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YTL: Into the next 15 years


Excerpts of the Cover Story from The Edge Malaysia:

The Edge Malaysia, 31 January 2005

Stories by Lim Ai Leen & P. Gunasegaram
Photography by Mohd Izwan Mohd Nazam

The man behind the YTL group's phenomenal growth, Tan Sri Francis Yeoh, ushers us into his office in the penthouse of YTL Plaza, smack in the middle of the Bukit Bintang area of Kuala Lumpur, where the group's hotels such as The JW Marriott and The Ritz-Carlton, and shopping complexes such as Lot 10 are located.

For the next hour or so, he hardly misses a beat as he weaves for us an almost enchanting, near-fairy-tale story of spectacular growth spanning several countries both developed and developing, what brought that about, and what the future holds for the group.

As size increases, growth tends to come down but Yeoh still sees the YTL group striding on by 20% a year (slowing from an incredible 55% a year from 1986 to 2000) up to 2020. That's an ambitious target but one that was exceeded in the first four years up to 2004, when growth averaged 31% a year. And Yeoh tells us where it will come from – wildcard Indonesia, cement and properties besides YTL's mainstay of regulated assets: power in Malaysia, water in the UK and transmission in Australia.

Over the 15 years to the new millennium, the YTL companies beat illustrious investor Warren Buffett's record in terms of shareholder returns. Will they do the same over the next 15? Read on for the answer.

On growth and financing infrastructure

The Edge: The YTL group has been growing quite rapidly in the last few years.

Francis Yeoh: On a compounded growth basis, between 1986 and 2000, the group actually beat Warren Buffett's record. We grew 55% compounded. If you talk about any listed company, regardless of where they're listed, China, New York or London, you're talking about returns. If you invest 10,000 dollars with us in 1989 and kept your YTL shares till today, your investment is now worth 550,000 dollars.

So you've showed 55% return a year since 1986 in share price terms?

Yes, in share price terms. It's all worked out in mathematical terms, and you can see the comparison. That's why it's stunning. We've done a study – we're one of the most profitable companies per employee in the world. We actually beat the Fortune's Most Admired and Forbes' Most Admired.

We focus on businesses that leverage on our core competencies i.e. our construction and engineering skills and also innovative ways of financing projects.

Like for the first IPP with Tenaga deal, we introduced two innovative financial ideas. One major breakthrough was to persuade EPF to do 15-year bonds. There was no 15-year bond in RM ever before. Without a 15-year bond, the project won't work. Secondly, we persuaded the Kuala Lumpur Stock Exchange and the Security Commission to allow IPC [infrastructure project company] listing. This would fast track our listing, without requiring a five-year track record. And they agreed to that. And we raised RM2.1 billion, and retired a floating debt of RM1.6 billion. The interests rate then was hovering around 10% and 12%, so we're talking about adding RM160 million to the bottom line.

I think if you want to do infrastructure projects in Asia, it helps to be very innovative. You cannot do a cookie-cutter global formula. Today, people still perceive Asia as a risky area, inevitably the money, the nervous capital, follows and behaves the same way. So they will build lots of hedges against the risks and insist on huge IRRs [internal rates of return].

Corporate experts should be giving a solution technically and financially to a developing country. In every other industry it happens – from cars to computers to cellphones. How come when it comes to utilities, it goes the other way round? We've not been able to transfer the technology in a flow-through, inexpensive way.

Could it be because the cost of input or energy keeps going up?

No. It's nothing to do with energy costs. It's because when you ask a foreign bank or investor to come and take local currency risks, they won't. Besides our country and others do not have liquid hedging markets against RM. Who would want to do that? So, they price in a lot of risk. That's why it's too expensive. This was where the whole impasse was. So, we broke that impasse. And since then, all financing of infrastructure is being done very effectively through the savings of Malaysians.

Now, of course I'm speaking in Indonesia at the infrastructure summit. So, SBY [Susilo Bambang Yudhoyono, the Indonesian President] and everybody wants to know exactly how we did it. Is it possible to do IPC? Is it possible to do 15-year bonds for Indonesia? I think it is. I think it is beginning to be possible.  

I'm quite excited about Indonesia. They already advertised that they have US$10 billion worth of projects to dish out to the world at the Infrastructure Summit. They are attracting the world to look at them. But I don't think that it is easy to find solutions if everybody puts on their blinkers and shades and try to do it the way that they are used to. I don't think that's going to work, it going to be a case of déjà vu, it's going to fail again. The ultimate price offered for infrastructure solutions will be too expensive, especially hedging against the Rupiah.

Since we are experienced in financing in local currency, I think we'll have a crack at it and see whether it works.

Why Indonesia is more attractive than China

Do you have any other targets within the region, since you're so positive on Asean?

Well, in Indonesia's case, it is quite different. It's past seven years since 1997, and there are a few countries in which I enjoyed investing. Malaysia is one of them, Britain and also Australia because there is very little fuss and minimal political interference. And strangely, or surprisingly, Indonesia is also one of these countries. When I keep telling people this, people won't believe it. But believe it. If I had a lot of so-called political interference or forced to bow to corrupted ways, I would not have invested in Indonesia.

Isn't it still a question of who you know?

I think that's a misperception. We Malaysians should do our research better.

I look at Indonesia today in this way. We are probably like Hong Kong and Indonesia is China, the hinterland and we should know Indonesia much, much better than China. When Indonesia welcomes Malaysian investors we should not miss this opportunity.

You think we should look at Indonesia more than China?

Yes, yes, of course. Because of the leavening influence of what we can offer. We have the rule of law, a strong banking system, a strong central bank, a robust stock exchange, we have seen and introduced much financial innovations. Look at Hong Kong, if not for the leavening influence of Hong Kong, applying the rule of law, infrastructure planning and robust capital market that Hong Kong inherited from the British, all the coastal cities would not have developed in such a dynamic way that attracted world-class investors.

Similarly, we can be a leaven to the Indonesian economy as we were also blessed with positive features of British influence including rule of law, robust capital market etc..

You are looking beyond power in Indonesia?

Well, we will see what’s available. But they need power quite a lot and Indonesia is a rich country; they still have huge oil and gas reserves. And if their people get their act together and push the economic agenda forcefully, I think Malaysians simply can't afford to neglect Indonesia.

What about looking at assets in China?

China has its own way of financing power. It goes to the New York Stock Exchange to raise capital armed with the most efficient power plants bundled in groups like Shandong and Huaneng. There are enough global tailors of finance that can excite US investors with the China story. They are not hungry for our type of solution for now. Lately, there are signs of brown outs and blackouts in the coastal cities and if China continues to grow at such a rapid pace they will look for fresh solutions.

Regulated assets

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Power plant turnover will not increase but YTL will make more profit when it retires its bonds.

At one time you were advocating going into developed countries. Is going into Indonesia, an emerging economy, a shift from or expansion of this strategy?

Regulated assets, that is, utilities, have a few features that I like. One is that it has long term concessions. Our investment in the transmission company, Electranet in South Australia has concession terms for 200 years. The water concession in Wessex Water is a concession in perpetuity. We are not subjected to the tyranny of quarterly results.

The second feature of the regulated asset is that the regulator is mandated by law to look after the interests of the consumer and the investor, in equal measure. I like the transparency of the system. The regulator is almost like a Supreme Court judge, you present your case, consumers present their case, he will study them, make his ruling and everyone follows thereafter.

The third feature of a regulated asset is that there is transparent compensation and punishment features. You can lose your licence if you mess up in your efficiency continually in not complying with the high standards set by the regulator. While the concession is in perpetuity, the regulator can change the ownership if you are persistently delinquent in meeting standards. I like this, it keeps water concession owners on their toes.

I hope and pray the Malaysian government will introduce some of these features. To me, it is both transparent and efficient. In Malaysia there are constant complaints in the press, so-called voices of protest, but it's ephemeral. There should be a "water voice" – not just the press, but a structured body to deal with water quality issues, customer complaints and fair tariffs.

There must also be a regulator independent of the government although the Government will determine upfront their political agenda.

If we follow this system, I think Malaysians can solve all their water and sewage problems overnight. In 1989, before the privatisation of water and sewage services in England, England was facing the same situation as Malaysia. In the Wessex area, for example, most of the rivers were open sewers like our Klang River today. When they were privatised and the regulator in place, the private sector has invested more than £50 billion. You're talking about RM350 billion funded totally by the private sector.

Along the way, new financial instruments were born like index-linked bonds. Financial innovation was unleashed onto the capital markets. Malaysian capital markets can similarly be enhanced with a whole plethora of financial instruments and in the process produce a few world-class water companies for our EPF and other global players to invest.

I've always lamented that if we want people to come back to this country, we've got to be able to hire more sophisticated people who are experienced in this area. How are we going to get Malaysian ‘brains’ in London and New York to return, those who know how to calculate WACC [weighted average cost of capital] and all these things, and know how to price index-linked bonds and also know how to put deals like that together.

We invented the first 15-year bond, right? But don't just stop there. Why not 25-year or 30-year bonds? You need long-term projects to have 30-year bonds. Water projects and railway projects are tailor made for them.

Do you think there's appetite in the market for these?

Absolutely. There's a huge appetite. Today, EPF [Employees Provident Fund] has RM1 billion a month coming into the market looking for investments. The private insurance industries, I hear, is RM1.2 billion. They are looking for long-term investments. They would love these bonds as proven in the UK case.

It also depends on the project, if you have a transparent regulatory framework, I guarantee you not just locals but the foreigners will snap up these bonds.

For you, is there a difference between investing in a regulated asset in a developed country, and now moving into regulated assets in developing countries?

There are not much quality regulatory framework in developing countries therefore it is difficult to find regulated infrastructure assets, it’s quite a struggle.

But you are still comfortable going to Indonesia even though the regulatory framework there is not all there?

To a certain extent, the PPA [power purchasing agreement] is regulated. It's not a merchant plant. In the US, people are beginning to realise that you cannot trust the private sector to price utilities in an unbridled fashion.

Utilities – water, gas, power, sewage – must be regulated. And they must be regulated transparently with a regulator that is similar to the UK model. I have mentioned previously why we welcome the model.

And there's no need to reinvent the wheel. The UK has done it. We can modify the model for Malaysia. In the UK, under their human rights laws, we cannot turn off the water even if the consumers don't pay. But the regulator will compensate you when you make your case. So you are assured of cash flow. These are the nuts and bolts of the business, but it's very fair and transparent.

So, in terms of electricity in Indonesia, you are happy with the PPA. What about other utilities?

Can I participate in water business in Indonesia? In its present state, I cannot. So I would advocate the same solution in Indonesia regarding the water regulatory framework. Let’s study it and debate it publicly. There are many models; at the end of the day, it's up to the business people and the consumers and the government. If we have tried and failed in many privatisation models, why not try a new one that has proven to work?

For example, how can water be decoupled from sewage? They should go together.

I would advocate that as a consumer, I have a vested interest to demand quality utility services at the right price.  I'm very unhappy with the level of services today. But as a practitioner, an investor, I have vested interests too to see Malaysians benefit from our experience in Wessex.

There is plenty of speculation that YTL would be a major player in the water privatisation projects. Are you going to wait until the regulatory infrastructure is in place before you dive in?

If the regulatory framework is transparent we will certainly bid. Why should it be just YTL, anybody can bid for it. The Robert Kuok group can bid for it, Ananda's (Krishnan) group can bid for it. Why not?

So, you're preparing yourself to bid for some of these water projects?

We've always been prepared because we're looking for regulated assets all over the world. But it doesn't mean we're going to get it. But I do welcome a transparent environment, where bids are advertised in the press, people will know how many bidders there are and also their experience and credentials, and the winning bids are announced promptly. That's wonderful for the country isn't it, to have that? Why should we always have a cloak-and-dagger routine about who's going to get the contract? Some people say I am going to be advantaged if the industry is regulated in this manner. I have no special advantage if the industry is regulated in this manner.

Indonesia is exactly doing this at the summit. It has 37 projects, all listed out for the world to bid. You're talking about transparency. Why can't we do that?  But will I win it? I'm not sure, it depends on the quality of the assets and on other competitors’ bids. You never really know.

At the end of the day, it favours the consumers. They would have a transparent and permanent water voice.


Malaysians have enough money in the savings system to invest in all this. There's over RM20 billion a year from our savings to invest. Let's have some world-class companies listed on the stock exchange with water and sewage assets. The positive multiplier effect is tremendous for the Malaysian capital markets. And then hopefully, we can go to China and other Asean countries and introduce our expertise. We would be such a bright light, wouldn't we?

The most likely people to lead this initiative are Malaysians. We still have plenty of untapped water resources, we have a regulatory framework and legal system that's closest to the British one. There should be another organized public debate on this issue which includes the consumers, investors, and the detractors. That way there's no mystery on what it's all about, no more black box.

Otherwise, a lot of public funds will be sucked into this area at the expense of education and other social priorities. The private sector should be allowed to shoulder this initiative and I am sure they can do a good job, and continue to create sustainable economic activity. The government will also benefit by taxing these profitable companies.

What proportion does power and Wessex Water contribute to the group's earnings?

Wessex Water businesses has outpaced power in turnover terms. I think Wessex's turnover is almost 60%. Right now, in YTL Power, including Indonesia, 70% of our revenue and about 50% of our profits, is from outside Malaysia.

What's your target growth for the next 10 years?

We have decided on a 20-20 vision. So 20% compounded growth until year 2020. From 2000 to 2004, we averaged 31%. In other words, we've surpassed the 20% target I've set. So we have done well so far.

It's 31% in share price, accompanied by profit and turnover. It's not exactly proportional, but there is a certain co-relation.

So what will this 20% target growth be driven by?

There are a few templates. Power plant turnover doesn't increase but when we are retire the EPF 15-year bond at 10% interest, we will make RM50 million more per year. So, there's one increasing profit profile despite the stagnant turnover.

Wessex turnover increases year on year through capex expenditure accompanied by growing profits. Profits in Wessex should grow at least 25% over the next five years.

Then we have the Australian asset, which is giving us a very good return. The IRR is about 12% to 13%. Dividends are remitted regularly to Malaysia.

Then our ERL [Express Rail Link] will start to contribute profits to us next year. In fact, many analysts thought ERL would lose money for at least seven years. We are going to start making profit next year. Ridership is increasing rapidly.

The other big contributor to the YTL group will be through our property arm.

YTL today has RM27 billion worth of hard assets. Not included in this as another RM8 billion of property assets. So actually, total assets should be RM35 billion. We can't put a value to these properties because these are privatisation properties. But the total sales of these properties will come to around RM12 billion to RM13 billion.

Like our Pantai Hill Park project. It is not registered as a hard asset, but we have generated a few hundred million worth of sales already. Our Sentul East and Sentul West project will command sales of at least RM10 billion.

So, YTL Corp has RM27 billion hard assets in water, power plants, ERL. And then RM8 billion of soft assets that are not in the books. That's where the profit will come from. Investors seem to have missed this.

And then profits will come from YTL Cement. We are now the second-largest cement company after our acquisition of Perak-Hanjoong, and we are quite confident that YTL Cement’s profit will jump from RM80 million to RM180 million a year after our take over.

Cement industry

What made you move into cement in such a big way?

Why not? Cement is an industry that we understood from day one. We pioneered ready-mixed concrete (RMC) in this country, we were one of the three – UDA ready-Mix, Buildcon and Australia's RMC, if I am not mistaken.

YTL Cement has the largest market share of RMC. And we are the sole manufacturer of slag cement in Malaysia and we also produce Portland cement. So we know about the cement business. Where's the logic of sending East Coast cement to the West coast and vice versa. Transport costs will be cut down severely. There are other savings as well.

Will all the capacity be used up? Everyone is saying the industry is not doing well.

Yes, the capacity will be used up. I think that the analysis is myopic. There will be no construction of new cement plants for the next five to six years. If there's a little bit of surplus capacity it will be very quickly used up.

Why are we taking over Perak-Hanjoong Simen? Because it was in financial straits, so banks are not likely to finance cement plants in the near future. Even if they do in two to three years' time, it will still take two to three years to build a plant. So you must understand it will be six years before any new capacity comes in.

Secondly, our economy has reached a level of sophistication and maturity where the RMC and cement must consolidate and converge. There were just too many RMC companies in the past, and now it's slowly consolidating. Like all developed economies there are only a handful of RMCs and cement companies, they simply consolidate.

We've made a profitable business out of a very competitive commodity type business because we are experts. It's very hard work, you know, to make business out of a so-called low barrier entry industry. But now the industry is maturing and consolidating and we welcome that.

So all the capacity will be used up for Malaysian construction. Will the cement go anywhere else?

The cement business is now a relatively easy business for us. If we are going to go to Indonesia, we can replicate our model there.

There is a growing tendency to use concrete components for housing because of shortage of labour etc. The prices of cement in Asean countries are much higher than in Malaysia. Malaysian cement companies went through a period of severe competition and discounts as high as RM120 were offered. Therefore this industry will prove to be a low hanging fruit for us to pick in Asean countries. We are doing our home work now.

Even though we are the second largest in Malaysia, our size is still small. We hope we can be a regional player through expansion in Indonesia and hopefully we can then take advantage of the periodical boom-bust cycles in this industry and expand further.

Expansion strategy

So you can see that most of our businesses are based on the intellectual capital accumulated over many years but we will not expand for expansion sake.

And thank God our local investors are patient and long term in outlook. They don't pressure CEOs to do the wrong thing. How many M&As in the US succeeded in the last 5 years. There are graveyards of companies that imploded and many are still struggling.

So I would say this. The 20% compounded annual growth is a mixture of existing businesses, some will grow organically and we will have to do some M&As. If you couple the two together, then 20% is quite achievable. I have no doubt, because we have sustainable long-term regulated assets.

We also have that track record of growth. We may not acquire an asset a year, but we may acquire two in two years' time. That's the nature of our business. When it grows, it leaps. You have to be patient and just have to wait for the right cycle. There will always be opportunities in Britain, Australia and Malaysia and now Indonesia.









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