Saturday, 23 July 2016

1MDB's strange reaction

Assume you are running a company.

Not some small SME, but a huge one, with tens of billions of Ringgit of assets (and unfortunately, also a huge amount of debt). The company is owned by the people of Malaysia, and you really want to perform to your best ability for them, you definitely don't want to let them down.

You are doing your best, but things have not been easy, it is tough to meet the debt obligations.

And then ..... out of nowhere, a party contacts you, to tell you that they will soon send billions of Ringgit to you.

And, to your big surprise, they do this all for free, to help the people of Malaysia.

Added to that, they will even do their best to get other parties involved to send even more money (and those parties are indeed cooperating, as we speak).

How would you react, sounds too good to be true?

Basically that is what happened this week to 1MDB, I guess Christmas came early for the company and its management team.

And what was their reaction to the announcements of the above events?


1MDB notes a press conference led by the US Attorney General today relating to a civil court action filed by the government of the United States of America.

1MDB highlights that it is not a party to the civil suit, does not have any assets in the United States of America, nor has it benefited from the various transactions described in the civil suit.

Furthermore, 1MDB has not been contacted by the US Department of Justice or any other foreign agency in relation to their investigations.

As previously stated, 1MDB will fully cooperate with any foreign lawful authority, subject to international protocols governing such matters and the advice of the relevant domestic lawful authorities.


What an incredible strange and terse reaction. Four sentences, that is it, have they even bothered to read the filing?

The document is of course only an executive summary, only 136 pages long, but even then, there is so much detail, is this the best 1MDB can offer?

And are they not happy receiving back their money, do they not want to know what has happened, do they not want to see some justice being done?


"[1MDB] .... does not have any assets in the United States of America".

No, the assets are from people who allegedly stole money from 1MDB, and bought assets in the US with the proceeds. The US wants to freeze these assets and give them back to the right full owner, 1MDB.


".... nor has it benefited from the various transactions described in the civil suit."

Nowhere it is claimed that 1MDB has benefited from the transactions, in the contrary, dozens of examples are given that 1MDB allegedly has been conned from its precious money, estimated to be about RM 12,000,000,000.00.


This blog is more about capital markets, not many listed companies are mentioned in this case, but bonds are, and unfortunately not in a very positive way.
















Malaysia has the ambition to become an important financial centre. The above cases (just a selection) seem to warrant scrutiny from the relevant authorities, why have they been so quiet regarding this case, surely this is not good for the Malaysian reputation?


The nice thing about these cases is that one can observe real conversations (either by phone or through email), like this one:



And to end this posting on a slightly more positive note, some Menglish is for ever added to the archives of the FBI):




Tuesday, 19 July 2016

Maxwells Mysterious Marketing (4)

I wrote before (here, here and here) about Maxwell's puzzling decision to spend a huge amount of money on billboards with zero impact, for instance:


The company increased its marketing spending by a factor 39 (!) compared to the preceding year, but revenue was down 38%, while gross margin went from 24% to a pathetic 6%.

It all doesn't make any sense whatsoever.


It would be good if the auditor would demand a list of the locations (GPS coordinates) of all 390 billboards and would check a few of them randomly if they exist and if they really feature Maxwell's advertisements.


It seems that the auditor has indeed tried to do that, Maxwell announced today:


.... that the Board has been presented with the Report dated 19 July 2016 by Ferrier Hodgson MH Sdn Bhd (“FHMH”).


Some snippets:


In view of the above, questions arise on the commercial and financial justification for incurring those advertisement costs of RM64.62 million (RMB92.40 million) when the MIHB Group was at the same time trying to down-size its involvement in the retailing business. (Section 4.3.2).

A search on the Six Advertising Contractors (similar to the companies searches made in the Companies Commission of Malaysia) was carried out and it was revealed that two (2) out of the Six Advertising Contractors were not in existence whilst one (1) had already ceased operations.

Numerous requests were made to the MIHB Group’s management for assistance to arrange for meetings with the said Six Advertising Contractors. MIHB Group’s management had represented to FHMH that since the last 10% of the contract sum has not been paid to the Six Advertising Contractors, the relationship between the Six Advertising Contractors and the MIHB Group has gone sour. It was unlikely that the Six Advertising Contractors would be agreeable to a meeting with FHMH.

According to the contracts with the Six Advertising Contractors, 390 billboards were to be erected in cities across the PRC for a one year period from 1 March 2015 to 29 February 2016.

2. Since FHMH's appointment on 21 December 2015, we have not been able to visit any of these 390 sites as the billboards have been dismantled in October 2015 for non-payment of the remaining 10% of the consideration.


The management’s reason for not paying the remaining 10% was that the advertising activities were not positively contributing to the sales of MXCL, notwithstanding the non-payment is a breach of MXCL's contractual obligations.


On 27 January 2016, TSS by way of emails forwarded 53 JPEG files which purportedly show images of billboards of the relevant products being advertised by city only. There is no reference to any streets or buildings numbers or exact locations of same.

5. We had further conducted examination on the JPEG files particularly with respect to the properties and details of each of the JPEG files which suggests that
the JPEG files have been created under Adobe Photoshop program.


What a mess!

For those who are counting on some form of justice to be done in China for the Malaysian shareholders of Maxwell: good luck with that.

The share price since it's IPO:




SGX hiving off regulatory arm

One of the grouses against privatizing stock exchanges (like Bursa, SGX and HKEX) is the conflict of interest between the commercial and regulatory divisions.

The SGX has taken action on this matter, according to this article in the Business Times (Singapore):

SGX to hive off regulatory functions

Some snippets:


In a move welcomed by market watchers as long overdue, the Singapore Exchange (SGX) said on Monday that it is hiving off its regulatory arm from its commercial activities. A new company temporarily dubbed RegCo will be set up as an SGX subsidiary by the second half of next year. It will house SGX's current regulatory team of around 100 people. RegCo will be run by current SGX chief regulatory officer Tan Boon Gin, who reports directly to a board separate from the exchange. Central bank and regulator Monetary Authority of Singapore (MAS) will ensure SGX gives RegCo adequate resources for its duties.

Market players hailed SGX's move as a crucial one to resolve the long-running perception that the exchange was conflicted in having to regulate its clients, which include China-related S-chips and penny stocks that had been the focus of extreme speculative activity.

While some might still gripe that the regulatory unit is not totally independent of the SGX, others countered that RegCo's board, at least, will be separate and the majority of its members independent of SGX.

In a statement on Monday, MAS said the independence of the subsidiary will be an important factor for its success. It requires the chairman of RegCo as well as a majority of its directors to be independent of SGX and its subsidiaries. All directors also have to be independent of SGX-listed companies.


Although the proof is in the pudding, this proposal sounds like a step in the right direction. Bursa Malaysia should consider to follow suit.

Sunday, 10 July 2016

High fees dampener for unit trust (3)

Just to show the effects of sales commission and management fees, I will use the following example:

  • The fund Amanah Saham Nasional 3 Imbang, managed by PNB, a slightly conservative fund, 2 out of 3 star rating, peer ranking 19/44, size about RM 1.2 Billion, all pretty decent
  • I assume 3 year holding period, starting 30 April 2013 until 30 April 2016, as shown in the fund overview
  • Sales charge 5%
  • Management fee 1.5% per year

Lets assume one invests RM 100 on April 30, 2013:

  • First RM 5.00 is used for sales charge
  • The remaining RM 95.00 grows over the three years by 9.11% to RM 103.65
  • During those three years the cumulative management fee is about RM 4.45

In other words, the total return on the RM 100 is RM 13.10, this amount is divided as follows:

  • RM 5.00 (38%) as sales charge
  • RM 4.45 (34%) as management fee
  • RM 3.65 (28%) as return for the investor

Is this a fair division, the investor getting only slightly more than one quarter of the total return in exchange for investing the money and running all the risk?

I claim it is not. A sales charge of 1-2% would be much more in line.

Let's assume 1.5% as the sales charge, the numbers would change slightly:

  • First RM 1.50 is used for sales charge
  • The remaining RM 98.50 grows over the three years by 9.11% to RM 107.47
  • During those three years the cumulative management fee is about RM 4.63

In other words, the total return on the RM 100 is RM 13.60, this amount is divided as follows:

  • RM 1.50 (11%) as sales charge
  • RM 4.63 (34%) as management fee
  • RM 7.47 (55%) as return for the investor

Much more fair already, and the return for the investor is more than twice the return with a 5% sales charge.

Needless to say, this is just an example, the preferred holding period is definitely longer than three years (but how many people do actually hold their investments longer than three years?). The fund is good, but a bit conservative. And there have been better periods of three years in the past (but also worse).

But still, the message is (I think) clear, high sales charges will eat too much in the returns of investors.

Hopefully one day this will change, and the maximum sales charge will be capped to a realistic number, say 2% for smaller amounts, 1% for larger amounts.