Thursday, 27 February 2014

Eratat: another S-chip bites the dust (2)

I blogged before about Eratat, one of the so called S-chips listed on the SGX.

The company made a new announcement, some snippets:

Mr Lin had produced online bank statements, the latest of which showed that the Company’s principal operating subsidiary Fujian Haimingwei Shoes Co., Ltd (“HMW”) had unencumbered cash balance of approximately RMB646 million (“HMW Cash Balance”) as at 24 January 2014 in its bank account maintained with the Agricultural Bank of China (“ABC Bank”), Jinjiang Chendai Branch (“24 January Statement”).

.... The above appeared to be consistent with an earlier document given by ABC Bank (“ABC Confirmation”), which showed that there was approximately RMB577 million of unencumbered cash balance in HMW bank account at ABC Bank as at 31 December 2013. 

.... the Company’s interim CEO, Mr Ho Ker Chern, the Audit Committee Chairman, Mr Lim Yeow Hua and the independent auditors (collectively, the “Working Parties”) made an impromptu visit to ABC Bank, Jinjiang Chendai Branch. They managed to meet the ABC Bank staff who handled the ABC Confirmation previously and she reaffirmed that the ABC Confirmation was verified by the bank branch. At the same visit, the Working Parties also met up with the branch manager of ABC Bank, Jinjiang Chendai Branch, Mr Zhang Liwei (张立伟) (“Manager Zhang”) and showed him the ABC Confirmation. Manager Zhang also affirmed that the ABC Confirmation was verified by ABC Bank and informed the Working Parties that HMW has been a good customer and did not have any bank loans with the bank.

So far so good, all seems to be fine, what could ever be wrong?

And then the bomb went off:

On 14 February 2014, the Company received a reply from ABC Bank, Jinjiang Chendai Branch (“ABC Response”). In their response, ABC Bank alleged that the 24 January Statement and the ABC Confirmation were not given by ABC Bank but were provided by the “finance company of HMW”. They also enclosed a confirmation signed by Mr Lin (in his capacity as the legal representative of HMW) on 8 February 2014 stating the same (“Lin Confirmation”). In the ABC Response, the bank also clarified that the cash and loan balances stated in the aforesaid documents were inconsistent with the bank’s records but did not elaborate further.

The Board was taken aback by the ABC Response as the 24 January Statement was taken from ABC Bank’s website and the ABC Confirmation was given by the bank’s employee at the bank’s premises previously. Moreover, the Working Parties had also met up with Manager Zhang as aforesaid and he had reaffirmed the documents then. 

And that sums up the problems with investing in Chinese companies, listed in Singapore (or Malaysia for that matter): even the bank balance can't be trusted.

My guess is, there is a huge difference in the bank balance, and (needless to say) the difference is not in a positive way.

On top of that, I don't like the response of the bank, they should mention how much the bank balance is, according to their books. They know from the correspondence that there are some major problems regarding HMW, and they should fully cooperate. By not elaborating they have not cooperated, I have some serious doubts with whom their loyalty lies.

"Given the discrepancies relating to the bank cash balances, the Audit Committee intends to conduct a special audit into the financial affairs of the Group, which could include, inter alia, ascertaining the bank cash balances, verifying the accounts receivables and payables and confirming the property, plant and assets of the Group.

However, given that the above would require the cooperation of the PRC management, there is no assurance that the special auditors (when appointed) would be able to conduct the special audit."

In other words, we might never even know how bad the situation is, or what exactly has happened. Pretty shocking.

And some more bad news:

"Due to the disruption to the Company’s management, the Group’s operations in China remain suspended and the staff did not return to work since the end of the Chinese New Year holiday period."

Investors who own shares in Eratat should be prepared for the worst. The share is suspended.

Tuesday, 25 February 2014

Good warning on perils in the oil and gas industry

Article in The Star: "Beware of risks in investing in sizzling oil and gas".

"... making money from the O&G business isn’t easy. Our market has seen its fair share of O&G companies that had stumbled in the past.

As examples, consider the stories of Ramunia Holdings Bhd, KNM Group Bhd Malaysia Marine, Heavy Engineering Holdings Bhd (MMHE) and the Scomi group. These stocks were at one point the darling of investors.

But at some point, they struggled to execute their businesses well. O&G fabricator Ramunia had slipped into PN17 status in June 2010. To quote from a Maybank research report dated April 2010: “Ramunia is in bad shape operationally and financially. It faces declining order book, earnings and shareholders funds due to poor project execution and negative cash flows.”

KNM Group Bhd was another high-flying oil and gas player. But it too did stumble, suffering a quarterly loss in 2009 and a full year loss at group level in 2011. Among the reasons for its losses was its high fixed cost and debt levels. It’s aggressive overseas expansion also saw it having to provide for foreseeable losses in Brazil, Canada and Indonesia.

The Scomi group had encountered similar problems with its overseas assets while giant fabricator MMHE had suffered from higher-than-expected expenses incurred from some of its projects and from the share of losses from jointly controlled entities’ performance.

One problem is that the O&G business, like many other sectors, is cyclical. You may invest during peak times but then get saddled with high fixed costs and low utilisation rates when the cycle hits a downturn.

Getting the right expertise to executive projects profitably is another challenge."

Ze Moola has written many articles about three of the above mentioned companies:

- Ramunia
- Scomi

Sunday, 23 February 2014

Landmark case against Mayban Trustee and Kaf Discounts (2)

I wrote more than two years ago about this case.

On February 10, 2014 the press summary was published about five civil appeals regarding this same case.

To summarize the main players:
  • Pesaka Astana (M) Sdn Bhd (Pesaka), a manufacturer of vehicles, proposed a financing scheme
  • Datuk Mohamed Rafie Sain (Rafie) and Datin Murnina bt Dato’ Haji Sujak (Murnina) are in control of Pesaka
  • KAF Investment Bank (KAF) was the lead arranger, facility agent and issue agent
  • Kenanga was the primary subscriber, who sold the bonds to the ultimate bondholders
  • Maybank Trustees (MTB) was the trustee

Problems started in 2005 when the accounts, which contained the revenue of certain orders, were not properly ring-fenced (as was promised to the bondholders), and:

"Having control over the accounts, Pesaka utilised the monies in the Designated Accounts for its own purposes and failed to redeem the bonds and repay the bondholders on the maturity date."

"Rafie had admitted that the funds of the Issuer were utilised to invest in the Amdac Group in various investments both locally and abroad. The common pattern was that the assets would ultimately be in the names of either Rafie or Murnina."

The results of this latest court case were different:
  • "KAF is not a party to the Trust Deed. It is strictly between the Issuer and MTB." and "MTB is wholly to blame for the loss and not KAF."
  • "We make an order that MTB is liable only to RM107 million and not the full amount of RM149,315,000."
  • No interest to be charged on top of the above amount: ".... our answers to the three questions on pre-judgment interest are in the negative."
  • "Similarly in the present case it is obviously not just and equitable to allow Pesaka to keep the ill-gotten gains or any part of it. This is especially so when the bondholders have not taken any step to enforce the Consent Judgment entered between Pesaka and the bondholders and instead focus their attention to MTB on the basis that MTB is in the position to satisfy the bondholders’ claim. Thus, by allowing indemnity in full, Pesaka will be called to meet its obligation in full"
  • " would be a travesty of justice that it be allowed to keep a portion of the ill-gotten gains and accordingly we order that Murnina too (and Rafie who together with Murnina owned 90% of Pesaka) must fully indemnify MTB for the loss." 

An interesting court case and judgement that might have consequences for future cases.

Pity that these cases are so rare in Malaysia, and often only in the case of bonds. When bonds default, that is a clear signal that something is wrong and that action has to be taken.

But when a prospectus of for instance an IPO or a Related Party Transaction or a General Offer contains wrong or misleading information or when a valuation given is not justified, then surely action also should be taken, even when the case might not be so black and white as a bond default?

And so many Malaysian IPO's have disappointed from the moment the company was listed, so many RPT's have yielded bad results, so many companies were delisted for a too low amount.

For a small minority shareholder the legal expenses would be too high, but for a large fund it should be worth their while. Hopefully the larger funds like PNB and EPF will be more willing to take appropriate action in these corporate exercises.

Regarding the above case, "Skilgannon1066" asked the following questions on Rocky Bru's website:

  • Why did Pesaka default on the bonds back in September 2005?
  • How did it get on to the Ministry of Defence's suppliers list if its financials were shaky?
  • Were the RM140 million bonds issued to finance a contract awarded to Pesaka by the Ministry of Defence?
  • Was the contract satisfactorily completed and the goods or services properly delivered to the satisfaction of the Ministry?
  • Is Pesaka Astana still a defence supplier in good standing with the Ministry, notwithstanding its bonds default in 2005?

In answer to the last question, according to this article, it looks like Pesaka is still doing business with the Malaysian government under its new name AMDAC (M) Sdn Bhd.

Saturday, 15 February 2014

Ocean Sky crash: A lesson for SGX

An article from R. Sivanithy in the Business Times (Singapore) about the Ocean Sky International, its share price crashing about 50% in a single day.

"At 2pm, after the shares had collapsed nine cents or 31 per cent to 20 cents, OSI requested a trading halt pending release of an announcement."

When was it exactly known that the deal with Ezion was off? If it was known more early, why did OSI not request the trading halt more early? Who were the sellers who sold that day before the trading was halted? The volume was clearly higher than the days before.

The article further zooms in on errors that the SGX made:

The problem is that - incredibly - SGX sent its standard template asking OSI to explain the substantial increase in its share price when it should have asked about the decrease.

Sixteen minutes later, at 1.52pm, possibly because it realised its error (though this is not explicitly stated), SGX issued a notice to ignore the previous query but did not mention anything else.

At 2pm, after the shares had collapsed nine cents or 31 per cent to 20 cents, OSI requested a trading halt pending release of an announcement.

At 2.07pm, seven minutes after the shares were suspended and 15 minutes after withdrawing its earlier query, SGX sent off its standard query template but with "decrease" mentioned in place of "increase". Some seven hours later, at 9.04pm, Ezion said in a filing that the deal had been terminated. This was followed a minute later by OSI filing the same announcement.

SGX's queries, including its blunder, raise questions over just how vigilant its surveillance really is, and highlights how far behind the curve it operates. Even if it had asked the right questions at 1.36pm, thus satisfying its brief as mainly a signaller of caution to the market, it would have made almost no difference - OSI's shares, at 21.5 cents at that time, had already crashed spectacularly.
Furthermore, the correctly worded query was issued seven minutes after the company suspended trading. So it carried no signalling or informational value whatsoever because nobody could have acted on it even if they had wanted to.

It is therefore difficult to refute the widely held belief that the exchange's archaic querying process as it stands today is weak and ineffective. Fortunately, the process is currently under review and proposals to raise the surveillance and querying bar were issued for public consultation last week.
If the exchange and regulators wish to redeem themselves, they should embark on a thorough investigation of the hurried sales which hit the market on Wednesday during the five hours of trading from 9am to 2pm.

Hopefully, when this is actually done, the findings will be divulged quickly. Wait too long and the incident will slip quietly into the annals of the local market's history - which is teeming with similar cases over the years that appear to have escaped official scrutiny.

Friday, 14 February 2014

Hong Kong Chairman blackmailed to hand over hundreds of millions of shares

From SCMP:

Businessman 'threatened to throw company chairman to sharks in extortion bid'

"A businessman ganged up with thugs and threatened to take the chairman of a listed company out to the high seas and throw him to the sharks in order to extort millions of shares from him, a court heard yesterday.

Koon Wing-yee, 56, former chairman of the listed Easyknit Group, targeted Hui Chi-ming, then chairman of Sino Union Petroleum and Chemical International, accusing Hui's company of causing him market losses, the Court of First Instance heard.

According to prosecutor Audrey Campbell-Moffat SC, Koon allegedly told Hui in March 2009: "I have lost so much money from your company.

"I want you to give me 100 million shares because I lost money buying your shares."

After Hui surrendered the shares, the gang jacked up the demand to 300 million shares, the court heard."

And the worst part is that these fellows can't be trusted, so it seems:

"Hui later gave in, on condition that the shares would not be sold within three months. But the shares were sold at a much lower price the next day."

Is there no honour anymore amongst thieves? Not in Hong Kong, it seems.

Anyone interested to invest in Easyknit International Holdings Ltd, whose former Chairman allegedly was behind the above?

A long and colourful list of articles regarding Easyknit can be found here on David Webb's site.

Thursday, 13 February 2014

Protasco's Puzzling Purchase (3)

I wrote in my previous posting about "Protasco's Puzzling Purchase":

"There still is hardly any transparency at all".

Protasco was simply begging Bursa to be queried, and Bursa "happily" complied, issuing a list of 21 (excellent) questions.

As far as I remember, by far the longest list of questions I have ever seen from Bursa (and I must have read hundreds of them). But may be that was Protasco's intention all the time, to be admitted to the Malaysian Guiness Book of Records.

Protasco did answer all questions, revealing lots of new information.

I will cherry pick some of it (I recommend shareholders of Protasco to read the whole document):

Question 2: why the valuation is so much lower than in the initial S&P agreement

"The purchase consideration of USD55 million under the Original SPA was derived at based on the Vendor’s valuation of the KST Field and taking into consideration Protasco’s effective interests in PT Haseba of 50.5%."

To just take over the vendors valuation sounds rather naïve to me, surely the vendor is interested to get as high a price as possible?

Question 3: Basis and justification for Protasco to enter into the Restated SPA as it is noted that Due Diligence in still on going

"The Board has decided to proceed with the Restated SPA to enable Protasco to take control of PT ASI, so that PT ASI can commence with the exploration, well re-activation and/or construction of the well (if required) in accordance with an agreed development plan approved by Pertamina.  The development plan is an integral part of the PMPA extension and/or other similar agreement by Pertamina to extend the PMPA beyond its expiry on 14th December 2014 for the Extension."

It looks like there is currently not enough money in PT ASI to commence activities, and PERTAMINA needs to see development going on. That is why the deal now is pushed through. Protasco will provide a loan of USD 5 Million for this purpose.

Question 7: To disclose basis and justification (including bases and assumption) in arriving at the valuation of USD35 million

"The valuation of USD33.3 million in KST Field by KPMG, Singapore is arrived at using the income approach [discounted cash flow method (“DCF”)].  In arriving at the valuation, the following bases and assumptions are used:"

And then a long list of assumptions is mentioned, a list that can easily be expanded on. The problem with DCF is that changes in a single assumption can cause quite large changes in the outcome, changes in a few assumptions will render the valuation basically useless. DCF might be useful in calculating the value of a bond, or of a toll highway with predictable traffic, but it is completely unsuitable to calculate the valuation of a junior energy play like PT ASI.

Question 10: Detailed information on KST Field

"(d) PT Haseba is entitled to USD32.39/bbl for every barrel received at sales point when the Indonesia Crude Price (“ICP”) is over USD100/bbl"

As far as I can see, the USD 32.39 is a fixed amount, this would hugely limit the upside potential, shareholders of Protasco should take notice.

Question 14: Information on PT Inovisi Infracom TBK (“PT Inovisi”)

"The substantial shareholder [of PT Inovisi] is PT Green Pine, holding 60.2% equity interest in PT Inovisi. PT Green Pine has business relationship with the Vendor [of PT ASI]"

What does "business relationship" mean? Do they infrequently do some trading or are the major shareholders substantially the same? I guess more towards the latter. Protasco has not been forthcoming at all about information regarding the seller (which is ultimately owned by a BVI registered company).

Question 19: Statement by Protasco

"Protasco, after considering the report by KPMG and barring unforeseen circumstances, is of the opinion that the Profit Guarantee is realistic."

For the sake of the shareholders of Protasco I definitely hope they are right, but I have strong doubts. This year for instance the company would need to make USD 2M, but the year has already started and there will be lots of initial start-up costs involved. PT ATI's track record so far also does not give any indication that the profit guarantee can be met.

If this deal is really that good, why did the seller (most likely based in Indonesia and having deep knowledge of the oil & gas industry) offer it to Protasco (based in Malaysia and with no experience in the oil & gas industry). The seller could simply have placed the PT Inovisi shares with a bank, borrowed money against it, and (re-)started the wells themselves and reap 100% of the profits.

If a deal sounds too good too be true, it often is too good to be true.

Wednesday, 12 February 2014

Stolen info SBM Offshore about alleged $ 250 million fraud (2)

KiniBiz picked up on the story on SBM Offshore and MISC (most likely after having read the story on this blog, although no source was mentioned) in their article:

"MISC named in global O&G bribery scandal"

KiniBiz asked for comments from MISC, which they could not give on time for that article.

However, today MISC has answered, in KiniBiz's article:

"Petronas’ MISC denies knowledge of bribery"

"At this point in time, we do not have any further information on the matter other than allegations that were made in Wikipedia and media releases made by SBM Offshore pertaining to the matter on Feb 7 and 10, 2014,” said the Petronas subsidiary in response to KiniBiz queries.

We have to wait for further information from SBM Offshore's side. Things have been going pretty slow there, the first allegations about possible bribery where reported in 2012.

From Reuters:

"It later disclosed it might have violated anti-corruption laws and could be subject to criminal investigation for alleged payments of bribes to officials in African countries. SBM Offshore has also said the investigation centres around potentially improper sales practices in two countries in Africa, and in one other country outside Africa, but said it was not possible to give more information or an estimate of the potential outcome."

This is the kind of language normally used when it looks like bribery did indeed happen. But what changed since last Friday is that the scale might be (much) bigger than initially feared, and that (some of) the management were aware of the bribery.

The COO was dismissed in 2013, in a rather "mysterious" announcement not mentioning the reason, but declaring that it was "not related to the operational performance of the projects in hand". The internet allegations did mention many times a person with the initials "JPL", which are the same as those of the COO.

Analysts now count on a possible very large fine for SBM Offshore, in the tune of RM 1 Billion to RM 2 Billion. Those amounts are peanuts for companies like JP Morgan, but not for SBM Offshore, who might want to use a rights issue to strengthen their balance sheet. Not sure though if the shareholders are too happy to draw their chequebook to pay for fines.

Monday, 10 February 2014

Stolen info SBM Offshore about alleged $ 250 million fraud

The share price of SBM Offshore, a Dutch company involved in the service industry for oil & gas, was hit hard last Friday on fresh allegations about corruption. The possible size makes it one of the largest recent cases of bribery.

The Dutch magazine Quote had published new information regarding this matter on its website.

The reader can use Google translate on the text, I have tried to translate a few paragraphs:

Stolen info SBM Offshore about $ 250 million fraud and involvement top executives

On the internet circulates a very detailed document that gives information about large scale alleged bribes by Schiedam (Netherlands) based Billion Euro company SBM Offshore, a supplier to the oil and gas industry. SBM confirms to Quote that this information comes from within the company. "It was stolen by a former employee who wanted to blackmail us."

A former employee of SBM has a large amount of information about possible fraud cases by employees of SBM Offshore on the Internet, which contains bribery of officials in Angola, Equatorial Guinea (both located in West Africa), Brazil, Malaysia, Iraq, Kazakhstan and Italy. Also, excerpts from transcripts of recordings published showing that (members of) the Board of Directors and (members of) the Board of Trustees for many years are aware of the malpractices. The top of the company would deliberately try to conceal these cases. In total, between 2005 and 2011, $ 250 million is spent on bribes.

The spokesman of SBM lets Quote know that this information actually comes from the internal investigation that runs inside the company. "This information has been obtained illegally by an angry former employee who tried to extort SBM. We are engaged in legal action against this person. This information is placed out of context. As the investigations of the American and Dutch judiciary are still running, with which we are fully cooperating, we can not further give any information."

The text can be found in the following Wikipedia article, an old revision dated October 18, 2013.

The link to Malaysia can be found in the following paragraph:

"4.1 MALAYSIA - Payments to Barnado Limited and Delcom Limited totalling approximately US$10,000,000, paid on (ie. by way of bribes) to “MISC” for the Kikeh FPSO (leased to US oil company Murphy)."

If these allegations by the formed employee are indeed true or not, I guess we have to wait until the investigations by the relevant authorities are finished.

More information about this project can be found here:


"The Kikeh field is located 120km northwest of the island of Labuan, offshore Sabah, East Malaysia in water depths of around 1,300m. Murphy Sabah Oil Company operates Kikeh on behalf of partner Petronas Carigali.

The FPSO Kikeh will be located in 1,350m of water. It will be owned by MDFT Labaun and operated by MDPX Sdn Bhd, two joint ventures between SBM and Misc Berhad. The converted tanker was built in 1974 It has an overall length of 337m a breadth of 54.6m and a deadweight of 273,000t. It has a storage capacity of two million barrels."

"In investing, you get what you don’t pay for"

I read the interesting article "The Mutual Fund Walking Dead", with the following eye-opening graph:

"The underperformance of active mutual funds is well publicized at this point.  These graphs are just another nail in the coffin.

What got my attention with this data is that it shows how many active mutual funds just completely go out of business.  Basically, they get shut down or merge with another fund.

The first study shows that only 55% of active mutual funds survived the 15 year period through 2012. Somehow, 36% survived but underperformed.  And only 18% both survived and outperformed their index.

The second graph shows how much worse active fund underperformance is once you add in the graveyard funds.  Nearly all of these asset classes go to roughly 80% underperformance against their index over 10 years including the dead funds.

In Don’t Count on It, John Bogle informs readers that there were only 49 stock mutual funds in 1945.  By 2006, that number had ballooned to 4,200.

He also shared that around 50% of the mutual funds created in the 1990s failed and 1,000 funds failed in the 2000-04 period.

So not only are you competing against simple, low-cost index funds when trying to choose active funds.  You also have to dodge the walking dead zombie funds that end up dying.

Mutual fund companies will continue to churn out funds that mirror the hottest performing sector or asset class.  If they don’t work those funds will be swept aside for the next revolutionary idea.

Don’t take the bait."

The graphs are from Vanguard, the company founded by John Bogle.

An interesting interview by The New York Times with Bogle can be found here, some excerpts (emphasis mine):

Start with the economy, the ultimate source of long-term stock market returns. “The economy has clouds hovering over it,” Mr. Bogle says. “And the financial system has been damaged. The risk of a black-swan event — of something unlikely but apocalyptic — is small, but it’s real.”

Even so, he says, long-term investors must hold stocks, because risky as the market may be, it is still likely to produce better returns than the alternatives.

“Wise investors won’t try to outsmart the market,” he says. “They’ll buy index funds for the long term, and they’ll diversify.

“But diversify into what? They need alternatives, bonds, for the most part. What’s so frightening right now is that the alternatives to equities are so poor.”

In the financial crises of the last several years, he says, investors have flocked to seemingly safe government bonds, driving up prices and driving down yields. The Federal Reserve and other central banks have been pushing down interest rates, too.

But low yields today predict low returns later, he says, and “the outlook for bonds over the next decade is really terrible.”

Dark as this outlook may be, he says, people need to “stay the course” if they are to have hope of  buying homes or putting children through college or retiring in comfort.

Too much money is aimed at short-term speculation — the seeking of quick profit with little concern for the future. The financial system has been wounded by a flood of so-called innovations that merely promote hyper-rapid trading, market timing and shortsighted corporate maneuvering. Individual investors are being shortchanged, he writes.

He is still preaching the gospel of long-term, low-cost investing. “My ideas are very simple,” he says: “In investing, you get what you don’t pay for. Costs matter. So intelligent investors will use low-cost index funds to build a diversified portfolio of stocks and bonds, and they will stay the course. And they won’t be foolish enough to think that they can consistently outsmart the market.”

He advocates taxes to discourage short-term speculation. He wants limits on leverage, transparency for financial derivatives, stricter punishments for financial crimes and, perhaps most urgently, a unified fiduciary standard for all money managers: “A fiduciary standard means, basically, put the interests of the client first. No excuses. Period.”

Sunday, 9 February 2014

Future global growth slowing down?

Apollo Asia Fund's 4th quarter 2013 review "The next three decades may be different" is not a cheerful read, but a very well balanced view:

"Investors will be familiar with the adage that the most dangerous phrase in investing is that "this time is different". When it comes to excitement over new technologies, fads, and bubbles, the sceptics are generally (in the end) proved correct. Yet today it seems appropriate to examine several potential cracks in the foundations of conventional thinking on economics and investment. I have been fortunate enough to spend my working life in Asia during a period of peace, prosperity, and globalisation, and to have witnessed tremendous growth, with a few major bear markets along the way. I am accustomed to cycles, but currently more interested in secular trends. It seems to me that the next three decades may be very different from the last three, and from the last century or so on which most investment thinking is based."

From an investment point of view, the following paragraph is rather remarkable (emphasis mine):

"Given the above, rational investment allocation seems more challenging than in the past. Change always presents new opportunities, but they may arise in new sectors, rather than those in which our skills have been honed. Caution as to future growth leads us to see fewer opportunities among the 'inevitables', riding predictable trends of demographics and income growth: some are priced for rates of growth that may become hard to deliver.

Valuations of Apollo Asia Fund's holdings are as high as they have ever been. Fifteen years ago, in December 1998, the current-year earnings yield of the portfolio was estimated at 16%, and the net dividend yield at 6%. Five years ago, in December 2008, the figures were 13% and 5% respectively. Both were years of crisis, which presented opportunities, and set us up for good gains. Now the earnings yield is 6% and the dividend yield 3%: still worth playing, but promising less. On a range of valuation parameters, our portfolio is now 25-30% more expensive than averaged over the last ten years. Cheaper stocks can be found, but they are often cheap for good reason. Many small companies have attracted new attention, as often happens when bull markets mature, and we treat lobster pots with caution.

All this should demonstrate that past performance is no guide to the future. Given the higher starting valuations, return expectations from here should be appropriately subdued. With business risks higher, rational investment allocation currently seems difficult. In a changing world, fresh thinking and skills may be required. Investors may wish to seek fund managers better equipped for the future: redemption requests remain welcome."

It is not often that a fund manager recommends her clients to consider redeeming (part of) their investment with the fund.

The quarterly report was written on January 10, 2014, with the global stock markets taking a dive in the last few weeks, the advice was well timed.

GMO just published their quarterly report partly about the same issues, lots of big picture stuff about resources, global growth slowing down, etc.

But also an investing story (GMO is after all also a fund manager), to be found on page 9, with the following tips:

Saturday, 8 February 2014

Eratat: another S-chip bites the dust

Eratat Lifestyle Ltd, one of the many so-called S-chips trading on the SGX, seems to have run into some very serious problems. According to this announcement:

"Prior to the receipt of the Acceleration Notice, the Audit Committee had approached CEO Lin to understand why the Company was not able to make the interest payment notwithstanding the HMW Cash Balance and the SAFE Letter. CEO Lin was not able to provide any satisfactory explanation. A suggestion was then made for CEO Lin to transfer the interest payment to an onshore account designated by the Bondholder so as to avoid any possible offshore remittance issue. Even then, CEO Lin was unable to accede to the above request without any satisfactory explanation.
The Chairman of the Audit Committee, Mr Lim Yeow Hua, and Company’s CFO, Mr Ho Ker Chern, also flew to Jinjiang, Fujian on 28 January 2014 to meet CEO Lin with a view to understand and resolve the above issues. However, CEO Lin said that he was in Beijing and could not meet them and he also did not take any steps to meet the requirements of the Bondholder and the Audit Committee.
In view of the above events, the Audit Committee has decided to suspend CEO Lin from his duties with immediate effect and also appointed the current CFO of the Company, Mr Ho Ker Chern, to take over as interim CEO to verify the HMW Cash Balance as well as the Group’s other cash balances, secure control over the Group’s bank accounts and facilitate any investigation into the affairs of the Group."

This sounds all pretty serious, both the default on the bond issue and the behaviour of the CEO.

The bond issue was anyhow very controversial, why does a company with a large amount of cash need debt?  About five months ago this issue was raised by Mothly Fool: "An Example Of Poor Financing Decisions":

"Under the agreement between SHK and Eratat, the former would purchase bonds, which would come due on June 2015, from the latter at a price of RMB100.5m. In addition, the interest payments for the bond would amount to RMB16.75m per year, bringing the effective interest rate on the bonds to 16.67% per year!

Even without any reference, that’s an unduly high amount of interest to be paid for a bond that has a maturity of only 2 years. Usually, bonds with higher interests are ones with longer maturity dates, in which the long time-span from issue-to-maturity would mean that the creditor is exposed to more risks.
Prior to the bond issue, Eratat’s latest financials showed that it had cash on hand of RMB545m with zero debt. This meant that it could have used its cash hoard, without undue stress on its finances, to fund the corporate activities that were just mentioned instead of relying on expensive debt. But as we know, Eratat decided to take on costly debt to “strengthen its financial position” despite management acknowledging the fact that the company has sufficient working capital for its needs.
Eratat’s annual interest payment of RMB16.75m for its bonds makes up almost 12% of its profit of RMB142 for the whole of last year showing how the bond issue isn’t exactly a shareholder friendly move as the interest payments are added expenses that might lower the company’s profits substantially."

As "D.O.G." commented, SHK is not related to Sun Hung Kai Properties, the well known Hong Kong property player.

SHK is controlled by Malaysia born tycoon Lee Ming Tee, who was jailed for one year "over his role in a deception to inflate the true value of the Allied Group. Mr Justice Michael Burrell described the case as 'an extraordinary piece of criminal litigation' and refused to impose a suspended sentence".

Lee is described as a "one-time scourge of the Australian stockmarket" and is linked to Malaysia's listed Mulpha International:

"Lee officially divorced himself from his Malaysian-listed property vehicle, Mulpha International, because of the onset of the fraud charges six years ago and is thought to have divested most of his wealth to his family. Mulpha International is run by his son, Lee Seng Huang, who owns a 4 per cent stake."

Sun Hung Kai & Co is mentioned many times on David Webb's website, which is not a good place to be, since all articles are distinctively negative: suspensions, fines, market manipulation, etc. Lee Ming Tee received a place in Webb's "Hall of Shame".

SGX and MAS have just proposed measures to strengthen the securities market in Singapore. A rather obvious one was left out: not to allow China based companies anymore to list on the SGX.

If the cash balance of a company can't be trusted, and executive directors behave in erratic ways, then all fundamentals go out of the window. What is left is a punt, not an opportunity to invest.

I don't want to suggest that all China-listed companies in Singapore (or Malaysia) are frauds, just too many are behaving in a dubious manner. China is still developing very fast, capitalism has only arrived about two decades ago at its shores. We need to wait may be 10 or 20 years for all to have settled.

Wednesday, 5 February 2014

tv programs about the Global Financial Crisis

Interesting series of four episodes by Al Jazeera, so far the first two episodes have been aired:

"The men who crashed the world"

"A global Tsunami"

From PBS/Frontline an older (2009) series:

"The Warning"

"Inside the Meltdown"

"Money, Power and Wall Street" (4 episodes):

Tuesday, 4 February 2014

Tesco: Buffett vs Woodford

I have often blogged about Warren Buffett but never about Neil Woodford, a fund manager who is rather famous in the UK. The two are squaring off on Tesco, the large global supermarket chain.

From the website of the DailyMail (Mail Online):

"Buffett vs Woodford: Two years after watershed Tesco profit alert, which legendary investor called it right?"

Tesco dumbfounded investors with a profits warning two years ago.

It also unwittingly created a face-off between two legendary investors, American billionaire Warren Buffett and British fund guru Neil Woodford, who laid opposing bets on the supermarket giant's future prospects.

To recap, very few saw Tesco's profit alert coming despite some rumblings of discontent about problems neglected under the regime of ex-boss Sir Terry Leahy. On the day the news broke in January 2012, shares in the company plummeted 16 per cent and closed at 323.45p.

But it wasn't clear whether Tesco had just suffered a temporary trading setback that Christmas or was in much deeper trouble.

Ordinary shareholders were torn between seizing the chance to buy in on the cheap or dumping the stock. Then a couple of extraordinary shareholders waded in on different sides - Buffett increased his stake, while Woodford sold all his stock in the company.

It's easy at this stage to say Woodford was right.

A couple of years on and despite valiant attempts by current boss Phil Clarke to turn the business around, Tesco's stock is still hovering around the 320p mark.

It's off the worst lows during this grim stretch for shareholders, but remains around 17 per cent lower than the 385p closing price on 11 January 2012 - the day before the watershed profit warning.
And with no sign of a robust recovery in sight, Buffett looks like he's starting to have doubts about his investment. He sold off some, but not all, of his stake in Tesco last autumn.

His firm Berkshire Hathaway holds 3.18 per cent of the supermarket's stock and is still its fifth biggest shareholder.

But after just two years, it's probably too soon to say Woodford has won this unintentional stand-off with Buffett.

Both Buffett and Woodford are contrarian investors who pursue long-term strategies. They are more than likely indifferent to whether the wider world judges their investing decisions as wrong - or right - over very extended periods so long as they make money in the end.

Below is the share price of the last 5 years, the stock hasn't done much and might thus be relatively cheap, it pays a decent dividend. Also, it is not often that one can buy a share at a decent discount to the price that Warren Buffett paid.

But Woodford's selling does look like a red flag, Woodford is playing a home game in the UK, Buffett is playing away. I prefer to wait, there is anyhow not much good economic news lately, markets look jittery.

LTKM Chairman missing in action? (3)

I posted twice about this case, here and here and several times about the Genneva gold trading scandal.

According to this article from Bernama, the previous Chairman of LTKM is not missing in action anymore.

Again, the charge is not related to a pyramid scheme, but to illegal deposit taking, apparently that is more easy to prove (BNM lost the first case regarding a pyramid scheme, they are appealing).

I guess there are more ways to skin a cat, Al Capone was not convicted for his crimes but for tax evasion.

I just hope for two things in the Genneva case:
  • A healthy dose of justice;
  • Lots of transparency in what really happened and why it took so long time before action was taken.
Hopefully one day there will be a book written by an investigative reporter revealing all, similar to "PKFZ: A Nation’s Trust Betrayed".

Another Genneva Director Brings Total Charged To 16 Individuals

KUALA LUMPUR, Feb 4 (Bernama) -- Another Genneva (M) Sdn Bhd director was charged at the Sessions Court here Tuesday for illegal deposit-taking amounting to RM5.5 billion, bringing the number of individuals charged in the gold investment case to 16 so far.

Ahmad Khairuddin Illias, 55, pleaded not guilty to two counts of illegal deposit for a gold scheme, under Section 25(1) of the Banking and Financial Institutions Act 1989, which is punishable by up to 10 years jail or maximum of RM10 million or both, upon conviction.

He is accused of committing the offence through two current accounts at CIMB Bank Berhad, Jalan Kuchai Lama branch here between Jan 10 2011 and Oct 1 2012.

Bank Negara Malaysia (BNM) prosecuting officer Fahmi Abd Moin applied for Ahmad Khairuddin's case to be tried jointly with the 15 other individuals charged earlier.

Judge Mat Ghani Abdullah set bail at RM500,000 with one surety and ordered the accused's passport to be impounded.

The court also scheduled Feb 20 for mention and submissions on the prosecution's application for the all the cases to be jointly tried.

Lawyer Mohd Hairani Samsi represented Ahmad Khairuddin.

Between Sept 2013 to date, BNM has charged 16 individuals, including the accused, and 10 companies on 1,550 counts in relation to gold investment schemes amounting to RM5.5 billion.

Sunday, 2 February 2014

Protasco's Puzzling Purchase (2)

I wrote before about Protasco's proposed deal to buy into an Indonesian oil & gas company, a rather strange deal since Protasco has no relevant industry experience in this field.

The company just announced that it has entered in an amended Sales and Purchase Agreement, 13 months after the initial announcement. Was the first announcement made during the Christmas holiday, this time it was made on the evening of the CNY family reunion diner. Interesting timing indeed.

The deal in short (all PT companies are Indonesian based):
  • Anglo Slavic Petrogas, a BVI based company, owns 100% of PT ASU
  • PT ASU owns 100% of PT ASI
  • PT ASI owns 95% of PT FAS, an oil & gas exploration company
  • PT FAS owns 70% of PT Haseba
  • PT Haseba has the rights to KST Field
Protasco wants to buy a big chunk of PT ASI shares from PT ASU.

The old deal (28 December 2012): Protasco buys 76% of PT ASI for USD 55M, with a USD 55M profit guarantee (spread out over 4 years). This deal values PT ASI at USD 72M.

The new deal (29 January 2014): Protasco buys 63% of PT ASI for USD 22M, with a USD 22M profit guarantee (spread out over 4 years). The deal values PT ASI at USD 35M.

It seems that the value of PT ASI suddenly has halved while the profit guarantee is down a whopping 60%! No reason is given for the much lower profit guarantee, puzzling.

PT ASI's net assets are only USD 9M. The valuation (about 4 times net assets) is done by KPMG based on the DCF (Discounted Cash Flow) model.

I think this tool is completely unsuitable (I wrote before about this) to calculate the valuation for a junior oil & gas company, due to the enormous uncertainties, for instance:
  1. The prices of oil and gas, fluctuating a lot
  2. Exchange price between different currencies
  3. Cost of exploration, often projects are more expensive and take longer than planned
  4. The exact amount of reserves available and the economic viability to extract them
  5. The possibilities of disasters, either caused by men (oil spills etc.) or by nature (the field is near an earthquake prone area)
  6. Possible changes in the conditions of the concession or in the tax rate (happen quite often, especially if profit is good and the government changes)
  7. High corruption and low corporate governance standards and enforcement in Indonesia (for instance compared to Malaysia)

There is still no approval to extend the partnership agreement that expires on December 2014 for another 10 years. The extension is however a condition for the deal to go through.

There still is hardly any transparency at all, for instance:
  • Who is behind the BVI based seller Anglo Slavic Petrogas?
  • What are the expected extraction rates and what are the oil & gas reserves of the KST Field?
  • Why was the exploration of KST Field stopped in the past? In 2011 revenue of PT Haseba was zero
  • Is there any middlemen, is any commission paid for this deal?
  • Who owns the other 30% of PT Haseba?
  • What did PT ASI pay to own 95% of PT FAS?
  • Protasco will make an advance of another USD 5 Million to be used for exploration, how much are the other companies (PT ASU, the other shareholders of PT Haseba) contributing?

Bad news is that the amount of money to be invested and loaned represents 24% of Protasco's net assets, and since this is less than 25% the company doesn't need shareholders approval nor does it need to appoint an adviser. Is it by chance that the percentage is just below the threshold?

An anonymous person pointed at the possible role that Adrian Ooi Kock Aun plays in the deal, he was appointed to the board of Protasco just before the deal was announced December 2012. He is the CFO of PT Inovisi Infracom Tbk, an Indonesian listed company that also invests in oil & gas. The guarantees that are given out are based on a large block of shares of PT Inovisi Infracom Tbk. Surely Adrian Ooi must be aware of the identity of this large shareholder who is most likely the person/company behind Anglo Slavic Petrogas, the seller. Should this information not be made public?