In this briefing:
- The Week that Was in [email protected] – Rent Seeking, Poultry Plays, and Lippo Group Restructuring
- ICICI Bank Internal Memo: Explains the Credit Appraisal Fiascos at Select Private Banks
- Indonesia: The Rent Seeker
- Green Shoots, Rotten Roots?
- Bank Negara Has No More Excuses to Avoid the Long-Delayed Rate Cut, Unlocking Value
1. The Week that Was in [email protected] – Rent Seeking, Poultry Plays, and Lippo Group Restructuring
This week’s offering of Insights across [email protected] is filled with another eclectic mix of differentiated, substantive and actionable insights from across South East Asia and includes macro, top-down and thematic pieces, as well as actionable equity bottom-up pieces. Please find a brief summary below, with a fuller write up in the detailed section.
This week’s highlights include comments from CrossASEAN Economist Prasenjit K. Basu on the Malaysian economy, Dr. Jim Walkeron the post-election outlook for Indonesia, as well as Equity Bottom-Up Insights on from Angus Mackintosh on Nippon Indosari Corpindo (ROTI IJ), Nicolas Van Broekhoven on Procurri Corporation (PROC SP), as well as three insights from Travis Lundy on theBank Danamon Indonesia (BDMN IJ)deal and a interesting trade idea from Jessica Irene on the Indonesian Poultry Sector.
In Bank Negara Has No More Excuses to Avoid the Long-Delayed Rate Cut, Unlocking Value, CrossASEAN Economist Prasenjit K. Basu revisits the prospects for the Malaysian Economy, where he sees a rate cut in the offing.
In Prabowo Enlists Clerics / Police Brace / Moving Jakarta / Scandals Complicate Reshuffle / FDI Gains, Kevin O’Rourke writes on the most important political and economic developments over the past week in Indonesia.
Equity Bottom-Up Insights
In Nippon Indosari Corpindo (ROTI IJ) – A Baker’s Dozen, CrossASEAN Insight Provider Angus Mackintosh revisits Indonesia’s largest breadmaker after a meeting with management in Jakarta.
In AGM Procurri + 1Q19 Results: Growth Phase Ahead as Novo Tellus Joins Board; Cheap at 3.8x EV/EBITDA, Nicolas Van Broekhoven reports back after attending the AGM for Procurri Corporation (PROC SP) in Singapore and continues to see significant upside.
In Danamon Deal Done: Index Selling and MUFG Selldown To Come, Travis Lundy assesses the upcoming issues with Bank Danamon Indonesia (BDMN IJ) following the completion of the transaction with MUFG.
In a follow-up insight, Danomon Down: Interesting Times, Travis Lundy revisits Bank Danamon Indonesia (BDMN IJ) following the collapse in the share price and suggests that value is starting to appear.
He goes on to discuss some very confusing trading anomalies created by a surprise announcement from MSCI in Danamon Even Downer: MSCI Rule Change Makes For Interestinger Times.
In Lafarge Malaysia Sold to YTL – Mandatory Offer Ensues, Travis Lundy takes a close look at the recent announcement that Lafarge Malaysia and Lafarge’s stake in Holcim Singapore will be sold to Ytl Corp Bhd (YTL MK).
Sector and Thematic Insights
In IPO Stalker: Osotspa’s First Public Meeting in a Century, Athaporn Arayasantiparb, CFA circles back having attended the shareholder meetings of recently listed Thai energy drinks leader Osotspa Co Ltd (OSP TB) and Wave Entertainment (WAVE TB), a subsidiary of Bec World Public (BEC TB).
In Singapore REIT – Let the Equity Fundraising Party Begin, Anni Kum zeros in on the Singapore REIT sector and highlights where she sees the most likelihood of fundraising to occur.
In April SG Buy Back Consideration Led by OCBC, Keppel REIT & Hong Fok, Geoff Howie highlights companies that have bought back shares in April.
An internal memo of an anonymous former senior official of ICICI Bank’s risk management department, publicised by the Indian Express, provides a damning indictment of the credit appraisal and monitoring processes at the bank. It reveals how basic banking processes were violated, and public and shareholder funds frittered away by reckless and greedy bankers. While government banks are blamed for indulging in ‘telephone banking’ (acting on instructions from politicians and bureaucrats to favour particular industrialists), the above memo completely exposes how a prominent private sector bank, manned by professionals, was conducting banking.
Unfortunately, such conduct may not be restricted to ICICI Bank alone. Rather, it may also explain how other banks such as Axis Bank, Yes Bank and Indusind Bank have taken high-risk corporate exposures. While the new managements at ICICI Bank, Axis and Yes Bank are restructuring their processes to avoid a repeat of their mistakes, Indusind Bank seems to have considerable faith in their existing CEO, who is responsible for some large ticket corporate loans gone sour. The broom which is currently in vigorous use at ICICI, Axis and Yes banks has yet to be taken out of the closet at Indusind Bank.
Indonesia’s election results will be confirmed by 22 May, with Joko Widodo leading the official vote count. Although President Widodo is considered slightly less of an economic nationalist than his challenger, Prabowo Subianto, both candidates have made it a pillar in their economic platforms. With five years of economic nationalism during Mr. Widodo’s last term, we expect more of the same during his second.
Just when you think the global economy is starting to spring green shoots, the skies have darkened and some of those shoots may be turning brown. In the U.S., ISM Manufacturing fell and missed expectations.
In China, both the official PMI, which is tilted toward larger SOEs, and the Cain PMI, which measures SMEs, fell and missed expectations. These readings have cast doubt on the longevity of Beijing’s stimulus-driven rebound.
On the other hand, the Non-Farm Payroll report came in ahead of expectations. In Europe, the PMIs for peripheral countries like Italy and Greece are outperforming Germany. In addition, exports from Korea and Taiwan, which are highly globally sensitive, have rebounded, indicating recovery.
How do investors interpret these cross-currents?
We concur with Rob Hanna of Quantifiable Edges, who made an insightful comment that “Tops Wobble Before Falling Over”. Our review of the market’s technical conditions reveals the market is not wobbling yet.
Any market wobble would be seen in NASDAQ and semiconductor stocks. Until Technology and NASDAQ leadership starts to falter, and if their leadership is not replaced by the reflation-sensitive cyclical groups, we remain bullish on equities.
With its labour force estimated to be growing 2.6% annually — and likely augmented by more foreign workers — Malaysia’s real GDP growth rate of 4.7% in 2018 was disappointing, especially given the strong 14% export growth during the year. The failure of Bank Negara Malaysia (BNM) to cut the OPR (official policy rate) was a major factor hindering domestic demand (particularly fixed investment spending). The global semiconductor cycle began to turn down by November 2018, and Malaysia’s exports have consequently contracted in 1Q 2019.
With the abolition of the GST soon after the PH government took office, CPI inflation has been consistently below 1% YoY since June 2018, and averaged -0.3% YoY in 1Q 2019. In the face of deflation, Malaysia’s real interest rate of +3.5% (the highest in more than a decade) has deterred real investment spending (which grew just 1.3% YoY in 2H 2018). With the fiscal deficit contained at 3.7% of GDP in 2018, and the current account surplus at a comfortable 2.4% of GDP in 2018 — and likely to be above 4.5% of GDP in 1Q 2019 — we expect Bank Negara to cut the OPR by 25bp on 7th May, and to cut it further by at least another 25bp in 3Q 2019.
The rate cut should spur a modest investment-led recovery to over 5% real GDP growth in 2H 2019 (after a likely moderation to 4.4% YoY growth in 1Q 2019), and should also provide a fillip to the stock-market, which has seen a big sell-off in the large-caps over the past year (making the KL index one of the worst-performing stock-markets in the world in the year-to-date and over the past 12 months). Lower interest rates will particularly boost the heavily sold-down GLCs (from both the Khazanah and PNB stables, whose stock prices have fallen as the former in particular has been gradually reducing its stakes, for instance in Tenaga last month). In light of the rate cuts to come, we are Bullish Malaysia, and would in particular recommend the large-cap GLCs, led by Maybank (with an attractive dividend yield of 6.2%) and TNB (with a dividend yield of 4.3%). The latter does face some headwinds from regulatory uncertainty (as its near-monopoly on transmission and distribution could be eroded over time), but its stock price should have scant further downside after the recent sell-off, and its bond-like characteristics make it attractive in a falling interest-rate environment.