Sunday, 20 April 2014

Anthony Bolton: I was wrong about China

"Anthony Bolton (born 7 March 1950) is one of the UK's best known investment fund managers and most successful investors, having managed the Fidelity Special Situations fund from December 1979 to December 2007. Over this 28-year period the fund achieved annualised growth of 19.5%, far in excess of the 13.5% growth of the wider stock exchange, turning a £1,000 investment into £147,000."

The above taken from Wikipedia. Pretty impressive, isn't it?

And then he did something he now definitely regrets:

"In 2009 he announced his return to fund management and in April 2010 moved to Hong Kong to begin managing the newly launched Fidelity China Special Situations PLC, an investment trust listed on the London Stock Exchange."

SCMP wrote recently an article with a rather harsh tone:

"Anthony Bolton retires with unfond memories of China"

"... despite his bullishness on China he was unable to repeat his successes with his China investments - to no great surprise from older hands here who felt he didn't have enough knowledge of the market to succeed in the short term.

He retired from Fidelity at the end of March. At a function to mark his retirement Bolton criticised standards of corporate governance on the mainland. Initially he thought corporate governance issues in China were about whether the chairman and the chief executive positions were held by the same person, or whether independent directors held a majority on the board.

"I found that corporate governance is a euphemism for 'are the figures real and is the management lying?', that is, fraud.

A longer and more detailed article in the Financial Times: "Anthony Bolton: ‘I was wrong about the market in China’"

“The most disappointing thing for me – and I am happy to admit it – is that I was wrong about the market in China,” the manager said during a press briefing on his last day in the office on March 31.

I thought it would go up for four years but it has gone down for more than four years.”

Eventually he did outperform the relevant index, but in absolute terms, the performance is nothing to shout about:

Someone who has performed (very) well by investing in China is Malaysian Cheah Cheng Hye (founder of Value Partners), about whom I wrote here.

Saturday, 19 April 2014

Fire in China Stationary plant (2)

I wrote before about China Stationary:

"Hopefully the administration is still in order, the administration office is mentioned as being damaged. In Singapore there was a China listed company where suddenly the whole administration went up in fire."

I am afraid that my fear that the administration was destroyed was indeed correct, according to the following announcement:

The Company’s auditors, Messrs RT LLP had communicated the following statements in their Audit Summary Memorandum for the financial year ended 31 December 2013:

“As a result of the fire incident, we are unable to proceed with their planned schedule to obtain walk-in bank confirmations, sight of fixed assets, as well as complete our audit fieldwork for the PRC subsidiaries. The aforementioned procedures are crucial for us to issue an audit opinion on the Group’s financial statements for the financial year ended 31 December 2013.

As at the date of this memorandum, management has not been able to provide us with the post balance sheet financial information and make the necessary arrangements to fulfil the aforementioned procedures as the financial records and company legal stamps that were stored in the administration office were destroyed by the fire as advised by management.”

The Singapore listed China company that I mentioned before was Sino Techfibre. A link to a Business Times article can be found here:

Blaze in Shandong facility may further obscure ongoing probe into its books

A FIRE at the China factory of mainboard-listed Sino Techfibre could further obscure an ongoing probe into its books as key financial records have reportedly been destroyed in the incident.

According to a statement released by the firm late Friday night, a fire had broken out at the administrative premises within its primary production facility at Longkou City in Shandong province in the early morning of April 20.

While the blaze did not cause any deaths or injuries, the financial records that were kept in the affected office have been destroyed, Sino Techfibre revealed.

‘The company has reported the incident to the local police, and the latter has commenced the necessary investigations,’ it said.

‘The cause of the fire and actual extent of the damage are currently still unknown, pending the completion of the police investigations into the fire and issuance of their report,’ it added.

The incident happened a week after the firm was red-flagged by external auditors Ernst & Young (E&Y) for accounting irregularities, adding to recent scandals surrounding the bookkeeping practices of several other China-linked companies.

Specifically, E&Y uncovered some discrepancies in the invoices issued by the firm and its suppliers.
Sino Techfibre said that it could not locate the sales manager who is at centre of this controversy, and has since lodged a local police report.

As E&Y did not obtain a satisfactory explanation on the issue, it could not complete and issue the audit report on Sino Techfibre.

In an update last Friday, the Chinese maker of polyurethane (PU) and microfibre synthetic leather products also announced that it has appointed an interim chairman and CEO following E&Y’s findings.

Sino Techfibre’s existing CEO Li Wenheng has been ‘re-designated as an executive director’ until further notice, the firm said.

Independent director Tay Wee Kwang has taken over as Sino Techfibre’s interim chief while Lee Wing Hang, another independent director, has been appointed as its interim chairman.

As part of his responsibilities, Mr Tay will oversee the independent investigations into the company’s audit issues as well as review the investigation report on last week’s fire. He will also take over the company seals of Sino Techfibre and all its subsidiaries.

Sino Techfibre is currently finalising the appointment of E&Y for an expanded audit.

In anticipation of this move, Sino Techfibre said that it has been ‘making the necessary preparatory work in respect of the relevant books and financial records of the company’ prior to last Wednesday’s blaze.

Yahoo: Conglomerate Discount

I wrote before about what is called "Holding Company Discount".

Bloomberg published an interesting article about this same issue, but calls it "Conglomerate Discount". The article is about Yahoo, and its holdings in Alibaba and Yahoo Japan.

"How Can Yahoo Be Worth Less Than Zero?"

The article is written by Matt Levine, some snippets:

"Yahoo Inc. is a public company consisting of a portfolio of

1. whatever you think Yahoo is,
2. a 35 percent stake in a separate but similar publicly traded company called Yahoo Japan, and
3. a 24 percent stake in a separate, different, soon-to-be-publicly traded company called Alibaba.

My Bloomberg View colleague Matt Klein ran the numbers in March, and non-Bloomberg-affiliated Matt Matt Yglesias ran them again today, and the numbers tell you that 2+3 > 1+2+3, as it were: Yahoo's Alibaba and Yahoo Japan stakes add up to be worth more than Yahoo is worth."

"One obvious question is, how can that be true? The actual Yahoo business -- call it "Core Yahoo" -- still makes hundreds of millions of dollars a year in profits, which theoretically belong to shareholders. A thing that pays you positive hundreds of millions of dollars a year shouldn't be worth negative billions of dollars.

Of course, profits that theoretically belong to shareholders aren't necessarily paid out to shareholders: Yahoo pays no dividend and has a ... checkered management history, so you could easily take the cynical view that Yahoo will plow those profits back into a declining business, be completely mismanaged, run the business into the ground and leave shareholders with nothing."

Core Yahoo is worth less than zero because it's an arithmetic residue of taking a bunch of businesses with very public price tags on them and applying a conglomerate discount.

That discount isn't really about the viability of the core business; it's about the fact that investors don't have direct access to any of the individual businesses, but have to buy them in packaged conglomerate form where any gains on the business they want can be wiped out by losses on the ones they don't.

I learned my lesson the hard way, about 20 years ago. I was quite impressed by the growth of AMMB, but calculated that AMCorp (owning a chunk of AMMB plus some other businesses) was a cheaper entry to AMMB. And on top of that, AMCorp had ICULS that traded at a discount to its shares.

That is a lot of discount on top of a lot of discount, what possibly could go wrong?

Well, in short, a lot:
  • AMMB had been growing very fast, but that was actually a red flag, in the Asian crisis fast growing banks would be hit hard; less aggressive banks (like Public Bank) did relatively better;
  • AMCorp's other businesses (if I remember correctly, a money-lending business) did very badly, and AMCorp apparently continued to support those.
Years later, AMCorp was privatised by its major shareholder in 2006 for RM 1.40, only a fraction of what it had been trading for a decade before. Soon afterwards AMCorp sold a large chunk of AMMB shares to ANZ (Australia and New Zealand Banking Group).

Friday, 18 April 2014

Maybulk: EGM on April 17, 2014 (2)

Yesterday the EGM of Maybulk was held to acquire even more shares in POSH with the purpose of holding a minimum equity of at least 20%. The resolution was carried by an overwhelming majority:

I hope the minority investors did have the opportunity to voice any concerns they might have had, I haven't read any newspaper articles describing the EGM as of now.

In the mean time, the details of the POSH IPO at the SGX are revealed:
  • Price per share S$ 1.15, near the bottom of the pricing range of S$ 1.13 to S$ 1.24;
  • Amount to be raised: S$ 383 Million;
  • Listing date: April 25, 2014.

To compare these prices with those paid by Maybulk, a few conversions have to be made:
  • Maybulk is a Malaysian company accounting in RM;
  • POSH is a Singaporean company accounting in S$, 1 S$ = RM 2.59;
  • The deal between Maybulk and POSH was done in USD, 1 USD = RM 3.24 or S$ 1.25;
  • Next to that, shares of POSH have just been split, 7.5 new shares for 1 old share.

In other words, for each share Maybulk bought in 2008 for USD 6.50, it will now own 7.5 shares bought at USD 0.87, or S$ 1.083. That means that the POSH shares that Maybulk bought in 2008 have appreciated by only 5.8% (one measly per cent per year), using the IPO price as benchmark.

However, things are worse when counted in RM: in 2008 1 USD was equal to RM 3.52, in other words the USD (and thus the investment in USD) is devalued by 8.0%. So actually Maybulk is sitting on a small loss for it shares it bought in 2008.

The shares it bought at the Rights Issue are faring better, they were bought at a price of USD 4.00. But that offer was open to all shareholders of POSH. The question is if that was indeed correct (from a legal point if view), given the irrevocable undertaking by PCL towards Maybulk. I think that offer could not have been made, and a legal expert (who I asked for advice in this matter) agreed with me. A rather strange affair.

Returning back to the issue of the EGM, the real issue at hand was if the Put Option (giving Maybulk a return of 25% on its investment of 2008) should have been exercised, that at least would have given some profit on its investment, even given the depreciation of the USD vs the RM.

That money could then have been used for a massive dividend to all of its shareholders, who could then decide what to do with the money. One option would be to buy POSH shares (either by subscribing to the IPO or by buying in the open market), not only at a lower price than was received  through the Put Option, but also with each shareholder directly in control (receiving dividends straight in their wallet, and the avoidance of the holding group discount, typically 30-40%).

But that Put Option was never decided on in the EGM, despite the huge size of it (close to RM 1 Billion) and it being a RPT. Another rather strange affair.

For the sake of the minority investors in Maybulk, I hope that in the long run the investment of POSH does work out, and that either there will be some profitable exit down the round, or that POSH does start paying substantial dividends to Maybulk (until now the amounts have been tiny).