CMDF-Bursa Research Scheme (CBRS)

Preamble

Relatively low levels of liquidity in "smaller" capitalised stocks have been an issue for many stock exchanges, as they have implications from a variety of perspectives - investor protection, cost of capital for issuers, overall market reputation, and exchange profitability.

As part of measures to enhance liquidity, Bursa Malaysia has launched the 2nd phase of the CMDF-Bursa Research Scheme (“CBRS II”). The scheme is intended to generate interests in stocks, particularly smaller capitalised ones.

The 2-year pilot phase of the scheme, which was launched in June 2005, was completed in June 2007 with participation of more than 300 listed issuers.

CRBS II has commenced in October 2007 and as of June 2008, a total of 212 listed issuers participated.

Why a Research Scheme?

The imbalance of research coverage on listed companies has driven Bursa Malaysia to take an active approach towards helping investors make better-informed decisions and facilitating greater investor understanding of listed companies.

This scheme will also be able to raise profiles of listed companies since they are unable to engage the research houses directly as it may result in a conflict of interest as the research houses will be financially compensated directly by the companies. In addition, under current circumstances, even if research coverage is demand driven, circulation of the research report is limited to clients only.

While eventually, research on companies should be left to the dynamics of the market, in the interim, a scheme to help promote wider research coverage could accelerate the maturation of the Exchange. The Exchange could coordinate efforts to manage such a scheme to ensure that the small cap stocks are on the radar screens of investors and that there is consistent coverage on stocks.

In a sense, the scheme could speed-up the learning curve of some of the smaller companies listed on the Exchange as to why they should be investor friendly, be more transparent and available to the investing public in general once they see the value in the coverage. The scheme would increase publicity and media of relatively smaller companies which would be to the interest of all market participants:

1. Companies
   Companies that are of a certain quality deserve the coverage but somehow due to either lack of demand for the stocks or resource constraints at research houses, they are not covered by analysts. This is synonymous to a "Catch 22" situation where stocks are thinly traded since there is no coverage because the volume traded does not warrant coverage.
   This scheme will override the commercial intentions of research houses in providing coverage and will ensure wider coverage and hence, increase the profile of the company, creating more interest and liquidity. This will in turn attract institutional following and widen the shareholder base of listed companies.
   
   
2. Retail Investors
   This scheme will allow for free access of analytical review reports of listed companies by professionals and facilitate informed investment decision making by investors. As part of its investor education obligation, the Exchange will promote the availability of such reports and ensure adequate distribution.
   
   
3. Institutional Investors
   Based on the broad framework of investment among institutional funds locally and internationally, their focus is mainly on highly liquid stocks listed on Bursa Malaysia. However, they do have small cap funds and this scheme will provide them more choice and aid the launches of new small cap funds.
   

The CBRS Framework

1. Objective
   The scheme aims to enhance research coverage of stocks listed on Bursa Malaysia and provide investors with more information to facilitate their investment decisions.
   
   
2. Eligibility
   The scheme is open to the following, subject to the approval of Bursa Malaysia:
   
   1. All companies listed on Bursa Malaysia
      
   2. All research firms that are licensed under the Securities Industry Act, 1983 with an established track record in issuing or promulgating analyses or reports concerning securities. The research team should comprise of at least 3 analysts, with at least 3 years of relevant experience each. Coverage of sectors will be based on sectorial expertise within the research firm.
      
      
3. Mechanics
   1. Under the scheme, each participating listed company will be covered by at least 2 research firms.
      
   2. Research reports generated under this scheme will be published on the Bursa Malaysia website and made available, free of charge to the public.
      
   3. Helps defray the costs in providing the research coverage; the cost of coverage will be subsidised by the Capital Market Development Fund (CMDF).
      
   4. All listed companies and research firms will be invited to participate in the scheme. The scheme will be offered for a period of 2 years, after which it will be reviewed by Bursa Malaysia.
      
      
4. Research Reports Frequency
   As a general requirement, research firms are expected to provide regular research coverage on the participating listed companies so as to facilitate investors in making informed investment decisions. The frequency of research coverage should take into account developments and events that would have an impact on the financial position, liquidity, and prospects of the company including, amongst others, material acquisitions/ divestments of assets, change in business direction, change in management team, take-over of the company, etc.
   At the minimum, research firms are required to produce the following Reports in each year for each listed company on their allocated list:
   
   1. One Initiation of Coverage Report within 3 months from commencement date (applicable only to the first year of coverage).
      
   2. At least 4 Coverage of Result Reports, corresponding to the quarterly results and full year results announcements by the listed company.
      
   3. At least 2 Update Reports to be issued at any time within the year, at the discretion of the research firm.
      
      
5. Contents
   Each research firm would have the discretion of presenting their research. However, the quality of Reports should be of similar standard to those that the research firms currently issue on their own. In this respect, the analysts must exercise their industry knowledge and professional judgment when producing such Reports. At the minimum, Reports are expected to contain the following items that are commonly observed in research reports:
   
   
   1. Initiation of Coverage
      Background of listed company, which may include a description of its history, business, product and/or market segments.
      Discussion of risk factors surrounding the company.
      Analysis of company's recent financials including the balance sheet, profit & loss, cash flow statements and the analyst's forecast or estimates.
      Analysis of the listed company against selected listed comparables.
      Valuation and Recommendation.
      
      
   2. Coverage of Results
      Analysis of results performance and the analyst's opinion on the outlook of the company. Valuation and Recommendation.
      
      
6. Update Reports
   As an update report on a company could be triggered by a spectrum of events, thus the contents tend to vary depending on the situation as well. Generally, such reports would be expected to cover the following areas:
   
   
   1. Description of the event that triggered the report.
      
   2. Analysis of the impact or influence of this event on the business prospects of the company.
      
   3. Valuation and Recommendation.