Short position

by **Cals** Sat 09 Jul 2016, 18:46

Saturday, 9 July 2016

Short position

Made in China

CHINA-MADE products have long been associated with their cheap prices and questionable quality.
Even today, this perception persists. But China has made progress in improving the quality of its products and services. To begin with, many big western brand names are already making some of their high-end products in China. In fact, many top brands are now also owned by Chinese parties, who have also created their own top brands such as Huawei. But quality issues seem to still linger.
Recently, Singapore shipped 26 defective China-made metro trains back to their manufacturer for repair after discovering cracks in the structure. The trains were supplied by CSR Qingdao Sifang Locomotive, a subsidiary of China’s main state-owned rolling stock company CRRC. The Singapore public transit operator SMRT Corp Ltd has said that the repairs are due to be completed by 2019. China’s rail companies have been pushing hard to win contracts the world over and have some major wins in Singapore, the United States and Hong Kong.
In the Malaysian rail scene, a number of deals have been struck with Chinese firms in the last few years, including the purchase of rolling stock for an intercity passenger service. Notably, the Land Public Transport Commission (SPAD) said last year that it will not compromise when it comes to assessing the reliability, safety and comfort of the 10 Electric Train Services (ETS) trainsets bought from China. SPAD said that after the first Chinese unit, codenamed ETS201, failed the compulsory “fault-free running” test when it was first tested last June. The big Chinese rail play, though, could be in the form of the ambitious Kuala Lumpur-Singapore High-Speed Rail (HSR) project. With a Chinese firm, namely, state-owned China Railway Construction Corp Ltd, now having a stake in 1Malaysia Development Bhd’s Bandar Malaysia, which is also the site that will host terminals for the HSR project, China is seen as the frontrunner in the race for the RM70bil HSR project. Quality control should be the top priority when assessing the suitability of firms bidding for such rail projects.
Where the foreign funds are going
IT is hard to read the sentiments of foreign funds coming into the stock market based on the outflows and inflows.
For the first half of this year, the outflow was reduced to RM48.6mil only in contrast to RM19.5bil last year and RM6.5bil in 2014.
According to analysts, the drying up of foreign outflows is a sign that the selling is almost done. And the current market valuation is a reflection of the true value of Bursa Malaysia.
Normally, when foreign funds stop selling, it is a sign of the market revving up. But this may not be the case this time.
One reason is that the economy has not picked up pace. More economists are predicting that the Malaysian economy will chart a growth of 4% this year, which is at the lower end of the range that had been forecast earlier this year.
Earnings of companies were generally bad in the last quarter and it is not likely to see much improvement in the third quarter. Commodity prices are coiling back, with oil and crude palm oil futures coming down.
The only bright spark in the economy is the construction sector, which is poised to benefit from the Government spending on infrastructure such as the second mass rapid transit project and the extension of the Pan-Borneo Highway into Sabah.
But foreign portfolio funds generally tend not to put too much money into construction stocks because of their “lumpy” earnings. The foreign favourites are banks and multinational companies (MNCs) with exposure to the consumer sector. But the banking sector still has some downside, while the valuation of MNCs is still high if compared to the region.
What is left are the fixed-income instruments such as bonds and Treasury papers issued by the Government carrying a handsome yield of more than 3.5%.
In a world where funds are in search of yields, Malaysian securities are one area that would continue to attract portfolio funds. So, the reduced outflow of foreign portfolio funds is probably because more money is coming into the fixed-income market and not into equities.
Finding shelter
ASIA File Corp Bhd (AFC) is seen as a steady company.
Making files and folders, the bread-and-butter operations of the company have over the years been rewarding to shareholders, who have been rewarded with not only an appreciation in the value of their shares over the years, but also in the form of high dividends.
The straightforward nature of the business is easy to digest and has led to expansion over the years.
But with its business expanding to Europe, the company which saw opportunities when it undertook the acquisition of companies there, must be feeling a little bit of heat as the euro gets rattled after the Brexit vote.
According to a report, Europe contributes about 60% of AFC’s revenue and the weak euro last year was blamed for a decline in the company’s financial performance for its year ended March 2015. To mitigate the risks and bolster earnings, what the company has done is to diversify. It has not made new acquisitions of businesses elsewhere, but has invested a big chunk of its cash into an investment-linked product.
In a filing, AFC announced that it has invested RM35mil of its cash in just over a month into an investment-linked product that has shares of some of China’s largest companies as the underlying instrument. As at March 31, 2016, AFC had RM84.6mil invested in what it classifies as “available-for-sale financial assets” and cash and its equivalent of RM75.6mil.
“The investment is part of AFC’s core strategy to maximise return on assets held by the group, taking into consideration the potential return and level of risk associated with the investment,” it said in an announcement yesterday after announcing that it had invested a further RM10mil into the product.
“As the investment is entered into with a licensed investment bank and the underlying shares are in relation to reputable international companies with proven track records, the board of directors is of the view that the investment risk is minimal,” it added.
AFC makes no mention of the potential returns it stands to make from its new investment, only saying that the “investment pays a regular coupon and can potentially be redeemed early or redeemed in shares rather than cash at maturity, depending on the performance of the underlying shares”.
The notion of investing a company’s money into financial instruments or shares is not the norm. Other listed companies have done so but it is not a widespread trend by companies listed on Bursa Malaysia. The risks are there and the performance of those instruments will be watched by shareholders of the company.