CIMB Downgrades Malaysian Banks

The argument for the downgrade refers to the implementation of Malaysian Financial Reporting Standards (MFRS) 9. Somewhat similar to CET1 ratio, the provision methodology would change under MFRS 9.

It was estimated that under MFRS 9, it would negatively impact the net profit of banks in the future.

See the full report below including sensitivity analysis of respective banks.

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You Still Have a Job Because Ringgit Devalued

What if I tell you that the reason you are still working and the availability of jobs is still strong is the reward for depreciated currency?

What if I tell you that low ringgit value no longer has the effect of 1MDB in it?

What if I tell you that the GST is good and the only way to save this economy?

Well, these few statements might have spurred the anger of anti-government parties and opposition supporters. For starters, I would like to clarify that I do not vote because I believe in what taught in economic books where politicians are a waste of a country’s resources. In laymen’s term, I hate politics.

Depreciated Currency Equals Jobs?

Many people in the country complains about the weak ringgit and how it’s affecting travel plans. All of a sudden, a pre-booked trip overseas raises in price due to currency depreciation. Often, people forgot that the depreciated currency actually protected jobs in the country itself. This is a common problem because jobs had always been there since the recovery from 2008’s financial crisis. The sudden drop in currency value is still fresh in people’s mind.

Malaysia still relies heavily on foreign direct investment (FDI) with the likes of electronics being the top export and top destination to seek OEM manufacturers like Dyson seeking the two plastic molding companies in Johor. Penang for example is heavily involved with plenty of local OEMs and multinationals such as Intel undergoes manufacturing in this region.

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If ringgit did not devalue, it would mean that the cost of production rises for our country and the likelihood of foreign investors going to new frontier markets like Vietnam or India. So FDIs and high demand for OEM products is the reason why we still have a job at the current moment. The reason they are still here is because all of us are still cheap labor.

The weaker currency spreads across most commodities export sectors like oil, palm, plastics and rubber. Oil and gas sector in Malaysia sells at SGD per barrel but the cost denominates in MYR. The lower price of crude per barrel would have ruined the feasibility of oil production but the lower cost of production still has rigs operating albeit harder than it used to be.

Jobs are important to the economy because it ensures continuous spending by participants of the economy. The middle income is the biggest contributor to the GDP other than the government as well as the biggest percentage that earns their income in the form of monthly wages. Continuously feeding positive sentiment to this group would ensure that the economy works like a well-oiled machine.

Losing Jobs?

If you sell Nasi Lemak and mostly do local businesses, people losing jobs might affect you directly as well. Lowering of monthly income causes the general public to refrain from eating out taking the alternative of self-preparation.

This is why when people starts to lose jobs, its catastrophic. Sectors such as consumer, retail, travel, real estate and banking would feel the wave of deteriorating income when sentiment goes bad. Jobs remains the key catalyst in preserving the current strength of the economy.

1MDB No Effect on Ringgit?

Indeed it was a big scare earlier but bad news fades with time. The ringgit isn’t going to strengthen back to previous levels.

Reason 1: Chinese depreciated their RMB artificially to improve on exports. All export nations round the world would see their currency devalue automatically just to be competitive against China once again.

Reason 2: The currency traders had valued ringgit lower because it is hard for Bank Negara to raise the interest rates. Trader are banking on the inability for Bank Negara to raise rates since the government debt continues to climb. You wouldn’t want to raise the risk-free rate when you are trying to leverage on debt financing.

The macroeconomic environment had changed in respond to China and the need for more debt to finance and keep the infrastructure spending intact. Pretty clear that construction jobs are needed to spur the economy, the MRTs built are creating jobs for people directly and indirectly.

GST Saves Economy?

I might sound like someone promoting GST in the government department. But having an independent economic view, we are technically stuck between a rock and a hard place prior to the GST implementation. Yes, we can all agree that the government placed us in this bad situation in the first place but nevertheless that’s the way when one management passes the baton to another.

Management at the top would only strive to achieve what’s easiest or most visible to the people during their term. Longevity of a policy and the potential backfire from bad policies are not taken into account in the likelihood that might cause bigger issues in the future. In fact, it is someone else’s problem so its fine.

Things like that doesn’t only happen in Malaysia. We have yet to see the effect of excessive money printing in the process of QE by the US Federal Reserve. It just so convenient that it was the fastest feasible policy at that time and governments takes the easy way out. The problem that it creates close to 10 years later isn’t the problem of the initiator and this is why economic cycle are present in the world.

To sum it all up, the reason for writing this article is to urge the general public not to be so negative to our country’s current problem. People never focus on the good but the bad gets highlighted over and over again. I think we should be more positive and it is healthy to stay that way rather than focusing on the negative. Just remember that in economic cycles, bad times are short while booms are long!

The 7th of The Decade Again…

Well well well… It’s that time again.

7th of The Decade

2007, 1987, 1977, 1957, 1917. These were the peak years for Dow Jones Industrial Average. Well it doesn’t prove that a crash is imminent but historically, the data is really scary and proves that the 7th of every decade seems cursed.

2.jpgWhat happens this year then? Peak months are usually July and October according to CIMB. Take a look at the full article by CIMB on evidence  backing this evidence.

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Follow Up on Lotte Chemical Titan IPO

If you’ve subscribed to the Lotte Chemical Titan IPO as a retail investor, I would say congratulation as all your subscription had been approved due to under-subscription. In most cases, under-subscription equals death by humiliation but this time around it’s all forgiven.

Jokes aside, 11 July 2017 on opening we should see the prevailing price for LCTITAN and anything below RM 6.50 is institution’s loss. We see a few probably scenarios on 1st day of listing.

Below RM 6.50

Obviously this meant that you should start preparing your form and send it out right away to avoid probably delays. The risk falls upon you if you would like to wait and hope that prices would rebound higher and you could make a profit.

Remember that once you’ve sent out the request form, you have to abide with this rule

l/We confirm that l/we own such Relevant Shares as at the Record Date and l/we will continue to own such Relevant Shares until the day such Relevant Shares are transferred to the Company’s CDS account (pursuant to paragraph 3 below).”

Make sure you have shares in your account equivalent to what you’ve subscribed to. No partial share amounts, just remember that.

Above RM 6.50

Congrats, I need not elaborate on this. But you might want to factor in transaction cost if price is merely a cent higher at RM6.51.

Stupendous amount of buyer at RM 6.50

We advise investors to do a cost analysis on their holdings. If you hold a small number of shares and your transaction cost isn’t huge. We recommend that you sell it to remove the risk of letters going missing and delayed cash return having to wait till Aug 2017. If you’re granted 100,000 shares, I guess it’s better to courier the document via PosLaju or any reputable couriers.

Meanwhile, don’t be scared if you’re successful in getting this under subscribed stock. Relax and have a good weekend, check your holdings if it’s correct in the morning of 11th July 2017.

Form Attachment

Download Here

 

 

 

Investment into Macau Gaming

You might be wondering how we went from insurance into Macau gaming. A little of that was my mistake when I decide to clear out our holdings before going into May, mainly on the fear that we are likely going to see a correction with such aggressive rise in the Hang Seng index for the year. Indeed divesting from Ping An seems to be a bad mistake and there’s no point chasing the stock at the current.

But since our cash holding in HKD isn’t invested and performing and that’s a bad sign. It accounts for a large portion of our portfolio and we need to be invested in something to avoid underperformance of our overall fund. Most of the index related stocks such as financials had followed the rise of the Hang Seng Index. Finally, we are left with the non-index related stocks such as technology and gaming.

Why Gaming?

In a survey ran by Credit Suisse, over 70% of the respondents from China said that in the next 6 months or so, they would be going on tours. 70% is the highest number compared to 56% coming in 2nd saying that they would consume more dairy products.

Due to the population size of China with only a 7% holding passports, if 1% of these passport holders visit Macau is already close to 1 million people. It is expected as well that the demand for tourism would likely come in during the October Golden Week where most of China closes for a week and celebrates their national day.

Obviously we would love to invest directly onto tourism companies but valuations are high with the likes of CTrip or Tuniu both listed in the NYSE.

At the moment, Macau gaming would be the less crowded trade and it is likely that the inflow of tourist would be high due to a couple of reasons:-

  • Investigation into corrupt Chinese individuals doing money laundering activities in Macau casinos had tapered off
  • As a wakeup call Macau casinos had begun addressing mass market tourism rather than VIPs
  • Stock price had corrected and now it’s in line with expectation of zero growth from the VIPs
  • Macau should be the ‘easy’ destination due to geography, currency and language for Chinese tourist
  • China has no casino and only lotteries for gambling activities except for its Special Administrative Region of Macau but Chinese people are hard wired to gambling itself

It seems though this is the right trade with most of Macau stock still trading cheaply in terms of their long-term average. Earnings had declined compared to the past few years and we would be paying a price to earnings ratio of around 25 – 30 at the current moment which is the same premium before the VIP crackdown in Macau. The high premium paid is fair with the respect to higher levels of mass market pouring into the region. VIPs come and go but mass market continues to flow in growing year on year.

The Chinese government in cities near to Macau are complementing with the growth of visitors into Macau. The demand of road capacities leading into Macau are upgraded from new planned roads to new bridges, these infrastructure spending would bring in more people especially from the mass market segment.

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HZMB stands for Hong Kong Zhuhai Macau Bridge which would also bring people directly from the Hong Kong international airport.

From the list of Galaxy Entertainment, SJM International, MGM Macau, Melco Int. and Sands China. Melco and Sands are the only two companies with casinos catered specifically for the mass market. Melco Int. built its iconic Studio City or better known as the building with a Ferris Wheel in the middle to attract more visitors. Stock price of Melco International rose 100% since its opening of Studio City.

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The rise in the revenue for mass market had also been solid and rising steadily and we shall see more development ahead such as mass-market specific hotel rooms by all the operators in Macau.

There is this saying where it goes “build it and they will come”. Indeed this hypothesis had been proven for the mass market segment seeing how successful Studio City is compared to Galaxy Phase II which still focuses on luxury.

Why Sands China?

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Sands had always been the name when it comes to mass market where almost 70% of its revenue are derived from mass market. The company’s stock price also went on a major correction when VIP segment gaming revenue did not pour into the city. Obviously mass market deteriorated slightly but the sell down might have been overdone for Sands China.

The infrastructure changes and internal structural change for Macau would likely contribute the most to Sands’ underperformance. With more and more headcounts coming into Macau, it is only a matter of time occupancy rate increases together with higher growth in gaming revenue.

Sands’ portfolio is very diversified where it can capture visitors of every segment since we are keeping our eyes on quantity addition. It also provides a 5-6% dividend yield which is good at such low interest rate environment now.

Sands’ trades less expensive compared to Galaxy Entertainment which is most research houses’ top pick. The reason behind being Galaxy still has plenty of land to develop (up to phase 4). It just opened its phase 2 last year but the reception was lackluster. Since we are looking at an investment horizon of 9 months we would disregard Galaxy from our stock pick. Enjoy the rise at the moment and we will revisit the Macau’s casino performance for another evaluation in the month of October when the revenue from Golden Week pours in.

IPO – Lotte Chemical Titan

Click to download the IPO extract done for your ease!

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Growth – 6

We rate growth at 6 due to its operations in Indonesia that would likely see major gains due to the increase in demand for olefins. From the IPO prospectus, it is expected that Indonesia would see double digit CAGR for all major olefins.

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Nevertheless, Malaysian operations should remain normal but with the unknown exception of the effects from a full scale RAPID Pengerang Project.

Industry – 5

We could just rate industry a mere average since prices of feed had declined with crude but the industry still do not see a huge gain in terms of profit. A simpler way to understand is that olefins are not specifically ‘branded’ which makes it a commodity in the end rather than a good.

Financials – 8

Top notch financials with little to no debt and currently increasing in margin versus the other major names in this field.

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Moat – 4

As stated in industry, the products offering do not have a specific brand to it. The company’s business does not differ from any of its competitors in the region.

Proceeds – 10

We rated a perfect 10 for proceeds as you can see that the funds raised would be fully utilize in business expansion which in the end turns into a new stream of revenue from the Indonesian side and de-bottle necking plans in place to increase the efficiency of the plants in Malaysia. One of the best IPO proceeds we are rated which reflects what raising funds should mean rather than settling debt obligation.

Valuation – 7

We rate valuations slightly better than average since at RM8.00 per share it should trade cheaper than its listed peers like Petronas Chemicals and PT Chanda Asri. At the moment Petronas Chemicals trades at 16.02 and PT Chanda Asri at 16.59 versus the expected PE of Lotte Chemical Titan at 15.

Conclusion

We recommend you to subscribe to this IPO due to good business structure, plan and good utilization of IPO proceeds. Growth should likely be healthy for Indonesia and the big chunk of money (around RM4 billion) would be utilized in the development of petrochemical plants over there.

Furthermore, we do not see any downside in first day of trade due to high institution allocation. Over 92% of the allocated shares are meant for institution which we would likely see a lock in period of 1 year.

CIMB Assumes Coverage on Bumi Armada

Such a long report for Bumi Armada by CIMB.

Click for Link

 

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Our Take

Bumi Armada is really one of the best there is for the oil and gas sector. We like it more than Sapura Energy due to its balance sheet. But of course, Sapura Energy would gain the most from the spillover from Petronas and likely most sensitive to oil price movements. Nevertheless, if you believe in oil this is a cheap counter to acquire at the moment.