Saturday, 30 November 2013

The Bitcoin Bubble

The Economist published today an article "The Bitcoin Bibble":

"Bitcoin is booming. Investors are piling into the digital currency, which is not issued by a central bank but is conjured into being by cryptographic software running on a network of volunteers’ computers. This week the price of a Bitcoin soared to above $1,000, from less than $15 in January.

Having long been favoured by libertarians, gold bugs and drug dealers, Bitcoin is attracting some surprising new fans. Germany has recognised it as a “unit of account”. Ben Bernanke, chairman of the Federal Reserve, told a Senate committee on virtual currencies that the idea “may hold long-term promise”. A small but growing band of shops and firms accept payments in Bitcoin. Some like the way it allows funds to be transferred directly between users, without middlemen. Others are attracted by the potential for anonymous transfers, or by the fact that the number of Bitcoins in circulation has a fixed upper limit—so there is no way a central bank can inflate their value away by issuing more.

But the recent price surge, driven by Chinese investors stashing money offshore, looks like a classic bubble. Hoarding means that Bitcoin is currently more of a speculative asset than a currency. And a crash is not the only risk Bitcoin users face. As the price rises, Bitcoin theft is increasing, both from individuals and from online exchanges that store the coins and convert them into other currencies. Around $1m in Bitcoins was recently stolen from BIPS, a European exchange. GBL, a Chinese Bitcoin exchange, abruptly vanished in October, taking $4.1m-worth of deposits with it."

The article ends with:

"... if you are lucky or clever enough to have owned an asset whose price has risen 60-fold in a year, it might be time to sell."

To be honest, I don't understand much of Bitcoins, to me it does resemble a classic pyramid scheme, including some rationale concepts (like the mining), which tries to give it some credibility (in itself very normal for these kind of schemes).

The price of Bitcoins fluctuates very much (sometimes 20% in a day), which makes it not very suitable being a currency.

Using Bitcoins for cross border payments would make live me easy, however, how can central banks check that the purpose of the payments was legal?

David Webb wrote an insightful article "The hole in Bitcoin", concluding:

" is the biggest flaw: the economics of it. For Bitcoin to succeed, it has to become a transaction currency, widely-accepted by the real world for goods and services. With a cap of 21 million Bitcoins, the accepted wisdom driving prices is that spreading the limited supply of Bitcoins over all these real-world transactions, even with fractional reserve banking, would necessitate a high valuation per Bitcoin.

Unfortunately, most of the people getting into Bitcoin, either with cash, goods and services or by buying and running mining rigs, are just hoarding the Bitcoins, either expecting the price to go up because they believe in this transactional utility, or expecting the price to go up because other people will - people like the  Winklevoss twins, who proposed setting up an ETF to hoard Bitcoins (SEC filing), rather like the SPDR Gold Trust.

The flaw then is that most Bitcoin owners are hoarding something which they expect to become a widely-used transaction currency, and if everyone holds on to their Bitcoins, then it won't become a transaction currency.


Even if we are wrong and Bitcoin becomes a widely-accepted transaction currency, the second flaw in Bitcoin is this: when the rate of coin production is reduced towards zero, the only economic incentive the nodes will have to convert electricity into blocks (and heat and noise) is the transaction fees. So far, these are very low, but if the people who control the Bitcoin specification don't increase the fees to a commercial level then the amount of machines running the algorithm will plunge for lack of reward, and it will become much less expensive to take control of the network by holding more than 50% of the hashing power. However, if fees become a significant part of transaction values, then a lot of users (not seeking illegal goods and services) will wonder why they don't just use traditional payment networks denominated in real currencies. So there's the conundrum: charge too little, and someone will put in enough capital to take over the network and turn it, in effect, into just another MasterCard, Paypal or Visa. Charge too much, and people will use other payment networks."

Marc Faber in an interview on CNBC:

a "massive speculative bubble" has encroached on everything from stocks and bonds to bitcoin and farmland. He attributed the vast bubble to "symptoms of excess liquidity."

Faber said the markets, which have reached record highs, could still rise before the bubble bursts, if stimulus programs such as the Federal Reserve's massive monthly bond purchases and super-low interest rates continue.

"Now can the market go up another 20 percent before it tumbles?" Faber said on"Squawk Box". "Yeah, it can go up even more, if you print money."

Warning investors that they could see disappointing long-term returns in equities, Faber said he thought a correction in equities was overdue when the S&P 500index crossed 1,600 points. The benchmark index surpassed 1,808 points this week.

Faber pointed to a high Shiller price-to-earnings ratio, a market indicator named after Yale University professor and Nobel Prize winner Robert Shiller, which relies on 10 years of adjusted inflation, as an indicator of the bubble. He said a high Shiller P/E ratio suggests low returns in the future.

Faber also referred to the rapid rise of bitcoin, the digital currency that crossed $1,200 early Friday, as an area affected by excess liquidity.

"Farmland is up 10 times over the last 10 years," Faber said. "And bitcoins are up now and who knows what next will go up."

Friday, 29 November 2013

It is raining court cases in Singapore penny stock saga (2)

Some more articles:

More stakeholders take court action

Lawsuits may provide answers on $8b meltdown  

Broker seeks to recover US$68m from 10 clients (the full  article of which I gave only 4 paragraphs yesterday)

"The Monetary Authority of Singapore and the SGX are "conducting an extensive review of the activities around these stocks".

Hopefully, they will be able to give the investing public some answers as to what exactly transpired in those frantic days.

      Thursday, 28 November 2013

      It is raining court cases in Singapore penny stock saga

      According to this article Interactive Brokers has joined in the ever growing list of court cases regarding the penny stock saga involving companies like Asiasons Capital, Blumont Group, LionGold Corp and Innopac Holdings, companies with Malaysian links:

      "Global broking giant Interactive Brokers has launched the largest legal action so far in the wake of October's penny stock collapse, taking aim at at least 10 clients as it seeks to recover about US$68 million of losses.

      BT understands that Interactive Brokers launched arbitration proceedings earlier this month against 10 individuals and entities through the American Arbitration Association.

      Pending the start of arbitration proceedings, the global broker has also obtained court orders in Singapore and Malaysia to freeze the assets of eight of those clients, including certain directors and shareholders of Asiasons Capital, Blumont Group, LionGold Corp and Innopac Holdings - four of the stocks at the centre of last month's selldowns.

      According to court documents inspected by The Business Times and confirmed by sources, Interactive Brokers on Nov 8 sought court orders to freeze the assets of Malaysian nationals Neo Kim Hock, Peter Chen Hing Woon, Tan Boon Kiat, Quah Su-Ling, Lee Chai Huat and Kuan Ah Ming; and two British Virgin Islands-registered companies, Sun Spirit Group Ltd and Neptune Capital Group Ltd."

      Earlier on it was announced that Goldman Sachs is being sued for its part in this drama, recent articles can be found here and here.

      I have blogged before about Goldman Sachs and its "ethics" (or rather lack of it), here is another (unrelated) case, as reported by The Independent:

      Adrian Bailey, chair of the Business Select Committee, which is due to question Mr Cable on Wednesday, said: “It’s totally unacceptable. I don’t see how you can act as adviser to the Government and then profit from the advice you have given them. It is a conflict of interest.”

      Tuesday, 26 November 2013

      7-Eleven IPO hits a snag? (2)

      The Star published an article "More explanation needed to justify high 7-Eleven valuations" on its website. Some snippets:

      "Disclosures surrounding the toppish valuation of Seven Convenience Bhd, the owner of 7-Eleven stores, is the reason why its planned flotation has hit a snag, banking sources said.

      According to the sources, Seven Convenience’s listing application did not sufficiently explain the justification behind the increased value of the 7-Eleven business, following its privatisation back in 2006.

      “In cases where companies have been privatised before and are then being brought back into the market (via an initial public offering or IPO), disclosure rules dictate that a very clear explanation needs to be given to justify the increased value of the asset,” said one banker, adding that a similar issue had arisen in last year’s listing of Astro Malaysia Holdings Bhd. The issuers had to provide additional disclosures to justify the much higher valuation they were looking to get from the second listing of Astro.

      Astro had been taken private in 2010, only to be re-listed, minus its overseas assets, in January 2012 at a price of RM3 per share for its retail portion, which was at a lofty price-to-earnings ratio of 24 times.

      It is understood that this disclosure was lacking in Seven Convenience’s IPO documents. Various reports on Monday stated that Tan Sri Vincent Tan’s US$700mil (RM2.17bil) IPO of Seven Convenience had either been rejected or deferred by the Securities Commission (SC).

      One source told StarBiz that the owners were looking to float the company at a massive price earnings multiple of more than 30 times historical earnings.

      However, sources added that this disclosure issue could be eventually resolved and predicted that Seven Convenience’s listing would be deferred to next March, possibly when it shows a new set of earnings that justifies its high valuation."

      As far as I know, the above is not confirmed by the Securities Commission, who normally doesn't comment on on-going cases. However, the above explanation does sound plausible.

      Regular readers of this blog might remember the IPO of Astro, especially this posting (pointing out that much relevant information was missing from the draft IPO prospectus, especially regarding the delisting exercise) and this posting (noticing a much improved IPO prospectus).

      Other (rather negative) articles about Astro can be found here. I am still bearish on Astro, I don't think TV has a bright future versus the combination of internet and mobile devices.

      Monday, 25 November 2013

      "all the IPOs this year were making money for investors", really?

      Article from the website of The Star: "At least 9 IPOs worth RM18.14bil for 2014".

      First of all a list of nine big IPO's in 2014. I have been sceptical about big IPO's, I think Bursa has been pushing this too much, it really should not be a target on itself. The target should be to bring good quality Malaysian companies to Bursa, at a reasonable price, leaving some money on the table for retail investors who might be willing to take the risk.

      On the list:
      • Two Iskandar developers, I am scared all the clever money has been made already, and the property market is way too hot and might already be cooling;
      • 1MDB (floating its energy assets), I am critical of 1MDB due to the lack of transparency;
      • Malakoff and IOI Properties, both playing the listing-delisting-relisting "game";
      • 7-Eleven, the listing possibly will not go through, according to an article in The Edge today.
      Further, the article mentions:

      "Besides these IPOs, there is likely to be another group of companies coming to the market under the guidelines for special purpose acquisition companies, or SPACs, and business trusts."

      I am highly sceptical of SPACs, and business trusts have performed badly (on average) in Singapore.

      In other words, I am not very positive about the announced plans for future IPO's in Malaysia.

      The article continues:

      "RHB Investment Bank Bhd director and regional head of equity capital markets Gan Kim Khoon recently said that investors should ride on the wave of Malaysia’s IPO market, but only after doing their homework on the new entrants.

      He noted that all the IPOs this year were making money for investors and said this trend was likely to continue next year, when speaking at a recent panel discussion on the prospects for next year’s equity market."

      All the IPO's this year making money for investors? Surely that can't be true:


      Further more statements like "investors should ride on the wave of Malaysia’s IPO market" and "this trend was likely to continue next year", I find those pretty dangerous statements given the high valuations and the bubble like conditions worldwide.

      I have never bought a share for long-term investment at IPO price, the risk is pretty high: [1] often there is a lot of hot air injected in the company and [2] the quality of the audits is not up to the standard compared to when the company is properly listed.

      I normally wait for at least two full years of audited results before I even consider investing in a listed company. Although I must have missed a few nice gains, I definitely also missed lots of misery.

      I do agree though with the following statement: "but only after doing their homework on the new entrants".

      7-Eleven IPO hits a snag?

      Article from the website of The Edge. We need to wait for confirmations:

      [1] if this rumour is indeed true
      [2] if so, what the reasoning is by the Securities Commission.

      I wrote before about this IPO.

      Sunday, 24 November 2013

      Finally Prince Frog responds (2)

      One person was so kind to send me the comments by CLSA (one of the brokers whose reports tend to have a rather high quality). I mostly agree with their opinion, some snippets (and comments by me in blue):

      Good news for Prince Frog today as the HKEx has given the company the green light to address investors and publish an important clarification document. While the company’s defence leaves open questions about its market share, we are encouraged that management of Prince Frog is taking the issue seriously.

      [of course they had to, if they had not addressed the issues, that would have been the largest red flag possible]

      We cut our target multiple to 9x 15CL PE, a 50% discount to peers given the overhang of the market share question. We cut our recommendation from BUY to O-PF and would be BUYers of the stock below HK$3.5.

      [my problem with valuing this kind of companies is that either some of the accusations of Glaucus are true (in which case any price might be too high), or all accusations are wrong (in which case the current price might be decent); the large drop in share price seems to indicate that some investors think there is at least a decent chance that (part of) the accusations of Glaucus are true]

      The lengthy clarification document provides a comprehensive defence of the company aimed primarily at discrediting the Glaucus short-seller report. While it lacks hard evidence (bank statements, sales receipts, etc.) [that was one of my problems with the report, it could have been much more concrete, another area is comparisons with other companies in the same industry] the simple fact that the exchange allowed the company to publish should be viewed as a positive. The continued implicit backing by the company’s auditor is also a key point which is inferred from the document.

      Prince Frog has provided a lengthy defence based mostly on the fact that their sales are in 3rd and 4th tier cities and it is unclear if Nielson’s data set covers the area where Prince Frog is making its sales. In specific Prince Frog notes: “the Company’s sales revenue derived from distributors located in the third and fourth-tier cities had consistently accounted for approximately 70% to 77% of the Group’s total sales in each financial year from 2008 to 2012.” The argument is that Neilson could not possibly cover these areas with a high percentage of accuracy hence the conclusion from the short seller report must be flawed.

      While we believe the logic makes sense, there are going to be continued questions and overhang on this point. There is nothing new in the clarification document that would give investors more confidence in the company’s sales figures.
      ["high percentage of accuracy", when differences between methods used are very large, then there is no need for a high percentage of accuracy, so this issue will indeed remain]

      The other major issue raised in the short-seller report is that the company’s taxes paid did not match with a list published by the local government. The company’s defence here is that there was an option to “opt in” to the government’s list of top paying enterprises. The company only opted in starting in 2012 which is why they were not on the list previously. A letter which confirms this was provided to the company and reviewed by the company’s law firm and stock exchange.

      [I agree, anyhow these tax issues in China seem to be rather murky]

      The report ends with:

      More information is always good and we hope the company will continue to disclose this information in the future.

      Saturday, 23 November 2013

      What the rich and famous do to avoid a MGO

      From David Webb's website comes the following announcement.

      "Ms Nina Kung" is no other than the colourful and controversial Nina Wang, who passed away in 2007.

      From the Wikipedia page:
      • Nicknamed "Little Sweetie" ("Siu Tim Tim" or "小甜甜" in Cantonese), she was noted for her two pigtails and her love of dressing in traditional Chinese dresses.
      • She was the richest woman in Asia and the world's 35th richest person, with a fortune of $4.2bn, according to Forbes magazine; a fortune which exceeded that of American talk show host Oprah Winfrey.
      • On 12 April 1983, the Wangs' Mercedes was hijacked. Teddy Wang was taken away and chained to a bed for eight days until Nina Wang paid a $33 million ransom. On 10 April 1990, Teddy Wang was kidnapped again. After his disappearance, Nina took the helm of Chinachem under the title of "Chairlady" and built it into a major property developer.
      • Two highly contested wills, both of her late husband and herself (lawyers having a field day in both cases), in both cases the issue of forgery emerged.
      Coming back to the SFC announcement:

      Why did the richest woman in Asia do this, why did she not simply announce the acquisition of the shares and make a General Offer? We will never know, since she past away, but I assume simply greed. It does show to what extend some of the rich and famous go to avoid making a MGO. Another reason for the authorities to be extra vigilant, and use all available systems.

      Thursday, 21 November 2013

      Finally Prince Frog responds

      Five weeks ago Glaucus Research launched its attack on Prince Frog. Trading in the shares of the latter company was halted and Prince Frog prepared an answer to the allegations. Only now the official reply was published. The time it took to respond is worrisome long, normal would be a reply within one week.

      The reaction of the market was not good:

      Although quite a bit of answers are given (in total 24 pages), doubts remain. I think Prince Frog could have been more specific in several cases.

      Some reactions:

      Wall Street Journal

      I expect Glaucus to respond soon.

      Tuesday, 19 November 2013

      MAS: disappointing again

      I have written several times about MAS, unfortunately not in a very positive way, and I am afraid this posting will not bring much change into that.

      A few days ago, the mood was positive:

      The Star: "MAS heading for profit, record passenger numbers"

      The Edge: "Hot Stock MAS rises 3% on possible 3Q profit"

      But it was not to be, the quarterly results were announced today:

      One small positive note, as reported:

      But that is rather ironic, if we put it into context:

      Any company that just received RM 3,074,800,000.00 in cash from its shareholders should show a decent cash position, or not?

      May be the only consolation for MAS' shareholders is that AirAsia X also lost money:

      Thursday, 14 November 2013

      Value fund managers go on strike

      Partly due to the QE (Quantitive Easing = money printing) programs of the FED (and other central banks) strange things are happening. Lots of rich valuations, for instance:

      "Can you put a price on friendship? You can if it’s in a painting by Francis Bacon, whose three-part portrait of fellow artist Lucien Freud has set a record for the most expensive artwork ever sold. "Three Studies of Lucien Freud,” a 1969 triptych by the Irish-born Bacon, sold for $142.4 million in a Christie’s auction Tuesday night in New York." according to this article.

      "A 59.60-carat pink diamond sold for $83 million, a record for any gemstone at auction. The oval-cut stone’s price exceeded the previous record by 82 percent at an auction last night in Geneva held by Sotheby’s, which called the gem one of the earth’s greatest natural treasures. Those prices include the buyer’s premium." according to this article.

      "Today the Wall Street Journal reported that Snapchat turned down a $3 billion or more all cash acquisition offer from Facebook. The news has taken many by surprise, as Snapchat has no revenue, and is an exceptionally young company." according to this article.

      Snapchat is a mobile apps where users can send photo's or pictures that disappear in a few seconds. Needless to say, the apps is quite popular with youngsters, but USD 3 Billion (please notice the "B") is also quite a bit of money, especially if the company has not yet shown any revenue nor profit (only losses).

      Property prices in Singapore, Hong Kong, Melbourne, Sidney, Beijing, Shanghai etc, are also sky-high, hardly affordable for young people with average incomes. Also in Malaysia, the property market is pretty hot.

      We notice the same in the share market, smallcaps are being played, warrants, all kind of speculative companies (especially in the mining and energy industry).

      Greenspan and Bernanke can be truly proud of their "experiment", bubbles start to form in many places.

      If there is one thing I learned from 20 years investing in the share market: if valuations are pricey, don't try to find the last value stock, better raise some cash.

      The following article is from Bloomberg, stressing this same point:

      Value Fund Managers Go on a Buyer's Strike

      Wally Weitz beat 90 percent of his rivals in the past five years by buying stocks he deemed cheap. Now he says bargains are so scarce that he’s letting his cash pile up. “It’s more fun to be finding great new ideas,” says Weitz, whose $1.1 billion Weitz Value Fund (WVALX) had 29 percent of its assets in cash and Treasury bills as of Sept. 30. “But we take what the market gives us, and right now it is not giving us anything.”

      Weitz, whose cash allocation is about the highest it’s been in his three-decade career, joins peers Donald Yacktman and Steven Romick in calling bargains elusive as stocks trade at record highs. The three are willing to sacrifice top performance for the safety of cash as stocks rally for the fourth year in the past five. The mutual fund managers’ comments echo those of private equity executives Leon Black and Wesley Edens, who say steep prices make this a seller’s market.

      As the Standard & Poor’s 500-stock index has risen 23 percent in 2013, the average amount of cash in funds that invest in U.S. stocks increased to 5 percent as of Aug. 31, from 3.7 percent the previous year, according to data from research firm Morningstar (MORN). Some fund investors frown upon equity managers who sit on large piles of cash, saying they prefer stockpickers to stay fully invested. “We hire them to run stocks, not time the market,” says Richard Charlton, chairman of Boston-based NEPC, which advises institutional investors.

      Value managers, who look for stocks that are cheap compared with a company’s earnings prospects, cash flow, or assets, have sat on their hands before, including during the runup in 2007 and 2008 to the financial crisis, says Russel Kinnel, director of mutual fund research at Morningstar. Most of the cash-heavy managers say their decisions are based on individual stock prices, not any attempt to call a market top. Holding cash during market rallies can depress returns. Yacktman trailed 60 percent of rivals this year through Nov. 1 and 82 percent in 2012 at his $11.4 billion Yacktman Focused Fund (YAFFX), according to data compiled by Bloomberg. The fund, whose cash level rose to 21 percent as of Sept. 30, from 1.4 percent at the end of 2008, bested 92 percent of rivals in the past five years. “We are having a more difficult time finding bargains,” Yacktman wrote in an e-mail.

      Romick, managing partner of First Pacific Advisors, took a similar stance in his second-quarter letter to shareholders of the $14.1 billion FPA Crescent Fund. “We find it difficult to invest in an environment that seems manipulated to engineer higher asset prices regardless of business fundamentals,” he wrote. His fund, which outperformed 68 percent of rivals over the past three years, had 40 percent of its assets in cash and short-term securities as of Sept. 30, according to FPA’s website. It beat 97 percent of its peers in the 2008 bear market. The fund had more than one-third of its assets in cash equivalents as of March 31 that year, filings show.

      In bear markets, value managers find it easy to put their money to work. Weitz’s Value Fund had 7.8 percent in cash at the end of 2008, regulatory filings show. “It was a wonderful time,” he says. “There was so much to buy.”

      Sunday, 10 November 2013

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

      An alarming credit boom in China could trigger a global financial crisis that would make the one in 2008 look mild by comparison, says old gloomy eyes, Marc Faber.

      “If I am telling you that we had a credit crisis in 2008 because we had too much credit in the economy, then there is that much more credit as a percentage of the economy now,” the author of The Gloom, Boom & Doom Report told CNBC late Thursday. “So we are in a worse position than we were back then.”

      China, in particular, has seen credit as a percentage of the economy jump 50% in the last four and a half years, said Faber, the “fastest credit growth you can image in the whole of Asia.”

      He’s not alone in this China worry, as lots of economists have been warning about rapid credit growth there, even as officials are trying to curb it.

      Meanwhile, Deutsche Bank strategist John-Paul Smith told clients on Wednesday that China’s growth model continues to be based on “ever-expanding debt, which leaves the country and financial markets very vulnerable to any potential loss of from investors and lenders.”

      That’s even though China may change forever this weekend, as the Communist Party holds its Third Plenum, widely expected to introduce lots of reforms.

      In his note, Smith says Deutsche Bank has had a pretty straightforward preference for developed over emerging markets the past three years. But that that now rests purely on its negative view of EM, rather than the “positive attractions of U.S. equities, which has become a consensus call”, he points out.

      “The U.S. market now appears somewhat overvalued, and vulnerable over the medium term to a shift away from capital to labor from a fundamental perspective, but could be headed for bubble territory if the situation with China and commodities plays out as we anticipate,” he said.

      Faber warns that China isn’t the only problem area. Other Asian countries are also seeing big jumps in household debt.

      “Government debt has not gone up that much, but household debt has,” said Faber. “In Thailand, where I spend a lot of time, we have had no recession, but we have had no growth either. It’s the same in Singapore and Hong Kong.”

      The above from an article at MarketWatch. Regarding the last comment, this might also be very true for Malaysia. That is, if inflation is correctly reported (not the simply incredible low numbers that have been officially reported), and thus the inflation-corrected GDP.

      The following article in The Economist "Household debt in Asia" seems to agree with Faber's last paragraph:

      "A new report from Standard & Poor’s, a credit-rating agency, worries about weakening credit quality at Asian banks, as loose lending practices lead to rapid loan growth, resulting in a sharp rise in household debt. A recent World Bank study identified Malaysia and Thailand as having the largest household debts, as a share of GDP, among eastern Asia’s developing economies. In Malaysia, where household debt now exceeds 80% of GDP, the government has been seeking to curb credit growth. Thailand’s government boosted access to credit following the country’s big floods in 2011. The recent slowing of growth in many Asian economies raises concerns about the sustainability of all this personal debt."

      Saturday, 9 November 2013

      Ranhill Energy: is the fine really adequate?

      The Securities Commission announced the following:

      "Securities Commission Malaysia (SC) has imposed a fine of RM200,000 on Ranhill Energy and Resources Berhad (Ranhill) and reprimanded and fined Tan Sri Hamdan Mohamad RM 300,000 for failure to disclose to SC material changes related to Ranhill’s listing.

      Both Ranhill and Tan Sri Hamdan, Executive Director/President and Chief Executive of Ranhill, were found to have breached section 215(3) read with section 354(1) of the Capital Markets and Services Act 2007, for failing to immediately inform the SC of the suspension of the licence issued by Petroliam Nasional Berhad to Perunding Ranhill Worley Sdn Bhd (PRW), a company controlled by Tan Sri Hamdan. The notice of suspension was received on 17 July 2013.

      Ranhill relies on PRW for contracts secured from PETRONAS. This contract represents a material contribution to Ranhill Group’s revenue. The suspension of the license is therefore deemed as a material change in circumstance as it poses potential adverse implications on Ranhill’s oil and gas business. Under the circumstances, Ranhill and Tan Sri Hamdan were required to immediately inform the SC of the material change in circumstance under section 215(3) of the CMSA as the earlier disclosures in the listing prospectus of Ranhill would no longer be considered accurate or reflective of prevailing circumstances, and possibly misleading.

      In the disclosure of such material development in this case, time is of essence, given that the retail and institutional offering by Ranhill had closed, the date for the allotment of shares to successful applicants was approaching, and investors needed to be given the opportunity and time to re-evaluate their investment decision.

      SC views timely and transparent disclosure of material information by companies and promoters seeking to raise funds via an IPO, as fundamental to ensuring trust and confidence in the capital market. Companies, promoters and advisers are reminded to exercise vigilance in this regard."

      The Star writes about the same issue, some snippets:

      A corporate lawyer explains: “It is not so much about the value of the contracts concerned. It is the fact that your licence was suspended or contract cancelled. That’s not necessarily the end of the world but it needs to be disclosed. Any reasonable investor would tell you that this is material information that impacts how he or she views and values the affected company. Non-disclosure therefore is more likely to assume that the offerors were looking to mislead investors.”

      "The withdrawal of the listing has also caused other problems. The IPO was meant to raise RM750mil, out of which, Cheval Infrastructure Fund was to receive RM77mil for the shares it was selling. Cheval is acting on behalf of private equity firm Tael Management Co (Caymans) Ltd.
      Ranhill Energy’s listing was supposed to be part of Cheval’s exit from the company. In 2011, Cheval together with Hamdan took Ranhill Bhd private at 90 sen per share. Cheval had wanted to pare down its stake in Ranhill Energy to 15.8% post-IPO, from 36.25% before the listing."

      Ranhill Energy is another of those listing-delisting-relisting plays that happen much too often at Bursa Malaysia. Bursa should discourage this by invoking a new rule that delisted companies are not allowed to relist in the next, say, ten years.

      Let's put things in context regarding the amounts involved:
      • IPO Amount to be raised: RM 750 Million
      • Total fine: RM 0.5 Million
      Punishment is supposed to act as a deterrent. The fine imposed in this case is 1/1500th of the amount of money raised. Although it is good that the SC has taken action, the fine itself hardly seems adequate.

      Friday, 8 November 2013

      London Biscuits: something seems wrong (2)

      It should be interesting to compare the numbers from London Biscuits with those from Apollo Food, a company in the same industry.



      These are some key numbers from 2013 of the two companies, all in millions of RM:

                             Apollo     London
      PPE                     115         517
      Revenue                 223         290
      Depreciation              9          16

      In other words:
      • Apollo has a Revenue/PPE ratio of 1.9, while London has a ratio 0.6
      • Apollo's depreciation (as percentage of PPE) is 7.8%, while London has 3.1%
      Huge differences, the numbers of London Biscuits are really very strange.

      If London Biscuits depreciation would be around 7.5% of its PPE (a percentage that sounds roughly right to me), then depreciation should have been RM 39 million, instead of RM 16 million. PBT would then have been a loss of RM 4 million, instead of a profit of RM 19 million. And that is just the adjustment for 2013.

      Apollo Food by the way has a rather pretty set of numbers:

      Thursday, 7 November 2013

      London Biscuits: something seems wrong

      KiniBiz raised the red flag over London Biscuits latest audited accounts:

      "Confectionary maker London Biscuits Bhd (LBB)’s latest annual audited accounts recorded yet another year of significant property, plant and equipment (PPE) acquisition cost, raising questions over its PPE expenditure which now averages RM63.64 million in the last five years.
       Additionally, the company has seen a net loss from PPE disposals for the past five years, recording a loss of RM1.76 million in 2013. Since it was listed in 2002, LBB has only seen a net gain from PPE disposals once in 2008, recording RM501,284."

      I think that indeed the amount in PPE is worrisome. I have made a simple comparison between 2003 and 2013, all amounts in millions RM:

                         2003        2013
      Revenue              53         290
      PAT                   9          15
      Depreciation          6          16
      Dividend              2           1

      PPE                  80         517
      Shareholders Funds   71         299
      Cash                 10          27
      Debt                 36         263

      Some observations:
      • Revenue is 5.5 times larger in 2013, but PAT has hardly grown
      • Dividend is even cut, to almost nothing
      • PPE has grown astonishing, 6.5 times larger
      • Shareholders Funds of RM 299 million looks impressive, but only RM 120 million is retained profit, money has been raised with the IPO, with Private Placements, Rights Issue, ESOS, etc.
      • The growth in debt minus cash is highly worrisome
      • Although the company claims to be profitable, cash flow seems to be consistently negative
      Two questions:
      • How is it possible that a company that claims to be profitable and hardly pays any dividend needs such a large debt?
      • How is it possible that the company needs RM 517 million PPE, to generate a revenue of only RM 290 million?
      My guess is that this could all be caused by systematically understating of the depreciation on the PPE. My reasons for this:
      • In 2003 depreciation was 7.5% of PPE, but in 2013 only 3.1%.
      • In 2003 revenue was 66% of PPE, in 2013 only 56% (I would have expected the reverse pattern due to economy of scale, more efficient machines, etc.)
      • Almost all PPE disposals are done at a loss.
      Too low depreciation would explain [1] overstated profits and [2] overstated value of the PPE

      Ze Moolah has paid attention to London Biscuits, here pointing at the ever growing debt and here pointing at the ever growing PPE.  He wrote the first warnings more than three years ago. Unfortunately (for investors in London Biscuits), it looks like he is right again.

      Please also check the following link, a interesting posting by "kcchongnz".

      Sunday, 3 November 2013

      PE, M&A, IB in Singapore

      "Banks with strong Balance Sheets tend to dominate deals – you see HSBC and DBS (a local bank) bidding on a lot of deals, as well as Standard Chartered, Citi, and so on.

      There are very, very few mega-deals here because most companies are not that big.

      If you do see a mega-deal, almost every single bank will be involved – on some larger M&A deals, you’ll see GS, CS, JPM, DB, Citi, DBS, and more, all listed as advisers.

      Most companies worth over $300 million USD here are family-owned or state-owned, and most families do not want to divest their companies – so M&A activity above that level is limited (and there are even fewer $1 billion+ USD deals in a given year).

      As a result, many bulge bracket banks aim for deals that are “below the bar” and you’ll see the likes of GS competing with HSBC for middle-market deals, which would be unheard of in the US.

      Most deals here involve natural resources or shipping, and different countries specialize in different products.

      Palm oil is huge in Malaysia, while Indonesia is more about coal. Other countries may specialize in rubber, sugar, and other commodities.

      Singapore is a hub for cross-border deals, partially because of the security and stability offered by the government, and partially because of its location.

      The most common deal types here are debt and equity issuances. Many bonds are issued here because we’re so “stable”; with ECM, you see a lot of secondary offerings and rights issues.

      If you work at a boutique firm here, as I did, there will be even less modeling than at a boutique in the US or UK.

      It’s a very sales-oriented job with a ton of pitch books, and boutiques are at a major disadvantage since the bulge brackets tend to be strongest in the debt and equity deals that are the most common here.

      Q: So is it safe to say that most companies do deals in Singapore because of the safety and stability over all else?

      A: Yes – the rest of Southeast Asia is perceived as “risky,” since you never know when the government will collapse, seize all property, or otherwise do something crazy, but Singapore is all about law and order.

      Companies that list here do so because they want stable stock prices; the main downside is that there’s far less liquidity than in Hong Kong, so some choose to list there instead.

      In line with this, there’s relatively little in the way of junk bonds, high-yield debt, and so on. That has been changing recently and some companies are now targeting Singapore for issuances that are too small for USD investors, but the volume is still low compared to other countries.

      Q: You mentioned before how there are lots of cross-border deals there – does that explain why you don’t see the same language requirements you do in Hong Kong?

      A: Sort of, but not really – it’s a little misleading to think that you will be working on tons of cross-border deals if you work here.

      Each country here speaks a different language (Indonesian Bahasa vs. Malaysian Bahasa vs. Thai vs. Vietnamese vs. Tagalog…) and most bankers will focus on 1-2 countries because no one can possibly use 5-10 different languages at a professional level.

      There isn’t a strict language requirement, but you still do gain a big advantage by knowing the local language – some companies’ filings and documents will be in the local language as well.

      Q: Thanks for explaining that. What about on the private equity / venture capital / hedge fund side?

      You mentioned that those industries are all relatively new in Singapore.

      A: Yeah, I doubt there are even 50 “real” buy-side firms here (NOTE: Our lists show around ~100 firms, but some of those may not be traditional PE funds / HFs).

      Various reasons explain this:

      For hedge funds, the market here is too “stable” and doesn’t offer the liquidity and volatility that many funds need to make money – so you’ll see more of them in Hong Kong.

      With that said, there are still some top-performing hedge funds here, including a well-known Singaporean quant fund… since you don’t have to trade the local market necessarily.

      Most of the companies here are too small for the mega-funds to be interested, though that’s starting to change.

      Some PE firms have focused on only a specific sector, so they wouldn’t necessarily want to bring in a team of generalists.

      On the other hand, Singapore is a great country in terms of light taxes and regulations, and tons of wealthy individuals are moving here – so I think you’ll see more fund activity in the future.

      Southeast Asia has a good growth story, but it’s not as good as the China or India growth story; there are also more cultural and language barriers since you’re dealing with multiple different high-growth countries instead of just one.

      Q: So do you think it’s easier for foreigners to find work in Singapore compared to other Asian countries?

      A: Well, it’s definitely easier to get a job here than in China – as your numerous interviewees in China have pointed out in the past.

      There isn’t a strict language requirement and it’s much more multicultural, so they’re not going to turn you away for “not being Chinese enough.”

      With that said, it’s still tough to come here and simply network your way into a job. You’d have a better chance by going through headhunters or transferring internally.

      Most firms here still prefer local candidates, especially those from the top 3 universities, but people who studied abroad at top schools and then come back here find work as well.

      Similar to the system in Mexico, many firms will put you through an extended “probation period” where they see how you perform as an intern for a long time before giving you a real full-time offer.

      So you have to be prepared for that if you’re coming here as a fresh graduate with no work experience."

      The above from an article in BusinessInsider, the full article can be found here.

      Saturday, 2 November 2013

      Short seller Muddy Waters targets NQ Mobile (3)

      Another interview with Carson Block of Muddy Waters regarding NQ Mobile, interesting are the following quotes:

      "... all of these China frauds that we have seen, the fraudsters don't get punished. The Chinese don't punish them ..."

      "... nobody in China gets in trouble for defrauding US investors ..."

      "... in some cases they get rewarded for defrauding US investors ...."

      If we replace "US" by "Malaysia" or "Singapore", will the above still hold true? I am afraid it will.

      But should Malaysia or Singapore then list companies of China on their share exchanges?

      Friday, 1 November 2013

      Bonia venturing into property: deja vu?

      I still remember one event in 1997 very well: property prices had risen, many players went fresh into the game, lots of hot money was poured into it, and then Bonia decided to also take a punt at it. Many commentators were amazed why a (reasonably successful) consumer brand like Bonia would want to venture into an unrelated industry.

      The rest is history, soon afterwards all came crashing down, the stock market, the currency, the bond market, the property market and the ego of certain people who thought they were on top of the world.

      It was with this in my mind when I received an email from a friend with the text:

      "Bubble peaking? Fashion and shoes maker buying into property ... totally unrelated business"

      pointing at this article on the website of The Edge:

      "Bonia adds prime KL property to its real estate investment arm".

      A clear "deja vu" moment for me.

      Another related article:

      "MOL’s Ganesh Kumar Bangah morphs into … property tycoon?"

      Ganesh has been a very successful internet founder (MOL, invested by Vincent Tan), what is he doing developing property?

      It is not 1997/98, after the crisis many steps have been taken to improve the strength of the banks, the corporate governance of companies, etc., that kind of crisis happens only once every 30-40 years or so. But Malaysia could be hit by a more moderate crisis, the one that hits countries on average every 7 years or so (both 30-40 years and 7 years are just indications). And the above two events (and many more, for instance the punting in penny stocks) do indeed point to a market top. But market tops are hard to predict, and bubbles can grow pretty large, so it does not mean that things will come down any time soon, it could easily happen in 2014 or even in 2015.

      Happy Deepavali to all Hindu readers.


      How to raise money

      Great article from Paul Graham about the whole process of young companies raising money, and the many pitfalls. Bit long read, but very rewarding for people who are looking for support in this field. It is also filled with good common sense tips.

      Readers should be aware of the following:
      • It is US centric (but most advice will also hold in Malaysia or Singapore)
      • It is mostly meant for tech centric, innovative companies, based in Silicon Valley, wanting to raise seed money or "Series A", say up to USD 3M (but again, lots of common sense that is also true in another environment)
      • It is also partly geared towards the Y Combinator program
      Y Combinator is a incubator in the US, it describes itself as:

      "In 2005, Y Combinator developed a new model of startup funding. Twice a year we invest a small amount of money ($14-20k + an $80k note) in a large number of startups (most recently 52). The startups move to Silicon Valley for 3 months, during which we work intensively with them to get the company into the best possible shape and refine their pitch to investors. Each cycle culminates in Demo Day, when the startups present to a large audience of investors. But YC doesn't end on Demo Day. We and the YC alumni network continue to help founders for the life of their company, and beyond.

      Since 2005 we've funded over 550 startups, including Reddit, Loopt, Clustrix, Wufoo, Scribd, Xobni, Omgpop, Weebly, Dropbox, Disqus, Songkick,  WePay,  Twitch, Heroku, A Thinking Ape, Machine Zone, Cloudant, Airbnb, Cloudkick, Stripe, Mixpanel, Listia,  Cardpool, Optimizely, AeroFS, Homejoy, E la Carte, PagerDuty, Hipmunk, Pebble, FiveStars, Parse, Meteor, Rap Genius, Codecademy, SocialCam, 42Floors, iCracked, Exec, Rescale, Thalmic, and Airware."

      Both in Malaysia and Singapore the governments are quite active in trying to support the eco-system for innovative start-up companies, through the use of grant schemes, tax rebates, infrastructure, etc. I don't think it is possible to get even close to the Silicon Valley success and mentality, but the efforts should have a positive effect. Some large, high-profile successes are needed, to lift the profile of Southeast Asia in this area.