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Dear Shareholders,
It is our pleasure, on behalf of the Board of Directors to
present the Annual Report and Audited Financial Statements of
JcbNext Berhad (“JcbNext” or “the Group”)
for the financial year ended 31 December 2023.
FINANCIAL PERFORMANCE
For the financial year ended 31 December 2023, the Group recorded
revenue of RM10.91 million, profit before tax of RM41.32 million
and a profit attributable to shareholders of RM35.49 million,
representing year on year (“YoY”) increase of 14.4%,
61.4% and 50.6% respectively. The growth is brought about by an
increase in dividend income from equity investments from RM7.16
million in 2022 to RM7.86 million in 2023. In addition, the
Group’s interest income had increased 123.4% to RM1.50
million in 2023 and similarly, gains on financial assets classified
as fair value through profit and loss which are mainly in respect
of the Group’s investment in money market funds, had
increased by RM1.00 million, driven partly by the increase in cash
as well as the general increase in interest rates during the year.
We also continued to sell shares of 104 Corporation in the open
market during the year which contributed gains amounting to RM18.47
million to our bottom line. The Group’s operating expenses
had decreased by 11.1% YoY with the decrease attributed to lower
staff cost and consolidation of the Group’s subsidiary in
Japan for six months as it was sold in June 2023. It is good to see
growth in dividends received from our equity investments which is
in line with our objective of growing free cash flows which can
then be distributed back to you, our shareholders. The higher
dividend income also means our dependence on our associates, in
particular 104 Corporation, is gradually reducing and we can have a
more diversified income base.
To have a balanced picture of the financial performance of the
Group during the year, we would also have to look into the
consolidated statement of financial position, specifically in
equity. Despite net profit attributable to shareholders being
RM35.49 million, the Group’s net assets grew by only RM13.35
million or 3.8% YoY. This was mainly due to a decrease in the fair
value of the Group’s equity investments designated at fair
value through other comprehensive income (FVOCI) during the year by
RM15.32 million. The decrease was mainly attributable to the
Group’s investments in Hastings Technology Metal Limited and
Chinese stocks. After accounting for the payment of the final
dividend for 2022 amounting to RM7.92 million, net assets or
shareholders’ funds increased from RM348.80 million in 2022
to RM362.15 million in the current financial year.
As at 31 December 2023, our total assets stood at RM371.66
million with shareholders’ funds recorded at RM362.15 million
(book value per share of RM2.74), compared with RM350.79 million
and RM348.80 million (book value per share of RM2.64) at the end of
2022. With liquid cash and short-term investments in money market
funds totalling RM109.57 million, and no debt, we continue to
search for acquisition opportunities and believe we are positioned
well to enter into long-term partnerships when such opportunities
eventually arise.
A detailed discussion of the Group’s financial performance
can be found in the Management Discussion and Analysis included in
this Annual Report.
DIVIDEND
The Board of Directors is pleased to propose a final single-tier
dividend of 6.5 sen per share for 2023 (2022: 6.0 sen). The
proposed dividend is subject to shareholders’ approval at the
forthcoming Annual General Meeting.
CORPORATE DEVELOPMENTS
2023 was a relatively quiet year for us. During the year, the
Group had invested an additional RM6.48 million into its equity
portfolio. In a way, this reflects our investment philosophy of
patiently building up a collection of good businesses that can
provide us with a regular stream of dividends. We will not buy if
such buying is inconsistent with our investment strategy and
criteria. During the year, the Group had also sold some investments
amounting to RM2.68 million and such disposals are more often than
not driven by changes in fundamentals so much so that the
investment no longer aligns with our investment criteria. I wish to
reiterate that JcbNext remains a long-term investor and does not
engage in short-term speculative trading of shares.
GOING FORWARD
2024 may be an unpredictable year for equity markets with many
variables in play. How the US and advanced economies perform and
whether they can tame inflation will affect the direction of
interest rates which in turn may have a bearing on equity markets.
Recent economic data have shown that inflation may be more stubborn
than expected, reinforcing the belief that interest rates may be
kept higher for longer. Other questions that do not have clear
answers include whether the second largest economy in the world,
China will be able to overcome the crisis in its property sector
which is weighing down on its economy and dampening household and
business confidence. Geopolitical developments ranging from the war
in Ukraine, the Middle East and the record number of elections
around the world this year may also be a catalyst of turbulence for
investors. Despite the uncertain outlook, work continues here at
JcbNext, to find undervalued gems: resilient companies with good
business fundamentals that will allow them to ride out this storm,
and hopefully we will all be able to enjoy the fruits of this
effort in the years to come.
SUSTAINABILITY
The Group continues to endorse principles of sustainability in
its business operations and corporate activities. We are pleased to
present to you our Sustainability Report in the Annual Report where
you can find our thoughts on the matter and also some of the
initiatives that are already in place.
APPRECIATION
We would like to record our appreciation to all our employees,
valued partners, business advisers and shareholders for your
continued support during the past year.
DATUK ALI BIN
ABDUL KADIR Chairman
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LETTER FROM THE CHIEF EXECUTIVE OFFICER |
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Overall performance
Our company recorded a revenue of RM10.9 million in FY2023, an
increase of 14.4% from the RM9.5 million in FY2022. Net profit
attributable to shareholders rose to RM35.5 million, 50.6% higher
than the RM23.6 million figure in FY2022. However, as shared
previously, accounting revenue and profitability figures might not
truly explain the economic substance of our company due to the
nature of our business.
In particular, FY2023 was a year when the growth in our
accounting profits – in my opinion – grossly overstated the
economic substance of our performance. Among developments captured
in the RM35.5 million profit included: i) RM18.5 million accounting
gain on disposal of investment in an associate, and ii) RM1.2
million foreign exchange gain. The RM18.5 million gain on disposal
was recognised mainly from the sales of a portion of our
shareholding in Taiwan-listed associate 104 Corp, at a price higher
than its carrying value in our books. I struggle to understand how
such a transaction could be deemed to increase our profitability
levels as it merely converts our investments into cash. You will
likely see such anomalies again whenever we sell investments
carried at a lower book value than the sales price.
The following are several key data points that the management
focuses on, that I hope would give you a more complete picture of
our performance. In short, we managed to increase our free cash
generation in 2023, but nothing near the 50% plus growth rate
suggested by the growth in our “profits”.
- Our assets produced dividends, interest and rental incomes of
about RM23.6 million in 2023 before taxes, a 10.9% increase from
RM21.3 million in 2022. This can be traced back to an increase in
dividends received from 104 Corp and the HKEX-listed Lion Rock,
offset by a decrease in dividends in our new equity portfolio -
primarily due to a one-off special dividend of RM700K that a
portfolio company paid in 2022.
- Staff costs and other operating expenses at our investment
holding operations were RM3.3 million in 2023, a decrease of about
8.9% from 2022. This excludes forex gains or losses. The RM3.3
million figure is about 0.7% of our 2022 year-end Net Asset Value
(NAV) of RM446.4 million (note NAV definition below).
- Deducting taxes and making some other minor adjustments, the
free cash flow generated by our business is estimated to have
increased by about 17.3% from RM14.6 million in 2022 to RM17.0
million in 2023, of which about 50% we would usually pay out as
dividends.
- As at 31 December 2023, the book value (BV) of our company
stood at about RM362.1 million, the biggest component of which is
RM243.8 million in marketable securities including stakes in our
listed associate companies (104 Corp and Innity), RM109.6 million
in cash and money market funds and RM18.0 million in investment
properties, with no material debt. This book value figure
increased by approximately 3.8% compared to 2022.
- If we had calculated the value of our assets using the market
prices of our associates, rather than what is shown on our balance
sheet, the figure - which we would loosely call the Net Asset
Value (NAV) - would be RM457.9 million at the end of 2023, an
increase of about 2.6% compared to 2022.
Larger business investments
As shared in previous annual letters, our aim is to help our
shareholders preserve their purchasing power, grow their wealth
gradually and provide a regular income stream through a
distribution of dividends. We hope to build up a collection of good
businesses at JcbNext for us to achieve that, either holding a
majority/controlling stake, or more likely a smaller piece of the
business. The focus is on improving the amount of dividend per
share we could pay out over time, while managing the downside risks
of our portfolio by working towards a diversified, conservative and
sustainable portfolio.
104 Corp
Our largest investment is 104 Corp in Taiwan, which saw its
growth in after-tax profits normalised to 1.4% in 2023
year-on-year, after growing 20.6% in 2022 and 43.2% in 2021. As
cautioned last year, despite the tailwind from a strong
semiconductor industry in Taiwan, the staggering growth numbers
seen in 2021 and 2022 were unlikely to sustain for any extended
period given the competitive nature of the capitalist system – as
much as we love the 104 business and its management team.
Nonetheless, we remain very happy shareholders in the company and
are cautiously optimistic that the current management team will
continue to work hard to create value for shareholders like us. For
2023, the company has again announced that they intend to pay out
100% of their 2023 profits as dividends later this year. As shared
previously, the nature of 104 Corp’s business has allowed the
company to grow without requiring much capital reinvestment, and
thus most of its profits can be distributed as dividends to
shareholders like us.
Note, based on our cost – our dividend yield from the 104 Corp
investment is now about 18.0%! (note: this includes positive impact
of TWD appreciation against the Ringgit). We first invested in 104
Corp in 2008 as part of a strategic plan to expand
Jobstreet’s online footprint. The current strong double-digit
dividend yield will continue to remind us of the merits of
investing long-term in good businesses and management teams.
Quoting Warren Buffett: “Time is the friend of the wonderful
business, the enemy of the mediocre”.
That said, over the last year, we have reluctantly continued
selling down a small portion of our holdings in 104. The decision
is driven almost entirely by our hope to diversify our portfolio
slightly as the carrying value of our 104 shareholding is still
about 27.9% of our book value as at the end of 2023. The sales were
done through open market transactions and we continue to believe
that the buyers should be very happy and proud new owners of such a
tremendous business.
Other larger business investments
The business environment in 2023 was challenging for most of our
other larger business investments.
Lion Rock in Hong Kong saw profitability decline by 15.8% in 2023
from the previous year, mainly due to the absence of a one-off gain
in 2022 from derecognizing London-based publishing company Quarto
as an associate – it’s now a subsidiary company of Lion Rock.
Lion Rock guided that their publishing clients continue to face
post-Covid inventory management issues, having built up substantial
stock in the face of global supply chain disruptions in 2022. It
also warned overcapacity among Chinese printers has exerted
downward pressure on printing margins.
Meanwhile, Hastings in Australia experienced a very challenging
year as prices of rare earth elements NdPr plunged, while the
global fundraising environment deteriorated as interest rates
increased. This double whammy, together with question marks over
the repayment of a convertible note due in 2025, has put tremendous
pressure on its share price – down about 80% in the past year. In
my opinion, the longterm outlook for the rare earth industry
remains broadly intact, while we continue to see Hastings
management team working on its financing options, as well as its
mining operations. However, short-term pressures are likely to
persist, raising questions about the company’s viability.
Elsewhere, our ACE market-listed associate Innity reported a MYR
1.1 million loss in 2023, compared to a slight loss of RM0.1
million in the previous year.
As with previous years, my colleague has prepared a much more
detailed (and better!) description of the corporate developments
for some of our investments in the MD&A segment of this annual
report for your reading.
Equity portfolio
In the last year, we continued to build up small stakes in
public-listed businesses in the Asia Pacific region. We invested
another RM6.5 million into this equity portfolio, bringing our cost
of investment in this portfolio to RM91.2 million as at the end of
2023. In the first quarter of 2024, we invested a further RM6.4
million, bringing the total portfolio to RM96.7 million at cost.
Our equity portfolio consists of 30 companies and 2 ETFs as at
the end of Q1 2024. It is quite heavily skewed towards businesses
that have traditionally paid out a good amount in dividends, with
banking and insurance companies in China making up about 31.1% of
the portfolio. As at the end of Q1 2024, about 53.5% of this equity
portfolio is invested in Chinese companies, and the rest in
countries including Malaysia, Hong Kong, Australia and Singapore. A
big part of our new investments last year were in Malaysian
consumer/ industrial companies. Many of these companies should
offer a solid base from which we could build up a long-term
portfolio.
Since we started building this new equity portfolio up in 2020,
we have only sold RM2.7 million worth of investments from it. By
design, our portfolio turnover will be significantly lower than a
more traditional fund management firm. As described in my letter to
you in previous years: we view such smaller equity investments as
part-ownership of good businesses and it’s our intention to
hold such investments for the long term. We do not view them as a
series of flashing stock tickers, arrows and numbers that we should
trade on at every opportunity.
In 2023, this equity portfolio generated RM3.8 million in
dividend inflow to us before taxes, from RM4.4 million in 2022,
mainly due to a one-off dividend payment from an earlier investment
– Favelle Favco - in 2022. We hope that the dividends we receive
will grow as we continue building up the portfolio and the
underlying businesses continue their recovery/ growth. On a cost of
RM91.2 million, the portfolio generated a dividend yield of 4.2% in
2022. While most of these businesses should still experience decent
growth, I believe we have invested in them at prices low enough to
offer good dividend yields even if the growth does not materialize
in last year’s letter, the cash inflow generated by our
investments, including companies in this equity portfolio, would be
partially distributed as dividends back to our shareholders, and
partially reinvested into more businesses. Having a steady flow of
dividend inflow would give us more confidence in investing a
portion of it into businesses with a higher risk/reward
characteristic, or in “deep value” situations where the
value of the investment might take a very long time to be unlocked
(if at all)
Cash
As at the end of 2023, we held around RM109.6 million in cash and
cash equivalents, which is about 30.3% of our net book value, and
is up from RM69.0 million a year ago. The percentage figure would
be about 23.9% if we calculated it based on our Net Asset Value of
RM457.9 million.
As shared last year, we imagine that there could be months or
even years when there will not be much buying/ selling actions at
our company, but a burst of activities could happen within a few
days if the market gives us that opportunity. While we wait for the
opportunities, we will continue to build up our database of good
businesses and work on improving our investment operations to allow
us to be more “nimble” when deploying our cash.
Our mini “Yangtze”
I recently watched an interview of Li Ka-Shing on Bloomberg, in
which he explained why he named his company Cheung Kong (長江in
Cantonese). He said the Yangtze River can be as majestic as it is
because it does not reject water flowing in from even the smallest
streams – and the naming of his company reminds him to be
“modest” in life so that he can attract other
“streams” his way. This is invaluable advice for life
and entrepreneurship, but I believe also insightful for our
investment activities at JcbNext.
We have said that we want to build up a sustainable dividend
inflow from our investments, which we could partially distribute on
to JcbNext shareholders. Ideally, these dividend inflows can come
from many good, long-term investments we own – rather than from
just a handful of larger investments - so that the impact of any
unexpected decline of individual companies in our portfolio can be
mitigated. If a couple of our dividend “streams” dry up
temporarily, we hope to still have many others that remain
uninterrupted.
I should add here that trying to build up the many
“streams” of dividends/ free cash flow will take time –
years or even decades. For us, this will involve developing both
the depth and width of our team’s “circle of
competence”, building up our database of good, established
businesses with strong economic moats - and then having both the
patience and conviction to make the purchases at the right time/
prices. We invest for a share of the long-term free cash flow of
other businesses, or a share of the dividends when that free cash
flow gets distributed. Thus, it is critical that we are cautious
with valuations and do not overpay.
There is no guarantee of success as we embark on this journey,
but I believe the better our ability to deploy capital into
long-term, cash-flow generating businesses, and the longer-term we
view our investments - the higher the chances of us building up our
own mini “Yangtze”.
At the office
It has been more than 1.5 years since our team fully returned to
the office after Covid-19. I am grateful that the transition has
been smooth. We started doing company visits and attending analyst
briefings in person last year – always enjoyable, and often
insightful, meetings that we took for granted before the pandemic.
Thank you
Lastly, allow me again to convey a special thanks to our
long-term shareholders. My pledges from previous years still hold –
we cannot promise instant results, but we would continue to treat
you as “partners”, keep our interests aligned, and
continue to build up a portfolio of good businesses for all of us.
CEO Lionel Liong Wei Li
30th April 2023
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MANAGEMENT DISCUSSION AND ANALYSIS |
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OVERVIEW
JcbNext Berhad (“JcbNext”) is an investment holding
company. It owned and operated the JobStreet.com online job portal
business from 2004 to 2014. In 2014, the job portal business was
sold to SEEK Ltd for close to RM2 billion with the net proceeds
paid as dividends to shareholders. Today, the Company has stakes in
associates, 104 Corporation, the largest job site in Taiwan and
Innity Corporation Berhad, a leading provider of interactive online
marketing platforms and technologies in Malaysia. It also operates
the Autoworld automotive content website. JcbNext also has quoted
investments in Malaysia, Hong Kong/ China, Australia, Singapore and
Europe and owns an 8-storey office building in Kuala Lumpur.
THE STATE OF THE GLOBAL ECONOMY IN 2023
More than three years after the global economy took an enormous
blow from COVID-19, the wounds are still healing, amid widening
growth divergences across regions. After a strong initial rebound
from the depths of the pandemic, the pace of recovery has
moderated. Several forces are holding back the recovery. Some
reflect the long-term consequences of the pandemic, Russia’s
war in Ukraine, geopolitical tensions and increasing geoeconomic
fragmentation. Others include the effects of monetary policy
tightening necessary to reduce inflation, withdrawal of fiscal
support amid high debt, and extreme weather events. Despite signs
of economic resilience earlier in 2023 and progress in reducing
headline inflation, economic activity is still generally falling
short of prepandemic projections, especially in emerging markets
and developing economies.
The strongest recovery among major economies has been in the
United States. The US economy defied expectations in 2023 and
proved surprisingly resilient. Many forecasters predicted a
recession which did not materialise. Instead, the US economy went
on a tear and pulled far ahead of other advanced economies. US GDP
expanded 2.5% (2022: 2.1%), driven by strong consumer spending, an
increase in private manufacturing construction investment and
increased state and local government purchases. Sound household
balance sheets and a strong labour market are the primary key
drivers of US consumer expenditures. Households received larger
fiscal transfers early in the pandemic and were able to spend the
associated savings more quickly; being better insulated from the
rise in energy prices resulting from the war in Ukraine; and
feeling relatively confident amid historically tight US labour
markets, all of which have supported real disposable incomes. 2023
was another strong year for jobs, labour supply and wage growth in
the US. Payroll employment rose by 2.7 million in 2023, less than
the increase of 4.8 million in 2022. Yearly job gains over the past
three years reveal a steady downshift from the breakneck pace of
job gains in 2021 to a more steady, stable pace in 2023. Wage
growth overtook inflation in February 2023 and stayed that way for
the rest of the year. Unemployment in the US was 3.6% in 2023, with
December marking 23 months in a row that it has stayed below 4%,
indicative of a persistently strong labour market.
A big theme for 2023 is the tightening of monetary policy by
central banks around the world, notably among advanced economies,
to combat inflation brought on by large fiscal stimulus during the
pandemic, global supply chain disruptions which were exacerbated by
Russia’s invasion of Ukraine, causing food and energy prices
to soar and surge in demand of goods and services after
restrictions have been lifted. The US Federal Reserve began raising
interest rates in March 22 and by the end of 2023, it had raised
interest rates 11 times for a total of 525 basis points, bringing
rates to 5.25%-5.50%. The US economy proved quite resilient despite
the sharp rise in interest rates. The aggressive interest rate
hikes seemed to have achieved their purpose without bringing the
economy to a screeching halt or a spike in unemployment. US
inflation moderated to 3.4% in December 2023 from its peak of 9.1%
in June 2022. Still some ways to go before hitting its target of
2%, the battle against inflation is very much on the table
The eurozone’s economy stagnated in 2023, underperforming
the rest of the world even as the global economy expanded and the
US chalked up impressively brisk growth. The eurozone’s
underperformance was mostly due to weakness in Germany which has
seen its business model of relying on cheap energy from Russia and
intense two-way trade with China upended by geopolitical events. As
has been the case for much of the world, the eurozone has felt the
agony of sharply rising interest rates over the last 18 months,
with the European Central Bank battling to bring down inflation
from its October 2022 peak of 10.2% to 2.8% in January 2024. In
contrast to the US, consumption in the eurozone is suffering much
more from the high inflation spike because wage growth has been
slow to adjust due to more negotiated wagesetting. That has
resulted in a larger decline in real wages. And energy
competitiveness has suffered from the energy crisis in the
eurozone, resulting in a big difference in industrial performance.
Furthermore, while eurozone budget deficits are still sizable,
fiscal support is much smaller than in the US.
The United Kingdom slipped into a technical recession in the
second half of 2023 following two consecutive quarters of
contraction in GDP. For 2023, its GDP grew by a meagre 0.1%, its
worst performance since 2009 after the global financial crisis if
2020 is excluded. The UK economy struggled to grow as households
and businesses came under pressure from rising borrowing costs,
higher taxes and elevated living expenses. The UK has one of the
highest inflation rates among G7 countries. The Bank of England
raised interest rates from December 2021 to August 2023 by a total
of 515 basis points which succeeded in taming inflation to 4.0% in
2023 from its peak of 11.1% in October 2022 (a big part of that was
also due to cooling energy prices). The high interest rate
environment weighed in on economic growth but the Bank of England
has indicated their commitment to keep rates high enough for long
enough to bring inflation back to its 2% target.
China’s economy grew by 5.2% in 2023, hitting the
government’s official target, but concerns about growth
momentum remain amid a protracted property crisis, sluggish
consumer and business confidence, and weak global growth. In 2022,
China’s economy grew by just 3% as a result of prolonged
COVID-19 regulations linked to its zero-COVID policy. After an
initial post-pandemic rebound, the economy has been weighed down by
the continuing crisis in the property market where the authorities
have been trying to rein in massive debts and speculation, as well
as record youth unemployment and a global slowdown. Exports –
historically a key growth lever – fell in 2023 for the first time
since 2016. Geopolitical tensions with the US and efforts by some
Western nations to reduce dependence on China or diversify their
supply chains have also hit growth. Problems dogging the property
market remain unresolved. The industry has long accounted for about
a quarter of China’s economy and experienced dazzling growth
for two decades. But financial woes at major developers such as
Evergrande and Country Garden have left projects unfinished, buyers
out of pocket and prices on the decline. Also weighing on the
economy is a lack of jobs for the country’s young people.
China also faces longer-term questions over its growth potential
after it announced its population fell for a second consecutive
year in 2023, amid a record low birth rate and a wave of COVID19
deaths after zero-COVID policies were abruptly lifted.
Malaysia recorded GDP growth of 3.7% in 2023, supported by
continued recovery in economic activity and labour market
conditions. The moderation of growth from 8.7% registered in 2022
was due to the challenging external environment. Current account
surplus in 2023 was sustained at 1.2% of GDP, supported by a
diversified export structure across markets and products. The
strength in external position is also reflected in the external
debt, which declined to 68.2% of GDP in 2023 and a higher net
international investment position at 6.6% of GDP in 2023. Bank
Negara Malaysia highlighted that importantly, the external debt
remains manageable given the favourable maturity and currency
profiles. It also said onethird of the external debt is denominated
in ringgit, limiting currency risk, while around 70% of the debt
has medium and longer-term tenures. Exports remained subdued due to
prolonged weakness in external demand amid stronger imports. For
2023 as a whole, headline inflation declined to 2.5% from 3.3% in
2022, while core inflation averaged 3.0%. Bank Negara had raised
the Overnight Policy Rate just once in 2023 by 25 basis points to
3%.
As 2023 came to a close, a heart-stopping rally in the last two
months of the year showed global stock markets with strong annual
gains due to investors betting on the fact that major central banks
have finally stopped their monetary tightening policies and will
indeed cut interest rates in 2024. The MSCI World Index has, since
late October 2023, surged by 16%, and, with a flurry of late
trading on the 29th of December, showed an annual gain of 22%. This
was reflected in data showing that in Western economies inflation
is falling faster than expected, which dramatically changed the
perception of interest rate changes. Jerome Powell, Chairman of the
Federal Reserve, fanned the flames of an equity rally in December
by announcing that borrowing costs may have peaked.
The rise in global equities as reflected in the MSCI World Index
is the best run on an annual basis since 2019, when a similar run
reflected a 25% gain. The S&P 500 finished the year up by 24% which
was mainly due to a massive rally in megacap tech stocks. European
markets, after a lacklustre 2022, posted positive gains in 2023
with Italy’s FTSE MIB charting gains of 30% and
Germany’s DAX coming in with an impressive 20% increase. The
overall increase for European equities was reflected on the STOXX
600 charting a gain of 13%. In the United Kingdom, the FTSE lagged
behind their counterparts in the United States and Europe by
posting a gain of 4% in 2023. Experts suggest that this is down to
a stubborn inflation rate, energy companies that are oil-price
exposed, and a preponderance of mining companies that are
overexposed to and rely on a slowing Chinese economy. Elsewhere all
three indexes in Japan posted hefty gains in 2023 with the Nikkei
Stock average finishing the year up 28%, this being the best rally
since 2013 which reflected a rise of 57%.
The big omission from the global rally in stock markets is China,
where the world’s second-largest economy has suffered from
problems in its property sector. As a result, the expected recovery
has faltered. Indeed, China’s CSI 300, which measures the
largest companies listed in Shenzhen and Shanghai, fell by 11.4%.
Their flagship financial centre, Hong Kong, has suffered over the
years and in 2023 stocks were particularly hard hit, with experts
advising the Hang Seng index is the worst performer of 2023.
Bursa Malaysia ended 2023 on a low note, closing at 1,454.66
compared to 1,495.49 on the last trading day of 2022. It was a
subdued year for the bourse, influenced by persistent selling
pressure throughout the year, largely attributed to the outflow of
funds resulting from multiple interest rate hikes in the United
States. Sluggish economic conditions in China, a lack of
substantial stimulus and the absence of major infrastructure
projects also contributed to the lacklustre performance of the
local index. Compared to the Asian region, the FBM KLCI is among
the indices with negative readings, along with Singapore's Straits
Times Index (-1.09 per cent), Philippine Stock Exchange Index
(-0.72 per cent) and SET Thailand (-15.15 per cent).
2023 IN REVIEW
During the year, the Group generated revenue from services,
rental of office space, dividends, interest and other investment
income. The Group’s revenue mix for 2023 and 2022 are as
depicted below:-
As the Group is principally in investment holding, the biggest
contributor to group revenue is dividends from equity investments
at 72% of revenue or RM7.86 million in 2023. This is followed by
rental income at 12% and together with dividend income, contribute
84% of group revenue. Services, interest income and investment
distribution income combined to contribute the remaining 16% of
group revenue. The decrease in the contribution of dividend income
from 75% to 72% of group revenue in 2023 was mainly due to the
increase in interest income generated on the Group’s cash in
line with the increase in interest rates in 2023.
Total revenue had increased by 14.4% in 2023 primarily from an
increase in dividend income from equity investments from RM7.16
million in 2022 to RM7.86 million in 2023 and an increase in
interest income from RM0.67 million in 2022 to RM1.50 million in
2023. Dividend income from equity investments had increased by
9.80% year-on-year primarily due to an increase in total dividends
received from Lion Rock Group Ltd (“Lion Rock”) in 2023
amounting to HKD0.13 per share as compared with HKD0.09 per share
received in 2022. During 2023, the Group continued to receive
dividends amounting to RM12.90 million from its associate, 104
Corporation, although such dividends are not accounted for as
revenue.
Interest income had increased by 123.4% YoY from RM0.67 million
in 2022 to RM1.50 million in 2023 driven in part by the increase in
cash as the Group continued to dispose shares of 104 Corporation,
lower level of acquisitions as well as the increase in interest
rates that punctuated 2023. The decision by the US Federal Reserve
to raise interest rates by a total of 100 basis points in 2023
benefitted the Group. The proceeds from the disposal of 104
Corp’s shares as well as dividends from investments abroad
were deposited into foreign currency term deposits which enjoyed
the higher interest rates.
Rental income from investment properties had increased slightly
from RM1.25 million in 2022 to RM1.33 million in 2023. The total
area leased to the tenant is approximately 23,700 square feet which
is about 87% of the net lettable area in Wisma JcbNext. The Group
retains approximately 13% of Wisma JcbNext for its own use. As
reported in the Annual Report 2021, the tenant for Wisma JcbNext
has formally notified the Company of its intention to move out by
28 February 2023, with the option of extending the tenancy by
another 6 months if needed. Since then, the tenant has exercised
several options to extend the tenancy, with the latest extension
taking the tenancy to 31 August 2025. The Group’s other
investment property, a 2-storey shoplot office in Johor, remained
untenanted throughout 2023 and was eventually sold in 2024 for
RM800,000.
The Group derives an insignificant level of revenue from the
provision of services predominantly through its subsidiary in Japan
which provides consulting services on a small scale. The
Group’s 60% stake in this subsidiary was sold in June 2023
for JPY0.88 million (approximately RM28,000). The Group did not
invest to expand the Autoworld automotive content website in 2023
but continued to update the website.
The Group’s operating expenses in 2023 amounted to RM4.65
million, a decrease of 11.1% compared with the previous
year’s operating expenses of RM5.23 million. The reduction in
operating expenses was mainly in staff costs and the direct cost of
sales for the operations in Japan. As shown in the table below,
other operating expenses in 2023 amounted to RM2.24 million, which
is relatively flat compared with the previous year.
Further breakdown of the Group’s other operating expenses
is as follows:
Group |
2023 RM
|
2022 RM
|
Net foreign exchange losses |
- |
81,402 |
Professional fees |
860,556 |
866,435 |
Directors’ fees |
356,730 |
343,738 |
Office expenses |
181,526 |
210,572 |
Security costs |
173,806 |
157,995 |
Utilities |
307,474 |
288,147 |
Staff benefits |
122,173 |
92,651 |
Quit rent and assessments |
66,733 |
63,525 |
Travelling |
21,838 |
6,046 |
Telecommunication |
18,036 |
21,331 |
Insurance |
44,420 |
42,921 |
Miscellaneous |
89,335 |
118,527 |
|
2,242,627 |
2,293,290 |
The Group continued to rely a great deal on our associates,
primarily 104 Corporation, to contribute to the Group’s
earnings in 2023. To recap, 104 Corporation is principally involved
in the online job portal business and also provides executive
search and HR consultancy services in Taiwan. 104 Corporation has
been listed on the Taiwan Stock Exchange since 2006. Taiwan’s
GDP grew by 1.4% in 2023, its slowest pace in 14 years, down from
2.59% growth in 2022 due to soft global demand and weak domestic
capital investment. Taiwan’s economy relies a lot on trade
given its geographical limitations and the global demand for its
exports like semiconductors and electronics. Trade has also been
one of the largest contributors to Taiwan’s economic growth
in the last five years. The value of imports and exports combined
has increased over 19% from 2019 to 2023. The height of the
pandemic (2021-2022) saw a significant expansion of trade with some
of its largest trading partners, in particular. Total trade between
Taiwan and the US increased 31% between 2020 and 2022. During that
same time, total trade increased 19% with China, 24% with Hong
Kong, 21% with Japan and 34% with ASEAN. Before the pandemic,
Taiwan’s annual growth in trade was negligible. And in 2023,
total trade started to come back down to pre-pandemic levels.
Taiwan’s central bank bucked the broader global trend by
raising interest rates in March 2024, after seeing its consumer
price index hit 3.08% in February, a 19-month high and ahead of an
expected rise in electricity rates in April.
Under the aforementioned circumstances, 104 Corporation’s
revenue in 2023 had increased marginally by 6.9% to NT$2.33 billion
compared with NT$2.18 billion in 2022 with the growth attributed to
its Job Bank business. Its profit before taxation increased by 5.0%
YoY to NT$549.96 million compared with NT$523.74 million in 2022
while the net profit attributable to shareholders increased 1.4%
YoY to NT$451.56 million compared with NT$445.26 million in the
preceding year. The balance sheet of 104 Corporation remains solid
with cash holdings of NT$2.90 billion at the end of 2023. 104
Corporation has recently announced a dividend of NT$13.61 per
ordinary share representing 100% of their net profit attributable
to shareholders for the 2023 financial year, which will be paid out
later this year. During the year, the Group had continued to
dispose a portion of its holdings of 104 Corporation in the open
market and in the process, the Group recorded gains on disposal of
the said shares amounting to RM18.47 million. It is important to
reiterate that the reduction of our stake in 104 Corporation is
primarily motivated by risk management as the investment in the
company represented a concentration risk on the Group’s
balance sheet. It is not a case where we want to ‘take
profit’ by selling when the share price is high, or make a
‘trading profit’ by selling some shares now and buying back
later. Going forward, the pace and quantum of selling 104
Corporation shares will depend on many factors including the
liquidity of the shares and/or interest from third parties.
Further, the need to reduce concentration risk will decrease as the
rest of our portfolio grows. Our investments, including 104
Corporation, continue to be long-term in nature, with the objective
of deriving dividend income and distributing those dividends onward
to our shareholders. As at 31 December 2023, the Group has an
equity interest of 18.65% in 104 Corporation, down from 21.74% a
year ago. In line with the reduction of the Group’s equity
interest in the company, our share of profit from 104 Corporation
in 2023 amounted to RM13.67 million, down 6.8% from RM14.67 million
in 2022. As mentioned earlier, the Group received dividend
amounting to RM12.90 million from 104 Corporation in 2023, up 6.2%
compared with RM12.15 million received in 2022, despite the lower
shareholding.
Our other associate, Innity Corporation Berhad
(“Innity”), is principally involved in the provision of
technology-based online advertising solutions, to their customers
in the Asia Pacific region, using in-house developed technology
platforms. Innity’s role in the online advertising process is
to serve as a one-stop centre for advertisers and advertising
agencies in offering the 3 major functions of the online
advertising process, namely Creative, Media and Research. In
essence, the group assumes the role of the advertising agency,
creative agency, media agency and researcher. Innity has been a
listed company since 2008 and currently, its shares are traded on
the ACE Market of Bursa Malaysia Securities Berhad (“Bursa
Securities”). The group has an established presence in
Malaysia, Hong Kong/ China, Indonesia, Philippines, Singapore,
Taiwan, Thailand, South Korea, Myanmar, Cambodia and Vietnam.
Innity faced a volatile and uncertain business landscape in 2023.
South East Asia’s digital advertising spending has shown a
rebound in the second half of 2023 after falling to lower levels in
the first half of the year. Innity’s revenue declined by 4.4%
to RM114.01 million in FY2023 compared with RM119.22 million in
FY2022. Its Malaysia and Philippines business units registered a
higher revenue by 10% and 11% respectively in FY2023 whereas lower
revenue was recorded in Singapore, Vietnam, Hong Kong and China,
Indonesia, Taiwan, Cambodia and Myanmar business units as compared
to the preceding year. Its Malaysia business unit remained as the
top revenue contributor in FY2023 followed by Hong Kong and
Philippines business units. Malaysia, Philippines and Hong
Kong/China business units contributed a combined revenue of RM86.44
million revenue, representing 75.8% of total group revenue. The
group’s gross profit increased 5.1% YoY to RM52.72 million,
reflecting a higher gross profit margin of 46% compared to 42% last
year. The marginal increase in gross profit margin was mainly due
to the reversal in provision of platform fees arising from the
discontinued Visa card-linked program in the Malaysia business unit
and reversal in the provision of customers’ rebates that were
no longer required in Malaysia and Singapore business units. The
group incurred a loss attributable to shareholders of RM1.10
million in FY2023 as compared to a loss of RM0.08 million in
FY2022. Despite a higher gross profit recorded in FY2023, rising
staff costs, higher depreciation expenses attributed to the
depreciation of the right-of-use asset in accordance with the new
lease term and share of losses incurred from associate company were
the factors that resulted in the higher loss. Our share of loss
from Innity in 2023 had increased to a loss of approximately
RM231,000 compared with a loss of approximately RM17,000 a year
ago. As at 31 December 2023, the Group has an equity interest of
20.98% in Innity.
Overall, the Group’s net profit attributable to
shareholders for 2023 surged 50.6% YoY to RM35.49 million from
RM23.57 million in 2022. As explained earlier, firstly, this was
due to higher revenue in the form of higher dividend and interest
income and secondly, lower operating expenses which had decreased
by 11.1% YoY. Next, we have the significant increase in the gain on
disposal of shares of 104 Corp from RM5.03 million in 2022 to
RM18.47 million in 2023 owing to the significantly higher quantity
of shares sold in 2023 and at higher prices too relative to 2022.
Gains on financial assets classified as fair value through profit
and loss are mainly in respect of the Group’s investment in
money market funds (“MMF”) and the increase from RM0.46
million in 2022 to RM1.47 million in 2023 was mainly due to the
reallocation of funds from Ringgit denominated term deposit to MMF
in Malaysia. In addition, there was an RM0.41 million increase in
the fair value of investment properties which was attributable to
the Group’s shoplot in Johor. Share of profits from
associates, however, recorded a 6.8% decrease YoY to RM13.67
million in 2023 compared with RM14.67 million in the preceding year
which was mainly due to the decrease in equity interest of 104
Corporation following the continued disposals of shares in that
associate. Although earnings per share amounted to approximately
26.88 sen per share (2022: 17.85 sen), the Company will continue to
pay dividends based on its free cash flow (“FCF”). The
Group’s FCF for 2023 amounted to RM17.05 million, up 16.9%
from RM14.58 million in the preceding year. The increase in FCF was
attributed to higher dividend received from 104 Corporation and
other equity investments as well as the increase in interest
income. To this end, the Board has recommended the payment of a
final dividend of 6.5 sen per ordinary share to be paid after the
forthcoming AGM.
The Group’s net assets attributable to shareholders grew by
5.0% YoY to RM362.15 million as at 31 December 2023 compared with
RM348.80 million at the end of the previous year. On a per share
basis, this translates to RM2.74 per share with the Company’s
shares quoted at a price of RM1.59 as at 31 December 2023.
OVERVIEW OF INVESTMENTS AND CASH RESERVES
The Group’s investments and cash reserves comprise of:
Group |
2023 RM’000
|
2022 RM’000
|
Investment
properties |
18,800 |
18,388 |
Investments in
associatesˆ (at market value) |
|
|
- 104 Corporation
|
195,954 |
211,216 |
- Innity |
14,040 |
12,139 |
|
209,994 |
223,355
|
Financial assets
at fair value through other comprehensive income |
|
|
- Lion Rock |
35,035 |
28,182 |
- Other investments |
93,679 |
108,945 |
|
128,714 |
137,127
|
Financial assets at fair value through profit or loss |
|
|
- Money market unit trust funds |
34,621 |
22,385 |
-Other investments |
881 |
- |
|
35,502 |
22,385
|
Cash reserves |
|
|
- USD |
28,591 |
6,350 |
- HKD |
11,186 |
4,357 |
- SGD |
31,660 |
9,098 |
- RM |
2,280 |
26,464 |
- Others |
351 |
342 |
|
74,068 |
46,611
|
|
467,078 |
447,866 |
ˆ In the audited financial statements, investments in
associates are accounted for using the equity method pursuant to
MFRS 128, Investments in Associates and Joint Ventures
The Group’s assets under management, which comprise
investment properties, equity investments, associates at market
value and cash and cash equivalents, grew 4.3% to RM467.08 million
as at 31 December 2023 compared with RM447.87 million in the
previous year. The increase in 2023 was mainly attributable to the
increase in the market value of 104 Corporation shares which rose
from NT$205 per share at the end of 2022 to NT$212 per share at the
end of 2023.
The performance of the Group’s associates has already been
detailed in the previous section of this report. The carrying value
of the investments in associates on the Group’s balance sheet
decreased by 9.1% to RM114.23 million in 2023 from RM125.71 million
a year ago. Against the Taiwan dollar, the Ringgit had weakened
from NT$1:RM0.1428 as at end 2022 to NT$1:RM0.1493 and this
contributed to an increase of RM4.76 million in the carrying value
of 104 Corporation on our balance sheet. Disposals of 104
Corporation shares during the year also contributed to a decrease
of RM16.90 million in the carrying value of 104 Corporation. In
addition, while the share of profit from 104 Corporation for 2023
amounted to RM13.67 million, the dividend received from 104
Corporation during 2023 based on its 2022 net profit amounted to
RM12.90 million. As mentioned in previous years’ Annual
Reports, while the dividend from 104 Corporation being an associate
does not benefit the Group’s bottom line, the dividend
provides liquidity for the Group to fund its working capital
requirements and dividend payment to shareholders. The dividend
from 104 Corporation alone account for 62% of total dividends
received by the Group in 2023.
The largest investment under the FVOCI category is Lion Rock with
a carrying value of RM35.04 million. Lion Rock is principally
involved in the provision of printing services to international
book publishers, trade, professional and educational conglomerates
and print media companies. This is a business that the Group had
invested in from 2011 to 2013 at a total cost of RM2.98 million.
Subsequently, in 2014, Cinderella Media Group Ltd, the parent
company of Lion Rock at that time in which we had a stake in then,
rewarded its shareholders by declaring a dividend-in-specie of its
stake in Lion Rock and spinning it off as a separate listed company
on the Hong Kong Stock Exchange. As a result of that, the
Group’s stake in Lion Rock had increased by an additional
36.5 million shares in 2014. At the end of 2023, the Group held an
equity interest of approximately 7.0% in Lion Rock. For the
financial year ended 31 December 2023, the dividend yield on Lion
Rock was 10.0% (2022: 10.9%). During the year, the Group received
RM4.06 million in cash dividends from Lion Rock, up 49.6% from the
RM2.72 million dividends received in 2022. On 27 March 2024, Lion
Rock announced a final dividend of HK$0.08 per share to be paid on
6 June 2024 after the conclusion of its upcoming AGM. The fair
value of the Group’s investment in Lion Rock had increased by
24.3% in 2023 in line with the appreciation of its share price from
HKD0.92 at the end of 2022 to HKD1.10 at the end of 2023.
Based on the disclosures in Lion Rock’s Annual Report 2023,
Lion Rock said the global book market encountered considerable
headwinds in 2023, with varying performance across different market
segments. The US market, which is the largest book market in the
world, saw a slight year-on-year decline in unit sales of printed
books. The UK and Australian book markets also experienced a
downturn in unit sales of printed books due to readers returning to
their normal consumption habits after the surge in demand triggered
by the pandemic. In the wake of COVID-19, Lion Rock’s
publishing clients struggled with inventory management issues
throughout 2023 due to the substantial inventory buildup in 2022 as
a result of global supply chain disruptions. Consequently, these
clients adopted a more cautious approach to placing print orders.
The Chinese book market experienced a 5% increase in unit sales of
printed books in 2023 but on the back of a 7% decline in value as
publishers and booksellers resorted to aggressive discounting
tactics to clear the inventory that had accumulated during the
COVID-19 lockdown period. Given the difficult local market
conditions in China, Lion Rock noticed a rise in competition from
Chinese printers for overseas book printing orders. This
overcapacity has exerted downward pressure on printing margins for
the industry. While the Red Sea crisis and conflict in the Middle
East may result in freight costs going up, Lion Rock opines that
the biggest uncertainty faced by Chinese printers is geopolitical
risk specifically the movement by the West to reduce reliance on
China and to diversify sources of supply. There is a significant
risk that politicians in the West may exert more pressure on
investors and corporates to comply with such ‘de-risking’
policies and impose further tariffs on goods imported from China
and other regions. Lion Rock aims to mitigate this risk with its
investment in its plant in Malaysia. Despite the headwinds of a
volatile and complex macroeconomic environment in 2023
characterised by geopolitical tensions, inflationary pressures,
rising interest rates and a sluggish global book market, Lion Rock
managed to achieve a 2.7% increase in revenue to HK$2,562.78
million from HK$2.496.09 million in the previous year. The increase
was attributed to the increase in book publishing revenue as a
result of the inclusion of the full-year results of the Quarto
Group, Inc in 2023 compared with nine months’ results in
2022. Profit attributable to shareholders amounted to approximately
HK$185.25 million, down 15.8% from the previous year. This decrease
was largely attributable to the HK$31.3 million one-time gain in
2022 from derecognising Quarto as an associate.
2023 was a relatively quiet year for the Group as far as
investments go. During the year, the Group had invested an
additional RM6.48 million (2022: RM33.60 million) into its
investment portfolio. For ease of reference, this portfolio will
hereinafter be referred to as the Equity Portfolio and it excludes
Lion Rock, Hastings Technology Metals Limited
(“Hastings”), the associates and the unquoted
investments. Most of the companies in the Equity Portfolio are
listed in Malaysia and Hong Kong/ China with a small portion in
Singapore, Australia and Europe. As at 31 December 2023, the top 5
holdings made up 39% of the Equity Portfolio while another 28
stocks made up the remaining 61%. These investments as well as
other targets emanated from research conducted internally in line
with the Group’s investment objectives and are reviewed and
approved by the Investment Committee and Board of Directors
respectively. Should the prices of these stocks move within our
target buy prices, we may increase our investments in these stocks
further as well as acquire other target stocks on our buy list. The
Equity Portfolio generated approximately RM3.80 million in
dividends for the Group in 2023 (2022: RM4.45 million). As at 31
December 2023, the fair value of the Equity Portfolio amounted to
RM86.34 million, up 1.3% from RM85.20 million a year ago. To
prevent any risk of front-running, the identities of the component
stocks will be kept confidential save for any laws or regulations
that require the Group to provide full disclosure.
|
Cost
of Investment RM
|
Carrying
Value RM
|
Fair
Value RM
|
104 Corporationˆ |
61,062,842 |
101,065,118 |
195,954,043 |
Innityˆ |
8,487,984 |
13,162,221 |
14,040,019 |
Lion Rock |
17,799,453 |
35,035,375 |
35,035,375 |
Other equity investments |
113,770,517 |
94,560,504 |
94,560,504 |
|
201,120,796 |
243,823,218 |
339,589,941 |
ˆ Accounted for using the equity method pursuant to MFRS
128, Investments in Associates and Joint Venturess
Looking at the table above, the fair value of all of the
Group’s equity investments combined including its listed
associates as at 31 December 2023 was significantly above total
cost owing to the large unrealised gains on 104 Corporation, Lion
Rock and to a lesser degree, Innity (please be reminded that the
unrealised gains on 104 Corporation and Innity, as associates, have
not been recognised in the financial statements at all). The fair
value of other equity investments remained below cost at the end of
2023 mainly due to the investment in Hastings and the
underperformance of Chinese stocks in general. The fair value of
the Group’s investment in Hastings had decreased by 78%
during the year as its share price plummeted from AUD3.52 at the
end of 2022 to AUD0.74 at the end of 2023. Some of the factors that
had affected Hastings’ valuation include the fall in
Neodymium and Praseodymium (NdPr) prices, escalation of project
capital cost and general uncertainty over the expected commencement
of production. As mentioned earlier, Chinese stocks and the Hong
Kong stock market did not fare well in 2023 due to sluggish
post-Covid recovery, property sector woes and fears of regulatory
crackdowns while the US Fed kept raising interest rates. These had
negatively impacted the Group’s investments in Chinese stocks
which were acquired from late 2020 onwards.
The Group’s treasury management objectives are to ensure
there is available liquidity when needed and to preserve our
long-term purchasing power to acquire investments. In that respect,
the Group has decided that the main currencies that it will
maintain are MYR, USD, SGD and HKD. While the holding of such
currencies may result in foreign exchange gains or losses and thus
volatility to our P&L, the Group does not intend to actively manage
or trade currency positions nor engage in any speculative
activities. The Group’s MYR cash is placed in current
accounts and money market unit trust funds while its USD, SGD and
HKD cash are mostly placed in interest-bearing bank deposits. While
the Group manages its treasury function conservatively to safeguard
the Group’s interests, the focus of the Board and management
is still on identifying new strategic investments and/or developing
a broad portfolio of investments that can contribute to the future
growth of the Group. To be able to capitalise on any opportunities
as and when they arise without sacrificing unduly on the
Group’s returns on its reserves, the Group will need to
maintain an appropriate mix of long and short-term investments and
cash.
FUTURE PLANS AND PROSPECTS
Four months into 2024, the world is fraught with geopolitical
tensions including the war in Ukraine and conflict in the Middle
East. Besides wars and conflicts, the year 2024 stands as a
monumental period in the history of global democracy, with over 70
countries scheduled to hold elections and close to 2 billion people
poised to cast their votes. However, this democratic spectacle is
shadowed by concerns that many of these elections may not herald
the strengthening of democratic ideals. Instead, there is
apprehension that they could further entrench illiberal rulers,
reward the corrupt and exacerbate political polarisation. The 2024
elections are set to have profound economic implications, with the
potential to significantly alter the global economic landscape.
Goldman Sachs Asset Management highlights that elections in key
economies such as the US, UK, South Africa, India, Taiwan and
Russia could diverge the global economy from its current
trajectory. The world, already grappling with the aftermath of
pandemics, wars and economic shocks, faces another layer of
complexity as these electoral outcomes may lead to shifts in power
balances, major policy changes and increased geopolitical friction.
Such developments could exacerbate trade conflicts and political
fragmentation, further destabilising an already precarious world
economic order and challenging investors to navigate a labyrinth of
uncertainty.
March 2024 inflation data in the US showed a jump from February,
dampening expectations of an interest rate cut and raising concerns
that inflation could be stubbornly high. The US consumer price
index rose to 3.5% from February’s 3.2%, still well above the
Fed’s target of 2%, reinforcing the narrative that interest
rates will stay higher for longer. Meanwhile, China published
positive economic data for March and the first quarter of 2024
which showed the second-largest economy in the world growing 5.3%
in Q1, higher than market consensus. Fixed asset investment was key
to Q1’s GDP outperformance, while last year’s main
growth driver of consumption has moderated. Net exports remained
weak and have not been a major contributor to growth. China’s
property market has yet to confirm the bottom and continues to drag
growth. Average new and secondary home prices continued to fall
month-on-month in March. Real estate investment slowed further by
-9.5% YoY in Q1.
The International Monetary Fund (“IMF”) stated in its
World Economic Outlook April 2024 that global growth for 2024 is
projected at 3.2%, which is the same rate as 2023. The pace of
expansion is low by historical standards, owing to both near-term
factors, such as still high borrowing costs and withdrawal of
fiscal support, and longer-term effects from the COVID-19 pandemic
and Russia’s invasion of Ukraine, weak growth in
productivity, and increasing geoeconomic fragmentation. Among
advanced economies, the US is set to lead the way with a growth of
2.7% in 2024 while the euro area and the UK are set to grow by 0.8%
and 0.5% respectively. In emerging markets and developing
economies, growth is expected to be stable at 4.2% in 2024 with
growth in emerging and developing Asia expected to fall from 5.6%
in 2023 to 5.2% in 2024. Growth in China is projected to slow from
5.2% in 2023 to 4.6% in 2024 as a postpandemic boost to consumption
and fiscal stimulus ease and weakness in the property sector
persists. The IMF projected Malaysia’s economy to grow by
4.4% in 2024.
Global headline inflation is expected to fall from an annual
average of 6.8% in 2023 to 5.9% in 2024, with advanced economies
returning to their inflation targets sooner than emerging market
and developing economies. The expected fall in global inflation in
2024 reflects a broad-based decline in core inflation especially
among advanced economies. The drivers for declining core inflation
include the effects of stilltight monetary policies, a related
softening in labour markets, and fading pass-through effects from
earlier declines in relative prices, notably that in energy.
So, are interest rates coming down in 2024? Quoting IMF Managing
Director Kristalina Georgieva, “Making the right policy
decisions will define the future of the world economy”, the
decision to cut rates is one that each country will have to make
after careful consideration of their economies. It is not an easy
decision as Kristalina puts it succinctly “The sobering
reality is that global economic activity is weak by historical
standards. Prospects for growth have been slowing since the global
financial crisis. Inflation is not fully defeated. Fiscal buffers
have been depleted. And debt is up, posing a major challenge to
public finances in many countries.”
The IMF listed several risk factors for an uncertain 2024. The
conflict in Gaza could escalate further into the wider region.
Continued attacks in the Red Sea and the ongoing war in Ukraine
risk generating additional supply shocks adverse to the global
recovery, with spikes in food, energy and transportation costs.
Such geopolitical shocks could complicate the ongoing disinflation
process and delay central bank policy easing, with negative effects
on global economic growth. In addition, a slower than expected
decline in core inflation in major economies as a result of
persistent labour market tightness or renewed tensions in supply
chains could trigger a rise in interest rate expectations and a
fall in asset prices. Furthermore, the risk that the cooling
effects of past monetary tightening are yet to come is plausible,
especially where fixedrate mortgages are resetting and household
debt is high. Such developments could increase defaults and raise
risks to financial stability. And in China, in the absence of a
comprehensive restructuring package for the troubled property
sector, a larger and more prolonged drop in real estate investment
could occur, accompanied by expectations of future house prices
declining, reduced housing demand, and a further weakening in
household confidence and spending, with implications for global
growth. Other adverse risks include excessive fiscal consolidation
that is more than necessary to curb debt-to-GDP ratios and rebuild
capacity for weathering future shocks, such as a sharp shift to tax
hikes and spending cuts, could result in slower-than-expected
growth. Lastly, the separation of the world economy into blocs amid
Russia’s war in Ukraine and other geopolitical tensions could
accelerate. Such intensification of geoeconomic fragmentation could
generate more restrictions on trade and cross-border movements of
capital, technology and workers and could hamper international
cooperation.
Due to the many uncertainties and risk factors as described
above, 2024 could yet again be another unpredictable year for
equity investments. In this environment of uncertainty, we will
continue with our strategy, albeit cautiously, of developing a
broad portfolio of long-term equity investments that would generate
dividend income at targeted yields which in return can be paid
onward to our shareholders. We will also devote time to monitor our
existing equity investments for any telltale signs of trouble. We
had only begun building our Equity Portfolio in earnest in 2020. In
that year, we had invested RM6.39 million which was followed by
another RM49.42 million in 2021, RM33.60 million in 2022 and
RM6.48m in 2023. Rising inflation that followed the pandemic and
the hawkish stand taken by advanced economies exacerbated by weak
growth in China and geopolitical tensions have pummelled stock
markets in our region where most of our investments are based.
During these times, there will be some paper losses on our
investments. We will continue to monitor the underlying
fundamentals of our investments and make the appropriate investment
decisions as necessary. The Group is also ready to seize the
opportunity to make further investments if valuations of target
stocks become attractive.
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