Saturday, 13 March 2021



If there’s a prime example of rent-seeking behaviour in emerging economies over the past 30 years, academics would be hard-pressed to find a better candidate than Malaysia’s dominant telcos.

These companies had enjoyed fatter margins, better cash flows, and higher profits than their global counterparts. They offer shoddy service and slow speeds but maintain premium pricing for customers. Our Southeast Asian brethren pay cheaper rates for better speeds.


These telcos are still high-debt entities that have truly enjoyed their monopolistic status. In fact, most of their annual cash flows and profits generated scarcely go towards paring down debt, but flow towards shareholders in the form of dividends instead. Yes, Malaysian telcos historically offer the highest dividend yields compared to global peers.

Long term shareholders are taken care of. There’s little to no threat to competition, and the telcos can afford to endure a terrible reputation for service non-reliability. Customers can’t turn to anybody else, really.

 Source : The Edge Weekly article

These are entrenched attitudes, and they have (on a relative basis) enjoyed the fruits of making the most money for doing the least effort.

Malaysia’s mobile telecommunications industry have long matured, and the market looks far more likely to shrink rather than expand. The industry does not have any strong earnings catalysts like new customer acquisitions or margin-enhancing service rollouts.

As a matter of fact, many of them are reliant on…. foreign workers. The prepaid business, to name just one example, is not exactly a breeding ground for innovative thinking.

But the telcos’ days of joy are coming to an end, specifically due to the government’s move to develop 5G technology and infrastructure via Digital Nasional Bhd, a special purpose vehicle.

This is because the 5G SPV ownership model that the government introduced under the MyDigital blueprint will disrupt mobile telcos’ business models, and revenue and cost structures in the long run.

Although the asset-light model under MyDigital is envisaged to enhance telcos’ efficiency, telcos need to do a lot of reparation works to their balance sheets. Specifically, reducing their long-term debt levels as their assets are reduced.

For example, as at December 31, 2020, MAXIS‘s non-current debt stood at RM9.5 billion. Repaying some of these borrowings over the next few years would almost certainly jack up its finance costs and crimp its dividends.

The inevitable compression in margins and yields may lead to industry consolidation with telcos signing pacts to save themselves. Just like some Malaysian banks, we are of the view that there are too many telcos right now in a country of 30 million people. A few of them have no reason for existing.

Then there's the shareholding factor. As a heavily institutionalised sector, telco stocks need foreign institutions’ support to prop up their stock prices. 


But with the dark, ominous clouds hanging over the mobile telco industry, the foreigners have little incentive to hold on to their Malaysian-listed mobile telco stocks.

....0.1% difference??? (Link to article)

Unless there’s a chance that dividends can return to historical levels, only then can share prices plausibly fetch historical-level premiums. Otherwise, what else is there? Telco is not a growth sector, and its value proposition is diminishing.



Which one uncle?

If we are not being total cynics over the government’s capability to pull this off, the MyDigital blueprint was designed to tilt the benefits of the digital economy to the rakyat. In effect, mobile telcos and their shareholders will have to surrender some of the profits.

Of course, this could all crash and burn spectacularly. Perhaps the next government won’t be so keen on this fancy SPV, hence continuity must be assured. 

DNB’s CEO Ralph Marshall has already said that investments will be ‘front-loaded’ over the next 2-3 years, meaning that a substantial portion of that RM15 billion (he said 25% of it) would be spent early and fast to lay the foundations of 5G. Depending on how intensive the rollout is, operations and maintenance costs alone would cost "upwards of RM600 to RM800 million a year".

Plunk down the billions and whichever government in the future picks this up will have no choice but to see the project through, lest they be accused of flushing billions of taxpayers’ money down the drain.

When it comes to this grand national 5G leap forward, there’s an idealistic point of view, and a pragmatic one.

The model is an untested one, because everywhere else in the world the development of telecommunications infrastructure is driven by the private sector funding and public sector regulatory guidance as part of a PPP. See how the EU does it.

Satisfying af... link to full document

Although the Finance Minister has clarified that the costs of this government-led initiative will now be 'borne by the private sector', the proclamation was light on details. If we were to venture a wild guess, financing would likely come from the SPV issuing new debt, the kind that is government-guaranteed and one that becomes a contingent liability.

Then there are the issues of capability and competence. Entrusting a government – a slow-moving bureaucratic mess, not to mention one with a lack of sophistication – to roll out 5G technology can be a laughable notion. It’s easy to poke fun at this.

We’d spare our political views, but here’s a pragmatic one. By keeping this to the government, it’s the equivalent of shooting oneself in both feet.

Left foot : tens of billions of ringgit foregone by not auctioning off the spectrum. We’re talking about critically needed government revenues, and a mechanism that is practised widely globally. But now it’s all lost, just like that. Denmark has just started, the UK has just started a second round of auction (with minimum bids of £1 billion), and then there's the US of A:

Right foot : execution risks. You can have a team of the smartest people in the world, but if the business strategy is fundamentally flawed, there’s no hope. An untested one perhaps gives you a 50:50 chance.

This MyDigital strategy is not just a RM15 billion bet. On a nett basis, after factoring in revenues lost from not selling off the spectrum, the deployment itself may ultimately cost upwards to RM40 billion and beyond. The exact figure may be unknowable, but the costs are very real.

Coming back to the private sector. Unfortunately due to the rent-seeking mentality, the telcos here do not operate like any other in the world.

Case in point : telcos expect to be allocated spectrum for free because they would bear the cost for capital expenditure (the aforementioned private sector investment).

Such an endeavour works best when there’s a clear economic incentive to deliver the best service for users. This requires a long-haul flight away from rent-seeking, but that’s how it should work.

But the reality was more like ‘Give us the spectrum, we’ll make it work, but the reward is that we get to gouge the customers anyway. No guarantee that connection speeds won’t die when a user passes by a thick brick wall, but at least it’s better than nothing, right?’

It’s not perfect though, because private sector competition brings with it duplication of resources, with individual telcos committing capex in the service of itself, and not to build infrastructure that can better serve everyone as a whole.

This is why yellow brand works best in one district, but suddenly green brand delivers super-maximum speeds in the housing area right beside it. The end result? Everyone gets spotty coverage.

And this is why the idea of a private sector consortium to handle a 5G rollout was doomed from the beginning. Nobody wants to cooperate. Everyone’s scared of overspending their allocation to the benefit of a competitor. 

Evidently not.... link to article

At best, they might end up having an SPV with three co-CEOs (from the different colours), a 15-member board with five each from the telcos, and so forth. You get the idea why this won’t work well. Unfortunately Malaysia is not the EU, and the telcos here are big fish in a small pond.

In fairness, all the permutations were probably considered at length by the powers-that-be for Malaysia’s 5G plan. We view the willingness to make a U-turn after making a mistake – like the earlier revocation of 5G spectrum awards – as a virtue, not a flaw.

And so the decision to create Digital Nasional Bhd was a calculated one. It might even be based on clear logic. But like KVMRT’s eventual cost or what 1MDB was supposed to have become, it’s going to be all about execution risks.

In no uncertain terms, the government has signaled to the telcos that their rent-seeking days are over. Creating this SPV is a high-risk high-return maneuver.

And believe it or not, the government seems to have put its own economic (and possibly political) self-interest behind to deliver on this high-concept, incredibly sophisticated, and no-room-for-failure plan.

It almost feels like – dare we say it – that this final decision was made on moral grounds. Better service for everyone. Higher speeds. Putting a stop to customer neglect. High hopes indeed.

But of course, even before it has started, the costs are already massive. And should anything go wrong, successive governments will be left to pick up the mess left behind by their predecessors.

Sunday, 14 February 2021


This stock doesn't get discussed often. The company hasn't announced flashy ventures. Shockingly, it hasn't even made plans to go into glove manufacturing or vaccine distribution. How dare they.

And yet MEDIA is up by more than 100% in three months, and last week it closed near a one-year high of 35.5 sen. Why?

It's tempting to dismiss it as a speculative play on a penny stock, but the share price rally reflects the company’s own slow and painful business turnaround. There is a fundamentals backed justification for this.

Research houses are of mixed views on the stock. CGS-CIMB curiously has a 61 sen target price, compared to 26 sen by Hong Leong and 21 sen by Public Bank.

Urbanites and those with Netflix subscriptions may feel that society has outgrown the need for TV3. In a similar vein, few read the New Straits Times anymore, unless if a copy is on the table while you’re waiting to get your teeth drilled by the dentist.

Media companies in general have struggled to adapt with the times. Their legacy businesses which used to be prime cash cows – ads sold for print and TV in particular – are facing a real threat of irrelevance. 

STAR tried to enter the streaming game, and it has little to show for it in terms of earnings after five years. Instead of being a saviour, the venture has caused STAR's future to dim some.

Share price performance comparison among public listed media companies, daily chart since November 2020

Companies under pressure rarely have the luxury of undertaking new, flashy ventures. They need to focus on what they have. For a sustainable turnaround story, it always comes down to cutting unnecessary spending, and growing sales.

In the heydays when they were majority owned by UMNO, MEDIA was already talking about cutting costs. But these were half-hearted attempts as they were still hoping that the advertising revenue will bounce back. Anybody in print media has been there, done that, faced disappointment.

MEDIA took its time in rationalising costs, as during the good times it somehow managed to grow its staff to 4,000 people. Slashing a bloated workforce is frowned upon during good times, and unthinkable during bad times. It would be like sacking civil servants.

But of course, things ended up really bad. All around them, media peers faced huge losses. Utusan Malaysia folded. Malay Mail quit printing copies in 2018. Smaller publications simply cut the bulk of their editorial team and tutup kedai. Things were never going to be the same.

And then Syed Mokhtar arrived in 2019 and bought MEDIA shares at 60 sen apiece. He is not known for messing around, and he obviously wants some sweet ROI.

After installing a new management team, one of MEDIA's first rehabilitation acts was to slash its headcount by around 1,400, or over a third.
Based on MEDIA's FY18 average staff cost of RM98,031.31, the total cost reduction comes to RM138.03 million. That’s nearly one fifth of total fixed costs for FY18. During the same year, before the entry of the big boss, they also managed to sell assets worth more than RM300 million. 

These are part of the groundwork laid more than two years ago to support MEDIA's turnaround. Remember that it was a post-GE14 environment. Media companies were essentially shunned and dismissed (we shared similar views) due to their past/present political associations and the obsolescence of the old media business model.

MEDIA weekly chart, since 2018

But fast forward a bit, and the rewards for making those tough decisions have borne fruit.
The company even managed to get back into the black in 3Q20 following its two-phase retrenchment exercise. Sales are finally outpacing expenditure.

The source of that sales growth? 

The home-shopping segment, under the brand CJ WOW SHOP, was instrumental in the turnaround since 2018. Unlike traditional print, its business model is new media for the new economy. It takes the monetisation of TV content to a whole new level.
It's relatively low cost, and a high volumes mover. Endlessly engaging. And if you disagree with that, check out the numbers.
The segment turned profitable suddenly when the pandemic hit. Just like Shopee or Lazada sales, this was another avenue where purchasing behaviour shifted from retail stores. Note that CJ WOW SHOP's revenues for the first nine months of 2020 have already covered the entirety of FY19.
Source : MEDIA company filings on Bursa Malaysia
With MEDIA having bought the remaining 49% stake in its home-shopping segment, more profits will be recognised from 4Q20 onwards. They are announcing earnings by the end of this month, by the way.

On the other hand, it still needs to deal with the traditional advertising business. This market as a whole is evidently in decline; the one that is on the short end of the stick is the newspapers, as fewer and fewer people are picking up the physical paper to get their news. 
There's less interest in long-form articles. The preference now is towards short digestible bits, as opposed to a two-pager wall of words. Call it a generational divide, but consumption trends change, and media companies have no choice but to follow suit.

The malleability of TV content, and its interactivity, still makes it a prime avenue for ad spending compared to print.

Advertisers, many of whom are on stretched budgets, will have to be mindful of their allocations. Since ad slots for digital mediums cost much less than the traditional ones, they will have little left to advertise on TV.

However, the average time spent per day watching free-to-air TV has remained steady at 2 hours over the past decade. There are still plenty in the suburban and the rural areas (the mass market) that get their TV fix from FTA broadcasts.

There is a glimmer of hope that TV’s ad spend will recover once the Covid-19 situation is contained. In fact, in the first two months of 2020, MEDIA ‘s flagship channel TV3 had an encouraging 11.5% year-on-year growth in ad sales, according to Nielsen Malaysia data.

The profitability of the home shopping format proves that there’s a captive TV audience. Ads are run during home shopping programs, and during the breaks. People actually watch these things.
As the appetite for ad spending returns, advertisers will get wise to this and understand its inherent appeal. Any hint of a turnaround there, and it’s a further earnings booster for MEDIA. The hard parts - the cost-cutting, asset sales, replacing management - are almost over.

But back to Syed Mokhtar for now. His cost of investment was 60 sen per share. MEDIA’s book value per share was 50.3 sen based on the latest quarterly earnings.

The current share price trajectory is not too difficult to explain. Forget the market’s incessant obsession with speculative newsflows and the chase for the new glovemaker or vaccine distributor.
Just look at the fundamentals for once.

Sunday, 17 January 2021



The 6 January 2021 report on gloves by JP Morgan caused a bit of a stir in the markets. Following up on an earlier December 2020 report, the assigned target prices were as follows : TOPGLOV at RM3.50 , HARTA at RM8.50 and KOSSAN at RM3.80.

These prices are of course at deep, deep discounts to not only their prevailing share prices, but also the assigned target prices set by Malaysian research houses. 


Without completely discounting the merits of JP Morgan’s argument at face value, we did some basic research to see if their claims actually hold up. 

To keep it simple, here are the main assertions made by JP Morgan: 

1) The amount of testing done for COVID is correlated with global gloves demand. The data shows testing has peaked in most countries, hence global gloves demand should fall.

2) Glovemakers should be priced at 18x earnings, as opposed to around 30x, which tends to be the ballpark figure for the ‘bulls’ (some of the local and international research houses). 

It’s really a view towards complete normalisation of gloves demand post-COVID, which is of course the consensus view. It's just the valuations that differed.

Our view is that JP Morgan’s analyst premised his entire argument on the supposed correlation between testing and gloves demand. 

This is where the thesis has flaws, because instead of proving such a correlation, the data was simply utilised to validate the rest of his presumptions. 

In other words, we (the reader) are gently asked to take JP Morgan's word that there is actually causation. Without proof or any attempt to demonstrate the validity of the assertion, aside from a neat-looking chart.

Another way to look at it is to look deeper into the data itself, and just add a bit of common sense. Comparing data sources would be a start.

This article highlighting the problem of testing data in the US is illuminating. Here’s an insightful excerpt:

Or we can also look at The Atlantic’s data tracking project, which shows that actual, reported daily testing is currently averaging 2 million per day across US states and territories. This figure (as of 15 January 2021) is at the upper end of the historical range.

So is this a peak or the start of another uphill climb? We don't know, and we don't have empirical data to suggest that things are getting better. It doesn't seem to be.


OK then, what would drive gloves demand other than testing? 

How about COVID related hospitalisations : more of it, and a higher frequency of it? That figure grew too, from 30,000 back in October to around 130,000 as of 15 January 2021.

We tried looking for a plateau, but our search was in vain.

You know  what else hasn’t plateaued aside from testing and hospitalisations? Confirmed daily cases. Deaths. And this is just for the US. 

Many developed nations are struggling to cope too. Germany, the UK, Sweden and South Korea are among countries that reported record high daily COVID deaths. Just last week.

If there is no empirical proof for this gem of a line below, the weight of their argument becomes just a little bit questionable. Perhaps the analyst fell in love too hard with the linkage.

It was quickly followed by this sentence which kind of invalidates their own thesis.

Besides India, Canada, Russia and the UK?

Last time we checked, more than two billion people live in these countries. A quarter of the world's population.

If they have not shown signs of decline in testing, why should the analyst cherry pick the ones that did and wonkishly link it to the ‘less testing, global demand will drop’ thesis? How ingenious!

Our view is that there was no ‘smoking gun’. This report was not meant to convince, except perhaps the analyst himself

We don’t know what kind of efforts JP Morgan’s star analysts undertook aside from diligent browsing of the Bloomberg terminal. Did they talk to any of the management? 

Did they talk to MARGMA to perhaps get a better understanding of the global gloves supply and demand? Weren't they the ones who said ‘there are no official data, it is thus difficult to track stock levels’ ?

Or were they content with analysing the outcome of TOPGLOV's directors reelection vote and provide this schoolboy interpretation here at the last sentence?

Hello, why else would there be dissenting votes? 

Maybe there's a correlation between global COVID testing data and Dato' Lim Han Boon's reelection chances as director. We leave it to JP Morgan's quants to figure this out.


In an 11 January note, JP Morgan provided an update less than a week after the 6 January report. It was more of the same, highlighting that gloves are ‘not needed’ while administering vaccinations. 

On the weight of this gospel, boom, there goes worldwide gloves demand… in JP Morgan's view of the world, it expects every single country, hospital, healthcare worker to ditch gloves overnight when it comes to vaccinations.

Naturally all this begs some very valid questions:

Who is this report really written for? Investors who seek a better understanding of Malaysia’s glovemakers? People who want to make informed investment decisions?

Or was it meant to serve JP Morgan’s clients who are keen to take the short bet? In case you didn’t notice, they issued two bearish reports during the first 11 days of 2021, just when (purely coincidental, we’re sure) regulated short selling activity was reinstated by Bursa Malaysia. Point number 4 below:


CGS-CIMB's fund flow report

And gosh, we wonder who facilitates a substantial proportion of these foreign fund flows.

 Standard disclosure in JP Morgan's research reports


The analyst who prepared the report was hired in August 2020. The historic gloves rally has lasted longer than he has at JP Morgan.

For an individual with substantial ASEAN research background, it would be tempting to simply look at Malaysia from a macro lens first and foremost. So the temptation would be to look at macro data to try and make sense of the industry dynamics.

Top-down analysis is to look at the big picture first. In can be the macro conditions, then narrowed down to the country, sector, and company. And yet these reports are seemingly skewed to macro only.

It would certainly be tempting to craft an all-encompassing thesis that conveniently overlooks the fundamentals merits of the individual companies.

This is not right because these companies are the biggest glovemakers in the world. A superficial look really doesn't tell much.

Imagine if someone lumps the FAANG stocks into one basket and presents a thesis that 'if everyone consumes the internet less next year, the FAANG stocks are all equally screwed'.

For an example of the kind of legwork JP Morgan presumably did not undertake, take this throwaway passage on TOPGLOV which has nothing to do with their main thesis, but all to do with arriving at the RM3.50 target price :

Google could have been their best friend. As we have mentioned before in detail, TOPGLOV does not need new capital to fund its capex. It has already done a Sukuk. The previous Singapore dual listing involved the issuance of zero new shares. Some simple searches would have unearthed all these.

There’s a caveat to the above. If TOPGLOV’s recent aggressive share buybacks becomes a constraint on their capex endeavours, then yes, they may need to issue new shares for the HK listing. But we have not heard anything of this sort yet, and we try not to make too many over-the-top assumptions unless new information crops up…

Also, assigning fair values for three companies at exactly the same P/E ratios (18x) is the height of laziness. 

There was no consideration for the companies’ earnings trends and/or trajectories, individual strengths (and weaknesses), and – just as important for us – the stocks’ respective historical trends. 

Forget about things like product mix, client mix, pricing strategy, business model,raw material costs, and who makes more nitrile gloves than latex or whatever else, because clearly these little things do not matter much for JP Morgan.

For example, in the pre-COVID years, HARTA almost always fetched the most premium valuation on a P/E basis because they were the highest-volume nitrile glove producer who enjoyed higher margins. 

People who have been in the market for a few years would also recall that TOPGLOV  actually struggled for a while (not just from capacity constraints, but also a suboptimal product mix) before building up capacity. It then overtook HARTA in terms of profitability and market capitalistion.

Analysts who haven't covered Malaysia for at least five years, or analysts who predominantly assumes the top-down view, may miss all the above. 

Aside from half-baked assumptions, and the danger of falling in love with your own half-baked assumptions, we have learned precisely nothing from these reports, which is the most frustrating thing.

We would have welcomed an even-headed, well-researched, credible report with thought provoking assumptions on the bearish side. We are not never-say-die glove bulls, and considering opposite viewpoints is the best way to learn and to be self aware.

Unfortunately that’s not the case here.  

Monday, 11 January 2021



Just dropping some brief views for this year, which is already turning out like 2020 2.0. All the best.


1. The everything bubble is chugging along nicely. Asset values are elevated, in some parts to historic extremes. Make no mistake; we do not doubt for a second that it’s a bubble situation. And bubbles will pop.


2. There are many permutations or triggers that could spark the most painful multi-year bear market in decades. The most obvious ones will emanate from US equities.




3. Only 4 out of the S&P500 constituents hit 52-week highs in the last week of December 2020. Even for a broad constituent index, the S&P is primarily swayed by the largest moves of the largest caps, in this case the tech names.


$TSLA valuations stretched way beyond belief... Link


4. $TSLA is trading at more than 1,500 times P/E (as I was typing this, it went to 1,700 times). All historical precedence points to such counters heading for a painful collapse eventually. There is no ‘this time it’s different’; we have studied bubbles and historical analogues spanning 300 years. When hype gets ahead of fundamentals and is seen as a permanent trend, be careful.



Blank check companies with $38 billion in free cash looking for something to buy... Link


5. SPACs and trendy ETFs are other phenomena indicative of what is essentially a flood of liquidity. Too much of it, with no place left to flow to. A bubble is perpetuated with seemingly insatiable inflows and good vibes. There will be a point when there are no more buyers left in the market. 


In a secular bull market, everyone's a genius....


6. In an equities market shock scenario, we believe that BTC will be positively correlated, simply by virtue of it being a purely sentiment driven asset class. There is little underlying justification for its fluctuations other than hype. We think if stocks fall, cryptos will fall just as hard.


7. We believe gold will retain its safe haven status in times of volatility in equities, notwithstanding movements in the USD, or DXY. As an inflation hedge, and a hedge against fiat currency depreciation, we’d go old school and stick to gold. Certain commodities (like precious metals) may be comparable gainers in a crash scenario, but we note that some are rallying due their proxy status of the global growth (hype) recovery angle.


Stacking bills sky high (pre-hip hop, 1920s Weimar Republic)... Link


8. Printing money stokes inflation eventually. And eventually what will happen is that interest rates need to go up again. There’s no escaping this. If and when central banks run out of tools, the market may finally see that the emperor has no clothes. This is probably the one, almost inevitable thing that will put a stop to the everything bubble.


9. The above are the wet blanket scenarios. Every year someone will talk about this, including us. We keep talking about it as a reminder that this time, it’s no different. That’s the thing about parties: they stop eventually.


10. While there is an ever-present temptation to keep dancing until the party stops, we advocate caution. Our holdings are probably about 18% in equities and 72% in cash right now. The cash component provides us with leverage and nimbleness to make big, short term trades. We have already stashed away (not the robo) significant funds. Not for rainy days, but for the major flood.


11. Some holdings we keep mostly as an experiment to see the most optimal way to derive good cash flows. Low risk, dividend yielding names are what we’re after. We may also express positions in stocks that are undergoing splits and bonus issues; for momentum names that kept being pushed up by an enthusiastic pool of mostly speculative buyers, our carrying cost for such names is small to the point of insignificant. 


12. We have actually been mostly in cash, at last count over the past six months. These are meant for short term momentum moves, knife catching (our specialty), and sudden breakouts. This kind of trading requires discipline as they rarely occur. Hence the key is patience, and waiting to strike at the right moment. Overtrading and speculative chasing in dumb penny stocks is an ever-present threat; unfortunately we are not immune to this.


KLCI performance since the pandemic began....


13. For short term considerations, we personally like tech, solar, vaccine (logistics related only), and healthcare, which we consider to be close to fair value and/or undervalued in some cases.


14. What we do not like currently : construction (threats of further cutdowns and mega project cancellations as reality sets in) and oil and gas (still influenced by OPEC newsflows, middling fundamentals).


15. Like the fire brigade, we are always on standby for sudden market shocks. We believe we can trade well enough to make a lot of money, but then again so does everyone else. Nothing makes one feel like an investing genius more than a runaway bull market. 


16. Given the trend in retail trading activity over the past six to eight months, there should be many opportunities for major gains. But we suggest not to lose sight of the main goals : capital preservation, and wealth growth. Trade within your capabilities and within acceptable risks. 


17. Always follow parameters, set tight loss stops, and take profit when targets are met. And with some luck, perhaps this year won't be worse than the last one.


More Tales By The Pelham Blue Fund