Mainstream
Tapping the world
Lim Cian Yai 
Part 1

THE world is your oyster, they say. For many listed companies, that rings true where earning their fortunes is concerned.

They have achieved their ambitions to stamp their mark abroad by setting up sizeable operations or chalking up large export revenues.

FocusM's research shows that 35 large Bursa-listed companies raked in a revenue of RM174.8 bil from abroad last year.

Some local companies which are strong at home have long ago ventured overseas in search of opportunities.

While many of them are well-known government-linked companies (GLCs), a large number are entrepreneur-driven.

To gauge a company’s significant presence abroad, FocusM looked at the revenue breakdown (as disclosed in their annual reports) of listed firms with a market capitalisation of RM1 bil and above. The 35 companies derived at least 50% of their revenue from abroad.

We also looked at the asset breakdown of these companies (if disclosed) to see the extent it correlates to their overseas revenue.

The top six companies generated more than 90% of their revenue abroad.

AirAsia X Bhd (AAX) leads the pack with its entire revenue generated overseas.

Its 2016 annual report shows that the long haul no-frills airline operator chalked up RM4 bil in revenue and a net profit of RM210.31 mil from North Asia, Australia, West Asia and Middle East markets.

Its sister company AirAsia Bhd, flies the domestic and regional routes.

AAX’s revenue profile is not unusual for an airline as SGX-listed Singapore Airlines Ltd states in its annual reports that it also derives its entire revenue from abroad.

Trailing behind AAX are Yinson Holdings Bhd (95.52%), Hartalega Holdings Bhd (95.45%), Kossan Rubber Industries Bhd (95.12%) and TA Global Bhd (94.69%).

Yinson which owns five floating, production, storage and offloading (FPSO) platforms garnered RM518.92 mil in revenue outside of Malaysia in FY17 ended Jan 31. Its key market is Africa with a minor presence in Norway and Asia.

The FPSO provider also has substantial assets overseas. Its non-current assets (other than financial instruments and deferred tax assets) in Africa accounted for RM4.4 bil as of Jan 31 – a 58% increase from the RM2.8 bil the year before.

Lee says Malaysia started becoming a significant exporter of capital since the 1990s

Expanding overseas
Socio-Economic Research Centre executive director Lee Heng Guie says Malaysia started becoming a significant exporter of capital since the 1990s, with outward direct investments (ODI) increasing at a rapid rate in the late 2000s.

ODI is a business strategy where a domestic firm expands operations to a foreign country via greenfield investments, mergers and acquisitions or expansion of existing foreign facilities.

Several factors such as liberal foreign exchange administrative rules have helped to facilitate more overseas investments, says Lee.

Beyond this, companies also expand for wider market access and to diversify their business.

Another common reason for firms expanding abroad is the saturated and mature local market, says JF Apex Securities head of research Lee Chung Cheng.

A 30% overseas contribution to a group’s top or bottom line is substantial, says Chung Cheng

He opines that a 30% overseas contribution to a group’s top or bottom line is substantial.

Demand for a product in a particular market will slide after reaching its peak. Instead of sitting idle for sales to come out of the slump, savvy business owners look for other markets where demand is emerging for their products even before the decline in sales becomes substantial.

Such expansions occur in a small country like Malaysia that has a 30 million population only, in contrast to the 600 million population of the Asean market.

Technology advancement has also assisted companies to trade globally without a physical presence in any country.

In short, any firm can now be an international company from the comfort of its home country.

As a result of these expansions, the stock of ODI (value of capital and reserves in another economy) rose to RM566 bil or 46% of gross domestic product (GDP) as at end of last year from 36.4% in 2010. As at end of Q1, the country’s ODI stood at RM568.4 bil.

Positive results
On a positive note, the rising ODI of companies has yielded positive results in the form of increasing profits and dividends accruing to them.

“Repatriation of profits and dividends earned from investments abroad will be partly used to invest domestically and create jobs. This also helps to accumulate foreign exchange holdings.

“It makes good business sense for companies that are established and have excellent track records to spread their footprints abroad {than] in a crowded domestic market, while simultaneously spreading risks,” says Lee.

In a way, investing abroad helps companies to sharpen their business sense under the pressure of competition and “non-familiarisation”.

Eventually, they will transform into highly competitive enterprises as they get exposed to new technologies, marketing techniques and a different pool of competitors.

While more local companies seek their fortunes abroad, the pressure is mounting on the government to maintain a liberal, business-friendly and competitive investment landscape to sustain higher domestic investment and retain and attract foreign direct investments.

Lee says increased ODI by homegrown companies should not be seen as resulting in less domestic savings to finance local investment, capital formation and job creation at home.

“In addition, Bank Negara’s foreign administrative rules also put in place safeguards regarding the amount of domestic borrowings that can be used to finance overseas investments.”

Furthermore, the data tells us that over the years, large cap companies recorded increased sales outside the country.

Of those featured, some 83% or 30 companies registered year-on-year growth in sales from overseas activities.

Overseas contributions
Kuala Lumpur Kepong Bhd (KLK) saw the highest jump in overseas revenue, with an increase of RM2.58 bil, driven by plantation and manufacturing activities. Over half its assets are located abroad.

However, this should not be construed as a lack of opportunity or that corporations are investing less locally.

Jerry says it is natural for businesses to expand overseas

iFast Financial research analyst Jerry Lee says it is a natural progression for businesses to expand overseas once they capture enough local market share and are looking for further expansion.

“If we look at the export data breakdown, companies that generate substantial foreign revenue also come from the country’s top exporting sector, for instance, the semiconductor and commodities related sectors.

“Most of these companies are within the primary and secondary industries which are involved in the extraction of raw materials and assembly and production of intermediate goods.

“These products tend to receive a decent demand from developed nations such as those in Europe, the US and Japan,” he says.

That rings true for semiconductors. About 20% of the country’s total exports are integrated circuits (ICs). The export of ICs is best explained by the lack of advanced technology and expertise in the local market to further unearth its value, says Jerry.

Export-led
Of all the 35 counters featured, 18 are exporters from resource-based and manufacturing industries.

Many of them operate from Malaysia but sell most of their products overseas with the exception of planters like KLK and Sime Darby Bhd that have estates and manufacturing facilities abroad.

Astramina Advisory managing director Wong Muh Rong who advises clients on corporate finance matters, says it is common for local manufacturers to sell products overseas.

Hence, with Malaysia being a resource-rich country and the 26th largest export economy in the world, it is not surprising that some local companies receive hefty revenues from overseas.

Nevertheless, Wong sees these activities are not so much of ODIs. She says overseas expansion should be computed based on total investments abroad.

Hence, she says asset size will be a better measurement of whether a firm is having a significant presence overseas.

She says several factors need to be considered before any overseas investment is made. As it is, businesses do not operate in a vacuum.

Downside
Not every overseas venture is successful such as seen in the hiccups experienced by Mudajaya Group Bhd with its India power plant project, or regulatory challenges faced by Axiata Group Bhd in its Nepal operations via Ncell.

Axiata bought an 80% stake in Ncell for US$1.36 bil (RM5.8 bil) from TeliaSonera Norway Nepal Holdings AS last year.

However, Ncell became embroiled in a tax dispute with local authorities that threatened to derail its 4G rollout plan.

The dispute was settled with an additional NPR13.6 bil (RM566.54 mil) payment to the tax authorities.

There are also restrictions on the remittance of funds to real estate developers until a project under the build and sell concept is completed in a country.

Responding to FocusM’s queries, Yinson’s group chief executive officer Lim Chern Yuan says access to financing is tougher than before.

The company’s clients are mostly multi-nationals involved in oil and gas.

“So our advantage is our balance sheet. Our order book now is at its highest ever, which is US$3.7 bil, and this can last us for the next 20 years,” he says.

Capital expenditure and contract prices are fixed in the FPSO business. That helps Yinson alleviate some operating risks.

Despite having reaped huge contributions from Africa, Lim stresses that Malaysia and Asean are still Yinson’s core markets with some active bidding exercises as well.

Many listed firms, especially government-linked companies, have made their names abroad.

Malayan Banking Bhd (Maybank) for instance, has offices in 20 countries. About 32% or RM237.56 bil of its total RM735.95 bil in assets were abroad as of Dec 31 last year. This is the highest among all listed firms.

Last year, Maybank provided RM210.67 bil or 43.37% of its total gross loans, advances and financing portfolio to overseas clients.

Having said that, some non-GLC owned companies and exporters have also made their name overseas.

For instance, Top Glove Corp Bhd and Hartalega Holdings Bhd are both global leaders.

Top Glove produces the most rubber gloves in the world while Hartalega leads in the nitrile glove segment.

The production capacity of Top Glove and Hartalega amounted to 48 billion and 24 billion pieces respectively.

The domination of exporters in the list might also illustrate the strength of export-driven activities to a nation’s economy as a whole.

The country exported RM785.9 bil worth of products last year. This is a marginal 0.76% year-on-year increase from RM779.9 bil the year before. Gross exports made up 70% of GDP last year.

Uncertainties
Generally, the main concern of being an export-oriented country is that economic growth might be affected in the event of a trade deficit, where the value of imports surpasses exports.

Uncertainties in a certain country or particular sector could also impact economic growth.

“When this happens, one might see increasing volatility in a country’s economic growth as the administration has little control over stimulating it,” says Jerry.

Having said that, he does not see any economic threat from being an export-reliant country.

This is because, firstly, Malaysia recorded trade surpluses for the past 19 years, and secondly, the country has a diversified export sector.

Hence, heightened uncertainties in one country or a downturn in a particular sector should not have a major impact on economic growth.

Moreover, local consumption plays an important role in driving economic growth, accounting for more than 70% of GDP.

“In recent years, we have seen declining reliance on exports, while the proportion of local consumption as a percentage of total gross GDP is trending upward,” Jerry says.

Lee says Malaysia will continue to balance its growth contribution between domestic and external demand, which means exports.

“Since the global financial crisis in 2008-2009, Malaysia has relied on domestic demand as the key growth driver to compensate for uneven and weak exports.

“If we can expand our export capacity, it will definitely bode well for the economy,” he says.

Part 2 will appear on Aug 8.


This article first appeared in Focus Malaysia Issue 241.