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TABLE OF CONTENT

Topic Content Page

1 1.0 INTRODUCTION
1.1 Definition of capital structure and optimal capital structure 3
1.2 Importance of optimal capital structure 4
1.3 Types of capital structure 5
1.4 Benefits of having optimal capital structure 6
1.5 Factors that may affect the firm’s capital structure 7-8
2 2.0 RESEARCH DESIGN
2.1 Sampling 9
2.2 Regression Analysis 10
3 3.0 DISCUSSION OF FINDINGS
3.1 Descriptive Analysis 11-12
3.2 Correlation Matrix 13-14
3.3 Trend of Firms’ Capital Structure 15-16
3.4 Regression Analysis 17
4 4.0 CONCLUSION 18
4.1 References 18-19
4.2 Appendix 20-21

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1.0 INTRODUCTION
1.1 Definition of capital structure and optimal capital structure

Capital is financial assets including buildings, debt, earnings and equity owned by an
organization to generate more wealth either by producing more goods and services or
through investment. Capital structure is the particular mix of the company’s debt and
equity in order to finance all its operations and assets. Debt includes loans and bond
issues, while equity can be found in the form of preferred stock, common stock or
retained earnings. Both debt and equity values of a company can be found on the
balance sheet.

The optimal capital structure varies across different firms but it has one goal in mind
– achieving the lowest Weighted Average Cost of Capital (WACC) for the firm. The debt
over equity ratio (D/E ratio) is often used by analysts and managers when determining
the optimal capital structure for the firm. In theory, the cost of debt is always cheaper as
debt financing is tax deductible, however, an increase in total debt would also expose
firms to a higher risk of default and bankruptcy. In fact, optimal capital structure is also
determined by which industry the firm is in. For instance, service-oriented or
labour-intensive industries like mining, software and marketing companies are
recommended to maintain a lower amount of debt because their cash flows are
unpredictable, thus prioritising equity. Meanwhile, capital-intensive or important
necessary industries such as auto manufacturing, banking and insurance tend to prefer
financing through debt. Ultimately, optimal capital structure is vital to provide sufficient
resources to run a business smoothly.

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1.2 Importance of optimal capital structure

Optimal capital structure means having the ideal balance of debt and equity to
maximise company’s value while minimising cost of capital. It is important for firms to
maintain an optimal capital structure as it allows firms to raise funds efficiently in order to
achieve enhanced capacity. Optimal capital structure can also translate into good credit
rating which opens more attractive borrowing opportunities for the firm as lenders will offer
more favourable terms to firms with good credit scores. Having optimal capital structure is
important as it provides financial flexibility by allowing companies to raise capital from a
variety of sources. In times of emergency, it enables the company to respond to changes by
making suitable adjustments in the components of capital structure and avoid possible risks.
.

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1.3 Types of capital structure

Firms can raise money via different capital structures to finance business operations..
These funds can come from either equity or debt. Debt includes loans and bond issues,
while equity can be found in the form of preferred stock, common stock or retained
earnings.

1. Debt capital
Debt is money borrowed to finance the operation of firms. Typically, there are
two types of debt, short-term and long-term debt. Short-term debt includes
short-term commercial paper while long-term debt includes debentures and
bank loans. However, it is important to note that debt providers are not given
any say in the decision-making process of firms.

2. Equity capital
Equity is money invested by shareholders and owners to run the business.
Typically, equity exists in two different forms, that is common and preferred
shares. Common shareholders have voting rights while preferred shares
don’t. Shareholders receive dividends as a reward for investing when firms
generate profit. In this case, shareholders are included in the decision-making
process. Retained earnings also belong to equity capital as firms’ profits are
retained for future reinvestment.

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1.4 Benefits of having optimal capital structure

Firms are willing to spend some portion of their funds to pay experts in order to attain
the most optimal capital structure. This may be due to the benefits of having an optimal
capital structure for the firm. The benefits include maximising the firm’s wealth,
minimising the cost of capital, efficient use of capital and retained ownership.

First of all, the optimal capital structure can maximise the firm’s wealth and minimise
the cost of capital as it is designed with both in mind. The present value of the following
years’ cash flow is used when calculating the firm’s wealth by discounting with Weighted
Average Cost of Capital (WACC). Thus, future projects can be planned by considering
the Time Value of Money (TVM). The best combination of debt and equity or optimal
capital structure will result in optimum risk and great return for a firm’s future growth.
Low WACC for projects are pursued by firms because it will allow firm to generate more
profit and avoid losses. As such, investors and other external parties are more confident
when they want to lend or invest in the firm as the firm will look more stable and secure
in their eyes. Therefore, it can be said that by reducing the WACC to the lowest possible
value, the wealth of the firm can be maximised.

Other than that, optimal capital structure also leads to the efficient use of capital.
Capital is an important and crucial resource firm has in order to fund its operation. It
should also be noted that capital for firms is limited. Capitals are highly valued because
they are scarce since an unlimited amount of certain things leads to it being regarded as
of no value. When deciding the most optimal capital structure of a firm, many factors
must be considered and analysed beforehand. This ensures that no capital is being
wasted on projects with low returns.

Last but not least, the owners can retain control over the firms. When raising capital,
part of the firm’s ownership or the firm’s shares are sold to external parties. By doing so,
the owner, little by little, loses their management power over the firm. Optimal capital
structure will prevent this from happening by restraining the owner from selling too much
of the firm’s shares and instead opting for debts. As such, the owner still has the
majority of the power over the firm even when there are plenty of shareholders and other
external parties in the management. So, it can be said that the best mixture of debt and
equity is important for firms because it helps the owner retain proprietorship right over
the firm.

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1.5 Factors that may affect the firm’s capital structure

Over the years, it is evident in the balance sheets that firms would not just stick to
only one composition of debt and equity. There are plenty of external and internal factors
that may affect the decisions of managers when determining the firm’s optimal capital
structure. These are the several determinants but not limited to cash flow situation,
business scale, state of the stock market and extent of control.

Firstly, a firm’s ability to generate positive cash inflow is essential because the firm
has to pay back loans’ interest and dividends to preferred shareholders while financing
its operations. The total fixed costs a firm has to sustain differ according to situations. If
a firm prioritizes debt financing and preference share capital, a higher amount of
payment is incurred. Occasionally, some firms might produce enough revenue but still
insufficient to pay for fixed charges. If the firm cannot financially commit to the debts and
dividends obligations, the firm may become insolvent. Thus, a firm must include these
obligations when forecasting the cash flow. If a firm expects stable cash flow and is
confident, it can go for debt financing rather than equity financing.

The business size and age of the firm is also one of the important factors when
deciding the optimal capital structure. Startups and small-sized businesses may face
difficulties in procuring long-term loans as creditors do not have confidence that the
firms will be successful. Even if the firm is able to get the loans, it comes with
inconvenient conditions and high-interest rates. Thus, small-scaled enterprises rarely
choose large long-term debt financing as their main capital. The period the firm runs the
business also plays a major role when analysing capital structure. The reason being that
past performances of long-standing firms can be seen more clearly thus giving investors
and lenders more security and confidence regarding the firms. Therefore, firms that are
more established have more opportunities and flexibility when designing their optimal
capital structure.

Other than that, the condition of the market is also significant. There are two
categories of market, boom state and recession state. During the pandemic Covid-19,
the latter applies to the situation of the market. The market state is seriously important
especially if the firm wants to raise capital through equity. This is because the market
affects the investors' behaviours and risks taking decisions. For the year 2019 and
throughout 2020, investors have been pulling out their investments as businesses

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continue to shut down one by one. They become more cautious since the economic
slowdown overwhelms the market.

Lastly, the capital structure of a firm is affected by the extent of control the owners
want to preserve. Owners are the founder of the company and common shareholders. In
other words, owners are individuals who have the right to vote and have voice in
management. Some owners do not like external parties getting involved in the
management as owners are likely to lose decision-making power as more external
parties come in. Most of the time, owners of businesses prefer to be the highest
authority decision-maker when making crucial decisions for their companies. Therefore,
these owners probably issue fewer ordinary shares and prioritise debt financing and
issuing preference shares. But, there is a catch. If the firm takes out more loans and
cannot pay back the fees incurred, the creditors will then have control over the company.
Therefore, optimal capital structure for firms should be designed after considering this
factor.

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2.0 RESEARCH DESIGN
2.1 Sampling

To analyze the trend before and after the Covid-19 pandemic, we examine the
relationship between the firms’ performance and capital structure. Our sample includes 20
companies listed on the Bursa Malaysia which makes up of 13 sectors: Technology
Hardware and Equipment, Industrial Metals and Mining, Food Producers, Fixed Line
Telecommunications, Travel and Leisure, Construction and Materials, Electronic and
Electrical Equipment, Beverages, Health Care Equipment and Services, Household Goods
and Home Construction, General Retailers, Oil Equipment and Services, and Software and
Computer Services. These firms are observed over 4 years, the 2018-2021 period, forming a
panel data of 80 observations.

The dependent variables in this study are Return on Assets (ROA) and Tobin's Q.
ROA is calculated by dividing a company's net income by the average total assets from the
balance sheet while Tobin Q is equal to the total market value of a firm divided by the total
value of assets owned by the firm.

The independent variables in the study are the age of the firm, total assets, firm size,
market capitalization, short-term liabilities, long-term liabilities, total debt, preference shares,
retained earnings, common shares, and equity. Control variables in this study comprise of
the following factors: CEO duality, the ratio of independent directors, size of the board and
ratio of female directors.

This study is done based on descriptive analysis and correlation matrix to determine
firms’ performance. For descriptive statistics, we analyze the sample’s mean, median,
standard deviation, minimum and maximum. Meanwhile, the correlation matrix will include
variables as follows: the age of the firm, total assets, firm size, short-term liabilities,
long-term liabilities, total debt, preference shares, retained earnings, common shares, equity,
CEO Duality, independent directors, size of the board, number of female directors, the firm’s
performance in form of return on assets (ROA), Tobin’s Q, cost of debt, cost of equity.

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2.2 Regression Analysis

The relationship between firms’ performance and capital structure was tested by the
following regression models:

Refer to Appendix for the acronym of each variable used in the regression model
i is observations of each firm
t is time for each year of observations

ROA and Tobin's Q are the two dependent variables used as models to represent the
measurement of firms’ performance. The independent variables include age of the firm, firm
size, total debt, total equity, CEO Duality, the ratio of independent directors, size of the
board, number of female directors and year.

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3.0 DISCUSSION OF FINDINGS
3.1 Descriptive Analysis

Descriptive Statistics
Std.
N Minimum Maximum Mean Median Deviation
AGE 80 1.792 3.611 3.087 3.219 .442
FIRMSIZE 80 9.665 18.444 14.261 13.829 2.420
MC 80 9.068 17.983 13.653 13.409 2.450
STD 80 6.658 17.008 12.490 12.680 2.714
LTD 80 .000 17.449 10.065 10.684 5.008
DEBT 80 7.163 17.653 12.865 12.780 2.981
Pshare 80 .000 7.924 .396 .000 1.736
RE 80 .000 17.346 11.447 12.349 4.705
CS 80 9.524 17.380 13.690 13.078 2.167
EQUITY 80 .000 18.056 13.618 13.398 3.455
DUAL 80 .000 1.000 .537 1.000 .502
INDPDIR 80 .200 .750 .486 .429 .143
BODSIZE 80 1.386 2.708 2.009 1.946 .273
GENDER 80 .000 1.559 .870 .910 .476
Tobin's Q 80 .270 8.115 1.150 .757 1.387
ROA 80 -.330 .301 .016 .018 .087
COD 80 .000 .099 .044 .047 .027
COE 80 -1.000 .270 .011 .015 .127
Value of N =80
Figure 3.1: Descriptive Analysis Table

Figure 3.1 presents a summary of descriptive statistics of the dependent and independent
variables used in the study, including mean, median, minimum, maximum and standard
deviation. Due to the nature of the study, we will only highlight figures on capital structure
and firm performance.

Capital structure includes total debt (short-term debt, long-term debt) and total equity
(preference shares, ordinary shares, retained earnings). For short-term debt, the minimum
value and maximum value are 6.658 and 17.008 respectively. The mean is 12.490
meanwhile the median is 12.680. Lastly, the standard deviation for short-term debt is 2.714.

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The data spread out nicely and there are no extreme outliers. Next, the long-term debt’s
minimum value is 0.000 which means during a certain year, at least a firm does not take out
any huge loans. The maximum value is 17.449 which does not differ that much when
compared to short-term debt which is at 17.008. The mean and median for long-term debt
are 10.065 and 10.684 respectively. The standard deviation is 5.008, so it means the data
are widely spread out and there are multiple outliers.

As for preference share, the standard deviation is 1.736 and the maximum value is
7.924. Most companies in the listed data do not have preference share thus the minimum
value and median value of 0.000 with mean value of 0.396. Ordinary or common shares are
usually issued to the public thus the minimum value is not zero but 9.524. The maximum
value is 17.380, the mean is 13.690, the median is 13.078 and the standard deviation is
2.167. Regarding the retained earnings, some firms do not set aside revenues for expansion
resulting in a minimum value of 0.000. The maximum value for retained earnings is 17.346,
the mean is 11.447, the median is 12.349 and the standard deviation is 4.705.

ROA and Tobin’s Q is the indicator when observing firm performance The minimum
value for ROA is negative which indicates that some firms suffer from losses as their assets
cannot generate more money than they actually cost. The maximum value for ROA is 0.301,
higher than 20%, which means that some firms are doing excellent in terms of profitability.
The mean, median and standard deviation are 0.016, 0.018 and 1.387 respectively. On the
other hand, the minimum value of Tobin’s Q is 0.270 and the maximum value is 8.115. The
huge difference in figures shows how certain listed firms are either extremely overvalued or
undervalued. Nevertheless, the mean and the median of Tobin’s Q, at 1.150 and 0.757
respectively, are near the ideal Tobin’s Q value of 1.

As for the components of Weighted Average Cost of Capital – Cost of Debt (COD)
and Cost of Equity (COE), the minimum value and the maximum value is observed. The
minimum value for COE is -1.000 which means the firm’s liabilities exceed the assets owned
by the firms. For COD, the minimum value is 0.000 which means some companies does not
rely on debt as their financing source.

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3.2 Correlation Matrix

Figure 3.2: Correlation Matrix Table

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Based on Figure 3.2, the numbers in bold display the correlation between the firm’s
performance (Tobin’s Q, ROA) and its capital structures (Debt, Equity). The significant level
is set at 0.01 and 0.05. Data that shows a positive correlation with each other means that it
moves in the same direction (if one value increases, the other value will also increase) while
data with negative correlation signify they move in opposite directions (as one value
increases, the other value will decreases).

Firstly, we focus on the relationship between Tobin’s Q and capital structure. Short-term debt
shows a weak positive correlation (0.051) as significant value (0.653) is greater than 0.05.
On the other hand, long-term debt shows a weak negative correlation (-0.157) with Tobin’s Q
with a significance level of 0.165. Preference share, common share and total equity shows
weak negative correlation with values of -0.041, -0.078 and -0.121 respectively while
retained earnings has a weak positive correlation (0.004) with Tobin’s Q.

Next, the relationship between ROA and capital structure should also be noted. The long
term debt and ROA has weak negative correlation (-0.007) meanwhile short term debt
shows significant positive value of 0.319 with significance level (0.004) at 1%. Thus, the total
debt shows a significant positive correlation (0.264) at the significance level of 5%. Both
preferred share and common share shows weak positive correlation with the value 0.002
and 0.185 respectively. On the other hand, the retained earnings have positive significant
correlation (0.489) with ROA at the 1% significance level.

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3.3 Trend of Firm’s Capital Structure

YEAR DEBT EQUITY

2018 112818143 164840059
2019 122222559 168066992
2020 127121604 166515891
2021 133522227 169443216

Figure 3.3: Line Chart of Debt and Equity from 2018 to 2021

The line chart above shows the trend of the firm’s capital structure using a comparison
of total debt and equity as an index of measurement.

Before the pandemic hit, an increase in both total equity from 164,840,059 to
168,066,992 and total debt from 112,818,143 to 122,222,559 is observed from the year
2018 to 2019. This signifies that the economy is growing steadily.

However, we notice a reduction in total equity and an increment in total debt during the
pandemic lockdown phase in 2020. A fall in total equity from 2019 to 2020 is observed,
from 168,066,992 to 166,515,891. Meanwhile, a rise in total debt from 2019 to 2020 is
observed, from 122,222,559 to 127,121,604. One of the factors that could explain this
phenomenon is the cut of interest rates by Bank Negara Malaysia (BNM) to mitigate the
economic slump due to the pandemic containment measures such as Movement Control
Order (MCO). Overnight policy rate (OPR) rate decreased from 2.5% in March, 2% in

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May and to 1.75% in July 2020. The six-month loan moratorium that was given to Small
Medium Enterprises (SME) to ease the financial burden caused by the economic
slowdown was another contributing factor to the increase of total debts during the
pandemic phase.

As the economy gradually reopens, an increase in both total debt and total equity can be
seen from 12,712,160 to 133,522,227 in total debts, and from 166,515,891 to
169,443,216 in total equity from 2020 to 2021. Total equity increases as investors are
more willing to invest due to reduced uncertainty and heightened stability in the market.
At the same time, the recovery of the economy post-pandemic has also recorded a rise
in total debts. It can be seen from the four previous global recession that happened in
1975, 1982, 1991 and 2009 that debt will increase significantly and later slowly decrease
as the economy recovers (Kose et al., 2021). This is due to the fact that debt financing is
more stable than equity financing in dire time as investors can be demanding. It should
also be noted that investors are also people who are greatly affected by recession and
pandemic covid-19 as they are mostly individuals compared to the bank, an institution or
organisation.

Overall, we have observed that the Covid-19 pandemic has caused significant shifts in
the composition of firms’ capital structure in terms of debts and equity.

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3.4 Regression Analysis

Standardized Coefficients
Beta Beta t t Sig. Sig.
(ROA) (Tobin’s Q) (ROA) (Tobin’s Q) (ROA) (Tobin’s Q)
Constant -1.811 2.425 .0751 0.18
DEBT .617 .319 2.780 1.938 .007* .057*
EQUITY -1.642 -2.180 -6.393 -11.428 <.001** <.001**
AGE .380 .229 4.719 3.834 <.001** <.001**
MC 1.155 1.962 5.394 12.343 <.001** <.001**
DUAL .123 .019 1.319 .270 .192 .788
INDPDIR -.239 -.182 -2.395 -2.454 .019* .017*
BODSIZE .147 -.132 1.271 -1.534 .208 .130
GENDER .108 .099 1.199 1.486 .235 .142
Y2018 .115 .013 1.120 .167 .267 .868
Y2019 .197 -.027 2.120 -.386 .038* .701
Y2021 .193 .015 2.075 .217 .042* .829
a. Dependent Variable: ROA, Tobin’s Q
Significant level at *5%, **1%
Figure 3.4: Regression Analysis Table

Figure 3.4 displays the outcome of the regression analysis which aims to examine the
relationship between firms’ performance and capital structure.

According to the ROA model, total debt shows a significantly positive relationship at the 5%
significance level (p=0.007) while total equity depicts a significantly negative relationship at
the 1% significance level (p=<0.001). However, using the Tobin’s Q model, total debt does
not show a significantly positive relationship while total equity depicts a significant negative
relationship at the 1% significance level (p=<0.001). Meanwhile, age of the firm and firm size
have a significant positive relationship against firm performance at a significance value of
<0.001 for both models. In the year 2019, there is a significant change (p=0.038) in the
ROA. This may be due to the sudden appearance of the covid-19 in Wuhan, China at the
end of the year in December. During the year 2021, there is a positive significant change
(p=0.042) in the ROA as the economy slowly recovers from Covid-19 that went rampant
throughout the year 2020.

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1.0 CONCLUSION
From our case study, we conclude that there is a significant change in the capital structure
during the Covid-19 pandemic. We have proven that capital structure has shown influences
on the firms performance through our quantitative findings by regression analysis using
Tobin’s Q and ROA as the performance index.

4.1 References
Tuovila, A. (2022, December 14). Capital structure definition, types, importance, and

examples. Investopedia. Retrieved January 13, 2023, from

https://www.investopedia.com/terms/c/capitalstructure.asp

Corporate Finance Institute. (2022, November 28). Capital Structure.

https://corporatefinanceinstitute.com/resources/accounting/capital-structure-overview/

ACCA. (n.d.). Optimum capital structure. Retrieved January 13, 2023, from

https://www.accaglobal.com/uk/en/student/exam-support-resources/fundamentals-exams-stu

dy-resources/f9/technical-articles/optimum-capital-structure.html

Geeks for Geeks. (2023, January 03). Factors affecting the choice of Capital Structure.

Retrieved 14 January, 2023, from

https://www.geeksforgeeks.org/factors-affecting-the-choice-of-capital-structure/

Sanaya, A. (n. d.). Factors Affecting Capital Structure: Top 32 Factors. Retrieved 14 January,

2023, from

https://www.accountingnotes.net/financial-management/capital-structure/factors-affecting-ca

pital-structure-top-32-factors/17416

Wong, E. L. (2020, July 07). BNM cuts OPR by 25bps to record low of 1.75%.

TheEdgeMarkets. https://www.theedgemarkets.com/article/bnm-cuts-opr-25bps-175

Annuar, A. (2020, March 24). Bank Negara announces automatic six-month moratorium on

all bank loans – except for credit card balances. malaymail.

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Kose, M. A., Nagle, P., Ohnsorge, F., & Sugawara, N. (2021, November). What Has Been

the Impact of COVID-19 on Debt? (Working Paper No. 9871).

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pact-of-COVID-19-on-Debt-Turning-a-Wave-into-a-Tsunami.pdf?sequence=1&isAllowed=y

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4.2 Appendix

A. List of the firm

B. Age of firm (Number and Natural log of the age)
C. Value of total assets (RM and natural log of TA)
D. Value of market capitalization (firm size-RM and natural log)
E. Value of Short-term liabilities
F. Value of Long-term liabilities
G. Value of Preference shares
H. Value of Retained earnings
I. Value of Common shares
J. CEO Duality – appointed for both manager and director position (Number and
natural log)
K. Ratio of Independent Directors (Number and ratio in decimal)
L. Size of the board (number and ratio in decimal)
M. Gender (number and ratio of female director in decimal)
P. Summation of STD and LTD. (RM and natural log)
Q. Summation of Preferred Share, Retained Earnings and Common Share (RM
and natural log)
i is observations of each firm
t is time for each year of observations

No. LIST OF COMPANIES

1 AMTEL HOLDINGS
2 ANN JOO RESOURCES
3 APOLLO FOOD HOLDINGS
4 AXIATA GROUP
5 BERJAYA LAND
6 GAMUDA
7 GENTING
8 GRAND CENTRAL ENTS.
9 GUH HOLDINGS
10 HEINEKEN MALAYSIA
11 IHH HEALTHCARE
12 IOI CORPORATION
13 JAYCORP BHD.
14 KEY ALLIANCE GROUP
15 MALAYSIA SMELTING
16 ORIENTAL HOLDINGS
17 PETRA ENERGY
18 PRIVASIA TECHNOLOGY
19 UNITED MALACCA
20 VSOLAR

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