CSC STEEL HOLDINGS BERHAD
180, Kawasan Industri Ayer Keroh,
75450 Melaka, Malaysia
8th Nov. 2016
ATTN: MESSRS. CHEN HUO KUN / JUANG DER FENG
VISIT TO CSC STEEL HOLDINGS BERHAD ON 3RD NOVEMBER, 2016
Re: Various Matters
On behalf of the visiting group, namely Tan Kit Pheng, Yap Sung Pang, James Ong, Tey Kok Shin and Lee Soo Seng, (we own a total of more than 30 million CSC Steel shares), I would like to thank you for the hospitality extended to us during our visit to CSC Steel HQ on 3rd November, 2016. Our trip was very informative as it deepens our understanding of nature of business of CSC Steel.
I would like to congratulate the group for their excellent achievement in the past. The above meeting gave me a first-hand impression of how much CSC Steel could do to maximise the wealth of shareholders.
As discussed, the management should seriously consider employing professionals who have gone through the corporate exercises before. This facilitates the management to undertake the following corporate exercises which in turn will double or triple CSC Steel’s market capitalisation in the near future. Please find below my recommendations for your kind perusal and actions.
- EMPLOYEE SHARE OPTION SCHEME (ESOS)
CSC Steel should firstly consider establishing a system to motivate and reward their staff. As per Bursa Malaysia’s guidelines, listed companies can apply for the issuance of Employee Share Option Scheme (ESOS) up to 10% of issued share capital. The MD is usually the biggest beneficiaries of ESOS (20%), and remainders 80% will be distributed to all other staff in accordance with their positions and years of services in the company. ESOS is normally valid for 5 years from the date of issuance. If the exercise price is fixed at 2.00 and the share price has gone up to RM4.00 within the next 5 years, all staff can subscribe ESOS and make 100% profits.
- ISSUANCE OF BONUS SHARES
In addition, CSC Steel should also consider the issuance of bonus shares which is an issue of free additional shares to the existing shareholders of the company in direct proportion to their existing shareholding in the company. For instance, a 1-for-4 Bonus Issue will entitle an existing shareholder to receive 1 Bonus Share at no cost for every 4 ordinary shares held. While Bonus Issues result in an increase of shares in circulation, existing shareholders continue to retain their proportionate ownership in the company.
From my long experience, your share price will immediately goes up by about 25% because shareholders would not sell their holdings with the prospect of getting 1 share for every 4 shares they are holding.
Management must realize that the company is like giving out cash to all the shareholders including the controlling shareholder in Taiwan without actually costing any money to the company. It is like the Government Bank Negara has given your company a license to print money.
- DIVIDEND POLICY
CSC Steel is the only CRC producer who are able to pay dividend consistently year after year since 2006. CSC Steel shall establish a dividend policy by declaring say 50% of the net annual profit after tax. This enhances shareholders’ confidence in the company and will attract the attention of the institutional investors that include Employees Provident Fund (EPF) and Tabung Haji.
- PRIVATE PLACEMENTS
History has shown that share price will rise more quickly if corporate exercises that include bonus issues/split shares/free warrants are carried out.
When the share prices have gone up, CSC Steel can leverage on them by selling more shares via private placement so that CSC Steel have funds to do expansion or acquire a new subsidiary. CSC Steel has the “license for printing money” as allowed by Bursa Malaysia. As per Bursa Malaysia’s regulations, all listed companies are permitted to sell 10% additional shares to institutional investors every year. In this regards, CSC Steel can issue 37mil new shares to an institutional investor(s). The fresh funds CSC Steel raise can be deployed to acquire new subsidiaries of similar businesses in Taiwan & Vietnam.
- BUY BACK OWN SHARES MORE AGGRESSIVELY
At present, CSC Steel has the cash and cash equivalent of RM320mil. The income interest is too small for shareholders. CSC Steel should acquire a subsidiary of similar businesses which can give shareholders earnings more than interest income.
CSC Steel’s Assistant Vice President Mr. Juang pointed out that CSC Steel prefers to play safe given the market volatility in steel industry.
Because of this, the best way to put the cash RM320mil to work is to buy back your own shares more aggressively. Bursa Malaysia allow all listed companies to buy back their own shares not more than 10% of total outstanding shares every year. The shares bought back can then be cancelled thus increasing the Earning per Share in the process. Nothing is safer than buying back own shares.
The last time CSC Steel bought back own share was 22 August 2016 at RM1.48. I suggest the company to buy back own share more aggressively. If the company bought back 10% of the total issued shares and cancelled them, every shareholder would literally richer by 10% for doing nothing.
It is worth noting that the above corporate exercises will not only increase CSC Steel’s market capitalisation but it will also benefit every stakeholder that include CSC Steel’s employees and shareholders. I firmly believe with your excellent management, the above said objectives are attainable.
I look forward to hearing your favourable reply soon. Should you have any queries re the above, please do not hesitate to contact me.
Koon Yew Yin