Malaysia Series: Government restructuring 0 comments

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Considering the Malaysian stock market and economy from a macro perspective, it is not difficult to make a case for it. In the mid-1990s, before the 1997-98 currency crisis, it had the third largest stock market in Asia by market capitalisation (after Japan and Hong Kong) but today it lags behind countries like South Korea, Taiwan, Singapore and of course China and India. Yet it has made a sizeable recovery since 1998 and many of the factors and controls that discouraged foreign portfolio investment are now removed.

Teh Hooi Ling wrote an interesting piece in today's Business Times on how investors learn from past experience with the result being less volatility and lower probability of bubble formation; I feel it is especially pertinent in Malaysia's case where things like the CLOB debacle have scared off many Singapore investors. Today Malaysia is seen as one of the more undervalued markets, and indeed it is safer precisely of such bad memories/legacies.

What do I mean by government restructuring? It not only refers to restructuring of government-related institutions, but also of attitudes towards foreign investment and social development. From a top-down perspective, it prepares the ground for a more benign investment climate and better market valuations.

Restructuring of foreign investment policies
The biggest bugbear of foreign investors has been the capital controls and currency peg of 1998 which restricted inflow and outflow of capital, and basically left the stock market in the doldrums in the early 2000s because of a lack of foreign institutional demand. The peg and controls have been removed since 2005 under Abdullah Badawi.

Some reform has been done on property investment by foreigners as well. Foreigners can now buy any number of residential properties in Malaysia priced above RM250k and take any number of loans from local banks. The abolishment of the long-time real property gains tax will stimulate long-term foreign demand for Malaysian properties, widely acknowledged to be one of the cheapest for a relatively well-developed Asian economy.

With regard to foreign direct investment, the fact that for the much-publicised Iskandar Development Region, the Bumpitera equity ownership requirement is set to be relaxed for a number of sectors to increase foreign investment, is also an indication of a warming investment climate.

Key property stocks: KLCC Properties, IGB, IOI Properties, I&P, MK Land, SP Setia, UM Land, Mah Sing

Restructuring of government-linked companies (GLCs)
This is one of the key themes that has attracted funds back into the Malaysian market. Encapsulated in the GLC Transformation Program in 2004, it has been one of the key programs launched under Badawi's new administration to improve corporate management and efficiency, consolidate operations if necessary, and increase overall competitiveness and value-add of the government-linked companies in which the two key government investment agencies, Khazanah and PNB, hold substantial ownership.

A sample list of companies held under these two agencies, published in March 06:















Another list of these GLCs, published in 2007. The 20 companies in bold, known as the G-20, are the key companies whose performances are tracked under the GLC Transformation Program:

















Listed GLCs comprise more than 1/3 of total market cap in Bursa, and have roughly tracked the main KLCI index's movements. The strong move by the KLCI from late 2006-07, making Malaysia among the top market performers worldwide, can thus be strongly attributed to these stocks and their improved performance and perception by mainstream investors.

Among the main restructurings:
- A top development over recent years has been consolidation and expansion overseas in the banking sector. BIMB recapitalised via sale of a stake in Bank Islam to Dubai Investment Group; Bumiputra Commerce merged with Southern Bank in 2006 and CIMB acquired overseas operations (GK Goh); A three-cornered fight for RHB Capital which eventually went to Employee Provident's Fund. Coupled with the entry of foreign investments, notably Arab money, these restructurings and consolidation are said to make Malaysian banks more competitive.
- Another restructuring coming up is the consolidation of the plantation sector, with the merger of the GLC plantation stocks Sime Darby, Kumpulan Guthrie, Golden Hope
- Shakeups at Malaysian Airlines and Proton, with success (supposedly) in the former and impending foreign takeover in the latter

Restructuring of political stance
Social policies are not so easy to reverse but in order to encourage foreign investment, a top priority of the government nowadays, it is likely that the bumiputra policy, especially the requirement for 30% business equity ownership, will be diluted with time starting from new developments like the IDR.

There are also signs of warming relations with its closest neighbour Singapore, with plans to increase flight links (ending the KL-SG monopoly flying rights held by SIA-MAS), build rail links (unconfirmed), encourage cross-border investments (Genting in Sentosa IR, Singapore probably in IDR, being two of the bigger developments).

There is tremendous potential synergy in this relationship, and it is high time both parties take steps to building it.

References:
(1) AMB report Mar 2006: Preview of Khazanah Nasional’s report card
(2) CIMB report Apr 2007: Above The Crowd
(3) GLC Transformation Programme Progress Review Mar 2007