Tuesday, 11 July 2017

"Lotte's Chemical Reaction"

A rather negative story about Lotte Chemical Titan from Bloomberg.

Some snippets:

Lotte Group seemed to be getting back to business after a rough year of court battles, family feuds and strained relations with China. 

Not so fast.

Believers in South Korea's fifth-largest conglomerate were hoping for a much-needed win with Lotte Chemical Titan Holding Bhd., the petrochemical unit that began trading in Malaysia Tuesday. Revival of the long-delayed 3.77 billion ringgit ($877 million) initial public offering, Malaysia's biggest since 2012, caps a period that has seen the group also take steps to settle family disputes and boost corporate debt sales.

But in the opposite of a typical IPO bump, shares of Lotte Chemical Titan fell below the opening price pretty much immediately -- and that was after the company cut the bottom of its price range to 6.50 ringgit a share, from 7.60 ringgit. By midday in Kuala Lumpur, the shares were down 2 percent.

Investors are right to bet against the newly listed company. The reason the Malaysian chemical maker cut its IPO price and trimmed the number of institutional shares has little to do with macro issues like equity demand and more to do with how Lotte missed a fundamental shift in the petrochemicals market.

While Lotte was hell-bent on getting the flotation done after taking the company private more than six years ago, it miscalculated in betting that the market would be willing to overlook the business's problems just because of a dearth of IPOs for large investors.

Back when Lotte took the unit private, the global economic recovery was driving strong demand for the raw materials used to make plastic and synthetic fibers used in everything from appliances to automobiles.

But as the years went on, Lotte Chemical did almost nothing to expand capacity -- unlike its global competitors -- despite having ample cash,  according to Smartkarma analyst Toh Zhen Zhou.

In the absence of investment, revenue growth slowed. Lower prices for inputs such as oil have helped prop up profit but as the sales outlook for products like cars weakens, demand for Lotte's offerings has waned. Meanwhile, raw material prices have declined and overcapacity in China is further pressuring the industry.

Is this really the best Bursa can do, as alleged by Bloomberg, the largest IPO since 2012?

A foreign company, again going through the "listed-delisted-relisted scenario", and with the above history?

Where are the homegrown Malaysian companies with increasing (international) revenues, juicy margins, high ROE, making unique products protected by IP (intellectual Property)?

Monday, 3 July 2017

Seth Klarman: "Margin of Safety"

Seth Klarman is a well known hedgefund manager behind the Baupost Group.

He wrote a book "Margin of Safety" that is long time out of print, and has quite a following, second hand books are sold for a small fortune on Amazon.

A discussion about the book can be found here, at an otherwise good forum about value investing.

The book is a bit outdated here and there, and mostly focussed on the US market, but other than that highely readable, and many topics and principles are timeless.

A download (from MediaFire) of Margin of Safety can be found here, at the second last comment.

Monday, 26 June 2017

Wing Tai GO: Pangolin not happy (3)

The Independent Advice is out and, as expected, the verdict is: "not fair but reasonable, accept".

More regarding this matter can be found on the following websites:

One snippet from the last source:

 .... unfortunately there is a ridiculous clause in the Malaysian Stock Exchange’s rules that insists on a 25% free float. This can be used as a weapon by potential acquirers of companies against minorities, as it is being used in this case. Basically, what WTS is saying is that once they get to 75%, the company will be in breach of the listing rules, that they will do nothing to rectify this breach and that they do not intend to maintain the listed status.

In Singapore, the minimum free float is 10%, which makes sense as it is in line with the compulsory acquisition threshold. I first complained about this crazy Malaysian ruling back in 2003 when Bumi Armada was privatised. Similar wording was used then. In the past couple of weeks, I have twice emailed Malaysia’s stock exchange chairman on this matter. No reply.

In a country where the majority of businesses are family-controlled, minorities need all the protection they can get. The current listing requirements make it easy for controlling shareholders to buy up their companies on the cheap. The authorities are failing investors.

Free float requirement for listed companies

Malaysia 25%
Indonesia 7.5%
Singapore 10%
Thailand 15%

This is indeed odd, and works very much against minority investors. The threat of holding shares in a company that might be delisted is not attractive to many, and definetely not to fund managers. And even if one would hold on, there is the chance that the shares will be mandatory acquired.

Pangolin's article continues:

The independent directors have appointed little-known Mercury Securities to give us independent advice. Cynics would contend that no board has ever appointed an Independent Adviser who will give guidance they don’t want.

In my very first blog posting in 2011 I wrote:

Immediately abolish all “Independent” Reports, they are useless and are even hurting the rights if the Minority Investors.

In every General Offer (GO) where the controlling shareholders want the minority investors to accept the (low) offer the recommendation will be "not fair but reasonable, accept".

When a GO is made according to the rules where the controlling shareholders want to keep the company listed, the recommendation will be "not fair, not reasonable, don't accept".

Independent reports give an undeserved air of credibility to the whole process of delisting, but in reality it is a complete waste of time and money.

In all those years since my first recommendation, basically nothing has changed. The wording used in the independent advice is now the rather curious "not fair but reasonable, accept" instead of "fair and reasonable, accept", and the quality of the independent report is somewhat higher, but the outcome is exactly the same, and minority investors basically don't stand a chance. 

Authorities should look into this matter and take concrete steps to level the playing field for minority investors:
  • The free float requirement should be reduced in line with neighbouring countries
  • Independent advice in the current form is a complete waste and even hampers minority investors
  • Independent directors should be appointed by the non-controlling shareholders, not by the controlling shareholders
  • The authorities should check if the controlling shareholders own or control shares held by nominees (so far enforcement in this matter seems to be close to zero)
  • Funds (especially Government Linked Funds which have been notoriously passive) should be engaged in shareholder activism, especially in these kind of exercises
  • Companies that are delisted should not be allowed to relist again; this would take away one of the incentives for delisting, since delisting will happen at a cheap valuation and relisting at a high one

Sunday, 25 June 2017

China government auditor detects fraud

Shocking (although not unexpected) article in The Malay Mail by Reuters: "China auditor uncovers 200b yuan in fake revenue at state firms", some snippets:

China’s government auditor said in its 2016 report published today that 18 of 20 central state firms it audited had inflated revenue by 200 billion yuan (RM125.4 billion) and profits by 20.3 billion yuan in recent years.

The companies audited include China National Petroleum Corporation, China Huaneng Group and Sinochem Group.

The report from the National Audit Office also said that due to inadequate risk control measures, the 20 centrally-administered firms had put overseas investments worth 38.5 billion yuan at risk.

Implications for China listed companies in Malaysia are bad, I expect things to be worse from an accounting point of view. Several of those companies are finally showing their true colours.

Will there be even a sliver of justice by the authorities coming down on the real culprits, and will the Chinese authorities lend a helping hand? I strongly doubt it.

With hindsight we are all experts. But the sad part is that many warnings were out there, already a long time ago. One of my first blog postings from 2011 (!) can be found here: China companies listed on BM.

"Where is Ze Moola" had written a lot about the same issue long before that.

Malaysian investors who poured hundreds of millions of RM in the IPOs of these companies have been hugely disadvantaged. Was this really necessary, should the authorities have listened more to the critical voices?