Thursday, 30 October 2014

Steve Jobs: The Lost Interview

Great interview with Steve Jobs, done in 1995, 19 years ago.

In 1995, during the making of his TV series Triumph of the Nerds about the birth of the PC, Bob Cringely did a memorable hour-long interview with Steve Jobs. It was 10 years since Jobs had left Apple following a bruising struggle with John Sculley, the CEO he had brought into the company. At the time of the interview Jobs was running NeXT, the niche computer company he had founded after leaving Apple. During the interview, Jobs was at his charismatic best - witty, outspoken, visionary. In the  end, only a part of the interview was used in the series and the rest was thought lost. But recently a VHS copy was found in the series director's garage. Now, cleaned up with modern technology, and put into context by Cringely, the entire interview will be screened in Landmark Theatres.


  • Entrepeneurship at its best, Apple built up from the ground.
  • "I never did it for the money", instead the passion for products and the hard work put in.
  • Companies run by product people (like Apple) vs companies run by sales people (like PepsiCo).
  • Jobs being at the right time (invention of the desktop, etc) at the right place (Silicon Valley).
  • Jobs using simple but very powerful words.

Maximizing Shareholder Value is the worlds dumbest idea

James Montier tells it as it is, he is very outspoken about the financial world, the things that are very wrong in his view.

In this extremely interesting presentation he argues that Maximixing Shareholders Value (MVS) is arguably the worlds dumbest idea. The presentation starts at 5:30.

One of his main arguments is wrong incentives, a subject that is also close to people like Warren Buffett and Charlie Munger, who warned about it many times. Many of the problems in the financial world stem from incentives that are either too much focused on the short term, or are misaligned.

One slide contains a collection of more dumb financial ideas, according to Montier:

Fans of Milton Friedman might want to consider skipping a few minutes from 10:00 onwards, Montier doesn't mince his words, describing the damage that Friedman has caused.

An earlier post on Montier can be found here.

Wednesday, 29 October 2014

Protasco's Puzzling Purchase (12)

According to this article in The Edge Markets:

.... managing director, Datuk Seri Chong Ket Pen has issued a statement to deny allegations in a legal suit started by Kingdom Seekers Venture Sdn Bhd, a firm controlled by Tey Por Yee.

“Clearly, this new proceedings amounts to nothing more than an attempt to smear and tarnish my reputation, apart from seeking to divert attention away from the earlier on-ongoing legal proceedings filed by Protasco Bhd against Tey and others,” Chong said in a joint press statement.

Chong added that he has appointed solicitors to “vigorously defend” the suit against the civil suit and will lodge a police report in respect of those allegations.

Tuesday, 28 October 2014

Protasco's Puzzling Purchase (11)

The saga that started about 22 months ago continues to intrigue, a new announcement:

Protasco Berhad (“Protasco” / the “Company”) wishes to announce that it has today been served with a Writ of Summons by Kingdom Seekers Ventures Sdn Bhd (“Kingdom Seekers”) suing in a representative capacity for and on behalf of the Company and or for the benefit of the Company. Kingdom Seekers is suing Dato’ Sri Chong Ket Pen, Kenny Chong Ther Nen, Low Kian Seng, Edward Khoo Mong Wei, Lim Yew Ting and RS Maha Niaga Sdn Bhd. The Company is named as a Defendant by virtue of the representative claim. Kingdom Seekers is a company controlled by one of Protasco’s director, namely Mr Tey Por Yee and is a substantial shareholder of the Company. The Company had on 22nd September 2014 commenced a suit against inter alia Mr Tey Por Yee for breach of his fiduciary and statutory duties.

Kingdom Seekers’ claims against Dato’ Sri Chong Ket Pen, Kenny Chong Ther Nen, Low Kian Seng, Edward Khoo Mong Wei, Lim Yew Ting, RS Maha Niaga Sdn Bhd is for the return of a sum of RM10 million to the Company and general damages purportedly suffered by the Company.

In this regard, the Company has appointed a firm of solicitors to represent the Company and oppose the foregoing suit. The Company wish to state that the suit filed by Kingdom Seekers have no significant immediate adverse effect on the current financial position of Protasco.

Tey gave a press conference with more detailed information, for instance the following map of the money trail:

After almost two years, bystanders are getting more and more information,  which is always the case when two parties engage in a mud slinging contest and/or are threatening with court cases.

But there are still many questions that I posed almost two years ago that are unanswered as of now.

The most obvious one: who were the shareholders and directors of Anglo Slavic Petrogas Ltd, the seller?

We will have to wait how the company will respond to these allegations. Eventually it might be the work for the judges and authorities to find out the facts and the possible wrongdoings.

Monday, 27 October 2014

ACGA: CG in Malaysia improving (2)

I wrote about this excellent regional Corporate Governance report before. This time I like to zero in on the disclosure of enforcement.

The relevant text in the CG Watch 2014 report is as follows:

I respectfully disagree with the above findings, especially the part about easy and logical access to enforcement information (one of the rare times I disagree with in the report).

Most likely the researchers looked from the angle of enforcement. But the angle which investors and market observers really want to use is (as so often) conveniently shown at David Webb's website:

A simple box at the top of the website, where one can search for enforcement news regarding a company or person.

Lets take an example, stock code 0010, Hang Lung Group Limited:

There are many ways to look at the data, but the beauty of the "Officers"-tab is that all the names of the people involved (either current or historic) are "clickable".

If we click for instance on "Chan, Ronnie ChiChung" then we get the following information:

That is a really helpful way for people to quickly get a grasp about both a company and its officers: have there been any issues in the past? Have the officers previously worked for other companies with issues?

Unfortunately, both the enforcement website of Bursa and Securities Commission don't even come close to this level of sophistication.

Things could be improved if Bursa would add all enforcement actions in their own announcements website under a separate category, where all enforcement news would appear, both from Bursa Malaysia and the Securities Commission grouped together, linked to the relevant company.

Despite having an otherwise excellent announcement website (I can't stress this enough, it is much better than all other announcements websites that I frequent), there is always room for improvement I guess.

I hope to continue to write more about the CG Watch 2014 report, which is in general quite positive about the CG developments in Malaysia.

Protasco's Puzzling Purchase (10)

As expected, but a bit belated, Protasco made the following announcement:

Protasco Berhad (“the Company”) wishes to announce that the Company has on 27 October 2014 received a Special Notice from shareholders of the Company, collectively holding approximately 10.51% of the issued and paid-up capital of the Company, notifying of their Proposal to move ordinary resolutions at an extraordinary general meeting of the Company to remove certain directors namely Tey Por Yee and Ooi Kock Aun.  A copy of the Special Notice is attached herewith.

Sunday, 26 October 2014

Australia 'paradise' for white-collar criminals (2)

And, not completely unexpected, Medcraft, the Chairman of the Australian Securities and Investments Commission has backtracked his previous statement that "Australia was a "bit of a paradise" for white-collar crime".

At a Senate estimates hearing the next day, he said he wanted to "correct" the comments as reported, having received a phone call from Finance Minister Mathias Cormann expressing his concern.

The Sydney Morning Herald continues (some snippets):

It was the sort of startling and "courageous" comment rarely heard from a senior public servant.

Greg Medcraft, the chairman of the Australian Securities and Investments Commission, may well be regretting his since-retracted statement this week that Australia was a "bit of a paradise" for white-collar crime.

But if his aim was to attract attention to the issue of penalties for corporate wrongdoing in Australia, his lapse into frankness may well have done the trick.

Medcraft has been pushing for months for tougher penalties in this area. In February, he told a Senate committee that Australia's penalties were inadequate, with the criminal sanctions inconsistent and civil fines set too low.

When it came to deterring white-collar crimes, Medcraft said, "you have to lift the fear and suppress the greed".

"The thing that scares white-collar criminals is going to jail, and that's what scares them everywhere in the world.

"The penalties, particularly civil penalties, in Australia for white-collar offences are basically not strong enough, not tough enough."

Nationals senator John Williams, an outspoken critic of the financial advice sector who has pushed for widescale reform, told the hearing: "I've said for 5½ years that we should have a royal commission into white-collar crime because I believe Australia is, today, a paradise for white-collar crime."

Some argue ASIC could make better use of the penalties available to it – that the problem is one of enforcement.

"In some cases it's true that Australia's maximum penalties can be less than the maximum penalties overseas," said corporate law expert Juliette Overland from Sydney University.

She agrees that there is a "good argument" for more consistency in sentencing of corporate wrongdoing in Australia.

But she says the focus should be on "deterrence up front, and the idea that if you engage in this conduct you will get caught", she said.

"The biggest problem with a lot of corporate crime is that it's so hard to uncover … if people think it's only a small chance you will get caught, they might still think it's worth a try."

The above is all very relevant in the Malaysian context. Ten, twenty years ago enforcement of white-collar crimes was virtually non-existent. I am pretty sure that some corporate "players" refer to this as "the good old time".

The good news is, things have clearly improved: more enforcement, and even some jail sentences. There is also much more transparency for investors these days, enabling them to stay away from "dodgy" companies and their insiders. That is, if investors do their homework.

But still, the glass is half full, there are many cases where the alleged perpetrators seem to get away with their loot, or receive at best a much delayed slap on the wrist.

Good enforcement should have the following characteristics:
  • a high chance that the perpetrators will be caught;
  • the punishment itself should be an adequate deterrent;
  • the whole process should be relatively fast (justice delayed is justice denied), this includes a fast response to credible complaints received from the public;
  • non-biased, it should not be that certain VIPs appear to be above the law;
  • transparent, both regarding the backgrounds of the enforcements, but also when no action is taken in cases where it seems that rules might have been broken.

Malaysia can still clearly improve on the above.

Saturday, 25 October 2014

Share Buybacks vs Insider Buying

Good article in The New York Times: "Stock Buybacks Demystified".

Some snippets:

Corporate insiders have impeccable timing when buying stock for their own accounts. When the ratio of insider buying to selling is higher than normal at many companies at the same time, it tends to be near a market low.

That was the case in late 2008 and early 2009, toward the end of the last bear market. The ratio was at historically high levels for months, just before stocks tripled, according to Vickers Weekly Insider, a service that tracks such trading.

But when bosses authorize buybacks — buying stock on behalf of their companies, not themselves — they show nothing like the same foresight. The $617 billion that companies in the Standard & Poor’s 500-stock index spent on buybacks in the 12 months through January 2008 was the highest amount in the nine years for which the research firm FactSet has compiled such data.

That was just in time for the worst market decline since the 1930s. The following year, a more auspicious time to accumulate stocks, buybacks totaled $353 billion.

“Insiders, when buying for themselves, are not looking at the present; they’re looking at the future. Buybacks are done for the present; cash flow is high, so they use it for buybacks. That drives them in good times and bad.”

Buybacks tend to be done late in an uptrend because that’s when there are fewer attractive alternatives for spending money and the greatest need to lift earnings. But that’s also when stock valuations are high. If companies borrow to accomplish their buybacks, as many do, it leaves them even worse off when the cycle turns down because they have more debt on their books, he added.

I have never been much of a fan of share buyback programs. I have seen enough cases in which these programs were abused, for instance :
  • A share price was "defended" at some artificial price level. When the money for the share buyback program ran out the share price crashed, not unexpectedly. The company should have let the share price go down, enabling it to buy more shares at a cheaper price, for the advantage of all remaining shareholders.
  • An aggressive share buyback program exactly at the moment that insiders are selling the share. There is the perception that the share price is artificially supported, enabling insiders to receive a higher price than they otherwise would have.

Share buybacks have been invented in the US, having had a double taxation on dividends.

Asian countries don't have this double taxation, so they can freely distribute excess cash in the form of dividends. There is here actually not much need for share buybacks (with this being a possible exception).

I prefer dividends over share buybacks:
  • Dividends are much more transparent, an overview of the dividends paid out in (say) the last ten years is quite insightful in evaluating a company.
  • Share buybacks are distracting, both for the management which has to execute it (dealing on a daily basis with price and volume), and for the shareholders who have to evaluate it in combination with the dividends.

Friday, 24 October 2014

Tomypak: CG issues

I wrote several times about Kuala Lumpur based fund manager Claire Barnes and the Apollo Fund which she manages.

In the latest quarterly report "FX headwinds & unheeded duties of care" corporate governance issues regarding Tomypak Holdings are described:

"A particular irritation has been the collapse of corporate governance at Tomypak Holdings, a Malaysian manufacturer of flexible packaging."

For a more detailed description I refer to the above link.

Of further interest is:

"We [the Apollo Fund] therefore expect the Securities Commission to require a General Offer, albeit at the low price of RM1.30."

Any readers with an interest in this company are invited to contact Claire Barnes.

The 5-year graph of Tomypak's share price:

The Apollo Fund is not the only fund which writes about corporate governance issues in their investment holdings. Singapore based Lighthouse Advisors for instance publishes public newsletters on their website with comments related to listed companies. Hopefully more funds will follow suit.

Wednesday, 22 October 2014

Australia 'paradise' for white-collar criminals

I wrote several times in a negative way about the Australian financial industry, and the lack of enforcement: here, here, here and here.

I have insights in a few (rather dodgy, to put it mildly) companies listed on the Australian exchange, and am indeed shocked, I think that most of those companies would not have been allowed to list on Bursa Malaysia. Next to that, the financial statements of the smaller listed companies compare very badly to the statements of ACE listed companies.

It seems that the chairman of the ASIC (Australia's Securities Commission) seems to agree on that, according to this article on Sydney Morning Herald's website.

Some snippets:

Australia is a "paradise" for white-collar criminals because of its soft punishment of corporate offences, the Australian Securities and Investments Commission chairman, Greg Medcraft, says.

Mr Medcraft said the only realistic response was harsher jail terms and bigger penalties for white-collar crime.

He also repeated calls for a national competency exam for financial advisers in the lead up to a crackdown on the industry and more funding for ASIC to investigate the finance sector, including a user-pays funding model.

Finance industry players were not "Christian soldiers", Mr Medcraft said on Tuesday, but were motivated by fear and greed.

"You have to lift the fear and suppress the greed," he said.

"This is a bit of a paradise, Australia, for white collar.

"The thing that scares white-collar criminals is going to jail and that's what scares them everywhere in the world."

"The penalties, particularly civil penalties, in Australia for white-collar offences are basically not strong enough, not tough enough. All you're doing is giving them a slap on the wrist [and] that is not deterring people."

In the past few years ASIC has come under fire over its handling of scandals at the financial planning arms of the Commonwealth Bank, Macquarie Group, and Storm Financial.

At recent Senate and parliamentary committee inquiries the corporate regulator was accused of being too slow to act against dodgy financial planners, of lacking transparency and being too trusting of big business.

Mr Medcraft admitted ASIC had made mistakes, but said its capacity to investigate and pursue corrupt financial advisers had been curtailed by a lack of resources.

He vowed to be more transparent about ASIC's enforcement actions and said the regulator would "not be captive to the big end of town".

"If we want to react faster, then having more resources to be able to do it is important," he said.

The Australian Securities and Investments Commission plans to devote more resources to scrutinising and investigating the financial advisory industry while also forcing the sector to lift its game through better education, monitoring and reporting of breaches.

EPF not allowed to vote in RPT

Bursa has made its final decision, EPF is not allowed to vote in the CIMB-RHB Capital-MBSB deal. The reasons behind this can be found here:

EPF’s position is not the same as the other shareholders of RHB Capital premised on the

(a) EPF’s controlling stakes in RHB Capital (41.5%) and MBSB (64.5%) place it in a position of significant influence in these companies;

(b) as the single largest shareholder of RHB Capital and MBSB and a major shareholder in CIMB Group, EPF may benefit from the transaction as a shareholder of MBSB and/or CIMB Group. As such, its overall position would differ from a party who is merely a shareholder of RHB Capital, especially given the differing terms and valuations applicable to the 3 affected companies; and

(c) EPF has prior knowledge of the Proposed Merger as it was notified by CIMB

I think that this decision is spot-on. I think that EPF should be able to block the whole deal if it thinks it is in their disadvantage.

But given that the EPF does indeed support the deal, it should not be able to push the deal through by being allowed to vote. This is after all a Related Party Transaction (RPT), and it is one of the Corporate Governance areas of great worry in Malaysia.

EPF has different percentages in each of the three companies, which means that it has a clear preference in the outcome: a relatively higher valuation for the company it has a large stake in, and vice versa.

If subsequently the minority investors shoot the proposal down, then may be it isn't that great anyhow.

Many corporate restructure exercises do disappoint, the outcome being less good than forecasted by the dealmakers who made the shiny PowerPoint presentations, showing all the synergy.

In reality, things are not that easy, cultural clashes of the employees of the different companies are quite common and economies of scale do not always work as expected.

To all Hindu readers: Happy Deepavali!

Friday, 17 October 2014

XOX: from bad to worse .....

I wrote before about XOX's corporate exercise to "massage" away its high accumulated losses. I will now give some more detail about this company, and its short but not so glorious past.

XOX is featured on Ze Moola's blog, which is often not a good sign, and this time it is no different.

In the last blog post we can see most of the directors smiling (except the person on the left) at the IPO ceremony at Bursa:

Not sure if the people who bought shares at the IPO price were also smiling, the board was distinctively red coloured, as can be seen on the right, not a single green number in sight.

The share plunged 35% on its first trading day, it must have been one of the worst performers of Bursa ever.

"Malaysian Shares" wrote two articles about the IPO, here and here.

Unfortunately for its shareholders, the share price has never recovered, in the contrary, it is now trading for RM 0.07, its lowest price ever:

XOX was a loss making company before its IPO, it is quite a surprise for me that it was allowed to be listed on Bursa. What probably helped was a rather optimistic (with hindsight) profit forecast that it issued in its IPO prospectus.

XOX was not able to hit the revenue and profit forecasts, it wasn't even close:

The above numbers are for the year up to 31 December 2011, while the company was listed on June 10, 2011 and knew already the numbers up to then. In other words, it only needed to forecast another seven months or so. And still it was able to overestimate its revenue by a factor 4, and instead of a forecasted PAT of RM 20 Million it booked a loss of RM 20 Million. Forecasting is probably not XOX's forte.

Over 2012 the company lost another RM 3.1 Million, over 2013 it lost RM 0.7 Million and over the first half of 2014 it lost another RM 1.2 Million. Not exactly shining numbers, and (partially) explaining the share graph.

To add insult to injury, on July 18, 2014 the company was reprimanded by Bursa for failing to take into account the necessary adjustments.

Which brings us to the present, and the multiple proposals that the company announced.

Apart from the earlier mentioned restructuring exercise, there are three other elements:

[1] A rights issue: this is considered to be a proper exercise to raise money, where all shareholders have the opportunity to participate (or to sell their rights if they don't want to do that).

[2] A huge large restricted issue. This is the kind of exercise that I don't like, since normal shareholders do not have the opportunity to participate.

[3] Establishment of a SIS (Share Issue Scheme) of up to 30% of the issued and paid-up capital for eligible directors and employees of XOX. My guess is that these directors and employees are substantially the same as before, in other words they were the same persons responsible for the disappointing results of the last three years, causing the share price to fall by 90%. Should they really be rewarded at this moment of time, at the expense of the minority investors? Would it not be better if the company first turns around, starts to book some decent profits causing its share price at least to equal its IPO price before the company even considers a Share Issue Scheme?

The total dilution can be seen in the following maximum scenario:

Current shareholders will have 166 Million shares after the share consolidation, and are entitled to the rights issue of shares and warrants, which will increase their shareholding (upon exercising of the warrants) to 498 million shares.

Holders of the proposed restricted issue will receive 190 million shares plus their rights issue and warrants, this might balloon to a total of 570 million shares.

Directors and employees might receive an additional 320 million shares.

In other words, current shareholders (who might include loyal shareholders who bought shares of XOX at its IPO price of RM 0.80), who inject further money to subscribe to the rights issue, and who inject even more money to exercise their warrants, will in total only receive 36% of the enlarged shares in the maximum scenario.

And almost all of the dilution due to the restricted issue and SIS will be done at a price that is only a small fraction of the RM 0.80 that shareholders paid at the IPO.

Is this the way the company wants to reward its loyal shareholders?

Note to the authorities: I am of the opinion that corporate exercises like the above should simply be outlawed. Restricted issues should be capped at a maximum of 10% (preferably even 5%) of the outstanding shares. The same should apply to SIS, ESOS and the like, please cap them at 10% (preferably at 5%).

Please take also note of David Webb's "Project Vampire".

Protasco's Puzzling Purchase (9)

Article in The Star: "Two Protasco non-exec directors deny allegations".

"Protasco Bhd non-executive directors Tey Por Yee and Ooi Kock Aun have denied all allegations made against them by the company and will file their defence at the end of this month."

“We have carried out our fiduciary and statutory duties to the best of our ability. We resolutely deny all these allegations. “The allegations are not true and not supported by facts. These will be made apparent when we file our defence at the end of this month, where proof will be furnished to back our defence.”

It was about time that they finally broke their silence. Hopefully we will see a healthy dose of transparency in this rather intriguing case, and the veil will be lifted on many aspects of this case. For instance, who was really behind PT Anglo Slavic Utama?

Wednesday, 15 October 2014

Jim Chanos: "The Biggest Short"

Great article by Steven Drobny about Jim Chanos, the well known short seller.

Chanos recommends his fund as an insurance, for all investors who have a sizeable "long" portfolio in shares. Chanos will do well when shares tank, and bad if shares rise. But from time to time there is an industry (for instance property developers) that is badly hit while the overall market rises, in those times both Chanos' fund (shorting that industry) and the overall index can rise.

I normally don't short particular shares (I do from time to time short an index, but only rarely), but even then Chanos' observations are interesting. The way to discover candidates to short is basically the same as the way to discover which shares to avoid like the plague.

Also, observations about China's economy and it's huge property bubble.

Tuesday, 14 October 2014

Kamdar: "It's a messy family affair" (3)

I wrote before about Kamdar: here and here. In some detail:

Assets : Amount due from Director / Other Receivables – RM8,842,306
Liability : Amount due to Shareholders –RM 8,763,089

.....while it looks like the asset and liability roughly cancel each other out, there might still be a problem for the Kamdar Group in collecting the amount due from Director.

It appears that the above "problem" might indeed become a reality, the company made the following announcement:

The Board of Directors of Kamdar Group (M) Berhad (“KGMB” or “the Company”) wishes to announce that the High Court of Kuala Lumpur on 3 October 2014 had issued a Writ of Summons together with Statement of Claims to Bipinchandra A/L Balvantrai, Jayesh R. Kamdar Rajnikant and Yap Kim Hong  and on 9 October 2014 Kamdar Sdn Bhd (“KSB” or “the Plaintiff”), a wholly owned subsidiary of KGMB, had served the same to the 3 Defendants via Messrs Amrit & Company, the solicitors of KSB to initiate proceedings to recover the alleged withdrawal of funds totalling RM8.7 million and to claim general, aggravated and exemplary damages, compound interest and such further and other relief as the court deems fit.

Sunday, 12 October 2014

SC enforcement

Quite a few fresh enforcement actions by the Securities Commission, here, here and here.

More details on the civil suit against Kenneth Vun and six others.

Lots of regulatory settlements regarding share manipulation and insider trading "without admission or denial of liability". I am not much a fan of the last part, but it might be a practical way to finalize the cases, which often stretch back many years in the past.

Capital Dynamics Asset Management (Tan Teng Boo's firm) was mentioned: "Failure to disclose the deferred performance fees chargeable annually in the statements issued to its clients", and received a directive "to disclose to its clients the chargeable performance fees to date, in the statement issued to its clients by 31 December 2014".

Cases against Apex Investment Services and AmInvestment Bank were older.

Saturday, 11 October 2014

Cutting accumulated losses through financial engineering

[updated version, with a request at the end]

The Net Asset Value (NAV) of a company at a certain moment is defined as:

NAV = Assets minus Liabilities

That makes sense. But there is another way to look at NAV:

NAV = Equity plus Retained Earnings

With the Equity being the amount that has been put in the company by the shareholders (initially, and later possibly through rights issues or an IPO) and Retained Earnings being the accumulated Earnings minus the accumulated Dividends over the lifespan of the company up to that certain moment.

If we combine the two above formula's:

Assets minus Liabilities = Equity plus Retained Earnings

A simple and beautifully balanced formula.

Example 1

Assets             40M     Equity             10M
Liabilities       -15M     Retained Earnings  15M
NAV                25M     NAV                25M

However, there is one group of companies which might not be too happy with this formula, and that is the group of companies which makes persistent losses. For them things might look like:

Example 2

Assets             30M     Equity             40M
Liabilities       -20M     Retained Earnings -30M
NAV                10M     NAV                10M

It is rather obvious that future investors can see that this company might have a problem (especially if no or very little dividends have been paid out in the past, which is often the case).

Financial engineers (of the kind that I don't like, to put it mildly) have come up with a creative solution. What would happen if the Retained Earnings (or losses, as is often the case) could be lowered?

Since the Assets and Liabilities (and thus the NAV) would stay the same, the Equity has to be lowered. So this is the solution they came up with:

Example 3

Assets             30M     Equity             10M
Liabilities       -20M     Retained Earnings   0M
NAV                10M     NAV                10M

This suddenly looks a lot more healthy than example 2. The reduction of the equity is done by reducing the par value or a transfer from the reserves (accumulated profits).

Needless to say, I like this kind of financial engineering as much as I like a toothache. This is the kind of "innovation" that is not helpful at all, brings no economic benefit, is not transparent but only distracting and costs money and effort that should be used to build the business.

There are many examples on Bursa of companies which have used the above accounting "trick", for instance MAS.

The above is from the 2013 audited accounts from MAS:
  • MAS had accumulated losses of RM 8.2 Billion as of January 1, 2013.
  • It lost again money in 2013 to the tune of RM 1.2 Billion.
  • One would expect accumulated losses of RM 9.4 Billion as of December 31st, 2013.
But through sheer "accounting magic", MAS "only" needs to report accumulated losses of RM 1.5 Billion. The reason is the RM 8 Billion capital reduction by transferring money from Share Capital and Share Premium.

Because of this, in my opinion, the meaning of the term "accumulated profits" (or losses) has completely lost its meaning, at least after any capital reduction exercise. The definition as used in Wikipedia, doesn't seem correct, there is no mentioning of the "accounting magic" which might distort the numbers.

One recent example is XOX Bhd, The Star wrote an article "XOX unveils plan to cut accumulated losses of RM50m" on their website.

When I read this headline, I thought (rather naively, I admit) that XOX would cut the losses by making profits. At least, that would make sense to me.

But I was rather surprised when I read the rest of the article:

XOX Bhd has announced several proposals to reduce its accumulated losses amounting to RM50.05mil as at end-June. The mobile virtual network operator, which has a market cap of RM33.2mil, told Bursa Malaysia that it was proposing to reduce up to RM32.73mil from its share premium account. “The credit arising therefrom shall be utilised towards setting off against the accumulated losses of the company,” it said. On top of that, it has proposed to halve the par value of its shares to five sen each, subsequently consolidating every two XOX shares of five sen each into one new XOX share of 10 sen. The par value reduction would give rise to a credit of RM16mil, which would be used to reduce its accumulated losses, it added.

XOX is one of the worst performing companies on Bursa, I will write soon a separate blog posting about all the issues.

Request: is there any accountant who can comment on this (anonymous is fine). I also would like to know: is the above a global convention?

Friday, 10 October 2014

Protasco's Puzzling Purchase (8)

A new, not completely unexpected, twist in this saga, from The Star website:

Protasco lodges police report against Tey and Ooi over aborted Indonesia O&G deal

Things have taken a turn for the worse between Protasco Bhd and Tey Por Yee with the former lodging a police report over an aborted oil and gas deal on an asset in Indonesia.

Protasco, a construction and property outfit, said in a filing with Bursa Malaysia yesterday that it had lodged a police report against Tey and Ooi Kock Aun – both directors at oil and gas firm PT Anglo Slavic Utama (ASU) following its recent filing of a civil claim against both individuals.

The latest development has put a strain on the relationship between Protasco and Tey who established a partnership in December 2012.

At that time, Protasco had entered into a sale and purchase agreement (SPA) with ASU to buy 76% of its unit PT Anglo Slavic Indonesia (ASI) for US$55mil (about RM180mil).

I assume that Bursa and/or the Securities Commission are on the case as well.

MOL Global down 35% at IPO

MOL Global among worst-performing IPOs ever

Malaysian e-payment company MOL Global produced one of the weakest US IPO debuts of all time, declining as much as 35% in its initial session even after reducing the size of the deal by as much as 40% and pricing the offering at the bottom end of the marketing range.

“If you are concerned about slowing growth in China what do you think is going to happen across the rest of Southeast Asia,” said one hedge fund source that participated in the deal.

“It was a case of first in, first out (in the aftermarket),” he said.

If MOL Global closes the session at current prices it would rank as one of the worst first-day performances on record for a US IPO.

One source close to the deal expressed concern that the company had an inflated view of its value in the wake of the highly successful Alibaba IPO, while a buyside source expressed concern that the book was low quality, including many orders from short-term focused investors.

MOL was targeting valuations of as high as 40-times 2015 earnings, deal sources said. That is far above above the 27.6- and 26.2-times multiples of Asian e-commerce companies Tencent and Baidu.

Above text is taken from IFRasia's website. MOL Global ended the day 35% below its IPO price.

Poker star Phil Ivey sues a Genting owned casino for RM 36 million (4)

I blogged before about this court case.

The result of the case is out, Phil Ivey lost the case, as reported by ITV.

"The casino said Mr Ivey had used a technique called "edge-sorting" to give himself an unfair advantage. They argued that Mr Ivey's conduct defeated the premise of the game and therefore meant there was no contract between Ivey and the casino."

It looks to me like a pretty greyish area, for instance what would have happened if Ivey had lost using his technique (which only gave him an advantage, it was not a sure way to win), would the casino have returned the losses? I don't think so, but that means that the casino could not lose, while they were themselves at fault by using imperfect playing cards.

It would be interesting if Ivey appeals the verdict. On one hand, lawyers are expensive, on the other hand, the stakes are high.

Anyhow, good news for the shareholders of Genting.

Thursday, 9 October 2014

Bursa reprimands Nakamichi, fines ED

Bursa announced enforcement against Nakamichi and its Executive Director, some snippets:

Bursa Malaysia Securities Berhad (635998-W) (Bursa Malaysia Securities) has publicly reprimanded Nakamichi Corporation Berhad (NAKA or the Company) and its former executive director, Lo Man Heng for breaches of the Bursa Malaysia Securities Main Market Listing Requirements (Main LR). In addition, Lo Man Heng was fined a total of RM1,432,000 as at 8 October 2014.

Lo Man Heng, the former executive director of NAKA was found to have breached paragraph 16.13(a) of the Main LR for causing NAKA’s failure to announce the 2nd QR 2013, 3rd QR 2013, 4th QR 2013 and AAA 2013 within the stipulated timeframes resulting in the breaches of paragraphs 9.22(1) and 9.23(2) of the Main LR.  A public reprimand and fine of RM2,000 per market day for each delay of the financial statements (subject to a maximum fine of RM500,000 for each financial statement) until the relevant accounts, information / documents of the subsidiary, Tamabina Sdn. Bhd. (Tamabina) was furnished to NAKA to enable preparation and finalisation of the 2nd QR 2013 were imposed on Lo Man Heng.


The finding of breach and imposition of the above penalties on NAKA and Lo Man Heng were made pursuant to paragraph 16.19 of the Main LR upon completion of due process and after taking into consideration all the facts and circumstances of the matter including the following:-
  • the aggravating conduct of Lo Man Heng; and
  • the materiality / impact of the breach vis-à-vis the material price and volume movement of NAKA’s securities upon the announcement that the Company would not be able to submit its 2nd QR 2013 within the timeframe stipulated and the non-submission of the 2nd QR 2013 had led to the suspension in the trading of NAKA’s securities from 9 September 2013 pursuant to paragraph 9.28(5) of the Main LR.

The people behind Golden Plus (about which company I wrote before, here and here) might want to take notice of the above.

Wednesday, 8 October 2014

The Edge: "O&G counters hit by a major selldown"

Article on the website of The Edge, of interest is the following part:

Those comments were very similar to the ones Tan made in his interview with The Star, which I mentioned in my previous blog posting.

If his influence is indeed so large, I don't know but it might very well be the case.

However, it has to be mentioned that warnings signals regarding the O&G industry have been there for quite some time. I mentioned them in postings, for instance here and here.

Reuters wrote in February "Oil firms seen cutting exploration spending". The share price of several O&G counters has been on a down trend for some while. 

The larger macro picture is most likely that the price of oil has come down due to a slow down of China's economy and alternative sources for O&G through fracking.

Monday, 6 October 2014

iCapital: discount/premium and over/underperformance

Article in The Star:

Formidable Malaysian fund managers who speak their mind are hard to come by. But you would not think of that when you meet the unassuming Capital Dynamics founder and managing director Tan Teng Boo – also the founder of Malaysia’s only closed-end listed fund,

I have written twice about Tan and iCapital, here and here. I quite like Tan, the Malaysian investment scene would be a lot more lively and interesting with a dozen or so outspoken fund managers like him. In the past I have subscribed to his publication and I am an investor in his closed-end fund

However, I am quite disappointed in the above article in The Star. Some of my issues:

For the record, recorded a compounded return of 13.78% a year since its listing in 2005 versus 8.17% for the KLCI.

First of all, the definition of the above return should be more accurate, it is the return on the NAV (Net Asset Valuation) of the share, not the return of the share price. But one only can sell the share in the market, not the NAV.

Secondly, the share price of is trading already for about six years at a quite significant discount to its NAV (the current discount is about 21%):

The compounded return on the share price is therefore clearly lower (than the return on the NAV), about 10.5% per year.

Still quite good, but lower than the above mentioned 13.8%.

Thirdly, shares on the KLCI yield on average about 3% dividend per year, clearly higher than what has paid out (despite the special one-off dividend of 9.5 cent).

If we take that into account, then for a long term investor the returns would not be that different than for someone who bought a large basket of KLCI shares. Actually, that is quite disappointing.

Fourthly, the fund has outperformed the KLCI nicely based on NAV. But the outperformance was very biased:

On December 31, 2008 the fund had increased its value by 58.59% (RM 100 invested at its inception would be worth RM 158.59) while the KLCI had decreased its value by 4.09% (RM 100 invested would be worth RM 95.91). The fund had a cumulative outperformance of 65% over its first three years.

On June 25, 2014 the fund had increased its value by 216.66% (RM 100 invested at its inception would be worth RM 316.66) while the KLCI had increased by 106.70% (RM 100 invested would be worth RM 206.70). The fund had a cumulative outperformance of 54% over its first nine years.

In other words, all the outperformance came from the stellar first three years, in the last six years the fund has even underperformed the KLCI (even more clearly if dividends are taken into consideration). Which would also (partly) explain the discount to NAV over those six years.

The reason for the underperformance is clear if one looks at the last column, the Fund's cash level, especially the last two blue boxes.

The Star: "If the cash portion of RM240mil is removed, that return would be much higher."

Correct, but that is "not allowed". The fund manager knowingly and willingly went into a high cash position, which would have worked out wonderful if shares had tanked (he would have been able to pick up shares at a bargain price with his large cash holding).

But shares went up (especially in 2012 and 2013), explaining the underperformance.

Whilst I have sympathy for Tan's conservative approach of holding cash (with hindsight may be too much), one can not simply subtract that and increase the performance by focussing on the invested part of the fund.

What is disappointing is that there is no discussion further about the discount of the share price towards its NAV, and possible ways to deal with it. In my previous articles on iCapital I have detailed how a simple share buyback mechanism could help decrease the discount to its share price. The "threat" alone of a buyback would already reduce the discount, in my opinion.

Further in the article a lot of opinionated statements by Tan, some of which I agree with, some not so much.

One that I definitely like a lot is the following:

Tan resolutely says that he is underweight on the Malaysian oil and gas sector, as well as some of the oil and gas service providers in Singapore. “The oil and gas business is a commodity business where margins are not sustainable. Now, it appears that the barriers to entry are so low. When you have players like Eversendai Corp and Yinson Holdings Bhd, who have never seen a rig in their lives, now becoming global players, I would be very careful,” he says.

PS: For more discussion about Tan and iCapital, please see here, here and here.

Sunday, 5 October 2014

ACGA: CG in Malaysia improving

I have written before about the highly regarded country reports by ACGA-CLSA:

The new report "CG Watch 2014" has been published, I have not yet read the full report, but this is what MSWG wrote about it in their weekly newsletter:

Malaysia is on the 4th position out of 10 in the ACGA-CLSA CG Watch 2014.  The Report mentioned that Malaysia was the only country that had consistently edged up in the score from 49% in 2007 to 58% in 2014. The improvements were largely through a mix of government-driven reforms in the corporate sector such as the implementation of CG Blueprint 2011, a state-grandfathered push to require domestic institutional investors to take up CG seriously through the Malaysia Code of Institutional Investors and the creation of one of the region’s better independent Audit Oversight Board (AOB). The Report also recognised the emergence of some aspect of culture emanating through the development of the Institutional Investors Code, and elements of voluntary poll voting with improved communications by PLCs.

The Report highlighted that the Asian region as a whole often gets caught up in politics making legislative changes tough and thus would depend upon strong government support which normally is not forthcoming.  Securities commissions are beginning to take enforcement seriously, but the disclosure of these efforts can be improved.  The Report also highlighted the conflicts of interest in the role of stock exchanges. Shareholder rights in the different markets were said to be weak, especially relating to takeover and major or related-party transactions.

The CG Watch 2014 reported that our country began promoting corporate social responsibility (CSR) well ahead of many other Asian markets, however, the implementation stopped at the aspect of CG financial reporting.

The Report had suggested that PLCs in Malaysia should disclose more details in the AGM agendas and should provide commentary on services covered by non- audit fees.

Lastly, the Report also highlighted several sure ways to be downgraded in the next rating. One; is the continuation of voting by show of hand at AGMs/EGMs and two; if the implementation of the Malaysian Code of Institutional Investors is weak.

While I do agree that in general CG seems to have improved over the last years, there is still the lingering fear that "corporate governance [is] lacking substance".

The real test would be the next recession, "Only when the tide goes out do you discover who's been swimming naked" (a quote from Warren Buffett).

In the meantime, I am looking forward to the detailed report regarding Malaysia and Singapore.

Friday, 3 October 2014

"Beware of land banking"

Readers of this blog will know that I am "not exactly" a fan of land banking schemes (to put it mildly).

For instance in this posting I wrote about this matter.

I was pleasantly surprised by the letter "Beware of land banking" posted on MalaysiaKini's website. I agree with what is written, and especially:

"In conclusion, if such overseas land is so good, then why come all the way here to hard sell smaller divided plots when it should be easily sold in their home country?"

The reason for this paradox is (and I am sure the writer of the letter knows this) the huge amount of sales commissions that are drawn. I doubt if these commissions are transparently disclosed to the public.

In my previous posting I did mention one court case regarding Walton International Group (Singapore). The judgement is a must read for anyone interested in land banking.

However, the above letter as published at MalaysiaKini's website mentions another court case, also by Walton against another former employee. More interesting inside details, the most outrageous one is the following:

".... Mr Britton’s evidence on the sacking of Ms Loh was also most unsatisfactory. For instance, when he was asked why Ms Loh, whose contribution to the company’s profits was as good, if not better, than Mr Iseli’s contribution to Walton Malaysia’s profits, had not been offered a generous financial package to resign whereas Mr Iseli had been offered such a package, he gave the astonishing reply that she had not been offered a severance package because unlike Mr Iseli, she had not been spreading rumours or perpetuating lies. Apparently, he seemed to believe that those who spread rumours and perpetuated lies should be rewarded with a generous severance package whereas Ms Loh, who did not act in such dastardly ways and had spearheaded the increase in the sale of Walton products in Singapore, should be summarily dismissed without any compensation for the flimsiest of reasons."

Tesco: Buffett vs Woodford (2)

I posted before about Tesco, with Warren Buffett increasing his stake in the UK supermarket chain, and Woodford selling all his shares.

I wrote:

"Below is the share price of the last 5 years, the stock hasn't done much and might thus be relatively cheap, it pays a decent dividend. Also, it is not often that one can buy a share at a decent discount to the price that Warren Buffett paid. But Woodford's selling does look like a red flag, Woodford is playing a home game in the UK, Buffett is playing away. I prefer to wait, there is anyhow not much good economic news lately, markets look jittery."

The question who was right, Buffett or Woodford, seems to have been answered in a very clear way:

"Warren Buffett: ‘Tesco was a huge mistake’", from an article in The Guardian. Some snippets:

Renowned US investor Warren Buffett has said he made a “huge mistake” by investing in Tesco, as the problems mount at Britain’s largest retailer.

Tesco shares have slumped 45% this year as the supermarket issued four shock profit warnings and last week became embroiled in an accounting scandal, admitting it had overstated its profits by £250m. The retailer has been the worst performer in the FTSE 100 index this year and its shares are at an 11-year low.

Undaunted by a shock profit warning from the company, Buffett raised his stake to over 5% when others were selling the stock. Tesco was the only stock in his top 15 picks that recorded a loss last year. Buffett told CNBC: “I made a mistake on Tesco. That was a huge mistake by me.”

The UK’s financial regulator has launched a full-scale investigation into the  accounting scandal that has plunged Tesco even deeper into crisis. The retailer’s new boss, Dave Lewis, is tasked with restoring Tesco’s battered reputation as well as fixing its business amid rapidly declining sales.

Meanwhile, star UK fund manager Neil Woodford – who decided to sell his stake in Tesco in 2012 after its first profit warning – said last week it could be a long time before any of the British supermarkets became good investment prospects again.

It takes a good investor to admit his mistake, and Buffett (despite the Tesco investment) must indeed be deemed to be one of the best (if not the best) investors of all times.

Wednesday, 1 October 2014

High cost for small transactions on Bursa

I wrote about the issue of high transaction costs on relatively small orders before.

By chance I run into the following share buyback by China Stationary:

China Stationary bought 100 shares at a price of RM 0.13 for a total amount of RM 54.01.

In other words, the shares cost only RM 13.00, the commission however a whopping RM 41.01!

In one word: madness.

If Bursa Malaysia actively wants to encourage more retail investors to participate (many of whom might trade for smaller amounts), they really should solve this issue.

In my previous blog posting I gave two simple solutions:
  • either raise the minimum board lot size for shares trading at lower prices (in Hong Kong for instance penny stocks go in lots of 10,000 shares)
  • or lower the minimum brokerage for these small orders.

What do investors want?

Great PowerPoint presentation from Hong Kong based David Webb. Almost all points mentioned are (highly) relevant in the Malaysian (or Singaporean) context.