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NEW!

Daryl Guppy on tracking the Shanghai Index PG22

LIM YIN FOONG:

The UKs loss is Singapores gain PG15

Market takes swine u fears in its stride for now PG14

Pacic Shipping Trust weighs rate-cut demands
Corporate PG8

Cash-rich China Zaino ups factory capacity

Corporate PG9

China Hongxing holds cash for expansion

Corporate PG10

CapitaMall Trust goes for organic growth

Corporate PG11

Baker Tech eyes contracts for rig components from Brazilian oileld
Corporate PG12

Middle East a eld of opportunity for oil-related companies

Corporate PG13

Macau the better bet among Asian casinos

Investing Ideas PG20

Keppel Land; Allgreen Properties; Wheelock Properties; Fraser & Neave; Ho Bee Investment; Bukit Sembawang
Hot Stocks PG33

8 885002 090004

HUNTER

Value

In todays volatile market, is buy-and-hold value investing outdated? Not if youre Hugh Young, managing director of Aberdeen Asia, which is hitting its stride with US$30 billion in assets under management and growing. See our Personal Wealth pullout for the veterans take on why his conservative approach works and his strategy in the current bear market.

2 THEEDGE SINGAPORE
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China puts money into Taiwan

Last week, Taiwans stock index rose the most since 1991 and the currency rallied after the island allowed Chinese investments for the first time since a civil war ended six decades ago. Far EasTone Telecommunications Co, Taiwans third-largest phone company, surged by the 7% daily limit after China Mobile Ltd agreed to buy a 12% stake for NT$17.8 billion ($788.6 million). Taiwan Semiconductor Manufacturing Co and Cathay Financial Holding Co also advanced by the maximum allowed on speculation more Chinese companies will invest in the islands companies. This is a landmark deal. China Mobile will lead the way for other Chinese companies that have been waiting to invest in Taiwan but were hesitating, says CY Huang, vice-chairman of Polaris Securities in Taipei. This will open the floodgates for more Chinese investments into Taiwan. The Chinese government said last week it would end a ban on investments in the island on May 1 following an agreement to open cross-border operations for financialservices companies, expand direct flights and cooperate in fighting crime. Taiwans tourism bureau estimates 87,000 Chinese visited from the mainland in March, compared with 42,000 in February. Last Thursday, Taiwans Taiex index, the worlds third-best performer this year, climbed 363.27, or 6.5%, to 5,977.33, headed for the biggest gain since August 1991. Stocks in the island are subject to a 7% daily trading limit. Only three of the 602 stocks on the index fell, with all 28 industry groups advancing. Taiwans dollar rose 1.2% to NT$33.27 against the greenback, the biggest gain since Oct 30, according to Taipei Forex Inc. The currency is heading for a appreciation of 1.9% this month, following an advance of 3% last month. Ties between Taiwan and China have improved since President Ma Ying-jeou took office in May 2008 and dropped the pro-independence stance of his predecessor, Chen Shui-bian. The island has enjoyed self-rule since Chiang Kai-sheks Nationalists fled the mainland in 1949 after losing to Mao Zedongs Communists in a civil war. Far EasTone jumped 7% to NT$37.65, the most since Dec 17, 2001. China Mobile agreed to pay NT$40 a share, or 14% higher than Far EasTones closing price last Wednesday, for the stake in Taiwans thirdlargest phone company. For China Mobile, the investment in Far EasTone is probably politically motivated, says Bertram Lai, an analyst at CIMB Securities in Hong Kong. The number of mobilephone subscriptions in Taiwan exceeds its population of 23 million people. Taiwan is a saturated market and offers little growth, says Lai. Its a bit disappointing as China Mobile said before it was focused on emerging markets. There is a political agenda here. We will become more linked to Chinas economy that will be inevitable, says Albert King, who manages US$10 million ($14.8 million) as CEO at Prophet Capital Inc in Taipei. This will boost investors confidence and they would likely attract more long-term investment. Taiwans Taiex has climbed 30%

Quoteworthy
Bill Bergman, analyst with Morningstar Inc, on the expected tone at the AGM of Warren Buffetts company on May 2. Berkshire Hathaway had announced in February that its book value had dropped by about US$8 billion ($11.9 billion) from US$109.3 billion on Dec 31.

Berkshire shareholders arent used to a 40% decline, and were in a serious moment for our economic climate

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this year, the third best out of 90 global benchmarks tracked by Bloomberg, while its currency has strengthened from a sevenyear low reached in March. Taiwans improving China ties are spurring optimism the island will profit from increased trade, leading Goldman Sachs Group Inc to upgrade its growth forecast last week. Goldman Sachs boosted its 2010 growth forecast to 3.5% from 2.5%, economist Enoch Fung writes in a note. It will shrink 7% this year. Taiwans Financial Supervisory Commission last Wednesday announced it will begin accepting applications from Chinese institutional investors to buy securities in the island. China allowed its so-called qualified domestic institutional investors to invest more than US$42 billion overseas as of Sept 30, 2007. Theres a lot of news indicating mainland China is receptive to greater business ties under the current Taiwan administration, which is more friendly towards Beijing, says Sean Callow, a Sydney-based senior currency strategist at Westpac Banking. It makes me slightly less bearish on Taiwan. He expects the currency to weaken to NT$34.50 by the end of June. Taiwans fiveyear government bonds fell for a second

day. The yield on the 0.875% bond maturing January 2014 climbed three basis points to 1.1%. Its price fell 0.115, or NT$115 per NT$100,000 face amount, to 99.9889. A basis point is 0.01 percentage point. The Taiwan dollar is relatively stable, the central bank said last Wednesday, after the local currency strengthened the most in almost a month. It added that the South Korean won posted a bigger gain than the Taiwan dollar. Export orders, an indication of shipments in the next three months, dropped for the sixth time in March, declining 24% from a year ago. Taiwan is seeking to bolster ties with China amid a slowdown in the islands NT$12.7 trillion economy. The islands GDP may contract 2.97% this year, the government forecast in April, reversing its November estimate of 2.12% growth. Its a demonstration of the Chinese trying to use soft-power to integrate with Taiwan eventually, by directly investing in Taiwans high-tech industry and making Taiwan more dependent on China, says Andrew Yang, director of the Taipei-based Chinese Council for Advanced Policy Studies. Theres a certain amount of risk because how Taiwan will avoid Chinese influence and control in Taiwan remains to be seen. Bloomberg LP

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assembler controlled by Temasek Holdings, eliminated 600 workers and posted its second straight loss in 1Q as demand slumped. Net loss was US$51.1 million ($76.2 million) in the quarter ended March 31, compared with a profit of US$17.9 million a year earlier, the Singapore-based company says. Sales tumbled 48% to US$220.5 million. CEO Tan Lay Koon shut down STATS ChipPACs production lines over a longer period in 1Q and implemented mandatory vacations as demand for chips used in electronics from computers to televisions dived amid the global recession.
Osim International, the biggest maker of massage chairs in Asia, posted its first quarterly profit in more than a year. Net income was $3.2 million in 1Q2009, compared with a loss of $13.2 million previously despite a 16.9% fall in revenue to $96 million. The profit was the companys first since the quater ended Dec 31, 2007. This comes after the writedown of its 55% equity ownership in Brookstone to zero

last year. As such, Osim expects profit this year to be higher.

Keppel Corp, Singapores biggest offshore marine engineering company, is scheduled to open a US$40 million ($59.6 million) shipyard in western Kazakhstan in September, says Krymbek Kusherbayev, head of the central Asian countrys Mangistau regional administration. The TOO Keppel Kazakhstan shipyard, located in the port of Aktau, will serve companies producing oil on the Caspian Sea shelf, Kusherbayev told a cabinet meeting in the Kazakh capital Astana, according to a statement on the Kazakh governments website. Singapore Post, the citys biggest postal- service

customers can continue to rely on us as they did during the SARS outbreak. The company proposed a final dividend of 2.5 cents.
Noble Group says it will pursue an offer for

provider, said 4Q profit rose 2.5% to $35.3 million despite a 2.9% dip in sales to $115.6 million. Rental and property-related income surged 49.7% to $9.7 million. In light of the swine flu outbreak, CEO Wilson Tan says, We have activated our business contingency plans to ensure there is no disruption to service and our

Gloucester Coal after an Australian regulator ruled a separate merger proposal between Gloucester and Whitehaven Coal doesnt require shareholder approval. Noble, which controls almost 22% of Gloucester, will send out its bidders statement to Gloucester holders as soon as possible, according to an emailed statement from the Hong Kong-based commodity supplier. Noble on Feb 27 offered to buy the shares it doesnt own in Gloucester, to thwart the bid for control from Whitehaven. Australias Takeovers Panel had earlier revoked an initial decision requiring a meeting of Gloucester shareholders and allowed the companys independent directors to decide on the cash offer from Noble. Gloucester currently considers that the Whitehaven merger remains in the best interests of holders, the Sydney-based company says. E Compiled by Angeline Cheong

THEEDGE SINGAPORE | MAY 4, 2009 3

THE EDGE SINGAPORE

Wheelocks Lawrence: We dont need to do a rights issue

EDGEWISE

temporary occupation permit (TOP) in 2010. Scotts Square is 70% sold and scheduled for completion in 2011. We have cash coming in every day, Lawrence said. Meanwhile, construction on Orchard View at Angullia Park has started but Lawrence said there were no plans to launch, and Wheelock can afford to wait till 2010. Ardmore 3 will be the companys next high-end project in Ardmore Park and the company says it wont

even think about the project till 2011. Ive got holding power. Why give it away? Lawrence said. We dont need to sell things cheap. In fact, he is waiting for the market to fall further, much like other potential buyers, so that Wheelock can put its cash to use. We dont have enough landbank, he added. So, there is still one high-end developer left that can do a land hunt without stumping for E money from its shareholders.

The high-end developer that can

Much has been said about the high-end property market and how the recession has floored several developers. How about being on the other side of the fence, a property developer with little or no landbank? That would rule out SC Global Developments, Ho Bee Investment, Bukit Sembawang, GuocoLand, MCL Land and several small construction companies-turned-boutique developers such as Chip Eng Seng, which are all stuck with high-end properties. Even the likes of CapitaLand may need to write down the value of the Char Yong Gardens and Farrer Court sites. Analysts reckon prices are likely to be cut to a new benchmark low this year. Then, theres Wheelock Properties. Owned by the family of the late Y K Pao, the highend developer appears to have none of these problems and is emerging from the luxe-market drop relatively unscathed. We have $900 million in cash as at today, CEO David Lawrence told shareholders on April 27 at the companys AGM. He has already found a use for some of that money. About $400 million will be spent on property construction. As for the rest, some may be used to pay down debt, as banks have raised the cost of funds. Although in a net cash position, as at end-December 2008, Wheelock had $383 million in bank loans. We dont need to do a rights issue, Lawrence added, almost preempting the expected question from shareholders.

Wheelock Properties
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Since the start of the year, at least three property companies have gone to their shareholders for equity fund raising CapitaLand, Bukit Sembawang and Keppel Land. But not everything was plain-sailing for Wheelock at the AGM. The one thing that shareholders took issue with was its 16% stake in SC Global. It was a typical end of a bullrun investment, Lawrence explained. Wheelock also has a 20.02% share in Hotel Properties. I apologise that they havent done so well and I will make sure they make money, he assured shareholders. He reckoned that the investments should do better as the market comes back. Lawrence also acknowledged that the Hotel Properties investment is strategic, and there are synergies between some of its properties and Wheelocks. In the meantime, Ardmore II, which is 100% sold, has started to contribute. It receives its

BLOOMBERG

4 THEEDGE SINGAPORE

| MAY 4, 2009

ECONOMY WATCH

cash havent stopped companies such as music-player maker Creative Techingapore employers fired a nology Ltd from firing workers. Falling external demand has severely record number of workers last quarter as the nations deepest affected the manufacturing sector, the recession since independence report says. Employment declined as the in 1965 forced manufacturers economy continued to worsen. Singapore will make a slow and to cut output. The nations seasonally adjusted unem- gradual climb out of the current recesployment rate rose to 3.2% from a revised sion, and the islands economy wont 2.5% in the previous quarter, the Ministry experience a decisive rebound this year, the Monetary Authority of Singaof Manpower said last Thursday. Employers retrenched 10,800 work- pore said last Wednesday. The jobless rate was the highest in ers, and another 1,800 were released from their contracts early, bringing to- more than three years, and in line with the median forecast in a Bloomberg tal job cuts to 12,600. The worst global recession since World News survey of nine economists. The War II has battered the trade-dependent manufacturing industry lost 19,900 economy, where the government says GDP jobs, while service industries added 10,300 new positions last quarter, the may shrink as much as 9% this year. Prime Minister Lee Hsien Loongs ef- report shows. Construction companies hired 8,500 forts to prevent job losses by handing out new workers, resulting in a total net job loss of 1,000 jobs in 1Q2009, the report says. About 13,920 workers were retrenched last year in Singapore, the most since 2003, while another 2,970 people were released before their contracts ended, the most since 1998. In the aftermath of the Asian financial crisis in 1998, about 30,000 workers were retrenched in Singapore, and some 26,000 people lost their jobs in the 2001 recession. Construction companies hired 8,500 new workers in 1Q, E Bloomberg LP though, overall, the sector saw a net job loss of 1,000

Singapore employers Japans factory output rises at twice predicted pace fire record number of workers J
| BY JASON CLENFIELD | | BY SHAMIM ADAM |

apans industrial output rose for the first time in six months and at twice the pace predicted by economists, indicating the economy may resume expanding as soon as this quarter. Factory production climbed 1.6% in March from February, when it dropped 9.4%, the Trade Ministry said last Thursday in Tokyo. Companies plan to increase output in April and May to replenish inventories that fell 3.3% last month. Stocks rose on speculation that the worst of the recession may be over as US consumers increase spending and stimulus packages in Japan and abroad take effect. Still, the slump that started with a collapse in exports may spread to households as companies cut jobs and wages. Judging from the output number alone, we can assume Japans economy will show a pretty solid expansion in 2Q, though it would be a rebound from a very low level, says Hiroshi Shiraishi, an economist at BNP Paribas in Tokyo. Its still too early to predict that Japans economy will return to a sustainable growth path. The Nikkei 225 Stock Average rose 4% in morning trading in Tokyo last Thursday, taking its gains to 25% since the gauge reached a 26-year low on March 10. The yen traded at 97.75 per dollar from 97.53 before the report. The median estimate of 33 economists surveyed by Bloomberg News was for production to gain 0.8%.

Companies forecast output will increase 4.3% in April and 6.1% in May. The Trade Ministry says output is stagnant as opposed to falling sharply previously. The production figures are the light at the end of the tunnel, says Soichi Okuda, chief economist at Sumitomo Research Institute in Tokyo. But the economy is at a low level and the strength of the recovery is weak. The economy shrank at an annual 12.1% pace in 4Q2008 and analysts expect a similar rate of contraction in 1Q. Reports show the slump is at least moderating. Exports rose last month from February and sentiment among consumers, merchants and small businesses advanced, while 25 trillion ($380.1 billion) in stimulus measures pledged by Prime Minister Taro Aso since September may support domestic spending. Honda Motor Co said last week the US market has hit bottom. Consumer spending in the US, Japans biggest overseas customer, jumped the most in two years in 1Q, according to GDP figures released last Wednesday. In China, US$585 billion in stimulus spending is starting to kick in: urban fixed-asset investment jumped 26.5% in the first two months of the year, bank lending quadrupled in February and vehicle sales rose 25%. Even so, Japanese companies may fire more staff and keep cutting wages to protect profits, and thats likely to depress household

spending, says Junko Nishioka, an economist at RBS Securities Japan Ltd in Tokyo. Consumer spending is what we need to closely monitor from now on, she says. Sharp Corp and Mitsubishi Motors Corp say sales will keep falling this fiscal year and only cost cuts will help them return to profitability. Japans unemployment rate probably climbed to a four-year high of 4.6% in March and household spending slumped for a 13th month, economists expect reports will show. Some companies may have raised production to replenish inventories rather than to feed new demand. Manufacturers including Toyota Motor Corp have cut stockpiles faster than sales have fallen, leaving room for a bounce in output that may be limited unless sales pick up. Exporters are rebuilding inventories on the basis of expectations for shipments, says Dwyfor Evans, a strategist at State Street Global Markets in Hong Kong. This is a little bit uncertain because if new orders remain at relatively low levels youre not going to see a sharp rebound in production. The Bank of Japan will probably cut its economic forecast for the year that started April 1 from a 2% contraction predicted in January. Governor Masaaki Shirakawa said last month weakening spending by companies and consumers will impair growth this year even as declines in exports and production E moderate. Bloomberg LP

BLOOMBERG

US Fed keeps powder dry while waiting for end of US recession

| BY SCOTT LANMAN & STEVE MATTHEWS |

S Federal Reserve officials left the door open to boosting their emergency programmes to aid financial markets and the US economy even as the worst recession in five decades shows signs of waning. The US Feds Open Market Committee voted unanimously last Wednesday to keep unchanged its targets for purchases of long-term Treasuries and housing debt announced in March. At the same time, the panel will continue to evaluate the timing and overall amounts the central bank buys. Chairman Ben S Bernanke and his team are still focusing more on whether to increase Fed aid than on crafting an exit strategy from a record expansion of credit to banks and other firms. While the contraction has slowed and outlook improved modestly, the economy may remain weak as job losses and tight credit inhibit consumer spending, the FOMC says. The worse it gets, the more the

Fed will do, says William Ford, a former Atlanta Fed chief whos now at Middle Tennessee State University. They are keeping their powder dry. They will react as things develop, and they are not locking themselves into anything. The Fed says it will keep purchasing as much as US$1.25 trillion ($1.9 trillion) of mortgage-backed securities, US$200 billion of federal agency debt and US$300 billion of Treasuries as part of efforts to reduce home-loan rates and improve overall conditions in private credit markets. Officials cut the benchmark lending rate to as low as zero in December and switched their policy to using direct bond purchases and loans to support credit markets. Last Wednesday, the Fed left the target range for the federal funds rate unchanged at between zero and 0.25%, reiterating that the benchmark rate will probably remain exceptionally low for an extended period. The Fed released its decision hours after the Commerce Department reported the US economy contracted at

a 6.1% annual pace in 1Q, reflecting declines in housing and a record slump in inventories. The economy shrank at a 6.3% annual rate in 4Q2008. Policymakers are saving ammunition, says Bill Gross, who runs the worlds biggest bond fund at Pacific Investment Management Co. By no means are we out of the woods. The real problem is a de-levering economy that continues and is requiring Fed purchases, he said in a Bloomberg Television interview. The Commerce Department report shows a 2.2% gain in consumer spending in 1Q, the most in two years. Consumer spending accounts for 70% of the economy. Household spending has shown signs of stabilising, but remains constrained by ongoing job losses, lower housing wealth and tight credit, the FOMC statement said. Weak sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories, fixed investment, and staffing. The worlds largest economy has

shrunk 3.3% since peaking in 2Q2008, already making this the second-worst recession since the Great Depression. GDP shrank 3.8% during the 1957/58 contraction, according to figures from the US Bureau of Economic Analysis. The FOMC last Wednesday maintained its commitment to employ all available tools to promote economic recovery and to preserve price stability. The Fed will continue to carefully monitor the size and composition of the central banks balance sheet, which has more than doubled to US$2.2 trillion in the past year. They wanted to strike a balance, says Jay Bryson, chief global economist at Wachovia Corp in Charlotte, North Carolina, and a former Fed economist. We are not to the point where they can declare the economy has hit bottom. The public wont get full details on how Fed officials adjusted their outlooks until May 20, when the central bank releases minutes of last weeks meeting. That report will include a new round of quarterly economic

projections of growth, inflation and unemployment from the Feds five governors and 12 district-bank presidents on the FOMC. Bernanke said in an interview with CBSs 60 Minutes programme that aired March 15 that the Feds efforts had brought down mortgage rates, among evidence of green shoots in some markets. The Fed chief said last month there were signs that the sharp decline in the economy was slowing, indicating a potential first step toward a recovery. The central bank refrained from shifting monetary policy as it prepares with other regulators to release results next week on tests of whether 19 of the largest US banks could weather a worsening economy. That may signal that officials are confident the stresstest results wont shock investors. The FOMC decision certainly lends itself to that perception, says Keith Hembre, a former Fed researcher who is now chief economist at US Bancorps FAF Advisors Inc in Minneapolis. E Bloomberg LP

THEEDGE SINGAPORE | MAY 4, 2009 5

6 THEEDGE SINGAPORE

| MAY 4, 2009

CORPORATE

New face, new focus for Global Voice

| BY JOAN NG |

rady Rafuse blogs, Twitters and has a Facebook account. Among his most recent blog posts is a list of the 10 top-ranked CEOs of publicly traded technology companies. The list includes names like Reed Hastings of Netflix and Steve Jobs of Apple. Those little tidbits about the 45year-old Rafuse may seem insignificant, but they provide a glimpse into the mindset of the man who has just been made CEO of fibre-networks company Global Voice Group, and suggest that he could be the right man for the job. Global Voice has reached what may be a turning point for the companys future. Last week, its rights shares were listed after a successful fund-raising exercise that allowed the company to raise $86 million in net proceeds. After using $60.1 million to repay its bondholders, the company will have close to $26 million in spare cash. It has also finally managed to establish its operations in London, which had previously been stalled by a legal dispute. And it has turned Ebitda positive. With immediate debt concerns out of the way, an additional injection of funds, and a strengthened network, the companys officials say it is ready to grow. How does it plan to do so? Are there any plans for that cash? And can shareholders look forward to a turnaround soon?

ing which time his team delivered more than US$2 billion ($3 billion) in contracted revenues. In December 2000, Rafuse joined Level 3 Communications, a US-listed fibre-networks company, where he also rose through the ranks to become president and CEO of European operations, leading the business to become a free-cash-flow-generating operation and the largest carrier of Internet traffic in Europe. In addition, he held the position of president of the content markets group, spearheading Level 3s entry into the content-delivery business. Now, Global Voices executive chairman and outgoing CEO Noel Meaney hopes Rafuse will be able to make similar changes at the company. The company is in an operational position to grow aggressively. So, we decided that we needed somebody who had market knowledge, who had been through that kind of growth cycle previously and [worked it] successfully, and who could take the company to the next stage of development, Meaney says. Rafuse successfully grew the business at Level 3 while he was there. He understands the industry. He is also pretty much in tune with my ideas and the boards ideas for the company. And on top of that he has brought in his own new ideas.

GLOBAL VOICE GROUP

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Of course, given the environment this year, I dont think its a good time to spend capital like a drunken sailor Rafuse
that it can be quite hard to think out of the box. Rafuse, she says, has challenged that. Among the first few things he did after being made CEO-designate in March was to give everyone in the management team a copy of What Would Google Do? by Jeff Jarvis. He has convinced the company that cloud computing running applications and software such as word-processing tools on the Internet rather than PCs is more secure, will help keep costs down and could even drive the companys own business. And he is working hard to engage the companys stakeholders in its future: from the shareholders, to the customers, down to the employees. In Singapore last week to attend Global Voices AGM, Rafuse busied himself taking pictures on his compact digital camera to post to an internal company blog. It helps employees understand and it gives them a stake in the company, he explains. He is also carefully questioning the companys costs. He says working at Level 3 made him understand that generating lots of revenue isnt great unless positive cash flows are being generated too. Whatever money we spend, it needs to be an investment. We cant just excuse it by saying its a necessary expense. Everything we do has to create value, he says

Fusing old and new

The near-term plan for the company has been pretty neatly sketched out. Among Global Voices targets are to grow the sales force, move towards becoming a product-driven company (selling specialised product sets and services rather than just leasing raw fibre), set up the right processes to make the business easily scalable, and increase the companys profile from a marketing standpoint, all of which should help the company towards achieving profitability. Whether the plan works will depend on its execution. What Rafuse adds to that, says finance director Brenda OKeefe, is a fresh pair of eyes. Some of us have been so close to the business for the last five years

Telco veteran
Part of the answer to those questions lies in the appointment of Rafuse, who has a long history in the telecommunications industry. Rafuse spent 16 years at UK telco giant BT Group, working his way up from the billings department where he recalls having to call customers and tell them to pay their bills all the way to the position of general manager for the energy sector. After his turn at BT, Rafuse worked for Concert, a joint-venture telecoms company between AT&T and BT, dur-

Profitability achievable
Of course, even with all those changes and initiatives, Global Voice has a
GWYNETH YEO/THE EDGE SINGAPORE

He [Rafuse] is also pretty much in tune with my ideas and the boards ideas for the company. And on top of that he has brought in his own new ideas. Meaney

long, hard road ahead of it to achieve profitability. And, it is under a lot of pressure to do it quickly. At the recent AGM, one shareholder pressed for details on how the company planned to achieve profitability, suggesting that it should perhaps review its business model. And there is a worry that the company will need another cash infusion in the future, which could further dilute shareholder value. Will Global Voice be able to achieve profitability soon? Rafuses answer is yes. But, he also stresses that shareholders need to remember that incessant pursuit of the bottom line can sometimes be at the expense of the future of the company, which is not something he wants to risk with Global Voice. Of course, given the environment this year, I dont think its a good time to spend capital like a drunken sailor, he says. But there is a need to invest. For instance, the company hopes to raise its profile through targeted and well-thought-out marketing campaigns. There is also a need to grow its sales force so it can reach out to more customers. And it needs to hook up more buildings to its network so that it has a wider reach and its services become more valuable. The objective, he says, is to achieve profitability within the shortest possible time frame. I dont know exactly when that is But the company has a business plan and Im just kicking the tyres on it. The money from the recent rights issue should certainly come in handy for some of those plans. And while Meaney says it hasnt been earmarked for specific projects or purposes yet, Rafuse adds that there will be investments that will need to be made in the business. On top of this, Meaney hints that new sources of revenue could be available to the company in the future. As he steps down from his position as CEO, he says that he will be looking at other ways to grow the business. We have a lot of infrastructure in the ground more than any one company would need. And were trying to see if we can use it to build additional revenue streams. Having received shareholder approval, Global Voice has changed its name to euNetworks Group with effect from April 29, to be consistent with its brand name in Europe. The change in the companys name, and the face behind it, could very well be the start of a new upward trajectory for the companys profit levels and its stock. Ever-patient investors hope the change will be more than just another fresh coat of paint. For now, Rafuse is the man to E watch.

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8 THEEDGE SINGAPORE

| MAY 4, 2009

CORPORATE

Pacific Shipping Trust weighs rate-cut demands even as DPU rises

| BY KANG WAN CHERN |
GWYNETH YEO/THE EDGE SINGAPORE

Pacic Shipping Trust

16000 14000 12000 10000 8000 6000 4000 2000 0

lvin Cheng, CEO of Pacific Shipping Trust (PST), was visibly tired after a gruelling two-hour session with analysts on the morning of April 23, a day after the release of its 1QFY2009 financial results. One would expect Cheng to have had an easier time. After all, the container shipping trust had done well for the quarter to March 31. PST posted a 72% y-o-y rise in revenue to US$15.2 million ($22.8 million) and net profit rose to US$6.6 million from US$466,000, driven by contributions from four new vessels delivered in FY2008. PST had also declared that, for 1Q2009, it would be distributing US$5.8 million, or 0.98 US cent per unit, to unitholders, up 77% y-o-y, representing a 24% yield. Instead, the analysts wanted to know how PST would be affected by an April 16 announcement by Chilean-listed shipper Compania Sud Americana de Vapores (CSAV) asking ship owners to agree to a temporary 30% cut in charter hire payments to help it raise US$750 million over the next two years. Whats worrying is that CSAV the largest liner company in Latin America, with a fleet of more than 110 vessels has leased two of the 12 container ships in PSTs fleet under five-year time charters, both of which will expire in 2013. The analysts were eager to know whether PST would agree to the cut and whether it would affect its distribution payout for the next few quarters. Cheng says he understands the shippers are going through tough times. Given the market situation, no shipping company is making money, he tells The Edge Singapore in an interview immediately following the analysts briefing. Cheng admits that agreeing to CSAVs request for a 30% cut in charter hire rates would trim PSTs distribution per unit (DPU) but still generate enough cash flow to cover the costs associated with each vessel. He also expects operating income to fall 5%, even though CSAV contributes about 30% to PSTs top lines. Indeed, a pull-back in global shipping demand and a glut of containerships have driven charter rates to their lows and led to a write-down in ship valuations across the board, forcing charterers to renegotiate rates and heightening the risk of shippers defaulting on their contracts. Early this month, Southeast Asias largest container carrier Neptune Orient Lines said it expected a US$240 million loss in 1Q2009, versus US$149 million in the previous quarter, owing to an oversupply of container ships. The unusual thing about CSAV is that they actually publicly came out to request that ship owners take a reduction, which is something none of the other owners have done, Cheng says. While it certainly didnt help us because we had to make an announcement, from a risk point of view, we actually like the idea that they are forthcoming enough and willing to face the issue. Last year, CSAV entered into its time-charter contracts with PST when the daily rates were hitting US$26,000. Now, they have fallen 40% to $15,600 or less. Meanwhile, as marked-tomarket valuations of ships continue to fall, shipping trusts may not be able to rely on charter rates to repay debt. In fact, according to Dagfinn Lunde, managing director of ship financier DVB Bank, a total of US$638 million of such debt in the shipping industry

Volume (000)

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0.1

Cheng: Given the market situation, no shipping company is making money

In the same boat

COMPANY SHARE PRICE AS AT APRIL 30 CHANGE YTD (%) MARKET CAP (MIL) DPU (1Q2009) YIELD HISTORICAL (%) PER (TIMES) FORWARD PER (TIMES)

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play now, he adds. Some market watchers are even suggesting that it could be a good idea for PST to offload its fleet and distribute the remaining cash to unitholders instead. Indeed, ship valuations are at an all-time low and months have gone by now without a single order for new vessels a first in the 53-year history of container shipping. Currently, about 10% of the worlds container fleet lies idle, with experts expecting vessel layups to hit 20% by year-end. OCBCs Kumar believes that the idea of winding up the trust is a bit far-fetched at this point. Besides, who would they [PST] sell the ships to? she argues. Anyway, if your charter rates are locked in, you might as well hang on. The situation has not reached the extent to which PST needs to think about winding up.

Refinancing debt
Meanwhile, PST will just have to rely on its charters to keep the funds flowing. Cheng says once there is sustainable market recovery, PST will refinance its debt and start expanding again. We still have quite a bit of long-term debt to pay off over an average term of eight years, so hopefully we will be able to refinance when the market recovers, he says, adding that PST has no mid-term financing needs. Currently, about US$80 million is still outstanding on the two vessels chartered to CSAV. Shares of PST closed last week at 17 cents apiece after climbing 6% since the CSAV announcement was made. In April last year, PST traded at a high of 42.5 US cents apiece. At those levels, the trust has a market capitalisation of US$100.26 million. It trades at three times historical earnings and five times future earnings. In comparison, First Ship Lease Trust and Rickmers Maritime, the other two shipping trusts listed on the Mainboard, trade at 27.6 times and 2.7 times historical earnings, and 32.2 times and three times future earnings, respectively. OCBCs Kumar has reduced her revenue forecasts for PST in FY2009 and FY2010 by 7% and 9% respectively and slashed DPU estimates by 17% and 22% respectively, citing counterparty risk and lender reaction as main risks. She says: PST already has a fairly conservative distribution payout policy but the board may have to be even more prudent in the light of recent events. She is maintaining a hold call on the stock, with a target price of 18 US cents. With the container-shipping industry expected to take another 18 to 24 months to recover, Cheng would probably have to spend more time convincing analysts and shareholders to hang in there as PST rides out E the storm.

First Ship Lease Trust Pacific Shipping Trust Rickmers Maritime

38 cents 17 US cents 35.5 cents

-22.45 17.24 -8.97

$191.18 US$100.26 $130.11

2.45 US cents 0.98 US cent 2.14 US cents

38.56 23.06 35.57

27.6 3.0 2.7

32.2 4.9 3.0

has already been written down so far. Will PST accede to CSAVs request? We are in the process of establishing whether the agreement makes sense, Cheng says. If so, we will do our best to accommodate them because thats the responsible way of dealing with it, as every shipping company is suffering now. We will try to participate, but to what extent is yet to be determined.

within the next few months. For CSAV, it also makes sense to conclude this sooner rather than later as they are a public-listed company with their own investors too. Meanwhile, Kumar warns that once PST accepts CSAVs 30% cut and both parties open renegotiations, lenders might increase interest expense on PSTs debt or demand higher debt repayments to reduce the risk of default.

Renegotiation with CSAV expected

We expect PST to agree to the renegotiation request, writes OCBC Securities Meenal Kumar in an April 17 report. The reality is that accepting this reduction is probably the best option PST has in todays environment. Lower cash flows from CSAV are better than no cash flows at all, in our view. However, Kumar says CSAVs request for a 30% discount will only take effect if every owner agrees to it. If PST accepts the cut, one consolation is that the trust can demand some form of repayment when rates recover. Typically, ship owners would demand some sort of compensation in return revenue clawback or partial payment in CSAV equity, suggests Kumar in her report. Cheng stresses that until a new agreement is signed, PSTs DPU will stay intact. They [CSAV] are obliged to pay whatever has been contracted until an agreement is reached between the owners, he says. As such, DPU will not be affected as long they continue to pay charter hire. For the sake of the market and for our own sake as well, we hope to reach an agreement

Rate cut for PIL next?

The remaining 10 vessels on PSTs fleet are contracted to its sponsor, Pacific International Lines, under eight- to 10-year bareboat charters. Taking a 59.2% stake in the trust, Singapore-based cargo shipper PIL operates a fleet of 105 vessels and is scheduled to take delivery of 17 more over the next two years. With the downturn in the shipping sector expected to drag on for the rest of the year, analysts and market watchers are wondering whether PIL could follow CSAVs lead by asking for a renegotiation of rates. And would it be possible for PIL to simply walk away from the expensive charter rates it is committed to pay, or perhaps even buy its ships back from PST at bargain prices? Cheng doesnt think so. A contract is a contract, he says. We are confident that [rate reductions] will not happen with PIL, based on what we know of the market today. He explains that buying back the vessels would require a huge capital outlay at a time when cash is king. In addition, it would defeat the purpose of setting up a shipping trust in the first place. It wouldnt make a whole lot of sense for them to do an asset

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THEEDGE SINGAPORE | MAY 4, 2009 9

CORPORATE

Cash-rich China Zaino ups factory capacity

BLOOMBERG

| BY ANGELINE CHEONG |

GWYNETH YEO/THE EDGE SINGAPORE

uggage and backpack manufacturer China Zaino says it will go ahead with the building of its new factory, on expectations of a market recovery next year. When completed in 1Q2010, the factory is expected to boost the companys production capacity by 30%. China Zaino will also continue to emphasise brand building to maintain market share and widen its distribution network. If overall market [conditions] improve after 2009, then we have to prepare for it now, says chief financial officer Lawrence Lam. With RMB997 million ($218 million) cash as at March 31, China Zaino is able to finance the construction of the new factory in Quanzhou city, Fujian province, which is expected to cost about RMB170 million. Kim Eng analyst Pauline Lee notes that more than half of its net cash balance will be deployed in FY2009. This includes advertising expenses of RMB150 million to sponsor the Chinese gymnastics team as well as advertise on TV, billboards and newspapers. The manufacturer may also fork out another RMB400 million to help distributors finance the furnishings at more than 300 new stores in Fujian, Jiangsu and Shandong provinces. The use of the cash has allayed the concerns of investors. Although it continues to expand, China Zaino is careful not to saddle itself with too much debt or to overinvest in new factories. Currently, its production lines can manufacture 27 million backpacks and enjoy a utilisation rate of about 80%. Production of luggage

China Zaino
140000 120000 100000 80000 60000 40000 20000 0

Volume (000)

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0.7 0.6 0.5 0.4 0.3 0.26 0.1

April 18, 2008

April 30, 2009

is outsourced to third parties. Starting out as an original equipment manufacturer of backpacks, China Zaino developed its Dapai brand in 2001. In 2007, the company broadened its product range to include luggage. Currently, its products are sold through distributors in more than 3,250 retail outlets in 26 provinces in China, mainly in first-tier cities. The average selling price of its luggage is RMB213, versus RMB2,000 for Samsonite of the US. The companys focus on the relatively resilient mass-market Chinese consumption market may shelter it from the global recession but it is not immune to the crisis. Last week, it announced a 19.2% increase in revenue to RMB603 million on increased marketing efforts, while earnings dipped 4% to RMB101.5 million in 1Q2009 on related advertising expenses and taxes. Average selling prices of products fell 11% q-o-q, although this drop was mitigated by a 10% increase in volume. We have to cut retail prices to maintain market share,

Lam: If overall market [conditions] improve after 2009, then we have to prepare for it now

explains Lam. Brokerage BOC International reckons China Zaino has a market share of more than 30% in terms of revenue. China has fared better than most countries, reporting a GDP growth of 6.1% in 1Q2009, but this figure represents the worst quarterly performance in almost two decades. Lam expects earnings to come under pressure this year, given the need to lower average selling prices to maintain sales in the current economic slowdown. A higher effective tax rate of 25% versus 19.6% last year will also crimp income. Although the emergence of the swine flu virus may hurt Chinas tourism sector, demand for luggage should stay strong as suitcases are often deployed in unconventional ways. For example, migrant workers widely prefer to use luggage, instead of cupboards, as storage boxes. Another potential growth area is sales to students who stay in dormitories, especially those in middle

school. Acknowledging the companys growth potential, BOC notes that Chinas per capita expenditure on backpacks and luggage is only a fraction of that in developed countries. The company has also maintained tight control over trade receivables, which stood at RMB273.7 million as at March 31, 2009, versus RMB318.6 million as at Dec 31. Lam says the company monitors its distributors closely through frequent contact. If we sniff out that they have some problems, we either downsize or replace them, says Lam. Looking ahead, Lam also sees the luggage segment increasing its contribution to 50% of total revenue, from the current 31.2%. We believe luggage should be our main driver for the future, he says. For FY2009, UOB KayHian is projecting a 10% increase in revenue to RMB2,468.7 million and earnings to be flat at RMB417 million. Based on the industry peer average forward price-to-earnings ratio of four times, the brokerage values the stock at 39 cents and maintains a buy call, adding that the management has confirmed that none of its shares were pledged to banks. Kim Eng also has a buy recommendation, with a target price of 35 cents. Meanwhile, Daiwa has an underperform call on the stock, with a target price of 15 cents, citing a lack of catalysts. Last Wednesday, chairman and founder Chen Xizhong acquired 202 million shares at 18 cents each, raising his stake to 72.2%, from 50.8%. Shares in China Zaino have recovered since hitting a low of 10.5 cents last month. At its last-traded price of 26 cents, the stock is tradE ing at 2.76 times FY2008 earnings.

10 THEEDGE SINGAPORE

| MAY 4, 2009

CORPORATE

China Hongxing holds cash for expansion

| BY LEU SIEW YING |
GWYNETH YEO/THE EDGE SINGAPORE

t the AGM of sportswear manufacturer China Hongxing Sports last week, its youthful CEO Wu Rongzhao finally faced worried shareholders and probably further upset some of them when he said the company was not paying any dividends even though it had a cash pile of RMB1.9 billion ($413 million). The company, a component of the FTSE ST China Index, has come under intense scrutiny in the wake of a string of accounting irregularities and corporate governance issues that has cropped up among Schips in the past few months, and especially so in the reporting season in March. Unlike other negligent S-chips, however, China Hongxings credibility was at stake simply because it did not declare a dividend, which is to many minority shareholders the best evidence that all is well with the companys cash position. Previous attempts by its management to be transparent only raised more doubts. (See Where is China Hongxings cash?, The Edge Singapore, March 30, 2009.) Last Tuesday, it was the 32-yearold Australian-educated CEOs turn to do the convincing. As it turned out, Wu seemed to have done a good Wu: The global [economic] situation was turning uncertain, so there could have been a substantial drop in retail sales in 2008... job. When queried by The Edge Sin- I think it is necessary to keep large cash reserves so that the company can deal with any economic situation. gapore, several shareholders leaving 800 million of Chinas 1.3 bilthe meeting, which went over 1 outlook remains uncertain. China Hongxing Sports lion population cannot afford However, while it is true that hours, said they accepted his exthe companys products. But, planation, though they still whined Hong Kong-listed China DongxVolume (000) Price ($) 600000 1.4 Wu says, incomes are rising about not getting their dividends. iang Group has RMB6 billion 1.2 and they will eventually beLater, the tired, red-eyed CEO would in cash, it has also managed 500000 come China Hongxings cusmeet The Edge Singapore to provide to pay out dividends amount1.0 400000 tomers. ing to 60% of its profit attribhis side of the story. 0.8 300000 To be fair, China Hongxing First off, Wu says, China Hongx- utable to equity holders. Anta 0.6 does have formidable rivals in ing has paid a dividend averaging Sports Products paid a final 200000 0.4 the sportswear market. Anta 10% of profit attributable to share- dividend of 10 HK cents and 100000 signed up former world No 1 holders each half-year since it listed a special dividend of eight HK 0.2 0.14 tennis player Jelena Jankovic in on the Singapore Exchange in No- cents while Xtep International 0 0 January to endorse its apparel vember 2005. No dividend will be paid a final dividend of eight May 5, 2006 April 30, 2009 line, and as if the international paid for 2H2008 as the board was HK cents and a special divistar were not enough, it roped concerned about the steep decline dend of five HK cents. in top Chinese tennis player Zheng Wu promises to resume divi- investor relations. in retail sales compared with 2007 At a time when sales are slowing Jie for good measure. China Hongxdend payments as soon as profits when it met in February. The global [economic] situa- recover to previous levels. In the down, does it make sense to expand ings endorsement measures pale in tion was turning uncertain, so there meantime, he will spend the re- the number of outlets? Wu insists comparison, as it cant afford to encould have been a substantial drop serves to expand the companys there are market prospects the com- gage big-name sports stars. Howin retail sales in 2008. We decided distribution network, which com- pany can develop. Mega and first- ever, it has received compliments to be prudent and stop payment for prised 3,824 stores at end-2008. tier cities are slowing down or even for being innovative it outfitted the second half, he says. I think it China Hongxing has targeted open- shrinking, but second-, third- and the North Korean team for the 2008 is necessary to keep large cash re- ing 600 stores selling its Erke brand fourth-tier cities are still growing, Beijing Olympics. Even if Wu had a valid use for serves so that the company can deal of sports shoes and apparel annu- he says. There is no official clasally, to eventually reach as many sification of cities in China, but in the companys cash reserves, some with any economic situation. Apart from the economic consid- as 10,000 stores. We think 300 to general, first-tier refers to Beijing, market analysts say he could go to eration, there is also concern that 400 new [points of sale] this year Shanghai, Guangzhou and Shen- the market to raise funds. But, Wu competition, already keen, would will be a more achievable target, zhen. Second- and third-tier cities has a ready response: We are not get worse. Our competitors have says Jenny Yeo, its vice-president include Chongqing, Tianjin and the issuing shares because we dont a lot of cash. Dongxiang has RMB6 for corporate communications and provincial capitals and bigger cit- want to dilute our shareholding. ies like Chengdu, Nanjing Our family controls more than 30% billion to RMB7 billion, [of the company]. Besides, I have and Wuxi. Anta and Xtep have China Hongxing, he says, confidence in the industry. I know RMB3 billion to RMB5 Chinas sportswear players wants to move its distribu- I can make this company bigger billion each. If we have MARKET CAP PRICE PER tion channel to lower-tier and take it further. sufficient cash, we can (TIMES) Wus explanations failed to concities because of the maruse it to expand our Li Ning HK$16.66 bil HK$16 17.6 vince some upset shareholders, who ket potential. When the market and promote HK$16.38 bil HK$6.58 13.6 Anta Sports Group walked out of the AGM. One even [peoples] potential purour brand, he says, reHK$21.47 bil HK$3.79 13.4 China Dongxiang chasing power is unleashed, refused to enter the meeting room iterating that the comXtep International HK$5.72 bil HK$2.60 8.6 we will stand to gain. A at Suntec International Convention pany has to be cautious $392 mil 14 cents 4.3 China Hongxing market survey conducted Centre, saying it was a waste of in the next two years Note: HK$1 = $0.19 as at April 30 last year shows that up to time. However, most shareholders because the economic
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appeared to accept his explanation. One investor, K W Su, admits he is unhappy about not getting dividends, but says it is fair enough if the company needs money. If the company wants to compete, they have to keep the money, he says. Alvin Wong, meanwhile, who left his job as a senior director of corporate marketing at a European MNC in Shanghai more than a year ago to be a full-time investor, says he will wait for 1Q2009 results to see how well the company is doing in terms of risk management, before making a decision about his investment. As for the AGM, he feels China Hongxings board and management did not make full use of the platform to engage with shareholders or to show they are in charge. Had they been more pro-active, it would have been an excellent opportunity to show their credibility, integrity and for bonding with shareholders. I give them a B- or C+, Wong says. Cash is not an issue for Wong as long as China Hongxings management shows they are managing it well. For a high-growth company, if they can make good use of the money to grow the business, its okay not to distribute it, he says. Indeed, the quality of China Hongxings receivables and the huge cash advances it has been making to distributors may be warrant more attention. Wu says its credit term was longer in 4Q2008, a traditionally slow period, but generally it was still within the 30-to-60 days it considers normal. As for cash advances, there is still an outstanding RMB900 million to be collected. CIMB analyst Germaine Khong, who has a neutral rating on the stock, says in a March 17 report that she continues to forecast a revenue decline of 13% y-o-y for FY2009. She says same store sales in February contracted around 15% after a strong performance in January. China Hongxings recent attempt to prove to shareholders that its cash pile was authentic by showing analysts here copies of its bank statements, meanwhile, has gone down badly even with the investment community in Hong Kong. Nichols Pang, president and portfolio manager of Striker Capital Management, a Hong Kong-based asset management company, says if investors were looking for a sportswear play, they have enough choices on the Hong Kong Stock Exchange. Weve got Li Ning and Anta in Hong Kong, so why bother with Hongxing? The much bigger Li Ning, which is in the top tier of the sportswear market, is trading at 17.6 times forward earnings while Anta is trading at 13.6 times, Dongxiang at 13.4 times and Xtep at 8.6 times. China Hongxing has bounced back from the years lows to trade at 4.3 times forward earnings. For the time being, China Hongxing seems to be in the clear and its auditors have signed off on its accounts, leaving it free to continue E with its expansion plans.

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THEEDGE SINGAPORE | MAY 4, 2009 11

CORPORATE

CapitaMall Trust goes for organic growth

| BY GOOLA WARDEN |
GWYNETH YEO/THE EDGE SINGAPORE

he euphoria over green shoots economic revival signs in China, South Korea and even Japan has many investors thinking the Asian consumer will take up where the Americans left off. But thats unlikely. And she probably wont save the world economy, either. Mainland Chinese have a tendency to save. Asians are brought up this way. We think, what if tomorrows bad?, is the prognosis of Lim Beng Chee, CEO of CapitaMall Trust (CMT) and CapitaLand Retail. Lim should know, since he oversees arguably the largest owner-operator of malls in Asia. Thats some 63 million sq ft of retail space spread across 95 malls in Japan, Malaysia, China, Singapore and India. Of these, 54 are operational, an additional 12 will be ready this year and 29 are under development. Ten malls will be opening in China in 2009, one in Bangalore, India, in June, while Singapores own luxe giant, ION Orchard, will open its doors in July. So Lim knows a thing or two about Asian consumption patterns. I wont say we will never become like the Americans, but it would take a few generations. How big a fridge can you have in your HDB flat? he says. Asias shoppers are younger relative to the Americans, though, and they will keep shopping.

at] The Atrium@Orchard next year so we can have growth beyond that, Lim says. CMT will use the $1.2 billion raised from the rights issue to repay $956 million of debt due in 2009 and for its plans for Jurong Entertainment Centre and The Atrium@Orchard. CMT is also exploring opportunities to increase the retail gross floor area of Funan DigitalLife Mall and Tampines Mall, notes Wilson Liew, an analyst at Kim Eng Research. CMTs tenant retention rate for 1Q was 73%, within its normal retention rate of between 70% and 80%. We have a policy of changing 20% of the tenants for a fresh look. Otherwise, after five years, nobody will come to our malls, Lim jokes. But many a true word is spoken in jest. One of his innovations relates to the complimentary use of the Raffles City car park during conventions and functions. Users can send an SMS with their licence plate number to a number printed on the ticket, so that when you reach the gantry, you dont have to wait, you can just get out.

New retail space provides competition

Thats all very well, but wont the Marina Bay Sands mall opening by year-end draw shoppers away? Raffles City is sitting on a train station with three lines, including the Circle Line, next year, Lim points out. Its survived 20 years and many openings Suntec City, Ngee Ann City, Marina Centre, he says. Then there is ION Orchard, the behemoth taking shape above Orchard MRT. Its not too high, eight floors and we have speed escalators. Its easy to manoeuvre and circulation is good, Lim says of the joint venture between CapitaLand and Sun Hun Kai Properties. Weve managed to target high-end and mid-range retailers. And the car park is outside the ERP [electronic road pricing area], so you dont get jammed because you come in from Orchard Boulevard. What of its impact on other malls? There could be some impact on the surrounding malls, Lim acknowledges. In a report last week on Starhill Global REIT, which owns Wisma Atria, adjoining ION, Nomura Securities analyst Tony Darwell says, Expectations of a marked slowdown in Singapores GDP and a fall in domestic consumption at a time of rising new retail supply will present a more challenging operating environment for domestic retail landlords. He has a reduce recommendation on CMT because he believes it is not immune to the slowdown. Liew of Kim Eng, on the other hand, has a buy recommendation with a target of $1.53. He points out that CMT is the only REIT component of the FSSTI and one of two REITs in the 27-member MSCI Singapore Free Index. The other is Ascendas REIT. While Lim talks of survival, Liew of Kim Eng points out that ION is a possible acquisition when rates and take-ups have stabilised. Other possible future acquisitions include Clarke Quay and Vista Xchange owned by CapitaLand. We do not expect CMT to acquire any of these assets within the next 18 to 24 months, as market conditions remain soft and asset values could possibly decline further, he says. It would also be in CMTs unitholders interests that the rents at ION Orchard and Vista Xchange are stabilised before the [malls] are acquired, if they prove to be yield-accretive. In the meantime, astute management of its current portfolio should keep CMT and sister REIT CRCT ticking over. Asian consumers may not hold a torch to the US shopper, but the rising number of consumers should sustain Asias new malls. Lim assures that more people are visiting his malls. Every month we open new malls, and traffic has picked up. E Forty million and counting.

Building for the shopping wave

The numbers are staggering. Liew Mun Leong, CEO of CapitaLand, told shareholders on April 23 that 40 million people walk through its malls every month. Whats more, in China, where more than half of CapitaLand Retails malls are situated, retail spending rose by 15% in the quarter to March. The Chinese governments stimulus package is spurring domestic consumption, Liew says, at a time when external demand and exports are falling sharply. That provides a measure of comfort for Lim. He is quietly confident. The traffic will increase. Its an exciting business for us, he tells The Edge Singapore. The numbers speak for themselves. CMTs distributable income rose 8% to $62.2 million in 1Q2009, despite a tough quarter for the retail sector. The largest S-REIT owns and manages 14 malls, including the iconic Raffles City and some popular suburban malls like Junction 8, Tampines Mall and Bugis Junction. CapitaLands China-based REIT, CapitaRetail China Trust (CRCT), which is 20%-owned by CMT, recently announced distributable income of $13.3 million for 1Q2009, up 51.3% y-o-y. CRCT owns seven malls, including Xizhimen Mall in Beijing. Despite the malls resilience, Lim knows that managing the listed CMT and overseeing the malls under the CapitaLand Retail umbrella is no walk in the park. In February, the 40-yearold successor to former pioneering manager Pua Seck Guan had to face the ire of shareholders and investors at shareholder meetings and road shows. The reason? An unpopular rights issue during a market slump. Would CMT have been able to price its rights issue differently, for instance, if it had waited a while longer? Its not about a better price. Its a renounceable [rights issue] and Im giving it to my unitholders. Whether its 90 cents or $1, its still going back to them, Lim explains. The nine-for-10 rights issue at 82 cents per share was eventually 16% oversubscribed, but not before Lim faced the music, so to speak. He admits the extraordinary general meeting was a stormy affair. You must understand where they come from. Every road show we went on, the first 10 minutes were always very tough, he concedes.

Investors wanted to know why CMT announced the rights price at such a big discount. At the time, the issue price of 82 cents was a 43.4% discount to the closing price of $1.45 on Feb 6 and a 49.1% discount to the 30-day weighted average price of $1.61. The rights issue price also represented a 28.7% discount to the theoretical ex-rights price of $1.15 and a 50.3% discount to pro-forma net asset value (NAV). Now though, CMT has been rewarded with a lower cost of capital it is trading at a yield of 6.5% and a discount of just 26% to its NAV of $1.66. Additionally, investors will be comforted by the assurance of a 100% payout of distributable income. During the road shows, a lot of long-term investors were very concerned about cutting the dividend. They were also lobbying the Monetary Authority of Singapore, Lim reveals. Why do you invest in REITs? Its for the dividends. If you cut it by 50%, how do you think a pension fund

This year, it is about survival and maintaining our distribution... Were still comfortable. Of course, there is some seasonality involved.
Lim
holder feels? he asks. Now that the refinancing issues are behind him, Lim says CMTs management can focus on operations. One of the effects of the rights issue is lower financing costs. Citigroup points out in a report earlier last month that finance costs fell 2% in 1Q2009 because CMT repaid a $150 million loan. Post-rights issue, we expect CMTs finance costs to be significantly lower in the coming three quarters, the report states.

CapitaMall Trust
120000 100000 80000 60000 40000 20000 0

Volume (000)

Price ($)

3.5 3.0 2.5 2.0 1.5 1.25 0.5

BLOOMBERG

Looking after the malls

This year, it is about survival and maintaining our distribution, Lim says. Growth has slowed and discretionary spending has dropped, he says. But, there are some bright spots. Supermarkets, books and stationery and department stores are still growing, and beauty and health is still okay, he says. Were still comfortable. Of course, there is some seasonality involved. This quarter, the cinema and entertainment came down because there werent any good movies. But on the whole, the malls are okay. For 1Q2009, the REIT reported an 11.1% rise in gross revenue to $134.5 million, although that was partly due to the full impact of Sembawang Shopping Centre, which was undergoing renovations a year ago. So far, CMT has locked in 90% of last years rentals for its portfolio of 14 malls here. As for future plans, CMT will focus on organic growth. We intend to start asset enhancement for Jurong Entertainment Centre so it can contribute to growth in 2010 and beyond. And then we can start [conversion works

May 12, 2006

April 30, 2009

CapitaRetail China Trust

120000 100000 80000 60000 40000 20000 0

Volume (000)

Price ($)

3.5 3.0 2.5 2.0 1.5 1.0 0.8 0

Dec 15, 2006

April 30, 2009

BLOOMBERG

12 THEEDGE SINGAPORE

| MAY 4, 2009

CORPORATE

Baker Tech eyes contracts for rig components from Brazilian oilfield
| BY KANG WAN CHERN |
GWYNETH YEO/THE EDGE SINGAPORE

im Ho Seng, chairman of Baker Technology, was glowing with the confidence of an oilman about to strike black gold during a recent interview with The Edge Singapore in his spartan office at Sea Deep shipyard, near Tuas. The yard has generated enough profit to repay Lim in full for the $20 million he first invested last April, and he is betting that it will earn him much more over the next few years. Even though Lim acquired Sea Deep just months before oil prices started their slide, he believes Baker Techs transition into a full oiland-gas play couldnt have come at a better time. With oil now creeping back up from a low of US$35 per barrel in February to US$51 per barrel last Thursday, enquiries for new jack-up rigs have started to pick up again, and that bodes well for Baker Tech. Previously a manufacturer of trailer axles through its 49% stake in York Transport, Baker Tech now makes essential components for jackup rigs, including jacking and skidding systems, cranes and other specialised steel components such as anchor winches at the Sea Deep yard. Baker Tech also holds a 15% stake in Sembcorp Marine subsidiary PPL Shipyard, which it acquired for US$3.6 million ($5.3 million) in May 2007. PPL Shipyard specialises in designing and building jack-up rigs. Since acquiring the stake, Baker Tech has received total dividends amounting to $16.6 million from the shipyard.

Baker Technology
500000 450000 400000 350000 300000 250000 200000 150000 100000 50000 0

Volume (000)

Price ($)

0.50 0.45 0.40 0.35 0.30 0.25 0.20 0.17 0.10 0.05 0

May 5, 2006

April 30, 2009

Lim estimates that Petrobras will need to build at least 40 new jack-up rigs to develop the Tupi oilfield in the Santos Basin

Brazilian buzz
But the main reason Lim is in high spirits stems from the growing buzz of activity at Brazils Tupi oilfield in the Santos Basin, which was discovered in November 2007. The field lies 340km off the Brazilian coast and the deposits lie beneath a 2km layer of water and 5km layer of sand, rock and salt. The Tupi field is estimated to contain five billion to eight billion barrels of oil. When Tupi starts pumping oil this year, Lim expects a sizable portion of rig-building orders from Brazilian oil company Petroleo Brasileiro (Petrobras) to land in the laps of Keppel Corp and Sembcorp Marine, two of

the worlds largest rig builders. The latest finding in Brazil will require a significant amount of jack-up rigs to drill up to 300ft in depth, Lim says. He estimates that Petrobras will need to build at least 40 new jack-up rigs to develop the field. We expect that Keppel and SembMarine will command a huge slice of that pie, which will benefit us, as we supply parts to the people who build the rigs, he adds.

Refurbishing old rigs

Until those orders are contracted out and Baker Tech gets a piece of the action, however, it will certainly need to rely on its other orders, totalling US$47 million as at March 31, to sustain earnings. The company will also have to rely on maintenance work on existing rigs to maintain cash flows. We bought into this business because we knew it would be profitable, Lim says. Its not a secret that orders for newbuilds have declined over the past few months, but we also do maintenance work on existing rigs, so we have anoth-

er leg to stand on. About 20% of the worlds existing jack-up fleet is more than 20 years old and require upgrading and refurbishing to comply with safety standards, he says. Most of Baker Techs customers are state oil majors from China, India, the Middle East and Singapore. For the quarter to March 31, the company posted $18.5 million in revenue, with the majority of orders being for jacking systems and steel components. Profits were $6 million for the same period, or about a third of revenue. Over the same period, available cash and cash equivalents stood at $53.8 million.

Watching for opportunities

Meanwhile, Lim says he will be watching the markets closely for opportunities to expand the business, to gain from an upturn in the cycle. Indeed, he already has some ideas in mind. We can expand and grow through product diversification, he reveals. The parts and machinery that we manufacture at Sea Deep can be used on other rigs like semi-submersible rigs as well. Does Sea Deep have the funds for expan-

sion? We still have the capacity at our yard to take on more orders, Lim says. In any case, we have $50 million. Cash is not a problem. When the time is right, the company will expand beyond its current markets, even as it keeps an eye out for suitable acquisitions. The strength of our company is that the people running it are veterans in the rig business, Lim continues. In addition, we operate in a niche market. Not more than a handful of companies do what we do. We also have a good reputation for delivering our orders on time. Usually, it takes the company 12 to 18 months to complete and deliver its orders. Investors appear to share Lims faith in the company. Since the beginning of the year, shares in Baker Tech have climbed more than 30%. Last Thursday, the stock closed at 17 cents. When oil traded at a peak of US$147 per barrel last July, shares in the company hit a high of 34 cents each. At current levels, it has a market capitalisation of $107.24 million and trades at 4.3 times its earnings. So far, it has received no analyst coverage. Our business has always been a very cyclical one. We believe in this business because fossil fuel is something that cannot easily be replaced and everyone knows it is being depleted by the day. That means there will always be demand for it and that oil prices will eventually recover, Lim says. Our fortune is now very much tied to the oil-and-gas sector. Indeed, once the price of oil starts to tick upwards, investors can be sure Baker Tech will E be ready to ride the boom.

China hopes draw billions in foreign funds back to Asia

| BY FAITH HUNG & KEVIN PLUMBERG |

fter a six-month drought, foreign investors have been sending billions of dollars back to Asia, a trend some expect to continue on hopes China will lead the region out of the global economic recession. Foreigners have poured a net US$6 billion ($8.8 billion) into six major Asian markets since early March, according to BNP Paribas, helping to boost China, Taiwan and South Korean stocks by up to 35% this year and making them the worlds best performers. Regional government efforts to drive their economies out of recession by aggressively cutting interest rates and

spending billions of dollars on stimulus packages, especially the US$600 billion one implemented by China, are fuelling international investor appetite for risk after months of caution. I think its time to be in risky assets. The rally weve seen since March is the start of a new bull market, said Anthony Bolton, president for investments of Fidelity International, an affiliate of the worlds top mutual fund firm Fidelity Investments, on a trip last week to Taiwan. I started to put in money in September, November, and then January and March. We are buying China-focused funds. Boltons contrarian bets made him a top UK fund manager for more than two decades. Chinas official Purchasing Man-

agers Index (PMI) for March rose to 52.4 from 49.0 in February, marking its first time in expansionary territory since September, a rebound that Beijing says the economy may have bottomed. The index is a key survey of the manufacturing sector, showing managers felt cautiously optimistic about the next few months. The massive inflows to China plays and other emerging markets contrast with outflows from developed markets, a sign foreign investors bet China will lead Asia out of the global recession. Emerging market equity funds have received inflows of US$7.3 billion so far this year, compared with outflows of US$56.1 billion for developed market

equity funds, fund flow tracker EPFR Global says in a recent report. In the previous week alone, foreigners purchased US$1.6 billion worth of Asian equities, their second-highest buying level in 48 weeks. Meanwhile, mutual-fund buying was at a 50-week high of US$946 million, Nomura International says in a report. China equity funds absorbed another US$243 million and Taiwan equity funds posted their highest weekly inflows in nearly a year, says EPFR. Fund managers say they favoured shares of infrastructure, raw materials, PC makers and China plays on expectations they will continue to benefit from Chinas massive economic stimulus. Chinas determination to sustain

8%-plus GDP growth remains the cornerstone of the latest surge in risk appetite, EPFR Global senior analyst Cameron Brandt writes in the report. Bratin Sanyal, head of Asian equity investment for ING Investment Management in Hong Kong, shares a similar view. We believe the bigger economies in Asia are going to come out of the downturn more quickly. China, India and Indonesia remain our favourite markets, along with Singapore and Hong Kong, because they add some stability to our portfolios with companies that are liquid. Fund managers say recent interest in Asia by foreign funds is likely to stabilise those markets, as many fund managers buy in on dips after missing initial rallies. Reuters E

BLOOMBERG

THEEDGE SINGAPORE | MAY 4, 2009 13

CORPORATE

Middle East a field of opportunity for oil-related companies

| BY JOAN NG |

nnouncing its results for FY2009 ended March last week, MTQ Corp revealed a net cash balance of some $17 million, versus a market capitalisation of $50.6 million. But rather than sit tight on that enviable cash hoard as many companies are doing in this downturn the oilfield engineering services provider is making a big bet on expansion in the Middle East. MTQ, which repairs equipment used in the drilling and exploration of oil & gas, is expected to spend about US$20 million ($29.59 million) over the next 18 to 24 months building a new facility in Bahrain. MTQ is not the only oil & gas player eyeing the oil dollars in the Middle East. Last week, oilfield equipment operator and supplier KS Energy Services announced a restructuring of its board of directors and management team to include a Middle Eastern shareholder that will help spearhead the companys expansion into that part of the world. The attraction of the Middle East, especially the Gulf states, for oil-related companies is manifold, says Kuah Kok Kim, chairman and CEO of MTQ. Oil production costs are significantly lower there, which means that exploration and production continues to be viable. Saudi Arabia, for instance, is reputed to have among the lowest costs of oil production in the world. And the Middle East has the second-largest number of rigs in operation after Latin America. In the mid-term, I think the Gulf will remain one of the most efficient oil & gas production areas, and one of the largest, says Kuah. And their reserves are among the largest in the world. The region is far away enough that it cannot be easily serviced by a facility located in Singapore, but also close enough to be within the seven-hour flying time region Senior Minister Goh Chok Tong has referred to in the past as Singapores hinterland. Countries in the Gulf are also putting a lot of emphasis on attracting foreign investments. MTQs setup in Bahrain, for instance, will be tax-free. The land on which the new facility will be built is close to four times the size of MTQs operations in Singapore because the cost, Kuah says, is much lower. And it is relatively easier to do business there, in comparison with other oil-producing majors such as Brazil and Russia.

(From left) Gibb, Wiluan and Baker join forces in the Middle East
SAMUEL ISAAC CHUA/THE EDGE SINGAPORE

Kuah: The Gulf will remain one of the most efficient oil and gas production areas

KS Energys new partnership

KS Energy, which owns and operates rigs and distributes related parts and equipment, is already reaping the benefits of its Middle East

foray. In FY2008, the company reported sales of $132.8 million from that region, the second-highest contributor after Singapore and accounting for 21.7% of total revenue. It was also the fastest-growing region, recording a sixfold growth in revenue. The company hopes to keep growing, with the entry of a large and active investor. Over the last year or so, the Dubai Transport Co (Dutco) has been gradually increasing its stake in KS Energy to 15.1% as at December last year. Now, the Dubai-based privately-held conglomerate will take a larger role in the operations of the company. With effect from May 1, Abdulla Saleh, a major shareholder and director of Dutco, will join

KS Energys board as a non-executive director. Being chairman of the Dubai Financial Services Association; vice-chairman of Emirates NBD PJSC, the largest banking entity in the Middle East; and having served as financial advisor to the late ruler of Dubai, Saleh should help open doors for KS Energy in the Middle East. KS Energy will also be welcoming Nelson Gibb into its management team. The Dutco chief operating officer says his role will be to advise KS Energy in its operations as well as to establish ways both companies can pool their existing resources to help each other grow. Gibb says there is demand in the region for new jack-up rigs. If you look at the jackup industry, particularly in the Middle East, a lot of the equipment is at the wrong end of the cycle, and I think new equipment coming onstream will be the equipment of choice, Gibb says. KS Energy has a jack-up rig under construction in the United Arab Emirates called the KS Endeavor and it is scheduled for delivery next year. We have high hopes for that, he adds. Gibb also says both companies are talking about sharing existing assets. Dutco, for instance, has logistics centres in the Jebel Ali Free Zone as well as in Qatar and Abu Dhabi. Such assets could be used by KS Energy to support its trading and distribution business in oil & gas equipment parts. There is also the possibility for KS Energy to develop new business areas in related fields, says CEO and chairman Kris Wiluan. Dutco has a joint-venture company with Australias McConnell Dowell Corp that deals in oil & gas pipelines, as well as a stake in a petrochemicals
BLOOMBERG/COMPANY FILINGS

company called Qatar Fuel Additives. And, Dutco would be able to support KS Energy in funding capital equipment purchases and growing the latters fleet. In February, KS Energy announced the formation of a 40:60 joint venture with Dutco called Landrig 5 that would allow the two companies to jointly own assets like land rigs.

Breaking new ground

Compared with KS Energys business, MTQs Middle Eastern expansion is still in its infancy. CEO Kuah says the company is just beginning to draw up the designs for the facility, and it will be 18 to 24 months before it is up and running. By that time, the region could be bustling with other Singaporean companies. International Enterprise Singapore, which promotes the growth of local companies overseas, has been encouraging local players to move into the Middle East. The Gulf is always going to be more resilient, in my opinion, obviously because of its financial strength, but also because of the service industry there, says Tariq Baker, Dutcos CEO. And I think you will see that while there is an impact [from the global recession], the Arabian Gulf region will be ready for the next challenge much faster than some of the other countries. Rohan Suppiah, an offshore analyst at UOB Kay Hian, says moving beyond Singapore and into regions such as the Middle East and Latin America is a natural progression for many of the local companies seeking to expand their reach and presence. And, even as orders from the Asean region dry up, companies may look for ways to supplement revenue in more distant territories. Gibb of Dutco says the oil &d gas sector in the Gulf region is slowly getting back on its feet. The infrastructure projects are starting to show signs of coming back, he says. Already, a number of locally listed oil-related players have announced work in the Middle East over the last few months (see table). Keppel Corp and Sembcorp Marine have established a presence there, and this may pave the way for the entry of more players. Singapores reputation for quality work in the industry has been established among several MNCs. Kuah of MTQ says he isnt worried about starting a new business in a faraway country because many of the executives working in the Middle East have worked in Singapore or the Asean region, and are already familiar with his company and work. As opportunities go, this is one companies E and investors should be watching.

Exploring new territories

A number of Middle East deals have been announced by oil & gas-related companies since the start of the year. While not all relate directly to the industry, they provide an idea of the activity that is still taking place in that region, and the opportunities available to companies willing to make the move.
COMPANY WHAT IT DOES RECENT MOVES IN THE MIDDLE EAST DATE ANNOUNCED PRICE (CENTS) MARKET CAP ($ MIL) YTD CHANGE (%)

Aqua-Terra Supply Co BH Global Marine KS Energy Services

Trades tools and equipment for the oil & gas industry Supplies lighting, cables and electrical equipment to the oil & gas industry Sources and distributes oil & gas equipment Provides drilling and subengineering services Oileld engineering and rental of equipment

Secured a $21 million contract for civil engineering works in Qatar Intends to set up a galvanised steel wire manufacturing plant in Oman Change to board and management to include Middle Eastern partner; set up a jointventure company to own land rigs Secured a US$10 million contract with the National Petroleum Construction Co in Abu Dhabi to provide subsea construction support Plans to build a greeneld facility in Bahrain to service oil equipment

April 8 March 17 April 28; Feb 29

16.5 20.0 80.5

57.9 84.0 280.1

37.5 17.7 -18.7

Mermaid Maritime

March 9

35.0

189.4

62.8

MTQ Corp

Jan 5

53.0

50.6

6.0

GWYNETH YEO/THE EDGE SINGAPORE

14 THEEDGE SINGAPORE

| MAY 4, 2009

CORPORATE

Airport security staff monitor body temperatures via infra-red computer images at Chek Lap Kok Airport in Hong Kong last Monday

Market takes swine flu fears in its stride for now

| BY MICHELLE TEO |

he spectre of a possible viral flu pandemic could hardly have come at a worse time for the markets, which have come under duress since the financial crisis unravelled last year. After news of swine flu infections from Mexico broke more than a week ago, markets were recalling the SARS outbreak and bracing for a fallout. Singapore-based investment guru Jim Rogers says the current epidemic, should it hit as hard as SARS did in 2003, would be a real disaster, given the already-weakened global economy. Late Wednesday, the World Health Organization (WHO)

raised its pandemic alert level from four to five, out of six, indicating a pandemic was imminent. It appears, however, that investors have taken the events of the past week in their stride. After an initial slump, the Straits Times Index continued advancing and closed above 1,900 on Thursday. In China, the epicentre of the SARS outbreak in 2003, the Shanghai Composite Index also closed higher, gaining 4.4% in total in April. Meanwhile, despite news that a toddler in Texas had succumbed to swine flu, the Dow Jones Industrial Average advanced more than 168 points at the close of Wednesday trading. This performance reflects a con-

fidence in Asias ability to handle health crises, as shown in the way the region overcame the SARS epidemic, which infected more than 8,000 people and killed nearly 800. Since then, countries like Singapore have put in place a comprehensive response plan to contain such an outbreak while limiting the damage on travel-related economic activity as it almost grinds to a halt. The Singapore Tourism Board says it is still too early to tell whether and how travel into Singapore will be affected by the outbreak, a sentiment echoed by organisers of events, including the Asia Pacific Economic Cooperation meetings. Earlier, the WHO also warned that border conBLOOMBERG DATA

trols do not work against the spread, and could worsen economic disruption instead. Still, while the impact on the broader markets remains to be seen, investors have reacted in several sectors, including transportation, hospitality and food. Are there buying opportunities in the market and what are some stocks to avoid?

Travel and retail

Among the hardest hit in a pandemic would no doubt be airlines and hotels, as the flu sparks fear of further cutbacks in travel. Companies in both industries are already grappling with significantly lower demand as a result of the recession. The International Air Transport Association (Iata) says the swine flu outbreak comes at the worst possible time for airlines. Global passenger traffic for March fell 11.1% from a year ago, the most since the start of the recession. It is still too early to judge the impact of swine flu on the bottom line, but anything that shakes the confidence of passengers is sure to have a negative impact on business, says Iata CEO Giovanni Bisignani. In Singapore, national carrier Singapore Airlines took a hit early in the week, closing 5% lower when markets reopened after the weekend. OCBC Investment Research notes that SIAs share price fell 38% during the SARS period, as the airline first started to park planes in the desert to cope with fast-diminishing passenger loads. SIA trades at 0.8 times price-to-book, even lower than the SARS period, the analysts wrote in an April 28 report. We will be cautious trying to pick [SIA] despite a dip in share prices as fundamentals are still weak and the flow-through of higher cost-cutting on corporate and personal travel would impact earnings.

Flu factor
Some counters have declined on fears that the swine flu outbreak could threaten business, while others could benefit from a health crisis. Is there value to be found?
PRICE AS AT APRIL 30 ($) MARKET CHANGE CAP FROM ($ MIL) APRIL 24 (%) PER (TIMES) YIELD (%)

COMPANY

WHAT IT DOES

Worlds second-biggest air carrier by market value Singapores largest hotel owner by number of rooms. Also owns Orchard Hotel Shopping Arcade. Frasers Centrepoint Trust A retail real estate investment trust (REIT) that has a portfolio of three suburban malls Suntec REIT Has office and retail properties in Suntec City, Park Mall, Chijmes and One Raffles Quay Peoples Food Holdings Shandong company that produces fresh and frozen meat and processed-meat products Synear Food Holdings Henan-based producer of quick-freeze food, desserts and snacks United Food Holdings Shandong-based company involved in soybean processing, animal feed and pig-rearing Medtecs International Manufactures and sells medical supplies, and woven and knitted medical textile products like surgical masks and gowns Riverstone Holdings Makes and sells cleanroom gloves and will start supplying medical gloves Parkway Holdings Owns and manages private hospitals in Singapore and across Asia Raffles Medical Group Operates medical clinics and Raffles Hospital

Singapore Airlines CDL Hospitality Trusts

10.700 12,696.06 0.580 0.740 0.735 0.495 0.195 0.045 0.110 0.480 1.210 0.910 481.65 462.17 1,160.39 559.51 268.12 50.04 47.84 148.56 1,367.76 471.79

0.94 4.50 2.77 7.30 -6.60 -13.33 0 120.00 0 7.08 -1.09

8.20

9.35

16.31 10.05 15.88 3.68 5.59 33.81 14.68 29.15 14.20 8.09 7.34 6.53 3.08 2.75

DBS Vickers believes, however, that the actual impact on SIA would be minimal because the carrier does not fly to Mexico and flies to only several US cities, with some exposure to Canada and New Zealand. Unlike SARS, we note that the epicentre is in Mexico and not Southeast Asia. Governments are more willing and better prepared to deal with the situation; and there are antiviral drugs available, the brokerage says in an April 28 report. SIA numbers should not be as bad as during SARS, unless the flu develops into a global pandemic. Analysts also expect hospitalityrelated stocks, including Singapores largest hotel-owner by number of rooms CDL Hospitality Trusts, to be affected. Similarly, OCBC says, retail REITs (real estate investment trusts) like Frasers Centrepoint and Suntec REIT could be affected, as both have malls that rely on tourist traffic. The brokerage writes, however, that we feel the macroeconomic crisis has already pushed sector valuations to distressed levels. A pandemic scenario would depress near-term yields, but our investment calls should be relatively unaffected. OCBC has a hold rating on Frasers Centrepoint and a buy call on Suntec REIT. Still, some analysts, including those at DMG & Partners, recommend keeping away from travel-related stocks like SIA and CDL Hospitality Trusts, given the uncertainties on their business prospects over the next few weeks.

Food and agriculture

Goldman Sachs notes that, although swine flu has not been observed to be transmitted to humans through pork consumption, consumer misunderstandings present a risk that near-term pork consumption may still decline.

PICTURES: BLOOMBERG

THEEDGE SINGAPORE | MAY 4, 2009 15

CORPORATE

The UKs loss is Singapores gain

ingapore has made no secret of the fact that it welcomes foreign talent and what better time to attract brains from abroad than now, when the recession is causing unemployment rates to soar in developed economies? In London, for its two-day Careers@Singapore programme, global recruitment body Contact Singapore recently took out full-page advertorials in the Observer and The Times promoting the benets of living and working in the island-state. The late-April event was aimed at showcasing job opportunities in Singapore in six growth service sectors: legal, healthcare, R&D, public services, interactive and digital media, and the nancial industry. Successful registrants had the opportunity to network with and, hopefully, receive offer letters from representatives of participating organisations including the National Healthcare Group, the National University of Singapore (NUS), Legal Labs, Standard Chartered Bank, Citigroup Singapore, DBS and Whitehead Mann Partnership. According to Contact Singapores website, similar nancial-sector career seminars held in London and New York in 1H2008 as the world teetered on the brink of a nancial meltdown attracted over 300 participants each, mainly City and Wall Street professionals. Undoubtedly, last months event in London would have seen greater response from the growing ranks of unemployed professionals considering a move abroad to nd work.

White-collar recession
The powers-that-be may deny that the UK is in a white-collar recession, but the latest

many professionals used to job statistics show that professionals security for many years are not have been badly hit, as a record prepared to hunt for new emnumber of them go on the dole. ployment. One such person is A Financial Times analysis of former BBC journalist Amanda Ofce of National Statistics data Austen, who suddenly found shows that more than 210,000 herself out of a job in her early people on unemployment benets in March had previously held 40s. Writing in the Guardian skilled middle-class jobs. about her humiliating experiThis gure is apparently over ence at her local Jobcentre Plus 120% higher than it was a year ofce, Austen reports how her ago; in contrast, the rise in claim- | BY LIM YIN FOONG | adviser admitted that the centre ant count for less-skilled workers simply doesnt know what to do is 75% from a year ago. Well-paid with unemployed professionals, since it doesnt get that many occupations that have seen a surge of them. in benet claims include sales and This has changed, howevmarketing managers, lawyers, er, since Austens article was architects, quantity surveyors, published last November. The accountants, financial-sector growing number of out-of-work professionals workers and advertising executives. While the number of professionals on benet has prompted the government to launch a 40 may pale in comparison to the 1.3 million claim- million ($87.9 million) initiative in early April ants who lost less-skilled jobs, some recruitment that enables Jobcentre Plus advisers to refer experts feel that the gure may not reect the newly unemployed professionals to private-sectrue state of white-collar unemployment. Higher- tor recruitment and employment agencies for income workers are generally believed to be specialist job-search support. Jobcentre Plus is reluctant to go on the dole and would rather the government-funded employment agency seek other options such as part-time jobs or that provides the unemployed with job search freelancing/consulting. This has given rise to the help. It also administers claims for unemployGiganomics phenomenon, a term coined by ment benets. inuential editor Tina Brown to describe portfolio workers who rely on a series of gigs rather than Talent exodus a job for life. Others may choose to go back to It is not just the bleak employment scenario at school to enhance their skills and reinvent their home that is driving Britons abroad, though. careers, or look abroad for jobs. There are fears of an exodus of big-earning talent, Online recruitment agency Monster.co.uks as the UK looks set to become one of the top 10 Corinne Mills says in the Financial Times that most expensive nations taxwise, following the

big money

unveiling of tax increases for high earners in the Budget announcement over a week ago. High-prole businesspeople including Sir Richard Branson have slammed the move to raise the top income tax rate to 50% from the current 45% for those earning more than 150,000 a year, and to cut all personal allowances for those whose annual salary exceeds 100,000. This is seen as a disincentive to entrepreneurs, some of whom have already indicated that they could leave the UK to relocate to tax havens like Switzerland and Monaco. For those looking farther aeld, Singapores top personal income tax rate of 20% would certainly make it seem even more attractive. In early 2008, The Daily Telegraph reported on an Organisation of Economic Cooperation and Development (OECD) study showing that the UK was experiencing its biggest brain drain in 50 years, as the country lost more 10% of its most-skilled citizens. While hundreds of thousands of retired Britons live abroad, the study revealed that almost 60% of those leaving take up jobs overseas. According to anecdotal evidence, the most frequently cited reasons for leaving the country were high house prices, taxes, poor climate and quality of life. Today, as the UK economy takes its worst dive in 30 years, increasing taxes and unemployment can be added to that list of reasons. Singapore will certainly have a greater pool of E talent from which to pick. Lim Yin Foong was editor of Personal Money, a Malaysian personal finance magazine published by The Edge Communications, from 2001 to 2006. She is currently based in the UK.

In Singapore, China-based meat producer Peoples Food Holdings share price slid 6% last week, over the previous week. Analysts say other consumer food product stocks that could be exposed are S-chips Synear Food Holdings, which makes and sells quick-freeze convenience food, and United Food Holdings, a food-processing company that also produces animal feed for its swine herd. Conversely, some analysts believe a worsening swine flu situation could be positive for oil palm plantations, as crude palm oil (CPO) prices could rise in tandem with soybean oil prices. Demand for soybean meal will likely collapse due to the mass slaughter of pigs. Soybean crushing may drop sharply, leading to a shortage of soybean oil, writes RBS analyst Nirgunan Tiruchelvam in a report last week. Soybean oil prices are likely to rise beyond our US$900 a tonne forecast for 2009. Our 2009 forecast average palm oil price of US$650 a tonne may be exceeded if the Mexican epidemic becomes a global pandemic. Palm oil producer Golden Agri-Resources is RBSs top pick for the sector. It is a highly liquid penny stock that provides exponential exposure to rising CPO prices. At a PER [price-to-earnings ratio] of 4.38 times and a price-tobook of 0.5 times for forecast FY2009, it is almost 70% below our sector valuation, Tiruchelvam says.

listed Medtecs International saw its share price more than double last week. The company says it is ramping up production of face masks and disposable gowns, and could boost output as much as fivefold if demand spikes on fears of a pandemic. CEO Clement Yang recalls that during the SARS outbreak, sales of those items shot up four to five times. Analysts at DMG also identified latex glove maker Riverstone Holdings as a potential beneficiary. The Malaysia-based company says it aims to boost production by about 40% this year, as it starts selling gloves to medical industry customers. DMG says there has yet to be visible impact on healthcare stocks like Raffles Medical Group and Parkway Holdings, which were listed during SARS. OCBC analysts note that, while the current swine flu hotspot is far away from Singapore, any lock-down in air travel might impede earnings as a significant amount of business comes from foreign patients.

Lessons from SARS

Essentially, governments, businesses and analysts are all looking to the experience of SARS, which hit Asia-Pacific the worst between February and April 2003. Credit Suisse notes that the STI fell 8% during that outbreak, although by then, the market had already collapsed 54% from its peak in January 2000. However, Asian stock markets recovered quickly and sharply from May to December 2003. Similarly, Credit Suisse notes, while real GDP in Singapore, Hong Kong and Taiwan fell 1% to 2% q-o-q in 2Q2003, it

Medical supplies
Yet, other companies that see some benefit from the health concern are drug firms and makers of gloves, masks and other medical supplies. Singapore-

rebounded sharply in 3Q2003. In an April 29 report, BNP Paribas observes that, in 2003, healthcare, utilities/energy outperformed, while financials, industrials and materials did not. Expect the same this time. Analysts say the most important point to note is that, as at April 30, there were no cases of swine flu in Singapore. Indeed, the markets were more focused on GDP numbers coming out of the US during the week. Analysts say that while the 6.1% contraction in 1Q2009 was worse than expected, people are taking it to mean that the worst may be over. The Monetary Authority of Singapores statement that the most intense phase of this downturn for Singapore has probably occurred also provides some reassurance to the markets, although the government stopped short of saying the recession has bottomed out. The swine flu outbreak poses a new risk to the local economy, as Singapore is heavily dependent on the two-way flow of people and trade through its borders. Industry observers say adverse effects could be limited, although it still pays to monitor developments closely. We believe the impact will likely by limited unless the source of concern extends meaningfully beyond Latin America, notes Goldman Sachs. However, the net impacts will be ultimately driven by policy and consumer response in the days ahead. With the lessons learnt from dealing with the SARS outbreak, both markets and investors alike are probably E already prepared.

A health worker examines a toddler after he showed a higher-than-average temperature on a thermal scanner upon arrival at Changi airport last Monday. Singapore has stepped up precautionary measures against the swine flu outbreak.

16 THEEDGE SINGAPORE

| MAY 4, 2009

CORPORATE

Asia should cash in on growing renewable-energy market, says Rabobank

| BY MICHELLE TEO |

he renewable energy and carbon trading market continues to grow despite the financial crisis, and Asian investors are missing out on this huge, virtually untapped sector, says Jotdeep Singh, Rabobanks regional head for renewable energy and carbon credits. Rabobank, the leading Dutch agricultural lender, believes there should be a regional hub for Asias renewable energy and carbon trading sector, to fully exploit the industrys potential. A key candidate would be Singapore, given that it is already functioning as a financial hub in many other areas and its convenient geographical location. The country has also attracted significant clean-tech investments, such as Renewable Energy Corps multi-billion-dollar solar panel factory and Neste Oils $2.4 billion biofuel facility. Jotdeep explains that, as clean-tech projects are diverse and dispersed throughout the region, the critical mass needed for the financial sector to step in to help the industry bloom does not yet exist. He says this lack of critical mass is the main reason lenders, investors and traders have difficulty understanding the renewable energy and carbon trading market, which in turn restricts the flow of funds to the projects. Financing for renewable-energy projects in Asia grew 30% from 2007 to top US$16.92 billion ($25 billion) last year, but it should really have been US$160 billion, Jotdeep says. You have banks that understand very well how an airport [project] financing needs to work, but how many banks understand equally well how solar or wind or biomass [project] financing needs to work? Fortunately, the financial markets are gradually recognising the counter-cyclical nature of most renewable energy and carbon trading projects. The financial meltdown may pose problems for new capital-intensive projects, while lower oil prices could temporarily put off the push for alternative fuel. But there is still a desire to reduce dependence on imported oil and move towards renewable and sustainable energy sources. If you look at India and China, for example, the demand for electricity is fundamental. Just because there is a recession doesnt mean some of that renewable power is not needed, Jotdeep adds. Indeed, the renewable-energy sector is expected to grow fast despite the downturn. The Clean Edge Report, an industry tracker, projects the market for solar, wind and fuel cells energy to exceed US$100 billion by 2014.

Stable industry

GWYNETH YEO/THE EDGE SINGAPORE

Despite the market turmoil, Jotdeep notes that the green-energy sector has performed better than others. A lot of asset classes have done badly but if you look at the lending portfolios of typical institutions, our guess is that the renewable-energy part of the lending has got less adversely affected, he says. Its because these projects are more stable in terms of their costs and revenues, and also the demand and supply. Demand is still strong, Jotdeep says, given that rapidly industrialising countries like China and India are still hungry for power. On the off-take side, you have a lot of renewable energy selling at pre-determined tariffs, Jotdeep says, adding that most of the deals are long-term supply contracts. Besides demand for energy, another important factor is the demand for carbon credits supplied by renewable-energy projects. Currently, renewable-energy projects make up about 70% of carbon credit-issuing developments in Asia. Carbon credits are credits that companies can purchase from eco-friendly projects to offset their carbon dioxide and other greenhouse gas emissions that contribute to global warming. Carbon credits come under the Kyoto Protocol, which seeks to tackle climate change by reducing greenhouse gas emissions. Under the Kyoto Protocol, countries have pledged to reduce their emissions to below 1990 levels by 2012, or 8% for the European Union and 6% for Japan. Industry watchers expect demand for carbon credits, and their price, to go up as 2012 draws nearer, and as industries struggle to meet their reduction targets. Indeed, despite the recession, the volume of trading in the global carbon credit market in 1Q2009 grew 37%, from the previous quarter, according to UK-based industry analyst New Energy Finance. While carbon credit prices crashed to below 10 a tonne in February this year, they have quickly recovered to about 11. Jotdeep adds that despite its volatility, the carbon credit market has encouraged clean-energy investments and energy efficiency. Meanwhile, Jotdeep observes that cleantech ventures are a lot less risky than what most sceptics think, particularly compared with other infrastructure or even tradition-

Jotdeep observes that clean-tech ventures are a lot less risky than what most sceptics think, particularly compared with other infrastructure or even traditional power developments
Prospects for Asia
Asia currently accounts for 75% of the worlds carbon-credit projects and is expected to hold 80% of carbon credits by 2012. Yet, as Jotdeep points out, London is currently the major hub for carbon-trading activities around the world. Indeed, Europe is effectively the global leader in the renewable energy and carbon credits industry. Why is Germany a leader in solar [technology] when Asia has many more times the solar resources, is already manufacturing [solar panels], and cheaply so? For Singapore to be a renewable energy hub, however, [it] has to have solutions for all the other renewable-energy technologies like wind, wave, biogas, biomass and so on, says Edwin Khew, chairman of the Sustainable Energy Association of Singapore. Khew adds that while many of such technologies cannot find viable applications here, this does not stop Singapores being a hub for renewableenergy and energy-efficient solutions. Jotdeep agrees, saying that while Singapore may not have the largest clean-tech developments, it could certainly be an example-setter. Indeed, the city-state is ramping up its greening activities in a bid to boost its green credentials. Last week, a top government committee unveiled a $1 billion national blueprint to cut energy usage and lower emissions. Singapore had earlier identified the clean-energy sector as an economic growth pillar, along with water technologies, and both sectors are projected to provide $3.4 billion in economic value-add annually by 2015. Whatever the case, the trend is clear that the renewable energy and carbon credit sectors are on their way up, and that the financial markets are to follow. There are a lot of interesting things happening on both the technology side as well as the project-deployment side, Jotdeep says. On the project deployment side, obviously, the equity returns are lower because the risk is lower. On the new-technology side, the returns could be higher, but your risks are much higher. In both areas of clean technology, you have interesting investment opportunities. And while investments so far this year amounting to US$1.32 billion as at February, according to New Energy Finance pale in comparison to 2008, Jotdeep believes Asias renewable-energy sector will still perform better than those of the US and Europe. The long-term logic for this has not gone away, he says. Its just a matter of time before it E picks up again.

al power developments. For example, while coal-, gas- or oil-fired power plants depend on the commodities prices, projects that generate energy from solar, wind or hydropower have no raw material costs. This significantly lowers the risk that comes from volatile material prices. A further boost comes from the ability to develop renewable-energy projects in a modular way, which reduces the risks that are typically associated with massive, capital-intensive undertakings like bridges and airports. Should there be concern over the new technology, Clean Edge records that global cleantech projects brought in at least US$115.9 billion in revenues last year a testament to the viability of projects in the sector. Also, green energy has increasingly become cost-competitive, compared with conventional fuel. In some cases, its even cheaper, he says. For example, if you need to transport your diesel to a remote island in Indonesia to fire up a palm oil mill, is that more expensive? Or would [it be] a biomass-power solution, based on that islands resources?
BLOOMBERG

Clean-tech companies
Some Singapore-listed companies have moved in on the renewable energy and carbon credits sector
COMPANY WHAT IT DOES CLEAN-TECH VENTURES PRICE AS AT MARKET YTD APRIL 30 ($) CAP ($ MIL) CHANGE (%) PER (TIMES) YIELD (%)

Keppel Corp

Worlds largest oil-rig builder. Also has businesses Environmental engineering arm recently secured in property development, telecommunications $518 million contract to build one of the largest and energy. waste-to-energy facilities in the UK Provides centralised utilities services to industries Operates a 30MW biomass power station in the UK Provides waste management solutions First Singapore company to obtain approval to sell carbon credits, which are generated from its 1MW biomass power plant. Credits have been forward-sold to Japans Kansai Electric Power Co. Operates biodiesel plants with a capacity of about a million tonnes a year

5.830

9,287.91

34.64

8.28

6.00

Sembcorp Industries ecoWise Holdings

2.650 0.055

4,731.18 35.95

14.22 -15.38

9.30 5.42

4.15

Wilmar International Oil palm cultivation and milling. Refines, processes and trades palm oil and lauric-related products. Trades in soybean, crude soybean oil and other grains.

3.540 22,605.31

26.88

9.95

2.06

THEEDGE SINGAPORE | MAY 4, 2009 17

GWYNETH YEO/THE EDGE SINGAPORE

CORPORATE

BSI Singapore tunes up for growth

| BY GOOLA WARDEN |

n the evening of April 3 at the Esplanade Concert Hall, world-renowned French violinist Renaud Capuon, accompanied by the Singapore Symphony Orchestra, enraptured the audience with his virtuoso performance of German composer and pianist Felix Mendelssohns only violin concerto. Sharing centre stage with Capuon was his violin, the BSI Del Gesu 1737. Made famous by its previous owner Isaac Stern, who died in 2001, the instrument was acquired by Swiss-Italian private bank BSI (Banca della Svizzera Italiana) AG in 2005 and loaned to the maestro. To boldly step in, sponsor a concert and the SSOs 30th anniversary celebration in the middle of a credit crunch takes some doing but, for BSI, it came naturally. It was a given, says Nicola Battalora (picture), CEO of BSI Singapore, tells The Edge Singapore. The SSO opportunity to promote or support their 30th anniversary was proposed to us at dinner the other night by the Dean of the Singapore Management University. Indeed, art and culture have long been an integral part of the DNA of the 135-year-old, Lugano-based private bank, which promotes and supports music in the lakeside town. In Singapore, avant-garde Asian art greets visitors at BSI Singapores newly expanded office on the 32nd level of Suntec Tower One. Why is BSI Singapore stepping its marketing efforts and expanding floor space at a time like this? Just weeks ago, HSBC joined the long list of banks reducing their wealth management staff. The British banking giant cut 100 positions in its private banking business in Hong Kong, or 8% of HSBC Private Banks 1,200 staff. Last month, UBS announced it was retrenching 240 people in Singapore and Hong Kong, including private-banking staff. Last November, Citigroup Private Bank trimmed 150 people from its Asian wealth management operations. In December, Credit Suisse said it would cut 5,300 jobs worldwide, including private-banking personnel. That month, Deutsche Bank retrenched 60 wealth management staff from offices in Singapore and Hong Kong.

headcount], says Battalora, adding that it wasnt easy looking for the right people even with the spate of retrenchments. We are a boutique bank and we want to hire people who can fit into our organisation. If you are joining a bank like ours, you have to share our values. Currently, Battaloras team of relationship managers consists of mainly Asians with private-banking experience and an average age of 45. Take, for example, the head of the private banking team, a Singaporean who speaks fluent Italian. That makes him the perfect candidate, says Battalora, because he can understand the culture of the bank and interact with everybody in the bank. Battalora, 47, is a Swiss-Italian and has been working for the bank since 1989. His previous appointments have taken him to places such as Guernsey in the Channel Islands, London and the Bahamas. Three-and-a-half years ago, he finally moved to Singapore. Battalora is frank about the problems that private banks face in the wake of the financial crisis. We are seeing companies disappear which we never thought would disappear. Private banking suffered from the crisis because the clients suffered from the downturn of the financial markets, he acknowledges. As a result, people are looking for investments that are more transparent and less risky, he says. According to market watchers, as much as US$40 trillion ($60 trillion) in global wealth has been wiped out. Cheng Tan Feng, managing director at BNP Paribas Investment Partners for Southeast Asia, estimates that 30% to 40% of US$700 billion in assets under management (AUM) as at end-2008 in Singapore was wiped out.

How can you not be in Asia when you look at the growth in wealth here? Battalora
Another boutique Swiss bank, Bank Julius Baer, has also seen net new money in its private-banking segment rise a record CHF17 billion in FY2008, with significant contribution from Asia even as total AUM declined by a third. How can you not be in Asia when you look at the growth in wealth here? Battalora says. It represents 50% of the worlds population and the economies here are growing very fast. Admittedly, its very crowded. Of course, we have to find a niche. Our aim is to become a meaningful player in private banking and wealth management in Asia. While Singapore is attractive as a booking centre because of the presence of a proactive regulator and its economic and political stability, the city-state will be used primarily to book Asian business, says Battalora. You [have to] be here to develop Asian business. Its not a cheap place to run a business in Singapore, he adds.

Adapting to Asia
In two to three years, Battalora aims to aggressively grow its Singapore business by more than 30%. We are leveraging on the relationship with our shareholder Generali. The more we can do with them, the more we grow. But he is very clear about one thing. We dont push products, he says emphatically. Indeed, one of the things that surprised Battalora when he came to Singapore more than three years ago was the focus on products rather than service. I was at a private-banking conference a few years ago. I raised my hand and said everyone here is talking about products, he recounts. The panellist told me, You are right; we are trying to service the needs of our clients, which are products. Clients are asking for products. Asian people want products. The other differentiating feature between

Boutique banks book new business

Although BSI can never grow to the size of Zurich-based Credit Suisse or UBS, it is the smaller banks that are booking new business now. In FY2008, BSI, a subsidiary of European insurance giant Assicurazioni Generali SpA, recorded a net profit of CHF101 million ($132 million) and tier-one capital adequacy ratio of 11.8%. AUM stood at CHF 78.2 billion, with the bank reporting a net inflow of CHF6.6 billion in AUM. Battalora declines to reveal Asias contribution to profits and AUM growth. All he can reveal is that we are looking for new space when our lease expires next March.

Expanding the niche

The situation is different at BSI Singapore, as it plans to add to its current count of 30 relationship managers. We have increased [our

Europeans and Asians is their appetite for risk-taking. In Asia, people are much more prone to taking risks, he points out. As a result, European clients have been less affected by the collapse in asset prices and stock markets. The risk profile of our European investors is much lower than that of our Asian investors. The discretionary management in difficult times allows clients to manage the risk better. European investors, on the other hand, allow private bankers to manage wealth at their discretion while Asian investors prefer equities, which is higher-risk. Moreover, Europeans tend to consolidate their wealth in two or three banks at the most. In Asia, people spread their wealth more, Battalora says. The banks are competing because the clients are moving money depending on the opportunity they are given. What I learned is [the bankers] need to show something to the client to interest them. Do I want to participate in this type of business model? No, but weve started to adapt ourselves to the market. Under BSI Singapores current licence, clients must have at least US$1 million to invest. The ideal amount is US$5 million, Battalora says. We try to fit with the client, structure the portfolio to suit the needs of the client whether he or she is looking for income, growth or security. The banks two important booking centres in Asia are Singapore and Hong Kong, says Battalora. It plans to service Malaysia, Thailand, Indonesia and India out of Singapore and Taiwan, and the Philippines out of Hong Kong. Singapore is the best location because of its solidity and reputation, he says, but adds that it is still early days. Meanwhile, Singapores music community has plenty to look forward to with BSI. The possibility of famed Argentinian pianist Martha Argerich performing at the Esplanade is exciting concert-goers. Elsewhere in Europe, BSI is collaborating with Acadmie de Musique (Fondation Prince Rainier III) to offer master classes to promising young musicians, and Battalora is willing to explore a similar programme in Singapore. With Capuon as the music director of the BSI Winter Festival in St Moritz, Singapore audiences can hope for an encore performance. As boutique private banking takes off in Singapore, all eyes will be on BSI Bank Singapore to deliver a master class in high-netE worth wealth management.

18 THEEDGE SINGAPORE

| MAY 4, 2009

OPINION

Singapore economy: Downturn? What downturn?

f we believe the data, Singapores economy is in free fall. Preliminary estimates tell us that the economy contracted 11.5% in 1Q2009 compared with 1Q2008. This is an extraordinarily horrible rate of contraction, much worse than what we saw in previous recessions 1985/86, 1997/98 or 2002. Right now, some of the smaller economies in Europe, such as the Baltic states, are contracting more than 10% annualised. In those economies, there are clear signs of distress affecting banks and companies, resulting in job losses and bankruptcies that really undermine citizens welfare. But, anyone who has been walking around Singapore sees a rather different picture. Shopping activity, whether in Orchard Road or in the HDB heartlands like Tampines, remains high, certainly high enough to create traffic snarls even during weekdays. Restaurants and other places of entertainment remain reasonably full its easier to get a place at a good restaurant, certainly, but business has not fallen off all that sharply. Non-performing loans at local banks are rising, but not dramatically. This may be an economy that is slowing, but it certainly does not feel like an economy that is falling at an 11.5% rate. In fact, other data seems to show that the things that affect ordinary folks are only worsening at a fairly modest rate unemployment is edging up, retail sales have weakened somewhat and highend residential prices are falling. There are two important issues that arise from this apparent disjuncture between economic data and citizens welfare. Both have important repercussions for policy.

A dual economy: Foreign part hit hard

One plausible explanation for the disjuncture is the dualist nature of the Singapore economy. We have one part of the economy that, judging by ownership and employment, is largely foreign and another part largely Singaporean. For example, manufacturing is largely foreign MNCs produce the bulk of exportable manufactured goods and a huge fraction of the workforce comprises foreign workers. Large parts

duction capacity with demand. of the finance sector outside doWe suspect that retrenchments mestic lending and insurance acwill rise in coming months as tivities have a very large foreign businesses realise that all this component wealth managetalk of green shoots of recovment, Asian Dollar Market acery is misplaced. tivity, investment banking and Second, many Singaporeans Treasury operations. Of course, work in parts of the economy Singaporeans are involved, but which provide financial, tradthey are not such a core part of ing and other support to neighthese segments that a downturn bouring economies like Malaywould hurt them significantly. sia and Indonesia. So far, our Our back-of-the-envelope es| BY MANU BHASKARAN | neighbours have not been as timates suggest that roughly half hard hit by the global recession. of the economy is foreign. InterBut, they too are beginning to estingly, the parts of the econofeel the delayed effects: For inmy that are currently in free fall stance, as commodity prices manufacturing and key parts remain low, rural households of finance are largely foreign. will reach a point where they These activities boomed between cannot continue spending out 2005 and 2007 and have now collapsed. In the boom, they did not seem to boost of the savings built up during the boom years the welfare of ordinary Singaporeans as much and domestic demand in these countries will as the GDP growth numbers implied, and they flag. As Malaysia and Indonesia slow, some are not hurting Singaporeans very much on the parts of our economy that are currently holding up will feel the heat. This decline will hurt way down, either. Singaporeans a lot more than declines in the foreign part of our dual economy. Delayed effects: Economy may Third, because of the overheating that prestabilise soon, but locals welfare ceded this slowdown, we entered the recession could be hurt But, this is not the entire picture. The very with a high cost structure. Wages rose sharply nature of the economy also suggests that the in 2007 to 2008 and so did rentals. The costs pain for ordinary Singaporeans is coming of intermediate services also rose materially. but with a lag. There are a number of rea- This did not hurt us much when the economy was booming and when our competitors were sons for this. First, many companies that have just emerged also seeing rising costs. In fact, Singapores infrom several years of labour shortage are averse flation exceeded the average of our main tradto laying off staff. In many cases, companies ing partners during the boom, for the first time have chosen to put Singaporean workers on in many years. This tells us that we were lospay cuts or, what is essentially the same thing, ing our competitiveness. As the global slowdown persists, this and forced no-pay leave for a few days a month. Pay cuts of around 10% to 15% are not nice, related weaknesses in our economy will force but neither are they painful enough to force an companies to undertake much more painful reabrupt cut in discretionary spending outside structuring. The result could well be a spell of big-ticket items such as cars, luxury goods or the deflation that we suffered in 2002 to 2003. expensive holidays. However, if we are right But, falling consumer prices will raise the real and the global recession is not going to end cost of debt and increase stress on borrowany time soon, Singapore companies will have ers. Default rates will rise. In addition, falling to start retrenching workers to align their pro- rentals and falls in real estate prices across the

world will also put downward pressure on real estate prices in Singapore. As the value of the homes they own falls, Singaporeans will feel poorer. This wealth effect will also weaken consumer spending. In other words, we could soon see another disjuncture: The data on the Singapore economy could get less bad, but the welfare of ordinary Singaporeans will start to take a beating.

So, what?
What conclusions should we draw from this analysis? First, we need to fine-tune the data we use to assess the welfare of Singaporeans, which is what really matters. No offence to the foreigners living in our midst whom we value. But, every country must first look after the welfare of its own citizens and to do that, we need to have accurate measures of their welfare. In a dual economy as ours, this measure has to go well beyond GDP growth. Policy objectives should then be set with this broader measure of welfare in mind, rather than a simplistic GDP target. Second, in the longer term, we need to think hard about the economic model we have chosen. We need to undertake a hard-headed, rigorous analysis of the linkages between the foreign and local components of our economy. We need to ask ourselves whether the MNC-led strategy is sufficient or whether it needs to be complemented with policies that actively build more linkages to erase the dualistic nature of our economy. Third, Singaporeans should not assume that the fairly benign nature of this recession will continue. It is likely to turn more painful for them in coming months, in the form of rising unemployment, falling incomes and declining values of the homes they own. It is advisable to exercise caution before taking on a large debt burden for a new home or before E rushing to buy stocks. Manu Bhaskaran is a partner and head of economic research at Centennial Group Inc, an economics consultancy

my say

Obama set to drive away the clouds

| BY SY HARDING |

he Doomsday scenario that has the US plunging into a new Great Depression that will last for a generation is beginning to subside, as are predictions of 5,000 on the Dow Jones Industrial Average. But the debate goes on about how sickly the economy is, how long it will take to revive and whether the nation is piling up a crushing amount of debt. The discussion offers great material for stress headaches, but clouds the issue of where the economy and the stock market are headed. Presidential history, however, offers some simple guidance that investors shouldnt ignore. Theres a strong tendency for each new presidential administration to do whatever it takes to make sure the economy and market will be strong when reelection time rolls around four years later. As the table shows, of the 19 bear markets since 1917 I define a bear market as one in which stocks fall at least 20% 15

ended in the first or second year of a presidential term, so that the economy and stock prices had recovered by the time the next election took place. Three of the four exceptions (during which the bear didnt flee until the third or fourth year) came during a presidents second term, after which most of the incumbents didnt want, or (starting in 1947) couldnt legally seek, a third term. The sole president who didnt see the bear depart until his fourth year in office was the unfortunate Herbert Hoover, who wasnt reelected. So, the odds seem good that the current bear market will conclude in the first or second year of the Obama presidency. Add in the gigantic stimulus plan that began in the last year of the Bush administration usually such programmes are smaller and start in the first or second year of the new presidents term and the bottom could be seen this year, perhaps in October, after a retest of the March E low. 2009 Dow Jones & Co, Inc

The first-term effect

BEAR MARKET

Woodrow Wilson (D) Warren G Harding (R)1 Herbert Hoover (R) Franklin D Roosevelt (D) Franklin D Roosevelt (D) Franklin D Roosevelt (D) Franklin D Roosevelt (D)2 Franklin D Roosevelt (D)3 Harry S Truman (D)4 Dwight D Eisenhower (R) John F Kennedy (D)1 Lyndon B Johnson (D) Richard Nixon (R) Gerald Ford (R)5 Jimmy Carter (D) Ronald Reagan (R) Ronald Reagan (R)2 George H W Bush (R) George W Bush (R) Barack Obama (D)
1

PRESENT

TERM

1917-20 1921-24 1929-32 1933-36 1933-36 1937-40 1937-40 1941-44 1945-48 1957-60 1961-64 1965-68 1969-72 1973-76 1977-80 1981-84 1985-88 1989-92 2001-04 2009-12

Sept 1916 Nov 1919 Oct 1929 Sept 1932 Feb 1934 March 1937 Nov 1938 Sept 1939 May 1946 April 1956 Dec 1961 Feb 1966 Dec 1968 Jan 1973 Sept 1976 April 1981 Aug 1987 July 1990 Jan 2000 Oct 2007

TOP

July 1917 Aug 1921 July 1932 Feb 1933 July 1934 March 1938 April 1939 May 1942 May 1947 Oct 1957 June 1962 Oct 1966 May 1970 Dec 1974 March 1978 Aug 1982 Oct 1987 Oct 1990 Oct 2002 ?

BOTTOM

MARKET DECLINE (%)

YEAR IN WHICH MARKET BOTTOMED 1ST

-24.1 -46.4 -89.0 -37.2 -22.1 -49.1 -23.3 -40.4 -23.2 -20.2 -27.1 -25.2 -35.9 -45.1 -26.9 -24.1 -36.1 -21.2 -50.1 -53.8

2ND

3RD

4TH

? ? ?

2 Died in office Second term 3Third term 4 Assumed presidency upon Roosevelts death (April 12, 1945) 5 Assumed presidency upon Nixons resignation (Aug 9, 1974)

ASSET MANAGEMENT RESEARCH CORP