Call of the Red Seas

Call of the Red Seas


Modest beginnings
Wealth Magazine, April 24, 2008

Like many Southeast Asian conglomerates, YTL is the product of several generations of sheer industriousness and a do-or-die sense of urgency.



Tan Sri Dato' Francis Yeoh's late grandfather, Yeoh Cheng Liam, left Fujian province in China in 1920 with not much more than a few dollars and a bag of clothes. He landed in what was then known as Malaya and found work in a timber shop. He saved up and started a timber business.



His son Yeoh Tiong Lay began working at age 13 to help pay for his siblings' education. He eventually started a construction company called Syarikat Pembenaan Yeoh Tiong Lay (Yeoh Tiong Lay Building Company) in 1955. It later became YTL, his initials.



It was not uncommon for him to take his seven children to the construction sites, and Tan Sri Francis can still recall the smell of cement.



The company's first construction projects were garrisons, army housing, hospitals and low-cost housing in Malaysia. When the energy crisis of the 1970s struck Malaysia, the business teetered at the brink of collapse as oil prices spiked about 20-fold within a brief period. The company's margins were too tiny to absorb the surge in costs.



The family's relatives and staff pawned their jewellery to keep the company afloat. For Tan Sri Francis, it was an early lesson that loyalty and staff are invaluable assets.



He was 16 at that time and was already supervising construction sites during weekends and holidays. Being the eldest of seven children, he offered to drop out of school, where he was the head boy, to help his father. The offer was sternly rejected.



The patriarch's reason presaged YTL's financial innovations in the future: Without formal training in engineering, he could not foresee the need for fluctuation clauses and other risk management techniques, he explained. Hence, the future of the company depended on Tan Sri Francis completing his education and receiving a degree in engineering.



The punctilious young man dutifully went to Kingston University in the UK and earned a degree in civil engineering. Upon his return to Malaysia in 1978, aged 24, his father appointed him Managing Director.

Today, Tan Sri Dato’ Seri Dr Yeoh Tiong Lay remains Executive Chairman and is said to have a great deal of influence over the group's direction, although his son remains the public face ofYTL. Senior executives who have worked with the group say the patriarch insists on prudence, which explains YTL's conservative approach in all deals. It may have shielded the group from the wreck of the 1997 Asian crisis, when many Asian stars fell because they had significant short-term US-dollar borrowings to finance long-term debt.




YTL Cement
Big Leagues


A year after Tan Sri Francis joined YTL as a degree-holding engineer, his father presented him with a symbol of success: A steel Rolex watch. “A Chinese businessman must have a Rolex,” Tan Sri Francis remarks with a laugh. The next year, it was a gold Rolex.



Thus far, YTL's trajectory is common to many entrepreneurial families in the region. The group could have remained a successful but indistinguishable Chinese family business, but Tan Sri Francis was not one to be content wearing construction boots and a gold Rolex for the rest of his life.



In everything he did, he sought to make a difference. His would be a life of collecting Patek Philippes, Cartier Tanks and Richard Milles, consorting with the likes of Jack Welch and Bill Clinton, and building a diversified business that rewards shareholders consistently.



YTL's entryway into the big leagues came in 1992, when Malaysia suffered a major blackout. It became clear that the national power provider, Tenaga Nasional, could not meet the demands of an economically growing country. The market was opened up to the private sector.



YTL got the country's first independent power producer (IPP) licence in 1993 and was tasked to build and operate two gas fired power plants. They were completed seven months ahead of schedule. But the IPP licence didn't come easily. It was won on the fact that YTL had previously completed several state projects, including Malaysia's first nucleus hospital, months before deadline.



When negotiating the IPP licence, YTL requested and received a deal that critics remember to this day for its audacity: Tenaga Nasional will buy 72% of YTL Power's output at S$0.07per kilowatt hour (kwh) (RMO.152 kwh) for 21 years - even if the national utility didn't need that much capacity. For YTL, it was a hedge against demand risk and a guaranteed income of nearly $500 million a year until September 2015. The IPPs that came later got far less lucrative deals.



In those days, citizens of developing countries typically paid more for electricity than people in developed nations because infrastructure financing in Third World regions like Malaysia and Indonesia came at a premium. Consumers bore the higher financing costs.



Until now, Tan Sri Francis gets incensed at the unfairness of it all. "Why should poorer nations have to pay more? It should be the other way around!" he exclaims.



Indeed, when YTL sought financing for the power plants, the major international banks demanded a premium for the political and other risks that Malaysia and the project were perceived to have. The loans would also be in US dollars, which presented exchange-rate risk for assets with revenues solely in ringgit. YTL refused the unfriendly terms.



To deliver YTL's vision - world-class services at Third World prices -Tan Sri Francis proposed a groundbreaking scheme: YTL would issue 10-year bonds in ringgit and the issue would be subscribed by Malaysia's top institutional investor, the Employee Provident Fund (EPF), a pension fund.



The government bought the idea and YTL issued $660 million {RM1.5 billion) worth of fixed-rate 10% bonds in 1994. It angered sections of the public, but it provided sufficient stability for the first IPP to operate and create a new industry.



Most importantly, it presented a viable financing model to the developing world.



This debt-financing approach became the pin-up model for many other countries wanting to privatise their utilities sectors. YTL was mentioned in every major central bank report, academic study, infrastructure conference and the like.



The Malaysian IPPs that won licences later also adopted a similar financing model. The first five raised more than $4.billion entirely from the domestic market, according to Euromoney and it defended the IPPs from the US dollar's precipitous rise against the ringgit during the Asian crisis.



Over the decades, YTL continued to innovate and surprise (critics would say annoy). In January 2007, YTL Corp raised $141 million (US$101 million) via Malaysia's first overnight sale of treasury shares. In Malaysia, treasury shares normally cannot be sold in overnight placements. But divesting 3.5% of the outstanding share capital on the market would have pressured the stock price downward.



Red Seas


But YTL doesn't win every time. In 1996, the group was given the opportunity to buy 80% of Hong Kong-base Consolidated Electric Power Asia. It would have turned YTL into Asia's largest IPP.



Tan Sri Francis managed once again, in astonishingly bold fashion to arrange for government financing. But he was outbid by a US firm. A banker who advised YTL on the deal said YTL would probably have won if it was listed and had access to the capital markets.



A year later, YTL Power launched an initial public offer, and has a current market cap of $6 billion.

YTL Corp The first to go public, in 1985 has a current market value of $5.6 billion. YTL Cement was listed in 1993 (current market cap $1.1 billion) and YTL e-Solutions a technology company, went public in 2002 (current market cap $327 million).



Starhill Real Estate Investment Trust -which contains Starhill Gallery, Lot 10, JW Marriott and The Ritz-Carlton Residenceas all in Kuala Lumpur –was listed in 2005 (current market cap $484 million). The group's total market cap is more than $13.2 billion, even during a time when the equity markets are battered out of their shells.



The group's compounded annual growth rate (CAGR) has been 55% since 1985 and dividends from all the listed units have been paid consistently each year. Tan Sri Francis often compares his group with Warren Buffett's Berkshire Hathaway, in the sense that both companies have delivered unwavering growth over long periods.



In the future, a CAGR of 20% until the year 2020 is realistic considering a relatively substantial base has been built, Tan Sri Francis says. After some thought, he declares "But we've crossed so many red seas eaten so much manna in the desert and still managed to grow by 55%, so I should say we can still do it:'



His ultimate aim is to build YTL into “a force for good. We want to bring joy to people and hopefully they will say, ‘we wish there were more companies like YTL, more leaders like you, more people who are caring.’ ”