Malaysia: A Safe Harbor in the Storm

Dato’ Ng notes that Vietnamese property prices had hit a bottom, and now have started to quickly move back to levels seen during the previous period. “Things are definitely looking good,” says Dato’ Ng.

What excites Berjaya about Vietnam is that it represents, on a smaller scale, the opportunities found in China a decade or so ago, before the massive development now underway. The country has a large pool of aspiring younger generation who are looking to move up in the world. With a fairly large population of around 90 million, Vietnam is large enough to develop its economy through not only exports but also by growing domestic demand.

Berjaya Land is more than Korea and Vietnam, it also has developments ongoing in Thailand, Singapore and China. “We are a pan-Asian player,” says Dato’ Ng.

The investment story that Berjaya Land is telling local and international investors is that buying into the company’s stock gives one exposure to some lucrative Asian property markets through their prime development projects. And of course Berjaya Land is also not neglecting its core market of Malaysia, where it continues to roll out a number of major projects as well as derive income from its already established developments dotted around the country.

One prime example is the Ritz-Carlton Residences which are now under construction, a US$570 million development that, when completed, should easily rank among, if not the, most prestigious residential addresses in the country. “Malaysia remains a good bet because the potential returns are so much higher,” says Dato’ Ng. “Interest rates are low and foreign investment is coming back.” There is also plenty of opportunity waiting in the wings.

As Berjaya Land develops its various projects around Asia, each could be spun off as a separate company, either as a standalone company or bundled in a listed Real Estate Investment Trust (REIT), unlocking significant value for investors. This building on its strengths is true of the entire group, where Tan Sri Vincent Tan has taken its broad focus on high-end consumer products and services, and built them out. For example, one area where it excels is in bringing well-known global food and beverage brands to Malaysia, such as being the partner in Malaysia for Starbucks Coffee.

Recently it added Krispy Kreme doughnuts, where the group has quickly added multiple locations. The company makes a strong case that its stock is now undervalued even without taking into account these profit potentials.

Using an analysis that looks at various net asset values finds that the stock is trading at a substantial discount to the value of its underlying properties. Another important aspect is that most of its projects are long-term developments, so that Berjaya Land can book revenues and profits well into the future.

Then there is also the X factor in terms of what kind of growth will be generated out from places like Vietnam, Malaysia and even South Korea’s Jeju Island, so that Berjaya Land’s value can piggyback on that growth. “Berjaya Land is a regional Asian property story,” says Dato’ Ng.

Green Growth

Malaysia is unique among countries for many aspects but one of the most interesting ones is the synergy that has emerged between plantations and property. In fact, several companies which are successful in both operating plantations and developing properties can be found. The common thread connecting them is of course land, as both plantations and real estate require access to the acreage on which to plant or build. There is also a natural synergy that allows smart operators to grow with the country itself, i.e., those who have their roots in plantations can convert their land banks into property developments like townships as urban areas spread or the underlying land becomes too valuable to operate as a plantation. Properly managed, both plantations and property can be major profit centers, ensuring companies in this space have not one but two very stable entities and, to some extent, offsetting sources of revenues and profits. That is, when times are good, property prices go up and become more valuable in relation to plantations. When times turn down, plantations can often provide steady income to supplement losses on the property side. Among the two best examples in this arena are IOI Corporation and Sime Darby.

Looking at the first, IOI Corporation got its start in property and plantations in the early 1980s and since then has gone from strength to strength.

“We are very focused in what we do,” says Dato’ Lee Yeow Chor, Group Executive Director of the IOI Group of Companies. “In our chosen fields we have a reputation for management capabilities and strong corporate governance. In plantations, we are known as the most efficient major company, with high yields and relatively low cost. In property, we can also generate good and consistent profit margins. So overall, our earnings and growth are consistent. You can say that plantations and property go up and down in cycles, but we are proud to say that for the last 20 years, we have always been profitable, and what is more we have had consistent earnings growth except for two of those years.”

Dato’ Lee adds that the company’s target for earnings growth is now set in a range of 10 to 15% as an average CAGR (cumulative average growth rate). What’s more, IOI has a policy of paying out a consistent and high dividend. Altogether, it’s an attractive package to present to investors about the group. Dato’ Lee is also clear that the recent economic turmoil has had a limited impact on the group. “The downturn is not affecting us that much. Yes, there was some impact towards the end of last year, but that is behind us now,” he says.

“The operating environment in fact has become quite favorable.” On the plantation side, the price of palm oil has recently stabilized. “Current price levels are considered good, and healthy profits can be made at these levels,” he says.

Dato’ Lee cites the recovery in property sales volume and prices in both Malaysia and Singapore as another factor. For Dato’ Lee, there remains opportunity in the current conditions, as building costs have fallen and it may even be possible to look at adding to its land bank at reasonable prices.

“We may want to acquire some prime property and hope we can find some opportunities before the market rebounds too much,” says Dato’ Lee. IOI has ventured into Singapore’s Sentosa Cove development in a joint venture with Singaporean developer Ho Bee.

And the long-term objectives of IOI have remained unchanged. For example, Dato’ Lee notes how IOI is committed to improving the yields of its palm oil plantations, through a strong commitment to research and development in the plantation side. The company is also replanting and replacing its older oil palm trees to increase potential yield, as well as implementing various agronomic measures to enhance efficiency. Just as important as the commercial side, Dato’ Lee is keen to emphasize the group’s commitment in producing sustainable and environmental friendly palm oil. For example, IOI has an environmental policy that emphasize the practice of “zero burning” during land clearing and strictly refrain from destroying any high conservation value forest within its control.

Sime Darby is also not standing still. The company is bringing new life to an old industry, after a massive merger exercise completed in November 2007 created the world’s largest listed originator of palm oil.

“The merger opened many things up, we need to move ahead or be left behind,” says Dato’ Azhar Abdul Hamid, Managing Director of Sime Darby Plantation Sdn Bhd. “We may be the biggest but we are not the best.”

Dato’ Azhar says that the company needs to improve its efficiency and yields. “We are looking for synergies to become a leader,” he says. Among the initiatives is to look at ways to develop the company’s downstream capabilities and capacity so it can become a fully integrated plantation company. The company wants to take advantage of its size, financial strength and business acumen to expand into new markets, for example, expanding its plantation holdings outside the traditional areas of Malaysia and Indonesia to Africa. The pressure is also on plantations since over the long-term its land bank will be converted from plantation land into property developments, so Sime Darby must continue to seek to enhance yields of what’s left to keep production growth going.

In the downstream arena, Sime Darby is adding new refineries so it can do more of its own refining internally, instead of selling its output to others, often rival companies.

Dato’ Azhar is so bold as to predict that at some point Sime Darby may become a net buyer of palm oil if it can develop its refinery capacity enough.

Even with aggressive growth strategies in place, there is a strong commitment to sustainability and environmental practices. “The sustainability journey is close to our heart,” says Dato’ Azhar.

Just as important as the plantations, Dato’ Azhar emphasizes that developing human capital is as important. The issue for the company is that plantations are losing luster with younger generations who no longer see this as a glamorous career choice. Dato’ Azhar says one way to address this is to empower plantation staff, moving away from a highly centralized management system that now exists today.

The other long-term issue that the plantation division must consider is the rising demand from China, so on the demand side of the business equation, Sime Darby again has pressure to build the supply side, either through enhancing yields or adding to its land bank, or both. The biggest breakthrough on this may come from Sime Darby Technology Centre Sdn Bhd. It is here that Dr. K. Harikrishna, senior vice president and Head, R&D Quantum Leap, led a team that has successfully mapped the full genome of the oil palm.

The significance of this accomplishment is historic. With this map of the genetic makeup of the oil palm, huge new opportunities can be pursued. “We have to take this to the next level, so we can increase yield,” says Dato’ Azhar.

Or as Dr. Harikrishna puts it: “We are looking for ways to help the oil palm do more for less.”

For this mature industry, the normal ways to increase yield are focused on traditional practices such as selective breeding and hybridization for strains that are more productive, which is a long and tedious process. With access to the genome of the oil palm, Sime Darby can start to directly target the genes that will enhance yield or other traits.

The possibilities are enormous, according to Dr. Harikrishna. Other than yield, researchers can start to target such traits as higher carotene or nutrient levels, longer stalks (which help in harvesting), disease resistance, and height reduction (shorter palms are easier to harvest as well). “As we learn more about the biology of the plant, we can develop these desirable traits,” says Dr. Harikrishna.

To draw an analogy Dr. Harikrishna holds up corn as an example, which is another one of the world’s most important agricultural crops.

In 1945, the average yield per acre was about 40 bushels of corn. By using traditional improvement yield techniques, corn producers have been able to raise output by four and half fold to annual average output of 180 bushels per acre today and talk about achieving 300 bushels per acre in the future.

At present, oil palm is nowhere near this level of productivity. “We are still low on the graph of oil palm yield enhancement”, says Dr. Harikrishna. With corn, as yields went up, it allowed multiple new uses of corn to develop, such as for corn syrup sweeteners, polymers, ethanol, corn starch and feed for animals.

“We have not yet pushed oil palm for that kind of yield, and if yield can go up even further we could develop more products,” says Dr. Harikrishna. “These new products will become feasible when you can generate higher yields.”

Of course, with knowledge of the genome, it will still take time to tease out these potential results – given the lifecycle of palms, it could be three to five years to see the fruits of these labors. Yet here is where Sime Darby’s size becomes a major advantage over its rivals, since that means it has the world’s largest breeding population so researchers can more quickly test out new strains. All told, the mapping of the oil palm genome could be a major turning point for Sime Darby, appropriately enough as it enters its 100th year anniversary. “This is a major discovery,” says Tun Musa.

One of the more intriguing and potentially paradigm-shifting companies in Malaysia is the Petra Group, which is seeking to commercialize recycled rubber through its subsidiary company Green Rubber.

While there are many companies claiming to “recycle” rubber, Green Rubber is the only one that has a patented DeLink process to devulcanize waste rubber so it can be remade into a host of high end applications, such as retread tires, shoe soles, automotive and industrial products and sporting goods.

Green Rubber already has a deal in place with Timberland with shoes containing 50% Green Rubber soles in stores now.

The Green Rubber technology represents years of development by Datuk Vinod Sekhar, Chairman and Chief Executive of the Petra Group (named after his daughter Petra).

“We are facing an unpublicized epidemic with 1.3 billion tires being disposed in landfills every year leading to water pollution and breeding grounds for disease-carrying insects,” said Datuk Vinod. “With Green Rubber’s patented and environmentally friendly technology, waste rubber – including discarded tires and waste latex – can we recycled in a cost effective manner. We provide our customers with high quality customized compounds that are no more expensive than virgin rubber.”

By 2012, Green Rubber intends to recycle the equivalent of more than 200 million discarded tires every year. The company is about to launch an aggressive expansion program as it looks to open new manufacturing plants for its revolutionary rubber compound in the Americas, the Middle-East, Asia and Europe. Its first US plant, in Georgia, will be fully operational within the next few months.

The DeLink process at the heart of the Green Rubber technology was originally developed by Sekhar’s father, the late Tan Sri Dr. B.C. Sekhar, who was the chairman of the Malaysian Rubber Research Development Board and known affectionately as the father of Malaysia’s modern rubber industry.

Timberland has said that it plans to sell 200,000 pairs of shoes using Green Rubber in them in the next six months. Green Rubber recently extended its deal with the footwear giant to supply compound made from glove factory waste.

“We are thrilled to partner with Green Rubber to support this innovative company’s efforts towards making rubber a more sustainable resource with a lighter environmental footprint,” said Jeff Schwartz, CEO of Timberland.

The use of Green Rubber extends well behind shoes. In its product catalog, Green Rubber can offer a wide array of products using its technology, such as car mats, marine fenders, air conditioner stands, weather stripping, protective cushions, bicycle tires and cane ends. Factories in Thailand, Malaysia and China are already churning out such products on a commercially viable basis. Simply put, Green Rubber can be used in almost any application in which natural rubber is used, as Green Rubber™ has similar performance characteristics of virgin rubber.

The need for recycling rubber grows stronger every year. Among the rationales for doing it are: one, virgin rubber prices are rising as demand increases from such fast-growing economies as China and India; two, synthetic rubber, a substitute for natural rubber, is growing more expensive as it is a product linked to the price of oil; three, Green Rubber can be produced at a cost that is competitive with virgin rubber; and finally, worldwide demand for rubber is expected to exceed supply by sometime around 2020. To give one small but telling example of how Green Rubber could help, the traditional process by which vulcanized rubber is created also creates with it 5 to 15% of its output as waste. The greater use of Green Rubber could have an immediate effect to eliminate such wastage.

To build out its Green Rubber technology, the company is now actively seeking new partnerships, as it developed with Timberland, to spread the use of the product and help save the environment. Given the global use of rubber, there is scarcely a market in the world where Green Rubber could not play a role. The company has a research laboratory on the outskirts of Kuala Lumpur where it continues to further optimize the performance of DeLink.

The parent company of Green Rubber, the Petra Group, is also just as interesting and innovative as its subsidiary. The Petra Group, which is 60% owned by the Sekhar Foundation, a charity group, is involved in a host of ground-breaking technologies and services. Among its many interests are a biotech arm, which has three product lines; a biofuels division, a sports and entertainment division, and a financial services division. The Petra Group’s many initiatives are part of the tradition of being innovative and forward looking, due to the entrepreneurial nature and pioneering spirit of its founder Datuk Vinod. Way back in the earliest days of the Internet, 1994, he founded Asia Connect, one of the first internet companies in South East Asia that provided such services as email addresses, domain name registration and even streaming internet radio broadcasts. For being one of the first in the industry, Datuk Vinod was able to sell Asia Connect for a healthy profit.

Just as important, the Petra Group sees a role for itself as a good corporate citizen. Along with the good that can potentially be done through the spread of Green Rubber technology, Datuk Vinod also runs the Sekhar Foundation, which benefits from its ownership of the Petra Group. The foundation is involved in a host of good works, from helping save the rainforests of Malaysia to bettering the lives of children. Its contributions and efforts are not just in Malaysia but can go anywhere in the world where there is a desiring cause or need. That’s why the corporate slogan of the group in many ways encapsulates what the long-term vision of its founder, the foundation and the group itself: “Petra: Finding solutions for humanity.”

Promising & Vibrant Malaysia
Malaysia’s ability to be a safe harbor in the storm was demonstrated amply throughout this remarkable period of unprecedented global volatility. As prospects on many fronts once again turn up for Malaysia and the world, many analysts are finding they must go back to their spreadsheets and revise upwards their forecasts for the country’s economic growth figures. The future does indeed look promising and prosperous for Malaysia, and the country is buzzing with activity and growth on many levels and in many sectors. The country has been astute in its instituting of numerous regional projects, such as Iskandar Malaysia, the ECER and MSC Malaysia, which are making major contributions to national and local growth. Connecting them all is an excellent network of infrastructure, such as a world-class national road system, telecom and power grids. Malaysia can count on not one but many centers of growth, covering the entire range of national assets, from the highest of high tech industries all the way across to the most basic, but valuable, agricultural commodities and energy resources. The nation’s political, regulatory, legal and social conditions are proving themselves to be stable, resilient and peaceful. On the business side, the country has a well-earned reputation for its commitment to a pro-business stance but one that also stresses corporate responsibility and transparency. In preserving its natural environment, the country continues to find ways to grow and improve its already high levels of sustainable development and ecological conservation. The country’s leadership displays a pragmatism and commitment to a carefully crafted and targeted reforms that are raising its profile on a regional and global scale, with investors and in world opinion. Malaysia is a country that knows its history, understands the present and is moving with self confidence into a better future for all its stakeholders, be they ordinary citizens to the most sophisticated global investors. It has built on its remarkable and unique diversity and turned this diversity into a strategic asset to build out its connectivity in the worlds of trade, finance, environmentalism and business. A strong and vibrant partnership exists between the public and private sectors, with a proactive government and administrative network supporting development where necessary but also fostering an environment where the talents and drive of entrepreneurs, multinationals and free markets can flourish and grow. Its geographic position at the heart of Southeast Asia continues to support its current position of leadership within the region, on many fronts. Its pioneering and successful efforts in Islamic finance provide an illuminating illustration of how Malaysia has brought together many strengths into a larger synergistic whole – drawing on its deep Islamic traditions and combining them with the latest innovations in global finance to offer a plethora of sophisticated products and services that fill a vital and growing market need. It is probably safe to say that few, if any, places in the world have at their disposal the same combination of human capital, cultural depth, far-seeing political leadership and market access to accomplish what has been done in Malaysia. In many ways, the tagline of “Malaysia, truly Asia” encapsulates in three words a much greater whole that should be, and is, becoming better known and respected throughout the world.

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