Short Position

  • Business
  • Saturday, 06 Jul 2019

Why the selldown of TNB?

Breaking up Tenaga Nasional Bhd (TNB) is not really a new proposal. It has been around since the 1990s when Tan Sri Ahmad Tajuddin Ali was the executive chairman.

As Ahmad Tajuddin battled the independent power producers (IPPs) who were making more money than TNB itself due to an off-take agreement, he proposed that the utility producer be broken up into three segments – generation, transmission and distribution.

The biggest cost segment is generation, which has already been liberalised with the government giving out licences to companies to build IPPs and supply power to TNB in the early 1990s.

Transmission and distribution are solely the domain of TNB at the moment. Transmission is another component that involves high capital expenditure. So, it would not be feasible for private operators to come into the picture.

The area where the government is looking to break up and open up to private companies is the retail distribution of electricity.

Under retail distribution there are two segments – the high-tension wires that are fixed to houses from the sub-station and the billing of electricity.

Now, the topic of breaking up TNB has cropped up again. In the latest development, the Energy, Science, Technology, Environment and Climate Change Ministry revealed in parliament that it was scrutinising and studying a proposal to liberalise the retail segment of TNB.

This area is generally the part where the billing and other front-end interaction happens with consumers. This segment fetches a low margin of hardly two sen per unit and is already open to private companies in some areas and condominiums.

For instance, the power supply to Mid Valley is through the owner of the development who buys it bulk from TNB.

The billing and collection is under the purview of the owner of the entire development.

Some apartments in Damansara have a similar concept, where the management buys bulk from TNB and supplies to the condo dwellers.

So, what the ministry is studying is only an extension of what is already happening.

Hence, why the sudden selldown of TNB stocks?

Share price exuberance

The way KNM Group Bhd’s shares have been traded over the last one week, you would think the company is poised for some major contract wins. KNM topped the list of the most-traded stocks on Bursa Malaysia last Friday. The trading action had begun a week earlier. The counter’s daily trading volume had only averaged five million shares a day previously. But it suddenly shot up to 333 million shares traded on Friday, June 28. The heavy volume spilled into this week. KNM’s stock also rose some 23% in that period to hit a 52-week high of 31.5 sen on Friday.

On Thursday, KNM said one of its units had won an oil and gas services contract from Technip Italy for the design, detailed engineering and fabrication of air cooler heat exchangers at the Middle East Oil Refinery in Alexandria. Prior to that on June 13, KNM announced that the same unit had won two similar contracts in Nigeria and Iraq, respectively. The problem is, the value of those contracts are relatively small. In total, the contracts are worth around RM63mil. While that is not a small figure, it pales in comparison to the exuberance associated with KNM shares. KNM has a large base of issued shares, at 2.5 billion.

This means that the loss-making company has to churn out a significant amount of profit before showing an impressive earnings per share.

To be fair, perhaps, this is the beginning of many more contract wins that would total up a significant value. If so, one wonders how investors piling into the stock are aware of such prospects of the company.

Recently, KNM announced its first quarterly profit in a long time. It came about after the company made massive write-offs and streamlined its unprofitable businesses. KNM has been in the red for the last three financial years.

It is hoped that its recent share price trajectory will be supported by sufficient earnings to boost the value of the company.

Cleaning up HKEX

The Hong Kong Stock Exchange (HKEX) is known to be the most exciting and attractive bourse in this region. Investors who can stomach its volatility love the market. But it is its destination for fund-raising that is most impressive. In the first half of this year alone, 84 companies got listed, raising a total of HK$69.8bil (RM37bil). In comparison, Bursa Malaysia only saw six listings that raised a total of RM1.3bil.

However, the Hong Kong market is not without concerns. Industry sources will tell you that over the last few years, many company owners in Malaysia and the region have been approached by certain advisers to pursue a listing in Hong Kong. The main pitch was not so much about the long-term benefits of getting listed in Hong Kong, but rather the value a listed shell would carry. The theory is that once listed, the shell could be worth a lot of money for mainly China-based companies seeking to inject their assets into the listed vehicle. This is mainly because the backlog of IPO applications in the Hong Kong market is massive.

While it is understood that a few business owners have managed to make a bundle from listing and then selling their listed shell, this window is coming to an abrupt halt.

Last week, it was reported that the former joint head of HKEX’s IPO vetting team was arrested on corruption charges in relation to two listing applications.

Bloomberg reported that HKEX had received anonymous letters alleging that an unidentified Chinese private equity firm had been raising money from Chinese investors to create shell companies that it planned to list in Hong Kong. The letters also alleged that a person inside one of the regulators had promised to help make sure the listings were successful, Bloomberg reported quoting sources.

HKEX’s securities regulator also said it is reviewing aspects of HKEX’s approach to vetting IPOs, which likely means that the loophole of listing shells for the purpose of reselling them to other parties will be closed.

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