Sunday, 29 April 2012

HuaBao: update

HuaBao made an official announcement to the HKEX. The typical legal kind of response that one can expect: the allegations of Anonymous Analytics (AA) are "incorrect and misleading" and the company will prepare a clarification. I hope it won't take too much time since many allegations were well known.

The company has dispatched delegates to verify financial information of some subsidiaries for the year ending December 31, 2010. Rather surprisingly, one would have guessed that that information was readily available in the headquarter.

Also there is mentioning of currency translations, different accounting standards and different dates for closing of the book year. This is all standard though and every accountant should know how to deal with that, it can't explain the allegations from AA.

More information about this case can be found here:


This is Chu Lam Yiu, major shareholder and Chairman of HuaBao, "Queen of Cashout", a self-made billionaire who founded the company a decade ago:

The share of HuaBao is still suspended.

Both the blogs if Buyersstrike and Bronte stress the importance of which parties are involved in listed companies, for instance which promoter brought the company to the market, who is the accountant, who are the directors, who are the major shareholders, etc. Bronte calls it the most important factor in his analysis: Who is associated with the company? Cheating people do not suddenly change overnight.

The Securities Commission has asked journalists, bloggers, "influencers" etc to publish about corporate governance matters. A database where one can trace the above information in a simple way would be very helpful, and added to this a database with offenders (both companies and persons). The result would be more exposure and less damage from unscrupulous persons, and thus a more healthy share market. Huge amounts of Malaysian IPO's have failed to live up to the high expectations from their glossy brochures. Aggregated information who was involved with the many failed ones would be very helpful.

If David Webb can run this kind of database all by himself and one assistant for the much larger share market in Hong Kong, then surely it should be easy to setup a similar service in Malaysia?

Hendry is still very bearish on China

Article from BusinessInsider about High Hendry, the outspoken Scottisch hedge fund manager.
  • Hendry is still very bearish on China. He doesn't think that China will be supplanting the US economy as the world's #1 in GDP anytime soon, and in fact he's fairly bullish on the US thanks to the burgeoning energy business.
  • The problem in China is that its success was long based on the artificial depression of the currency, and financial repression that prevented banks from offering decent interest rates to savers. Anyone with their money in a bank got crushed, so to get around this financial repression the people bought houses like crazy.
  • The scale of the Chinese housing bubble has been unprecedented, and the scale of underground credit is enormous. There are trillions of dollars of loans that originate through firms that are nominally in businesses like shipbuilding, but which ended up in the mortgage credit game.
  • China is so freaked out by all this, it's given death sentences to some of the underground players in the real estate bubble.
  • Hendry sees a Weimar-like situation where Chinese leaders thought they could get away with fiscal profligacy on the back of strong exports, but the weakness abroad means it might not happen.
  • The Chinese market is a casino, pure and simple. It only benefits insiders. There's no reason for anyone to invest in it.
  • The way Hendry has shorted it, however, is via Credit Default Swaps on Japanese corporates that are exposed to China. Japanese companies remain very troubles with debt loads that are way too high. This is why Japan is a value trap that has taken in suckers for years, thinking that stocks are very cheap.
  • In Japan he sees, what he calls "The Tranquility That Could Rock the World."
  • Ultimately, he thinks we'll see one more washout in the market, with 30-year Treasury yields hitting 2.5% (they're currently at 3.125%) and the VIX surging to 80, at which point we'll have a truly 'generational' opportunity to buy risk assets.

Saturday, 28 April 2012

2 Billion: "a little money"

Article at The Edge Malaysia "Ananda pares down stake in Bumi Armada"

Tycoon Ananda Krishnan and his bumiputra partners will sell roughly 15% of offshore services provider Bumi Armada Bhd in private placements to local and foreign institutional investors in a deal that will raise close to RM 2 billion.

Financial executives involved in the placement told The Edge Financial Daily that the sale of roughly 440 million shares in Bumi Armada would cut the joint holdings of Ananda and his bumiputra partners to 55% in the company. 

"It [the deal] will widen our shareholder base and raise a little money" said one financial executive.

I have written before about Bumi Armada, where minority investors were forced out under the (in Malaysia infamous) "delisting and compulsory acquisition threat". The total amount of money that minority investors missed out on is a staggering RM 2.5 billion.

When the company was delisted in 2003, the full 100% of the company was deemed to be worth only RM 440 million, which was regarded "fair and reasonable" by the "independent" adviser.

To call these unbelievable large amounts of money "a little money" is simply an insult to the (tens of) thousands of investors (who invested either directly or indirectly through unit trusts and the like) in Bumi Armada, who were forced out in the past.

To give an idea about the size, below is how RM 1 Billion looks like, with each note being worth RM 100.

Is it any wonder that Malaysia scores so badly in the GINI-coefficient, measuring the inequality in family income in a country?

I have fought the unfairness of the General Offer of Bumi Armada by filing a complaint to the Securities Commission. I attached a detailed list of the many shortcomings in the brochure. After three years I finally received an answer from Bursa Malaysia, one single line of text, nothing was wrong, not a single explanation whatsoever offered on the many issues that I had raised.

When Bumi Armada relisted in 2011, it left out in the brochure all the information about the low offer price and the delisting threat in 2003.

Both the Securities Commission and Bursa Malaysia have lately expressed their surprise about the low participation by retail investors in the local sharemarket. I don't think they should be surprised at all, they bare a lot of the responsibility for that.

Friday, 27 April 2012

Silver Bird hammered by 300 million write-offs

When it rains, it pours.

One doesn't need to be a rocket scientist to predict that the write-offs would be huge for Silver Bird, but even then, the amount came way above expectattion.

From plus RM 213 million Shareholders' funds in one foul move to minus RM 83 million:

"Based on the financial position of the SBGB Group as at 29 February 2012, the Special Committee of SBGB also wishes to announce that subject to the approval of the relevant authorities, creditors and shareholders, the Group intends to seek the support of its bank lenders, major creditors and major shareholders to undertake a PCDRS. In this connection, the Special Committee of SBGB wishes to announce that Appendix 1 and the PCDRS will be or have been forwarded to the creditors and shareholders of the SBGB Group for discussion purposes.  The PCDRS essentially envisages a proposed capital reduction, a proposed rights issue, a proposed debt settlement which incorporates a cash repayment, the terming out of part of the liabilities, debt to equity conversion and waiver of debts that are no longer supported by assets, and the proposed liquidation of subsidiary companies that are no longer essential to the future operations of the SBGB Group."

I hope that will not turn into throwing good money after bad money.

Even before the huge write-off the company had already accumulated losses of RM 44 million, the total amount now is a stunning RM 344 million.

Announcements herehere and here.

Thursday, 26 April 2012

Crocodile bonus issue

Crocodile Garments Ltd announced a bonus issue.

"To celebrate the 60th anniversary of Crocodile in the apparel business, the Board has recommended the Proposed Bonus Issue of Shares as a requital to the Shareholders for their ever-lasting valuable trust and support".

David Webb comments:

"What a load of nonsense. Bonus issues, like stock splits, do not generate shareholder value - they just incur administrative expenses. The company should resume paying dividends instead. It has NAV of $1.67 per share (31-Jan-2012) but trades at $0.49 - that's unrequited love!"

Unfortunately, in Malaysia the situation is not much different, too often the Board of Directors "rewards" their shareholders with useless bonus issues (that only cost money), while not unlocking the value in the company.

Wednesday, 25 April 2012

Anonymous Analytics dissects HuaBao

After their first success with Chaoda (I blogged about it here), Anonymous Analytics has exposed a second possible Chinese fraud: HuaBao International. Their 44-page report can be found on their website. A long but enjoyable article for people who appreciate these kind of financial detective stories.

Many red flags are raised, like:
  • Backdoor listing (requiring less due diligence)
  • Auditor resigning
  • Related Party Transactions
  • Extremely heavy insider selling by the chairwoman
  • Impossible high margins compared to other companies in the same industry
The share is suspended, and the company announced they will come with a detailed report. But they will always say that, so it has no real meaning.

Will AA again be proven right? I don't know for sure, but it looks quite likely.

More information in an article in Business Week.

Marc Faber speaks of Imminent Market Crash

  • Chinese economy will go in a (technical) recession, from 10% growth to 3% growth
  • Inflation in China and US is understated, and thus growth overstated (in Malaysia it is the same story, if I may add)
  • Too many Ferrari's, Maserati's and Bentley's, too expensive high-end property
  • Lots of people will lose a lot of money
  • US: nothing has been fixed financially regarding the deficits
  • US economy is slowing down
  • Bernanke's money printing hasn't solved anything in the longer term
  • Asia's shares yielding 5% dividend, some corporate bonds and some government bonds might do ok in the shorter term

Sunday, 22 April 2012

GP Ocean Food & Securities Commission (2)

I found a relevant article from the newspaper The Sun archived on Malaysia Today regarding this matter.

ACA probes top SC official     
Monday, 02 June 2008 12:58 

Tim Leonard, The Sun

PETALING JAYA: The Anti-Corruption Agency is wrapping up a probe on a top Securities Commission official that started more than a year ago.

Investigation papers were opened in 2006 into the case that has its roots in an anonymous letter addressed to SC chairman Datuk Zarinah Anwar on May 10 that year, but took time because evidence-gathering was laborious.

The letter alleged that SC officials played a key role in getting a company listed on Bursa Malaysia and another prepared for listing despite both companies failing to meet the financial requirements. The letter also mentioned several irregularities.

Copies of the letter were forwarded to the Prime Minister’s Office, Finance Ministry, Attorney-General’s Chambers and the press.

An ACA official told theSun that the key official could have worked with others who had direct or indirect links with the SC.

The ACA official also said the recent charging of former NasionCom Holdings Bhd managing director Datuk Chee Kok Wing for graft is a precursor of things to come.

“The case will open up a can of worms and shed light on various allegations of corruption and irregularities played at a high level."

On May 20, Chee pleaded not guilty to eight counts of receiving bribes amounting to RM3.85 million. The charge sheet stated that he allegedly received the money to induce an SC director to help seafood company Gropoint Ocean Sdn Bhd (GP Ocean) to get a listing on Bursa Malaysia in 2006.

Chee also allegedly received money from GP Ocean’s directors, including its managing director Datuk Andrew Lim Kim Ming, to stop an SC probe into GP Ocean.

In a surprising turn of events on May 26, Chee filed a RM100 million defamation suit against Andrew Lim. theSun also learnt that GP Ocean’s former chairman, Datuk Ali Abdul Kadir, was until end of February 2004 chairman of the SC. Ali resigned after Andrew Lim and his brother Kim Hai were charged with submitting misleading information to SC in June last year.

The allegations of irregularities brought to an abrupt halt GP Ocean’s plans for a main board listing. "All these cases are inter-linked and we have been trying for a long time to nab the 'big fishes'," said the ACA official.

When contacted, ACA director of investigations Datuk Mohd Sukri Abdul confirmed the probe on the SC official and the case's link with the Nasioncom and GP Ocean cases.

He said the ACA is collecting fresh evidence on the case and charges will be filed soon.

“We are waiting for a few more witnesses to come forward. Although the file (on the SC official) was opened some time ago, lack of evidence has hampered our efforts,” he said, explaining why it has taken ACA a long time to charge the SC official.

Shukri declined to say whether more than one individual will be charged.

In a statement on May 21, SC welcomed the charges against Chee. “This development serves as a strong reminder to participants in the capital market that they should deal directly with the SC and not through individuals claiming to act for or on behalf of the SC,” said its head Zarinah.

The SC has transparent processes and procedures in discharging its regulatory functions, and these are available on the SC website. The SC has also instituted pre-submission consultations since early 2006 for all applicants and their advisers, she said.

This is complemented by post-decision meetings with applicants to explain the outcome of their submissions. Reasons for rejection are also published on the SC’s website as future guidance for applicants and their advisers.

Zarinah said the SC will continue to work closely with the ACA to ensure that any abuse of this nature will be swiftly dealt with to protect the integrity of our market.

The Securities Commission answered two days later on its website:

SC welcomes ACA denial of false report 

The Securities Commission (SC) welcomes the categorical denial and clarification from the Anti Corruption Agency (ACA) following the false report in The Sun on Monday 2 June 2008.

Capital market participants are strongly reminded to deal directly with the SC.

"Unfortunately, there are unscrupulous individuals who claim that, for a fee, they are able to influence the SC's decision-making. The SC does not condone this kind of behaviour. We urge anyone who has business with the SC to deal directly with us and not through any middlemen," said the SC Chairman Dato' Zarinah Anwar.

"We will continue to work together with the ACA to eliminate these abuses in the market place and we welcome the recent charge by the ACA against one such individual," she added.

The SC practices the highest level of transparency and accountability, with a high degree of openness in our decision making processes. In addition we have in place stringent internal codes of conduct benchmarked against other leading securities regulators.

But what does that mean? Why does the SC not simply write what was wrong and what was correct in the article of The Sun? Why does it not clearly write what was going on at the SC in May 2006? I could not find a single article about this affair on the website from the SC.

Here is another article, this time from The Star, that mentions the following:

"The founder of telecommunications service provider NasionCom Holdings Bhd Datuk Chee Kok Wing was charged in two courts with eight counts of bribery involving RM3.85mil.

Chee, 45, claimed trial at a Sessions Court here to six charges of accepting bribes amounting to RM3.1mil and was slapped with another two bribery charges involving RM750,000 at the Petaling Jaya Sessions Court later.

The former NasionCom Holdings group managing director is accused of committing the offences to help the listing of a seafood company on Bursa Malaysia and to stop investigations by the Securities Commission (SC).

He is alleged to have received a RM1mil bribe each via a bank account from Gropoint Ocean Food Sdn Bhd (GOF) director Lee Sin Teck as an inducement for SC division director Kris Azman Abdullah to help in the listing of GOF on Bursa Malaysia and to stop a probe by the SC."

(to be continued)

Friday, 20 April 2012

GP Ocean Food & Securities Commission (1)

Judgment made in 2009 about a case from 2006 involving the listing of GP Ocean Food Sdn. Bhd.

The Defendant Dato’ Lim Kim Ming had uttered the following words:

“He [Dato’ Chee Kok Wing] approached me and asked me to pay RM3 million to pay the SC  (Securities Commission). He said it is the culture in SC in order to get a company listed."

"He kept calling me to pay up the RM3M. Later as payments I were made in small portions he asked for RM4.2 million and also because the investigation has gone too far."

"He said he has strong cable and network with SC and if I don't pay I wont be selamat." .

"He called me to inform me of the listing approval even before my merchant bankers knew of it, and demanded money. He claimed to know a lot of things will happen if I don't pay, like investigation". 

"Kris Azman [Director of the Securities Commission] called me and asked me for money. "

"Wong Tze Yen cashed out my cheque for RM 600,000.00 and handed it to Dato' Chee's secretary to pay to SC."

“Dato’ Chee also wanted RM 400,000 to be paid to his account to be paid to SC."

The Defendant’s defence is that around 2006, G.P. Ocean Food Sdn Bhd, in which Defendant is one of the director was in the process of going into public listing on the main board of KLSE. The application was forwarded to the Securities Commission and on 22.3.2006 the approval by SC was granted. At that time Datuk Ali Kadir was the Chairman of SC.

Around 10.5.2006, SC received an anonymous letter alleging that the Defendant had made use of the influence of the Plaintiff and various others including Datuk Ali Kadir, Dato Azman Yahya (Former Chairman of Danaharta Urus Sdn Bhd) to guarantee the approval of the Defendant’s company application for public listing.

Pursuant to that incident SC had decided to review its approval.

Consequently the Directors of G.P. Ocean Food Sdn Bhd decided to withdraw the application pending investigation by the SC.

Conclusion by the judge in the defamation case:

Thursday, 19 April 2012

Offer for Esso: not fair and not reasonable

Today the independent advice of Kenanga Investment Bank regarding the mandatory take-over offer of Esso (RM 3.59 per share) was published on the website from Bursa Malaysia.

The advice was rather remarkable: "not fair and not reasonable" and recommend the shareholders to reject the offer. Remarkable since this advice is very rarely given in Malaysia.

The offer does indeed look rather stingy, PE of only 6.3, 1.1 times book value, net dividend yield of 3.8% and at a discount to its recent traded price. Those multiples do not look good compared to other companies in the same industry, either in Malaysia (Shell) or in neighboring countries.

Esso is regarded one of the better companies on Bursa Malaysia, although its earnings can be quite volatile, it has sometimes even booked losses in the past.

Are we going to see more similar advices on Bursa Malaysia? Is the quality of independent advices improving? One swallow doesn't make a summer, but I definitely am hoping for a positive trend.

Wednesday, 18 April 2012

Wooing retail investors in Malaysia

Article in The Business Times (Singapore), for those for whom the article is too long, the conclusion will be sufficient:

"Bursa Malaysia (then) may have difficulty in increasing retail participation in the market because by and large individuals are risk-averse, loss-averse, are not "over-confident" and may be reluctant investors because of asymmetric information and a long history of insider trading and lax regulatory control and discipline of Bursa Malaysia".

BT 20120418 ISEASBURSA 1270707 
A place for retail investors too: The retail average daily value in Bursa Malaysia has declined since it reached a high of RM806 million in 2007. The percentage of investors or participants who are retail investors has also declined from 37 per cent in 2007 to 26 per cent in 2011.
SHARES on Bursa Malaysia have been close to their all-time high in recent months. The FTSE Bursa Malaysia KL Composite Index (FBM KLCI) has breached 1,590. This surge in the index has been due to the speculative activities of foreign and local institutional investors and local retailers.

According to a recent report in the Business Times, "foreign institutional funds saw net buying of RM3.4 billion (S$1.4 billion) in the Malaysian stock market last month while local retailers and institutional funds were net sellers, disposing of RM600 million and RM2.1 billion worth of shares respectively". It appears that institutional investors are dominant in the market compared to retail investors. At the same time as the market has been peaking, the trading volume has gone down. For instance, the volume of units traded on April 9 is only about a third of the volume of units traded on March 7.

The peaking of the FBM KLCI then is not due to an increase in trading volume, but more due to the selective buying and selling of stocks that make up the KLCI. The low trading volume among retail investors in the Kuala Lumpur Stock Exchange or Bursa Malaysia has been a cause of concern for the management of Bursa Malaysia. In the 1990s, Bursa was concerned with the lack of institutional investors. Although the market capitalisation of Bursa Malaysia as a percentage of GDP is high, its trading volume is low from a regional perspective.

The retail average daily value in Bursa Malaysia has declined since it reached a high of RM806 million in 2007. It declined to RM283 million in 2008 before it climbed to RM442 million in 2011. However, the percentage of investors or participants who are retail investors has declined from 37 per cent in 2007 to 26 per cent in 2011. The prospects of increasing the trading volume among retail investors in 2012 appear dim as the economy is expected to grow at a slower rate and consumer and investor confidence remains low. Inflation is a problem.

Trading volume has declined from RM53,316.13 million in January 2011 to RM39,869.54 million in March 2012.

There are concerted efforts to increase the trading volume to generate income and commissions not only for Bursa Malaysia and the remisiers, but also to generate funds for corporations, interest earnings and commission for banks, and capital gains for retail and institutional investors.

The current focus of Bursa Malaysia appears to be to increase the number of individual retail investors to get them to be active participants to increase the trading volume. This is because there is a limit to increasing the trading volume of local institutional investors, many of whom are government-linked corporations (GLCs). The GLCs are unlikely to be active traders given their bureaucratic set-up.

About 40 per cent of the stocks in Bursa Malaysia are held by government-linked corporations and these stocks are hardly traded. About 20 per cent to 30 per cent of the stocks are held by foreign institutional investors who create a great deal of volatility in the market as foreign portfolio investment decisions are made overseas.

Malaysia's experience with foreign portfolio investors has been that they invest when the trade balance and current account balance are high and increasing, and they leave when foreign trade receipts are falling and negative. They are also active in Bursa Malaysia when returns look more attractive in Malaysia compared to the equity markets in the advanced industrial countries. This introduces volatility and risk in the market and individual retail investors are averse to trading in a market where they are disadvantaged by asymmetrical information.

Great losses
The government and the foreign and local institutional investors are more likely to have greater access to prior and accurate information as to when the foreign portfolio investments move in and move out of Bursa Malaysia. The individual retail investors suffered great losses in 1998 when the KLCI crashed to below 300 during the Asian Financial Crisis in 1997-98. The KLCI was well above 1,200 in 1996.

The remaining 30 per cent to 40 per cent of the stocks in Bursa Malaysia are held by mainly ethnic Chinese family firms that are also averse to trading their shares. They hope for capital gains as a leverage when negotiating with banks for loans. There is also a sense of insecurity among these Chinese family firms in the context of Malaysia's New Economic Policy prescription of 30 per cent ownership for bumiputras (sons of the soil) and the dilemma of dealing with the concept of "Kedaulatan Melayu" or Malay hegemony.

Empirical studies of Bursa Malaysia testing the famous "Efficient Market Hypothesis", made popular by Eugene Fama of Chicago University, have consistently found that the Malaysian stock market is semi-strong form efficient.

However, entry and exit into the market is not easy as listing is done largely on the merits of the case despite Bursa Malaysia's claims that it has moved to disclosure-based listing. Exit is also difficult as the government is wary of employment and economy-wide implications of listed firms going bust, hence its eagerness to provide aid to distressed listed firms.

Since trading is thin, it is hardly likely that the market is efficient. It has also been observed by some eminent economists that the successful test of the Efficient Market Hypothesis does not mean that the market is efficient. There are built-in biases in the hypothesis that will produce a result to show that either the market is strong form efficient, semi-strong form efficient or weak form efficient. There are only three outcomes possible and they all point out that the market is efficient, although an institutional analysis will show that the market is designed to serve the interests of the government. Bursa Malaysia is regulated by the Securities Commission and the central bank (Bank Negara Malaysia), which are in turn responsible to the Minister of Finance, who also happens to be the Prime Minister.

The institutional trappings of Bursa Malaysia are not lost on retail investors who by and large are short-term investors and invest small amounts of money, unless of course they can get loans from the banks for share trading. The retail investors are on the whole risk-averse given the current and past episodes of insider trading. They will on the average invest only their windfall gains as "over-confidence" is not a trait of individual investors given their primary socialisation in an authoritarian culture.

There is also pressure on the government and GLCs not to invest in risky investments and this does not help to increase trading volume. The government already has substantial investment funds in Bursa Malaysia as the Employees' Provident Fund (EPF) that it manages controls about one third of the FBM KLCI. In recognition of this fact, a former EPF employee in charge of investments is now the chief executive officer (CEO) of Bursa Malaysia. The current CEO is also former head of a leading commercial bank, reflecting the key role played by institutional investors and banks in shaping the growth and development of Bursa Malaysia.

Eyes on EPF
The KLCI average dividend yield for 2011 was 3.4 per cent, indicating that any naïve investor in the market should at least earn an equal percentage by investing in the stocks listed in the index. The EPF was able to pay its account holders a dividend of 6 per cent in 2011. In the 1970s, when the interest rate was higher, the EPF paid a dividend of nearly 8 per cent to account holders.

The overwhelming majority of employees contribute about 10 per cent of their salaries to the EPF and are wary of the EPF's investments in a stock market that is risky, given its track record of episodes of insider trading.

The EPF is thus under pressure not to be active in risky trading given that the dividends it declares are watched closely by workers, who want a say in how the EPF is managed.

Individual investors are averse to active trading in the market given that they are risk-averse and also loss-averse. They are loss-averse in the sense that they may trade quickly to realise a gain but they will keep the equity or asset if it makes a loss, hoping that over time they can sell it for a profit and realise a gain.

Bursa Malaysia then may have difficulty in increasing retail participation in the market because by and large individuals are risk-averse, loss-averse, are not "over-confident" and may be reluctant investors because of asymmetric information and a long history of insider trading and lax regulatory control and discipline of Bursa Malaysia.
The writer is Visiting Senior Research Fellow, Institute of Southeast Asian Studies, Singapore

Monday, 16 April 2012

Silverbird: I declare that the statements may be incorrect

Silverbird's 2011 annual report is out. The tone is set on page 5:

"These are trying times that have befallen the Group and it is unfortunate that the scourge of financial irregularities have crept into our fold. Many will be aware from the announcements by the Company that this year was marred by the recent discovery of financial irregularities that have cast severe doubts on the accuracy and reliability of the financial reporting of the Group, and which have led to some of the Company’s subsidiaries defaulting in their respective loan repayments and the Company being classified as an affected listed issuer under Practice Note 17 of the Main Market Listing Requirements of Bursa Malaysia Securities Berhad".

But then rather optimistically:

"I am pleased to inform that the preliminary findings indicate that the businesses would be profitable if properly managed".

A bold statement, given that Silver Bird has accumulated losses of RM 44 million and that is without taking into account of the financial irregularities, which can increase the losses further, probably substantial. "When it rains, it pours" is almost always true in these kind of cases.

No dividend is announced (no surprise there), but the Directors also make a gesture:

"In view of the crisis before the Company, the Board of Directors has resolved to put all directors’ fees for the financial year ending 31 October 2012 in abeyance pending completion of the on-going investigations into the financial irregularities".

Interesting statement comes later:

"I, Richard George Azlan Bin Abas, being an independent non-executive director of Silver Bird Group Berhad, who has taken primary responsibility for the financial management of Silver Bird Group Berhad, upon the suspension from work of the director and/or officer primarily responsible for the financial management of Silver Bird Group Berhad, do solemnly and sincerely declare that, to the best of my knowledge and belief, the financial statements set out on pages 36 to 90 may be incorrect, in light of the circumstances as highlighted in Note 47 to the financial statements and the Statement of Directors, and I make this solemn declaration conscientiously believing the same to be true and by virtue of the provisions of the Statutory Declarations Act 1960".

In other words, the value of the report is very limited at best.

I hope that the investigation by PKF Advisory is finished soon with a healthy dose of transparency what exactly has happened.

Sunday, 15 April 2012

Xiang Leng: Police confirm probe into Chua Soi Lek's brother

Article from Malaysia Today, orginally from MalaysiaKini:

Police have confirmed that it received a report concerning an alleged corruption case involving MCA president Chua Soi Lek’s brother Chua Chong Seng.

In a text message to Malaysiakini, Criminal Crimes Investigation Department chief Syed Ismail Syed Azizan said the report was lodged on Friday.

He added that a team from the department has begun investigations into the matter but has not classified the case under any section of the Penal Code yet.

According to The Edge, ornamental fish breeder Xiang Leng Holdings Bhd in a special audit had failed to account for RM90.7 million in capital expenditure between 2005 and 2008.

The report said three former directors including Chong Seng were signatories of cash cheques amounting to RM85.7 million given out under questionable circumstances to four contractors for the construction of fish ponds and another RM5 million was paid out to 52 other contractors.

The other two signatories are former managing director Ng Huan Tong and his wife, Lim Wan Hong.

The report added that the cash cheques were made through a licensed moneychanger company which is 80 percent owned by Chong Seng, but he did not disclose them to the company.

According to a filing with Bursa Malaysia by the company, it said the issuance of huge sums of money through cash cheques was against the company’s financial manual and there was a lack of corroborative evidence that the amount was ever paid to the contractors.

Saturday, 14 April 2012

HFT: just another way Wall Street firms “screw over the little guy”?

Excellent article from "Macro Rants" about High Frequency Trading (HFT).

I strongly recommend to read the whole article, but the main points are:
  • HFT trading creates lots of volume, but more volume is not prima facie better (unless you are collecting per-trade commissions on that volume, which is why Wall Street likes HFT).
  • HFT trade systems “win” (aka profit) – but who loses (who pays)? Wall Street lobbyist like to argue that HFT is victimless, but if there was no profit in HFT why would anyone do it? It sounds too good to be true – and it is. We all pay for HFT trading – via exchange fees and false information about liquidity.
  • Why don’t the exchanges lower their transaction fees for everyone, instead of marking up each trade and rebating a fraction of the mark-up to just the popular clique? HFT firms and stock exchanges essentially gouge the public on every trade, and split the spoils between themselves.
  • "HFT adds no meaningful value to the public. It is a poorly veiled way for a privileged few to benefit from exchange transaction fees".
Do we really need HFT in Malaysia? Better give it a pass, I think. 

High frequency trading (HFT) has been in the news a lot lately, as the SEC tries to determine what additional regulations (if any) are required – and many in the public view, rightly or wrongly, that HFT is just another way Wall Street firms “screw over the little guy”.

I would argue that HFT is bad, not because it screws over the little guy (it may or may not) – but because HFT undermines the whole economic purpose of having markets in the first place: it obfuscates value (prices) rather than aiding value (price) discovery.

Lets step back for a minute and remember the reason why financial markets exist at all in capitalist economies. Providing liquidity is only one small part of the reason – if business owners want to sell their company (or part of it), they can do so without selling shares to the public. They don’t need an actively traded stock, or even a listed stock. Plenty of transactions are done between private entities, and most companies are actually sold (privately) to new owners – no financial markets involved at all. Many countries around the world have private companies, but they don’t have stock markets. In many others (including G7 countries), private company valuations are in aggregate many times the total market capitalization traded on exchanges.

The theoretical reason for having financial markets is to assign prices to large companies that (at least on average) equal the value of those companies. By assigning the “correct” price to each company, the markets direct finite capital to the places it can best serve society. Capital allocation is the reason why financial markets exist. Price discovery (as an approximation of value) is why financial markets exist.

The problem is that individual traders range from the very astute to the village idiot. Even the so-called experts can, and often do, make mistakes. Financial markets overcome this using “crowd wisdom”. Numerous studies have shown that a large crowd of people, each making estimates of a value, will usually beat even the so-called experts. Not just some of the time, but most of the time.

One frequently cited example is having a large group guess the number of marbles in a jar – the crowd average guess is usually very accurate even when experts guess wrong. There are still people who make crazy guesses (outliers), but on average the absurdly high and absurdly low guesses tend to cancel out. On average, the crowd gets it right – and usually beats even the experts who in theory should have an edge.
On average, a large crowd will estimate the correct value of a company as well, if not better, than the experts.

But crowd wisdom relies on several assumptions, perhaps the most crucial being that the bets are independent. If there is large scale collusion between crowd members, then essentially you no longer have a crowd, you merely have a handful of estimates that are just echoed by sub-groups. Outliers no longer cancel out, and the estimate becomes biased by a few guesses. Instead of having a true student government election, you have a handful of high school cliques. The popular clique “wins”, everyone else grumbles.

How does HFT fit into this? HFT is done by a computer sitting at the exchange data center. The computers are “co-located” because HFT strategies must be executed as fast as possible, they don’t think carefully what the company is actually worth – that is not part of their programming; it would take too long. For all the sales pitches and PR spin, most HFT algorithms are not all that different. They all use a moving average or two, an RSI indicator, and a list of pending trades (limit orders / market orders).  They really aren’t all that different from one another — except for execution speed.

Essentially, HFT is the popular clique. For much of 2009-2011, HFT trading represented as much as half of all market trades. Half the trades were not independent bets, and worse, they weren’t even guesses about the true value of the underlying companies. They were ultra-short term mean reversion trades (selling gamma) without regard to whether the short term mean was valid.

HFT trading creates lots of volume, but more volume is not prima facie better (unless you are collecting per-trade commissions on that volume, which is why Wall Street likes HFT). Volume has both a quantity and a quality component – and HFT has zero quality. HFT algorithms do not attempt to value the underlying company, they don’t have the time. One might argue the quality of HFT trade volume is negative – because it tends to dry up when markets are extra volatile, exactly when liquidity is most needed.

Why do exchanges pay for HFT trade flow? Where does that money come from? HFT trade systems “win” (aka profit) – but who loses (who pays)? Wall Street lobbyist like to argue that HFT is victimless, but if there was no profit in HFT why would anyone do it? It sounds too good to be true – and it is.
. . . .
We all pay for HFT trading – via exchange fees and false information about liquidity. What do we get in return? HFT systems are not required to balance order flow, as the old stock specialists on the NYSE used to do in return for their privileged market access. Getting 0.000001 higher price is legally a better execution – but practically speaking it is not. One has to trade 10,000 shares for the price difference to matter by a penny. Almost no one benefits from HFT in practical terms.

Why don’t the exchanges lower their transaction fees for everyone, instead of marking up each trade and rebating a fraction of the mark-up to just the popular clique? HFT firms and stock exchanges essentially gouge the public on every trade, and split the spoils between themselves. The HFT firm that gives the highest rebate back to the exchange gets to do the gouging.
. . . .
HFT adds no meaningful value to the public. It is a poorly veiled way for a privileged few to benefit from exchange transaction fees.

Friday, 13 April 2012

Skills mismatch stifling wage growth in Malaysia

Article in the Singapore Business Times regarding a report from the World Bank.

After having lived 16 years in Malaysia and 2 years in Singapore, the big difference that I see is that in Singapore they handle mistakes so differently: they acknowledge them, they take care of the problem, they learn from the whole episode, and they move on. Newspapers are also much more critical.

In Malaysia they love to break down useful feedback mechanisms, while "shooting the messenger" seems to be the national sport with certain persons. I hope that one day Malaysia "gets it" and then things might move pretty fast in the right direction. Until that happens, Malaysia will be an underperformer.

All those issues mentioned in the report of the World Bank below, they are known for so long time, they have been said by so many people, and still ......

World Bank report also says structural reforms required for the modern job

"Much of the country's competitiveness is still derived from low-cost labour - a result of the huge inflow of low-skill foreign workers."

A MISMATCH in education and employment skills has been one of the factors suppressing wage growth in Malaysia and the creation of "modern" better paying jobs, according to a World Bank report.

The report found that although most openings created over the past decade were for skilled professionals, the majority (44 per cent) of existing jobs is still low-skilled.

Transforming the "traditional" labour force to one that is more modern and productive will require structural reforms, including a shift in teaching from a system that emphasised rote-learning to one that is creative and critical thinking, the global development agency said in a Malaysia Economic Monitor April 2012 report on Modern Jobs.

Although Malaysia has set its sights on becoming a high-income economy by 2020, the report's findings indicate the difficulties it faces given its labour market. For one, the majority of jobs especially in the private sector are still low-skilled, and out of five in the workforce, only one has post-secondary certification - and of these, slightly over 5 per cent have tertiary education. This is in line with countries with similar income levels but below OECD nations.

Consequently, instead of innovation or creativity, much of the country's competitiveness is still derived from low-cost labour - a result of the huge inflow of low-skill foreign workers, estimated at 1.8 million in 2010. Skilled foreign labour has declined by about a quarter since 2005.

With the overall unemployment rate is 3 per cent, graduate unemployment is also surprisingly high, at over 20 per cent for arts/business, and 11 to 17 per cent for science, technical and ICT graduates.

The skills mismatch was reflected in a 2011 survey conducted by the Japanese Chamber of Trade & Industry, Malaysia (Jactim), in which 40 per cent of respondents cited "difficulty recruiting technicians, specialised workers, managerial employees" as a challenge in securing high-quality labour.
An equal proportion of respondents cited high litigation risk, while 42 per cent complained of difficulty in hiring Malaysian workers. Employees' low retention rate was the biggest headache for 62 per cent of respondents, reflecting a tendency by staff to move to another job for a little more salary.

In Malaysia, the quality of labour was the fourth top challenge faced by Japanese firms. Higher cost in procurement topped the list (62 per cent), followed by wage increase (55 per cent) while obtaining raw materials and parts at the host country was the least problematic (33 per cent).

The World Bank said an inefficient regulatory environment and insufficient social safety nets also threaten the country's planned economic transformation.

Malaysia is undertaking a review of its education system by local and international experts to improve the quality of its labour force. Findings are expected by year-end.

One way to find talent, the World Bank suggested, is to consider extending a "nearly automatic work permit" for foreign graduates of Malaysia's universities.

Thursday, 12 April 2012

High Frequency Trading on Bursa Malaysia?

Article from The Malaysian Insider:

"Trading of equities on Bursa will be a new ballgame once computer-driven ultra-high frequency trading is introduced, said Edgar Perez, author and former Citigroup vice president.

High-speed trading already makes up six per cent of trades on the Bursa derivatives market and the stock exchange operator is reported to be gearing up for the introduction of ultra-fast trading of equities."

I am not a fan at all of High Frequency Trading (HFT), there are elements to it that are (in my opinion) not ethical. Is Bursa Malaysia seriously considering HFT? I am afraid they are:

"Bursa said in its 2011 financial results press conference that it expects growth in HFT as the new trading style, which is practised by elite hedge fund traders, is now in demand by the rest of the market."
Bursa Malaysia is now a listed company, retail investors are not very active anymore (like in the heydays of 1993) so Bursa might consider HFT to add to their profit.

There is no free lunch here, what HFT traders make, comes from other players, in this case the "normal" investors or traders, who get slightly worse prices on their trades.

Another article from Bloomberg is supposed to counter the fears that many (including me) have:

"High-Speed Trading Is Progress, Not Piracy".

I am not impressed, especially if I read statements like:
  • "Their quote-and-cancel rates may be high"
  • "Momentum ignition (in which traders take a position and then start rumors or place orders to quickly drive the market up or down) and layering (where traders place orders in the market-order books to imply substantial buying or selling pressure without the intention of executing) could both open the door to market manipulation".
I am probably an old fashioned guy, but for me things should be pretty simple:
  • A company is an unique relationship between people who have time but no money (founders/managers, employees) and people who have money but no time (investors)
  • Investors will receive shares, Founders/Managers will receive shares and wages, employees receive wages
  • There are rules and regulations in place, and a regulator is holding a close watch to check if all is fair and square
  • When there are many persons holding shares in one company, it makes sense to create an orderly market for the shares
I fail to see where HFT fits in the above.

I hope Bursa Malaysia will seriously consider the interests of all market participants before they make the decision to introduce HFT in Malaysia. It might be good for their bottom line, it might be good for trading volume, but it might alienate the retail investors even more.

I would recommend to just focus on the basics, and increase much needed enforcement, thereby bringing back confidence and credibility to the market. Retail investors will then return back, although it might take a long time.

Wednesday, 11 April 2012

Learn how to cook the books in the "Fraud School"

Article and multimedia presentation from Muddy Waters:

"There was an important article in the Chinese media on April 3, 2012 talking about an investigation into a "fraud school" that prepared fraudulent companies to list in the US via RTO. The article states that this fraud school was responsible for bringing RINO (exposed by MW) to the US. It also states that the Chinese investment bank at the center of the fraud school previously worked with ALN, LIWA, RINO, and FSIN. We conclude that FSIN presents a high risk of fraud."
RTO's are Reverse Take Overs, where due diligence is often more lax than with fresh new IPO's.

Xian Leng: "boxes of cash"

In my previous article about Xian Leng I was rather worried about the pretty vague and indecisive announcement made by Xian Leng to Bursa Malaysia. Most likely Bursa was not happy at all about how things were proceeding, held a meeting with members of the Board of Directors of Xian Leng, upon which the following announcement was made. This is already much more concrete than the previous announcement, with a clear list of preemptive and corrective actions that will be considered and (hopefully) undertaken.

It is good that Bursa Malaysia chases the Board of Directors, although the Managing Director, his wife and Chua Chong Seng have resigned, the Managing Director is still the majority shareholder.

An article in The Star of today reveals more fishy matters:

What puzzled those who have read the auditor's report would be Chua's seemingly cavalier attitude to money. In two interviews with the auditors, he said boxes of cash were left in the office on Ng's instructions to pay the four contractors.

Chua claims not to know what happened to the cash after it was passed over to two employees in the accounts department which, according to Ng, should have been passed to the relevant contractors.

The auditors noted that although payment vouchers for the contractors were signed and receipt of payment have purportedly been acknowledged, neither Ng, Lim or Chua as well as Xian Leng's accounts personnel could confirm the identity of the persons who signed on the payment vouchers.

Furthermore, the circumstances surrounding the four contractors' getting the projects for the development of the fish farms seems fishy. The auditors said there were no written contracts entered into with the contractors, who only issued invoices stating the work done in broad terms.

They said no tenders or competitive bids were called before the four contractors were appointed since there was no such company policy while Ng said he was the only one involved in engaging the contractors due to the sensitivity and security surrounding the arowana breedstock.

Checks with the Companies Commission of Malaysia by the auditors showed that the contractors were all registered as sole proprietorships with three of the contractors issuing invoices after their business registrations had expired with no subsequent renewal.

The auditors have not been able to contact the contractors, one of which has passed away while the whereabouts of two others were unknown. Another has been hospitalised while one Abdul Razak, said to be the main contractor who brought the other contractors to work on the fish farms, have not been contactable.

A troubling sign which the auditors noted was that a “finance manual” adopted by the company in January 2003 listing down policies and procedures was never tabled to the board nor the audit committee.

Besides this, the external and internal auditors of Xian Leng did not inform the board nor the audit committee of the issuance of cash cheques.

Sunday, 8 April 2012

Brace for hot money outflows?

Article in The Star warning for hot money outflows:

"The trading of shares on Bursa Malaysia and the FTSE Bursa Malaysia KL Composite Index (FBM KLCI), which are close to their all time highs, are prone to a sharp crash should hot money, which have been net buyers of Malaysian stocks for the past six months, liquidate their holdings. Hot money, also known as foreign purchases into any type of local financial security including equities, can leave for various reasons including any change in the dynamics of the global economy, said OSK Research head of research Chris Eng."

I would not always blame foreigners so easily. Some foreign investment nominees might simply be rich Malaysians who parked their money overseas and who are now trading through their accounts in the British Virgin Islands, the British Channel Islands and the like.

But the argument gets even weaker when we see the numbers:

Inflow 9.8 Billion, outflow 6.4 Billion, that is a difference of only 3.4 Billion, about 1/4th of one per cent of the market cap of Bursa Malaysia. That does not sound like a worrisome number, it is completely dwarfed by the investments from EPF and PNB. So any warning about a "sharp crash" to be caused by foreigners, I don't see that quickly happening, not based on the above numbers.

I would love to see the comparable numbers of 1993, that was when the Malaysian market was really hot and inflows were huge, by any standard. The market index topped that year at around 1400 points, it took about 18 years for the CI to breach that height. I am afraid the same can't be said for the other indices, that time there was for instance a Second Board, if that would still exist then I am sure the index would currently still be lower than in 1993.

The big crash did come, not in 1994 (that was just a correction to about 900-1000 points) but in 1997 and 1998. What happened in those years was simply unbelievable, unless one witnessed it himself.

Unfortunately, we don't have proper accounts what really all went on (behind the scenes), I have never seen detailed studies from those faithful years. And that is unfortunate, because it means that no lessons will be learned and the same costly mistakes will be made again.

Xian Leng: "fishy payments"

Xian Leng has made an announcement to Bursa Malaysia regarding the special audit. The article from The Edge Malaysia, about which I wrote before, is largly confirmed. "Where is Ze Moola" also has written about the matter.

The announcement is pretty vague, and many questions still remain open: what exactly happened, by who, when, where, why and how?

The company has written of the amount of RM 86 million, but if that is really realistic, why did nobody notice the huge gap between the payments done (huge) and the value of the contract work (tiny)? Huge amounts of capital expenditure of many years have been (almost) fully written off.

How is it possible the checks and balances (internally and externally) failed so hopelessly?

And even about the follow up actions, the company is deliberating its next course of action. It better hurry, the payments where done 6 years ago, memories don't get better over time and proof might get destroyed (records of 2004 and before are already not available anymore).

Xian Leng is pretty small  for a listed company and the amount involved is relatively huge. I hope for some fast and decisive action, to bring some much needed justice to the minority shareholders.

Wednesday, 4 April 2012

Buffett Message Is ‘Do as I Say, Not as I Do’

Controversial article from Alice Schroeder (writer of the impressive book "The Snowball") in Bloomberg about Warren Buffett. One only has to read some of the comments to verify that many readers think she has gone too far.

I think she definitely has some valid points though, I also was not happy with the involvement of Berkshire Hathaway in several financial companies during the economic crisis of 2008/9, nor did I like how Buffett defended rating agency Moody's Corporation.

His big legacy is growing Berkshire Hathaway (together with Charlie Munger), the phenomenal success story, the way he build it up, the fact that he only takes USD 100K wages and no options under an ESOS scheme, and the fact that 99% of it will be given to charity.

Outperforming returns are diminishing compared to the S&P 500, but that was to be expected and was announced by Buffett in the past, Berkshire Hathaway is simply getting too big, meaning that investments in small and medium sized companies don't make sense anymore. In other words, his universe of potential investments has shrunk markedly.

The last few years have been a struggle for investors in Berkshire Hathaway Inc. (BRK/B) Since the March 2009 market low, the Standard & Poor’s 500 Index has risen 80 percent compared with 44 percent for Berkshire, even though crashing stock prices and unprecedented volatility perfectly suited Warren Buffett’s investing style.

Now Berkshire stock hovers at about a 10 percent premium to the company’s estimated $110,000 per-share book value at March 31, 2012, (assuming the overall book value increases in a rising stock market by about $10 billion this quarter) and perhaps below a liquidation price. In essence, the market is placing no value on Berkshire’s prospects.

Alice Schroeder

Alice Schroeder
Ben Baker/Bloomberg

I believe two basic problems have brought Berkshire to this pass. First, Buffett’s investing record has been underwhelming for the past few years, except for special opportunities linked to his own reputation and relationships. Second, Buffett has lost stature because of the way he uses his role as a public figure. And both of these situations will be difficult to reverse.

As he has for years, Buffett wrote in his most recent shareholders’ letter, covering 2011 results, that he’s not going anywhere anytime soon. This used to give investors comfort; now it has them disconcerted. Buffett also wrote that his unnamed successor will take over “when a transfer of responsibilities is required.” Unless Buffett dies suddenly, this begs the question, “required by whom?” to which the answer is: Berkshire’s board. If the board handles its responsibilities well, then Berkshire stock, already cheap at $122,115, will turn out to be an even bigger bargain with hindsight.

Sweet Deals
During the financial crisis, Buffett cut some very sweet deals that made billions for Berkshire. He bought preferred stock from Goldman Sachs Group Inc., General Electric Co., Dow Chemical Co., Wm Wrigley Jr. Co. (to finance its sale to Mars), Swiss Reinsurance AG, and later, Bank of America Corp. He also made a deal to reinsure 20 percent of capital-starved Swiss Re’s business. He bought Burlington Northern Santa Fe Corp., which investors applauded as a savvy move.

These, unlike stock purchases, were classic “only Buffett” maneuvers, which arose partly from his relationships and reputation -- bringing home how dependent Berkshire was on Buffett’s deal-making ability at this crucial time.

Meanwhile, many of Buffett’s major stock picks for the past five years, like Johnson & Johnson, Kraft Foods Inc., ConocoPhillips, and Wal-Mart Stores Inc. have been lackluster.

It used to be an “aha” moment when a Buffett stock pick was revealed -- his 1980s buy of Coca-Cola Co. caused such a sensation that trading in the stock had to be stopped. But the recent $10.8 billion International Business Machines Corp. purchase got only a yawn. The impression is that Buffett no longer buys based on the brilliant insights of yore, but rather, chooses conservative mega-cap stocks when they appear to be moderately priced bets.

Chances are that most of the stocks will work out OK, and that Buffett’s new asset managers -- Todd Combs and Ted Weschler -- will gradually take on more responsibility and add value. For several years, though, it would have been better to passively invest your money in an index (SPX) fund than to buy Berkshire shares, which has restrained investors from wanting to pay much more than book value for the stock.

Berkshire’s poor performance has meant something else -- that Buffett’s worst investing decision was to not repurchase Berkshire’s own stock sooner than September 2011, when he finally agreed to buy back company shares. Since then, the pace of repurchases has been a crawl. Yet Buffett has been table- pounding investors to buy Berkshire because, he says, it is significantly undervalued. He praised Jamie Dimon for buying back JPMorgan Chase & Co. stock. And he criticized the late Steve Jobs for not having taken his advice to buy back Apple stock when it was undervalued.

Diminished Stature
Overhanging Buffett’s public role in the past few years is the way Berkshire’s financial interests shaped his public statements. At a time of crisis, Buffett had the opportunity to put a capstone on his career as one of the greatest business statesmen in history. Instead, his stature is diminished. To wit: Buffett struggled to reconcile Berkshire’s sale of derivatives linked to market indices with his longtime criticism of leverage from derivatives, which was perceived as hairsplitting.

He often criticizes Wall Street yet defended Berkshire investments in Goldman Sachs and Moody’s Corp. before the Financial Crisis Inquiry Commission. He praised other banks that made bad mortgage bets, such as Bank of America and Wells Fargo & Co. He attacked Irene Rosenfeld, the chief executive officer of Kraft, for, in his view, overpaying for Cadbury Plc, literally at the same time that Berkshire, by his own admission, was paying a high price for Burlington Northern. Recently, Buffett took his audience aback by criticizing those who have lost homes to foreclosure, saying they victimized banks (that Berkshire has invested in) by profiting from earlier refinancing at cheap rates.

Another example of the statesman missing the mark took place on Oct. 17, 2008, when Buffett wrote a New York Times op- ed urging investors to buy American stocks, as he was. For decades, Buffett had avoided making market calls that required short-term timing of the market. This one was especially risky, coming only a month after Lehman Brothers Holdings Inc. had filed for bankruptcy and while the global economy was in a frightening tailspin.

To his credit, Buffett was trying to boost public confidence in the markets. At the time, though, Berkshire was selling far more equities from its portfolio than it was buying, including large stakes in Johnson & Johnson, ConocoPhillips and Procter & Gamble Co.

Buying Opportunity
Buffett later wrote that he would have preferred to keep those shares, which were sold to fund the GE, Goldman and other special deals. But investors who jumped into the market on his advice would have waited another nine months just to break even. They would have missed the market’s bottom in March 2009 -- the greatest buying opportunity in decades. Nor did investors have a way to participate directly in the special “buy American” deals Berkshire was getting.

The 2008 Berkshire stock sales were the beginning of a $10 billion-plus selling streak that continued through the end of 2010, when Buffett announced his “all-in bet on America” through the purchase of Burlington Northern. Because of the contrast between Buffett’s bullishness on stocks and the way he was putting Berkshire’s own money to work, Buffett appeared to be “talking his book” to pump up Berkshire’s value and his patriotic persona.

Now, Buffett is stumping for President Barack Obama and has made himself the poster boy for higher taxes on corporations and the wealthy, even while Berkshire has lobbied for tax breaks and is battling the Internal Revenue Service on tax assessments at its NetJets Inc. operation.

Buffett’s opinion on taxes is not new -- many people agree with it -- and he has every right to express it. Yet he is a huge beneficiary of low tax rates, which has spurred a torrent of hypocrisy charges. Buffett’s ubiquitous presence and inclination toward stunts hasn’t helped. It made international news when his secretary sat with Michelle Obama at the State of the Union address. Lately, he has switched to using his housekeeper’s taxes as his foil.

Senior business leaders are so incensed about Buffett’s visibility on taxes that it appears he is losing the support of a key constituency that was receptive to his broader and, arguably more important, ideas on capital management, philanthropy and corporate governance. Presumably, the Republicans are sharpening arrows to let fly at Buffett come this fall, which may further damage his credibility.

If Buffett wants to be a player in politics, he’s got every right. But it would be a shame if he forgot that his main legacy is Berkshire Hathaway. His lasting impact will come from focusing on the company and ensuring that the succession process takes places gracefully. That requires more than simply choosing a person. The transition of responsibilities also must be wisely managed.

There are many ways to execute this, and changes may be taking place already that aren’t visible. The stock price is sending a quiet signal that shareholders will welcome any news that lets them put a higher value on Berkshire’s future. Some shareholders are growing publicly restive. The AFL-CIO Reserve Fund submitted a proposal for a shareholder vote in May seeking more transparency about Buffett’s successors and regular updates to ensure the process will be board-driven.

Ultimately, it is Berkshire’s board that bears the fiduciary responsibility. For its members, this transition requires navigating one of the greatest governance challenges in business. The board holds Berkshire’s value -- and Buffett’s legacy -- in its hands.

Tuesday, 3 April 2012

Xian Leng: 90 million accounting issue (updated)

On April 3, 2012 the Managing Director resigned:

As the audit investigation on Xian Leng Holdings Berhad's Group capital expenditure by PricewaterhouseCoopers has come to the final stage, and couple with the deteriorating financial result of the Group for the past few years. I believe that it would be prudent for me to relinquish my position as the Managing Director of Xian Leng Holdings Berhad voluntarily on my own accord.

New developments in Xian Leng, as reported in a rather damaging article in The Edge of this week. The heading is "RM 90m accounting issue in Xian Leng", which is much more than previously estimated, "when it rains, it pours".

The following official announcement was made yesterday:

Reference is made to the article under the title “RM90 million accounting issue in Xian Leng” as appeared in page 18 of The Edge Malaysia dated 2 April 2012. The Board of Directors of XIANLNG wishes to announce that the investigation has yet to be completed and save as previously disclosed in our announcements, no authority has been given to any party for the disclosure of any information pertaining to the investigation. This announcement is dated 2 April 2012.

Looks like the report was leaked to the journalist of The Edge, but the contents are not denied. If the article of The Edge is indeed true, then things look pretty bleak for Xian Leng.

"A draft report by PricewaterhouseCoopers Advisory Services Sdn Bhd on ornamental fish breeder Xian Leng Holdings Bhd alleges that the company cannot account for as much as RM 90.7 million in funds utilised as capital expenditure between 2005 and 2008."

"According to the report, the board of directors was aware of a sum of RM 90.7 million allegedly spent on building large ponds, but it did not give its consent for the expenditure."

This sounds strange, they were aware of it, but didn't give its consent. Then why did they not raise the alarm? The amount of RM 91 million is huge.

"The accounts of Xian Leng Trading do not sufficiently explain the transactions with the four contractors as the cheques were not drawn in their favour. Instead they were drawn in favour of parties connected to the four contractors or to "cash" while the corresponding vouchers were made out to the four contractors". The cheques were allegedely made to a money changer, a company substantially controlled by an individual who was also a director of Xian Leng. The director resigned in August 2008". The director apparently could not account for the RM 37.7 million of the cash paid to the money changer. It is also worth noting that transactions with the money changer, which is a related-party transaction, had not been disclosed to the stock exchange and shareholders."

If this is true, then there are some serious issues regarding internal audit etc in the company. Large cash payments, payments to money changers, Related Party Transactions, all alarm bells should have been ringing. Why did it take so long before action was taken?

The alleged director involved must have been Chua Bah Bee @ Chua Chong Seng, a non-independent executive director and an accountant, since he is the only one who resigned in August 2008. He sold millions of his shares just before he resigned at age 63.

The auditors of Xian Leng are Ernst & Young.