of Kenmark’s shares at six sen and 11.5 sen on Tuesday and Wednesday, the acquisitions would have cost a total of RM2.81 million.

Kenmark was the most actively traded counter on Bursa Malaysia on Wednesday with some 138 million shares changing hands. The counter added 5.5 sen, or 91.67%, to 11.5 sen before being suspended, pending yesterday’s announcements. It resumes trading today.

During those two days, Kenmark saw 330 million shares done, which was 1.83 times its total paid-up share capital of 181 million shares. It is not known if Ishak acquired the shares from the open market, or from the major shareholders.

The large volume suggested panic selling and it would have been easy for any party to acquire large blocks of shares from the open market given the large free float. Kenmark has a free float of over 50%, as the two major shareholders own a collective 46.3%.



It is also unclear if there was forced selling by banks following the price collapse. According to Kenmark’s 2009 annual report, of the 30 largest shareholders who owned 146.57 million shares or 81.78% of the company, about 60.42% was pledged to various financial institutions.

They include the shares belonging to its managing director, Taiwanese national James Hwang Ding Kuo, who holds a 29.3% stake. Hwang, who broke his silence on Wednesday over his disappearance for over a week, had said he was unwell and that a friendly party had acquired a substantial stake in the company.

While Ishak has had a fair share of the limelight since the 1990s, starting with Idris Hydraulic, Aokam Perdana Bhd and later KFC Holdings Bhd, Ishak had been relatively quiet for much of the last decade, at least as far as corporate news was concerned.

The Penang-born Ishak last made the front pages of business newspapers in 2005, when he was actively fending off parties who had sought to take over KFC’s parent company, QSR Brands Bhd. Since the late 1990s, it was widely perceived that Ishak was in control of QSR and KFC.

KFC, during Ishak’s time, was riddled with boardroom tussles and several curious developments, and had found itself a takeover target of various parties given its healthy cash flow. In fact, it probably holds the record of having had the most number of board changes as a result of these feuds. Ishak was a key character in this entire saga.

In the last battle over QSR and KFC in 2005-2006, it was reported that Ishak’s trusted aides had let the company slip into the hands of others. The saga came to an end when Johor state-controlled Kulim (M) Bhd emerged to take control of QSR, in a deal many perceived was orchestrated by Ishak.

Ishak’s major entry into the corporate scene started in the early 1990s when he staged a takeover of Idris Hydraulic (M) Bhd, which became a darling of retail investors during the stock market’s bull run then.

Idris Hydraulic held various timber concessions in Keningau, Sabah, which were collectively known as the Sagisan Concession, spread over 256,000ha. To leverage on its concessions, it had entered into a joint venture with Aokam Perdana Bhd in 1992 with Teh Soon Seng. Ishak forged a bond with Sarawakian Teh to win a high-profile battle against Leong Hup Holdings Bhd for control over KFC, which marked Ishak’s entry into the fried chicken retailer.

Aokam Perdana’s shares rallied in the early 1990s as investors were drawn to the notion that the company earned fat margins due to a cheap supply of logs from Idris’ concessions. Idris Hydraulic’s shares also had a phenomenal run. Stories of its planned expansion and diversification plus a healthy dose of rumour further fuelled optimism; Idris Hydraulic’s share price skyrocketed from 80 sen to RM8 within a year during the super bull-run of 1993–94.

The company was involved in a wide array of businesses, from timber concessions in far-flung places like Gabon in Africa, to hotel operations in Myanmar and multi-billion ringgit sewerage concessions at home. There was also a steady stream of talks and deals, most of which never came through, that had added to the sugar rush in the counter.

However, having reached its peak of RM8, the stock steadily began its downward spiral. Even the stock market rally of 1996-97 failed to lift the counter which appeared to have lost its lustre. Many of the promises on the company’s future plans were not delivered.

Ishak also controlled several other companies involved in retail, food and beverage, hotels and property development and had stakes in Parit Perak Bhd and hypermarket chain Carrefour.

He was also once a secretary of the Permatang Pauh Umno division, the stronghold of then deputy prime minister and now Opposition Leader Datuk Seri Anwar Ibrahim.

But like many other businessmen, the 1997-98 Asian financial crisis dealt his impressive portfolio a massive blow. He lost Idris Hydraulic in a debt-restructuring exercise. In 1998, Aokam was declared insolvent and could not pay some RM33.3mil of debt.

It was reported in 1997 that the police was looking for Teh to assist in investigations surrounding an alleged theft and misappropriation of funds from Aokam worth some RM55mil.

According to the Securities Commission (SC) website, in 2001, Ishak was convicted by the courts for disclosing false information to the SC in a proposal by Idris Hydraulic to the SC that stated he did not hold any shares in KFC. The information submitted was in connection with a proposal for the acquisition of an asset of KFC by Idris Hydraulic. Ishak pleaded guilty and was convicted on Aug 23, 2001. He was fined RM400,000, in default six months imprisonment.

In 2003, Ishak, as a director of Idris Hydraulic, was also compounded RM400,000 by the SC for misusing RM50mil of the proceeds raised from the disposal of Kewangan Bersatu Bhd. As a result of the compound, the charge was withdrawn.

My Comments: Ishak can best be summarised as a maverick, and an important player especially in a super bull market. As you can see from his chequered history, he has paid a number of fines for a number of questionable moves in the eyes of the SC and Bursa in the past. He has brilliantly survived the torrid 90s and came out very rich. I was shocked that he chose Kenmark to mark his return to a listed vehicle. He has been off the listed vehicles for many years, there have been many rumours. One which is more solid is that he is now running a billion dollar company called Offshore Oil, no need to guess which industry the company is in. From my sources, the company is doing extremely well, and I was expecting a RTO exercise or an IPO sometime later in the year as he has moved all his Offshore Oil operational people back to KL. His team is so huge that apparently he has reportedly bought Chua Ma Yu's building on Jalan Ampang (CMY) next to Avenue K.

Was Kenmark an abberation and not a RTO vehicle? Was Ishak only grabbing Kenmark shares on the low for a quick trade? I doubt he would do that and then flipping it for RM20-40m profit, that kind of money does not do justice to his net worth, or even worth his time to be in such a "shiny spotlight" with a company ladened with enough twists and turns for a 20-episode series such as Lost & Heroes.

Some may ask if he was going to do a RTO with Offshore Oil into Kenmark, why doesn't he buy a lot more of Kenmark? The answer is simple, considering the size and profitability of Offshore Oil, a RTO would mean hundreds of millions or maybe passing the billion mark in new shares being issued by Kenmark, why bother with the existing free float of Kenmark? But of course, that RTO is still a big IF.



If he were to use Kenmark as the RTO vehicle for Offshore Oil, then the shares will fly much further. Even if he does not do it, by virtue of a stable of new directors and his significant stake, it is likely to be a lot more in store for Kenmark. To some extent, it should also mean that Kenmark's problems are not insurmountable.

If you own a race horse, sometime you will only want the best jockey on board. Other times you may have a higher risk appetite and engage a high flying, always skirting the edges of acceptability, but promises much excitement and volatility - then Ishak is your man. Place your bets ...

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Maternity Leave & Disrespectful People

One stupid letter in The Star was the most widely emailed article. Not the first one, which was a piece by a rep from ILO, but the reader's letter in response to the article. I know some of you would have thought "Gee, I hope Dali read this and will write something on it". Well I did, and I am. The content of the reply was deplorable and disrespectful in so many ways. My sensitive comments in red.



StarBiz: THE issue of maternity leave has received considerable attention lately by workers' and employers' representatives as well as the Government.

The past 60 years or so has witnessed more women of child-bearing age than ever before entering the job market worldwide as well as in our country. Maternity protection as it relates to work and family responsibilities is an essential entitlement in the context of the rights of working women.

The International Labour Organisation (ILO), the agency within the United Nations system devoted to promoting decent work, over more than 90 years of its existence, has adopted a series of international conventions regarding maternity protection.

The First Maternity Protection Convention was formulated in 1919, the year of the ILO's founding. Since then, the ILO has been a major voice on the rights of working women globally.

The most recent ILO Maternity Protection Convention (No. 183) and its accompanying Recommendation (No. 191), 2000, spell out what member states have adopted as the internationally recognised minimum standard that they should aspire to in terms of maternity leave of not less than 14 weeks, as well as non-discrimination in employment, facilities at work, and benefits and entitlements in the context of national law and practice.

Currently, of ILO's 183 member states, the vast majority of them, including several in the Asia Pacific region, provide 12 weeks or more maternity leave with more than 70 of those providing 14 weeks or more. Fewer than 30 countries mandate a maternity leave of less than 12 weeks.

Malaysia, for long an active member of the ILO and currently serving on two of the three benches of its governing body, could reinforce its commitment to workers' rights, in particular that of working women, by reviewing the status of our law and practice regarding maternity protection and consider how best these can be brought into conformity with the minimum internationally recognised standard.

RUEBEN DUDLEY,

Former United Nations/ILO regional deputy director for Asia & the Pacific.

I REFER to “Stay in step with the ILO on maternity leave” (The Star, May 21) and agree with the writer that maternity protection is an essential right of working women. (Hallo... essential right you say, and you agree, it seems what you think is a right is really just a privilege ... i.e. that the government or company are so nice to allow women to have maternity leave. Woman (if that is really you), do not confuse a right with a privilege, the former is enshrined in what we deem as our freedom and claims to be a citizen in a particular country, and that we would never be punished for exercising our freedom or claims. The latter is called a privilege as it implies only via the benevolence of our government or employers that we are accorded those privileges).

However, no reasonable woman, working or not, would argue that she should be paid while she is not working. (Hallo woman, I think you are confusing being pregnant as a leisure activity. When something is as fundamental as getting access to drinking water, do you think that is not a right? If a company does not provide access to drinking water, do you think that is fair? What about holidays? These are part of the cost of employment. Since when is maternity leave a disastrous impact on bottomline, if it is these companies should not be around. Psst, I think 99 out of every 100 woman think it is OK to get paid when on maternity leave). Paying a salary to a person that is not fulfilling his or her job description is economically disadvantageous to the employer and to the economy at large.

While the woman gets paid for not working, there is another prospective employee who may have to go hungry and homeless because he can't get a job. (Herein lies the suspicion as to why I think the writer is a male masquerading as a female, probably using her mum's IC, "he can't get a job", why does it have to be a he? "He" is probably not as good or qualified, probably thats why he DID NOT DESERVE TO GET EMPLOYED in the first place, not because he does not have a uterus!!! That argument as a "cost" and "taking away jobs from others who do not ever want to be pregnant" is as solid as quicksand).

By asking for ridiculously generous benefits, women's rights activists have bankrupted uncountable companies in the West and now they are trying to do the same here. (Pray tell, which companies, instead of making a ludricous brushstroke at half truths. You want to check out the maternity benefits at Microsoft, at GE, at Citigroup, at Nestle, at Nike, etc... A caring employer not only tries to maximise the output of their employees but knows how important it is to retain motivated employees. Loyalty and a sense of belonging does wonders to productivity and reduces enormous HR costs as they do not switch jobs so often. Its whether you view is as an "investment in your employees" or an unnecessary expense).

I wonder if the ILO and similar rights organisations only consider the rights of the workers when formulating their recommendations, or if they also look at the balance sheets of the companies.

A pregnant woman should resign, or take unpaid leave until her child is born and until he is big enough for her to return to work. Pregnant women are already unable to fulfill their duties because their condition does not usually allow them to perform as they should. The position left vacant should be filled by temporary or contract workers. (Spoken like a true small time entreprenuer who is grappling with minimal profits. You would be wonderful as a businessperson in an undeveloped country where you can put in place these laws yourself. You line of thinking not only is repulsive, its disrespectful to women in general. Pregnancy is not just a part of life, it is the very process why you exist in the first place. What you are saying is so disrespectful as if pregnancy needs to be viewed as a "cost factor").

Women should not be selfish and think they can have it all, and lawyers should consider that human rights are subservient to the performance of the economy. Every right has a price, and having no job gives you no money to pay for your rights. (Woman (if that is you), maybe you have your own plot of land for farming, but most married couples need to be both working in order to have a mortgage and a car early in their marriage. It so happens that most women need to be pregnant around 30 (i.e. early in their career) and do not have the luxury of living off a single salary. When you rob a person of their choice to be pregnant, or make their pregnancy as a hindrance, it is awful. I don't know man, maybe you were immaculately conceived cause you sounded like your were birthed from a stone ... probably in an office environment between 9-5).

A business proposition must be equitable to be successful, and by demanding that women be paid although they are not working, while others are practically starving because they can't get a job, the ILO jeopardises the interest of the mother, the child, and the future of the country.

MARISA DEMORI

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