TUTORIAL 2: FINANCIAL ENVIRONMENT

Question 1 (Dollphin Wong Jia Nee)

Discuss the methods to differentiate between the types of financial markets.

A primary market where the fresh issue of securities are offered to the public; A secondary
market where issued securities are traded between the investors

Question 2 (Gan Jun Hui)

Discuss the functions of financial markets.

The primary function of the financial market is to move funds from surplus to deficit.In this
market, funds are transferred from the surplus units to the deficit units.For example in the
financial market the saver act as a surplus unit where they generate more income than they
spend, and have funds left over.Then,the borrowers act as a deficit unit where they generate less
income than they spend and need to acquire additional funds in order to sustain their
operations.After that,the bank is the place where bring together borrowers and savers.Then,the
funds are able to move from surplus unit to deficit units.

Question 3 (Gan Qi Jin)

Describe the primary function of each type of financial institutions: (At least 1 example to be
provided for each type of financial intermediary)

i. Commercial banks
ii. Pension funds
iii. Life insurance companies
iv. Investment banks
Answer:
i. Commercial Banks- Traditional ‘department stores of finance’ that serve a variety of savers
and borrowers. For an example, central banks expand or contract the
money supply through commercial banks.

ii. Pension Funds - The main goal of a pension fund is to ensure there will be enough money
to cover the pensions of employees after their retirement in the future. As
an example, retirement plans funded by corporations or government
agencies for their workers.

iii. Life Insurance Company- Created to provide peace of mind by assuring that financial loss
or hardship will be alleviated in the event of the insured person's
death.Example, Payment paid upon death, maturity or surrender of
policy.
iv. Investment Banks- Investment banks helps individuals or organizations raise capital and
provide financial consultancy services to them. Example, investment bank
will go through the process of due diligence to determine the value of the
company, settle the deal by helping the company prepare necessary
documents and advising it on the appropriate timing of the deal.

Question 4 (James Ng Kar Yang)

Using a diagram, explain the role of investment banks in the issuance of new shares in the
primary market and the trading of shares in the secondary market. (You may refer to lecture
slides which has animation)

Investment banks have facilitated the issuance of bonds and equity in the primary market, while
they have accelerated the buying and selling of outstanding bonds and equity in the secondary
market.Investment banks provide stock research, including the upside potential of each stock, the
downside risk, and the fundamentals that help buyers and sellers make their judgments. In
addition, investment banks sell and trade securities on behalf of clients to maximize profits.

Question 5 (Loh Jeng Fai)

Read the following 2 articles to answer Question 5(a), (b) and (c)

(5a) Mr DIY is planning to raise funds through an IPO. Identify the financial market an IPO
exists in.

Primary market

(5b) Identify the investment banks and financial services corporations shortlisted by Mr DIY
for the IPO exercise.

CIMB Group Holdings Bhd and RHB Investment Bank Bhd

(5c) Identify the investment bank identified by HELP International Corp Bhd to underwrite its
IPO. What does underwrite mean in this situation?

CIMB Investment Bank Bhd. As an underwriter, CIMB Investment Bank pledges to buy
all the unsold shares in the IPO exercise.

Question 6 (Lam Ji Shan)

Identify which financial market the following transactions took place in. Primary market or
secondary market?

Transaction Financial market

Company raises capital through IPO Primary market

Ali buys 20,000 Genting Bhd shares through his investment Secondary market
account with CIMB Securities Bhd

Mrs Lee transfers her shares in Lee Minimarket Sdn Bhd to her Secondary market
son

EPF purchased a significant number of Air Asia Bhd shares Secondary market
from Public Mutual Bhd. CIMB Investment Bhd brokered the
transaction.

1st article : Extracted and adapted from “The Star” / 4 Jan 2019 :
PETALING JAYA: Mr DIY, Malaysia’s biggest home improvement retailer, is planning to launch
an initial public offering (IPO) either in Malaysia or Hong Kong in the fourth quarter of this
year, says Creador Sdn Bhd chief executive officer Brahmal Vasudevan.

Private equity firm Creador is an investor in Mr DIY, which emerged some three years ago. It
owns an 18% stake in the company, while the remainder is held by the company’s founders.

Sources said Mr DIY is looking to raise RM1.5bil via the IPO.

The company, which is only looking to list its Malaysian business, is targeting a valuation of
RM10bil, potentially making it the 35th largest company by market capitalisation should it be
listed on Bursa Malaysia,

The home retailer is identifying underwriters and bankers, and has so far shortlisted Malayan
Banking Bhd, CIMB Group Holdings Bhd, RHB Investment Bank Bhd, Credit Suisse and JP
Morgan, added the source.

Last year, Mr DIY grew by 35% and made a net profit of RM300mil on the back of RM1.8bil in
revenue. This would put the retailer in the 47th spot in terms of profitability on Bursa Malaysia.

The listing of Mr DIY on Bursa Malaysia would boost the Malaysian capital market, which is in
need of a catalyst. In recent years, the local bourse has barely attracted big new listings.

Mr DIY’s rapid growth over the last decade can be attributed to a business model that
emphasizes affordable pricing and a wide variety of products. Mr DIY has between 10,000 and
15,000 stock-keeping units throughout its 500 stores in Malaysia.

The home retailer serves some 110 million customers a year, with an average of 10 million
customers walking into its stores per month. The company is looking to double the number of
stores in Malaysia over the next five years.

As for its international presence, Mr DIY had expanded its operations to Thailand, Brunei and
Indonesia.

From its humble beginnings in Jalan Tuanku Abdul Rahman, Kuala Lumpur, Mr DIY was
initially set up as a hardware shop in 2005, before transforming to become more all-inclusive.

From household products to electrical items, it has become the largest “department store” chain
with housewives forming the bulk of its customer base.

The company employs more than 4,000 workers, with each of its store space encompassing an
average of 10,000 sq ft.

The company retails a variety of household, hardware and electrical products. For its next
engine of growth in Malaysia, Mr DIY will be jumping on the e-commerce bandwagon.
The company has devised a comprehensive e-commerce strategy that is expected to yield a
20-time uplift in the number of online orders compared with when it launched its online store
some 14 months ago. This strategy will be launched in phases.

The company has also invested in a new 15,000-sq-ft warehouse, which is able to store more
than 20,000 products. This is a huge improvement from its previous warehouse, which was 800
sq ft.

While Mr DIY has its own webstore, it has also moved to e-commerce platforms such as Shopee
with a user base of 16 million to grow sales. It leverages on Shopee’s lower price guarantee, free
shipping programme and key campaign periods to have a competitive edge over other sellers
and attract customers.

2nd article : Extracted from “The Star” / 11 April 2007

KUALA LUMPUR: HELP International Corp Bhd (HELP Group) has picked CIMB Investment
Bank Bhd to underwrite its initial public offering and listing on the second board.

“The listing will enhance the group's corporate profile and enable us to raise capital for our
intellectual property development,” president and co-founder Dr Paul Chan said in a statement
yesterday in announcing the agreement with CIMB.

It would also fund the group's future expansion to strengthen its position as a major player.