Regional Notes 2018.05.04

Malaysia vote battle heats up with focus on jobs for young

The jobless rate “hides a lot of unpleasant things in the labor market: low pay, low productivity, low skill and a high number of foreign workers,” Zakariah Abdul Rashid, executive director of the Malaysian Institute of Economic Research, said at a conference in Kuala Lumpur in April. “Those unemployed are the youth, highly-qualified individuals who can’t get jobs.”

Foreign labor has underpinned that rebound. The central bank estimates that about 82 percent of the net jobs created in 2016 went to non-residents. Unemployment among 15 to 24 year olds stood at 10.8 percent last year, according to the World Bank, while joblessness among local graduates has increased more sharply than non-graduates since 2011, data from the central bank shows.

Documented overseas workers accounted for 12 percent of the labor force last year, after a steady decline from 16.1 percent in 2013, according to central bank data. Still, adding in the unregistered workers may boost the total amount of foreign labor to as high as 40 percent according to some estimates.

J-beauty: Japan’s sleeping giant awakens

The sleeping giant of the beauty industry, “J-beauty” has woken up. Long eclipsed by the success of K-beauty, the $13bn South Korean business built on insatiable demand for innovative sheet masks, snail extract creams and convoluted skincare routines (most recently resulting in Unilever’s purchase of skin-whitening brand Carver Korea for €2.27bn), J-beauty, its older, more sophisticated sister, is now re-entering the spotlight. The Japanese business has benefited from the growth in Chinese tourists, following limits imposed on travel to Korea by the Chinese government and a surge of enthusiasm for the Olympics in 2020. Japanese beauty exports are tipped to exceed $2.75bn this year.

As Okabe puts it: “K-beauty is driven by trends, it meets those tentative needs of the consumer which are hot or of the moment, whereas J-beauty is something far more sustainable, authentic and eternal.” While J-beauty can’t possibly compete with the entrepreneur culture of Korea, which has the manufacturing speed and efficiency to bring cutting-edge trends to market quickly, K-beauty can’t compete with Japan’s far more delicate and intricate beauty rituals, their obsession with beauty (Euromonitor reports that Japan has the highest per capita spend on skincare and cosmetics) and their long-term investment in technology.

Company Notes 2017.10.20

Digi.com Q3 FY2017 Results

Digi continued to register notable milestones, with our 4G Plus network being one of the fastest growing networks in Malaysia, capable of delivering consistent LTE speed around 10Mbps 80% of the time. Meanwhile, rapid LTE 2600Mhz and LTE 900Mhz deployments expanded Digi’s LTE-A coverage to 49% of the population, making us the frontrunner for widest LTE-A network coverage nationwide.

Postpaid ARPU levelled to RM77 on the back of a larger postpaid subscriber base supported by sturdy demand for our new postpaid plans. Prepaid ARPU steadied at RM32, with higher contribution from prepaid internet revenue.


Palette Multimedia Q1 FY2018 Results

Palette has moved into the medtech space with the significant investment made over the past few years on the development of imedic, the mobile health system. imedic enable patients to have wireless medical devices at home or anywhere, to regularly make measurement and upload the vital sign data to the Cloud. This would allow doctors from anywhere in the world to have access to the patient’s data 24×7 to review and provide online consultation to the patients. More than 15 devices have been developed to connect to imedic including CPAP machines for sleep apnea patients. The Company will continue to invest in the innovation and development of its next generation of imedic with extensive artificial intelligence (AI) technologies performing analytic on the “Big Data” of the patients and make useful recommendation of diagnosis and treatment plan to the doctors and patients.

The Company has effectively combined the latest innovative technologies: medtech, AI and Big Data in imedic. The power to be unleashed from these 3 technologies could be enormous. In additional to its early adoption by hospitals and doctors in the China market and other Asian countries, the Company has made successful penetration into the Russia market. The Company has recorded profit last quarter and Q1 FY2018. The Board of Directors is in the opinion that the Company will be profitable for the current FY.

Scientex expects growth from major investments

“For the manufacturing side, for the last three to four years, we have invested probably almost RM1 billion to expand the capacity to [produce] 350,000 tonnes [of stretch films per year].”

He said the group’s new stretch film facility in Arizona in the US is on track to commence its operations early next year. The two lines at the US facility, he said, will take about two years to be fully utilised. At full utilisation, the plant will be able to produce up to 30,000 tonnes of stretch film per annum. With this new plant, Lim said the group expects its sales in the US market to increase further.

Scientex now has a total land bank with a gross development value (GDV) of RM11 billion, which includes completed projects with a RM3.2 billion GDV and ongoing projects worth RM1.5 billion. The remaining RM6.3 billion worth of land will be used for future projects which can last the group for up to 10 years, said Lim.


Oriental Food seeks growth via biscuit venture

“We originally planned to launch our biscuit products this month, but we wanted to make a bigger impact by launching the entire series on the market. We still have another few products to finalise and we will be launching them next month.”

“We can easily add machines to our existing four production lines for our potato products. Adding one [machine] could boost our revenue probably another 5% to 10%. But in order to have more growth, we have to venture into another [new] segment.”

“For this financial year (FY18), it is very difficult for us to estimate our bottom line due to the rising cost of raw materials and labour. This year, we see a rise in sugar prices, as well as packaging cost due to higher paper prices. And the price of paper is expected to rise by another 8% in the near future as some China paper mills had stopped production on environmental grounds, resulting in supply shortage.”

“Although we absorb some margin loss, all of us are still making money,” he said, adding that raw materials account for 60% of the group’s production cost.


YSP Southeast Asia’s Vietnam ops to break even

“Our bottom line was previously very much affected by unrealised foreign exchange losses due to the volatility of the Vietnamese dong and the US dollar.” YSPSAH purchases a good 60% of its raw materials in US dollars. Lee said its exports, which are also denominated in US dollars, helped mitigate the situation.

“Our animal use drugs segment faces strong headwinds”, he said, since this segment, which caters to livestock and aquatic creatures, took a hit after the Chinese embargo on Vietnamese swine took place. Vietnam is one of the biggest pork producers in Asia, and the largest within the Asean region. The biggest buyer of Vietnamese pork used to be China, up until political tensions between both countries led to an import ban in November last year. “We have been trying to reduce our reliance on the domestic market there, and instead to focus on exporting products from there.”

The Vietnamese plant is running at a rather low utilisation rate of 40%, where it manufactures over 50 registered products that are distributed to more than 1,200 clients through 35 YSPSAH sales representatives to date. Lee said this is not its full range of products just yet. By year end, YSPSAH aims to have a total of 60 products registered and launched in Vietnam.


Affin to focus more on retail banking

The group now wants to shift its focus to retail banking, which had already contributed close to 50% to overall revenue this year.

“In this five-year programme from 2016 to 2020, we have allocated about RM300 million to spend not only on IT (information technology) but also with a view to improving the performance and delivery of our retail banking operation. So it’s actually quite a substantial improvement. I think we are well within our target to meet the 40% goal for Islamic banking by 2020 [set] in the Malaysian financial sector blueprint.”

“The positioning of the bank will be enhanced because the bank is at the apex [of the corporate structure], and hence [it holds] all the assets of the entities underneath it so the size will be enhanced as well. The bank will also have a direct access to the capital and equity market which, again, profiles the company as a much stronger entity.”


MPay gets MCMC licence to roll out mobile services

“With the ASP licence obtained from MCMC, MPay Mobile has become the latest mobile virtual network operator (MVNO) in Malaysia supporting a wide spectrum of services to the public nationwide, including the latest high-speed broadband 4G network.”

“Enabling Asia is a mobile virtual network aggregator, who has a wholesale MVNO agreement with one of four network operators in Malaysia, offering a complete network product and services to MVNOs.”

“The aim is to bring more convenience and accessibility for customers who are located at remote areas with difficulty to access to bank branches, or who intended to move away from traditional banking at branches towards online and mobile banking.”


Bellew explains why he is leaving Malaysia Airlines to return to Ryanair

On Malaysia Airlines, Bellew pointed out that success is just within its grasp. Just another 4%-5% in revenue monthly and it should move to profits, he added.

“It is Ireland’s greatest company. They need my help and there is a big challenge. It is a form of national service,” he said in a personal statement why he was rejoining the Irish low-cost carrier.

ASEAN Open Skies implementation remains slow — IDEAS

“Freedom of travel in air is characterised by nine different levels of freedom. Asean has implemented perfectly the first four levels of freedom, [while] the fifth freedom is in progress. The ninth level of permission, which is the final spectrum of freedom of air, essentially gives an airline the freedom to travel in the domestic destination of a foreign country, not just the capital city itself. We are halfway to full freedom of flight in the air. There is an understanding among the Asean countries that this can be done by the year of 2020, but as a think tank, we observe that the progress has been slow, and a lot of obstacles at regulatory and policy levels still exist.”

Ali noted that there are no national supportive policies in certain large countries in the region, which allows a foreign carrier to freely navigate across the country. “And then there are of course government-owned airlines operating in different countries, which also impose restrictions on private airlines originating from the same region to fly without permission,” he said. Therefore, Ali opined that Asean governments should stay away from aviation businesses over time.


Unshackle the EPF or face the consequences

The provident fund, which endears itself to many above 55, warned that it may not be able to keep up with the current rate of dividends if there are continued restrictions on its efforts to invest outside Malaysia.

The returns from its investments overseas outweigh the proportion of money allocated. For instance, as at June 30 this year, the returns from overseas investments accounted for 32.5% of the EPF’s total investment income. This is despite overseas investments making up only 29% of the total investment assets of the fund.


Economists warn of inflation if minimum wage hiked

“If there is a minimum wage increase next year, it would likely result in a cost-push inflation as businesses are likely to pass on the rising costs to consumers. It would also contribute to demand-pull inflation at the back of income growth. The increase in minimum wage will cascade up to other income groups and higher wage across the economy.”

“We will see another round of inflationary pressure [if minimum wage is raised], but it’s crucial to move Malaysia out of the low-wage industries. We need to move to higher value products and services. The increase in minimum wage will force manufacturers to seek out for higher value-added jobs and activities rather than the low value-added [jobs], high volume output.”

Noting that the minimum wage-earning workers in Malaysia are largely made up of foreigners, she said an increase in the wage rate could spur Malaysians to take on more of these jobs, and thereby help reduce unemployment in the country.

“A hike will add to the costs of doing business, which may mean more people in the lowest strata losing their jobs,” Wan Saiful said, adding that an increase in wages should come only after there is an increase in the productivity level.

Curated Insights 2017.08.20

Apple has the best business model for generating cash

Apple’s $64B of operating cash flow was nearly as much as that of Alphabet ($36B), Facebook ($19B), and Amazon ($17B) combined. In essence, Amazon is doing as well financially as Facebook. Google is generating as much cash as Amazon and Facebook put together. Apple is generating nearly as much cash as Amazon, Facebook, and Google combined.

Apple’s $51B of TTM free cash flow is $3B more than the free cash flow produced by Alphabet, Facebook, and Amazon combined. In what may come as a surprise, Apple is bringing in 70% more free cash flow than Microsoft, who is still considered to possess one for the more lucrative business models in existence.

Apple is a design company focused on selling tools capable of fostering superior experiences. Scale is considered a byproduct of a properly functioning business model. Facebook and Google are service companies focused on offering free, data-capturing services to as many people as possible. The business models are dependent on achieving scale in order to access as much data as possible. Amazon is a retail platform company focused on getting you to buy more stuff over time. Scale in terms of purchase volume is needed in order for the cash flow/reinvestment cycle to continue.

Instead, we have non-hardware companies pontificate how hardware won’t matter in the future. In reality, the opposite will likely occur. Hardware will matter more going forward. The wearables industry represents a good example of this in practice. Meanwhile, the way smartphone and tablet components are mattering more now than ever to AR and AI is another hole in the “hardware won’t matter” thesis.


No one knows how much money WeChat is making, and investors are too bullish to care

…the success of Honor of Kings as an example of WeChat’s indirect influence on Tencent’s revenue growth. “When you go into the game, it becomes all about playing with your WeChat friends, and looking at their scores and achievements,” he says. Honor of Kings is currently ranked the top-grossing game in China’s iOS App Store (registration required), and four other Tencent titles fill out the top 10.

…pointing to WeChat’s low take on payments (Stripe and PayPal each charge about 3%) and its aggressive discounts, speculates it’s a loss leader. Tencent executives, meanwhile, have downplayed its role in making money for the company. “We consider payment at this point in time as to [sic] infrastructure service rather than a service that generates profit for us. And I think that status will maintain for quite some time.”

“Payments are the gateway to lending. And because you’re tracking the same consumer across so many platforms, you know the credit score of the consumer and you have very few non-performing loans.”


How Baidu will win China’s AI race—and, maybe, the world’s

But to train the algorithms that will deliver the intelligence to transform our cities, it needs data. To wit: The company with the most data wins.

Clearly, he saw more opportunity across the Pacific: In China, 731 million people—nearly twice the entire population of the United States—are online. Says Lu: “China has the structural advantage.”

We’re the first major company to clearly separate the perceptual and the cognitive layer. Perceptive capability and the cognitive are related, but they are quite different. Most of the [other] AI platforms bundle them together.

But one thing I learned is that in this race to AI, it’s actually more about having the right application scenarios and the right ecosystems.

It’s just like the phone ecosystem today. The phone ecosystem is the largest silicon software ecosystem. I believe the same thing will happen for the autonomous system. The car is going to build a larger ecosystem. And the same set of capabilities—hardware, sensors, chip sets, software—will be used to build industry robots, home robots. We want to have hundreds of companies and universities all at work on this, building a very large ecosystem. Then we can build robots, build drones, and build all those autonomous systems. So, to me, autonomy is a key.

…because China is highly, highly fragmented. There’s more than 250 car OEMs [original equipment manufacturers], unlike the United States, which is a heavily concentrated industry. None of the OEMs will have the full capabilities to build out deep R&Ds. With our code base that we released on July 5, [we will make it possible for] one person to assemble a vehicle in three days that can do autonomous driving in limited forms and start on R&Ds.

We’re competing against nobody. We enable each OEM, whether it’s Bosch, Continental, or Nvidia, to be able to do more.


Amazon has largest A.I. platform in the world, its machine learning guru boasts

Despite the lack of notoriety, “inside Amazon we’ve been doing machine learning for over twenty years,” he notes, and anyway, “We have more machine learning running on the platform than anywhere else” he claims, meaning AWS is doing more A.I. than Google or any other facility in the world.

“Today, machine learning is very technical,” he says, but overtime, and with Amazon’s help, it is going to be simpler and simpler to apply machine learning to any number of different applications, “and to do it with high accuracy.”

Wood noted another important development, the shift from just the “training” phase of A.I., where a computer deduces patterns, to the “inference” stage, where it responds to user requests based on what it’s learned.

…what he thinks of machines making machines, meaning, machine learning being able to design new algorithms for machine learning, a kind of self-reflexive moment in A.I. “Absolutely,” says Wood, “It’s already happening. There are customers on AWS who are training bots to to make algorithms.” One example is something called Bandits, where machines face off against one another, with one machine trying to deduce learning models while the other is trying to trick it with falsehoods.

Amazon expands program that pays Alexa developers for top-performing voice apps

It’s notable that the Alexa platform has managed to attract a sizable group of developers ahead of any formal compensation program, or support for traditional app monetization business models, like freemium apps, paid apps, and advertising. Despite this, Alexa’s app store has grown to over 15,000 skills in a relatively short period of time – after all, the Echo speaker – Amazon’s first Alexa device – wasn’t even available to the public until July 2015.

That said, direct payouts for skills is a program that can only be sustained for so long. Eventually, developers will demand more control over their businesses, rather relying on some inscrutable algorithm. In the meantime, Amazon will face competition from rivals, including Google Home and Apple’s forthcoming HomePod – both from companies who have a better understanding of how an app store ecosystem works.


Amazon in talks to offer event ticketing in U.S.

…the U.S. ticketing market as ripe for attack. Consumers dislike ticket fees, and venue owners, sports leagues and teams want more distributors for their tickets as they seek to boost sales. Access to tickets could be another means to lure members to the Amazon Prime shopping club. For music acts and sports teams, selling tickets through Amazon could help sell their merchandise.

Amazon has had conversations to partner with Ticketmaster as a potential way to get into ticketing in the United States, but those conversations have stalled over who would control customer data, according to sources with knowledge of the conversations.

Ticketing would likely make money for Amazon, which has a patchy record of profitability. Ticketmaster generated $1.6 billion in revenue from initial sales of tickets to events in 2016, according to estimates by research firm BTIG. That figure does not include revenue from the reselling of tickets, which BTIG estimates at $250 million.


Amazon looks to new food technology for home delivery

If the cutting-edge food technology comes to fruition, and Amazon implements it on a large scale, it would be a major step forward for the company as it looks to grab hold of more grocery customers shifting toward quick and easy meal options at home.

The pioneering food-prep tech, known as microwave assisted thermal sterilization, or MATS… The method involves placing sealed packages of food in pressurized water and heating them with microwaves for several minutes, according to 915 Labs.

“They obviously see that this is a potential disruptor and an ability to get to a private brand uniqueness that they’re looking for. They will test these products with their consumers, and get a sense of where they would go.”

“They have to leapfrog to MATS because they don’t have the refrigerated supply chain like we have in the U.S.”

Facebook buys computer vision startup focused on adding objects to video

…could be useful as Facebook pursues additional video filter creation technology, both for its live streaming efforts, and for platforms like Instagram Stories.

…being able to add objects to live video and remove them or cover them over on the fly is also something that can be put to interesting use in the emerging field of augmented reality.

The world’s shipping companies are going super-sized

A massive consolidation is underway in the $500 billion global industry and the survivors now enjoy big economies of scale and increased demand, one year after excess capacity caused the sector’s worst-ever crisis — the bankruptcy of South Korea’s Hanjin Shipping Co.

These super-sized shipping companies wield much more pricing power over manufacturers and retailers like Wal-Mart Stores Inc. and Target Corp. The five biggest container lines control about 60 percent of the global market, according to data provider Alphaliner. Shipping rates are climbing, and an index tracking cargo rates on major routes from Asia is about 22 percent higher than it was a year earlier.

“Since the demise of Hanjin Shipping, flight to quality has become more noticeable in the container shipping business,” said Um Kyung-a, an analyst at Shinyoung Securities Co. in Seoul. “That’s why the market is becoming more and more dominated by top players with big ships and those that don’t have could become more and more obsolete.”


The awesome but mostly unknown story of Carlsberg beer in China (Part 1, Part 2)

It was a daring strategy. Inland China was the one region that was not yet dominated by the large SOE brewers. It was still open territory. But you also need to have a picture in your mind of Western China circa 2003. It was the poorest part of China. It was a massive and undeveloped territory. There was little infrastructure and even less money.

A review of Sunny’s Carlsberg presentation in 2006 is fascinating. Western China had exceptionally low per-capita beer consumption. In Eastern China in 2005, it ranged from 30-80 liters per person, but in Tibet and Ningxia it was only 10-15 liters. And in Yunnan and Xinjiang it was closer to 3 liters. That could of course mean big growth one day. More likely, it meant small money in difficult geographies for the foreseeable future.

Across the board, it was a strategy of regional dominance. They were building a competitive advantage based on local economies of scale in marketing, distribution and production. And they were racing to become a giant in the West.


Deep learning could discover new plant species hidden in centuries of herbarium data

…but the valuable info in these slowly vanishing temples to the plant kingdom needs to be modernized in order to be of use to an increasingly digital-first scientific community.

They trained a plant-identification algorithm on a quarter million images of plant samples, and set it to work IDing new sheets. It matched the species picked by human experts exactly 4 out of 5 times, and 90 percent of the time the correct species was in the algorithm’s next few guesses.

“People feel this kind of technology could be something that will decrease the value of botanical expertise,” study co-author Pierre Bonnet told Nature. “But this approach is only possible because it is based on the human expertise. It will never remove the human expertise.”

CRISPR’d pigs offer hope for the human organ transplant shortage

The findings represent an important breakthrough in the potential for xenotransplantation, or the use of animal organs in humans. Currently there are more than 117,000 men, women and children on the donor waiting list in the U.S., 22 of whom die each day from lack of a matching donor. The ability to use a pig heart, lungs or other body parts could shore up the shortage and save numerous lives.

This is the first time researchers have been able to demonstrate they were able to inactivate PERV and open the way for xenotransplantation without cross-species contamination.

CRISPR holds enormous potential to wipe out diseases in both humans and animals, upend our food system and has many other applications we likely don’t see yet. Just last week, U.S. scientists were able to demonstrate they could successfully CRISPR out a faulty heart gene mutation in human embryos. However, there is still a lot to take into account before applying the technology to fully formed human beings.


The death of the internal combustion engine

And then there is oil. Roughly two-thirds of oil consumption in America is on the roads, and a fair amount of the rest uses up the by-products of refining crude oil to make petrol and diesel. The oil industry is divided about when to expect peak demand…

Meanwhile, a scramble for lithium is under way. The price of lithium carbonate has risen from $4,000 a tonne in 2011 to more than $14,000. Demand for cobalt and rare-earth elements for electric motors is also soaring. Lithium is used not just to power cars: utilities want giant batteries to store energy when demand is slack and release it as it peaks. Will all this make lithium-rich Chile the new Saudi Arabia? Not exactly, because electric cars do not consume it; old lithium-ion batteries from cars can be reused in power grids, and then recycled.

Housing for the long run?

Housing beat stocks mostly because the returns were less than half as volatile. Thanks to the magic of compounding, this created a performance gap of more than 2 percentage points each year, on average, since 1950, with an even bigger gap if you start the clock in 1870.

Housing has beaten stocks since 1950 because rental income has been better than dividend income, not because house prices have grown more than stock prices.

It’s possible to imagine a world where most housing is owned by large diversified investment trusts that anyone can invest in, but until then, “housing for the long run” is not a practical investment strategy.


Sustainability of hedge-fund reinsurers questioned

Such reinsurers generally engage in “low-margin and low-volatility (property/casualty) reinsurance business,” and try to generate returns for investors through hedge fund investment or other strategies.

The fund reinsurers’ strategy is a half success, as they outperform traditional reinsurers’ investment record. This is still not enough to offset underwriting losses, says S&P, leaving the fund reinsurers trailing their more established brethren in total return.

“We continue to believe that HFRs need to focus as much on the additional risks of their overall strategies as they do on the higher investment returns,” S&P said, adding that “HFRs will continue to evolve, learn from their earlier brethren’s mistakes, and nibble at the edges of the reinsurance market as they carve out a niche for themselves.


ASEAN at 50

Southeast Asia is one of the world’s most diverse regions. Its 640 million people include 240 million Muslims, 120 million Christians, 150 million Buddhists, and millions of Hindus, Taoists, Confucianists, and Communists. Its most populous country, Indonesia, is home to 261 million people, while Brunei has just 450,000. Singapore’s per capita income of $52,960 per annum is 22.5 times that of Laos ($2,353). This diversity puts Southeast Asia at a distinct disadvantage in terms of fostering regional cooperation. When ASEAN was founded in 1967, most experts expected it to die within a few years.

But ASEAN defied expectations, becoming the world’s second most successful regional organization, after the European Union. Some 1,000 ASEAN meetings are held each year to deepen cooperation in areas such as education, health, and diplomacy. ASEAN has signed free-trade agreements (FTAs) with China, Japan, India, South Korea, Australia, and New Zealand, and established an ASEAN economic community. Today, ASEAN comprises the world’s seventh-largest economy, on track to become the fourth largest by 2050.

Yet ASEAN’s long-term progress is undeniable. Its combined GDP has grown from $95 billion in 1970 to $2.5 trillion in 2014. And it is the only reliable platform for geopolitical engagement in the Asia-Pacific region, unique in its ability to convene meetings attended by all of the world’s great powers, from the United States and the European Union to China and Russia.