Thursday, 30 January 2014

Zulauf and Faber: buy GDX (Gold Miners ETF)

In the "Barrons Roundtable 2014" both Marc Faber and Felix Zulauf recommend to buy gold minining companies through "GDX", a gold miners ETF managed by Van Eck, more information can be found here.

The ETF closely tracks the appropriate gold miners index and only has a 0.5% management fee.

Top holdings are Barrick Gold, Goldcorp Inc., Newport Mining, Silver Wheaton, Yamana Gold, Franco-Nevada and Newcrest Mining.

The article on Barrons is behind a pay wall, but the individual stories from Marc Faber can be found here, from Felix Zulauf here.

Wishing all readers a happy and prosperous new year of the horse.

Wednesday, 29 January 2014

SGX Circuit breakers won't help small investors

A rather critical letter by Michael Dee in The Straits Times (Singapore) about the recently introduced "circuit breakers" and the Penny Stock Saga:

The Singapore Exchange's (SGX) new "circuit breakers" come 25 years too late, do not cover shares priced below 50 cents, and delay trading by only five minutes - it is 15 minutes on the New York Stock Exchange ("SGX circuit breakers to kick in next month"; last Thursday).

Other than insiders, who could possibly respond in the five-minute "cooling off" period? Yet again, the smaller investor is disadvantaged compared to remisiers, highly sophisticated players and high-frequency traders.

The circuit breakers would have had no impact on the recent penny stock fiasco beyond delaying the inevitable by a few minutes - and buying time for the big players and insiders.

Prior to their collapse, Blumont Group's price-earnings ratio was up to 500 and price-to-book value ratio was 60; Asiasons Capital's price-earnings ratio was more than 580; and LionGold Corp was virtually unprofitable, yet had a market value of up to $1.42 billion.

There were no discernible results to support these valuations, and no reaction from the SGX and Monetary Authority of Singapore (MAS) until it was too late.

Investors need, expect and deserve protection from unwarranted and manipulated price movements - both up and down. This comes from much greater transparency and regulatory rigour than what we are currently seeing from the regulators.

Investors would be better served by the SGX and MAS releasing a full report on what happened and why it happened. Only then would the scope of the issues be understood and solutions holistically designed to prevent unwarranted run-ups in share prices that attract unsuspecting buyers in "pump and dump" schemes.

Penny stocks trading as low as one-tenth of a cent are ripe for manipulation.

Thus, shares with prices below 50 cents and valuations below $50 million have no business being listed on the mainboard. A listing provides a misleading and inappropriate stature to companies that have neither earned nor deserve it.

The SGX needs an alternative exchange for these second-tier listings, with different rules to manage investor protection.

In fact, the SGX would do well to set investor protection as its No. 1 priority over commercial interests.

Tuesday, 28 January 2014

It's like 1997 all over again?

Since the sell-off of 2013, doom-mongers may argue, two things have got worse.

First it has become even clearer that the rich world’s central bankers do not have much of a clue how to tame the beast they have created in the form of ultra-loose monetary policy. Ben Bernanke, the outgoing Fed chief, chairs his last policy meeting on January 28th and 29th. The Fed is expected to trim its bond purchases by a further $10 billion, to $65 billion a month. No doubt this will be accompanied by a torrent of elegant verbiage to show that the Fed is in command. But sceptics should look at Britain, where the newish central bank boss, Mark Carney, has abandoned the framework he put in place only half a year ago. It was supposed to govern the pace at which monetary policy would return to an even keel. The process of normalising central banks’ balance-sheets is going to be mighty unpredictable and disruptive.

The second change for the worse is that the emerging world’s recovery in exports looks tepid. The hope had been that as the Western world grew faster it would suck in more goods from emerging economies, helping them to improve their current-account balances and making them less dependent on foreign capital inflows.

What might cause the panic to spread from these troubled spots to all the emerging economies? Perhaps if more countries faced either social instability or a sense of political impasse, making tough reforms harder. This is not impossible—India and Indonesia face elections this year which could rouse passions or result in weak governments. Brazil faced widespread unrest last year.

A second trigger might be a sense that the emerging economies are fibbing about the state of their financial systems. The 1997 crisis spiralled when it emerged that many private banks were in dreadful shape and that some monetary authorities had become captives of the private sector. The central banks of Thailand and South Korea misled the outside world, respectively, about their reserves position and their country’s dollar liabilities.

One common characteristic of all emerging countries today is that they have all shared in the colossal credit boom. Loans have been growing by double-digit rates for many years. Vietnam has already blown up—it has set up a “bad bank” to try and clean up its lenders. Perhaps more countries are yet to own up to big, bad debt problems of their own. If you want to give yourself a fright on this front consider the share price of Standard Chartered, a Western bank largely exposed to the emerging world. It has collapsed.

So there are two things to watch for signs that the present panic might morph into something much nastier. First the streets—for more social unrest and political gridlock. And then the banks—for any sign that their books are rotten.

Above snippets from an article in The Economist "It's like 1997 all over again".

I prefer to put a question mark behind that sentence, I do expect things to be tough, but not as bad as in 1997. However, that "optimism" is based on the believe that banks (for instance in Malaysia) are in much better shape than in 1997 and that Bank Negara does indeed have its house in order. I am pretty sure that is indeed the case, but if the perception of foreign investors is worse, than a quick outflow of "hot" money might indeed cause a financial disturbance.

Things have been lately too good for investors, people started to brag last year about the local share market performance reaching an all-time high, both 5-year and 10-year results must have been good, since they were based on low valuations due to respectively the global crisis (2008) and SARS (2003). The local property market also boomed.

When I read about the many multi-billion ringgit IPO's (non if which excites me in the least) and huge rights issues/private placements (what is wrong with good old-fashioned organic growth?) planned for 2014, then that does scare me, it all sounds too much.

Is it a case of too much "loose" cash slushing around in search for some investment and a decent yield?

It sounds very toppish, investors should adopt a defensive stance.

Monday, 27 January 2014

"Mega" default in China? (2)

It looks like, at least for the time being, the danger of a possible default that would have roiled the Chinese financial markets is over. However, there is still the case of setting a precedent and of "moral hazard".

The article is from Bloomberg:

China Credit Trust earlier said it reached an agreement for a potential investment and asked clients of ICBC, China's biggest bank, to contact their financial advisers.

The accord staves off a default that threatened to roil China’s markets and stoke concerns of financial fragility in emerging economies after assets from Argentina’s peso to the Turkish lira plunged last week. The bailout may encourage risk-taking by wealthy investors in China’s $1.7 trillion trust industry -- the fastest-growing part of the shadow-banking system -- even as authorities try to curtail the nation’s debt.

“A default was bound to lead to systemic risks that China is unable to cope with, so in that sense a bailout is a positive step to stabilize the market,” said Xu Gao, the Beijing-based chief economist at Everbright Securities Co. Still, implicit guarantees distort the market and “delaying the first default means risks are snowballing,” he said.

Sunday, 26 January 2014

"Mega" default in China?

Article published by Forbes: "Mega Default In China Scheduled For January 31".

I think that the title is rather exaggerated (the amount in question is about USD 500 Million, very small for a country like China), but I do agree it might cause some shock to the financial system towards retail investors and there will be some reputational damage. Partly that will be a much needed wake up call. The full article (some comments by me in red):

On Friday, Chinese state media reported that China Credit Trust Co. warned investors that they may not be repaid when one of its wealth management products matures on January 31, the first day of the Year of the Horse.

The Industrial and Commercial Bank of China  sold the China Credit Trust product to its customers in inland Shanxi province.  This bank, the world’s largest by assets, on Thursday suggested it will not compensate investors, stating in a phone interview with Reuters that “a situation completely does not exist in which ICBC  will assume the main responsibility.”

That depends on which promises the product was sold to the people. For instance, was the word "guarantee" used? Work for lawyers. It all sounds a bit like the infamous minibonds.

There should be no mystery why this investment, known as “2010 China Credit-Credit Equals Gold #1 Collective Trust Product,” is on the verge of default. 

The Chinese are definitely number one in the world in inventing "creative" names.

China Credit Trust loaned the proceeds from sales of the 3.03 billion-yuan ($496.2 million) product to unlisted Shanxi Zhenfu Energy Group, a coal miner.  The coal company probably is paying something like 12% for the money because Credit Equals Gold promised a 10% annual return to investors—more than three times current bank deposit rates—and China Credit Trust undoubtedly took a hefty cut of the interest.

Yes, I assume that China Credit Trust took a nice commission, I hope they were transparent about it. The problem with products with high commissions is that they are often sold, not bought. There is just too much incentive for the selling party.

Zhenfu was undoubtedly desperate for money.  One of its vice chairmen was arrested in May 2012 for taking deposits without a banking license, undoubtedly trying to raise funds through unconventional channels.  In any event, the company was permitted to borrow long after it should have been stopped—reports indicate that it had accumulated 5.9 billion yuan in obligations.  Zhenfu, according to one Chinese newspaper account, has already been declared bankrupt with assets of less than 500 million yuan.

The Credit Equals Gold product is not the first troubled WMP, as these investments are known, to risk nonpayment, but Chinese officials have always managed to make investors whole.  CITIC Trust did that in 2013 on a steel-loan product in Hubei province, and a mysterious third-party guarantee rescued a Hua Xia Bank WMP.  An investment marketed by ICBC’s Suzhou branch was similarly repaid.

"WMP" or "Guaranteed Products" or "Structured Products", many names have been used in the past. The public must understand that when returns are "promised" that are way beyond the risk-free rate of Fixed Deposits, then of course there is a (quite real) risk. There is no free lunch here.

There has never been a default—other than one of timing—of a WMP, so the Credit Equals Gold product could be the first.  If it is, it will edge out the WMP that invested in loans to Liansheng Resources Group, another Shanxi coal miner.  Jilin Trust packaged Liansheng’s loans into a wealth management product sold by China Construction Bank , the country’s second-largest lender by assets, to its customers.  Liansheng is in bankruptcy, and it looks like the WMP holders will not be repaid in full.

A WMP default, whether relating to Liansheng or Zhenfu, could devastate the Chinese banking system and the larger economy as well.  In short, China’s growth since the end of 2008 has been dependent on ultra-loose credit first channeled through state banks, like ICBC and Construction Bank, and then through the WMPs, which permitted the state banks to avoid credit risk.  Any disruption in the flow of cash from investors to dodgy borrowers through WMPs would rock China with sky-high interest rates or a precipitous plunge in credit, probably both.  The result?  The best outcome would be decades of misery, what we saw in Japan after its bubble burst in the early 1990s.

I am not sure about that, of course the ultra-loose credit is basically spending money that still has to be earned, in other words future growth will decrease at least for some time. But China still has a lot going for it, so my guess is that it could mean a pretty large recession, partly cleansing the system, and then continued growth again. If China would really go into decades of misery, that would have tremendous negative effects for emerging markets which have partly piggybacked on China's growth.

Most analysts don’t worry about a WMP default.  Their argument is that the People’s Bank of China, the central bank, is encouraging a failure of the Zhenfu product to teach investors to appreciate risk and such lesson will improve the allocation of credit nationwide.  Furthermore, they reason the central authorities would never allow a default to threaten the system.

Observers make the logical argument that “to have a market meltdown, you have to have a market” and China does not have one.  Instead, Beijing technocrats dictate outcomes.

That’s correct, but that is also why China is now heading to catastrophic failure.  Because Chinese leaders have the power to prevent corrections, they do so.  Because they do so, the underlying imbalances become larger.  Because the underlying imbalances become larger, the inevitable corrections are severe.  Downturns, which Beijing hates, are essential, allowing adjustments to be made while they are still relatively minor.  The last year-on-year contraction in China’s gross domestic product, according to the official National Bureau of Statistics, occurred in 1976, the year Mao Zedong died.

Marc Faber commented that indeed China has invested too much in for instance infrastructure. But if one had the choice to either invest too much (China) or almost nothing (India), then he would still prefer the first. China will continue to grow and will start eventually using the infrastructure.

Why will China’s next correction be historic in its severity?  Because Chinese leaders will prevent adjustments until they no longer have the ability to do so.  When they no longer have that ability, their system will simply fail.  Then, there will be nothing they can do to prevent the freefall.

We are almost at that critical point, as events last June and December demonstrate.  The PBOC did not try to tighten credit as analysts said in June and December; it simply did not add liquidity.  The failure to add liquidity caused interbank rates to soar and banks to default on their interbank obligations.  In the face of the resulting crises, the central bank backed down both times, injecting more money into state banks and the economy.  So Chinese leaders showed us twice last year that they now have no ability—or no will—to deal with the most important issue they face, the out-of-control creation of debt.

There are rumors that local authorities in Shanxi will either find cash so that Liansheng can pay back its loans or force institutions to roll over the WMP marketed by Jilin Trust.  Similarly, there are suggestions that ICBC, despite its we’re-not-responsible statement, will produce dough for the Credit Equals Gold investors.  Others say China Credit Trust, China’s third-largest such group as measured by assets, will repay investors in part.  Repayment will avoid an historic default and postpone a reckoning.  In all probability, authorities will be able to get past Zhenfu if they try to do so.

Even if Beijing makes sure there is no default on January 31, we should not feel relief. Just as Zhenfu followed Liansheng, there will be another WMP borrower on the edge of disaster after Zhenfu.  And there are many Lianshengs and Zhenfus out there.  There may have been 11 trillion yuan in WMPs at the end of last year.

And at the same time China’s money supply and credit are still expanding.  Last year, the closely watched M2 increased by only 13.6%, down from 2012’s 13.8% growth.  Optimists say China is getting its credit addiction under control, but that’s not correct.  In fact, credit expanded by at least 20% last year as money poured into new channels not measured by traditional statistics.  That appears to be in excess of credit expansion in 2012.

Even if credit expansion slowed last year, Silvercrest Asset Management’s Patrick Chovanec tells us why we should be concerned.  As he wrote today, “Looking purely at the decline in the year-on-year rate of credit expansion is kind of like arguing that if I chase my shot of vodka with a pint of beer, I’m actually exercising moderation because the alcohol proof level of my drinks is falling.”

Saturday, 25 January 2014

MSWG's latest issue of The Observer

MSWG's latest weekly newsletter dated 18-24 January contained two interesting articles:

"OCBC has settled a civil claim with the Securities Commission where it was purportedly involved in
manipulation of DRB-Hicom Berhad shares in July 2011. The settlement was reached following a letter of demand sent by the SC pursuant to its civil enforcement powers.  OCBC was required to pay RM2,475,000, which was equivalent to three times the pecuniary gain of RM825,000, which OCBC had made as a result of the breach. OCBC Bank agreed to settle the fine, though without admission or denial of liability.


While we laud the SC for having disclosed the suit and the broad details, we remain unsure as to the substance of the breach and the transgressions involved.  As such we believe that future cases should contain these details."

I agree with MSWG's comments.  Although enforcement has clearly improved over the last few years (which is of course commendable), the explanation of the enforcement is often lacking clarity, to put it mildly. Added to this, I am not in favour of all these settlements "without admission or denial of liability".


The Board of Directors of Kinsteel announced that the indirect subsidiary company of Kinsteel, Perwaja Steel Sdn Bhd (“PSSB”) has defaulted in repayment of Murabahah Medium Term Notes of RM50,000,000 on 29 November 2013.  By virtue of this default, PSSB has cross-defaulted its banking facilities with RHB Bank Berhad, OCBC Bank (Malaysia) Berhad, Standard Chartered Bank Malaysia Berhad and Kuwait Finance House Berhad (collectively known as “the Banks”) totalling RM768,738,785. The reason for the default was due to the company’s inability to generate sufficient cashflow amid the slowdown of steel industry as a result of oversupply and decline in steel prices.
Pursuant to the default, the lenders of PSSB have the right to enforce its rights under the loan documents which include enforcing the various collaterals given to secure the loan/credit facilities granted by the lenders to PSSB, which collateral includes the corporate guarantee given by Kinsteel. 

The extent of the liability of the Company is limited to the corporate guarantees provided to the Banks amounting to RM706,000,000.  Nevertheless, Kinsteel is taking proactive approaches to negotiate with its lenders to arrive at an amicable arrangement to both parties. In addition, PSSB has been granted the abovementioned Order that restrains any actions by the lenders on the guarantees provided by Kinsteel for PSSB’s facilities. According to the opinion of the Board mentioned in the announcement, there is no impact to the business and operations of Kinsteel arising from the default. Kinsteel will be able to continue with its existing business of manufacturing and trading of steel bars and steel related products, which has its own distinct autonomous business operation and management whereby its financial and business operations are independent from those of PSSB.


We find it difficult to comprehend that there is no impact to the business and operations of Kinsteel on the default on banking facilities of RM768,738,785 by one of its indirect subsidiary where the exposure of the company to the defaulted banking facilities amounted to RM706,000,000. The company should update shareholders on the financial status of its subsidiaries and associates which are now in PN1 and PN17 status.

The relevant announcement by Kinsteel to Bursa can be found here. The company announced a horrible set of numbers for its nine months until 30 September 2013: a loss for the period of RM 370 Million (of which RM 156 Million attributable to equity holders) on sharply lower revenue of RM 1.2 Billion. The balance sheet also looks very weak, showing RM 1.8 Billion in overdrafts and short term borrowing versus equity of only RM 382 Million.

The share price over the last 2 years:

Thursday, 23 January 2014

China's princelings using offshore havens

Update 1: it seems some people might not have liked the story in The Guardian, since its website is blocked in China, according to this source.

Update 2: the links below don't seem to be working with Internet Explorer, but I don't have a problem with Google Chrome

Update 3: I have changed the title of this posting, although BVI's are probably a tax heaven for some, I did mean "havens", not "heavens"

The Guardian published details of senior Chinese political leaders and their families using offshore accounts in the British Virgin Islands (BVI).

"More than a dozen family members of China's top political and military leaders are making use of offshore companies based in the British Virgin Islands, leaked financial documents reveal.

The brother-in-law of China's current president, Xi Jinping, as well as the son and son-in-law of former premier Wen Jiabao are among the political relations making use of the offshore havens, financial records show.

The disclosure of China's use of secretive financial structures is the latest revelation from "Offshore Secrets", a two-year reporting effort led by the International Consortium of Investigative Journalists (ICIJ), which obtained more than 200 gigabytes of leaked financial data from two companies in the British Virgin Islands, and shared the information with the Guardian and other international news outlets.

In all, the ICIJ data reveals more than 21,000 clients from mainland China and Hong Kong have made use of offshore havens in the Caribbean, adding to mounting scrutiny of the wealth and power amassed by family members of the country's inner circle.

As neither Chinese officials nor their families are required to issue public financial disclosures, citizens in the country and abroad have been left largely in the dark about the elite's use of offshore structures which can facilitate the avoidance of tax, or moving of money overseas. Between $1tn and $4tn in untraced assets have left China since 2000, according to estimates."

The detailed information can be found here.

The database also has many entries regarding Malaysia and Singapore. The list contains many VIP's and familiar companies.

Being on the list itself is not necessarily proof of any wrong doing. Neither is the absence from the list a proof of the opposite. Especially in certain global industries BVI's are often used.

For Malaysia, we often read stories like "foreigners pumping several billion into the local share market" etc. Readers should be aware that companies based in tax heavens like BVI count (as far as I know) as foreign companies.

In other words, the "foreigners" could actually be Malaysians who manage and hold their assets at these foreign places.

One prime example is Ananda Krishnan, who uses a complicated company structure, involving companies in the Jersey Islands and Curacao:

In it self there might be nothing wrong with the structures, but it will definitely make live more difficult for the authorities. 

Wednesday, 22 January 2014

Triumphal and Perak Corp: unfair privatisations?

Article in The Star: "Will minority shareholders triumph in seeking higher value?".

"It has been reported that a group of individual shareholders who own a combined 4.4% stake in Perak Corp have deemed the RM3.90 per share offer by Perak Corp as “ too low”. This is taking into account the fact that the company’s underlying assets, which have not been revalued in a long time, have appreciated. Perak Corp is the owner of Lumut Port via listed Integrax Bhd – an asset that has huge income-generating potential. Its two major property assets, meanwhile, are the 256.8ha in Bandar Meru Raya and 186ha in Behrang.

The minorities estimate that Perak Corp’s revalued net asset value (NAV) is more than RM12. The company’s NAV per share as at Sept 30, 2013 was RM5.03, while it is sitting on RM180mil in cash.

In Triumphal’s case, the offer of RM1 is at a 65% discount to the company’s NAV per share of RM2.84 as at Sept 30 last year. It has been pointed out by analysts that the company has strong asset backing and was in a net cash position of RM17.81mil as at Sept 30 last year."

Delisting exercises are often unfair in Malaysia, done at a steep discount to its NAV (while sometimes the NAV is even conservatively valued). There is a rather awkward "reward" for controlling shareholders, if they don't extract clear value from a listed company then the share price will go down and the controlling parties are able to privatize the company for a low price. Minority investors are often unable to fight these exercises, being a dispersed group.

However, in this case:

"Two major local institutions now have the opportunity to challenge recent privatisation deals involving Bursa Malaysia-listed firms which are seemingly unfair to minority shareholders. The institutions are Permodalan Nasional Bhd (PNB), which owns 12.18% in Triumphal Associates Bhd, and Sime Darby Property Bhd, which controls a 6.13% block in Perak Corp Bhd."

With the current attention for more shareholder activism by institutional investors, these cases come quite timely. Will PNB and Sime Darby put up a fight?

MSWG holds an investor education forum on January 23, 2014 at 10.30AM about these two cases, but also about Kian Joo Can Factory and BERNAS. Interested parties might want to contact MSWG about this event.

Tuesday, 21 January 2014

Australia's biggest pension scam

An article in The Global Mail by Mike Bowers:

"Inside the Offshore Fraud: The Villains and Victims of Australia’s Biggest Pension Scam"

The timeline gives a clear picture what happened:

Investors are protected by 5 parties:
  • The trustee, who keeps all assets in trust
  • The fund manager, who manages the assets in the best interest of the investors by giving instructions to the trustee, without being allowed to "touch" the assets
  • The financial advisor, who is responsible to give good investment advice to his clients
  • Auditors, both internal and external, checking the books
  • The securities regulator who is responsible for licensing etc.

Yet in this case, involving the Astarra Strategic Fund managed by Trio Capital, all were sleeping on the job:
  • The fund manager and the trustee were connected;
  • The financial advisors received huge incentives to recommend this fund: "Retail investors could invest in the Strategic Fund with as little as $1000, and were often advised to do so by financial planners, who received an up-front commission of up to 4 per cent.";
  • Auditors KPMG (internal) and WHK (extrernal) are reputed companies, yet didn't see the danger; unfortunately, having one of the "Big Four" accounting firms is not exactly a guarantee against fraud or scams, as many cases have shown in the past;
  • Trio Capital, who ran the Astarra Strategic Fund was licensed by Australian financial-regulation authorities

One of my favourite bloggers, John Hempton from Bronte Capital was the whistle-blower in this case, acting on a tip off, the story "A dark privatised social security story: Astarra, the missing money and how examining a fund manager owned by Joe Biden’s family led to substantial regulatory action in Australia" (which is a beautiful read) can be found here.

Remarkably how fast Hempton found out that the persons behind the hedge fund had a rather patchy background, a clear red flag. And yes, Joe Biden is the US Vice President.

Another informative article written by Dominic McCormick, Hempton's tipper, can be found here.

Luckily the authorities acted fast, as can be seen from the above timeline, in a few months all related funds were suspended and only two years later one manager was jailed and many other were punished to a lesser degree. Lots of stories have been written about the case, informing the public. Unfortunately, the alleged mastermind behind it all probably goes scot-free.

What can be learned from this case?
  • Investors should be aware that fund managers don't handle money themselves, they should be separated from the trustees;
  • Investors should be informed about fees, high fees are a red flag since the advisors have a clear incentive to recommend the investment;
  • Don't put all your eggs in one basket, please read the story about John Telford;
  • Even having several reputable companies or authorities overseeing an investment vehicle is not a guarantee that nothing fishy is going on;
  • Whistle-blowers form an important part in the eco-system, if the authorities had not acted so quickly, much more damage would have been done.

In Malaysia several similar cases have occurred, Genevva gold trading scheme was one, SJ Asset Management another. Both cases have dragged on for years, not much information is forthcoming. I hope one day we will get as much clarity about these (and other) cases as in the above Australian scam. Their investors and the public at large deserve it, as do the alleged perpetrators.

Monday, 20 January 2014

CEO Liew of SP Setia announced resignation

SP Setia announced today the resignation of its CEO Liew Kee Sin per April 30, 2014, together with the CFO Teow and director Lee.

The news is not unexpected, but still it is bad for the minority investors of SP Setia. The share price has not performed well recently, probably in anticipation of these events, especially considering the almost all time high valuation of the CI:

Aberdeen Asset Management Asia last year already ceased to be substantial shareholder of the company, according to this announcement. Aberdeen has a good track record being a long term value investor, so their departure as a shareholder is worrisome.

I have written many times about SP Setia and the controversial hostile take-over by PNB. PNB should rethink its strategy if this kind of corporate manoeuvre is indeed worth its while. I doubt it, I think they can better stay as a relatively smaller share holder on the side-lines in a supportive role, while the founder/CEO is running the business, while keeping a large share in the company.

Minorities not only have to deal with the loss of the top management, but also with the huge dilution caused by a Private Placement and new ESOS scheme, the details are to be found here.

The only good news is that Liew will stay on as Chairman for the large Battersea project in London and as Managing Director of the Qinzhou Development Consortium.

Sunday, 19 January 2014

Code for institutional investors

I have often written about the lack of what I call GLF's (Government Linked Funds) in shareholder activism in Malaysia, for instance:

Let’s have real shareholder activism
Institutional investors have to fight
A death knell for shareholder rights

"They have been very disappointing in the last decades, they could have been vocal, they could have voted against controversial deals (especially Related Party Transactions), they chose to stay silent and toe the line. I am sure that if they had issued press releases in the past, announcing how they would vote and why, that newspapers would be more than happy to print their views.

They helped to initially fund MSWG, it looks like these GLF's found that that was enough for them, they let MSWG do the talking and stayed further passive.

I really hope their mentality will change soon; they are managing other people's money and thus have a huge responsibility. We are now Anno 2011, a world where people demand transparency; these GLF's should update their websites, give insights in their holdings, their voting behaviour and their explanations for it, etc."

One of the prime examples of this can be found here, it involves a very controversial RPT cash deal by MMC taking over Senai (a loss making airport) in the midst of the global recession. MSWG tried to organize a meeting, but the following funds could not attend due to "some other work commitment":
  • EPF (Kumpulan Wang Simpanan Pekerja)
  • PNB
  • KWAP (Kumpulan Wang Persaraan)

MSWG and the Securities Commission have issued their "Malaysian Code for Institutional Investors 2014", it is now open for public consultation, the document can be found here.

Some comments:
  • What I miss is a general description of the "landscape", mostly some numbers like how much have the institutional funds invested compared to the total market cap of Bursa, in how many listed companies, in how many companies do they have a controlling stake, etc.
  • The members of the Steering Committee are almost all from the GLF's, I would have loved to see some participation of non-government linked fund managers like Aberdeen (who is known to fight for the interest of their investors), Public Mutual, etc.
  • The paper is luckily quite short and definitely readable, but also on rather high level and thus pretty general; I like more concrete stories from the trenches, what are the really big cases (in my opinion most minority shareholders value has been destroyed through: delisting, relisting, RPT's, private placements), how are they going to tackle those?
  • In paragraph 3.4 a list if given how institutional investors can make their concerns known; I think an important avenue is left out, if a company "misbehaves" and (despite feedback given by institutional investors) doesn't repent, then reaching out to the media should definitely be considered. This has happened on many occasions in (mostly) Western countries, and sometimes with success.
  • Paragraph 3.5 relates to seeking legal remedies or arbitration. Institutional investors should understand that this is an avenue that is almost impossible for retail investors, the costs do not compensate for possible gains. But institutional investors have often large holdings, and for them it should be a serious consideration. This avenue has so far been neglected.
  • Chapter 6: "Institutional investors should publish a voting policy", on important issues (like the ones I described in the previous sentence), I think fund managers should be transparent and publish their specific voting in major issues; people who trusted their money to these asset managers are entitled to know how the asset managers voted.

At the end of the day, the proof is in the pudding, we have to wait and see if there will be a substantial improvement in the involvement by the GLF's, not only passively (behind the scenes), but also more openly and actively ("on the barricades").

Friday, 17 January 2014

HSBC overstated assets by more than £50bn?

Article from UK-based Telegraph:

HSBC could have overstated its assets by more than £50bn and ultimately need a capital injection of close to £70bn before the end of this decade, according to an incendiary report published by a Hong Kong-based research firm.

Forensic Asia on Tuesday began its coverage of Britain’s largest banking group with a ‘sell’ recommendation, warning the lender had between $63.6bn (£38.7bn) and $92.3bn of “questionable assets” on its balance sheet, ranging from loan loss reserves and accrued interest to deferred tax assets, defined benefit pension schemes and opaque Level 3 assets.

The original article can be found here:

HSBC Holdings: End of the Charade

When it comes to HSBC, the Street cannot come up with enough disingenuous excuses for the group’s glaring problems – notably at the subsidiary level. In our view, HSBC has not made the necessary adjustments during the quantitative easing reprieve. Rather, it has allowed legacy problems to linger as new ones in emerging markets gather pace. The result has been extreme earnings overstatement, causing HSBC to become one of the largest practitioners of capital forbearance globally. This charade appears to be ending, given how few earnings levers remain besides selling off core elements of the franchise and the stringencies of Basel III compliance. We expect EPS pressures and dilution from capital increases to be high. A dividend cut may even be on the cards. SELL.

HSBC Holdings (5 HK; HSBC or the Group) has overstated assets at the major subsidiary level to the tune of US$63.6bn-US$92.3bn, by our calculation, amounting to between five and seven years of results. Given this unaccounted-for level of balance sheet risk and the enormous increase in the Group’s Basel III/CRD IV capital requirements, we believe HSBC needs to raise between US$58bn and US$111bn in capital (depending on the implementation of a counter-cyclical buffer), representing 32-61% of current stated equity. Given how much new equity HSBC appears to need, a dividend cut or suspension is quite plausible.

It is a wonder how Group management can say to shareholders with a straight face that HSBC will achieve perennial operating ROEs of 12-15%. Here are our problems with Group CEO Stuart Gulliver’s target: (a) the numerous franchise disposals and accounting change should cause the Group’s 2012 mainland Chinese 15.1% bottom-line contribution to decline by 39% in US$ terms; (b) HSBC’s emerging market franchises are not faring well either, since not only has HSBC failed to take advantage of QE judiciously, allowing many of its legacy developed market problems to linger, but newly created ones in emerging markets are now building up; (c) if we are correct, the Group is likely to raise substantial capital and/or hive off parts of its core franchise; (d) we think HSBC faces up to US$10bn of additional legal and regulatory penalties; (e) high reliance (52% of pre-tax income) on low-quality and volatile trading seems unsustainable.

We formally launch coverage of HSBC with a Sell rating and set a price target of HK$63 per share, implying 25% downside. At face value, HSBC’s shares trade on a P/BV of 1.6x and a consensus P/E of 10.6x. HSBC also trades on a P/TBV of 1.4x. If our analysis is correct, HSBC now trades on a P/ATBV (adjusted tangible book value) ratio of 2.3x. Our price target implies a P/ATBV of 1.7x.

Thursday, 16 January 2014

Penny Stock Saga: were the share prices manipulated? (2)

More news regarding this interesting case, which is very important for Singapore (SGD 8 Billion in paper value lost from the highs), but also has a heavy Malaysian component to it (many persons involved are Malaysians).

The parties being sued by Interactive Brokers are (according to this website):

Malaysian nationals:
  • Neo Kim Hock
  • Peter Chen Hing Woon
  • Tan Boon Kiat
  • Quah Su-Ling
  • Lee Chai Huat
  • Kuan Ah Ming
British Virgin Islands-registered companies:
  • Sun Spirit Group Ltd
  • Neptune Capital Group Ltd.
Singaporean listed companies involved:
  • Asiasons Capital
  • Blumont Group
  • LionGold Corp
  • Innopac Holdings 

From an article in Business Times (Singapore) written today by Grace Leong, more news regarding the answer by Quah Su-Ling and the rebuttal by Interactive Brokers (emphasis mine):

IPCO International chief executive Quah Su-Ling, who is among eight clients sued in High Court over $79 million in losses sustained by Interactive Brokers (IB) in the wake of the penny stock crash, has alleged the US online brokerage was involved in a "commission-generating scheme".

According to court documents inspected by The Business Times, Ms Quah, who is seeking to unfreeze nearly $15 million in assets belonging to her and her company Sun Spirit Group, said she does not recall signing the broker's account-opening documents or completing any forms.

The large-volume trades in the shares of Asiasons Capital, Blumont Group and LionGold Corp from her account and that of Sun Spirit's happened because Ken Tai, owner of Algo Capital and her financial advisor, had exceeded his authority over the accounts, she said.

She was rebutting allegations that she may have been involved in an "intricate pump-and-dump scheme to artificially generate trading volume" in the stock trio and to drive up their share prices before they crashed and wiped out over $8 billion in value.

In arbitration proceedings against her, the British Virgin Islands-incorporated Sun Spirit and eight other individuals and entities to recover $79 million in unpaid margin loans, Interactive Brokers flagged "suspicious trading activities through the defendants' accounts" made by Algo Capital. A hearing in relation to the freezing order was held last Friday.BT understands that judgment was reserved.

The broker alleged: "The unusual trading pattern employed by (Algo), which involved buying and selling the same stock in the same account on the same day at the same price, or closing out a large amount of shares in the morning, then repurchasing those shares in smaller lots throughout the day at set intervals, ... (gave) the market the appearance that the stocks were more heavily traded than they were.

"For instance, Algo often traded substantial portions of the volume of total daily trades in LionGold shares and even exceeded 80 per cent of the total trading volume on certain days. Similarly, for Asiasons shares, Algo's trading volume was as much as 67 per cent on some days."

But Ms Quah, in her affidavit, said Mr Tai had purportedly told her that it was the broker that had "placed pressure on him to maintain his high-volume trading".

"Despite the fact that Ken Tai had been trading large volumes of shares in the companies for an entire year (from August 2012 to October 2013), Interactive Brokers did not see fit to flag or exercise its rights to suspend or freeze Sun Spirit's or my accounts in light of what they now allege as 'suspicious activity'."

Between October 2012 and last Oct 4, the broker allegedly made commissions amounting to $776,152 on trades done in her account, and $177,981 on Sun Spirit's account, she said.

She also claimed the broker may have violated the Securities and Futures Act by offering margin-trading services to Singapore residents in respect of SGX-listed stocks without the requisite licence from the Monetary Authority of Singapore (MAS), and was in breach of its own internal policy.

But Interactive Brokers, represented by Senior Counsel Harpreet Singh of Cavenagh Law, said Ms Quah has not produced any credible evidence to support her claims.

Nor has she explained why Mr Tai would "gratuitously implicate" himself by admitting he was in a commission-generating scheme to defraud the defendants, it said in court documents.

IB said it is "completely unaffiliated with the advisers and/or customers who trade on its platform and in no way manages or supervises customer trading or offers any input in the trading".

"It is highly improbable that a sophisticated and experienced businesswoman and investor would be so trusting of Mr Tai. ... The more plausible explanation is the defendants, all of whom were interrelated and had connections with (LionGold, Asiasons and Blumont), were fully aware of Mr Tai's actions."

In challenging Ms Quah's claims as to why she did not disclose her relationship with the other defendants, the broker said she must be "intimately aware that most brokerages would impose higher-margin requirements on customers who disclose they are insiders of a stock they are trading, or that they hold a large position in that stock, either individually or acting in concert with others."

"If there was anyone trying to circumvent the need to obtain a licence from the MAS, it would be Ms Quah and Ipco, who had incorporated Sun Spirit on the other side of the world, and then used it for investment in the (three companies') shares through its account with Interactive Brokers."

On why Ms Quah and Sun Spirit could have been involved in such unusual trading activities and yet suffered huge losses, the broker said: "They may have expected their scheme to continue to be successful, or believe that they could have sold off their positions for large gains before the share prices collapsed, but had simply waited too long."

Wednesday, 15 January 2014

Faber: "Financial Asset Bubble could burst any day"

Marc Faber and his usual gloomy predictions:

"I think we are in a gigantic financial asset bubble. But it is interesting that that despite of all the money printing, bond yields didn't go down. They bottomed out on July 25, 2012 at 1.43% on the 10-years. We went to over 3.0%. We're now at 2.85% or something thereabout. But we're up substantially. Now, this hasn't had an impact on stocks yet. In fact, it pushed money into the stock market out of the bond market. But if the 10-years goes to say 3.5% to 4.0%, then the 30-year goes to close to 5.0%, the mortgage rates go to 6.0%. That will hit the economy very hard."

"[The bubble] could burst before. It could burst any day. I think we are very stretched. Sentiment figures are very, very bullish. Everybody's bullish. The reality is they're very bullish because they think the economy will accelerate on the upside. But my view is very different. The global economy is slowing down, because the global economy's largely emerging economies nowadays, and there's no growth in exports in emerging economies, there's no growth, in the local economies. So, I feel that the valuations are high, the corporate profits have been boosted largely because of the falling interest rates."

A relevant warning for Malaysians:
"The larger the government becomes, the less economic growth you have and the more crony capitalism and corruptions you have."
I am a big believer in lean and mean governments.

Monday, 13 January 2014

Penny Stock Saga: were the share prices manipulated?

The first cracks seem to have appeared in the (in)famous "Penny Stock Saga", where the crash of Asiasons Capital, Blumont Group and LionGold Corp wiped out SGD 8 Billion in a just a matter of a few days.

In an article "Offshore broker's role in penny stock saga, Court papers filed by US firm shed disturbing light on stock trio debacle" by Goh Eng Yeow in The Straits Times (Singapore), it is noted:

Concerns centre on the outcome of the investigation being conducted by the Monetary Authority of Singapore (MAS) and Singapore Exchange (SGX) over the odd trading activity surrounding the stock trio - Asiasons Capital, Blumont Group and LionGold Corp - before they crashed, wiping out over $8 billion in value in days.

There have been all sorts of rumours and allegations circulating in the market on how the three counters achieved spectacular price surges last year and their subsequent crash.

None of these rumours has been substantiated, but a court document filed here by United States online brokerage Interactive Brokers sheds some light.

Interactive has asked a court to freeze the assets of eight of its clients - six individuals and two companies - that lost almost $80 million in total from the stock debacle.

That court document makes for depressing reading. The allegation it contains seems to suggest how easy it is to subvert the local stock market using an offshore brokerage account.

It begs the question as to whether offshore brokers have put sufficient checks in place to stop a stock manipulator from using their trading platforms to manipulate prices in Singapore's market.

How does an offshore broker check if the accounts that are opened with it are genuine or not? And on what criteria does it extend loans on the shares pledged to it as collateral for share trading?

Would the malfeasance which Interactive purportedly uncovered ever come to light, if its erstwhile clients had not failed to make good on the massive losses which they had sustained in punting the stock trio?

Interactive describes itself as an online broker catering to well-heeled individuals and institutions. It says it does not employ any human "brokers" or "advisers". All trading is done online by customers or by independent financial advisers appointed by them.

In hindsight, this would appear to make it far easier for a person to open a trading account with Interactive Brokers than with any of the nine traditional brokerages here serving retail investors. This is because the SGX requires the client to turn up in person at the brokerage.

Interactive said it was only after the parties failed to make good their losses when the stock trio collapsed that it investigated further and found that there was something amiss.

To adhere to Singapore's regulations, its policy has been to prevent customers, whose legal residence is in Singapore, from trading Singapore-listed stocks.

But it claimed that these parties "deliberately misled Interactive and/or engaged in multiple non-disclosures when applying to open their respective... accounts".

The six individuals had listed themselves as Malaysians and given Malaysian residential and mailing addresses, while the two companies were listed as British Virgin Island-registered entities.

But further checks after the stock trio's crash suggested that "they are likely to be resident in Singapore and/or have a sufficient connection with Singapore".

Interactive noted the eight parties had appointed the same financial adviser, Algo Capital Group, which operates out of a Bishan address to trade on their behalf. They had also borrowed large sums to buy substantial stakes in Blumont, Asiasons and LionGold.

But what must surely take the cake is Interactive's belated acknowledgement that "many of the trades appear to serve no economic purpose and appear now to have been undertaken in a manner possibly to manipulate the share prices of the companies concerned".

Interactive noted that Algo often accounted for "substantial portions of the volume of total daily trades in LionGold shares, and even exceeded 80 per cent of the total trading volume on certain days".

The same trading pattern exists in Asiasons, where Algo's trading volume "was as much as 67 per cent on some days".

"(Algo) often sold a large block of shares at a given price in one or more of the (parties') accounts, then quickly re-purchased approximately the same number of shares at the same price, putting the accounts back where they started, but giving the market the appearance that the stocks were more heavily traded than they really were," it alleged.

Now, if any remisier is so brazen as to indulge in similar trading behaviour, he will surely be hauled up by the SGX's market surveillance team for questioning.

The question is that since Interactive is based offshore serving foreign customers, whose responsibility is it to ensure that it is up to scratch in keeping similar market misbehaviour at bay?

Of course, it is difficult to tell how much truth there is in Interactive's claims since its objective is to recover as much of its losses as possible.

But unless the MAS and SGX conclude their probe speedily, the uncertainties will continue to cast a pall over the market and make retail investors even more cynical about penny stocks. It is in the best interests of all to make haste on the investigation.

Sunday, 12 January 2014

Onerous terms of Blumont's credit line

I have written little (here and here) about the penny stock saga around Blumont and other connected counters in Singapore. I do hope that the court cases and the investigation by the Singapore authorities will throw more light on this (for many people involved rather painful) affair.

The Edge Singapore highlighted a new credit line of USD 30 Million that Blumont has taken up, the details of which can be found here. In short:
  • To be repaid full within 6 months after the first drawdown
  • Interest rate of 10% per year, to be paid monthly
  • Drawdown fee of 5%
  • Administration fee of 0.5% per month
  • Arranger fee of 4%
I can not remember I ever saw such onerous terms, I think even any self respecting "ah long" would be embarrassed by these. A back on the envelope calculation gives an annualised yield of well beyond 30% a year including all fees. How many listed companies have a ROCE (Return On Capital Employed) beyond 30% a year? Not many, and I strongly doubt Blumont falls in that category.

In The Edge Singapore Alex Molyneux (not yet appointed as Chairman) remarked:

".... if you 're not an investment-grade company, you don't borrow at 5%, 6%".

But is that really the case? Below is the graph for the yield of the so called "junk" bonds, the lowest grade of corporate bonds:

Many junk bonds are indeed yielding only 5-6%, that seems to contradict Molyneux.

Seth Klarman (Baupost Group) mentioned in Capital & Crisis (December 2013):

"It is almost embarrassing that five years after a crisis - a crisis that can happen again - we're back to those levels of speculative behaviour. It's really astonishing. Everything that can be financed has gotten financed."

The article, titled "The Silly Season", continues:

"You can find good evidence of this in the exuberant corporate junk bond market. This is where the iffy borrowers go and interest rates are high. In fact, it's often called the high-yield market. But today, it seems just about every company has been able to borrow, or refinance, at record-low rates. The High-Yield Index, a proxy for the junk bond market, hit an all-time low in yield this year."

For Blumont, apart from the incredible terms of the loan, there is also the issue how it plans to repay the loan, after only six months. The company owns chunks of not very liquid mining companies that are unlikely to pay any dividend in the near future. If it can't pay back its loan, it might be in danger of losing the assets it pledged against the loan.

And for the global situation regarding risk and return: it looks like we are back to the situation in 2006/07, the "goldilocks" days. Does the world really have such a short term memory, that all the events of 2008/09 have been forgotten?

Saturday, 11 January 2014

SC Charges Former CEO of Malaysia Pacific Corp for Insider Trading

Announcement by the Securities Commission:

"The Securities Commission Malaysia (SC) today charged Dato’ Ch’ng Chong Poh, the former Chief Executive Officer (CEO) of Malaysia Pacific Corporation Berhad (MPAC) with 58 counts of insider trading of MPAC shares between 14 May 2008 and 20 August 2008.

All 58 charges preferred against Dato’ Ch’ng were for offences under Section 188(2) of the Capital Markets and Services Act 2007. Dato’ Ch’ng had allegedly acquired the MPAC shares ahead of the entering into of a multi-million ringgit joint venture project between Oriental Pearl City Properties Sdn Bhd, a wholly owned subsidiary of MPAC and Amanahraya Development Sdn Bhd (ADSB), a wholly owned subsidiary of Amanah Raya Berhad, to undertake and manage several projects in the Iskandar Development Region in Johor.

The offences carry a punishment of mandatory imprisonment not exceeding 10 years and a fine of not less than RM1 million.

Dato’ Ch’ng claimed trial to the charges preferred.  Sessions Court judge, Tuan Mat Ghani bin Abdullah who set bail at RM300,000 with one(1) surety also required Dato’ Ch’ng to surrender his international passport to the court.

The SC views insider trading seriously and will continue to actively enforce such breaches to maintain investor confidence in the capital market."

As far as I can remember, this is only the third time ever that someone is charged for insider trading. I am all in favour of more enforcement regarding possible insider trading, just pity that it took six years to file the charges.

The announcement for the project with ADSB can be found here. The project had indeed a decent potential, that is if all would go according to plan. The reader should however be reminded that during the summer of 2008 the global recession started to take shape, culminating in the fall of Lehman Brothers (September 2008).

The share price of MPAC during that period:

Notable is the sudden rise in price and volume starting end of July 2008, about one month before the official announcement of the project.

There are a few interesting issues regarding to this case. First of all, this is a screenshot of the announcements of Bursa Malaysia of MPAC:

In other words, no change in shareholding has officially been reported to Bursa between May and August 2008.

Another issue is that the official announcement of the project was made on August 20th 2008, but that The Edge Malaysia published some details of the deal already in their issue dated August 18th 2008, according to this announcement, which is a reply on a query by Bursa.

Ch’ng Chong Poh has by the way recently resigned as CEO of MPAC on December 19, 2013 according to this announcement.

MPAC is involved in several material litigation cases, for instance here and here, but also in one involving the above joint venture agreement with ADSB.

The last annual shareholders meeting seems to have been a rather heated affair, the company had to issue twice clarifications to Bursa, here and here.

Saturday, 4 January 2014

2013 Most popular Blog Postings

I have made a list of the 10 postings from 2013 that received the most hits, plus added some updates on the issues raised:

1. Lending money to a related company is a no-no

Good news regarding Aeon Credit Service, they did cancel their proposed loan facility to its parent company, a nice victory for shareholder activism in Hong Kong.

Panasonic was mentioned as one of the Malaysian companies with a very high amount of funds parked in a related company. Shareholders voted in favour of the related part transaction. According to the latest quarterly result, it looks like there is some improvement in the size though, let's hope it will continue that way:

2. Protasco's Puzzling Purchase

The corporate exercise was announced more than one year ago, RM 50 million cash was parked in an account in Indonesia, a huge amount of red flags surround the proposed deal. There is still no end in sight if this controversial deal will go through or not, and if so under which conditions.

3. YTL Power, why was it listed?

Many companies are delisted in Malaysia, often at (very) low valuations, The Edge (based on research from RHB) expected that might happen to YTL Power: "A languishing stock price could potentially turn YTLP into a privatisation target.".

The good news for its shareholders is that the share price went up, quite a bit even from its lows at RM 1.40, making a possible delisting less likely:

4. 10 Worst Corporate Accounting Scandals

Unfortunately very US centric article, who will write a similar article about the 10 Worst Malaysian Accounting Scandals?

5. China Stationery: too many red flags and what does "demised" mean?

I still don't know what "demised" means in the announcement, I guess we have to wait for the year report. The auditors have intended to resign, another red flag to add to an already long list.

6. Marc Faber: China could spark a bigger crisis than in 2008

Marc Faber is a great analyst who has been proven right many times. His nickname is Dr. Doom, and he is rather gloomy at the moment, investors should take heed.

7. SPAC's: Boon or Bane?

I have been very critical about SPAC's from the start, this was my first article about the matter, many more followed. One snippet from the first article:
  • SPAC's are very good for the managers, they have almost nothing to lose and still earn good wages
  • The verb is "you can't have your cake and eat it", but SPAC's managers prove the verb is wrong
  • Minority shareholders pay for the dilution by and fees for the managers, and carry almost all of the risk
These issues have been correctly changed by the Securities Commission, details can be found here. Founders and initial investor now have to put their money where their mouth is, and wages for managers are reduced. Good steps in the right direction, although I would still simply prefer to abolish SPACs altogether.

8. Fed up about the Fed

I am not an economist (nor will I ever be one), but I do like the Austrian school (Carl Menger, Friedrich Hayek, Ludwig von Mises, Marc Faber). Basically they don't like any interference with the economy whatsoever. Entrepreneurs must know that if things turn sour, there will be no safety net, there needs to be clear feedback from the real world to them to correctly assess the risks involved.

Greenspan however introduced the "Greenspan put" which later turned into the Bernanke put. There is the important issue of moral hazard. While the middleclass in the US is struggling and real wages have fallen, the top 1% is doing extremely well. The extremely rich  should raise a statue for Greenspan, Bernanke and (in the future) Yellen, they owe a lot to them.

9. Protons marketshare slipped from 80% to 18%

Not being a listed company it is less in the limelight than before. A pity, since a healthy dose of sunlight (in the form of transparency) is often helpful.

10. Masterskill in timing the IPO & Goldman Sachs

Not long after this post Masterskill posted a shocking loss. Many Malaysian companies have failed from the moment they were listed, and unfortunately the authorities have hardly ever taken any action. I hope they will do a thorough, investigative research in this case, since there are (too) many red flags.

One posting just didn't make it in the Top 10, but it is my favourite over the year so I still like to mention it:

Maemode: accurate predictions by Ze Moola, but why did nobody notice?

Ze Moola has blogged in "Where is Ze Moola" since 2005 more than 3,000 articles! That in a time when Corporate Governance was not yet very common or popular. He has unfortunately stopped, not sure for what reason. But these days others have stepped up, The Edge was the first in this area, MSWG is doing its work (a larger part probably behind the scenes), the business section of The Star (Errol Oh) has improved, there is Focus Malaysia and KiniBiz, also newer bloggers like Serious Investing have joined.

Ze Moola was many times right and will be proven more often right in the future. Some cases just need years to pan out, like in the Maemode case.

One week ago it was announced that Maemode still can't issue its audited annual accounts nor its quarterly accounts. Enough reason for Bursa to suspend trading in Maemode's shares, if not for the reason that the shares were already suspended.

I hope that the authorities will thoroughly investigate Maemode, especially its long history of large receivables which "were not able to receive".

Seth Klarman (from Baupost fame) said recently:

"It is almost embarrassing that five years after a crisis - a crisis that clearly can happen again - we're back th those levels of speculative behaviour. It's really astonishing."

Below the fireworks of Dubai 2014, which went down in the 2008 global crisis, but looks to be back again in the limelight.

Wishing all readers a Happy New Year!

Friday, 3 January 2014

"Listing of IOI Properties rushed and ill-timed"

Article on the website of The Star: Listing of IOI Properties ‘rushed and ill-timed’:

"Minority shareholders claim listing of IOI Properties rushed and ill-timed".

Details follow, mostly from remisiers on behalf of their clients:

  • "as most of them (their clients) were away for the holidays or had yet to receive the necessary documents by post"
  • "While the application is downloadable from Bursa Malaysia’s website, a remisier said this put senior citizens at a disadvantage. “Many of them don’t have access to the Internet. It shows a lack of concern for shareholders,” he said."
  • "Stockbrokers are not authorised to sign on behalf of clients. We can try to help one or two clients, but not if it involves thousands of ringgit"

Rita Benoy Bushon, Chief Executive Officer, Minority Shareholder Watchdog Group, is even more outspoken in "The Observer, Message from the CEO", dated 3 January 2014:

"Minority shareholders of IOI Corp Bhd have every right to feel disgruntled by the short space of time given to subscribe for their entitlement for shares of its soon-to-be-listed IOI Properties Bhd.
Although the Company has announced the book closing date of the ROS (Restricted Offer Shares) on 19 December 2013 which is at least 11 market days before the date of application according to the Main Market Listing Requirement, it nevertheless had only issued the prospectus on 26 Dec 2013, which is a mere five working days before 2 January 2014, if the public holidays and weekends are excluded.

IOI should have realised that by conducting this exercise over the vacation period, many people may be on leave, postal deliveries could also be delayed in this period, which also meant that many may not have received the necessary documents by post on time. (Thus the complaints are valid.)

The company should really have given minorities more time to subscribe for their entitlements.
We view this as especially serious since it has been the subject of criticism following its delisting in 2009 (being bought out at just 0.66 times NTA for a RM1.3 billion valuation).

We hope IOI Corp will further extend the closing period for the application (noting that they have already done so today by 4 days) and show their good faith to the current minority shareholders, who are expected to be keen to take advantage of the offer. The reason being, that each IOI Properties share at RM1.76 under the ROS comes at a 30% discount to the reference price of RM2.51. In addition, an even steeper 42.7% to IOI Properties’ pro forma net asset per share of RM3.07. Otherwise, it could be construed negatively by the public that the offer not taken by entitled shareholders (for reasons beyond them) would be given to other shareholders at the discretion of the Board, at a discount."

I have written before about this IPO: "The return of IOI Properties" and "IOI Prospectus, 1623 pages!".

The only good news I can bring is that the length of the IPO prospectus is indeed brought back to 750 pages, a reduction of almost 1000 pages, although for me, it is still much too long.