Saturday, 28 February 2015

Maybulk: large paperlosses on its investment in POSH (2)

In my previous post on this matter, I wrote:

"... if Maybulk decided to mark its investment in POSH against the market price (which sounds pretty reasonable to me), then it has to account for a one-off loss of RM 540 Million."

Maybulk announced its quarterly results and, as expected, the company did not mark its investment in POSH down against the market price. Although POSH's share price keeps on going down (at the moment it is SGD 0.52, 55% below the IPO price), Maybulk in actual fact managed to book a paper profit on its investment.

That does sound rather puzzling, how can one book a profit on an asset that only goes down in value?

The "trick" is that the SGD is going up compared to the RM. Maybulk is taking that into consideration, but not the (much larger) decrease in price of POSH's share.

The value of POSH in Maybulk's account is now a whopping RM 1,334 Million. However, the market value is only about RM 533M, a difference of about RM 800 Million.

In other words: although Maybulk's investment in POSH has been most disappointing, the share price of POSH has tumbled, the dividends received by Maybulk have been peanuts, "the share of results of an associate" (due to POSH's profit) has been small (and anyhow a non-cash item) and there is no clear exit down the road, Maybulk still continues to book paper profits on it.

According to Maybulk its own shareholders equity is close to RM 2.0 Billion. If we subtract the above RM 800 Million from it, then the adjusted net asset value is close to RM 1.2 Billion, about 40% less.

Maybulk's current market cap is RM 1.28 Billion, much closer to the adjusted net asset value than Maybulk's value. It seems the market values Maybulk according to its adjusted NAV, not the NAV in its books. That says something.

I am pretty sure that Maybulk's accounting is all according to the international accounting standards, and that the auditors will sign off on them.

Those standards are definitely not mine, I think they are pretty ridiculous. I think that if an asset is valued in a normal functioning market then that value gives a much better reflection than some paper value derived from the amount invested corrected for the share of results and currency fluctuations.

At the very minimum, Maybulk should inform its shareholders about the huge gap between the valuation in its books versus the valuation according to the market. Unfortunately, Maybulk's transparency has "not exactly" been great, and this rather obvious comparison is not made.

Will the 2014 year report give more information on this subject? I doubt it, but hope to stand corrected.

To add to the rather bleak situation, things don't look rosy in the near future either: "The Board expects 2015 to be a testing year for the group."

Maybulk announced a dividend of only 1 cent. It has 151M cash versus RM 347 M borrowings due to its continued investments in POSH.

AirAsia X: is the rights issue enough? (2)

I wrote before about the coming rights issue of AirAsia X to raise RM 395 Million in much needed cash.

AirAsia X announced its fourth quarterly results, they were not exactly pretty: another loss of RM 168M, bringing the total for the year to RM 519M.

In other words, its 2014 loss is 1.3 times the amount the company wants to raise through its rights issue. The obvious question would be: how long will the rights issue last? The company still has not shown a single year of profit (corrected for one-off items and deferred tax).

From a Reuters article:

Analysts said shoring up the balance sheet has now become a priority for AirAsia X.

"Their capital base is really thin right now," said Maybank analyst Mohshin Aziz. "Among all the airlines in Asia Pacific, their balance sheet is the most precarious. They need to execute their rights issue as soon as possible."

Sunday, 22 February 2015

Enforcement against Chinese companies listed overseas

If you are transporting 50,000 truckloads of timber across China, it can be hard to see the wood for the trees. If you are trying to audit 68 sq km of Chinese orange groves, you can easily find yourself a few fruit short of a still life. But how, exactly, do you lose track of 2,810 shops full of fluorescent trainers and dayglo “leisure wear”, spread across 21 provinces and three municipalities?

That is the question being asked this week in London, after the non-executive directors of Naibu, a Chinese sportswear company quoted on the Alternative Investment Market, admitted they had lost all contact with the company’s chairman and executive director and had no information on its operations, or its “current financial position”.

Shareholders are well aware of theirs, however: from their first trading in 2012 to their suspension last month, Naibu’s shares have lost 90 per cent.

One of the many horror stories from the Financial Times: "China’s intangible assets at home in Aim".

Some more snippets:

In 1995, timber group Sino-Forest floated in Toronto, rose to a market value of $6bn and gained US fund manager John Paulson as lead shareholder before collapsing amid allegations that its logs were illusory.

Fruit producer Asian Citrus came to the London Stock Exchange in 2005 and grew its share price sevenfold in five years — before losing 90 per cent of its value on claims that it had over-counted its oranges.

One Chinese company, shoemaker Ultrasonic, even offers hope to Naibu investors. After listing in Frankfurt in 2011, its shares fell 79 per cent in a day last year, on news that its chief executive, and much of its cash, had vanished. They recovered when he turned up a few weeks later claiming he had simply lost his mobile phone.

The article further looks at three key aspects:

The functioning of the exchanges
What does it say about London’s Aim that it enabled Naibu’s owners to float just 9 per cent of their shares, gain a £68m valuation for the company and — in the case of two of the top three original shareholders — offload entire stakes, amounting to 30 per cent of the group? Little wonder one FT hack suggests the market be renamed ATM. Sino-Forest’s senior executives found Canada’s market as bountiful: listing and offloading $83m of shares before their company collapsed.

The role of non-executive directors
Under the Aim rules, Naibu’s did not have to adopt the UK Corporate Governance Code, but they were required “to aspire to achieve the key elements”. Yet, in spite of claiming 30 years’ experience of the City, they seemed to do little for their £60,000-a-year part-time salaries beyond setting up an Aim compliance committee — and perhaps hanging on the telephone, in vain, to Fujian province.

The integrity of corporate advisers
Naibu’s nominated adviser, before it relinquished its licence, filled the company’s Aim admission document with claims that it was China’s 10th-largest sportswear brand — in a survey commissioned by Naibu itself — in a booming market. For its diligence, it took an initial fee of £30,000, a further fee of £170,000, and commission at the rate of 5 per cent of the aggregate sums raised.

The above is all very relevant for China listed companies on Bursa and SGX ("S-chips"). My concern in all of this is the enforcement across borders, which seems to me very complicated.

However, there might be some hope. I wrote before about China Sky, Singapore's Business Times reported regarding enforcement against its former CEO, some snippets:

Former chief executive of beleaguered China Sky Chemical Fibre, Huang Zhong Xuan, will pay a civil penalty of S$2.5 million and surrender 10 per cent of his shareholding in China Sky under a settlement agreement with the Monetary Authority of Singapore (MAS).

The civil penalty was meted out after he admitted to making misleading public disclosures and failing to make the required disclosures to the market, thereby breaching the Securities and Futures Act (SFA), the MAS said on Thursday.

The S$2.5 million penalty will be paid from the US$3.7 million in his Singapore bank account, which was frozen under a High Court injunction that MAS obtained in 2013. The surrender or cancellation of his shares will raise the net asset value per share for existing China Sky shareholders.

MAS assistant managing director for capital markets Lee Boon Ngiap said: "The offer by Huang to surrender 10 per cent of his shareholdings in China Sky is the first negotiated settlement of its kind, directly benefiting existing shareholders of China Sky. 

CAD director Tan Boon Gin said: "Cases like this have jurisdictional issues that make case resolution challenging. This case has come to a successful resolution through close collaboration between MAS, CAD and SGX, as well as assistance rendered by the authorities and regulators in the People's Republic of China.

Friday, 20 February 2015

Markets also need negative viewpoints

I normally quite like Bloomberg's articles, but find the following article not balanced enough:

"Anonymous Analysts Are Wreaking Havoc in the Asian Markets"

The headline is much too aggressive for my liking, the share price of two companies in SE Asia declining caused by negative reports is something else as Asian Markets turning into chaos.

The first paragraph:

"An anonymous researcher releases a report questioning the accounts of a publicly traded company. Investors catch wind of it and sell. The targeted firm denies the allegations, but by then the share-price damage is already done."

I have not yet met a single fraudulent company admitting its fraud at the first instance being confronted by a report. Since both honest and fraudulent companies will deny allegations, the denial itself contains therefore no news.

What could contain news is a detailed write-ups from companies in which they give a point-to-point rebuttal of all the allegations.

Even better, if companies had pre-empted events by providing a high degree of transparency to their shareholders. In Noble's case for instance there was unease for quite some time regarding the valuation of Yancoal, why had it not addressed that issue before? Valuing an asset at 56 times its market value is bound to raise some eyebrows.

Let's assume that short sellers are right in a particular case, then "the share-price damage is already done" is indeed true. But the damage is caused by unscrupulous managers and their financial engineers who have cooked the books, blown lots of hot air in the company, spread rumours etc. The short sellers have merely prevented more future damage (while in some cases profiting handsomely in the mean time, I admit).

Also, some of the allegations by so called short sellers or whistle blowers might need years to pan out. In 1999, financial analyst Harry Markopolos "informed the SEC that he believed it was legally and mathematically impossible to achieve the gains Madoff claimed to deliver". It took another nine years before the fraud was finally unravelled, lots of additional damage being done in those years.

A further comment from the Bloomberg article:

“No research should be anonymous,” said Jimmy Ho, president of the Society of Remisiers, Singapore’s biggest association of equity traders.

Whilst I agree that non-anonymous research would be better, I do have sympathy for the reasoning behind it:

Carson Block, the founder of Muddy Waters LLC, said in 2012 he stopped trying to bet against Chinese stocks after workers at a storage company he owns in Shanghai were harassed and unidentified “gangsters” came looking for him.

“Putting our name on the reports gave us more credibility but I understand why people see a need to be anonymous when publishing this kind of information because of the threats and the costs of extra protection,” Block said in an interview on Tuesday in New York.


...independent research reports can be beneficial for investors if they “weed out” companies that are bending accounting rules or engaging in fraudulent activity.

“I’m not concerned about the origins of the report, it’s whether the report is true, accurate and valid ultimately,” said Surtees, whose firm oversees about $50 billion. “Time will tell.”

Another comment by Mr. Ho:

“MAS should make sure analysts do not use their research for their own agenda.”

That also means that analysts (or brokers, bloggers or anyone spreading rumours to increase the share price of a certain company) who write positive reports for their own agenda (or the agenda of their company) should equally be punished. In that case government of all countries in the world should consider quickly building a few more jails for this purpose alone.

News on financial markets is rather biased, and all in a positive way for listed companies:
  • Managers have a real financial incentive (receiving wages but often also owning a stake in the company) to paint their companies as rosy as possible, they even hire PR companies for that purpose.
  • Brokers and the like receive their handsome fees through all kind of financial work for these companies (bringing them to the market, structuring deals, etc.), their research reports are often quite biased (just check how many "buy" reports there are versus "sell" reports). Even if brokers don't have a direct link to a company, they might be involved with one of the other companies of the majority shareholder.
  • Professionals like auditors and writers of independent reports too often have a bias towards the companies that pay them: "whose bread I eat, his song I sing".
  • Journalists are sometimes hesitant to post negative questions, their papers are sometimes biased towards companies that advertise (a recent example from the UK and the response containing the remarkable admission "All [media organisations] have their own self-serving agendas, both political and commercial"). 
  • Regulators should be on top of their game, but realistically they can't follow hundreds of companies and are not strong in particular fields (like valuations).

Despite all these shortcomings, I like the capital markets and am an active and passive (through external fund managers) participant for more than thirty years, both in listed and unlisted companies.

But giving the many biases, there is a clear and urgent need for views from "the other side", views that give critical analysis of companies, that question their accounts and their business models.

Therefore we have to be careful not to immediately jump on top of messengers of bad news.

The three cases mentioned in Bloomberg's article are:
  • Noble, in a report written by Iceberg Research, about which I wrote before;
  • Sound Global Ltd, in a report by Emerson;
  • Ozner Water, in a report by Glaucus.

Thursday, 19 February 2015

China Stationary: questions regarding accounts

I wrote before about China Stationary's latest accounts, and the many red flags. The company announced amended accounts, correcting the PBT of last year.

Unfortunately, no other changes were made, as far as I can see. Apart from the many questions that I have regarding the accounts (questions that hopefully will be answered in the audited accounts), there is one number that I think can't be right, the number in red, "894,674":

Also, it is much too much coincidence that it would be exactly the same as the number the year before.

However, if the number is indeed wrong, then at least one other number is also wrong, since the numbers have to add up. My guess is that the number below the red number, "455,415", is also wrong. Although the Renminbi did fluctuate relative to the Ringgit, it did so by a small margin, I don't think it can explain RM 455M in "effect on exchange rate on cash and bank balances".

Wishing all readers who celebrate the festival a Happy CNY and a healthy and prosperous 2015.

Wednesday, 18 February 2015

Fraud at mTouche? (2)

I wrote before about this issue. The company announced today:

"Further to the Company's announcement on 13 January 2015, the Board of Directors of the Company (“the Board”) wishes to announce that the Company and MTSB (“the Plaintiffs”), have commenced a civil suit in the High Court in Malaya at Kuala Lumpur on 17 February 2015 against Pearl Legend International Limited (“PLIL”), Goh Eugene and Tan Wee Meng. Goh Eugene and Tan Wee Meng were previously the directors of the Company and MTSB.

The civil suit is for, amongst others, the recovery of wrongful payments made by MTSB to PLIL from 2009 to 2010 amounting to RM6.3 million on the basis of PLIL’s total failure of consideration in relation to an agreement dated 2 January 2009 entered into between MTSB and PLIL.

Alternatively, the Plaintiffs are also seeking RM6.3 million in damages against Goh Eugene and Tan Wee Meng, who were directors of the Plaintiffs during the material time, for breaching their fiduciary and statutory duties as directors and causing the Plaintiffs to suffer RM6.3 million in losses."

Noble: overstating Yancoal's value?

"Iceberg Research", an unknown and anonymous website, has issued a negative report about Noble Group, the commodity trading company listed on the SGX.

For me, the most important is if the allegations are true and the most interesting item is the valuation of Yancoal in Noble's books:
  • Noble owns 13% of their shares;
  • Yancoal is listed and the 13% of the market cap is worth about $11M;
  • Yet the investment is in the books of Noble for $614M;
  • Noble doesn't seem to have significant control over the company.
That looks very weird, to put it mildly.

Macquarie writes:

"But the shares are thinly traded, which can distort market value. This is one reason why Noble can use a financial model, reviewed by auditors Ernst & Young, to value the stake. With sustained weak coal prices, we have been flagging the risk of further write downs for YAL (2012 carrying value: US$813m). The Noble CEO himself hinted at such a potential outcome at a recent sell side event. Whilst we do not see the full carrying value at risk, there could be a non-trivial impact vis-à-vis Noble’s S$0.98 BVPS (excluding perpetuals). But, again, we have been flagging this risk for well over a year."

Regular readers of this blog will know what I think about the many financial calculations (most of them DCF models) that are being used. Changing one single parameter would already later the outcome of the model hugely, but there are often many important parameters. The result is a very wide range of valuations (not a single valuation), the lowest of which has to be zero.

In other words, giving a single valuation through the use of these kind of models is (in most cases) useless, rubbish and self-serving.

Noble has since responded, no surprises here:

If the DCF model of the stake in Yancoal does indeed indicate a valuation of $614M, 56 times as much as the current market price, then the company really should publish the model's assumptions and calculations, for all to see. We could then also check the model with the outcome say three years down the road.

Unfortunately, publishing the model's details hardly ever happens is my experience.

The Monetary Authority Singapore (MAS) is looking into the case, Noble's year report will be announced on February 26, 2015.

Saturday, 14 February 2015

Asian investors in VGMC conned for RM 7 Billion

A long series of articles on Naked Capitalism's website about Virgin Gold Mining Corporation and the aftermath:

Some snippets:

Virgin Gold Mining Corporation (VGMC) is a big international gold-themed pyramid fraud. If you are unfamiliar with the term, many (including me) often call these things Ponzis, though in truth Ponzis are slightly different in structure, and tend to be more durable.

The whisper number around the VGMC fraud is $2Bn, and, though there could easily be a hefty dose of hype in there, it is easy to construct a plausible tally of thousands of bilked investors, with losses ranging from tens of thousands into the millions.

Virgin Gold is undertaking an exercise of issuing fresh Convertible Preferred Stocks (CPS) and invites willing investors worldwide to take up this offer.

The offer price starts at $0.80/share on 1 January, 2010.

By the end of 2012 or mid 2013, VGMC  has a very impressive  geographical footprint, on Facebook pages, blogs, and bulletin boards: Egypt, Dubai, Singapore, Brunei, Indonesia, Malaysia, Thailand, the Philippines, Japan, and both Hong Kong and mainland China. Judging by this ASIC warning, it’s put in an appearance in Australia too, and there are even training sessions for promoters, run by some idiot from southern Africa, at the Ritz in London.

With (purportedly and plausibly) thousands of investors across the Middle East and Asia, and a very high, very lively social media profile, it’s pretty clear that cooling the marks out is going to take a lot more planning and organisation than usual.

By the end of 2012 or mid 2013, VGMC  has a very impressive  geographical footprint, on Facebook pages, blogs, and bulletin boards: Egypt, Dubai, Singapore, Brunei, Indonesia, Malaysia, Thailand, the Philippines, Japan, and both Hong Kong and mainland China. Judging by this ASIC warning, it’s put in an appearance in Australia too, and there are even training sessions for promoters, run by some idiot from southern Africa, at the Ritz in London.

With (purportedly and plausibly) thousands of investors across the Middle East and Asia, and a very high, very lively social media profile, it’s pretty clear that cooling the marks out is going to take a lot more planning and organisation than usual.

Malaysia is featured (unfortunately) several times in the above articles, and not only as investors. The authorities might want to have a look at the details.

Some good news, both the Securities Commission and the Monetary Authority Singapore put VGMC on their alert list (SC alert, MAS alert), the SC already in 2010 (MAS doesn't put a timeline). In other words, investors have been warned, the list of unauthorised websites / investment products / companies / individuals is the most visited page on SC's website.

Why do so many investors fall for these schemes in Malaysia and Singapore? I don't know, but may be making "Hustle"  (one of my favourite series) part of the school curriculum will help.

The introduction in the first article above is straight from the lessons to be learned from Hustle (and many other devious schemes as well):

The mark is permitted to win some money and then persuaded to invest more. There is an “accident” or “mistake,” and the mark loses his total investment. The operators then depart in a ceremony that is called the blow off or sting. They leave the mark but take his money. The mark is expected to go on his way, a little wiser and a lot poorer.

Wednesday, 11 February 2015

Announcements: Tanjung, Dufu, Sasbadi, China Stationary

Tanjung Offshore announced:

"We refer to our previous announcements on 8 January 2015, 5 February 2015 and 6 February 2015. Tanjung Offshore Berhad (“Tanjung” or “Company”) wishes to announce that it has on 11 February 2015, lodged a Police Report against two directors, Tan Sri Tan Kean Soon (“Tan”) and Muhammad Sabri bin Ab Ghani who have been suspended from their executive positions following the findings of the Company’s Independent Committee. 

We also refer to the following articles: “Tan Kean Soon breaks silence over allegations at Tg Offshore”, published by Bernama on February 9, 2015; and “Tan Kean Soon declares he is blameless over Tanjung Offshore issue”. 

In reference to Tan’s allegations in these articles, the Company would like to state that Tan was given ample opportunity to present his concerns before the Independent Committee. However, Tan declined to attend interviews with the Independent Committee, or to make any statement to the Committee despite several reminders to attend the interviews. When the Board of Directors (“Board”) of Tanjung formed the Independent Committee at the meeting of 8 January 2015, Tan had agreed to and consented to it. The Board also agreed to his request to include Tan's personal legal advisor as an ex officio member of the Independent Committee. Tan’s personal legal adviser attended only the initial two (2) meetings out of daily meetings conducted by the Independent Committee over a two (2) week period."

This in relation to statements like "I am certainly blameless", as made by Tan in an article in The Star. Time will tell if that is correct.

Dufu announced:

The Board of Directors of DUFU (“the Board”) wishes to announce that it had on February 4, 2015 received an allegation letter against certain Senior Management of the Group on misappropriation of the Company’s fund of approximately RM3.9 million. Further to the emergency Board of Directors’ Meeting held on February 9, 2015 to address such allegation, the Board still unable to ascertain the factuality of such allegation for the time being. In consequent thereto, the Board has set up an Independent Committee (IC), comprising 3 Independent Directors of DUFU to coordinate and oversee the investigation process of the case. The composition of the IC are as follows:-

Chairman: Mr. Ong Choon Heng;
Members: Mr. Khoo Lay Tatt and Mr. Ang Siak Keng.

The IC has been authorized to perform the following duties at its sole discretion:-
  • To appoint an Investigation Auditors to investigate on the remittance of fund to U.S. during the year of 2013;
  • To request the existing Auditors of the Group (Messrs. Crowe Horwath) to investigate on the remittance of fund to U.S. during the year of 2014;
  • To investigate on the potential related party transactions.

KiniBiz wrote about Sasbadi, a company that only listed half a year ago:

"Law En Ruey, the chief operating officer of recently listed book publisher Sasbadi Holdings Bhd, has moved to retire from his post at the ripe old age of 30, according to an announcement on Bursa Malaysia."

When one invest in a stock one bets on the horse (read: company), but also the jockey (read: the management team). An important change has occurred so soon after a listing, which is rather remarkable.

China Stationary announced its 4th quarter results, a selection of some red flags:
  • Revenue has fallen hugely this quarter to only RM 36M
  • But PPE (Property, Plant & Equipment) is strangely up a lot, about RM 80M
  • However, depreciation is down
  • Loss over the year before tax is RM 216M
  • Trade & Other Receivables is up to RM 200M, strange in relation to the low revenue
  • Selling and Distribution expenses fallen from RM 34M to only RM 1M
  • Cash is down almost RM 300M
  • But interest received is hugely up, from RM 4M to RM 29M

Next to that, losses due to the fire, late delivery and 10% deviation in reported earnings:

The cash flow statement is also puzzling, despite the losses and spending on PPE the cash as measured in RM went actually up because of RM 455M due to the exchange rate? The Chinese Renminbi did indeed change somewhat relative to the Ringgit, but not that much.

Tuesday, 10 February 2015

The Bitcoin Bubble (2)

I wrote before about the Bitcoin Bubble.

That article was, with hindsight, not badly timed, very near the top. The price of a Bitcoin has since come down by about 80%. The volatility of the price of Bitcoins makes it not very suitable to be a financial intermediary.

Below is a video about a Bitcoin mining operation in China. Aliens observing our planet from a distance must scratch their heads (that is, if they have any) in disbelief on the sheer waste of these kind of activities, also from an environmental point of view. It is not exactly that the computations lead to anything that is useful for society, in the contrary.

The SCMP reports "Investors fear HK$3b losses in closure of bitcoin trading company".

Tanjung Offshore: possible misconduct (2)

There has been a few new developments in this case. Tanjung Offshore has submitted the reports (containing the findings of the independent commission) both to the Securities Commission and to Bursa Malaysia. We need to wait what their actions will be, if any.

According to recent newspaper articles (like this one in The Star) Tan Sri Tan Kean Soon "has broken his silence over certain allegations at Tanjung Offshore Bhd. In refuting what has appeared in the media in the last fortnight, Tan said he would soon tell his side of the story so that shareholders would know the full picture."

That is rather vague, and we have to wait for more details. The only "meat" in the article is this part:

"Tan said he had questioned a number of deals that were announced and then aborted, especially those which incurred hefty and wasteful advisory fees without bringing any benefit to the company. He was also not pleased at the questionable manner in which the company acquired an oil and gas service provider as well as the acquisition of a residential property abroad which was not aligned to the core businesses of Tanjung Offshore."

I find the property acquisition by an Oil&Gas player also rather odd, but the question is did Tan openly speak out against the property deal and the high advisory fees? In the announcements made to Bursa I can't find indication whatsoever that the board of directors did not agree on these matters. If Tan opposed these deals, surely he should have made his opinion and reasoning known to the other shareholders?

Sunday, 8 February 2015

Dilution is very real

GMO published its quarterly letter, which is always interesting to read.

Regarding the issue of dilution (also in relation with my previous posting), GMO wrote the following regarding the relationship between GDP growth and EPS growth for a nation:

I am sure the above holds true for many Bursa listed companies as well.

Some will boast about their increase in market cap, while a lot of that was funded by rights issues, private placements and acquisitions paid for by issuing new shares while hardly paying any dividends.

Next to that there will be rather quiet (one could say: boring) companies, where market cap has grown less spectacular, but where no new shares were issued while paying out generous dividends.

Lay Hong: large private placement and substantial share issue scheme

Regular readers of this blog will know that I am not a fan of private placements (PP).

If a company really needs money then a rights issue is much more fair, all investors will have the opportunity to participate, and those we don't want to can sell their rights in the market.

When a company's major shareholders are engaged in a battle for control and the company announces a PP, then alarm bells should go off.

Lay Hong is such a company, which announced a large private placement, combined with a substantial SIS (Share Issue Scheme).

I am also not a fan of SIS or ESOS either, I would prefer a system where employees receive a bonus for hitting some long term targets. That seems much more transparent (for shareholders) and fair (for employees).

"Serious Investing" wrote a good article about the Lay Hong private placement.

MSWG wrote the following in their newsletter of February 6, 2015:

MSWG has a very valid point, Lay Hong's earnings track record is not that great, can it really increase earnings by such an amount that the dilution caused by the PP and the SIS will be offset?

From it's last year report:

Friday, 6 February 2015

SGX issues

"Remisiers write to Tharman to resolve issues plaguing market"

Article in the Business Times (Singapore) of February 5, 2015.

Some snippets:

The issues raised and remedies proposed include separating Singapore Exchange's regulatory and commercial roles, raising the public portion of an IPO, restoring investors' trust in the local bourse, reviewing onerous rules for "high-risk" products, and listing of government-linked companies such as PSA and Changi Airports International to add breadth and depth to the market.

...some of the key recommendations contained in the letter were:
  • issuing at least 25 per cent of shares in an IPO to the public; this would avoid the farce of initial public offerings turning into initial private offerings;
  • better rules for short selling disclosure;
  • rethinking regulations for sophisticated instruments;
  • setting up truly independent committees when consulting the public on proposed policy changes;
  • raising the quality bar for CPF Trustee stocks and lifting the limit for investment in equities from 35 to 80 per cent of the CPF Ordinary Account;
  • transferring long-suspended stocks with governance issues to a high-risk third board with cash upfront trading;
  • providing the market with regular updates on investigations such as the current probe into the October 2013 crash of LionGold, Blumont and Asiasons;
  • separating SGX's regulatory and commercial roles.
I have written about quite a few of the above issues, for instance "Listing panel lacks investors", the lack of public shares in an IPO and separating regulatory and commercial roles of SGX (or Bursa for that matter).
The response came one day later:

"SGX and SIAS respond to remisiers' grouses"

Some snippets:

SGX said: "We actively engage market participants, relevant stakeholders and the public prior to introducing any new initiatives to the marketplace through public consultations. Initiatives are then introduced after approval from our regulators." It mentioned the recent reduction of the board lot size from 1,000 to 100 as an example of the result of such a public consultation.

To me, reducing the lot size without reducing the cost doesn't make sense at all, I wrote before about this subject: "High cost for small transactions on Bursa".

On other fronts, Mr Gerald agreed that better rules for short selling disclosures and a review on regulations for sophisticated instruments are needed. He concurred, too, that the market should be given regular updates on on-going investigations and that the SGX's commercial and regulatory roles should be separated. Some of these are already under review, he said.

Another article from the Straits Times (February 6, 2015):

"Prospectuses should be in plain English"

Some snippets:

SINGAPORE'S financial regulator has rolled out a set of proposals aimed at fixing a problem that has long plagued the financial industry - bad writing.

The Monetary Authority of Singapore (MAS) wants issuers of financial products to write their prospectuses in plain English, not jargon-laden gibberish.

It is urging them to present information in a clear, concise and logical manner and avoid unnecessarily lengthy sentences.

A prospectus is meant to contain all the information investors and their advisers would need to make an informed investment decision about a financial product.

However, "in recent years, MAS has observed that prospectuses have grown in length and are often drafted in a technical, convoluted or legalistic manner", the regulator noted.

"As a result, even though prospectuses may contain comprehensive disclosures, investors often find them difficult to read and understand."

Many prospectuses are long and repetitive, include unnecessary or irrelevant details and use financial or technical jargon to conceal important information, the MAS added.

They also employ vague disclosures that may not be meaningful to investors, use convoluted descriptions or explanations and include lengthy and difficult-to-understand terms and conditions.

I completely agree with this, and have written several times about the long, hardly readable brochures of IPO listings on Bursa, for instance here.

Thursday, 5 February 2015

Long-term investors should know about short selling skills

Great article by "ContrarianValue Edge":

"What Long Term Investors Can and SHOULD LEARN From Short Sellers"

Some snippets:

Let me make it clear at the outset that I had never done short selling nor do I plan to do in future. But I found principles of short selling technique to be equally helpful to long-term investors. For short sellers the maximum upside is 100% whereas downside is unlimited. These asymmetrical returns force short sellers to be much more diligent and conservative compared to long only investors. I was surprised to note that most successful short sellers never short any stock merely on over-valuation. I am not talking here about short sellers who short a stock in the morning and cover their position by the end of the day.  I am talking about short sellers, who after deep analysis create a position and hold on to it until their conviction pays off.

Charlie Munger once said, ‘All I ever want to know is where I’m going to die, so I never go there’. My sole attempt at studying short selling technique is to find what successful short sellers look for in a good short and to avoid such stocks.

Successful short sellers look for the following before they decide to short any stock:
  • Business : Secular problems or fundamental change in the nature of business.
  • People: Dishonest and incompetent management.
  • Balance Sheet: Higher leverage is preferred.
  • Profit & Loss account: Quality & Sustainability of earnings. Simple overstatement of earnings is not enough. Short sellers are looking for cases where  economic reality is significantly divorced from the accounting presentation of the business.
  • Price: Valuation is given least preference by most short sellers.

Many interesting links are also to be found in the above article.

A good (albeit almost 20 years old) book is "The Art of Short Selling" by Kathryn Staley:

Standard & Poor's fined USD 1.37 Billion

Article from the New York Times about the rating agencies that were at the centre of the global financial crisis. As so often, conflict of interest was the cause of all troubles. Some snippets:

It cost $1.37 billion, but Standard & Poor’s has finally appeared to close the darkest chapter in its 150-year history as a rating agency.

Yet that payout announced on Tuesday, which will settle an array of government lawsuits that accused S.&P. of inflating the ratings of subprime mortgage investments, does not represent closure for the broader ratings business. An uncertain future still lies ahead for S.&P. as well as for its main rivals, Moody’s and Fitch.

In the wake of the financial crisis, when rating agencies were blamed for feeding a subprime mortgage frenzy, Congress used the Dodd-Frank Act to adopt a battery of changes for the rating industry. S.&P., Moody’s and Fitch announced their own cultural overhauls and struck a competitive tone about whose ratings were the strictest.

S.&P. settled accusations from the Securities and Exchange Commission that it had misled the public about its approach to rating certain commercial mortgage investments — misconduct that occurred in 2011, years after the crisis. And even as S.&P. has publicly raised concerns about the quality of loans backing subprime auto bonds, it continues to award top ratings to the investments, echoing problems that led to the government settlements on Tuesday.

“The $1.37 billion fine shows that the current system does not work,” said Representative Brad Sherman, a California Democrat who has co-written legislation to crack down on rating agencies.
At the heart of the problem, some lawmakers say, is the rating agency business model. The agencies are paid by the same banks and companies they rate. And when market share declines, a rating agency might lower its standards to attract new business, a concern that underpinned the Justice Department lawsuit that S.&P. settled on Tuesday.

“In reality, the ratings were affected by significant conflicts of interest, and S.&P. was driven by its desire for increased profits and market share to favor the interests of issuers over investors,” Attorney General Eric H. Holder Jr. said at a news conference announcing the settlement.

S.&P. argues that its ratings offer investors a valuable service. While certain ratings might prove to be imperfect, they are meant to be opinions, not fact.

But Senator Al Franken, a Minnesota Democrat who has proposed an overhaul of the ratings business, argues that potential conflicts might impair those opinions.

“As I’ve said since the financial crisis, enforcement after wrongdoing won’t be enough,” Mr. Franken said in a statement on Tuesday, referring to the settlement. He called on the S.E.C. to “fix the fundamental problems of the credit ratings agencies’ conflicts of interest that continue to put everyday Americans and our financial system at risk.”

Wednesday, 4 February 2015

And another gold scheme bites the dust ....

The modus operandi seems to look like this:

  • Take a commodity that is "hot", for instance gold
  • Take a business model that resembles a pyramid
  • Take a term from a country that is regarded safe, for instance Switzerland
  • Open a big office
  • Ka Ching!
  • And don't forget to get away on time

From the Straits Times (Singapore) two articles, "More than 100 file police report against gold buyback firm" and "High returns, low risk a red flag".

One would guess that people learned from previous cases like the Genneva saga, but apparently not, some snippets:

"On Monday, more than 100 people gathered to make police reports with the Commercial Affairs Department about local investment company Suisse International. They claimed to represent about 250 people who had lost around $35 million to the firm. They had invested in a gold buyback scheme but claim that they have stopped receiving their promised monthly payments, some since as far back as last September."

"Some of the investors had previously bought gold from another firm, Genneva Gold, which was raided by the CAD in 2012, and were eager to sell it off. They were told Suisse International bought and sold gold to turn into novelty coins to be sold at a profit to local or overseas companies."

"The MAS put both the Singapore and Hong Kong arms of Suisse International on its Investor Alert List last November. Both firms are listed with the same Beach Road address. The company offered investors returns of 20 per cent, which financial experts say is unusually high and should have been a red flag. They advise people to do more research to find out what the usual return rates are for various types of investment."

"At first I thought the investment was not bad, there were returns... it looked legitimate, the office in Toa Payoh was so big and I was at the opening of the Johor Bahru office as well," said the retiree who is in his 50s. "But the more we hear, the more we feel we have been very naive. It's a really painful feeling."

"In the wake of the latest alleged gold scam, in which more than 250 investors claim to have lost $35 million, financial experts and consumer watchdogs here urged people to vet a company's track record before investing in it. This includes checking if the firm is licensed by the Monetary Authority of Singapore (MAS), looking up its data on the Accounting and Corporate Regulatory Authority website and scrutinising the firm's financial and audit reports."

Sunday, 1 February 2015

Yields of Equities vs Bonds

I love charts, especially over a very long time frame. Unfortunately, most data is from the US, not from Asia (or more specific, from Malaysia or Singapore).

A beautiful graph can be here at found at "MarketAnthropology":

Black is the yield on 10 year US government bonds.
Red is the Dividend Yield on the S&P 500 (US).

I added the blue line:
  • On the left of it (roughly 1870 until 1960) is where the dividend yield tended to be higher than the yield on the bonds; the reasoning was simple, shares are more risky than bonds, so they need to yield more;
  • On the right of the blue line (roughly 1960 until 2010) is where the bond yield is higher than the dividend yield; the reasoning was that earnings (and thus dividends) are growing over time (through reinvested earnings), hence that makes equities more attractive in the long run (even when they are more risky in the short term).
The second interesting feature is that since roughly 2010 both yields together are at the lowest levels ever. For equities one reason could be increased share buyback programs which are in the US (from a tax point of view) more attractive than dividends (that argument doesn't hold in Malaysia or Singapore).

However, surely QE (quantitative easing), on an enormous (unprecedented) scale must have played an important role also, both for bonds and equities.

At the moment the dividend yield is higher than the yield on US 10 year government bonds.

From  "MarketAnthropology":

"For just the fourth time in the last fifty years, the S&P 500 yields more than 10-year Treasuries. If one was to mine the data, in the three previous occasions where this had occurred, equities rallied sharply over the short-term and strongly performed over the next year - quickly closing the aberration that represented a particular extreme between these two markets."

"That said, we would strongly caution anyone looking for similar returns or bolstering their respective equity biases with this fourth occurrence. From our perspective, the fourth time may be the charm as these two massive trends pass quietly in the night, ending an epoch that first set sail in 1959 as Treasury yields began their long and steep journey to a secular peak in 1981." 

I agree, I think that both equity and bond valuations in the US are high, and that QE has distorted things. The long term averages for both yields are clearly much higher than current values. A regression to the mean would imply that the prices for bonds and equities (not necessarily at the same time) would substantially fall.

When that will happen, one of course never knows, especially in a world that is so much distorted.

AirAsia X: is the rights issue enough?

There were many rumours going around regarding AirAsia X, quite a few of them were proven right, as so often in Malaysia.

The company (belatedly, only on January 30, 2015) responded on some of them:

"With regards to the press reports in the NST dated 28 January 2015, AAX can confirm Azran Bin Osman Rani’s cessation from the Chief Executive Officer office with effect from 30 January 2015.

The Board of Directors of AAX has appointed Datuk Kamarudin Bin Meranun (“Datuk Kamarudin”) as the Group Chief Executive Officer for AAX and Benyamin Bin Ismail (“Benyamin”) as the Acting Chief Executive Officer of the Company with immediate effect.

As to the speculation on the resignation of the Chief Financial Officer, there is no truth to this.

Datuk Kamarudin and Benyamin will spearhead with the reorganisational and turnaround exercise for the Company and to strengthen the Company’s balance sheet and to maximise profitability in ensuring the Company will be in a better financial footing."

The company also announced a rights issue to raise RM 395 Million, money that is indeed very much needed. The question is if the money is enough. The company has been bleeding lots of money (if one takes out one-off items and does not take deferred taxation into account, then AirAsia X lost money in every single year of its existence). Also, the company has large capital commitments.

Next to that, there has been a lot of selling through insider trades after the IPO, not adding to the confidence.

I think it would have been much better if all the money raised at the IPO would have been injected into the company, and shares owned by insiders would have locked up for say two years after the IPO. The authorities should consider this for future IPO's of companies, especially those that have not yet proven their business model.

With 20/20 hindsight we are all experts, but it must be noted that there were enough critical comments before AirAsia X's IPO.

"Serious Investing" wrote an interesting article here with an update here.

I wrote here on the IPO, some snippets:

"AirAsia X is offering 790 million shares, rumoured to be priced around RM 1 per share. Almost 200 million of these shares are from existing shareholders, which seems strange, AirAsia X's balance sheet is weak and this company needs money, lots of it, so why not just issue new shares?"

The exact amount paid to its existing shareholders in June 2013 would be RM 246 Million (197M shares at RM 1.25), money that would indeed have been very helpful for the company. With that money the company might not have needed a rights issue.

I also wrote about valuation:

"A company in this state, urgently needing money should not strive for a sky-high valuation. The total number of shares currently is close to 1.8 Billion, in other word pre-IPO the company is valued at about RM 1.8 Billion. Shareholders equity is 518m, which includes 247m deferred tax assets. The offer therefore looks very stretched, both from an earnings point of view (operational losses, even after six years) and a balance sheet point of view (excl. deferred tax assets).

It must also be noted that Virgin Group (Richard Branson) invested in AirAsia X in 2007, but did not participate in the subsequent rights issue in 2010, according to The Edge. Also, he sold his 10% of the company allegedly for more than USD 21M, valuing the whole company at more than RM 650m.

AirAsia had an option to increase its current shareholding in AirAsia X, but strangely enough it decided not to execute that option. Its shareholding of AirAsia X will therefore drop to only 12%, hardly meaningful and below the 20% needed to call AirAsia X its associate."

In a later post I wrote:

AirAsia X managed to book a profit over 2012, but only with the help of deferred tax accounting and gains on foreign exchange, without these 2012 would also have been a loss (like all previous years). To me, it completely hasn't proven its business model on the long haul flights.

Since the results of AirAsia X were not exactly rosy, the company also published its EBITDA numbers (Earnings Before Interest, Tax, Depreciation and Appreciation), showing profits every year.

Charles Munger has a very clear opinion about EBITDA:

"Every time you see the word EBITDA in a presentation, you should replace it with BULLSHIT EARNINGS, because that's what they are!"

Given the results of AirAsia X since the IPO, it appears that Charles Munger is indeed right about EBITDA.

AirAsia X's share price since its IPO: