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||Asean Affairs 14 September 2012
ASEAN Equity Preview, Golden Agri Resources, Garuda, Sime Darby, Sri Trang Agro
By Shayne Heffernan Ph.D.
Asian Markets will peak today and if you are holding positions it would be a great day to sell.
Economist Shayne Heffernan explains why this dodgy version of QE3 is futile
This dodgy version of QE3 will make no difference to the USA Economy, companies in the US are already sitting on a record cash hoard, adding to the cash with QE3 will introduce rapid inflation in to a high unemployment environment, a disaster for people and corporations.
American economists are so used to studying the US economy as a seamless whole that they don’t want to accept it has structural problems, because for them, structural problems are a developing countries’ issue. Yet in a globalizing world, every country has to undergo some structural changes. The emerging economies, noticeably China, India and Brazil, are changing the global economic landscape.
Among all the changes, the reallocation of jobs poses the most serious challenge to developed countries. Products that used to be made in developed countries are now being produced in emerging economies at much lower costs. As a result, developed countries might have lost forever the chance to create low-end jobs.
The Main Problems with Today's Fed move
Obama is Guaranteed Victory in 2012
Low interest rates do not matter if banks are not lending to consumers and small businesses, and corporations that are able to borrow money will not lend or invest it. What would be more effective is to make life easier for small business by dropping regulations and barriers to entry. Removing the rules imposed on banks under the ridiculous Volcker and Dodd-Frank legislation would also help.
The greatest beneficiaries of the lowest rate policy are the corporations that need money the least, so how does that help?
Lower interest rates do not provide a sufficient reward to lenders for taking on riskier loans and home mortgages. Therefore home mortgages, consumer loans and small-business loans may be easier to get if rates were higher. Obama’s war on Banks has not built a great economy, it has reduced the level of activity and risk banks are willing to take, small business is one of those risks.
By keeping short-term interest rates pegged near zero and pushing long-term rates below 2%, the FED is advertising that it has no faith in the recovery. If it does not have faith in the economy, they why should anyone else have confidence? It confuses me no-end that when the economy is so bad that QE3 seems justified that the market would rally, why? If the economy is in such a state that intervention is needed that is not an environment to invest in at all.
The current slow recovery has lasted more than three years. Therefore, one can expect the economy to enter a new recession sometime within the next one to two years. If that happens, the FED must have resources to fight it, firing off a QE3 now would put the future at risk.
QE3 will add to the cash hoards of corporations, without making a dent in economic growth or unemployment.
Sri Trang Agro-Industry, is hoping to become a market leader in the global market by 2014 and is kicking off this plan by putting aside Bt2 billion to build three new plants over 2013-2014.
Company director Kitichai Sincharoenkul said his firm wanted to boost its production capacity to 1.5 million tonnes by 2014 from its current scope of 1.1 million to 1.2 million tonnes.
"We aim to double our global market share from 9 per cent to 15 per cent by 2014," he said.
This year Sri Trang was able to boost its production capacity to 100,000 tonnes at its factory in Udon Thani province and by another 100,000 tonnes in Palembang, Indonesia. The boost in its production capacity should help the company's sales volume grow by 10 per cent next year, Kitichai said.
Sri Trang's revenue this year is expected to be Bt100 billion, less than last year's Bt133 billion because the price of rubber has plunged 40 per cent this year to US$2,700 (Bt84,645) per tonne.
He said the global demand for rubber was dropping due to the economic slowdown, though demand for the material in the automotive industry is rising thanks to the booming Chinese economy. China is the key importer of rubber at 37 per cent of total sales volume, followed by the United States and Europe.
The Battersea Power Station project here is expected to contribute significantly to Sime Darby Bhd group and its property division in the next two years.
Sime Darby group chief operating officer, Abd Wahab Maskan, said the project has attracted interests from Malaysia as well as other countries, which included large property development investment companies.
“There are interest shown by those who had suggested sub-joint venture and possible booking of retail blocks,” Abd Wahab told Malaysian reporters on the sidelines of the Battersea familiarisation tour recently.
Abd Wahab, who is also managing director of Sime Darby Property Bhd, said residential and commercial sales launches for the phase one of the project will take place next year with construction work starting in the second half of 2013.
He said the project was expected to attract interests because of its location on the South Bank of River Thames, near the upmarket boutique shopping district of Sloane Square and the Battersea Park, the green space in the London Borough of Wandsworth.
Sime Darby has a 40% stake in the special-purpose vehicle, Battersea Project Holding Co Ltd, which has acquired the power station site for £400 million.
SP Setia Bhd has 40% and Employees Provident Fund 20%.
Abd Wahab said the £400 million for the 15.8-hectare site was a good price based on an estimation of 5% of its gross development cost.
“In Malaysia the ratio is at 25% to 30% of development cost while in Singapore and other big cities the percentage is at 30 to 40,” he said.
“This shows that the land cost in the power station site is lower than its development cost,” he said.
In terms of the expected profit margins from the investment, Abd Wahab said when the group invested in real estate, the minimal margin expected was 25% to 30%.
Abd Wahab said there was a possibility of better contributions from this project when the global economy improved and from initiatives by the UK government to increase investment in London as well as infrastructure projects surrounding the Battersea site.
“We anticipate that interests from global investors for the London properties are still there, especially those who are looking at London as a major investment destination,” he said.
On funding for the project, he said, out of the £400 million paid for the site, £300 million will be funded via borrowings while the rest as well as other costs, will be from equities from the three parties.
Fitch Ratings said that the debt ratio at Singapore-listed Golden Agri Resources will increase but it should remain manageable after the company’s planned bond issuance.
The global ratings agency also said the bond issuance would not affect its subsidiary in Indonesia.
The palm oil unit of Indonesia’s Sinar Mas conglomerate group is planning to issue $400 million in convertible bonds next month that will mature in 2017. The bond issuance will weaken the company’s ratio funds from an operation adjusted leverage to 2.0x by the end of the year and 3.4x in 2013. It was at 1.5x in 2011.
This leverage ratio indicates the company’s ability to pay its debts, using money from its operations.
The estimated 3.4x ratio is higher than Fitch’s negative rating trigger at 2.5x. However, the rating agency believes that the leverage will improve to below 2.5x in 2014 “as free cash flow is used to meet scheduled debt amortization.”
Over the longer term, funds from operation leverage should remain below 2.5x as the company ramps up its downstream production.
Meanwhile, Golden Agri plans to plans to use the bond proceeds for general corporate purposes, including acquisitions or joint ventures.
Fitch notes that this is in line with similar expansion moves by other Indonesian palm oil companies, in response to the growth potential of the country’s palm oil industry.
“The proposed issue will strengthen GAR’s liquidity and its resources for potential investments,” the agency said in its statement. “Fitch is therefore of the view that GAR’s proposed bonds will not impact the ratings of its Indonesian plantation subsidiaries, which are driven by their strong linkage to Golden Agri Resources.”
Export Development Canada will help finance Indonesian flag carrier Garuda Indonesia’s purchase of Canadian aircraft.
Handrito Hardjono, finance director of Garuda Indonesia, said EDC will provide Garuda with $135 million worth of financing facility to help it purchase five Bombardier CRJ1000 NextGen aircraft in 2013.
“EDC has agreed to lend $135 million, or 80 percent, of the total funds needed to purchase the Bombardier aircraft,” Handrito said on Tuesday. “The remaining 20 percent will come from internal funds.”
Bombardier is a Canadian aircraft and train manufacturer while CRJ1000 NextGen is a narrow-body aircraft with fewer than 130 seats.
In June, Nordic Aviation Capital in Denmark announced that Garuda will also lease 12 units of the same aircraft, along with buying the five units directly from Canada.
Amid Garuda’s expansion phase, the company has also ordered aircraft from Airbus and Boeing. Handrito said the company had secured a $200 million syndicated loan from banks to help finance the purchases.
The loan will be disbursed by the end of September and will mature in two years.
ASEAN Ready for 2015
According to the Jakarta-based secretariat, key achievements that support this increased implementation rate include the implementation of the Asean Single Window (ASW) through the development of its new architecture and legal framework.
The ASW, a unified customs system for the region, is seen as the cornerstone of the AEC and a test case on how practical the envisioned single economy may be.
Also, the governments of the 10 Asean members have decided to explore mechanisms to effectively address the issues of non-tariff barriers; completed the Asean Agreement on the Movement of Natural Persons; implemented a peer review process to remove investment restrictions; and made effective the Asean Plus Three Emergency Rice Reserve (APTERR) Agreement on food security.
In September 2010, agriculture ministers of Asean and those of China, Japan and South Korea signed the APTERR agreement, which is aimed at ensuring the long-term food security and livelihoods of the people in the East Asian region.
Asean groups the Philippines, Indonesia, Malaysia, Thailand, Singapore, Brunei, Cambodia, Laos, Myanmar (Burma) and Vietnam.
Under the agreement, the 13 countries commit to build up a reserve of 787,000 tons of rice – including 12,000 tons from the Philippines — in anticipation of instabilities in supply resulting from natural disasters and humanitarian emergency situations.
The 13 countries account for around two-thirds of global rice production and more than half of global rice exports.
But even with these milestones, the AEM recognized the major risk that the uncertain global economy has been posing to AEC-building.
Thus, the ministers agreed to address implementation bottlenecks under the AEC, particularly initiatives related to customs and transport.
Yesterday in Asia
Tokyo rose 0.39 percent, or 35.19 points, to 8,995.15, Seoul was flat, edging up 0.66 points to 1,950.69 and Sydney eased 0.50 percent, or 21.9 points, to 4,339.4.
Hong Kong eased 0.14 percent, or 27.76 points, to 20,047.63 and Shanghai was off 0.76 percent, or 16.17 points, at 2,110.38.
– Singapore closed flat, edging up 0.48 points to 3,030.14.
Fraser and Neave surged 4.82 percent to Sg$8.92 while City Developments fell 1.06 percent to Sg$11.18.
– Taipei closed 0.11 percent higher, adding 8.35 points to 7,578.80.
– Manila closed 0.64 percent higher, adding 33.40 points to 5,240.50.
Metropolitan Bank and Trust added 0.4 percent to 93.75 pesos and Universal Robina put on 1.5 percent to 62.50 pesos.
– Wellington closed 0.10 percent, or 3.68 points, lower at 3,786.04.
– Jakarta was flat, edging down 3.46 points to 4,170.64.
Car maker Astra International fell 0.68 percent to 7,300 rupiah, Indah Kiat Pulp and Paper declined 0.91 percent to 1,090 rupiah, and Indocement dropped 2.24 percent to 19,600 rupiah.
– Kuala Lumpur was up 0.91 percent, adding 14.62 points to 1,628.40.
– Bangkok fell 0.18 percent, or 2.27 points, to 1,257.69.
Coal producer Banpu dropped 1.38 percent to 428 baht, while electricity firm EGCO gained 2.46 percent to 125 baht.
– Mumbai rose 0.12 percent, adding 21.13 points to 18,021.16.
Shayne Heffernan Ph.D.
Linda Johnson, Business Development Director - Private Client Group, Heffernan Capital Management
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