Constitutional lessons
The Federal Court’s decision last week to support the Perak Sultan’s choice of menteri besar (MB) has divided public opinion about the role of the monarchy in our parliamentary democracy. Nevertheless, the unanimous judgment of the apex court in favour of the Barisan Nasional (BN) MB Datuk Seri Dr Zambry Abdul Kadir, concurring with the Court of Appeal decision of May 22 last year, can be expected to cool the political temperature in the state. This is mainly because it virtually spells the end of the legal process for the plaintiff, Datuk Seri Mohd Nizar Jamaluddin of the Pakatan Rakyat (PR). The best option for the losing side then is to prepare well for the next electoral contest, which is likely to be the 13th general election. Protracting the dispute will only disrupt the state administration and weigh down on business sentiment.

Indeed, Perak has experienced an unsettling struggle for power between the two coalitions ever since the PR formed the government after the 12th general election. The contest descended into turmoil in February last year when three PR assembly members left the coalition, causing then menteri besar Nizar to lose majority support of the House.

Nizar’s request to the Sultan to dissolve the state assembly in order to obtain a fresh mandate from the voters was not entertained by the ruler, who spoke to the assembly members and formed the opinion that Nizar had lost the confidence of the House. Under Article 16(6) of the Perak Constitution, the nation learnt, this meant that the menteri besar’s post would automatically fall vacant.

The crux of the debate then is whether the ruler should determine if a coalition leader has the confidence of the House, or whether that legitimacy should come from the voters. The people of Perak will get their say on the matter in some three years or so. The extended episode offers deep lessons for the stakeholders on the principle of the separation of powers, the integrity of democratic institutions and the importance of the constitution in determining who holds power ultimately.

Lower values for IPOs
In the much anticipated initial public offering of JCY International Bhd, the selling price to institutional investors was slashed to RM1.60 per share in the bookbuilding process. The price is the lower end of the RM1.60 to RM2.20 range indicated earlier by the arrangers. The final retail price was fixed at RM1.52 per share.

The offer price of RM1.60 values the company at 8.4 times RHB Research Institute’s estimated FY2010 earnings per share of 19.1 sen. At the retail offer price of RM2 originally indicated in its prospectus, JCY would be valued at 10.5 times forward earnings.

JCY, which will debut on Bursa Malaysia on Feb 25, is issuing 530.2 million shares, equivalent to 25.9% of the company, of which 23% forms the allocation for institutional investors, while 2.9% is for the retailers. The exercise will raise RM843.48 million based on the new offer prices.

JCY’s IPO is Malaysia’s largest after Maxis Bhd in the last six years. Despite this, the lower offer price indicates a less than enthusiastic response to JCY, said to be one of the largest global precision engineering manufacturers of hard-disk drive mechanical components. Its end customers include Western Digital and Seagate.  

Is the poor response indicative of investors’ doubts about prospects for the company? Or is it a symptom of the malaise affecting the global stock market now? After a bountiful period for Chinese IPOs in the second half of 2009, the picture has changed drastically with companies flopping on their debut. Wilmar International, which had planned to raise as much as US$3.5 billion in a Hong Kong listing of its China unit, allowed its application to lapse. If market sentiment remains weak, companies going for listing may have to settle for cheaper valuations, as seen in JCY’s case. Similarly, bankers bringing companies to market will have to make do with less than they had hoped for in getting the deals done.

Hap Seng should go regional
Investors of Hap Seng Consolidated Bhd would prefer that the company buy a stake in its Hong Kong-based sister company Lei Shing Hong Ltd (LSH) — which owns a Mercedes Benz dealership in China — and not sell a stake in its Mercedes dealership in Malaysia to the latter.

The family of the late Tan Sri Lau Gek Poh controls 61.5% of Hap Seng and 36.6% of LSH, which also owns such dealerships in Taiwan, South Korea and Vietnam.

Last Tuesday, Hap Seng announced that it had signed an agreement to sell a 35% stake in Hap Seng Star Sdn Bhd (HSS), which operates the Mercedes dealership in Malaysia, to LSH for RM103.8 million cash.

The sale price is deemed attractive at 23 times HSS’ net profit for FY2009 ended Dec 31. Hap Seng also stands to make a profit of some RM93 million from the sale of the 35% stake. This translates into 17 sen per share, which closed last Thursday at RM2.45. Hap Seng’s rationale for the sale of the stake in HSS includes the strategic alliance with LSH that has a regional exposure in the motor vehicles business, as well as enabling the company to raise capital for alternative investments or to improve its gearings.

But given the trend of local companies venturing abroad — for instance, the Tan Chong group recently explored the possibility of setting up a Nissan assembly operation in Vietnam — Hap Seng should also consider tapping into LSH’s network in the region through a new joint venture or acquiring a stake in the Hong Kong outfit. Note that LSH is not only involved in the motor vehicle business, but has a wide range of other trading businesses as well as property development and investment in Beijing and Shanghai.

In any case, the sale by Hap Seng of a stake in HSS shouldn’t be seen as a move by the Lau family to pump money into Hap Seng or the family taking away a slice of the local business. But hopefully, it could pave the way for Hap Seng to participate in some of the lucrative overseas ventures owned privately by the Laus.

This article appeared in Corporate page of The Edge Malaysia, Issue 793, Feb 15-21, 2010.