Malaysia Stocks Fall After a Puzzling Deal : Fresh Setbacks Hit Kuala Lumpur and Seoul 
International Herald Tribune
November 19, 1997
Thomas Fuller

Malaysia's stock market plunged 6.8 percent Tuesday — to its lowest level in nearly five years — after the disclosure of a controversial deal that some analysts said amounted to a bailout for influential investors.

Two government-linked companies shuffled their assets on Monday, with the country's largest construction firm, United Engineers Malaysia Bhd., transferring more than $700 million in cash into its debt-laden parent, Renong Bhd.

On Tuesday, the day after the deal became public, investors sent share prices of both companies plummeting, and the benchmark composite index dropped 45.20 points, to 622.09.

Many analysts said the seeming lack of transparency in Monday's deal had further eroded confidence in the Malaysian market in the eyes of foreign investors.

"We're seeing a seminal event in Malaysia's stock market history," an analyst with a foreign firm told Reuters. "You have a tremendous dilemma of whether to invest in Malaysia."

Neil Saker, regional economist at SocGen Crosby Securities in Singapore, said, "What today's news really proves is that there are a lot of unexpected surprises in the pipeline."

At the very least, the arrangement seemed unlikely to lure back the many foreign investors who have abandoned Malaysia in the days since the government of Mahathir bin Mohamad imposed trading restrictions in August.

But the deal appeared to be a victory for Halim Saad, the executive chairman of Renong and one of the wealthiest men in Malaysia. Analysts said Mr. Halim was in a position to sell, at a premium, a portion of his personal stake in Renong as part of the deal.

Before being privatized several years ago, Renong was the main business vehicle of the United Malays National Organization, one of the main parties in the ruling National Front coalition.

In the deal, United Engineers Malaysia bought 32.6 percent of its largest shareholder, Renong, for 2.34 billion ringgit ($702.9 million)

In its announcement on Monday, United Engineers said the sale had taken place on the open market. But analysts said the deal — which involved 722.9 million shares — was equivalent to four months of trading.

"There are a lot of big questions on this deal," said the head of research at a Kuala-Lumpur based securities house. If the purchase was indeed carried out on the open market, he said, then United Engineers broke the rules of the stock exchange which stipulate that shareholders should make a declaration each time they accumulate more than 5 percent of a company.

"It's a total breakdown in regulations," he added.

Analysts said the losers in the deal were small shareholders of United Engineers: The company's stock fell 38 percent, to 3.86 ringgit. Renong dropped 20 percent, to 2.31 ringgit. Neither Mr. Halim nor officials at United Engineers and Renong were available for comment. Mr. Halim is believed to own more than 20 percent of the company.

"At the end of the day, investors in the government's savings schemes will be forced to bail out everyone," said an economist in Singapore who, like almost interviewed for this article, did not want to be identified by name.

The move "is seen as a bailout for large Renong shareholders," Inter-Pacific Capital Sdn. said in a report issued Tuesday. At least two research firms who declined to be identified said they had downgraded their ratings on United Engineers from buy to sell.

Analysts were also puzzled by the business logic of deal.

"To buy shares of a debt-ridden company at the time when interest rates are rising is unquestionably a witless investment move," Inter-Pacific Capital Sdn. said in a report Tuesday, adding that Renong's debt was at least 3 billion ringgit.

After years of an investment boom, many Malaysian companies are highly leveraged. A recent report by the Standard & Poor's Corp. rating agency estimated total credit to the private sector at 170 percent of the country's gross domestic product. Companies are also starting to feel the effect of the regional currency crisis.

Copyright © 2006 the International Herald Tribune