Regional Notes 2018.05.25

Malaysia’s credit rating threatened by GST removal

“In 2017, GST revenue was RM44.3 billion or 3.3% of GDP. Unless the government introduces other offsetting measures at least over the next one to two years, the GST’s removal will have a net negative effect on government revenue, even accounting for some budgetary cushion from higher oil prices.”

“Beyond 2018, the reintroduction of the SST will create a revenue shortfall of 1.7% of GDP if the GST remains at zero. The ministry of finance said it will announce specific measures that will cushion the shortfall. According to the government, the rationale for eliminating the GST is that it will ultimately boost private consumption and economic growth, adding to the tax coffers through improvements in corporate and motor vehicle taxes, and excise and import duties. We do not include these effects in our assumptions because we do not expect a sizeable multiplier effect.”

“While it will uplift consumer sentiment in the short term, the actual consumer spending trend would depend on the impact of the GST removal on general prices. We foresee ‘price stickiness’ to be a major challenge for policymakers as businesses may, for example, be reluctant to reduce prices due to profiteering and a general belief that most businesses will not reduce prices.”

Malaysia’s 1 trillion Ringgit government debt explained

Federal government debt of 686.8 billion ringgit, or 50.8 percent of gross domestic product

Government guarantees of 199.1 billion ringgit, or 14.6 percent of GDP. The government is committed to paying the debt of entities which are unable to do so, including 42.2 billion ringgit for Danainfra Nasional Bhd, 26.6 billion ringgit for Prasarana Malaysia Bhd and 38 billion ringgit for 1MDB.

Lease payments for public-private projects of 201.4 billion ringgit, or 14.9 percent of GDP. The government is obligated to pay for rental, maintenance and other costs on a number of projects, such as construction of schools, hospitals and roads.

NTPM to spend RM50mil on expansion

“Our selling price has been adjusted by about 10% already, but still that is not sufficient. So, the profit has dropped. For this reason, we need to increase our market share to sell more. The growth of the tissue paper business in the domestic market is less than 3% a year, which is in line with global growth. In Vietnam and Indo-China, however, the growth is faster, which is why we are expanding the Vietnam operations.” Lee said the group was targeting to double the contribution from Vietnam by 2019 to RM80mil from RM40mil.

The tissue paper business generates about 65% of group revenue, while the personal care segment contributes 35%. Some 90% of the personal care business is generated from the local market. Despite the challenging and highly competitive local market conditions, the group succeeded in raising the revenue from the personal care segment by 9.4% to RM199.9mil in 2017.


Vitrox expects 2018 to be another growth year

“In the first three months of 2018, we have secured accumulated sales orders of about RM105mil, which will keep us busy for the next three months. The March book-to-bill ratio is 1:2, which means that for every 100 units of products we ship out, we receive 120 units of new orders in the same period. The current book-to-bill ratio is even higher.”

Company Notes 2017.09.15

Bermaz Auto Q1 FY2018 Results

…partly caused by the Mazda CX-5 run-out programme as more sales incentives were given for this model since the preceding quarter in anticipation of the new CX-5 model to be launched in October this year.

…continue to remain disciplined and will focus on driving sales at its standard selling prices with value offerings as this augurs well for the Mazda brand image and popularity in the longer term. The Group is optimistic that the new CX-5 to be launched in October 2017 will help to improve the unit sales as well as the profit contribution from associated companies for the second half of the financial year.

…cautious on the potential impact of the new excise duty expected to be introduced in early 2018. This impact may be mitigated to a certain extend as brought forward purchases of CX-5 and CX-9 from Mazda Japan is expected to be made prior to 1 January 2018.


Berjaya Food Q1 FY2018 Results

The Group expects Starbucks to maintain its revenue growth momentum, and the price adjustment in the previous financial year is expected to mitigate the negative impact from the fluctuating Ringgit Malaysia. In addition, the operational and menu rationalisation of KRR will also have a potential to yield positive results for the brand moving forward.

IOI Corporation divests 70% equity stake and retains 30% stake in IOI Loders Croklaan in a new business partnership with Bunge

During the fourteen years since IOI acquired Loders, Loders has grown from having three processing plants to seven plants in Europe, North America and Asia, and earnings have nearly quadrupled during this period. IOI has positioned Loders as a leading palm-based specialty fats player which supplies its products to nearly all major MNC food companies. In order to sustain its significant growth and better serve its multinational customers, Loders will need to expand its processing plant footprints to regions such as South America and South Asia, and offer more varied product offerings including seed oil–based products. In IOI’s assessment, the faster and more effective way to do so is by leveraging on Bunge’s existing plant assets in these regions and Bunge’s established integrated supply chain in seed oils.

After the transaction, IOI will still play an important role in Loders given our expertise in palm oil sourcing and our business experience in the fast-growing Asia Pacific Region. IOI will have two representatives on Loders’ five-member Board of Directors and our representatives will also be involved in key management decisions taken by Loders. IOI will continue to be a major supplier of palm oil and palm products to Loders after the transaction.


NTPM expanding tissue paper plants

The expansion would increase the group’s production capacity to 170,000 tonnes per year by end-2018 from 110,000 tonnes currently. The bulk of the expenditure will be to increase the production capacity of our plant in Ho Chi Minh to 50,000 tonnes a year from 10,000 tonnes presently.

“Due to the increase in pulp prices, we have to raise the selling price for our tissue products by 3% to 5%.” Pulp prices have increased to around US$700 per tonne this year from US$500 year ago.


Censof growing quietly and steadily

Censof’s entire stake of 17% in DNex is worth more than its entire market capitalisation. Based on DNex closing price of 47.5 sen, Censof’s stake is worth about RM141.6mil. Censof has been cutting down its stake in DNex and could be divesting more in the near future. In August 2016, Censof disposed of a 7.3% stake in DNeX and its entire 19.6% holding of warrants for RM32.3mil to pare down the groups borrowings.

Rubber glove prices may increase by 9% to 12%, says MARGMA

The (Hurricane Irma) devastation has caused the prices of Butadiene, an important material in the production of Nitrile Latex, to soar as its production has been severely affected.

“Another cost component that has a runaway effect on the industry is the shortage of paper. This shortage has pushed packing material prices up by 15% already and it looks like [it’s] moving up again. The lack of readership of newspapers and magazine is causing the lack of feedstock to cupboard and cartons processing.”


PLUS receives takeover offer from Maju Holdings

Maju’s indicative offer implies a total enterprise value in excess of RM36 billion for PLUS. Other significant details divulged by sources familiar with the offer include Maju’s plan to freeze toll rates for 20 years until the end of the concession period.

The offer’s other strengths include the acquisition reducing the government’s contingent liabilities by RM30 billion, and Maju is said wanting to forfeit the government’s compensation of about RM900 million owed to the toll road operator, a result of toll hikes not implemented.

PLUS has five concessions…All PLUS Malaysia’s concessions end in December 2038.

PLUS paid an RM815 million dividend to its parent Khazanah in FY15. As at end-Dec 31, 2015, PLUS had non-current assets amounting to RM30.22 billion, and current assets of RM3.26 billion. It had long-term debts of RM31.27 billion and current liabilities of RM1.56 billion.


Port Klang business hit as key firms shift operations to Singapore

“Only Kuantan Port has Chinese equity so far because it also aids Beijing’s South China Sea claims. Other infrastructure plans have either not taken off or are only loans, or worse, just Chinese companies winning construction deals.”

The new alliance agreements’ biggest impact on Klang was the loss of transshipment volumes – goods stored before being shipped to their final destination – from giants United Arab Shipping Company (UASC) and France’s CMA CGM. This could total up to 2 million TEU annually. UASC has now merged with Germany’s Hapag-Lloyd, making it part of THE Alliance, while CMA CGM is the biggest company in the rival Ocean Alliance.

Both groups, which handle nearly half the world’s shipping capacity, started realigning in April, resulting in more than half of Klang’s Asia-Europe calls being shifted to Singapore, said industry officials. CMA CGM and Cosco have naturally gravitated to Singapore as both have major investments there. PSA saw a 9.6 per cent jump in the second quarter to 8.5 million TEU.

Among the world’s top 20 ports, Klang was one of only two, the other being Tanjung Pelepas on the south coast of Johor, to see a drop in volume in the first half of this year.


China investments transforming Malaysia

With the entry of our corporations, Malaysia has become a new leader in certain sectors and there is significant improvement in some industries.

In the case of ECRL, PM has announced that at least 30% of the civil engineering work will be awarded to local contractors. The electrified double-tracking railway line linking Gemas with Johor Baru will see 50% of the civil construction works awarded to local players.

Company Notes 2017.06.30

On earnings calls

Magni-Tech Industries in a filing with Bursa Malaysia

The garment segment accounted for about 89.1% and 95.3% of the Group’s revenue and profit from operations respectively.

Garment revenue surged by 38.8% which was mainly due to higher sale orders received and to a moderate extent aided by favourable foreign exchange movements.

Packaging revenue increased by 1.7% mainly despite the cessation of SIPP’s business in Q4-FYR 2017.


LKL International in a filing with Bursa Malaysia

…the lower revenue generated from medical/healthcare beds segment due to economic slowdown generally. Local market continued to contribute a significant portion amounting to 67.03% of the total revenue.

The fully automated Computer Numeric Control (“CNC”) punching machine (TruPunch 2000) which was acquired and completely installed is now fully operational, whereas the CNC laser tube machine (TruLaser Tube 5000 Fiber) is expected to be operational in the Q2 FY2018. These machines will increase the operations efficiency and process accuracy with less wastage, as well as reduce the dependency on manual labour.

The joint venture with T.M.I Solutions (Pvt) Ltd to distribute selected Nihon Kohden products has commenced its business in Q1 FY2018.


Hai-O Enterprise in a filing with Bursa Malaysia

The successful strategy transformation which focused on smaller consumer products and targeted recruitment strategy have continued attract more young entrepreneurs to join in as distributors.

Despite higher sales generated from patented medicine, it was offset by the drop in sales of duty-free goods. The drop in duty-free products’ sales was mainly due to the imposition of more stringent rules by authority on duty-free trade in border town.

The success in re-branding of its key beverage product “Min kaffe” during the year had attracted many consumers and boost up the sales of this product. The intensive member retention program and member recruitment campaign carried out during the year had resulted monthly average new members increased by about 5,000.

The implementation of CRM system which provided E-commerce platform had helped to increase distributors’ productivity and efficiency.


Hiap Tech Venture in a filing with Bursa Malaysia

The outlook of the steel industry in Malaysia in 2017 remain positive if China remains committed and steadfast in cutting its steel output capacity and other proactive actions which will prevent the dumping of cheap steel exports to Malaysia.

The majority of steel products produced locally is destined for infrastructure and construction sector applications. Hence, the outlook for the steel industry in Malaysia very much depends on the growth and performance of this sector. The construction sector is expected to maintain its robust performance with a targeted double-digit growth of 10.3% through new construction works valued at RM138 billion in 2017.


KM Loong Resources in a filing with Bursa Malaysia

We foresee an increase in FFB production from young mature areas and strong FFB yield recovery in Keningau region in where about 50% of the Group’s planted mature area is located. We expect the FFB production to be potentially 20% higher comparing the quantity achieved in the FY2017.


NTPM in a filing with Bursa Malaysia

…we would have felt the full impact on the cost arising from the raise the minimum wage for employees in Peninsular Malaysia by RM100 to RM1,000 per month, and to RM920 from RM800 for employees in East Malaysia starting from 1 July 2016, the recent increased volatility in the foreign currency exchange rate, pose a challenge for the Group to contain and monitor its manufacturing cost.


Subur Tiasa in a filing with Bursa Malaysia

In view of prevailing tight supply of logs in the market as the result of the forest management and timber certification initiated by the authority, timber prices are expected to sustain. The higher tax premium on timber imposed by state authorities will impact the performance of timber division.


Cypark Resources in a filing with Bursa Malaysia

…the implementation of Net Energy Metering Programme by SEDA will provide us with new opportunity to expand our renewable energy project portfolio. Cypark currently has been given first right to undertake the turnkey EPCC, management & operation contract to develop 15MW (dc) solar plants by the winners of the first LSS tender.

Our Biogas to Energy project will start to contribute to our revenue once our Fully Anaerobic Bioreactor System (FABIOS) in Ladang Tanah Merah is commissioned in 2018. We also plan to expand our biogas activities to include Palm Oil Mill Effluent (POME).

…focus our research & development resources in developing business opportunities from energy storage, exportable Biomass Solid Fuels (BSF) and Energy Efficiency (EE) projects.

…confident to secure more government contracts for landfill closures and new sanitary landfill projects. We believe that we have strong competitive advantage based on our solid track records of successful completion of 18 landfill closure projects covering total area of about 600 acres nationwide and our success in constructing and operating 1000 tpd sanitary landfill in Negeri Sembilan which is one of the country’s largest and most modern facilities.

…our current successes have made Cypark as the preferred partner for many world renowned green technology providers such as Hitachi (Japan), TESCO (Japan) and Ciel Terre (France).

On logistic services

Tasco shareholders approve venture into cold chain business

“The expected RM110mil revenue contribution represents about 15%-20% of our overall top line based on our revenue last year. We consider this to be a conservative projection, as we did not include the value that could be generated via the synergy created between the new cold chain segment and our other existing business segments. We believe that the acquisitions that have been approved by our shareholders would position us as one of the best end-to-end logistics solutions providers.”


Tasco develops global distribution hub in DFTZ for Renesas

“Whatever [Renesas] produces is sent to our KLIA warehouse to be integrated. We have something like a factory where we do ‘pick and pack’, and from there we distribute [the products] globally.

“The warehouse is actually temperature-controlled. It is how we will expand our dry service menu into the cold service menu — not just for food and beverages or pharmaceuticals, but also for semiconductors.

“Malaysia still carries very good conditions to be a regional hub. [However,] we see operations getting more sophisticated and need many things to cope [with that].”

“Our focus for the Westport land is making it a regional hub. We would like to promote it to existing customers.”


On banking

Non-performing loans to rise — S&P

The household debt-to-GDP ratio was 88.4%, while corporate debt was about 110% of GDP in Malaysia.

“The rate hikes are expected to lead to a higher NPL ratio among local banks to between 1.8% and 2%, up from a near-historical low of 1.6%.”

“Malaysian banks in general [have focused on] protecting their bottom line, but we do have our doubts about how sustainable this approach can be in the future. The banks need to grow, and they have constant requirements to invest in compliance and technology.


Banking sector consolidation faces many stumbling blocks — S&P

“We have a saturated banking sector. There are a lot of cannibalisation and duplication in the sector as a whole. So, there is a clear need for consolidation, which has taken place at a very slow pace.”

The sector’s net interest margins have been trending downwards consistently for the last five or six years, adding that profitability has been declining.


On corporate development

U Mobile ends network sharing deal with Maxis

Maxis said the termination is a convenience option available to U Mobile under the NSA. The termination will take place in stages over a period of 18 months with completion on Dec 27, 2018. U Mobile is not obliged to compensate for terminating the NSA as the company has an option to review the NSA after five years from the agreement’s commencement date.

“For FY17, the impact is going to be minimal, but it can be material moving forward. Assuming the fee to be stagnant at FY16’s level, that would be almost RM1 billion from FY19 through FY21.”

U Mobile was seen as a winner in the Malaysian Communications and Multimedia Commission’s spectrum reallocation exercise last year, where it was allocated 2x5MHz of the 900MHz frequency and 2x15MHz of the 1,800MHz frequency for 15 years effective July 1 this year. The spectrum used to belong to Maxis and Celcom.


Bumi Armada climbs on Armada Kraken first oil

“Achieving first oil on the Armada Kraken FPSO is an important milestone, as we work to deliver oil to our clients, EnQuest plc and Cairn Energy plc, and work towards receiving the charter income for Bumi Armada.”

The Armada Kraken is the third of four FPO projects Bumi Armada is starting up this year. “She is our first ever heavy oil production facility and has the largest liquid handling capacity in our fleet (460,000 barrels of liquid per day) and she marks Bumi Armada’s entry into the North Sea as a production facilities owner, operator and duty holder.”


Gamuda stands to gain from booming construction sector

…to benefit from the booming construction sector in Malaysia, given its dominant roles in the MRT and other rail-based projects.

…to ride on the next infrastructure/property boom in Penang via its project delivery partner role in the Penang Transport Master Plan.

“…there would likely be a lag effect before more meaningful earnings contribution, as land acquisition and actual mobilisation of machinery could be slower than expected for a project like the ECRL.”

Gamuda’s order book is still 50% lower than management’s target of RM10bil per annum.


Alibaba ups its stake in Southeast Asia’s Lazada with $1 billion investment

“That [valuation] is quite a significant uptick and overall that reflects the great performance and traction that Lazada has seen. It also reflects that Alibaba continues to be extremely positive about this region, doubling down on Southeast Asia and seeing the potential.”

“The e-commerce markets in the region are still relatively untapped, and we see a very positive upward trajectory ahead of us. We will continue to put our resources to work in Southeast Asia through Lazada to capture these growth opportunities.”