The Psychology of Rights Issues

With the share prices of Maybank and TMI taking a beating after their rights issues were
announced, the weightage of these 2 companies on the KLCI means that their rights issues have
an impact on the market as a whole. As we approach the important milestones for these 2
companies’ rights issues, we will evaluate the previous rights issues by other companies to
better gauge the possible performance of Maybank and TMI based purely on their rights issues.
Based on the experience of larger caps and regional rights issues, Maybank and TMI are likely to
see their share prices appreciating ex-rights and holding throughout the rights trading period.
However, some medium term weakness should emerge as the new rights shares are listed. We
advise investors to trade the market at between 830 and 890 pts for April but look to pare down
their holdings ahead of the May results season.

Rights issues dampen the KLCI. When the rights issues of Malayan Banking (Maybank) and TM
International (TMI) were announced in late February, investors were spooked by the potentially large
dilutive effects as the discounts offered exceeded 30%. Given the weighting of Maybank (4.3%) and
TMI (1.8%) on the KLCI, the benchmark index dropped in tandem when these two companies’ shares
fell more than 20% to their lows in mid-March before recovering recently.

Upcoming rights issue milestones. With Maybank shares going ex-rights on Mar 31 and TMI on Apr
8, we feel it is critical to understand the psychology behind the rights issue and try to ascertain how their
share prices may trend as their movements will affect the broader market. To do this, we will take a look
at a number of companies both in Malaysia and regionally that have recently declared rights issues.

Bigger caps and Regional Players more indicative. Given the low liquidity and free float of the
smaller cap companies, we feel that they may not be indicative of what will be experienced by Maybank
and TMI. Instead, we look at big cap companies such as MAS and KNM as well as regional companies
including HSBC in Hong Kong and DBS as well as Chartered Semiconductor in Singapore. From our
analysis, we saw these companies experiencing the following trends:

1. An initial drop in share price after the rights issue price is announced;
2. A recovery ahead of the ex-date;
3. A further rally after the ex-date;
4. Share price holds up well during the rights trading period; and
5. Price retreats after new rights shares are listed.
KLCI may be in for short term strength but medium term weakness. With Maybank and TMI having
experienced the first 2 of the 5 trends above, we expect their share prices to either hold or recover after
going ex-rights. External factors including the upcoming 3 by-elections on Apr 7 may influence their
share prices aside from the rights issue but generally we expect some recovery in the month of April.
However, as the new rights shares will be listed towards the end of April or early May, broader market
weakness could emerge. We continue to advise investors to Trade the market between 830 and 890 pts
in March and April but pare down their investments in May ahead of the 1Q2009 results season.