Friday, February 12, 2010

Does Khazanah Know What It Is Doing?

Khazanah's investment of RMB300 million in Oriental University City Limited (OUC) in Hebei Province, China raises more questions than confidence

What exactly is Khanazah's investment role, strategy and philosophy will be the biggest question raised with its recent acquisition of a 10% stake in OUC for RMB300 million or RM150 million.

Is Khazanah a strategic investor meant to play an active role to bring and develop key industries and technologies in Malaysia via mega developments such as the multi-billion Iskandar Malaysia project?

Or is it a strategic investor in Malaysian companies to help provide local firms with the necessary capital and financial backing for success, such as its holdings in PLUS Expressways, Malaysia Airlines Systems, Malaysia Airport Berhad, Silterra semiconductors as well as many prior failed projects such as the Langkawi prawn farming project?

Or has it now become Malaysia's sovereign wealth fund taking up portfolio investments in businesses overseas without a strategic role in them, such as the 10% OUC investment where Khazanah is neither experienced in the education sector, nor does it have the scale and leverage to manage its Chinese investments?

Khazanah Managing Director Tan Sri Azman Mokhtar claimed that the latest investment is part of their China and education services strategy giving “exposure into the exponential growth potential of China's education services sector”. The pertinent question to ask then is “What is Khazanah's 'China and education services strategy'? How much funds has Khazanah allocated to its China or education services portfolio or is this investment more “opportunistic” in nature, and isn't really part of any strategy?

In fact, when reviewing the entire list of Khazanah's existing portfolio companies, there is not a single “education services” provider in sight, whether in or out of Malaysia ruling out any like synergies between its investee companies.

When reviewing the details of the acquisition, more questions arise, for not only has Khazanah turned itself into some form of portfolio investor, but it has also become a “pre-IPO” venture capitalist.

It's valuation of OUC at RMB 3 billion with its 2009 net profit of RMB 52 million meant that Khazanah paid an astronomical historical price-earnings (PE) ratio of 58 times for its purchase. In addition, the acquisition is valued at more than 8 times OUC's net book value. It is clearly a high-risk transaction for the investment is predicated on a stock exchange listing in 2013.

As a comparison, at today's prices for substantially lower risk, but equally exciting global growth prospects, Khazanah could have purchased Apple Inc for a PE of 24, Google Inc for a PE of 26 or even Amazon.com Inc at the same PE of 58. Why did Khazanah pick an investment in Hebei which is expensive, high-risk and illiquid?

Should Khazanah not be focusing its energies on ensuring the success of Iskandar Malaysia which is today threatened with not only declining investments but also investor withdrawals, to ensure that its RM7.6 billion investment in the project over 5 years will generate reasonable returns to the government and its rakyat?

Instead, it's out-of-the-blue investment in education services provider all the way in Hebei, China drains the confidence of Malaysians in Khazanah's ability to professionally manage the wealth of the nation.
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