Transcript of Questions and Answers from the TR Media Conference, 26 August, 2008, Singapore
Temasek Holdings spokespeople present:
• Michael Dee, Senior Managing Director, International
• Manish Kejriwal, Senior Managing Director, Investment, International & India
• Lao Tzu Ming, Managing Director, Risk Management
• Nagi Hamiyeh, Managing Director, Investment
Q (Bloomberg): What are your actual
profit numbers, stripping out the divestments? Are you
looking at a better year for core operations or have
you been affected by the market, as you talked about
the 7% returns?
Michael Dee:
We do not specifically break the $18 billion
down but we can say fairly clearly is that the operating
performance of the portfolio companies has generally
been very strong by looking at the underlying entities.
Q (Newsweek):
Please explain the negative wealth added figure of -$6
billion. Could you explain what it means and how important
this figure is?
Michael Dee: It is meant
to say what is the return on your capital, above a hurdle
rate. The TSR is a measure of returns, which is not
measured against a benchmark rate of return. TSR is
an absolute number – 7%. Wealth added is what
is our return relative to the cost of capital. If we
exceed that cost of capital in our returns, then we
have a positive wealth added such as we have had in
the last four years.
If we don’t make that hurdle rate
of return, then it would be a negative number. Keep
in mind that as you show positive wealth added over
time, the bar goes up each time and makes it more difficult
to get over that hurdle. So, that’s why you will
see over time, periods of positive wealth added and
negative wealth added. And what we focus on is the cumulative,
which as I mentioned, is positive.
Q (Newsweek): And what is the
reason for the negative wealth added figure?
Michael Dee: It is not
hitting the cost of capital target.
Q (Financial Times): Getting back
to that capital injection question again, was that the
single largest capital injection that had been made
by the Finance Ministry since 1974, and when was it
made?
Michael Dee: It was
made in April of 07, I don’t know if that was
the largest or not. It‘s decided by our shareholder,
not by Temasek board. When we raise capital, from whatever
source it comes from, it’s not geared to any particular
investment. It simply goes into the investment pool,
so, whether we go out and borrow money from the capital
markets through a divestiture, receive the dividend
from one of our portfolio companies, or receive an injection
from our shareholder, it’s not for any particular
investment. It simply has become part of the aggregate
investment pool.
Q (Economic Daily, China): My
question concerns risk management. When you make your
investments in China , what are the main factors considered
by your company?
Lao Tzu Ming: Basically, we start off by looking at the economic fundamentals, and then we employ a multi-disciplinary team to look at the financial, commercial, regulatory, legal, tax, etc. - all the key components to assist us in making the decision. And when we are satisfied that the criteria match, we'll then make the investment. We'll also decide on the deal structure, and also the manner in which we invest.
During the holding period, we look at
whether circumstances have changed, whether the assumptions
we used before we made the investment are still holding
true. So, we regularly review our investments, and sometimes
we increase our investments, sometimes we stay put,
other times we may divest or partially divest, but it
is over a long period of time.
Q (Newsweek): This year, for the
first time, you have more investments outside Asia than
in. Do you see that as a trend continuing for the next
couple of years?
Michael Dee: If you look back historically - two years ago, we actually had a net divestment outside of Asia . Last year our ratio of investments in Asia to investments outside of Asia was approximately 2½ to 1. I expect this statistic to be volatile over time, as we do not target that number from a management perspective. We want to be available and capable of executing high quality investments that we believe to have excellent value, no matter where they are in the world. If they happen to be outside of Asia one year, so be it. If not, we will invest where we see the best value. And that is part of our international strategy - that we are prepared to take advantage of these opportunities, wherever they are in the world.
Q (Frankfurter Allegemeine Zeitung):
One of your companies, NOL, is bidding for Hapag-Lloyd
in Germany . How important is Europe for you on your
investment agenda, as a region? And are you aware of
the risk that you are not welcomed as an investor in
some of these countries?
Nagi Hamiyeh: NOL has a Board and they do what they see fit with respect to their strategy. We have not interfered in their decision process.
Michael Dee: As with
all large investors, we believe the free flow of capital
around the world is good for everybody - good for investors
and good for investees. We work hard at our strategic
relations and our engagements to ensure that Temasek
is a welcomed investor and that people understand how
we invest and the governance model that we use, which
we believe is a good one to have.
Q (Newsweek): Do you see more opportunities
in the next couple of years in Europe, or in Asia?
Michael Dee: It’s hard
to predict, and we want to be prepared so that if we
do see the opportunity, we can act on it. That’s
the fundamental concept. Again, we don’t want
to try and say that in two years’ time, we think
X. For example, in opening our offices in Latin America
and Mexico, we would like to have people on the ground
because that could potentially give us some interesting
opportunities to look at.
Q (Reuters): You've said the credit
crisis is not over and the epicentre of the credit crisis
is the financial sector. So don't you think you are
exposed to a very volatile sector that could potentially
hurt your earnings? And with Merrill Lynch, you had
protection at the start of the investment but now you
are unprotected, so how do you see the Merrill Lynch
investment going forward?
Manish Kejriwal: In the investment world, every move we make has its own set of risks. Before we make any investment, we look at the economic risks, legal risks, strategic risks, commercial risks, and the country risk. It's a comprehensive look.
What we did at Merrill, for example, was when we invested in December; we had this mitigation instrument which was the reset clause which we reactivated, which allowed us to get average net cost down substantially.
If I elevate this more broadly to the financial sector, which was the broader part of your question, the financial services industry is one we believe in because in emerging markets like Asia, we see its growth as a proxy of economic growth, especially in China, India and Indonesia.
More recently, we've concentrated a little more in the US and UK , primarily because we see value. Unlike many others, Temasek is a long term investor, and while we cannot time these things perfectly, we can take long term perspectives, and be a long term stable shareholder in those organisations that we believe have a strong franchise, strong fundamental value and a strong leadership team.
Q (Reuters): Do you have a cap,
either a short-term or medium-term cap on the proportion
of investments in financials?
Manish Kejriwal: No,
we don't have a cap. Having said that, we are very happy
with where we are right now. If you look at the financial
sector, as a proxy of growth or that of opportunity,
and if you look at other indices around the world, a
30%, 40%, 45% concentration is relatively normal for
financial services as a sector within the total market
cap of any index.
Q (Australian Financial Review):
There’s been a lot of Chinese government money
flowing into the Australian resources sector. I’m
just wondering if you have any interest in that area,
given your returns there, whether you feel muscled out
by the activity we’re seeing from the Chinese?
Nagi Hamiyeh: The first
part of the question, if we are interested in the resource
space – absolutely. The resource space generally
has gone through an unprecedented growth, especially
on the demand side, across all the commodities. However,
we’re very cognizant of the fact that valuations
went up quite a bit.
The Chinese are very interested in the
Australian landscape because they’re ultimately
one of the biggest off-takers there. I wouldn’t
put us in the same category as the Chinese, we are first
and foremost a financial investor, and we do not have
any other objectives besides maximizing returns. So
we look at any investment in any sector opportunistically,
and if it makes sense we pursue, and otherwise we won’t
pursue.
Q (Straits Times): Your portfolio
by sector – are you satisfied with that proportion
and is the proportion likely to change?
Michael
Dee: Is the proportion likely to change? I am
sure it is. It will change over time as we see opportunities.
Right now, we are satisfied with where we are now but
you can expect that the portfolio will change over time
as we see different opportunities and position ourselves
for that.
Keep in mind that with a portfolio of
the size that we have, of S$185 billion, it’s
a bit of a battleship that is difficult to turn very
quickly. We have a very long-term view and we make sure
that the situations, the sectors and the geographies
that we go into are ones that we are comfortable with.
Q (Straits Times): You have also
mentioned that, as a broad overview, (the portfolio)
will be one-third in Singapore, one-third in OECD countries
and one-third in Asia ex-Japan. Are you on track with
that, are you satisfied with the allocation now or is
that something you’d want to change in terms of
portfolio allocation?
Manish Kejriwal: Every
investment you look at is on its own merit, and the
portfolio might change over time. We are not too predictive
about where that might go to. As an example, it’s
broadly about 30:40:30. We thought it would be a third,
a third, a third.
Over time, as new opportunities come up in different
parts of the globe, that might change. As of right now,
we are quite satisfied with where that stands.
Nagi Hamiyeh: Bear in mind that this
is merely a guideline rather than cast in stone. So,
it’s just an indication of where we see ourselves
heading.
Q (Associated Press): In your
press release, the Chairman is quoted as saying: "We
are concerned with the emerging risks of stagflation.
Opportunities may be limited in such a scenario". I
was wondering, in which countries or regions do you
see the highest risk of stagflation over the next year?
Manish Kejriwal: Looking forward, we remain prepared and aware of the risks that remain across the globe. And we literally look at it bottom-up, on an investment by investment perspective to see what we can do to maximise our return based on the risk associated with that return, to have a balanced portfolio to maximise return for our shareholder. Lao Tzu Ming: I would like to comment on the cyclical basis. What we have seen in the past 12 months is a very severe dislocation in some global markets. And if you look at any trend, in the long term, the equity market goes up rather than comes down.
The difference between a short-term trader
and a long-term investor like us is that we are not
highly geared and as a result, we can ride through the
storms. From that point of view, we are not distracted
by some short-term dislocation as long as we know that
the underlying fundamentals of our investments are sound.
If we are of the view that an investment should be divested, then we would rather divest it. From that point of view, we are actually making very definitive decisions on whether to hold or divest.
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