Gentlemen,
Here is an interesting introduction to business Malaysia style and an example of why I likely will not be investing here until there is real reform. The very last sentence is chilling.
Best,
Stitch
Troubled Tycoon
Reckless growth grounds high-flying Malaysian
By S. Jayasankaran in Kuala Lumpur
May 28, 1998
A flight of carpeted stairs leads to the nondescript offices of Joseph
Chong, once a high-flying tycoon and parliamentarian. The rooms occupy
the first floor of a travel agency, huddled among a hodge-podge of
eateries, small businesses and car-dealerships in a downmarket area of
Kuala Lumpur. The modest surroundings are in stark contrast to the plush
premises that Chong used to rent in Menara Goldhill, a hi-tech
sophisticated building in the heart of the capital's business district.
But that was in the halcyon days of the early 1990s, when Chong's flagship
company, Westmont Industries, was flourishing and he was one of
Malaysia's leading tycoons. Encouraged by Prime Minister Mahathir
Mohamad's exhortations to Malaysian businesses to think global, Chong
dreamed of becoming a world player in steel and energy. He bought a bank
in Manila and landed contracts to sell power to Pakistan and Kenya.
In 1994, he clinched the biggest privatization deal in Manila with the
purchase of a majority stake in National Steel Corp.--the Philippines' largest
steel maker--for more than 1 billion ringgit (then worth $400 million). His
political star, too, was on the rise: He was elected to parliament in 1995 as a
member of Gerakan, a component of the ruling National Front coalition.
So much has changed since then.
The National Steel deal blew up in Chong's face, triggering a financial
decline from which he's still struggling to recover. In 1996 he sold the steel
maker at a loss to Malaysian business baron Halim Saad. He has also sold
Westmont industries--but that move has aroused bitter controversy, with
the present owner now suing Chong for alleged nonpayment of arrears
amounting to 200 million ringgit. Many of Chong's other companies,
meanwhile, are wallowing in debt. He also faces a slew of legal suits filed
by creditors and at least one police investigation of a former company.
Even his political credentials are in doubt. Finance Minister Anwar Ibrahim
reportedly was annoyed at Chong for challenging incumbent Lim Keng
Yaik for the presidency of Gerakan. And Mahathir was embarrassed by the
National Steel debacle.
"Yes, I grew too far, too fast," Chong concedes now. "It was beyond
reasonable growth."
Chong's story exposes the pitfalls of Kuala Lumpur's "big is best" initiative
in the face of the region's economic crisis. Like Chong, many tycoons who
subscribed to Mahathir's grand plan of global business have foundered on
their prime minister's and their own ambition. As Chong's primer for
survival suggests--with its creditor-protection and array of legal suits--the
restructuring of Malaysia Inc. will be protracted and messy.
The Chong saga also is a classic example of doing business,
Malaysia-style: build up a private concern, then inject it into a listed
company through a reverse takeover, see its shares fly, sell a portion of the
stake, and then acquire other assets with cash, new shares and debt. For
ethnic-Chinese tycoons such as Chong, forging ahead requires linking up
with prominent Malays, preferably those close to the political leadership.
Although the National Front coalition comprises all races, it has
subscribed since 1971 to affirmative action that favours the poorer Malays.
In the early 1990s, Chong teamed up with Kamaruddin Jaafar, a close
confidant of Finance Minister Anwar and a senior leader in Mahathir's
United Malays National Organization, the dominant party in the coalition.
(Kamaruddin didn't respond to requests for an interview.) Chong's other
Malay partner is Fadil Harun, an Umno state assemblyman. Kamaruddin
and Fadil together control 51% of Westmont Holdings, while Chong holds
the rest. The holding company is the controlling shareholder of all the
listed companies in which Chong has an interest.
If privatization is corporate Malaysia's merit badge, Chong earned his
stripes in late 1991. At that time Westmont Holdings bid for, and won,
control of Sabah Shipyard, then a mildly profitable concern owned by the
government of Sabah state. Chong's connections helped--his only serious
competitor was United Engineers, an infrastructure unit of the gigantic
Renong group controlled by Halim, who himself has solid links to Umno.
Westmont Holdings paid the Sabah government 21 million ringgit for the
shipyard and soon began turning in profits. By 1992, Chong had already
doubled the shipyard's profits to 18.6 million ringgit, and he redoubled
them to more than 37 million ringgit in 1993.
Then he went big. In a reverse takeover in 1993, a small listed garment
maker, Yangtzekiang, bought a stake in Sabah Shipyard for 254 million
ringgit, paid for in new Yangtzekiang shares--a transaction that made
Chong's company the largest shareholder in Yangtzekiang. That purchase
coincided with the biggest bull run in the history of the Kuala Lumpur
Stock Exchange. The share price of Yangtzekiang, now renamed Westmont
Industries, soared to more than 20 ringgit from 2.5 ringgit in less than a
year.
Chong was on his way. Westmont Holdings, say analysts, began selling
its shares in Westmont Industries and used the money to snap up other
listed companies: First, Wing Teik, a maker of steel pipes; and later a bunch
of property and plantation companies that were later consolidated into
Westmont Land. An ambitious Chong then used Wing Teik to buy
National Steel. Analysts say Chong improved the Philippine firm's
productivity on taking it over, but was tripped up by a series of
circumstances beyond his control. For example, soon after the sale of
National Steel, Manila lowered duties on steel imports to 5% from 20%,
opening the gates to a flood of cheaper metal.
Chong also maintains that he sold National Steel shares to fund managers
on assurances from the Philippine government that the company would be
allowed to list on the local stock exchange. This permission was never
given, however, and Chong was forced to buy back the shares.
By 1996, National Steel was in serious trouble. Under the terms of the
agreement, Wing Teik was supposed to inject 600 million ringgit into the
plant and was obliged to buy a further 20% stake from the Philippine
government for 314 million ringgit. Wing Teik didn't have the necessary
funds to invest. The situation was worrying enough for Philippine
President Fidel Ramos that he mentioned it to Mahathir, say government
officials in Kuala Lumpur.
Enter Halim Saad. He bought Wing Teik's 75% stake in National Steel for
1.2 billion ringgit. After paying for interest costs, Wing Teik had lost 250
million ringgit on its purchase. It was the beginning of the end for the
company: It is now under court-sanctioned creditor protection and looking
to restructure its way out of 750 million ringgit in debt.
But Halim's experience with National Steel has been equally dismal. Senior
Malaysian government officials say Mahathir didn't arm-twist Halim into
the rescue. Halim apparently conducted due-diligence checks on the
company before making his offer. To buy the steel maker, he borrowed
more than $700 million in U.S. dollars, a currency that has since appreciated
30% against the ringgit. A banker from one of Halim's four Malaysian
creditor banks says the size of Halim's debt is now deeply worrying to
them.
A pall of controversy also hangs over Chong's sale of Westmont
Industries to Soh Chee Wen, now another embattled tycoon, for about 500
million ringgit. The company is being managed by Swasco Juta, a private
company, which has since sued Chong and his companies for various
alleged nonpayments. (Chong is contesting the suits.) Swasco Juta also
has filed at least two police complaints against Chong and his associates
alleging "fraudulent" practices, such as backdating and falsifying
accounts. Meanwhile, Sabah Shipyard, the biggest part of Westmont
Industries, has asked for creditor protection and has laid off more than 700
workers.
In response, Chong has filed his own complaints with the police against
the shipyard's management and is legally contesting Sabah Shipyard's
creditor protection. He is also suing Soh Chee Won for allegedly paying
only half the agreed sum for Westmont Industries. Soh, who's even more
indebted than Chong, is contesting the suit.
To add to Chong's troubles, Westmont Land is also burdened by debt of
250 million ringgit. Moreover, Chong is appealing a suit he lost in early
1997 to Sime Securities. The troubled brokerage unit of the Sime Darby
group claimed that Chong was obliged to settle 15 million ringgit in unpaid
bills. "I deny it categorically," growls the troubled tycoon. "Ask them to
prove I had an account there."
Indeed, the legal action and debt notices swirling around him don't seem to
faze Joseph Chong. "I'm not a jolly good guy," he says defiantly. "I'm a
fighter and I fight back." Among his weapons are his Malay partners,
Kamaruddin and Fadil, who are still with him. Asserts Chong: "Thirty-six
months from now, this country will recover and I'll be back." |
