thedocshare01.docshare.tips/files/22668/226685041.pdfthailand was still suffering from the tsunami...

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THE WEEK IN PICTURESOCBC

OCBC chairman Dr Cheong ChoongKong with some of the 60 childrenat the bank’s Christmas party forthe Singapore Children’s Society atOCBC Centre last Thursday. A yearago, OCBC Bank adopted theSingapore Children’s Society as itsofficial charity and, for the next fiveyears, the bank will donate a totalof $2.5 million to the society.

Demonstrating the partnership between Singapore, Japan and Showa Denko: (From left) Kengo Yokota, managingdirector, Showa Denko HD Singapore Pte Ltd; Koji Shimizugawa, senior managing director, Takenaka Corp; Teo MingKian, chairman, Economic Development Board; Mitsuo Ohashi, representative director and chairman of the board ofdirectors, Showa Denko K K; Chong Lit Cheong, CEO, JTC Corp; and Shinji Sakai, director, Showa Denko K K.

Jorma Ollila, chairman and CEO of Nokia Oyj, waiting for thestart of Nokia Capital Market Days last Thursday, in New York.Nokia Oyj, the world’s largest maker of mobile phones, forecastindustry handset sales to rise more than 10% next year, helpedby high-end phones and more subscribers.

A Proton showroom in KualaLumpur, Malaysia. Proton HoldingsBhd shares fell as much as 2.6%after a newspaper report saidMalaysia’s biggest carmaker maypost RM700 million ($1 approxRM2.24) in pre-tax loss for thequarter ended September.

The Boeing 777-300ER flies over Washington State in thisundated photograph. Cathay Pacific, Hong Kong’s largest airline,will buy 12 Boeing 777-300ERs with options for 20 more, whileleasing four of the same model. Three Airbus A330-300s will beleased from International Lease Finance Corp.

PICTURES: BLOOMBERG SHOWA DENKO

Genting International’s executivechairman Lim Kok Thay (right) andchief financial officer Tan Hee Teckat the press briefing for the launchof the company’s IPO in Singapore.It is offering one billion newshares at 35 cents each, includingan over-allotment option of 103.4million shares. While the companywill maintain its listing on theLuxembourg Stock Exchange, theprimary listing will be in Singaporeafter the IPO. GentingInternational, together with sistercompany Star Cruises Ltd, is oneof 11 bidders for the integratedresorts at the Marina Bayfront andSentosa sites.

CHU JUCK SENG/THE EDGE SINGAPORE

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ECONOMICS WATCH

Singapore’s factorieskeep pumpin’ it up| BY SHAMIM ADAM |

D omestic manufacturing expandedlast month at the fastest pace in 15months on higher overseas and do-mestic orders and production, a keygauge showed.The Singapore Institute of Purchasing

and Materials Management (SIPMM) lastThursday said its purchasing managers’ in-dex rose 2.1 points from October to 53.5,the highest since August last year. A read-ing above 50 indicates overall factory acti-vity expanded. The median forecast of seveneconomists in a Bloomberg survey was fora reading of 52.

The government is counting on a reboundin electronics shipments by companies suchas Venture Corp and increased pharmaceuti-cals production to achieve economic growthof around 5% this year. The economy grew7% in the third quarter from a year earlier.

SIPMM said in its report that a sub-index

The travel business| BY MURRAY BAILEY |

Hotels count the customersCustomers were flocking to four-star hotels, bothlower and upper, filling over 80% of their rooms inthe first eight months of the year (see Table 1).Although five-star hotels got more dollar from eachcustomer, the net result still favoured the upper-four-stars. This may indicate a shift in travelpatterns caused by low-fare airline (LFA) travellers,who have been producing good volume growth fortheir destinations, but not necessarily in spending.

Still, it is risky to assume that all LFAcustomers are budget travellers. Bob Burns, co-founder of Regent Hotels, once told me his top-end resort in Italy’s lake district attractedGermans (because they were close to Italy’ssouthern border), Americans and — since thestart of Ryanair flights — quite a number ofBritons. So, travellers are taking a US$20 flight topay as much as US$1,000 a night at Burns’ resort.Low-cost air fares actually motivate people totravel. Cost is not a major factor becausetravellers who are ready to spend US$1,000 anight for a hotel room would presumably haveenough money to pay much more for the flight.

So, AirAsia’s slogan — “Now everyone can fly”— is not quite right. The customers could beregular travellers who are travelling more often orvisiting new destinations because the fares are low.

2005 heads for 10% visitor growthThe growth in regional visitors was slowing —although by not much. From over 11% in the firsthalf, it slipped to under 11% at the end of thethird quarter. With the numbers trending down,the year-end figure is likely to be lower, albeit stillabove 10%, making this a good year, if not agreat one. And that would be well above theWorld Tourism Organization’s expected 5% to6% growth worldwide.

Singapore, however, continued to under-perform in the region — running at 8% growthcompared with almost 11% for the region. Giventhe boost in visitors, which usually comes fromLFAs, this was not encouraging news. China,

Hotel results in Singapore (Jan-Aug)ITEM LOWER-4-STAR GROWTH* (%) UPPER-4-STAR GROWTH* (%) 5-STAR GROWTH* (%) CITYWIDE**Occupancy (%) 84 5 85 7 73 2 81Average room rate ($) 113 20 202 23 234 15 164

An “average room rate” is the result of total room revenue divided by the number of hotel rooms occupied*Points for occupancy **No comparison with 2004

Table 1

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Hong Kong and even high-cost Japan weremoving ahead much faster. Although growth inAustralia was slower than Singapore by a point,Down Under should be suffering more as itslonger-haul passengers — who make up half ofits visitors — would be harder hit by fuelsurcharges on air fares.

Data on visitor counts for Malaysia andThailand covered periods earlier than the firstthree quarters. Malaysia was running slower thanSingapore. However, its figures usually reflectgrowth in outbound travel from Singapore, whomake up 60% of total visitors in Malaysia.

Thailand was still suffering from the tsunamiin the four months for which it had counts. Laterindicators (from hotel occupancy, throughAugust) showed no change for Bangkok — so,at least the decline has stopped. But for Phuket,hotel occupancy was down from 71% in 2004 tojust 46% this year.

Murray Bailey is a research director and travelbusiness analyst

Visitor arrivals into mainAsia-Pacific destinations(2005)

GROWTH (%)YEAR NO OVER OVER

DESTINATION THRU (’000) 2004 2000Singapore Sept 6,574 8.3 14.6

Australia Sept 3,961 7.3 13.7China* Sept 14,943 24.0 100.4Hong Kong** Sept 7,408 15.3 16Japan Sept 5,081 9.1 42.2Malaysia July 9,485 4 62.5Thailand*** April 3,500 -9.5 5.9

Total*** Sept 58,789 10.7 43.3

Notes: *Foreigners only. **Excludes China, Macau.***Estimated; ‘Total’ is for destinations shown here

Table 2

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measuring the electronics industry also ex-panded at a faster pace. The sub-index rose1.3 points to 55.4 as new orders in domesticand overseas markets increased. The medianforecast in the Bloomberg survey was for areading of 54.4.

Export orders expanded in November af-ter a contraction the month before. The indexfor new export orders gained 2.3 points to50.9. The sub-index for new electronics ex-port orders also reverted to growth, gaining6.9 points to 56.2.

The index for production, an indicatorof current factory output, gained 4.6 pointsto 56.8 last month. The sub-index of elec-tronics production rose 3.5 points to expandat 62.4.

The overall employment index rose 1.2points to 51.5. The sub-index of electronicssector employment gained 0.6 point to ex-pand at 50.3, after contracting in Octoberfor the first time in five months. —Bloomberg LP

Shipping containers at the Singapore harbour. The government is counting on a rebound in electronicsshipments and increased pharmaceuticals production to achieve growth of around 5% this year.

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CORPORATE

Dressing up MalaysiansSecond Chance eyes at least 50 apparel retail outlets across the Causeway in five years

| BY CHAN CHAO PEH |

S econd Chance, a Singapore-grownhousehold name, is well-known for itsclothing, jewellery and accessories ca-tering to the Malay community. Thestory of Mohamed Salleh Marican,founder of the company, has been well chroni-cled. The company is remarkable not only forbeing the only Malay company listed in Sin-gapore, but also for the way it has made atleast two comebacks from businesses thatturned bad, hence the name, Second Chance.

In its latest reincarnation as Second ChanceProperties, the company is earning a big chunkof its profits from real estate. Since 1999, thecompany has been steadily buying up retailoutlets in shopping centres and neighbourhoodtown centres all over Singapore.

For the financial year (FY) ended June 30,its property business contributed an earningsbefore interest and tax of $6.7 million, or 46.7%higher than FY2004. Last year alone, the com-pany added eight units to its portfolio, chalk-ing up a total of more than 40 units (see box).

Income from the property business, coupledwith its dividend payout, has given this scarce-ly traded stock the financial strength to behavealmost like a “mini-REIT” (real estate investmenttrust). For FY2005, the company earned a netprofit of $10 million, compared with $8.9 mil-lion for FY2004. This was its third consecutiveyear of bottom-line growth. In the same period,revenue was up 8.31% to $39.09 million. Itsshareholders, who number just over 2,000, wererewarded with a dividend of 2.5 cents per share.Based on last Wednesday’s closing price of 20.5cents, this payout translates into a yield of about10% — beating Singapore-based REITs at cur-rent valuations. To add more cheer, the com-pany has committed to pay out the same 2.5cents, gross, for FY2006 and FY2007.

Pay by GiroWhile keeping some units for its retail business,Second Chance rents most of them to tenantslike banks DBS and Standard Chartered, andclothing retailers Giordano, Bossini and HangTen. Salleh points out that they are reputablecompanies that carry hardly any risk of default-ing on payments. “We don’t have to worry norask for rent. Every month, they send it by Giro,”says Salleh in an interview with The Edge Sin-

gapore. “Collecting rental is the best business.”Unlike many businessmen who made their

first fortune on property, real estate wasn’t onSalleh’s mind when he started a tailor shop threedecades ago. “We never, ever wanted to go intoproperty but, having been in the retail trade for30 years, we’ve always been paying rent,” hesays. Following the 1997 Asian financial crisis,however, the property market collapsed soonafter Second Chance was listed in January thatyear. With extra cash and a sense of the me-chanics of the retail industry, Salleh decided tomake his foray into property investment in 1999— when the market was in the doldrums.

Another broader factor has also influencedthe company’s strategy in property. A bigchunk of its properties is at City Plaza, a shop-ping centre diagonally across from SecondChance’s flagship store at Tanjong KatongComplex. Both buildings are near the PayaLebar MRT station. In the mid-1990s, when theSingapore economy was accelerating at neardouble-digit rates, the four-storey TanjongKatong Complex and some of its surroundingareas had been slated for redevelopment as partof an overall master plan. During the Hari Rayafestive season, this area is so popular with theshopping crowd that traffic police have theirhands full trying to prevent the throng fromspilling onto the roads and forcing passing carsto inch their way forward.

Salleh needs a sizeable alternative locationto house Second Chance’s retail operationswhen tenants from the Tanjong Katong Com-plex move out. City Plaza is the obvious choice.However, the subsequent economic downturnshave put the redevelopment plans on hold till2012, says Salleh, citing discussions he and otherbusinessmen in the area had with the Singa-pore Land Authority. “The plans — which in-

clude underground links, hotels and offices —were made during boom times in the mid-1990s,when everybody could not think properly. Now,everybody just keeps quiet,” he quips. But theoriginal bet stays. “This area will be redeve-loped. It’s just a matter of time,” he adds.

In recent months, the property market hasfinally been showing signs of an upturn, withproperty stocks enjoying a long-awaited run.However, it is Salleh’s turn to become cautious.Between 1999 and now, Second Chance pickedup ideal units cheaply and, very often, belowvaluation, which contributed to yields of ashigh as 8%, when interest costs were just2.5%. With the upturn, properties that used tobe valued at $2 million are now pegged at $2.4million, and owners are asking for $3 million,he notes. As a result, yield has fallen to be-tween 5% and 6%, while costs have edged upto 4%. “The shiok is no longer there,” he says.

First Lady in MalaysiaSecond Chance will be leaning on its apparelretail business (under the First Lady brand)for growth, and slow down on the purchaseof new properties. “We don’t want to chase;we don’t want to get carried away,” he says.

Second Chance has a 20% share of ladies’apparel in Singapore, estimates Salleh, andonly 1% in Malaysia, through its six First Ladyoutlets, with three in Kuala Lumpur. “In Sin-gapore, there’s limited room for expansion.That’s why we are expanding into Malaysia,where disposable income is rising,” he says.

He believes that First Lady has marketeditself enough to create awareness across theCauseway, and the time is ripe to step up theexpansion. “We are going all out to expand,through our own companies or through fran-chises. For the cities, we are going into the

shopping malls; for the outlying areas, we aregoing into the hypermarkets. Five years fromnow, we will be in every town and city, ofboth West and East Malaysia,” says Salleh.That will be at least 50 locations, he estimates.For FY2005, the company earned an opera-ting profit of $1.62 million on revenue of $8.73million from the apparel business.

Salleh believes he can win over customersin Malaysia with his range of affordable bajukurung and kebaya, with even elaboratelyembroidered ones going for as low as $20,compared with tailor-made ones that can costfour times more. The company sources itsapparel from seven different factories in Viet-nam, and materials from China. With some250,000 pieces sold a year, it can demand adeep discount on volume.

Dividend payout assuredThe company is confident that it can fund itsexpansion in Malaysia easily, without addi-tional borrowings. Start-up costs for each out-let can be recouped as early as within a year,says Salleh. “We are collecting cash everyday,” he says.

The company’s business is not all glittery.The sale of gold jewellery, its largest revenuecontributor, was $22.63 million in FY2005,down from $23.92 million in FY2004, as highergold prices drove away price-sensitive custom-ers. Operating profit was also down from $3.71million in FY2004 to $3.27 million in FY2005.Currently, with gold prices at record levels ofmore than US$500 an ounce — a 20-year high— Salleh concedes there will be some impact.

The apparel and property businesses willmake up for declines in gold jewellery sales,though. Second Chance may be slowing downon its property-buying spree, but that does notmean income from this segment is falling. In-stead, in line with market rates, Salleh has beenasking for higher rental, ranging from 10% to30%. So, shareholders can be assured that thecompany will at least maintain the current levelof dividend payout, says Salleh, who, alongwith his family, owns 70% of the company.

Having built its little property empire inSingapore, Second Chance is not about to turnits back entirely on the sector. “The retailproperty business has given us the highestreturns. If anything happens to the propertymarket again, we move in again,” he says. E

Selected Second Chance properties in Singapore and MalaysiaBUILDING ADDRESS

City Plaza 810 Geylang Road (Units 01-45, 01-46, 01-60, 01-61, 01-56/57, 01-47, 01-81,01-107, 01-105, 01-43/44, 02-51, 02-86/88, 02-105-108, 02-50, 02-81/82)

Far East Plaza 14 Scotts Road (Units 02-40, 02-42)Peninsula Plaza 111 North Bridge Road (Units 01-28, 01-29, 01-38, 01-44, 01-45A/B)Lucky Plaza 304 Orchard Road (Units 01-56/57/58/59)People’s Park Complex 1 Park Road (Unit 01-32/33)Ampang Park Shopping Centre Jalan Ampang, Kuala Lumpur, Malaysia (Lots 1.80, 1.81, 1.82)

Sm_8_S194.pmd 2.12.05, 9:05 pm8

THEEDGE SINGAPORE | DECEMBER 5, 2005 • 9

SPONSORED STATEMENT

The process ofUPS ExchangeCollectSM

1 Buyer and seller agree to saleand purchase terms and specifyUPS Exchange CollectSM for fi-nancial settlement

2 Seller ships the goods by UPS, which notifies the buyer that the goods are intransit and that payment must be made before delivery

3 Buyer pays UPS4 After UPS receives payment, it delivers the shipment to the buyer5 Upon verification of delivery, UPS remits funds to seller

In UPS we trustAV equipment retailer lets customers shop onlinewith confidence via UPS Exchange CollectSM

| BY P C LEE |

I n the world of e-commerce, trust isdefinitely a two-way street. While anonline seller takes a risk by under-taking to deliver goods to overseasbuyers who may not pay, the buyertoo has to take a leap of faith because he isnot familiar with the credibility of the said ven-dor. And for small, online vendors of goodsand services to overseas buyers, a higher de-gree of trust must be established between theparties before a transaction can take place.

Expandore Electronics, a Singapore-basedsupplier of cutting-edge broadcast and elec-tronic equipment since 1994, faced such achallenge when it decided to expand its dis-tribution network via e-commerce and establish it-self as a preferred world-wide supplier. As a smalland medium-sized enter-prise (SME), Expandorehad no way of knowing ifits potential buyers fromabroad were genuine, so itrisked delivering goods toa buyer who could delay ornot pay. And it’s just oneside of the issue. Overseasbuyers, especially first-time ones, are not famil-iar with Expandore anddo not know much about the company.This concern is raised when high-value andexpensive goods such as professional videoand audio equipment are involved.

John Malcolm, now one of Expandore’sregular clients, echoes the concerns of first-time buyers: “I was initially a bit hesitantabout buying something over the Internetand checked Expandore’s profile via severalsources before placing an order. There areso many scams going on these days that youhave to be a bit careful.”

To put the buyer’s mind at ease, Expan-dore decided to offer an alternative finan-cial transaction process that provides thebuyer with enough confidence to purchasefrom Expandore and not bring his businessto other tried-and-tested suppliers.

The solution came in the form of UPS’s Ex-change CollectSM, which enables Expandore tooffer an alternative payment method to cus-tomers that is fast, secure and simple. UPS Ex-change CollectSM offers an electronic financialsettlement option which gives full visibility ofgoods and funds during each step of the trans-action, enabling sellers to quickly receive pay-ment for their goods. UPS acts as a trustedthird party to collect the funds from the import-er prior to shipment delivery and pays the ex-porter only upon delivery. A major advantageof this service comes from the trusted and re-liable brand name of UPS, which legitimisesthe arrangement for both sides.

Prospective customers recognise UPS as aglobal and trusted brand that provides reli-

able delivery services. Withthe option of using UPS Ex-change CollectSM, custom-ers are assured of an easyand secure way of manag-ing financial transactionsfor online purchases.

On top of the securityprovided by UPS, buyersaround the world are alsonotified of the transition oftheir purchases. In addi-tion, UPS has officesacross the globe that buy-ers can visit should theyhave any queries.

“I now have my HVR-Z1P camera andI am very pleased indeed. UPS’s deliveryservice was excellent; it cleared the par-cel for collection within 12 hours,” saysGordon Hiles, one of Expandore’s manyinternational customers.

According to Steven Sun, director ofExpandore, the company’s growth has beenimpressive since it opted for the UPS Ex-change CollectSM service. He says, “We areable to use UPS Exchange CollectSM to helpturn sceptical buyers around. When pros-pective buyers learn of UPS ExchangeCollectSM as the alternative payment gate-way, they are reassured and keen to buyfrom us. Not only do we get more custom-ers, they are also confident and satisfiedwith our service.”

PICT

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PS

UPS delivers the shipment to the buyer after it receives payment

Buyers will be notified of the transitionof their purchases

SPONSORED STATEMENT

E

Sm_9_S194.pmd 1/12/05, 7:56 pm9


CORPORATE

Boustead gets fired up

| BY GOOLA WARDEN |

W ong Fong Fui spent much of lastweek out of town. The jet-settingchairman and CEO of BousteadSingapore was, as usual, busy se-curing contracts for the company,in which he has a 30.6% stake. After acquir-ing it in 1996, Wong set out to remake thecompany so that its main businesses can besummed up in two words: oil and water.

The company designs and operates heatersused in oil refining. Wong says the orderbookfor the company’s energy segment rose from$45 million as at end-March this year to $75million by Sept 30. About a quarter ofBoustead’s revenues come from its energy seg-ment, which includes power generation andsolid waste energy recovery. Its half-year re-sults (the company has a March year-end) sawrevenues from the energy sector jump 35%.Separately, Boustead’s subsidiary delivered Sin-gapore’s first dual-membrane-based desali-nation plant to Senoko Power in June.

Rising energy orderbook“China and India are the fastest-growing mar-kets for Boustead as these countries invest sig-nificantly in oil refineries and power plants,”states Phillip Securities in a September report.It reckons that the spending increase wouldcreate demand for heaters and process-con-trol systems, Boustead’s forte.

The long period of refinery construction —from five to seven years — and the refurbish-ing of old ones are all good for Boustead. Itsheaters are central to the refining process.Boustead’s total orderbook has been risingsince the middle of last year. In the six monthsto Sept 30, it jumped by 50% to $330 million.Boustead’s share price reflects the improvingfundamentals. After staying stagnant formonths, prices rose by 48% in a year, from62 cents to its last traded price of 92 cents.

The company designs and operates direct-fired process heaters used in the crude-oil-re-fining process, through its 90%-owned subsidi-ary Boustead Industrial Heaters (BIH). The

manufacturing is outsourced. Investment in thebuilding of new refineries has just started after20 years of neglect. “High crude-oil prices haveencouraged investment in refineries,” notesPhillip Securities Research. The local brokeradds that total exploration and productionspending (including refineries) is likely to grow9% this year.

Another subsidiary, Control & Electrics(C&E), provides wellhead control panels forwell, production and floating platforms, andproduction, storage and offtake vessels thatare used in oil production. C&E’s clients in-clude Larsen & Toubro, Iranian Offshore Con-struction Company, Qatar Petroleum andSaudi Aramco. By the end of financial year(FY) 2006, C&E will have put in place well-head controls for 60% of Oil & Natural GasCorp’s (India) offshore platforms operating inthe Arabian Sea. Phillip Securities Researchanalyst Deng Jiewen says C&E is especiallystrong in designing wellhead control panels.

At the oil-refining end, BIH has completedprojects in 26 countries. CEO Wong says Bous-tead’s heaters are “at the heart of the refiningprocess and petrochemical plants. The heatersare used to distil oil products and are funda-mental to refining”. BIH’s customers includemultinationals Shell, British Petroleum, Exxon-Mobil, Unocal, Texaco and MW Kellogg.

What is Boustead’s edge? “Compared withlarger competitors such as ABB (Asea BrownBoveri) Lummus and Foster Wheeler, BIH hascost competitiveness that gives it flexibility tocompete for projects,” says Phillip SecuritiesResearch, noting that it also has better exper-tise than smaller competitors in direct-firedprocess heaters.

Alternative energyWong says projects are getting bigger. In thepast, $3 million to $5 million contracts wereconsidered medium-sized. These are now seenas small against several enquiries above $10million. “We see this trend continuing into nextyear and beyond,” he says. He sees the com-pany’s revenues growing to $500 million in thenext five years. In the first half of this year

(1H2005), Boustead’s turnover grew 46% to$157.6 million. DBS Vickers, in a Nov 15 up-date, has forecast revenues of $284 million forFY2006 and $349 million for FY2007.

A new area for Boustead, and a side effectof high oil prices, is its foray into alternativeenergy sources. Wong says Boustead is in-volved in a pilot project in Malaysia with Ma-laysian Mining Corp to turn municipal wasteinto energy. The company has managed tobook almost $4 million in sales in the sixmonths to Sept 30 for this segment.

In Indonesia, Boustead converts waste likepalm kernels into energy. Wong says the re-moval of fuel subsidies there means findingalternative sources becomes more urgent.Boustead Maxitherm Industries, the unit thatproduces the boilers to convert waste into en-ergy, is raising capacity.

Phillip Securities Research estimatesgrowth in municipal-waste-generated energyto rise to 29 billion kWh by 2025 from 7 bil-lion kWh currently. Boustead also owns79.5% of Salcon, whose unit Salcon PowerCorp manages and operates the 203.8mwNaga Power Plant Complex, in Cebu, the Phil-ippines. The company is planning to constructa new 200mw coal-fired plant next to Naga.

Salcon builds and operates industrial, mu-nicipal and waste-water treatment plants —Boustead’s second main area of operations.

Boustead Projects, another subsidiary, pro-vides industrial real estate solutions. Profitsfor 1H2006 more than doubled to $26.34 mil-lion, partly because of a surge from its indus-trial property segment.

Unused Section 44 tax creditsRecently, Boustead announced a dividend-in-specie of 83% of its 49.9%-owned associate,EasyCall International, which is listed on theAustralian Stock Exchange. The exercise usesup $2.1 million out of its $6.1 million in taxfranking credits in Section 44 Tax Credit bal-ance. The company has indicated it wouldexplore ways of using the remaining tax cred-its before expiration in December 2007.

The recent half-year announcement alsoshowed strong operating cash flow of $82million, boosted by a reduction in receivablesand inventories. The sale of two industrialproperties to Mapletree Logistics Trust con-tributed partly to a strong cash inflow and re-sulted in a sharp rise in cash and bank bal-ances to $106.8 million. Boustead is in a netcash position of 30 cents per share.

A series of positive developments, from theoil-and-gas sector to a recovery in the local in-dustrial property market, is drawing investorattention to this company. The point of inter-est is whether its energy-related orderbook willcontinue to grow at the current hot pace. E

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RERevenues from oil refining rose 35% and its energy-related orderbooksurged 66% in the six months to Sept 30. CEO Wong Fong Fui seesthis trend continuing.

Wong says projects are getting bigger, above $10 million, and sees the trend continuing in the near future

Sm_10_S194.pmd 2/12/05, 9:39 pm10


CORPORATE

Cerebos making losses in ChinaBut the maker of Brand’s Essence of Chicken hopes to break even in two to three years

| BY AUDRINA GAN |

A nalysts and reporters were treated tojars of Brand’s Essence of Chickenduring Cerebos Pacific Ltd’s fourth-quarter (4Q) results briefing at theSwissotel Merchant Court Hotel lastTuesday. Cerebos, best known for its chickentonic drink, also produces sauces, juices, instantcoffee, condiments and health supplements.

The chicken-tonic recipe, which was con-cocted by England’s royal cook H W Brandto boost King George IV’s ailing health, wassuch a success that Brand decided to sell thetonic commercially. Last year, Cerebos soldmore than 140 million bottles of chicken es-sence, which is the company’s key revenuegenerator. Nonetheless, in a recent marketsurvey, the group discovered a surprising yetinteresting find: The taste of this 19th-centurytonic drink is a barrier to attracting potentialcustomers. What’s more, it’s also impedingregular customers from consuming more. Torectify this, Cerebos is working with a hand-ful of universities in Japan and the US to im-prove the taste.

The China quandaryBrand’s Essence of Chicken may be the cate-gory leader in markets like Thailand, Taiwanand Singapore. But there remains one “sore”spot — an outflow of red ink is still evident inCerebos’ Brand’s liquid business in China sinceits first foray in 1996. For its fiscal year endedSept 30, Cerebos posted a pretax loss of $8.44million, up 19% year-on-year in China. Al-though revenue has grown 21% to $13.36 mil-lion, losses have widened due to the substan-tial investment in advertisement and promo-tion. In particular, Cerebos is moving intoChina in a bigger way as it embarks on majortelevision ad campaigns, vice-president andgroup financial controller Koo Nguang Siah tellsThe Edge Singapore at the briefing. “China is avery difficult market... there’s no transpa-rency,” says Koo. Bad debts are a common is-sue facing foreign firms in China.

To be on the cautious side, Cerebos, whichhas a cash and cash equivalent of $233.52 mil-lion at the end of financial year (FY) 2005,rarely extends any credit terms. So far, creditterms are only extended to multinational cor- E

porations such as Carrefour, Watsons andMacro Wholefoods. “Many of our Chinesecustomers prefer credit terms. But we go forcash transactions or through wholesalers whowill bear the credit risks,” says Koo. And hemaintains the company will stick to its cash-dealing policy even if this translates into aslower growth rate for Cerebos in China.

Still, why has penetrating the China mar-ket proven to be such a difficult task?Brand’s did well in Thailand and Taiwan interms of revenues in FY2005. DBS VickersSecurities’ analyst Paul Yong points out thatthe fundamentals in China are “quite dif-ferent” from the rest of Cerebos’ markets.For starters, the geography is vast, with eachChinese city larger than Singapore. “Thus,each city has different requirements andvarious efforts,” says Yong. Cerebos cur-rently has a network of distributors inGuangzhou and Shanghai. Recently, it ap-pointed an exclusive distributor, JDH, forits developing market in Beijing.

From Yong’s perspective, brand buildingis important for markets like China, particu-larly for premium products such as Brand’sEssence of Chicken and bird’s nest — theonly two Cerebos products sold in the coun-try. Chinese companies, including Kangfulaiand Xiyi, also compete with Brand’s Essenceof Chicken for a slice of the market. WhileCerebos has committed to a bigger adver-tising and promotion budget in China thisyear, Koo declined to comment on thegroup’s marketing expenditure. One thing

is for sure, though. The enhanced market-ing blitz via TV commercials would not befrequently repeated in years to come. “It’scostly to do so, not to mention the slew ofTV channels in China,” says Koo.

If the challenges mount, could Cerebosthrow in the towel in China? DBS Vickers’Yong, who sees huge potential for growth inChina, doubts it. “If they can be so successfulin a non-Chinese market like Thailand, it doesnot make sense for it to stop penetrating [the]China [market],” he adds. At Cerebos, Koosays the firm is resolved to “make things workin China”.

During the briefing, Ramlee Buang,Cerebos’ executive vice-president and chieffinancial officer, reiterates that the companywould not go beyond its annual thresholdof $10 million with regard to losses in thecountry. Meanwhile, Koo points to a posi-tive sign — China has recently imposedmore stringent regulation and penalties in abid to minimise false product claims. Now,claims have to be backed up with scientificresearch, which Cerebos purportedly has.When will profits start rolling in? While Koosays the group is more “optimistic” aboutChina than before, he prefers to maintain acautious stance. “It would probably takeanother two to three years before we couldpossibly break even in China,” adds Koo.At DBS Vickers, Yong does not foresee theChina operations breaking even over thenext three to five years, even as he concedesthat revenue growth has been “quite good”.

Bird flu may dampen future growthThe spread of bird flu in the region maypresent another stumbling block for Cerebos.Analysts like Yong reckon the epidemic maystifle growth for its flagship product. Koo,however, feels the impact would be minimal,though he concedes that there was a slightdip in revenue for two months in Thailandlast year when the virus was first reported.“Consumers are aware that our products aresafe... we purchase our chicken from securefarms in Thailand, China, Malaysia and Tai-wan,” says Koo.

Another golden egg lies in the group’s cof-fee and sauces segment in Australasia underbrand names such as Fountain, Gravox,Robert Harris, Riva and Gregg’s. About 50%of total sales are derived from this segmentand Cerebos is looking at further expansionthrough acquisitions and organic growth.These include opportunities in retailingroasted and ground coffee in New Zealand.Presently, Robert Harris, the group’s groundcoffee brand in New Zealand, is profitablebut Ramlee acknowledges it does not have theability to “shift Cerebos” into the premiummarket yet. Franchising opportunities forRobert Harris in Asia is also on the cards.

Cerebos reported a 4% growth in earningsto $64.2 million on the back of 5% revenueexpansion to $694 million. The firm said itwould pay a tax-exempt special dividend of19 cents. For now, investors must be hopingthat its key segments will continue to performand that the red ink will stop in China.

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Although Brand’s Essence of Chicken is Cerebos’ key revenue generator, the taste of this 19th-century tonic drink is a barrier to attracting potential customers

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Rotol’s new bridge to success

| BY FRANCIS TAN |

Rotol Singapore Ltd has been one ofSingapore’s best-performing stocksthis year. At 19 cents, it is up awhopping 280% from the five-centlevel at the start of the year, whenits loss-making, construction-related alumi-nium coating and fabrication business wasfacing a bleak outlook. The first run-up inthe stock occurred in April, when the pricenearly tripled over one month following theemergence of J Bridge as a possible control-ling shareholder. On Oct 14, J Bridge exer-cised a call option that took its stake to57.3%, or 220 million shares, which werepriced at 10 cents each. The stock touched a51/2-year high of 21 cents on Oct 7, follow-ing the successful completion of the “reversetakeover” on Oct 5.

No divestmentSo, who is J Bridge and why the enthusi-asm over the stock?

Shiro Suzuki, Rotol’s newly appointed ex-ecutive director and J Bridge’s sole Singa-pore-based representative, was eager to ex-plain the nature of J Bridge’s participation inRotol. “It is not a reverse takeover as we arenot doing away with the existing business togain only a shell company,” he says.

The company plans to rehabilitate and re-structure Rotol through a “hands-on restruc-turing approach” and to pursue “new busi-ness opportunities with better profit mar-gins”. Shiro says, “We’ll do what we can but,at the least, we hope to change the money-losing trend by next year.”

Shiro, 31, first cut his teeth in the financialindustry as a credit analyst with the Los An-geles branch of Sumitomo Trust & Banking.He then specialised in distressed assets atKPMG as an accountant-cum-financial con-sultant for four years, mostly in its Japan of-fice. He joined J Bridge in July 2004, follow-ing a brief stint at Shinsei Bank Ltd.

Senior staff returnWhat about Tan Khee Bak, the founder andnow 27.6% shareholder of Rotol (includingshares held by TKB Foundation Ltd)? He isoverseeing Rotol’s Jiaxing factory nearShanghai and exploring business opportu-nities in China which, together with Taiwanand Hong Kong, accounted for only 11% ofturnover in financial year (FY) 2004, or $0.8million. The rest of the turnover came al-most entirely from Singapore. In its interimresults, Rotol said, “Intense competition,both in Singapore and China, is expected tocontinue, which will have a negative impacton pricing.”

On the home front, Rotol’s existing busi-ness is managed by a team of experiencedstaff, including three former employees. Tanand a senior manager managed to persuadetwo former sales managers to return afteran absence of three years. Frederick Lim,59, a 12-year veteran with Rotol, says overa phone interview, “We got offers elsewhere…but Rotol is still the pioneer company [influorocarbon coating]... it still needs us andwe can still contribute to the company. Whynot? Why [do we] need to work in a newenvironment?” Lim and another 13-yearRotol veteran re-joined the company in Sep-tember and persuaded a former sales execu-tive to join them the following month. Limis upbeat over business prospects. “Thereare lots of projects coming up next year,including commercial projects and condo-miniums. Hopefully, some of our customerscan get big projects and we can then workwith them.”

As newcomers to Singapore and with cor-porate governance issues a major concern,J Bridge opted for a large nine-memberboard for Rotol to include four independentdirectors. Perhaps more importantly, itneeds a successful rehabilitation of Rotol towin credibility for its unusual investmentbusiness model. Judging from the stock per-formance since the emergence of J Bridgein April, and at 2.1 times the book valueper share of 9.1 cents now, the market hasevidently placed high expectations on JBridge to achieve some degree of success inSingapore as it did in Japan. However, with85% of the shares held by J Bridge and Tan,the tight stock liquidity means only thesetwo insiders would benefit the most fromany turnaround.

CORPORATE

Impressive recordJ Bridge, which is listed on the Tokyo StockExchange with a market capitalisation ofabout US$825 million ($1 approx US$0.60),is an investment firm that specialises in theacquisition of listed and private companies. Itwas a struggling warehousing and logisticscompany before a takeover led by ToruMasuzawa at the end of 2003. Masuzawa, 44,is the CEO of J Bridge and the executive chair-man of Rotol. The executive vice-president ofJ Bridge, Kenichiro Yamamoto, 43, is the CEOof Rotol. Both are based in Tokyo.

Since the takeover, J Bridge has investedin 14 businesses in Japan and South Korea,of which 10 are listed companies. The busi-nesses include the manufacturing of tofu andnoodle, distribution and retail of apparel, thedesign and installation of IT security systems,and a chain of computer stores.

In the six months ended Sept 30, J Bridgerecorded a 12-fold jump in consolidated netprofit to ¥1.6 billion ($1 approx ¥70). It fore-casts full-year net profit will climb five-foldto ¥7.6 billion. J Bridge has only 60 staff as atMarch. Its stock has risen 72% since the be-ginning of the year.

Rotol is J Bridge’s first “revitalisation” in-vestment in the region, but not its first in theconstruction sector. In May, J Bridge investedin a civil engineering firm, Kidoh Construction,

Tokyo-based J Bridge is highly motivated to succeed in its first‘revitalisation’ investment outside Japan with Rotol. It stands tobenefit from the upturn in the construction industry and returnof key ex-staff. But its free float is a low 15%.

which is listed on Osaka with a market capi-talisation of about US$190 million. Kidoh’sannual sales have halved to ¥11.3 billionover the past three years. However, its stockhas jumped 2.4 times since J Bridge showedup. Kidoh is keen to expand overseas andShiro believes Rotol could act as a conduitfor Japanese companies such as Kidoh tocome to Asia.

Rotol has about $22 million cash and lessthan $5 million debts. It is “exploring oppor-tunities” with regard to a possible sale of itssix-storey factory, which was written downto $13.8 million in August.

It is not a reversetakeover as we arenot doing away withthe existing businessto gain only a shellcompany — Shiro

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CORPORATE

Setting its sights on IndiaJetstar Asia’s next thrust will be in Indian cities like Chennai and Bangalore

| BY AUDRINA GAN |

S itting in a small, windowless room in abuilding at Terminal 1, Changi Airport,Ken Ryan, the 50-something-year-oldCEO of Jetstar Asia and Valuair, looks atad tired. It’s the tail end of his nine-month stint in Singapore, but he doesn’t let onthat he’s tired, or that he’s leaving his post.Three days after his interview with The EdgeSingapore, JetStar Asia announced that NeilThompson, who is currently general managerof customer relationship marketing at Qantas,will take over as its acting CEO, as Ryan returnsto Australia this month. “Ken’s family has un-fortunately been unable to join him in Singa-pore, which is why he has reluctantly decidedto return to Australia,” said Geoff Dixon, chair-man of Jetstar Asia and Qantas, in a statementlast Friday.

It’s been an eventful year for Ryan andJetStar Asia, which turned one on Nov 28. Tocelebrate, the airline offered cheap air fares,from as low as $18 for a one-way ticket toBangkok and Phuket.

When Jetstar Asia celebrates its secondbirthday, Ryan hopes Orange Star (the newholding company) would have broken even.That’s a lofty goal, particularly since the Julymerger between Jetstar Asia and Valuair is aunion between two loss-making airlines. JetstarAsia reportedly chalked up losses of $51 mil-lion in the first seven months of its operation,while Valuair lost $4.1 million last year.

Little surprise then that Orange Star is for-mulating ways to come out of the red. In Oc-tober, the Australian media reported thatQantas intends to codeshare on Jetstar Asia’sflights from Singapore to Kolkata and the Thaicities of Bangkok and Phuket. Ryan concedesthat the Qantas offspring is mulling over thecodesharing agreement. From Ryan’s perspec-tive, it makes commercial sense to codeshareon several routes, such as Bangkok. Presently,Jetstar Asia’s only codesharing agreement iswith Myanmar International Airways for itsfour-times-a-week flights to Yangon, whichcommenced on Oct 31.

“We foresee we will do that [codesharing] ifit has a financial contribution to the bottom line.The whole idea of codesharing really is tobroaden the scope of passengers you can carry,”explains Ryan. His remarks were made in refer-

ence to the comments by Tiger Airways’ CEOTony Davis, who said, “What the codesharingmeans is that Jetstar Asia will effectively ceaseto operate independently as a low-cost carrier[LCC].” Davis added: “It will become the re-gional services arm of Qantas in Asia…”

Rather than being a LCC, a term often usedto describe Jetstar Asia, Ryan said the carrier“sees itself as a low-fare carrier”. He assertsthat a prospective codesharing agreement withQantas would not affect its low-fare position-ing. “Travellers still want to have a certainlevel of comfort and competitive fares… weare as competitive as any carrier, includingTiger Airways,” adds Ryan.

China dilemmaIn a bid to ride into the black, Orange Starhas also been conducting a series of route ra-tionalisation at Valuair. Unprofitable routes,including those to Perth, Chengdu andXiamen, have been axed in recent months.The first route people expected to be axed wasPerth — indeed, this competitive and seasonalroute was axed in October. Why are popularbusiness-cum-leisure destinations like Cheng-du and Xiamen, which are served by Singa-pore Airlines and a handful of Chinese carri-ers, not profitable? “Valuair could not buildthe load for Chengdu and Xiamen. If we [had],we would have continued. We’re not in thehabit of pulling out routes unless they arecommercially unviable. We didn’t make suchdecisions lightly,” says Ryan.

But AirAsia’s CEO Tony Fernandes hadonce lauded Xiamen as one of Thai AirAsia’smost profitable routes. “I’m not privy to Tony’saccounts,” Ryan retorts with a smile. “Tony’sa very gregarious character. I’m not sure whyhe would say that. I simply know what ourresults are.” In his view, there was no way theroute could continue in a viable manner.

Some market watchers like analyst ChrisEng from Malaysia-based OSK, which tracksAirAsia, think otherwise. “Xiamen is a profit-able route, given the huge amount of busi-ness traffic. There’re a lot of IT companiesthere,” he says. Rather than a lack of demand,he reckons Valuair’s semi-frills model is thecrux of the problem. “They’re caught in be-tween the full-service carriers and the lowerend of the market.”

Is China still on the radar screen for Orange

Star? Ryan’s answer was implicit: “Flights toChina take a long time.” But he surmised thatJetstar Asia would still be interested in flying toShanghai if the Chinese aviation authoritieswould give it the green light. On Nov 25, 2004,Jetstar Asia announced seven new routes —Shanghai, Hong Kong, Taipei, Pattaya, Jakarta,Surabaya and Manila. The plan was dashedwhen China and Indonesia subsequentlyblocked LCCs from flying into key airports inShanghai, Beijing, Surabaya, Medan, Jakartaand Bali.

Incidentally, China and Singapore signed amemorandum of understanding (MOU) lastweek to expand aviation transportation betweenthe two countries. This enables airlines from thetwo countries to fly freely on any route withoutlimits on capacity, routing and aircraft type.

Looking to IndiaFor now, Ryan prefers to cast his bets on In-dia. He feels the Indian aviation market is fac-ing a dearth of capacity. Jetstar Asia currentlyflies to Kolkata. “We hope to fly into moreIndian cities, such as Bangalore and Chennai,in the near future,” says Ryan. In September,Jetstar Asia received flight permits forBangalore from the Civil Aviation Authorityof Singapore (CAAS). It is awaiting trafficrights from Bangalore’s aviation authorities.

However, analysts like OSK’s Eng are scep-tical about India. For starters, India has re-

cently witnessed the emergence of manyLCCs, including Kingfisher Airways and AirDeccan. Ping also perceives poor airport in-frastructure as another stumbling block.

Despite recent new entrants such as Air Sa-hara, Jet Airways and Jetstar Asia, demand forseats has continued to grow dramatically.CAAS figures show that in 2003/04, passengertraffic between Singapore and India grew 25%to 1.5 million passengers. In August, Singaporeand India signed a MOU for more services be-tween Singapore and three Indian cities,namely Bangalore, Hyderabad and Kolkata.The additional capacity afforded were hotlycontested by Singapore Airlines, Jetstar Asiaand Tiger Airways.

But observers point out that the Indiangovernment remains reluctant to increase ca-pacity to the high-demand gateways ofMumbai, New Delhi and Chennai. It’s be-lieved the main concern stems from the im-pact of competition on Indian state-owned car-riers, which are facing a squeeze from domes-tic and foreign competitors.

For now, even if India is not growing atbreakneck speed, routes such as Taipei, whichhas been described as “one of the strongestroutes”, have given Jetstar Asia a much-needed boost. Other recently launched routeslike Phnom Penh, Siem Reap and Yangon alsobode well, given their positioning as emerg-ing tourist destinations.

Ryan says Jakarta is “a major route” forValuair, which is now being used as OrangeStar’s Indonesian vehicle. Even as its otherIndonesian route, Surabaya, is “not asstrong” as Jakarta, he maintains it’s a prom-ising route. “There are a lot of IndonesianChinese on that route,” he reveals. Whatabout Bali, where flights were supposed tobe launched end October? Ryan says it’sputting that route on hold until “some in-ternal problems are sorted out”.

Even if Ryan perceives that the Indonesianmarket could rake in profits for Valuair, itfaces stiff competition, from Adam Air to In-donesia AirAsia (formerly Awair) to Lion Air.“Even AirAsia perceives Adam Air, which hasbeen aggressively marketing itself and buy-ing new planes, as a threat,” says OSK’s Eng.To break even, the new CEO will probablyhave to dish out more options when workingout his sums. E

Ryan: The whole idea of codesharing really is tobroaden the scope of passengers you can carry

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| BY ASSIF SHAMEEN |

CORPORATE BIG MONEY

T he name is Bond. Sir John Bond. Hemay not have the swagger of RogerMoore, but Bond, chairman of HSBC,has, in his own way, changed the waybanks operate in Asia and around theworld. Last week, HSBC, the world’s third-largest bank, announced that Bond would re-tire next May. In just over seven years, Bondhas transformed what was essentially anemerging-markets and UK bank into a globalfinancial services powerhouse. Few peoplehave had such a profound impact on globalbanking. Indeed, Bond joins such other fi-nancial luminaries as ex-Citibank CEO WalterWriston, who made Citi a global banking gi-ant. Yet, while Wriston had over 17 years toshape what was already a fairly internationalbank, Bond did it in just seven years, remak-ing HSBC “the world’s local bank” in doublequick time.

Just days before his retirement was offi-cially announced last week, I met Bond inKuala Lumpur. It was my third meeting withhim in nearly a decade. He proffered his handbefore I could say a word: “I am John Bond.”Bond is an old Singapore hand, having hadseveral long stints in Southeast Asia, includ-ing Indonesia and even Brunei. When askedwhat he has achieved and how, he shrugs:“You know, I am just an ordinary bloke whogot lucky.” When Bond, 64, leaves HSBC —just before his 65th birthday — the real storywould be how he rode that luck to create abank in his template.

Without a formal college degree or anybanking qualifications, Bond started at thelowest rung of the ladder. Indeed, the twoslow journeys onboard old steamers madehim the patient, methodical person he is today.At 17, as a final-year high-school student, hesailed to California for a one-year stint as anexchange student at Cate College. After highschool, he applied for a trainee job at HSBC(then known as Hongkong and ShanghaiBanking Corp) at the age of 20 becausehaving seen the US as a teenager, he wantedto see the rest of the world. The bank in thosedays was a colonial institution with a strongpresence in Singapore, Malaysia and HongKong. When I first met Bond, he was CEO,which in HSBC speak, is actually more likethe chief operating officer, since the chair-man has executive and strategy functions.Even then, he was fairly focused on helpingcreate the world’s best-performing retail-banking franchise.

Though Citigroup is bigger than HSBC (inboth market capitalisation and assets), theformer’s huge US presence and larger footholdin investment banking make it a smaller glo-bal retail-banking player than HSBC. Yet, 12years ago, when Bond — then the head ofwhat was Marine Midland Bank in the US —was tapped by then HSBC chairman SirWilliam Purves to be his heir apparent, HSBCwas a middling player in the global retail-banking arena. HSBC, under Bond, has spentover $50 billion on more than 50 acquisitions

— mainly in consumer-banking space in LatinAmerica, the US and Europe — even as it haspassed up opportunities to buy banks in Asia,unlike its arch-Asian rival Standard Chartered(which has bought banks in South Korea,Thailand, India and Indonesia).

When Bond took over as chairman ofHSBC, it was a federation of banks with noclear identity and 200-odd entities each with

different names like Midland Bank of the UK,Hongkong Bank and Marine Midland Bankof US. Bond brought them all together undera single name and umbrella. Now, everythingis HSBC. Indeed, HSBC is now the secondfinancial brand behind Citi and the 14th best-known global brand behind the likes of Coca-Cola and Nike.

But Bond will be remembered for his fo-

Building a powerhouse cus on cost controls. He is so famous for per-sonally turning off lights that HSBC officesaround the world are known to have dark cor-ridors. Even today, on most days, Bond takesthe London Underground to his office everymorning. When he visits Paris, he takes themuch cheaper Eurostar train rather than usea corporate jet. Banking, he says, is all aboutcosts. The lower you keep the costs, the bet-ter your margins. Citibank’s Wriston is re-membered for his famous quote: “Informationabout money is becoming almost as impor-tant as money itself.” Bond might be remem-bered for his pontification on cost controls. E

Sm_17_S194.pmd 2.12.05, 11:15 pm17


CORPORATE

| BY GOOLA WARDEN |

C hina state-owned oil and gas producerPetroChina Co Ltd (PetroChina) mayhave grabbed headlines last month foraccidentally spilling benzene intonortheast China’s Songhua river. Butit hit all the right notes with investors in Sin-gapore. A contract secured by Singapore Ex-change-listed media company Fung Choi

Printing and Packaging Group (Fung Choi)with PetroChina sent the former’s stock priceup 10%.

Last week, Fung Choi set up a new unitcalled Weilun JV, which secured a major con-tract with PetroChina to upgrade signage at3,000 petrol stations. It led to a five-cent(10%) gain in Fung Choi’s share price in twosessions. The contract is likely to raise reve-nues and profits by 25% and more in the next

Lai says the whole point of the JVs is to move intofast-growing and high-margin business

PetroChina deal will boost Fung Choi

Joint-venture structure

*Comprising 35 million renminbi plant, equipment and other assets and the rest in cash

Fung Choi Printing Ltd

43.7 million RMBcash

51%

61%

49%

49%

2.55 million RMB cash

2.45 million RMB cash

42 million RMB*

Zhongshan Weilun Co Ltd

Guangzhoushi Liri Co LtdJV1 = Weilun JV

JV2 = Liri JV

three calendar years. Fung Choi, a small-cap,southern China-based company, is a 27.1%-owned associate of Fraser & Neave (F&N). Itis run by Chinese entrepreneur Lai Yuen Ling,who is also its major shareholder, presidentand executive director. Its main business isprinting, which makes up 70% of revenues,and packaging.

Tying up with PetroChinaPetroChina has 40,000 petrol stations inChina. Of these, a Fung Choi-controlled jointventure has secured sole rights to upgrade3,000 of them in southern China. The cost ofeach upgrade is 300,000 renminbi ($1 approx4.8 renminbi). “We expect to upgrade 30 sta-tions a month next year, increasing to 40 sta-tions in 2007 and 55 stations in 2008,” saidLai at an analyst briefing on Nov 30. Thatwould mean revenues of 108 millionrenminbi next year, rising to 198 millionrenminbi in 2008. Lai hinted at profit mar-gins in excess of 25%. Fung Choi’s net profitmargin is 22%.

Fung Choi’s net profits for the threemonths to Sept 30 (1Q2006) stood at HK$33million ($1 approx HK$4.60) on a turnover ofHK$148 million. Revenues and profits rose29.6% and 9%, respectively, year-on-year.The company’s China-based packaging, print-ing and publication business is what makes itattractive to investors. David Toh, senior port-folio manager of equities at DBS Asset Man-agement (DBSAM), says he likes Fung Choibecause “it is a play on the media and adver-tising sector in China”. Toh sees advertising-related spending growing strongly because ofChina’s fast-expanding middle class.

Lynette Tan of DMG & Partners, in a reportdated Nov 14, expects demand for Fung Choi’sproducts and services “to remain healthy withan increasing level of consumer spending”.Fung Choi prints brochures and other adver-tising material for customers like Creative Tech-nology, Haier Group, Qingdao Kerry Vegeta-ble Oil and Tsingtao Brewery. It also has a stra-tegic partnership with Fraser & Neave Invest-ments, a subsidiary of SGX-listed F&N.

Fung Choi will set up a JV company withZhongshan Weilun Co Ltd (Weilun) calledthe Rising Display Products (Zhongshan) CoLtd (Weilun JV), which in turn will set upanother JV company with Guangzhoushi LiriCo Ltd (Liri) called the Liri JV. Fung Choi,which will control the JV, has invested 43.7million renminbi in it. The Weilun JV will,in turn, have a controlling stake in the LiriJV (see chart).

Weilun is a Chinese company with opera-tions in Zhongsha. It designs and manufac-tures point-of-sale display units. Weilun’smain customers are consumer brand namessuch as Procter and Gamble, Unilever andL’Oreal. Liri is one of 20 suppliers of adver-tising designs for signage at PetroChina’spetrol stations, and the only one servingsouthern China. E

The set-up of WeilunJV led to a five-cent(10%) gain in FungChoi’s share price intwo sessions. Thecontract is likely toraise revenues andprofits by 25% andmore in the next threecalendar years.

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Most of the work for the PetroChina con-tract will be done in Zhongshan. The Liri JVwas set up to procure the contract becauseLiri originally did design work for PetroChinabut is unable to produce the signboards, hencethe tie-up with Weilun JV. Fung Choi’s chieffinancial officer Edmond Woo indicated thatthe PetroChina deal’s first year of operation(worth 108 million renminbi) is comparableto Weilun’s current business.

DBSAM’s Toh points out that risks forChina companies are usually related to cor-porate governance issues. However, headds, “Fung Choi’s management has beendelivering on their financials, and valuationsare cheap”. Fung Choi’s Lai says the wholepoint of the JVs is to move into fast-grow-ing and high-margin business. So far, inves-tors are reaping the rewards. But as with allChinese companies, growth doesn’t comewithout risks.

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CORPORATE

| BY VICKI KWONG |

O asis Hong Kong Airlines Ltd, thecity’s first low-fare carrier, won li-cences to operate London, Chicagoand four other routes, becoming thesecond Asian discount carrier to an-nounce plans to fly to the US and Europe.Oasis will firm up plans to lease Boeing Co

747-400 aircraft after Hong Kong’s Air Trans-port Licensing Authority approved its appli-cation for the routes, CEO Steve Miller said ina telephone interview last Thursday. The air-line plans to start flights to London’s GatwickAirport next June, he said.

The approval “has helped us get back ontrack”, said Miller, a former CEO of HongKong Dragon Airlines Ltd, the city’s second-

biggest carrier. Oasis had originally plannedto start flights this year. “We’ll now proceedwith confirming aircraft and employing crew.”

Oasis, which is among at least 18 discountairlines that have emerged in the region thelast three years, is seeking to win businessfrom budget travellers by charging 40% lessthan economy-class fares offered by CathayPacific Airways Ltd, Hong Kong’s biggest car-

rier, on the Hong Kong-London route.Kingfisher Airlines Ltd, a six-month-old

discount carrier founded by India’s biggestbrewer, has said it plans to fly to the US andEurope. Kingfisher has ordered US$3 billion($1 approx US$0.60) worth of planes fromAirbus SAS, including five A380s, which willbecome the world’s biggest passenger planewhen it enters service next year.

Oasis Hong Kong Airlines gets licences

Cheaper faresOasis may charge as little as HK$1,000 ($1approx HK$5) for a return ticket booked inadvance, Miller said. Average fares may bearound HK$3,000, he said. Cathay Pacific,which last Thursday added a fourth daily serv-ice to London’s Heathrow Airport, chargesHK$5,250 for a trip leaving Hong Kong on Dec5 and returning from London on Dec 12 oneconomy class.

The Hong Kong-based carrier plans to startoperations with one used Boeing 747-400 thatit will lease from Bank of America Corp, Millersaid. Bank of America took over the planefrom United Airlines after the carrier soughtbankruptcy protection.

Oasis plans to put 90 business-class seatsand 270 economy-class seats on the 747-400,Miller said. The four-engine 747-400 can fly amaximum of 8,349 nautical miles (9,601 miles).

Apart from London and Chicago, the air-line also won rights to operate flights to Ber-lin, Cologne, Milan and Oakland. Cathay Pa-cific doesn’t have direct flights to any of Oa-sis’s destinations except London.

Cathay Pacific’s oppositionCathay Pacific had objected to Oasis’ applica-tion for traffic rights before obtaining an air op-erator’s licence, according to a document fromthe Air Transport Licensing Authority. Oasisexpects to get an air operator’s licence in thenext few months, Miller said last Thursday.

Oasis is backed by Raymond Lee, who hasproperty businesses in the US and is chair-man of the airline.

Macau Eagle Aviation Services Ltd is an-other discount airline in north Asia that willoperate in the former Portuguese colony. Itaims to start flights to other Asian cities nextyear, CEO Andrew Pyne said on Nov 14. Hedeclined to name the destinations until anagreement with Air Macau Ltd, the city’s solecarrier, is firmed up.

The new airline, formerly known asWOW!Macau, needs to obtain traffic rightsfrom Air Macau, which has an exclusive op-erating licence in the city. Macau Eagle mayfly to Europe and the Middle East after start-ing Asian flights, Pyne said.

The company dropped the WOW!Macauname as it’s similar to WOW, an allianceformed by the cargo units of DeutscheLufthansa AG, Singapore Airlines Ltd, JapanAirlines Corp and Scandinavian Airlines. —Bloomberg LP

Oasis is seeking to winbusiness from budgettravellers by charging40% less thaneconomy-class faresoffered by CathayPacific Airways Ltd onthe Hong Kong-London route

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likely to be about what’s going on. Surely, atsome point, their “independence” will be re-flected by their own ignorance.

In addition, the less independent directorsare personally involved with the affairs of thecompany and its shareholders — or through lim-ited knowledge, stay silent — the more theycould be claimed to be there just for “windowdressing” or the directors’ fees. And, independ-ent directors who derive the bulk of their in-come from directors’ fees may not be effectivewatchdogs on behalf of minority shareholders.Much like auditors and management consult-ants, they will have to manage their own finan-cial self-interests in following the status quo setby the substantial shareholders and top execu-tives who appointed them versus challengingthem to be better stewards of the company.Would such an individual really be more effec-tive on the board than someone who owns 5%of the company’s shares, representing a signifi-cant portion of his net worth? Wouldn’t the in-dividual holding a significant number of sharesbe more likely to question the rest of the boardand top executives than an individual who is intheir pay?

And, the idea that increasingly onerousstandards of corporate governance will promotea company’s ability to raise capital is simply nottrue. Over the long term, financial markets valuecompanies according to how they actually per-form in terms of delivering shareholder value,with corporate governance rules only helpingto ensure transparency and accountability. Acleanly run company still needs to make moneyto attract the interest of investors.

In the end, an ideal independent directordoesn’t easily fit into the mould that regulatorsin Singapore — and other developed markets,for that matter — are prescribing because it isimpossible to legislate personal ethics. The in-dividual ought to be skilled in business, have agreat deal of boardroom experience, and pos-sess deep insight into the workings of the com-pany and its industry. But such an individual isvery likely to have done some kind of businesswith the company or its majority shareholdersin the recent past. How else would he have ac-quired all the requisite knowledge and skills?

Rather than continue imposing more ruleson public listed companies, Singapore’s regula-tors should perhaps look at other ways of keep-ing top executives and majority shareholdershonest. A good starting point would be to findways to make it easier and cheaper for minorityshareholders and other stakeholders to bringlegal action against their companies when theirinterests have been undermined. That way, in-dependent directors wouldn’t base their conducton a checklist of duties alone, but on an over-arching concern about what is in the best inter-ests of all their companies’ stakeholders.

The SGX has to comply with a stricter definition ofindependent directors. Its independent directorscannot be substantial shareholders of the company.

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FROM PAGE 3

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Oil-storage caverns for Singapore| BY WILL KENNEDY ANDNESA SUBRAHMANIYAN |

S ingapore plans to dig underground cav-erns that can hold 25 million barrels ofoil, expanding the island’s storage ca-pacity by almost a third, said Choo ChiauBeng, chairman of Singapore Petroleum Co,at the Ascope 2005 conference in Manila lastweek.

The caves, which will cost $800 million,are to be built on Jurong Island, near existingstorage facilities and two of the country’s threeoil refineries. A decision on the project, whichwill be led by Jurong Town Corp, is expectednext year, he said. The new storage will helpend a shortage of tanks in Asia’s No 1 oil-trading centre, Choo adds. Singapore’s threeoil-storage companies outside the refinerieshave been running at 90% of capacity for the

last five years, the US Energy Information Ad-ministration said in a June 2005 report.

Singapore’s three oil refineries, one ofwhich is 50% owned by Singapore Petroleum,have oil tanks that can hold 63 million bar-rels. Independent tank operators have capac-ity of a further 27 million barrels, Choo said,adding that other companies have plans tobuild storage facilities totalling 17 million bar-rels of oil by 2008. — Bloomberg LP

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| BY MANUBHASKARAN |

my say

Will the gloom lift in Thailand?T he news from Thailand this year hasbeen discouraging. Almost everythingthat could go wrong seemed to havegone wrong: the after-effects of the tsu-nami on tourism, a severe drought, highoil prices causing inflation to spike up, a harshmonetary tightening by the central bank, pro-tectionist measures by the US on key processedfood exports, an ugly insurgency in the southof the country and mounting political difficul-ties for Prime Minister Thaksin Shinawatra inrecent weeks, despite his landslide victory inthe general elections. Not surprisingly, thestock market has under performed and eco-nomic growth seems to have lost its lustre.

We think it is too soon to write Thailandoff. There are two reasons to think it couldsurprise on the upside next year. First, someof the above negatives were one-off and arealready dissipating or disappearing. Second,the supply-side fundamentals of the economyremain intact — along with the surge in in-vestment spending that we expect, economicgrowth is likely to recover quite sharply.

One-off negatives dissipatingOn the first point, one encouraging developmentis that the drought has ended and reservoirs arefilling up again. The drought has also galvanisedthe government into addressing needed im-provements in drainage and related works sothat the water-dependent sectors such as farm-ing and certain manufacturing industries suchas chemicals will not be hurt so badly the nexttime there is a drought. In addition, tourism isrecovering as visitors put the horrors of the tsu-nami behind them and tourist infrastructure isrepaired. Oil prices have also started to ease,and they are likely to continue to fall next year.What is more, we see the rate increases by thecentral bank as a positive — it shows that it isindependent and will act effectively against in-

flation. We expect more mon-etary tightening in the comingmonths but the bulk of it hasalready happened.

Supply side of economystronger than expectedSecond, despite the cyclicalweakening in the economy thisyear, the supply side of theeconomy — in terms of its abil-ity to attract investment, delivera good return on capital, adjustto intensified competition anddevelop new niches of competi-tiveness — appears to be intact.Our recent visit to Thailandgave us more confidence inthese longer-term factors. Busi-nessmen we met — both Thais and foreign in-vestors — seemed a lot more confident than inour previous visits. We came across severalinstances of how Thai manufacturing busi-nesses had managed to fend off tough compe-tition from China and elsewhere. For instance,there was a Thai firm making flexible packag-ing materials for the food-and-beverage indus-try. Faced with more competition, it upgradedprocesses, took in a Japanese partner with im-proved technology and quality control, and de-veloped a reputation for high-quality productsthat today command a premium price in theChinese market. We saw similar examples in asteel company and in a chemical company pro-ducing intermediate plastics for use in Thai-land’s booming automotive industry.

In fact, a visit to several industrial estatesreinforced this view. It was clear that there isa surge of new foreign investment — much ofit in supporting industries for the automotiveindustry. All three industrial estates we vis-ited were expanding massively because of a

booming demand for factoryspace. Several conversationswith Japanese investors indifferent industries also led usto believe that there is likelyto be a continued rise in Japa-nese investments in Thailand.

Also, it is worth notingthat external demand is prov-ing to be much stronger thanmany of us expected. That isone reason almost all theAsian economies that have re-ported third-quarter GDPgrowth numbers have sur-prised strongly on the upside— the latest being Malaysia.We would not be amazed ifThailand also produced a

pleasant surprise when it reports third-quar-ter GDP. After all, some of the key economicindicators such as consumer confidence havebeen improving lately.

Politics is the main riskWhat, then, are the risks? Our main concern ispolitics. The southern insurgency seems to beworsening. The tough security measures that thegovernment felt it had to take may have hadthe unintended effect of hurting ordinary folksin the south and causing them to become morealienated from the central government. In suchinsurgencies, the key to victory is to secure thesupport of the ordinary people; that providescrucial intelligence and denies the insurgentsmuch-needed refuge and resources. However,while there is always a risk of insurgent attacksspreading to Bangkok or major tourist areas, wesuspect that this will not happen. The insurgentsseem to be calculating that such a widening oftheir campaign would alienate their supportersand bring forth a much tougher and more effec-

tive security crackdown. If a terrorist attack didtake place in Bangkok, it would be the work offoreign terrorist groups and not the local insur-gents. So, the likelihood is of continued violencein the south, but contained in the deep southrather than spreading.

So, that leaves Thaksin’s weakening posi-tion as the key remaining risk. A former sup-porter, media magnate Sondhi Limthongkul,has whipped up an increasingly effective cam-paign against Thaksin. His rallies seem to begaining larger crowds and some of the chargeshe has hurled against the premier seem to behitting home with the crowds. Consequently,there is talk of efforts to unseat Thaksin andeven rumours of a coup. But the fact of thematter is that Thaksin still retains control overvirtually all the instruments of power — he has75% support in Parliament, and tough lawsagainst defections limit the chances of support-ers defecting. He also has loyalists in the secu-rity forces and in the bureaucracy, while alsocontrolling much of the electronic media. Heis a savvy political fighter and will not go downso easily. We suspect that the current agitationagainst Thaksin will peter out — unless hemakes a misjudgement. Our remaining con-cern, however, is that he is now wounded po-litically and may not command the same au-thority that he had before. That exposes himto renewed bouts of agitation in future shouldhe or his supporters make policy errors or pur-sue unpopular but necessary policies.

Still, if the economy does recover well, aswe expect, then the public mood is quitelikely to change for the better. Overall, weexpect Thailand to do better than the con-sensus expects.

Manu Bhaskaran is a partner of and head ofeconomic research at Centennial Group Inc, aneconomics consultancy

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Yuan still pegged to the dollarThere’s a good chance that thisyear will be remembered in thefinancial markets as the one inwhich China blinked and made theyuan more flexible. The misconcep-tion should be snuffed out before jour-nalists start compiling their “Thingsthat Shook the World This Year” lists.

What flexibility? All that hap-pened on July 21 was that the yuanmoved from one peg to another,says a new study. Although Chinano longer targets a fixed rate ofabout 8.3 to the dollar, it continuesto hug the US currency almost asfirmly as before.

Economists Ajay Shah and IlaPatnaik and statistician Achim Zei-leis say, “The evidence suggests thatthe new Chinese currency regime isa peg to the US dollar.”

China’s official position is thatthe yuan began its long march toflexibility after it was pegged to abasket of currencies. Apart from thedollar, the basket includes the euro,the yen, the won, the Singapore dol-lar, the British pound and the ring-git. In August, Stephen Jen, MorganStanley’s global head of currencyresearch, computed the impliedweight of the dollar in China’s cur-

Swiss currency starting July 22, thegraph looks like a mirror image ofthe yuan-franc. So far in their analy-sis, the researchers have used sta-tistical techniques that have existedsince 1981. Using a newer approach,known as econometrics of structuralchange, Shah and his team haveruled out the possibility that China’scurrency regime is becoming moreflexible with time.

The authors have set up a weeklymonitoring mechanism at this webpage: www.mayin.org/ajayshah/pa-pers/CNY_regime. Until Nov 21, thelatest date for which Shah has donethe math, “there’s no evidence thatthe currency regime has changedcompared with that prevailing” inthe 68 days to Oct 31, he says.

Shah was a consultant to India’sfinance ministry until late October.His study, however, has nothing todo with the Indian government. Healso has shown that the Indian ru-pee and the Russian ruble are se-verely inflexible.

Eyes on ChinaIt isn’t a predictive study. Itdoesn’t say the yuan will remainpegged to the dollar forever oreven tomorrow. When — and if —China embarks on the road to aflexible currency, the researchersexpect to discern the signs on theirradar. Those signs, or a lack of

them, may have a crucial signifi-cance next year.

If the US Federal Reserve stopsraising interest rates next year andJapan, coming out of deflation,starts increasing them, then theremay be a case for the dollar toweaken against Asian currencies in2006. The authorities in Beijing,some analysts say, will embrace astronger yuan either under pressurefrom the US or after the domesticChinese economy overheats somuch that it becomes imperative toshift the export engine into a lowergear. “China may decide to move itscurrency by about 10% or more inthe next 12 months, thus leading notonly to a weakening of the dollarrelative to the renminbi but also toan appreciation of a wide range ofAsian currencies, including theyen,” says New York Universityeconomist Nouriel Roubini.

Looking at how determined Chinais to hold on to a de facto dollar pegclose to the original level, it’s not atall clear whether it will allow a 10%revaluation next year. A flexible yuanmay still make the list of the world’smomentous financial events —though not this year, nor perhaps thenext. — Bloomberg LP

Andy Mukherjee is a BloombergNews columnist. The opinions ex-pressed are his own.

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thedocshare01.docshare.tips/files/22668/226685041.pdfthailand was still suffering from the tsunami...

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