Thread,
The Haj money hurts more then helps?
Earlier I posted info about how state investment funds in Malaysia were being used to prop up politically connected companies. One fund in particular, a savings fund for pilgrims who wanted to save money to make the Haj to Mecca someday, had been used to direct money into the local car manufacturing concern (Hicom). Today's WSJ carries this interesting story.
Reprinted for personal use only:
Malaysia Pilgrims' Fund's Buys Not Seen Helpful
By CHARLES ROTH
Dow Jones Newswires
KUALA LUMPUR -- The move by Malaysia's pilgrims' fund Tabung Haji to buy assets from the Diversified Resources Bhd. (P.DRH) and Hicom Holdings Bhd. (P.HCM) consortium signifies yet another tapping of state-related agencies to sustain politically connected, cash-starved corporates, analysts say.
Perhaps worse, the investment ultimately may not benefit either the fund or the debt-laden consortium.
While proving to be a stopgap for DRB-Hicom, the fund may well find it can't recoup its investment plus profits within a year as promised, analysts said.
Tabung Haji, a fund for Muslims planning to undertake the pilgrimage to Mecca, intends to spend about 250 million ringgit (MYR) (US$1=MYR4.2250) on the purchase of factories, buildings and land from several DRB-Hicom subsidiaries.
Investments in fixed assets will be a first for the fund, as it has traditionally invested mainly in Islamic capital market instruments, said the head of research at a foreign research house.
Ahmad Razali Mohamed Ali, the fund's chairman, said Monday that Tabung Haji was already examining the assets of DRB-Hicom's subsidiary companies, and noted that the fund would buy only the subsidiaries' assets, and not shares. But the group issued statements Thursday that, though it hasn't officially been in contact with the fund, it's "prepared to consider any offer for its assets."
The investment in fixed assets, rather than shares reflects DRB-Hicom's cash deficiencies, analysts said.
But "DRB-Hicom's receipt of MYR250 million will have only a marginal impact on the group's cash needs as the amount represents less than 10% of total borrowings of MYR2.84 billion" as of the end of May 1997, said a research head at a local brokerage house, who declined to be named for fear of government censure.
Citing the 1997 annual reports, the research head said Hicom's short-term debt amounted to about 45%, while that of DRB totaled around 75%.
An analyst at a U.S. investment house, who covers the group, estimated Hicom's current net debt-to-equity ratio at 110%, while for DRB, it's 100%.
The current economic downturn has taken a considerable toll on the group. At the end of March, DRB registered a net loss of MYR26.8 million, while Hicom's group net profit dropped 5.3% to MYR631.9 million.
While the asset sales may ultimately come to naught, they will help the short-term debt servicing requirements, "otherwise they could technically be insolvent by next year," said the U.S. investment house analyst.
About a month ago, market rumors had Hicom considering seeking court protection from its creditors. Officials at the group couldn't be reached and didn't return messages. Nor were Tabung Haji officials available.
The head of research at the foreign research house said it's doubtful Tabung Haji will recover its investment within a year, as asset prices continue to fall, especially in the property market. She expects another 18 months of wrenching economic pain before any substantive recovery in all market segments begins.
Private sector economists reckon Malaysia's economy could contract by up to 5% this year.
Two weeks ago, when government officials announced that Tabung Haji might aggressively pick up shares in a bid to support the ailing stock market, the country's Muslim community expressed tentative support for the idea.
"It should be supported as long as there (isn't) any malpractice or fraud (and) if the fund doesn't get cheated or forced" to buy shares, said Subky Latif, a spokesman for the opposition Islamic Party Of Malaysia.
"Muslims' assets should be protected and expanded. This is a good deed," he added.
The government has rather Byzantine stakes in DRB-Hicom. In Hicom - which has a controlling interest in the national car company Perusahaan Otomobil Nasional Bhd. (P.PON), or Proton - the government has a golden share, meaning it can veto board decisions. It also has a 25.23% equity interest in the group through various state agencies. And through some of the same agencies, it also has a direct stake in Proton.
Nearly 66% of DRB's paid-up capital is formally held by the estate of its deceased chairman. DRB ultimately has a controlling stake in Hicom.
Though its outlay in the group is relatively small, Tabung Haji doesn't have much muscle with which to boost this sagging market. The fund has total deposits of MYR5.96 billion from its 3.28 million contributors, according to its chairman.
Because of Tabung Haji's relatively small size and its Islamic investment principles, the analyst at the U.S. investment house suggests the rest of the state-linked funds may now be suffering badly from their continual attempts to prop up a share market now at a 10-year low.
State-linked funds such as the Employees Provident Fund, the country's mandatory pension fund, have steadily raised their exposure to the sagging equity market since the onset of the Asian economic crisis last July. Analysts say they may well have already exceeded their equity market portfolio caps.
Investors in the funds may not take kindly to poor dividends they perceive coming from politically - not commercially - motivated investments.
Earlier this year, when the EPF announced its 1997 dividend payment of 6.7%, its lowest dividend in 23 years, seven Malaysian trade unions called on the EPF to explain the 1997 dividend as well as its investment decisions with respect to extending loans and buying shares.
It appears "to workers that the EPF has been used to bail out certain companies affected by the economic downturn," they said in a joint statement.
As for DRB-Hicom, the head of research at the local brokerage house says that "since the MYR250 is only a small portion of the group's debt, we would expect more asset sales."
However, such sales probably won't be open to foreigners, which presents another reason for tapping local, state-linked funds. "The government wants ownership of strategic assets to remain in local hands. As such, it would not surprise us if cash-rich Proton and (national car distributor) Eon (P.EON) acquire motor-related businesses from the DRB-Hicom group," the head of research at the local house added.
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