Wednesday, April 29, 2009

Malaysians are poor – based on our tax records

Only 1 million or so Malaysians pay tax. That’s 10% of the working population. Take a look around you. 9 out of 10 adults you see don’t pay tax. That’s a phenomenally narrow tax base. 1 million Malaysians are paying for the government services for all 24 million of us; 26 million if you include the (legal) foreigners.

Or perhaps it’s more accurate to say 1 million Malaysians are paying for the “work” done by our government, which includes trips to Disneyland, Mount Everest and other exotic locations.

Hafiz Noor’s musings on income tax got me thinking.

Firstly, are the vast majority of Malaysians that poor, that 9 million working Malaysians don’t pay tax?

Secondly, if the core issues are not addressed, more and more Malaysians will do their utmost to avoid tax. Because, we don’t seem to be getting our money’s worth.

One function of taxation is to raise revenue to fund social services such as roads, schools, hospitals and security. Yet, in Malaysia, we 1) pay tolls, 2) are forced to send our children for private education, 3) go to private hospitals when we are very ill and 4) engage private security to patrol our home neighbourhoods because of the rising crime rates. Another function is redistribution, that is to take from the rich to help the poor. No right thinking human should be against that. But how much of that do we see going on in Malaysia? We see billions of ringgit being squandered on follies and some scandal or other; and on the other hand there are so many obvious examples of poverty.

So, where did all our tax money go? This lack of accountability fuels the sense of injustice by the taxpayer and increasing efforts to avoid or downright evade tax. Why pay tax when “the government is going to waste it anyway”?

Which brings me to the broader, third issue. There are about 12 million eligible voters. The fact tbat only a fraction of these voters pay taxes is fertile ground for populist politicians offering voters short-term goodies at the expense of longer term economic disaster.

Voters will be tempted to vote for whoever offers cheap petrol/electricity/[insert whatever you want here] because they don’t have to cover the cost. The only way the costs can be covered would be to raise taxes. Our taxes, once you factor in the indirect taxes, are already among the highest in the world. Raise them further and the brain drain will get worse. We will face economic ruin when our best and brightest are all gone.

How can we get around this? One – break the addiction to cheap foreign labour so that Malaysians can move up the value chain and earn enough income to pay taxes. Two - accountability by the government – so we know where our tax money is going and feel we have a stake in its spending. Dare we hope for the report on the Port Klang Free Zone problems to be made public; and just as importantly, the people responsible held accountable and penalized?

Saturday, April 25, 2009

Is the next bull run here? (2)

The US equity market is still going great guns. So, is the bear market over? Last week, I pointed to a fundamental research piece offering one view.

This week, I came across another interesting piece. This one is from the technical research perspective.

For the uninitiated, here’s one technical mantra:
In a bull market, advances accompanied by increasing volume or declines on diminishing volume are taken to be bullish. Conversely, in a bear market, declines are accompanied by increasing volume and advances show diminishing volume. Volume should always be studied as a trend (relative to what has preceded) – Richard Russel, The Dow Theory Today.

Check out Hussman Funds for the full article.

Tuesday, April 21, 2009

Where are the good Malaysian employers?

The best employers in Malaysia are foreign, based on a study by human resource consultancy Hewitt Associates in conjunction with The Edge, The Edge Financial Daily and Asian Strategy and Leadership Institute (ASLI).

Only two home-grown firms made it to the Top 10 – property developer SP Setia at No 6 and Telekom Malaysia at No 10.

That's a sad indictment of 53 years of Barisan Nasional (BN) rule. BN economic policy is characterised by secure monopolies, oligopolies or various protections for industries ranging from autos to banks, gambling, telecoms and satellite tv.

All this protection resulted in some very rich businessmen emerging – enough to support the largest Ferrari showroom outside Italy. That's right – the RM20m showroom was officially opened on 31 March in a glittering ceremony graced by royalty.

So, we can been proud that our richest can now compete with the best in the world. On the other end of the scale though, our workers are forced to compete against the most lowly-skilled in a race to the bottom for the lowest wages and worst working conditions.

The BN government often defends protectionist measures as necessary to defend the rakyat's interests. The survey results suggest otherwise. Opening more industries to foreign competition could lead to better working conditions and remuneration for the ordinary worker.

For the record, the top 10 employers are:

1. The Ritz-Carlton, Kuala Lumpur
2. American Express (M) Sdn Bhd
3. Four Seasons Resort Langkawi, Malaysia
4. Federal Express Services (M) Sdn Bhd
5. Agilent Technologies
6. SP Setia Berhad
7. Hilton Kuala Lumpur
8. Intel Technology Sdn Bhd
9. Golden Arches Restaurants Sdn Bhd 10.
Telekom Malaysia Bhd

Monday, April 20, 2009

What’s happening in Perak?

For those confused by the plethora of articles, or, like me, are just too tired of this whole imbroglio to wade through all the reports, here’s a summary of the situation.
The mainstream media reports Barisan Nasional (BN) now has an undisputed majority in Perak following the Federal Court’s recent declaration that Speaker V. Sivakumar’s suspension of UMNO’s Datuk Seri Zambry Abd Kadir and his six executive councillors are null and void. Combined with the earlier ruling that it is the Election Commission (EC) and not the Speaker that decides an electoral vacancy, it is said BN now holds a 31-28 majority in the state assembly, including the three party-hoppers.
The alternative media on the other hand points out that only two declarations sought by the BN applicants were granted, which were to declare null and void the suspensions for Zambry and also his exco. The Federal Court omitted the application to declare that Zambry and his exco have the right to attend and take part in all assembly meetings. Constitutionally, the Speaker has full power in the assembly. If that is the case, then Pakatan holds a 28-24 majority as Zambry and his six exco members would be barred by the Speaker.
N.H. Chan, a former Court of Appeal judge writing in Malaysiakini says the relevant law, in the present context, is Article 72 of the Federal Constitution which states:
(1) The validity of any proceedings in the Legislative Assembly of any State shall not be questioned in any court.
(2) No person shall be liable to any proceedings in any court in respect of anything said or any vote given by him when taking part in proceedings of the Legislative Assembly of any State or of any committee thereof.
(3) No person shall be liable to any proceedings in any court in respect of anything published by or under the authority of the Legislative Assembly of any State.
Following the Federal Court decision, the Perak state assembly secretary Abdullah Antong Sabri, without the consent of Speaker V Sivakumar, issued a notice convening the Perak state assembly on May 7. Speaker Sivakumar subsequently suspended him indefinitely for this act of ‘insubordination’ and appointed Misbahul Munir Mardukhas, the political secretary of recently-elected Bukit Gantang MP Mohd Nizar Jamaluddin, as his replacement. “Meanwhile, the purported sitting on May 7 cannot proceed, pending clarification,” he said, adding that he would write a letter to the palace to seek clarification if the palace had given permission for an assembly to be convened.
So, that’s where we stand. A real constitutional mess with the BN quite ironically hamstrung by the various constitutional changes it had put through in the past which reduced the scope for judical review of the legislative branch. My hope? Prime Minister Najib will stop this BN attempt to impose a BN government in Perak that the majority of Perak rakyat did NOT vote for. Focus on fixing the economy and the states you rule, deliver “People First, Performance Now” and in the next elections you can convince the rakyat you deserve to be the government.

Friday, April 17, 2009

Is the next bull run here?

I’m often asked if economic recovery is around the corner and the bear market is gone. I share the views of Jack McHugh at the Big Picture:

“Nothing sows the seeds of doubt in the minds of money managers quite like a bear market rally. Thoughts like, “Is the bottom in?”, and “Am I missing a once in a generation buying opportunity at the beginning of a great new bull market?” cause institutional investors to reach for the antacid tablets. For many of them, losing money in a bear market is no sin, as long as everyone else is taking on water, too. But missing out on the gains of a bull market is a career-threatening problem. As such, large investors are all competing to strain their eyes in looking for Ben Bernanke’s “green shoots”. They almost hunger for the early bits of growth that often presage an economic recovery. What they forget is that many of these green shoots will turn out to be weeds, or, what’s worse, be lost to a spring frost.

I’m not trying to be an eternal pessimist, either, since there are indeed some hopeful signs. As you can see from the articles below, the credit markets are starting to pick up. Even if prices in the dicier parts of fixed income aren’t up as much as are stocks since March 6, they are starting to tick higher. LIBOR continues to recede, high yield bond issuance is climbing off the mat, and even carry traders are beginning to feel safe enough to re-establish risky positions. With all the cash now gushing out of Washington, I suppose these nascent signs of improvement should be both expected and welcomed. But since one of the primary goals of these scribblings is to offer a perspective that is ever mindful of risk management, I would like to call everyone’s attention to the fact that these same hopeful signs were on display in the autumn of 2007 and the spring of 2008.

The spring of 2009 may yet bring more upside for investors, but they should be mindful of the fact that when individuals, corporations, and even some countries all try to delever on a global basis, false springs are more the rule than the exception. After the 1929 crash, the Hoover administration spied similarly hopeful signs in the U.S. economy. “Recovery is just around the corner”, is first attributed to economist, Irving Fisher, but Team Hoover repeated this phrase and variations of it right up until he was crushed by the landslide election of FDR in 1932. It is true the U.S. economy in 2009 has yet to see the massive reversals suffered during the Great Depression, but the root causes of each period — easy monetary policy and an over-reliance on debt — are the same.

What’s different this time is that Mr. Bernanke and the successive Treasury Secretaries he’s teamed up with have long since ditched conventional policy responses. It’s been said, and I agree, that trying to foster sustained growth in an economy weighed down by too much debt is like trying to start a sustainable fire using wet logs. The matches and gasoline (some stimulus and a low funds rate) didn’t work on our debt-soaked economy, so Mr. Bernanke is resorting to the blowtorches and rocket fuel (a lot of stimulus and quantitative easing). I don’t know enough about the chemistry of combustion to accurately predict what will happen next. But my advice would be to stand well back and wait to see what happens next. I’ll risk being underinvested during this rally. Even if he’s successful, Mr. Bernanke might set fire to more than just the logs.”

Wednesday, April 15, 2009

Goldman’s missing month …

Floyd Norris of the New York Times has an astute observation:

“Goldman Sachs reported a profit of $1.8 billion in the first quarter, and plans to sell $5 billion in stock and get out of the government’s clutches, if it can.

How did it do that? One way was to hide a lot of losses in not-so-plain sight.

Goldman’s 2008 fiscal year ended Nov. 30. This year the company is switching to a calendar year. The leaves December as an orphan month, one that will be largely ignored. In Goldman’s earnings statement, and in most of the news reports, the quarter ended March 31 is compared to the quarter last year that ended in February.

The orphan month featured — surprise — lots of write-offs. The pretax loss was $1.3 billion, and the after-tax loss was $780 million.

Would the firm have had a profit if it had stuck to its old calendar, and had to include December and exclude March?”

Tuesday, April 14, 2009

When competition is bad ...

Watch out! Your weekly dose of English Premier League (EPL) could get a lot more expensive next year.

The rights to broadcast EPL are auctioned off every few years. Right now Astro holds the Malaysian broadcast rights until 2010. Bidding for the 2010-2013 EPL rights will commence later this year.

The Edge last week reported that Telekom Malaysia may decide to bid for these rights. Telekom is looking to launch broadband tv. Securing the hugely popular EPL franchise will almost certainly mean a few hundred thousand new subscribers, giving its service a substantial boost.

Conversely, Telekom's gain would be Astro's loss. Astro without EPL would not be very attractive to many.

Which means we could see a very intense bidding war between Astro and Telekom.

Competition is usually good. It is normally the best way to better products and services and lower prices for consumers. But in this case, the winner of any Astro-Telekom competition is not the Malaysian consumer. It is the multi-millionaire EPL footballers, managers and hangers-on. They will enjoy the benefits of whatever expensive price that Astro or Telekom pays. Malaysian consumers will foot the ultimate bill.

Regular readers will know I am all for free markets, competition and transparency. However, sometimes, markets do fail. This is a clear case of market failure, when a few hundred EPL magnates make more millions, paid for by millions of Malaysians who earn just a few hundred ringgit a week.

We have already experienced one round. Astro subscribers may remember sports became a lot more costly in 2007. Prior to that, Astro had a comfortable lock on the rights to televise EPL in Malaysia. That changed in 2007, when Astro suddenly found competition while it was bidding for the EPL rights for 2007-2010. It bid very high to secure the rights, and then raised subscription fees to cover its costs.

When markets fail, higher authorities must step in. Khazanah could play a role, as it is a shareholder in both Telekom and Astro. Could it prevail on the two companies to cooperate instead of compete? In the first place, I don't see how Telekom is going to deliver broadband tv on its decrepit Streamyx platform. Rather than pay so much and giving WAGS even more to splurge on frivolous luxuries, it should use the money to improve its services.

Or if it is too much to ask for Khazanah to arbitrate between two competing companies, the government should set up one umbrella organisation to bid for EPL rights for Malaysia. Since there will be only one bidder from Malaysia, the price should be much lower. This organisation can then sell the rights to Telekom, Astro and any other interested party. Any profits can be deployed to good use – whether charity, public transport, sports development ...

Wednesday, April 8, 2009

Lower toll rates can boost the economy

The MCA has jumped on the bandwagon for a toll-free PLUS.

Their proposal is in many ways similar to the DAP’s proposal - I noticed they even used the same KL-Penang toll rate example ☺. But there is a crucial difference – the DAP proposes that the government/Khazanah general offer extends to all minority shareholders of PLUS, including Employees Provident Fund (EPF). The MCA, on the other hand, considers EPF as part of the government. I completely disagree with that. EPF is the custodian of the rakyat’s hard-earned retirement money. It MUST NOT be treated as yet another source of funds for the government to fritter away.

Still, I am glad there is more support for bringing toll rates down. Cheap and efficient transport can do wonders for the local economy. The most recent proof – Japan’s dramatic toll rate cuts last month. Japanese expressway users now pay just ¥1,000 for unlimited travel on weekends and holidays.

It had a tremendous positive impact on the local economies. Weekend traffic on local highways soared 18% yoy! The boost is even more pronounced when compared to two weeks before – traffic was up 40%! All these means more income for local hotels, shops, restaurants and services – a key ingredient in keeping the domestic economy afloat as exports plunge.

Dare we hope for the same in Malaysia? Y1000 just ¥1,000 is equivalent to RM38. That’s incredibly cheap for the average Japanese who earns far more than the average Malaysian. So how about, say, RM20 for unlimited travel in Malaysia? I’ll bet that will encourage more Malaysians to take their families away for a weekend in Port Dickson, Melaka, Ipoh, Pangkor, Penang, Kuantan, Cherating …… boosting sales of everything from keropok lekor to assam laksa ☺

Saturday, April 4, 2009

Khir Toyo and family spent RM1.7m meeting Prince Charming and Cinderella

The Selangor Select Committee on Competency, Accountability and Transparency (Selcat) concluded its public inquiry into the expenses of the now-defunct Balkis on Wednesday, March 31.

Balkis was the welfare and charity organization set up by the wives of Selangor’s elected representatives during Barisan Nasional (BN) rule. It was hurriedly dissolved after March 8, and RM10m was transferred to Bakti, the charity organization for wives of federal government ministers. The legality of that dissolution and cash transfer is also being questioned, but that’s another issue.

Right now, I am disheartened by the absence of public outrage and mainstream media coverage on the abuse of power and privilege unearthed by the Committee. Consider just a few of the revelations:

1) State investment agency Permodalan Negeri Selangor Bhd (PNSB) spent almost RM1m on a Dec 2004 Eurodisney trip for then Selangor menteri besar Datuk Seri Dr Mohd Khir Toyo, his wife, their three children AND maid;
2) Khir must have hankered for the real thing after seeing the European copy, so off he went to Disneyland in Orlando, Florida, in Jan 2008, just 2 months before historic March 8. Again, his wife, their three children and maid went along. Cost – about RM650,000 for their entire US jaunt.

PNSB CEO Datin Khairiyah Abu Hassan told the Committee that the trips were in preparation for setting up an 8 hectare theme park in Bagan Lalang. A very flimsy reason indeed which collapsed under further questioning when it transpired that Khir and entourage visited Disney as ordinary public guests, there were no meetings with Disney senior executives or technical personnel and no reports were submitted after the trips!

But where is the public outrage, and where is the disciplinary action by UMNO? The very senior UMNO politician has not denied spending RM1.7m of public money on a private family jaunt. RM1.7m is 68 low-cost houses; it can keep nearly 300 families out of hard-core poverty for a year. And that RM1.7m is just one of numerous other infractions. If UMNO is serious about reform, it needs to send a clear message. Abuse of power will not be tolerated. Transgressors will be expelled.

It doesn’t seem to be happening.

Also, what about the other Barisan Nasional coalition members? Silence implies consent, or at the very least, acquiescence.

Ask what politics can do for you and your family, not what you can do for the people sounds like an appropriate BN slogan.

Wednesday, April 1, 2009

EPF – please exercise better governance

Shareholders of MMC Corporation Berhad (MMC) recently approved its proposal to acquire Senai Airport Terminal Services Sdn Bhd (SATS). MMC will pay RM1,700,000,000 CASH to parties related to its substantial shareholder. This deal had attracted substantial criticism from the start. Here are some facts and figures from a very unhappy fund manager with a large chunk of retirement money under EPF’s stewardship:

1) SATS’ main asset is Senai Airport and 2,718 acres of land held under Enigma Harmoni Sdn Bhd (EHSB).
2) The airport operations, which have made losses for the past 5 years, are being bought for RM580m CASH, based on discounted cash flow. Of course, I agree that discounted cash flow is a relevant metric, but the RM420-620m discounted cash flow valuation by Ernst & Young (EY) beggars belief:
a. The airport operations have been loss-making for the past five years. To arrive at its very high discounted cash flow valuation, EY makes some heroic assumptions, including forecasting passenger traffic growth more than 30 years away – up to 2053!
b. By that time, it assumes Senai Airport will handle almost 22 flights per hour, or one flight every 3 minutes and 21m passengers! Do you consider that achievable?
3) MMC is paying RM1.12bn CASH for 2,718 acres of land valued at RM2.0-2.2bn by valuers Knight Frank Ooi & Zaharin Sdn Bhd and IPC Island Property Consultants Sdn Bhd (IPC). A bargain? Hmmm … For a start, consider that EHSB itself acquired the land for just RM332m in December 2007.
a. Now, barely two years later, Knight Frank and IPC say the land value has gone up 6-7x! Again, discounted cash flow (in the guise of potential development value) is brought in to justify the valuation.
b. Note that SATS, as of June 2008, had already booked in a RM264m revaluation surplus, and its total net book value (including the airport) was RM185m. The assumptions Knight Frank and IPC used to come up with such a massive gain over SATS previous valuation is a very good question.
c. Using this RM2.0-2.2bn valuation, MMC claims the land is being bought at 0.83-0.95x net asset value. This is utter rubbish. The standard method when evaluating listed companies is based on the net asset value of the land bank as it is today, not on prospective profits from the future development of that landbank.
d. Using SATS own RM185m book value, MMC is paying 9x the book value based on normal valuation methodology. Over on Bursa Malaysia, the listed companies are in fact trading at 0.4-1.6x book. MMC is paying well over the range.
4) Finally, MMC is advancing RM417m to EHSB to repay advances made by its outgoing shareholders. No mention here is made of when and how MMC will get back that RM417m, nor the interest rate that MMC is charging. Is MMC offering an interest-free loan?

EPF owns about 7% of MMC, and while EPF has not disclosed whether it voted for or against the deal, I also note it has not taken a public stance either way. In the meantime, MMC’s share price tanked as investors hated the deal. Its share price fell 61 sen on 5 Aug 2008 when the deal was first announced, wiping out RM2.6bn of market capitalization in one day. Since then, the share price has collapsed further to about RM1.40, wiping out RM4.05bn of market capitalization – our EPFs share of that loss is RM0.3bn! True, markets overall have fallen – the KLCI itself was down 26% in that period, but MMC’s share price collapsed by nearly half (49%)!

Let’s see what happens with the new, incoming CIO (Chief Investment Officer), now that no-nonsense Johari Muid has been moved to other duties. Dare we hope for a more activist EPF that will protect our retirement money?