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Asia-PacificSeptember 3 2006

Singapore accelerates overseas acquisitions

Temasek Holdings, owned by the Singapore finance ministry, is spreading its wings in Asia, expanding its portfolio of financial services and banking assets. Simon Montlake reports.
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Constrained at home by its small domestic market, Singapore Inc is expanding its presence in Asian countries, where growth rates offer better prospects for returns. Like many investors, Singapore is looking for a piece of the action in China and India, betting on the emergence of a buoyant middle-class with more spending power, and sizing up the potential for national companies to become regional players.

In contrast to the many private lenders and corporations playing the game in Asia, the driver of Singapore’s expansion is Temasek Holdings, an investment company owned by the finance ministry. Since 2002, the pace of its overseas acquisitions has accelerated, with financial services very much in its sights. Temasek’s bank portfolio includes major lenders in India, Pakistan, China, Malaysia and Indonesia. Most recently, it acquired 11.55% of Standard Chartered, paying about $4bn.

Sector choice

The pursuit of banking assets across Asia dovetails into Temasek’s strategic plan to gain more exposure to consumer markets in emerging economies. “Temasek has clearly decided which sectors of the market are growing, and banking is one of them. Anything that has to do with Asian consumption is worth pursuing in their eyes,” says Prabodh Agarwal, head of equity research at CLSA in Singapore.

With a portfolio valued last year at $63bn, Temasek has a strong presence in Singapore, including a controlling stake in DBS Bank, the biggest lender in south-east Asia. The shift towards overseas assets is part of a long-term goal to invest one-third of its capital in emerging Asia, one-third in the Organisation for Economic Co-operation and Development economies and one-third in Singapore. Last year, Singapore’s share of the mix dipped below 50% for the first time.

This strategy has spurred on Temasek to hire more outside talent, including Charles Ong, its chief investment officer, who was headhunted from Deutsche Bank. About one in four of its staff are non-residents of Singapore, although its CEO, Ho Ching, is a Singaporean resident married to Prime Minister Lee Hsien Loong (see Karina’s Kolumn, page 16).

Thai minefield

Despite this expertise, Temasek stumbled into a political minefield in Thailand this year, when it paid $1.9bn to acquire Shin Corp, the telecommunications group founded by Prime Minister Thaksin Shinawatra. The tax-free deal provoked a backlash against Dr Thaksin, who has since been fighting to save his political career (see page 26). His opponents led a boycott of Shin Corp companies and rallied outside the Singaporean embassy in Bangkok, although the campaign has had a limited impact.

Temasek officials have repeatedly insisted that Shin Corp was a purely commercial deal without political overtones. But the failure to calculate the political risk involved in buying such a strategic asset in Thailand has raised eyebrows among investment bankers who are schooled in the intricacies of negotiating deals in rough-and-tumble markets.

As the protests in Bangkok showed, some find it hard to untangle the relationship between Temasek and the Singaporean government. But the government association may be a bonus when it comes to foreign banking acquisitions, according to Jimmy Phoon, senior managing director of investments at Temasek.

“One of the concerns of the financial services sector is how stable the shareholder is. And this has actually worked to our advantage, particularly in the period after the Asian financial crisis. Many institutions had balance sheet problems and one of their key considerations was the financial stability of the investor,” he told the Straits Times newspaper in July.

Enviable balance sheet

With its Standard & Poor’s (S&P) credit rating of AAA, Temasek certainly has an enviable balance sheet with which to grow its investments. While the recent spurt in foreign acquisitions has increased its exposure to more volatile markets such as India, a modest sell-down of Singapore assets has kept down borrowing and maintained a healthy gearing, say ratings analysts.

The emphasis on equity returns has also helped to maintain a balance between growth assets and cash generation, says Greg Pau, director of corporate and infrastructure ratings at S&P in Singapore. “Temasek only buys companies that are revenue generating, and it does not go into green-field projects that won’t make a return for four or five years. So you have immediately got cash coming in,” he says.

Temasek’s track record on investments has drawn some criticism at home. Between 2000 and 2005, its compounded annual return was 1%, compared with an average 2.7% on Singapore’s stock market, where most of its equity holdings are listed. On the other hand, as an unlisted company, Temasek can pursue acquisitions for long-term gain without worrying about short-term market reactions.

China is a case in point. Temasek is the largest overseas investor in Chinese banks, one of many players drawn by the promise of access to the country’s estimated $1700bn in savings. Through its subsidiary, Asia Financial Holdings, Temasek has minority stakes in Bank of China, China Construction Bank and Mingsheng Bank, a small privately owned lender.

As investors have scrambled to buy shares in newly listed Chinese banks, the value of Temasek’s stakes has risen considerably. Despite lingering concerns over risk management in China’s decentralised banking sector, investors such as Temasek have profited handsomely from the surge in equity value.

Foreign banks typically tie up with Chinese lenders in the hope of getting an inside track on the banking sector, while sharing expertise and products with their partner. Some may be hoping that the current 25% cap on foreign ownership will eventually be eased, although analysts say this appears unlikely for large state-owned banks, such as Bank of China.

With its single-digit equity stakes, Temasek cannot expect to exert any significant management control over its Chinese banking assets, but will be content to watch its investments grow. By contrast, it has acquired controlling stakes in two large Indonesian lenders: Bank Danamon and Bank Internasional Indonesia. And in Pakistan, it has a majority stake in NIB Bank, and has brought in a new management team.

Hands-on approach

This flexibility as an investor is cited as one of Temasek’s strengths as it spreads its wings. “Temasek is a hands-on investor. It will take strategic stakes and it would like to have control, if possible. But regulators in some markets prevent foreigners from taking control of banks, so the next best thing is to take a large minority stake,” says Mr Agarwal.

Indonesia is considering tightening the rules on foreign holdings in banks in a bid to promote consolidation in the sector. Its central bank said in July that it may bar foreign investors from holding dominant stakes in more than one bank, a move that would affect Temasek and its Malaysian counterpart, Khazanah Nasional. Two Singaporean banks, United Overseas Bank and OCBC, also have equity stakes in more than one Indonesian lender.

Ironically, while Temasek is taking advantage of privatisations in Asia, its own government has shown little inclination to sell its prize assets at home. Temasek was created in 1974 to own and manage Singapore government investments, and today controls many of Singapore’s largest companies, including the national airline and dominant telephone carrier.

As Temasek rebalances its portfolio to favour overseas investments, both in emerging economies and developed countries, its strength at home will continue to underpin its financial profile. “It has a very strong balance sheet. It has sold stakes recently in some Singapore entities, but it also has a large portfolio in others. Its asset base is so large that it can tap these to make new investments,” says Elizabeth Allen, vice-president of corporate ratings at Moody’s in Hong Kong.

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