1.

1 Introduction The purpose of this report is to measure the economic exposures that need to faced by the selected companies which have been listed in (the same sector of) Bursa Malaysia (BM) from the years 2000 to 2010. Here, the economic exposure is measured using correlation.

Specifically, the correlation coefficients of major exchange rates, like example MYR against USD, EUR, JPY, GBP, CHF, SGD, and CNY, with a companys share prices measure a companys economic exposures. The projects second aim is to uncover some factors that may be associated with a companys economic exposure. In particular, the respected factors of the companys (1) size, (2) liquidity, (3) efficiency, (4) profitability, and (5) leverage, are examined for association with the companys economic exposures, again using correlation analyses. The first company that have been choosen is Linear Corporation Berhad which had registered office at Seberang Prai, Penang, Malaysia. This company have been established since 1981 and already listed in the main market of bursa Malaysia since 18 November 1994. In addition, the Linear Group is a visionary and missionary private sector organisation which dedicated to meeting and exceeding the needs of its clients and partners. Linear Corporation Berhad (Linear) focused on industrial product sector and major in machinery but also engaged in investment holding and providing management services. The company, through its subsidiaries, operates in five segments which is investment holding, manufacturing and distribution of HVAC products (condenser, evaporator, cooling tower), engineering, which includes designing and building of district cooling system plants, trading of cooling towers and solar panel, and others, which includes providing water treatment services, trading of water tank, composites and other compounds and information and communication technology (ICT) services. The Linear Group is today one of the leading heating, ventilation and air-conditioning (HVAC) solution providers in the ASEAN region. In fact, Linear offers market expertise in

the areas of manufacturing, marketing, sales and distribution of HVAC products, multidisciplinary engineering services and integrated HVAC solutions. The Linear Group has achieved international recognition like example in USA, Italy, Japan, Australia, Singapore, Pakistan and European Union which they had enjoyed great success in its endeavours. 2.1. Company Factors and Share Prices

Linear Corporation Berhad 8

7
currency (M$) 6 5 4 3 2 1 0 share price

Figure 1(a) Based on figure 1(a) above, we can see that the share price of Linear Corporation Berhad is increasing from year 1999 until the year of 2000 and reached the amount of M$ 7.2 but then, significantly decrease at the middle of year 2000 until year 2001. There is fluctuation in the share price from year 2001 until 2004 which after that had continuously decreases until the end of 2010 and reached the amount of M$ 0.1. While in terms of company factors, there is a volatile in the size of linear corporation assets from year 2000 until year 2007 which is the highest amount of M$206,175. But then, the company size start decreasing from year 2008 until year 2010. In terms of liquidity, there is a different range of value from year 2000 until year 2010. It starts with 0.4365 in year 2000 and decrease to 0.2731 in year 2001, which is the least liquidity among the 11 years. But

then, increase again until it reach the amount of 0.9268 at year 2009, which is the highest liquidity amount for all the 11 years and then going down again at year 2010 to the amount of 0.5686. The company efficiency starts with the amount of 0.4745 at year 2000 and then decrease until the amount of 0.2983 at year 2005. But then, increase from year 2006 until 2007 and finally drop back at year 2008 until 2010. In terms of profitability, there is volatility in the range of value and the company also faced negative profit in certain year. The company highest profit among the 11 years is at year 2004 with the amount of 0.1475. The last factor, which is leverage had been increase from year 2000 until year 2005 and then fluctuate from year 2006 and reach the highest leverage which is 0.4176 at year 2010.

3.1. Company Economic Exposures Exchange rate Year 2000 MYR/ USD MYR/ EUR MYR/ JPY MYR/ GBP MYR/ CHF MYR/ SGD MYR/ CNY -0.202 (0.150) 0.452 (0.001) -0.131 (0.355) 0.330 (0.017) 0.294 (0.033) -0.758 (0.000) -0.074 (0.601) -0.111 (0.432) -0.648 (0.000) -0.550 (0.000) 0.793 (0.000)

0.264 0.062 0.168 0.397 0.050 (0.059) (0.662) (0.233) (0.004) (0.723) 0.675 0.500 0.524 0.377 0.181 2001 (0.000) (0.000) (0.000) (0.006) (0.198) -0.697 -0.824 -0.598 -0.847 -0.809 2002 (0.000) (0.000) (0.000) (0.000) (0.000) 0.297 0.561 0.638 0.529 0.174 2003 (0.032) (0.000) (0.000) (0.000) (0.219) -0.154 0.007 0.162 -0.050 -0.257 2004 (0.271) (0.959) (0.246) (0.721) (0.063) 0.825 0.612 0.853 0.865 0.784 0.835 2005 (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) -0.801 0.288 -0.771 0.277 -0.753 -0.584 2006 (0.000) (0.038) (0.000) (0.047) (0.000) (0.000) -0.277 0.741 -0.706 -0.343 0.067 -0.517 2007 (0.047) (0.000) (0.000) (0.013) (0.637) (0.000) -0.157 -0.745 0.725 -0.843 0.815 0.152 2008 (0.266) (0.000) (0.000) (0.000) (0.000) (0.282) 0.687 -0.508 0.560 0.018 0.703 0.572 2009 (0.000) (0.000) (0.000) (0.897) (0.000) (0.000) 0.451 0.823 0.829 -0.128 0.745 0.221 2010 (0.001) (0.000) (0.000) (0.360) (0.000) (0.112) Table 1 [a]: Economic exposure measure for [Linear Corporation Berhad] correlation between weekly share price and weekly exchange rates

Based on the table 1(a) above, if the coefficient is positive [negative], it means that the companys weekly share price is correlated positively [negatively] with the particular exchange rate, like example, an increase in the companys share price is associated generally with an increase [a decrease] in the particular exchange rate, for that particular year. A higher coefficient reflects higher degree of linear relationship between the companys share price and the exchange rate. Thus, a higher the coefficient is interpreted as a greater economic exposure for the company as its share price movements are more closely related to the exchange rate movements. Actually, only when the Sig is less than 0.05, the correlation coefficient is significant. However, here, the Sig value is ignored.

In year 2000 and 2005, the company has positive correlation between weekly share price and weekly exchange rates of USD, EUR, JPY, GBP, CHF and SGD while negative correlation between the company weekly share price and CNY. While in year 2001 and 2003, the company has positive correlation with all the particular exchange rates which is USD, EUR, JPY, GBP, CHF, SGD and CNY. Contributing to this positive correlation is the growth in local sales and the widening of market coverage through the established distribution networks, in particular in the booming Middle East and other Asia Pacific markets. In year 2002, the company has negative correlation with all the particular exchange rates which is USD, EUR, JPY, GBP, CHF, SGD and CNY. This is because of the negative effects of the global downturn continued to be felt throughout 2002. Unfavourable market conditions especially in the local commercial development and construction sector continued to suppress the demand of heating, ventilation and air-conditioning ("HVAC") products. Furthermore, linear weekly share price has positive correlation with EUR, JPY and CNY while they are negatively correlated with GBP, CHF and SGD during year 2004. Different situation happen in year 2006, because linear weekly share price have positive correlation only with USD and JPY while they are negatively correlated with EUR, GBP, CHF, SGD and CNY. For year 2007, the company weekly share price has positive correlation only with USD and GBP while they are negatively correlated with EUR, JPY, CHF, SGD and CNY. In addition, the company weekly share price is positively correlated with EUR, GBP and CHF but negatively correlated with USD, JPY, SGD and CNY at year 2008. The worsening economic pain reported in the United States and around the world during the 1st quarter of 2009 brought many to grapple with the fear of an inevitable global recession. They are negatively correlated only with USD and CNY at year 2009 but positively correlated with others weekly exchange rates. During year 2010, linear weekly share price are positively correlated with all the weekly exchange rates except JPY that show negative correlation.

4.1. Company Economic Exposure Correlates Exposure to Factors Size USD 0.298 (0.566) -0.273 (0.600) 0.233 (0.657) 0.176 (0.738) 0.265 (0.612) EUR -0.310 (0.354) 0.042 (0.902) -0.519 (0.102) -0.379 (0.251) 0.339 (0.308) JPY 0.066 (0.847) -0.200 (0.556) -0.162 (0.634) -0.032 (0.925) -0.171 (0.615) GBP -0.169 (0.620) 0.273 (0.417) -0.258 (0.443) -0.399 (0.224) 0.294 (0.381) CHF -0.295 (0.379) 0.224 (0.508) -0.454 (0.160) -0.517 (0.103) 0.253 (0.453) SGD -0.257 (0.445) 0.139 (0.683) -0.450 (0.165) -0.491 (0.125) 0.099 (0.772) CNY 0.010 (0.977) -0.357 (0.281) -0.199 (0.557) 0.135 (0.692) 0.053 (0.878)

Liquidity

Efficiency

Profitability

Leverage

Table 2 [a]: Correlates of economic exposure for [Linear Corporation Berhad] correlation between yearly currency exposures and yearly factors First of all here we need to look at the Sig value of the company for all the company economic factors. This is because the sig reflects the probability of error in concluding that there is correlation, like example, when the coefficient is not zero (positive or negative), when actually there is no correlation. So, if the Sig value is less than 0.05, it means that the probability of error is less than 5% when it is concluded that there is correlation. Thus, the coefficient can be accepted as not zero (positive or negative). Otherwise, like example when the Sig value is more than 0.05, then the coefficient is accepted as zero, and it is concluded that there is no correlation. Based on the table 2(a), we can conclude that from year 2000 until year 2010, linear corporation has sig value for more than 0.05. Then the coefficient is assumed to be zero, and we can conclude that there is no correlation between linear yearly currency exposure and linear yearly factors which is size, liquidity, efficiency, profitability and leverage.

Next, if the coefficient is positive [negative], it means that the companys yearly economic exposure (to a particular currency) is positively [negatively] correlated with a given company (yearly) factor (size, liquidity, efficiency, profitability, or leverage) over the 11 years (2000-2010). More specifically, it means that an increase in the companys economic exposure to a particular currency is generally associated with an increase [a decrease] in the companys factor (size, liquidity, efficiency, profitability, or leverage) over that period. Higher the (absolute) coefficient, higher the degree of linear relationship between the companys economic exposure to a particular currency and the companys specific factor. It also means that movements in the companys yearly economic exposure (to a particular currency) are more closely related to the movements in the companys (yearly) factors. In year 2003, the company still in its infancy stage, this economic optimism was only marginally felt in the local commercial development and construction sector, which was largely oversold. Compounding this, the region was drastically hit by the outbreak of Severe Acute Respiratory Syndrome (SARS). With market forces in the heating, ventilation and airconditioning (HVAC) industry influenced by these factors, margins from the production of HVAC equipment which forms the mainstay of our revenue continued to be depressed. Much company profit margins however were taken up by the rising cost of raw materials and the prolonged over-hang in the commercial development and construction sector took its toll on a cross section of the HVAC industry resulting in some of their upstream customers failing in their debts to company and the company stocks moving more slowly. This can be shown by the negative correlation between company yearly currency exposure and yearly factors efficiency. Plans are also underway to expand their products range and to tap into new markets, both local and foreign, particularly the emerging markets such as the Middle East, China and India which offer vast potentials for their products. This can be seen in the positive

correlation between linear yearly currency exposure and yearly factors profitability. The ongoing global economic crisis had a besetting effect on the business environment worldwide. Almost all economic sectors were adversely affected by this crisis and they were not spared either. Demand for their products contracted drastically due to the immediate slowdown in development projects worldwide. 5.1. Summarization and findings of the previous sections.

The fifth and final section should then summarise and integrate the findings of the previous sections. Here, the following specific questions should be addressed. (1) To which currencies (or exchange rates) do the companies appear to have greater economic exposures? (2) Which companies seem to have greater economic exposure? (3) Are there patterns in the yearly economic exposures of these companies? (4) Which company factors appear to be more correlated with the companies economic exposures? Explain why some factors may be more correlated with economic exposure. (5) Based on the evidence and analyses of this project, what can a company do in order to reduce its economic exposure?

6.1. References

Next, the reference section must carry at least three references that must have been cited in the report. References can include the textbook, other books, and journal, magazine, or newspaper articles. Finally, the report should include appendices. In the appendices, the (1) financial statement data worksheets, (2) SPSS data sets used for the correlation analyses, and (3) outputs of the correlation analyses must be included. Apart from these, relevant pages from company annual reports, newspaper and journal articles, and other relevant material can be included as well.