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FEER: Negative Spiral
By Lorrien Holland
23/3/2001 2:36 pm Fri
The Far Eastern Economic Review
SHROFF: MALAYSIA - Negative Spiral
By Lorien Holland
Kuala Lumpur's stockmarket survived the Asian Crisis better than most,
despite the beating taken by some of the nation's corporate giants.
But efforts to recapitalize those companies appear to be pulling the
market into a spiral of negative sentiment--and the government's
pension funds into some troubling investments.
Take the initial public offer of Time dotCom, the telecoms arm of Time
Engineering, which is 46 % owned by the Renong Group. Renong is
politically well-connected but mired in debt and in dire need of cash.
Analysts warned well before the IPO that Time dotCom's offer price of
3.30 ringgit (86 cents) was too high, given the global meltdown in
technology stocks. But the offer went ahead in February--and
underwriters had to mop up three-quarters of the 572 million shares
after investors spurned them. That did little for market sentiment,
but it meant Time got its cash.
However, in mid-March, two government pension funds emerged as major
sub-underwriters in the deal. As Time dotCom's stock price has tanked
since it started trading on March 12, these two pension funds have
incurred, on paper, a loss in excess of 400 million ringgit.
Malaysians make mandatory payments into the bigger of the two funds,
the Employees Provident Fund, while the other fund, Kumpulan Wang
Amanah Pencen, provides pensions for civil servants. So opposition
politicians were quick to cry foul.
"It is clearly a gross mismanagement of public funds to invest some 6%
of [the civil servants' pension fund] on a counter which all market
analysts had declared would nosedive after its public debut," said Lim
Kit Siang, chairman of the opposition Democratic Action Party. He also
filed a complaint with police against the Employees Provident Fund for
alleged "criminal breach of trust and criminal misuse of public
Analysts contacted by the REVIEW also expressed reservations over the
Time dotCom deal, which highlighted concerns over poor corporate
governance and government rescues for well-connected firms. These
issues, along with Malaysia's capital controls, have led to an exodus
of foreign funds from the market in the past three years. Market
sentiment is deflated, with daily trading volume hovering around 75
million shares, compared with more than 500 million early last year
during the bull run in hi-tech stocks.
One of the government's tactics in countering this negative sentiment
appears to be to support the market by propping up the three blue-chip
stocks--Maybank, Telekom Malaysia and Tenaga Nasional--which make up
around one-third of the stockmarket's capitalization. "Keeping
consumer confidence up is one of the biggest economic problems facing
the government, as people do not seem willing to risk spending money.
And one of the ways to do this is to support the market, and prevent a
downward spiral," says a local analyst.
DREARY COMPANY RESULTS
According to market data, if these three blue-chip counters are taken
out of the Kuala Lumpur Composite Index, the market would be some 150
points lower and the divergence between the two indices would grow
rapidly (see chart). This lower level would tally better with dreary
corporate reports for the year ending December 31, 2000, which showed
some 80% of Malaysian companies did not perform up to expectations,
according to a local business publication, The Edge.
Manu Bhaskaran, director of SG Securities in Singapore, sums up the
government's Catch-22 situation: "The issue here is that companies
need to be recapitalized and how do you do that if the market is
poor." But using pension funds to underwrite recapitalization is a
risky business which in turn affects investor sentiment and tends to
push down the market.
The long-term prognosis for Time dotCom itself, however, is not
necessarily negative. The Malaysian government now owns some 47% of
the company through the two pension funds, its bad-debt recovery
agency Pengurusan Danaharta Nasional and its investment arm Khazanah
Nasional. With such a large stake, it's unlikely to let the company
As the government holds the right to grant telecoms licences and other
contracts, it could steer Time dotCom toward profitability, or simply
wait for the market to rise. "The loss incurred is still unrealized,
and this could still transform into profits," says Edmond Cheah,
executive director of KL Mutual Fund, one of Malaysia's largest
privately owned unit trusts.
The Business Times, Singapore
KL market set for 2-year low as blue chips falter
Top 3 heavyweights already 4-10% down as correction begins
MALAYSIAN shares look set to hit two-year lows, reversing February's
recovery, as top-heavy bluechips begin a correction that has already
seen the country's three biggest firms lose between 4 and 10 per cent
Tenaga Nasional Bhd, Malayan Banking Bhd (Maybank) and Telekom
Malaysia, which together make up almost 40 per cent of the key share
index's capitalisation, wield a powerful influence on the market's
"If you take out the weighting of these three firms, the index should
be trading at 150 points below its current level," said Jason Chong,
research head at Merrill Lynch.
Power firm Tenaga is currently trading at over 20 times its price
multiple, top banking group Maybank at 22 and dominant telephone firm
Telekom at 30, compared with the broader market's average of 17 times.
"Share prices of these three will drop until they are more in line
with the rest of the market," said Mak Hoy Kit of KAF Seagroatt &
And until they do, analysts say investors are unlikely to flock back,
given that regional markets such as Thailand, Singapore and Hongkong
are all trading at cheaper valuations of 9.4, 16.5 and 16.1 times
Since the start of this month, Tenaga has lost 80 cents to RM11.90,
Maybank RM1.50 to RM12.70 and Telekom 70 cents to RM11.30.
Two years ago, the country's benchmark Composite Index of 100 key
bluechips closed at 513.91 and while dealers are quick to say losses
in the current cycle may not go that far, a test of the psychological
600-point mark was likely.
The index closed at 656.50 yesterday, down 1.32 per cent on the day.
"Conditions are still bearish. The index will slip on a lack of
investor interest and it's only a matter of time before it tests the
600 points support," said Phua Kwee Hock, a technical analyst with TA
While the local market has been undermined by steep losses on Wall
Street which saw US shares decline almost 8 per cent in the past week,
analysts said domestic factors were also to blame for the slump. "The
local market has been hurt by both external and domestic factors,"
said KAF's Mr Mak.
Mr Mak says a string of disappointing corporate earnings, the dismal
debut of Time dotCom shares and a recent outbreak of violence between
two racial groups which left six dead and more than 200 arrested,
exacerbated the market's fall.
Since striking a 20-month low of 652.61 on January 3, local stocks had
clawed back ground, reviving hopes the worst might be over.
But after consolidating for more than six weeks above the
psychological 700 points-mark, a string of disappointing corporate
results hammered in the reality of a slowing domestic economy.
Malaysian exports have dipped 7 per cent in January from a month
earlier, hurt by falling electronics demand in the United States, the
country's largest trading partner.
The country's biggest and most watched share sale in years, telecom
firm Time dotCom's initial public offer, saw more than a quarter of
the issue value lost on debut, reinforcing investors' perception that
it may not be time yet to jump back into Malaysian stocks.
Foreigners pulled out US$3 billion (S$5.3 billion) in the second half
of last year, discouraged by a 10 per cent exit tax on short-term
profits, poor corporate governance and a lack of trading liquidity in
the market, dominated by a few large but state-controlled stocks. --