Looming Elections in Malaysia Spur IPO Spree

By Peter Pham - September 14, 2012 | Tickers: FB, GS, HCA, EWM | 0 Comments

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Malaysia has become the global destination of IPO hunters this year with several deals exceeding the billion dollar mark. Last month, the continent’s largest hospital operator, IHH, the Malaysian government’s healthcare unit with operations in Malaysia, Singapore and Turkey, raised $2.1 billion in its IPO on the Bursa Malaysia.

This made IHH the third biggest IPO for 2012 behind Felda Global Ventures Holdings ($3.3 billion) and Facebook (NASDAQ: FB) (~$10 billion).  With the market cap of $8 billion, it is now also the second biggest healthcare listed company after HCA Holdings (NYSE: HCA) with a $12.5 billion cap.  Felda’s title as most successful IPO of the year may be short-lived as Japan Airlines Company (JAL), that went bankrupt two years ago, is planning for an $8.4 billion IPO on September 10^th.  It successfully implemented its restructuring program. Japan has arranged more than twenty IPOs this year but it is still behind Malaysia.

The majority of these Malaysian IPOs have been state owned enterprise (SOEs). The capital and equity market in the country is still developing due to its strong pension infrastructure.  The equity market trails only Singapore in sophistication and the two will form the first link in the network of exchanges planned across ASEAN.  And, while Malaysian equities are gaining in stature, they have not attracted to cross-list or IPO there like in Singapore or Hong Kong. 

But the success of the Felda and IHH IPOs indicates that after the disaster of Facebook, global investors are waking up to the potential in Asia-Pacific.  Malaysia plans to bring $5 billion in investments this year. In most of the cases, the Malaysian corporations have been successful in winning support of local and foreign government backed funds such as AIA Group, Qatar Investment Authority, Retirement Fund Inc and Employee Provident Fund.

Malaysia’s politics may be driving a lot of this IPO activity as the rule of Prime Minister Naijib’s Barisan Nasional ruling coalition is at its lowest level of support in more than 60 years.  Making public a number of SOEs that have grown fat under state control can be seen as a way to placate the electorate and reduce the perception of cronyism and corruption.

The next one up is Malaysia’s sovereign wealth fund, 1Malaysia Development Bhd, on the advice of Goldman Sachs (NYSE: GS), is planning to raise $2 billion through an IPO scheduled for early next year. The planned IPO will be for its ‘power assets’ as it will continue to develop Kuala Lumpur’s financial district with another $8 billion in investment.

Astro Malaysia, the country’s cable television operator, which is also partly owned by the government, is aiming for a $1.5 billion from IPO scheduled between the end of September and early October.  Malaysia is currently third in total IPO listings by value this year, behind the United States and China. But, this pace of privatization will not last much past next year after PM Naijib calls the election, which has to happen before June 2013. 

But in all of this, the one company that has not gone public is the source of nearly 45% of the government’s revenue, state oil and gas giant Petronas. While some of its subsidiaries are traded publicly, the parent company is wholly-owned by the Malaysian government and is tiring of being their cash cow.  Until the country finishes building a number of coal-fired power plants thereby raising the amount of power generated by coal from 10% to the planned 45%, Petronas will be under pressure to support the government’s plans to underwrite an election victory through subsidy of a number of infrastructure projects. 

The situation in Malaysia is in stark contrast to the one here in Vietnam where a number of SOEs have dragged their feet in privatizing portions of themselves, which is creating some of the drag in flushing out some of the mis-directed capital from the previous credit boom. 

Malaysia’s leading corporations are represented in the iShares MSCI Malaysia Index Fund (NYSEMKT: EWM) which has undergone a shift in asset allocation to reflect these IPOs.  The KLCI Bursa Malaysia Index has performed well this year returning 7.5% while EWM has returned 8.4% and is paying a 3.7% dividend.  We like Malaysia for its Eastward-shifting trade balance and relative political stability, even if UNMO, the ruling party, loses. 

While I understand that Fools are not much into timing, sometimes a good trade lines up with good fundamentals.  Now is a good opportunity to consider shifting some S&P 500 profits into EWM as a medium term defensive play against U.S. political gridlock. The KLCI broke through strong resistance at the 1600 level in early July and has been moving steadily higher.  EWM has yet to reflect this breakout and is not quite tracking with the KLCI.  There is a strong probability of EWM breaking above $15 in September which would confirm a long-term trending move out of consolidation indicating that the market agrees with this analysis

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