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The surge in oil price seems to have hit a brick wall. If it has, then, it has come at just about the right time, as the broad array of economic data for May seems to have indicated that finally the high oil price is beginning to impact a wide range of countries. By mid-May, crude oil was already trading way above US$130 per barrel. Judging from May’s economic figures of various countries, it would appear that the price of US$130 is the dividing line between tolerable and intolerable pain.
When the US subprime problem broke out in full blast in Aug 2007, many thought that this problem would send the world economy spiralling into a Great Depression-like situation. Instead, as the 6 bln people kept spending, the global economy went on expanding merrily, sending the economy-sensitive barometer, the price of crude oil, to one record level after another, together with various commodities. As the rate of inflation went upwards, global overheating and stagflation instead of a global recession became the new mantra for the many worriers. In a matter of months, the worries shifted from a subprime-induced global catastrophe to an oil and inflation-induced global meltdown.
The sustained demand for oil amidst supply worries meant that the high oil price went higher. As the price of this ubiquitous material hits levels where consumers and businesses are screaming in pain, the entire global economy, except for the super wealthy Middle East oil producers, began to feel the pain. Hence, the weakening economic conditions in various economies, starting May 2008.
For Malaysians, rising oil and food prices came as a double blow. While having to suffer the pain of rising inflation, at the same time, Malaysians had to suffer from the rotting mess created by our political monkeys. After the subprime issue blew up in Aug 2007, the global economy has been remarkably resilient. Prediction after prediction that the subprime and credit market problems in the Western economies would engulf the rest of the world in a huge financial flame has so far proven to be illusory. As the Citigroups, the Merrill Lynches, the UBSs, etc continue to suffer, the rest of the world enjoyed better incomes. That is, until the price of crude oil began to bite and government after government reduced or removed subsidies, the 6 bln people outside the US are feeling the pinch. The next direction of oil price is crucial. A prolonged or steep correction in crude oil price now would be the best outcome for the global economy. This would make the global boom very sustainable. On the other hand, further spikes in oil price would greatly increase the chances of a hard landing for everyone, including the oil producers. While all of us can make all kinds of forecasts, no one really knows, not even the so-called “evil” oil speculators, what the price of oil would do next.
As i Capital has advised recently, the savings grace for the KLSE, amidst the political circus that we are witnessing, is a robust global economy. The important question for Malaysians therefore is, what is the state of our economy ? So far so good.
Our banking system is safe from the subprime and credit market problems. Figure 1 shows that aggregate NPL, as a percentage of total loans, has been dropping since the 1997 Great Asian Crisis. Contrary to coffee-shop talk, consumer spending has actually remained pretty healthy. Figure 2 shows year-on-year quarterly growth in real private consumption. Since 2006, its rate of growth has been rising. Figure 3 conveys the same message. Since the Great Asian Crisis, growth in bank lending has been picking in momentum.
Visitor arrivals – see figure 4 – have climbed steadily after the SARS-induced plunge in 2003. Even our exports have reversed trend and started to grow healthily – see figure 5 – which, of course, is being driven mainly by higher exports of commodities. Not everything is fine and dandy though.
As figure 6 shows, the year-on-year growth in manufacturing employment has been dropping for a prolonged period. The manufacturing sector is STILL the largest sector of the Malaysian economy. Any prolonged contraction there is always a worrying development. Is it merely a cyclical downturn or is it experiencing a long-term decline ? However, the most important question of all is this : are our politicians paying attention to this development ? Were there any serious research and analysis conducted on this negative development ? What policies and measures has the government taken to improve the competitiveness of our manufacturing sector ?
In the current rising inflation environment, it is the urban Malaysians that are suffering the most. The palm oil and rubber smallholders are enjoying levels of incomes that have not been enjoyed before. The rise in diesel and petrol prices would hardly make a dent to their pockets. It is the millions of urban Malaysians that are feeling the current pinch the most. The manufacturing sector is located in or near the urban areas. Employment there has stopped growing. Without any effective and efficient public transport, the rise in diesel and petrol prices has hit the urban dwellers really hard. The Malaysian manufacturing sector needs measures and policies to tackle its short and long-term problems. While there is a long list of problems, there is a scary dearth of solutions, either from the ruling coalition or from the opposition parties.
Our sincere advice to our opposition parties is to move away from conducting populist-type of protests. These attract plenty of media attention but DO NOT SOLVE Malaysia’s fundamental economic problems. Our politicians, from all camps, have this old and bad habit on underestimating the sophistication of the Malaysian voters. The voters realised the problems that the Malaysian economy faces cannot be solved with short-term, stop-gap measures. Please do not kid us (that is why the 4th prime minister had to spend so much time and effort in trying to convince us that his capital control was the right policy). The opposition parties need to oppose in a responsible manner and come out with responsible, tenable alternate solutions, for both the short and long-term problems of the country. It is time that we have smarter, more sophisticated, and more responsible politicians, at both ends of the political spectrums. We already have enough monkeys in the country.
Meanwhile, the International Energy Agency (IEA) raised its 2008 demand forecast for the first time in 6 months. Due to rising consumption in developing countries, the agency increased its outlook by 80,000 barrels a day (or 0.1%), to 86.85 mln barrels a day in its latest monthly report, leaving demand growth at 1% for 2008. The IEA forecasts the same pace of growth for 2009. As we watch the price of oil with nervousness, we are watching the Malaysian economy with nervousness too. Will it get sodomise by its own politicians and higher oil price ?
The KLSE
With the KLSE already numbed, i Capital revises its immediate-term outlook of the KLSE slightly to a range of 1,120 to 1,300. See Stop Press for the latest. For the short-term, i Capital revises its outlook slightly to a range of 1,120 to 1,400. For now, for its medium and long-term outlook of the KLSE, i Capital still expects the KLSE CI to hit 2,000 points. With the 2008 election results now history but with the political comedy still being acted out, i Capital will review its medium- and long-term outlook at a relevant time.
____________________ Don’t Try to Predict the Future / Be In Harmony with the Market / Don’t fight the Market ~Charlie Wright
In May, Malaysia’s inflation rate stood at 3.8%. Following the 40% jump in fuel price in Jun, the inflation rate is expected to rise to around 7% in Jun and even higher in Jul when the increase in electricity tariff takes effect. In the second half of the year, the inflation rate is expected to climb to levels last seen in the early 1980s. Such development has led many to speculate that Bank Negara will raise interest rate soon, maybe as early as 25 Jul, the date of its next monetary policy meeting.
However, i Capital thinks that Bank Negara will not rush into raising interest rate because of the nature of the current inflation problem. In addition, crude oil price is likely to have peaked or close to one. The messy political situation is also not conducive for an interest rate hike.
____________________ Don’t Try to Predict the Future / Be In Harmony with the Market / Don’t fight the Market ~Charlie Wright
The surge in oil price seems to have hit a brick wall. If it has, then, it has come at just about the right time, as the broad array of economic data for May seems to have indicated that finally the high oil price is beginning to impact a wide range of countries. By mid-May, crude oil was already trading way above US$130 per barrel. Judging from May’s economic figures of various countries, it would appear that the price of US$130 is the dividing line between tolerable and intolerable pain.
Hit brick wall? Oil how much now?
When the US subprime problem broke out in full blast in Aug 2007, many thought that this problem would send the world economy spiralling into a Great Depression-like situation. Instead, as the 6 bln people kept spending, the global economy went on expanding merrily, sending the economy-sensitive barometer, the price of crude oil, to one record level after another, together with various commodities. As the rate of inflation went upwards, global overheating and stagflation instead of a global recession became the new mantra for the many worriers. In a matter of months, the worries shifted from a subprime-induced global catastrophe to an oil and inflation-induced global meltdown.
I wonder.. is the subprime done and dusted OR are we NOW seeing the impacts from it?
[Updated on 11/07/2008 13:33:00]
Principal activities: Assembling and distributing gaming and amusement machinery and equipment and casino management.
Major shareholder/s: Gerak Juara S/B, Datuk Chuah Kim Seah
Financial highlights (RM mln) – 31 December (click to view)
With the Asian gaming industry booming, i Capital presents an update on Dreamgate Corporation (Dreamgate)’s latest developments, which was transferred to the mainboard of the KLSE in Jan 2008. Dreamgate started out as a slot machines distributor and subsequently it operated a revenue-share model and provided a 1-stop solution for gaming needs. 80% of the profits are contributed by its revenue-share model business, under the technical support and management (TSM) division and the rest by its sales and marketing (S&M) division.
S&M division
This division’s 1Q 2008 performance paled in comparison with that of the previous quarters, with only RM184,000 revenue generated. This is an anaemic number compared with the RM2.74 mln posted in 1Q 2007. As shown in figure 1, the performance of this division is cyclical. In 1Q 2008, the lowest sales was posted and the number of machines sold has dropped sharply – see table 1. The downtrend was highlighted when i Capital last featured Dreamgate in 19 Sep 2005, but it has entered into a string of manufacturing joint ventures – see table 2. With the additions of the joint ventures, the results should have improved, but this has not been the case.
Table 1: Machines and outlets (click to view)
Table 2: Joint venture details (click to view)
TMS division
The TMS division has been producing better results and achieved a compounded annual growth rate of 78% over the past 5 years but at the expense of margin where margins have constantly been testing new lows – see figure 2. The new placements may still be growing but at a much slower rate. The placement of machines is a driver for future revenue as it brings in daily new wins. Comparing with outlets addition, there were 5 new outlets but only 124 new placements – see table 1. It is strange that after building a solid base of more than 5,000 machines, it is not achieving a consistently growing stream of revenue. Is this a problem of execution capability ?
Dreamgate’s market position
Over the years as the Macau gaming market experienced exponential growth, more and more slot manufacturers responded with the opening of offices in Macau in order to be in a better position to serve their customers in a rapidly expanding market. This development inevitably changed Dreamgate’s market position, which used to be strong, and is slowly straining the performance of its S&M division while slot manufacturers with offices in Macau enjoy sales growth. The changes in the gaming industry have affected Dreamgate’s execution capability. Although casino operators can still buy from distributors like Dreamgate, over time, casino operators prefer to deal directly with the manufacturers. The same will be witnessed in the other countries it is operating in (Cambodia, Malaysia, Philippines, Singapore, Vietnam, etc). This is a natural phenomenon of market maturity.
In 1Q 2008, Macau’s gross gaming revenue surged by 61.8% compared with 1Q 2007. With such lucrative gaming revenue, spending on new purchases or replacements of machines should persist. Dreamgate should be reporting a rise or flattish sales in the worst-case scenario, but Dreamgate’s revenue from the Macau market fell by 18%. The fall in Dreamgate’s revenue and the surge in Macau’s gross gaming revenue just does not paint a very good picture. The fall in sales could be due to product performance. Casino operators exist to make profits so the product performance is very important, regardless of brands and price because a machine with high earnings performance will pay for itself within 90 days of operations. Dreamgate has a 50% equity interest in a slot machine manufacturer, Cron Corporation, and also the distributionship of a few other brands. The performance of machines supplied or manufactured by Dreamgate may not have performed as well as the others in the casino floor, thus less repeat orders were taken and resulted in falling sales. On average, it takes 5 years for all the machines to be replaced and around 20% of the machines on the casino floor are replaced yearly. Dreamgate has been in the Macau market for more than 9 years, if repeat orders for replacements have been made, its S&M or TSM divisions would have reported better results.
Latest developments
Dreamgate is always on the hunt for new gaming-related ventures. In Jun 2007, it entered into 70% and 60% joint ventures in Mekong Recreation Club Ltd. (MRC) and Chateau de Bavet Club Co., Ltd. (CDB) respectively. These joint ventures are involved in the management of casinos and also hospitality management. CDB is a boutique hotel, which houses 77 rooms and 20 suites. MRC has been in operation since Feb 2008 and CDB is targeted to open by 4Q 2008.
Dreamgate’s research and development (R&D) team came up with its 1st game – Hot Rock in 1Q 2008. There is still plenty of work that needs to be done on game designing as the management acknowledged that they have yet to find enough talented game designers. Dreamgate uses proprietary software and hardware and the way forward is ‘off-the-shelves’ software and hardware, such as ‘Windows’ and ‘Pentium motherboard’ that allow interoperability. Using ‘Windows’ will speed up game and product developments. It also touches on the capacity issue where game development can be literally limitless and not restricted by proprietary software. In short, whatever that can be done on a computer, can also be done on the machines. Abundant amount of resources have to be spent over a long period of time before launching games that sell in the market. If Dreamgate’s S&M and TSM divisions are not able to manage and maintain growth, it is questionable how Dreamgate is able to pump in more funds on R&D for a long period of time.
Conclusion and Advice
At a price of RM0.33, Dreamgate is capitalised at RM287.8 mln. For this, what do investors get in return ?
The era when Dreamgate’s S&M and TSM divisions were flourishing seems to be over. Being a 1-stop centre for gaming needs may not be a good idea after all. It may be a fatal diversification and the saying that “Jack of all trades and master of none” is quite a fair description of Dreamgate’s position. From the string of joint ventures it had entered into, there have not been much results so far. It is not comforting to know that it is again extending its business model. It would be a better idea if it seeks success in a particular area before taking the next step. i Capital is sceptical of a company which has a fast pace of diversification and not having a competitive advantage in any specific area of the extremely competitive environment it is operating in. Thus, i Capital revises its rating on Dreamgate Corporation to a Sell.
____________________ Don’t Try to Predict the Future / Be In Harmony with the Market / Don’t fight the Market ~Charlie Wright
waaa... dreamgate now so cheap? have not followed this one a long time.
BTW, they don't own nothing, they must declare interest if they have any
eg:
Conclusion and Advice
At RM5.85, TMI is capitalised at RM21.9 bln. For this, what do investors get in return ? Indonesia, Sri Lanka, Bangladesh, and Cambodia present TMI with a total untapped market potential of 280 mln subscribers. In the case of India, the potential is 860 mln subscribers. TMI’s venture in Iran and Pakistan could provide opportunities for TMI to take up interest in some of the cellular operators. The Iranian government’s intention to privatise MCCI could be one of such opportunities. Thus, one can see the potential that TMI is tapping into.
In many aspects, TMI is indeed a truly global company. In all the markets that TMI is in, TMI is competing head-on with the giants of the industry. As shown by the above analysis, most of its operations are competing well. Adding to its high growth assets are two strong cash generating companies, which are Celcom and M1 that will help to finance part of TMI’s cash needs.
In short, i Capital sees the recent plunge in TMI’s share price as not being in line with the group’s increasing attraction. Thus, i Capital revises its rating to a Buy for the longer term for TM International.
Disclosure of interest (required under the Capital Markets & Services Act): The publisher and associates have an interest in TM International.
____________________ Don’t Try to Predict the Future / Be In Harmony with the Market / Don’t fight the Market ~Charlie Wright
