The Far Eastern Economic Review
Issue cover-dated 29th March 2001

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 funds."

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 fail.

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.

http://www.feer.com/

The Business Times, Singapore
21st March 2001

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 in value.

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 direction.

"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 & Campbell.

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 earnings respectively.

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 Securities.

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. -- Reuters

http://business-times.asia1.com.sg