Sunday, 31 May 2015

Issues regarding INEDs

From the last newsletter of MSWG:

... the Malaysian Code on Corporate Governance 2012 (the Code) recommends a 9-year term limit for INEDs (Independent Non-executive Directors) and the Listing Requirements makes reference to this recommendation where the companies must either comply or explain.

The Code provides under Recommendation 3.3 that there must be strong justifications for the board of a PLC to retain as an INED a person who has served in that capacity for more than 9 years. Also, the prior approval of shareholders is required to be sought.

Over the last 3 years, since the introduction of the Code in June 2012, we observed that the following have been practised:

  • INEDs tenure limit of 9 years have been exceeded sometimes as long as 20 or 30 years.
  • INEDs have been re-elected over the limit without strong justifications.
  • No resolutions were proposed for re-elections.
  • Multiple number of INEDs who have exceeded the limit were being put up for re-election simultaneously.

Focus Malaysia wrote an article (partially behind paywall) about the same matter: "Firms don’t fully comply with governance code".

My opinion, for what it is worth:

  • Asking Board of Directors to give a justification about the independence of a director whose tenure limit exceeds 9 years is akin to asking companies if their Corporate Governance is any good: both will result in useless, self serving statements.
  • With 55% of the listed companies on Bursa having INEDs with a tenure of more than 9 years, the obvious conclusion is that voluntary measures don't work. If the regulators want to be serious about this rule then they should simply enforce it. INEDs who are deemed to be useful to a listed company can still stay on, but as an non-independent director.

David Webb wrote "Principles of Responsible Regulation", one snippet:

As a result of the prevalence of controlling shareholders, investors large and small are usually minority shareholders, and if they are to have any real influence in the ordinary decision-making of companies, then they should have proper representation in the form of truly independent directors in the board room. But they don't.

Under HK listing rules, a so-called "Independent Non-Executive Director" is only as independent as the controlling shareholder wants him (or occasionally her) to be, because the controller gets to vote on the elections in general meetings. The result is often a sham system of illusory checks and balances where rubber stamps fill the required 3 seats on the board (or 1/3, whichever is greater) and form the committees that are supposed to monitor the executive management of the company.

And his recommendation:

"Independent directors should be elected by independent shareholders; any shareholder or the board can nominate candidates, but controlling shareholders must abstain from voting."

Webb's other recommendations also appear to be highly relevant in the Malaysian situation, with the exception of the second (Malaysia does have quarterly reporting).

On another matter, not only INEDs have an important role to perform versus minority shareholders, external auditors also.

Michael Dee wrote an open letter to the employees of Noble Group, his third recommendation being:

" ..... speaking of the now extinct Lehman Brothers, change your auditor, E&Y, who have been auditing Noble’s finances for 20 years now.

This is far, far too long. Auditors are guardians for investors and 20 years breeds too cozy a relationship. E&Y were Lehman’s auditor along with other infamous companies now defunct.

Noble says they rotate E&Y partners every five years but this is just substituting players on the same team. Your management have said E&Y doesn’t have to defend your financials, however they should defend their role in singing off on them.

Here it is instructive to review two aspects of E&Y which are relevant to establishing how much trust one should have in their work. First, as Lehman’s auditor they signed off on the earlier mentioned Repo 105.

Since then, it must be noted, E&Y has paid US$109 million in fines and penalties relating to their Lehman auditing work, including $10 million just recently paid to NY State over their role in the Lehman collapse.

“Auditors will be held accountable when they violate the law, just as they are supposed to hold the companies they audit accountable,” said New York Attorney General Eric Schneiderman.

The Public Companies Accounting Oversight Board (PCAOB), an accounting watchdog established by the US Congress has recently issued scathing comments about E&Y.

As reported by the WSJ in 2012 and 2013 the PCAOB found in their review of over 100 audits that they were deficient about 50 percent of the time.

In half of the audits reviewed, “E&Y hadn’t obtained enough evidence to support its audit opinions giving its clients a clean bill of health“ as reported in the WSJ last year.

But this isn’t a recent problem, the WSJ also reported in 2011 that in over half of the E&Y deficient audits it was because “E&Y was deficient in its testing of how clients applied fair value to their hard-to-value securities”.

This is directly relevant to Iceberg’s charges. Also directly relevant is that in 2012 it was reported E&Y had paid a record US$2 million fine with the PCAOB Chairman saying; “These audit partners and E&Y — the company’s outside auditor for more than 20 years — failed to fulfill their bedrock responsibility”. Not a ringing endorsement I would say."

I think it would be a good idea if listed companies are forced to change auditor every say ten years. It would increase the chance that possible irregularities would be noticed, especially in cases where auditors have become "too cozy" to the companies they are auditing, or when their fees for non-audit related services have become too high.

Friday, 29 May 2015

Hanergy: SFC is investigating

It seems that the SFC has started an investigation in the remarkable rise and fall of Hanergy, according to this article in The Financial Times. Some snippets:

Hong Kong’s securities watchdog has confirmed Hanergy is under investigation — hours after the troubled solar panel maker’s chairman dismissed any such probe as “purely rumour”.

In the interview with Xinhua, China’s official news agency, Mr Li lashed out at reports that followed the spectacular crash of its share price, which wiped nearly $19bn off Hanergy’s market capitalisation.

He said: “We can say that in Hanergy has never in its history been better than it is today, our business is prospering, and this is a great time for Hanergy.”

In his interview Mr Li said it was impossible for any investigation to be under way without his knowledge — a sentiment undermined by the SFC statement.

“This is purely rumour, there is no such possibility,” he said. “I would be the first to know if the authorities were really planning a probe. But I know nothing about such news.”

Mr Li, in the Xinhua interview, also appeared to address concerns that he had used shares of the company as collateral to secure loans, saying the company did not owe overdue bank loans or interest payments to any bank.

We never did before, we don’t now and I believe we won’t in the future,” he said.

If those statements are "entirely true", I have strong doubts about that, time will tell. The stock is still suspended.

In the mean time, at least one complaint has been filed in Hong Kong, by none other than David Webb.

Wednesday, 27 May 2015

AirAsia X: is the rights issue enough? (3)

I wrote before:

".... its 2014 loss is 1.3 times the amount the company wants to raise through its rights issue. The obvious question would be: how long will the rights issue last? The company still has not shown a single year of profit (corrected for one-off items and deferred tax)."

AirAsia X announced today another large quarterly loss, RM 126 Million this time.

The company will soon receive the much needed RM 391 Million cash from it's rights issue.

But how long will that last?

After taking out the deferred tax assets (which I think it never should have counted in the first place), the company lost RM 1.07 Billion over its life time.

And then, there are capital commitments running in the tens of Billions:

How is this going to end?

Icon Offshore: former CEO "to focus on personal matters"

The company announced today:

To put in "a bit more perspective" why the formed CEO might have opted not to be re-elected, please read:

"Icon Offshore: CEO and COO remanded".

Icon Offshore is listed less than one year ago, and now already the CEO is gone.

People who invested in the company when it was listed will be very disappointed.

The share is currently trading at RM 0.53, a far cry from its IPO price of RM 1.85.

Monday, 25 May 2015

The Forgotten Depression

Great presentation by James Grant, one of the good guys. I subscribed to his newsletter, but unfortunately had to discontinue it, since it was too US centric and the recommendations too often involved bonds (I always have been more of an equity guy).

If you've never heard of the Depression of 1921, it's because the federal government and the (then new) Federal Reserve did the opposite of what they did in 2008: federal spending was cut, the federal budget was balanced, and interest rates were allowed to rise. In other words, real austerity measures were implemented. The result? A short economic contraction that healed itself.

Also interesting is his remark about John James Cowperthwaite:

He was asked to find ways in which the government could boost post-war economic outlook but found the economy was recovering swiftly without any government intervention. He took the lesson to heart and positive non-interventionism became the focus of his economic policy as Financial Secretary. He refused to collect economic statistics to avoid officials meddling in the economy.

In line with this is Marc Faber's comment that close to 100% of the economic data is collected by institutions like the FED and national banks. These are institutions that are not exactly known to rock the boat, so we should have a healthy dose of scepticism regarding their numbers.

Sunday, 24 May 2015

Maybulk: large paperlosses on its investment in POSH (3)

Maybulk published its 2014 year report. Two excerpts, the first from the Chairman:

And from the CEO:

"Yielded satisfactory returns", "continues to contribute positively", that sounds all very good.

This is in rather stark contrast to what I wrote before (here and here) about the hundreds of millions of paper losses that Maybulk should book on its investments.

Was I wrong? Unfortunately, I was not.

"Hidden" deep in the report, somewhere in the notes on page 66 we find the following:

So Maybulk is indeed sitting on a huge paper loss of about RM 780 Million, according to market value!

However, while Buffett marks to market the Berkshire Hathaway accounts for 50 years, Maybulk decided not to write the investment down. Apparently they think they know things better than Buffett.

The reasoning can be found here:

Based on price-to-book ratio?

Firstly, they haven't bothered to substantiate the reasoning by numbers, what is the price-to-book, how are other companies in the same industry valued to their book value? Disappointing, since we are talking about a RM 780 Million difference, not exactly peanuts.

Secondly, POSH is indeed trading at a discount to it's book value, but only a discount of 30%. If we correct for that factor, then the valuation still doesn't even come close to the RM 1.3 Billion for which it is valued in the books.

Thirdly, POSH has USD 295 Million of intangibles on its balance sheet, due to take overs it made in the "goldilocks" period before the global financial crisis.

I think it is questionable that those intangibles should still remain on the books, branding wise (under the POSH name), asset wise (some ships have been sold, new ships have been bought) or employee wise (some will have moved on, new ones have been hired). I think the intangibles should have been written down to zero by now.

If POSH is indeed overstating its balance sheet (by not writing down its intangibles), then that will result in low ratio's of profitability (earnings compared to assets and equity), and that seems indeed to be the case:

Although 2014 was a difficult year for the industry, 2011 until 2013 were fine, and the ratio's should have been clearly higher. These are really low indicators, they might even be lower than the cost to borrow funds, which doesn't make sense. Why borrow money to buy assets that yield less than the interest rate to be paid?

In other words:

  • POSH should write down its intangibles, which will decrease its book value
  • Maybulk should impair it's investment in POSH, it should have marked to market it's investment.

Maybulk's year report is very disappointing in that is does not want to face reality, although it was expected:

"Will the 2014 year report give more information on this subject? I doubt it, but hope to stand corrected."

It is the first year report after the IPO of POSH, the first time an objective (market) value is available for it's huge investment.

Nowhere in the report is the decline in price of POSH quantified (for the benefit of the readers of this blog: it is 59% down compared to its IPO price). Nowhere in the management discussion it is mentioned that the market value of it's investment has occurred huge paper losses.

This is important, since the investment is for a large part held for 6.5 years, that is rather long.

But also, Maybulk could have sold the shares in POSH for a profit a bit more than one year ago, but it decided not to do that and even to add further to the position at the IPO price, which looks like a very expensive mistake.

What was started in 2008 through a RPT has led to a huge destruction of capital, at a moment when there was in fact a huge opportunity. Not many companies had the luxury to sit on top of RM 1 Billion cash in the middle of the global crisis. Now the company is sitting on a large paper loss while having a net debt position, and has cut it's dividend to a measly 1ct.

The AGM will be held on May 27, 2015.

Saturday, 23 May 2015

Chairman "had something to do", company down USD 19 Billion (2)

For those readers who might not yet fully realize what has happened with Hanergy and who might think there is still hope, Bronte Capital wrote an article with the rather clear title:

"Hanergy: let there be no doubt".

"There has been much press that compares Hanergy to other solar companies and suggests there may be disruptions in the market for panels. Garbage I say. The right comparison is Sino Forest or Longtop Financial Technology.

Hanergy barely existed."

With Sino Forest and Longtop being two of the largest scandals of China-listed companies.

Zerohedge wrote:

"How China's (Formerly) Richest Man Destroyed His Own Fortune When He Tried To Sell A Stock".

Friday, 22 May 2015

MSWG "puzzled" about Can One deal

From "The Observer" MSWG's newsletter dated May 22, 2015:

Can-One had on 13 June 2014 entered into a conditional share sale agreement with Teh Khoy Gen for the proposed acquisition by Can-One of 3,000,000 ordinary shares of RM1.00 each in F & B Nutrition Sdn Bhd (F&B) representing the remaining 20% of the issued and paid-up share capital of F&B not already owned by Can-One at a purchase consideration of RM112,900,000 to be satisfied entirely via the issuance of 39,753,000 new ordinary shares in Can-One (Can-One Share(s)) representing approximately 20.69% of the enlarged issued and paid-up share capital of Can-One at an issue price of RM2.84 per Can-One Share which represents a premium of approximately 10% over the 5-day volume weighted average market price of can-one share up to and including 12 June 2014 (Proposed Acquisition)

The Board of Can-One further announced that Bursa Malaysia had vide its letter dated 20 April 2015 (which was received on 21 April 2015) approved the listing and quotation of 39,753,000 new Can-One Shares to be issued at an issue price of RM2.84 per Can-One Share as the purchase consideration pursuant to the Proposed Acquisition.

[Source: Can-One’s announcements on Bursa Malaysia’s website on 14 June 2014, 21 April 2015 and 8 May 2015]

MSWG was puzzled at this deal as Can-One is acquiring from Mr. Teh Khoy Gen, the remaining 20% equity stake in a subsidiary (F&B), which it already owns 80% stake while the remaining 20% is owned by Mr. Teh and how this could result in Mr. Teh emerging as a new shareholder in Can-One with a 20.69% equity stake (from a 20% equity stake in the subsidiary of Can-One).

Thus we need further clarification as it does not appear to add up. This is on account of the following:
(ii)        This subsidiary, F&B, makes up only about 56% of Can-One Group’s EBITDA.
(iii)       There are other subsidiaries and associates such as Kian Joo which contributed the remaining 44% of Can-One Group’s EBITDA.
(iii)       Can-One is valuing its shares at a 17% discount to its net assets, whereby F&B is valuing it at 4.86 times its book value.
(iv)       Can-One’s issue price for its shares only represents 6.21 times of price-to-earnings ratio (PER), whereas the PER of F&B is 15 times. F&B is an unlisted entity and yet it is accorded a PER which is much higher.

Based on the above, we, thus, require further explanations at the coming EGM.

I agree, and I like to add the following illustration from page 28 of the circular:

Can One will acquire 20% of F&B, so the PAT of Can One will increase (the blue box), that is good.

However, existing shareholders of Can One will get diluted (the red box), that is bad.

Unfortunately, the dilution is much larger than the added earnings, and thus existing shareholders will receive 12% less profit than before the deal.

The deal thus looks clearly bad for existing shareholders, and it is indeed puzzling why the board of directors of Can One supports the current deal.

Three reasons are given:
  • the increased earnings, but on a per share basis that doesn't work, as explained above; also the PE of (unlisted) F&B is compared to the PE of listed company, which is really not fair, unlisted companies trade at much lower valuations than listed companies
  • about the outlook for F&B (but Can One owns already 80%)
  • lastly a rather curious statement:

First of all, that is three times the word "may", so rather speculative.

Secondly, assuming that there is a genuine buyer, in most contracts (or according to the articles of association) the seller has to offer the shares first to the current shareholders (Can One) under the "Right of First Refusal" rule, so Can One can still decide to buy the shares when that moment arrives.

Thirdly, assuming indeed an outside party buys the 20%, requests and gets a board seat and starts to expose the "secrets". Well, that is plainly against the rules, a director has to act in the best interest of the company, so time to call in the cops.

In other words, all arguments given are rather weak.

Thursday, 21 May 2015

Synergy between car parts and mining? (2)

Bursa queried China Automotive Parts (CAP) about Siburan acquiring a stake in CAP, the company answered here and corrected one answer here.

The company had to admit that CAP had actually nothing to do with the deal and that thus no synergies should be expected:

Good from Bursa to get some clarity in this matter. It might have poured some (much needed) cold water on the share price of CAP which was 10% down today.

The results of Siburan were also mentioned, not impressive to say the least, but quite normal for those junior Australian mining companies. They are definitely not intended for orphans or widows.

CAP also announced its quarterly result, profit was down 44% on 37% lower revenue.

Bank Negara makes it difficult for 1MDB? (2)

I wrote before about this rather puzzling statement:

“The remaining US$1.103bil in 1MDB’s investment funds managed by Cayman (Islands) Monetary Authority has been redeemed and is kept in US currency at BSI Bank Ltd Singapore (BSI Singapore),” he said in a written reply to the Dewan Rakyat in response to a question raised by Petaling Jaya North MP Tony Pua.

“The decision to use a bank in Singapore is to facilitate transactions as Bank Negara Malaysia (BNM) regulations require approval by the bank for each transaction exceeding RM50mil,” wrote Najib, who is also the Prime Minister.

It didn't seem to make any sense at all. And when that is the case, often something else is going on.

This article in The Edge "1MDB has no cash after all" dropped a bombshell on the whole affair:

There is no cash after all in 1Malaysia Development Bhd’s (1MDB) Singapore bank account.

That was the shocking revelation by Prime Minister Datuk Seri Najib Razak (pic) yesterday in response to a parliamentary question asked by DAP lawmaker Tony Pua.

Pua asked whether Bank Negara Malaysia (BNM) had been informed by the authorities in Singapore that the bank statements of 1MDB and its subsidiary (Brazen Sky Ltd) at the Singapore account of Swiss bank BSI had been falsified and whether there was US$1.103 billion (RM3.99 billion) in cash in the account as previously stated.

“1MDB has explained that the redeemed investments of 1MDB [from the Cayman Islands] are in the form of assets in US dollars in a bank in Singapore for the purpose of balancing the liability of the company’s US dollar,” said Najib in his written reply to Pua.

Najib, who is also the finance minister, told Parliament in March that the cash redeemed from the funds that were kept in the Cayman Islands is now with BSI Singapore. In his written reply yesterday, he said the answer he gave in March is now “amended”.

Transparency of 1MDB has been simply horrific, any small listed company on Bursa would put 1MDB to shame. Even the tiniest of ACE-listed companies with assets that are less than 1/10,000th of the size of 1MDB needs to issue:

  • quarterly statements (although unaudited)
  • audited yearly statements, including the notes and lists of assets
  • year reports, including statements by the Board of Directors
  • announcements regarding any major issue
  • a reply to queries of Bursa within one working day

And all has to be done in a correct and timely fashion.

1MDB's website contains none of the above, except for some photo's of smiling children and a highly biased selection of news articles (conveniently leaving out any critical article).

1MDB urgently needs to increase it's transparency in a big way, the more so since it manages OPM (Other People's Money).

MACC detains ex-director Tanjung Offshore

Tanjung Offshore continues to be in the news for the wrong reasons. According to The Star:

The Malaysian Anti-Corruption Commission (MACC) is investigating an ex-director of oil and gas (O&G) company Tanjung Offshore Bhd to assist into allegations of bribery in relation to a project.

According to a Bernama report, the investigations are believed to be linked to the purchase of Gas Generators (Malaysia) Sdn Bhd.

Sources said the individual, who is in his late 50s, had turned up at the MACC headquarters in Putrajaya yesterday afternoon and was detained for further questioning.
MACC would obtain a remand order today.

Tanjung will soon release it's 2014 year report, which includes a statement about Corporate Governance.

I predict the Board of Directors will write that CG in the company is in excellent state, and that the company adheres to the highest possible standards.

I leave it to the imagination of the reader if this statement will indeed be correct.

Asking companies about their Corporate Governance is much more useless than asking your hairdresser if you need a haircut. Bursa should do away with the requirement for this kind of statements, which simply begs for a boilerplate answer. Even the companies with the worst possible CG standards will still claim to have the best possible CG.

Wednesday, 20 May 2015

Chairman "had something to do", company down USD 19 Billion

Losing a few Billion, it can happen to the best, but losing USD 19 Billion in 24 Minutes, that is pretty tough, even if it is just paper value.

The company in question is Hanergy Thin Film Solar Group Ltd., listed in Hong Kong.

FT reported:

“Chairman Li [chairman and majority shareholder] did not attend the AGM,” said T.L. Chow, an external spokesman for Hanergy. “He had something to do.”

FT has written several times about this company, for instance about its suspicious group structure and the frequent trading between holding company and subsidiary:

FT also reported about the remarkable rise of the share price in the last ten minutes of each trading day (which used to be for years a familiar pattern in the Malaysian context):

David Webb also warned about bubbles and suspicious accounting practices:

Hanergy accounts for revenue and profits on a "percentage of completion basis", which is earlier than actual invoicing. At 30-Jun-2014, Hanergy had net tangible assets of HK$8,023m, of which $4157m was gross amounts due from contracts with Hanergy Affiliates (revenue which had not been billed) and $1914m was receivables from Hanergy Affiliates. It had also made prepayments to Hanergy Affiliates of $1540m for photovoltaic modules for solar power plants (Hanergy is going downstream), most of which had not been delivered. Add that all up and you see that $7611m, or 95% of the net tangible assets, are accounts with Hanergy's parent group. So not only is Hanergy in a bubble at 15 times its NTAV, but most of the NTAV depends on its parent group not defaulting. The listed company pays its parent in advance, but gets paid in arrears, heavily supporting its parent.

Bloomberg reported that shorting of speculative shares can horribly backfire:

Short sellers bowed out on Hanergy Thin Film Power Group Ltd. at just the wrong time.
Wagers against the Chinese solar-panel maker fell to 3.1 percent of its outstanding shares on Monday, the lowest level since December 2013, just before the stock slumped 47 percent in 24 minutes on Wednesday in Hong Kong to erase about $19 billion of value. Short interest dropped from 2014’s high of 5.1 percent, data compiled by Markit Group Ltd. show, as bears capitulated amid a 162 percent gain in the stock this year.

“Those who shorted Hanergy in the past got squeezed because it kept going up,” Andrew Sullivan, head of sales trading at Haitong International Securities Group, said in Hong Kong. “While there was a wall of money supporting the stock, it was very difficult to short.”

AirAsia: perfect PR

"AirAsia looks to sell stake in loyalty programme"

"AirAsia denies sale of stake in loyalty programme"

Two announcements in the span of two days, twice in the news, for free.

And at the same time letting the world know about its loyalty program BIG, and how valuable that might be. If BIG is really that big as reported is of course not sure since no part is actually being sold to an independent outside investor (which would have given some base line valuation).

It can't get much better than that, AirAsia's PR engine again running full steam ahead.

The "timing" is also "convenient", with negative sentiment towards AirAsia X, which is trading "ex rights issue" at a price of only RM 0.28, a far cry from its IPO price.

The loyalty program and its recently established leasing company Asia Aviation Capital are two new members of the highly complicated Tune Air group.

This group has different shareholdings in a large group of subsidiary companies (some of them listed, others not), which depends one a huge volume of Related Party Transactions on a daily basis.

From a corporate governance point of view this is undesirable. I wrote about this before. Independent directors have to ensure that all transactions are done on a arms length basis. I have doubt this can be done, especially in the Malaysian context.

The solution, list the holding company and keep all subsidiaries 100% owned, is simple and from a CG point of view highly desirable.

But of course, this would be less "sexy", and one could only list the holding company once.

Tuesday, 19 May 2015

Scan files legal action against Bursa Malaysia (2)

As more or less could be expected, Scan lost its case again Bursa Malaysia, according to this announcement.

I hope they won't appeal and just mend their business, which is in a bad shape, the company lost RM 7.1M in 2014 and 2.6M in 2013, with revenue in 2014 less than half of that in 2013.

According to this announcement:

"..... in the exercise of the powers under Rule 1.03 of the ACE LR, SCN is hereby classified as a GN3 Company pursuant to GN3 of the ACE LR with effect from 18 May 2015 and the Company is required to ensure strict adherence with its obligations under GN3 of the ACE LR."

Monday, 18 May 2015

Synergy between car parts and mining?

China Automobile Parts made an announcement:

The Company wishes to announce that it has been informed by its major shareholder, namely Guotai International Holdings Limited (“Guotai”) (“Vendor”), via its letter dated today that it had entered into a conditional binding heads of agreement (“HOA”) with Siburan Resources Limited (“SBU”) (“Purchaser”), an Australian public-listed company which is a West-Australian based exploration company with tungsten and gold projects in Australia, New Zealand and Papua New Guinea.
The HOA entails the acquisition by SBU of 100,000,000 existing ordinary shares of USD0.10 each (“Sale Shares”) representing 16.67% of the issued capital of CAP from Guotai International Holding Limited, for a total purchase consideration of RM60,000,000 representing a purchase price of RM0.60 per CAP share.
To satisfy the purchase consideration of RM60,000,000, SBU shall issue to Guotai and/or its nominees 417,360,000 fully paid ordinary shares in the capital of SBU or equivalent to 62.5% stake in SBU (after the acquisition) at an issue price of $0.05 per share, which is equal to the Australian dollar equivalent of RM60,000,000.

Siburan is one of those typical Australian listed mining company, tiny and loss making, often based in Perth. Someone "in the know" told me there are hundreds of those.

A few things are rather odd about this proposed deal.

First of all CAP's shares are priced at a huge premium (RM 0.60), while Siburan's shares are priced at market value (AUD 0.05), why?

Secondly, what is the synergy between a Chinese car parts maker and an Australian listed mining company? I don't quite get it.

Thirdly, Siburan has a marketcap of only AUD 14.6M or RM 42M. To buy over shares worth RM 60M, it has to issue an enormous amount of shares, 417M to be exact, while currently there are only 239M issued.

Fourthly, Siburan (while not even holding enough shares to equity account CAP's earnings, for that it needs to own at least 20% of CAP's shares), will be some sort of holding company for these shares.

In other words, there will be a large group of investors (mostly Australians), who own shares in Australia listed company Siburan, which act as a holding company for 16.7% of the shares of Bursa Malaysia listed CAP, which owns a Bermuda listed company, with all of its operations based in China. By the way, the 16.7% might get diluted in a later stage due to a massive 300M warrants that are outstanding for CAP.

Fifthly, shares of CAP went up, from about RM 0.34 to RM 0.42, interesting because for CAP hardly anything will change, except that one major shareholder will sell some of his shares to a new large shareholder, who will appoint one director of CAP.

To me, it all doesn't make any sense at all. But then again, getting Chinese companies listed on Bursa never made any sense to me, so that should not come as a surprise to the readers.

1MDB accounts "are audited by an international firm" (2)

In the previous blog post on this subject I wrote about the pretty bad state of audits, even if performed by the "Big Four" companies.

But how would the situation be if an audit company is warned in detail about possible fraud or other financial irregularities, surely auditors will step up their game, zoom in on the situation at hand and give a proper report?

According to short seller Carson Block the answer is an astonishing "no".

In "Beware the false reassurance of corporate probes" (free registration might be required) published by the Financial Times he writes (some snippets):

When it comes to defending themselves against accusations of wrongdoing, management teams and their complacent boards follow a well-worn routine. Their immediate reaction is to issue a blanket denial and announce that an independent committee of directors will investigate the accusations. The committee duly appoints an independent law firm to oversee the investigation, and the consulting arm of a Big Four accountancy to pore over the books.

Too often, such investigations are worthless endeavours that lead to more pain for investors. Frequently, companies are exonerated by their boards but subsequently tumble into bankruptcy or announce earnings restatements or evidence of other serious problems.

Directors are not inclined to embarrass themselves by exposing serious problems that had long been under their noses. That would invite shareholder lawsuits, regulatory scrutiny and professional embarrassment.

Nor are they likely to relish the prospect of clashing with management when the chief executive is often the one who put them on the board in the first place. Board members may even be conspirators in the fraud. If they are based in China and have little connection to the US, they are unlikely to face prosecution.

Time and again, investigators report that they have found no evidence to support claims of wrongdoing. The question that investors need to ask themselves is: how hard did these investigators look for clues that might have revealed something was amiss?

The firms hired to support the probe are often given a deliberately narrow brief. For example, there might be tight restrictions on the investigators’ ability to investigate the sources of the company’s cash balances.

Fraudsters have repeatedly duped independent committees and their advisers by showing that they control large cash balances. Often, they do this by borrowing the funds. If directors make it impossible to detect such ruses by limiting investigators’ access to evidence, nobody knows; the entire process is shrouded by the cloak of attorney-client privilege.

Accounting firms are also rife with conflicts of interest. Their main line of work is auditing public companies. This makes them unwilling to heap embarrassment on management teams and boards. To do so would be bad for business.

That doesn't sound that promising. Block gives a concrete example:

In 2011, Sino-Forest Corporation, a China-based company listed on the Toronto Stock Exchange that Muddy Waters had accused of falsifying its revenue, spent approximately $50m on such an investigation, hiring PwC as a consultant. The result was a clean bill of health. In a press release announcing the completion of the investigation, the independent committee said the company was unequivocally “not the ‘near total fraud’ and ‘Ponzi scheme’ as alleged by Muddy Waters . . . Sino-Forest is a real company.”

Unfortunately, investors who bought Sino-Forest bonds following the committee report saw their prospects for recovery plunge when the company declared bankruptcy four months later.

The problem is not confined to emerging markets. In the US, numerous independent board investigations have issued clean bills of health, only to be proved wrong later on.

A report into wrongdoing at Enron, carried out by a law firm hired by the company, was later described as “a whitewash” by an Arthur Andersen investigator. When Global Crossing ordered an investigation into allegations levelled by a former employee, the report came back clean. Yet the company fell into bankruptcy and settled with the SEC over an accounting scandal.

The solution according to Block:

Boards that truly want transparency should stop hiring law firms to conduct these investigations in private and under legal privilege, and open their work to genuine scrutiny.

Hopefully 1MDB will follow this advice for increased transparency, it is long overdue.

Saturday, 16 May 2015

Goh Ban Huat: connecting the dots

Excellent detective work by Errol Oh in The Star: "From Casio King to King of Coincidences".

This in regard to the acquisition by Goh Ban Huat of 20% in Time Galerie (M) Sdn Bhd for RM 14 Million, as announced here and here.

The detailed work showing possible relationships is much too cumbersome for ordinary retail investors.

Unfortunately, because there are systems out there that would make things much more easy, for instance "Handshakes" and "Webb-site". Pity that Bursa is not making similar systems for retail investors.

Related Party Transactions (RPTs) have a horrific reputation in Malaysia, as detailed in many cases in this blog (and much more cases in "Where is Ze Moola") where minority investors often received the short end of the stick.

But there is one category even worse, RPTs that are dressed up as non-RPTs. With many big players registering their holdings under nominee accounts, in a country where conflict of interest is normal, surely this is happening many times per year.

Unfortunately, enforcement on this aspect is really weak, we hardly hear about relevant cases against major shareholders who do business deals with related parties and fail to report this.

This is very relevant, since RPTs have to follow much more stringent rules and guidelines than non-RPTs. Larger RPTs even require an independent adviser and have to be approved in EGMs where the related parties have to abstain.

That all doesn't mean that Goh Ban Huat's acquisition is a RPT. But it does mean that the regulators actively should look into this deal (and in many similar deals).

It also doesn't mean that it is bad for its shareholders, Time Galerie looks like a very decent, profitable company.

There is one part in the reply to Bursa's query though that I don't like, the comparison to similar transactions. It shows that the PE of Time Galerie (11.8) compares reasonable with five other deals done with listed companies.

However, unlisted companies are sold for much lower PE's, a PE of 5 is often considered reasonable, and a PE of 2 is not unheard of. Shares in unlisted companies are very illiquid, and the standard of the audits is much lower than those of listed companies, hence those companies are trading at a large discount to their listed rivals.

In an unrelated matter, an interesting story about how Robert Tan gained control over Goh Ban Huat can be found here, paragraph 4.3. And for readers who like to know more about Syed Mokhtar (about whom I have written many times in this blog), paragraph 4.2 seems to be interesting.

Friday, 15 May 2015

1MDB accounts "are audited by an international firm"

Article from The Malaysian Insider:

Debt-laden 1Malaysia Development Berhad (1MDB) insisted today its accounts are audited by an international firm, saying it reserves the right to sue those making malicious and slanderous statements against the government-owned strategic investor.

The company broke its silence after senior banker Datuk Seri Nazir Razak yesterday told its board to appoint independent auditors or resign over a RM42 billion debt. "

The Board would like to stress that 1MDB accounts are audited by an international audit firm, Deloitte, " it said in a statement issued in capital Kuala Lumpur tonight.

It said that Deloitte signed off 1MDB’s 2013 and 2014 accounts without qualification and similarly KPMG signed off the 2010, 2011 and 2012 accounts with no qualification.

Accounts audited by international audit firms, members of the "Big Four".

What possibly could go wrong?

Well, let's start with "The dozy watchdogs" written by The Economist, some snippets:

PwC’s failure to detect the problem is hardly an isolated case. If accounting scandals no longer dominate headlines as they did when Enron and WorldCom imploded in 2001-02, that is not because they have vanished but because they have become routine. On December 4th a Spanish court reported that Bankia had misstated its finances when it went public in 2011, ten months before it was nationalised. In 2012 Hewlett-Packard wrote off 80% of its $10.3 billion purchase of Autonomy, a software company, after accusing the firm of counting forecast subscriptions as current sales (Autonomy pleads innocence). The previous year Olympus, a Japanese optical-device maker, revealed it had hidden billions of dollars in losses. In each case, Big Four auditors had given their blessing.

And although accountants have largely avoided blame for the financial crisis of 2008, at the very least they failed to raise the alarm. America’s Federal Deposit Insurance Corporation is suing PwC for $1 billion for not detecting fraud at Colonial Bank, which failed in 2009. (PwC denies wrongdoing and says the bank deceived the firm.) This June two KPMG auditors received suspensions for failing to scrutinise loan-loss reserves at TierOne, another failed bank. Just eight months before Lehman Brothers’ demise, EY’s audit kept mum about the repurchase transactions that disguised the bank’s leverage.

The situation is graver still in emerging markets. In 2009 Satyam, an Indian technology company, admitted it had faked over $1 billion of cash on its books. North American exchanges have de-listed more than 100 Chinese firms in recent years because of accounting problems. In 2010 Jon Carnes, a short seller, sent a cameraman to a biodiesel factory that China Integrated Energy (a KPMG client) said was producing at full blast, and found it had been dormant for months. The next year Muddy Waters, a research firm, discovered that much of the timber Sino-Forest (audited by EY) claimed to own did not exist. Both companies lost over 95% of their value.

Of course, no police force can hope to prevent every crime. But such frequent scandals call into question whether this is the best the Big Four can do—and if so, whether their efforts are worth the $50 billion a year they collect in audit fees. In popular imagination, auditors are there to sniff out fraud. But because the profession was historically allowed to self-regulate despite enjoying a government-guaranteed franchise, it has set the bar so low—formally, auditors merely opine on whether financial statements meet accounting standards—that it is all but impossible for them to fail at their jobs, as they define them. In recent years this yawning “expectations gap” has led to a pattern in which investors disregard auditors and make little effort to learn about their work, value securities as if audited financial statements were the gospel truth, and then erupt in righteous fury when the inevitable downward revisions cost them their shirts.

The modern audit does not even provide an opinion on accuracy. Instead, the boilerplate one-page pass/fail report in America merely provides “reasonable assurance” that a company’s statements “present fairly, in all material respects, the financial position of [the company] in conformity with generally accepted accounting principles (GAAP)”. GAAP is a 7,700-page behemoth, packed with arbitrary cut-offs and wide estimate ranges, and riddled with loopholes so big that some accountants argue even Enron complied with them. (International Financial Reporting Standards (IFRS), which are used outside the United States, rely more on broad principles). “An auditor’s opinion really says, ‘This financial information is more or less OK, in general, so far as we can tell, most of the time’,” says Jim Peterson, a former lawyer for Arthur Andersen, the now-defunct accounting firm that audited Enron. “Nobody has paid any attention or put real value on it for about 30 years.”

Those conflicts of interest

Even so, the misaligned incentives built into auditing all but guarantee that accountants will fall short of investors’ needs. The beneficiaries of the service—current and prospective shareholders—pay for it indirectly or not at all, while the purchasers buy it only because they are required to. As a result, companies tend to select auditors who will provide a clean opinion as cheaply and quickly as possible. Similarly, accountants who discover irregularities may be better off asking management to make minor adjustments, rather than blowing the whistle on a misstatement that could embroil their firm in costly litigation.

I invite the reader to Google on search terms like "Deloitte" "accounting" "scandals" or "KPMG" "accounting" "scandals", and one would see a huge list of incidents regarding these two audit firms. PwC or EY , the other companies in the "Big Four" don't seem to be any better, for that matter.

Tuesday, 12 May 2015

Scan files legal action against Bursa Malaysia

It does not often happen, but Scan Associates Bhd. did just did that, it filed a legal action against Bursa Malaysia, according to this announcement.

The company wishes to announce that bursa Malaysia securities bhd(BM) had at 6pm on 8.5.2015 issued a directive for the company to announce that the company had triggered rules 2.1(b) and (c)  of GN 3 based on the company 's Q4 2014 results.

In any event,  the company has no means to make such announcement as the company Secretary had resigned on the same day.

The company disagrees with the directive and has appointed solicitors,  Messrs lim,  chong,  phang & Amy to file a legal action against BM. The suit was filed on 10.5.2015 against BM to,  inter alia,  nullify the directive and to seek damages from BM. (The Suit).

The suit filed in the high Court in Kuala Lumpur bearing suit number 22ncc-130-05/2015.

Further to that,  the high Court had on 11.5.2015 heard the company 's application and granted an ad interim injunction to restrain BM to implement the reclassification of the company. The ad interim injunction will be enforceable and binding until the High Court makes a decision at 4pm on 18.5.2015.

A rather peculiar announcement (besides the inconsistent usage of capital letters and spacing) in which the company blames the fact that it had no company secretary to make such an announcement.

For more information, please read this article on Kinibiz (behind paywall).

Saturday, 9 May 2015

Qualified opinions on 6 listed companies

From MSWG's weekly newsletter of May 8, 2015:


Name of Listed Company
Date of Announcement
Basis of Opinion (Salient Points)
NPC Resources Berhad
30 April 2015
Ernst & Young
Insufficient time to perform sufficient audit procedures as the audited financial statements of three foreign subsidiaries were only available close to the date of the financial statements of the Group were approved by the Board.
Silver Ridge Holdings Bhd
30 April 2015
Baker Tilly Monteiro Heng
Unable to obtain sufficient and appropriate audit evidence on the recoverability of receivable.
Stemlife Berhad
30 April 2015
Ernst & Young
i)  Non-compliance with the requirements of MFRS 4 (Insurance Contracts) for the assessment of insurance liabilities and revenue associated with insurance contracts; and

ii) insufficient access to the financial information and management of an associate.
Wintoni Group Berhad
5 May 2015
SJ Grant Thornton
Unable to physically sight the Group’s computer equipment.
China Ouhua Winery Holdings Limited
30 April 2015 & 5 May 2015
Helmi Talib & Co.
Unable to ascertain whether the net recoverable amount of an asset acquired in China will exceed the total purchase consideration.
Ire-Tex Corporation Berhad
5 May 2015
Unable to validate the existence of sales of RM5 million to 2 related parties which were subsequently impaired.

It is a bit out of the norm though not totally surprising that within a short period of time there were 6 public listed companies where their independent auditors had qualified their opinions on their audited financial statements highlighting issues of concern for investors to take note.
It may also serve as a ‘red flag’ or early warning signal to audited financial statement readers particularly shareholders, investors and potential investors who may need to make more informed investment decisions.

Wednesday, 6 May 2015

Bursa limits information to 5 years ONLY? (3)

Good news, from Bursa's announcement website:

"Bursa Malaysia had on 20 April 2015 replaced the announcement dissemination system known as Bursa LINK. As we have over 1 million records of announcements made by listed issuers over a span of 15 years,  the data migration and verification has to be carried out progressively to ensure data integrity and reliability. During the initial period of migration, only announcements for a period of 5 years from 1 January 2010 are made available on the website. Thereafter, the remaining past announcements on Bursa Malaysia website will be progressively increased to 15 years within 3 months from 20 April 2015."

Sunday, 3 May 2015

China Ouhua: red wine and red flags (4)

China Ouhua announced their audited accounts, qualified by the auditors (as was the case in the previous year), with some really bad news for the shareholders:

When Ouhua IPO-ed, they were supposed to be a fast-growing, highly profitable player in the wine industry in China.

Now it informs its shareholders that it abandoned its vineyards due to bad weather, insect pest and (worst of all) poor management? The vineyards are their main business to produce their own wine, it cant possibly get much worse than this, can it?

Despite the wine business going horribly wrong for Ouhua, they still deposited RMB 119M cash to purchase land, "conveniently" without having any independent valuation done. The transaction should have been concluded a long time ago, but is still "pending".

I am afraid that either this transaction will go through, and the land is useless given the abandoned vineyards, or the transaction will not go through, and the deposit will not be returned.

Michael Lewis wrote in "Crash Boys":

"Financial regulators, like editorial writers, are at best the markets’ last line of defense; they are less inclined to join any battle than they are to wander in afterward and shoot the wounded."

Malaysian regulators have done some enforcement that (I think) falls in this last category ("wander in afterward and shoot the wounded"), for instance:

SAAG: " ..... Notwithstanding that SAAG had been de-listed ...."
Carotech: "..... Notwithstanding that CAROTEC was de-listed ....."
MAE Models: "..... Notwithstanding that MAEMODE was de-listed ....."
EcoFuture: ".... Notwithstanding that EFUTURE had been de-listed ....."
Baswell: ".... Notwithstanding that BASWELL had been de-listed ....."
Axis: "..... Notwithstanding that AXIS had been de-listed ....."
NAMFATT: "..... Notwithstanding that NAMFATT has been de-listed ....."
Global Carriers: "..... Notwithstanding that GLOBALC was de-listed ....."
Kenmark: "..... notwithstanding that KENMARK had been de-listed ...."
Intelligent Edge Technologies: "..... Notwithstanding that IE was de-listed ....."

I hope that the regulators in the case of Ouhua will not wait for the company to be delisted, and take appropriate action now, it is long overdue in my opinion.

They should order an in-depth investigation, not only at the current situation and the recent developments, but also at the whole IPO process, the warranties and representations that were provided, all the parties involved (the promoter, the bankers, the advisors, the pre-IPO shareholders) and the roles they played. They should also interview the many directors that have resigned, and the previous auditor.

Saturday, 2 May 2015

Amin Shah and the Singapore-Batam ferry (3)

I wrote before about this (here and here).

The court has decided regarding possible misconduct by the lawyers that Bernadette Rankine initially had hired, article from the Straits Times (Singapore) dated April 14, 2015:

In 2009, Mr Singh was hired by Ms Bernadette Rankine, then an art gallery owner, to handle the sale of her house in Joan Road, off Thomson Road, which was sold for $12 million.

She had decided to sell the property and live off the proceeds after ending her 13-year relationship with Malaysian businessman Amin Shah.

But her former boyfriend lodged a caveat against the property to block the sale. In February 2010, the caveat was lifted and the net sales proceeds of $6.9 million held by the law firm were ordered to be released to her.
Mr Singh gave her a cheque for $5 million as well as $50,000 for her assistant's wages.

A few days later, he gave her a cheque for $1.8 million, while she in turn issued two cheques, one for $1.6 million to Mr Singh's wife and the other for $200,000 to Mr Menon's wife.

Mr Singh had advised her to place the money with their wives for safekeeping, saying that if her former boyfriend launched more legal actions against her, her money would be frozen and she would not have the means to pay for lawyers.

Nine months later, she asked them to return the money. When they refused, she complained to the Law Society. They have since returned the full sum.

In April last year, a disciplinary tribunal found the pair guilty of misconduct - Mr Singh for advising her to pay the money to the wives and then refusing to return it, and Mr Menon for agreeing with the advice.

The pair contended that the money was a gift from Ms Rankine but the tribunal found this "inherently absurd".

Yesterday, the court agreed, saying it was unlikely that Ms Rankine, who needed money for pending legal matters, would give away one quarter of her key asset to the wives of the two lawyers she had known for less than six months and to whom she had already paid fees.

The court agreed with the society's counsel, Mr P. E. Ashokan, that the pair had embarked on an elaborate scheme to disguise the transaction by using Ms Rankine as a conduit, instead of transferring directly from the firm to their wives.

Friday, 1 May 2015

Bursa limits information to 5 years ONLY? (2)

MSWG comments on the same issue in their newsletter for April 30, 2015:

"On the capital market scene, recently, to our surprise, we learnt of a significant change in the provision of statistics and information pertaining to public listed companies (PLCs) on Bursa Malaysia website.

We have received complaints from retail investors and noticed that statistics and information including company announcements, quarterly financial results and annual reports were only available on the Bursa Malaysia website for 5 years. Hitherto, these information were generally made available for 10 years. We do not know why Bursa has taken this step to truncate information available to the public to only 5 years. In addition, no announcement was made on such a change.

Also, we believe this new development is somewhat regressive. It is always preferable for investors to have longer period of 10 years’ statistics including historical data and announcements at a one-stop centre to enable investors to carry out meaningful research. Particularly, if they need to do a time-series analysis which requires longer historical data.

We urge Bursa to reconsider providing these important statistics for the consumption of the general investing public who relies on reliable and up-to-date information in order to develop a more vibrant retail investors’ market."

First of all great that MSWG puts pressure on Bursa to reconsider the change.

I am also rather surprised, I would have thought that MSWG would have been kept in the loop of radical changes like this, but apparently not.

As far as I remember, Bursa started with their platform in (probably, I do remember some material from before 2000) 1999, and simply kept all announcements ever made.

In other words a great archive of all kind of information: financial results, IPO documents, shareholder changes of directors and major shareholders, related party transactions, etc.

I have been critical of Bursa on many occasions (mostly on enforcement related matters), but I have praised their website, for instance here:

"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."

If Bursa restricts the announcements to only the last five years, then I am afraid I have to take back my compliment.

The HKEX for instance gives information starting 1999:

SGX seems to be the worst of the three. They only offer announcements since 2010, also the user interface is confusing (their last update made things even worse), at least, that is my opinion. In addition to that, they even make  money on advertisements through Googleads, which I think they really should not do (users might mistakenly think that the companies featured in the ads are supported by SGX, which they aren't). SGX is making enough money as an exchange, they don't need this extra source of income.