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shareholders approval
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Property players turn to bonds
amid weak equity market
sentiment, says HSBCs Kern
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More darkness before dawn
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E
| BY MIKE PEACOCK |
There is an unusually public level of
disagreement going into a key eurozone
meeting. EU leaders arent helping to
foster a sense of united purpose that
could calm investors a little.
On June 26, Germanys 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 Merkels 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 Merkels 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.
Eurozone finance ministers will hold a
conference call on the Spanish package
and the Cypriot bailout request later on
June 27.
The leader of Germanys 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 Italys 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
Pre-summit discord
TheWeek
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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-
gapores so-called Qualifying Full Bank (QFB)
licence, Deputy Prime Minister Tharman Shan-
mugaratnam said in a speech to bankers at-
tending an industry dinner.
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
outlet in Singapore.
The latest announcement by Singapore is part
of a global trend following the 2008 financial
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 & Marines
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
LLC has secured a contract from Transocean
Offshore Deepwater Drilling Inc to repair and
upgrade the semi-submersible rig Sedco 707.
Separately, Keppel O&Ms shipyard in Azerba-
ijan, Caspian Shipyard Co, has also secured
a contract to build a floating dock for Baku
Shipyard LLC.
Drydocks World, the ship repair company, an-
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-
PaxOcean Asia. All parties will work together
to grow DDW-PaxOcean Asia into a leading
yard in the region. The new partners will also
collaborate on cross-promotional activities and
other strategic initiatives within the offshore
and marine industry.
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. k1s 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.
LionGold Corp said on June 28 it is acquir-
ing an 11.2% stake in ASX-listed gold pro-
duction company Citigold Corp Ltd (CTO) for
A$10 million ($12.8 million). By subscribing
for 125 million new shares in CTO for eight
Australian cents each a 33% premium to
its last traded price LionGold becomes the
single-largest shareholder of CTO. CTO owns
the Charters Towers Project, which comprises
more than 1,500 sq km of land in 56 granted
mineral holdings and two applications.
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.
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 OKPs 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.
Lion Asiapac expects to report a net loss in 4Q
ending 30 June because of impairment losses
on the fair value of the groups 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
June 30. Compiled by Amy Tan
Quoteworthy
The fact that Bank Danamon still offers at this
discount indicates that the bid as outlined in
DBSs 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 Singapores largest bank
what he calls The Lady Gaga Treatment
Merkel arriving for the EU summit in Brussels on June 28
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THE WEEK OF JULY 2, 2012
EDGEWISE
THEEDGE SINGAPORE | JULY 2, 2012 5
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 its 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-Cashs 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-Cashs 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-Cashs 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
doesnt work, or if the chain is too short, we
wont 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 companys range of pre-owned
jewellery and watches for sale.
During its three years in business, Maxi-
Cashs 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-Cashs 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.
Maxi-Cash soars as
it makes pawnbroking
as good as new
Maxi-Cash operates the
largest chain of pawn shops,
with 24 outlets located
throughout the country
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ECONOMY WATCH
| BY GOOLA WARDEN |
F
orget about the BRICs and the Next-11.
Its SNAC time. Geneva-based Davis
Hall, global head of FX and precious
metals advisory at Crdit 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
dont 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 thats the
case, they also arent 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. Weve 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 wont be pleasant for eurozone na-
tions for some time, he adds. Were going to
have EU living standards suffer; unemployment
is going to increase and were 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 isnt
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.
If you have a sovereign wealth fund youre in
great hands, Hall says. And, if you can find a
country that also happens to be a net commodi-
ty exporter then so much the better, he adds.
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;
N is for Norway, a country with the second
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
a solid balance sheet.
To be sure, these currencies arent entirely
free of risks. Australian exports, for instance,
are driven by demand from China, which looks
like its 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
is bad news for Norway and Canada, which
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
a very strong banking system and a history
of running internal and external surpluses.
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.
As for Singapore, the nations 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
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
Norwegian currency, and the Singapore dollar
if youre a euro-based client. It could also be a
good time to start nibbling gold, and consider
the Australian dollar, Hall says.
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
up to $1.31 before falling back to $1.20 against
the US dollar. If Im a US dollar holder, Im
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
the region.
Hall is something of a secular bear on the US
dollar. Born in the US, he remembers moving
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
CHF4.25. Now, 37 years later, US$1 is worth
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
every intention to gain export advantage from
weakening the currency. They are living with a
huge advantage of seniorage. Everybody is still
willing to trade US dollar, Hall says.
The lesson from that is it isnt enough to
just hold cash, but to diversify ones 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%; theyre 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 thats 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 well look
back at these years and say, Why did people buy
bonds? Why didnt they buy gold?
Look to currencies of SNAC nations and gold
for diversification, says Crdit Agricoles Hall
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G
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P
O
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T
he finances of Chinas county-
level governments are unstable
and unsustainable as the major-
ity of their fiscal income comes from
sources other than taxation, the na-
tions top auditor said.
About 60% of revenue raised
last year by 54 counties investi-
gated by the National Audit Of-
fice wasnt 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
offices 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
Ministrys Institute of Fiscal Science,
was cited by the paper as saying.
Bloomberg LP
Auditor: China local government finances are unsustainable
Hall: If safety and capital preservation are paramount,
then investors should focus on countries that have
strong balance sheets and balanced external accounts
E
THEEDGE SINGAPORE | JULY 2, 2012 7
8 THEEDGE SINGAPORE | JULY 2, 2012
CORPORATE
| 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 Asias 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 Indias 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
Malaysias Pantai Holdings and Inter-
national Medical University Malay-
sia, as well as about 11% of Indias
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 IHHs IPO
could shine the spotlight on the Sin-
gapore healthcare sector again. [It]
could result in greater interest in Sin-
gapores 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 sectors
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 IHHs IPO impact lo-
cally listed players such as Raffles
Medical Group?
According to DMG, Raffles Medical
is IHHs closest SGX-listed peer, after
Khazanahs buy-out of Parkway and
Thomson Medicals delisting in early
2011 by new owner Peter Lim. Raffles
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 Engs 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
Medicals 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 Parkways 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 Medicals
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
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-
ras 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--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-
icals shareholders are institutions,
with stakes of less than 5%, say
Tan and Wong. Given Raffles Medi-
cals 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 Medicals 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. Thailands
Bumrungrad International Hospital,
with 554 beds in Bangkok, is trad-
ing at about 26 times earnings. In-
dias 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 Engs
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 $2.73, or 26.6 times
forecast FY2012 earnings.
Both DMG and OCBC have over-
weight calls on the healthcare sec-
tor.
Raffles Medical Group unlikely to see
negative impact from healthcare IPOs
July 3, 2009 June 28, 2012
Rafes Medical Group
Volume (000) Price ($)
B
L
O
O
M
B
E
R
G
0
5000
10000
15000
20000
25000
30000
0.8
1.0
1.2
1.4
1.6
1.8
2.0
2.18
2.4
2.6
E
Raffles Medical Group has 380 beds at Raffles Hospital and has been widening its
specialist services at the hospital
B
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THEEDGE SINGAPORE | JULY 2, 2012 9
10S THEEDGE SINGAPORE O JuL 2, 2012
CORPORATE
| 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 isnt con-
vinced hes seen it all.
Risks come up everywhere, Kohnke, 54,
tells The Edge Singapore. Were 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 doesnt free Kohnke from having to con-
stantly monitor OCBCs 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 worlds 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.
OCBCs strength didnt 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 banks $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
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 banks trading activities. Or, what
would happen to its portfolio of mortgage as-
sets if unemployment were to rise more than
forecast. If its 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 OCBCs 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, youre
out of business, Kohnke says. He adds that
OCBCs 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.
Weve 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
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THEEDGE SINGAPORE | JULY 2, 2012 11
12 THEEDGE SINGAPORE | JULY 2, 2012
CORPORATE
| 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 Radiances 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, GIHLs 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
Radiance gets new lease of life as
RTO wins shareholders approval
Taylor believes the RTO will result in Radiance shareholders benefiting from
the enormous growth opportunities in the satellite communications industry
B
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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
GIHLs 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?
Radiances 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, Radiances
shares have been trapped below the
10-cent mark. The companys 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 Radiances 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 approved the RTO, Taylor
has his work cut out for him. Bring-
CORPORATE
THEEDGE SINGAPORE | JULY 2, 2012 13
E
ing Radiances manufacturing capabilities up
to speed is the first step, says Taylor. GIHL in-
vested US$1 million last year to upgrade Ra-
diances 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.
E
uropes 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, Airbuss 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 worlds 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 worlds largest pro-
Airbus mulling US plant, sources say
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-
ons 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
July 10, 2009 June 28, 2012
Global Invacom Group
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FRANCK MULLER BOUTIQUE SINGAPORE 01-07 ION ORCHARD (65) 6509 3380 B1-19 THE SHOPPES AT MARINA BAY SANDS (65) 6634 8825 MELBOURNE 119 COLLINS STREET (613) 9650 0288 JAKARTA PLAZA
INDONESIA (6221) 310 7608 BANGKOK SIAM PARAGON (662) 610 9423 AUTHORISED RETAILERS SINGAPORE SINCERE FINE WATCHES NGEE ANN CITY (65) 6733 0618 SCOTTS SQUARE (65) 6636 0600
THE SHOPPES AT MARINA BAY SANDS (65) 6634 9782 SUNTEC CITY (65) 6337 5150 VIVOCITY (65) 6278 1698 SINCERE HAUTE HORLOGERIE HILTON SINGAPORE (65) 6738 9971 WATCHES OF SWITZERLAND
PARAGON (65) 6732 9793 KUALA LUMPUR SINCERE FINE WATCHES STARHILL (603) 2141 8848 SURIA KLCC (603) 2166 2181 PAVILION KL (603) 2141 8418 THE GARDENS MALL (603) 2287 1133
14 THEEDGE SINGAPORE | JULY 2, 2012
CORPORATE
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 thats 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. Theres 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.
E
| 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 hasnt 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 Beijings 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 arent 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 dont believe
[clear policy changes] will happen
until early next year, with the new
government in place.
Nevertheless, Kern doesnt 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.
Thats 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. Thats 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. [Thats] 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$500 million issue more
than 11 times covered.
According to Kern, demand for
such debt, just like demand for oth-
er investment assets, is still coming
from big name fund managers from
the US and Europe. In each mar-
ket, you also have some local private
Property players turn to bonds amid weak
equity market sentiment, says HSBCs Kern
S
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People want definitive plans and
solutions, no more half-measures
from the EU. We want some bold
moves that can give some direction
to the market. Kern
CORPORATE
THEEDGE SINGAPORE | JUL 2, 2012 15
in what you do. Thats why I say its impor-
tant to stay close to your knitting.
Changing with the times
OCBC has traditionally been among Singapores
more prudently run financial institutions. In fact,
it was the countrys largest bank decades ago,
backed not only by formidable capital ratios,
but also by a convoluted web of investments in
blue-chip companies such as Fraser & Neave,
Robinsons & Co, WBL Corp, United Engineers
and, of course, Great Eastern Holdings. In 2000,
before OCBC acquired Keppel Bank, it had a to-
tal capital adequacy ratio (CAR) of 24.9%, and
a core tier-1 CAR of 20.9%.
Over the last decade, however, OCBC has
steadily offloaded its corporate holdings to com-
ply with regulations by the Monetary Author-
ity of Singapore (MAS), which prohibit banks
from holding more than 10% of a company
whose business is deemed non-core. There
was a MAS directive to stay focused on the
banking business. These assets were non-core
to the underlying business, says Kohnke, who
joined the bank in 2005.
kohnke: We're working with uncertainty, if every-
thing is known, there is no risk
JuIy 3, 2009 June 27, 2012
Oversea-Chinese Banking Corp
vo|urc ('000) l||cc ($)
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fk0M PACL 10 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
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 companys 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.
E
C
C
8
C
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-
nesias 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,
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Education
materiaIs
CMC Markets
16 THEEDGE SINGAPORE | JULY 2, 2012
CORPORATE
| BY LEU SIEW YING |
I
ts 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 Chinas Zhenhua Oil. At about
10.30am, they are joined by Myan-
mars Energy Minister Than Htay,
and an elaborate blessing ceremo-
ny gets underway.
Than Htay climbs 60 steps up to
the colossal rigs 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 didnt 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 didnt start drilling
immediately because of delays in
the delivery of the drilling equip-
ment and inclement weather. In ad-
dition, the minister wasnt 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
so, there is always a chance that an
exploration company will find noth-
ing. But this is what the industry is
all about. Its 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 wouldnt be
a complete waste of money because
of the geological data that is collected
in the process, Traver says.
Riding on Myanmars opening
For Interra Resources, however, the
latest drilling operations are a big
deal. For one thing, the company
hasnt 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 Myanmars
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-
tion. Meanwhile, just 24km away, a
Myanmar-China gas pipeline to de-
liver offshore gas to Chinas 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 Myanmars 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 doesnt 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
share price on the day before the an-
nouncement was made. The rights is-
sue is renounceable and non-under-
written. However, the companys 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 companys 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
1 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 arent
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 familys 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
wasnt 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.
Interra Resources begins drilling new
well in Myanmar; launches rights issue
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.
July 3, 2009 June 28, 2012
Interra Resources
Volume (000) Price ($)
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THEEDGE SINGAPORE O JuL 2, 2012 S 17
C0h1IhuLS 0h PACL 19
| BY KYUNGHEE PARK |

osco Corp Singapore Ltds strategy of

seeking orders to build oil rigs and
offshore accommodation units to off-
set slumping ship demand hasnt 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. Thats 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 its 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
2 years, even though Cosco Singapore hadnt
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 Singapores 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, didnt 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-states 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 companys 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
Cosco Singapore Ieft as Iowest-rated
major Asian stock on rig push
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-
nys 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
CORPORATE
| BY ASSIF SHAMEEN |
I
n his nearly three decades in the dry
bulk shipping industry, Khalid Hashim,
the CEO of Thailands 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 thats not what the industrys 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-
nas 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
Moodys 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 isnt 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 dont 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 isnt 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
for new buildings has dried up, Macquaries
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 Suisses 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.
Citigroups 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. Citigroups
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-
tors down cycle and may be more defensive
on the last leg down, he notes.
More darkness before dawn for
battered dry bulk shipping sector
M
alaysias state oil compa-
ny on June 28 agreed to
buy Canadas 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 Malaysias Petronas
follows its formation of a joint ven-
ture with Progress last year to de-
velop a part of Progress Energy Re-
sources Corps 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-
adas 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 Energys
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 Energys 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 Canadas
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 Energys 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 Billitons US$39 billion
($49.94 billion) bid for the worlds
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 Canadas 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-
nys 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
Malaysias Petronas to buy Canadian gas producer
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.
E
CORPORATE
THEEDGE SINGAPORE O JuL 2, 2012 S 19
E
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 Singapores 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-
nys 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
| BY SUPUNNABUL SUWANNAKIJ |
.
hailand, the worlds 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 years 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
1haiIand seeks rubber-export Iimits
THB91.07 per kg on June 27 from this years
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
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20 THEEDGE SINGAPORE | JULY 2, 2012
| 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 Stewarts 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 companys 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.
Its 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,
Thailands SET Index and Indonesias Jakarta
Composite Index advanced 37%, 55.5% and
108.1% respectively.
Why have Singapores 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. Malaysias Public Bank, for instance,
was ranked the 10th biggest wealth creator in
the study.
They didnt get hit as much by the recession
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 isnt 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 Chinas
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. Were not saying there isnt 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 dont take into account the risks,
they will end up suffering.
Destroying
shareholder value
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?
STI has underperformed regional market indices
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2007 2009 2008 2010 2011
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137.028
146.865
155.528
208.111
STI Normalised as at Jan 3, 2007
FBM KLCI
PCOMP Index
SET Index
JCI
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THEEDGE SINGAPORE | JULY 2, 2012 21
Thats not to say that acquisitions in poten-
tially risky markets wont pay off in the long
term. Jardine C&C acquired Indonesias 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 $10.2 billion of wealth for its
shareholders over the past five years.
Part of the reason for its strong perform-
ance was also the changing perception of In-
donesias risk profile. Indonesias risk-free
rate, or the minimum return required by share-
holders, has dropped significantly over the
last few years. People now dont see Indone-
sia as such a risky place to do business in,
Schwarz says. On the contrary, the country
has become a magnet for foreign direct in-
vestment following efforts by Jakarta to con-
tain its budget deficit and bolster economic
growth, which in turn prompted several cred-
it rating agencies to upgrade Indonesia to in-
vestment-grade status.
Reassessment of strategies?
Clearly, these trends could have profound
implications for the growth strategies of Sin-
gapore companies. They could, for instance,
force some of them to reassess their regional
acquisition plans. In the past, people would
invest in Singapore banks, which have some
exposure to Indonesian banks and to the re-
gion in general. Now, that risk has come down
enough for people to go directly into Indonesia
and bypass Singapore to get that exposure,
Schwarz says.
The result could be companies having to
face more competition for acquisitions in re-
July 3, 2009 June 28, 2012
Jardine Cycle & Carriage
Volume (000) Price ($)
0
500
1000
1500
2000
2500
3000
15
20
25
30
35
40
50
55
46.12
July 3, 2009 June 28, 2012
Singapore Airlines
Volume (000) Price ($)
10.27
0
5000
10000
15000
20000
25000
30000
35000
40000
45000
50000
8
9
11
12
13
14
15
16
CONTINUES NEXT PAGE
July 3, 2009 June 28, 2012
United Overseas Bank
Volume (000) Price ($)
18.40
0
5000
10000
15000
20000
25000
30000
35000
13
14
15
16
17
19
20
21
July 3, 2009 June 28, 2012
Wilmar International
Volume (000) Price ($)
3.59
0
20000
40000
60000
80000
100000
120000
140000
160000
2
3
4
5
6
7
8
Schwarz: The global financial meltdown had a
significant impact on the performance of companies
before and after the crisis
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Wealth Added ranking
Top 10 creators of wealth in Southeast Asia in the last ve years
Top 10 destroyers of wealth in Southeast Asia in the last ve years
RANK COMPANY INDUSTRY COUNTRY WEALTH ADDED ($ BIL)
1 Astra International Automobiles and components Indonesia 21.8
2 HM Sampoerna F&B and tobacco Indonesia 14.4
3 Gudang Garam F&B and tobacco Indonesia 11.0
4 PLUS Expressways Transport Malaysia 10.5
5 Jardine Cycle & Carriage Retail Singapore 10.2
6 Wilmar International F&B and tobacco Singapore 9.2
7 Bank Central Asia Financial services Indonesia 9.1
8 Telekom Malaysia Telecommunications Malaysia 8.0
9 Advanced Info Service Telecommunications Thailand 7.6
10 Public Bank Financial services Malaysia 7.5
RANK COMPANY INDUSTRY COUNTRY WEALTH DESTROYED ($ BIL)
91 Indosat Telecommunications Indonesia (6.5)
92 Singapore Airlines Transport Singapore (9.3)
93 United Overseas Bank Financial services Singapore (9.6)
94 MISC Transport Malaysia (10.7)
95 Singapore Telecommunications Telecommunications Singapore (11.9)
96 Tenaga Nasional Utilities Malaysia (12.0)
97 CapitaLand Real estate Singapore (13.6)
98 Flextronics International Technology hardware & equipment Singapore (14.1)
99 DBS Group Holdings Financial services Singapore (16.7)
100 Telekomunikasi Indonesia Telecommunications Indonesia (37.3)
COMPANY
Astra International
HM Sampoerna
Gudang Garam
PLUS Expressways
Jardine Cycle & Carriage
Wilmar International
Bank Central Asia
Telekom Malaysia
Advanced Info Service
Public Bank
COUNTRY
Indonesia
Indonesia
Indonesia
Malaysia
Singapore
Singapore
Indonesia
Malaysia
Thailand
Malaysia
COMPANY
Indosat
Singapore Airlines
United Overseas Bank
MISC
Singapore Telecommunications
Tenaga Nasional
CapitaLand
Flextronics International
DBS Group Holdings
Telekomunikasi Indonesia
COUNTRY W
Indonesia
Singapore
Singapore
Malaysia
Singapore
Malaysia
Singapore
Singapore
Singapore
Indonesia
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. Thats a problem in any indus-
try where you make a long-term investment.
People will just commit funds. If things dont
turn out well, they blame macroeconomic is-
sues or the local governments.
Among Singapore-listed companies whose
ventures overseas dont 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 Stewarts 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 doesnt 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 havent
had much to cheer about recently. Interesting-
ly, Temasek Holdings, which controls a large
swathe of listed companies in Singapore and
FROM PREVIOUS PAGE
July 10, 2009 June 28, 2012
CapitaLand
Volume (000) Price ($)
0
20000
40000
60000
80000
100000
120000
140000
160000
180000
200000
1.5
2.0
3.0
3.5
4.0
4.5
2.64
July 10, 2009 June 28, 2012
DBS Group Holdings
Volume (000) Price ($)
0
10000
20000
30000
40000
50000
60000
11.0
11.5
12.0
12.5
13.0
14.0
14.5
15.0
15.5
16.0
13.84
July 10, 2009 June 28, 2012
Singapore Telecommunications
Volume (000) Price ($)
0
50000
100000
150000
200000
250000
2.7
2.8
2.9
3.0
3.1
3.24
3.3
3.4
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 theres one thing that destroys
wealth more than how [poorly] a firm is man-
aged, its 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.
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 $37.3 billion.
Malaysia creates most wealth in region for investors
E
NUMBER OF TOTAL WEALTH ADDED AVERAGE WEALTH ADDED MEDIAN WEALTH ADDED
COMPANIES (DESTROYED) (DESTROYED) (DESTROYED)
($ BIL) ($ BIL) ($ BIL)
Malaysia 20 36.8 1.8 2.0
Thailand 15 20.0 1.3 0.7
Indonesia 16 18.3 1.1 1.3
Philippines 10 (14.4) (1.4) (1.2)
Singapore 39 (90.0) (2.3) (1.4)
Total 100 29.3
Wealth Added by country in last five years
NUMBER OF TOTAL WEALTH ADDED AVERAGE WEALTH ADDED MEDIAN WEALTH ADDED
COMPANIES (DESTROYED) (DESTROYED) (DESTROYED)
($ BIL) ($ BIL) ($ BIL)
20
15
16
10
39
100
NUMBER OF
COMPANIES

1.8
1.3
1.1
(1.4)
(2.3)
AVERAGE WEALTH ADDED
(DESTROYED)
($ BIL)
COVER
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real watches for real people
Oris Carlos Coste Chronograph Limited Edition
Automatic mechanical chronograph
Automatic helium valve
Water resistant to 500 m
Limited to 2000 pieces
www.oris.ch
Distributor & Service
Swiss Prestige Pte Ltd
371 Beach Road #14-05 KeyPoint
Tel: +65 6296 1904
email: info@oris.com.sg
THEEDGE SINGAPORE | JULY 2, 2012 23
24 THEEDGE SINGAPORE | JULY 2, 2012
OPINION
Samsonite shrugs off bag recall
Y
ou can have the worlds best-known
brands under your umbrella but in
the days of Twitter and Facebook, it
doesnt take much to knock one of
them off its pedestal, and at warp
speed too. Thats the lesson the worlds 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-makers 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 magazines 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 Singapores ca-
sinos, Europes malls, Australias 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 Asias.
Alongside big names such as
Prada, Coach and LOccitane,
Samsonite was one of several
global brand owners that sought
to list in Hong Kong, hop-
ing for some of Chinas 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 Samsonites 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.
Samsonites 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.
Thats 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, Samsonites
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.
| BY ASSIF SHAMEEN |
big money
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| BY RANJEETHA PAKIAM |
F
elda Global Ventures Holdings
Bhd, the worlds 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 havent 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 didnt 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 Europes
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-
changes 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
shouldnt 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 Assets Ri-
chardson.
IHH Healthcare Sdn Bhd, Asias
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 worlds
largest palm-oil company by acre-
age, and 9.9 times at Singapores
Golden Agri-Resources Ltd, data
compiled by Bloomberg show. Fa-
cebooks 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 & Poors 500 index.
Felda wont tank, it wont 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
companys shares, said before the
debut. Its 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, Malaysias 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
Priced-to-sell Felda Global jumps in IPO debut
CORPORATE
E
THEEDGE SINGAPORE | JULY 2, 2012 25
| 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: Its 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 theres
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 arent
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 Televisions Market Makers.
The universal bank model is broken,
Trone said.
Getting bigger
Theres little sign that market forces are chang-
ing the universal-banking strategy. Corporate
raiders or potential takeovers dont provide the
same impetus for banks as they do for other
industries. Laws prohibit non-financial firms
from buying lenders, and banks cant 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-
gans purchase of Bear Stearns Companies
and Washington Mutual Inc in 2008, as well
as Bank of Americas acquisition of Country-
wide Financial Corp and Merrill Lynch & Co.
JPMorgans balance sheet has increased 49%
to US$2.3 trillion since the end of 2007. Bank of
Americas 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. Theyve 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 Televisions
Schatzker that he disagrees with Purcell.
This is a knee-jerk discussion thats 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 Yorks 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 thats what we need to do.
That wasnt the course taken by Green-
spans 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 industrys 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 dont 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-Franks 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 isnt happening at two of the markets
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 thats
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, Citigroups CEO, said the
banks central mission over its 200-year history
has been to support economic progress.
That hasnt 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.
Thats a valid question, we should look at
it, Dimon, JPMorgans CEO, said at a Feb 28
investor event when asked if the bank would
be worth more broken up. But I cant 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 didnt 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 todays 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
JPMorgans 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
US financial conglomerates under
pressure from investors to break up
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26 THEEDGE SINGAPORE | JULY 2, 2012
CORPORATE
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-
koks main airport in 2008, protestors
forcing Asean leaders to hastily leave
a summit meeting in 2009, a violent
end to the occupation of Bangkoks
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
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.
Lets 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.
Manu Bhaskaran is a partner and
head of economic research at Cen-
tennial Group Inc, an economics
consultancy
Can Thailand surprise on the upside?
| BY MANU BHASKARAN |
my say
E
Smaller lenders could acquire parts of larger conglomerates
boards of directors is another reason theyre
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. Citigroups 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 companys proxy.
Managements and boards are also protected
from market forces in ways they wouldnt be
at industrial conglomerates, says Amar Bhide,
a professor at the Fletcher School of Law at
Tufts University. Regulators wont 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, whats 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 Prices Heine Securities
Corp became Chase Manhattans biggest share-
holder and said the banks stock wasnt 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 doesnt want to hear it, Price says. Im
just a small money manager now, so theres
nothing I can do. These are big banks now.
Bloomberg LP
FROM PREVIOUS PAGE
OPINION
E