Sunday, July 8th, 2018

 

Tencent says to spin off online music unit in US

HONG KONG, July 8 — Tencent Holdings Ltd has submitted a proposal to the Stock Exchange of Hong Kong to seek a separate listing of its online music entertainment business on a recognised stock exchange in the United States. “The Stock Exchange…


French Davos castigates US web giants for not playing fair

LONDON, July 8 — What was meant to be an opportunity to mingle in the sun in a southern French city turned partly into a public denunciation of tax practices of US web giants. Aix-en-Provence is host to an annual weekend gathering of politicians…


Malaysian stocks, ringgit to remain under selling pressure

PETALING JAYA: The Malaysian stock market and the ringgit, which have seen constant pressure since the surprise outcome of the 14th general election, are unlikely to change course anytime soon as the US action to slap tariffs on imports from China is expected to increase risk aversion in the short term, say economists.

Last Friday, the US imposed tariffs on US$34 billion (RM137 billion) worth of goods from China. Beijing was quick to retaliate, announcing levies on the same value of US imports. Bursa Malaysia's benchmark index, the FBM KLCI, fell 1.6% or 26.79 points to close at its intraday low of 1,663.86 points in reaction to the news, while most emerging market currencies, including the ringgit, yuan, Indian rupee, baht, won and Singapore dollar traded lower. The Malaysian unit closed at 4.0465 to the US dollar on Friday.

MIDF Amanah Investment Bank chief economist Dr Kamaruddin Mohd Nor told SunBiz that the local currency as well as the emerging economies' currencies are expected to remain under pressure this week amid heighten trade tensions between the two economic powerhouses.

He said trade tensions would hamper investor sentiments towards emerging economies, which in turn would influence the flow of funds as investors assess the possible risks and adverse outcomes associated with the dispute.

“Thus, selling pressure due to this factor as well as other external factors (faster than expected interest rate increases in the US and stronger dollar) will weigh on the ringgit and regional currencies in the near term,” he added.

Meanwhile, FXTM global head of currency strategy and market research Jameel Ahmad said there is some risk aversion in the atmosphere following the announcement by US President Donald Trump, where emerging market currencies and stock markets appear to be struggling as a result of a cautious trading environment.

“If Asian stock markets continue to trade cautiously in wake of the US trade tariffs on China coming into play, there is a likelihood that this could also negatively impact the European stock markets,” Jameel said.

Socio-Economic Research Centre executive director Lee Heng Guie noted that emerging markets' assets, including currencies, have been under pressure in recent weeks due to the trade tensions, damaging market volatility due to capital reversals on expectations of higher US interest rates ahead and US dollar strength.

Additionally, Lee said the ringgit is expected to remain at the current trading range given the multifacet external headwinds amid domestic political and policy transition.

He noted that among the potential long-term effects from the tariffs' implementation are slowing trade and investment as trade activity lessens, which would weigh on firms' profitability and investments' returns.

Lee added that domestic demand would also dampen as households' income becomes affected by the weak performance of export-oriented companies and industries.

“In addition, global financial market volatility will have negative spillover on domestic equity market,” he said.

Therefore, Lee said the government needs to widen its trade relationships with countries that are committed to adopting fair and open trade practices while companies work on products and markets complexities to minimise the disruption amid the global network of supply and value chains.

Kamaruddin said while the research firm which does not expect local companies to face devastating near-term disruptions, they will have to be prepared if the list of products involved are part of their value chain.

Overall, economists said the continued trade spat between the US and China, the return of market volatility, and the reality of higher US interest rates pressuring emerging financial markets and currencies, are expected to weigh on Malaysia's growth momentum this year.

“The estimated impact on GDP growth is around 0.1-0.3 percentage point,” Lee said.

However, Kamaruddin said MIDF is keeping its full-year 2018 GDP growth forecast at 5.5%.


Turf war over Sarawak oil & gas resources may stump new investments

PETALING JAYA: Industry players believe that the turf war of sorts between Petroliam Nasional Bhd (Petronas) and the Sarawak state government is likely to affect new investments into the state's oil and gas sector more than existing players in the market.

A senior analyst who spoke to SunBiz on condition of anonymity said those who are already operating in the state might not see much of an impact at this juncture, but it is best for fresh entrants to take on a wait-and-see approach as the matter unfolds.

Kenanga Research in its note to investors last Thursday said it expects the ongoing tussle between Petronas and state-owned Petroleum Sarawak Bhd (Petros) to continue with anticipation of Petronas pursuing a court case, although this might delay the awards of Production Sharing Contracts (PSC) in the state.

According to Datuk Mohd Abdul Karim Abdullah, managing director and CEO of Serba Dinamik Holdings Bhd, which has substantial operations in Sarawak, the state government has been prompt in updating industry players in terms of applications and approval of licences, permits and leases which Petronas and PSC holders will have to adhere to, but is yet to provide a clearer direction for contractors and suppliers.

He asserted, however, that Serba Dinamik is gearing itself towards fulfilling and complying with the requirements.

When contacted by SunBiz for more details, a Petros board member declined to comment, saying any statements made will have to be from the state government.

The Sarawak chief minister's office responded to SunBiz by saying that Datuk Patinggi Abang Johari Tun Openg will be touching on the matter in the State Legislative Assembly seating which starts tomorrow.

The analyst said while Sarawak has claimed ownership and has started exercising regulatory authority since July 1 with a focus on revenue generation, more needs to be done on the capital injection front.

“At the end of the day the state government wants more revenue for its oil and gas assets. How are they going to do it? Is it (through) additional taxation or is it through an equity stake in oil and gas assets?” he asked.

One issue with that, he pointed out, would be the fact that current projects have all seen capital injection and development by Petronas, thereby making it difficult for the state to stake a claim.

“Oil is just out in the sea under the seabed … you cannot get this unless you have the management, and the capital to put in (for) the necessary equipment and assets to extract it from the ground or else it will just be a resource that is untapped,” he added.

Alternately, if Sarawak chooses to increase royalties, this too could have its own repercussions as it might affect the inflow of investments from industry players and reduce the rate of returns from oil and gas assets, creating an environment shrouded in uncertainties. These uncertainties will in turn affect companies' ability to secure lending from financial institutions.

Petronas currently pays a 5% royalty to oil and gas-producing states, but the Pakatan Harapan government promised in its election manifesto to increase the royalty to 20%.

Meanwhile, Kenanga Research opined that the timeline of the 20% royalty payment promised by the Pakatan government remains vague given the ongoing tussle over regulatory rights, thus the move to increase royalties is unlikely to affect Petronas' FY18 capital expenditure(capex) allocation of US$55 billion (RM242 billion) as these are typically long-term plans which are subject to little change once finalised.

However, once the increase in royalty is implemented, Petronas' capex headroom might see a strain as there could be greater reliance on its dividends to finance government plans, especially with the zero rating of the Goods and Services Tax.


Temasek set to book record S$300m portfolio

SINGAPORE: Singapore state investor Temasek Holdings Pte Ltd is likely to book a record S$300 billion (RM892.3 billion) for the value of its portfolio, powered by gains in DBS Group Ltd and Chinese banks, while it steps up investment in tech startups.

At the same time, Temasek is swooping in on opportunistic purchases with its stake buy in Swiss-based airline caterer Gategroup Holding AG, weeks after an announced move to buy into Hainan Airlines Holding Co Ltd. Both firms are part of China’s debt-saddled HNA Group Co Ltd, which has been selling part of its holdings.

Analysts estimate Temasek, the top investor in about a third of companies in Singapore’s Straits Times Index, to report a net portfolio value of about S$300 billion for the year ended March 31, up roughly 9% versus a nearly 14% increase to S$275 billion a year earlier.

Temasek said it will give details of its performance this week.

“Last year was a good year across all asset classes and across the world. A rise in its portfolio value to above S$300 billion is quite doable,” said Song Seng Wun, economist at CIMB Private Banking.

Last month, Temasek and GIC Pte Ltd, Singapore’s bigger state fund, featured among main investors in a record-setting US$14 billion (RM56.5 billion) fundraising by China’s Ant Financial Services Group. Temasek also put more money into online Chinese services firm Meituan Dianping last year. – Reuters


Valuations of rubber glove stocks ‘stretched’ due to share price rally

PETALING JAYA: The valuations of rubber glove stocks are stretched at mid-teens to high-teens due to the run-up in share prices, according to Kenanga Research.

“Rubber glove stocks under our coverage have performed well since 2017, until now, led by Hartalega (+116%), Top Glove (+139%) and Kossan (+24%) in line with the strong demand and a more stable supply-demand dynamics underpinning earnings recovery,” the research house said in a report.

“Due to the run-up in share prices, the PER valuations appear stretched vis-à-vis earnings growth. However, earnings growths of rubber gloves players are growing at an average of between -1% and 10% over the past eight quarters. We believe the share prices have appreciated ahead in anticipation of the upcoming quarter reporting season.”

Anecdotal evidence suggests that rubber gloves stocks’ share price rally was led largely by massive PER (price-to-earnings ratio) expansion compared to pedestrian earnings growth over the past eight quarters.

Following a period of capacity consolidation starting back in mid-year 2016, which led to falling average selling prices (ASP), nascent signs of glove makers ramping up capacities are emerging again. The robust demand is attracting players to ramp up production.

In anticipation of higher demand and switching from vinyl gloves, players are raising capacities again.

“We expect headwinds including potential higher minimum wage which could derail earnings of glove players. Any hike in the minimum wage could derail glove players’ earnings since labour accounts for 9% of production cost.

For illustrative purposes, if the present minimum wage is hiked by 50% to RM1,500/month, ceteris paribus, assuming ‘a no cost pass-through’ scenario, the minimum wage policy is expected to hit glove players’ bottom-lines by 3-12% on a full-year basis based on our back-of-the-envelope calculations,” said Kenanga.

However, in the past, it said, glove makers had managed to gradually pass cost through via higher ASPs.

It has underperform calls on Hartalega, Top Glove, Kossan and Supermax, reiterating its underweight recommendation due to rich PER valuations and flat sequential earnings growth.


Priceworth shares to go ex-rights on July 18

KUALA LUMPUR, July 8 — Shares in timber and forest plantation group Priceworth International Bhd will trade ex-rights on July 18, for its RM102.37 million renounceable two-for-one rights issue with bonus shares. The provisional allotment of rights…


Business booming for plastic giants as change beckons

It’s the worst enemy of environmental campaigners, but people around the world use mountains of plastic every day and business is booming for manufacturers. Much to the chagrin of activists, an increasingly restrictive regulatory environment appears to have put little dent in the industry’s power so far. That is changing, however, and plastic giants are […]


Singapore’s Temasek set to report record portfolio; tech deals in focus

SINGAPORE, July 8 — Singapore state investor Temasek Holdings Pte Ltd is likely to book a record S$300 billion (RM892.7 billion) for the value of its portfolio, powered by gains in DBS Group Ltd and Chinese banks, while it steps up investment in…


External headwinds create uncertainties in the market

KUALA LUMPUR: Prevailing external factors will continue to plague regional equity markets including Malaysia, creating uncertainties and causing fund managers to stay on the sidelines.

Rakuten Trade Sdn Bhd Head of Research Kenny Yee (pix) said foreign outflows exceeded RM10 billion during the May-June period, with the post-general election market experiencing net foreign selling of nearly RM7 billion to-date.

By comparison, the country recorded net foreign inflow of RM10.25 billion into equities in 2017.

“For this week alone, net selling has touched RM310.7 million (till Thursday) and we reckon these funds may continue to divest in the immediate term,” he told Bernama.

Yee said the ongoing trade spat between the United States and China was likely to be the main factor contributing to the trend.

At Friday's closing, Bursa Malaysia's key index ended sharply lower at 1,663.86 from Thursday's 1,690.95, a fall of 26.79 points.

However, Yee expressed optimism that the 'kitchen-sinking' in the country was merely a short-term pain.

He said Malaysia was deemed the region's safe haven, with the market supported by the “big four” government-linked investment companies (GLICs), namely the Employees Provident Fund, Permodalan Nasional Bhd, the Retirement Fund Inc and Lembaga Tabung Haji.

“The total fund size managed by the four GLICs exceeds RM1.2 trillion, not to mention those from sovereign wealth fund Khazanah Nasional Bhd and its subsidiary, ValueCAP Sdn Bhd,” he added.

He also believed that foreign funds were likely to take advantage of the weak ringgit, which had depreciated to about RM4.04 against the greenback from the year's highest level of RM3.86.

“Index-linked blue chips such as Telekom Malaysia, Maybank, KLK and Genting are now ripe for the picking as they are trading at attractive levels,” Yee said, adding that investors could re-look at small-cap stocks like Econpile, GFM, Kelington and Mi Equipment when the market liquidity was restored.

However, he cautioned that the US remained the epicentre of global equity markets, making a stir on issues pertaining to trade tensions or its interest rate increases.

Yee also refuted speculation that the arrest of former Prime Minister Datuk Seri Najib Abdul Razak would affect foreign investors' confidence in the local stock market.

Last Wednesday, Najib hit the headlines in local and foreign newspapers as the country's first ex-prime minister to be charged in court, with three counts of criminal breach of trust (CBT) and one count of abuse of power in connection with SRC International Sdn Bhd funds totalling RM42 million.

Meanwhile, Hermana Capital Bhd Chief Executive Officer and Chief Investment Officer Datuk Dr Nazri Khan Adam Khan said global equity sentiment continued to be affected by worries on trade tensions between the world's two largest economies and the possibility of a second round of tariff imposition.

“Anytime now, they will be going for the second round of tariff imposition worth US$50 billion (RM202 billion),” he said.

The US began imposing new tariffs on US$34 billion (RM137 billion) of Chinese imports on Friday and Beijing retaliated with its own set of tariffs rate on US goods, equalling that of Washington.

RHB Banking Group Chief Economist and Head of Research, Dr Arup Raha, said domestic buyers were seen mopping up stocks sold by foreign funds but with little appetite to be overly aggressive.

“Investors will likely stay risk-off with the tightening in monetary conditions globally; hence, emerging market (EM) outflows are not expected to reverse in the near-term,” he said.

However, he said, sentiment could be lifted by a de-escalation in the US-China trade conflict, a better explanation on the government's fiscal options in 2019, decisions on big-ticket infra projects and further clarity on leadership roles at government-linked companies/GLICs as well as government agencies.

Commenting on the ringgit's performance, Arup said all Asian currencies fell against the greenback over the week despite the broad US Dollar Index being slightly lower over the same period. However, the ringgit actually fared better than most of its peers.

“The ringgit fell 0.19% week-on-week (w-o-w), only behind the Taiwan dollar and the Philippine peso, excluding the Hong Kong dollar which is pegged to the greenback,” he noted.

The biggest themes this week were the US-China trade war rhetoric and Chinese yuan movements (-0.64% w-o-w against the dollar), while the overarching driver of tighter US monetary policy continued to exert influence over emerging-market assets, he said.

“Despite Malaysia's reliance on trade and its economic ties with China, investors are still sticking with the strong and resilient growth story in Malaysia.

“We also do not see the market pressuring Bank Negara Malaysia to hike rates at this juncture, unlike its neighbour Indonesia,” Arup said.

He noted crude oil prices, which were a traditional ringgit driver in the past, appeared to have little impact on the currency this week.

“We forecast the ringgit's performance to be comparable with the rest of the region over the second half of this year, eyeing the 4.10 level (versus the greenback) for end-2018,” he said.

Arup said despite weakness in Malaysia's external fundamentals, Malaysia's full-year growth should remain robust while deep domestic liquidity should support the broader market even if foreign investors pared down their holdings.

He added the fiscal budget, likely to be tabled in November, would be key to watch, both to gauge the government's ability to stick with its 2.8% deficit target for 2018 and the 2019 plans.