Malaysia: A Safe Harbor in the Storm

One of the key components to grow any economy is channeling funds via the capital markets to entrepreneurs and companies to allow them to grow. And one of the most effective ways to do this is via a stock market. The country’s stock exchange, known as the Bursa Malaysia, is taking multiple steps to enhance its ability to do this. “We are quite positive on the near-term outlook for the capital markets and also that we can create a more efficient platform for companies to raise capital,” says Dato' Yusli Mohamed Yusoff, Chief Executive Officer for Bursa Malaysia Berhad.

One of these initiatives is the creation of a new index using the brand and methodology of the FTSE group, which creates globally recognized benchmark stock market indices. In July, Bursa Malaysia rebranded its benchmark index, the Kuala Lumpur Composite Index to the FTSE Bursa Malaysia KLCI to be the primary market benchmark for the exchange. The advantages of the move was to replace an index with 100 stocks to one with 30 stocks, making it easier for investors to track the index, as well as making it easier to create Exchange Traded Funds (ETFs), future contracts and other index-linked products popular with investors, including those looking to engage in sophisticated trading strategies. “This move helps give us a better profile and puts us more in line with international standards,” says Dato’ Yusli.

Behind the scenes, Bursa Malaysia has also introduced “Direct Market Access” (DMA) for its equities market, extending it from a capability already existing for derivatives. The DMA facility allows international investors to trade on the exchange directly without going through brokers, which facilitates the development of program trading and other automated trading strategies, as well as giving large traders more autonomy when conducting trades.

Another groundbreaking move was the listing of two Chinese companies on the exchange, the first time that the Bursa Malaysia has done so.

The listing of the Chinese companies is in line with larger reforms at the exchange, which saw it streamline in August from a three-tiered structure of a first and second board, plus the Mesdaq market, into a simpler two-tier structure with a main market (combined the first and second boards) plus the conversion of Mesdaq into the ACE market. “Before we had a market just for tech and growth companies, the new ACE is for all companies,” says Dato’ Yusli. The listing requirements are simplified as well, with companies wishing to list on ACE need only have an approved financial institution sponsor the listing plus three years of operations.

The derivatives side has not been ignored either. Here Bursa Malaysia is entering a strategic partnership with CME Group to develop its derivatives expertise with a global leader as well as internationalize its crude palm oil futures contract (FCPO), of which is the global price benchmark.

The biggest changes are probably in the area of Islamic finance, where Bursa Malaysia wants to build and enhance Malaysia’s already considerable expertise in this field. Dato’ Yusli is pleased to see the establishment of the Bursa Suq Al-Sila’ and its first palm oil product brought to market. Bursa Suq Al-Sila’ is an international commodity platform that is able to facilitate commodity-based Islamic financing and investment transactions under the shariah principles. “This move brings together two areas of strength we have in one product, palm oil and Islamic finance,” says Dato’ Yusli.

The push to develop has shown up in the financial figures. For the first half (ended June 30), revenues and net income were down from last year’s first half due to the extreme downturn experienced in the first quarter of the year. But looking on a second quarter to second quarter basis, Bursa Malaysia saw its net profit rise 22% to US$9.9 million on operating revenue that rose 12% to US$24.67 million in the same period. “For any market to be sustained we need to focus on quality not quantity,” says Dato’ Yusli. In the case of Bursa Malaysia, it is not lacking in the quantity of new steps but all of them are adding to the quality of its capital market.

Along with the quality of capital markets just as important to a country’s development is the development of human capital. Here Malaysia is also taking strides, in part through such institutions as the International Centre for Leadership in Finance (ICLIF) that conducts training programs to develop the leadership skills of executives in Malaysia and increasingly from the region. ICLIF was set up and endowed as a not-for-profit corporation by Bank Negara, the central bank of Malaysia in October 2003, and launched its first programs in 2004. “It is the only institute set up by a central bank like this anywhere in the world,” says Mr. David J.S. Winfield, ICLIF’s CEO and Executive Director.

The current downturn has underlined the need for ICLIF in the country, says Mr. Winfield. “Now is the time to invest in the development of your people. Those who understand the importance of talent development and succession planning are continuing to invest,” he notes. When times are tough, the importance of human capital and good leadership becomes more critical when many companies are trying to operate, and even survive, in the midst of challenging circumstances.

Interestingly, there is opportunity in the crisis for ICLIF. During the good times, companies preferred to send their executives to one of the two so-called “core programs” offered by ICLIF, either the program for global leadership (for senior executives) or one for high performers (for up and coming middle managers). Now companies are cutting their spending on the core programs but are opting for customized programs also offered by ICLIF.

The key lesson, though, is that the basic mandate of ICLIF has not changed – helping to develop the next generation of corporate leaders in Malaysia and the region. ICLIF’s forte is delivering a program that adapts global best practices to a regional context. “We have to understand how leadership is different in Asia from other parts of the world and how to make leaders succeed in Asia,” says Mr. Winfield. So although ICLIF started in Malaysia it has been successfully branching out to attract a greater number of participants from countries such as Pakistan, Bangladesh, India and Indonesia. Indeed about a quarter of some 250 graduates since 2004 who have gone through (or are now attending) one of the two core programs are not Malaysian. Along with widening the geographic scope of ICLIF, at the same time Mr. Winfield is also actively seeking to increase the corporate scope. Given ICLIF’s roots lie with an initiative started by Bank Negara, naturally its earliest participants tended to come from banks and other financial institutions. These days the mix is more varied, from India’s state railroad to Star Publications (Malaysia). Indeed, ICLIF has a 5 year contract with Indian Railways to deliver 6 workshops a year in Kuala Lumpur on Scenario Thinking and Innovation.

As ICLIF succeeds in widening its geographical and corporate scope, Mr. Winfield sees a synergy emerging from a “network effect” that is value in addition to the actual curriculum. “The idea is not just to develop leadership but also to develop networks,” he says. To maximize this effect, class size is kept to no more than 25 per program so that participants can get to know each other and learn from each other. “It is important to learn from the professors but one should also learn from the others,” he says. He takes pleasure in watching some of the older executives who normally circumspect open up and interact with other participants. “Our goal is to understand not just what are the leadership challenges in Malaysia but in Asia and to address the needs of companies operating in the Asian region,” says Mr. Winfield.

Global Malaysia
In fact, Malaysia is already the home of many emerging global champions, companies that are competitive not just in their home market but also on a worldwide basis. These champions are emerging, often without much fanfare, in a variety of industries.

One sector for example is in transportation. The international gateway for the country, the KL International Airport (KLIA), is the flagship airport of the listed Malaysia Airports Holdings Berhad (MAHB), which operates the 39 airports in Malaysia and has added international operations as well to its holdings.

“We have huge potential to grow,” declares Tan Sri Bashir Ahmad, Managing Director and CEO for Malaysia Airports Holdings Berhad. “We are still seeing growth in the midst of this crisis.”

KLIA in 2008 was one of the fastest growing of major airports in Asia, at 4%, as measured by total passenger traffic. At 28 million passengers a year, KLIA is catching up in total numbers with some of Asia’s busiest airports like Singapore’s Changi, Hong Kong’s International Airport and Bangkok’s Suvarnabhumi.

What makes Malaysia attractive as a destination and transit center is the low cost of its airport fees, with KLIA for example boasting some of the lowest landing fees in the region. Tan Sri Bashir is making his airports even more competitive this year, turning the downturn into an opportunity to implement aggressive cost cutting and revenue boosting measures.

In one small example, MAHB was able to reconfigure its luggage trolley system at KLIA to eliminate the need to buy 300 new trolleys. All told, Tan Sri Bashir expects to save US$7 million this year.

On revenue boosting, he is looking for ways to drive revenue in the non aeronautical side of the business, such as the retail operations and eateries. “We are developing a new business model, from making money running airports to running an airport business.”

It is no longer enough to just ensure that a passenger can arrive, check in and board a plane quickly and easily. Savvy operators like MAHB realize that airports have access to huge numbers of consumers, often with an hour or two of time on their hands while waiting for a plane, making them ideally placed to sell goods to them, entertain them or give them a meal.

That said, MAHB is not ignoring the requirements of providing quality passenger services. It is an active participant in a global industry-wide effort called Simplifying the Business that looks at ways to simplify and improve the core functions of checking in, ticketing, baggage handling and other basic functions.

For example, passengers can use an e-ticket sent to their mobile phone to board the plane. Having entered its 11th year of operations, MAHB under Tan Sri Bashir is optimistic about the future. “We have done well for the last 10 years and we can do even better in the next 10,” he says.

Just as airports connect people so does telecom. One of Malaysia’s most global companies is also one of its newest, at least in name: Axiata Group Berhad. It’s a brand that’s only been around since April, when the mobile operator TM International changed its name.

Axiata is one of the region’s biggest and most diversified cellular operators, with a presence in 10 countries across Asia serving over 90 million customers. It controls cell phone companies in five countries, namely Aktel in Bangladesh, Hello in Cambodia, XL in Indonesia and Dialog in Sri Lanka, in addition to Celcom in Malaysia. It also has strategic stakes in six more companies in five countries, comprising Idea and Spice in India, MTCE in Iran, Multinet in Pakistan, M1 in Singapore and Samart in Thailand.

“We want to be the largest regional mobile operator in the ASEAN and South Asia region,” declares Dato’ Sri Jamaludin Ibrahim, President and Group CEO for Axiata.

The change was made to reinforce the company’s regional aspirations, where it focuses on emerging markets such as Cambodia. “We are in some of the fastest growing countries in the world, where penetration is still low,” he declares.

While Malaysia remains about half of the revenues, by 2015 Dato’ Sri Jamaludin sees Malaysia’s contribution declining to 30% as these other markets take a larger share, especially from the operations in the big markets of India and Indonesia.

Even in the midst of the downturn, Dato’ Sri Jamaludin is optimistic. The company has introduced new measures to contain costs, such as steps to make its cell sites more efficient, but he also sees opportunities arising from the current volatility. For example, Axiata may be able to grow its portfolio of mobile assets at relatively affordable prices. However, he is not losing sight of organic growth as well. Combined, Dato’ Sri Jamaludin is confident that Axiata can be a star performer by most corporate metrics in the next few years.

“We should be a couple-fold bigger in revenues and market capitalization by 2015,” he says.

The beauty of the Axiata model is not only most of its markets are fast-growing in plain vanilla telephone services, they also have room to grow the non-voice parts of the business as well. These applications include music, games and other high-value products or services that can be sold to its customer base.

With its broad geographic spread, Axiata can also seek best practices in each market and import them into others where applicable. It’s an important balance, says Dato’ Sri Jamaludin. “You have to balance how to operate in these local markets and local cultures with an ability to leverage off the strengths of the whole company,” he says. “It’s an art rather than a science.”

The idea is basically to be known as a regional mobile company that just happens to be based in Malaysia, i.e., Axiata wants consumers in its markets to see the brand as a regional or global one, not just a Malaysian one. To that end, Dato’ Sri Jamaludin is trying to build a multinational staff who bring a varied of skills with them – he notes that the management includes Sri Lankan, British and other nationalities. To also reinforce its regional ambitions, Axiata has in place strict corporate governance standards. “I’m trying to create history,” he says. “We can be a homegrown company that became a multinational player.”

One of the most remarkable global stories out of Malaysia is Top Glove Corporation Berhad.

It is the world’s largest maker of rubber gloves. Its production capacity is 31.5 billion pieces of gloves per year at 355 glove production lines from 19 plants, of which 13 are in Malaysia, 4 in Thailand and 2 in China. The company now has roughly a 23% share of the global market for gloves (140 billion pieces a year). The company is an interesting play on Malaysia’s natural advantage in rubber, where it has always been a global leader in production, with an important application: gloves.

“It’s not easy to be number one, and it’s even more difficult to maintain it,” says the modest Tan Sri Dato’ Sri Lim Wee-Chai, Executive Chairman and CEO for Top Glove. “It’s like being in an Olympic game, you have to stay healthy and fit.”

Tan Sri Lim has been able to grow the company at a remarkable and reliable rate. Since the company’s IPO in 2001, the total return to shareholders, as measured by stock price growth and dividend payouts, has been 1,282%. “That’s better than Warren Buffett,” says Tan Sri Lim.

The future looks bright: Top Glove is targeting a 30% share of the world market by 2012. Of course, the overall market is not standing still either. With the rise of global health threats as the H1N1 virus, the demand for rubber gloves has steadily risen. Overall, global consumption of rubber gloves over the last decade has risen on average about 9% a year.

In fact, despite the overall downturn in the global economy, Top Glove has seen little impact in the demand for gloves worldwide, as demand has remained strong from traditional industries such as healthcare and food preparation.

Rather, the biggest impact on the business for Top Glove has been the price of raw latex that is the main ingredient for the gloves. In the middle of last year the latex price hit major new highs (today it is back to more normal levels).

Despite this challenge, Top Glove continued to grow and prosper based on its already strong position in the industry and sound financial management.

“In good times you should prepare for the bad times, and in the bad times you should prepare for the good,” says Tan Sri Lim. “We are able to overcome challenges when you have good management and leadership.”

Given that gloves are basically a commodity product, how does Top Glove maintain its edge?

Here is where Top Glove excels. It doesn’t treat gloves as commodities. The company takes every step possible to ensure the gloves are top quality, with a target of zero defects, at the lowest possible cost. Coupled with a strong commitment to service and a wide range of products, Top Glove can differentiate and excel over its rivals.

“We always work for our boss, and our customers are the boss,” says Tan Sri Lim. For example Top Glove makes 13 key products, from surgical gloves used in operations, to gloves used in high-tech clean rooms as well as the ordinary household gloves used when washing dishes or doing other domestic chores (the company also makes PE aprons). The company now has 850 customers in 180 countries. Another possible opportunity is consolidation in the industry, in which Top Glove would obviously be one of the consolidators. “When all the small positives come together it becomes one big positive,” says Tan Sri Lim.

Opportunities in Real Esate
Malaysia offers many advantages to those in the property and real estate game. One of the leading companies here is UEM Land Holdings Berhad, a real estate company that is majority owned by the UEM Group, which in turn is owned by Khazanah, the investment holding agency of the Malaysian government.

An optimistic attitude is exhibited by Mr. Wan Abdullah Wan Ibrahim, Managing Director and Chief Executive Officer for UEM Land Holdings Berhad, master developer of Nusajaya in Iskandar Malaysia.

“Do we stop or move ahead in this global recession? The board decided that we needed to move ahead because we have all the ingredients to succeed,” he says. “The recession is not holding back our plans.”

UEM Land’s signature project is the positioning of Nusajaya in Iskandar Malaysia as a regional city, in which it will have a number of catalytic developments to jumpstart growth in the region.

Mr. Wan Abdullah points to the Puteri Harbor development on the waterfront as a prime example. “Two and half years ago this was just mangrove swamp,” he says. “Now we are already in the next phase building offices, retail, and other components.”

However, all of these will be done in partnerships to spread the risk and the rewards. For the harbor, no expense was spared, with for example, an expensive set of pontoons to moor the docks rather than less aesthetically pleasing pilings, all told some US$71.02 million was invested in the harbor’s infrastructure.

Puteri Harbor is spread over 688 acres and will include high-end residential, commercial and retail properties, resorts, hotels, a convention center, a 76-berth public marina and a 200-berth private marina for boats up to 90 meters, a mega yacht berthing terminal for boats up to 120 meters, a clubhouse, a sales gallery and other amenities. The public marina and clubhouse opened in January this year, when the first yacht arrived. The other two catalytic developments within Nusajaya are a fully managed industrial park – the Southern Industrial & Logistics Cluster (SiLC) and Kota Iskandar, the complex housing the new administrative center for the state of Johor.

On the residential side, UEM Land has just put on the market the second phase of East Ledang, a 861 unit high-end resort-style residential development located within the Iskandar region, and has other major residential developments underway, such as Horizon Hills, a joint venture project with 6,000 units to be sold in 12 phases to 2020.

To top it off, UEM Land also has projects ongoing in Cyberjaya, the designated intelligent city of Malaysia. “We don’t need to survive on Iskandar alone, we are also developing projects in Cyberjaya,” says Mr. Wan Abdullah.

In other words, UEM Land has a lot of future long term growth potential already locked into its projects. Investors seem to agree that UEM Land is performing. The stock of UEM Land, which listed on the exchange in 2008, launched at US$0.15 but was recently traded at a stock price of US$0.45, a tripling in value in the space of about a year, doubly impressive as this was achieved in the middle of a recession. The turnover in the stock has also climbed into one of the top ten most active stocks on the Bursa Malaysia.

In light of these significant achievements, Mr. Wan Abdullah makes a case that these projects, even though high-end, actually represent great value for money. “I don’t tell people whether our projects are expensive or cheap, I talk about value,” he says.

For example, in the East Ledang project, a semi-detached home with 4,000 square feet can be bought for about US$400,000 – a significant value for money proposition when compared to typical prices for the same type of home in next-door Singapore or even in the capital Kuala Lumpur. He urges all investors to get in early, as these types of tempting value may not last forever, once word gets out about the Iskandar developments. “Why don’t you get the early bird price?” he asks.

The other leading light in Malaysia is Sime Darby Berhad. It’s hard to imagine Malaysia without Sime Darby. It is the largest company on the Bursa Malaysia by market capitalization, worth about US$14.02 billion as of August 27, 2009. It is the bluest of blue chips, and next year it will celebrate its 100 years since its founding by William Sime and Henry Darby as a small rubber plantation company.

Employing nearly 100,000 staff, it is also a multinational, operating in over 20 countries around the world. One of the biggest events in the company’s history took place just two years ago, when the “new” Sime Darby was created out of the merger of three companies - Golden Hope Plantations Berhad, Kumpulan Guthrie Berhad and Kumpulan Sime Darby Berhad, creating in one fell swoop the world’s largest plantation company, controlling about 5% of the world’s palm oil supply with around 850,000 hectares of plantation land spread out over Malaysia, Indonesia and Liberia.

“The original Sime Darby was big before the merger, so what we have now is an enlarged version that is many times the size of the original. So in a sense we are not even two years old,” says Tun Musa Hitam, Chairman of Sime Darby. “All things being considered, we are doing reasonably well.”

Sime Darby is a major conglomerate, having besides its plantation business operations in property, industrial, motor vehicles, energy and utilities and other services such as healthcare. Sime Darby’s two largest shareholders are the national unit trust agency, Permodalan Nasional Berhad (PNB) and the national provident fund, the Employees Provident Fund (EPF), and as such is known as a Government-Linked Company (or GLC). Its shareholder structure means that Sime Darby has a major national responsibility on its shoulders, and has a policy to pay dividends of at least 50% of earnings.

However, Tun Musa contravenes the notion that Sime Darby enjoys special breaks as a GLC. “Our challenge as a GLC is how to get away from that perception,” he says. He notes that Sime Darby has been successful in many foreign markets, where its GLC status is largely immaterial. “We get no favors in these foreign markets,” he declares. Yet this does not mean Sime Darby neglects its responsibility as a leading blue chip to be a model corporate citizen. For example, the company recently launched a foundation, the Yayasan Sime Darby, which will set aside anywhere between US$14.15 million and US$28.30 million a year. The role of the foundation is to manage the company’s social responsibility requirements, which is practiced at all levels, and contributes to the broader goal of nation building.

The company has not stood still since finalizing the 2007 merger. For example, its plantation business is now dominant, contributing some 52.5% or US$487.25 million of total annual operating profits, for the 2009 financial year ended in June 30, 2009.

“Property should make a bigger contribution to the group if all our projects take off,” declares Dato’ Tunku Putra Badlishah, Managing Director of Sime Darby Property Berhad. He sees the 8% figure rising up to 15%, with the caveat that much depends on the price of CPO, since this is such a big determinant of final net profit for the group.

One long-term project that will help change the balance is the Sime Darby Vision Valley development, a multi-year, multiple-project initiative covering some 80,000 acres planned for development near the international airport, KLIA.

Surprisingly, Dato’ Tunku expects the property division’s performance to be slightly above last year’s, which is a major achievement given the state of the market. One of the savvy techniques to reach that goal was this year’s “Parade of Homes” promotion, which was staged twice in 2008 and again in June this year. The group assembled attractive financing and other incentives for all its property developments that were offered for a limited time to spur sales. In the three events, Sime Darby was able to sell 2,377 units worth US$397.60 million.

“This is one of the successes. Because of our scale we can roll out a single marketing proposition,” says Dato’ Tunku.

It is one example of an innovative approach that he is pushing for property. Another innovation is on the environmental side. Sime Darby is developing what it calls its “Idea House” that incorporates innovative technologies to create an eco-friendly and sustainable house. For example, the house will be carbon neutral, and collect rainwater to supplement its water supply, have solar panels on the roof to generate power and an open plan layout to facilitate the use of natural ventilation instead of air-conditioning. Another such sustainable development will be Elmenia East, which have things such as bike paths to discourage the use of automobiles. “We are looking at the best practices across the group and how to implement them,” says Dato’ Tunku.

Berjaya Corporation Berhad represents another part of Malaysia’s success spectrum, a global conglomerate with multiple businesses, headed by one of Malaysia’s wealthiest and best-known entrepreneurs Tan Sri Dato’ Seri Vincent Tan (indeed “berjaya” means “success” in the Malay language).

As one example, consider Berjaya Land Berhad, which is for now one of the smaller but increasingly important branches of the group. As it stands, the sports and gaming parts of Berjaya, represented by Berjaya Sports Toto, is the biggest part of the group, representing about 80% of revenues. But the company is looking to create a more diversified base of revenue contribution. So, for example, property is targeted to become one third of the group, with gaming falling to one third. However, for investors, they get the best of both worlds with Berjaya Land, since it is the majority owner since 2008 of Berjaya Sports Toto. This ownership of this gaming franchise throws off some US$57 million, thereby giving the company a steady flow of funds to deploy in real estate investments and lessening its need to raise outside financing.

In some cases, the group can create synergy. For example, South Korea has allowed gaming to be permitted on the resort island of Jeju, where Berjaya Land is building a resort through a joint venture. “With 120 tables at the casino, we will be the largest gaming operation going into Jeju,” says Dato’ Francis Ng, Chief Executive Officer of Berjaya Land. “It was a great opportunity during the economic crisis.”

This development will be massive, covering 184 acres including residential, retail, commercial, hotel and of course a casino. The gross development value of Jeju alone is US$3 billion. Despite this massive Korean project, the even bigger long-term play for Berjaya Land is Vietnam.

In this country, Berjaya Land has become the single largest foreign developer. “There is great opportunity in Vietnam,” says Dato’ Ng.

One of its most prestigious projects is the Vietnam Financial Centre in Ho Chi Minh City. This project covers 16 acres in a prime location in Ho Chi Minh City, with a gross development value of US$1.8 billion, which is slated to be completed by 2013.

Another signature project is the Vietnam International University Township about 19 kilometers outside central Ho Chi Minh City. The project has a gross development value of US$7.3 billion, which includes colleges, international and local schools, a medical center, commercial development, retail, and sports facilities.

The project is slated to be completed in stages from 2011 until 2021. All told, Berjaya Land has six big projects in Vietnam, two in Hanoi and four in Ho Chi Minh. The full development of these projects will take eight to twelve years, so Berjaya Land is definitely making a long-term commitment to the country.

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