Friday, 30 August 2019

Is the Music Industry a “Sunset” Industry?

According to the Global Music Report 2019 by International Federation of the Phonographic Industry (IFPI), in 2018, the global recorded music market grew by 9.7%. It is the fourth consecutive year of global growth and the highest rate of growth since IFPI began tracking the market in 1997.

Decades ago, people often said that the music industry was a sunset industry.  The introduction of cheap compact disk (CD) duplicating machines and digital audio coding format such as MP3 had led to the growth of piracy in music recording.  In a 2007 policy report by Institute for Policy Innovation, the estimated loses due to piracy were:

·       $12.5 billion in total output annually. Output includes revenue and related measures of economic performance.
·       the U.S. economy loses 71,060 jobs. Of this amount, 26,860 jobs would have been added in the sound recording industry or in downstream retail industries, while 44,200 jobs would have been added in other U.S. industries.
·       U.S. workers lose $2.7 billion in earnings annually. Of this total, $1.1 billion would have been earned by workers in the sound recording industry or in downstream retail industries while $1.6 billion would have been earned by workers in other U.S. industries.
·       U.S. federal, state and local governments lose a minimum of $422 million in tax revenues annually. Of this amount, $291 million represents lost personal income taxes while $131 million is lost corporate income and production taxes.

The music industry continued to lost ground from 2001 to 2014, especially in the form of Physical sales such as CD and Vinyl.  This, however, started to reverse in 2015.  The revenue of online streaming grew nearly 460% in just 4 years! 

Several factors have contributed to the reversal of the declining trend.
1.     More users are listening to music online thanks to cheaper online cost.  Coupled with the advancement of technology has made the detection of pirated content online easier.
2.     User friendly interface by music platform provider such as Spotify, YouTube and Apple Music enabled on-demand streaming.  Users can create their favourite playlists easily.
3.     Artificial intelligent (AI) suggested contents are fulfilling.  Users have broader access to the music genre that suits their taste.
4.     Subscription based provides cheaper solution than buying physical forms.
5.     Larger user based from various part of the world.
6.     Royalty collections is more transparent thanks to online streaming.  Data are readily available.
7.     Stronger authority enforcement on countering piracy contents.
While many people relate music industry to music distribution platform such as Spotify, Apple Music and YouTube, they are just part of the value chain.  A basic music industry framework could be depicted as:

Music must be created, produced, manufactured, reproduced, and distributed in order to reach a consumer, thus constituting the value chain, defined as “a sequence of activities during which value is added to a new product or service as it makes its way from invention to final distribution” (Botkin & Matthews, 1992 cited in Waltman, 2011, p. 26).

The “Creation” block consists of artists, composers, musicians and producers; the “Production” block consists of music labels such as Universal Music Groups, Sony Music and Warner Music Group while the “Dissemination” block consists of YouTube, Apple Music and Spotify etc.

This series of “How to Value Music Industry?” will analyse each block in the value chain, providing valuation opinion of each segment in the music industry.  Last but not least, to identify the investment opportunities in the music industry.  Stay online!


Thursday, 29 August 2019

7 Simple Things To Do!

There are so many diversionary issues that seem to confuse leaders and people alike. Some of these require not much wisdom or courage just to fix it. And what could these be?

1.         Zakir Naik – a caustic, spiritually arrogant Indian citizen who needs to be deported;

2.         “Khat” – please defer its implementation;

3.         Lynas – waste disposal should go back to Australia or please close the company; no foreign investor will be impacted by its closure;

4.       Cost of living – prices of basic food items cannot increase sharply almost every month. Granted inflation is benign by official figures;

5.      Zero tolerance for not complying with traffic rules – those who “Bermaharajalela” on the road need summons, reprimand or counselling. It is time for authorities to haul-up traffic offenders that beat traffic lights, ride on wrong side of the road and commit other traffic offences. Then there are those who throw their rubbish indiscriminately, even from their cars for others to collect. Heavy fine should be imposed on them.

6.         Resolve “flash” floods – it is always in the same places, the same areas of the road that water collects after a heavy downpour. Why can’t authorities find ways to improve drainage?

7.         Traffic “pincers” – it is incredible that after paying toll, one is subjected to a gridlock – LDP Puchong, NPE, SMART and others all have issues. There are several common sense solutions but the standard operating procedure is to form a “Jawatankuasa”, then wait for several months for a laporan “Kajian Terperinci”.

We can all make a difference but leadership and political will is required to resolve some of the above. There are more onerous and challenging ones like reform of the legislature or judiciary. But this rightly will take more time. In the meantime, do the simpler ones, at least from my standpoint!

Wednesday, 28 August 2019

Will Asia’s Consumers Be A Force in the Global Economy?

The short answer is Yes! Over the last two decades, global poverty has dropped dramatically. About 1.2 billion people have been propelled into the consuming class, i.e. an income level at which they can make significant discretionary purchases. This is according to McKinsey Global Institute’s report. By 2030, more than half of global consumption growth will be from Asia.

The Asian middle class will be 3 billion strong. South-east Asia will have 163 million households in this consuming class by 2030. The highest impact will emerge from Indonesia.

The Asian region is one of the most important markets for international companies. Asians have long had a preference for foreign luxury goods and brands. But this is changing. The post ‘90s generation is starting to lose bias against domestic brands – they are starting to choose local brands over foreign ones.

The most striking consumption has occurred in China. Growing wealth in China has created an affluent class of aspirational consumers accounted for one-third of global spending on luxury goods and McKinsey anticipates this will double by 2025.

Exhibit 1

Not only growth but dynamic changes as new consumers move past basic purchases to new brand loyalties and indulgences that express their fashion and style. Companies need to meet ever-high expectations which will set trends for the rest of the world.


Asia’s future is now, McKinsey Global Institute, July 2019

Tuesday, 27 August 2019

Is Asia Shaping the Future of Digital Innovation?

A recent (July 2019) McKinsey Global Institute study suggests Asia is “online and booming”. It accounts for half (2.2 billion) of world’s internet users, with China and India accounting for one-third.

Exhibit 1

China, Japan, South Korea and Singapore are among the most digitally advanced nations in the world. Three of China’s internet giants – Baidu, Alibaba and Tencent – are building a rich digital ecosystem growing beyond them.

China now ranks second only to the United States in terms of start-up investments. Asia now accounts for nearly half of the global investments (Exhibit 2). This is especially in virtual reality, autonomous vehicles, 3-D printing, robotics, drones and AI. 

Exhibit 2

As of April 2019, Asia was home to one-third of world’s 331 “unicorns” (start-ups valued at more than USD1billion). Of this, 91 are in China, 13 in India, 6 in South Korea and 4 in Indonesia. By comparison, the U.S. is home to 161 unicorns, U.K. has 16 and Germany has 9.

China has made AI development a strategic priority. South Korea and Singapore have major national initiatives to build AI capabilities. Japan has announced new courses in its universities and technical schools to produce 250,000 graduates annually.

So Asian countries are breaking into forefront on innovation and technology. What about Malaysia? Have we introduced new courses in schools, colleges and universities in AI and robotics? Do we provide the ecosystem for start-ups to be unicorns? Or, do we see “khat” as the answer?

Asia’s Future is Now, McKinsey Global Institute, July 2019

Monday, 26 August 2019

Malaysia’s RM1.09 tril Debt and Liabilities

Recently the Special Parliamentary Select Committee on Budget confirmed that outstanding government debt and liabilities stood at RM1.09 trillion. This was confirmed by the chairman of the committee Datuk Seri Mustapa Mohamed. The latest findings of the government’s debt and liabilities are in line with the accrual released by the International Monetary Fund (IMF). The government saw an increase in total debt and liabilities in 2018 as compared to 2017 due to higher government guarantees borne and federal debt.

Source: The Edge

Federal Debt rose to RM741.05 billion at end-2018 compared to RM686.84 billion the previous year. This represents 51.2% of Malaysia's gross domestic product (“GDP”) as compared to 50.1% of GDP in the previous year. The increase was attributed by higher GIIs and MGS issuances. The primary purpose of Federal debt instruments is to provide funds for development expenditure needs after taking into account the operating surplus and also to refinance maturing debt.

Federal Debt encompasses of the following:-

2018 Amount (RM’billion)
          2017 Amount                    (RM’billion)
Malaysian Government Securities (“MGS”)
Malaysian Treasury Bills (“MTB”)
Government Investment Issues (“GIIs”)
Treasury Housing Loan Fund
Offshore Borrowing

Total Federal Debt

The table below explains the debt legislative and administrative guidelines on Federal Debt instrustments.

Based on the 2019 Budget, the Federal Government gross borrowing requirements are anticipated to be higher for deficit financing and refinancing of mature papers. Approximately a total of RM70 billion is expected to mature this year.

Government guarantees borne on the other hand saw an increase from RM102.1 billion to RM132.7 billion in 2018. The Federal Government may have to step in for some of the government guarantees borne as these projects are unable to generate sufficient revenue to repay the principal and interest of the sukuk issued.

Source: The Edge

The Federal Government will have to explore ways to manage the Federal debt and government guarantees in the coming years. One approach that the government has done this year is to tap the international bond market instead of the domestic bond market. The government issued a Samurai bond in March this year. An issuance size of 200 billion yen (approximately RM7.3 billion) was issued in March and the proceeds were used to finance infrastructure development. 

The government is looking into setting a ceiling for government guarantees on public projects. The Prime Minister mentioned last month (in his speech) that the government is looking into this approach as currently there is no limit on the amount of guarantees given by the Federal Government.

Source: Budget Info 2019, Treasury Malaysia;
What is in Malaysia’s RM1.09 tril debt by The Edge, 18th July 2018; and
PSC confirms govt debt, liabilities at RM1.09 trillion at 2018 year-end by the Star newspaper, 17th July 2018

Friday, 23 August 2019

CFA Institute Investment Foundations Program: Chapter 10 – Equity Securities (Part IV)

In a previous article, we introduced the CFA Institute Investment Foundation Program (Read more here).  It is a free program designed for anyone who wants to enter or advance within the investment management industry, including IT, operations, accounting, administration, and marketing.  Candidates who successfully pass the online exam earn the CFA Institute Investment Foundations Certificate.

There are total of 20 Chapters in 7 modules, covering all the essential topics in finance, economics, ethics and regulations.  This series of articles will highlight the core knowledge of each chapter.

Chapter 10 provides an overview of equity securities. The learning outcome of chapter 10 is as follows:
·       Describe features of equity securities;
·       Describe types of equity securities;
·       Compare risk and return of equity and debt securities;
·       Describe approaches to valuing common shares;
·       Describe company actions that affect the company’s shares outstanding.

Valuing common shares is a complex process because of their infinite life and the difficulty of estimating future company performance. There are three basic approaches to valuing common shares:
·       Discounted cash flow valuation
·       Relative valuation
·       Asset-based valuation

Analysts frequently use more than one approach to estimate the value of a common share. Once an estimate of value has been determined, it can be compared with the current price of the share, assuming that the share is publicly traded, to determine whether the share is overvalued, undervalued, or fairly valued.

The discounted cash flow (DCF) valuation approach takes into account the time value of money. This approach estimates the value of a security as the present value of all future cash flows that the investor expects to receive from the security. This valuation approach applied to common shares relies on an analysis of the characteristics of the company issuing the shares, such as the company’s ability to generate earnings, the expected growth rate of earnings, and the level of risk associated with the company’s business environment.

Common shareholders expect to receive two types of cash flows from investing in equity securities: dividends and the proceeds from selling their shares. The following example illustrates the application of the DCF approach, using estimates of dividends and selling price, for a common share of Volkswagen.

The relative valuation approach estimates the value of a common share as the multiple of some measure, such as earnings per share (EPS) or revenue per share. The multiple is determined based on price and the relevant measure for publicly traded, comparable equity securities. The key assumption of the relative valuation approach is that common shares of companies with similar risk and return characteristics should have similar values. Relative valuation relies on the use of price multiples of comparable, publicly traded companies or an industry average.

One multiple commonly used in relative valuation is the price-to-earnings ratio (P/E), which is the ratio of a company’s stock price to its EPS. For instance, a publicly traded company that generates annual earnings per share of $1.00 and is trading at $12 per share has a P/E (or price-to-earnings multiple) of 12. The following example illustrates two applications of the relative valuation approach.

The asset-based valuation approach estimates the value of common stock by calculating the difference between the value of a company’s total assets and its outstanding liabilities. In other words, the asset-based valuation approach estimates the value of common equity by calculating a company’s net asset value. The asset-based valuation approach implicitly assumes that the company is liquidated, sells all its assets, and then pays off all its liabilities. The residual value after paying off all liabilities is the value to the shareholders.

The DCF valuation approach relies solely on estimates of a company’s future cash flows and implicitly assumes that the company will continue to operate forever. In contrast, the asset-based valuation approach implicitly assumes that the company will stop operating and essentially provides a liquidation value.

The relative valuation approach does not estimate future cash flows but instead uses price multiples of other comparable, publicly traded companies to arrive at an estimate of equity value. These price multiples rely on performance measures, such as EPS or revenue per share, to estimate value. The relative valuation approach implicitly assumes that common shares of companies with similar risk and return characteristics should have similar price multiples.

Companies undertake major changes as they grow, evolve, mature, or merge with another company. Some of these changes result in changes to the number of common shares outstanding—the number of common shares currently held by shareholders. Various corporate actions can affect equity outstanding:
·       Selling shares to the public for the first time (when a private company becomes a public company), referred to as an initial public offering (IPO)
·       Selling shares to the public in an offering subsequent to the initial public offering, referred to as a seasoned equity offering or secondary equity offering
·       Buying back existing shares from shareholders, referred to as a share repurchase or share buyback
·       Issuing a stock dividend or conducting a stock split
·       Issuing new stock after the exercise of warrants
·       Issuing new stock to finance an acquisition
·       Creating a new company from a subsidiary in a process referred to as a spinoff

Sample question:

Which of the following corporate actions would decrease a company’s number of outstanding shares? free polls

Thursday, 22 August 2019

The Dark Side of Leadership

The dark side of leadership is defined as “an ongoing pattern of behaviour exhibited by a leader that results in overall negative organisational outcomes based on the interactions between the leader, follower and the environment”, Semann & Slattery, leadership coaching consultants.

That’s a mouthful! But spectacular organisations like WorldCom, Enron and Lehman Bros have shown the dark side of leadership as much as our very own 1MDB. Between 50-70% leaders do not perform well or experience leadership failure (Hogan & Kaiser, 2005). Most leadership literature focuses on heroic leaders or those exhibit traits, characters that one would emulate to improve an organisation. Few focus on flawed character, incompetence or unethical behaviour.

Leaders may exhibit the dark side of leadership due to a range of factors. Kellerman (2004, 2005) argues that ineffective or unethical leadership is the cause. Others argue that it is a personality disorder (Benson & Hogan, 2008; Goldman, 2006); corruption of charisma; lack of emotional intelligence (Hogan & Hogan, 2002) or just non-leadership. Regardless, long-term outcomes are largely negative and may result in workplace bullying, harassment, decreased productivity, conflict, theft and unethical behaviour.

Kellerman argues that leaders who are incompetent have a cautionary approach to organisational growth and fail to deliver. Inertia may lead to significant damage when external shocks paralyse response. Charisma and narcissism can also poison organisations. Charismatic leaders who exhibit dark side of leadership can become blinded by their own vision and power. Narcissism has four main themes – entitlement; arrogance; self-absorption; and, authority. These connected with abuse of power and lack of empathy create a toxic culture. That’s seen in Governments led by authoritarian, autocratic leaders or companies owned by self-absorbed individuals or select family groups.

By understanding the dark side of leadership from past failures, current leaders then have an ability to limit long-term negative outcomes for stakeholders and organisations. And then perhaps try to change the result by renewal and transformation.


Colin Slattery, The Dark Side of Leadership: Troubling Times at the Top, Semann & Slattery

Wednesday, 21 August 2019

Does Debt to GDP Matter?

In more recent months, it has become fashionable for U.S. economists to argue that America’s growing public debt is not a problem but something to be embraced.

Lawrence Summers and Jason Furman of Harvard penned a recent article “Who’s Afraid of Budget Deficits?”, where they argued that debt reduction should not be a priority. The Tory Government in the U.K., especially under George Osborne, the former Chancellor, used to cut expenditure to balance books. And they failed miserably!  

Olivier Blanchard, former IMF chief economist, views debt is sustainable when the risk-free interest rate is below the economy’s growth rate.

The U.S. Congressional Budget Office (“CBO”) projects USD 900 billion deficit in fiscal 2019. As at February 2019, U.S. debt level was USD 22 trillion. CBO expects by 2029, debt will increase to USD 28.7 trillion or 93% of GDP.

In 2009, Reinhart and Rogoff documented eight centuries of financial crises. Excessive debt accumulation was the cause for slower economic growth (long-term) as they argued. Once debt reaches more than about 90% of GDP the risks of a large negative impact on long term growth becomes highly significant.

A study by the World Bank found that if debt to GDP ratio of a country exceeds 77% for an extended period of time, it slows economic growth.

Meltdowns, in various countries, share some common themes and these include:
·       huge capital inflows are a precursor to a crisis;
·       wave of financial innovation leads to crisis; and
·       financial liberation precedes a crisis.

What about Malaysia?

Malaysia’s external debt (Federal government, corporates and banks) stood at RM924.9 billion or 64.7% of GDP as at end December 2018, according to Bank Negara Malaysia (Star, Feb 14, 2019). Of this, one-third is denominated in Ringgit while the balance is subject to fluctuations in exchange rate. It is therefore useful to monitor debt levels more closely and take steps not to exceed a threshold of say, 75%.

Breakdown of Foreign Currency-Denominated External Debt (% Share)
Source: BNM Quarterly Bulletin (Fourth Quarter 2018)


1.     Caroline Baum, Opinion: Does debt matter? It doesn’t until ... it does
2.     Why the $22 trillion national debt doesn’t matter – here’s what you should worry about instead
3.     Carmen M. Reinhart & Kenneth S. Rogoff (2009), This Time Is Different, Princeton University Press