Curated Insights 2019.10.11

Three big things: The most important forces shaping the world

Lower births are a global phenomenon, particularly in the developed world. And while America ages and population growth slows, the rest of the world’s major economies turn into a Florida retirement community and population growth in many cases is on track to turn negative.

When people talk about what nation will own the next century they point to leadership in AI and Machine Learning, where China looks so competitive. But it’s staggeringly hard to grow an economy when you lose a fifth of your working-age population in a single generation. China could invent something as big as the next internet, but when mixed with its demographics have an economy that muddles along. Europe, Japan, and South Korea are the same or worse.

Demographics will slow America’s economy, but they’re a five-alarm fire for other countries. So even assuming equal levels of productivity growth, the U.S. is head and shoulders better off than other developed nations, just given its demographics alone. America could drop the ball on technology while China/Europe/Japan make all the right moves, and America could still remain a much larger and more powerful economy.

TechCrunch founder Michael Arrington recently wrote: “I thought Twitter was driving us apart, but I’m slowly starting to think half of you always hated the other half but never knew it until Twitter.” This is a good point that highlights something easy to overlook: 1) everyone belongs to a tribe, 2) those tribes sometimes fundamentally disagree with one another, 3) that’s fine if those tribes keep their distance, 4) the internet increasingly assures that they don’t. Opening your mind to different perspectives is good and necessary. But when fundamental, unshakable views that used to be contained within tribes expose themselves to different tribes, people become shocked to learn that what’s sacred to them isn’t always a universal truth. The range of political opinions has always been extreme, but what we’ve seen over the last decade is what happens when the warm blanket of ideological ignorance is removed.

The best economic news no one wants to talk about

So, let’s play a game of wish-casting. Imagine a world where wage growth was truly stagnant only for workers in high-wage industries, such as medicine and consulting. Imagine a labor market where earnings growth for low-wage workers, such as those who work in retail and restaurants, had doubled in the past five years. Imagine an economy where wages for the poorest Americans were rising twice as fast as hourly earnings for high-wage earners. It turns out that all three of those things are happening right now.

One reason you haven’t heard this economic narrative may be that it’s inconvenient for members of both political parties to talk about, especially at a time when economic analysis has, like everything else, become a proxy for political orientation. For Democrats, the idea that low-income workers could be benefiting from a 2019 economy feels dangerously close to giving the president credit for something. This isn’t just poor motivated reasoning; it also attributes way too much power to the American president, who exerts very little control over the domestic economy. Meanwhile, corporate-friendly outlets, such as The Wall Street Journal’s editorial pages, have reported on this phenomenon. But they’ve used it as an opportunity to take a shot at “the slow-growth Obama years” rather than a way to argue for the extraordinary benefits of tight labor markets for the poor, much less for the virtues of minimum-wage laws.

Democrats don’t want to talk about low-income wage growth, because it feels too close to saying, “Good things can happen while Trump is president”; and Republicans don’t want to talk about the reason behind it, because it’s dangerously close to saying, “Our singular fixation with corporate-tax rates is foolish and Keynes was right.”

But good things can happen while Trump is president, and Keynes was right. “Tighter labor markets sure are good for workers who work in low-wage industries,” Bunker told me. “This recovery has not been spectacular. But if we let the labor market get stronger for a long time, you will see these results.”

Charles Schwab and the new broker wars

Schwab now derives more than half of its revenue from net interest income, and the company estimates that it will lose $75 million to $150 million in revenue for every quarter-point cut by the Federal Reserve. If we get four more cuts over the next 12 months, Schwab could lose $600 million, about 6% of its estimated $10.6 billion total.

“People underestimate how much the economics of Schwab’s business comes from investing client cash,” says Steven Chubak, an analyst with Wolfe Research. “Rising rates were a very good story for them, but rates may now be going in the other direction, and that will create headwinds,” says Devin Ryan, an analyst with JMP Securities.

Schwab can withstand the revenue loss. It is one of the most broadly diversified brokerages, including asset-management, custodial, and back-office services for institutional investors. Based in San Francisco, the firm oversees $3.7 trillion in client assets, including $1.55 trillion custodied by registered investment advisor firms, or RIAs. Schwab is the largest RIA custodian in the country. The company sponsors mutual funds and exchange-traded funds. Its Intelligent Portfolios service—automated managed accounts of ETFs—has grown into the largest robo-advisor with $30 billion in assets.

The big profit center for Schwab is now its bank. With more than $276 billion in assets, Schwab Bank is larger than Ally Financial, KeyCorp, and Fifth Third Bancorp, according to S&P Global Market Intelligence. Schwab Bank recently crossed a regulatory threshold, subjecting it to stiffer federal stress-test, capital, and liquidity requirements.

As rates increased in recent years, Schwab Bank became the tail that wags the company dog. Net interest revenue from the bank amounted to $5.8 billion, or 57% of Schwab’s total revenue of $10.1 billion in 2018, up 36% year over year. Management and administrative fees were 32% of revenue in 2018, with trading and related revenue rounding out the pie.

Schwab’s revenue base now looks well balanced between RIA sources (such as custodial fees) and retail brokerage, Chubak says. The company’s low-cost ETFs and robo-advisory service are marketplace winners. Schwab recently rolled out a premium subscription advisory service offering “unlimited guidance” for $30 a month and a one-time planning fee of $300. Schwab CEO Bettinger said on a recent call with analysts that the premium subscription service “seems to have really taken off in terms of client interest and response.”

Schwab’s platform for RIAs is considered one of the strongest suites of tools and software in the industry. And it is benefiting as advisors break away from Wall Street brokerage houses. The trend has been going on for a decade, but it may be gaining momentum. Bettinger said recently that the breakaway RIA trend began “to pick up a bit again in the second quarter.” Schwab recently launched an upgraded version of its portfolio-management software to compete more effectively.

“Schwab’s competitive strength is their enormous stronghold on the advisor community,” says Thomas Peterffy, chairman of Interactive Brokers. “They have cultivated that for years.” The RIA industry is also consolidating into firms with 50 to 100 advisors, says Chip Roame, managing partner of Tiburon Strategic Advisors, a financial consulting firm. That’s good news for Schwab, since larger firms with more trading, analytics, and custodial requirements are likely to bring assets to the firm.

The tech stock that Apple, AMD, and Nvidia can’t do without

TSMC’s client list includes the world’s top technology companies, such as Apple (AAPL), Qualcomm (QCOM), Huawei Technologies, Nvidia (NVDA), and Advanced Micro Devices (AMD). They all rely on TSMC to make the most demanding chips used in smartphones, servers, artificial intelligence applications, and networking devices.

JPMorgan estimates that TSMC accounts for about 50% of the world’s foundry revenues and 80% to 90% of the industry’s profits.

TSMC has consolidated its market share in recent years because its foundries were the first to offer 7-nanometer chip production at significant volume. Smaller chips offer greater performance and improved power efficiency. The entire chip industry is rapidly trying to get to a 7nm (and lower) manufacturing process, but most manufacturers have yet to make the transition. Intel (INTC), which fabricates most of its own chips, is unlikely to have 7nm products before 2021.

Regional Notes 2018.03.30

China’s push for tech self-sufficiency threatens Asia’s exporters

But at the same time, there’s been a spike in sales to China of precision metal working machines and equipment for making chips from firms like Japan’s Yaskawa Electric Corp. With a Chinese state-backed fund gearing up to pour as much as $31.5 billion into homegrown semiconductor manufacturing, there’s potential for trade flows to start to shift.

Yet the direction is clear: Beijing is aiming higher and it has the resources to reach its destination. And that will mean difficulties for many companies around the region. “China, in a very short period of time, is rapidly going up the value chain,” said Gary Hufbauer, senior fellow and trade specialist at the Peterson Institute for International Economics in Washington, speaking from Taos, New Mexico. “They will produce the things that Korea and Japan are now producing, and Korean and Japanese firms have a big challenge to try to keep ahead on the technology.”


Uber pulls out of Southeast Asia, selling operation to rival Grab

The cease-fire marks a victory for Grab as well as SoftBank Group Corp., the biggest shareholder in both companies. Masayoshi Son’s firm is pushing to reduce competition in a Southeast Asian ride-hailing market forecast to reach $20.1 billion by 2025. Uber and Grab, together with two other SoftBank-backed ride-hailing firms — India’s Ola and China’s Didi Chuxing — provide about 45 million rides a day, according to SoftBank presentation material in February.


Regulators to ensure Grab-Uber deal will not erode competition

“We will ensure that no one single market player dominates the sector to the detriment of commuters and drivers,” an LTA spokesman said. The LTA added that it was reviewing a regulatory framework to license private-hire car operators “to keep the private-hire car and taxi industries open and contestable”.

The CCS said Singapore’s competition laws prohibit mergers that may result in a “substantial lessening of competition”, and indicated that it could “require the merger to be unwound or modified” to prevent an erosion of competition. It said it could also issue “interim measures” before it made up its mind.

The taxi company agreed in December to pay some $640 million for a 51 per cent stake in Uber’s Singapore rental car fleet. ComfortDelGro spokesman Tammy Tan said: “We are reviewing all aspects of the proposed tie-up with Uber Technologies, which is currently under review by the CCS.”

Pentamaster plans dividend in two years

“Currently, 50% of our exports go to mainland China, including to US-based multinational corporations located there. We expect the exports to rise to 60% in the near future. The business opportunity is great which is why we are expanding our facilities.”

“I think KWAP is seeing the potential in the future of technology we are in — 3D sensing. It is going to be used a lot in autonomous cars and electric vehicles. We have developed a 3D sensor testing capability to test the component that can be used in telco, automotive and smartphones.”

He said five years ago, PCB only focused on automotive handlers without test solutions, which “anyone could do”, so he built the handler with tester as a complete ecosystem to reduce competition.

“We are also looking to secure more IARM business from the US. We have secured a few now. This segment has a lot of growth potential because of Industry 4.0 where factories look to becoming fully automised. Our technical sales unit in Sunnyvale, US, would be able to discuss with clients regarding requests for quotations and proposals. Proximity to our clients is key, hence we see our US business growing. More so now with the US placing 30% tariff on raw materials which would make manufacturing in US expensive.”


US tariffs may hurt Malaysian technology firms

However, a report last Friday by Nomura highlighted US trade protectionism and a sharper-than-expected slowdown in China as bigger risks to the Malaysian economy, as exports account for 71% of GDP. “We estimated Malaysia’s ultimate exposure to the US — including via intermediate goods to China for assembly into final products destined for the US — at 10% of GDP, about half of which is in electronics products,” the research house said, adding that another 8% is exposed to China’s final demand.


Minimal impact on M’sia from US tariffs

This is because Malaysia’s trade exposure to both China and the US accounted for 25% of its total trade, she said, pointing out that Malaysia was impacted by Washington’s earlier move to impose tariffs on solar panels.

Malaysia is the largest exporter of solar cells and panels to the US, accounting for 24% of total US imports of the products last year. Meanwhile, the country’s steel and aluminium exports to the US of US$300 million in 2016 accounted for only 1.8% of total exports to the US.

In 2017, China was Malaysia’s second-largest export destination, constituting 13.5% or RM126.2 billion of total exports, while the US was the third-largest export destination, accounting for 9.5% or RM88 billion of Malaysia’s total exports.

Bank Negara cautions of severe property market imbalances

“Such (the purchase of non-residential properties) financing accounted for 26.1% of banks’ exposures to the property market or 13.5% of banks’ total outstanding loans. End-financing for the purchase of shops accounted for the bulk (40%) of banks’ exposures to non-residential properties or 5.4% of banks’ total outstanding loans. Exposures (via end-financing) to the office space and shopping complex segments, where oversupply is particularly acute, accounted for 3.2% of banks’ total outstanding loans,” it said.

Based on Bank Negara’s analysis, the incoming supply of 38 million square feet of new office space in Klang Valley is expected to drive vacancy rates to an all-time high of 32% by 2021 (1997: 5.1%; historical high in 2001: 25.3%), far surpassing levels recorded during the Asian Financial Crisis (AFC).

The incoming supply of 140 new shopping complexes by 2021 across Klang Valley, Penang and Johor is expected to worsen the oversupply condition in this segment. In 2016, major states such as Penang, Klang Valley and Johor already had higher retail space per capita (10.5, 8.2 and 5.1 square feet per person, respectively) relative to regional cities such as Hong Kong and Singapore (3.6 and 1.5 square feet per person, respectively). This will continue to exert downward pressure on occupancy rates and rentals.


Malaysians’ income weighed down by low-wage foreign workers

“In Malaysia, our salaries and wages are low, as half of the working Malaysians earn less than RM1,700 per month and the average starting salary of a diploma graduate is only about RM350 above the minimum wage. The low-income segment of Malaysian households face many challenges with regard to their income level. Since 2014, the bottom 40% (B40) population’s income expanded by 5.8% on an annual basis. However, expenditure grew at a faster pace of 6%, reflecting the rising cost of living. It is high time to reform our labour market by creating high-quality, good-paying jobs for Malaysians,” he said at a media briefing after the release of the central bank’s 2017 annual report here yesterday.

From 2011 to 2017, the share of low-skilled jobs in Malaysia increased significantly to 16% compared with only 8% in the period of 2002 to 2010. Apart from that, local economic sectors that rely on foreign workers such as agriculture, construction and manufacturing also suffer from low productivity.

Company Notes 2017.10.13

LPI Capital Q3 FY2017 Results

“With its diversified distribution channels especially its strong agency network, Lonpac has continued to build its market share in the newly liberalised environment. Its gross premium income for the third quarter grew by 34.6% to RM416.6 million from RM309.6 million registered in the previous corresponding quarter. Lonpac’s profit before tax for the quarter under review similarly registered an impressive 20.3% jump to RM102.4 million from RM85.1 million previously. With its prudent underwriting policy and costs control measures, Lonpac managed to improve its combined ratio to a new record low of 63.9% for the third quarter of 2017, reduced from 65.0% reported in previous corresponding quarter. As a result, its underwriting profit registered a strong improvement by 19.9% to RM83.6 million from RM69.7 million previously, despite its claim incurred ratio having increased marginally to 40.3% from 38.9% previously.”

Lonpac has established a Digital Strategy Department to leverage on technology to distribute its products and to further enhance its services to our customers. We believe that investment in technology will enable us to further expand our business segment and strengthen our market position.


Zhulian Q3 FY2017 Results

We also look forward to improving the contribution from the MLM segments especially from our Thailand and Myanmar markets in order to drive growth momentum for overall Indochina market once we materialise our plan to enter Cambodia and Laos market. The Group will continue to adopt rationalisation in our business operations.


Atlan Holdings Q2 FY2018 Results

Duty free segment reported lower profit in current quarter and cumulative quarter as compared to the corresponding quarter and cumulative quarter in the previous year mainly due to lower revenue as lower demand from customers following the imposition of Goods and Services Tax at the border outlets and duty free zones with effect from 1 January 2017, coupled with higher management fee incurred. However, the decrease was partially offset by savings in transportation costs.


Top Glove Q4 FY2017 Results

The uptrend in sales revenue also came on the back of an increase in average selling prices (ASP) arising from a surge in raw material prices, as well as a strengthening of the USD over the course of FY2017. Additionally, more sales of nitrile gloves, which command a higher ASP, coupled with new capacity, also helped move sales revenue figures higher.

…the signing of a letter of intent to acquire the entire ordinary shares of Eastern Press Sdn Bhd, a printing and packaging material manufacturer for RM47.25mil. The proposed transaction is expected to provide the Group with synergistic benefits, enabling it to improve its supply chain coordination, thereby allowing for flexible planning and better delivery time in relation to the supply of packaging material for its glove products, as well as better cost and quality control.

Vitrox investing RM130mil to expand ops

According to Chu, the important growth segments are the automotive and telecommunication infrastructure industries.

“The report expects China to continue to be the world’s largest car market for the foreseeable future, and has upgraded its 2017 China forecast to 28 million units.”

“The total spending on endpoints and services will hit almost US$2 trillion in 2017.”

“We shipped out 106 units of advanced optical inspection and advanced x-ray inspection equipment for used in the electronic assembly industry. Only 1% of our shipment goes to the smart device segment. We are, therefore, not subjected to the volatility of sales in the smart device market. The second half of 2017 should see double-digit growth for all the four sectors over the same period last year and also the first half of this year.”


Choo Bee upbeat about steel price rally

“We have seen the price [of steel] really move up since July. It has hit [a five-year] high at the moment. At RM3,000 per tonne, it’s an extremely good price. It’s really a positive development for us. We’re seeing demand rising now. The construction industry is getting more active in the second half of the year. Since the third quarter, we have seen more orders coming in, and we expect the momentum to continue in the fourth quarter.”

Presently, its manufacturing segment makes up 40% of the group’s revenue, while its trading segment contributes the remaining 60%. The domestic market makes up the lion’s share or 95% of the group’s sales. Its only export market now is Singapore. Tan said Choo Bee intends to re-enter the US and the Middle East in the long run, but gave no timeline.

In the mean time, Choo Bee is looking to set up another new factory as part of its 10-year expansion plan. “Everything is still in planning stage … it will be in the Klang Valley. It will be near our existing warehouse in Kampar because we want to centralise everything. It makes more logistical sense,” Tan said. Choo Bee’s sole factory in Pengkalan, Perak, which produces about 110,000 tonnes per annum, is now running at about 75% capacity.


George Kent partners Siemens for HSR bid

Under the deal, George Kent and Siemens will form an engineering, procurement and construction (EPC) pre-consortium to prepare a joint offer on the EPC level to the special purpose company which shall bid for the development, financing, construction and technical operation and maintenance of the Kuala Lumpur-Singapore HSR.


Petronas Dagangan in joint venture to install EV charging stations

Through this tripartite partnership, Petronas Dagangan commits to install 100 ChargEV stations by 2018 and will explore strategic partnerships to increase the number of ChargEV stations gradually, in tandem with market demand. Petronas Dagangan will also look into installing solar PV panels at 100 selected stations. With this, the energy used to power the ChargEV stations will be fully renewable and completely carbon-free, making it truly green.


Rubber glove exports to hit all-time high

The Malaysian Rubber Glove Manufacturers Association (Margma), in a statement yesterday, said it had increased this year’s export sales target to RM16.2bil amid strong demand from overseas. The figure is almost RM3bil higher than what was achieved in 2016.

“As of the present situation, all glove manufacturers are oversold and selling beyond their capacity to produce by over three or four months behind due to demand and labour shortage issues,” Margma president Denis Low Jau Foo told StarBiz when contacted yesterday.

Despite the challenges, Low said rubber glove exports from Malaysia are expected to reach close to 150 billion pieces this year. It is estimated that exports from Malaysia accounted for two-thirds of global consumption.

“This is the more recent factor apart from the continued increase in hygiene awareness among the population worldwide. In China, the government has been actively closing vinyl glove factories which do not comply with environmental regulations. Due to this, there has been a vacuum over the past few months from the reduction of producers in China today. And I expect China’s actions to continue further in the near future. Over there, it is the vinyl gloves while over here, we have the nitrile and latex rubber gloves.”

Charting Naza’s direction

The focus of the second generation was to put a framework of corporate governance and professional managers in place at the key business divisions of the group. Nasarudin says his late father had about 100 active companies when he passed away and the group had no holding company. The problem they faced was the need to consolidate everything over the past seven years and put the right structure in place.

Apart from the auto business, which accounts for 60% of group revenue, the group’s other large business interest is in property development. That division, headed by Faliq, has seen sales rise from RM200mil to about RM1bil and is said to be valued at RM3.5bil – ripe for a listing on the stock exchange. It has 400 acres of land for mixed integrated development in the Klang Valley, but the weak sentiment in the domestic market has forced it to look abroad for opportunities. “We are sitting on very strategic land bank and with Platinum Park, we are the second-largest land owner at KLCC. At KL Metropolis, we are sitting on over 70 acres. When it comes to prime land, we are taking our time in realising that value,” says Faliq.


Malaysia Airlines mulls stake sale to another carrier

“It’s the trend these days; that’s what’s happening. Other airlines, they take a portion of somebody else, get really close [working] together … what it does is it generally lifts overall value, and you have other commercial operation opportunities, maybe you can have joint purchasing, maybe you cooperate on aircraft, you have the same product line, that’s the trend where the industry is going, and it makes a lot of sense. It allows for balanced growth. If you look around the world, a lot don’t have partners in Southeast Asia.”

Bellew acknowledged that Malaysia Airlines will remain loss-making in FY17 which is within expectations. “I think we are on track to be profitable in the second half of next year.”

Malaysia addressing inaccurate claims in EU draft palm oil report

The European Parliament had also endorsed the certified sustainable palm oil (CSPO) plan for Europe-bound vegetable oil exports to ensure that they are produced in an environmentally sustainable way.

Describing the draft report as the “wish list” of MEPs, Kalyana stressed that the EU Parliament has no rule-making authority. “It’s not a EU policy; it’s just recommendation from the parliament,” Mossenlechner told reporters.

The resolution calls for the EU to discontinue the usage of vegetable oils in biodiesel by 2020 on the grounds that they were allegedly produced in an unsustainable manner leading to deforestation.


Digital banking penetration to exceed 60% by 2018

This was well below the more than 90% penetration seen in South Korea, Australia, Singapore, Hong Kong and Taiwan, but above the rates of Indonesia, Thailand and the Philippines.

“Phase one of fintech disruption involved fintech start-ups disrupting the banking industry by offering their services directly to consumers, completely independent of banking industry players. However, now fintechs have realised how costly it is to acquire customers on their own, so there is a shift seen in these start-ups to providing business-to-business solutions, so they are looking for partnerships with bigger and more established banking players to offer customers a joint value proposition.”


Here’s why Malaysians can’t afford a house

Just 20 percent of new Malaysian housing launches in the first quarter were priced below 250,000 ringgit ($59,000), down from 33 percent between 2010 and 2014, according to the central bank’s “Housing Watch” website. The bulk of new homes cost between 250,000 ringgit and 500,000 ringgit. The median annual household income is estimated at around 63,000 ringgit.

Only about half of people living in Kuala Lumpur own a home, while nationwide the number was 72.5 percent at the last census in 2010. Demand is set to rise: the median age of Malaysia’s 31.7 million people is 28 years and the nation’s urban population is growing at an average 4 percent a year, among the fastest pace in East Asia, according to the World Bank.

“The focus should be on building houses which people can afford, not building expensive houses and then trying to push them, and then complaining that the banks are not giving loans,” he said. “The reason people are having problems getting loans is because the houses are not affordable. It’s beyond their repayment” ability, he said.


ABM ‘strongly refutes’ recent REHDA claim on difficulty to secure housing loans

The overall housing loan approval rates remains high at 73% of the applications in the second quarter of 2017. Furthermore, ABM said 72% of the housing loan borrowers are first-time house owners under the affordable home category.

ABM said its 27 member banks take an average of two to nine working days to process a housing loan application with complete documentation submitted by the applicant. “Therefore, the 60 to 90 days taken for loans approval as stated by Rehda is not reflective of the speedy approval process of housing loans by banks.”


Malaysians’ median monthly household income rises to RM5,228 in 2016

Seven states surpassed the national median monthly household income of RM5,228, namely, the Federal Territory (FT) Kuala Lumpur (RM9,073) FT Putrajaya (RM8,275), Selangor (RM7,225), FT Labuan (RM5,928), Johor (RM5,652), Melaka (RM5,588) and Penang (RM5,409).

On consumption expenditure, he said Malaysians spent an average RM4,033 a month, an increase of 6% from 2014. “Almost 70% was spent on four main groups, namely, housing, water, electricity, gas and other fuels (24%), food and non-alcoholic beverages (18%), transport (13.7%) and restaurants and hotels (13.4%). The scenario is in line with the composition of a developed country’s spending pattern.”


Malaysia should ease migration policy

“In receiving countries, foreign workers can fill labour shortages and promote sustained economic growth, if migration policies are aligned with their economic needs. Inappropriate policies and ineffective institutions mean that the region is missing opportunities to gain fully from migration. These restrictive policies are partly influenced by the perception that an influx of migrants would have negative impacts on receiving economies. However, there is evidence to the contrary.”

All said, Malaysia and Singapore have the lowest international labour mobility costs in Asean, which reflect their openess to globalisation, their efforts to develop migration system that meet labour market needs and their geogrphic centrality in the region.


Minimum wage to go up

This would be the second time in three years that minimum wage levels in the country have been revised. In July 2016, The minimum salary was raised to RM1,000 from RM900 in Peninsular Malaysia, and to RM920 from RM800 in Sabah, Sarawak and Labuan.

“We know that the minimum wages order must be reviewed at least once in two years. The review will look at the ability of the employer to pay the minimum wage which is a responsibility that is very challenging to ensure that the minimum wage policy meets all objectives”, Riot was quoted by Bernama as saying.