Business

Saturday July 4, 2009

Paving the way forward

By TEE LIN SAY


No doubt, Prime Minister Datuk Seri Najib Tun Razak appears to be pushing the right buttons in dismantling long-held rules that have served as impediments to the capital market, and hence, nation’s growth. Policy changes can be monumental and more so, when there are a slew of them within a short span, and all in the name of liberalisation.

So, while it was not surprising that Najib would unveil some key measures at the week’s Invest Malaysia 2009, very few were prepared for their wider implication. For one, he removed a key element in the age-old New Economic Policy (NEP) which required firms seeking a listing on the local bourse to farm out 30% of their shares to bumiputras.

“Those who say the measures will have minimal impact are missing the point. It is the tone, sometimes, that these measures set that are more important than the actual measures,” says a corporate observer.

In place, is a new Securities Commission guideline which requires companies to allocate half of an initial public offering (IPO) public shareholding spread to bumiputra investors.

Calling it a “long-term positive for the capital market”, OSK Research says the new guideline means there is only a requirement for firms seeking a listing to offer between 12.5% and 25% to bumiputra investors as companies typically offer between 25% to 49% of their shares in an IPO. “The waiver of the 30% bumiputra equity condition for post listing fund raising exercises could also pave the way for more placement exercises and energise the domestic capital market,” says the research house.

Najib also announced the repeal of Foreign Investment Committee (FIC) guidelines over equity, mergers and acquisition, and share transactions. However, national interest in terms of strategic sectors will continue to be safeguarded through sector regulators.

FIC’s approval will also no longer be required for property transactions, including those between foreigners and non-bumiputras, unless the transaction involves the dilution of bumiputra or government interest for properties valued at RM20mil and above.

In no uncertain terms, this ensures that Malaysia remains visible on the international arena.

Crystal clear

The message from Najib is clear. Malaysia welcomes foreign and local investors. The country will provide incentives for those who invest.

Since becoming the country’s sixth prime minister, Najib has certainly been quick with all the right economic moves.

In a space of four short months, Najib has liberalised some 27 service industries, released a RM60bil stimulus package (technically RM15bil), mend ties with Singapore and strengthened relations with China.

In May, Najib paid Singapore a visit, and in return, Singapore’s founding father made an 8-day “fact-finding tour” to Malaysia, one of the longest visits he has made to Malaysia since 1965.

Earlier this month, Najib followed in his father’s footsteps and paid a successful visit to Beijing on 35 years of diplomatic relations. Najib has identified the need to dig more wells in the relationship with China.

With that, it may seem harder to accuse Najib of being a protector of the status quo or continuing with old economic models. Yet, it will take some time before the real impact of the measures start to sink in.

“It hasn’t really sunk in. I’ve been so used to the 30% bumiputra quota over the last three decades,” says one seasoned observer.

A political analyst says Najib is hoping to address two issues, which is the economy, as well as winning back the support of non-Malays.

Progress in GLC reforms

Meanwhile, Khazanah Nasional Bhd managing director Tan Sri Azman Mokhtar also touched on topics ranging from the mid-term review of the government linked companies (GLC) transformation programme to new growth sectors that Khazanah will be emphasising.

It has been five years since the GLC restructuring and transformation work began.

CIMB Research head Terence Wong notes that from that time to 2007 before the onset of the current global financial crisis, the K9 Khazanah companies (Bumiputra-Commerce Holdings Bhd, Tenaga Nasional Bhd, Telekom Malaysia Bhd, Axiata Bhd, UEM Land Bhd, Malaysia Airlines, Malaysia Airports Holdings Bhd, Pos Malaysia Holdings Bhd and Proton Holdings Bhd) have seen their gearing drop from 64% to 43%, earnings double from RM5.4bil to RM10.8bil and from a RM4.7bil loss to a profit of RM458mil.

As for new growth sectors, Khazanah will be looking into healthcare, education, creative industry, life sciences or biotech, leisure & tourism, new agriculture, renewable energy, sustainable development, high speed broadband, the Iskandar Malaysia project and Islamic finance.

A right move

Malaysia’s first listing of the year was industrial chemical distributor Samchem Holdings Bhd, which was listed on Bursa Malaysia main board on June 23. It was listed with only 10% of its share capital consisting of bumiputra shareholders.

The market will take time to absorb what is happening. Sometimes the market needs a few positive events or data points before it reacts... CLEMENT CHEW OF JP MORGAN

An investment banker explains that bumiputra requirements have been relaxed since the beginning of the year.

“In Samchem’s case, it offered its 30% portion to bumiputra investors. But as there was no appetite for the initial public offering, the bumiputra quota was considered fulfilled, and hence was allocated to the public,” he explains.

Attracting investors – foreign and local

JP Morgan Chase senior country officer and head of equities broking, Clement Chew feels that the measures are significant and far reaching.

“The market will take time to absorb what is happening. Sometimes the market needs a few positive events or data points before it reacts. These are profound changes in the right direction. We believe there is a strong will and motivation from the top to make Malaysia market friendly. During his speech, the Prime Minister was not ambigious as to what his objectives were,” says Chew.

MIDF-Amanah Investment Bank Bhd vice-president of dealing Lim Teck Seng sees the main purpose of the measures as a government effort to attract foreign investors.

“I believe over time, these measures are positive especially for foreigners and locals looking to list in Malaysia. Increasingly, it is getting difficult for foreigners to fulfil the 30% bumiputra quota, as bumiputra institutions like PNB and Khazanah are concentrating more on other investment objectives especially on the overseas front,” he says.

But somewhat cynical is Capital Dynamics Asset Management Sdn Bhd managing director Tan Teng Boo who says there is so much more to be done to pitch the country’s appeal to investors: “How broad-based are these measures? Compared to before, yes, it is a step forward. But there are other issues. For instance, how competitive is the workforce and the human capital here?”

He also points out that these measures appear to be more accomodative for the stock market than the economy.

CIMB’s Wong, however, is encouraged by the announcements, as they can be considered to be among the most significant made when compared to previous Invest Malaysia events.

“Arguably, the policy measures are more significant than those revealed in past Invest Malaysia conferences, as they lay the foundation for Malaysia to introduce its new economic growth model and move up from a middle income nation to a high-income one,”

He believes that interest in the Malaysian equity market will receive a boost from the participation of 70 representatives of more than 50 foreign fund management firms as well as over 600 domestic investors.

Who will benefit?

Wong notes that in the past four Invest Malaysia conferences, the Kuala Lumpur Composite Index posted gains averaging 4% to 6% in the 4 to 6 week period after the conference.

“We believe this could take place again after investors digest the major announcements,” he says.

By abolishing the FIC requirements, Chew says the stock market and, in particular, commercial properties will benefit. Activty in the REITS (real estate investment trust) sector will also get a boost. Hence, companies sitting on assets will stand to benefit.

“Entrepreneurs who may be thinking of relisting their companies or embarking on corporate exercises will be more encouraged to do it. With the removal of the 30% bumiputra requirement, it will make Malaysia a more competitive place to list. This is fundamentally good for Bursa as it creates interest, and hence volumes. So structurally its very good,” says Chew.

Hence, he expects foreign flows to turn positive in time.

“As it is, foreign shareholdings are already very low. I don’t see them going out. The big foreign selling is over. I don’t see much downside and the market should be well supported,” he adds.

Certainly, foreign shareholdings in local listed companies are back to 2004 levels at relatively low levels of 20.7%. Most companies’ foreign shareholdings have also yet to bounce off their post-Asian financial crisis lows.

MIDF’s Lim says equity markets are primed to benefit over time, as there will be an inflow of new techniques and products.

“As always, if the various authorities are properly coordinated, implementation will be good. I would say, we are quite on par now with other regional markets. The problem however is still liquidity. To encourage foreigners to come, the authorities will still need to resolve the liquidity issue of the market,” he says.

“Why would a foreign broker want to set up shop here if liquidity in the market is low? Even with incentives, it will not be lucrative for them unless their plan is to capture the local large institutional businesses. They will still prefer to go to more liquid neighbouring markets,” he says.

A jaded Tan however, doubts that foreigners will flock to Malaysia in a big way as certain fundamental issues have yet to be clearly addresse, the biggest of which includes education.

“To be globally competitive, we need to ensure that we are judged purely on merit and performance. Foreigners will ask: Are people really judged on merit in Malaysia?,” he says.

On the other hand, private equity banker Sherilyn Foong says Malaysia’s neighbours are also rather competitive and are aggressively pursuing their comparative advantages.

She says there are a host of other variables to consider, for instance tax holidays, government incentives, availability of talent, infrastructure, ease of doing business and costs.

Nonetheless, she is especially excited about the potential transfer of technology or expertise imported by foreign investment houses which will result in more sophisticated investment products for Malaysia.

“This will also help in innovation expertise applied to Islamic financial products to further Malaysia’s ambition to be the global centre of Islamic finance,” she says.

Related Story:

What the captains of industries say

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