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OTHER HIGHLIGHTS

SINGAPORE (INCLUSIVE OF GST) S$3.80

7 OTHER HIGHLIGHTS SINGAPORE (INCLUSIVE OF GST) S$3.80 Lower volatility, better performance PERSONAL WEALTH THE ASCOTT

Lower volatility, better performance

PERSONAL WEALTH

S$3.80 Lower volatility, better performance PERSONAL WEALTH THE ASCOTT INTERVIEW Dror Benshetrit, star designer OPTIONS

THE ASCOTT INTERVIEW

Dror Benshetrit, star designer

OPTIONS

THE ASCOTT INTERVIEW Dror Benshetrit, star designer OPTIONS What’s hot in collective sales market? CITY &

What’s hot in collective sales market?

CITY & COUNTRY

www.theedgesingapore.com BUSINESS & INVESTMENT WEEKLY THE WEEK OF JULY 2 — JULY 8, 2012 530
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BUSINESS
&
INVESTMENT
WEEKLY
THE WEEK OF JULY 2 — JULY 8, 2012
530

MICA (P) No. 210/03/2012 PPS 1519/09/2012 (022805)

NOTEWORTHY

MANU BHASKARAN: Can Thailand surprise on the upside? PG26

MANU BHASKARAN:

Can Thailand surprise on the upside? PG26

MANU BHASKARAN: Can Thailand surprise on the upside? PG26 ASSIF SHAMEEN: Samsonite shrugs off bag recall

ASSIF SHAMEEN:

Samsonite shrugs off bag recall

PG24

City Developments ‘gets’ property uptrend, says OCBC’s Eli Lee PG28
City Developments
‘gets’ property
uptrend, says
OCBC’s Eli Lee PG28

Interra Resources drills new well, launches rights issue

PG16

Raffles Medical Group unlikely to see negative impact from healthcare IPOs

Corporate PG8

World’s strongest bank OCBC ready for Basel liquidity rules, flags technology risks

Corporate PG10

Radiance gets new lease of life as RTO wins shareholders’ approval

Corporate PG12

Property players turn to bonds amid weak equity market sentiment, says HSBC’s Kern

Corporate PG14

More darkness before dawn for dry bulk shipping sector

Corporate PG18

Oil change

Capital PG27

Keppel Corp, Yangzijiang Shipbuilding, Sembcorp Marine, Cosco Corp, Sembcorp Industries, ASL Marine

Hot Stocks PG41

Cosco Corp, Sembcorp Industries, ASL Marine Hot Stocks PG41 SAMUEL ISAAC CHUA/THE EDGE SINGAPORE LingeringLingering

SAMUEL ISAAC CHUA/THE EDGE SINGAPORE

LingeringLingering aftermathaftermath The global financial crisis might have passed but Singapore’s largest
LingeringLingering
aftermathaftermath
The global financial crisis might have passed but
Singapore’s largest companies are still destroying
shareholder value. What’s ailing Corporate Singapore?
Turn to our Cover Story on Pages 20 to 22.
are still destroying shareholder value. What’s ailing Corporate Singapore? Turn to our Cover Story on Pages

2 THEEDGE SINGAPORE | JULY 2, 2012

2 THE EDGE SINGAPORE | JULY 2, 2012
2 THE EDGE SINGAPORE | JULY 2, 2012
2 THE EDGE SINGAPORE | JULY 2, 2012
2 THE EDGE SINGAPORE | JULY 2, 2012
2 THE EDGE SINGAPORE | JULY 2, 2012

THEEDGE SINGAPORE | JULY 2, 2012 3

THE EDGE SINGAPORE | JULY 2, 2012 3
THE EDGE SINGAPORE | JULY 2, 2012 3
THE EDGE SINGAPORE | JULY 2, 2012 3

REUTERS

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TheWeek

Pre-summit discord

| BY MIKE PEACOCK |

There is an unusually public level of disagreement going into a key eurozone meeting. EU leaders aren’t helping to foster a sense of united purpose that could calm investors a little. On June 26, Germany’s Angela Merkel said Europe would not share debt liability as long as she lived. Maybe she was playing to a domestic audience, but if she meant it, one of the main planks of a structure that could eventually solve this crisis has just been reduced to ashes. On the other side of the fence, Italian Prime Minister Mario Monti said he was in no mood to rubber-stamp any conclusions in Brussels. He said the summit promised to be “very difficult”. Spanish Prime Minister Mariano Rajoy is in accord with him. There may be movement in other areas, though, with Merkel’s coalition

parties suggesting the European Stability Mechanism (ESM) rescue fund could lend directly to banks, which would remove the stigma from the Spanish government of having to ask for aid and may explain why Madrid has been dragging its feet over a bank bailout of up to €100 billion ($159 billion), waiting for something better to come along. More significantly, a senior lawmaker in Merkel’s party said the ESM could have its preferred-creditor status removed. Technical perhaps, but a big deal since, as things stand, if the rescue fund offers a bailout or buys up bonds, it could drive private investors out because they would be the last to get paid in the event of a default. Removing that obstacle could go some way to improving sentiment about Spain. However, we need to hear more senior voices in favour before this moves from the possible to the probable.

Quoteworthy The fact that Bank Danamon still offers at this discount indicates that the bid
Quoteworthy
The fact that Bank Danamon still offers at this
discount indicates that the bid as outlined in
DBS’s proposal may be deemed unwelcome,
much like the recent performance by a certain
scantily clad entertainer
— Macquarie Securities bank analyst Matthew Smith in a recent research
report on how Indonesian regulators are giving Singapore’s largest bank
what he calls ‘The Lady Gaga Treatment’
largest bank what he calls ‘The Lady Gaga Treatment’ Merkel arriving for the EU summit in

Merkel arriving for the EU summit in Brussels on June 28

Eurozone finance ministers will hold a conference call on the Spanish package and the Cypriot bailout request later on June 27. The leader of Germany’s opposition SPD told the Financial Times urgent measures were needed to lower eurozone borrowing costs. Monti wants the eurozone rescue funds to be used to help limit the spreads over German Bunds on bonds issued by countries that respect EU budget rules. Support for his structural reform programme is waning at home and Italy’s parties have made it clear he needs to return from Brussels with some sort of trophy. After the finance ministers of Germany, France, Italy and Spain met in Paris on June 26, Merkel and French President Francois Hollande will meet the next day to try and revive the Franco-German axis and come up with a common platform ahead of the summit. She routinely did this with Nicolas Sarkozy, but on eurozone bonds and a host of other issues, she and Hollande

look far apart. After a rather discordant meeting of the two of them, Monti and Rajoy, there will be an imperative to at least sound more consensual. The summit will agree on a growth package worth around €130 billion, but a lot of that is shuffling existing money and it also builds in a fairly heroic assumption about how far European Investment Bank money can be leveraged. On the banking union, agreement on cross-border supervision is quite likely, but Germany will resist a deposit guarantee fund or resolution structure for failing banks until the road to fiscal union has been set in stone. So, the threat of a bank run remains. Spain continues to put its shoulder to the austerity wheel, saying on June 26 it would consider raising consumer, energy and property taxes. Data shows the central government has almost reached the year-end target in the first four months of the year. Tax increases would presumably push it deeper into recession. — Reuters

WEEK IN REVIEW Singapore said on June 28 that foreign banks with a relatively large
WEEK IN REVIEW
Singapore said on June 28
that
foreign banks
with a relatively large
share of deposits in the
city-state would be required to locally incor-
porate their retail
operations, forcing them to
commit
capital here. The
new
rules will
ap-
ply to foreign banks that are important to the
domestic market
and
that
operate under Sin-
gapore’s
so-called Qualifying Full Bank (QFB)
licence, Deputy Prime Minister Tharman Shan-
nounced on June 28 that it had entered into
a global strategic alliance with Kuok Group to
form a joint venture between Drydocks World-
Southeast Asia and Pacific Carriers Ltd. The
new venture will be named DDW-PaxOcean
Asia Pte Ltd but will have its headquarters in
Singapore. Khamis Juma Buamim, chairman
of Drydocks World and Maritime World, will
also serve as chairman of the board of DDW-
mugaratnam
said in a speech
to bankers
at-
PaxOcean Asia. All parties will work together
tending an industry dinner.
to
grow DDW-PaxOcean Asia into a leading
QFBs
enjoy greater
privileges such as being
able to open
several branches in the city-state
and
accept retail
deposits. In contrast, most
other foreign banks are
restricted to just one
yard in the region. The new partners will also
collaborate on cross-promotional activities and
other strategic initiatives within the offshore
and marine industry.
outlet in
Singapore.
The latest announcement by Singapore is part
of a
global trend following the
2008 financial
SMRT Corp said on June 28 it would increase
the discount it gives to commuters who trav-
el during morning off-peak hours to 50 cents
from 30 cents from Aug 6. The rail operator
also said it would extend the discount to Circle
Line stations. The discount, meant to encourage
commuters to change their travel patterns and
ease crowding during peak hours, will benefit
passengers on the North-South and East-West
Lines, Circle Line and Bukit Panjang LRT who
arrive at 14 city-area stations before 7.45am on
weekdays, excluding public holidays. The 14
city-area stations are Bugis, City Hall, Dhoby
Ghaut, Lavender, Orchard, Outram Park, Raf-
fles Place, Somerset and Tanjong Pagar and
the newly added Circle Line stations of Bay-
front, Bras Basah, Esplanade, Marina Bay and
Promenade.
crisis for countries to
ensure local depositors
are better protected. This will make it more
ex-
pensive for banks as they will lose the benefit
of managing
their capital bases centrally.
Tharman,
who is also
the finance minis-
ter,
said
the
central bank
would consider
al-
lowing foreign banks
that
incorporate locally
and
are sufficiently localised to
open an addi-
tional 25 places of business, of which up to 10
may be branches.
Keppel Corp said
Keppel
Offshore & Marine’s
Shares of k1 Ventures on June 28 jumped to
their highest level since last August after its
majority shareholders offered to take the firm
private in a deal valuing it around $292 million.
Within five minutes of trading, k1 shares had
surged as much as 19.5% to $0.135, matching
the offer price of $0.135 a share. More than
two million shares were traded, 3.4 times
the average full-day volume over the past 30
days. k1’s main shareholders include a unit
of Keppel Corp. k1 has investments in sectors
such as transport leasing, education, oil and
gas exploration, financial services and auto-
motive retail.
yards in
the US and Azerbaijan have
secured
contracts worth a
total of about
US$70
million
($89.6 million). In the
US, Keppel AmFELS
LionGold Corp said on June 28 it is acquir-
ing an 11.2% stake in ASX-listed gold pro-
LLC has
secured
a contract from Transocean
OKP Holdings, the infrastructure and civil en-
gineering company, says it has taken a 10%
stake in CS Land Properties (CSLP) for $111,111.
CSLP was earlier involved in the en-bloc pur-
chase of a block of condominiums at No 4 Am-
ber Road, Singapore. OKP secured the stake
in CSLP through its newly formed subsidiary
OKP Land. The acquisition marks OKP’s first
foray into property development since it ob-
tained shareholders’ approval in September
2010 to diversify into the sector. In connection
with the investment, OKP has also agreed to
extend a loan facility of up to $20 million to
CSLP. As at June 27, $18.4 million has already
been disbursed.
Offshore Deepwater Drilling Inc to repair and
duction company Citigold Corp Ltd (CTO) for
A$10 million ($12.8 million). By subscribing
upgrade
the
semi-submersible
rig Sedco 707.
for
125 million new shares in CTO for eight
Separately, Keppel O&M’s shipyard in Azerba-
Australian cents each — a 33% premium to
ijan, Caspian Shipyard Co, has also
secured
its
last traded price — LionGold becomes the
a contract to build a
Shipyard LLC.
floating dock for Baku
single-largest shareholder of CTO. CTO owns
the Charters Towers Project, which comprises
more than 1,500 sq km of land in 56 granted
Lion Asiapac expects to report a net loss in 4Q
ending 30 June because of impairment losses
on the fair value of the group’s available-for-
sale financial assets due to the plummeting
stock market. The 4Q losses will result in lower
group net earnings for the financial year ending
Drydocks World, the ship repair company,
an-
mineral holdings and two applications.
June 30. — Compiled by Amy Tan
E

THEEDGE SINGAPORE | JULY 2, 2012 5

BRYAN TAY/THE EDGE SINGAPORE

EDGEWISE

EDGEWISE

JULY 2, 2012 • 5 BRYAN TAY/THE EDGE SINGAPORE EDGEWISE Maxi-Cash soars as it makes pawnbroking

Maxi-Cash soars as it makes pawnbroking as good as new

Newly-listed Maxi-Cash Financial Services seems to have convinced the market that its business of pawnbroking and trading pre-owned jewel- lery is set to grow over time. Shares in the company began trading on June 22 and quickly soared well above its IPO price of 30 cents. On June 26, the stock hit a closing high of 47.5 cents, with more than 220 million shares having been traded over the three trading days. The stock ended June 28 at 44 cents. Even at that level, Maxi-Cash would be the second best performing IPO in the past year, after construction and heavy engineering company Civmec Ltd. Why is Maxi-Cash so hot? Perhaps it’s because the market can see how quickly it is widening the appeal of the age-old service of pawnbro- king. Walking into a Maxi-Cash store, located five minutes from a major shopping hub in the heartlands, feels not much different from stroll- ing into a regular jewellery store. However, with- in the display cases festooned with gold neck- laces and Rolex watches are signs proclaiming all the items to be “As Good as New”. And at the far end of the store is a counter, not unlike one you would find in a bank, where custom- ers can pawn their jewellery or watches. Maxi-Cash’s pawnbroking business enables people to obtain access to short-term loans by providing just about any form of jewellery or branded timepiece as collateral. Every pledge transaction has a redemption period of six months, during which time customers can reclaim their items by repaying the loan and the interest incurred of up to 1.5% per month. Customers can also choose to partially redeem their item, renew their loans, or partially repay their loans. Items which are not redeemed or renewed after the redemption period are auc- tioned off. Most of Maxi-Cash’s revenue currently comes from trading second-hand watches and jew- ellery though. The items it sells are obtained from walk-in customers, other traders of sec- ond-hand jewellery as well as from the auctions of unredeemed pledged items. These are then put on sale at Maxi-Cash’s retail stores. Within a small store, a watch enthusiast might find a 1970s vintage Rolex watch for just over $7,500, while a bargain-hunter could get a certified dia- mond solitaire for just over $2,000. The salesgirl at one of the outlets assures customers that while the jewellery is pre-owned, they are refurbished before being put on sale. The Rolex watches in their own designated display cases are also serviced prior to sales, and come with an in-house six-month warran- ty. “We are very strict when we buy watches,” she says. “If there are flaws, if the movement doesn’t work, or if the chain is too short, we won’t take them in because the repair costs would make it harder to sell.” Maxi-Cash was formed in 2008 by its par- ent company, Aspial Corp, the Mainboard-list- ed jeweller and property developer that owns jewellery chains like Lee Hwa, Goldheart and Citigems. It opened its first pawn shop at Ang Mo Kio Central in February 2009 and subse- quently added another nine within the year. By May 2012, the chain was operating 24 outlets throughout the country, the largest number of outlets among its peers. At its IPO, Maxi-Cash sold 56 million new shares at 30 cents each, with 2.25 million for public subscription and the rest for private placement. Out of the net proceeds of $15.1 million, $6 million will go toward the opening of four more retail outlets in Tampines, Pasir Ris, Hougang and Redhill. The rest of the pro- ceeds would go toward general working capital, branding and marketing activities, and the ex- pansion of the company’s range of pre-owned jewellery and watches for sale.

During its three years in business, Maxi- Cash’s revenues have climbed fast, to hit $87.7 million in 2011. Its earnings for the year came in at $3.1 million, against losses of $1.3 mil- lion and $4.7 million in 2010 and 2009 respec- tively. The pawnbroking business accounted for 16.3% of its sales last year, and 41.5% of its earnings. Meanwhile, Maxi-Cash’s parent Aspial is riding on its success. Aspial said in its 1Q2012 results statement that its financial-service busi- ness, namely Maxi-Cash, reported a 46.8% growth in revenue during the quarter to $22.9 million, while pre-tax profit improved to $1.7 million compared with the $100,000 in 1Q2011.

Moving forward, Aspial said the financial-service business is ex- pected to perform better in 2012 than in 2011. By broadening the appeal of a business that has always served a need in society, perhaps Maxi- Cash is on its way to becoming a

household name.

E
E

Maxi-Cash operates the largest chain of pawn shops, with 24 outlets located throughout the country

a household name. E Maxi-Cash operates the largest chain of pawn shops, with 24 outlets located
a household name. E Maxi-Cash operates the largest chain of pawn shops, with 24 outlets located

BRYAN TAY/THE EDGE SINGAPORE

6 THEEDGE SINGAPORE | JULY 2, 2012

ECONOMY WATCH

ECONOMY WATCH

Look to currencies of ‘SNAC’ nations and gold for diversification, says Crédit Agricole’s Hall

| BY GOOLA WARDEN |

F orget about the BRICs and the Next-11. It’s SNAC time. Geneva-based Davis Hall, global head of FX and precious metals advisory at Crédit Agricole, says investors looking for alternatives to the

US dollar or the euro should simply focus on the currencies of Singapore, Norway, Austral- ia and Canada. The way he explains it, most investors are more interested in capital preservation and don’t really have the stomach to bet on a re- bound in the currencies of the BRIC nations — the emerging market powerhouses of Bra- zil, Russia, India and China. And, if that’s the case, they also aren’t likely to be comfortable wading into currencies of the even more exot- ic “Next-11” emerging markets, which include Nigeria, Egypt, Iran and Bangladesh. In fact, most emerging market currencies have been weakening against the US dol- lar this year, Hall points out. The Brazilian real has lost 10.9%, the Indian rupee is down 7.5%, the Russian rouble has lost 2.8% and even the mighty renminbi is down 1%, based on their spot rates. “The high beta currencies within the BRIC currencies have seen huge outflows,” Hall says. Meanwhile, things appear to be going from bad to worse in Europe. “Contagion is spread- ing. This process of recovery can take 10 years,” he warns. “We’ve come to the conclusion that the euro will plod along. We do not see a break- up of the euro, and we do not see a ‘Grexit’.” Yet, things won’t be pleasant for eurozone na- tions for some time, he adds. “We’re going to have EU living standards suffer; unemployment is going to increase and we’re going to have a deflationary phase of de-leveraging.” Hence, the euro may weaken further, espe- cially if the European Central Bank eases mon- etary conditions. “Europe will have the luxury of allowing the currency to get weaker,” Hall says. That could make the US dollar a benefi- ciary. “Typically, when you have ‘risk-off’, the US dollar always benefits.” Yet, investors whose home currency isn’t the US dollar might not want to be too heav- ily exposed to the greenback. So, what alter- natives do they have? “Nothing clears the mind more than the absence of alternatives,” Hall tells The Edge Singapore in a recent interview. If safety and capital preservation are paramount, then in- vestors should focus on countries that have strong balance sheets and balanced external accounts. “We need triple-A ratings, current ac- count surpluses, no debt, or at least low debt.

current ac- count surpluses, no debt, or at least low debt. As for Singapore, the nation’s

As for Singapore, the nation’s small, open economy means that is highly vulnerable to external shocks. Yet, Hall figures that the Lion City will be able to manage itself out of any difficulties that come along, as it always has in the past. Notably, it has managed to build up huge sovereign wealth funds, de- spite not having any natural resources. In fact, Hall says that Singapore has perhaps one of the best fiscal positions among the SNAC nations. “For the fiscal report card in the class, the best is Norway, and Singapore is a very close No 2,” Hall says. Singapore also has a very strong banking sector, much like Canada, according to Hall. “Canada has the safest banking system and the best quality banks with Singapore.”

Bearish on euro, US dollar

Hall: If safety and capital preservation are paramount, then investors should focus on countries that have strong balance sheets and balanced external accounts

Over the next six months, as the euro crisis rolls on, Hall is recommending a move to the SNAC currencies for safety. “It is time to get out of the euro and get into the Canadian dollar, the

If

you have a sovereign wealth fund you’re in

Norwegian currency, and the Singapore dollar

great hands,” Hall says. And, if you can find a country that also happens to be a net commodi-

if you’re a euro-based client. It could also be a good time to start nibbling gold, and consider

ty

exporter then so much the better, he adds.

the Australian dollar,” Hall says.

That led Hall to the currencies of a hand- ful of small nations, where the first letters of their names spell SNAC. S is for Singapore, the pre-eminent triple-A rated country in Asia;

He is also watching for an opportunity to trade out of the US dollar and into the SNAC currencies in the weeks ahead. For instance, he expects to see the Singapore dollar trade

N

is for Norway, a country with the second

up to $1.31 before falling back to $1.20 against

largest sovereign wealth fund after the United Arab Emirates and the best managed econo- my in Europe, according to Hall; A is for Aus- tralia, a major commodity producer and C is for Canada, also a commodity producer with

the US dollar. “If I’m a US dollar holder, I’m getting an opportunity in the next couple of weeks to consider getting out and buying some of these SNAC [currencies]. Singapore is definitely our flow of funds favourite for

solid balance sheet. To be sure, these currencies aren’t entirely free of risks. Australian exports, for instance,

a

the region.” Hall is something of a secular bear on the US dollar. Born in the US, he remembers moving

are driven by demand from China, which looks like it’s headed for a slowdown. Yet, Hall thinks that might simply provide investors with an opportunity to buy the Australian dollar. “As everybody becomes more wary of China, the Australian dollar has already succumbed to a 10% drop,” Hall points out. Meanwhile, weakening oil prices recently

to Switzerland with his parents when he was 11 years old. It was 1975 and the US had just abandoned the gold standard. “I had US$12 savings,” Hall says, adding that he wanted to use it to buy some sweets. “My dad told me we had to exchange it, and I became fas- cinated by currencies. We exchanged it, and he gave me CHF47 because US$1 was worth

is

bad news for Norway and Canada, which

CHF4.25.” Now, 37 years later, US$1 is worth

are both major producers of the commodi- ty. Yet, Norway has put aside much of its oil wealth for future generations when its natu- ral resources are exhausted. And Canada has

just 75 centimes. Hall believes that the US dollar will contin- ue depreciating against gold and many other currencies in the very long term. “The US has

a

very strong banking system and a history

every intention to gain export advantage from

of

running internal and external surpluses.

weakening the currency. They are living with a

“Canada is a triple-A America,” Hall says. If these currencies weaken because of falling oil prices, it could be an opportunity to get into them, Hall figures.

huge advantage of seniorage. Everybody is still willing to trade US dollar,” Hall says. The lesson from that is it isn’t enough to just hold cash, but to diversify one’s holdings

into different currencies. “You need to diver- sify to reduce risk,” Hall says.

Gold to benefit from reflation

Perhaps the one global currency that faces the least risk of being debased is gold. For the moment, however, the precious metal is fac- ing some selling pressure along with other fi- nancial assets. Also, gold has fallen because consumers in India have been unable to buy as much as they could before, with the falling value of the rupee. Technically too, gold is testing a pivot point, Hall says. The yellow metal is already trading below its 100-day and 200-day moving aver- ages. If gold falls through US$1,510 an ounce on the chart, the next support is down near the US$1,400 area. However, gold could snap back quickly if the US Federal Reserve or other major central banks decide to launch another major quanti- tative-easing exercise. “My opinion is the mar- kets will suffer, volatility will stay high until central banks reflate and provide liquidity. Until then, capital is going to stay right under the mattress,” Hall says. “Since the start of the year, [the S&P 500 and gold] have fallen 6%; they’re moving in tandem until [US Fed- eral Reserve chainman Ben] Bernanke pulls the trigger,” Hall adds. Hall figures that a good entry point for in- vestors would be at US$1,400 per ounce. And since interest rates on most major currencies are close to zero, the opportunity cost of hold- ing gold at this point is virtually nothing, he adds. Over the longer term, Hall expects gold to keep rising for a number of reasons. For one thing, central banks have started to hold gold again, instead of currencies like the Swiss franc, US dollar, British pound and the euro. In addition, it is getting harder to increase the supply of gold. “You have to dig deeper into more politically sensitive countries to ex- tract gold. The easy gold has already been ex- tracted,” Hall says. A new mine with the as- sociated infrastructure is likely to cost US$5 billion, and that’s before a single nugget has been extracted, he adds. “At the moment, gold is losing value, but we should use the weakness to buy gold until ad- ditional liquidity is delivered,” Hall says. He ex- plains it could be a matter of time before concert- ed efforts to reflate the global economy simply turns into rampant inflation. “You can imagine the money leaving the bond market when infla- tion becomes a risk. At the moment you have de- flation. But at some stage in the future we’ll look back at these years and say, ‘Why did people buy

bonds? Why didn’t they buy gold?’”

E
E

Auditor: China local government finances are unsustainable

T he finances of China’s county-

level governments are unstable

and unsustainable as the major-

ity of their fiscal income comes from

sources other than taxation, the na- tion’s top auditor said. About 60% of revenue raised last year by 54 counties investi- gated by the National Audit Of- fice wasn’t derived from taxes, Liu Jiayi, the head of the agency, told a meeting of the legislature on June 27, according to a transcript of his speech posted on the audit

office’s website. Total fiscal reve- nue at those counties rose 17% to RMB112 billion ($22.5 billion) last year, Liu said. China shelved a plan last week to allow local governments to sell bonds directly amid concerns that the companies they set up to bor- row money will default on some loans. Debt racked up by local gov- ernments and their entities stood at about RMB10.7 trillion at the end of 2010, with 17% maturing this year and 11% next year, according

to an audit office report released last year. “The proportion of non-tax income in fiscal revenue is relatively high at county-level governments, pointing to relatively poor stability and sustain- ability,” Liu said, without specifying the other sources of revenue. Non-tax revenue includes admin- istrative fees, fines, lottery income, foreign aid and income from “the use of state-owned resources,” ac- cording to information on the Min- istry of Finance website.

Central government subsidies to county and township authorities last year were more than three times that in 2005, but local governments are facing larger expenditure pressure, with mandatory growth targets for spending on areas including edu- cation, agriculture and science and technology, Liu said. China has more than 1,600 coun- ty-level governments, according to the Ministry of Civil Affairs. The central government should distribute more tax revenue to local

authorities to help them meet rising city construction and public welfare costs, according to a report that ap- peared on June 28 in China Daily. Local governments have been forced to turn to non-tax income such as land sales and to increase debt because of the imbalance in tax revenue and spending obliga- tions with the central government, Jia Kang, director of the Finance Ministry’s Institute of Fiscal Science, was cited by the paper as saying.

— Bloomberg LP

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BRYAN TAY/THE EDGE SINGAPORE

BLOOMBERG

8 THEEDGE SINGAPORE | JULY 2, 2012

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Raffles Medical Group unlikely to see negative impact from healthcare IPOs

| BY MICHELLE TEO |

O ne of the highly anticipat-

ed IPOs this year is that

of Integrated Healthcare

Holdings (IHH), a hospital

management firm owned

by Malaysian sovereign wealth fund Khazanah Nasional. IHH is planning

a dual listing in Singapore and Malay-

sia later this month in a share offering that could raise as much as US$2 bil-

lion ($2.6 billion), making it the larg- est after the proposed listing of state- run plantation company Felda. IHH is already Asia’s largest hos- pital operator, with more than 5,000 beds in some 90 facilities, following

a series of acquisitions by Khazanah

of some of the biggest hospital opera- tors in Asia and the Middle East. Last December, Khazanah bought 75% of Turkish private hospital chain Aci- badem AS in a deal said to be worth US$650 million. Just the year before, Khazanah had trumped India’s Fortis Healthcare with a US$3.3 billion offer for then Singapore-listed 2,800-bed operator Parkway Holdings, which runs the Gleneagles and Mount Eliz- abeth hospitals here. IHH also owns Malaysia’s Pantai Holdings and Inter- national Medical University Malay- sia, as well as about 11% of India’s Apollo Hospitals Enterprise. Meanwhile, Fortis is said to be mulling a US$400 million IPO of its own this year through a business trust. In fact, the company had wanted to list Religare Healthcare Trust on the Singapore Exchange (SGX) late last year, but then deferred plans due to the volatile stock market. However, it reportedly would only be a spin-off of its non-core businesses such as ra- diology and hospital F&B operations, in order to allow Fortis to concentrate on its high-margin core activities such as emergency services, intensive care and operating theatre. Industry analysts say IHH’s IPO could shine the spotlight on the Sin- gapore healthcare sector again. “[It] could result in greater interest in Sin- gapore’s healthcare sector, and could lend a slight boost to the share prices of other SGX-listed healthcare provid- ers,” says DMG & Partners Research in a June 20 report. Maybank Kim Eng notes in a recent report that de- spite the recent sell-off in equity mar- kets due to the economic uncertain- ties, “hospital stocks have managed to hold on to their premium valua- tions, trading at above market aver- age PERs [price-to-earnings ratios] of about 26 times”. Analyst Yeak Chee Keong says other than the sector’s typically defensive earnings, a re- newed interest in the business could provide stock support amid expecta- tions of higher valuations to come. How else will IHH’s IPO impact lo-

cally listed players such as Raffles Medical Group?

According to DMG, Raffles Medical

is IHH’s closest SGX-listed peer, after

Khazanah’s buy-out of Parkway and Thomson Medical’s delisting in early 2011 by new owner Peter Lim. Raffles

delisting in early 2011 by new owner Peter Lim. Raffles Raffles Medical Group has 380 beds

Raffles Medical Group has 380 beds at Raffles Hospital and has been widening its specialist services at the hospital

Medical, analysts say, could now ben- efit from the IPO spotlight with better brand awareness overseas. Analysts Lynette Tan and Terence Wong add that it is not likely for Raffles Medi- cal to see any negative impact on its shareholding or stock price. The group has 380 beds at Raffles Hospital and a wide network of gen- eral practitioner and dental clinics in Singapore. It has been broadening its specialist services at Raffles Hospi- tal, including adding a neuroscience centre in April, and is preparing to expand the premises by more than 100,000 sq ft, likely in 2015. At the same time, Raffles Medical is scheduled to start operations at a new specialist medical centre in the Orchard area in 1H2013. The group also operates a clinic network in Hong Kong as well as a medical centre in Shanghai. As Nomura analyst Lim Jit Soon notes in a June 6 report, the company is also evaluating a tender in Hong Kong for two plots of land zoned for hospital development, al- though it is likely to proceed with a joint venture instead.

For its last financial year end- ed December, Raffles Medical saw earnings rise 11.3% to $50.4 mil- lion after revenues grew 14.1% to $272.78 million. FY2011 also saw a total dividend payout of four cents a share, or a yield of about 2%. Raffles Medical said prof- it after tax in 1QFY2012 ended

March grew 10.5% to $11.7 mil- lion. Turnover increased 13.2% to $72.9 million in the quarter. The hospital division was the

stronger performer again, with rev- enue growing 15.3%, compared with the 7.4% growth in sales recorded by the healthcare services. The group says it expects Raf- fles Hospital to continue to perform well, particularly as it continues to expand its base of foreign patients, as well as increase its pool of spe- cialist staff. Also, in spite of the eu- rozone issues, Raffles Medical says it has not seen a drop in foreign pa- tients and still has about 60% pa- tient occupancy rate.

Healthcare challenges

The healthcare sector in Singapore and the region is expected to continue to see robust growth, analysts say, based on high population growth, an ageing demographic and rising affluence. In Singapore, 20% of the population is expected to be aged 65 and above by 2030. “In the current uncertain mar- ket, we argue [that] the defensive na- ture of hospital services would stand out as a strong attribute,” writes May- bank Kim Eng’s Yeak.

But there are challenges, chief among them the rising cost of staff. In order to retain and attract healthcare professionals into the public hospital sector, the Singapore government has started to raise the wages of health- care professionals, with the aim of increasing their salaries by an aver- age of 20% by 2014. This could mean private hospital operators would have to raise the wages of their staff too in order to keep or hire talent, thus increasing costs as well. Wages are already estimated to be equivalent to nearly half of Raffles Medical’s revenue. “Raffles Medical would need to respond correspond-

ingly with a competitive compensa- tion structure to retain and attract staff,” Yeak says. “Nevertheless, we note that it still has room to raise its charges and intends to do so, given that its average surgical cost is lower than that of Singapore General Hos- pital, a public hospital.” At the same time, Raffles Medi- cal has acknowledged that compe- tition within the sector is intensify- ing as more hospital beds come on stream, starting with Parkway’s 333- bed Mount Elizabeth Novena Hospi- tal. About 180 beds are expected to be available soon, with the rest coming on stream at year-end. More beds are slated to come on stream in 2014 and 2015, as the Singapore Health Min- istry says it plans to add 3,700 hos- pital beds by 2020, although about half of these would be in communi- ty hospitals. However, there is still a supply crunch. There are only about 2.2 beds per 1,000 people, while many other developed countries have three beds for every 1,000 people, Yeak notes. In fact, the public health sector is said to have been in talks with private hospital operators about leasing their beds and subsidising the cost. “Though [Mount Elizabeth Nove- na Hospital] marks one of the biggest increases in private hospital beds in more than 10 years, we do not ex- pect any major negative impact on Raffles Medical as the new hospital targets the high-end segment of the market,” Yeak says. OCBC analysts Wong Teck Ching and Eric Teo write in a June 15 re- port that the group should continue to benefit from both local patients as well as the growing medical tourism industry in Asia, particularly in Sin- gapore. Furthermore, despite being a private hospital, Raffles Medical’s patient bills seem to be lower

than those in public hospitals. According to Health Ministry figures, the average total bill

for medical specialities at Raf-

fles Medical is lower than that at

Mount Elizabeth hospital and the

National Heart Centre. In terms

of surgical procedures, Raffles

Medical seems to be charging

even less than the Singapore

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General Hospital.

“Management believes that

competitors’ premium of 20% to 30% is unjustified and as

such is confident that it has room to increase prices and close the gap, though there might be resistance from insurance providers,” Nomu- ra’s Lim says. “Although competitive and wage pressures are on the rise, we believe that Raffles Medical has room to raise its ASPs [average selling prices] given its competitive pricing vis-à-vis its peers, while an increased depth of sub-speci- alities on offer would aid its revenue intensity increment,” OCBC says. And, while IHH could be a hot stock for many investors, DMG does not see any loss of interest in Raf- fles Medical. “Most of Raffles Med- ical’s shareholders are institutions, with stakes of less than 5%,” say Tan and Wong. “Given Raffles Medi- cal’s consistent and stable growth, it is not likely that these shareholders would reduce their stakes just to free up funds to invest in another health- care group.” DMG has a “buy” rat- ing on Raffles Medical, with a price target of $2.67.

‘Overweight’ on healthcare

Out of 11 analyst ratings on Bloomb- erg, there are five “buy” calls and two “outperform” recommendations for Raffles Medical’s stock. The others are “neutral” or recommend a “hold” on the counter, which has gained about 4% since the beginning of the year. The stock is 13% down from its peak achieved a year ago, and trading at about 22 times earnings.

Indeed, it seems that Raffles Medi- cal, with Ebit (earnings before interest and taxes) margins of about 22%, has now emerged as the cheapest hospital stock in the region. In Malaysia, for instance, KPJ Healthcare trades at about 24 times earnings. Thailand’s Bumrungrad International Hospital, with 554 beds in Bangkok, is trad- ing at about 26 times earnings. In- dia’s Fortis, with some 10,000 beds,

is trading at about 55 times earnings,

and IHH could be valued at as much as 35 times earnings. “Raffles Medical has the strong- est balance sheet among its peers, being the only one in a net-cash po- sition,” notes Maybank Kim Eng’s Yeak. “Even after accounting for capital expenditure for its expan- sion plans, we expect it to remain in a net-cash position, helped by its strong operating-cash-flow-generat- ing capability.” To factor in potential price increas- es, Yeak has raised his revenue esti- mates for the company by 1.1% to 2.5% over FY2012-FY2014. However, costs are also expected to increase, by 14% to 16% from the year before. He

expects the group to generate $315.1

million in revenues and earnings of

$54.3 million in FY2012, representing

growth of 15.5% and 7.7% respec-

tively. Yeak has upgraded the stock to

a “buy” and trimmed his price target

to $2.71, from $2.73, or 26.6 times

forecast FY2012 earnings. Both DMG and OCBC have “over-

weight” calls on the healthcare sec-

tor.

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THE EDGE SINGAPORE | JULY 2, 2012 • 9

10 THEEDGE SINGAPORE

CORPORATE

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| BY GOOLA WARDEN |

ilbert Kohnke, chief risk officer at

Oversea-Chinese Banking Corp,

has seen more than a few finan-

cial crises and market upheavals

during his more than 20 years in

banking. Among them were the Latin Amer- ican debt crisis, the technology bust and the recent global financial crisis. Yet, he isn’t con- vinced he’s seen it all. “Risks come up everywhere,” Kohnke, 54, tells The Edge Singapore. “We’re working with uncertainty; if everything is known, there is no risk.” The most effective way for banks to avoid uncertainty and risk is to stick to their “core competencies” in familiar markets, ac- cording to Kohnke. “From a banking perspec- tive, we should stick with what we know best.” That doesn’t free Kohnke from having to con- stantly monitor OCBC’s businesses and oper- ations for signs of trouble, though. “We do a very detailed stress test from a credit risk per- spective, a funding risk perspective and oper- ational risk, to understand the type of things which could potentially hurt us.” He must be doing something right. In May, OCBC was named the world’s “strongest” bank for the second consecutive year, topping a ranking by Bloomberg Markets Magazine of 78 global banks with at least US$100 billion in total assets. The banks were assessed on fac- tors that included their capital ratio, loan-to- deposit ratio, ratio of non-performing assets to total assets and efficiency ratio, which com- pares costs with revenue. OCBC’s strength didn’t come about by shy- ing away from extending credit, often in seg- ments of the market that some might consid- er relatively risky. In fact, Kohnke notes that OCBC is more exposed to the local proper- ty sector than other banks. As at March 31, loans to the building and construction sec- tor and housing segment made up more than 40% of the bank’s $134.6 billion loan book. “If you look at concentrations in our portfo- lio, real estate in Singapore is a big piece of our book,” Kohnke says. However, he says the bank has been careful to leave itself a significant margin of safety, and that there would have to be a very large slump in property values before its capital ratios are

large slump in property values before its capital ratios are affected. “We can absorb 30%, we

affected. “We can absorb 30%, we can absorb 50%, even more than that,” he claims. “There would be very significant market stresses, and we would not need to touch our capital.” Kohnke and other risk managers at OCBC also try to anticipate trouble at each of its business units by conducting “a lot of scenar- io-planning”. For instance, they might con- sider the impact of a surge in market volatil- ity on the bank’s trading activities. Or, what would happen to its portfolio of mortgage as- sets if unemployment were to rise more than forecast. “If it’s Europe, the exporters would have problems,” Kohnke says, citing another example of its scenario-planning. “We must understand the factors that could impact a portfolio, and the mitigating actions you take to manage those risks.” One of OCBC’s strengths is the diversity and counter-cyclicality of its businesses. While the corporate sector is susceptible to business cy- cles, the consumer business is relatively sta-

ble. “Consumer banking tends to be less vol- atile because people will continue to pay for their homes and their cars to protect those,” Kohnke says. “The Treasury side can help you offset some of the other risks.”

Basel liquidity ratios met

If there is a lesson that banks learnt during the recent global financial crisis, it is not to rely too much on wholesale funding. “In the US, if you were dependent on short-term wholesale funding paper, if that source dries up, you’re out of business,” Kohnke says. He adds that OCBC’s universal banking model largely shields it from such a risk. “As a universal bank, we have multiple streams of liquidity and busi- ness lines.” New regulations could soon force banks to pay greater attention to funding strategies and liquidity. Basel III global regulatory standards for banks will include the added dimension of two liquidity ratios, in addition to the pre-

scribed capital ratios. While the precise defi- nition of the new ratios are still being final- ised, OCBC is confident that its large base of customer deposits will enable it to easily meet the new standards. “We’ve said we can today meet the liquidi- ty requirements under Basel III,” Kohnke says. He adds that OCBC has “solid” loan-to-deposit ratios across its currency exposures, including Singapore dollars, Malaysian ringgit, Indone- sian rupiah and Chinese renminbi. Is more financial market turbulence likely in the months ahead? What does it mean for the banks? “There is a very active funding market and it will allow you to fund yourself through most market crises,” Kohnke says. “The is- sue is that the cost will sometimes go up,” he adds. “However, as long as a bank has a good reputation, and is rated well, funding can be favourably priced,” he says. “If you run your institution well, people will have confidence

SIM Membership SIM Management House, 41 Namly Avenue, Singapore 267616 | membership@sim.edu.sg
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BRYAN TAY/THE EDGE SINGAPORE

12 THEEDGE SINGAPORE | JULY 2, 2012

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Radiance gets new lease of life as RTO wins shareholders’ approval

| BY JO-ANN HUANG |

T ony Taylor, managing direc- tor of Global Invacom Hold- ings Ltd (GIHL), a British firm making high-tech sat- ellite equipment, only nar-

rowly managed to persuade minori- ty shareholders of Mainboard-listed

Radiance Group to support a reverse takeover (RTO) at its extraordinary general meeting on June 15. Only 57% of them voted for the deal that will see Radiance acquire GIHL and investors in GIHL become major shareholders of Radiance. Now, Taylor is determined to en- sure that the new assets being ac-

quired by Radiance really do give it

a new lease of life. GIHL is a lead-

ing manufacturer of high-tech satel-

lite equipment and one of only sev- en such companies in the world. It

is heavily invested in R&D and has

more than 30 registered patents. On the other hand, Radiance is a be-

leaguered contract manufacturer of

satellite parts. Under the RTO deal, GIHL will be injected into Radiance in exchange for US$49 million ($62.6 million) worth of cash and Radiance shares. Post-RTO, the combined list- ed business entity will be renamed Global Invacom Group. Taylor believes the RTO will result in Radiance shareholders benefiting from the enormous growth opportu- nities in the satellite communications industry, instead of enduring poor margins, intense competition and rising labour and material costs as a contract manufacturer. “Unless you have some key pieces of intellectu- al property (IP), contract manufac- turing is a tough place to be. And I would rather be a smaller sharehold-

er in a big successful business with lots of IP, than a bigger sharehold- er in a business with a limited life- time,” says Taylor, who was speaking

to The Edge Singapore at the conclu- sion of the EGM. Yet, many of Radiance’s minori- ty shareholders objected to the RTO

because of the dilution they would suffer. Their collective stake in Radi- ance will fall from 35.5% to 10.2% with the expansion of its share base to 230 million shares. This is af- ter a four-to-one share consolida- tion, an issuance of 122.5 million consideration shares, as well as a compliance placement of 41.6 mil- lion shares. On the other hand, GIHL’s three directors, which include Taylor, would end up owning 14.4% of Radiance. Other shareholders of GIHL will hold a 38.7% stake in Radiance af- ter the RTO. Investors who take up the compliance placement will hold a further 18.1% stake in the enlarged Radiance. Meanwhile, The Pacific Trust, whose beneficiaries include the directors and other employees of GIHL, will see its stake reduced from 59.1% to 16.9%. Besides the dilution they will suf- fer, some minority investors also fear that GIHL might not ultimately suc- ceed in its business. “They do have

not ultimately suc- ceed in its business. “They do have Taylor believes the RTO will result
not ultimately suc- ceed in its business. “They do have Taylor believes the RTO will result

Taylor believes the RTO will result in Radiance shareholders benefiting from the enormous growth opportunities in the satellite communications industry

patents that can be commercialised, but the gestation period for R&D can sometimes be unpredictable and long. The key is whether they can continue to innovate and come up with better products going forward,” says Chua Ghim Hock, a senior test development engineer and Radiance shareholder.

Demand for satcomm services rising

GIHL’s key customers include US sat- ellite broadcasters DirecTV Group and DISH, as well as their British counter- part British Sky Broadcasting Corp. One top seller is low-noise-block con- verters that transform microwave sig- nals received by a satellite dish an- tenna into meaningful information for television viewing or broadband Internet access. GIHL also sells to broadcasters satellite dishes, switches and other accessories that are then assembled into satellite receivers for their customers. The company also manufactures satellite equipment that enables broadcasters to use high ra- dio frequencies such as the Ka band, which supports the transmission of high-quality images for television viewing and faster speeds for broad- band Internet access. Taylor says demand for satellite communications services is grow- ing throughout the world. Compared with cable networks, which are ex- pensive and take a long time to lay out, satellite receivers are easy and cheap to set up, and can receive sig- nals across large geographical areas. In Europe alone, the number of satel- lite TV subscribers grew 22% in the last four years. Satellite TV currently reaches 44% of all 186 million digital TV homes in the continent. VSAT, which is a type of satellite receiver used to provide broadband

Internet access, also has huge po- tential, says Taylor. The number of homes equipped for satellite Inter- net in the world has increased 30% a year in the last two years, he adds. GIHL will continue to invest in R&D to keep up with the demand for bigger bandwidth, faster transmission speeds and better satellite technology. From 2009 to 2011, the company invested US$13.8 million in R&D. In FY2011 ended December, GIHL achieved rev- enues of US$62.9 million and earn- ings of US$4.1 million.

A reprieve for Radiance?

Radiance’s financial woes began in late 2009, when its former chairman Sun Jiangrong was forced by liquida- tors to sell his pledged 52.4% stake after he defaulted on a $120 million loan he took from a hedge fund. Sun was under investigation for corporate governance issues plaguing Sino-En- vironment Holdings, another one of his firms. Since then, Radiance’s shares have been trapped below the 10-cent mark. The company’s shares closed at 36 cents on June 28 post- consolidation. It has a market capi- talisation of $23.7 million. In 2010, GIHL swept up the 52.4% stake in Radiance in an effort to protect its largest contract manu- facturer of satellite parts. The stake in Radiance was eventually placed in The Pacific Trust. By January this year, GIHL had increased its stake in Radiance to 59.1%. GIHL also took over Radiance’s manage- ment after the buyout, with Taylor becoming chairman of Radiance. In FY2011 ended December, Radiance posted revenues of $104.7 million and earnings of $5.9 million. Now that shareholders of Radi- ance have app roved the RTO, Ta ylor has his work cut out for him. Bring-

THEEDGE SINGAPORE | JULY 2, 2012 13

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Airbus mulling US plant, sources say

E urope’s Airbus is seriously studying the possibility of opening an assembly line in the US, marking a direct challenge to Boeing in its home market as competi- tion heats up in the global jet market,

people familiar with the matter say. The plan calls for the possible produc- tion of A320 narrow-body jets, Airbus’s best- selling model, most probably in Mobile, Ala- bama, where EADS had planned to assemble US tanker aircraft in a Pentagon contest it lost to Boeing last year. Airbus and its Franco-Ger- man parent company EADS have said for some months that they were studying reshaping the plan to establish a foothold in commercial air- craft production in the world’s largest single passenger-jet market. One of the sources does not rule out an im- minent announcement. But an Airbus spokesman said the company had not yet completed its studies. “No deci- sion has been taken,” Airbus spokesman Stefan Schaffrath says, declining further comment. Airbus CEO Fabrice Bregier was quoted in a Spanish newspaper on June 27 as saying the planemaker was actively looking at a possible new assembly plant. “This is part of the brain- storming we are doing regarding our interna- tional development,” El Economista quoted him as saying. Setting up in the US would boost Airbus’ presence in the key US market as it enters a phase of fleet renewal, and would reduce cur- rency risk by increasing its exposure to costs in dollars, the currency in which aircraft are sold. It would be the second Airbus assembly plant outside Europe. None of the sources agreed to speak pub- licly on the matter because decisions have not yet been finalised. Airbus is currently the world’s largest pro-

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ing Radiance’s manufacturing capabilities up to speed is the first step, says Taylor. GIHL in- vested US$1 million last year to upgrade Ra- diance’s factories in Shenzhen and Shanghai. For the plants, this is their “first investment in a long, long time”, according to Taylor. He also wants the contract manufacturing busi- ness to strengthen its relationship with its cur- rent customers and plans to grow its customer base to include other high-tech satellite equip- ment makers. “We are going to take the facto- ry managers and introduce them to customers that they have had for 10 years but have nev- er met so they can understand their products and requirements,” he says. With the combination of both businesses, hopefully the new Radiance can benefit from the resulting synergies and bounce back. “GIHL and Radiance combined is a bigger company, thereby having improved supply-chain coordi- nation, cost-sharing and bigger opportunities in the marketplace,” says Chua. “However, it remains to be seen whether it can live up to its potential.”

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ducer of passenger jets ahead of Boeing. It as- sembles in Toulouse, France, the German port city of Hamburg and, since 2009, in Tianjin outside Beijing, China. Airbus said earlier this month it had started talks to extend the Tian- jin venture beyond 2016. When EADS lost the tanker contest to Boe- ing, analysts said the long, politically-charged competition had focused industry attention on Alabama and fostered a belief that this could

lead to future projects. The original tanker pro- posal included a kernel of commercial produc- tion in Alabama with plans to assemble com- mercial freighters alongside the US Air Force refuelling planes. But the new proposal would spread its reach to passenger jets, a much larger market in which Airbus and Boeing compete fiercely for the li- on’s share of a global jet market estimated at US$100 billion ($127.9 billion) a year.

Alabama and the US South have made strides in recent years in gaining aerospace and other manufacturing work. Aerospace and defence industry employ- ment in Alabama rose 13% from 2002 to 2008, according to a study conducted by the Ala- bama Aerospace Industry Association. High- tech space jobs are centred around Huntsville, with Boeing and Lockheed Martin as major

employers. — Reuters

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14 THEEDGE SINGAPORE | JULY 2, 2012

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Property players turn to bonds amid weak equity market sentiment, says HSBC’s Kern

| BY CHAN CHAO PEH |

J ason Kern observes that just about everyone he meets in Asia loves talking about property, clearly indicating that there is strong demand for it. Yet, mar-

ket sentiment for shares in property developers and real estate-related se- curities is ice-cold, he laments. “If there is one main driving fac- tor, it is the uncertainty in Europe,” says Hong Kong-based Kern, who is head of real estate and lodging ad- visory at HSBC. While the turmoil in the eurozone hasn’t had much impact on the market for physi- cal property in Asia, it has certain- ly dulled the mood in capital mar- kets. “Uncertainty is the death of all capital markets,” says Kern. “Peo- ple want definitive plans and solu- tions, no more half-measures from the EU. We want some bold moves that can give some direction to the market.” Markets have also been worried about the prospect of Asian govern- ments introducing more anti-specu- lative measures to cool the segment. “China calls the tune for the rest of the region,” Kern says, referring to Beijing’s efforts to keep a lid on property prices via various admin- istrative measures, including curb- ing the flow of credit to the sector. “The public market wants to know the bad news, but it wants to know it definitively,” Kern says. And, un- til it becomes clear what Asian gov- ernments plan to do, investors might just sit on their hands. Even growing signs of a slowdown in China, which might make Beijing soften its property curbs, have done little to improve sentiment. If any- thing, it might have only confused the market even more. Kern says big policy shifts aren’t likely to happen

until the 18th Party Congress later this year, when a new team at the top is expected to take up their posts. “I may be wrong, but I don’t believe [clear policy changes] will happen until early next year, with the new government in place.” Nevertheless, Kern doesn’t doubt that Asian real-estate assets will con- tinue to see strong underlying de- mand. And, when things become clearer, capital markets will rebound. “There is not a lot of concern about the prospects of these particular as- sets. It is really just investors saying, ‘I see value at x, but I am interested in buying at a discount of y, because I need some downside protection in such volatile markets.” That’s not to say that property companies are strapped for cash, though. Kern, who has closed more than 80 transactions valued at more than US$35 billion ($44.8 billion) over the last two decades, says there are still lots of ways for real-estate players to obtain capital in this un- certain environment. For instance, property companies are increasing- ly taking advantage of low interest rates by issuing bonds. This year, some US$20 billion worth of debt has been raised by real-estate compa- nies in the region. That’s more than the amount raised over the whole of 2011. HSBC was involved in about half of the bond deals for property players this year.

Surging bond issues

Kern says the surge in bond issues is partly the result of weakness in equity markets, but also the with- drawal of some banks from the Asian market. According to him, proper- ty companies have traditionally fi- nanced themselves through bank borrowings. It was cheap and the companies also had close relations

with their bankers, he says. However, some US and Europe- an banks have been pulling out of the market recently because of trou- bles in their home markets. “Not surprisingly, the pricing of those bank borrowings for these develop- ers has gone up,” Kern says. That has narrowed the cost of borrow- ing through the issue of bonds, he adds. “[That’s] one of the reasons why you see large Hong Kong devel- opers doing very large half a billion to a billion dollars of investment- grade bonds.” Also, because interest rates are relatively low, it makes sense for these companies to issue bonds that have somewhat longer tenures than bank borrowings. “Textbooks say you should put long-term debt in place, when it is available and when it is relatively reasonably priced,” Kern explains, adding that investment- grade issuances are typically priced at less than 5%. Interestingly, some of the new bond issues are by companies doing it for the first time — even though the companies might have been pub- licly traded for a long time. “They have never availed themselves to the debt capital markets before because they could always get it cheaper from the banks,” says Kern. Among them are Nan Fung Inter- national Holdings and Wheelock & Co. The list of other bond issu- ers include China Resources Land, Hang Lung Properties and, most recently, Swire Properties, with its 10-year, US$500 million issue more than 11 times covered. According to Kern, demand for such debt, just like demand for oth- er investment assets, is still coming from big name fund managers from the US and Europe. “In each mar- ket, you also have some local private

“In each mar- ket, you also have some local private People want definitive plans and solutions,
“In each mar- ket, you also have some local private People want definitive plans and solutions,
“In each mar- ket, you also have some local private People want definitive plans and solutions,
“In each mar- ket, you also have some local private People want definitive plans and solutions,
“In each mar- ket, you also have some local private People want definitive plans and solutions,
“In each mar- ket, you also have some local private People want definitive plans and solutions,
“In each mar- ket, you also have some local private People want definitive plans and solutions,
“In each mar- ket, you also have some local private People want definitive plans and solutions,
“In each mar- ket, you also have some local private People want definitive plans and solutions,
“In each mar- ket, you also have some local private People want definitive plans and solutions,

People want definitive plans and solutions, no more half-measures from the EU. We want some bold moves that can give some direction to the market. — Kern

banking demand — very strong de- mand for yield products from some private banks, especially when you get to the hybrids such as the per- petual bonds — that’s very popular because of the higher yields. But, the ones that drive these deals, that re- ally set the pricing for the demand, are still the big global institutional investors,” he says.

Healthy REIT hub

Kern is also optimistic about the real- estate investment trust (REIT) mar- ket. Here, Singapore looks set to be a key player, he says, noting that the local market already has 27 REITs and business trusts listed and that more might follow soon. “I think Singapore, in particular, has the healthiest, deepest and most diversified REIT market, and certain- ly in Asia-Pacific and arguably in the world,” says Kern. The list of right ingredients includes good tax incen- tives, proper regulations and, the most important of all, strong spon- sors such as CapitaLand, Mapletree, Ascendas and Keppel Land. “They have created very good growth ve- hicles that will continue to buy as- sets, expand their portfolios and have been trying to generate good returns for unit holders,” he adds.

The REIT market here also stands out for its geographical diversity. While those listed in other markets, such as Japan and Australia, are very much domestic-market oriented, and those listed in Hong Kong are essen- tially Greater China plays, the Sin- gapore-listed REITs offer exposure to more than a dozen markets such as Japan, India, Australia, Europe and across various major property sec- tors from retail to hospitality. “Singapore is clearly your pan- Asia hub,” Kern says. “I expect the deals to continue. There’s still a huge amount of very high-quality com- mercial assets that are in private hands, and it makes all the sense in the world to put them into the pub- lic markets.” Still, the recent market uncertain- ty has scuppered some planned IPOs of REITs. Ascendas has shelved the flotation of its Ascendas Hospitali- ty Trust. Also, there has been much talk of another renminbi-denomi- nated bond from ARA Asset Man- agement, but nothing has been an- nounced yet. Kern is still betting that sentiment will soon improve enough for lots more deals to get done. “We are entering a slower period now, but the long-term prospects are still

positive,” he says.

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THEEDGE SINGAPORE 15

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Malaysia and Indonesia, with a growing Great-

er China presence. By geography, Singapore makes up 51.7% of its loan book followed by Malaysia with 15.5%, Greater China with 13.3% and the rest of Southeast Asia with 8%, of which rupiah loans comprise 3%. As at end- 1Q2012, OCBC had total CAR of 16.1%, tier-1 CAR of 14.7% and core tier-1 CAR (less pref- erence shares) of 11.6%. Would OCBC have been any worse off if it had simply hung on to its investments in

in what you do. That’s why I say it’s impor- tant to stay close to your knitting.”

F&N and Robinsons? “Of course, these were very good companies, the Singapore commu- nity knew these well, and the risks associat- ed with them,” Kohnke acknowledges. Yet, they constituted “merchant banking” activi- ties that would probably be out of place with- in the group today, he adds. Where is Kohnke looking for trouble next? In the digital age, it seems only natural that he suspects the next major disaster for bank- ing groups coming from some kind of tech-

nology failure. Already, when ATMs and on- line banking systems go down for even a few hours these days, it wreaks havoc on the lives of bank customers. And, unlike credit risks, where the warning signs of a slowing economy or a company’s financial performance might give a bank time to take action, technology failures often happen without warning. “Technology risk is 24/7 and they evolve continually,” Kohnke says. “Tech risks can be

calamitous, it can happen anytime.”

Changing with the times

OCBC has traditionally been among Singapore’s

more prudently run financial institutions. In fact,

it was the country’s largest bank decades ago,

backed not only by formidable capital ratios, but also by a convoluted web of investments in blue-chip companies such as Fraser & Neave, Robinsons & Co, WBL Corp, United Engineers and, of course, Great Eastern Holdings. In 2000, before OCBC acquired Keppel Bank, it had a to- tal capital adequacy ratio (CAR) of 24.9%, and

a core tier-1 CAR of 20.9%. Over the last decade, however, OCBC has steadily offloaded its corporate holdings to com- ply with regulations by the Monetary Author- ity of Singapore (MAS), which prohibit banks from holding more than 10% of a company whose business is deemed non-core. “There was a MAS directive to stay focused on the banking business. These assets were non-core to the underlying business,” says Kohnke, who joined the bank in 2005.

business,” says Kohnke, who joined the bank in 2005. In 2003, OCBC divested a 4.03% and

In 2003, OCBC divested a 4.03% and 2.27% stake in Fraser & Neave and WBL Corp respec- tively, via a selective capital reduction exercise. In 2004, its 49%-owned associate Raffles In- vestments sold its 43.3% stake in Raffles Hotel; and Raffles Investments itself was sold the fol- lowing year. In 2005, an 8.6% stake in Straits Trading was also divested via selective capi- tal reduction. And, in 2006, the bank sold off its 26.6% stake in Robinsons and White Sands Shopping Mall. OCBC also made significant investments during the same decade. It gained control of Great Eastern and now holds an 87% stake. In 2004, it acquired a controlling stake in Indo- nesia’s Bank NISP. The following year, OCBC bought a 12.2% stake in Ningbo Commercial Bank. In 2006, it picked up a 10% stake in Vi- etnam Joint-Stock Commercial Bank for Private Enterprises. And, in 2009, it bought ING Asia Private Bank, which it merged with its exist- ing private banking business and renamed the whole thing Bank of Singapore. OCBC now operates mainly in Singapore,

ing private banking business and renamed the whole thing Bank of Singapore. OCBC now operates mainly
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ing private banking business and renamed the whole thing Bank of Singapore. OCBC now operates mainly

INTERRA RESOURCES

BLOOMBERG

16 THEEDGE SINGAPORE | JULY 2, 2012

CORPORATE

CORPORATE

Interra Resources begins drilling new well in Myanmar; launches rights issue

| BY LEU SIEW YING |

I t’s daybreak at a remote oil and

gas field, located about 55km

from the ancient city of Bagan in

central Myanmar. Monks dressed

in saffron-coloured robes assem-

ble around a massive onshore drill- ing rig and begin praying. Within a few hours, the site is abuzz with activity. Among the prom- inent individuals in attendance are Edwin Soeryadjaya, chairman and controlling shareholder of Interra Resources and Liu Yijiang, chairman of China’s Zhenhua Oil. At about 10.30am, they are joined by Myan- mar’s Energy Minister Than Htay, and an elaborate blessing ceremo- ny gets underway. Than Htay climbs 60 steps up to the colossal rig’s main platform, fol- lowed by Soeryadjaya, Liu and oth- er officials. They squeeze into the control cabin and at 11am sharp, the minister pushes a button. The drill lets out a low hum as it begins to bite into the earth. The officials then file down the steps and take turns to sprinkle holy water onto the drill from a silver bowl. “I didn’t quite ask what [the monks] were praying for but I hope it is the right thing,” says Marcel Tjia, CEO of Interra Resources, who attended the blessing ceremony held on June 24. The drilling rig could bore more than 12,000 ft into the ground to tap a potential gas reservoir in an area known as Chauk in central My- anmar. “We are drilling through a new geological formation with promising characteristics. We will not know the result or the size and the potential of the discovery until we finish drill- ing,” Tjia says. Interra Resources expects to know the results of the discovery over the next 100 days or so. Only at that point will it become clear if the cost of the drill- ing was worth it. The lease on the equipment alone could top US$10 million ($12.8 million). The company operates the Chauk concession through Goldpetrol, a 60:

40 joint venture with Zhenhua Oil. Goldpetrol identified the drilling loca- tion for the latest well from a 278km 2D seismic study of the subsurface geology at the concession area. This augments 515km of seismic data ac- quired earlier. Goldpetrol completed the acquisition, processing and inter- pretation of the data in May. However, it didn’t start drilling immediately because of delays in the delivery of the drilling equip- ment and inclement weather. In ad- dition, the minister wasn’t able to attend the ceremony. The Myanmar government holds a 40% stake in the Chauk concession through na- tional oil company Myanma Oil and

Gas Enterprise (MOGE). Goldpetrol owns the remaining 60%. Stuart Traver, a consultant at oil and gas consultancy Gaffney, Cline and Associates, says that comprehen- sive seismic studies do lower the risk of financing drilling operations. Even

do lower the risk of financing drilling operations. Even Interra Resources’ drilling rig could bore more

Interra Resources’ drilling rig could bore more than 12,000 ft into the ground to tap a potential gas reservoir in an area known as Chauk in central Myanmar. The company expects to know the results of the discovery over the next 100 days.

so, there is always a chance that an exploration company will find noth- ing. “But this is what the industry is all about. It’s all about taking risks, which is why the price of oil is so high,” he says. Traver says that it is often less prof-

itable to drill for gas than oil, because gas deposits tend to be located deeper underground. “Usually, the deeper you go, you are more likely to find natu- ral gas rather than oil but the risk-re- ward is not the same.” However, even

if an exploration company fails to find

gas, a drilling operation wouldn’t be

a complete waste of money because

of the geological data that is collected

in the process, Traver says.

tion. Meanwhile, just 24km away, a Myanmar-China gas pipeline to de- liver offshore gas to China’s western provinces is being built. Myanmar is also eager to develop its power stations to address desper- ate electricity shortages. That could create a ready pool of domestic de- mand for gas found at Interra Re- sources’ concessions at Chauk and Yenangyaung. “If we have a signifi- cant amount of gas onshore, it means they can start building infrastruc-

ture,” Tjia says. In fact, Interra Resources, which

also has oil production and explo- ration concessions in Indonesia, has been expanding its operations in Myanmar in recent months. It is drilling another well with its own rig that could be completed in as lit- tle as four weeks. The well, which could be as deep as 2,300ft, is aimed at producing oil from reservoirs that have not been drained by surround- ing wells.

Earlier this month, the com- pany also completed two wells in Yenangyaung, which have increased its oil production by 50 barrels per day (bpd). This year, the company has completed five wells, adding 250bpd

to its total production. Tjia told The Edge Singapore in April that Interra

Resources is drilling nine wells this year and could significantly boost its production if each of these wells average 50bpd. As at Dec 31, Interra Resources had 210 producing wells with a daily output of 2,100 barrels in Yenangyaung and Chauk. Interra Resources’ share of the production was 532bpd in 2011. The oil and gas fields at Chauk and Yenangyaung have been produc- ing oil for more than 100 years. Inter- ra Resources began operating them about 17 years ago, but it moved at a slow pace for most of that time be- cause of Myanmar’s economic pa- ralysis. Until the end of last year, it had sunk only 24, mostly shallow to intermediate depth wells, of which two were dry. Does the company have the fi- nancial capacity to quicken its pace of operations? How much will it need? Where will it get the addi- tional capital?

Strong shareholders

Interra Resources doesn’t currently have any debt, and its officials have said that it has fully provided for its 2012 capital expenditure. Yet, some analysts are worried that it lacks the financial heft to support its expanding operations. Even after the strong run- up in its shares this year, Interra Resources has a market capitali- sation of only $114 million. Alex Goh, a Kuala Lumpur-based an- alyst at AMResearch, says that upstream companies ought to have a market capitalisation of at least US$200 million as each drilling operation costs US$20 million to US$30 million. On June 27, Interra Resources announced a one-for-two rights issue of new shares priced at 15 cents apiece. That was a 63% discount to its weighted average

Riding on Myanmar’s opening

For Interra Resources, however, the latest drilling operations are a big

deal. For one thing, the company hasn’t drilled such a deep well before. “This is a very special well because of the depth and we are drilling into

a new reservoir,” says Tjia. Prior to this, the deepest well Inter- ra Resources drilled was at the adja- cent Yenangyaung concession, which is also operated by Goldpetrol on a joint-venture basis with MOGE. As

it happened, the company found gas

rather than oil. As there was no in- frastructure to deliver the gas to the market at that time, the well was capped. Now, Interra Resources is much more likely to be able to monetise whatever it finds in its wells, thanks to Myanmar’s rapid opening. Tjia says that if

Interra Resources was to strike gas today, it will have the op- tion of selling it to local as well as export markets. The deep well is just 16km away from an existing MOGE pipeline that supplies gas for local consump-

Interra Resources Volume (‘000) Price ($) 300000 0.55 250000 0.45 0.385 200000 0.35 150000 0.25
Interra Resources
Volume (‘000)
Price ($)
300000
0.55
250000
0.45
0.385
200000
0.35
150000
0.25
100000
0.15
50000
0
0.05
July 3, 2009
June 28, 2012

share price on the day before the an- nouncement was made. The rights is- sue is renounceable and non-under- written. However, the company’s key shareholders have provided an under- taking to subscribe for their respective entitlements as well as up to 44.67 million excess rights shares. Based on its existing share capi- tal comprising 295.4 million shares and outstanding share options, which are exercisable into 500,000 shares, the company could issue as little as 88.6 million new shares to raise $12.8 million, or as many as 147.96 mil- lion new shares to raise $21.7 mil- lion, depending on the take-up rate of the rights issue. The company’s major sharehold- ers, Soeryadjaya and his long-time business partners Sandiaga Salahudin Uno and Subianto Arpan Sumodikoro, collectively own 29.76% of the com- pany. They could see their sharehold- ing expand to as much as 45.97% in the event the minimum number of rights shares is issued. “We will try to raise the maxi- mum, but $12.8 million is the abso- lute minimum we need for the next 1½ years,” says Tjia. Interra Resourc- es says it plans to use the capital for new projects at its existing oil and gas assets in Myanmar and Indonesia in 2012 and 2013. Unused funds could be utilised for other acquisitions. Ac- cording to Tjia, MOGE is putting up 18 new onshore and offshore blocks for tender. Details on these assets aren’t out yet, but Tjia expects keen com- petition for them. Interra Resources started its op- erations in 1996 with assets that had been spun out of Astra Interna- tional, an Indonesian conglomerate founded in the 1960s. Soeryadjaya and Tjia, who are cousins, are the offsprings of the founders of Astra International. The Soeryadjaya family lost con- trol of Astra International in the ear- ly 1990s when they were forced to rescue their Summa Bank. Astra In- ternational is now controlled by Jar- dine Cycle & Carriage. In the last dec- ade, Edwin Soeryadjaya has steadily been rebuilding his family’s busi- ness through his Saratoga Group. The group and its affiliates have in- terests in Jakarta-listed coal mining company Adaro Energy and Singa- pore-listed tug boat operator Seroja Investments. Its other interests span telecommunications and oil palm plantations. It also recently backed the relaunch of budget carrier Man- dala Airlines. As Myanmar opens its doors to the world again, Soeryadjaya and Tjia might have another chance to add to their family fortune. Certainly, the omens appear good. On June 24, when Interra Resources’ latest drilling operations began, at an auspicious moment chosen by the monks, there wasn’t a cloud in the sky despite it being a rainy season. In addition, company shares have jumped 10% on heavy volume since then, on re-

newed investor interest.

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THEEDGE SINGAPORE 17

CORPORATE

CORPORATE

| BY KYUNGHEE PARK |

osco Corp Singapore Ltd’s strategy of seeking orders to build oil rigs and offshore accommodation units to off- set slumping ship demand hasn’t con- vinced investors.

The company, which operates seven shipyards in China, has dropped 49% in the past year in Singapore trading. It also has the lowest analyst ratings among major Asian stocks, with 21 “sell” ratings, two “holds” and no “buys”, according to data compiled by Bloomberg. That’s the worst among the MSCI AC Asia Pacific Index members covered by at least three analysts. The shipbuilder has set aside $164 million (US$128 million) for cost overruns since the be- ginning of last year, or more than its 2011 annual profit, as building drilling units and oil-rig sup- port vessels takes longer and costs more than expected. The company has also offered lower prices and more generous payment terms than Singapore-based market leaders Keppel Corp and Sembcorp Marine Ltd as orders for dry- bulk ships wane. Cosco Singapore, which gets its name from the city where it’s registered and listed, last month agreed to build a semi-submersible accommo- dation vessel for Cotemar SA for at least 30% cheaper than what Keppel and Sembcorp Marine charged for larger units. The facilities are used for workers on offshore platforms. The Chinese company will build a unit able to hold 750 people for a price of more than $200 million. Keppel signed a letter of intent to build a 440-person facility for $315 million in March. Both contracts had delivery schedules of about 2½ years, even though Cosco Singapore hadn’t built such equipment previously, according to Nomura Holdings Inc analyst Lisa Lee. She rates the stock “sell”. The shipbuilder, which is controlled by state- owned China Ocean Shipping Group Co, is also increasing its financing costs by letting customers pay for work later. Sevan Drilling AS will pay for 90% of an on-order rig on completion, compared with an original agreement for 80%, the Aren- dal, Norway-based company said last month. Shipyards are usually paid in instalments as work progresses. The change and the possibility of other sim- ilar agreements means Cosco Singapore’s cred- it, foreign exchange and cash-flow risks may be higher than expected, Singapore-based Oversea- Chinese Banking Corp analysts Chia Jiunyang and Low Peihan say in a note. They downgrade the company to “sell” from “hold” and cut their fair-value price to 84 cents from 98 cents.

Li Jian Xiong, vice-president at Cosco Sin- gapore, didn’t reply to an email and phone call seeking comments. “As a relatively new entrant, the company ex- pects to incur higher costs during the execution of offshore marine engineering projects on new product types,” it says in a statement. “Progres- sively, the company will gather expertise and capabilities to reach out to a broader customer base, laying a firmer foundation for long-term sustainable growth in offshore and marine en- gineering.” The shipbuilder closed unchanged at 97.5 cents on the city-state’s stock exchange on June 27. The stock will drop to 80 cents within the next year, based on 13 analyst estimates com- piled in the past three months. The company’s net income fell 25% in the first quarter to $27.8 million, weighed down by $13.8 million of expected losses on construction contracts. Full-year earnings will drop about 6% to $131 million, according to the average of 19

analyst estimates compiled by Bloomberg. The stock trades at 17 times expected earnings, the highest among the 12 companies in the Bloomb- erg World Shipbuilding Index, which trades at a ratio of 10. Only 11 of the index members have earnings estimates.

“Cosco is trading at a premium relative to both the shipbuilding and offshore engineering yards, which is not justified given the compa- ny’s poor earnings outlook,” says analyst Robert Bruce at CLSA Ltd, which rates the stock “sell” and has a 65 cent target price. This year through

May 8, the shipbuilder has won contracts for a wind-turbine installation vessel, two pipe-lay- ing offshore construction vessels, four platform supply vessels, a tender rig, two tender barges, a semi-submersible accommodation vessel and

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18 THEEDGE SINGAPORE | JULY 2, 2012

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More darkness before dawn for battered dry bulk shipping sector

| BY ASSIF SHAMEEN |

I n his nearly three decades in the dry bulk shipping industry, Khalid Hashim, the CEO of Thailand’s mid-sized opera- tor Precious Shipping has not seen the industry in such dire shape. There are just too many dry bulkers out there and not enough cargo and as such, freight rates have been falling off the cliff. Indeed, things have been so bad that Precious Shipping made its first-ever quarterly loss in 1Q2012. Still, Kha- lid tells The Edge Singapore in a phone inter- view from Bangkok that the worst may be over and a slow, grinding recovery may be- gin later this year. But that’s not what the industry’s widely followed benchmark Baltic Dry Index (BDI) is telling the world — it recently hit its low- est levels since late 2008. The index, which touched its peak of 8,000 more than four years ago, has been hovering just over 1,000 recent- ly. The BDI has long been regarded as a key leading indicator of global growth. In early 2009, six months after the collapse of Lehman Brothers, the BDI rebounded, followed by a recovery in global equity markets and econo- mies. Now, as the BDI continues to languish, economists and analysts have been speculat- ing whether it is signalling a prolonged peri- od of stagnation. Timothy Ross, regional transport analyst for Credit Suisse, says people are reading too much into the index. “The BDI is a simple ex- pression of spot demand on a range of voyag- es across four major classes of vessel on any given day and has no predictive power what- soever,” he points out. Even that linkage ap- pears to have broken down over the past 18 months, he notes because of a glut in large Cape-size vessels and slower growth in Chi- na’s iron-ore imports. Dry bulk vessels are used to ferry iron ore, coal, grain and bulk commodities from Aus- tralia, South Africa and Brazil to China, India and other fast-growing nations. They come in

all shapes and sizes, from small 40,000-ton handy-size vessels used by Precious Shipping that carry small cargo within Southeast Asia to large Cape-size carriers of 400,000 tons that ply between Brazil and China carrying iron ore.

Slowing

Moody’s Investors Service estimates that de- mand for dry bulk seaborne trade will grow just 4% this year, compared with 6% last year. Why is the growth in dry-bulk trade slowing? For one thing, slower growth in Chinese steel production is translating into a lower level of iron-ore imports from Brazil and Australia. Though growth in other dry bulk commodi- ties such as thermal coal and grains isn’t ac- tually falling off the cliff, it is still less spec- tacular than it was just two years ago and a pale shadow of the situation before the global financial crisis. Macquarie Securities notes that with de- lays in new iron-ore projects, ore degradation as well as infrastructure bottlenecks in China and elsewhere in emerging markets, growth in seaborne iron-ore trade will slow to 3.7% — from around 11.1% in 2010 — only to recover to 5.5% next year. Thermal coal demand will likely moderate to just 5% this year. Growth in demand for seaborne coking coal is fore- cast to be around 10.8%, down from 29.1% in 2010, while global grain shipments are esti- mated to grow 2.5% this year, down from the 7.6% seen in 2010. A bigger issue than softer demand and slow- er growth is the worsening shipping glut. The shipping industry has long swung from feast

to famine to feast. In good times, the industry orders too many new ships, which results in a glut and subsequent collapse in freight rates. Few new ships are ordered, causing a huge supply crunch that then helps to fuel the next boom. While the current shipping overcapacity includes all variety of vessels, the biggest glut is in crude oil tankers and dry bulk carriers. The global fleet of dry bulkers, which num- bered 417 vessels in 2008, grew to 614 units last year. Up to 110 new dry bulkers will likely be delivered this year from current order books of over 190 vessels. One reason for the bigger- than-expected glut is that shipyards are deliv- ering 70% to 75% of order books against the anticipated 50% to 60%. Normally, in slug- gish times, analysts and shipowners take or- der book sizes with a pinch of salt because they don’t believe shipyards will actually de- liver the ships. Traditionally, one way the supply-demand imbalance is corrected is by retiring older ships promptly. Nearly 4.5% of the global dry bulk fleet could be taken out by the scrap yards this year, down from the 6% estimated earlier be- cause, ironically, there isn’t enough capacity available to scrap ships in China. Still, overca- pacity has reached levels where less efficient vessels as young as 16 to 18 years old are be- ing scrapped. In boom times, shipowners try to stretch the service of dry bulkers to as long as 25 years, or even longer.

Peaking glut

The good news is that few new orders are being placed for dry bulkers. “The funding

Overcapacity has reached levels where less efficient vessels as young as 16 to 18 years old are being scrapped. In boom times, ship owners try to stretch the service of dry bulkers to as long as 25 years, or even longer.

for new buildings has dried up,” Macquarie’s Janet Lewis tells The Edge Singapore. As more capacity is taken out and demand catches up, there is hope that supply and demand could return to balance by the middle of the decade, she says. “The silver lining in the cloud is that all bad news on the dry bulk sector has already been discounted and the glut has just peaked,” says Credit Suisse’s Ross. Indeed, he reckons that the current year could be the bottom of the cycle, with cumulative overhang of excess supply exceeding 20%. As supply dries up and demand claws back, he sees freight rates re- covering next year. Citigroup’s shipping analyst Rigan Wong is equally optimistic that the worst in the dry bulk glut may soon be behind us. Down cycles seldom last more than four years, he notes in a recent report on the sector. Pre- vious shipping down cycles lasted between three and four years, except for the longest one between 1980 and 1986. That cycle, he notes, was particularly long due to over- ordering midway through the downturn, which was fuelled by ample bank lending. “We are now in the fourth year of the cur- rent down cycle,” he notes. “Ship financing continues to be constrained, leading to or- der deferrals or even cancellations.” More- over, ship scrapping is gaining momentum and demand for dry bulk shipments of iron ore, coal and grain is likely to pick up next year and the year after.

A little more pain

There is darkness before dawn. Citigroup’s Wong says while there may be a little more pain for the dry bulk sector before investors see gain, there is value emerging from some stocks such as the dual Singapore- and Seoul- listed STX Pan Ocean and Hong Kong-based Pacific Basin Shipping. The two stocks may have already priced in the worst of the sec- tor’s down cycle and may be more defensive

on the last leg down, he notes.

E
E

Malaysia’s Petronas to buy Canadian gas producer

M alaysia’s state oil compa- ny on June 28 agreed to buy Canada’s Progress En-

ergy Resources Corp for C$4.8 bil- lion ($5.94 billion) to bolster its re- serves of natural gas for export to Asian markets. The deal by Malaysia’s Petronas follows its formation of a joint ven- ture with Progress last year to de- velop a part of Progress Energy Re- sources Corp’s Montney shale assets in the foothills of north-eastern Brit- ish Columbia. Progress owns shale fields in the provinces of British Co- lumbia and Alberta. The two companies, which have been studying the feasibility of a new

liquefied natural gas terminal on Can- ada’s West Coast as a way to secure higher prices for shale gas, outlined plans to build a terminal in Prince Rupert, British Columbia. North American gas prices have remained stubbornly weak owing to

to static domestic demand and the rapid development of shale supplies throughout Canada and the US. “Our asset base requires extensive capital to develop,” Progress Energy’s chief executive Michael Culbert says in a release. “Petronas offers the size and scale that will enable our com- pany to continue to grow and not be limited by the same cash-flow chal- lenges faced by many producers in the North American natural gas mar- ket today.” Petronas says its Canadian sub- sidiary, Petronas Carigali Canada Ltd, will pay C$20.45 a share for the Cal- gary-based gas producer — a 77% premium to Progress Energy’s clos- ing on June 27. Including debt, the deal is valued at about C$5.5 billion, the companies say. “The proposed transaction will combine Petronas’ significant global expertise and leadership in develop- ing LNG infrastructure with Progress’

extensive experience in unconven-

tional resource development to build

a strong and growing, world-class

energy business based in Canada,” Anuar Ahmad, head of the gas and power business for Petronas, says in

a statement. In April, Progress denied it was in talks with Petronas, after news emerged that it was considering a proposal to buy the Canadian natu- ral-gas producer. Last year, Petronas paid C$1.07 billion for a half interest in shale- gas fields owned by Progress, and the two pledged to study the feasi- bility of exporting liquefied natural gas to Asia.

Other Asian players such as Pet- roChina, Korea Gas and Mitsubishi are also venturing into North American shale-gas plays and finding willing partners that are in desperate need for capital to fund growth. Several players, including Apache

Corp and Royal Dutch Shell, are eye- ing LNG terminals on the Canada’s

Pacific Coast as a way to absorb bur- geoning output from the Montney and Horn River areas. Progress’ shares closed at C$11.55

on June 27 on the Toronto Stock Exchange, near the midpoint of their trading range over the past 52 weeks. The deal will need to win the ap- proval of Progress Energy’s share- holders, antitrust authorities and the Canadian federal government, which has the authority to review wheth- er such deals are of “net benefit” to the country. In 2010, Canada vetoed mining giant BHP Billiton’s US$39 billion ($49.94 billion) bid for the world’s top fertiliser producer Potash Corp, arguing that the deal was not of net benefit as based on the provisions of the Investment Canada Act. Mindful of this hurdle, Petronas

attempted to highlight some of the benefits that this acquisition would provide to Canada. “This development will generate substantial economic benefits for the provinces and local communities,” Ahmad says in the statement. “Pet- ronas’ access to capital will help to bring Canada’s abundant and clean- burning natural gas resources to glo- bal markets, leveraging our well-es- tablished and extensive network of customers worldwide.” Petronas says it plans to combine its Canadian business with that of Progress and retain all of Progress’ employees to capitalise on the ex- perience and depth of the compa- ny’s team. The Malaysian company says it remains committed to fostering strong community relations and build- ing on Progress’ existing commu- nity and charitable commitments.

Reuters

E
E

THEEDGE SINGAPORE 19

CORPORATE

CORPORATE

| BY SUPUNNABUL SUWANNAKIJ |

hailand, the world’s largest rubber pro- ducer, will discuss with Indonesia and Malaysia possible limits on shipments from the countries representing 70% of supply to boost plunging prices.

“If necessary, there will be a limit on ex- ports,” Deputy Farm Minister Nattawut Saikuar says, without giving more details. “The three countries will have to jointly make the decision and set the amount.” Prime Minister Yingluck Shinawatra will dis- cuss the matter “informally” with leaders from Indonesia and Malaysia, he says, without giv- ing a date for the meeting. Prices have plunged 26% this quarter, the most since the final three months of 2008, as growth slowed in China, the biggest consumer. While Thailand is building inventories and cutting ageing trees, local auction rates have dropped 24% from this year’s peak. The country announced plans last month to buy more than 10,000 tonnes in Tokyo and Shanghai, and to cooperate with its Southeast Asian neighbours, with whom in 2009, it cut sales to combat a slump amid the global financial crisis. Thai government officials will also visit China to negotiate the sale of a “significant” amount to state agencies and private companies, says Nattawut. The trip will be sometime after July 6, he says. “There is buying interest from China but we still have to finalise the prices.” Rubber for delivery in December gained 2.1% to end at ¥240.3 per kg (US$3,031 or $3,875 a tonne), the highest settlement level since June 21, on the Tokyo Commodity Exchange. Fu- tures on June 25 dropped to ¥227.8, the low- est level since November 2009. The auctioned price of Thai ribbed smoked sheet declined to

three bulk carriers. The orders are worth US$1 billion, says the company. In the first quarter, the shipbuilder delivered 12 dry-bulk carriers, a drilling unit and a shut- tle tanker. The drill unit was the second of the four ordered by Sevan Drilling. The Norwegian company has options for two more. Cosco Sin- gapore delivered the first rig in November 2009. Delivery was due about a year earlier, according to the March 2007 order announcement. Cosco Singapore’s dry-bulk ship operations have suffered because global overcapacity and the European debt crisis caused worldwide or- ders to fall 47% to 8.2 million tons in the first five months, says shipbroker Clarkson plc. The company will work through most of its dry- bulk orders by the end of June, increasing pres- sure to find new work, DBS Vickers Securities analysts Janice Chua and Ho Pei Hwa say in a note. Furthermore, at least some of the compa- ny’s 47 orders in hand may be at risk of can- cellation if a slump in dry-bulk rates continues, says OCBC. The slowdown has also prompted other Chi- nese shipbuilders to target the offshore market. China Rongsheng Heavy Industries Group Hold- ings Ltd intends to win 40% of its orders from the sector by 2015, it said in May. It had no such orders on its books at the end of December after delivering a cable-laying vessel in May last year. Yangzijiang Shipbuilding Holdings Ltd aims to win its first order for a jack-up rig this year af- ter the formation of a venture with Qatar Invest-

ment Corp. — Bloomberg LP

E
E

THB91.07 per kg on June 27 from this year’s high of THB119.36 reached on Feb 8. To boost state inventories, the government is seeking an additional THB10 billion (US$314 million or $401.1 million) after allocating THB15 billion to state agencies and cooperatives to pur- chase domestically at above market rates, says Nattawut. Farmers who replace ageing rubber trees with oil palm will get a higher incentive payment, he says.

“The government is working on measures to boost and stabilise the rubber prices,” he adds. Nattawut on April 24 announced plans to lift rubber prices to THB120 (US$3.77) per kg as soon as possible, to THB150 in the second half and THB180 by next year. “The target is still THB120 per kg.” For an efficient execution of the plan, the gov- ernment will also increase the number of points of purchase where farmers can sell their pro-

duce, Nattawut says. More than 10,000 tonnes have been bought since May, he adds. Thai exporters will continue to buy from the Tokyo and Shanghai exchanges, he says, with- out revealing the amount purchased. Farmers who cut down ageing trees and shift to planting oil palm will receive an additional in- centive payment of THB10,000 per rai (0.16ha), on top of the existing rate of THB16,000 per rai,

says Nattawut. — Bloomberg LP

E
E
of THB10,000 per rai (0.16ha), on top of the existing rate of THB16,000 per rai, says

PICTURES: SAMUEL ISAAC CHUA/THE EDGE SINGAPORE

BLOOMBERG

20 THEEDGE SINGAPORE | JULY 2, 2012

COVER STORY DestroyingDestroying shareholdershareholder valuevalue Singapore has some of the largest companies in the
COVER STORY
DestroyingDestroying
shareholdershareholder valuevalue
Singapore has some of the largest companies in the region, but they lagged well
behind Malaysian and Indonesian companies in delivering shareholder value during
the last five years. What has gone wrong? What does it mean for investors?

| BY FRANKIE HO |

S ingapore experienced one of its strong-

est recoveries ever when the global

economy rebounded from the 2008/09

financial crisis, with its GDP expanding

14.5% in 2010 after contracting 0.8%

in 2009. Yet, a number of the largest compa- nies listed in Singapore failed to show a simi- larly strong upturn in shareholder value cre- ation. In fact, on the whole, they were found to have destroyed value. Stern Stewart & Co, the New York-based consulting firm that created the Economic Val- ue Added (EVA) performance metric, found in a recent study that while Singapore is home to a large number of listed heavyweight com- panies, the local market underperformed its Southeast Asian neighbours when it came to creating value for shareholders. The biggest value destroyers in Singapore were the local banks and real estate companies. The study was based on Stern Stewart’s pro- prietary Wealth Added Index (WAI), a variant of EVA. Both EVA and WAI take into account the cost of capital in determining whether com- panies create value for shareholders. While EVA measures a company’s finan- cial performance, WAI measures performance based on total shareholder returns, compris- ing share price movements and dividends. The idea behind WAI is that value is created only when these returns exceed an imputed cost of equity. Under WAI, a company destroys wealth if the return it generates is less than its cost of equity. Stern Stewart applied its WAI model to the 100 largest companies by market value in South- east Asia to study their performance between January 2007 and December 2011. Of the 100 companies, 39 were from Singapore, 20 from

Malaysia, 16 from Indonesia, 15 from Thailand and 10 from the Philippines. Based on the find- ings, companies from Singapore and the Phil- ippines ranked the lowest for wealth creation. In fact, they generally destroyed wealth during the five-year period. On the other hand, com- panies from Malaysia, Thailand and Indonesia

mostly created wealth for shareholders. Only two Singapore-listed companies were ranked among the top 10 wealth creators in the study. They were Jardine Cycle & Car- riage and Wilmar International. At the other end of the spectrum, companies in Singapore accounted for six of the top 10 destroyers of wealth. They were Singapore Airlines, ranked 92; United Overseas Bank, 93; Singapore Tel- ecommunications, 95; CapitaLand, 97; Singa- pore-headquartered Flextronics Internation- al, which is listed on Nasdaq, 98; and DBS Group Holdings, 99. It’s perhaps little wonder that the Straits Times Index lagged well behind the benchmark indices for Malaysia, Thailand and Indonesia during the same period. From the beginning of 2007 to the end of 2011, the STI declined 11%, while the FTSE Bursa Malaysia KLCI, Thailand’s SET Index and Indonesia’s Jakarta Composite Index advanced 37%, 55.5% and 108.1% respectively. Why have Singapore’s companies done so poorly? Is their performance set to improve? Or should investors look elsewhere to stash their cash?

Global links, domestic disadvantages

Martin Schwarz, senior vice-president at Stern Stewart, tells The Edge Singapore that the gen-

erally large exposure that Singapore companies have to the global economy was one reason for their poor performance in creating shareholder value. “The global financial meltdown had a significant impact on the performance of com- panies before and after the crisis,” he says. In the case of Singapore banks, for instance, their close links to global markets had a huge bearing on how much wealth they generated or destroyed. Stern Stewart found that Singa- pore banks actually created more wealth for shareholders than their Southeast Asian coun- terparts in the months leading up to the on- set of the crisis. But when the credit crunch in the US sank the global economy into reces- sion, they ended up destroying more wealth than their peers in the region. And, in the re- bound that followed, the Singapore lenders managed to recover only half of the wealth they destroyed. By contrast, the major banks in the neigh- bouring markets are less exposed to the fi- nancial system of troubled developed econo- mies than the Singapore lenders. As a result, many of them were able to fully recover the wealth destroyed during the crisis by the end of 2011. Malaysia’s Public Bank, for instance, was ranked the 10th biggest wealth creator in the study. “They didn’t get hit as much by the recession

STI has underperformed regional market indices % 208.111 Normalised as at Jan 3, 2007 STI
STI has underperformed regional market indices
%
208.111
Normalised as at Jan 3, 2007
STI
FBM KLCI
155.528
PCOMP Index
146.865
137.028
SET Index
JCI
100
88.977
2007
2008
2009
2010
2011

as the Singapore banks,” says Schwarz. “They rebounded faster, relying a lot more on their lo- cal clientele, while the Singapore banks relied more on their international customers.” Another possible reason that Singapore lost out to its neighbours in the ranking was that the country isn’t endowed with natural resources. On the other hand, companies in other South- east Asian markets that do have plentiful nat- ural resources benefited directly or indirectly from the strong demand from China, enabling them to score well on the WAI before and im- mediately after the financial crisis. With Sin- gapore not having such resources, its compa- nies as a whole did not gain as much. Still, Schwarz warns that having significant exposure to natural resources might prove to be less of an advantage going forward. Palm oil juggernaut Wilmar, for instance, took the sixth spot in the overall ranking of the 100 companies, generating $9.2 billion in wealth for shareholders over the past five years. “Wilmar was riding the commodity prices,” Schwarz says. This year, however, commodi- ty plays would not have done as well because of growing concerns of a slowdown in China’s economy. “If we were to do the ranking up till today, I would not expect [Wilmar] to be at the top,” he says. Meanwhile, locally listed commodity-supply- chain managers Olam International and Noble Group did not make the cut for wealth crea-

tion, despite the run-up in commodity prices in recent years. Schwarz says this could have been because of their acquisition-led growth strategies. “Even if they were good stewards of capital, they would have overpaid for ac- quisitions at some point. If you make plenty of them, you can end up paying quite a lot.” Olam, for one, was also exposed to “vola-

tile and less stable” markets such as Africa, he notes. “We’re not saying there isn’t growth po- tential in these markets. The problem is there are a lot of costs involved in operating there that people may not know in advance. People may rush into acquisitions in a foreign mar- ket. If they don’t take into account the risks, they will end up suffering.”

THEEDGE SINGAPORE | JULY 2, 2012 21

CHARTS: BLOOMBERG

COVER STORY

COVER STORY

Wilmar International Volume (‘000) Price ($) 160000 8 140000 7 120000 6 100000 80000 5
Wilmar International
Volume (‘000)
Price ($)
160000
8
140000
7
120000
6
100000
80000
5
60000
4
3.59
40000
3
20000
0
2
July 3, 2009
June 28, 2012

That’s not to say that acquisitions in poten- tially risky markets won’t pay off in the long term. Jardine C&C acquired Indonesia’s Astra International years ago and has reaped the benefits recently. The group is now one of the largest makers and distributors of vehicles in Indonesia, making it a key beneficiary of bur- geoning consumer spending in the country. Jardine C&C took the fifth spot in the ranking, having created $10.2 billion of wealth for its shareholders over the past five years. Part of the reason for its strong perform- ance was also the changing perception of In- donesia’s risk profile. “Indonesia’s risk-free rate, or the minimum return required by share- holders, has dropped significantly over the last few years. People now don’t see Indone- sia as such a risky place to do business in,” Schwarz says. On the contrary, the country has become a magnet for foreign direct in- vestment following efforts by Jakarta to con- tain its budget deficit and bolster economic growth, which in turn prompted several cred- it rating agencies to upgrade Indonesia to in- vestment-grade status.

Reassessment of strategies?

Clearly, these trends could have profound implications for the growth strategies of Sin- gapore companies. They could, for instance, force some of them to reassess their regional acquisition plans. “In the past, people would invest in Singapore banks, which have some exposure to Indonesian banks and to the re- gion in general. Now, that risk has come down enough for people to go directly into Indonesia and bypass Singapore to get that exposure,” Schwarz says. The result could be companies having to face more competition for acquisitions in re-

CONTINUES NEXT PAGE

more competition for acquisitions in re- CONTINUES NEXT PAGE Schwarz: The global financial meltdown had a

Schwarz: The global financial meltdown had a significant impact on the performance of companies before and after the crisis

Jardine Cycle & Carriage Volume (‘000) Price ($) 3000 55 50 2500 46.12 2000 40
Jardine Cycle & Carriage
Volume (‘000)
Price ($)
3000
55
50
2500
46.12
2000
40
1500
35
30
1000
25
500
20
0
15
July 3, 2009
June 28, 2012
Singapore Airlines Volume (‘000) Price ($) 50000 16 45000 15 40000 14 35000 13 30000
Singapore Airlines
Volume (‘000)
Price ($)
50000
16
45000
15
40000
14
35000
13
30000
25000
12
20000
11
15000
10.27
10000
9
5000
0
8
July 3, 2009
June 28, 2012
United Overseas Bank Volume (‘000) Price ($) 35000 21 20 30000 19 25000 18.40 20000
United Overseas Bank
Volume (‘000)
Price ($)
35000
21
20
30000
19
25000
18.40
20000
17
15000
16
10000
15
5000
14
0
13
July 3, 2009
June 28, 2012
($) 35000 21 20 30000 19 25000 18.40 20000 17 15000 16 10000 15 5000 14
($) 35000 21 20 30000 19 25000 18.40 20000 17 15000 16 10000 15 5000 14

CHARTS: BLOOMBERG

22 THEEDGE SINGAPORE | JULY 2, 2012

COVER STORY

COVER STORY

Malaysia creates most wealth in region for investors

FROM PREVIOUS PAGE

gional markets, and investors becoming less impressed with their efforts to build a regional footprint through such acquisitions. Already, the rush to get into hot growth markets such as China, India and Vietnam has resulted in companies failing to earn a sufficiently high return on their capital. “When we analysed our clients’ performance and saw that they had not done well in cer- tain countries, we asked them why they went there in the first place. Often, they would say:

‘We were told that if we were not in India or China, for example, we were not in business,’” says Schwarz. “That’s a problem in any indus- try where you make a long-term investment. People will just commit funds. If things don’t turn out well, they blame macroeconomic is- sues or the local governments.” Among Singapore-listed companies whose ventures overseas don’t seem to have paid off yet are the real-estate players. Twelve of them were represented in the list of 100 companies, making up almost one-third of the Singapore firms in Stern Stewart’s study. Among them,

property groups such as CapitaLand and Kep- pel Land have been building their presence in China and Vietnam in recent years. “Between 2009 and 2011, there was quite a lot of expansion into China and Vietnam by Singapore real-estate companies,” Schwarz notes. “People tend to underestimate the costs involved in going into these places. These mar- kets may look attractive but, as a developer, you may face delays, for example. Delays and red tape — these are costs that are not neces- sarily on paper. If you have committed capi- tal and are not getting any returns, you would have suffered.” Again, this doesn’t necessarily mean that these companies have the wrong long-term growth strategies or that they should change their direction. “While companies may have created or destroyed wealth, a lot of that has to do with external factors,” Schwarz concedes. In any case, the findings do explain why in- vestors backing Corporate Singapore haven’t had much to cheer about recently. Interesting- ly, Temasek Holdings, which controls a large swathe of listed companies in Singapore and

Wealth Added ranking Top 10 creators of wealth in Southeast Asia in the last five
Wealth Added ranking
Top 10 creators of wealth in Southeast Asia in the last five years
RANK
COMPANY
COMPANY
INDUSTRY
COUNTRY
COUNTRY
WEALTH ADDED ($ BIL)
1 Astra International
Astra International
Automobiles and components
Indonesia
Indonesia
21.8
2 HM Sampoerna
HM Sampoerna
F&B and tobacco
Indonesia
Indonesia
14.4
3 Gudang Garam
Gudang Garam
F&B and tobacco
Indonesia
Indonesia
11.0
4 PLUS Expressways
PLUS Expressways
Transport
Malaysia
Malaysia
10.5
5 Jardine Cycle & Carriage
Jardine Cycle & Carriage
Retail
Singapore
Singapore
10.2
6 Wilmar International
Wilmar International
F&B and tobacco
Singapore
Singapore
9.2
7 Bank Central Asia
Bank Central Asia
Financial services
Indonesia
Indonesia
9.1
8 Telekom Malaysia
Telekom Malaysia
Telecommunications
Malaysia
Malaysia
8.0
9 Advanced Info Service
Advanced Info Service
Telecommunications
Thailand
Thailand
7.6
10 Public Bank
Public Bank
Financial services
Malaysia
Malaysia
7.5
Top 10 destroyers of wealth in Southeast Asia in the last five years
RANK
COMPANY
COMPANY
INDUSTRY
COUNTRY
COUNTRY
WEALTH DESTROYED ($ BIL)
91
Indosat
Indosat
Telecommunications
Indonesia
Indonesia
(6.5)
92
Singapore Airlines
Singapore Airlines
Transport
Singapore
Singapore
(9.3)
93
United Overseas Bank
United Overseas Bank
Financial services
Singapore
Singapore
(9.6)
94
MISC
MISC
Transport
Malaysia
Malaysia
(10.7)
95
Singapore Telecommunications
Singapore Telecommunications
Telecommunications
Singapore
Singapore
(11.9)
96
Tenaga Nasional
Tenaga Nasional
Utilities
Malaysia
Malaysia
(12.0)
97
CapitaLand
CapitaLand
Real estate
Singapore
Singapore
(13.6)
98
Flextronics International
Flextronics International
Technology hardware & equipment
Singapore
Singapore
(14.1)
99
DBS Group Holdings
DBS Group Holdings
Financial services
Singapore
Singapore
(16.7)
100
Telekomunikasi Indonesia
Telekomunikasi Indonesia
Telecommunications
Indonesia
Indonesia
(37.3)
CapitaLand Volume (‘000) Price ($) 200000 4.5 180000 4.0 160000 140000 3.5 120000 100000 3.0
CapitaLand
Volume (‘000)
Price ($)
200000
4.5
180000
4.0
160000
140000
3.5
120000
100000
3.0
80000
2.64
60000
40000
2.0
20000
0
1.5
July 10, 2009
June 28, 2012

around the region, also failed to earn returns that beat its cost of capital in the past year. The sovereign wealth fund disclosed in its lat- est annual report that it lost some $8.8 billion in wealth in the 12 months ended March 2011, compared with the $41.8 billion it created in the previous year. One reason for the reversal, according to Schwarz, could be that Temasek held stakes in a number of international banks, whose share prices tumbled on concerns about their financial health and tougher business con- ditions. Its substantial property investments worldwide could also have weighed on its performance. As for the Philippines, the Stern Stewart study found that it was also guilty of destroy- ing wealth because of its unfavourable regula- tory environment. “The Philippines is seen as a place where there is a lot of red tape,” says Schwarz. “If there’s one thing that destroys wealth more than how [poorly] a firm is man-

aged, it’s the government.” The total amount of wealth destroyed by some of the largest compa- nies in the Philippines over the last five years amounted to about $14.4 billion.

Singapore Telecommunications Volume (‘000) Price ($) 250000 3.4 3.3 200000 3.24 150000 3.1 3.0 100000
Singapore Telecommunications
Volume (‘000)
Price ($)
250000
3.4
3.3
200000
3.24
150000
3.1
3.0
100000
2.9
50000
2.8
0
2.7
July 10, 2009
June 28, 2012
DBS Group Holdings Volume (‘000) Price ($) 60000 16.0 15.5 50000 15.0 14.5 40000 14.0
DBS Group Holdings
Volume (‘000)
Price ($)
60000
16.0
15.5
50000
15.0
14.5
40000
14.0
13.84
30000
13.0
20000
12.5
12.0
10000
11.5
0
11.0
July 10, 2009
June 28, 2012

In terms of wealth created in the region over the last five years, Malaysia topped the list at $36.8 billion, followed by Thailand at $20 billion and Indonesia at $18.3 billion. As- tra International of Indonesia took pole po- sition in the ranking of the 100 companies, generating $21.8 billion in wealth for share- holders. Incidentally, the biggest wealth de- stroyer in Southeast Asia was also from the same country — Telekomunikasi Indonesia,

which lost $37.3 billion.

E
E
Wealth Added by country in last five years NUMBER OF NUMBER OF NUMBER OF TOTAL
Wealth Added by country in last five years
NUMBER OF
NUMBER OF
NUMBER OF
TOTAL WEALTH ADDED
TOTAL WEALTH ADDED
AVERAGE WEALTH ADDED
AVERAGE WEALTH ADDED
AVERAGE WEALTH ADDED
MEDIAN WEALTH ADDED
MEDIAN WEALTH ADDED
COMPANIES
COMPANIES
COMPANIES
(DESTROYED)
(DESTROYED)
(DESTROYED)
(DESTROYED)
(DESTROYED)
(DESTROYED)
(DESTROYED)
($ BIL)
($ BIL)
($ BIL)
($ BIL)
($ BIL)
($ BIL)
($ BIL)
Malaysia
20
20
36.8
1.8
1.8
2.0
Thailand
15
15
20.0
1.3
1.3
0.7
Indonesia
16
16
18.3
1.1
1.1
1.3
Philippines
10
10
(14.4)
(1.4)
(1.4)
(1.2)
Singapore
39
39
(90.0)
(2.3)
(2.3)
(1.4)
Total
100
100
29.3
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371 Beach Road #14-05 KeyPoint
Tel: +65 6296 1904
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THEEDGE SINGAPORE | JULY 2, 2012 • 23

THE EDGE SINGAPORE | JULY 2, 2012 • 23

24 THEEDGE SINGAPORE | JULY 2, 2012

OPINION

OPINION

Samsonite shrugs off bag recall

Y ou can have the world’s best-known brands under your umbrella but in the days of Twitter and Facebook, it doesn’t take much to knock one of them off its pedestal, and at warp

speed too. That’s the lesson the world’s largest branded-luggage maker Samsonite learnt the hard way last week. Even the most proactive management and the most efficient public re- lations machine have a very small window of opportunity to react to a breaking news story that suddenly develops a life of its own. The US-based, Hong Kong-listed firm ini- tially dismissed reports in a Hong Kong con- sumer publication about toxic materials being used in the handles of one of its lines and two other lines being possibly tainted. However, it quickly backtracked and ordered the with- drawal of a key line when its shares plunged sharply and angry customers started showing up at its stores to return their bags. Years ago,

the reaction time on something like this would have been a day or two. These days, with Fa- cebook, Twitter feeds and instant emails on smart phones, an hour or two can make all the difference. On June 15, Samsonite announced it was pulling its Tokyo Chic line of suitcases from stores around the world to replace their han- dles following reports that they might con- tain carcinogens. The luggage-maker’s shares plunged more than 16% after the disclosure. The shares have since recovered some ground but are still down nearly 12% from the levels before the news broke. They are down more than 10% since the company was listed on the Hong Kong bourse amid much fanfare ex- actly a year ago.

For its part, while it in- sists the handles do not con- tain harmful substances, Sam-

sonite is still recalling them for

a quick replacement to boost

confidence in its products. Re- iterating that all its lines were

safe, Samsonite kept the two smaller lines mentioned in the magazine’s story — Cube- lite and Westlake — on the shelves. The swift action sta- bilised its share price, calmed customers and gave the firm more breathing room to rebuild confidence. To be sure, Samsonite is a

key beneficiary of a global trav-

el boom — led by first-time overseas travellers

from China, India, Brazil and other emerging markets, who are thronging Singapore’s ca- sinos, Europe’s malls, Australia’s resorts and other destinations around the globe. CLSA Asia Pacific Markets forecasts the global luggage industry to grow 5% annually over the next five years. Per-capita expenditure on luggage in Asia is forecast to grow 10% year-on-year in the same period, with sales in China grow- ing 18% and India 14% annually. The burgeoning middle class in emerging markets has a growing appetite for travel goods. Samsonite, with its strong brand recognition and dominant market position, is one of the best-placed players in the sector. The company and the other brands in its corporate fold — including American Tourister — have 9.6% of the global branded-luggage market and about 11.6% of Asia’s.

global branded-luggage market and about 11.6% of Asia’s. | BY ASSIF SHAMEEN | big money Alongside
| BY ASSIF SHAMEEN |
| BY ASSIF SHAMEEN |

big money

Alongside big names such as Prada, Coach and L’Occitane, Samsonite was one of several global brand owners that sought to list in Hong Kong, hop- ing for some of China’s shine to rub off on them. Founded 102 years ago in Colorado by Jesse Shwayder, the compa- ny was named after biblical strongman Samson to high- light the durability of its early luggage. The founding family sold it years ago and it ended up with a private equity group that listed Samsonite in Hong

Kong last year. With Europe in recession and US growth sluggish, Asia has been the main engine for growth in the sales of glo- bal branded goods in the past two years. Big brands are hoping China, India, Southeast Asia, Brazil and other emerging markets will make up for the dwindling sales in tradition- al markets. Asia already makes up between 25% and 35% of global sales in most branded goods categories, with China and Japan be- ing the dominant markets. Sales growth is in the 15% to 25% range in most major Asian markets. For the January to March quarter, sales to China grew 36%. Most analysts are forecasting Samsonite’s sales in the country will grow more than 30% this year. Nomura Securities’ Tanuj Shori projects that the company, which currently derives a third of its sales from Asia, will see over 43% of revenues come from the region within four years. Its gross margins are at a high of about

54% — above even that of higher-end brand Tumi — and analysts say despite slower growth in developed markets and the recent luggage recall, they are likely to remain at over 50%. The firm is forecast to post profits of US$160 million ($205 million) on sales of US$1.75 bil- lion this year. Samsonite’s secret sauce is its well-honed niche strategy. Although its products are sold around the world, it customises them to the tastes of local markets. After all, a young Chinese couple from Shanghai on their first overseas holiday trip to Europe needs a different bag from one that a middle-aged American couple from California travelling to New Zealand would. Unlike some of its peers, Samsonite has also invested heavi- ly in product development and innovation. That’s why the next time you are at an air- port, you will see Samsonite suitcases and bags in many shapes and sizes, built from an array of materials. By focusing on higher-growth markets like China and the rest of Asia, pushing its segmented multi-brand strategy with Sam- sonite and American Tourister, and launch- ing innovative new products across multiple price points, the firm is trying to extend its lead over its nearest rivals. Next up are ac- quisitions to broaden its product base and ge- ographical reach. Since its IPO, Samsonite’s top executives have articulated a strategy of which mergers and acquisitions are a key part. It is looking to add to both its top-tier brands and mass-market footprint. In an in- dustry that will increasingly be defined by travellers from China and India, that sounds

like a smart move.

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Priced-to-sell Felda Global jumps in IPO debut

| BY RANJEETHA PAKIAM |

F elda Global Ventures Holdings Bhd, the world’s third-biggest oil palm planter, jumped more than

16% in its Kuala Lumpur debut, af- ter raising $3.3 billion in the biggest

IPO since Facebook Inc. That was the best first day of all initial pub- lic offerings above US$500 million globally this year, according to data compiled by Bloomberg. The stock surged to as high as RM5.46, before paring gains to close at RM5.30. “For- eign investors haven’t been allocat- ed sufficient shares,” says Alan Ri- chardson, who helps oversee about US$87 billion as a money manager at Samsung Asset Management Co in Singapore. Demand from institutions exceed- ed supply by more than 40 times dur- ing the IPO, Felda CEO Sabri Ahmad said in an interview on June 20. The plantation group priced the stock be- low the top of its indicative range, unlike Facebook which has slumped since its May debut. State-controlled Felda could have received more than RM4.55 per share from institutions, though decided not to after allocating 90% of the avail- able stock to Malaysian subscrib- ers, Sabri said. “We wanted to put something on the table for them to enjoy,” he said.

Resilient market

With a market capitalisation of RM19.3 billion ($7.7 billion), Fel- da will qualify to join the 30-mem- ber FTSE Bursa Malaysia KLCI In- dex. The benchmark closed 0.5% lower on June 28. Funds that track the gauge would be obliged to buy the shares in the open mar- ket if they failed to get allocation during the initial sale. “People who didn’t get the shares want to,” says Abdul Jalil Abdul Rasheed, who manages US$3 bil- lion as CEO of Aberdeen Islamic As- set Management Sdn Bhd in Kuala Lumpur. Malaysia has withstood a global stocks sell-off brought on by Europe’s debt crisis, which has seen at least US$12.3 billion of first-time sales scrapped or delayed globally since the start of this year, according to data compiled by Bloomberg. The KLCI index touched an intra- day record the week of June 20, af- ter foreign funds were net buyers of shares for an eighth straight month in May, according to the stock ex- change’s website. Felda Global is ranked the equivalent of buy with an average price target of RM5.53 by four brokerages surveyed by Bloomb- erg, including Public Investment Bank Bhd. “The food business is quite re-

silient to recession,” says Sabri in Kuala Lumpur. “As long as China and India keep on buying oils and fats, the demand is there. The debt crisis shouldn’t have a big impact.”

Cornerstone investors

State funds including Permodalan Na- sional Bhd, Lembaga Tabung Haji and the Employees Provident Fund Board were among the so-called cornerstone investors for its share sale. “The strength of the Malaysian IPO market is that you have a lot of domestic liquidity, which ensures that real demand cannot fully be satisfied,” says Samsung Asset’s Ri- chardson. IHH Healthcare Sdn Bhd, Asia’s biggest hospital operator, has simi- larly signed up local pension funds among its 22 cornerstone investors, for more than 60% of its share sale in Kuala Lumpur next month. IHH plans to raise about RM6.4 billion, two people familiar with the matter said on June 15. Felda, which also produces rub- ber and sugar, reported a 46% drop in profit to RM192.2 million for the three months ended March 31. This was partly because of accounting changes after a business structure revamp, chief financial officer Ah- mad Tifli Mohd Talha said. The company remains “quite pos-

itive”, as it can still achieve its full- year profit target this year, Sabri said, without providing an earnings forecast. The Felda shares were priced at 14.2 times estimated full-year earnings, a person familiar with the matter said on June 14. This compares with 14.7 times at local rival Sime Darby Bhd, the world’s largest palm-oil company by acre- age, and 9.9 times at Singapore’s Golden Agri-Resources Ltd, data compiled by Bloomberg show. Fa- cebook’s Mark Zuckerberg per- suaded investors to pay about 107 times reported earnings, a higher price-to-earnings multiple than al- most every company in the Stand- ard & Poor’s 500 index. “Felda won’t tank, it won’t be like Facebook,” Lye Thim Loong, who helps manage US$500 million at Li- bra Invest Sdn Bhd in Kuala Lumpur and subscribed for the Malaysian company’s shares, said before the debut. “It’s not as expensive.”

Global ambition

Felda, the largest shareholder of sugar refiner MSM Malaysia Holdings Bhd, has 355,864ha of leased or managed palm and rubber plantations in the Southeast Asian nation. It also has land in Indonesia, as well as overseas palm oil refin-

ing businesses, soybean and can- ola-crushing operations and a US oleochemicals plant, the prospec- tus shows. “We want to be a global player,” Sabri said. The company intends to use part of its IPO proceeds to ex- pand its palm oil upstream opera- tions in Indonesia and venture into Africa. Cambodia and Myanmar are being targeted for rubber and sugar respectively, he said. The group is part of the Feder- al Land Development Authority, a government agency formed in 1956 with World Bank funding to help steer the rural poor out of pover- ty. Key to its creation was Abdul Razak Hussein, Malaysia’s second prime minister and father of the current leader Najib Razak. Najib, who must call elections by early next year, announced windfall one- off payments to plantation workers and their families, known as set- tlers, amounting to RM1.69 billion on May 8. A trust will be set up to hold 20% of Felda shares for plant- ers after the IPO so that they can reap dividends, he said. “Political patronage will always be high as Felda has over 112,000 settlers who vote in many key rural constituencies,” Khor Yu Leng, an independent agribusiness analyst,

says. — Bloomberg LP

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THEEDGE SINGAPORE | JULY 2, 2012 25

BLOOMBERG

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US financial conglomerates under pressure from investors to break up

| BY CHRISTINE HARPER |

S eventeen years ago, fund manager Michael F Price spurred the merger of Chase Manhattan Corp and Chemical Banking Corp, creating what was then the biggest US bank and laying the foun-

dation for JPMorgan Chase & Co. Now he has

a new message: It’s time to break up. The stocks of five of the six biggest US banks — JPMorgan, Bank of America Corp, Citigroup Inc, Goldman Sachs Group Inc and Morgan Stanley — are languishing at or below tangible book value. That means the pieces are worth more than the whole, Price says. “Within the banks are wonderful assets,” says Price, who sold his fund-management company for US$610 million in 1996 and now runs MFP Investors LLC in New York. “How long are the boards of directors going to stand by and take no action and let them be pounded? So far there’s no indication that any of these banks or boards of banks is willing to do anything about it.” Politicians and regulators have resisted calls from some investors to split up conglomerates that were assembled over two decades by ex- ecutives such as former Citigroup CEO Sanford “Sandy” Weill and former Bank of America CEO Ken Lewis. These universal banks offered cus- tomers everything from checking accounts and insurance to derivatives trading and merger advice. The 2008 financial crisis and subse- quent performance of the companies are call- ing that into question. Some investors, tired of unpredictable loss- es, costly regulation and legal headaches, have abandoned the banks in favour of more focused lenders such as Wells Fargo & Co and US Ban- corp. Bank of America has traded below its book value since 2009, while New York-based Citigroup has done so since 2010, according to data compiled by Bloomberg. “It is not clear why a bank needs to do lots of activities in financial services that aren’t banking,” Ken Fisher, CEO and founder of Woodside, California-based Fisher Invest- ments, which manages about US$44 billion ($56.23 billion), says in an interview. “It is not clear to me, other than perhaps in some very special cases, that being a bank helps you be an investment bank or an asset man- ager or an insurer.” JPMorgan and Citigroup would be worth more broken up, David Trone, an analyst at JMP Se- curities LLC in New York, told Stephanie Ruhle and Erik Schatzker in a June 22 interview on Bloomberg Television’s Market Makers. “The universal bank model is broken,” Trone said.

Getting bigger

There’s little sign that market forces are chang- ing the universal-banking strategy. Corporate raiders or potential takeovers don’t provide the same impetus for banks as they do for other industries. Laws prohibit non-financial firms from buying lenders, and banks can’t make purchases that give them more than 10% of US deposits. JPMorgan, Bank of America and Wells Fargo were already at or above that lev-

el at the end of March, according to data from

the Federal Reserve and the companies. Some banks have got bigger since the fi- nancial crisis. The Fed, US Treasury Depart- ment and other regulators supported JPMor- gan’s purchase of Bear Stearns Companies and Washington Mutual Inc in 2008, as well as Bank of America’s acquisition of Country- wide Financial Corp and Merrill Lynch & Co. JPMorgan’s balance sheet has increased 49% to US$2.3 trillion since the end of 2007. Bank of

49% to US$2.3 trillion since the end of 2007. Bank of JPMorgan’s disclosure of a US$2

JPMorgan’s disclosure of a US$2 billion trading loss reignited concerns that a bank with US$2.3 trillion of assets had too much risk for managers and regulators to monitor

America’s assets have grown 27% to US$2.18 trillion in the same period. Citigroup, the third-biggest bank by as- sets after JPMorgan and Bank of America, was given more federal aid during the crisis than any other US bank. Its US$1.94 trillion balance sheet is 11% smaller than at the end of 2007 After the crisis, policymakers, politi- cians and former bankers began calling for a breakup of too-big-to-fail banks. They’ve in- cluded former Citigroup co-CEO John Reed, US Senator Sherrod Brown, an Ohio Demo- crat, former Federal Reserve Bank of Kansas City President Thomas Hoenig and Dallas Fed President Richard Fisher. Morgan Stanley became the biggest US se- curities firm in 1997, when it agreed to be ac- quired by Dean Witter, Discover & Co, a bro- kerage run at the time by Philip J Purcell. Purcell, who oversaw the combined company until a revolt by some shareholders and former employees led to his departure in 2005, now thinks that breaking up the banks would be better for shareholders, according to an opin- ion piece in the Wall Street Journal. “The market is now discounting the stock prices of financial institutions with investment banking and trading,” Purcell wrote in the piece. “Breaking these companies into separate busi- nesses would double to triple the shareholder value of each institution.” Morgan Stanley CEO James Gorman said in an interview with Bloomberg Television’s Schatzker that he disagrees with Purcell. “This is a knee-jerk discussion that’s been going on,” Gorman, 53, said. “We need to just calm down, let this play out with new regula- tion, the new capital rules, and at that point, then figure out which businesses to accelerate, and which businesses to slow down.” Former Fed Chairman Alan Greenspan, com- menting at New York’s Council on Foreign Rela- tions in October 2009, said he thought breaking up the banks might make them more valuable. “In 1911, we broke up Standard Oil — so what happened?” he said. “The individual parts became more valuable than the whole. Maybe that’s what we need to do.” That wasn’t the course taken by Green- span’s successor, Ben S Bernanke, and Timo- thy F Geithner, who led the New York Fed be- fore President Barack Obama appointed him Treasury secretary. They supported legislation that allowed the banking conglomerates to re-

main intact and sought to address the risks of future collapse by requiring them to hold more capital, submit to new regulations and prepare living wills to help the government dismantle them in the case of a calamity. The five biggest US banks accounted for 52% of the industry’s assets in 2010, up from 17% in 1970, according to a report this year by the Dallas Fed. Four banks account for 93% of the notional derivatives holdings in the US banking system, according to the Office of the Comptroller of the Currency. Wells Fargo, the fourth-biggest US bank, made 33.9% of the mortgage loans originated in the first quar- ter, the highest share ever recorded and more

than triple its closest competitor, according to Inside Mortgage Finance. To Ira M Millstein, a senior partner at New York law firm Weil Gotshal & Manges LLP and

a veteran antitrust attorney, such statistics in- dicate that the Federal Trade Commission and the Justice Department should view banking conglomerates the same way the government once looked at Standard Oil — as an anti-com- petitive oligopoly. When JPMorgan last month disclosed a US$2 billion trading loss, it reignited con- cerns that a bank with US$2.3 trillion of as- sets had too much risk for managers and reg- ulators to monitor. “I just don’t see how you manage those kinds of institutions effectively,” Gary Stern,

a former Minneapolis Fed president, said at a

June 14 Bloomberg Link conference in Boston. “But I think the responsibility for dealing with that is principally with the management and boards asking themselves: What businesses should we really be in?” Price, Trone and other advocates for break- ing up the biggest lenders cite new regulatory

burdens, including Basel Committee on Banking Supervision capital requirements and the Dodd- Frank Act, as core threats to profitability. “They worked well together in the old world,” says Price, 61, who forecast in Au- gust 1995 that the merged Chase and Chemical would become a US$100 stock. Shares soared to more than US$138 before splits in 1998 and 2000. “That was the analogue world. This is the digital world.” Those regulatory constraints will become even tighter after the JPMorgan trading loss, according to Trone, who calls the biggest US banks “uninvestable” because of new regula-

tion and risks from the European sovereign- debt crisis. Dodd-Frank’s so-called Volcker rule, which restricts trading at deposit-taking banks, will be such a limitation on profits that “market forces” will lead companies to split off trading and investment banking from de- posit-taking, Trone says. That isn’t happening at two of the market’s worst performers: Charlotte, North Carolina- based Bank of America, with 278,688 employ- ees as of the end of March, and New York- based Citigroup, with 263,000. “Our customers need us to do this, and that’s why we do it,” Bank of America CEO Brian T Moynihan, 52, told investors on a May 30 con- ference call to explain why his bank needs to be in consumer and corporate and investment banking. Vikram Pandit, Citigroup’s CEO, said the bank’s “central mission” over its 200-year history has been “to support economic progress.” That hasn’t been serving shareholders. Over the past five years, those two stocks were the worst performers in the 24-company KBW Bank Index, dropping 84% and 95% respectively. Bank of America is trading at about 60% of its tangible book value, while Citigroup is at 52%, according to data compiled by Bloomberg. Tan- gible book value is the best estimate of what shareholders would get if all of the banks’ as- sets were sold and its liabilities paid off. By contrast, a bank a fraction the size — Minneapolis-based US Bancorp, with US$341 billion in assets — chalked up the third-best performance in the KBW Bank Index and is trading at 2.6 times tangible book value. JPMorgan, led by former Weill protege Jamie Dimon, 56, is trading at about tangible book value even after posting record profit in 2011. Wells Fargo, its smaller and more US-cen- tric competitor, is valued at 1.72 times tangi- ble book value. “That’s a valid question, we should look at it,” Dimon, JPMorgan’s CEO, said at a Feb 28 investor event when asked if the bank would be worth more broken up. “But I can’t imag- ine that the units of this company would per- form better if they were parts of a much small- er company.” Marc Lasry, the billionaire co-founder of Av- enue Capital Group LLC, said on Bloomberg Television that banks will have a difficult time making money in coming years and weak stock performance could lead boards to make chang- es. Davide Serra, the former head of European bank research at Morgan Stanley who is now managing partner at Algebris Investments, said on television that the universal bank model “has through time been the winning one.”

Emerging markets

Spokesmen for Bank of America, Morgan Stanley and Goldman Sachs declined to comment on whether their boards are considering breaking them up. A JPMorgan spokesman didn’t return calls seeking comment. Jon Diat, a spokesman at Citigroup, said in an e-mailed statement that the bank has been profitable for more than two years and that its presence in emerging mar- kets and history of helping finance trade make it well-suited for today’s economy. Fisher, who says he has been underweight on bank stocks compared with benchmark in- dexes for three years, sees another explanation for why banks stick to their model. “The inherent nature of a lot of CEOs is to love empire-building,” he says. “The ones that love empire-building will do whatever he or she can to dissuade the board of directors” from breaking their companies up. High compensation for bank CEOs and their

CONTINUES NEXT PAGE

26 THEEDGE SINGAPORE | JULY 2, 2012

OPINION

OPINION

Can Thailand surprise on the upside?

T hailand has been in the head- lines in the past few years for all the wrong reasons — a military coup, political pro- tests that shut down Bang-

kok’s main airport in 2008, protestors forcing Asean leaders to hastily leave a summit meeting in 2009, a violent end to the occupation of Bangkok’s main commercial centre by protes- tors in 2010 and the worst flooding in 70 years that disrupted global sup- ply chains in late 2011. Most observers see political risks such as uncertainty over the royal succession and the irreconcilable de- mands of extremists on both sides of the political divide marring prospects for the country in the medium term. Our view, however, is that while there will certainly be unsettling political

developments over the next one or two years, the Thai system is adjust- ing its way to accommodate these likely developments. We also believe that the long-term prospects for the Thai economy are much better than the country is credited with.

Politics will not help in the near term

We are likely to see a resurgence of political tension in the coming months. Efforts by the government of Prime Minister Yingluck Shinawatra to push through a law to give legal backing to political reconciliation as well as amendments to the constitu- tion have been resisted by opponents of her brother, the former prime min- ister Thaksin Shinawatra, who was ousted in the 2006 coup. The Constitutional Court, which has a conservative pro-establishment bent and has often acted as a check on the pro-Thaksin factions, has ordered the legislature to suspend consideration of the constitutional changes on the grounds that these changes might undermine the status of the constitutional monarchy. Six years after Thaksin was ousted in a military coup, his opponents in the establishment as well as among the urban middle classes remain deep- ly hostile to him. They now suspect that he intends to return to Thailand through an amnesty (part of the rec-

onciliation law), which would allow him to escape jail for the offences he was convicted of after his ouster. Both the pro-establishment Yellow Shirts as well as the pro-Thaksin Red Shirts are now threatening more agi- tation if their demands are not met.

If this was not trouble enough, the

politically inexperienced Ms Yingluck also has to find ways to accommo- date the return of 111 senior political leaders who had been banned by the military coup leaders from holding political office until May this year. They are now demanding cabinet and other positions but these can only come at the expense of current office holders who are not keen to give up their positions.

Hopeful signs that political tensions will eventually subside

The most important positive devel- opment is that the mainstream of the Thai citizenry is fed up with the political gridlock and wants the po- litical bickering to end. Neither side can afford to ignore the views of this silent majority. Thus, both sides feel some degree of pressure to work to- wards reconciliation. This was prob- ably why General Prem Tinsulanon- da, the head of the Privy Council and leader of the royalist establish- ment, agreed to meet Prime Minis- ter Yingluck — unlike his refusal to meet the two earlier pro-Thaksin prime ministers, Samak Sundaravej and Somchai Wongsawat. Yingluck has also been careful in protecting the interests of the mon- archy and cultivating a close work- ing relationship with military lead- ers, whom she reportedly meets every week.

So, we read the renewed political tension as a reflection of how each side

is testing the other to see how far they

can be pushed, as part of a negotiation process, not a sign of another round

of political destabilisation.

This process of reconciliation is helped by the fact that the extrem- ists on either side are losing sup-

port. The Yellow Shirts could muster only a few thousand supporters for

a recent rally. The Red Shirts were

thousand supporters for a recent rally. The Red Shirts were | BY MANU BHASKARAN | my
thousand supporters for a recent rally. The Red Shirts were | BY MANU BHASKARAN | my

| BY MANU BHASKARAN |

my say

shocked to be told by Thaksin in a speech via video link that he would need to work towards some form of accommodation. It is clear that nei- ther the Yellow Shirts nor the Red Shirts are getting the funding and organisational support they used to receive from the powerful factions in the elite who were using them.

In other words, the tensions we are seeing now are part of a political game that is still risky but which has

a good chance of ending positively.

The outlines of a historic reconcilia- tion are now visible — Thaksin will be allowed to return to Thailand but not to high political office, and the establishment will cede some powers and influence while the pro-Thaksin factions will accept constitutional re- straints that will limit their political agenda while promising to uphold the position of the monarchy and help en- sure a smooth royal succession. There may well be a lot of hard negotiations and bluster that could cause politics to be unsettled but the final outcome, we believe, will be a positive one in the longer term.

Economy — impressive

resilience in near term

For all its weaknesses in infrastructure and technical skills, the Thai economy

has demonstrated two critical strengths — resilience to exogenous shocks and

a capacity to reinvent itself — which

we believe will carry it forward. Let’s look at resilience first. The Thai economy is rebounding strongly

from the flood disaster and is likely

to hold up reasonably well despite the global slowdown.

• The manufacturing sector, which was hit hard by the flooding of major industrial estates, has made up for lost ground. Industrial pro- duction rebounded by 38.9% in the first quarter of this year, in seasonally adjusted terms from the last quarter of 2011, compared to the sharp 33.5% collapse in the final quarter of 2011. This boosted GDP growth in 1Q2012 to 12.6% q-o-q, up from the 6.2% q-o-q contraction registered in

4Q2011.

• Other sectors that were hit — tourism and agriculture have recouped their losses even fast- er and are now above pre-flood levels. Resilience to a slower global econ- omy is also helped by reconstruction spending. Investment spending on replacing damaged equipment has been substantial. As at the end of April 2012, the Board of Investment had approved machinery imports worth as much as

THB92.1 billion (0.9% GDP) to replace flood-damaged ones for 377 projects. Fiscal spending will boost demand as both current and capital expendi- tures, especially transfer payment to local government and extra-budgetary funds, are being accelerated. Moreover, the higher minimum wage of THB300 a day that is being rolled out will help boost consump- tion spending. While many small enterprises will be hurt by rising la- bour costs, our view is that business associations’ claims of several hun- dred thousand job losses as a result of this minimum wage are greatly ex- aggerated. Thailand is essentially a labour-short economy with millions of foreign workers employed at ex- ceedingly low wages. A higher minimum wage, if en- forced effectively, will force a neces- sary adjustment up the value curve while not causing a spike in overall

unemployment. The Yingluck gov- ernment has also brought in a slew of measures to help the corporate sec- tor, including substantial cuts in cor- porate tax rates.

Long-term positives building momentum

There are also promising signs for longer-term growth. First, after many years of under-investment in phys- ical infrastructure since the finan- cial crisis of 1997, Thailand is ram- ping up spending on mega projects in transport and water manage- ment. The Strategic Committee for Reconstruction and Future Devel- opment has approved a budget of THB2.65 trillion ($110 billion) for in- frastructure development from 2012 to 2016. New mass transit lines are to be built in the greater Bangkok

area. Several high-speed train lines are also to be constructed, linking Bangkok to Chiang Mai initially and to points in China and Malaysia in the longer term.

Second, Thailand remains one of the most attractive places in the world for foreign investors. Foreign invest- ment applications are soaring again, with Thailand showing itself as one of the major global production hubs for automobiles and parts as well as electrical appliances. Third, Thailand is likely to be a winner from new integration trends in Asia. The opening of Myanmar means that India-Asean transport links can resume. The Asean-China trans- port routes are already being built. Roads and railways built to support the Greater Mekong Subregion are boosting physical connectivity. At the heart of all these positive trends

is Thailand — it will become the lo-

gistics and transport hub underpin- ning physical connectivity within a more integrated Asean.

The bottom line

Thailand will probably encounter

a number of political difficulties in

the near term and there will be times when external observers will turn very negative. But the underlying positives will help Thailand absorb these shocks and emerge stronger in

the long term.

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Manu Bhaskaran is a partner and head of economic research at Cen- tennial Group Inc, an economics consultancy

CORPORATE

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Smaller lenders could acquire parts of larger conglomerates

FROM PREVIOUS PAGE

boards of directors is another reason they’re resistant to change, according to David Ellison, president of FBR Fund Advisors Inc in Arling- ton, Virginia, and chief investment officer of FBR Equity Funds. A pay package for Pandit that would have awarded him about US$15 million for 2011, along with a retention plan that could be worth about US$40 million, was opposed by share- holders this year in a non-binding advisory vote. Citigroup’s non-employee board members received between US$56,250 and US$625,000 in 2011, including a mix of cash and stock, ac- cording to the company’s proxy. Managements and boards are also protected from market forces in ways they wouldn’t be

at industrial conglomerates, says Amar Bhide,

a professor at the Fletcher School of Law at

Tufts University. Regulators won’t permit lev- eraged buyouts of banks, and the largest US lenders are too large to be candidates for lev- eraged buyouts, he says. “Unless somebody comes in and says, ‘Aha, this bank is trading so far below book value that I can come in and break it up and sell the piec- es,’ what’s the incentive for the boards of direc-

tors?” Bhide says. “Banking is an industry where these things are simply not allowed.’” Because regulators only allow banks to ac- quire banks, eventually some of the smaller lenders, perhaps supported by private-equity companies as shareholders, could attempt to acquire parts of the larger conglomerates, Fish-

er says. “The ant will swallow the elephant and disgorge the pieces.” Regulators are unlikely to baulk at such a deal “if the avowed purpose is to set the bank to bank- ing and the other pieces off on their own.” In April 1995, when Price’s Heine Securities Corp became Chase Manhattan’s biggest share- holder and said the bank’s stock wasn’t being pro- perly valued, Chase took action. Its US$10.9 billion merger with Chemical four months later created the biggest US bank at the time, with almost US$300 billion in assets. Price reaped a profit. About 18 months ago, Price said on a Bloomb- erg Television interview with Tom Keene that New York-based Goldman Sachs should break itself into separate trading, banking and mon- ey-management businesses. Price said the parts

could reward Goldman Sachs shareholders, whose stock was then worth about US$162, with a value of US$250 a share. Goldman Sachs, with US$951 billion of assets, closed in New York on Tuesday at US$91.03, or about 74% of tangible book value. Greenhill & Co, which operates as a stand-alone investment bank, is valued by shareholders at more than six times tangible book value. Asset-management companies such as Legg Ma son Inc and Black- stone Group LP trade at more than six and four times tangible book value respectively. “I talked about Goldman doing it, and Gold- man doesn’t want to hear it,” Price says. “I’m just a small money manager now, so there’s nothing I can do. These are big banks now.”

— Bloomberg LP

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