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Below is the transcript of a CNBC Exclusive interview with Loh Chin Hua, Keppel Corporation CEO. The interview was first broadcast on CNBC's Squawk Box Asia on 25 January 2019.
All references must be sourced to a "CNBC Interview'.
Interviewed by CNBC's Sri Jegarajah
Sri Jegarajah (Sri): Chin Hua can we start with the China macro picture? What are the signals telling you about the Chinese economy?
Loh Chin Hua (Loh): Well I think what we get in more recent times is that the growth in China is slowing. Demand is also slowing particularly for luxury goods. We are watching this very closely because as a group, China is a very important market for us even though the short term growth seems to be a bit murkier. I think we are still very positive about the medium to long term growth story for China.
Sri: And are those signals consistent with growth rates near 6.6 percent which is the official assessment or in reality are they closer to below six percent?
Loh: I think it's very difficult to generalize because the Chinese market there are quite a number of different cities different regions and they all have their own growth dynamics. So for instance in the markets that Keppel Land is focused on in the Jingjinji area in the Yangtze pearl delta as well as in the Greater Bay Area and Chengdu metropolitan area we still see growth to be quite still quite robust.
Sri: That being said does Beijing need to introduce more support measures to keep the economy ticking over or is the risk that they could add to asset bubbles?
Loh: I think Beijing is obviously I think the Chinese policy makers they have generally been acknowledged to have done a pretty good job since even after the global financial crisis. In terms of managing the economy, clearly they will have to find new growth engines. If the trade tensions continue to impact on their exports I think there is of course the property market which is quite often where the Chinese government may be looked to help boost domestic demand. The other area of cost would be on infrastructure. But of course I think in the end they will have to balance all that with their own the levels of domestic debt which everyone is kind of watching very closely as well.
Sri: And just on this issue Chin Hua, do you think it's a potential problem in the making that they are deleveraging and trying to stimulate the economy at the same time.
Loh: They have a tough challenge but I believe that they also have some policy levers that they can use. And I think ultimately I think domestic demand you know in terms of confidence et cetera it is imperative that they keep the domestic economy chugging along. So this is something that I believe President Xi and his policy makers are very focused on.
Sri: Does Beijing need to undertake a major stimulus package with fiscal spending doing the heavy lifting to keep things chugging along.
Loh: Well it's possible. I mean they've also talk about some tax measures. But I think there are various levers that they can they can deploy to try to introduce better demand into the domestic market to stimulate the domestic market.
Sri: And you refer to the property market that is a very big driver for broader economic growth especially on the construction side, the Chinese property market has cooled in recent months does Beijing need to step in and how aggressive do they need to be.
Loh: The cooling measures are not a new phenomenon. It has been operating now for a number of years because I think in the recent years the Chinese policy makers are very concerned about asset bubbles and I think rightly so they have taken certain prudential measures to ensure that demand is not too speculative but I think on the ground what we have seen in more recent times is that whilst the cooling measures are still in place in some cities in terms of the way that these measures are being enforced may start to slacken a bit to give a bit more air you know to give more space to the demand side for the residential or for the property market.
Sri: The global trade tensions
Sri: Are they the biggest risk to the Chinese economy?
Loh: Well that's certainly one of the challenges that China faces I think.
Export is still a very important part of the Chinese economy. So I think as China grows, as China becomes a more important economic power - in fact they are now [a] very important economic power - Xi will have to find a way to adjust his position relative to the other trading partners.
Sri: Do you fear that the economic picture in China could worsen in 2019 if the trade situation is not resolved between the U.S. and China?
Loh: I think the general consensus is that if the trade tensions are not resolved between U.S. and China, it would not only be bad for China. I think would be bad for the whole world. So I think we would also be affected. So you know I think you'd like to think that if you follow through on that, there must be a way for both sides to come to some form of
a consensus where they can resolve their issues. But generally I think this is not expected to just go away. So I think not just for 2019, I think we just have to be more aware that in the future, nation-to-nation tensions will probably be there for a while.
Sri: On a global basis some of the market indicators out there are forecasting a recession in the next 12 to 18 months what are the forward indicators that you watch specifically, Chin Hua and what are they telling you?
Loh: Our businesses are very focused on long term trends because we are a solution provider for sustainable urbanization. So we're involved in providing solutions such as infrastructure, clean environment, property, etc. So we tend to look more at the long term trends. Of course short term trends are important because it could impact the outlook in terms of how our customers look at placing orders with us. But a lot of the projects they were involved in, the decision makers do not look at just short term outlook in terms of growth. Having said that, I will say that we are obviously very keenly watching things like job figures in the U.S. we are also looking very closely at the demand side in China, particularly domestic demand. As I shared earlier, the slowdown is real. We just need to see how the Chinese policy makers can act to provide some balance to the domestic demand.
Sri: And if you can turn to the U.S., the growth picture there seems relatively resilient for now-
Sri: Do you fear that the slowdown could deepen in the U.S. and be aggravated by the shutdown?
Loh: Well certainly the shutdown is going to have an impact if it's going to be prolonged. I think the U.S. is enjoying pretty good recent figures on the job market [which] is quite encouraging. Having said that, it is in a fairly expanded growth phase, so one has to expect that at some point the economy in the U.S. will also slow. And if the trade tensions continue I think it's not just bad for China, bad for the world but I think it will also be bad for the U.S.
Sri: Does it make sense against that context, Chin Hua, for the Fed to be cautious?
Loh: I believe so. Of course I'm a businessman, I'm looking for...clearly you want the Fed, the central banks to be very prudent in terms of ensuring that inflation is kept in check and global economies on an even keel, but at this point in time given the tail risks out there, I will certainly hope that policymakers will be a bit more cautious in terms of their rate adjustments.
Sri: And if the Fed is dialing down on the pace of rate hikes, is that a net positive for the business because it could ease the pressure on mortgages and, from your perspective, ease the pressure on holding costs on inventory.
Loh: Well certainly, a number of our solutions include things like properties and infrastructure assets, which are very long dated assets with cash flow, whether we develop it ourselves or we help our customers build it, an interest rate environment that is more benign would be more positive, in general. We also have a number of REITs and Keppel Capital. These are kind of more focused on generating income for the unit holders. So again, if interest rate environment is more benign that will be helpful.
Sri: Give us a read on market conditions as you see them in 2019. What are they looking like what do you characterize as the biggest risk to growth, earnings and revenue at Keppel?
Loh: I relate it back to our business. On the offshore [and] marine side, I've just shared in our fourth quarter results briefing, although KOM made a loss for 2018, that loss was on the back of provisions, additional provisions that we had to take. So [if] you take away RIDs [Revaluations, major impairments and divestments] we made a net operating profit for 2018, [for] the whole year. And that's quite remarkable because this is after a period of growth up to 2014 when the oil price took a turn for the worst. We have been "rightsizing" Keppel Offshore & Marine over the past couple of years. Today, we are fighting fit. And I'm very glad you know this. One of the highlights was that you know we finally broke even on our offshore [and] marine business. I've also shared that the offshore marine sector is starting to look a bit more optimistic although I will caution that we do not expect a v shaped recovery in the offshore sector. But we're starting to see more enquiries, particularly on the production assets like FPSOs, FLNGs. Our push into gas has also paid handsomely. We are reaping the dividends from that push. There are orders that we just secured on the gas side. This ranged from FLNG vessels conversion with GIMI for BP.
Sri: So the new orders pipeline for 2019 is looking fairly healthy? How would you characterize it?
Loh: We don't provide a forward forecast for the year but I've shared that we are cautiously optimistic. Last year our new orders were higher than the year before. And we are cautiously optimistic for 2019.
Sri: That being said, Chin Hua, profitability, isn't there a risk that it's going to remain under pressure on the O&M side because project breakevens are around $40-45 a barrel?
Loh: Actually oil price is just one of the factors that will determine the demand for the solutions that we provide. So to give you an example, I think at today's oil price, say anywhere from 55 to 60 dollars, almost all solutions can work in the different fields - whether it's jack-ups or the deep floaters. But it's really dependent also on the oil companies, the ultimate customers. So what we've seen initially, when the oil price corrected, was that most of the oil companies were very careful about their cash flow. They want to continue to pay dividends to their shareholders. They may want to keep some of their cash for M&A activities. But I think in more recent times we are seeing that oil companies are also now giving FID approvals, particularly for production assets, because they need the production to boost their cash flow. And I think ultimately the drilling will start very soon because in the course of the last five years, [for] most oil companies, their reserves have also been depleted. So at some point they will have to [replenish].
Sri: When you look at Keppel Corp's share price over a 12-month period, it's not a very pretty chart, down more than 40 per cent. What do you put that down to?
Loh: Well. I think maybe there is still a lack of appreciation for what we have done. I think the market... perhaps, it's taking some time for the market to fully appreciate, some of the changes, some of the very profound changes that are being made to our business model over the last few years. They tend to look at us in the past as an offshore [and] marine business, or as a property business, depending on which segment provides the bulk of the returns or the profits for the group. But if you look at the group, today we, Keppel, see ourselves as a solution provider for sustainable urbanization. By that we mean urbanization is a trend that is secular, so it doesn't matter what happens in the short term, but if we look at a very long-term basis urbanization will continue. As you urbanize, you'll need energy. So this energy can be fossil fuels or can be renewables. You will also need clean environment, you need clean water, et cetera. So these are environmental engineering solutions that we provide. Of course you need urban space to live in, which is again a business that we're in. And finally we also have a business we call connectivity. So this will be in the form of the data centers that we run or the urban logistics that we have. And of course M1.
Sri: Which leads us neatly on to that story. Why do you want majority ownership of M1 - its share price is falling, it's in dire need of restructuring, is it really worth the effort?
Loh: We believe so. I think you know, Keppel has been involved in M1. So this is not a new business for us. Keppel first got involved in M1, I believe in 1994, when we were [one of] the founding shareholder[s], even before it was listed. And we've invested over the years about a 170 million in total in M1. And in terms of the distribution and various bonus shares which we liquidated or we monetized, over that period we've collected about 737 million. So by all accounts, M1 had been a very good investment for Keppel. But as you know, that was before the recent changes in the telco industry in Singapore. With the introduction of the fourth telco, and of course with MVNOs coming in, the market has become more competitive. I think we took a view that, you know, I think two years ago together with our partners we did a strategic review on whether we could potentially exit from this together. Unfortunately we didn't get a price that at least Keppel was happy with. But I think now we see that whilst it is an industry that is going through a lot of disruption, we think that there are still opportunities there. If someone like us, together with our partner SPH, can gain control, then we can then digitize the business, we can put in place some cost management measures - both from the front end and the back end. And then finally, it's also about how we see M1 now becoming part of the solutions we provide under the connectivity space.
Sri: So it sounds like you are convinced that you can unlock some real value at M1 if you have a bigger size of the pie. Does that imply that $2.06 is the full and final bid?
Loh: It is definitely a full and final bid because we had made - that means the company that is bidding, which is part of Keppel and SPH, our partner in this exercise - have made an announcement, I think a couple of days ago, to say that the $2.06 is our final price.
Sri: Do your shareholders think it's a good idea?
Loh: I think the point is that right now you have to take a view that at some point you have to believe there's value in it, and if we did not think there was value we would not be involved.
Sri: It's been reported that M1's biggest stakeholder Axiata considers your bid inadequate. Under what circumstances would you sweeten your bid?
Loh: Well clearly right now, I mean we have already declared that we are not going to increase the price. So under no circumstances will we increase the price.
Sri: Okay, let me talk to you about the Keppel O&M Brazil bribery case. I know it's been a very difficult period for you. Keppel is a GLC, investors were clearly very shocked when this happened. How badly has this tarnished the brand?
Loh: It was a shock to all of us, clearly the brand has taken the hit. As someone said, it takes years to build a brand, but you can lose it quite quickly. At the same time, I am also encouraged by the people that we talk to, both internally and externally. Particularly our customers. They still have confidence. This is clearly a misstep, but they have confidence that Keppel, with our track record will get this fixed and that we will come back. And I think of course we are not taking anything too casually. We are also working very hard to make sure that this never happens again.
Sri: Can I just ask you then, what guarantee can you give shareholders that oversights of compliance has been tightened to ensure that this does not happen again?
Loh: The oversight and compliance have definitely been tightened. But I think beyond that, it is really also about the culture. I think if you look at the company, we have probably been amongst the first amongst companies in Singapore or even in Asia where we take safety very seriously. So we believe that all our workers have a right to get home safe every night. So we have gone on this "safety journey" for many years. Safety was never- was not initially- in the shipyard in the early days, was probably not as important a consideration but I would say that in the last 20 years we have really put a huge emphasis on safety. It is a journey that we will never complete, because you know, we are still working very hard to make sure that you know our workers are all safe.
Sri: Safety was not in question though, was it? It was the perception of corruption at Keppel O&M...
Loh: Yeah I mean maybe I'm taking a bit longer to explain but I think the point is that safety, is something that's important to us. So when you look at safety. or you look at, bribery, it has some of the same features because we also have a duty to ensure that our colleagues do not come to harm. So you can come to harm in the form of a workplace accident. But as we know today, if you are exposed and you are unaware and you do something that's wrong and that causes a problem from an anti-bribery point of view, it can also affect the individuals. So I think if we apply the same way that we look at safety, which is really about culture, which is my point : it's really not just about processes but to apply the right culture so that all of us know that it's not just doing the things right, but it's doing the right thing.
Sri: Okay, if the culture is changing, then what does it mean in practical terms at the company? Does it mean you will look at introducing a whistleblower policy after this case, so that if somebody has an issue with the way the company is being run, they can safely and independently make it known?
Loh: We have a whistle blowing policy in place for some years. But of course, in light of what has happened, we have strengthened it. So today, we have an outside party that is involved on a whistle-blower hotline, so you can call 24/7 and you can speak to someone that's not a Keppel person, but an outside party and you can speak in different languages. And this is not just about anti bribery. It is also to give us better controls.
Sri: What bothers me, Chin Hua, is that these solicit payments were made over a 10 year period. To your credit, you took action against 17 employees. Why did no one spot this malfeasance within that 10 years?
Loh: I think those questions have been covered last year. I think I'd rather not go back into it again. The main point here is that we have a global resolution. We are very determined to put right and we have spent a lot of time and resources to make sure that this does not happen again and as I said, it's not just about processes or controls, but it's also about getting the right culture to make sure that people know, it's not just about doing things right but doing the right thing; winning business ethically and legally.
Sri: Does this affect how you do business in future and does it affect how you'd bid for contracts in Brazil or elsewhere you operate internationally?
Loh: Sure, there is no exception. Anywhere we operate, we'd follow these rules. It is not something that'd have any exception. I believe we can still run business legally and ethically, based on the superior solutions that we have.
Sri: Chin Hua, we'd leave it there. Thank you very much sir.
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