YTL Power produced the most inexpensive electricity per unit

The Edge Malaysia, October 19, 2009

BY JOSE BARROCK

Tan Sri Francis Yeoh Sock Ping is on the phone in his office located in the heart of Kuala Lumpur's Golden Triangle. He is engrossed in a conversation on the merits and demerits of having a disc jockey in one of his restaurants. He is clearly hands-on in the running of the billion-dollar business empire under the YTL banner, which ranges from power generation to restaurants, from the UK to Australia.

In an interview with The Edge, Yeoh shares some of his views on his companies and how they may fare over the next few years.

The Edge: Do you see a lot of assets that you want to buy at this point in time?

Yeoh: Not yet, we have to wait for the hedge funds to be forced with redemptions or banks to take a haircut before good deals can come through. It is a battle and the jury is still out on whether it will happen ... if it does not happen, the whole bubble will get carried to a different level.

What kind of opportunities do you see for YTL?

I think in areas of water. Asia needs a lot of water but it is not managing it well ... it is still a very difficult area, of not understanding water and living in denial, making water very cheap and not spending enough to fix the pipes, knowing it is so expensive to fix the pipes and hoping something happens. It's going to hit the region hard pretty soon.

Our mobile phone charges are among the most expensive in the world, but people pay ... if there is quality water, people will pay, but it is politically difficult in this region. Anyway, if you don't fix the water issue now, one day you are going to fix it very expensively. I'm talking about the whole of Asia; this is one thing that is going to haunt them. You can't deny there are opportunities in Asia.

Is it still the group's strategy to buy assets on the cheap and growing them?

If you look at our track record, look at Wessex Water or Perak Hanjong Cement or Starhill or Lot 10, it's all the same ... we bought Starhill and Lot 10 at about RM200 per sq ft (psf), now it's worth about RM2,000 psf. But that doesn't mean the market on its own is worth RM2, 000. If I didn't do Bintang Walk, it would not be worth RM2, 000, and (if we did not put in money and develop the area), the Qatar funds and Pavilion would not have been attracted to put money in this area. If we acquired it at RM200 psf but had no vision and no ideas on how to make the real estate better, it would not have appreciated so much. We know what to do with it ... this is one example of how we add value and bring up the value. When we bought Wessex Water from Enron, it was not as profitable as now. Enron thought it was not giving it enough returns ... besides Enron's own problems. When we bought it, it was below regulatory asset base (RAB) 0.9, now, it's worth £2.2 billion and there is a 30% premium on RAB, so you are talking about £2.8 billion. So, that asset alone is worth RM16 billion. And we have received a lot of dividends, and we made it the top water company in the UK the last three years in a row. We won the Queen's award for the best managed water company.

Consistently, we have asked for the least amount of tariff increase from the regulators, and we can do this due to management. When we bought Perak Hanjong, it was losing RM170 million. One year after the acquisition, we turned it around and it made RMl00 million. We did this through management. Once there is certainty of leadership and long-term owners, people get stabilised, even the unions. That is our track record ... when people settle down, they are likely to produce more. That is the secret, they know our values and they know we are very long term.

Your strategy is to own the assets for the long term and without partners?

A lot of people like to buy assets cheap and then sell them. Most people have this model, so we don't have partners who share our crazy view. Long term is an oxymoron in the investment world. Long term is three years max in the investment world. For a hedge fund, three months is max, but since our assets are 30 years and 60 years, we’ve left alone without partners to buy these assets.

But by default rather than design, and with all the cash generated, we can do more alone and there are fewer headaches and problems with management decisions than if we had partners.

You are often perceived as being a politically-linked company, especially with your independent power producer (IPP) business. Can you comment?

Our IPP in Malaysia is among the more profitable ones for a few reasons. This is because we did the first 15-year bond in Malaysia; we financed it in ringgit, which mitigated us from the Asian financial crisis at the time. If we had done it in US dolIars, we would have gone bust.

We invented the IPC (infrastructure project company) listing in the stock exchange. From that, we got RM2.1 billion. We had at that time RM1.6 billion of floating debt at 14%. So when we retired the RM1.6 billion debt at 14 %, our bottom line in the first year improved by RM200-odd million. That is why we are more profitable than others. If you had geared like us in a similar manner and done an IPC listing you would have the same results. The analysts and the newspaper seem to think we got a fat deal from Tenaga.

We are sick of that this is lack of analysis and truth. We have the most inexpensive electricity per unit. We have no inflation clauses. If you are innovative, I think your stock should have a premium. We should be awarded a premium for being able to do that. Instead, we are nailed for having a very lucrative deal against Tenaga, which is not the truth.

So your IPP is lucrative because of costs and the capital structure?

Look at our train from the airport to the city. We are doing it at RM35 million a km, other transport companies are doing it at RM150 million per km, five times the price. The difference is simple; we are not going to sell it. Look at all the other concessions, all back in the government's hands. The people who did the concessions have gone bust and sold it back to (Syarikat) Prasarana because they made all the construction profits up front and then dump the concessions.  

Our model is very long term. We are called boring. We are called many things, but we pay dividends, we give returns. We give Warren Buffet -type of returns, but the perception is we are still doing politically linked businesses.

Today, 85% of YTL's business is outside Malaysia. Do you think we saw Tony Blair to get Wessex water? Do you think we met the Australian prime minister to get Electranet? No. Do you think we met Lee Hsien Loong to get (Power) Seraya? Nothing. They were open bids. We seem to be able to work in a transparent economy. Why nail us as bagging politically lucrative deals?
 

You were pushing for a bullet train to Singapore. What is happening with that?

If you look at property prices between Paris and London, there was a 24% difference and within five years, there was almost zero differentiation. So can you imagine the value of Paris properties and the wealth introduced to Paris. The prices in Paris moved up to that of London. We have a 600 % difference between KL and Singapore. Today, we can't even sell at RM2, 000 psf. Singapore sells at about RM6, 000 to RM7, 000. All it takes is one train.

Does the Singapore government want that? Their property prices may drop.

If that was the case, they would not have let Genting invest in Singapore or let YTL own electricity assets there. Singapore is one of the world's most forward-looking economies. Singapore is very simple. They have their economic interests. They don't have an axe to grind, and they don't care about geopolitical issues. It's actually about economic survival and that is what makes Singapore great. For them, the rule of law is important. If we sign any agreement with Singapore, they will not change their minds. The sanctity of contract and law is their niche. There are a lot of things we are doing that are good but we could make it better. Like, second homes in this country are a good programme, but if you have a second home here, one of our rules is you cannot work here. Who should buy a home here? They don't do that in Spain. There are a lot of things we should think clearly about.

You have two RElTs. What are your plans for them?

Starhill Global will become the vehicle of the Starhill brand. You would expect us to do something here. Starhill Global could take the two shopping centres here and the hotels could be put into a hotel REIT. We will call it a YTL Hospitality REIT and we will own many brands of hotels like Ritz-Carlton, Marriott, many brands ... a lot of brands trust us to manage a hotel. Starhill is a very sought-after brand. We are doing something in the Bund in Shanghai. We have been approached from Amarti to Beirut to do Starhills.

Wessex Water is great. Seraya Power is an awesome power company. It's not an IPP and that's why we can have a brand in Seraya.

You have often compared yourself with Warren Buffet.

What is the difference between YTL and Warren Buffett? There's no difference. In terms of return on investment, we are just as good. Same as Buffett's track record, but Buffett does not pay dividends. We do. And even with that, we are not exciting enough.

But why is Berkshire Hathaway worth so much and why is Warren Buffett the second richest man in the world? It is the same model and I admire him as he doesn't sell his Coca- Cola stock. He bought it 20 to 30 years ago and when times were down, he bought more. He bought many companies and he grew them huge. He gets all the dividends from Coca- Cola and reinvests them for his investors. He doesn't payout dividends like us. That is the difference. I think our model is the same. I think our YTL Power, our YTL Cement and YTLe are all little Coca-Colas. If you look at Asia as an economic power house then our future is very bright as we are quite Asian-centric.

Wessex alone is worth RM16 billion, more than whole market capitalisation of YTL Power which means all the other businesses, including Seraya (Power), including Electra Net, accounts for zero, even negative value. Where are the analysts?