Wednesday, 30 January 2013

Independent advice: "not fair but reasonable"

Article in The Star by John Loh: More cases deemed ‘not fair but reasonable’

"In March 2010, the SC had - in an effort to raise the standard of independent advice by getting independent advisers to conduct deeper analysis and disclose more information to shareholders - issued a consultation paper that led to the additions to Practice Note 15 of the Code on Takeovers and Mergers 2010.

The revised guidelines took effect from Nov 1 last year.

The new rules essentially decoupled the terms “fair” and “reasonable” as two distinct criteria, with “fairness” referring specifically to valuation and “reasonableness” to elements other than valuation.

“The decoupling of the terms will further ensure that independent advice circulars are more easily understood, transparent and provide clear bases to justify a recommendation,” the SC had said."

Thirteen independent advises in the above table:

  • 4 times "not fair but reasonable", language that is used when the price offered is less than its fair value, but at least it offers a option for the shareholder to sell (instead of holding shares in an unlisted company);
  • 4 times "not fair and not reasonable", not necessarily against the wish of the majority shareholder, it could be a take-over offer at a low price where the majority shareholder wants to keep the company listed;
  • 5 times "fair and reasonable".

Two remarks:

  • This is a huge change from the past when almost always deals were deemed to be "fair and reasonable", the change is good; the average standard is also better than in the past (with some exceptions);
  • Why are so many proposals deemed to be "not fair"? Do the Board of Directors fulfill their fiduciary obligation to work for all shareholders? Can they not come more often with deals that are deemed to be "fair"? In the case of privatizations, have they really tried to unlock more value?

The SC and Bursa Invite Comments on Proposed Best Practice Guide on Independent Advice Letters, latest by tomorrow (January 31, 2013). The documents can be found here.

My comments regarding this Guide:

  • In general the guide appears to be good;
  • However, guidelines are only of use with strict enforcement. SC really needs to come down hard on errant independent advisers who write biased reports in favor of the majority shareholders;
  • DCF (Discounted Cash Flow): in itself a good tool in certain areas (where reliable predictions can be made), unfortunately it is often abused (to come up with sky-high valuations) and therefore I would recommend to do away with it, my previous posting about this can be found here;
  • I would stress reasonableness in valuation: for instance if a certain asset is acquired not too long ago and the current valuation is very different, good reasons should be given, I often miss this common sense approach;
  • Data should be as up-to-date as possible: for instance I still often miss an up-to-date balance sheets and profit and loss account; also if the amount involved is large there really should be a recent audited account. In the KFC case the independent adviser compared the company with other companies based on share prices of one year old, this should not happen;
  • For asset heavy companies like property developers or plantation companies: revaluation of assets should be done if the last valuation is done more than 3 years ago; Glenealy Plantations was privatised with its last revaluation done 14 years ago, in the midst of the Asian Crisis;
  • Margin of safety: if the value of an asset depends on all sort of future conditions being met, then there really should be a decent margin of safety;
  • Executive summary: I would prefer this always to be done.

Some general comments, not related to the Guide:

  • A random assignment of a (non-conflicted) independent adviser to a specific case would increase the chance that the independent advisers is really independent; at the moment companies (that is the Board of Directors) can choose their own independent adviser;
  • Independent advice should be send together with the main document, or at least not much later.

Are you a value investor? Take the Apple test

Interesting posting from Prof. Ashwan Damodaran about Apple on his blog "Musings on Markets".

He writes:

"Based on my estimates, and they could be skewed by my Apple bias, at its current stock price of $440, there is a 90% chance that the stock is under valued."
Plus 5 investment tips from the professor:
  1. Don't bet the house: No matter how confident you are in your value assessment, don't go overboard and invest a disproportionate amount of your portfolio in Apple. This is not just about you being right on the value but also about the market coming around to your point of view, and that is not in your control or mine; betting more than 10% of your portfolio on this stock strikes me as foolhardy.
  2. Don't double down (Dollar averaging): I have never been a fan of dollar averaging, which not only muddies the water about when/how much you invested in a stock but results in increasing your bets as the market goes against you. Take a stand against the market but do not make this an ego trip, where admitting that you are wrong becomes impossible to do. Thus, while I feel more confident now that the stock is under valued than I was a week ago when I bought the stock for $500, I don't plan to buy more shares.
  3. Think of buying the business, not the stock: The old adage that you are buying a piece of a company, not a share of stock, is particularly relevant when you make a bet like this one. My intrinsic valuation is determined by Apple's capacity to generate profits and cash flows and is not dependent upon whether portfolio managers are investing with me or analysts are lowering their price estimates. If I buy Apple at $440 today and I can hold the stock, I will get a share of a cash that is paid out and a share of ownership in the cash that is withheld. I have to keep reminding myself of that truth, even if the market moves against me.
  4. Do not track the day to day stories: In an increasingly connected world, I know that this is really difficult to do, but there is no harm trying. Turn off your financial news channel, don't read opinion stories about Apple and avoid equity research reports like the plague.
  5. Be willing to wait... even if you are not sure what you are waiting for: The big question that those of us who chose to make this bet face is what the catalyst will be that brings the market back to its senses (at least as we see it...). From my experience, it is almost impossible to tell. For instance, how did Netflix, which was a tailspin, a year ago, turn itself around? There was no single precipitating event but a collection of small news stories and solid earnings reports that seemed to settle the fears that investors had about the company's future direction. With Apple, it could be a new product, a couple of healthy earnings reports or a stock buyback.
Disclosure: I have also started to buy some shares of Apple at USD 450, knowing very well that the share might easily go down further.

At the start of each year, Damodaran constructs a spreadsheet with fundamental data from each listed stock. The dataset can be found here. Malaysian and Singaporean stocks can also be found under "emerging markets", in the rather peculiar category "Small Asia". I recommend to first download the file to disk and then to work on it. It might be interesting for value investors who like to work with  filters to find some value ideas.

Tuesday, 29 January 2013

Shareholder activism in HK scores a victory

One week ago I wrote: "Lending money to a related company is a no-no" about Aeon Credit Service (listed in Hong Kong) planning to lend money to its parent company.

David Webb strongly advised minority shareholders to vote against this proposal.

Claire Barnes from Apollo Investment Management wrote:

"A helpful investor has noted that unless Aeon Credit Service Asia (ACSA) could rely on unanimous shareholder approval (which it clearly cannot, as we object strongly), its proposal appears to be in breach of section 168A of the Companies Ordinance in Hong Kong, as the loan would be financing a competitor. We have written further to the company, urging it to withdraw the proposal, and to rethink its plans in China to avoid conflicts of interest and ensure fair treatment of minority shareholders."

The good news is that Aeon Credit has indeed withdrawn their proposal, the objections apparently didn't fall on deaf ears:

"The Board decided to terminate the Loan Agreement in order to allow time for better communication with the Shareholders and the market on its business strategy and direction."

A great success for shareholder activism in Hong Kong, it also shows how a few funds being pro-active can quickly persuade listed companies to withdraw proposals that are not beneficial for minority investors.

Malaysia (and its large Government Linked Funds) can learn a thing or two from this episode. I can hardly recall a similar victory for minority investors, despite the IMF (again!) calling Malaysia the 4th best country in the world regarding "minority shareholders protection". A rather preposterous claim, I am sorry to say, which has no baring to the reality. It is all based on laws, not on actual (court) cases or enforcement.

Next to that, Malaysian minority investors are severely hampered by the fact that there is no possibility for class action suits. MSWG would be in a prime position to initiate class action suits against companies and directors who have disadvantaged minority investors. The VEB in The Netherlands (comparable to the MSWG in Malaysia) has initiated and won many class action suits, some of them against Fortune 500 companies. Which also explains its popularity and its membership of 48,000 (on a population of below 20 million).

Sunday, 27 January 2013

Weekly roundup: Country Heights, gold trading, Protasco, CDS information leaked

MSWG has tackled the "Country Heights Grower Scheme", according to this article in The Star:

“Why the rush to terminate when the prevailing average crude palm oil (CPO) price is still hovering around RM2,300 per tonne, which is above the minimum RM800 per metric tonne?”

Rita pointed out that Ferrier Hodgson, the independent adviser, had stated that a shortfall between the grower's fee payable of RM215mil (contributed by the subscribers) and the underlying value of the land at RM129mil cast doubt on the recoverability of the grower's fee.

“Would CHGS be able to refund the capital of about RM215 million in this two years?” questioned Rita.

“If the net yield payments were not made, would it not be deemed as a breach of the terms and conditions of the agreement signed between the subscribers and CHGS?”

“Why is there a difference, ie, RM86mil, ie, RM215mil and the value of the land, ie, RM129mil? Why was there no professional valuation carried out for the said land?”

The first grower scheme in the country will be seeing its general meeting next month on Feb 8.

“In addition, what was the reason for fixing the general meeting date a day before the Chinese New Year's celebration, given the expected long break holiday?”

These seem to be all very valid questions. Although Country Heights is a listed company, the details of this kind of investment scheme can not be found on the website of Bursa Malaysia.

On MSWG's website Rita writes:

"It is time market regulators re-examine all such schemes, its structure and marketing taglines to ensure that subscribers/investors are protected"

This scheme is attracting a lot of attention in the forums, for instance on lowyat.

An old link from a Bloomberg interview with Country Heights's Lee about the Grower scheme:

``It's like money dropping from the tree,'' Lee, managing director of developer Country Heights Holdings Bhd., said July 2. ``I'm a very conservative guy. The only risk they take is the price of the palm oil. 

Bee Garden Holdings Sdn., owned by Lee's wife and which runs the project, has sold 8,000 of the available plots, and expects to sell the rest by the end of the year, said Lee.

"Under the so-called Country Heights Grower Scheme, plot buyers will receive 12 percent each year on the amount invested if palm oil averages above 2,100 ringgit a ton from the fourth year onward, and a further 5 percent depending on the plantation's output. If palm oil prices are lower, the annual return drops on a sliding scale, paying 1 percent if the price of palm oil is between 901 ringgit and 1,100 ringgit a ton. There is no return on a price below 800 ringgit. ``It's very difficult for the price to drop below 800,'' Lee said. ``The potential is so great on palm oil.'' In total, annual returns will probably range from 11 percent to 17 percent from the fourth year onwards, the project's prospectus says."

With palm oil around RM 2,300 per ton, annual returns should be good, so MSWG's concerns regarding the termination of the contract seem to be correct.

A more general article about Malaysian investors hungry for yield and the rise of unregulated investment schemes can be found on Bloomberg.

In Singapore another gold trading company, Gold Guarantee, has apparently run into problems, the newspaper article is mentioned here.

I would caution investors to participate in these kind of schemes. If an investor is bullish about gold, he could invest in one of the large, listed mining companies in the US, Canada or Australia. If an investor is bullish about palm oil, he could consider investing in any of the listed plantation companies. And for property there are the REIT's. Information on these companies is much better and can (for Malaysian companies) easily be found on Bursa Malaysia's excellent announcements website.

On my posting "Protasco's Puzzling Purchase", "anonymous" suggested that the purchase might have to do with the recent change in directors and shareholding. "Ronnie" mentioned that "MSWG is doing a fine job given its limited resources. Hopefully they will do something or raise the alarm.", with which we agree.

The red flags are too numerous to count, and the announcement was of extremely poor quality. Not a single reason (production numbers, proven/probable/possible reserves of oil or gas, large historic profit numbers) was given why PT ASI would be worth that much money. A valuation would be done, but is it not the normal way first to do research before one buys a part of a company?

And then there was the saga of CDS account information possibly having being leaked. The Star's editor Risen Jayaseelan suggests to make the list of the largest 1000 shareholders available,  for a price:

News editor Risen Jayaseelan reckons that if made available, the latest shareholder list of companies like Hong Leong Capital Bhd would be a sought-after item, as it would shed light on who is really buying the shares at prices above the takeover offer.

Bursa Malaysia was initially reluctant to investigate, hiding itself behind the excuse that it had not received any complaint. If information is credible (which it appeared to be, from different sources), then Bursa should just act and not use these kind of excuses, but act pro-actively and fast. Luckily, a few days later did it had indeed started an investigation into this matter, according to The Edge.

Busy days for the regulators.

Friday, 25 January 2013

Apple: highest profits but share drops 12%

Some quick facts on Apple and its earnings release yesterday:

  • Apple's calendar year 2012 profits were the highest of any company, ever
  • Its Q1 2013 earnings were the 4th largest quarterly profit of any company in history
  • Apple trades at 10.2 times trailing earnings, less than 9 times future forecasted earings
  • Apple has USD 137 Billion cash, about RM 420 Billion, Apple alone could almost settle the whole of the Malaysian debt
  • Excluding cash (USD 145 per share), Apple is trading at 7 times earnings
  • It's share has dropped from a high of 700 to 450, a drop of 36%
  • But ..... critics will point out that Apple's margins are falling, and they are correct

Apple's history in launching innovative products:

2001: iPod
2004: iPod mini
2007: iPhone
2010: iPad
2013: Will we see another invention? Capital expenditure for R&D is up.

The above written with the help of an article from SeekingAlpha:

"In Defense Of Apple: Battling The Mounting Hysteria" by Helix Investment Management.

The share price is exactly back where it was one year ago:

China listed companies on Bursa, does it make sense (2)

[Updated in red]

I posted before about China listed companies on Bursa. I received several reactions (both through comments and in private), and like to clarify things.

The valuation for these eight counters is very cheap, by all standards, because the market clearly doesn't trust the numbers (reported profit, cash in the bank, etc). I do agree with the market on this observation.

The reason why I think this: it would be so simple to increase the share price, either by a share buyback program or (preferably) by paying out a decent dividend. An example for the latter:

Say the share price is RM 1.00 and the company has nett earnings per share of RM 0.50, for a PE of 2 and has a strong balance sheet (quite typical for the China listed companies on Bursa). If it would pay out half of its earnings in dividend, then the dividend per share would be RM 0.25, for a whopping dividend yield of 25%! With the RM 0.25 retained earnings it would grow its profit (and thus dividend) the next year even further.

But there is no China listed company on Bursa having this kind of dividend yield, not even one.

 I do not want to imply that all Chinese listed companies on Bursa are frauds, in the contrary, but I am sure there are some suspect cases, and it is almost impossible to say which ones are frauds and which ones aren't (or to which extend).

In case people wonder how a company can report cash in the bank that "isn't theirs": companies can get a cash injection at the end of the quarter from certain banks which will be reversed the next day. There should be a liability on the balance sheet to offset the extra cash, but that will be left out. No risk for the bank, the cash will always stay inside, they just charge a small fee for their "service".

Unfortunately, these practices have been observed in the past in Chinese listed companies in other countries. The result is that the interest rate over that quarter doesn't tally with the average cash balance during that quarter that one would suspect, given the beginning and ending balance.

I hope to have some time in the future to do some more research on this subject. The two comments I received are both quite interesting:


"Investors don't trust the accounts because most of these 'unwanted' companies have 2nd or 3rd tier accounting firms as auditors; let alone the poor accounting procedures in China. The fact that you have highlighted the serious 'anomaly'of cash per share being much more than the share price of some of these companies could be serious case of window-dressing at y/e; which professional) auditors should caution management against as this deflects from a true & fair view."


"I like that you highlighted the yardsticks provided by the Edge, however I think these numbers by itself does not do justice since it does not reflect what is truly happening.

For example.

Chia Ouhua. China Ouhua Winery Announces Quarterly Losses. I wrote that almost a year ago.

The cash situation then, 

Cash depleted. (55.469 million vs 160.695 million a year ago)

I was lost for words then... 

I just glanced through their most recent quarterly statement and China Ouhua cash balance is up back to some 124+ million.

Apparently there was a third party loan repayment of 24 million (!?) and trade receivables decreased by a whopping 44+ million.

Profit wise, Ouhua's 3 quarters net profit is some 5 million versus previous year sum of 33 million.

Forget the fact that this is China firm and just look at the numbers alone.

Yes, cash balance is more than their share price, which sounds damn seductive but what kind of company is this? 

And for all it's cash 'richness', for current 3 quarters of the fiscal year, Ouhua only received some 755k in interest income. Why so low?

Let's stray for a moment and look at XiDeLang. As per its most recent earnings, XDL is sitting on some 323 million RMB. It earns some RMB 965k in interest income. 

At the bottom of the cash flow statement. XDL said it placed some 2.114 million in deposits with financial institution  (in Ouhua's case, for all its cash richness, Ouhua did not state how much money it has in deposits)

XDL states it has some 323 million in cash but only pledges 2.114 million as deposits. 

Makes me wonder. ... what does XDL do with all its other money?"

Wednesday, 23 January 2013

Protasco's Puzzling Purchase

The nice thing about blogging is getting high quality comments. I had my fair share, although I can't always follow up on the information due to time restraints.

One (anonymous) poster pointed me at the following announcement, made by Protasco Bhd (PB):

On behalf of the Board of Directors of PB (“Board”), AmInvestment Bank Berhad (“AmInvestment Bank”) is pleased to announce that PB, had on 28 December 2012 entered into a sale and purchase agreement (“SPA”) with PT ASU to acquire 95,000,000 PT ASI Shares (“Sale Shares”), representing 76% equity interest in PT ASI (“Proposed Acquisition”).

The acquisition is huge, RM 170 million, almost half of its shareholders funds (RM 358 million on December 31, 2011).

The value seems to be in exploiting "KST Field" (an oil and gas field) in Indonesia, the corporate structure is as follows:

The announcement is puzzling (to say the least):

  • Protasco does not seem to have relevant experience in the notoriously difficult oil and gas industry, why does it want to take so much risk, especially in Indonesia with poor corporate governance?
  • PT ASI is only a few months old: "PT ASI was incorporated in Indonesia on 6 September 2012 as a private limited company".
  • PT ASI only has one director who hardly owns any shares. No background of this director is given.
  • The vendor is 99% owned by Anglo Slavic Petrogas Ltd, a company registered in the British Virgin Islands, no background is given, a search on the internet returns nothing; who is behind this company, what is their track record?
  • The company structure of PT ASI owning part of PT FAS owning PT Haseba is rather artificial, why is such a difficult construction chosen?
  • Who are the minority shareholders of PT FAS and PT Haseba?
  • On the signing of the S&P, Protasco will pay RM 50 million cash, why so much? This is about 30% of the total amount, much higher than normal in comparable deals.
  • On November 1, 2012 PT ASI signed a S&P agreement to buy an additional 46% of PT FAS. What was the price paid for that stake? Why does Protasco not wait until this deal is panned out?

"PT Haseba had on 14 December 2004 entered into a 10-year production management partnership agreement (“PMP Agreement”) with PT Pertamina (PERSERO) (“Pertamina”), a state-owned company, wherein PT Haseba has been granted rights by Pertamina to develop and produce oil and gas in the Kuala Simpang Timur Field (“KST Field”) in the Nanggroe Aceh Darussalam Province, Indonesia (“Asset Injection”). The PMP Agreement was then novated by an agreement dated 3 February 2012 by Pertamina to PT Pertamina EP, and was amended by a supplemental agreement dated 22 February 2012 made between PT Pertamina EP and PT Haseba. The Board understands that PT Haseba has been in negotiation with PT Pertamina EP for an extension to the PMP Agreement to operate the KST Field."

In other words, the production agreement will expire in 2014 (next year!) and it is not sure if PT Haseba is able to negotiate a new contract, and if so under what conditions. Why buy into a company with so much uncertainty?

"The KST Field was founded in 1972 and operated by PT Pertamina Doh Nad Sumbangut until 1997. Thereafter, in 2004, Pertamina awarded PT Haseba a 10-year PMP Agreement for KST Field."

Why the gap of seven years? Also, this field seems to be pretty old, often yields are not that great in old fields. Why can't Protasco give some production numbers for KST Field?

"For information, quoted securities (“Blocked Securities”) amounting to approximately the Deposit has been blocked to secure the Deposit. In the event of non-completion, the Blocked Securities may at the option of PB be sold and the proceeds from the sale of the Blocked Securities shall thereafter be  remitted to PB."

Which securities?

The poor quality in writing of in the above paragraph seems typical of the great hurry in which the document is written. Normally I don't make a point of this (my English is also not that good, I am not a native English speaker), but this time it is remarkably poor for this kind of announcement.

"The Vendor further provides and guarantees to PB that the PT ASI Group shall achieve a consolidated profit before taxation amounting to USD50,000,000 (“Total Sum”) for four (4) consecutive financial years and subject to relevant terms in respect thereto. The Profit Guarantee shall be secured by the Vendor depositing all the Consideration Shares with a stakeholder (“Stakeholder”)."

But the "Consideration Shares" only represent about 12% of the total purchase sum. Therefore, a thorough reasoning should be given: where is the profit guarantee based on?

It is definitely not based on the profit from PT Haseba, its results are poor, its revenue in 2011 is even zero:

Why are no preliminary results for 2012 given? At least the half year numbers should be made available? And why are all the financial statements not audited?

What are the results for PT FAS for the last three years?

The following risk factors are mentioned:
  • The PT ASI Group is engaged in oil and gas concessions as well as oil and gas development. In this respect, the Proposed Acquisition represents a diversification from the core business activities of PB in road construction, rehabilitation and maintenance, engineering services and consultancy as well as higher education.
  • The Proposed Acquisition would thus expose the Company to the political and regulatory risks in Indonesia and the inherent risks associated with the oil and gas industry which include amongst others, fluctuations in demand for and prices of oil and gas, natural disasters and extreme weather conditions as well as shortage of experienced managerial and supervisory personnel. 
  • In particular, the PMP Agreement in relation to the KST Field is for a period 10 years from 2004. There can be no assurance that PT Haseba will be able to procure the extension to operate the KST Field.
Protasco is a listed company with a otherwise decent track record and pays a quite good dividend.

Bursa Malaysia has strangely enough not yet asked any queries to Protasco.

I hope the authorities and/or MSWG will urgently look into this matter. And Protasco really should be a lot more transparent regarding this deal.

Tuesday, 22 January 2013

Lending money to a related company is a no-no

David Webb advises independent shareholders of Aeon Credit Service (co) Ltd (ACSA, to vote against a proposal to lend money to its parent company.

Strong words by David Webb:

"Loans to controlling shareholders are always a bad idea. The controlling shareholder, through its power to control the composition of the board, can in practice decide whether to repay the loan or seek rollover. If a controlling shareholder gets into financial difficulties, it is more likely to repay its bankers than it is to repay a company it controls. Its bankers may even have a security pledge over the listed company's shares.

If a company has surplus capital beyond its foreseeable requirements, then the golden rule is that this should be returned to all shareholders by way of a dividend, not to one shareholder by way of a soft loan. Loans to controlling shareholders are an abuse of company funds.

ACSA is in the business of consumer credit, on which it normally makes a decent spread. In the year to 20-Feb-2012, it had interest income of $1,010m and interest expenses of just $118m, on outstanding loans of $4775m. That's an average interest rate of about 21% on the loans, ignoring the near-zero rate on time deposits. But for a loan to its parent, it proposes to charge only 0.75% above its unspecified "Cost of Funds", which is probably only about 2% p.a.. ACSA says that "the Company" (presumably, its directors) "considers it desirous to grant the Loan Facility to ACH to generate a reasonable return for the Group". Desirous for ACH, perhaps, but not for minority shareholders, given the risks involved.

Setting aside the issue of whether lending money to a controlling shareholder is a bad idea, the terms are lousy. ACH does not even offer any security, and the interest rate is not reasonable compared to the rate on consumer loans. If ACH wishes to borrow money, then it should go directly to the banks and pay market rates.

Another concern for ACSA shareholders is what this says about the parent's strategy in greater China. ACH wants to use the money to invest in its own "PRC Business" outside of ACSA, defined as micro-finance, leasing and consumer finance. That puts it into competition with ACSA, and reduces the potential for ACSA to expand beyond its mature HK business. ACH also has wholly-owned subsidiaries in Taiwan doing credit cards and hire purchase. If AEON wishes to regain investors' confidence after this proposal is either withdrawn or defeated, then it should announce a consolidation of all its greater China business into ACSA and sign a non-compete undertaking, removing the conflicts of interest."

In Malaysia, Panasonic Manufacturing (Malaysia) Bhd (previously known as Matsushita Electric Company (M) Bhd) is engaging in a similar practice. From its latest quarterly report:

The amount involved is huge, by all standards, twice as much as its non-current assets.

In its latest year report the company was keen to brag about its track record of having delivered good returns to its shareholders. It has all rights to do so, investors who would have invested in the shares of the company at its IPO in the 70's would have done very well indeed. But that doesn't mean that placing funds with related companies is a good practice, in the contrary.

I love capitalism, despite its short comings I don't know of any system that is better. It performs best if left alone, with a decent amount of corporate governance. Japanese companies have their own sense of corporate governance, by global standards it is very disappointing for such a developed and rich country. After the share market bubble in the 80's burst, the performance of the NIKKEI index has been bad. Japanese companies should welcome good, internationally accepted, corporate governance practices, it is long overdue.

Monday, 21 January 2013

MMM and 4 directors reprimanded, fined 494K

Bursa Malaysia has taken action against MMM (Malaysian Merchant Marine Bhd) and 4 of its directors: Dato’ Ramesh Rajaratnam, Kamil bin Abdul Rahman, Datuk K. Anthony @ Merlyn Kasimir and Dato’ Khairil Anuar bin Aziz.

"Bursa Malaysia Securities Berhad (Bursa Malaysia Securities) has publicly reprimanded Malaysian Merchant Marine Berhad (MMM) and its four directors for various breaches of the Listing Requirements of Bursa Malaysia Securities (LR) / Bursa Malaysia Securities Main Market Listing Requirements (Main LR). The four directors were also fined a total of RM493,750.

MMM was publicly reprimanded for committing various disclosure breaches arising from its failure to disclose/make accurate disclosures in respect of the termination/non-completion of certain vessel
acquisitions and financial reporting breaches as follows:-"

And then a long list of incidents, for example:

"The QR Disclosures were not factual, unclear, ambiguous, inaccurate, not succinct, not balance, not fair, did not contain sufficient information to enable investors to make informed investment decisions and particularly misleading as to the funding and continuance of the Bow Santos Acquisition. There was also blatant omission of the termination / non-completion of the Bow Santos Acquisition and forfeiture of the deposit in MMM’s 1st QR 2010, 2nd QR 2010 and 3rd QR 2010. In respect of the statement on funding, there was no evidence of any confirmation from lenders to grant MMM credit facilities for the Bow Santos Acquisition before MMM executed the MOA and paid the deposit."

Etc, etc, etc.

Kudos to Bursa for taking action and giving a detailed description of the facts.

Still, questions remain, most incidents happened in 2009 and 2010, could Bursa not take action more early? The company was officially delisted on March 17, 2011, its shares were suspended since August 2010. The punishment seems rather late to offer any solace to its long suffering minority shareholders. Also, are fines really a sufficient deterrent?

MMM has been a controversial company for a long time, something Bursa was well aware off: since its listing in 1999 MMM had to reply a whopping 36 times to queries from Bursa.

Other events have well been documented by Where is Ze Moola.

MMM was linked to M3nergy, a company that was delisted in October 2010, and which was also reprimanded and its directors fined on August 17, 2010.

Sunday, 20 January 2013

Observations and stock picks from Marc Faber

Marc Faber's always interesting (and highly recommended, but rather expensive) "The Gloom, Boom & Doom Report" of January 2013 starts with a common subject, how bad economists have performed:

"Too much time has been spent on constructing econometric models and too little on thinking about how the economy works".

Another favourite subject, the huge decline in purchasing power of the USD against gold. Between 1800 and 1933 the price was quite stable, around USD 20 per ounce, then until 1970 about USD 35, after which the price exploded (after leaving the gold standard) to now around USD 1,800 per ounce.

Another observation: the extremely low current yield on USD Long-Term treasuries, the last time that happened was in 1946 (2.1%), in 1980 they were 14%.

Faber is bullish about stocks from Vietnam and China since they have lagged the other markets, the latter one through Hong Kong listed shares. Some examples are Hang Seng Bank (0011), Swire Pacific (0019), Sun Hun Kai (0016).

In Singapore Faber owns a host of REIT's: Ascendas, Ascott, CapitaCommercial, CapitaMall, CDL Hospitality, First, K, Fraser Centerpoint, Mapletree Logistic, Parkway Life and Suntec.

In Malaysia he prefers: Fraser & Neave, Berjaya Sports, BAT, Guinness, Carlsberg, JTI, PB Bank, SP Setia and Hektar Reit.

This is more meant as a shotgun approach, buying a large basket of holdings in SE-Asian stocks, readers should do their own homework, as usual.

Last year was a wonderful year for investors who were long equities. The S&P 500 is up by 12%, many Asian markets are up by 20 to 30%. Bond investors also achieved gains of 10 to 15%. Agricultural commodities are up by 25%. Faber doesn't see similar gains for 2013 and recommends a defensive strategy.

Saturday, 19 January 2013

China listed companies on Bursa, does it make sense?

In The Edge of January 14, 2013 an article by Kathy Fong about China listed companies on the Bursa Malaysia. Their fundamentals all look good, but despite that, they are trading at unbelievable cheap valuations.

                   Net Cash(m)    Net Cash p/s  Share price
China Ouhua           125            19            12
China Stationery      864            70            77
XiDeLang(in RMB)      304            42            21
XingQuan              326           106            79
HB Global             131            28            32
K-Star                 79            30            16
Maxwell Intl          221            55            31
Multi Sports          223            43            31

The above based on the numbers from The Edge:
  • Net Cash: in millions RM, Cash minus Borrowings
  • Net Cash p/s: net cash per share in Sen
  • Share price: in Sen
Most shares are trading below the cash per share (in other words, the whole business comes for free) and are trading at valuations like 2 times net earnings per share.

Would it make sense to buy a basket of these stocks? To me it doesn't, if for every company that goes to near zero another company is taken private at say 30% premium, the returns just don't add up.

Investing is for a large part based on trust, trust that the balance sheet and profit & loss accounts are correct, the trust is obviously not here.

Bursa and SC have clearly improved the quality of recent Malaysian IPO's. I also have to admit that not yet one China listed company in Malaysia has actually gone bust or had any financial scandal. I am pretty sure that will happen, but things can take a lot of time to pan out.

To me, things must make sense, founders list their companies because:
  • They are good, reliable companies
  • The companies can use the new money injected to grow further
  • The founders want to take some money of the table (understandable, since often a huge percentage of their wealth is tied to this one company)
  • It offers a liquid market to their employees who might own shares or options in the company
  • Investors pick up the IPO shares since there is some value at the IPO price, taking into consideration the risk involved (companies that have just IPO-ed are notoriously more risky than companies that have listed 2 or more years ago).
I don't think listing these Chinese companies makes any sense at all. The investing public obviously doesn't trust the accounts and therefore the valuations are beyond believe.

Given that, which founder would list its company, knowing the share price will most likely go south after the IPO?

And for SC and BM, enforcement in Malaysia has already been proven to be so difficult, why make it even more difficult by listing Chinese companies?

Eight very depressing share charts of the Chinese listed companies in Malaysia:

Tuesday, 15 January 2013

"Malaysian Nate Silver" suspended by Bank Islam?

I wrote before about Nate Silver's popular book "The Signal and the Noise", and ended with:

"Where is the "Malaysian Nate Silver" predicting the coming elections, both overall and per state .....?"

Apparently, there is a "Malaysian Nate Silver", his name is Azrul Azwar Ahmad Tajudin, and he is chief economist of Bank Islam:

In a report by The Straits Times, Azrul Azwar’s calculations found that one of the most likely scenarios was that the ruling Barisan Nasional (BN) coalition would likely win only between 97 and 107 of the 222 parliamentary seats, which are insufficient to form the next administration.

But the result would also mean that PR will only gain a shaky hold over Parliament, far from the supermajority once enjoyed by its rival.

The two other likely scenarios reportedly presented by Azrul Azwar was that there would be a narrow win for BN and a bigger win for PR.

Azrul Azwar had taken into account factors such as race and demographics.

He had also forecasted that under the most likely scenario of a narrow win by PR, a fallout would result, with the stock market set to respond in a “knee-jerk” fashion as well as an extended period of perceived instability.

He also did not rule out the possibility of “economic sabotage” by businesses and the civil service that are aligned with BN.

The above according to an article on The Malaysian Insider. It was first highlighted in The Straits Times, an article that I indeed read, but disposed since it didn't strike me as anything extraordinary. It was presented at an economic forum, I haven't visited many of those, but I do visit regularly investment forums and predictions regarding election outcomes are considered to be very normal.

Bank Islam, Azrul Azwar's employer, suspended him. Not for doing a lousy job, but for "being involved in political activities". Rather remarkable, if you want to predict the Malaysian economy, you have to take into account the level of business, which is (unfortunately) so much interwoven with politics.

Would he have been suspended if he had predicted a win for BN? I doubt it, since I have read many such predictions with no action being taken by their employers.

We have to wait what will happen, may be Bank Islam will wait for the elections to happen, and when PR wins, Azrul Azwar will be reinstated again?

For me, as a Westerner and a mathematician, making predictions based on mathematical models, it all sounds pretty unbelievable that one can be suspended for exactly doing that.

Saturday, 12 January 2013

EPF actively fighting for minority shareholders?

The Star published today a (for me rather remarkable) interview with the CEO of the EPF, Tan Sri Azlan Zainol. One snippet:

We are very particular about governance and are one of the major players in terms of activity at AGMs. We are quite vocal. If we don’t like certain things, we will vote against it."

The perception of the EPF, at least with me, is very different. I have actively followed the Malaysian share market for 18 years, read a huge amount of information, and the silence from the EPF in worrisome CG issues has been deafening. I can only recall one time that they were active, during the privatisation of Malaysian Oxygen Bhd (MOX) together with Aberdeen, but even there I suspect that Aberdeen was the fighter and EPF the follower.

Also, being vocal during AGM's is not really enough. Press is often not allowed and many people will have voted before on paper, without hearing what is said at the AGM's.

Am I wrong, or is EPF really active?

The influential CG Watch 2102 report seems to agree with my view point, please read my previous posting on this report. One item:

12. Are institutional investors actively voting against resolutions with which they disagree?
Malaysia: “marginally” (0.25).

[with 0.00 being the lowest and 1.00 the highest score]

The interview continues:

“I shall not name a company that had very poor governance. We walked away from that investment.”

Why does the CEO not name the company, in this instance or in any other case? In the whole interview with The Star, not one is mentioned.

EPF can be so much more vocal in all CG issues, why is it not displaying more transparency? It can simply issue press releases about certain important matters, for instance why it will vote against a certain resolution together with its reasoning, surely most newspapers would be happy to carry that information.

I would love to eat my words and admit that EPF has indeed changed its way and is now a shareholder activist. But I definitely need clear proof for that, together with concrete cases in which EPF was vocal and fought sight by side with the other minority shareholders. At this moment, I am not aware of any, except for the above mentioned MOX case.

Three, more recent, deals in which EPF was very much involved, did it put up a fight in any of these cases, and if so was it vocal about it?
  • Maybulk's related party acquisition of a part of POSH in 2008 and its other RPT in 2009 in which it didn't reveal details of the purchase; EPF did sell all of its shares and thus walked away from that investment, but much too late and at a great cost
  • MMC's RPT of the Senai airport
  • Possible insider trading with the privatisation of Proton, at the expense of the EPF

Friday, 11 January 2013

Protons marketshare slipped from 80% to 18%

Pretty astonishing statistics in an article from The Malaysian Insider:

"At its peak, four of every five cars sold in Malaysia was a Proton, but the carmaker is now in danger of slipping into third spot in sales behind Toyota and Perodua, the second national car company that has ruled the roost for over six years.

Industry sources told The Edge newspaper in an article published today that Proton saw its market share slip in December 2012 to just 17.7 per cent, with Toyota now a close third at 17.1 per cent share of passenger vehicle sales in the country.

“Perodua (Perusahaan Otomobil Kedua Sdn Bhd) is the runway market leader while Proton over the last few years has been a strong second. Now Toyota is closing in on Proton’s position,” an unnamed executive told the financial daily.

Proton is controlled by Tan Sri Syed Mokhtar Al-Bukhary’s DRB-Hicom.

Proton was established by Tun Dr Mahathir Mohamad in 1983 and became a poster child of the former prime minister’s industrialisation policies.

Dr Mahathir had made it patriotic to buy a Proton, but the company has seen its sales slump in the last decade due to increasing liberalisation of the Malaysian market."

I wrote before about my home country, The Netherlands. Dutch people seem to be more practical then Malaysians, at least when things don't work out: just move on, even if it means taking a loss.

The Netherlands has a company dealing with cars, trucks etc, DAF, but in 1975 it sold of its passenger car division to Volvo in 1975. Dutch people had the same love-hate relationship with its (only) homegrown car as Malaysian have with Protons. The DAF passenger car was as ugly as the Proton Saga.

Holland also had one steel company, Hoogovens, it first merged with British Steel and was later sold to Tata Steel from India. Malaysia is still stuck with its steel industry, Perwaja Steel is rumored to have lost about RM 10 Billion.

KLM, the royal Dutch airlines, merged in 2004 with the much larger Air France. Malaysia Airlines continues to be a big headache, with huge accumulated losses of around RM 8 Billion.

For the people in charge, there might be a lesson here.

Thursday, 10 January 2013

Malaysian govt agencies squatting on KL land

Front page article today from The Business Times (Singapore):

Ruling may lead to huge damages claims, affect major govt complex in KL

"A large plot of land in Kuala Lumpur occupied by various government agencies for almost three decades has been found to have been illegally acquired by the government of the-then British Malaya in 1956 in a unanimous court ruling that could open Putrajaya to potential damages running into the hundreds of millions of ringgit

In late November, the Federal Court refused leave to government counsel to appeal a decision by the Court of Appeal that decided that the 1956 acquisition by the government of 263.3 acres of land belonging to private firm Semantan Estates (1952) was not "lawfully" executed and that the government had been acting as "a trespasser" since then,

The title under which the land is held was prepared in the 1950s and would have been changed by now so it isn't clear what the area includes exactly as it is now highly developed. Even so, it would almost certainly include the Jalan Duta Government Complex which includes the Internal Revenue Board, the Ministry of International Trade and Industry, and two bank branches including CIMB.

But what isn't clear is whether the land in question extends out into the immediate vicinity of the government complex. That is possible as the complex appears to take up far less than 263 acres. If so, it could include buildings like the High Court Complex, the National Archives' building, the Federal Territories Mosque, even part of the new palace of the Malaysian King."

- It will put paid to a proposal to privatise the Jalan Duta Government Complex

- It will likely cost the government dearly, probably several hundreds of millions of RM

I love court cases where the underdog wins. The case has dragged on for some time (60 years!), but better late than never.

Wednesday, 9 January 2013

Israeli corp governance standards are much higher than those in Singapore

I wrote before that Singapore has clearly better CG than Malaysia. In my opinion, for a good part because of much better enforcement.

But according to Mak Yuen Teen, in a letter written to the Business Times, Israel has much better standards than Singapore.

An excerpt (emphasis mine) including a few interesting issues and the way they are handled in Israel:

"Israeli Company Law imposes higher standards of corporate governance in a number of key areas compared to what currently exists in our (note: Singaporean) regime. For example, an "external director" who is independent and possesses special qualifications (such as accounting or finance expertise) must be elected by a majority of shareholders who are not controlling or interested shareholders, or not objected to by more than 2 per cent of non-interested shareholders ("special majority").

Another important requirement is for a comprehensive remuneration policy for officers to be approved by a similar special majority, although the board can still adopt the remuneration policy if it is rejected by shareholders. In general, the remuneration packages of the CEO, controlling shareholders and their relatives also require the approval of the special majority.

Rules on disclosure and approval of related-party transactions have also been enhanced to improve minority shareholder protection. What this means is that minority shareholders in Sarin (note: a company based in Israel, listed in Singapore), including Singapore shareholders, will have more say over the appointment of the "external director" and approval of a transparent remuneration policy and remuneration packages of key officers, and greater protection in general, compared to minority shareholders in even Singapore-incorporated companies.

It is ironic that an emerging market like Israel (albeit classified as "developed" by MSCI) has now run ahead of us in key corporate governance requirements because it recognises the importance of protecting minority shareholders. It should certainly make us humble when we make claims about our own "world-class" standards of corporate governance."

As noted, "us" and "our" in the above text refers to Singapore. Since Singapore has higher standards than Malaysia, their authorities also might want to pay attention. It is really about getting a more even playing field for the minority shareholders versus the majority shareholders. And Malaysia still has a long way to go on that area.

Monday, 7 January 2013

YTL Power, why was it listed?

The below article is from The Edge of last week, based on research by RHB (December 24, 2012), the emphasis is mine:

We are disappointed that YTLP declared only 0.9375 sen per share for its first interim single-tier dividend. We had expected 1.875 sen/share, as was declared in 1Q12. Therefore, we revised our FY13 dividend per share forecast lower from 4.9 sen to 3.7 sen. Yields do not look attractive at 2.5%.

Historically, the rationale for the cut in dividends was to prepare the group for any potential M&A. As at end-Sept, YTLP is sitting on RM 10 billion in cash.

We think YTLP's start-up operating losses may have peaked given a larger WiMAX subscriber base now. WiMAX losses widened to RM 309.8 million in FY12. A languishing stock price could potentially turn YTLP into a privatisation target. We believe this will help achieve YTL Corp's goal of transforming into a dividend yield play by reducing the cash outflows to minority shareholders among its subsidiaries.

YTL Power reduces its dividends, it sits on a huge cash pile of RM 10,000,000,000.00, its stock price is languishing, which means YTL Power might be privatised so that YTL Corp can lay its hands on the full cash pile, instead of sharing it with YTL Power's minority shareholders?

Minority shareholders must hope that a company does well and generates a lot of cash. But if that happens, then it will be privatised?

This sounds rather disturbing, minority investors can share in the risk, but not in the returns? Why then did YTL Corp list YTL Power in the first place?

This graph does indeed show that the share price has been coming down, from a level of RM 2.20 to now RM 1.65.

Good postings about YTL Power can be found here and here.

Updated: and a newer one from "Market Watcher" here regarding insider buying and selling of YTL Power, shares and warrants.

Sunday, 6 January 2013

Syed Mokhtar, please expose those who abuse the system

From the website of The Star: "The caring side of Syed Mokhtar":

"Fresh from the publication of his biography recently, tycoon Tan Sri Syed Mokhtar Albukhary has released a 195-page coffee table book on his global charity work, which many ordinary Malaysians are not familiar with.

Until the release of his biography Syed Mokhtar Albukhary: A Biography by Premilla Mohanlall, where he opened up on many issues for the first time to put the record straight, the reclusive billionaire had always shied away from the media.

He has rarely talked to journalists, except a privileged handful and even then, it is always on an off-the-record basis. This continuous distancing from the media has only put him under greater media scrutiny.

I wonder why I get bad press when others who have abused the system for personal gains have not been subjected to such media scrutiny. Perhaps it is time to come out and defend myself,” he said in his book.

Envy, jealousy, fascination and simply selfish politics may have been reasons why SM, as he is known, has found it difficult to get the kind of coverage he wants, and deserves."

I have written about the first book (a biography) about Tan Sri Syed Mokhtar here.

This second book about his charity seems again a PR exercise, according to the Linkedin profile of the writer. A pity, because what Malaysia needs is thoroughly investigated books written by independent writers.

But the most interesting of the article in The Star is the above quote in bold. Syed Mokhtar is surely very well informed, why does he not simply name and shame those that have abused the system for personal gains? If laws are broken, it is even his obligation to do so. If no law is broken, he could still come with recommendations how to improve the system to end the abuse, he is in an ideal situation to do that.

Regarding the charity, there has been controversy in the past. Listed companies controlled by Syed Mokhtar have donated huge amounts of money to his charity. Was it not more appropriate to give this money in dividends to all shareholders and to let them decide for themselves what they want to do with their money? And if they want to give it to charity, let them choose the charity of their liking? MSWG has also tackled this issue. "Where is Ze Moola" wrote about it here.