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BBMF2093-CORPORATE FINANCE

BACHELOR OF BUSINESS (HONS) FINANCE & INVESTMENT


YEAR 2 SEMESTER 3
COURSEWORK

CHEW CHIN LAP

13WBR11861

NICHOLAS TAN PENGXI

13WBR10039

VICTOR HO KAI SHENG

13WBR12255

YANG QI ONN

13WBR10443

TUTORIAL GROUP

RFI 4

DAY

FRIDAY

TIME

11.00AM

DATE OF SUBMISSION

4 JULY 2014

School of Business Studies


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1.
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Group Member Appraisal Form


This basis of this evaluation is your group members commitment to completing the
assignment and to their regard for other members of the group. It should be based on
the contribution given by each member and his or her involvement in this assignment.
Group members should be appraised using the following basis:
100% o Group member attended all group meetings or if unable to attend, contacted the
group in advance and came to an alternative arrangement that the majority of group
members were happy with.
o Group member contributed to group discussion.
o Group member always offered to help or volunteered for tasks.
o Group member had assigned tasks completed on time.
50% o Group member missed group meetings without making alternative arrangements
with other group members.
o Group member assigned tasks were only partly completed or poorly completed.
o Group member did not contributed to the group effort or volunteer for tasks.
0%
o Group member attended few meetings and made no contribution to the assignment.
Name of student:
ID:
Instructions:
Place the name of each of the members in your group in the space provided below.
Appraise each of the members in your group by circling one of the totals shown
below (i.e. 100%, 50% or 0%)
Group Member
1.

100%

50%

0%

2.

100%

50%

0%

3.

100%

50%

0%

4.

100%

50%

0%

5.

100%

50%

0%

6.

100%

50%

0%

Note: Failure to submit a Group Member Appraisal Form will result in a ZERO
appraisal being recorded against your name.

Group Member Appraisal Form


This basis of this evaluation is your group members commitment to completing the
assignment and to their regard for other members of the group. It should be based on
the contribution given by each member and his or her involvement in this assignment.
Group members should be appraised using the following basis:
100% o Group member attended all group meetings or if unable to attend, contacted the
group in advance and came to an alternative arrangement that the majority of group
members were happy with.
o Group member contributed to group discussion.
o Group member always offered to help or volunteered for tasks.
o Group member had assigned tasks completed on time.
50% o Group member missed group meetings without making alternative arrangements
with other group members.
o Group member assigned tasks were only partly completed or poorly completed.
o Group member did not contributed to the group effort or volunteer for tasks.
0%
o Group member attended few meetings and made no contribution to the assignment.
Name of student:
ID:
Instructions:
Place the name of each of the members in your group in the space provided below.
Appraise each of the members in your group by circling one of the totals shown
below (i.e. 100%, 50% or 0%)
Group Member
1.

100%

50%

0%

2.

100%

50%

0%

3.

100%

50%

0%

4.

100%

50%

0%

5.

100%

50%

0%

6.

100%

50%

0%

Note: Failure to submit a Group Member Appraisal Form will result in a ZERO
appraisal being recorded against your name.

Group Member Appraisal Form


This basis of this evaluation is your group members commitment to completing the
assignment and to their regard for other members of the group. It should be based on
the contribution given by each member and his or her involvement in this assignment.
Group members should be appraised using the following basis:
100% o Group member attended all group meetings or if unable to attend, contacted the
group in advance and came to an alternative arrangement that the majority of group
members were happy with.
o Group member contributed to group discussion.
o Group member always offered to help or volunteered for tasks.
o Group member had assigned tasks completed on time.
50% o Group member missed group meetings without making alternative arrangements
with other group members.
o Group member assigned tasks were only partly completed or poorly completed.
o Group member did not contributed to the group effort or volunteer for tasks.
0%
o Group member attended few meetings and made no contribution to the assignment.
Name of student:
ID:
Instructions:
Place the name of each of the members in your group in the space provided below.
Appraise each of the members in your group by circling one of the totals shown
below (i.e. 100%, 50% or 0%)
Group Member
1.

100%

50%

0%

2.

100%

50%

0%

3.

100%

50%

0%

4.

100%

50%

0%

5.

100%

50%

0%

6.

100%

50%

0%

Note: Failure to submit a Group Member Appraisal Form will result in a ZERO
appraisal being recorded against your name.

Group Member Appraisal Form


This basis of this evaluation is your group members commitment to completing the
assignment and to their regard for other members of the group. It should be based on
the contribution given by each member and his or her involvement in this assignment.
Group members should be appraised using the following basis:
100% o Group member attended all group meetings or if unable to attend, contacted the
group in advance and came to an alternative arrangement that the majority of group
members were happy with.
o Group member contributed to group discussion.
o Group member always offered to help or volunteered for tasks.
o Group member had assigned tasks completed on time.
50% o Group member missed group meetings without making alternative arrangements
with other group members.
o Group member assigned tasks were only partly completed or poorly completed.
o Group member did not contributed to the group effort or volunteer for tasks.
0%
o Group member attended few meetings and made no contribution to the assignment.
Name of student:
ID:
Instructions:
Place the name of each of the members in your group in the space provided below.
Appraise each of the members in your group by circling one of the totals shown
below (i.e. 100%, 50% or 0%)
Group Member
1.

100%

50%

0%

2.

100%

50%

0%

3.

100%

50%

0%

4.

100%

50%

0%

5.

100%

50%

0%

6.

100%

50%

0%

Note: Failure to submit a Group Member Appraisal Form will result in a ZERO
appraisal being recorded against your name.

Assessment Criteria For Group Coursework ( 100 marks) 25% weightage

Sources of financing

25

Capital structure, gearing,

40

liquidity,risk of bankruptcy
3

Recommendations to improve

25

sources of financing
4

Report presentation including


grammar, inclusion of reference
materials as appendices and
ability to present in a clear
manner.
Total

10

100

TABLE OF CONTENTS

CHAPTER 1: INTRODUCTION
1.1 Company Profile

1.2 Company Business Activity

9-10

1.3 Corporate Structure

10-14

1.4 Company Marketing Strategies

14-15

1.5 Expected Return of Ordinary Shareholders [Capital Asset Pricing Model]

15-16

CHAPTER 2: CONTENT
2.1 Sources of Finance

17-20

2.2 Capital Structure

20-28

2.3 Recommendations for alternative

28-30

CHAPTER 3: CONCLUSION

31

REFERENCES

32-33

APPENDIX

34-38

PART B: INDIVIDUAL COURSEWORK

39-67

CHAPTER 1: INTRODUCTION

1.1 Company Profile


MBM Resources BHD (MBMR 5983) is a company under trading and service
industry in Bursa Malaysia. MBMR has grown over the years through acquisitions
and organic expansion. One of the first significant achievement of the company is the
secure of exclusive distributorship of Daihatsu motor vehicles in 1980 under Daihatsu
(Malaysia) Sdn. Bhd. (DMSB). In 1994, MBMR was incorporated as an investment
holding company under the Med-Bumikar Mara Sdn. Bhd. Group of Companies (the
MBM Group). MBMR was successfully listed on the Kuala Lumpur Stock Exchange
(now known as Bursa Malaysia Securities Berhad) on 9 February 1995. The next
significant milestone for MBMR Group would be the acquisition of Federal Auto
Holdings Berhad (Federal Auto). Federal Auto was an established Volvo cars
distributor until the year 2000 when it remained a leading dealer. Today, it is also the
leading dealer for international reputable brands including Volkswagen and
Mitsubishi. MBMR also expanded into automotive parts manufacturing with the
acquisition of wheel manufacturer, Oriental Metal Industries (M) Sdn. Bhd. (OMI);
and safety and NVH products manufacturer, Autoliv Hirotako Sdn. Bhd. and Hirotako
Acoustics Sdn. Bhd., subsidiaries of Hirotako Holdings Berhad.
The groups head office located at No. 1-6, The Boulevard, Mid Valley City,
Lingkaran Syed Putra, 59200 Kuala Lumpur. The Group now has a combined total of
46 branches around Malaysia that enables MBMR to reach its customers more
effectively.

1.2 Company Business Activity


With diverse investments in the automotive industry, the automotive group has
made its name in the local market. MBMRs businesses are conducted in Malaysia
only. MBMR has two core businesses, which are automotive distribution and
retailing; and automotive parts manufacturing. However, for the purpose of
diversification, MBMR does have some minor business in property development.
9

Through its subsidiaries, the local company currently represents some of the biggest
international brands in Malaysia, including commercial vehicle brands Daihatsu and
Hino; passenger car brands Perodua, Volvo, Volkswagen and Mitsubishi; and sports
tuning brands, ABT and Heico Sportiv. The motor trading business of MBMR
includes light trucks to medium and heavy duty trucks and buses in the commercial
vehicle market, and from compact entry level cars to luxury cars in the passenger
vehicle market. On the other hand, MBMR's automotive parts manufacturing division
currently produces steel wheels, assembles wheel modules, builds bodies for
commercial vehicles and manufactures automotive safety equipment such as airbag
modules, seat belts, steering wheels, noise and heat reduction materials and insulator
parts. Meanwhile, MBMR also provides after sales service, body and paint, providing
of spare parts and accessories as well as customer services.
The Companys subsidiaries include Hirotako Holdings Berhad, Oriental
Metal Industries (M) Sdn. Bhd. (OMI), Daihatsu (Malaysia) Sdn. Bhd. and Federal
Auto Holdings Berhad. There are two subsidiary companies of MBMR involves in
property development, which are Inai Benua Sdb. Bhd. and MBMR Properties Sdb.
Bhd. Besides that, MBMR has associates that cooperate with it in daily business, such
as Hino Motors Manufacturing (Malaysia) Sdn Bhd., Hino Motors Sales (Malaysia)
Sdn. Bhd., and Perusahaan Otomobil Kedua Sdn, Bhd. (Perodua).

1.3 Corporate Structure


1.3.1 Board of Directors
The Board of Directors (Board) of MBM Resources Bhd (MBMR) is
considered the key of success to the company's business and is committed to enforce
the principles of good governance in all their business dealings in respect of its
shareholders and stakeholders. MBMR considers that its complement of NonExecutive Directors provide for an effective Board with a mix of industry-specific
knowledge and commercial experience. This balance enables the Board to provide
clear and effective leadership to the Company and bring informed and independent
judgement to many aspects of the Companys strategy and performance so as to
ensure that the Company maintains the highest standards of conduct and integrity.

10

Currently, the Board has seven members, consists of three non-independent


non-executive directors, two independent non-executive directors, one group
managing director and one executive director. Y. Bhg. Dato' Abdul Rahim Bin Abdul
Halim serves as Non-Independent Non-Executive Chairman of the Board at MBM
Resources Bhd. A qualified economist, Y. Bhg. Dato Abdul Rahim was MBM
Resources Berhads (MBMR) Managing Director until 28 February 2006. He is
currently the Chairman of MBMR. He held several senior positions in the Ministry of
International Trade and Industry (MITI) and Daihatsu (Malaysia) Sdn. Bhd. (DMSB)
prior to his appointment to MBMRs Board on 17 December 1993. Dato Abdul
Rahim has experience in the motor vehicle industry and is presently on the Boards of
Rubberex Corporation (M) Berhad, Central Cables Berhad and Ewein Berhad as well
as several other private companies. He holds a Bachelor of Economics (Honours)
degree from the University of Malaya. He is the Chairman of the Boards of the
following companies Oriental Metal Industries (M) Sdn. Bhd. (OMI) and Hino
Motors (Malaysia) Sdn. Bhd. (HMMSB), and a Board member of Perusahaan
Otomobil Kedua Sdn. Bhd. (Perodua).
Mr. Looi Kok Loon serves as Managing Director and Executive Director of
MBM Resources Bhd. He was appointed to the Board on May 18, 2001 and
subsequently Managing Director since March 1, 2006. He had previously worked for
a foreign investment bank. Mr. Looi holds a Bachelors degree in Government and
Economics from Brunel University and a Masters degree in Management from the
University of Kent, United Kingdom. He represents MBMR on the Boards of the
following companies Perodua, HMMSB, DMSB, Federal Auto Holdings Berhad
(FAHB) and OMI.
Encik Aqil Bin Ahmad Azizuddin serves as Non-Independent Non-Executive
Director of MBM Resources Bhd since August 17, 2010. He was Company's Director
from May 18, 2001 to 2002 and Executive Director from 2002 to August 17, 2010. He
holds a Bachelor of Science in Business Economics and an Associate degree in
Commercial Graphics from Southern Illinois University, the United States of
America. He has served as Chairman of Federal Auto Holdings Bhd, Chairman in
Daihatsu (M) Sdn Bhd, and Director, Marketing Manager and Managing Director in
Daihatsu (M) Sdn Bhd. He also holds directorship in Awesome Power Sdn Bhd,
Cendera Azizuddin Sdn Bhd, Clearwater Sanctuary Golf Resort Sdn Bhd, Kampung
11

Baru Inn Sdn Bhd, Perusahaan Otomobil Kedua Sdn Bhd, PERODUA Sales Sdn Bhd,
Pembinaan Teknikhas Sdn Bhd, Precisionag Sdn Bhd, Hartamuda Sdn Bhd, Bizworth
Sdn Bhd, Galian Lembah Kinta Sdn Bhd, GMMI Sdn Bhd, MBM Energy Sdn Bhd
and Arah Seraya Sdn Bhd. He serves as member of the Audit Committe of the
Company with effect on January 1, 2011.

C
D
ih
ra
ei
cr
tm
a
o
rn
Diagram 1.1: Directors of MBMR

12

1.3.2 Management Team


MBM Resources Bhd (MBMR) Management Team is a sub-entity from the
Board of Directors. The roles of Management Team are to guide the development and
business of the company and the Managing Director is responsible for the day-to-day
running of the businesses of the Group and to develop and implement strategies. The
Management Team consists of five members.

M
rA
LNLN
oA
oG
iE
KM
oE
kN
LT
oo
oT
nE
A
M

Diagram 1.2: Management Team of MBMR

13

1.3.3 Board Charter


The Board Charter will assist the Companys stakeholders to better understand
the objectives of the Board, the Companys organisation structure and the manner in
which the Board exercises its authority and discharges and allocates responsibilities in
managing the affairs of the Company.
The Board is responsible for undertaking the business and affairs of MBM
Resources Bhd and its subsidiaries (collectively and each individually the
Company) in the interest of its shareholders. In addition, the Board is responsible
for identifying areas of significant business risk and ensuring arrangements are in
place to adequately manage those risks.

1.4 Company Marketing Strategies


1.4.1 Multi-brand Strategy
With the aim to be one of the leading and most complete automotive groups in
Malaysia and the region, MBMR uses the multi-brand strategy which allows the
group to saturate the automotive market by occupying greater shelf space and filling
almost all price and quality gaps. MBMR is the leader in every market segment it
competes in, with products that range from light, medium and heavy duty trucks and
buses to entry-level compact cars and luxury sports utility vehicles. The examples
include commercial vehicle brands Daihatsu and Hino; passenger car brands Perodua,
Volvo, Volkswagen and Mitsubishi. This helps to secure greater shelf space with little
remaining for rival products.
1.4.2 A Diverse Network of Products and Services.
The MBMR group do not just position themselves merely as automotive
distributors. On the contrary, MBMR aims to achieve capabilities that include
manufacturing and assembly, distribution, retail and dealerships, parts and
accessories, body and paint repair and customer services. Therefore, the group has
been invested in sales and aftersales service network and automotive parts
manufacturing business, and strategic acquisitions. The investments in expanding
network expansion not only increased MBMRs capacity and geographical reach but
14

also allowed it to leverage on the growing number of cars sold to boost its recurring
income contribution from the lucrative aftersales business. For example, major
investments of MBMR in manufacturing such as the alloy wheel plant in Rawang and
the joint-venture plant with Hino Motors Ltd in Sendayan may contribute to the group
by helping the group to achieve greater financial stability when expansion costs are
fully absorbed.

1.5 Expected Return of Ordinary Shareholders [Capital Asset Pricing Model]


The current stock price for MBM Resources Bhd is RM 3.060, beta of MBMR
is 0.37 from reuters1(Refer to appendix 1), risk-free rate is 3.04% based on 3 month
Malaysia Treasury Bill2(Refer to appendix 2) and the market return is 14% based on
the year to year total return performance of FTSE Bursa Malaysia KLCI 3(Refer to
appendix 3). An investor always looks for a rate of return that compensates him for
taking on risk of the securities. So, in order to meet the expectation of investors,
Capital Asset Pricing Model (CAPM) plays a very important role because it describes
the relationship between risk and expected return and is used in the pricing of risky
securities in order to fulfill the requirements of investors between their return and risk
tolerance. The expected return can be calculated using formula:

R= 3.04 + 0.37(14 - 3.04)


= 7.0952%

1 http://www.reuters.com/finance/stocks/overview?symbol=MBMR.KL
2 http://www.bnm.gov.my/index.php?tpl=489&sdate=2014-07-02&lang=
3 file:///C:/Users/Lap/Downloads/FBMKLCI_20140630.pdf
15

The required rate of return from MBM Resourcing Bhd share is 7.0952%. The beta of
MBMR is lower than the market beta of 1. This indicates the company will be less
volatile than the market. As the total market return will be as high as 14% while the
required return of the shareholders will only be 7.0952%. The stock is considers
undervalued in the SML as we can gain higher return with same risk apply.

16

CHAPTER 2: CONTENT

2.1 Sources of Finance


2.1.1 Equity Financing

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irusvAoTetsni
nyroecarsn
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Diagram 2.1: Sources of Finance


2.1.1.1 Ordinary shares
Issuing shares of its stock and receives money in return is one of the sources
of financing in MBMR. The shareholders of MBMR represent equity ownership in
the company and entitle the owner to a vote in matters put before shareholders in
proportion to their percentage ownership in the company. They are entitled to a
dividend only after a certain date or if profits rise above a certain amount. The
companies will first issues shares through the primary market and the shares will be
transacted in secondary market. A total of 390,637,453 (Refer to appendix 4)4
ordinary shares with par value of RM1 have been issued to the shareholders.
2.1.1.2 Right issue and warrant
4 http://www.mbmr.com.my/Automotive/Investors/ShareholderInformation/Share-Capital/
17

MBMR issue rights share and warrant as a way of raising new share capital.
The warrant issued by MBMR will entitled the holder of the warrants to subscribe for
a new ordinary share in the company. It can be exercised at any time within a period
of 5 years commencing from the date of issue of the warrants which is 21 June 2012
but the holders of the warrants will not be entitled to any voting rights or to participate
in any distribution and/or offer of further securities in the company. MBMR have
issued 73,165,836 right issue warrants together with listing and quotation for the
73,165,836 right shares on the Main Market of Bursa Malaysia and there are 73,300
warrants have been exercised at the fixed price of RM3.20 (refer to appendix
5).Lastly, the warrants shall be transferable in the manner provided under the
Securities Industry Act, 1991 and the rules of Bursa Malaysia Depository Sdn. Bhd.5

2.1.2 Debt Financing


Debt financing comes in the form of a loan. Generally, its acquired either
through a commercial bank or through a loan program provided by an organization.
The long term debt financing used by MBMR are term loan and bank overdraft.
2.1.2.1 Term Loans
MBMR is having a term loan from a bank for a specific amount that has a
specified repayment schedule and a floating interest rate. The term loan have three
maturity which are more than 1 year and less than 2 years, more than 2 years and less
than 5 years and more than 5 years. The average effective interest rates per annum of
the following are 5.3% in the group and 5.8% for the company (Refer to appendix
6). The loan amount has decrease from RM402, 886,000 in year 2012 to RM369, 410,
000 in year 2013(Refer to appendix 7).6 MBMR also used short term financing
such as bankers acceptance and revolving credits.
2.1.2.2 Bank Overdraft

5 Financial Report 2013, pg139 &140, note 32


6 Financial Report 2013, pg 142 & 143, note 34
18

MBMR used bank overdraft as one of the financing sources as well. It is an


extension of credit from bank when an account reaches zero. An overdraft allows the
individual to continue withdrawing money even if the account has no funds in it. The
average effective interest rates per annum of the following are 6.5% in the group
(Refer to appendix 3).
2.1.2.3 Bankers Acceptance
Bankers acceptances are issued by MBMR as part of a commercial
transaction. These instruments are similar to T-Bills and are frequently used in money
market funds. Bankers acceptances are traded at a discount from face value on the
secondary market, which can be an advantage because the banker's acceptance does
not need to be held until maturity. Bankers acceptances are regularly used financial
instruments in international trade. The average effective interest rates per annum of
the following are 3.7% in the year 2013 for the group (Refer to appendix 6).
2.1.2.4 Revolving Credits
Revolving credit is a line of credit where MBMR pays a commitment fee and
is then allowed to use the funds when they are needed. It is usually used for operating
purposes, fluctuating each month depending on the customer's current cash flow
needs. It can be taken out by MBMR. Along with the commitment fee there are also
interest expenses for corporate borrowers and carry forward charges for consumer
accounts. The average effective interest rates per annum of the following are 4.5% in
the year 2013 for the group (Refer to appendix 6).

2.1.3 Hired Purchase


Hired purchased is another financing tool used by MBMR. It is a form of
installment credit and it is similar to leasing, with the exception that ownership of the
goods passes to the hire purchase customer on payment of the final credit installment,
whereas a lessee never becomes the owner of the goods. Hire purchase agreements
usually involve a finance house. The finance house will always insist that the hirer
should pay a deposit towards the purchase price. MBMR uses hire purchase as a
source of finance and hire purchase finance from a finance house in order to purchase
19

the fixed asset such as company vehicles, plant and machinery, office equipment and
farming machinery. The present value of hire purchase payables is RM40,000 which
RM17,000 will be due within one year while another RM23,000 will be due in the
second to fifth years inclusive. The effective interest rates for 31 December 2012
ranges from 6.54% to 7.1% per annum. Interest rates are fixed at the inception of the
hire purchase arrangements (Refer to appendix 8). 7

2.2 Capital Structure


2.2.1 Equity
Year

Year

Year

Year

Year

2013

2012

2011

2010

2009

RM

RM

RM

RM

RM

500,000,000

500,000,000

500,000,00

500,000,00

500,000,00

390,637,000

242,943,000

242,677,00

242,073,00

242,073,00

73,165,000

73,166,000

74,000

2,000

1,361,000

266,000

604,000

Authorized
:
Ordinary
share of
RM1 each
Issued and
fully paid
as 1
January
Bonus
share
Right issue
with
warrants
Exercise of
warrants
Exercise of
ESOS

7 Financial Report 2013, pg 146, note 36


20

Issued and
fully paid

242,943,00

242,677,00

242,073,00

257,057,00

257,323,00

257,927,00

390,637,000

242,943,00

242,677,00

242,073,00

3.21 =

x 3.21 =

0 x 3.18 =

0 x 3.34 =

0 x 2.59 =

1,254,1825,31

1,253,944,77

772,558,74

810,541,18

626,969,07

390,711,000

390,637,000

109,289,000

109,363,000

390,711,000 x
Market
value

as 31 dec
Unpaid
share
capital

0
0
Table2.1 Share Capital

RM

PERCENTAGE %
390,637,000
100=78.1274
500,000,000

Issued and fully paid

390,637,000

Exercise of warrants

74,000

74,000
100=0.0148
500,000,000

Unpaid share capital

109,289,000

109,289,000
100=21.8578
500,000,000

Table 2.2 Percentage of Share Capital

21

2.2.2 Debt
Term Loan

Banker Acceptance

Revolving Credits

Bank Overdraft

Bank Overdraft;
0%
Revolving
Credits; 5%
Banker Acceptance; 18%

Term Loan; 77%

Chart 2.1 Long Term and Short Team Debts


TERM

RM000

Long Term

478,186

%
365,937
100=76.5261
478,186

86,501

86,501
100=18.0894
478,186

Revolving Credits

25,000

25,000
100=5.2281
478,186

Bank Overdraft

748

748
100=0.1564
478,186

Banker Acceptance
Short Term

PERCENTAGE

Table 2.3 Percentage of Long Term and Short Team Debts

22

2.2.3 Gearing Ratio


How can the gearing ratio be evaluated?

A business with a gearing ratio of more than 50% is traditionally said to be


highly geared.

A business with gearing of less than 25% is traditionally described as having


low gearing

Something between 25% - 50% would be considered normal for a wellestablished business which is happy to finance its activities using debt.

Debt to equity ratio =

Long term Debt


( no .of outstanding s h are x s h are price )

Year

Debt to equity ratio

2009

18,481,000
242,073,000 x 2.59

= 0.029 = 2.9%

2010

21,199,000
242,677,000 x 3.34

= 0.026 = 2.6%

2011

332,845,000
242,943,000 x 3.18

= 0.43 = 43%

2012

316,521,000
390,637,000 x 3.21

= 0.25 = 25%

2013

321,344,000
390,711,000 x 3.210

= 0.26 = 26%

Table 2.4 Debt to equity ratio

23

Debt to capital ratio =

long term debt


( no .of outstanding s h are x s h are price )+long term debt

formula 2.2
Year

Debt to capital ratio

2009

18,481,000
18,481,000+626,969,070

= 0.028 = 2.8%

2010

21,199,000
21,199,000+ 810,541,180

= 0.025 = 2.5%

2011

332,845,000
332,845,000+772,558,740

= 0.30 = 30%

2012

316,521,000
316,521,000+1,253,944,770

= 0.20 = 20%

2013

321,344,000
321,344,000+1,254,182,310

= 0.20 = 20%

Table 2.5 debt to capital ratio


80.00%
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
2009

2010

2011

2012

Graph 2.1 Debt to capital ratio vs Debt to equity ratio


24

2013

The gearing ratio is the proportion of a company's debt to its equity. The
gearing ratio is also concerned with liquidity. In theory, higher the gearing ratio means
higher the risk of the business. The graph is show about the debt to equity ratio and
debt to capital ratio from the year of 2009 to year of 2013. Both ratio are move in the
same direction. From the year 2009 to 2010, there is slightly decrease in the debt to
equity ratio from 2.9% to 2.6%, which is a good sign for the MBM resource.
However, the debt to equity is highly increase from the year 2010 to 2011, which are
2.6% to 43%, which mean the MBM resource is borrowing more long term loan to
finance their business in that year and it will indicate MBM resource facing the high
risk than the previous year. In year 2012, the debt to equity ratio has decrease from
43% to 25% due to MBM resource has increasing their share capital by issuing bonus
share to their shareholder. In year 2013, there has increase slightly from 25% to 26%,
it a quite good for MBM resource because not much change in the debt to equity ratio
and may be they have indicate a conservative financial management.
Graph 2.1 shows the debt to equity ratio which measure a companys financial
leverage. The debt-to-capital ratio gives us an idea of a company's financial structure,
or how it is financing its operations, along with some insight into its financial
strength. In year the year of 2009 and 2010, the debt to capital ratio remains very low
which are 2.8% and 2.5% respectively but in the year of 2011, the ratio increases
sharply to 30%. In this year, MBM Resources Berhad (MBMR) was investing RM250
million in capital expenditure over the next five years in an aggressive expansion plan
to transform the group into one of the key automotive players in Malaysia and the
region.
The non-equity capital expenditure will primarily be utilised to expand its
manufacturing infrastructure, enhance its nationwide retail and service network, and
realise the value of its prime assets. In line with its aspiration of becoming a complete
automotive group, MBMR is investing in new manufacturing facilities to cater for
product line extensions and equip itself with vehicle assembly capabilities. It is also
enhancing its substantial motor retail and service network across the country with new
3S and one-stop body and paint centres to cater to the needs of its growing customer

25

base.8 (Refer to appendix 9). This is why the debt to capital ratio is so high in year
2011 as MBMR was using non equity capital expenditure to expand their business. In
year 2012 and 2013, the debt to capital ratio is 20% for both years dropping from 30%
in year 2011. This has proved the sudden increase of debt to capital ratio in year 2011
was because of expansion of its businesses.
2.2.4 Liquidity Ratio
Current ratio =

total current assets


total current liabilities

Year

Current ratio

2009

398,479,000
102,361,000

= 3.89

2010

529,163,000
359,705,000

= 1.47

2011

764,442,000
372,817,000

= 2.05

2012

1,020,234,000
573,035,000

2013

968,996,000
461,651,000

= 1.7
= 2.09

Table 2.6 current ratio

8 http://www.mbmr.com.my/Detail/News-and-Media/PressReleases/RM250-Million-Expansion-Plan-To-Transform-MBM-ResourcesBerhad-Into-Major-Automotive-Group/
26

Quick ratio =

Year

(total current assetsinventories)


total current liabilities
Quick ratio

2009

(398,479,00013,393,600)
102,361,000

2010

(529,163,000199,032,000)
359,705,000

= 0.91

2011

(764,442,000 261,687,000)
372,817,000

= 1.34

2012

(1,020,234,000 393,693,000)
573,035,000

2013

(968,996,000 282,439,000)
461,651,000

= 2.58

= 1.09
= 1.48

Table 2.7 quick ratio

4.5
3.89
4
3.5
3
2.5
2.58
2
1.5

1.7

1.47
1.34

1
0.91

0.5
0
2009

2.09

2.05

2010

2011

current ratio
quick ratio

1.48
1.09

2012

2013

Graph 2.2 current ratio versus quick ratio


The graph shows about the current ratio and quick ratio of MBM resource
from the year 2009 to 2013. The different between current ratio and quick ratio are the
quick ratio is excludes the inventory. Therefore it will be more precise than the current
ratio. Overall of the performance of the current and quick ratio is considered well,
27

because almost all ratios are at healthy ratio. In general, the healthy rate for current
ratio is 2 and the quick ratio is 1. So for the year of 2009, 2011 and 2013 of the
current ratios are healthy which the ratios are higher than 2 which are 3.89, 2.05 and
2.09 respectively. For the quick ratio, only year 2010 is not at the healthy ratio, other
years are consider have a healthy quick ratio.
In year 2009, the current ratio is the highest which is 3.89 compare to other
year current ratio. However, high current ratio may not always is a good signal.
Because a company with high current ratio will unable to pay its current liabilities if a
large portion of its current assets consists of slow moving or obsolete inventories.
From year 2010 to 2013, the current ratio move up and down which are 1.47,
2.05, 1.7 and 2.09 respectively. It show that for year 2010 and 2012, MBM recourse is
tend to less liquidity and maybe is they increasing in the short-term debt, and there are
no much increase in current asset. For year 2011 and 2012, MBM resource is more
liquidity and able to meet the short term debt repayment.
For the quick ratio, the movement is same as the current ratio. There is a rapid
decline from year 2009 to 2010 and rise and fall from year 2010 to 2013. Based on the
quick ratio, the lowest quick ratio is 0.91 which mean MBM resource short term
liability are more than current asset which is the most liquid assets that easily convert
to cash. On the other hand, with a low quick ratio may have fast moving inventory.
Overall of the quick ratio, it show that MBM resource has ability to pay short term
debts immediately because their average quick ratio is above 1 and they have a strong
liquidity position However, higher quick ratio does not mean that a company has a
strong liquidity position because a company may have high quick ratio but slow
paying debtors.

2.3 Recommendations for alternative


2.3.1 Bond
Our group first recommendation of financing sources to MBM Resources Bhd
is bond. Bond is a debt security issued by a corporation and sold to investors. The
backing for the bond is usually the payment ability of the company, which is typically
28

money to be earned from future operations. In some cases, the company's physical
assets may be used as collateral for bonds. The reason why Issuing bond is more
popular than issuing to stock in Malaysia is because interest on bonds and other debt
is deductible on the corporation's income tax return but the dividends on stock are not
deductible on the income tax return. A second advantage of financing assets with
bonds instead of stock is that the ownership interest in the corporation will not be
diluted by adding more owners. Bondholders and other lenders are not owners of the
assets or of the corporation. Therefore, all of the gain in the value of the assets
belongs to the stockholders. The bondholders will receive only the agreed upon
interest. This is related to the concept of leverage or trading on equity. By issuing
debt, the corporation gets to control a large asset by using other people's money
instead of its own. If the asset ends up being very profitable, all of its earnings minus
the interest will enhance the owners' financial position. In addition, the debt to equity
ratio is 26% (calculated in gearing ratio) which consider low debt company.
Therefore, it is better to issue bond compared to other debt financing and shares.
Moreover, bond has a lot of feature such as convertible and callable bond. Convertible
bond is one where the holder can convert the bond into common stock at a future time
while the callable bond is one where the issuing company is likely to retire the bonds
before maturity if the bonds are paying 9% interest while the market rate of interest is
6%.
2.3.2 Factoring
Other than bond, factoring is another source of financing MBMR should use.
Factoring is a financial transaction in which a business sells its accounts receivable
(i.e., invoices) to a third party (called a factor) at a discount. Factoring is a good short
term financing tool as it gets cash quickly and don't have to collect the debt. However,
you lose some of the value of the invoice. The factoring company gets the debt and
has to collect it. They make a profit by paying you less cash than the face value of the
invoice. Factoring can be used to get money quickly, avoid the hassle of collecting
bad debt, smooth your cash flow and borrow money, secured by your debt.
2.3.3 Retained Earnings

29

MBMR consider a stable company which paid out dividend twice every year.
This shows that MBMR choose to pay out dividend with most of its retained earnings.
We suggest that MBMR should used retained earnings as their internal source of
financing. The amount of earnings retained within the business has a direct impact on
the amount of dividends. Profit re-invested as retained earnings is profit that could
have been paid as a dividend. The major reason for using retained earnings is to
finance new investments, rather than to pay higher dividends and then raise new
equity for the new investments. The management of many companies believes that
retained earnings are funds which do not cost anything, although this is not true.
However, it is true that the use of retained earnings as a source of funds does not lead
to a payment of cash. Besides, the dividend policy of the company is in practice
determined by the directors. From their standpoint, retained earnings are an attractive
source of finance because investment projects can be undertaken without involving
either the shareholders or any outsiders. In addition, the use of retained earnings as
opposed to new shares or debentures avoids issue costs and the use of retained
earnings avoids the possibility of a change in control resulting from an issue of new
shares.
Another factor that may be of importance is the financial and taxation position
of the company's shareholders. If, for example, because of taxation considerations,
they would rather make a capital profit (which will only be taxed when shares are
sold) than receive current income, thus finance through retained earnings would be
preferred to other methods. However, a company must sometimes restrict its selffinancing through retained profits because shareholders should be paid a reasonable
dividend, in line with realistic expectations, even if the directors would rather keep
the funds for re-investing. At the same time, a company that is looking for extra funds
will not be expected by investors such as banks to pay neither generous dividends, nor
over-generous salaries to owner-directors.

30

CHAPTER 3: CONCLUSION
MBM Resources BHD (MBMR 5983) is a company under trading and service
industry in Bursa Malaysia. The company was publicly listed in 1994 and has grown
over the years by leaps and bounds. The core business of MBMR lies in the
automotive industry. With its subsidiaries and associates, MBMR is able to be a
leading dealer in the industry.The two core businesses of MBMR are automotive
distribution and retailing; and automotive parts manufacturing. MBMR also
diversified its investment in property development. Brands under MBMR included
Perodua, Daihatsu, Hino, Volvo, Volkswagen and Mitsubishi. The Chairman of
MBMR is Y. Bhg. Dato Abdul Rahim while the managing director is Mr. Looi Kok
Loon. Both of them play important roles in the development and success of MBMR.
The marketing strategies used by MBMR included multi-brand strategy which helps
MBMR to saturate the market, and also a diverse network of products and services
that enables MBMR to be the most complete automotive groups in Malaysia. The
current stock price for MBM Resources Bhd is RM 3.060, beta of MBMR is 0.37
from reuters, risk-free rate is 3.04% based on 3 month Malaysia Treasury Bill and the
market return is 14% based on the year to year total return performance of FTSE
Bursa Malaysia KLCI. MBMR has used several sources of finance to carry out its
business. The first source is equity financing. Under equity financing, MBMR issued
ordinary shares, right issues and warrant to raise capital. The second source is debt
financing. The long term debt financing used by MBMR are term loan and bank
overdraft while short term financing used are bankers acceptance and revolving
credits. The third source of financing is hired purchase.

31

REFERENCES
BNM Government Securities Yield. 2014. BNM Government Securities Yield.
[ONLINE] Available at: http://www.bnm.gov.my/index.php?tpl=489&sdate=2014-0702&lang=. [Accessed 20 June 2014].
Futures Definition | Investopedia. 2014. Futures Definition | Investopedia. [ONLINE]
Available at: http://www.investopedia.com/terms/f/futures.asp. [Accessed 20 June
2014
Malaysian Bonds Market Information, Malaysia Bonds, Islamic Bonds, Ringgit
Bonds, Asian Bonds, Bond Info Hub. 2014. Malaysian Bonds Market Information,
Malaysia Bonds, Islamic Bonds, Ringgit Bonds, Asian Bonds,Bond Info Hub.
[ONLINE]

Available

at:http://bondinfo.bnm.gov.my/portal/server.pt?

open=514&objID=27280&parentname=CommunityPage&parentid=1&mode=2&in_
hi_userid=22874&cached=true. [Accessed 20 June 2014]
MBM Resource Berhad :: Share Capital. 2014. MBM Resource Berhad :: Share
Capital.

[ONLINE]

Available

at:http://www.mbmr.com.my/Automotive/Investors/Shareholder-Information/ShareCapital/. [Accessed 20 June 2014].


MBM Resources Bhd (MBMR.KL) Quote| Reuters.com. 2014. MBM Resources Bhd
(MBMR.KL)

Quote|

Reuters.com.

[ONLINE]

at:http://www.reuters.com/finance/stocks/overview?symbol=MBMR.KL.

Available
[Accessed

20 June 2014].
Options Defined - NASDAQ.com. 2014. Options Defined - NASDAQ.com.
[ONLINE] Available at: http://www.nasdaq.com/investing/options-guide/definitionof-options.aspx. [Accessed 20 June 2014].
Primary vs. Secondary Market. 2014. Primary vs. Secondary Market. [ONLINE]
Available

at: http://finance.mapsofworld.com/capital-market/primary-vs-

secondary.html. [Accessed 20 June 2014].


Sukuk Definition | Investopedia. 2014. Sukuk Definition | Investopedia. [ONLINE]
Available at: http://www.investopedia.com/terms/s/sukuk.asp. [Accessed 20 June
2014]
32

What is U.S. Treasury Bond? definition and meaning. 2014. What is U.S. Treasury
Bond?

definition

and

meaning.

[ONLINE]

Available

at:http://www.investorwords.com/5198/US_Treasury_Bond.html. [Accessed 20 June


2014]

33

APPENDIX
Appendix 1(Beta of MBMR)

Sources: Reuters

34

Appendix 2 (Risk free rate)

Sources: BNM

Appendix 3 (FTSE Bursa Malaysia KLCI total return)

Sources: FTSE

35

Appendix 4(Analysis of Shareholdings as at 30 April 2013)

Sources: MBM Resources Bhd

Appendix 5 (share capital-warrants)

Sources: Financial Report 2013, pg 139, note 32

36

Appendix 6 (Average effective rate per annum of the borrowings)

Sources: Financial Report. pg 143, note 34

Appendix 7 (total borrowing of term loan)

37

Appendix 8

Sources: Financial Report 2013, pg 146, note 36

38

Appendix 9 (press lease on 11 Jun 2011

39

PART B: INDIVIDUAL COURSEWORK


CHEW CHIN LAP

13WBR11861
25

Development of markets
Products offered

NICHOLAS TAN PENGXI

25

13WBR10039
25

Development of markets
Products offered

VICTOR HO KAI SHENG

25

13WBR12255
25

Development of markets
Products offered

YONG QI ONN

25

13WBR10443
25

Development of markets
Products offered

25

40

Chew Chin Lap


13WBR11861
Chapter 1 Development of Capital Market in Malaysia
The capital market refers to markets for medium- to long-term financial assets.
For our purposes the capital market encompasses corporate stocks, public and private
debt securities with maturity exceeding one year, and shares with no fixed maturity
period which are traded in the stock market, the government bond market, and the
market for private debt securities. The domestic currency (ringgit) bond market has
expanded since the financial crisis, supplying some RM34.4 billion in 2000, about 85
percent, of the total net funds raised (Table 1). Low interest rates, financing for
expansion, and corporate debt restructuring all contributed to the increase in public
and private debt securities. The total value of outstanding bonds reached RM242
billion in 2000 compared to RM202.5 billion in 1999, with PDS comprising 58
percent of outstanding bonds in 2000.
Launched ten years ago, the first Capital Market Masterplan (CMP1) guided
the development of the Malaysian capital market for the period of 2001 to 2010.
CMP1 aimed to build a capital market that would be competitive in meeting the
countrys capital and investment needs and support long-term nation-building efforts.
Since 2000, the growth of the Malaysian capital market had outpaced the economy,
with the size of the capital market expanding from RM718 billion to RM2 trillion or
at an annual compounded growth rate of 11%. This strong growth was achieved
through rapid industry expansion and strong regulatory oversight that underpinned
investor confidence in the capital market. From a capital market comprising mainly
equities and government debt securities in 2000,

41

significant market segments were successfully nurtured for private debt securities and
investment management, coupled with the development of a comprehensive and
innovative Islamic capital market (ICM). Today, these market segments rank among
the leading centres in the region, broadening the Malaysian capital market landscape
and complementing a well-established stock market which provides equity financing
to almost one thousand PLCs and which has functioned as a growth platform for
many small and mid-cap companies.

1.1 Primary Market


The primary markets deal with the trading of newly issued securities. The
corporations, governments and companies issue securities like stocks and bonds when
they need to raise capital. The investors can purchase the stocks or bonds issued by
the companies.
Money thus earned from the selling of securities goes directly to the issuing
company. The primary markets are also called New Issue Market (NIM). Initial Public
Offering is a typical method of issuing security in the primary market. The
functioning of the primary market is crucial for both the capital market and economy
as it is the place where the capital formation takes place.
1.2 Secondary Market

42

The secondary market is that part of the capital market that deals with the
securities that are already issued in the primary market. The investors who purchase
the newly issued securities in the primary market sell them in the secondary market.
The secondary market needs to be transparent and highly liquid in nature as it deals
with the already issued securities. In the secondary market, the value of a particular
stock also varies from that of the face value. The resale value of the securities in the
secondary market is dependant on the fluctuating interest rates.
Chapter 2 Development of Financial Market in Malaysia
The Financial Market mainly comprises:
i) The Money and Foreign Exchange markets, and
ii) The Capital and Derivatives Markets
The Malaysia financial market is governed and regulated by the Bursa
Malaysia or the Malaysia stock exchange (MYX). Earlier known as Kuala Lumpur
Stock Exchange, MYX is the barometer of Malaysia financial market. The various
financial institutions are involved in the financial markets.
2.1 Derivatives Market
The derivatives market is for trading instruments that provide contingent
claims on underlying assets, and whose values depend on the price of the underlying
assets or securities. Bursa Malaysia Derivatives (BMD), formerly known as Malaysia
Derivatives Exchange (MDEX), came into inception on 11 June 2001 with the merger
of the Kuala Lumpur Options and Financial Futures Exchange of Malaysia
(KLOFFE) and the Commodity and Monetary Exchange of Malaysia (COMMEX
Malaysia). The name MDEX was changed to Bursa Malaysia Derivatives Berhad in
April 2004.

43

2.2 Bond Market


The bond market is the market through which both the private and public
sectors can raise funds by issuing private debt securities and Government securities
(such as Treasury bills and Government bonds) respectively. Issuance of Malaysian
Government Securities is becoming significant as the government sourced the bulk of
its financing requirements from the domestic market. The bond market has become
increasingly popular, as many companies issue private debt securities as an alternative
means for fund raising.
2.3 Foreign Exchange Market
The foreign exchange market is the market for trading in foreign currencies
against the Ringgit or against other foreign currencies. Dealings in the foreign
exchange market can be undertaken in the spot market as well as the forward market.
When the foreign currency transacted has to be delivered immediately, the foreign
exchange market is known as the spot market. On the other hand, if the foreign
currency that is traded is to be delivered on a future date, (exceeding two working
days) the market is known as the forward market. The forward market enables traders
and investors to hedge against foreign exchange risk, i.e., a way to reduce the risk of
exchange rate fluctuations. Traders and investors could also take a speculative
position on the exchange rate movement, with a view to make profits if they read the
trend movement correctly in their favour.
According to the Bank for International Settlements, the preliminary global
results from the 2013 Triennial Central Bank Survey of Foreign Exchange and OTC
Derivatives Markets Activity show that trading in foreign exchange markets averaged
$5.3 trillion per day in April 2013. This is up from $4 trillion in April 2010 and $3.3
trillion in April 2007. Foreign exchange swaps were the most actively traded
instruments in April 2013, at $2.2 trillion per day, followed by spot trading at $2.0
trillion.
2.4 Money Market
The money market is an avenue for channelling short-term funds with
maturities typically varying from overnight to those not exceeding 12 months. It
provides a ready source of funds for market participants facing temporary shortfalls in
44

funds. At the same time, it also provides short-term investment opportunities and
outlets for those with temporary surplus funds. An efficient money market is an
intermediary not only for financial institutions but also for firms and non-bank
investors to invest their surplus funds. Money market operations comprise two broad
categories: placement of short-term funds, and purchase and sale of short-term money
market instruments (such as bankers acceptances, negotiable instruments of deposit,
Treasury bills, Cagamas notes, etc.). The interbank players in the money market are
the commercial banks and investment banks.
Chapter 3 Financial Products
Chapter 3.1 Bond
3.1.1 Japanese Government Bond (JGB)
A bond issued by the government of Japan. The government pays interest on the bond
until the maturity date. At the maturity date, the full price of the bond is returned to
the bondholder. Japanese government bonds play a key role in the financial securities
market in Japan.
There are other bond like Samurai bond which is a yen-denominated bond issued in
Tokyo by a non-Japanese company and subject to Japanese regulations. Other types of
yen-denominated bonds are Euroyens issued in countries other than Japan.
3.1.2 Bank of Thailand Bonds (BOT Bonds)
Bank of Thailand bonds are debt securities issued by the Bank of Thailand and used
primarily for conducting monetary policy, managing liquidity and interest rate in
financial market in order to stabilize economic growth and setting benchmark interest
rate that helps enhance corporate debt market development.
3.1.3 US Treasury Bond
A negotiable, coupon-bearing debt obligation issued by the U.S. government and
backed by its full faith and credit, having a maturity of more than 7 years. Interest is
paid semi-annually. U.S. Treasury Bonds are exempt from state and local taxes. These
securities have the longest maturity of any bond issued by the U.S. Treasury, from 10
to 30 years. The 30-year bond is also called the "long bond." Denominations range
45

from $1000 to $1 million. U.S. Treasury Bonds pay interest every 6 months at a fixed
coupon rate. These bonds are not callable, but some older U.S. Treasury Bonds
available on the secondary market are callable within five years of the maturity date.
3.1.4 Sukuk
Sukuk is an Islamic financial certificate, similar to a bond in Western finance, that
complies with Sharia, Islamic religious law. Because the traditional Western interest
paying bond structure is not permissible, the issuer of a sukuk sells an investor group
the certificate, who then rents it back to the issuer for a predetermined rental fee. The
issuer also makes a contractual promise to buy back the bonds at a future date at par
value.
3.1.5 Malaysian Government Securities (MGS)
MGS is a long-term interest-bearing bonds issued by the Government of Malaysia to
raise funds from the domestic capital market for development expenditure.
3.1.6 Malaysia Treasury Bills (MTB)
It is a short-term securities issued by the Government of Malaysia for working capital.
3.1.7 Government Investment Issues (GII) and Malaysian Islamic Treasury Bills
(MITB)
GII and MITB is a long-term and short-term non interest-bearing Government
securities, which are issued based on Islamic principles by the Government of
Malaysia.

Chapter 3.2 Derivatives Products


3.2,1 Options
Options are contracts through which a seller gives a buyer the right, but not the
obligation, to buy or sell a specified number of shares at a predetermined price within
a set time period.
3.2.2 Futures
46

A financial contract obligating the buyer to purchase an asset (or the seller to sell an
asset), such as a physical commodity or a financial instrument, at a predetermined
future date and price. Futures contracts detail the quality and quantity of the
underlying asset; they are standardized to facilitate trading on a futures exchange.

47

References
Futures Definition | Investopedia. 2014. Futures Definition | Investopedia. [ONLINE]
Available at: http://www.investopedia.com/terms/f/futures.asp. [Accessed 20 June
2014

Malaysian Bonds Market Information, Malaysia Bonds, Islamic Bonds, Ringgit


Bonds, Asian Bonds, Bond Info Hub. 2014. Malaysian Bonds Market Information,
Malaysia Bonds, Islamic Bonds, Ringgit Bonds, Asian Bonds,Bond Info Hub.
[ONLINE]

Available

at:http://bondinfo.bnm.gov.my/portal/server.pt?

open=514&objID=27280&parentname=CommunityPage&parentid=1&mode=2&in_
hi_userid=22874&cached=true. [Accessed 20 June 2014]

Options Defined - NASDAQ.com. 2014. Options Defined - NASDAQ.com.


[ONLINE] Available at: http://www.nasdaq.com/investing/options-guide/definitionof-options.aspx. [Accessed 20 June 2014].

Primary vs. Secondary Market. 2014. Primary vs. Secondary Market. [ONLINE]
Available

at: http://finance.mapsofworld.com/capital-market/primary-vs-

secondary.html. [Accessed 20 June 2014].

Sukuk Definition | Investopedia. 2014. Sukuk Definition | Investopedia. [ONLINE]


Available at: http://www.investopedia.com/terms/s/sukuk.asp. [Accessed 20 June
2014]

What is U.S. Treasury Bond? definition and meaning. 2014. What is U.S. Treasury
Bond?

definition

and

meaning.

[ONLINE]

Available

at:http://www.investorwords.com/5198/US_Treasury_Bond.html. [Accessed 20 June


2014]
48

Nicholas Tan Pengxi


13WBR10039

The capital market refers to markets for medium- to long-term financial assets.
For our purposes the capital market encompasses corporate stocks, public and private
debt securities with maturity exceeding one year, and shares with no fixed maturity
period which are traded in the stock market, the government bond market, and the
market for private debt securities. Government securities through issues of Malaysian
Government Securities (MGS) account for the bulk of the funds raised by the public
sector. Private debt securities (PDS) are the main source of capital market funding for
the private sector, with the equity market also providing a sizeable portion through
rights issues and initial public offerings (IP0s). The domestic currency (ringgit) bond
market has expanded since the financial crisis, supplying some RM34.4 billion in
2000, about 85 percent, of the total net funds raised (Table 1). Low interest rates,
financing for expansion, and corporate debt restructuring all contributed to the
increase in public and private debt securities. The total value of outstanding bonds
reached RM242 billion in 2000 compared to RM202.5 billion in 1999, with PDS
comprising 58 percent of outstanding bonds in 2000.
The variety of capital market products and services as well as fund-raising
capacity expanded significantly, particularly during the 1990s. Up to the late 1980s
the government's funding needs dominated fund-raising in the capital market. As
49

much as three-quarters of funds raised were to finance public sector investments.


Privatisation in the late 1980s and 1990s resulted in increased financing needs among
private sector firms. The capital market expanded to meet this demand. During the
1980s and 1990s improving trading and clearing and settlement systems strengthened
the equity market. At the end of September 2000 stock market capitalisation reached
RM489 billion with 788 listed companies. A new equity exchange (MESDAQ) was
established in late 1997 to promote high-growth and technology companies.
Since the implementation of CMP1, there have been structural changes in the
channels of savings mobilisation and intermediation in Malaysia to address funding
vulnerabilities. The sources of financing have been broadly diversified in tandem with
the expansion of the Malaysian capital market. This has reduced concentration and
maturity mismatch risks as well as provided greater avenues for the financing of
large-scale projects. The diversification of financing sources through broadening the
capital market provided a prudent balance between debt and equity assets and
strengthened the resilience of the national financial system.
The rapid growth in capital market assets over the last decade reflected the
rising sophistication in financial intermediation. Deregulation and liberalisation
lowered friction costs, increased economies of scale, reduced time-to-market and
expanded distribution channels. The increased efficiencies and competitiveness
provided the basis for rapid growth of the Malaysian capital market.

During the past 10 years, stock market capitalisation grew by 11% annually to
triple in size from RM444.4 billion in 2000 to RM1.3 trillion in 2010. The exchange
landscape was transformed with the consolidation of exchanges and clearing houses.
This was followed by the demutualisation and listing of the exchange. Transaction
50

costs were substantially reduced while market infrastructure was upgraded with new
trading platforms and a shortening in the settlement cycle to T+3 in line with
international benchmarks.
The consolidation of stockbrokers also increased the soundness of capital
market intermediaries and strengthened competitiveness; with some stock broking
firms evolving into investment banks.

Primary Market
The primary markets deal with the trading of newly issued securities. The
corporations, governments and companies issue securities like stocks and bonds when
they need to raise capital. The investors can purchase the stocks or bonds issued by
the companies.
Money thus earned from the selling of securities goes directly to the issuing
company. The primary markets are also called New Issue Market (NIM). Initial Public
Offering is a typical method of issuing security in the primary market. The
functioning of the primary market is crucial for both the capital market and economy
as it is the place where the capital formation takes place.

Secondary Market
The secondary market is that part of the capital market that deals with the securities
that are already issued in the primary market. The investors who purchase the newly
issued securities in the primary market sell them in the secondary market. The
secondary market needs to be transparent and highly liquid in nature as it deals with
the already issued securities. In the secondary market, the value of a particular stock
also varies from that of the face value. The resale value of the securities in the
secondary market is dependant on the fluctuating interest rates.

51

Development of Financial Market in Malaysia


The Malaysia financial market is governed and regulated by the Bursa Malaysia or the
Malaysia stock exchange (MYX). Earlier known as Kuala Lumpur Stock Exchange,
MYX is the barometer of Malaysia financial market. The various financial institutions
are involved in the financial markets. The money market, the foreign exchange
market, the equity market, the derivatives market and the bond market collectively
make up the financial markets of Malaysia.

Money Market
The money market is an avenue for channelling short-term funds with maturities
typically varying from overnight to those not exceeding 12 months. It provides a
ready source of funds for market participants facing temporary shortfalls in funds. At
the same time, it also provides short-term investment opportunities and outlets for
those with temporary surplus funds. An efficient money market is an intermediary not
only for financial institutions but also for firms and non-bank investors to invest their
surplus funds. Money market operations comprise two broad categories: placement of
short-term funds, and purchase and sale of short-term money market instruments
(such as bankers acceptances, negotiable instruments of deposit, Treasury bills,
Cagamas notes, etc.). The interbank players in the money market are the commercial
banks and investment banks.

Foreign Exchange Market


The foreign exchange market is the market for trading in foreign currencies against
the Ringgit or against other foreign currencies. Dealings in the foreign exchange
market can be undertaken in the spot market as well as the forward market. When the
foreign currency transacted has to be delivered immediately, the foreign exchange
market is known as the spot market. On the other hand, if the foreign currency that is
traded is to be delivered on a future date, (exceeding two working days) the market is
known as the forward market. The forward market enables traders and investors to
hedge against foreign exchange risk, i.e., a way to reduce the risk of exchange rate
52

fluctuations. Traders and investors could also take a speculative position on the
exchange rate movement, with a view to make profits if they read the trend movement
correctly in their favour.

Derivatives Market
The derivatives market is for trading instruments that provide contingent claims on
underlying assets, and whose values depend on the price of the underlying assets or
securities. Bursa Malaysia Derivatives (BMD), formerly known as Malaysia
Derivatives Exchange (MDEX), came into inception on 11 June 2001 with the merger
of the Kuala Lumpur Options and Financial Futures Exchange of Malaysia
(KLOFFE) and the Commodity and Monetary Exchange of Malaysia (COMMEX
Malaysia). The name MDEX was changed to Bursa Malaysia Derivatives Berhad in
April 2004.

Bond Market
The bond market is the market through which both the private and public sectors can
raise funds by issuing private debt securities and Government securities (such as
Treasury bills and Government bonds) respectively. Issuance of Malaysian
Government Securities is becoming significant as the government sourced the bulk of
its financing requirements from the domestic market. The bond market has become
increasingly popular, as many companies issue private debt securities as an alternative
means for fund raising.

53

Financial Products

Malaysian Government Securities (MGS)


MGS is a long-term interest-bearing bonds issued by the Government of Malaysia to
raise funds from the domestic capital market for development expenditure.

Malaysia Treasury Bills (MTB)


short-term securities issued by the Government of Malaysia for working capital.

Government Investment Issues (GII) and Malaysian Islamic Treasury Bills


(MITB)
GII and MITB is a long-term and short-term non interest-bearing Government
securities, which are issued based on Islamic principles by the Government of
Malaysia.

Sukuk
Sukuk is an Islamic financial certificate, similar to a bond in Western finance, that
complies with Sharia, Islamic religious law. Because the traditional Western interest
paying bond structure is not permissible, the issuer of a sukuk sells an investor group
the certificate, who then rents it back to the issuer for a predetermined rental fee. The
issuer also makes a contractual promise to buy back the bonds at a future date at par
value.

US Treasury Bond
A negotiable, coupon-bearing debt obligation issued by the U.S. government and
backed by its full faith and credit, having a maturity of more than 7 years. Interest is
54

paid semi-annually. U.S. Treasury Bonds are exempt from state and local taxes. These
securities have the longest maturity of any bond issued by the U.S. Treasury, from 10
to 30 years. The 30-year bond is also called the "long bond." Denominations range
from $1000 to $1 million. U.S. Treasury Bonds pay interest every 6 months at a fixed
coupon rate. These bonds are not callable, but some older U.S. Treasury Bonds
available on the secondary market are callable within five years of the maturity date.

Options
Options are contracts through which a seller gives a buyer the right, but not the
obligation, to buy or sell a specified number of shares at a predetermined price within
a set time period.

Futures
A financial contract obligating the buyer to purchase an asset (or the seller to sell an
asset), such as a physical commodity or a financial instrument, at a predetermined
future date and price. Futures contracts detail the quality and quantity of the
underlying asset; they are standardized to facilitate trading on a futures exchange.

Japanese Government Bond (JGB)


A bond issued by the government of Japan. The government pays interest on the bond
until the maturity date. At the maturity date, the full price of the bond is returned to
the bondholder. Japanese government bonds play a key role in the financial securities
market in Japan.

Bank of Thailand Bonds (BOT Bonds)


Bank of Thailand bonds are debt securities issued by the Bank of Thailand and used
primarily for conducting monetary policy, managing liquidity and interest rate in

55

financial market in order to stabilize economic growth and setting benchmark interest
rate that helps enhance corporate debt market development.

56

References
Futures Definition | Investopedia. 2014. Futures Definition | Investopedia. [ONLINE]
Available at: http://www.investopedia.com/terms/f/futures.asp. [Accessed 20 June
2014

Malaysian Bonds Market Information, Malaysia Bonds, Islamic Bonds, Ringgit


Bonds, Asian Bonds, Bond Info Hub. 2014. Malaysian Bonds Market Information,
Malaysia Bonds, Islamic Bonds, Ringgit Bonds, Asian Bonds,Bond Info Hub.
[ONLINE]

Available

at:http://bondinfo.bnm.gov.my/portal/server.pt?

open=514&objID=27280&parentname=CommunityPage&parentid=1&mode=2&in_
hi_userid=22874&cached=true. [Accessed 20 June 2014]

Options Defined - NASDAQ.com. 2014. Options Defined - NASDAQ.com.


[ONLINE] Available at: http://www.nasdaq.com/investing/options-guide/definitionof-options.aspx. [Accessed 20 June 2014].

Primary vs. Secondary Market. 2014. Primary vs. Secondary Market. [ONLINE]
Available

at: http://finance.mapsofworld.com/capital-market/primary-vs-

secondary.html. [Accessed 20 June 2014].

Sukuk Definition | Investopedia. 2014. Sukuk Definition | Investopedia. [ONLINE]


Available at: http://www.investopedia.com/terms/s/sukuk.asp. [Accessed 20 June
2014]

What is U.S. Treasury Bond? definition and meaning. 2014. What is U.S. Treasury
Bond?

definition

and

meaning.

[ONLINE]

Available

at:http://www.investorwords.com/5198/US_Treasury_Bond.html. [Accessed 20 June


2014].
57

VICTOR HO KAI SHENG RFI 4


13WBR12255

Write a report on the development of the capital / financial markets in Malaysia and
how with this developments more financial products could be used by Malaysian
companies to finance operations, expand locally and in the international markets and
how it changes their choice of financing.
(1,000 words)

Capital market has grown along with the economy of Malaysia. Malaysia's
capital market expanded by 10.5% to RM2.7 trillion in 2013, underpinned by steady
growth in key markets and is considered as one of the highly developed market in the
region. Capital markets are financial markets for the buying and selling of longterm debt orequity-backed securities. These markets channel funds from surplus units
such as companies or governments making long-term investments to deficits units.
Capital market consists of primary market and secondary market. In primary
market, new stock or bond issues are sold via processes called underwriting. The main
entities seeking to raise long-term funds on the primary capital markets are
governments (which may be municipal, local or national) and business enterprises
(companies). Governments tend to issue only bonds, whereas companies often issue
either equity or bonds. In secondary market, previously issued financial
instruments such as stock, bonds,options, and futures are bought and sold to meet
investors needs.
There are various type of financial instruments in the financial market,
however for source of financing, there are mainly two types of financial instruments,
which are debt financing and equity financing. Debt financing involves borrowing
money, typically in the form of a loan from a bank or other financial institution or
from commercial finance companies. Equity financing involves bringing in investors
58

or partners who provide capital in exchange for a share of ownership of the


business.These investors or partners generally invest because they expect to make a
profit when the business becomes successful.
The examples of debt financing include money-market and bond instruments.
Money-market instruments are debt securities that have maturities ranging from one
day to one year and are extremely liquid. Treasury bills, federal agency notes,
certificates of deposit (CDs), eurodollar deposits, commercial paper, bankers'
acceptances, and repurchase agreements are examples of instruments. The suppliers of
funds for money market instruments are institutions and individuals with a preference
for the highest liquidity and the lowest risk.
Meanwhile, a bond is a security that represents a borrower's commitment to
the lender who makes funds available to the borrower. Therefore, bond investors in
effect lend a sum of money to the bondissuer that must be paid back by the specified
maturity date. The borrower must also pay the lender interest, known as a coupon. An
example of international bond is Samurai Bond. Samurai Bond is a yen-denominated
bond issued in Tokyo by a non-Japanese company and subject to Japanese regulations.
It gives issuers the ability to access investment capital available in Japan. The
proceeds from the issuance of samurai bonds can be used by non-Japanese companies
to break into the Japanese market, or it can be converted into the issuing company's
local currency to be used on existing operations.
On the other hand, equity financing refers to the process of raising capital
through the sale of shares in an enterprise. Equities are securities that represent a
fraction of their issuer's equity capital. Each shareholder is entitled to a share of the
company's earnings that is proportional to the amount of shares held and is paid out in
the form of an annual dividend. Issuing shares to public has been a common source of
financing to companies.
In addition, there is another financial instrument called derivative instruments,
which are are contracts that are used to buy or sell, at a fixed date and an agreed price,
a specified quantity of a financial instrument, or to swap cash flows at a fixed date.
Derivatives may be firm contracts or options, and traded on a regulated market or
over-the-counter. They are called derivatives because their value is derived from an

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underlying asset and varies with this asset's price. Such financial instruments may be
used to gain exposure to a given asset or to hedge the risk of this exposure.
Examples of derivatives include futures. A futures contract requires delivery of
an underlying asset at a specified date and according to specific terms. Quantities,
delivery dates and payment terms are standardized in futures contracts. The
underlying asset is delivered at the agreed price at the end of the contract. Another
example would be options. The buyer of an option acquires the right to purchase from
(call option) or sell to (put option) the option seller a given amount of an underlying
asset at a predetermined price, or to receive the difference between the option exercise
price and the underlying price, either at a specified date (in the case of a European
option) or any time before the option expires, in the case of an American option.

60

Yang Qi Onn 2RFI4 13WBR10443

Development capital market in Malaysia


A capital market is a market for securities (debt or equity), where business enterprises
(companies) and governments can raise long-term funds.
Capital market financing has developed along with Malaysia's economy. It is a
reflection of increasing income, savings and private sector demand, the amount of
funds generated in the capital market over the thirty years between 1962 and 1992
increased by Ringgit Malaysia (RM) 7.5 billion per annum.
The other services and product that support these markets also expanded, including
activities of investment management funds, stockbrokerages, advisor services. By
September 2000, Malaysia had 62 licensed stock brokerages, 32 futures broking
companies and 735 licensed futures broker representatives.
The first Capital Market Master Plan (CMP1) for the period of 2000-2010 would
go a long way in directing the development of Malaysia's capital market. CMP1
aimed to build a capital market that would be competitive in meeting the countrys
capital and investment needs and support long-term nation-building efforts. The sizes
of the capital market expanding from RM718 billion to RM2 trillion or at an annual
compounded growth rate of 11%.
CMP1 had identified a total of 152 recommendations with strategic initiatives to
strengthen fund-raising, promote the growth of the investment management industry,
enhance market and intermediation competitiveness, provide a strong and facilitative
regulatory regime and establish Malaysia as an international Islamic capital market
centre.
Primary market

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This is a market where firm issuenew securities on an exchange to the public for the
first time. The process of selling new issues to investors is called underwriting. In the
case of a new stock issue, this sale is an initial public offering (IPO).
Companies, governments and other groups obtain financing through debt or equity
based securities. Primary markets are facilitated by underwriting groups, which
consist of investment banks that will set a beginning price range for a given security
and then oversee its sale directly to investors. This also known as "new issue market"
(NIM).The function of the primary market is crucial for both the capital market and
economy as it is the place where the capital formation takes places.
Secondary market
The secondary market is that part of the capital market that deals with the securities
that are already issued in the primary market.
The investors who purchase the newly issued securities in the primary market sell
them in the secondary market. The secondary market needs to be transparent and
highly liquid in nature as it deals with the already issued securities. In the secondary
market, the value of a particular stock also varies from that of the face value.

Development of financial market in Malaysia

The Money Market


The money market is an avenue for channelling short-term funds with maturities
typically varying from overnight to those not exceeding1year. It provides a ready
source of funds for market participants facing temporary shortfalls in funds. At the
same time, it also provides short-term investment opportunities and outlets for those
with temporary surplus funds. An efficient money market is an intermediary not only
for financial institutions but also for firms and non-bank investors to invest their
surplus funds.
Foreign Exchange Market

62

Foreign exchange market is the market for foreign currency transactions against
ringgit or against other foreign currencies. Trading in the foreign exchange market can
be taken in the spot and futures markets. When foreign currency transactions, must be
delivered immediately, the foreign exchange market is called the spot market. On the
other hand, if you are trading foreign exchange is a future delivery date; the market is
called the forward market. Forward market allows traders and investors to hedge
against foreign exchange risks, namely a way to reduce the risk of exchange rate
fluctuations.
Bond Market
Bond market is issued by private bonds and government securities market to raise
funds through private and public sectors. Malaysian government securities issuance is
becoming significant as the bulk of the financing needs of the government
procurement from the domestic market. The bond market has become increasingly
popular because many private companies issue bonds as an alternative means of
raising capital.
Equity Market
The short-term money market funds, the equity market is to raise long-term funds.
Development of the equity market in favour of society, because it offers more
channels for borrowers, especially the medium-and long-term financing. The equity
market provides a channel for enterprises through issuing stocks and shares, with the
main or second board market in Malaysia stock exchange listing to raise funds.
Derivatives Market
Derivatives market for the provision of the related assets or contingent claims trading
tools, and its value depends on the price of the underlying assets or securities. The
main use of derivatives is to hedge against fluctuations in trading or price of the
underlying assets, although it is possible to use derivatives speculative capital gains.

63

Financial product
Malaysian Government Securities (MGS)
Malaysian Government Securities (MGS) is long-term interest-bearing bonds issued
by the Government of Malaysia to raise funds from the domestic capital market for
development expenditure.
Malaysian Treasury Bills (MTB)
Malaysian Treasury Bills (MTB) is short-term securities issued by the Government of
Malaysia for working capital.
Government Investment Issues (GII) and Malaysian Islamic Treasury Bills
(MITB)
Government Investment Issues (GII) and Malaysian Islamic Treasury Bills (MITB) is
long-term and short-term non- interest-bearing Government securities, which are
issued based on Islamic principles by the Government of Malaysia.
Bankers Acceptance
Through a short-term debt instruments issued by commercial bank guarantee line.
Bankers' acceptances issued by the company are part of a commercial transaction.
These instruments are similar to the Treasury bills often usedin money market funds.
Bank acceptances are traded at the nominal value of the discount in the secondary
market, which may be an advantage because bankers' acceptance does not need to
hold to maturity transactions. Bank acceptances are financial instruments often used
in international trade.
Eurobond
Issued by international syndicate, and according to which the classification of the euro
currency denominated bonds. In dollar-denominated and issued by an Australian
company Eurodollar bonds in Japan will be an example of euro bonds. In this
example, the Australian company could issue Eurodollar bonds in any country other
than the United States

64

Sukuk
An Islamic financial certificate similar to Western financial bonds that in line with
Shariah, Islamic religious law. The payment bond structure of traditional Western
interests is not allowed, Islamic bond issuers to sell an investor group the certificate,
who then leased back to the issuer for a predetermined rental fee. Issuers also make
contract commitments to buy back bonds at par future date.
Forward contract
A tailor made agreement between two parties to purchase or sell an asset at a
predetermined price on a specified future date. A forward contract can be fulfilled
either by cash settlement or delivery.
Future contract
A contractual agreement, generally make on the trading on futures exchange, to buy
or sell a particular commodity or financial instrument at a predetermined price in the
futures. Futures contracts detail the quality and quantity of the underlying asset.
Swap
A swap is an agreement between two parties to exchange cash flows over time
sequence. Under normal circumstances, when the contract began, at least one of these
series is random or uncertain variables, such as interest rates, exchange rates, stock
prices and commodity prices to determine the cash flow.

65

Reference
http://www.sc.com.my/wp-content/uploads/eng/html/cmp2/cmp2_final.pdf
http://www.tradechakra.com/economy/malaysia/capital-market-in-malaysia-167.php
http://www.ibbm.org.my/pdf/CIAFIN%20Oct%2008%20Chap%201.pdf
http://www.kpmg.com.my/kpmg/publications/tax/I_M/Chapter5.pdf

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