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World-Class Malaysian Companies Malaysian Fund Management Company, KSC, Profiles Ten Regional and Global Market Leaders By Mr. Choong Khuat Hock Posted, March 8, 2005 KSC, an independent fund management company in Malaysia, has picked 10 Malaysian companies that are listed on the Kuala Lumpur Stock Exchange which we think are world class. In achieving world class standards, they have to be one of the best at what they are doing in the world or in Asia. They represent a broad range of industries covering shipping (MISC), plantations (IOI Corp), electronics (Uchi Technologies), the internet (JobStreet) and manufacturing (DK Leather, Ekowood, OYL, Scientex Packaging, Supermax, Tong Herr). Quite a few of the companies (DK Leather, Ekowood, JobStreet and Supermax) have also established global brands. The ratings for many of these companies are cheap. Other than Jobstreet which is priced on a FY05 PER of 19.7x because of its strong growth, the rest of the companies are trading between 6-13x despite the fact that most of them will be reporting earnings growth above 15% in 2005. When Malaysia gained independence from Britain in 1957, it was a resource-based economy. Oil palm was introduced in the 70's and Malaysia is currently the largest exporter of palm oil in the world. Crude oil and gas resources were also developed. The electronics industry started in Penang (located on the North Western part of Peninsular Malaysia) in the 70's and to this day Penang remains the main electronics centre in Malaysia with Dell and Intel operating there. Malaysia's industrialization process started in the 70's and gathered pace in the 80's and 90's. However, unlike Japan, Korea and Taiwan where local companies were deeply involved in the industrialization programme, Malaysia was dependent mainly on foreign direct investment (FDI). The 1997 Asian crisis badly affected Malaysia but as the country had a stronger fiscal position; it was able to impose exchange controls and exited the crisis without help from IMF. What was clear from the industrialization process was that the bulk of government inspired companies like Perwaja (steel production) and Proton (car manufacturing) were either disastrous (e.g. Perwaja which lost billions) or successful only due to protection of tariffs (e.g. Proton) which distorted the market. The silver lining from the post-Asian crisis period of low FDIs and absence of government inspired mega-projects is that it allowed more efficient and competitive private companies to prosper. The Asian crisis removed inefficient companies and resulted in better use of capital. We have only analyzed some world class Malaysian companies that are listed on the Kuala Lumpur Stock Exchange (http://www.klse.com.my/). The Kuala Lumpur Stock Exchange is one of the largest stock exchanges in South East Asia with a market capitalization of US$190bn and with over 700 companies listed on it. Nevertheless, there are unlisted world class Malaysian companies like Petronas (http://www.petronas.com.my). Petronas is the national oil company that is 100% owned by the government oil. It is the rare example of a successfully run government-owned company that has expanded overseas successfully so much so that it derives the bulk of its profits from outside Malaysia. It is one of the most profitable companies in the Far East with net earnings of US$6.23bn for FY3/04. As to why Malaysia, a small country with a multiracial and multi religious population of 25m people, has a disproportionate number of world class companies in the Islamic world? The reasons could be: Malaysia inherited a country with a relatively good physical and legal infrastructure from the British. Its clear legal system encouraged FDIs. Malaysia had a relatively educated population and the government and the private sector (by establishing twinning programs with Western universities) continued to invest in education. The widespread use of English and its establishment as the main medium of communication in the business world ensured that the population was wired to the world. The presence of a skilled and educated workforce is essential in building world class companies. It has a stable government which had a policy of promoting racial & religious harmony and foreign direct investment. The political climate was relatively liberal with equal rights for women who were part and parcel of the workforce. Less reliance on FDIs post-1997 and lesser dependence on government inspired mega-projects gave room for private companies to flourish. Despite tariffs to protect certain industries, Malaysia's adherence to free trade, privatizations and tariff reductions encouraged competitiveness. Since 1997, the Ringgit was pegged to the US$ at RM3.8:US$1. The stable and competitive exchange rate helped exporters but trade surpluses, the inflow of funds and rising foreign exchange reserves (standing at US$71bn) are now putting pressure on the Ringgit to appreciate. Listed below are some of the world class Malaysian companies. DK Leather DK Leather is the largest automotive leather upholstery (mainly leather seats plus steering wheels and gear boxes) manufacturer for the secondary market in the world. The company started as a leather trading house in 1997. Source: http://www.dk-schweizer.com/ It launched their own brand (DK Schweizer) in 2001 and set up a plant in Holland in 2003. Around 65% of its products are exported, evidence of its cost efficiency. It is enjoying pretax profit margins of around 30% in the US and 40% in Europe. It is benefiting from the outsourcing of production to Asia. The company has a cash position of RM28m. This will enable it to grow through acquisition and to pay higher dividends. Ekowood Berhard Malaysia's abundant timber resources ensure that it is the largest exporter of medium density fibreboard and engineered solid hardwood flooring in Asia. Ekowood is the largest exporter of engineered solid hardwood flooring in Malaysia. It focuses on high end products and exports more than 90% of its products. Over 50% of its exports go to Europe and the rest are exported to the US and Australia. Source: http://www.ekowood.com/ The use of hardwood flooring is gaining ground at the expense of carpets. This is because hardwood floors are more hygienic than carpets, easier to clean, more uniform than pure hardwood and seen by many to be more esthetic. Ekowood is looking to grow revenues and profits by around 10-15% p.a. for the next 5 years. IOI Corp IOI Corp is the largest integrated palm oil plantation company in the world with total planted area of 152,000 hectares. Malaysia is the world's largest producer of palm oil. It produces 14m tones of palm oil, of which 12m tones are exported. Palm oil is used mainly for cooking and is also used in the oleochemical industry which produces vegetable fats, margarines and soaps. Source: http://www.ioigroup.com/ IOI Corp will also be setting up the largest vegetable oil refinery in Europe in Rotterdam which should start production by December 2005. IOI is also one of the first township developers where it converts its plantation land nearer to the city into townships. Its Puchong township near Malaysia's capital, Kuala Lumpur, now has a population in excess of 400,000. Jobstreet JobStreet is the largest online recruitment agency in Malaysia and one of the largest in the region. It is also no.1 in the Philippines, a close no. 2 in Singapore and no. 3 in India. Growth has been phenomenal with a revenue compounded annual growth rate of 46% for the 3 years till FY2003. Revenue growth should exceed 60%in FY04. In addition to gaining market share from the print media, it will also benefit from rising internet penetration rates standing at 61% (2.1m users) for Singapore and only 34% (8.7m users) for Malaysia, 4.2% (3.5m users) for the Philippines and 1.7% (18.5m users) in India. The company is also focused on R&D with a team of 12 people located in Penang and Cyberjaya, headed by Dr Albert Wong who has a doctorate from MIT. It also enjoys a tax free status in Malaysia until 2009. MISC    MISC is the largest energy transportation group in the world. Its fleet consists of 18 LNG carriers, 48 Petroleum tankers, 15 Chemical tankers, 24 Containerships (liners) and 34 Bulk carriers. Source: http://www.ioigroup.com/ Although the LNG carriers account for 60% of earnings followed by 30% from petroleum tankers and the balance from bulk and liners. The LNG carriers are more profitable as the achieve ROEs of 12-15% over a 15-20 year period. MISC's strategy is to concentrate on LNG and petroleum tankers so that it can leverage on the strengths of its parent, Petronas, which has exploration projects throughout the globe. O.Y.L.    OYL is one of the largest air conditioner manufacturers in the world. In the 1980s, it expanded regionally into China and Indonesia. Having set a firm foundation regionally, OYL took a significant step towards the globalisation of its activities when it acquired US-based SnyderGeneral in May 1994. This acquisition of a major US company by a Malaysian public listed organisation is the first in Malaysian corporate history. Scientex Packaging Scientex Packaging (SCIP) is the largest producer of stretch films in Asia. Stretch films are thin plastic films used for packaging and are replacing carton boxes which are bulkier and less flexible.    Stretch films accounts for 60% of the group's turnover. Malaysia counts for close to 40% of the production of stretch films in Asia with Scientex Packaging accounting for 10% of Asian production. SCIP exports 70% of its products. The demand for stretch films is expected to expand by 10% p.a. in Asia with Malaysia accounting for 40% of production in Asia.   Supermax    Supermax is Malaysia's largest Own Brand Manufacturer (OBM) and the world's second largest producer of rubber gloves. Its main competitors are Kimberley Clark, Ansell, Allegiance and Microflex. The company started as a trader and exporter of latex gloves in 1987 before venturing into manufacturing in 1989. OBM production accounts for 70% of its profits. Supermax has succeeded in establishing its own brands with a strong presence in Canada, the US, Mexico and Brazil. Almost 100% of its production is exported to medical and dental buyers. Its recent acquisition of a 20% stake in APLI (the world's fourth largest glove manufacturer) will boost its capacity to 17.7bn pieces p.a. of gloves a year by 1996. Tong Herr Tong Herr, together with 2 sister companies in Taiwan and one in China, has a 30% market share of global stainless steel fasteners (nuts and bolts). Stainless steel fasteners are 3-4 times more expensive than mild steel fasteners (made by listed Chin Well Berhad). Global consumption for its products is estimated to be growing between 5-7% annually. All its sales are exported. The business is extremely cash generative with capex of RM5m in 2004 being less than depreciation. Tong Herr has a rising cash pile of RM110m and has recently increased dividend payout. Uchi Technologies Uchi is the largest producer of coffee modules in the world. These coffee modules are the control centres of coffee machines. The manufacture of coffee maker modules account for 80% of profits. Uchi makes control modules for all the major coffee makers like Saeco (Italian), Jura (Swiss), Krups (German), AG (German), Bosch (German), Siemens (German) and Nestle (Swiss). Uchi is confident that the outsourcing trend will increase as it is more cost effective for the coffee makers to concentrate on design and branding while outsourcing the coffee modules to Uchi. Uchi controls the intellectual properties of key. Sales in 2005 should increase by 15-25%. Uchi has a net cash position of RM20m and is expected to continue its high dividend payout ratio. Mgt stated that dividends will be maintained at high levels in the next few years. Key Financial Indicators Company Market capitalisation US$ million FY05 EPS* sen Growth FY/05/FY % 04 DK Leather 138.2 13.3 13.7% Ekowood 62.3 14.9 12.9% IOI Corp 2602.1 76.5 19.5% Job Street 77.8 7.6 65.2% MISC 7782.6 148.1 20.3% OYL 1320.2 254.1 10.0% Scientex Packaging 36.5 30.0 48.5% Supermax 101.2 47.5 37.3% Tong Herr 84.1 48.0 -8.7% Uchi Technologies 244.5 19.2 11.0% * The bulk of the earnings are derived from consensus forecasts from Bloomberg but we have used analyst forecasts where the stock coverage is limited. Download Excel File Source: KSC   ------------------------------------------------------------ Mr. Choong Khuat Hock is Head of Research at Malaysian based fund management company, Kumpulan Sentiasa Cemerlang (KSC) Sdn. Bhd. He is a chartered accountant and a rated analyst for 9 years, with 14 years experience in investment banking. Mr. Choong can be contacted at illuminati8@yahoo.com or +603 62033888. Kumpulan Sentiasa Cemerlang (KSC) Sdn. Bhd. was established in 1996 as a fund management company licensed by the Securities Commission of Malaysia. KSC manages around RM300m (US$80m). Figures audited by international actuarial company, Watson Wyatt, shows that RM1 placed with KSC in the beginning of 1997 would be worth over RM4 currently, representing a compounded annual return of 18% p.a. KSC developed an investment style known as tactical asset allocation where its equity allocation is dependent on its macro views. The key management staff of KSC are: Mr. George Lim (CIO and asset allocator) - Worked for Citibank in Malaysia and Singapore, responsible for US$50m in direct investments. Mr. Daud Mah (CEO) - MBA from Wharton School. Worked in Boston Consulting Group.

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