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The Star Online: Business

Efficiency and rule of law put high-cost country like Singapore big on FDI map

Posted: 07 Mar 2014 08:00 AM PST

IT'S a poll not any country wants to top.

So when a survey by the Economist Intelligence Unit put Singapore on top of its list of most expensive cities in the world, well understandably, there would have been a chorus of grumbles.

Singaporeans for long have complained how expensive things have become. In a city where cars and property would cost more than an arm and a leg for many people elsewhere, cost of living is a big talking point.

But the message from the policy makers is that expect costs to remain high.

According to the Straits Times, Deputy Prime Minister Tharman Shanmugaratnam says that as long as the economy remains vibrant, Singapore will not be a cheap place for doing business.

There is, however, a couple of issues with that ranking. The EIC took into account the price of wine, the cost of a car, and the value of high fashion when tabling its findings. The reality is that not everyone buys all the items in the basket of goods and services used in the survey.

The other thing is that the seemingly high costs is not having an effect on the amount of foreign direct investments (FDI) are finding its way into Singapore. The same thing is being seen in the rest of South-East Asia.

Bank of America Merrill Lynch (BoA) in a report this week noted that FDI into the five big economies of South-East Asia continued to strengthen in 2013, and overtook the amount of money foreigners had invested into China.

"FDI into Asean-5 climbed to US$128.4bil in 2013, up 7% from US$120bil in 2012. FDI into China, based on official FDI utilised, fell to US$117.6bil in 2013, down 2.9% from US$121.1bil in 2012," it says.

BoA notes that FDI into China reached a peak in 2011 at US$124bil and has edged lower over the past two years.

The report says that the narrowing of the gap in what China and South-East Asia draws in as FDI is caused by a more favourable demographics in the region versus an ageing China with a labour force which is starting to shrink.

The other thing in this region's favour, which is benefiting from a growing consumption market, is rising wage differences that has been caused by higher wage growth in China and an appreciating yuan. The pace in the rise of wages in China has also been a deterrent to FDI.

"China is also starting to emerge as an outward FDI investor given its growing savings and wealth."

The political landscape in South-East Asia also influenced just how much money flowed into each country with Thailand seeing a decrease in 2012 but Malaysia, Indonesia and the Philippines saw healthy growth numbers.

Indonesia benefits from a large domestic market and so does the Philippines.

Even though FDI into Singapore only rose 5%, economists say investors were not deterred by the high cost of the doing business in the city-state as there were other factors that swings things in Singapore's favour.

Singapore, in value terms, still commands the lion share of FDI into South-East Asia.

"It's efficiency and the rule of law," says an economist who gave the reason why a high cost country like Singapore can continue to pull in foreign money into its economy.

Singapore for a long time has been among the leaders in polls ranking the best place to do business. In the Global Competitiveness Report, Singapore has been ranked second for the past three years.

"It's down to the institutions, governance and investor protection. Those factors mitigate the cost of doing business there," says the economist.

But recent political decisions, especially when it comes to foreign labour, may hamper investment flows into Singapore.

BoA says Singapore's Economic Development Board is projecting a lower manufacturing investment target in 2014, compared with 2013.

"Malaysia seems to be succeeding in attracting FDI as part of its transformation drive, with more than a third going into its manufacturing sector in 2013," says BoA.

The economic transformation programme has been a big-pull factor in driving investments higher from both domestic and foreign sources.

The policy to pluck the low-hanging fruits for investment opportunities has seen total investments in Malaysia surge in recent years.

Total investments in the country from both domestic and foreign sources amounted to RM216.5bil last year, up from RM167.8bil in 2012.

Genting bets on Sri Lanka?

Posted: 07 Mar 2014 08:00 AM PST

THE Genting group, on an expansion trail, may be close to securing a casino venture in Sri Lanka, sources say.

The tourism industry in Sri Lanka, a country which boasts of fine beaches and interesting wildlife, has been booming in recent years after the end of a decade-long civil war and it is no secret that Genting has been eyeing entry into the market, industry observers say.

Genting's interest in the Sri Lankan gaming scene has long been speculated, dating back to 2010 when the Sri Lankan government passed a bill to regulate the gambling industry to boost tourist arrivals. But the idea was put on the backburner after laws related to casinos faced opposition.

Last year, the government approved the development of three integrated resorts (IR), one of them to Australian casino mogul James Packer who controls Crown Ltd.

ASX-listed Crown is planning a US$350mil resort-casino complex in the heart of the Colombo commercial hub with local casino operator Ravi Wijeratne, who owns two casino approvals in Sri Lanka according to a Reuters report in December. The Reuters report, quoting government officials, said another Sri Lankan entreprenuer Dhammika Perera, who has been running casinos on a small scale, owns three casino approvals.

Perera, who got approval to build a US$300mil casino resort facility, was reportedly looking to lure a US or Asian gaming brand for one of his casino approvals. The third IR project that will be built is a US$650mil casino project by local conglomerate John Keells Holdings.

Sources say Genting's possible venture into Sri Lanka could also be via a tie-up with a local partner as the government policy was not to issue any new casino licences, but to allow existing approvals to operate under regulations passed in 2010.

"Gaming licences are not something that come by easily, so Genting is always on the lookout for any openings," a source tells StarBizWeek.

"It is also about positioning. Sri Lanka is not exactly a gaming haven, but it is a gateway to the untapped Indian market where gambling is highly regulated," says a source.

Genting, when contacted, declined to comment.

Of interest is that Genting has a presence in Sri Lanka via a 25% stake in the Union Bank of Colombo, a smallish commercial bank accounting for less than 1% of the country's banking sector assets.

The source says Genting hopes to draw from the Philippines' experience where it had a first mover advantage when Resorts World Manila (RMW) opened in 2009.

Analysts say RWM is well positioned for a multi-year growth story as it embarks on its next US$700mil capex cycle to double its room and gaming capacity by 2018.

"The Philippines is a roaring success story with Genting having recouped investments made within a year. It is exploring Sri Lanka in the same vein," says the source.

In 2012, Sri Lanka received one million international visitors and is targeting 2.5 million arrivals by 2016 according to news reports. China is one of Sri Lanka's fastest-growing visitor source markets, with arrivals from the country surging 75% in the first 10 months of 2013 but arrivals from India is fast rising – up 9% in the same period, media reports indicate. Tourism revenue surged above the US$1bil mark in 2012 and could surpass US$2bil a year ahead of the target set for 2016.

Currently, there are around nine small casinos already in operation in Sri Lanka although only four are licensed and registered with the Department of Inland Revenue, reports indicate.

Betting big overseas

In recent years, cash-rich Genting has been investing substantial amounts overseas to diversify beyond its strongest, but saturating Malaysian and Singaporean operations. Analysts estimate that at the rate that Genting is expanding abroad, its Malaysian operations will account for less than a third of its revenue, from about 40% currently. As at Dec 31, it had RM11bil cash.

"After being side-lined in Macau, Genting's strategy is to look well ahead of the curve and work towards a vision of having a footprint in every major international gateway," CIMB Research said in a recent regional gaming sector report. For the record, Genting failed in its bid to get a casino licence in Macau in 2001. The research firm estimated Genting would be spending US$9.5bil over the next five years excluding potential opportunities in Miami and Japan.

Earlier this month, it made its maiden foray into South Korea via a US$2.2bil (RM7.33bil) joint venture on the Jeju Island.

Through Genting Singapore Ltd, it is vying for a licence in Japan, which may soon legalise casinos. But it will be up against some big names like Las Vegas Sands Corp and US-based MGM Resorts International who are also reportedly eyeing Japan. Industry analysts predict Japan could rake in US$15bil in annual gaming revenue, making it Asia's largest market for gambling after Macau.

Genting's plans in Miami in the US two years ago had hit a legislative bump but there may be a breakthrough with the state's legislators introducing a draft bill and voting on a new gaming law in the second quarter of this year. It had invested close to US$500mil in two properties in Miami and is awaiting legislative approval for a casino permit.

It is no secret that to be dubbed a major gaming player, one needs to have a presence in Las Vegas. Genting is pouring US$4bil into an unfinished project it took over in Las Vegas with construction expected to start in the second half of this year. CIMB noted that Genting's timing into Vegas is favourable given the resurgence of Asian VIP business into the casino hotspot. It expects the group to cross-market their Asian VIP database into Vegas not unlike other international gaming players there.

"Although Macau continues to take centre stage with US$45bil in gross gaming revenue in 2013, the US remains the biggest gaming market in the world at US$70bil a year," CIMB Research said in its regional note. The research house does not rule out the group pooling its assets in New York, Las Vegas and Miami for a combined listing in the US to crystallise value.

How to be a multi-millionaire - version 3.0

Posted: 07 Mar 2014 08:00 AM PST

NASDAQ is seeing a revival of the tech boom. The last time it happened in the year 2000, any company with the name ending in ".com" saw its share price run well ahead of fundamentals – if there were any in the first place.

The DotCom boom produced many millionaires and a much bigger pool of investors who got burnt by putting money into companies that failed in the following year.

This time around, the buzz surrounding tech stocks are related to nimble start-ups that employ a few people who come out with applications that shake the mobile Internet space.

Leading the pack is Facebook buying WhatsApp, the company that invented the free messaging technology for smart phones over mobile Internet, for US$19bil. It is a deal financed by Facebook shares.

WhatsApp employed 55 people – meaning the value per employee, if the amount is shared out evenly, is US$345mil. But that obviously is not the case as the bulk of the shares go to the two founders of WhatsApp.

However Facebook has offered each of the WhatsApp employees some US$55mil worth of restricted stocks of the company if they stay on.

There are other similar deals that have been transacted the last two years, turning the employees into multi-millionaires overnight.

Softbank paid US$1.5bil for a 51% stake in Finland's Supercell, a company that makes games for mobile Internet users. Supercell had 132 employees at the end of 2013, meaning each of them were worth US$11mil.

In 2012, Facebook acquired Instagram a company comprising 13 employees for US$1bil – a deal that valued each employee at some US$77mil.

Malaysia has not produced the start-ups that have shaken the mobile Internet world, although we have a few aspirants eyeing a listing on the Nasdaq. MoLAccess Portal Sdn Bhd is amongst them.

However we have more than a fair share of our own versions of "WhatsApp" or "Instagram", that is, small and nimble companies with a few employees that have made plentiful returns.

The difference is, instead of innovation and technology, what these companies have are people with connections to decision makers in and outside the country and sound knowledge of how the capital markets worked.

This combination is the key to making millions in this part of the world.

In the 1980s, the trend was to get contracts – preferably from the government – and to flog it off to contractors for a handsome profit. In the 1990s it was all about privatisation and long-term concessions from the government.

The most lucrative of them were concessions to build and operate power plants and water treatment plants because it used to be awarded to privately-owned companies.

For instance a power plant concession with a power purchase agreement sealed with Tenaga Nasional Bhd, is worth more than RM800mil. The company operating and maintaining the power plant is worth another RM800mil. These are estimates based on transacted prices disclosed by listed companies.

Without a single ounce of experience but loads of knowledge about how the finances work, a firm with a handful of employees that lands itself with a licence to build and operate a power plant is worth a cool RM1.6bil.

Not bad for a firm that probably employs fewer than 100 people, including the tea lady and office boy.

But over the years, concessions and contracts awarded to individuals and listed companies had drawn so much scrutiny and glares from the public that the government has decided to tender them out through a competitive process.

In the last four years, one of the routes to becoming a multi-millionaire without drawing much attention is to win a mandate to raise funds in the debt market by issuing bonds backed by guarantees.

Bonds are debt papers that give investors a coupon of a between 3.5% and 6% or more, depending on factors such as the maturity period, the underlying assets backing the bonds, and the issuer.

The higher the coupon rate, the more risky the bonds.

The best debt papers normally are those that come with guarantees. In particular, investors fancy a guarantee from the government or a related agency.

The key is to find a reason to raise the money. Normally, if it is for an investment with a foreign party in Malaysia, it does not need much justification since the beneficiary is the domestic economy.

To raise funds to facilitate the investment, the agency raises long-term funds, preferably with a maturity of 25 years or more.

The papers are much sought after because of the guarantees. Distribution is easy and the advisers make a pile along the way.

For instance, a 25-year government-guaranteed paper with a coupon of 5% will find ready buyers prepared to accept a 4% yield.

The spread between coupon rate and the yield of 1% – better known as 100 basis points – is the clean profit for those arranging the transaction.

There may be several layers involved in distributing the papers but everybody makes a handsome profit along the way.

Bond traders estimate that for every RM1bil raised for a government-guaranteed paper with a tenure of 25 years and coupon rate of 5%, the persons or firm distributing or selling down the debt papers could easily pocket a total of RM125mil. So for RM10bil debt paper, the amount is estimated at RM1bil or more in fees and commissions.

Now comes the best part. After raising the money and if there is no use for it in the immediate term, the bond issuer simply parks the funds in a foreign fund that gives a return exceeding the coupon rate.

If the coupon rate is 5%, to justify the fund-raising exercise, the returns must be higher.

Nobody pays much attention to the mandate of the fund manager handling the funds. As long as the returns are higher, the question of mandate and recoverability would only come in 24 years when the bonds are near maturing.

By then, the deal makers would have long gone, taking their millions with them and probably multiplying the money.

So if you can't find employment in the next start-up that can write the program that revolutionises the mobile Internet world, then identify the firm that is going to do the next biggest debt market deal.

Kredit: www.thestar.com.my

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