Efficiency goal
The vehicle end-of-life (VEL) policy that was introduced with the New Automotive Policy (NAP) late last month has now been scrapped, much to the relief of owners of older vehicles and the support industries that service their needs. Those who stood to benefit from the VEL policy, including national car makers that would have seen a demand for their marques, would naturally be disappointed at the lost opportunity for a growth in earnings.

However, it is important that the NAP encourages the efficient allocation of resources in the current environment of liberalisation. Malaysians tend to hang on to their vehicles because they are paying a relatively high portion of their income to own automobiles. To finance vehicle purchases, they take costly hire purchase loans that may stretch to seven or nine years.

So, a VEL policy would make more sense after motor vehicle tariffs, including sales, import and excise duties, are lowered to make them more affordable, and incomes rise to match the country’s level of economic development.

Moreover, the VEL policy, which includes mandatory annual testing for vehicles older than 15 years before road tax renewal, will require additional resources to be allocated nationwide. This should be put in place before the policy is introduced so as to  remove the incentive for corruption due to an overstretched implementation system.

When introducing the NAP, the Ministry of International Trade and Industry should take the opportunity to remove inefficiencies in the automotive sector, especially the rentier culture that adds to the cost of doing business in Malaysia.

In addition, it is unfair to unnecessarily burden vehicle owners, especially the lower income earners who try to stretch the lifespan of their motor vehicles, by putting in a vehicle scrapping policy, when less painful steps would suffice.

In this light, the Finance Ministry should fine-tune the Real Property Gains Tax proposed under Budget 2010 to ensure that it prevents speculative activity and does not penalise housebuyers indiscriminately.

Ho Hup puzzles
Less than three weeks ago, Ho Hup Construction Bhd looked positive with a big launch to announce its completion of a stalled development project.

The company, which is under Bursa Malaysia’s PN 17 list for having inadequate shareholders’ funds, announced grand plans for its 60 acres of freehold land in Bukit Jalil. The land had been earmarked for commercial development and has an estimated gross development value of RM1.59 billion.

However, last week, the company announced a capital reduction of 95%. It also announced a proposed restricted issue and rights issue after the reconstruction of its capital.

According to the company, the capital reduction was necessary to wipe out its accumulated losses, estimated to touch RM105.1 million by year-end. Although it is not out of whack for companies to announce a capital reduction to wipe out accumulated losses, is such an exercise necessary for a company such as Ho Hup that has valuable landbank?

That piece of land has been the main reason why Ho Hup has of late seen more than its fair share of boardroom battles. The land has even become more valuable with the impending relocation of the Lai Ming Secondary School to Bukit Jalil.

Another matter is Ho Hup’s restricted issue to potential investors identified by the board. What’s interesting is that if the entire exercise is approved, the new investors would end up with more than 50% of the company.

Moreover, it is perplexing that Ho Hup’s debt levels would not be reduced much from its current RM97.3 million after the completion of the exercise.

Fortunately, the entire exercise requires shareholder approval, which leaves minorities with some leeway to stop the deal if they do not like it. But if the minorities themselves do not work together, then they only have themselves to blame.

Price quandary
Is it possible to boost the equity value of a company by more than double in less than two months? Certainly it is not unheard of but in the case of Kumpulan Jetson Bhd, it is hard to link the movement of its share price since the entry of the Naza group with any value creation.

And now, the company is proposing a 10% private placement at an issue price of RM1.92. Keep in mind that when the Naza group made a conditional takeover offer in August, the company was only valued at 65 sen per share.

While one can argue that the company’s share price has seen a new lease of life since the entry of the Naza brothers, what has changed fundamentally? One could question why any investor would want to take a stake in the company at this price when the major shareholders originally gave it a low valuation.

And it also gives rise to the niggling thought that if the share price should fall below RM1.92 tomorrow, the major shareholders would still not be any worse off.

Also, ever since the attempt to take Kumpulan Jetson private fell through, its share price has managed to reach historic highs, which is a complete turnaround from before, when there were days the stock was hardly traded.

The most recent announcement was for a RM104 million contract for the rehabilitation of a housing project in Kuala Selangor. While it is most certainly positive for the company, does it justify the near stratospheric jump in share price that followed? Three days after the announcement of the contract, Kumpulan Jetson’s share price closed at an all-time high of RM2.29 on Oct 29.

With such volatility, the eventual list of placees will surely be brought up for scrutiny. Since the new investors entered Kumpulan Jetson, various questions have arisen. This private placement and its high issue price have simply added yet another question to the list.

This article appeared in Corporate page of The Edge Malaysia, Issue 780, Nov 9-15, 2009.