Malaysia game changer
Category: Asia, China, Malaysia, Singapore
By Toby Garrod
Kenanga’s CEO forges plan to regionalise investment banking sector
As group managing director of K & N Kenanga Holdings Berhad, Chay Wai Leong aims to tackle Malaysia’s excess liquidity problems via the firm’s Greater China expansion strategy. The combination of his ideas and his financial firepower make him a force to be reckoned in the region’s retail brokerage and investment banking market.
Asia Asset Management: As a Singaporean with years of experience working in the financial industry both there and in Hong Kong, what drew you to join Kenanga Investment bank?
Chay Wai Leong: At times, people ask me; What are you doing in Malaysia? You should be in Singapore or Hong Kong making lots more money. But having been in Malaysia for the last 15 years, it makes a lot of sense for me. Before Kenanga, I was CEO and managing director of RHB Investment Bank Berhad and head of corporate and investment banking at RHB Banking Group. With this, I accumulated significant relationships with Malaysia corporates and government. I also had my fair share of success. When I joined RHB as part of its senior management team in 2006, its market cap was about four billion ringgit. When I left four years later, market cap was around 20 billion ringgit. I feel this experience gives me a lot to offer Kenanga, which in turn promises some great opportunities.
When I was at RHB, we built a very successful business. So I was thinking to myself, so what is next? There are two things I have not done before – go into government or start my own business. I didn’t want to set up a company from scratch. At the same time, the management of Kenanga needed to find a new CEO. This is in line with new regulation asserting that any stakeholders that owned more than a 5% stake were not allowed to run the company. So I thought, this would be a good opportunity. Kenanga had some capital, about US$200 million. No real dominant shareholders. We already knew what to do with this type of platform and we wanted it to be our own venture. I spoke with the key shareholders about having a stake, and they proved agreeable. We’re working it out at this point in time. It’s more like having your own company, with a bunch of capital, and good shareholders.
How do you see your role at Kenanga?
Though Kenanga Investment Bank began formally operating as an investment bank in 2007, the company has for most of its 39-year history has very much been a mid-sized retail broker. When I joined, about a year ago, I was interested in how we could expand this established player into something more substantial and help transform the Malaysian financial landscape in the brokerage and investment banking arena. As part of this vision, I wanted to acquire other players, and ECM Libra Investment Bank, a division of ECM Libra Financial Group, seemed like the ideal candidate. They needed to sell because of ownership issues regarding their major shareholders, who had stakes in ECM as well as AmBank. We looked at the combined entity and we realized that if we put the two together we would become very dominant in the retail securities business. Ultimately, the deal would make us the largest independent investment bank in Malaysia and a top-three brokerage house.
The reason we decided to look at ECM, even though it has been available for a number of years, is that we can structure a deal whereby we can take advantage of the fact that both firms, ECM and us, are highly capitalized and can use some of the excess capital to pay for the deal. Our CAR ratios are 40-50%. In fact, we are not even asking the shareholders for any money to do this transaction. In addition ECM is a very well managed company and very profitable.
The deal makes a lot of sense. The combined entity will have the largest retail broking sales force in the country. Retail is where we want to go because it is the most lucrative segment of the market. Yields are between 30-40 basis points, as opposed to 4-5 for foreign institutional. Local institutional is slightly higher than that. Meanwhile, we will be one of the very few independent investment banks in Malaysia.
So what is the plan for the medium to long term?
Going forward, the plan is to continue expanding. We have kept some powder dry in the keg, so if there is another acquisition opportunity sometime down the road we can take a look. When that happens we may ask the shareholders for some money. We believe that we cannot be a single-country house. We are currently looking at expanding into Singapore and Indonesia. We are also exploring a Hong Kong / China strategy. Instead of opening up shop there ourselves, and competing with about 400-500 other companies, we will probably from joint-ventures or partnerships with other firms – most likely a mid-sized Chinese securities company.
As part of our Hong Kong / China strategy, we want to bring the big Malaysia funds to the big IPOs in Hong Kong. There have been precedents for this, such as when AIA was listed, two of the cornerstone investors were from Malaysia. There is a lot of liquidity in Malaysia and not enough Investment opportunities. When you think about the big funds globally, you think about the Middle Eastern Sovereign Funds and Temasek, but people neglect the Employees Provident Fund, for instance, even though it is actually as big as Temasek. Second, we believe that there are a large number of companies in China that want to list to raise capital, but are not able to do it because of their size. They are too small for the Hong Kong Stock Exchange. Meanwhile, Singapore has been announcing even higher thresholds for listing. This is very good for us, as we can bring them to Malaysia where there is very good liquidity.
There have been some problems in the past with Chinese companies listing on the Bursa. The main problem was that there was a rush to list, without much planning. The first four companies were shoe companies. How many shoe companies can a market absorb? The plan is to bring good Mainland companies to the Bursa. The trick is to bring the right companies. Currently we are talking to a healthcare equipment manufacturer, for instance.
So how will the new entity be constructed?
Our key businesses are broking at 60%, investment banking at 35%, and to a smaller extent fund management.
Regarding projected earnings, we are currently going through a lot of investments, including three front end systems and one back office system, as well as personnel integration. As a result of this, the next 18 months aren’t going to be very exciting in terms of earnings. All the synergy will come 18 months later. The beauty of the deal is that we will remain a very similar company structurally, and we require only one infrastructure. We expect huge cost synergy from this deal.
How would you describe your customer base?
We are really aiming to increase the penetration of the retail division. We would like to double from the current figure of 200,000 customers. Most banks use brokerage services as a loss leader, so they don’t really care too much about it. For us it is different. We believe that we will increase the penetration rate through our better understanding of the business, and win this lucrative section of the market. If you want your IPO to be distributed to the local institutional market, then we can’t compete with CIMB. If you want your IPO to be distributed to international investors, we can’t compete with Goldman Sachs. But if you want your IPO to be distributed to the Malaysian retail market then you should come to us.
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