From the Edge for w/e 8/6/06

From the current issue of the Edge, we have the following stories:

1. EON to face the reality of slowing sales & mounting inventories

From the 1H2006 results, we've learned that EON was only able to sell 60246 Proton cars, a drop of 20.7% from 75983 units sold in 1H2005. In fact, since the setting up of Proton Edar by Proton & the change of status for EON from Proton distributor to super dealer, EON's share of Proton cars sold in Malaysia has declined steadily from 50% of all Protons cars sold in 2003 to 40% in 2004, and 30% in 2005. Despite the declining sale, EON's inventories of Proton cars has risen steadily. At the end of 1H2006 (as at Mar 31, 2006), the inventories stood at RM618 mil, a 46%-increase from RM422 mil as at Dec 31, 2005. As a result of the decline in business volume, EON has now proposed to undertake a VSS involving 2500 of its employees (announced last week). There is also some market talk that Proton Edar & EON may have to be restructured because the dealers' network (189 for Proton Edar & 116 for EON as at end July 2005) and the branch network (34 for Proton Edar & 52 for EON as at end July 2005) of these 2 companies are too large to sustain the reduced sale volume. I expect continued weakness in the share of EON in the days ahead.

2. Proton's can of worms was opened for all to see.

The government, probably in reply to the many charges leveled against it by the former CEO of Proton, Tengku Mahalel & our former Prime Minister, has allowed a PricewaterhouseCooper report on Proton to be published. The report gives a damaging account of the mismanagement in Proton that was largely due to poor corporate governance. The Board of Proton was reduced to a mere rubberstamp and most executive powers were either vested in the office of the CEO or exercised collectively by its senior management (thru Management Committee Meetings). Mistakes in the acquistion of Lotus in 1996 and, subsequently, MV Augusta in 2005 were examined. And, many more. The report is very interesting and reminded me of the poor management of General Motor by its then Chairman, Roger Smith as potrayed in the book "Comeback". Billions after billions of dollar was spent by Roger Smith to build automated plants in order to catch up with Toyota. Those ill-conceived expansion & modernisation programs had reduced what was once an American icon into an embarassing example of American inefficiency.

3. OCBC to take Great Eastern Holdings private

This artcicle talks about the current offer of S$16 per share made by OCBC to the minority shareholders of Great Eastern. OCBC currently owns 83% of Great Eastern & hope to secure 90% acceptance from the remaining shareholders in order to compulsorily acquired Great Eastern under the provision of the Singapore Companies Act. Some of the minority shareholders are resisting the offer but they are faced with a tough choice of Great Eastern being de-listed if they do not accept the offer and OCBC somehow manages to secure 90% of the outstanding shares of Great Eastern i.e. an additional 7% shares. The offer will lapse on August 16 and it is the second time that OCBC is going down this path. It had tried to take Great Eastern private in 2004.

What makes this story interesting is that it may provide an inkling to the likelihood that Great Eastern's Malaysian operation may be injected into Pacificmas Bhd. The latter was first announced in 2004 but, until today, there is still no firm indication when the deal is going to be completed. The last news we heard was that the due diligence has yet to be completed (why so long?). The tenacity in which OCBC pursues Great Eastern across the Causeway made me believe that the Pacmas' proposed acquistion is a dead deal. I do not believe that OCBC, the majority shareholder of Great Eastern as well as the largest shareholder of Pacmas (owning 25% of its shares), would like to see any dilution of its interest in the Malaysian operation of Great Eastern. In any event, the coming liberalisation of financial services sector would mean that Great Eastern may not gain a huge advantage by localising its Malaysian operation.

4. MMC-Gamuda front-runner for railway job

The revival of the double tracking project may provide the catalyst for the re-rating of Gamuda. I have written earlier about the very nice techncial set-up for the Gamuda share. I believe that Gamuda is a good buy at RM3.50 or thereabout.