Selangor Water Assets -Towards Resolution?

After close to  two-year deadlock, there appears that the proposed consolidation of water assets in Selangor could  finally be concluded soon, writes Tee Lin Say in the online-STAR.

The main question now is, who will control the special purpose vehicle (SPV) that will oversee the operations and maintenance (O&M) portion of the state’s water industry.

Recently, there have been strong indications that all the parties are close to agreeing on pricing, and are now in the midst of ironing out the O&M issues. Sources believe that the Selangor government and Pengurusan Aset Air Bhd (PAAB) will jointly pay for the acquisition of the state’s water assets and liabilities at over one-time book value.

The Federal Government’s share of the acquisition price will approximately be equivalent to one-time book value of the assets, while the state government will pay the rest. This could mean that PAAB will own the assets, while the Selangor government will end up with a stake in the management of the assets.

Another burning question is whether the SPV will have private sector participation. As it stands, the state’s water assets are parked under four concessionaires – Syarikat Bekalan Air Selangor Sdn Bhd (Syabas), Syarikat Pengeluar Air Selangor Sdn Bhd (Splash), Puncak Niaga (M) Sdn Bhd and Konsortium Abbas Sdn Bhd (Abass).

Currently, the state government has considerable clout over Selangor’s water supply chain via its listed investment arm, Kumpulan Perangsang Selangor Bhd (KPS), which owns 55% of Konsortium Abbas and 30% of Splash. It also owns a 30% stake in Syabas, the state’s water distribution company.

Says one observer: “While the state shall definitely lead the SPV, it only has Konsortium Abass, and hence will not be able to go full-scale. Perhaps, it could outsource some parts to Gamuda Water Sdn Bhd or Sungai Harmoni Sdn Bhd.” Gamuda Water belongs to Gamuda, while Sungai Harmoni is owned by Taliworks Corp Bhd.

Another observer disagrees, pointing out that it will not cost much for the state to set up an O&M unit.

“Why would they want to share the profits? After all, it is the O&M portion which has the attractive margins. Since they are already buying over the assets of the concessions, maybe they can just buy over some of the O&M units, for instance Gamuda Water or Sungai Harmoni,” he conjectures.

An AmResearch analyst says these latest development implies that Splash’ offer in March for the consolidation of Selangor’s water industry at RM10.75bil may have prodded both the Federal and state governments to expedite consolidation talks.

“More importantly, it validates our earlier conviction that the Selangor government remains very much in contention to lead the consolidation of water assets within the state,” adds the analyst.

Gamuda launched the takeover offer via Splash, its 40% associate. That proposal was shot down as it was seen to be not in line with the regulatory framework for the industry.

According to the AmResearch analyst, based on the Splash offer, the implied valuation for Puncak Niaga and KPS is estimated at close to RM4.50 per share and RM1.88 per share respectively.

“We caution that nothing has been finalised as yet. Any deal would not be consummated until the issue of control over the SPV has been resolved. More importantly, we hold the view that the Selangor government is unlikely to consent to any purchase of Puncak’s water assets unless it secures control over water distribution rights in Selangor,” he adds. Owned by the Ministry of Finance, PAAB was set up in May 2006 to restructure and consolidate the country’s fragmented water sector, with the intent of making the state concessionaires asset-light.

The state and federal governments had been in a stalemate over the last two years over who should consolidate Selangor’s water assets and control over the supply and distribution.

In June 2009, the state government made an offer of RM9.22bil, or one-time book value, for the water-related equity, assets and liabilities of the four water companies. However, the parties could not come to an agreement. Gamuda then stepped in with its offer, which may have helped bring the standoff closer to an end.

Will KPS shareholders still have to wait for Godot?

China Funds: Destination Malaysia

China’s banking regulator has recognised Malaysia as an approved investment destination, paving the way for an inflow of Chinese funds into this country, the Securities Commission (SC) said.

The SC said Malaysia had now become an approved investment destination under China’s Qualified Domestic Institutional Investor (QDII) scheme and thereby joined the ranks of 10 other such recognised jurisdictions.

They are Australia, Canada, Hong Kong, Germany, Japan, Luxembourg, Singapore, South Korea, the United Kingdom and the United States.

SC chairman Tan Sri Zarinah Anwar and China Banking Regulatory Commission (CBRC) chairman Liu Mingkang signed letters of exchange in Beijing yesterday to formalise the recognition. CBRC is China’s banking regulator.

Zarinah said in a media statement: “The QDII programme presents a major opportunity for Malaysian capital market intermediaries to gain access to the Chinese market. They should therefore make full use of the opportunity to broaden their reach to this new pool of investors.”

The programme enables Chinese nationals to invest in overseas markets through approved institutions.
The China Securities Regulatory Commission (CSRC) had also confirmed that based on an existing memorandum of understanding with the SC, Malaysia is an approved investment destination under the QDII programme for Chinese fund management and securities companies.

CSRC is China’s capital market regulator.

“With the recognition, approved institutions regulated by CBRC and CSRC may now invest funds pooled from their clients into Malaysian securities, including equities, fixed-income products and collective investment schemes approved by SC.

“Such Chinese institutions may also engage the services of licensed Malaysian fund managers to assist with QDII investment matters,” the SC said.

Bursa Malaysia Bhd said the QDII recognition augured well for the exchange.

“It is aligned with our other initiatives such as improving our country classification for the capital market. We also see this benefiting us in terms of enhancing our attraction as a capital-raising platform for foreign companies, particularly Chinese companies.”

Bursa noted that Malaysia was the second Asean country to be recognised as an authorised market for Chinese investors.

Inter-Pacific Asset Management Sdn Bhd chief executive officer Robbin Khoo said this development paved the way for joint ventures and collaborations between Malaysian fund asset managers and their Chinese counterparts.

“Our relationships can now be reciprocal. Market players can now build relationships where each can be directly involved in the other’s market,” he said.

Khoo added that with Malaysia having promoted itself well as an international Islamic finance hub, there should be keen interest from the part of Chinese investors looking for exposure into syariah-compliant investment products.

It is understood that the Chinese government had mandated the QDII programme to get their institutional and other investors to diversify their funds into different asset classes and different parts of the globe.

“Commodity-based securities or derivatives could be a target investment by China, given its increasing bilateral trades with Malaysia,” pointed out a fund manager familiar with the programme.

It is still unclear how much funds will actually flow into the Malaysian market as a result of this development.
It is understood that Chinese authorities have approved its banks and securities-related firms under the QDII scheme to invest up to US$47.7bil so far. However, it is unclear how much of this has been invested in approved markets.

Canada was the last recipient to gain the QDII status in April. Canadian Finance Minister Jim Flaherty had then said in a statement that the recognition would give Canadian financial markets access to up to US$8bil in investment capital.

1Malaysia Sukuk Under Subscribed!

Well, what do you know.

First, the 1Amanah Saham Malaysia went abegging. Now, 1Malaysia Sukuk suffers the same fate.

I wonder how will PM Najib react to this?

Let us read this release from the Ministry of Finance.

" Take up of the 1Malaysia sukuk issued by the Ministry of Finance fell short as only RM2.4 billion out of the RM3 billion sukuk was subscribed as of June 21.

Last year’s Sukuk Simpanan Rakyat, also issued by the Ministry of Finance, was fully subscribed after nine days of sale and the initial amount of RM2.5 billion was upsized to RM5 billion by using the allocation of the second series.

Both sukuks offered a five per cent return per annum for three years to investors.

The Ministry of Finance said today that Sukuk 1Malaysia 2010 amounting to RM2.4 billion was allocated to 74,781 investors who will be notified by their agent banks.

It added that beginning 22 June, investors can sell and purchase the sukuk at agent banks.

The purchase of the sukuk is based on a first-come first-served basis, with no maximum limit, subject to the availability of the sukuk sold by existing sukukholders. The minimum sale or purchase is RM100 and transactions are in multiples of RM100. An administrative cost of 0.1 per cent of the nominal purchase value is payable to the agent banks.

The selling and buying prices are calculated based on principal at par plus accrued profit.

Information on the availability of Sukuk 1Malaysia 2010 and daily prices can be obtained from www.bondinfo.bnm.gov.my or checking with agent banks.

A Re-look at Genting Berhad

Let us read what a blogger has to say about what is happening at RWS and Universal Studios Theme Park at Sentosa Island, Singapore.

" A peek at RWS-Full house!

Our attempt to visit Universal Studios was futile as tickets were sold out during weekends and on the day of our visit. Park capacity has increased to about 8,000 to 10,000 guests (from 5,000 visitors in May; full capacity: 30,000) and operating hours was extended to 7pm (from 6pm) in view of the school holidays. Hotels were seeing more than 80% occupancy, with weekends fully booked. While the casino was quiet during our visit on Monday morning, we understood that gaming operations have stabilized post-MBS opening and are seeing good visitations backed by strong loyalty from Genting Group’s Worldcard members.

A total different picture was presented during our evening peak hour visit, with table crowds averaging 3 rows deep.

Positive stance on Singapore gaming. 

Even with MBS’ opening in Apr10, we believe GENS will likely report another strong quarter backed by healthy visitations during the peak holiday season (May-Jul10). While Genting Singapore offers the best leverage into Singapore’s duopolistic market, a cheaper entry will be via Genting Berhad (Buy/ TP: RM9.00) which is trading at half of GENS’ valuation at 7.4x 2011 EV/EBITDA, along with resilient base earnings from its other operations ie Malaysian gaming, plantation and power. "

My Observation:

Genting Berhad's price has broken the RM7.00 psychological barrier and moving slowly upwards trying to sustain gains collected along the way.  Bearing no unforeseen drastic market movements, Genting Berhad should move beyond RM7.60 by this Friday 25 June 2010.

Accidents or otherwise?

Throughout history, humans have always been prone to accidents.

An accident is defined as "an undesirable or unfortunate happening that occurs unintentionally and usually results in harm, injury, damage, or loss".

Let us look at the 10 ten most expensive accidents in the history of the world as measured in USD.

The nett loss includes property damage and expenses incurred related to the accident such as cleanup and industry losses. Many of these accidents involve casualties which obviously cannot be measured in dollar terms. Each life lost is priceless and is not factored into the equation.

However, it must be pointed out that deliberate actions such as war or terrorism and natural disasters do not qualify as accidents and therefore are precluded here.

# 10. Titanic - $150 Million

The sinking of the Titanic is possibly the most famous accident in the world. But it barely makes our list of top 10 most expensive. On April 15, 1912, the Titanic sank on its maiden voyage and was considered to be the most luxurious ocean liner ever built. Over 1,500 people lost their lives when the ship ran into an iceberg and sunk in frigid waters. The ship cost $7 million to build ($150 million in today ' s dollars).


# 9. Tanker Truck vs Bridge - $358 Million

On August 26, 2004, a car collided with a tanker truck containing 32,000 liters of fuel on the Wiehltal Bridge in Germany . The tanker crashed through the guardrail and fell 90 feet off the A4 Autobahn resulting in a huge explosion and fire which destroyed the load-bearing ability of the bridge. Temporary repairs cost $40 million and the cost to replace the bridge is estimated at $318 Million.

# 8. MetroLink Crash - $500 Million

On September 12, 2008, in what was one of the worst train crashes in California history, 25 people were killed when a Metrolink commuter train crashed head-on into a Union Pacific freight train in Los Angeles . It is thought that the Metrolink train may have run through a red signal while the conductor was busy text messaging. Wrongful death lawsuits are expected to cause $500 million in losses for Metrolink.

# 7. B-2 Bomber Crash - $1.4 Billion

Here we have our first billion dollar accident (and we ' re only #7 on the list). This B-2 stealth bomber crashed shortly after taking off from an air base in Guam on February 23, 2008. Investigators blamed distorted data in the flight control computers caused by moisture in the system. This resulted in the aircraft making a sudden nose-up move which made the B-2 stall and crash. This was 1 of only 21 ever built and was the most expensive aviation accident in history. Both pilots were able to eject to safety.

# 6. Exxon Valdez - $2.5 Billion

The Exxon Valdez oil spill was not a large one in relation to the world ' s biggest oil spills, but it was a costly one due to the remote location of Prince William Sound (accessible only by helicopter and boat). On March 24, 1989, 10.8 million gallons of oil was spilled when the ship ' s master, Joseph Hazelwood, left the controls and the ship crashed into a Reef. The cleanup cost Exxon $2.5 billion.

# 5. Piper Alpha Oil Rig - $3.4 Billion

The world ' s worst off-shore oil disaster. At one time, it was the world ' s single largest oil producer, spewing out 317,000 barrels of oil per day. On July 6, 1988, as part of routine maintenance, technicians removed and checked safety valves which were essential in preventing dangerous build-up of liquid gas. There were 100 identical safety valves which were checked. Unfortunately, the technicians made a mistake and forgot to replace one of them. At 10 PM that same night, a technician pressed a start button for the liquid gas pumps and the world ' s most expensive oil rig accident was set in motion.

Within 2 hours, the 300 foot platform was engulfed in flames. It eventually collapsed, killing 167 workers and resulting in $3.4 Billion in damages.

# 4. Challenger Explosion - $5.5 Billion

The Space Shuttle Challenger was destroyed 73 seconds after takeoff due on January 28, 1986 due to a faulty O-ring. It failed to seal one of the joints, allowing pressurized gas to reach the outside. This in turn caused the external tank to dump its payload of liquid hydrogen causing a massive explosion. The cost of replacing the Space Shuttle was $2 billion in 1986 ($4.5 billion in today ' s dollars). The cost of investigation, problem correction, and replacement of lost equipment cost $450 million from 1986-1987 ($1 Billion in today ' s dollars).

# 3. Prestige Oil Spill - $12 Billion

On November 13, 2002, the Prestige oil tanker was carrying 77,000 tons of heavy fuel oil when one of its twelve tanks burst during a storm off Galicia , Spain . Fearing that the ship would sink, the captain called for help from Spanish rescue workers, expecting them to take the ship into harbour. However, pressure from local authorities forced the captain to steer the ship away from the coast. The captain tried to get help from the French and Portuguese authorities, but they too ordered the ship away from their shores. The storm eventually took its toll on the ship resulting in the tanker splitting in half and releasing 20 million gallons oil into the sea.

According to a report by the Pontevedra Economist Board, the total cleanup cost $12 billion.

# 2. Space Shuttle Columbia - $13 Billion

The Space Shuttle Columbia was the first space worthy shuttle in NASA ' s orbital fleet. It was destroyed during re-entry over Texas on February 1, 2003 after a hole was punctured in one of the wings during launch 16 days earlier. The original cost of the shuttle was $2 Billion in 1978. That comes out to $6.3 Billion in today ' s dollars. $500 million was spent on the investigation, making it the costliest aircraft accident investigation in history. The search and recovery of debris cost $300 million.

In the end, the total cost of the accident (not including replacement of the shuttle) came out to $13 Billion according to the American Institute of Aeronautics and Astronautics.

# 1. Chernobyl - $200 Billion

On April 26, 1986, the world witnessed the costliest accident in history. The Chernobyl disaster has been called the biggest socio-economic catastrophe in peacetime history. 50% of the area of Ukraine is in some way contaminated. Over 200,000 people had to be evacuated and resettled while 1.7 million people were directly affected by the disaster. The death toll attributed to Chernobyl , including people who died from cancer years later, is estimated at 125,000. The total costs including cleanup, resettlement, and compensation to victims has been estimated to be roughly $200 Billion. The cost of a new steel shelter for the Chernobyl nuclear plant will cost $2 billion alone. The accident was officially attributed to power plant operators who violated plant procedures and were ignorant of the safety requirements needed.

Well, in a phrase, these accidents are "definitely man-made".

Yuan Set to Float

Yes, you read correctly. China is allowing the yuan to float.

China will gradually make the yuan’s exchange rate more flexible, the central bank said today, indicating that it was ready to break a 23-month-old dollar peg that has come under intense fire from abroad.

The People’s Bank of China all but ruled out the one-off revaluation or major appreciation hoped for by critics, saying there was “no basis for big fluctuations or changes” in the exchange rate.

However, it was clear that China intended its announcement — published in English at around the same time as Chinese, a departure from usual practice — to mark the end of the yuan’s de facto peg to the dollar, which it had defended as a “special policy” to protect its economy from the global financial crisis.

Whether the announcement will be enough to placate critics, especially US lawmakers who say an undervalued currency gives China an unfair trade advantage, remains to be seen.

“The global economy is gradually recovering. The recovery and upturn of the Chinese economy has become more solid with enhanced economic stability,” the Chinese central bank said in a statement on its website.

“It is desirable to proceed further with reform of RMB exchange rate regime and increase the RMB exchange rate flexibility,” it said. The yuan is also known as the renminbi, or RMB.

In practice, this is likely to mean that the central bank will use its system of setting daily reference rates for the yuan to guide the currency back to a path of gradual appreciation against the dollar, which it followed for three years until mid-2008.

Initial movements will probably be small, but cumulatively, it could amount to several percentage points over the next few months.

International complaints about China’s exchange rate policy had died down in recent months as the European sovereign debt crisis became the dominant concern, but in recent days pressure had begun to mount again.

A group of US lawmakers, led by Senator Charles Schumer, were pushing for a bill that would allow the United States to use countervailing duties against countries with “fundamentally misaligned” exchange rates.

And the yuan was threatening to be the elephant in the room at a G20 summit in Canada on June 26 and 27. US President Barack Obama said that it was essential to global economic vitality that countries adopt market-oriented exchange rates, but a series of Chinese officials said the yuan was China’s sovereign concern and should not be discussed in international circles.

China has held the yuan at roughly 6.83 to the dollar since July 2008 in an attempt to insulate the fastest-growing major economy from the ravages of the global financial crisis.

Well, let us hope that this new development will augur well for all.

Banks: On the War wagon!

Get globalised!

No more hiding behind affirmative policies!

Welcome to the real world.

Let us read this report.

 The doors are well flung open now for competition when BNM gave out licences to 5 foreign banks to start operations in Malaysia soon!

So, you better watch out or else your market share will dwindled to your own behest!

" Malaysian banks can expect more intense competition now that there are five more commercial foreign rivals.

This means that local lenders will have to improve their products and service level. Also, they will have to figure out how to retain their employees as the entry of new players could result in staff pinching.

RHB Research Institute head of research Lim Chee Sing said that while local banks are used to competition, they have to be wary of foreign banks which will slowly but surely intensify the heat. [Boil and bubble, Toil or face trouble!]

"It will take some time for them to fully enter into the competition, and it will arrive from various angles. Some of the local and foreign banks right now are already crossing in each other's path," says Lim.

On Thursday, Bank Negara Malaysia awarded commercial banking licences to five foreign banks, including two from Japan.

The five are France's BNP Paribas SA, Japan's Mizuho Corporate Bank and Sumitomo Mitsui Banking Corp, Indonesia's PT Bank Mandiri and the United Arab Emirates' (UAE) National Bank of Abu Dhabi.

This means that these lenders could do consumer banking, which is a growing market, as well as corporate banking, which involves lending to small and medium enterprises, among others.

Mercury Securities research analyst Edmund Tham said that local banks must buck up because foreign banks are good in certain areas, like cash management, for instance.

"Marketing people from the foreign banks will also be more dynamic because they can't operate from many branches like the local banks," he added.

Unlike local banks, which can open as many branches as they want, foreign commercial banks can only open eight.[ Never mind, they can work eight times as hard!]

Despite such limits, foreign banks are doing well. US lender Citibank has a big credit card business and was the market leader until recent years.

An analyst at TA Securities said the new banks would be strong in the corporate loan segment.

"But some Malaysian banks are responding to the challenge. Citibank, for example, was big on the credit card segment with the highest return on equity even though the bank only has a few branches.

"But now Malaysian banks are gnawing into their credit card market share. Local banks are also moving offshore to intensify their global presence, such as in Thailand, Singapore, China and other areas."

An investment banker at Kuwait Finance House said the new additions will be good for the banking landscape as there will be more options for customers.

"But local banks have to rise to the challenge as well by giving more flexible products, better rates and better customer service," he said.

Malaysia has over the years issued 19 licences for commercial banking, and three for Islamic banking, to foreign operators."

I think the field will get much more crowded in the coming years!