Military conglomerate in Myanmar hoping for more JVs

2016.11.21 14:14:51 | 2016.11.21 14:15:17
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U Hla Moe, general manager of the planning department for the military conglomerate Myanma Economic Holdings Limited (MEHL), spoke to The Myanmar Times for an exclusive interview on operating as a public company, the outlook for joint ventures with foreign firms and competing on a level playing field in Myanmar`s new economy.

The military established Myanmar Economic Holdings Ltd in 1990 ? the same year that the National League for Democracy won an unrecognised general election victory. The huge conglomerate, along with its sister firm Myanmar Economic Corporation, enjoyed a privileged position in the economy for many years. Both were exempt from certain taxes and came to dominate sectors including trading, natural resources, alcohol, cigarettes and consumer goods.

But in the past five years reforms have chipped away at their exemptions and dispensations. In certain sectors, local and international firms are increasingly able to compete on an equal footing with the military conglomerates. Amid an environment of widespread economic reform, MEHL is also going through its own internal changes, the most significant of which was a decision to become a public company operating under the same company law as ordinary Myanmar firms.

MEHL was formed with K10 billion in share capital, with each share valued at K1000. When the company was founded, there were 4 million "A Type" shares held by the Ministry of Defence and the Directorate of Defence Procurement, and 6 million "B Type" shares held by four groups: in-service military personnel from police constables up to senior generals, retired military personnel, regimental welfare organisations and veteran organisations.

At the end of the 2015-16 financial year, MEHL transferred all its "A Type" shares to "B Type" shareholders as part of an application to the Ministry of Planning and Finance to register as a public company. This involved returning over K1 billion to the defence ministry, but also freed the conglomerate from sharing its future profits, said U Hla Myo.

"We returned K1.13 billion to the Ministry of Defence and the Directorate of Defence Procurement," he said. "[As those entities were formerly shareholders] we had to pass on a share of our profits [to them], but from now on no more profit sharing."

U Ye Min Oo, a member of the NLD economic committee, said it was right and proper that in order to run as a normal public company the conglomerate returned the capital the state entities had invested. But he also wants to see MEHL transfer a chunk of the profits it has made through the use of the capital over the last 26 years.

MEHL made over K100 billion in pre-tax profits in the 2015-16 financial year, according to U Hla Myo, who declined to comment on suggestions that the firm should transfer a share of historical profits to the government.

There are now 328,619 MEHL shareholders, with in-service military personnel representing the largest group, said U Hla Myo. The conglomerate has no plans to sell shares to non-military personnel in the near future, he said, as MEHL is focused on making profit for its existing shareholders, and has no need for extra capital.

"People think that MEHL has huge profits, but not all [our] firms make high profits," he said. "The profits have to be shared among a large number of shareholders, so the firm makes only a little return [for shareholders]. We want to concentrate on making profits for our existing investors."

Pedestrians walk past Ruby Mart, part of the Myanma Economic Holdings Limited empire

Pedestrians walk past Ruby Mart, part of the Myanma Economic Holdings Limited empire

MEHL profits for the 2015-16 financial year were K102 billion before tax, and about K37 billion was distributed [through dividends] to shareholders, said U Hla Myo.

"At our annual general meeting, we decide and agree what percentage of profits would be distributed. Total profit is divided into four slices; One is distributed to shareholders; the second is used for the upgrade or maintenance of machineries [in our businesses and firms]; the third is reserved for reinvestment or new investment; and the fourth is for the welfare, bonuses and other corporate social responsibility activities," U Hla Myo said.

He also sought to dispel rumours that MEHL had used any of its profits to purchase weapons.

"In the past, people thought that MEHL profits were used to buy military weapons, because the MoD held a certain percentage of our shares," he said. "But we guarantee that we have never used our profits for defence expenditure since the company was first formed."

No more special treatment U Hla Myo said MEHL had begun to operate more like an ordinary firm from around 2012, although the formal shift in status to being a public firm meant there could be no question of special privileges.

"People always said that MEHL enjoyed all the privileges because it was running under the Special Company Act [of 1950]," he said. But now that it`s running under the 1914 Company Act, there are no more privileges. Even the polices related to [gem and jade] mining have changed a lot. There are no special cases of MEHL being offered mining blocks without tender. We also have to [enter] the tender system now, and pay income tax the same as other companies do."

U Aung Naing Oo, director general of the Directorate of Investment and Company Administration, told The Myanmar Times earlier this year that the conglomerate would not be treated differently to other firms, and would "definitely" not be allowed advantages in certain sectors.

MEHL has three main business departments ? trading, services and production. The conglomerate has 55 wholly owned subsidiaries: 23 engaged in production, eight in the services sector and six engaged in trading. There are also two local affiliate services firms and 16 joint ventures with foreign partners, according to MEHL data. Six of those joint ventures are engaged in production, the firm said.

"We are doing joint ventures with Japan, Korea, China, Singapore and Hong Kong at the moment but we welcome [firms from] all countries that are willing to do business with us," said U Hla Myo. "We`re in negotiations with some [new] foreign investors and most are interested in production-based JVs."

With many of the US sanctions now lifted, U Hla Myo said it is the best time for the conglomerate to enter into more joint ventures with foreign businesses.

"Western sanctions put many constraints on [foreign] investment and doing business," he said. "We had to rely on our capital and profits were less because international investors avoided doing business with us." MEHL prefers foreign joint ventures because of the need for support in terms of finance and technology, he added.

MEHL`s most profitable foreign joint ventures are Myanmar Brewery, Virginia Tobacco, Myanmar Posco Limited and The First Automotive Company, said U Hla Myo.

The conglomerate`s most profitable trading firms are Myawaddy Trading Limited, Adipati Agricultural Produce Trading Limited, Myanmar Imperial Jade Company, Myanmar Ruby Enterprise and Shwe Gandamar International Trading Limited, which includes well-known brands Gandamar Wholesale and Ruby Mart, he added.

In the services sector, insurance firm Aung Thitsar Oo is the most profitable business, although Myawaddy Bank and Bandoola Transportation Limited are also successful, he said. Copper production, which includes the controversial Lepadaung copper mine, is among the group`s most profitable production enterprise.

By Myanmar Times

http://www.mmtimes.com/index.php/business/23774-military-conglomerate-hoping-for-more-jvs.html

[ⓒ Pulse by Maeil Business News Korea & mk.co.kr, All rights reserved]

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