Corporate Governance in Malaysia

Non-bumi to head securities regulator

2012-03-13T18:48:00.002+08:00

"Ms Zarinah had explained to staff in an internal memo that was leaked that it was 'just part of his normal acquisition, with all purchases made in the open and duly reported to Bursa'. The memo added: 'Naturally, he had no knowledge of the Sime Darby purchase at the time as this is a sale by the major shareholders and the board was not told of the negotiations until later.'

This email did not make matters better. It could be perceived as influencing the outcome of investigations that were (and still are) ongoing

"she had been credited with 'establishing a robust regulatory and governance framework which has contributed to the growth of the market, and investing resources in building regulatory capacity'."

I agree that there has clear progress at the SC during her leadership. Unfortunately, the recent controversies will overshadow that (partly).

From The Business Times (Singapore), by Pauline Ng

MALAYSIAN Prime Minister Najib Razak has appointed Ranjit Ajit Singh as the new Securities Commission (SC) chairman succeeding Zarinah Anwar, effective April 1.

Ms Zarinah: The outgoing chairman has been in a difficult position recently despite her achievements over the last six years

Currently one of the SC's two managing directors - the other being Nik Ramlah Mahmood, who was appointed deputy chief executive - Mr Singh is the first non-bumiputra to head the regulatory body since it was established in 1993.

Ms Nik Ramlah is a lawyer by training and has served the SC for over 18 years; she is also the executive director of enforcement.

The appointments by Mr Najib, who is also finance minister, comes after weeks of industry speculation that Ms Zarinah would not be staying on after six years at the SC - including two one-year extensions - because of the recent controversy concerning Sime Darby's acquisition of a 30 per cent stake in E&O from its three biggest shareholders including GK Goh Holdings.

Minorities were unhappy that the conglomerate had not included them in its offer and one shareholder, Michael Chow Keat Thye, has brought a legal suit against the commission to overturn the offer waiver accorded to Sime.

Moreover, filings to the exchange also showed that Ms Zarinah's husband Azizan Abdul Rahman - E&O chairman and shareholder since 2002 - had raised his stake in the developer prior to Sime's offer.
Ms Zarinah had explained to staff in an internal memo that was leaked that it was 'just part of his normal acquisition, with all purchases made in the open and duly reported to Bursa'.

The memo added: 'Naturally, he had no knowledge of the Sime Darby purchase at the time as this is a sale by the major shareholders and the board was not told of the negotiations until later.'

Her explanation notwithstanding, she was put in a difficult position despite her previous achievements at the SC, where she had been credited with 'establishing a robust regulatory and governance framework which has contributed to the growth of the market, and investing resources in building regulatory capacity'.

Industry players believe Mr Singh to be a suitable successor. A financial economist and accountant, he has served the SC since 1994 in a number of areas including supervision and market oversight (where he is currently executive director), strategy and risk management, financial policy and economics.

The country's biggest Indian political party - the Malaysian Indian Congress (MIC) - was particularly pleased with Mr Singh's elevation as there had been concerns that he might not get the promotion, ostensibly because of the government's well-known pro-bumiputra policies.

In Mr Najib's tenure, however, more non-bumiputras have been promoted to head government departments and institutions as well as appointed to the boards of state-linked companies, including Petronas.

Raking Muck, part 5 & 6

2012-03-12T19:33:00.002+08:00

David Webb published the 5th part and 6th part of the "Raking Muck" series.

From the last part:

"We'll bring this hexalogy to a close. We've given you enough reasons to avoid investing in all of the listed companies named at the top of this article, as well as any company which uses the same advisers, particularly on a regular basis. We've also laid out evidence surrounding a substantial number of dubious transactions that the SFC, ICAC or CCB should investigate, and we've drawn attention in the "regulatory notes" boxes to a number of deficiencies in HK's regulatory framework which facilitate some of these schemes.

Once in a while, the authorities do actually listen and act. Examples include our article Cooking with Gas (4-Apr-2004) which was eventually followed by an ICAC investigation and convictions in 2010, and a trilogy of articles about the Styland Network in 2002. Just last week, 10 years later, the SFC won a landmark ruling ordering the former Chairman and his wife (who was an executive director) to pay HK$85m in compensation (plus a lot of interest since 2000). The case was actually heard in Jan-2011 but it took 14 months for Justice Aarif Barma to issue his judgment, which says something about the strain the courts are under and the need to raise the budget for the judiciary. It will be interesting to see whether the couple pay up. The court has disqualified them as directors for 12 years, but their son is now CEO of Styland and they still own 22.72% of it. No criminal charges were brought against the couple.

Other series include the tetralogy of articles in 2009 on China Public Procurement Ltd (1094) and China Railway Logistics Ltd (8089), amongst others. No public action has been taken on those. There was also our articles on EganaGoldpfeil, after which the company collapsed. The SFC has commenced action against the directors seeking disqualification orders and HK$2.13bn of compensation, but no criminal charges have yet been brought despite an investigation by the Commercial Crime Bureau."

David Webb is doing all the work, free of charge, and "Once in a while, the authorities do actually listen and act". For a high-income country like Hong Kong, that is very disappointing. One reason why they are only rated a "B" country in Corporate Governance, similar to Singapore.

SC Chairman (under fire) retires as expected

2012-03-10T22:36:00.003+08:00

The Securities Commission (SC) announced that Tan Sri Zarinah will retire when her term as Chairman is completed on 31 March 2012.

It does not come as a surprise and was widely speculated. Tan Sri Zarinah came under fire for the Sime Darby / E&O case when it was revealed that her husband, the Chairman of E&O, had bought shares in E&O just before Sime Darby acquired a large chunk of the company.

Malaysian newspapers didn't write about this issue (worrisome) although surely some journalists must have known it, but The Straits Times (Singapore) did publish an article about it, after which the Malaysian papers more or less had to follow suit since the news was also all over the internet.

Another issue was if Sime Darby had to make a MGO for the remaining shares. The SC concluded that it didn't need to, but it didn't give any arguments, and later on it was revealed that the SC taskforce was of the view that a new "concert party" had been created between Sime Darby and E&O's managing director and thus that a general offer obligation had been triggered.

The perceived conflict of interest between Tan Sri Zarinah, as the Chairman of the Securities Commission, and her husband Datuk Azizan Abdul Rahman, Chairman of E&O, looked outright bad and was directly opposite the SC's own Principles and Standards:

"Conflicts of Interests
An integral part of ethics and integrity is the avoidance of conflict of interest. In this regard, all SC staff and their immediate family members have the obligation to avoid putting themselves in situations of conflict where their personal interest is conflicted with the interest of the SC."

"The SC must demonstrate the highest level of honesty and integrity in all our dealings with stakeholders and ensure exemplary conduct of our staff. The Statement of Principles and Standards applies to all business transactions entered into by the SC. All staff as well as those who do business with us, need to fully understand the requirements of the Statement and ensure its application in all dealings and engagements with the SC."

The above statement was signed by Tan Sri Zarinah herself.

Datuk Azizan Abdul Rahman was actively involved in many other listed companies, both through his chairmanship of the investment panel of Lembaga Tabung Haji (one of their investments is Silver Bird which recently ran into severe problems), and directly:

Apex Equity Holdings Bhd
Bina Darulaman Bhd
Gefung Holdings Bhd
Isyoda Corporation Bhd
MBF Holdings Bhd
Nagamas International Bhd
Ramunia Holdings Bhd
TH Plantations Bhd
Tongkah Holdings Bhd

Isyoda was taken private after a General offer with "delisting threat" at 0.6 times book value. It was involved in the construction of the controversial Shah Alam hospital:

"On winning the contract in 2007, Sunshine Fleet has first sub-contracted the project to ailing construction firm Isyoda. Isyoda was unable to complete the project after it was delisted from Bursa Malaysia, and is in the process of being declared bankrupt. The project was later sub-contracted to GMH. GMH claimed that when it took over last year from Isyoda, it had to fork out RM10 million to repay the ailing construction company for the bond the latter placed with the Public Works Department (PWD) on Sunshine Fleet's behalf."

Blogger Where is Ze Moola wrote about Ramunia. Interesting is the following paragraph:

"According to a filing with Bursa by Ramunia, Oilcorp’s 51% indirectly owned subsidiary Oilfab Sdn Bhd had accepted a letter of offer from Ramunia to acquire its Pulau Indah fabrication yard assets located on it for RM83.8 million on Jan 25. According to Ramunia, RM80 million of the purchase price would be satisfied via the issuance of 156.86 million new Ramunia shares to Oilfab at an issue price of 51 sen each while RM3.8 million would be paid for in cash. What is interesting about the deal is that Oilcorp was also delisted from Bursa on the same day. This certainly raised questions on the timing of the deal. Could the deal have saved Oilcorp from delisting had it sold the asset earlier?"

In my opinion, it was a huge mistake of the "powers that be" to appoint Tan Sri Zarinah as Chairman of the Securities Commission while her husband was actively involved in so many listed companies. It was not a question if conflict of interest situations would happen, but when.

The new appointments for the Securities Commission are:

Datuk Ranjit Ajit Singh as Chairman
Dato Dr Nik Ramlah as Deputy

The Star describes them as follows:

"Ranjit is a leading expert in the field of securities regulation and is widely recognised internationally for his expertise in the regulation and development of emerging and developing markets”.

“Nik Ramlah is internationally recognised for her work in the area of corporate governance, having been actively involved in the preparation of a high level finance committee report on corporate governance which was released in 2001 and the corporate governance blueprint which was released last year”

The Securities Commission (and Bursa Malaysia for that matter) have been criticized by the IIF:

"Despite its operational independence, the SC is perceived as being influenced by the MoF by a cross-section of market participants and is considered to be a weak regulator."

Other statements:

"The E&O deal had triggered unease over the widely perceived coddling by the SC of large state-controlled companies at the expense of minority shareholders when exercising its authority on corporate takeovers."

Both the SC and BM have tried to increase much needed Corporate Governance by using the "soft" approach: education, brochures, increased documentation etc. However, this approach is rather limited and a "hard" approach is needed to complement its effort by increasing much needed enforcement.

Ranjit and Nik Ramlah have their work cut out for them.

Raking Muck, Part 3 & 4

2012-03-08T19:55:00.002+08:00

David Webb continued with his series "Raking Muck", Part 3 and Part 4.

In the latter one the following text, describing the situation in Hong Kong:

"Regulatory note: the "Independent Financial Adviser" system in the Listing Rules and Takeovers Code is a waste of shareholders' money and gives investors false comfort. However bad a company's proposal is, the company will almost always be able to find an "IFA of last resort" to say that the proposal is fair and reasonable, and investors may then be misled into voting in favour. When investors do vote a proposal down, it is usually against the advice of the IFA. The system is a gravy train for shoddy IFAs. It would be better to scrap the requirement for an IFA, and require the company to justify its proposal on its own, taking whatever advice it wants to prepare the circular. If the company can't convince shareholders of the merits, then it risks being voted down.An alternative would be a jury-pool system where IFAs are randomly assigned to deals by the regulator. Pricing for the work could be determined by an annual tendering exercise. A firm would only qualify for the next year's jury pool if investors had actually agreed with the firm's recommendations by passing or rejecting proposals at least (say) 80% of the time. We proposed a similar such system in 2001."

It all sounds very similar compared to the situation in Malaysia. Independent advice in Malaysia is also not worth the paper it is written on. It actually often does more damage than it does good: it costs time (the delay to write the report) and money (paid for by the shareholders), and can be used as an excuse by Government Linked Funds to vote in favour, regardless how bad the deal is.

Pelikan rewarding shareholders?

2012-03-08T09:00:00.001+08:00

"KUALA LUMPUR (March 7): Pelikan International Corporation Bhd plans to reward its shareholders with one treasury share for evey 50 existing shares held for FY ended Dec 31, 2011."

Shareholders own Pelikan relative to their shareholding. If Pelikan holds the treasure shares, cancels the treasure shares or tranfers them to the shareholders, in all three cases nothing changes for the shareholders. They still hold the same piece of the same pie.

Pelikan, a well known international brand, was brought to the Malaysian market with quite some excitement. That excitement has fizzled out. These are the last quarterly results, they look bad, is that why they try to comfort the shareholders with an empty gesture?

The Board Of Directors: Role and Responsibilities

2012-03-07T23:08:00.001+08:00

Great post from a VC (Venture Capitalist), Fred Wilson, about the Board of Directors, from a very practical point of view. He is from New York City, which might explain the rather open culture. In Malaysia, too many Boards are just ticking the boxes. It is very, very seldom that a member of the Board openly disagrees with the CEO or Chairman.

This is the first of a series of MBA Mondays posts on the topic of The Board Of Directors. I want to dig into the role and responsibilities of the Board as a way to kickoff this series. But first a few disclaimers. I am not a lawyer and I am not giving out legal advice on this topic. I am a practicioner and am telling you the way I see it and what I've learned over the years. I think both are important perspectives. You will have to look elsewhere for the legal view on this topic.

The Board of Directors is the governing body for a company. All major decisions will need to be ratified by the Board. You will need the Board's approval to sell your company. You will need the Board's approval to hire or fire a CEO. You will need the Board's approval to do a major acquisition. You will need the Board's approval to do a major financing, including an IPO. On all matters of major strategic importance, the Board will need to be engaged, involved, and supportive.

However, the Board should not run a company. That is the role of the CEO and his/her senior management team. The Board's job is to make sure the right team is at the helm, not to be at the helm themselves. Boards that meddle, that get too involved, that undermine the management team are hurting the company, not helping the company.

Boards work for the company. The company is their responsibility. They must always act in the best interests of the company and its major stakeholders; the employees, the customers, the shareholders, the debtholders, and everyone else that is relying on the company to deliver on its promises.

Some would say that the company works for the Board. But I think that is wrong. The company works for the market (and I am using the word market in all of its meanings) and the Board and the management team work for the company. Every director must put the interests of the company first and their interests second. This is called fiduciary responsibility.

About ten years ago, I was in a Board meeting when management told the Board that they had uncovered significant accounting issues in a recently acquired company. This was a public company Board. And these accounting issues had flowed through to several quarterly financial statements that had been reported to the public. Every Board member who was also a material shareholder (me included) knew that the minute this information was disclosed, our shareholdings would plummet in value. But there was no question what we had to do. We had to hire a law firm to investigate the accounting issues. We had to immediately disclose the findings to the public. And we had to terminate all the employees who had an involvement in this matter.

Things like fiduciary responsibility seem very theoretical until you find yourself in a moment like this. Then they become crystal clear. Directors often must act against their own self interests. They must do the right thing for the company, its shareholders, and its stakeholders. There is no wiggle room on this rule. For directors, it is the golden rule.

The hard thing about being a director is that many times, the right answer is not clear. Should we accept this extremely generous offer and sell the company? Should we ask the CEO to leave the company? Should we go public or wait a few more years? There are no formulas that you can run to tell you the answers to these questions. There is no "right answer." Only time will tell if the right decision was made. And even then, there will be debate.

Debate is what good Boards do. They put the key issues on the table and discuss them. Good directors are deeply engaged in the important issues and they are upfront and open about their opinions on them. They are respectful of the other Directors and listen carefully to opposing opinions. Boards should try to reach a consensus and then act on it. Board should not procrastinate on the big decisions. Boards need a leader to drive them. That leader is commonly called the Chairman. I plan to write an entire post on the subject of the Board Chair as part of this series.

There are many CEOs who want to manage their Board. That is a mistake in my opinion. A great Board manages itself and treats the CEO as a peer and gives the CEO's opinion great weight. But a great Board is not a rubber stamp. A great Board pushes the CEO and the company to make the most of the opportunities in front of the company. It makes sure that the CEO and the management team are pushed out of their comfort zone from time to time. It asks the hard questions that must be asked.

Boards are fluid. They should evolve. Members should come and go occasionally. There should not be too much churn but some churn is good. Board members should not coast. Board members should not treat their seat as a right (even if it is). Boards should always be looking for new blood.

I will end with a somewhat controversial statement in light of the way some of the most successful tech companies are run. Boards should not be controlled by the founder, the CEO, or the largest shareholder. For a Board to do its job, it must represent all stakeholders' interests, not just one stakeholder's interest.

Silver linings in the Silver Bird cloud?

2012-03-05T23:14:00.001+08:00

The Star published on March 3, 2012 an article about Silver Bird, called: "Silver linings in the Silver Bird cloud".

The optimism from the writer, Errol Oh, stems from the fact that Silver Bird did announce its (otherwise horrific) results on time. But if the results were not announced on time, that would also have been a huge red flag.

And another assumption of Oh: "it may well be because the auditors are mindful of the fact that their work is subject to the scrutiny of the Audit Oversight Board (AOB)".

My guess at this moment is that Silver Bird simply ran out of money, and alarm bells started to go off, not really a surprise. Not sure if the AOB had anything to do with that.

Was there any red flag that investors, auditors or authorities might have foreseen that troubles at Silver Bird were brewing?

For the readers of Where is ze Moola's blog it should not have come as a surprise what has happened, the huge amount of articles about Silver Bird were literally littered with red flags. But apparently they stayed unnoticed with many, including the authorities.

No matter how I look at what has happened, I don't see any silver lining at all, I only see very dark clouds for Silver Bird and its shareholders.

PNB's offer price for SP Setia: "not fair, not reasonable"

2012-03-05T19:54:00.002+08:00

The independent circular from AmInvestBank has been issued in relation to the Mandatory General Offer for SP Setia by PNB. Their recommendation for the normal shareholders:

"Not fair and not reasonable", it is very, very rare in Malaysia that this advice is given.

The reason is two-fold:

The Board of Directors issued this statement September 2011: "The Board has met to consider the Offer and are of the view, based on external valuations of the Company by investment analysts published before receipt of the Offer, that the Shares Offer and Warrants Offer fundamentally undervalues the Company."
PNB did not issue a "delisting threat", in other words it would try to keep the listing status of SP Setia

This is exactly the way it should be, shareholders have an opportunity to exit, but are not forced to accept.

Offers with "delisting threat" have a very high percentage chance of succeeding, the share price rises just below the offer price, many impatient shareholders sell at that price. Fund managers often are not allowed to hold shares in de-listed companies and also sell, and the 90% barrier is breached after which the share is delisted. Also, independent advisers almost always recommend to accept the offer, at best they will value the offer as "not fair but reasonable" since at least it offers an opportunity to exit.

My recommendation is: simply don't allow companies to issue the "delisting threat" in combination with the General Offer. It makes Bursa much more fair for minority investors.

Warrant of arrest for SJAM head

2012-03-04T10:22:00.004+08:00

We posted before about SJAM and its rather curious investment in Maxbiz. Finally after almost two years the Securities Commission issued a warrant of arrest for the head of SJ Asset Management (SJAM):

Why did it take the Securities Commission so unbelievable long to issue this? It looked crystal clear from the start of the investigation (July 2010) that something was very, very wrong here.

Interestingly, the Securities Commission had already warned before about SJAM on its own website, in words that could not be more clear "a scheme to defraud":

Both this list of unauthorised websites/investment products/companies and individuals and the referral list by IOSCO are, by the way, highly recommended, great service in a country where so many cheating schemes (especcially pyramid schemes) seem to thrive. With very limited and slow enforcement, people should stay alert themselves. I hope the lists will be updated regularly.

Some more information about the rather mysterious ties between SJAM and Maxbiz can be found here and here.

Interesting quote from Tan Whai Oon: "For a listed company, we don't normally ask for board representation. there is supposed to be much more transparency in listed companies, there is supposed to be corporate governance and independent board members".

This sounds all rather naive, to hear this from a fund manager in the Malaysian context, may be that is why he is rumored to have gone to Nepal?

Some high net worth customers of CIMB were referred to SJAM, as this article from PWM (Professional Wealth Management) shows: CIMB striving to stand out from the Malaysian crowd. CIMB will definetely stand out from the crowd through this recommendation, but not for the good reasons, their "holistic approach to wealth management" didn't seem to work, at least in this case:

Many, many questions remain in this case:

How much of their money will clients from SJAM receive back?
How long was this scheme going on (from The Star: "Subsequently, a senior finance executive of the company spilled the beans on the accounts that have apparently been cooked since 2001")?
Which company was responsible for auditing the accounts of SJAM?
Where were the regulators all those years?
When will finally some justice be done?
When will all the issues surrounding Maxbiz and Geahin be clarified?
Etc, etc, etc.

YTL Cement, Padini, Maybulk, China Sky/SGX

2012-02-28T19:24:00.002+08:00

YTL Cement's shares will be suspended from tomorrow onwards. YTL Group owns more than 90% of the shares, enough to delist, but not enough for a mandatory acquisition. Minority investors who held out for a better offer have had some success in the past, like in Metrojaya's case, or Tang's (in Singapore).

I just don't like the way these General Offers with "delisting threat" are done in Malaysia, minority investors have hardly any chance to fight them, fund managers have to accept the offer since they don't want to end up with shares in unlisted companies.

Padini announced its quarterly results: higher turnover, earnings and cash, but also a high inventory (RM 229 million). Interesting.

Maybulk announced its year end numbers: "the current depressed freight market if it continues will result in many bancruptcies. The Board is confident that it will weather through these turbulent times and be able to benefit from this challenging situation in the medium to long term".

Previous articles about Maybulk and its POSH acquisition can be found here.

Another very sharp letter from Mr. Yeap (former independent director of China Sky) in the Business Times (Singapore). Would The Star or The New Straits Times dare to publish such a negative letter about Bursa Malaysia?

Has S'pore Exchange shifted its stand?

I NOTE from the media that SGX has stated: 'SGX will not discuss the court proceedings or rehearse arguments in the public. We have not done so hitherto and intend to wait for the hearing in court.'

Again, I was surprised by such a statement made by SGX.

In its announcement dated Feb 22, after making reference to the hearing in the High Court on Feb 21, SGX stated that 'Mr Yeap has now made certain representations which had not previously been offered to the SGX-ST . . .'.

I have not communicated with SGX after the commencement of my judicial review hearing in the High Court, save for my communication with the counsel representing SGX during the judicial review proceedings on Feb 9, Feb 20 and Feb 21.

If SGX was not referring to the judicial review proceedings in its Feb 22 announcement, SGX may wish to enlighten the public as to the details of any form of communication between SGX and I, in addition to the judicial review proceedings.

If SGX is unable to do so, it will follow that the SGX's statement is misleading, in that contrary to the SGX's statement, SGX was the one that first referred to the judicial review proceedings and made selective and inaccurate quote of arguments exchanged during the judicial review proceedings in its Feb 22 announcement.

It is interesting to note that SGX has shifted its stand after I have stated that I have no objection in SGX releasing the full and accurate transcript of the hearing to the public.
No doubt all concerned will be able to judge whether the SGX's statement was misleading and to draw the correct inference from SGX's shift of its previous stand.

Yeap Wai Kong
Former China Sky
independent director

Ex-China Sky director suing SGX to overturn reprimand

2012-02-27T19:01:00.001+08:00

The fight between China Sky Chemical Fibre Co. Ltd. and the SGX (Singapore Exchange) gets more and more interesting.

From the Business Times (Singapore) by Lynette Khoo, published Feb 27, 2012:

A former China Sky independent director (ID) has dismissed an apparent Singapore Exchange (SGX) offer to settle his grievance out of court, calling it an affront to common sense.

Yeap Wai Kong, who has applied to the courts to overturn a public reprimand issued against him by SGX, said yesterday that he 'shall continue to seek redress against the Singapore Exchange'.

The High Court will hear his judicial review application for a quashing order on SGX's public reprimand against him on March 26.

Mr Yeap issued a press release yesterday in response to SGX's offer to review its reprimand if he can provide new information to show why he should not have been reprimanded.

This statement from SGX on Feb 22 essentially provides an avenue for Mr Yeap to address his issue with SGX without going through the courts.

'The 22 February announcement seems to suggest that I should bear the onus of substantiating why I ought not to be publicly reprimanded after SGX has already publicly reprimanded me without giving me an opportunity to be heard. Common sense is affronted upon the utterance of such a proposition,' Mr Yeap said. 'Even a court would have to give an accused an opportunity to be heard and a fair hearing before the court is entitled to sentence the accused.'

In a previous turn of events, China Sky hit back at SGX through the website of .... SGX itself! It used the SGX announcements site to publish a lengthy expose what had happened before, even including the personal notes taken by the CEO at a meeting with SGX officials.

Although China Sky seems to outwit the SGX for the time being, the story will probably not end well for its shareholders. The independent directors and the CEO of China Sky have resigned, and the share is suspended. Investigations are on-going.

Raking Muck, Part 2

2012-02-27T09:00:00.004+08:00

David Webb published the second part of this entertaining investigation.

I received a comment on the previous blogging from "Imenwe":

"The article is very confusing. Maybe a picture involves the beneficiary parties will be better.".

It has been noted, and Webb made this helpful scheme:

Webb constructed a very helpful database on his website with which visitors can track all the connections between companies, directors and professionals. Although the Bursa Malaysia website is good regarding announcements, annual year reports etc, these kind of connections don't show up. If Webb can provide this service free of charge with a small but very dedicated team of two persons, surely Bursa Malaysia should be able to match this?

From a presentation by Webb, given May 27, 2011:

Warren Buffett Admits To 5 Big Mistakes

2012-02-26T23:16:00.003+08:00

There are two big events each year for Berkshire Hathaway fans, the Annual General Meeting and the publishing of its year report with the accompanying letter of Warren Buffett. The last event happened yesterday and can be found here: here.

It is rather long (21 pages), a selection of the most important quotes can be found here.

Just a single $100 bill invested in Berkshire Hathaway in 1964 would have turned into $513,055, enough to buy a nice house in the US (especially since the recent crash in housing prices). All capital gains, since the company does not pay a dividend.

The good thing about Warren Buffett and Charlie Munger is that they openly admit their mistakes, something that is vey rare in those (and many other) circles:

HOUSING HOROSCOPE

The blunder: Buffett predicted in last year's letter that the U.S. housing recovery would begin within the next year and help fuel economic growth.

The explanation: Buffett doesn't mince words and says he was "dead wrong" about this one. But he says basic biology makes it unavoidable that the country will need more houses.

The quip: "People may postpone hitching up during uncertain times, but eventually hormones take over. And while 'doubling up' may be the initial reaction of some during a recession, living with in-laws can quickly lose its allure."

ENERGY ERROR

The blunder: Buffett spent about $2 billion buying bonds offered by Texas utility Energy Future Holdings. But those bonds are now worth about $878 million, and he conceded Saturday that even that could be wiped out.

The explanation: Buffett comes right out and admits misjudging the company's prospects and the likelihood that natural gas prices would remain depressed.

The quip: "However things turn out, I totally miscalculated the gain/loss probabilities when I purchased the bonds. In tennis parlance, this was a major unforced error by your chairman."

ACQUISITION ANGST

The blunder: Some of the companies Berkshire Hathaway has bought don't add much to the company's bottom line. Buffett didn't single out the laggards in Berkshire's manufacturing, service and retail unit, but he acknowledged that a few produce poor returns.

The explanation: Buffett says he misjudged some of these businesses before Berkshire bought them partly because he didn't always listen to curmudgeonly Vice Chairman Charlie Munger.

The quip: "I try to look out 10 or 20 years when making an acquisition, but sometimes my eyesight has been poor. Charlie's has been better; he voted 'no' more than 'present' on several of my errant purchases."

OIL OOPS

The blunder: In 2008, Buffett more than quadrupled Berkshire's stake in ConocoPhillips when oil and gas prices were near their peak. It cost the company several billion dollars.

The explanation: Buffett said he didn't anticipate the dramatic fall in energy prices that happened later in 2008.

The quip: "During 2008 I did some dumb things in investments. I made at least one major mistake of commission and several lesser ones that also hurt."

TEXTILE TROUBLE

The blunder: Buffett has said that buying Berkshire Hathaway itself may have been his worst investment decision. It was a struggling New England textile mill when Buffett bought into it in the 1960s. He kept the mill running for 20 years before shutting it down.

The explanation: Buffett didn't recognize immediately that the textile business was doomed to continue losing money.

The quip: "The dumbest thing I could have done was to pursue 'opportunities' to improve and expand the existing textile operation — so for years that's exactly what I did," he said last year. "And then, in a final burst of brilliance, I went out and bought another textile company. Aaaaaaargh! Eventually I came to my senses, heading first into insurance and then into other industries."

From: http://www.businessinsider.com/warren-buffett-admits-to-5-big-mistakes-2012-2

Bursa takes action against remisier

2012-02-26T10:24:00.002+08:00

According to an announcement of Bursa Malaysia a remisier (Dealer Representative) named Chong Lee Fatt has been found guilty of unauthorised and false trading activities in the shares of YGL Convergence Bhd and H-Displays (MSC) Bhd.

I am all in favor of enforcement, so kudos to Bursa.

Also, the charges are spelled out in detail, which is good for transparency.

What is missing however is when these illegal activities took place, there is no timeline in the announcement.

Some details of what had happened:

Chong had failed to authenticate the application to open an account for a client (the said client) in the manner as required under the rules and falsely declared authentication of the account opening forms. In this regard, the account opening forms were not executed by the said client in person before him but instead, the forms were submitted by a third party.
Chong had allowed the said client’s account to be operated by a third party who had unlawfully undertaken numerous trades in the account. These unauthorised trades gave rise to losses in the account which was disputed by the said client. In this regard, the losses suffered were subsequently set off against Chong’s commission and security deposit lodged with the Participating Organisation (PO). In undertaking these unauthorised dealing activities, Chong was noted to have acted upon the instruction given by the third party who was not a person allowed and authorised, in writing, to trade on behalf of the said client.
Chong’s dealing in the securities of YGL and HDISPLAY in the said client’s account constituted false trading activities/unethical trading as there were rollover activities in the said client’s account. This gave rise to a false or misleading appearance of active trading or the market for the securities concerned.

The punishment:

reprimand
fine of RM 100,000
12 months suspension as registered person

In my opinion, persons who touch the accounts of clients and/or are caught in false and unethical trading should be barred for life from the securities industry. Set a clear example, and make sure every remisier knows about it.

The other issue is that there is mentioning of a "third party", surely this person should also be punished.

The companies were listed on the ACE market:

HiDisplays a company involved in LCD panels suffered a large loss of RM 42 million in 2009. Trading was suspended on July 26th 2011.
YGL Convergence is a tiny company with some accumulated losses of 3.2 million according to its 2010 year report.

10 Investment lessons from Jeremy Grantham

2012-02-25T17:35:00.003+08:00

GMO published its 4th quarter 2011 report, in it 10 pearls of wisdom from Jeremy Grantham about investing.

1. Believe in history. In investing Santayana is right: history repeats and repeats, and forget it at your peril. All bubbles break, all investment frenzies pass away. You absolutely must ignore the vested interests of the industry and the inevitable cheerleaders who will assure you that this time it’s a new high plateau or a permanently higher level of productivity, even if that view comes from the Federal Reserve itself. No. Make that, especially if it comes from there. The market is gloriously inefficient and wanders far from fair price but eventually, after breaking your heart and your patience (and, for professionals, those of their clients too), it will go back to fair value. Your task is to survive until that happens. Here’s how.

2. “Neither a lender nor a borrower be.” If you borrow to invest, it will interfere with your survivability. Unleveraged portfolios cannot be stopped out, leveraged portfolios can. Leverage reduces the investor’s critical asset: patience. (To digress, excessive borrowing has turned out to be an even bigger curse than Polonius could have known. It encourages financial aggressiveness, recklessness, and greed. It increases your returns over and over until, suddenly, it ruins you. For individuals, it allows you to have today what you really can’t afford until tomorrow. It has proven to be so seductive that individuals en masse have shown themselves incapable of resisting it, as if it were a drug. Governments also, from the Middle Ages onwards and especially now, it seems, have proven themselves equally incapable of resistance. Any sane society must recognize the lure of debt and pass laws accordingly. Interest payments must absolutely not be tax deductible or preferred in any way. Governments must apparently be treated like Polonius’s children and given limits. By law, cumulative government debt should be given a sensible limit of, say, 50% of GDP, with current transgressions given 10 or 20 years to be corrected.) But, back to investing …

3. Don’t put all of your treasure in one boat. This is about as obvious as any investment advice could be. It was learned by merchants literally thousands of years ago. Several different investments, the more the merrier, will give your portfolio resilience, the ability to withstand shocks. Clearly, the more investments you have and the more different they are, the more likely you are to survive those critical periods when your big bets move against you.

4. Be patient and focus on the long term. Wait for the good cards. If you’ve waited and waited some more until finally a very cheap market appears, this will be your margin of safety. Now all you have to do is withstand the pain as the very good investment becomes exceptional. Individual stocks usually recover, entire markets always do. If you’ve followed the previous rules, you will outlast the bad news.

5. Recognize your advantages over the professionals. By far the biggest problem for professionals in investing is dealing with career and business risk: protecting your own job as an agent. The second curse of professional investing is over-management caused by the need to be seen to be busy, to be earning your keep. The individual is far better-positioned to wait patiently for the right pitch while paying no regard to what others are doing, which is almost impossible for professionals.

6. Try to contain natural optimism. Optimism has probably been a positive survival characteristic. Our species is optimistic, and successful people are probably more optimistic than average. Some societies are also more optimistic than others: the U.S. and Australia are my two picks. I’m sure (but I’m glad I don’t have to prove it) that it has a lot to do with their economic success. The U.S. in particular encourages risk-taking: failed entrepreneurs are valued, not shunned. While 800 internet start-ups in the U.S. rather than Germany’s more modest 80 are likely to lose a lot more money, a few of those 800 turn out to be today’s Amazons and Facebooks. You don’t have to be better; the laws of averages will look after it for you. But optimism comes with a downside, especially for investors: optimists don’t like to hear bad news. Tell a European you think there’s a housing bubble and you’ll have a reasonable discussion. Tell an Australian and you’ll have World War III. Been there, done that! And in a real stock bubble like that of 2000, bearish news in the U.S. will be greeted like news of the bubonic plague; bearish professionals will be fired just to avoid the dissonance of hearing the bear case, and this is an example where the better the case is made, the more unpleasantness it will elicit. Here again it is easier for an individual to stay cool than it is for a professional who is surrounded by hot news all day long (and sometimes irate clients too). Not easy, but easier.

7. But on rare occasions, try hard to be brave. You can make bigger bets than professionals can when extreme opportunities present themselves because, for them, the biggest risk that comes from temporary setbacks – extreme loss of clients and business – does not exist for you. So, if the numbers tell you it’s a real outlier of a mispriced market, grit your teeth and go for it.

8. Resist the crowd: cherish numbers only. We can agree that in real life as opposed to theoretical life, this is the hardest advice to take: the enthusiasm of a crowd is hard to resist. Watching neighbors get rich at the end of a bubble while you sit it out patiently is pure torture. The best way to resist is to do your own simple measurements of value, or find a reliable source (and check their calculations from time to time). Then hero-worship the numbers and try to ignore everything else. Ignore especially short-term news: the ebb and flow of economic and political news is irrelevant. Stock values are based on their entire future value of dividends and earnings going out many decades into the future. Shorter-term economic dips have no appreciable long-term effect on individual companies, let alone the broad asset classes that you should concentrate on. Leave those complexities to the professionals, who will on average lose money trying to decipher them.
Remember too that for those great opportunities to avoid pain or make money – the only investment opportunities that really matter – the numbers are almost shockingly obvious: compared to a long-term average of 15 times earnings, the 1929 market peaked at 21 times, but the 2000 S&P 500 tech bubble peaked at 35 times! Conversely, the low in 1982 was under 8 times. This is not about complicated math!

9. In the end it’s quite simple. Really. Let me give you some encouraging data. GMO predicts asset class returns in a simple and apparently robust way: we assume profit margins and price earnings ratios will move back to long-term average in 7 years from whatever level they are today. We have done this since 1994 and have completed 40 quarterly forecasts. (We started with 10-year forecasts and moved to 7 years more recently.) Well, we have won all 40 in that every one of them has been usefully above random and some have been, well, surprisingly accurate. These estimates are not about nuances or PhDs. They are about ignoring the crowd, working out simple ratios, and being patient. (But, if you are a professional, they would also be about colossal business risk.) For now, look at the latest of our 10-year forecasts that ended last December 31 (Exhibit 1). And take heart. These forecasts were done with a robust but simple methodology. The problem is that though they may be simple to produce, they are hard for professionals to implement. Some of you individual investors, however, may find it much easier.

10. “This above all: to thine own self be true.” Most of us tennis players have benefited from playing against non-realists: those who play to some romanticized vision of that glorious September day 20 years earlier, when every backhand drive hit the corner and every drop shot worked, rather than to their currently sadly atrophied skills and diminished physical capabilities. And thank Heavens for them. But doing this in investing is brutally expensive. To be at all effective investing as an individual, it is utterly imperative that you know your limitations as well as your strengths and weaknesses. If you can be patient and ignore the crowd, you will likely win. But to imagine you can, and to then adopt a flawed approach that allows you to be seduced or intimidated by the crowd into jumping in late or getting out early is to guarantee a pure disaster. You must know your pain and patience thresholds accurately and not play over your head. If you cannot resist temptation, you absolutely MUST NOT manage your own money. There are no Investors Anonymous meetings to attend. There are, though, two perfectly reasonable alternatives: either hire a manager who has those skills – remembering that it’s even harder for professionals to stay aloof from the crowd – or pick a sensible, globally diversified index of stocks and bonds, put your money in, and try never to look at it again until you retire. Even then, look only to see how much money you can prudently take out. On the other hand, if you have patience, a decent pain threshold, an ability to withstand herd mentality, perhaps one credit of college level math, and a reputation for common sense, then go for it. In my opinion, you hold enough cards and will beat most professionals (which is sadly, but realistically, a relatively modest hurdle) and may even do very well indeed.

Note:
Polonius, a character in Hamlet, a verbose, self-important advisor to the King, was clearly intended to be a real loser, but curiously in the end Shakespeare couldn’t resist making most of his ponderous advice actually useful and memorable. His famous speech to his son Laertes who is embarking on a dangerous
sea voyage to France (from Denmark) is reproduced as an Appendix. (Hamlet makes genocidal if rather unintentional war on the Polonius family, accounting for Laertes, his sister Ophelia, and poor Polonius himself: a clean sweep.)

The full letter can be downloaded here pfd-file:

http://www.gmo.com/websitecontent/JGLetter_LongestLetterEver_4Q11.pdf

On a separate note: I am aware that I copy lots of information from well known US investors. I would love to do the same from another part of the world, especcially Asian or even Malaysian/Singaporean. But the reality is that investing has always been very US centric. Not too long ago the marketcap of all US stocks was larger than the marketcap of the stocks of all other countries combines. Most studies, books etc are simply from the US. However, if any reader of this blog knows some good articles from non-US writers, please let me know and I am more than happy to publish them.

SGX & BM must just hit offenders hard

2012-02-24T19:43:00.002+08:00

Excellent article from the Business Times (Singapore) about S-chips which are listed on the Singapore Exchange (SGX) and Corporate Governance in general. Replace SGX by BM (Bursa Malaysia), and the story would be exactly the same.

Valuations for S-chips on the SGX (and BM) are very low, so why would a high-quality Chinese company choose to list on the SGX (BM)? It just doesn't make sense. In other words, they will only be able to attract lower quality Chinese companies.

Also, about the conflicting role SGX being market watchdog and profit-making company, exactly the dilemma for BM (reason why they never should have been listed in the first place).

Market manipulation and insider trading, another subject very relevant for BM, who hardly takes any action at all against these perpetrators.

And then the conclusion: "Hardline measures like these are surely worth considering. Augmenting SGX's (BM's) market-based regulation with strict penalties, prompt investigation and greater transparency in disclosing the findings of investigations may result in better quality listings - and eventually, higher valuations.".

I can't agree more on that.

By R SIVANITHY

IN HER excellent commentary, 'Why S-chip fraud cases keep cropping up' (BT, Feb 17), NUS finance professor Qian Meijun identified the local market's low valuation as one reason for the scandals relating to China stocks that investors have had to endure over the past five years.

In other words, companies which had poor fundamentals, questionable accounting and/or lousy governance were happy to list here because the ramifications of being exposed were seen as being negligible.

Such an attitude does not only apply to S-chips, but also to several other questionable companies with less-than-desirable governance.

Many of these firms - some controlled by Singaporean shareholders - are incorporated in tax havens such as Bermuda or the British Virgin Islands and over the years have made announcements of outrageously large contracts that, once the share price has shot up and the relevant parties have bailed out, hardly ever materialise.

Problem is, it looks like there are no checks to see if the original disclosures were bona fide and action taken if they were not.

This has led to the impression of a lax regulatory regime where manipulation is easy. Such a misperception must be addressed.

When share prices shoot up or plunge inexplicably, for instance, querying companies is of limited use because 99.9 per cent of the time the reply is negative and nothing more is heard.

Granted, scrutinising all the trades for dozens of odd price rises or falls is very laborious but in order to send the correct message, why not just pick one or two and focus all energies on those?

Syndicates or 'operators', as they are popularly known in local broking circles, always have to accumulate stock ahead of their ramping activities or before big announcements.

Deterrent message
Going through trades of just one or two large odd price-movers with a fine tooth comb before, during and after the movement and then coming down hard on any improper practices uncovered would go a long way in sending the necessary deterrent message to the market and would surely help prevent more scandals from emerging.

Stiffer penalties and prompt action are a must. In Australia, the punishment for illegal market activities was raised significantly in 2009, when the role of primary market regulator was transferred from the Australian Stock Exchange to ASIC (the Australian Securities and Investments Commission). Insider trading, for example, can now result in 10 years in jail compared to five previously.

In addition, ASIC this week released a formal document pledging to be more public in warning investors of emerging risks in financial markets as well as detailing the specifics of an investigation if it was in the public interest.

Hardline measures like these are surely worth considering. Augmenting SGX's market-based regulation with strict penalties, prompt investigation and greater transparency in disclosing the findings of investigations may result in better quality listings - and eventually, higher valuations.
'A high-quality firm that meets the listing standards of more than one market will naturally choose the one that appreciates its shares more,' wrote Prof Qian.

'Low valuation leads to low quality and the low quality confirms the low valuation. It is a vicious cycle.'
She also pointed out that the Singapore Exchange's conflicting roles as market watchdog and profit-maximising company may have contributed to the problem, since the exchange could in theory have admitted companies that were hastily packaged to meet listing standards on paper but had little real substance behind them.

What can be done to break out of the negative cycle? SGX's conflict of interest is a controversial subject that has been exhaustively debated over the 12 years that the exchange has been a listed entity.

Checks and balances
The official position is that there are sufficient checks and balances in place to ensure SGX's objectivity and so there is no need to revamp the present model which relies on market/disclosure-based discipline.

Since the existing regulatory model is here to stay, what might be done within the boundaries of that model to enhance public interest and boost valuations?
A useful starting point might be to acknowledge that even if the exchange had unwittingly allowed sub-standard investment-grade firms to list here, the prime motivation in the first place for those companies to go public and foist their shares upon an unsuspecting and admittedly gullible Singapore public was that they believed that when they were found out, they would probably be able to get away with it.

Published February 24, 2012

Bursa should ban the use of DCF valuations

2012-02-24T10:45:00.002+08:00

Catcha Media Bhd is proposing to buy over 50% of Auto Discounts Sdn Bhd (ADSB) for RM 5,000,000, valuing the whole company at RM 10,000,000. Auto Discounts operates a website carlist.my with on-line car classifieds.

The circular can be found here:

http://announcements.bursamalaysia.com/EDMS/subweb.nsf/LsvAllByID/AC12354CE071892A482579AD002507A4?OpenDocument

The financials of ADSB are as follows:

The numbers do not look exactly attractive, cumulative revenue over the first 3 years of operating were not even RM 100K. Due to the history of loss making the shareholders' funds are minus RM 1.7 million.

Moore Stephens AC Advisory Sdn Bhd is brought in to value this company. They use two methods:

[1] Revenue Multiple (RM) and

[2] Discounted Cash Flow (DCF).

Their findings:

[1] RM: Moore Stephens uses a multiple of 6.0, but this is a very high multiple, much more normal are revenue multiples of between 1 and 2. Also, since RM 5.85 million represents 50% of ADSB, they value the whole company at RM 11.7 million. Given the multiple of 6.0 they expect a revenue of RM 1.95 million for this year, which seems very high given the first half year revenue of only RM 0.29 million.

[2] DCF: Moore Stephens calculates the value of ADSB to be RM 12 million. This is a very high valuation and unfortunately, as always in Malaysia, the whole basis of this valuation (the projections regarding revenue, expenses, profits, etc) are not revealed, so the readers can't check anything at all. Although the whole report contains 79 pages and the DCF data can be packed in a single page, this information (probably the most important part of the whole report) is always left out.

Apart from that, DCF valuations are only reliable if the underlying business (or asset) has a very stable income and revenue stream, like a toll bridge or a bond or sometimes a blue chip with a history of 40 year stable growing profits and dividends. A young internet startup with a history of losses and a very uncertain growth path is therefore the least suitable to be used for this kind of valuation: a small change in growth rate will give hugely different outcomes.

Bursa Malaysia really should ban the usage of DCF models in circulars, readers have no way of evaluating the quality of these (often sky-high) valuations since all important details are left out.

Disclosure: I own indirectly a company that owns a website which is a competitor to carlist.my. I have a Masters degree in Maths, have used mathematical models for 30 years and have put my money where my mouth was (by actively investing using the models, not just coming up with theoretical values). I have used DCF valuations before, but have stopped using them due to the highly uncertainty of the outcome, and the limited possibilities to use them.

Edgeworth blames recession, credit crunch for troubles

2012-02-23T18:24:00.004+08:00

(updated version)

The first blogging about Edgeworth Properties received a lot of hits, therefore the second article from Singapore, I haven't read any news from Malaysia yet. I sincerely hope not too many Malaysians and Singaporeans are caught in this. Things are not looking well at all, according to below article.

Also mentioned are the sales commission and marketing expenses, 34%. How is it possible to promise returns up to 100% of the investment amount after such commissions?

These kind if investments are not bought but sold, the hard way.

Update:

There is an article in The Star, in the Property Scene:

http://www.starproperty.my/PropertyScene/TheStarOnlineHighlightBox/19231/0/0

A very interesting link about the legal proceedings:

http://www.grantthornton.ca/resources/creditor_updates/documents/Edgeworth%20Properties/Second%20Report%20to%20Court%20of%20the%20Monitor%20dated%20February%2017,%202012%20incl%20appendices.pdf

The last pages (the appendices) contain letters/emails mostly from angry customers. Also an email from Grace Leong, she is really chasing this case, I love her attitude. Since I have left Malaysia after 16 years, I am quite surprised about the Singaporean journalists, they are doing a good job especially in these kind of Corporate Governance issues. A very big difference compared to Malaysia.

From The Business Times (Singapore):

By GRACE LEONG

EDGEWORTH Properties Inc - whose land-banking scheme had drawn thousands of investors in Singapore - has laid the blame for its liquidity crisis on the recession that had hit both the property and financing markets hard. And unexpectedly high cost overruns only made matters worse, the Canadian company declared in court papers to back its bid to restructure its operations while keeping creditors at bay.

There are 'no funds to satisfy, in whole or in part' the buy-back obligations to these investors, said Edgeworth chairman Donald Hurst.

Edgeworth chairman Donald Hurst, in an affidavit filed with the Ontario Superior Court of Justice in Toronto last fall, said that the company had C$69 million (S$87 million) in secured debt, C$31 million in unsecured debt, and potentially owes C$144 million to nearly 4,000 investors in Asia and 100 more in Canada.

According to Mr Hurst, the C$144 million represents the company's obligations to buy back the Asian investors' undivided property interests (UDI) or beneficial ownership in 12 parcels of land in Alberta at a premium when it comes due over the following five years. It also includes the company's obligations to buy back UDI in one other parcel from the Canadian investors.

But with insufficient liquidity to service its debt and its current assets worth less than its cumulative obligations, Edgeworth is insolvent, Mr Hurst said.

There are 'no funds to satisfy, in whole or in part' the buy-back obligations to these investors, he said. In fact, the monies raised by the UDI programmes were 'insufficient on their own to complete the development of the properties'.

In seeking restructuring protection, Mr Hurst said that the Asian UDI investors, among others, are 'most at risk' if there is no 'orderly value maximisation process' to deal with their claims and property interests.

The nearly 4,000 investors, which sources said include over 2,000 in Singapore, had invested some C$70 million between 2007 and 2011 but received land titles to only three of the 12 properties. The investors had alleged that Edgeworth, after taking their money, used some of the properties as collateral for loans that it received from mortgage firms. Sources say that Singapore investors accounted for more than half of the C$70 million investment.

Land-banking firms typically buy rural land with the intent to rezone it into commercial or residential use, or both.

In Edgeworth's case, the company planned to use investment monies raised through the UDI programmes to fund the costs of rezoning and subdividing the properties as well as the payout of mortgages. The company, Mr Hurst said, would then sell or develop the property and use the income generated to buy back the UDI units from the investors.

'Unfortunately, due to the recent recession and its impact on the real estate and financing markets, financing became extremely expensive or otherwise, unavailable. As a result, Edgeworth was unable to raise sufficient financing for its numerous projects.'

Thus, the rezoning and subdivision of the properties have not been completed and only three UDI programmes have had their mortgages paid off and their titles transferred to the Asian investors.
To date, none of the 20 parcels owned and managed by Edgeworth in Alberta have been fully developed, Mr Hurst said.

'The lack of adequate financing coupled with significant overhead and operating costs left the Edgeworth Group in a state of constant financial struggle, forced to use all of its resources just to service debt and pay operating expenses.

'The monthly interest costs on the mortgages on the properties are roughly C$800,000, and prior to downsizing initiatives . . . maintaining offices and staff throughout Canada and Asia was costing Edgeworth roughly C$1 million per month.'

He also cited other 'unforeseen factors' including 'mandated changes to the investment market . . . and shareholder-related issues'. 'These collective difficulties have depleted Edgeworth of its cash reserves, leaving Edgeworth in a liquidity crisis, and unable to satisfy its current and future obligations.'

According to Mr Hurst, Edgeworth raised C$64 million from the Asian and Canadian investors under the UDI programmes. After paying sales agents' commissions and the marketing expenses of its sales offices in Singapore, Malaysia and the Philippines, which amounted to C$22 million, the remaining C$42 million was transferred to Canada. Of this amount, Edgeworth refunded C$5.3 million to several UDI investors for various reasons, he said.

Of the remaining C$36.7 million, C$29.5 million went to property acquisition, C$3.7 million was used to pay down mortgages, C$2.8 million was used to cover 'additional Asian remuneration and selling expenses' and the remaining C$700,000 covered head office administrative expenses.

Published February 22, 2012

Walter Schloss, ‘Superinvestor’ Who Earned Praise From Buffett, Dies at 95

2012-02-23T08:54:00.000+08:00

Legendary US value investor Walter Schloss died on February 19, 2012, at the age of 95.

Walter Schloss, right, stands for a photo with his son Edwin.

Source: Heilbrunn Center for Graham and Dodd Investing, Columbia Business School via Bloomberg

Warren Buffett wrote about him: "Walter never made a dime off of his investors unless they themselves made significant money. He charged no fixed fee at all and merely shared in their profits. His fiduciary sense was every bit the equal of his investment skills."

His investment style was based on sheer hard work: "The Schloss theory of investing, passed from father to son, involved minimal contact with analysts and company management and maximum scrutiny of financial statements, with particular attention to footnotes."

http://www.bloomberg.com/news/2012-02-20/walter-schloss-superinvestor-who-earned-buffett-s-praise-dies-at-95.html

http://www.aliceschroeder.com/blog/walter-schloss-what-guy

CAD on trail of Edgeworth Properties?

2012-02-22T19:06:00.003+08:00

Article from The Business Times (Singapore) about landbanking company Edgeworth Properties. I am always very hesitant about these schemes, why would other countries (most often Canada) let Malaysians & Singaporeans run away with beautiful yields on their investments? Surely there are enough investors in Canada (or the US) who can invest and check out the land themselves? Also, the sales commissions on these kind of product are unbelievable high, from the $65 million in sales about one third went to sales commissions.

Buyer beware, when it sounds too good to be true, it often is ....

"Investors in a bind after Canadian land-banking firm's court protection move"

By GRACE LEONG

(SINGAPORE) Just a year-and-a-half after the Commercial Affairs Department (CAD) started probing Profitable Plots for allegedly not paying investors, BT understands that it is on the trail of another land-banking firm - Canada-based Edgeworth Properties Inc.

Published February 21, 2012

Singapore investors are apparently part of a group of 4,000 Asian investors who had invested some C$70 million in 12 parcels ... but received land titles to only three of them.

The Canadian company has obtained court protection to restructure its operations which includes closing its Asian offices - putting more than 2,000 investors in Singapore in a bind over their land investments in the province of Alberta.

Apparently, they are part of a group of 4,000 Asian investors from countries including Malaysia, the Philippines, Indonesia and Thailand who had invested some C$70 million (S$88 million) in 12 parcels in Alberta between 2007 and 2011 but received land titles to only three of the properties.

Sources say that Singapore investors accounted for more than half of the C$70 million investment.

A Singapore investor told BT that many investors had signed sales and purchase agreements with Edgeworth and paid for the properties in cash. But instead of transferring titles to them, Edgeworth, after receiving their money, allegedly mortgaged some of the properties to mortgage firms such as Romspen Investment Canada, the investor said.

Edgeworth also allegedly used several properties as collateral for loans that it had received from other mortgage companies, such as Firm Capital Corp, Hurlburt Farms Ltd, Liberty Mortgage Services Ltd and Sterling Bridge Mortgage Corp, she said.

Sources said that Consilium Law Corp, previously acting on behalf of the Asian investors, filed complaints with both the CAD and the Royal Canadian Mounted Police last September.

When asked, a CAD spokeswoman would only say: 'It is inappropriate to comment on police investigations, if any.'

Edgeworth Properties Singapore Pte Ltd, along with sister offices in Malaysia and the Philippines, closed after their parent sought and obtained protection in November under the Companies' Creditors Arrangement Act in Canada. The CCAA allows a business to restructure instead of immediately going into bankruptcy and allows creditors to recover part of what is owed to them.

The Ontario Superior Court of Justice in Toronto in November also issued an order placing 16 of the company's properties into receivership. Last month, the court issued an order extending the stay of proceedings until today, which prevents any claims from being pursued against the company to give it time to come to a resolution on its assets.

But Firm Capital, which holds the first registered mortgage on one of the properties, Creekside Estates, has succeeded in getting stay provisions removed on that property and is now seeking authorisation to sell it, court documents show.

Stikeman Elliott LLP, a Canadian law firm presently representing the Asian investors, said in court documents that it 'does not appear likely' that the Asian investors of Creekside Estates will receive any proceeds from that sale.

Complicating matters, Romspen Investment, another Edgeworth creditor, is also applying to the court to lift the stay of proceedings on several other properties. These include seven parcels that the Asian investors had paid for but did not get titles to, and which were instead mortgaged to Romspen, the Singapore investor said.

Grant Thornton Ltd, the court-appointed monitor of the Edgeworth Group, last Friday asked for the court to extend the stay of proceedings to May 31.

Michael Creber, Grant Thornton senior vice-president, argued in court papers that if Romspen's request was approved without additional protections, that could frustrate 'prospective transactions . . . currently being negotiated, which appear to be sufficient to repay the majority, if not all, of the amounts' due to the mortgage companies.

It could also result in other stakeholders, including the Asian investors, 'losing the ability to voice their concerns in a single forum', he said.

But should Romspen's request be granted, it should be amended to 'address the concerns of subordinate stakeholders', he added.

In particular, he asked that all interested parties, including the Asian investors, should be entitled to assert any claims that they may have to the Romspen-mortgaged properties and their sale proceeds.
Grant Thornton also supported Edgeworth's request for court approval to increase fee allowances to lawyers representing the various stakeholders including the Asian investors to C$200,000 from C$75,000.

In a Feb 13 letter to Kenneth L Campbell, Judge of the Ontario Superior Court of Justice, the Asian investors said: 'The current reality presents a grim picture to us recovering anything from the . . . parcels without issued title, but we will not go down without a fight.'

Land-banking firms such as Edgeworth typically buy rural land with the intent to rezone it into commercial or residential use, or both. These firms, in turn, invite investors to buy parcels of land.

In Edgeworth's case, the Asian investors said that they were allegedly promised net returns of 60, 80 or 100 per cent on so-called undivided property interests in Canada, depending on when the raw land obtains development approvals and when they exit their investments. This is expected to take five years or less.

'Edgeworth told me in March 2011 they wanted to buy back the land and will pay out 80 per cent returns on June 30, 2011. But in April, they claimed that they were in financial difficulty and couldn't make the payouts,' the Singapore investor said.

Many Asian investors, in their sales and purchase agreements with Edgeworth, also had to agree to not file a caveat or claim against the property, she said.

A lawyer said that that should have been a red flag to the investors. 'If you don't file a caveat against the land, then no one knows you have a claim on it.'

In the case of Profitable Plots, some 1,500 Singaporeans and 4,000 foreigners are believed to have invested in the land investment firm, which was raided by the CAD in August 2010 after some investors alleged that it owed them money. To date, the complaints involve investments of more than $30 million.

Raking muck, Part 1

2012-02-22T09:21:00.000+08:00

David Webb is a Hong Kong based Corporate Governance advocate, with exactly the right background. He has worked in the financial world as an investment banker, and knows the world inside-out. His work is always of outstanding quality (I don't think he was ever proven wrong on any issue) and a shining example for regulators how to research complex situations with accounting, legal and other issues involved.

Part 1 of a new series, long but highly recommended:

http://webb-site.com/articles/muck2012p1.asp

Masterskill hit by oversupply of new nurses

2012-02-21T23:04:00.002+08:00

Masterskill listed on Bursa Malaysia almost two years ago, it has not been a happy ride for those that picked up the shares at the IPO:

One remarkable fact from the IPO brochure was not so much the RM 5.5 million in listing expenses, but the fees paid by the selling shareholders, which amounted to a staggering RM 33.5 million.

The renumeration of the CEO over 2010 was RM 8.5 million, which is (in my opinion) clearly too high for a company of this size, with such a short trackrecord as a listed company.

Below article is from the Business Times (Singapore), February 21, 2012:

"Analysts cut forecast on expectations of weaker enrolment"

By PAULINE NG IN KUALA LUMPUR

RIDING on a high at its initial public offering (IPO) in 2010 when it went on the market with a 15-20 premium over its peers, Masterskill Education Group - the country's biggest nursing school - has found the ground shifting under its feet owing to an oversupply of new nurses.

Equity analysts, such as Hwang-DBS Vickers, who cover the Bursa Malaysia listed company have trimmed their earnings forecast on expectations of weaker enrolment, following a recent news report that slightly more than half of private nursing diploma graduates in 2010 could not land a job four months after graduating.

This is also in big part because of a mismatch in needs, Health Minister Liow Tiong Lai said recently, since most private nursing colleges only offer general training even though the private sector requires specialised nurses.

However, the writing was arguably already on the wall around the time of Masterskill's listing. Officiating at its prospectus launch, Higher Education Minister Mohamed Khaled Nordin announced a moratorium on new private nursing institutions to prevent an oversupply of nurses given the mushrooming of such colleges.

The proliferation of such colleges had ostensibly been allowed in an effort to improve the nurse to population ratio to international standards of 1:200 from 1:490 currently.

Of 106 institutions, some 60-odd are reportedly private providers, 11 are public institutions, while the health ministry runs the rest.

Some 37,000 students are said to be enrolled in nursing diploma courses with the private providers. About 12,000 students graduate annually, but only 1,500 are absorbed by the private sector.

Masterskill specialises in nursing and allied sciences programmes, and has an estimated student population of 14,000, with about a third currently enrolled in its nursing courses. Perceived as a leader in nurse training with an estimated 16 per cent market share of student enrolment, the training institution contends that its students have far greater success with employment.

But the negative publicity has hurt, especially because it is less diversified compared with its peers Help International and SEGI International.

Demand for its courses last year had already been eroded by other factors including a higher minimum entry requirement for nursing programmes, as well as the reduction in the maximum amount loaned by a government fund for students enrolling in such courses.

Hwang has trimmed its projected net profit for the fiscal year ended Dec 11 by about 7 per cent to RM42 million (S$17.4 million), and forecast earnings for FY12 and 13 at RM28.5 million and RM32.5 million respectively. For FY10, Masterskill had posted a profit of RM102 million.

Its share price has been on the decline since its listing in May 2010 at RM3.80 per share, and is currently trading at about RM1.16.

Controlled by businessman Edmund Santhara, Masterskill now plans to diversify into offering other courses including business, law and hospitality.

6 Trillion of fake Bonds seized

2012-02-21T09:30:00.001+08:00

According to Bloomberg, "Italian anti-mafia prosecutors said they seized a record $6 trillion of allegedly fake U.S. Treasury bonds, an amount that’s almost half of the U.S.’s public debt."

From here the story just gets weirder: "The bonds were found hidden in makeshift compartments of three safety deposit boxes in Zurich, the prosecutors from the southern city of Potenza said in an e-mailed statement. The Italian authorities arrested eight people in connection with the probe, dubbed “Operation Vulcanica,” the prosecutors said. The U.S. embassy in Rome has examined the securities dated 1934, which had a nominal value of $1 billion apiece, they said in the statement. Officials for the embassy didn’t have an immediate comment." ...

And weirder: "The individuals involved were planning to buy plutonium from Nigerian sources, according to phone conversations monitored by the police." ...

And really, really weird: "The fraud posed “severe threats” to international financial stability, the prosecutors said in the statement."

Ok great, however one thing we don't get is just how can $6 trillion in glaringly fake bombs [sic] be a "threat to international financial stability."

http://www.zerohedge.com/news/6-trillion-us-bonds-seized-zurich?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+zerohedge%2Ffeed+%28zero+hedge+-+on+a+long+enough+timeline%2C+the+survival+rate+for+everyone+drops+to+zero%29

This is how one Trillion looks like:

Malaysia is well under way to have a national debt half that size in RM, with each note being a RM 100 note. The size of that debt has been downplayed by several people in high positions. I am much less optimistic, given the fact that the debt has continued to grow, even in good economic times.

More pictures:

http://usdebt.kleptocracy.us/

8 Rules of Investing

2012-02-20T10:55:00.000+08:00

Eight Rules of Investing by David Merkel: good, common sense rules that can help investors create a low-turnover portfolio of good quality, value companies. The only rule I would like to change is Rule 7, I think investing in 30-40 companies is too much for most people and an investor might lose focus, I think investing in 10 companies for the purpose of diversification should be fine. What I miss is the empasis on management (people) and their track record (Corporate Governance) in related companies.

David Merkel:

My objective in guiding investors is to teach them how to tilt the odds of success in their favor. As a value investor that rotates sectors, I have eight methods that each tilt the odds a little in my favor. Individually, each tilt is worth a little. As a group, they have been very powerful for my past results. Unaudited, these methods have allowed me to beat the market since the strategy started in September of 2000.

Industries are under-analyzed, relative to the market on the whole, and relative to individual companies. Spend time trying to find good companies with strong balance sheets in industries with lousy pricing power, and cheap companies in good industries, where the trends are not fully discounted.
Purchase equities that are cheap relative to other names in the industry. Depending on the industry, this can mean low P/E, low P/B, low P/S, low P/CFO, low P/FCF, or low EV/EBITDA.
Stick with higher quality companies for a given industry.
Purchase companies appropriately sized to serve their market niches.
Analyze financial statements to avoid companies that misuse generally accepted accounting principles and overstate earnings.
Analyze the use of cash flow by management, to avoid companies that invest or buy back their stock when it dilutes value, and purchase those that enhance value through intelligent buybacks and investment.
Rebalance the portfolio whenever a stock gets more than 20% away from its target weight. Run a largely equal-weighted portfolio because it is genuinely difficult to tell what idea is the best. Keep about 30-40 names for diversification purposes.
Make changes to the portfolio 3-4 times per year. Evaluate the replacement candidates as a group against the current portfolio. New additions must be better than the median idea currently in the portfolio. Companies leaving the portfolio must be below the median idea currently in the portfolio.

Each of these rules enforces a discipline on the overall portfolio that most professionals and individual investors do not possess. It takes the emotion out of investing, and forces us to think like risk-sensitive, profit-seeking businessmen. I agree with Buffett when he said, “I am a better businessman because I am an investor, and I am a better investor because I am a businessman.” The two disciplines mutually reinforce each other, leading to better results.\

More information: on the website from Barry Ritholtz:

http://www.ritholtz.com/blog/2012/02/david-merkel-the-eight-rules-of-my-investing/

PMI: more questions than answers

2012-02-19T17:40:00.001+08:00

PMI published its offer document for the take-over offer. To recap, the joint offerors, companies controlled by Khoo Kay Peng, offer RM 0.045 per PMI share, which must be one of the lowest offers ever recorded on Bursa Malaysia.

More information can be found here: http://cgmalaysia.blogspot.com/search/label/PMI

The offer document does not answer issues raised, and even adds some more. These kind of documents are supposed to deal with important issues, but in Malaysia they are very good in avoiding them.

[1] The main issue is that the offerors bought their shares from (primarily) the Hope Foundation, and that this price is used for the price offered to the minority investors. But the Hope Foundation seems to be connected to the offeror, there are many indications to be found on the internet, for instance in an article in "Malaysian Business", the previous name was even "MUI Foundation" and the shares it traded in where all connected to the offeror. But if this is indeed the case (and it seems to be very likely), then that means there is a huge conflict of interest, it would be in the interest of the joint offerors to make an offer as low as possible to the Hope Foundation, instead of an arms length offer. It would also explain why a large shareholder (Hope Foundation) would sell its shares for about the lowest price ever. Although this issue seems to be obvious, and the authorities are aware of it, it is never raised in the offer document, not even once. There is simply no mentioning at all of the Hope Foundation.

Here is a link from the website of Raja Petra, also about the Hope Foundation (I haven't been able to check the accuracy of the rather wild allegations though):

http://www.malaysia-today.net/mtcolumns/40479-tan-sri-dato-dr-khoo-kay-peng

[2] Investors who sold their PMI shares on August 24th or 25th for RM 0.040 will get half a cent extra per share, since the offer was already unconditional on August 24th. A pretty straight forward ruling, the announcement regarding the offer on August 26th was simply two days too late. The Securities Commission made this ruling on October 7th (good and fast action, I have to admit), PMI objected on October 10th (rather strange, it looks very clear that rules have been breached) and the SC overruled the objection. All correct, but why did the SC suddenly need 3.5 months to reach this conclusion, when their first ruling took less than two weeks? Because of this the whole process is hugely delayed. The impact will be very small, most trades on those two days were anyhow done at RM 0.045, investors have to reclaim their money if they made any on RM 0.040 and some will even have forgotten that they sold their shares those days. The total impact will be a few Thousand Ringgit at most. The delay by the SC is puzzling.

[3] The independent advisor will be Hwang-DBS. This company did another independent advice for the same offeror, more details can be found here:

http://cgmalaysia.blogspot.com/2011/09/muib-and-pmcorp-horrible-deal-from-past.html

In my opinion, both that Related Party Transaction between PMCorp and MUI and the independent report were the worst in Malaysia in the last 10 years, and that says a lot. Hwang-DBS is never punished in any way, shape or form (the authorities are aware about the horrific details of this deal but apparently are unwilling to take any action, for reasons only they know best). But to allow this same company to do another independent advice for the same major shareholder is pretty unbelievable.

[4] There is no mentioning at all in the document of the last Rights Issue by PMI and the projections done there. Interestingly, in that brochure PMI was projected to have losses in 2009, 2010 and 2011 (which is what happened), but to deliver profits from 2012 onwards. Why would shareholders accept a low offer just when profits are projected to kick in? At the very least there should be an update on these projections.

[5] There is no detailed discussion about the assets of PMI, mainly a building, a piece of land and shares in MUI: is there a way to unlock value, can or will they be revalued, etc.

[6] What is interesting (and this is almost completely ignored in the report) is that PMI is trading above the offer price, the last closing price is RM 0.06, 33% above the offer price. Since February 8, 2012 all transactions have been higher than the offered price.

It must be noted that quite a few breaches of rules by PMI have occurred (together with many Corporate Governance issues), but that so far nobody received even as much as a reprimand.

Everything Must Go! The Great European Fire Sale

2012-02-19T10:47:00.000+08:00

This could turn very big and nasty. The debt problems in Europe are huge. Finally, 3 to 4 years after the global economic crisis, some sense of urgency has set in and governments are deleveraging after having lived way beyond their means. The amount of government bonds that have to be rolled over before the end of the year are staggering, I have seen estimates of over two Trillion Euro: 2,000,000,000,000.00.

http://www.independent.co.uk/news/world/europe/everything-must-go-the-great-european-fire-sale-7079815.html

All over Europe, nations have been looking for a quick, innovative way out of the debt trap. Unfortunately, they've all had the same idea. Tom Bawden explains, while Charlie Cooper anatomises the great European fire sale

What do Rome's 2020 Olympic bid, Portugal's Shrove Tuesday carnival, Greece's sunlight, Ireland's National Stud, Spain's national lottery and Britain's national air traffic control service have in common? Answer: they are all being either sold or cancelled by European governments desperate to whip their public finances back into shape after a decade of living beyond their means.

Such measures would once have suggested incomprehensible panic. Now everyone's at it. It would have been more surprising if Mario Monti hadn't called off an Olympic bid that could have swallowed up €9.5bn (£8bn) that his near-bankrupt nation didn't have.

But it's not just radical belt-tightening that we're seeing. A remarkable number of nations are also doing the equivalent of selling the family silver, in a Europe-wide fire sale of state assets with no obvious precedent.

Greece is probably the Continent's biggest auctioneer, with an estimated €50bn of assets up for sale (see far right). But others have had the same idea. Ireland, for example, is considering the sale of billions of euros of assets, from Dublin's historic port to the Irish National Stud horsebreeding operation.

Spain is looking to raise cash by offloading, among other things, two major airports and a large chunk of its most famous lottery ("El Gordo", or "The Fat One").

Britain is hoping to convert the Government's 49 per cent stake in National Air Traffic Services into ready cash, along with the BBC's "doughnut" Television Centre, in West London, and the iconic Admiralty Arch. The latter, on the edge of Trafalgar Square, is expected to fetch £75m and be turned into a hotel. The Ministry of Defence and the Foreign Office are also planning spectacular disposals of assets to plug holes in their finances. (And that's without mentioning the sales that have already taken place, such as that of the high-speed rail link from London St Pancras station to the Channel Tunnel, which went to a pair of Canadian pension funds for £2.1bn in November 2010.)

These desperate remedies might seem ambitious at the best of times – but this isn't the best of times. Most nations in Europe urgently need need to get their finances in order, and most have had the same idea of raising some quick cash through fire sales. And if everyone puts things up for sale at the same time, it is bound to depress prices.

That may explain why there's such a gap between the headline figures that get reported when mooted sales are announced and the sums that are actually raised. Greece, for example, has so far raised a mere €180m of its declared target of €50bn.

Yet there should, ultimately, be no shortage of buyers. China is looking to invest its riches in every nook and cranny of the world, while governments in the Middle East still seek to spend their oil wealth.

It is hard to know whether to feel cheered or depressed by this prospect. On the one hand, anything that can speed our escape from debt is to be welcomed. On the other, family silver, once sold, remains sold. As our economy is increasingly sidelined by China and India, there is a strong danger that things will never get back to the way they were.

Tom Bawden

Judiciary not independent, how about Bursa regulators?

2012-02-17T11:35:00.002+08:00

Interesting article about former Chief Justice Tun Mohd Dzaiddin Abdullah:

http://www.themalaysianinsider.com/malaysia/article/judiciary-now-cowed-due-to-dr-m-says-ex-cj/

The courts have become subservient to politicians in the executive arm of government today because of Tun Dr Mahathir Mohamad, former Chief Justice Tun Mohd Dzaiddin Abdullah said today.

He stressed: “This alters in my view in a very fundamental manner the basic structure of the Federal Constitution, from the concept of the independence of the judiciary to dependence of the judiciary on the executive for its judicial powers.”

The response came soon:

http://www.themalaysianinsider.com/malaysia/article/dr-m-says-ex-cjs-claims-about-cowed-judiciary-a-lie

Tun Dr Mahathir Mohamad has called a former chief justice’s claim that the courts are subservient to politicians due to constitutional amendments made during his tenure a lie.

“That’s slander, but I won’t sue them. That whole gang, they make unfounded accusations,” the former prime minister said

The Lingam video clip plays an important part in the discussion if the Malaysian courts are independent:

http://en.wikipedia.org/wiki/Royal_Commission_of_Inquiry_into_the_Lingam_Video_Clip

"On 17 January 2008 Mahathir was brought before a Royal Commission that look the manipulation of top judicial appointments during his administration, a scandal that has cast doubts about the independence of Malaysia's judiciary. He was made to testify before a government inquiry into a secretly recorded video clip that showed a man believed to be a prominent lawyer, V. K. Lingam, boasting that he could get key judicial appointments made with Mahathir's help. Throughout the inquiry Mahathir feign ignorance and forgot key timelines."

"A new revelation appeared showing PKR President Anwar Ibrahim releasing a third video clip purportedly showing Lingam talking about having dinner with and buying an expensive gift for former Chief Justice Tun Mohamed Dzaiddin Abdullah. Anwar said he was disappointed the Royal Commission which focused solely on the fixing of judges and did not allow evidence that court decisions had also been fixed."

But how about independence of other institutions, like the Securities Commission and Bursa Malaysia? Enforcement actions by these institutions can be found here:

http://www.bursamalaysia.com/website/bm/media_centre/media_releases.html

http://www.sc.com.my/sub.asp?pageid=&menuid=229&newsid=&linkid=&type=

There is simply no enforcement against Government Linked Companies (GLC), established "blue chips", or corporate high-flyers.

The Institute of International Finance wrote a well-researched report in 2007:

"Corporate Governance in Malaysia, an Investor Perspective".

http://www.iif.com/gcm/corpgovern/reports/article+81.php

[please click on "Malaysia]

Although positive remarks can be found regarding improvements, there are also some harsh observations:

Despite its operational independence, the SC is perceived as being influenced by the MoF by a cross-section of market participants and is considered to be a weak regulator. Nevertheless, it is considered a much stronger regulator than the Companies Commission, which is responsible for regulating all companies incorporated under the Companies Act of 1965. The SC has enforcement powers against those who breach the securities laws. However, companies and individuals who do not comply with the Companies Act can only be prosecuted by the Companies Commission, which has a weak surveillance and enforcement division. The SC, which has a stronger surveillance and enforcement function, provides the Companies Commission with information it may discover regarding financial wrongdoing or non-compliance during the course of SC investigations but there is limited coordination in bringing such companies to trial. However, on its own, the SC has taken action against companies that fail to ensure its consolidated financial statements are in accordance with approved accounting standards, corporate disclosures contain material omissions and submission of false information.

The following suggestions were made:

Establish a timetable to merge the Companies Commission and Securities Commission

Make the new entity a fully independent capital market regulator to increase the effectiveness of the regulatory structure

Encourage investigative financial journalism and freedom of press

Introduce international best practices currently not included in the Malaysian Code on Corporate Governance such as cumulative voting, disclosure of off-balance-sheet transactions, and risk monitoring methods

This report is written five years ago, but nothing has really changed regarding the above suggestions, except for some items in the Corporate Governance Blueprint 2011.

Felix Zulauf's market prognosis

2012-02-15T09:07:00.000+08:00

Legendary Swiss investor Felix Zulauf believes that the current rally in risk assets is likely to last until at least the end of March, but that global sharemarkets will again succumb to downward pressure in the second half of the year.

In a wide-ranging interview with Business Spectator, Zulauf, who is president of Zulauf Asset Management and who has been a member of Barron’s Roundtable for more than 20 years, paints a gloomy picture of debt-laden industrialised countries, where central banks have no choice but to print money in an attempt to stave off dire deflationary pressures.

He also predicts that dwindling demand from the West will force China to redouble its efforts to boost domestic consumption, but that this will reduce China’s rate of economic growth.

Rest of the article:

http://www.businessspectator.com.au/bs.nsf/Article/Felix-Zulauf-Swiss-rally-risk-assets-Greece-crisis-pd20120213-RER8N?OpenDocument&src=sph&src=rot

How corruption takes a toll on the bourse

2012-02-14T19:09:00.003+08:00

According to Dr. Jerram: "Low corruption leads to high income per capita and high equity market valuations". The last is logical since low corruptions also tends to lead to high corporate governance, which improves valuations.

Malaysia had once the highest income per capita of all the countries in the below graph (in Asia only Japan had a higher income per capita). A huge effort is needed in fighting corruption and improving corporate governance, not only in words but in deeds.

Link between graft, per capita income and valuations: study

IF typically the stock market and the economy each seem to have a life of their own, consider how rife graft is in the country.

There's a close link between corruption perceptions, income per capita and equity market valuations, particularly for developing economies, according to findings by Richard Jerram, chief economist at Bank of Singapore.

Drawing on Transparency International's annual corruption perceptions index, Dr Jerram points to two countries in particular - Indonesia and India - that illustrate the 'potential benefits to economies, as well as equity and bond markets, from improving governance, and the hazards from heading in the wrong direction'.

Declining perceptions of corruption in Indonesia over the last 10 years - as reflected in an improving corruption perceptions index score during the period - have been accompanied by a rise in the country's investment-to-GDP ratio.

Views about corruption in India, on the other hand, have worsened in recent years and this has led to a decline in the investment-to-GDP ratio. 'This has been a major factor behind infrastructure bottlenecks that have led to persistently high inflation and a slowing trend growth rate,' says Dr Jerram in a report titled Honesty, Growth and Markets published yesterday.

The trends are also seen in the financial markets, he notes. The Indian equity market has weakened over the past four years, and remains 15 per cent below early 2008 levels. Indonesia's stock market, in contrast, is 40 per cent higher and its bond market has fared well, 'illustrating that the quality of growth is important and not just the absolute speed'.

The report also cites research findings about corporate governance being worse under corrupt governments, with firms from more corrupt countries trading at lower market multiples.

After all, corruption can be seen as a form of tax on economic activity, as it raises, in effect, the cost of doing business and reduces returns to investors, says Dr Jerram.

But, for the equity market, it is 'the change in the corruption perceptions index that seems to matter rather than the absolute level', he notes, comparing the findings for Indonesia with the trends for Malaysia, Thailand and the Philippines.

Only the Philippines perhaps shows promise - its 2011 corruption index was its best since 2004. 'Thailand is still trying to repair the damage from increased corruption perceptions from the previous Thaksin administration, while Malaysia is struggling to convince investors about its latest economic reform plan.'

Asked about the corruption perceptions trend findings for Singapore, Dr Jerram said the link is 'not particularly relevant for developed economies as other factors are more important for investment'.

But there is generally a close relationship between the corruption perceptions index and per capita GDP in Asia. 'Identifying countries that are successfully reforming and improving business conditions also points towards rising incomes and stronger capital markets,' he says.

The Business Times (Singapore), February 14, 2012

Proton: possible Insider Trading, was EPF one of the victims?

2012-02-12T15:56:00.009+08:00

Te recap: on January 16, 2012 DRB-Hicom announced that it would buy the shares of Proton from Khazanah Nasional for RM 5.50 per share and that it would make a Mandatory General Offer for all other shares. But up to that date, the share price of Proton had increased by about 100% in high volume since the first half of November 2011, giving rise to suspicion of insider trading, possibly in a large scale.

The chain of events (official announcements to Bursa Malaysia in red):

14-11-2011 Protons shares are thinly traded around RM 2,70 per share, in low volume of about 300,000 per day, as was normal for the preceding two months.

15-11-2011 The share price takes off, it closes at RM 3.21 in brisk volume of 4,300,000, more than ten times higher than the average volume in the previous days.

The trading volume in Proton shares will stay very high in the coming 12 trading days, averaging 4,400,000 shares.

17-11-2011 Article in The Star: "Research analysts and stockbrokers are surprised by the sudden surge in Proton's share price. They say the marketplace is abuzz with all sorts of rumours.".

3-12-2011 Article in The Star: "Speculations that Proton Holdings Bhd is once again a subject of a takeover or a management buyout persisted as the share price of the national auto maker spiked on Friday, rising to a nine-month high at 51 sen to RM3.61 a share."

5-12-2011 The volume has increased to more than 20 million (60 times its normal volume in the first half of November 2011), the price jumped further up from RM 3.82 to RM 4.50.

Bursa Malaysia finally issues an "UMA" (Unusual Market Activity) enquiry, three weeks after the share price took off in unusual high volume. This day represents the vertical line in the above graph.

6-12-2011 Proton announces: "The Board of Directors of PROTON wishes to clarify that after making due enquiry with the Board of Directors and major shareholders, the Company is not aware of any reason for the unusual market activity in the shares of the Company recently, and further, that there is no material corporate development not previously disclosed.". Khazanah Nasional is a major shareholder of Proton.

The article in The Star of that day: "Euphoria is in the air for Proton Holdings Bhd as its share price put on 89 sen or 24.6% to close at RM4.50, amidst talk that its largest shareholder, Khazanah Nasional Bhd, is divesting its stake in the national carmaker. A weekly reported that Khazanah was likely to ask for business proposals from parties interested in its 42.7% stake in Proton.".

8-12-2011 DRB-Hicom announces: "We refer to Bursa Malaysia Securities Berhad’s (“Bursa Malaysia”) telephone query on Thursday, 8 December 2011 regarding the above article appearing in page 1 of Starbiz section, The Star newspaper dated 8 December 2011. In this regard, we wish to inform Bursa Malaysia that the Company is not aware of the source and the basis of the article."

The article in The Star: "DRB-HICOM Bhd's bid for control over Proton Holdings Bhd is likely to include the presence of Volkswagen AG at a later stage, a reliable source said. DRB-HICOM's plan is to first secure a controlling block in Proton. But at a later stage or second phase of the deal, DRB would divest some of its equity to Volkswagen, resulting in both parties sharing control and management in Proton, the source said. Such a structure could make the deal more desirable, considering that it moved away from the prospects of Proton falling into the hands of a foreign party, an issue which was likely to have been part of the reasons why previous attempts by Volkswagen to buy into Proton were scuttled."

12-12-2011 Article in The Star: "Proton adviser Tun Dr Mahathir Mohamad said that Khazanah was selling because it was not pumping more money into Proton, which needed funds for research and development work on new products such as hybrid cars. “I worry about the buyer (DRB-HICOM) having enough money to inject into Proton. The shares it will be buying are above market price, which will make profitability difficult,” Dr Mahathir said after delivering a speech at the MIDF Investment Forum organised by MIDF Amanah Investment Bank Bhd".

13-12-2011 Announcement by Proton: "The Board of Directors of Proton Holdings Berhad wishes to inform that after making due enquiry with the Major Shareholder, Khazanah Nasional Berhad ("Khazanah") has informed that, in its normal course of business, it regularly receives proposals, enquiries and expressions of interest in relation to its various investments and companies where it has interest in, including Proton. Khazanah will make necessary disclosure at the appropriate time."

Article in The Star: The time has come for Khazanah Nasional Bhd to state its intentions about its 42.7% stake in Proton Holdings Bhd. With so much speculation on Khazanah's possible divestment plans, it would only do Khazanah and the market good if it said something more than the usual “We don't comment on speculation”.

28-12-2011 Article in The Star: "Persistent rumours about a possible takeover had resulted in spikes in Proton's share price in recent weeks. Among the names linked to the takeover included local automotive assembler DRB-HICOM Bhd, the Naza group (the country's largest privately held automotive group), Sime Darby Bhd and UMW Holdings Bhd.".

31-12-2011 Article in The Star "Should Proton Holdings Bhd go to DRB-HICOM Bhd?"

5-1-2011 The volume increases further to 9,500,000 shares, the share price closes above RM 5.00.

6-1-2011 Article in The Star: "The share price of Proton Holdings Bhd jumped to an intra-day four-year high of RM5.16 as talk and speculation on state fund Khazanah Nasional's 42.7% stake sale in the national carmaker intensify..... Industry observers said DRB-HICOM seemed to be the front-runner in the fight for the stake".

9-1-2011 The volume is 8,700,000 shares.

DRB-Hicom announces regarding the article "Bid for Proton Stake": "We refer to Bursa Malaysia Securities Berhad’s (‘Bursa Malaysia”) telephone query on 9 January, 2012 regarding the above article appearing in the various newspapers dated 9 January 2012. We wish to inform Bursa Malaysia that DRB-HICOM has always viewed Proton Holdings Berhad (“Proton”) as an important automotive industry player and accordingly DRB-HICOM was on the look-out for when opportunity will arise to explore any viable proposal(s) which will benefit and add value to the Group’s business and expansion plans. In this regard, the Company has submitted a bid for the acquisition of Proton’s shares held by Khazanah Nasional Berhad (“Khazanah”). As at to date, the proposal is pending decision by Khazanah.".

12-1-2011 15.9 million shares are traded between RM 5.34 and 5.49

13-1-2011 11.8 million shares are traded between RM 5.18 and 5.53

16-1-2011 Proton shares are suspended and the announcement is made that DRB-Hicom will buy over the shares for RM 5.50.

The above chain of events make a bad overall impression. It looks very much that certain parties where privy of inside information.

Why was Bursa Malaysia so late with its Unusual Market Activity query? The share price of Proton had increased already over 3 consecutive weeks by a whopping 70% while the daily turnover had risen 20-fold when it finally took action.

The announcement on December 6, 2011 by Proton looks puzzling to say the least. The market was rife with rumour, but Proton nor Khazanah Nasional wasn't aware of anything at all?

The fact that the share price was more or less capped on RM 5.50 on the days before the final announcement on January 16, 2011, do suggest that certain parties might have known the price that DRB-Hicom would offer.

Also, both Proton and DRB-Hicom appeared remarkably passive in issuing announcements, both only responded on queries from Bursa Malaysia (most notably on December 6, 8 and 13, 2011 and January 9, 2012) from Bursa Malaysia, they didn't initiate these announcements themselves.

From Bursa Malaysia's website: "We place significant emphasis on timeliness, adequacy and accuracy of disclosure to enable investors to make informed investment decisions.". Was that really the case in the above corporate exercise? I have strong doubts about that.

Who are the victims of the possible insider trading? Everyone who sold his shares between November 15, 2011 and January 16, 2012. EPF is definitely one of them:

Disposed 16/11/2011 500,000
Disposed 17/11/2011 50,000
Disposed 24/11/2011 4,392,300
Disposed 30/11/2011 2,714,000
Disposed 30/11/2011 2,000,000
Disposed 02/12/2011 1,000,000
Disposed 02/12/2011 1,000,000
Disposed 02/12/2011 1,000,000
Disposed 05/12/2011 441,300
Disposed 05/12/2011 1,000,000
Disposed 06/12/2011 100,000
Disposed 06/12/2011 577,800
Disposed 16/12/2011 60,000

EPF sold about 15 million shares of Proton, for a price clearly below the MGO price. If the buyers of these shares were trading with insider information, then EPF was disadvantaged for an amount of roughly RM 20-30 million on those trades.

Will EPF take any action? Until now, they have always been as quiet as a mouse, so I would not count on it.

Previous posts about this issue:

http://cgmalaysia.blogspot.com/search/label/Proton

Warren Buffett: Why stocks beat gold and bonds

2012-02-11T11:50:00.000+08:00

In an adaptation from his upcoming shareholder letter, the Oracle of Omaha explains why equities almost always beat the alternatives (bonds, gold, etc) over time.

By Warren Buffett

FORTUNE -- Investing is often described as the process of laying out money now in the expectation of receiving more money in the future. At Berkshire Hathaway (BRKA) we take a more demanding approach, defining investing as the transfer to others of purchasing power now with the reasoned expectation of receiving more purchasing power -- after taxes have been paid on nominal gains -- in the future. More succinctly, investing is forgoing consumption now in order to have the ability to consume more at a later date.

From our definition there flows an important corollary: The riskiness of an investment is not measured by beta (a Wall Street term encompassing volatility and often used in measuring risk) but rather by the probability -- the reasoned probability -- of that investment causing its owner a loss of purchasing power over his contemplated holding period. Assets can fluctuate greatly in price and not be risky as long as they are reasonably certain to deliver increased purchasing power over their holding period. And as we will see, a nonfluctuating asset can be laden with risk.

Investment possibilities are both many and varied. There are three major categories, however, and it's important to understand the characteristics of each. So let's survey the field.

Investments that are denominated in a given currency include money-market funds, bonds, mortgages, bank deposits, and other instruments. Most of these currency-based investments are thought of as "safe." In truth they are among the most dangerous of assets. Their beta may be zero, but their risk is huge.

Over the past century these instruments have destroyed the purchasing power of investors in many countries, even as these holders continued to receive timely payments of interest and principal. This ugly result, moreover, will forever recur. Governments determine the ultimate value of money, and systemic forces will sometimes cause them to gravitate to policies that produce inflation. From time to time such policies spin out of control.

Even in the U.S., where the wish for a stable currency is strong, the dollar has fallen a staggering 86% in value since 1965, when I took over management of Berkshire. It takes no less than $7 today to buy what $1 did at that time. Consequently, a tax-free institution would have needed 4.3% interest annually from bond investments over that period to simply maintain its purchasing power. Its managers would have been kidding themselves if they thought of any portion of that interest as "income."

For taxpaying investors like you and me, the picture has been far worse. During the same 47-year period, continuous rolling of U.S. Treasury bills produced 5.7% annually. That sounds satisfactory. But if an individual investor paid personal income taxes at a rate averaging 25%, this 5.7% return would have yielded nothing in the way of real income. This investor's visible income tax would have stripped him of 1.4 points of the stated yield, and the invisible inflation tax would have devoured the remaining 4.3 points. It's noteworthy that the implicit inflation "tax" was more than triple the explicit income tax that our investor probably thought of as his main burden. "In God We Trust" may be imprinted on our currency, but the hand that activates our government's printing press has been all too human.

High interest rates, of course, can compensate purchasers for the inflation risk they face with currency-based investments -- and indeed, rates in the early 1980s did that job nicely. Current rates, however, do not come close to offsetting the purchasing-power risk that investors assume. Right now bonds should come with a warning label.

Under today's conditions, therefore, I do not like currency-based investments. Even so, Berkshire holds significant amounts of them, primarily of the short-term variety. At Berkshire the need for ample liquidity occupies center stage and will never be slighted, however inadequate rates may be. Accommodating this need, we primarily hold U.S. Treasury bills, the only investment that can be counted on for liquidity under the most chaotic of economic conditions. Our working level for liquidity is $20 billion; $10 billion is our absolute minimum.

Beyond the requirements that liquidity and regulators impose on us, we will purchase currency-related securities only if they offer the possibility of unusual gain -- either because a particular credit is mispriced, as can occur in periodic junk-bond debacles, or because rates rise to a level that offers the possibility of realizing substantial capital gains on high-grade bonds when rates fall. Though we've exploited both opportunities in the past -- and may do so again -- we are now 180 degrees removed from such prospects. Today, a wry comment that Wall Streeter Shelby Cullom Davis made long ago seems apt: "Bonds promoted as offering risk-free returns are now priced to deliver return-free risk."

The second major category of investments involves assets that will never produce anything, but that are purchased in the buyer's hope that someone else -- who also knows that the assets will be forever unproductive -- will pay more for them in the future. Tulips, of all things, briefly became a favorite of such buyers in the 17th century.

This type of investment requires an expanding pool of buyers, who, in turn, are enticed because they believe the buying pool will expand still further. Owners are not inspired by what the asset itself can produce -- it will remain lifeless forever -- but rather by the belief that others will desire it even more avidly in the future.

The major asset in this category is gold, currently a huge favorite of investors who fear almost all other assets, especially paper money (of whose value, as noted, they are right to be fearful). Gold, however, has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.

What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As "bandwagon" investors join any party, they create their own truth -- for a while.

Over the past 15 years, both Internet stocks and houses have demonstrated the extraordinary excesses that can be created by combining an initially sensible thesis with well-publicized rising prices. In these bubbles, an army of originally skeptical investors succumbed to the "proof " delivered by the market, and the pool of buyers -- for a time -- expanded sufficiently to keep the bandwagon rolling. But bubbles blown large enough inevitably pop. And then the old proverb is confirmed once again: "What the wise man does in the beginning, the fool does in the end."

Today the world's gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce -- gold's price as I write this -- its value would be about $9.6 trillion. Call this cube pile A.

Let's now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world's most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?

Beyond the staggering valuation given the existing stock of gold, current prices make today's annual production of gold command about $160 billion. Buyers -- whether jewelry and industrial users, frightened individuals, or speculators -- must continually absorb this additional supply to merely maintain an equilibrium at present prices.

A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops -- and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil (XOM) will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.
Admittedly, when people a century from now are fearful, it's likely many will still rush to gold. I'm confident, however, that the $9.6 trillion current valuation of pile A will compound over the century at a rate far inferior to that achieved by pile B.

Our first two categories enjoy maximum popularity at peaks of fear: Terror over economic collapse drives individuals to currency-based assets, most particularly U.S. obligations, and fear of currency collapse fosters movement to sterile assets such as gold. We heard "cash is king" in late 2008, just when cash should have been deployed rather than held. Similarly, we heard "cash is trash" in the early 1980s just when fixed-dollar investments were at their most attractive level in memory. On those occasions, investors who required a supportive crowd paid dearly for that comfort.

My own preference -- and you knew this was coming -- is our third category: investment in productive assets, whether businesses, farms, or real estate. Ideally, these assets should have the ability in inflationary times to deliver output that will retain its purchasing-power value while requiring a minimum of new capital investment. Farms, real estate, and many businesses such as Coca-Cola (KO), IBM (IBM), and our own See's Candy meet that double-barreled test. Certain other companies -- think of our regulated utilities, for example -- fail it because inflation places heavy capital requirements on them. To earn more, their owners must invest more. Even so, these investments will remain superior to nonproductive or currency-based assets.

Whether the currency a century from now is based on gold, seashells, shark teeth, or a piece of paper (as today), people will be willing to exchange a couple of minutes of their daily labor for a Coca-Cola or some See's peanut brittle. In the future the U.S. population will move more goods, consume more food, and require more living space than it does now. People will forever exchange what they produce for what others produce.

Our country's businesses will continue to efficiently deliver goods and services wanted by our citizens. Metaphorically, these commercial "cows" will live for centuries and give ever greater quantities of "milk" to boot. Their value will be determined not by the medium of exchange but rather by their capacity to deliver milk. Proceeds from the sale of the milk will compound for the owners of the cows, just as they did during the 20th century when the Dow increased from 66 to 11,497 (and paid loads of dividends as well).

Berkshire's goal will be to increase its ownership of first-class businesses. Our first choice will be to own them in their entirety -- but we will also be owners by way of holding sizable amounts of marketable stocks. I believe that over any extended period of time this category of investing will prove to be the runaway winner among the three we've examined. More important, it will be by far the safest.

This article is from the February 27, 2012 issue of Fortune.

http://finance.fortune.cnn.com/2012/02/09/warren-buffett-berkshire-shareholder-letter/

Bursa Malaysia: earning income from fines?

2012-02-10T19:11:00.000+08:00

Yesterday, Bursa Malaysia (BM) announced its 2011 results:

http://announcements.bursamalaysia.com/EDMS/edmsweb.nsf/ba387758ae37412b482568a300466fb6/f38c1ecc61338cf84825799f00203fd2/$FILE/QuarterlyReport-31122011.pdf

The profit was RM 151 million versus RM 116 million the year before. That sounds good, until one realizes that this profit is made from commissions on trades and from listing fees. In other words, all coughed up by market participants, there is no free lunch here.

I have never been a fan of exchanges being privatized into listed companies, and BM is no exception. I think that exchanges should roughly break-even, although a small profit for a rainy day is ok. Also, there is an inherent conflict of interest situation between being a company and being a regulator, which BM is.

I was rather surprised when I read the following:

BM increased the fines hugely, by 154%. I am all in favour of that, both Bursa Malaysia and the Securities Commission have been much too lenient for a very long time. Enforcement has been improved recently, but what is completely missing is any enforcement whatsoever directed at well-know directors, blue chips and/or Government Linked Companies. It is simply non-existent.

But the strange situation is that Bursa Malaysia is booking fines as "other income". I would have guessed that the collected fines would be used for a good purpose like reimbursing investors who have been disadvantaged, funding MSWG or actively encouraging shareholder activism (something that is almost non-existent in Malaysia). By simply keeping the fines, BM is encouraged to hand out more and larger fines, to bolster the bottom line. Surely that can never have been the intention.

Better to run a Private Equity Fund than to invest in one

2012-02-08T11:34:00.000+08:00

Commissions, commissions, commissions. Managers of Private Equity Funds (similar to Hedge Funds) know all about them. Buyer beware!

http://www.nakedcapitalism.com/2012/01/quelle-surprise-its-better-to-run-a-private-equity-fund-than-invest-in-one.html

It’s perverse that it takes a Mitt Romney presidential bid to shed some long-overdue harsh light on the private equity industry.

It was not as hard as you might think to do well in the private equity business in the 1990s. Rising equity markets lift all boats, and PE is levered equity. A better test of the ability to deliver value is how they did in more difficult times.

The Financial Times reports on a wee study it commissioned to look into who reaped the fruits of private equity performance. Its findings:

From 2001 to 2010, US pension plans on average made 4.5 per cent a year, after fees, from their investments in private equity. In that period, the pension funds paid an average 4 per cent of invested capital each year in management fees. On top of those, private equity often collects a variety of other fees and a fifth of investment profits
“Assuming a normal 20 per cent performance fee, this would amount to about 70 per cent of gross investment performance being paid in fees over the past 10 years,” said Professor Martijn Cremers of Yale.

Now some readers might argue that even with fund managers feeding at the trough, 4.5% per annum returns were still better than the S&P 500, which delivered 1.7% compounded annual returns over the decade. But they are missing several things. First is that the S&P is extremely liquid and tolerates trades in size. By contrast, when you hand your money over to a PE fund, it is an expected 5 to 7 year commitment, and if the fund does badly, they will hold on to your money longer hoping a rally will allow them to unload some garbage barges at a decent price. I have no idea what rules of thumb are used to adjust returns to allow for extreme illiquidity and a lack of any control over exit timing, but in the stone ages when Goldman would value illiquid securities for estate purposes (a task that fell to junior investment bankers), we’d apply a 20% to 40% haircut.

A lot of investors, notably university endowments, took big hits when they put too much in private equity and found they were stuck in the crisis during 2007 to 2009. Some actually tried selling PE stakes in a pretty much non-existant secondary market and took huge haircuts. In addition, there were widespread complaints of the PE funds publishing phony valuations of their portfolios during that period. Bigger swings in value mean more risk, which mean worse Sharpe ratio, which is one of the benchmarks used by the pension fund ~~soothsayers~~ consultants.

So where are the customers’ yachts? The release of Mitt Romney’s tax returns, which show $21.7 million of income in 2010 and $20.9 million for 2011, demonstrate he could buy a fleet of yachts. Wonder how often he takes his clients for a ride, in both senses of the word.

The "battle" between SP Setia & PNB, another turn

2012-02-05T12:07:00.001+08:00

On September 28, 2011 PNB made an offer of RM 3.90 for the shares of SP Setia:

http://cgmalaysia.blogspot.com/2011/09/battle-between-sp-setia-pnb.html

"The Board has met to consider the Offer and are of the view, based on external valuations of the Company by investment analysts published before receipt of the Offer, that the Shares Offer and Warrants Offer fundamentally undervalues the Company."

Subsequently, PNB and the Board of Directors of SP Setia started negotations:

http://cgmalaysia.blogspot.com/2011/12/stock-options-and-bonuses-to-entice-sp.html

"Permodalan Nasional Bhd (PNB) may be paying out lucrative bonuses and stock options to property developer SP Setia Bhd’s top management staff in order to persuade them to stay on with the company following an offer by PNB to increase its stake in the property developer."

However, minority investors, holding 55% of the shares of SP Setia, did not get a chance to be involved in these negotiations at all, they were completely sidelined.

A deal was struck and a new offer was proposed on January 20, 2012:

http://announcements.bursamalaysia.com/EDMS/edmswebh.nsf/all/482576120041BDAA4825798B00295D17/$File/Press%20Release.pdf

It turns out that PNB has increased its offer price by a measly 5 cent or 1 percent (in the mean while, the share market has increased much more since the last offer made), and that Tan Sri Liew (the CEO who received a put option from PNB to dispose his shares) switched sides and is now suddenly a joined offeror.

An offer price of RM 3.90 fundamentally undervalues the company, but an offer price of RM 3.95 is suddenly "fair and reasonable"? The share price of SP Setia traded several months in 2011 above RM 4, shareholders who didn't sell at that price are now supposed to accept this offer?

It will be interesting to read the offer document, both the opinion of the Board of Directors, and the independent advice.

This is what MSWG wrote about the revised offer:

MSWG's COMMENT: The original offer by PNB was unanimously rejected by the Board (except for interested directors) led by LKS, as the offer was deemed “fundamentally undervalued”. The property developer said it would seek rival bidders. Does the Board consider the revised, lightly adjusted offer prices fair given that: 1) it deemed the previous offer “fundamentally undervalued”, and 2) the Bursa Malaysia Properties Index closed at 839.06 points on the date the original offer was received and has since appreciated 21% to close at 1012.48 points on the day the revised offer was received?

Besides the above issues, there is also the matter of increasing nationalisation and crowding out of the private sector:

http://cgmalaysia.blogspot.com/2011/10/towards-nationalisation-and.html

The way this whole exercise has been conducted looks very disappointing given the parties involved: a large Government Linked Investment Company and one of the "blue chips".

YTL: why so stingy? (3)

2012-02-02T20:42:00.001+08:00

In The Edge today a good article about the take over offer of YTL Cement by YTL Corporation.

http://www.theedgemalaysia.com/in-the-financial-daily/200327-ytl-cement-minorities-stuck-between-a-rock-and-a-hard-place.html

The writer analyzes the situation that minority investors are stuck between a rock and a hard place. A situation that is unfortunately very common in Malaysia when the acquirer uses the dreaded "delisting threat". Minorities have to choose either accepting an offer that is not favourable (or sometimes even outright bad) or holding on to unlisted shares. And in the last case they still risk that their shares are mandatory acquired.

The fact that independent advisers are writing recommendations that always follow the majority shareholders ("whose bread I eat, his song I sing"), is making things much worse. The authorities (SC and BM) do have a very clear mandate to act in these cases, but they simply refuse to use it.

I was therefore rather surprised that the CG Blueprint 2011 completely ignored this very disturbing problem.

Added to this, both YTL Corp and YTL Cement are not obliged to hold an EGM, a rather surprising waiver from Bursa Malaysia.

YTL has a special section about Corporate Governance, full with beautiful sentences:

http://www.ytl.com.my/CorporateGovernance.asp

But actions speak louder than words ......

"YTL Cement minorities stuck between a rock and a hard place", written by Max Koh, 2 February 2012

It would appear that YTL Cement Bhd’s minority shareholders are stuck between a rock and a hard place when it comes to accepting YTL Corp Bhd’s offer to take the former private.

Last December, the conglomerate made a conditional share exchange offer to buy the remaining shares and outstanding irredeemable convertible unsecured loan stocks (ICULS) in YTL Cement that it does not own at RM4.50 and RM2.21 respectively.

The share exchange would be settled with the issuance of YTL Corp shares of 10 sen each at RM1.42 per share. This translates into an exchange ratio of 3.17 YTL Corp shares for every YTL Cement share, and 1.56 YTL Corp shares for every YTL Cement ICULS.

The offer, which will be closed on Feb 10, 2012, raised eyebrows as YTL Corp received a waiver from Bursa Malaysia to hold an extraordinary general meeting (EGM) to obtain YTL Corp shareholders’ approval for the share swap.

YTL Corp based this waiver on the grounds that it has obtained authorisation from its shareholders at its annual general meeting (AGM) last November to issue up to 10% of its current issued shares without the need for shareholders’ approval. YTL Cement was also not required to hold an EGM.

As such, the deal would go through without an EGM at YTL Corp and YTL Cement.

Hwang DBS Investment head of equities Gan Eng Peng said YTL Corp had provided a poor share swap for the minority shareholders of YTL Cement, adding that the minorities could not object to the offer as no EGM would be held, and the offer does not include a premium.

“Furthermore, YTL Corp’s high effective shareholding means it is very easy to delist YTL Cement, forcing the minorities to accept the poor deal,” Gan told The Edge Financial Daily.

YTL Corp already owned 47.4% of YTL Cement on Jan 9, 2012, the posting date of the offer document . As at Jan 20, it received acceptances for an additional 9.62% stake in YTL Cement which nudged up its interests to 57.02%, hence making the offer unconditional. Feb 10 will be the first closing date for the offer.

Gan said the share swap is essentially a case of Hobson’s Choice for YTL Cement’s minorities who have little to benefit from the share swap, whether they accept or reject the offer.

Gan noted that if the minorities accept the offer, they would be trading for less attractive YTL Corp shares which are more expensive and provide less dividend payout.

For FY11 ended June 30, YTL Corp and YTL Cement declared two sen and 13 sen in dividends to their shareholders respectively. The dividends represent a yield of 1.4% for YTL Corp shares at RM1.42 each, and 2.9% yield for YTL Cement shares based on the offer price of RM4.50 each.

Gan also noted that the minorities would be switching their investment to a conglomerate, which is less favourable than a pure-play stock.

The latest statements ended Sept 30, 2011 showed that YTL Cement was in a net cash position, while YTL Corp had RM28.34 billion in borrowings and RM12.97 billion in cash.

As at Sept 30, 2011, YTL Corp’s and YTL Cement’s net assets per share were RM1.20 and RM4.76 respectively, for FY11, YTL Corp posted a net profit of RM1.03 billion or 11.53 sen per share (basic) and 11.44 sen (fully diluted). YTL Cement, meanwhile, recorded RM337 million in net profit, with earnings per share of 71.53 sen (basic) and 48.44 sen (fully diluted).

At the offer price of RM4.50, YTL Cement is being valued at 0.95 times book, while the shares it will receive in YTL Corp are priced at 1.18 times book.

On a price-earnings ratio (PER) basis, YTL Cement is priced at a historical PER of 6.3 times, while the YTL Corp shares are issued at a PER of 12.3 times — almost twice that of YTL Cement shares.

On a fully diluted basis though, the PER valuation gap narrows, with YTL Cement valued at 9.3 times and YTL Corp at 12.4 times.

If the minorities were to refuse the offer, Gan said they would end up with YTL Cement shares that are less liquid as other parties would have accepted the share swap.

Note that YTL Corp already owned a 57.02% stake as at Jan 20.

In its announcement to Bursa Malaysia, YTL Corp said it does not intend to maintain the listing of YTL Cement if it does not meet the public shareholding spread of 25%.

YTL Corp and parties acting in concert (PAC) currently have a 96% stake in the ICULS. If the ICULS are fully converted, YTL Corp and PAC would own 67% of YTL Cement’s enlarged share capital.

“It would be easy for YTL Corp to increase its shareholding from 67% to 75% and force a delisting. In an EGM called for delisting, all shareholders, including PAC, can vote and there should be an exit offer of the same nature”, said Gan.

In addition, a minimum 90% acceptance level of the outstanding shares would result in a mandatory acquisition by YTL Corp of YTL Cement shares, including those that belong to the dissenting shareholders.

As such, Gan noted that the outcome is not favourable for YTL Cement’s minority shareholders, whether they accept the offer or not.

Compared with the recent privatisation offers for Proton Holdings Bhd and QSR Brands Bhd which offered a premium to the minorities, it appears that YTL Cement is left with no clear winning choice.

While the share swap is an easy deal for YTL Corp to privatise its subsidiary at a low price, observers are concerned that it would become a precedent for similar deals in the future.

ACGA gives feedback on CG Blueprint 2011

2012-02-01T21:08:00.004+08:00

http://www.acga-asia.org/

"The Asian Corporate Governance Association (ACGA) is an independent, non-profit membership organisation dedicated to working with investors, companies and regulators in the implementation of effective corporate governance practices throughout Asia. ACGA was founded in 1999 from a belief that corporate governance is fundamental to the long-term development of Asian economies and capital markets."

ACGA gave its feedback on the Corporate Governance Blueprint 2011 from the Securities Commission. The full feedback (7 pages) can be found here:

http://www.acga-asia.org/public/files/ACGA%20Response%20to%20CG%20Blueprint%20(final%20draft).pdf

Some items:

II. Mandate poll voting via amendments to the Listing Requirements and CG Code

The arguments presented by the SC for mandating voting by poll on only “substantive” resolutions, such as related-party transactions, as opposed to resolutions that were “administrative or procedural in nature”3, do not address the fact that companies and shareholders may disagree on what constitutes an administrative resolution and what is a substantive one. As has been seen over the past few years in Asia and globally, issues such as director re-elections and approving audited financial accounts may seem “administrative”, but are now considered substantive by many shareholders. The argument that a show of hands empowers minorities also fails to take into account that controlling shareholders can easily ask for a vote by poll should they not “like” the results from a vote by a show of hands.

In other words, ACGA likes poll voting on all issues.

Chapter 2: Role of Institutional Investors

Recommendations
I. Formulate a new code for institutional investors
• Institutional investors to drive the formulation of a new code and publish their commitment to the new code for institutional investors.

II. Create an industry driven umbrella body for institutional investors
• Institutional investors to work together towards the establishment of an umbrella body.

ACGA: These suggestions are well-intentioned and we fully support the idea of institutional investors taking on a more proactive role in corporate governance. However, we question whether these ideas will bear fruit at this stage in Malaysia? Is the investment industry ready? As one fund manager in Malaysia pointed out, unit trust fund managers, government fund managers and other fund managers do not belong to the same institutional framework and are often lobbying against each other; hence the idea of an institutional investor-driven stewardship code might not be feasible at the moment.

It is worth noting that Malaysia has not seen a great deal of engagement or activism by local institutional investors, whose usual policy has been and, for the most part, continues to be “voting with their feet”.

Khazanah Nasional, the investment holding arm of the government, has a mandate to transform certain industries “with the objective of pursuing the nation’s long-term economic interests”. While this makes them active investors, their specific mandate is not necessarily closely aligned to other institutional investors. The Employees Provident Fund, another government agency, has also become increasingly interested in the governance of its investee companies, and in 2010 published its “Corporate Governance and Voting Guidelines”. Yet, beyond these two institutions we have seen little evidence of engaged shareholders, other than a few institutional investors, such as Aberdeen Asset Management and Corston Smith.

"It is worth noting that Malaysia has not seen a great deal of engagement or activism by local institutional investors": this must be the understatement of the year, and not only applies to institutional investors but also to retail investors. Shareholder activism in Malaysia is, as far as I can judge, almost non-existent. SC and BM should take a good deal of the blame for this.

The praise for the EPF is really too much in my opinion, except for initial funding of MSWG and publishing its voting guidelines it has been very quiet, much too quiet. This is a large institute with all the necessary facilities, manpower and money, they could have done such a better job if they had wanted to do so.

We also agree that creating an industry umbrella body for institutional investors is a good idea. Once again, however, some fundamental questions need to be asked. Who will lead it? Who will fund it? Moreover, such a body needs to be independent. It should not be set up by the government or with government funding. We believe this would defeat the purpose of such a body.

Chapter 3: The Board’s Role in Governance

We agree that the chairman and CEO should be separated. While we understand that most companies that currently have a separate chairman and CEO only follow the letter of the guideline rather than the substance, imposing an independence criteria on a company’s chairman could, we fear, only lead to more box-ticking.

In this context, it is worth emphasising that the quality and authority of an independent chairman is critical. Most Asian listed companies—and Malaysia is no exception—are either family-controlled or majority state-owned, hence it is very likely that any “independent chairman” will be loyal to the majority shareholder. We would suggest that it would be better to mandate the recommendation made in the Corporate Governance Code that a board nominates an INED to be the senior independent director to whom concerns may be conveyed. The lead independent director would be responsible for, among other things, ensuring that independent directors can perform their duties responsibly; call meetings of the independent directors as needed; serve as principal liaison between the independent directors and the chairman and senior management; and respond to shareholder and other stakeholder questions and comments.

With regard to the question of allowing a former CEO to become the chairman after a “cooling-off” period, it is extremely unlikely that a former employee would ever be completely free of their loyalty to the company in the Asian context. A “cooling-off” period, therefore, would not have a great deal of meaning in this context. One of the expectations that the SC has for the Code is the “diligent exercise of voting rights”5. We suggest that the SC starts with this first and mandate a policy whereby institutional investors would need to publish their voting policies and also how they have voted at AGMs annually. The Thai Securities and Exchange Commission put such a policy in place in 2005.

MF Global: A Despicable State of Affairs

2012-02-01T09:22:00.000+08:00

"And perhaps this is why the American people are turning away from their corporate-branded presidential candidates and Congressional representatives, whose approval ratings have fallen to 9%, in righteous indignation and revulsion, in disgust at their craven betrayal of their sacred oaths and trust. They must have no sense of justice, or of proportion, or history, and apparently they have no shame."

It sounds like the US has not learned anything from the financial crisis?

http://jessescrossroadscafe.blogspot.com/2012/01/mf-global-despicable-state-of-affairs.html

Much of the financial press picked up this story from the Wall Street Journal, Money From MF Global Feared Gone. Much of the mainstream media in the US and the UK these days is just a conduit for sound bites from the monied interests.

"Nearly three months after MF Global Holdings Ltd. collapsed, officials hunting for an estimated $1.2 billion in missing customer money increasingly believe that much of it might never be recovered, according to people familiar with the investigation.

As the sprawling probe that includes regulators, criminal and congressional investigators, and court-appointed trustees grinds on, the findings so far suggest that a "significant amount" of the money could have "vaporized" as a result of chaotic trading at MF Global during the week before the company's Oct. 31 bankruptcy filing, said a person close to the investigation."

And as we have heard, quite a bit of that money was also diverted in the last few days into the pockets of MF Global's bank, JP Morgan, which still reportedly holds much of it. Now whether they are legally entitled to keep that money is another matter. But this entire charade has been cloaked with a public relations campaign using terms like 'missing,' 'vaporized,' and 'mystery' to describe the customer assets as if no one really knows where the funds had gone, which the CFTC has explicity stated months ago is not the case. And that the handling of the bankruptcy and the method of ordering customers with creditors is in violation of the CFTC's rule 190, as is evident from the precedents and intentions which established it.

What the press apparently has not yet heard or is not reporting is that vulture funds are now contacting the MF Global customers, however they may have obtained their names, and are offering them 85 cents on the dollar for their claims. Most of the claim holders are reported to expect or to have been payed 72 cents on the dollar as things now stand. The Wall Street Journal certainly casts gloom on their prospects for a full recovery and hopes of justice, based on the report from an unnamed source.

This is creating a difficult position for these much abused customers because of the need to settle their income tax obligations for 2011. Until they can prove the funds are not 'recoverable' they bear the responsibility for their tax obligations on the full amount. But if they settle with the vulture funds they can take the loss and move on, capitulating to the despair and the anxiety of having been cheated and abused by the partnership between government and Wall Street.

Obviously customers can ask for extensions on filing their taxes and hope for a settlement at some point. But the issue is the odd manipulation of the bankruptcy in the courts, and the uncertainty and fear fostered in the customers caused by the management of this situation through rumour and innuendo and the canard of the 'missing money' from almost day one.

Remember that the customers were not speculators who lost money on their bets, as the bailed out banks had been, but in many cases were depositors who had cash and valid title to precious metals and treasuries held on account in a firm that was one of the Fed's primary dealers and a major player at the CME. And the money was taken twice. First by MF Global, and then by the financial institutions that seized the money and then manipulated the courts and the press to hide it and to keep it.

The theft of customer funds was bad enough, but the manner in which the exchange, the regulators, the court, the Congress and the Obama Administration have dealt with the aftermath of this is truly despicable. Throughout the financial crisis the character of the public's dealings with the financial sector has been dominated by of opacity, obfuscation, misuse of influence, abuse of power, and fear.
If I have ever seen the opportunity for those in the government to take a heroic stand in defense of the people against the predations of powerful financial interests this was it. And they have failed miserably. So whatever these politicians now say seems at best a shallow mockery, with the ring of untruth, and the hollowness of hypocrisy.

And perhaps this is why the American people are turning away from their corporate-branded presidential candidates and Congressional representatives, whose approval ratings have fallen to 9%, in righteous indignation and revulsion, in disgust at their craven betrayal of their sacred oaths and trust.

They must have no sense of justice, or of proportion, or history, and apparently they have no shame.

Worst business move ever?

2012-01-30T19:50:00.003+08:00

Ronald Wayne, the "third investor in Apple" sold his 10% share of the company for USD 1,500. The investment would now have been worth RM 46,000,000,000!

"US pensioner Ronald Wayne gave up £15bn slice of Apple" by Nick Allen.

It could rank among the worst business moves of all time. In 1976, Ronald Wayne decided to pull out of his friends' computer company after two weeks, fearing he could be saddled with debts if it failed.

After drawing up the original contract for the firm and designing its logo, he withdrew his 10 per cent stake and walked away with $1,500 (£975).

Speaking from his home in a remote desert town near Death Valley, Nevada, the little known "third founder" of electronics giant Apple said he has no regrets.

Mr Wayne, 75, relinquished a stake that would now be worth around £15 billion and lives on a state pension and deals in old stamps and coins to supplement his income.

More:

http://www.telegraph.co.uk/technology/apple/7624539/US-pensioner-Ronald-Wayne-gave-up-15bn-slice-of-Apple.html

Twist in E&O takeover saga

2012-01-30T09:03:00.002+08:00

(updated version)

From The Straits Times (Singapore), January 30, 2012, written by Leslie Lopez. A long article that is only available for subscribers, some snippets:

In affidavits filled in the High court, The Securities Commission stated that Justice Tuan Abang Iskandar Abang Hashim was previously employed by the agency and that "in the circumstances, there is a real danger of bias prevalent in so far as the present dispute is concerned"
The yet-to-be-published court filings made available to The Straits Times represent the first responses by the Securities Commission to a closely followed suit filed in December by a minority shareholder of E&O.
The waiver granted to Sime Darby has stoked criticism of the coddling of listed state-controlled entitities that dominate the Malaysian stock exchange at the expense of minority shareholders.
The legal dispute is also offering a rare peek into the inner workings of the Securities Commission.
According to the affidavit signed by Datuk Francis Tan Leh Kiah, the second-most senior commissioner in the Securities Commission, Sime Darby's purchase of the stake in E&O underwent two layers of scrutiny to determine whether a general offer should be carried out.
A task force comprising senior officers from the agency's corporate finance and legal divisions examined the transaction and considered two key elements in the deal that could rise to a mandatory general offer obligation on Sime Darby. Mr. Tan said the task force ruled that the three groups which sold the blocks of E&O shares to Sime Darby did not collectively control the company and the disposal did not trigger a general offer.
But on the second issue, the task force was of the view that a new "concert party" has been created between Sime Darby and E&O's managing director Terry Tham, who jointly controlled more than 33 per cent in the property concern after the deal. Thus, a general offer obligation had been triggered, Mr. Tan's affidavit noted.
The recommendations were then forwarded to the agency's final ruling authority. Mr. Tan said that a three-member committee unanimously agreed with the recommendation from the task force that the three groups were not acting in concert and did not have control of the company.
But the committee in "a majority decision" ruled that Sime Darby and Datuk Tham were not acting in concert and a general offer obligation did not arise.

Update: the Malaysian newspapers still haven't picked up the story, but The Malaysian Insider has:

"SC task force found Sime Darby triggered E&O general offer"

http://www.themalaysianinsider.com/business/article/sc-task-force-found-sime-darby-triggered-eo-general-offer/

YTL: why so stingy? (2)

2012-01-29T11:01:00.002+08:00

YTL Cement announced it has received a takeover notice from YTL Corp. The takeover would not be in cash, but through an exchange of YTL Corp shares, in a ratio of 1 for 3.17.

A previous blog about this issue can be found here:

http://cgmalaysia.blogspot.com/2011/12/ytl-why-so-stingy.html

MSWG wrote about the same issue in in their newsletter January 12, 2012:

In the mean time, OSK has issued their independent advice:

http://announcements.bursamalaysia.com/EDMS/subweb.nsf/LsvAllByID/812E0748C2233F874825798A00147DD3?OpenDocument

With the risk of repeating myself, it is not very good, I miss any critical remarks whatsoever about the issues at hand.

Those issues are:

YTL Corp's shares are more liquid, however, OSK fails to notice that 97% of the shareholders hold 100,000 or less shares which can easily be sold in the market (monthly turnover is on average more than 3 million shares);
YTL Corp is a diversified conglomerate with its earnings dominated by the utilities segment, but investors of YTL Cement knew that when they bought their shares, and they still preferred them above the YTL Corp's shares;
However, there is no cash alternative, making the offer less attractive;
YTL Cement shareholders will end up with odd lots;
The average market price of YTL Corp and YTL Cement over the last six months shows that there is no premium whatsoever in the offer, while from a valuation point YTL Cement clearly looks to offer somewhat better value from an earnings, dividend and assets point of view;
If YTL Cement shareholders collectively don't accept the offer, then there is a decent chance that YTL Corp will increase the offer price.

So the question remains: why would shareholders of YTL Cement accept the offer?

Blogger "Bursa Stock Talk" attended me on his blog:

http://bursastocktalk.blogspot.com/2012/01/ytlcmt-iculs.html

"Despite the offer made is close to the 7th anniversary of the ICULS (10 November 2012) whereby the conversion price of the ICULS to mother shares will be adjusted from RM2.04 to RM1.82, shouldn't the offeror and the independent adviser take the step down conversion price into consideration as the adjustment is just few months away? Both the offer document dated 9 January 2012 and the independent advice circular appeared to be silent on this. The Board of YTLCMT confirmed that to the best of their knowledge and belief, there are no materials facts, the omission of which would make any statement in this IAC misleading. But is not the adjustment in conversion price with difference of 10.8% significant?"

I think the writer definitely has a very good point, the 7th anniversary is about nine months away and it appears rather strange if this is not mentioned in the offer document or in the independent advice.

I hope that YTL Cement shareholders do not accept the offer, thereby forcing YTL Corp to increase its offer price for the YTL Cement shares. The closing date is February 10, 2012.

Maybulk, Maxbiz, PMI, AirAsia

2012-01-28T11:54:00.003+08:00

Maybulk's share price has risen fast in the last month, in high volume:

Bursa Malaysia issued a "Unusual Market Activity" (UMA) alert, on which Maybulk responded:

"We refer to Bursa

Malaysia

’s query today in respect of the recent interest in Maybulk shares and wish to announce that the Company is not aware of any reasons or any corporate exercise that may have contributed to the increase in share price and high trading volume of Maybulk shares."

What definitely has changed lately is that the relentless selling by EPF has finally stopped. Up to December 30th 2011 the EPF routinely sold 2 million shares a day at a price around RM 1.50. Many of these shares were bought at double the price in 2009. Hopefully somebody can explain the logic behind this trading.

I have written a lot about Maybulk in the past regarding the controversial Related Party Transaction that took place in 2008, buying POSH shares at a very high price (more than four times the Net Asset Value) in the midst of the global recession:

http://cgmalaysia.blogspot.com/search/label/Maybulk

I have withdrawn my complaint with the authorities (SC & BM) out of protest against the highly unsatisfactory and even unethical way they have handled it. The only thing they have done really well in this case was dragging their feet.

Even up to today, minority investors have not been informed properly about important issues regarding the Related Party Transactions, either the POSH acquisition in 2008 or the (relatively less important) purchase of a vessel in 2009. In its latest year report less than one page (out of 81 pages) is dedicated to POSH, while about half of Maybulks shareholders equity is invested in it.

Maxbiz announced it is expecting profit margins of between 5% and 15% from its fiber network connection project.

http://www.theedgemalaysia.com/business-news/200086-maxbiz-expects-5-to-15-profit-margin-from-fibre-network-connection-project.html

It also made some clarifications in an announcement to Bursa Malaysia about some other projects.

The share price has lately retreated, from a high of RM 0.195 to RM 0.11.

A previous write-up of this blog stated "It is hard to find a company with more red flags than Maxbiz". It would be an immense effort if Maxbix can even stay afloat.

http://cgmalaysia.blogspot.com/search/label/Maxbiz

Pan Malaysian Industries (PMI) is forced to comply with the following: "compensate entitled shareholders of PMI who had sold their PMI Shares between 9.00 a.m. on 24 August 2011 and 5.00 p.m. on 25 August 2011 (“Compensation Period”) for the differential amount between the offer price of RM0.045 per Offer Share and the price at which their PMI Shares were sold during the Compensation Period"

http://announcements.bursamalaysia.com/EDMS/edmsweb.nsf/LsvAllByID/06D37FCB8672B1BC4825799200390931?OpenDocument

Apparently there was a timing difference between the moment the General Offer was announced and the moment is should have been announced. Good for shareholders who sold their shares below RM 0.045 during those days, although it will be only a small amount of money, I think, and most of the shareholders will be selling their shares anyhow at huge losses.

Frankly, this ruling by the SC should be the least worry to PMI. I think there are many, much more serious Corporate Governance issues at stake here:

http://cgmalaysia.blogspot.com/search/label/PMI

The Edge Malaysia reported that AirAsia's airfare issue with the Australian Consumer watchdog (ACCC) has been resolved.

http://www.theedgemalaysia.com/business-news/199990-airasias-airfare-issue-with-australia-consumer-watchdog-resolved.html

"The problem could have been due to an IT issue, and it has been corrected."

However, the website of the ACCC has not yet issued a statement that the issue has been resolved:

http://www.accc.gov.au/content/index.phtml/itemId/2332

I hope that AirAsia will treat Malaysian consumers as if they were protected by a powerful consumer watchdog similar to the ACCC.

George Soros predicts riots, police state and class war for America

2012-01-27T08:52:00.000+08:00

“I am not here to cheer you up. The situation is about as serious and difficult as I’ve experienced in my career,” Soros tells Newsweek. “We are facing an extremely difficult time, comparable in many ways to the 1930s, the Great Depression. We are facing now a general retrenchment in the developed world, which threatens to put us in a decade of more stagnation, or worse. The best-case scenario is a deflationary environment. The worst-case scenario is a collapse of the financial system.”

“The collapse of the Soviet system was a pretty extraordinary event, and we are currently experiencing something similar in the developed world, without fully realizing what’s happening,” adds Soros.

Soros goes on to say that as the crisis in the Eurozone only worsens, the American financial system will continue to be hit hard. On the way to a full-blown collapse, he cautions, Americans should expect society to alter accordingly. Riots will hit the streets, says Soros, and as a result, “It will be an excuse for cracking down and using strong-arm tactics to maintain law and order, which, carried to an extreme, could bring about a repressive political system, a society where individual liberty is much more constrained, which would be a break with the tradition of the United States.”

http://rt.com/usa/news/george-soros-class-war-619/

China listed stocks on Bursa: different opinions

2012-01-26T09:34:00.002+08:00

Popular blogger "Salvatore Dali" wrote about China listed companies on Bursa Malaysia in a surprisingly positive way:

http://malaysiafinance.blogspot.com/2012/01/lowdown-on-china-stocks-on-bursa-just.html

"I think Bursa/SC have traveled the extra mile in ensuring these China firms are genuine, most if not all have been "site-visited" by them."

"I cannot say this with greater effect. If the hypotheses are true, which means at least most or all of the companies on Bursa are not fraudulent, and to get XDL going through this phase of value creation, which I think will be wildly successful. This could be the catalyst that is needed for the rest of the China companies listed on Bursa to do likewise. As things stand, none of the China firms on Bursa are "fraudulent yet", maybe none are. If enough of them go through the value creation steps led by XDL, it could very well lift Bursa as the "best exchange to list China firms". If this is all true and good, then Bursa and SC must continue to make doubly sure that future China listing go through even more stringent listing checks and balances. So far so good, even with depressed share prices, at least we do not have a total bust up (yet)."

I have read a lot about fraudulent China companies, and am much less optimistic. I think the chance that at least one Bursa listed Chinese company will go bust this year should be quite substantial. However, some frauds take a long time to unravel. For instance it took more than 10 years for serious problems to surface in two high-profile cases Chaoda and Sino Forest:

http://cgmalaysia.blogspot.com/search/label/chaoda
http://cgmalaysia.blogspot.com/search/label/Sino-Forest

On the other side, Salvador might be right, the articles that I have read are from companies that were not listed on Bursa Malaysia so it is theoretically possible that those listed in Malaysia are of higher quality. For instance, in the US many Chinese companies followed the "reverse takeover" (RTO) way to list, where filtering is much less stringent than those that go through a proper Initial Public Offering (IPO), like in Malaysia.

Yet, I am suspicious, to me it doesn't make sense for a good quality company in China to look for a listing in Malaysia. To me, it sounds more like a case for a company that tried to list on other exchanges, but was rejected.

Time will tell.

In Singapore the SGX has a serious problem with China Sky, the company was ordered to perform a special audit, and it simply refuses to do so. The SGX sued the company, but at the last moment withdrew the suit, without giving a reason. All independent directors have since resigned. It would be interesting to see how Bursa Malaysia would handle such case.

http://themalaysianreserve.com/main/index.php?option=com_content&view=article&id=1200:sgx-withdraws-suit-against-china-sky-relating-to-rules-compliance&catid=38:money&Itemid=126

An article about China companies listed in the US:

http://www.marketwatch.com/story/chinas-stock-bubble-was-made-in-the-usa-2012-01-20

"While many blame China’s business governance for the slew of frauds, breaking down the IPO supply-demand basics reveals nothing exotic about this latest bubble-bust catastrophe. On one side were impressionable and uninformed American investors in search of shortcuts and ignoring fundamentals. On the other, unscrupulous investment bankers spinning public offerings out of anything, coupled with private-equity funds pushing for “timely” exits. These agents of seduction were “born in the U.S.A.” "

An interesting website from Roddy Boyd who writes about China frauds in a very detailed way:

http://www.thefinancialinvestigator.com/

Olympus scandal triggers Japan shareholder activism, how about Malaysia?

2012-01-25T09:20:00.001+08:00

In Japan, finally, shareholder activism starts to wake up. Lawyers for Shareholders' Rights (LSR) is backing an individual Olympus shareholder whose stake is worth only around 2.8 million yen ($US36,000) but who - unlike the institutions - has stood up against the board.

In Malaysia, shareholder activism is also moribund:

Authorities (Securities Commission and Bursa Malaysia) have to take a large part of the blame due to their inactivity and almost always siding with the majority shareholders
Large institutions like PNB, EPF, etc. have also been very disappointing in defending minority shareholders rights, being very passive and not speaking up
Investors therefore mostly vote with their feet
MSWG has toned down since they are being sued (they don't have whistleblower protection)

However, one minority investor of E&O, Mr. Michael Chow, is suing the Securities Commission over Sime Darby's waiver not to have to make a General Offer for all shares.

http://cgmalaysia.blogspot.com/2011/12/minority-shareholder-sues-sc.html

This court case will definitely draw a lot of attention, could this case be the spark to ignite the so much needed shareholder activism in Malaysia, similar to what is happening in Japan?

http://www.smh.com.au/business/world-business/olympus-scandal-triggers-japan-shareholder-activism-20120123-1qcsk.html

After British whistleblower Michael Woodford was sacked as CEO of Olympus and revealed the Japanese firm had covered up losses of $US1.7 billion, he mounted a campaign to get his job back.

His effort though went nowhere, with Japanese financial institutions preferring to stick with the remaining board and several disgraced directors, some of them being sued by Olympus itself.

Now a group of 26 activist lawyers is looking to change Japan's closed corporate society as the scandal rocks global confidence in the business governance standards of the world's third-largest economy.

Woodford, the first non-Japanese to lead the camera and medical equipment maker, was disgusted at the lack of response to his campaign for re-instatement.

Institutional shareholders "are the reason why these directors are still there, without their support they shouldn't be," he said. "Despite one of the biggest scandals in history (they) have not spoken one single word of criticism."

But shareholder activism is rare in Japan. Instead institutions tend to have cosy ties with board members and cross-shareholdings are commonplace, creating a network of interests that militates against rocking the boat - on Friday the Tokyo Stock Exchange said it would let the firm stay listed.

Lawyers for Shareholders' Rights (LSR) is backing an individual Olympus shareholder whose stake is worth only around 2.8 million yen ($US36,000) but who - unlike the institutions - has stood up against the board. The anonymous man from western Japan is suing the directors who sacked Woodford, demanding they pay Olympus 1.34 billion yen in compensation for the firm's costs.

Takuro Maekawa, one of LSR's leading members, said his team - who do not charge for such cases - want to change a culture which "has compromised corporate responsibility and compliance".

Olympus has admitted that it used over-priced acquisitions and consultancy fees to hide losses it had made on earlier investments dating back to the 1990s.

In one element of the scheme it paid a Cayman Islands financial adviser $US687 million when it bought British medical instruments company Gyrus for $US2 billion in 2008.

Legal action

Olympus itself has launched legal action against 19 top current and former executives, including six present board members, among them president Shuichi Takayama, after an independent panel found them responsible for the cover-up.

But Takayama has not been sacked in disgrace or resigned, instead saying in the past week he would step down only after an extraordinary general meeting in April.

"I want to fulfil my responsibility for the benefit of stakeholders until handing the company over to new directors," he said.

None of Olympus' major Japanese shareholders have publicly called for him to go.

Instead they have quietly reduced their stakes as the share price plunged, with the biggest shareholder Nippon Life Insurance only citing unspecified "risks" and "economic rationality" when it said in November it had sold almost two-fifths of its holding.

Maekawa condemned the institutions' silence as "extremely abnormal".

LSR is looking at joining Olympus' own case, he said, to ensure it is properly pursued and "to bring all of the scandal into the light of day".

The LSR lawyers first started mounting actions on such issues in the early 2000s.

They sued four executive directors of Hitachi Zosen, a leading machinery and infrastructure firm, demanding they reimburse the fines the company had been ordered to pay for bid-rigging, eventually settling for 205 million yen.

They have also taken action against the president of Daiichi Life Insurance, demanding he pay back the expenses he claimed for wining and dining a number of politicians.

But the Olympus case is by far their most internationally high-profile so far.

"Our objective is not necessarily to help short-term investors make money by demanding a company make profit in every quarter," Maekawa said. "Individual investors have long been left at a great disadvantage to institutional holders."

Michikazu Aoi, professor of global management at Meiji University, said the Olympus scandal could have long-term consequences for both the company and the country.

"The Olympus board may be thinking, since the company has the world's top-notch endoscope technology, that they can withstand the scandal, smoothly handing over the company to the next board, and that the share price will eventually recover," he said.

"But I don't think things will be so easy."

The spectacle would appear "bizarre" to foreign investors, but Japanese financiers had different priorities and standards, he said.

"Japanese businessmen try to smooth over issues slowly. They seem to believe it is the way not to hurt anyone's interests. But they don't necessarily think about the interests of shareholders."

AFP

ACCC takes action against Air Asia for misleading pricing

2012-01-24T17:07:00.000+08:00

http://www.accc.gov.au/content/index.phtml/itemId/1028315/fromItemId/142

The Australian Competition and Consumer Commission has instituted legal proceedings in the Federal Court, Melbourne against Air Asia Berhad (Air Asia).

Air Asia is a foreign corporation that carries on a business in Australia as a supplier of international air travel services to the Australian public.

The ACCC alleges that Air Asia on its website (www.airasia.com/au) did not display some airfare prices inclusive of all taxes, duties, fees and other mandatory charges. Businesses that choose to advertise a part of the price of a particular product or service must also prominently specify a single total price.

The alleged conduct is in relation to the following flights between:

Melbourne and Macau, London, Ho Chi Minh City, New Deli, Hangzhou and Chengdu
Perth and Taipei, Phuket, Osaka, London, Ho Chi Minh City, and Hangzhou, and
Gold Coast and Ho Chi Minh City.

The ACCC alleges the conduct contravenes section 48 of the Australian Consumer Law within the Competition and Consumer Act 2010.

The ACCC is seeking:

declarations that Air Asia contravened the Competition and Consumer Act 2010
an injunction to restrain Air Asia from engaging in misleading conduct in the future
a court order that Air Asia publish corrective notices on its websites regarding the conduct
penalties, and
ACCC costs.

The matter has been filed in the Federal Court's Fast Track List and is listed for a scheduling conference in Melbourne on Friday, 2 March 2012 at 10:15 a.m.

Release # NR 006/12
Issued: 24^th January 2012

Although the airline involved is AirAsia X, the website is owned and operated by AirAsia, so the suit is against AirAsia, not AirAsia X, as I wrote before. AirAsia is providing the following services for AirAsia X, for a fee that has been strongly decreased lately (it was probably more easy to list services that were not included):

1. Engineering2. Cargo
3. Flight Operations4. Procurement
5. In-flight Sales
6. People (Human Resources)
7. Treasury
8. AirAsia Academy (Training)
9. Communications10. Information Technology
11. Ground Operations
12. Security
13. Ancillary Revenue
14. Commercial, Sales & Distribution
15. Go Holiday

Happy Chinese New Year

2012-01-21T09:33:00.000+08:00

Wishing all Readers a Prosperous and Healthy year.

AirAsia in trouble over hidden fees

2012-01-20T11:46:00.000+08:00

The Australian consumer watch dog ACCC is taking aim at Air Asia X.

I like that, there should be a credible Malaysian consumer watch dog who is actively fighting for the Malaysian consumers as well. I was surprised how aggressive AirAsia is with their online selling, for instance it takes three separate efforts to turn away an offer for insurance. And indeed, as alleged, AirAsia should be more transparant regarding taxes, fees and other charges.

Article from The Sydney Morning Herald:

http://www.smh.com.au/travel/travel-news/airasia-in-trouble-over-hidden-fees-20120119-1q7e7.html

Matt O'Sullivan

January 19, 2012

THE consumer watchdog has taken legal action against budget airline AirAsia for allegedly failing to disclose the full price of fares for flights from Australia to destinations overseas.

The same day AirAsia executives were spruiking launch fares as low as $99 for one-way flights on its new route from Sydney to Kuala Lumpur, it has emerged that the regulator began legal proceedings in Melbourne seeking both penalties and orders for the Malaysian airline to issue corrective notices on its website.

In documents filed in the Federal Court on Tuesday, the Australian Competition and Consumer Commission claims that fares sold on the airline's website disclosed only part of the total price for flights from Melbourne, the Gold Coast and Perth to destinations in Asia, Europe and India because they excluded taxes, fees and other charges.

The regulator wants the court to order the airline to publish on its website a notice stating that it failed to ''specify, in a prominent way, the single price for air travel on its website … since at least September''.

The ACCC has shown a growing willingness to take action against airlines for running foul of consumer laws.

Last year it pursued budget airline Tiger Airways for selling tickets after the air-safety regulator had grounded its fleet of aircraft in July due to safety concerns.

The regulator also took Qantas to task for the amount of compensation it offered passengers disrupted by its decision to ground its entire fleet on October 29.

SC seeks to recuse judge

2012-01-20T09:51:00.000+08:00

An interesting twist in an interesting saga, the SC is seeking to recuse High Court judge Abang Iskandar Abang Hashim from hearing a suit by minority shareholder Michael Chow in E&O Bhd. In 2004 the judge was appointed Director of Enforcement Division of the SC, a job he held until 2009.

From The Malaysian Insider:

The Securities Commission (SC) is seeking to recuse High Court judge Abang Iskandar Abang Hashim from hearing a suit by a minority shareholder in E&O Bhd, which could delay proceedings against the regulator for failing to compel Sime Darby Bhd to buy remaining shares after it bought a 30 per cent stake in the property developer for RM776 million.

Ironically, minority shareholder Michael Chow Keat Thye’s lawyers are battling against the recusal although the trial judge used to be the SC’s enforcement director from May 2004 until he was elevated to the High Court in October 2009.

“Yes, we are fighting against the recusal. We are fine with Yang Arif Abang Iskandar hearing the case,” a lawyer for Chow told The Malaysian Insider, declining to be named as he was not authorised to speak to the media.

The recusal hearing is scheduled for March 14, the original date for the case after Chow obtained leave for his legal suit.

Sime Darby’s subsidiary, Sime Darby Nominees Sdn Bhd (SD Nominees), had applied to intervene in the judicial review on January 7, according to a filing in the Bursa Malaysia.

For more follow the link:
http://www.themalaysianinsider.com/malaysia/article/sc-seeks-to-recuse-judge-in-simes-eo-offer-waiver-suit/

Are auditors above the law?

2012-01-19T09:14:00.001+08:00

Sometimes I really wonder why auditors seem to escape scrutiny, again and again.

There is a discussion going on: auditors are watchdogs, not guard-dogs, so they can't be held liable for anything that might be wrong with the accounts. That is a fair comment I guess.

On the other hand, they should do their work in a correct way, do sample testing, have an open, critical mind about what they investigate etc. When things turn sour in a big way, they should therefore be held accountable. But somehow or the other, that doesn't seem to happen.

In Malaysia I can't remember any auditor of a listed company being punished in one of the big accounting scandals. It appears Malaysia is not the only country where that happens.

Below article from the New York Times is about the huge Olympus scandal in Japan, huge in the amount of money involved, the number of years that the fraud was ongoing and probably the number of people who must have been involved or had knowledge about it.

There are also very serious Corporate Governance issues at play. For instance in the Board of Directors firing the CEO who discovered the fraud, the typical "shoot the messenger" syndrome that is (unfortunately) also quite common in Malaysia.

And what did the company say?

"Olympus, the Japanese camera maker whose executives have admitted to covering up $1.7 billion in losses, said Tuesday that its auditors, KPMG Azsa and Ernst & Young ShinNihon, had not been complicit in the false accounting"

But this is what an expert said:

“It’s hard to believe that Olympus could have kept such a large-scale cover-up secret from its auditors, who study its finances intimately,” said Shinji Hatta, a professor of auditing at the Graduate School of Professional Accountancy at Aoyama Gakuin University in Tokyo.

In the first paragraph a possible motive for the actions of Olympus:

Any action to dismiss or sue Ernst & Young ShinNihon, its current auditor, could leave the company without a firm willing to audit its finances, jeopardizing Olympus’s compliance with the exchange’s listing requirements.

This doesn't sound right at all.

http://www.nytimes.com/2012/01/18/business/global/auditors-not-involved-in-cover-up-olympus-says.html?_r=2&partner=rss&emc=rss

Olympus Clears Auditors in an Accounting Cover-Up

TOKYO — Olympus, the Japanese camera maker whose executives have admitted to covering up $1.7 billion in losses, said Tuesday that its auditors, KPMG Azsa and Ernst & Young ShinNihon, had not been complicit in the false accounting — though those firms remain under investigation by the Japanese authorities over possible roles in the scandal.

Olympus Sues Executives Over Cover-Up, but Does Not Dismiss Them(January 11, 2012)

A decision to clear the auditing firms could strengthen Olympus’s chances of staying listed on the Tokyo Stock Exchange, helping the company maintain access to equity capital. Any action to dismiss or sue Ernst & Young ShinNihon, its current auditor, could leave the company without a firm willing to audit its finances, jeopardizing Olympus’s compliance with the exchange’s listing requirements.

Still, experts have asked how Olympus could have perpetrated such a scheme without at least tacit knowledge by its auditors. KPMG audited Olympus until 2009 before handing it off to Ernst & Young. The two firms still face possible sanction by Japan’s Securities and Exchange Surveillance Commission.

Just how much Olympus’s auditors knew about the manufacturer’s scheme, going back decades, to hide losses has emerged as an important aspect of the continuing investigations into its finances. The two firms signed off on the accounts before Olympus’s president and chief executive, Michael C. Woodford, blew the whistle on the fraudulent accounting in October, just after he was fired by Olympus’s board.

“It’s hard to believe that Olympus could have kept such a large-scale cover-up secret from its auditors, who study its finances intimately,” said Shinji Hatta, a professor of auditing at the Graduate School of Professional Accountancy at Aoyama Gakuin University in Tokyo.

In a report released last month, an investigative panel appointed by Olympus, which makes digital cameras and the medical optical devices like endoscopes, had been critical of the auditors’ role, saying the firms had not done enough to expose wrongdoing.

But a separate panel of lawyers hired by Olympus to investigate the roles of the two auditors found that the firms had not violated their fiduciary duties, Olympus said in a statement. That report, released Tuesday, said that Olympus’s executives had so cleverly buried the losses that external auditors could not have uncovered them.

The report instead blamed five former and current Olympus internal auditors for allowing the company to misstate its finances. The five internal auditors are responsible for a total of 8.4 billion yen ($109 million) in costs related to the cover-up, Olympus said.

Minoru Ota, a former internal auditor who had headed the company’s accounting unit, is to blame for almost half of that cost, the statement said.
“The masterminds in this case hid their illegal acts through artful manipulation of expert opinion,” the report said.

Olympus did not make Mr. Ota available for comment, and calls to a registered number under that name in Tokyo went unanswered.

The company said later Tuesday that it had filed a lawsuit against all five of the internal auditors, demanding 500 million yen from each.

Olympus has admitted that a handful of former and current executives set up a scheme to obscure losses by illicitly keeping unprofitable assets off its books. The company later tried to settle those losses in payments masked as merger-and-acquisition fees.

Last week, the company sued 19 current and former executives, including the current president, Shuichi Takayama, over their roles in concealing the losses. The scandal has led to investigations by the authorities on three continents, and Olympus shares remain on watch for possible delisting on the Tokyo exchange.

But a person with close knowledge of various investigations relating to Olympus said that not only was Olympus adept at hiding its losses, but that the company might have received help from its banks misstate its financial position.

KPMG received confirmation statements from Société Générale and Commerzbank that, with hindsight, were clearly misleading, the person said on condition of anonymity, saying he was not authorized to speak to the media.
Those inaccurate statements have been submitted by KPMG to Japanese regulators to aid in their inquiry, and the authorities have begun a broader review that is likely to include the conduct of Olympus’s banks, the person said.

“Société Générale’s policy is to fully and strictly comply with all regulations and laws in the countries where it operates,” the bank said in an e-mailed statement. “As always, Société Générale will cooperate with the relevant authorities if needed.” Commerzbank did not respond to calls seeking comment. Olympus’s third European bank, LGT of Liechtenstein, has not been linked to misleading statements.

Hiroko Tabuchi reported from Tokyo and Keith Bradsher from Hong Kong.

GMO: Something's Fishy in China

2012-01-18T10:10:00.000+08:00

Edward Chancellor, who focuses on capital market research as a member of Grantham, Mayo, Van Otterloo’s asset allocation team, laid out that negative forecast last week when he spoke in London at a research symposium hosted by Societe Generale.

Accusing the soft-landing camp of “uncritically accepting” China’s growth story and placing an “overblown belief” in the authorities in Beijing, Chancellor listed 10 tell-tale traits of an economy on the verge of collapse. China, according to Chancellor, meets that classic definition of a bubble.

http://advisorperspectives.com/newsletters12/GMOs_Forecast_for_China.php

[1] First among them is a growth story that is uncritically accepted. Chancellor cited the dot-com era, when analysts routinely assumed that virtually every company would follow an s-shaped growth curve, where initial growth was tepid, as companies expanded into niche markets. Rapid market growth followed, as firms were assumed to possess a dominant strategy, as was followed by a leveling off of growth, as markets matured.

Chancellor related such uniformity of thinking to his experience working in Hong Kong, where he said that the dream of the typical businessman there was to sell a toothbrush (or other everyday goods) to every Chinese person, as a way to tap into its growing middle-class consumer demand.

But that dream has turned into a nightmare for most. Chancellor cited projections of a billion urban consumers in China’s cities by 2030. Economists, however, “are not very good at predicting anything, much less demographics,” he said.   Migration to cities is a pro-cyclical phenomenon, according to Chancellor, and once its economy slows, China’s population will exit the cities. He cited similar patterns in the US, where Chicago’s population grew during boom periods and shrank or stalled when the economy slowed.

Furthermore, China’s population, which is set to contract in a few years, is even more reason to be skeptical about projections of a billion consumers, Chancellor said.

[2] Chancellor’s second sign was overconfidence in authorities. A clear example from the US experience was Bob Woodward’s book, Maestro, a tribute to Alan Greenspan published at the peak of the dot-com bubble in 2001. Chancellor cited several similarly laudatory books about China’s leaders, but he offered a starkly different take on China’s braintrust. China’s leaders “are not incompetent when it comes to lining their own pockets,” he said, and through corruption “have made a great deal of money in recent years.”

[3] Third, easy money and credit expansion are precursors to a financial crisis, according to Chancellor, who cited data similar to that published by Reinhart and Rogoff showing that debt-to-GDP invariably rises rapidly before a crisis. Indeed, China’s total debt-to-GDP has risen dramatically from approximately 135% in 2008 to 175% in September of 2011. A significant contributor, Chancellor said, has been “social financing,” which is lending by non-bank entities partly controlled by Chinese authorities.   He said those loans come close to being “Ponzi financing,” since they are short-term, high-interest-rate loans that largely support real estate development.

[4] An investment boom and a misallocation of capital are the fourth signal of a bubble. As an example, Chancellor cited the railway boom in Britain between 1820 and 1840, when the British Parliament authorized excess construction that led to duplicative railroads serving London and ultimately a low return-on-capital for the industry.   Today, Chancellor sees signs of over-investment in luxury goods in China, an extreme example of which was the sale of a Tibetan Mastiff for 1 million UK pounds.

[5] Fifth, Chancellor cited troubling “agency” issues. At the peak of the dot-com era, Chancellor said it was common for investment banks to hire brokers and analysts not based on their ability to understand businesses or their competitive strategies, but based on how well they understood the “game” of underwriting and how fees were allocated among, for example, trading, new issues and corporate finance.   In China’s case, he cited an index – created by GMO – of IPOs with the word “China” in the company name, stocks which he said were promoted by brokers telling you to “buy China,” while ignoring the notion of a possible bubble. That index has already fallen nearly 60% in the last four years.

[6] Collective irrationality and herd behavior were the sixth sign of a bubble that Chancellor discussed. As an example, he cited the Mississippi bubble of 1719, when investors poured money into a trading company based on an over-hyped value of properties in Louisiana. Signs of similar activity in China include excessive trading – in 2009, there were days when the Shanghai exchange volume was greater than that of New York, London and Tokyo combined.

[7] Fraud and Ponzi financing were the next indicators Chancellor cited, of which there is a long history in the US, including Enron and WorldCom. Chancellor showed examples from China today, including Longtop and Sino-Forest, the latter of which ensnared the hedge fund investor John Paulson, who lost $100 million when the company collapsed amid questions about its finances.

[8] Ninth on Chancellor’s list was conspicuous consumption, which in China has been most obvious in excess investment.   He said China’s fixed investment is roughly 50% of its GDP, a level that no other economy has sustained for a long period of time.

[9] Real estate markets are the subject that most clearly separates the optimists from the pessimists in regard to China. Chancellor, as you might expect, said the market is vastly overbuilt, with empty apartments throughout the country. Moreover, work on much of the construction has been shoddy, he said, including the use of cement insufficiently strong to support buildings.   Many apartments have no fixtures, electricity or bathrooms.

[10] And the number 10 sign of a bubble…
Ultimately, what matters for investors are valuations, and Chancellor cited several examples of prices in China that increased by two or more standard deviations above their historical averages. The most prominent illustration is in housing, where the value of China’s housing stock went from 2% to 3.5% of GDP from 1998 to today. By contrast, the corresponding increase in the U.S. was from 1% to just over 1.5% from 1998 to 2006, and ours is now back to nearly 1% of GDP.

China’s housing bubble more closely parallels that of Ireland in 2004 and Japan in 1990; it both cases, a collapse in housing led to severe recessions.

Chancellor said that he discussed China’s housing market with his boss, Jeremy Grantham.   Acknowledging that China’s empty apartments were primarily for trading and not for occupancy, Grantham said that they were like the sardines tins that California’s gold miners exchanged in the 1850s. When a prospector was flush with money, they would buy a tin of sardines, and sell it when their fortunes had reversed.
One day, however, a miner opened a tin and found that the sardines were rotten – thus realizing that these tins were really for trading, not eating.

The sardine investor may still have been better off in those days than a Chinese real estate investor is today, since there was a secondary market for trading those little tins.

There is no secondary market for Chinese housing, Chancellor said.

Proton acquired by DRB-HICOM

2012-01-17T09:39:00.002+08:00

Proton issued yesterday the following announcement:

http://announcements.bursamalaysia.com/EDMS/edmsweb.nsf/LsvAllByID/E581A6FBAFD248FD48257987003BD713?OpenDocument

(i) PROPOSED ACQUISITION BY DRB-HICOM BERHAD ("DRB-HICOM") OF 234,734,693 ORDINARY SHARES OF RM1.00 EACH IN PROTON HOLDINGS BERHAD ("PROTON") ("PROTON SHARES") REPRESENTING APPROXIMATELY 42.74% OF THE ISSUED AND PAID UP SHARE CAPITAL OF PROTON FROM KHAZANAH NASIONAL BERHAD FOR A TOTAL CASH CONSIDERATION OF RM1,291,040,812 OR RM5.50 PER PROTON SHARE ("PROPOSED ACQUISITION"); AND

(ii) PROPOSED MANDATORY GENERAL OFFER ("MGO") FOR ALL THE REMAINING PROTON SHARES NOT ALREADY OWNED BY DRB-HICOM AFTER THE PROPOSED ACQUISITION ("REMAINING PROTON SHARES") FOR A CASH CONSIDERATION OF RM5.50 PER PROTON SHARE ("PROPOSED MGO")

It is good news that there will be a Mandatory General Offer, which is normal in these cases.

But there is still the issue of possible insider trading:

http://cgmalaysia.blogspot.com/2011/12/proton-possible-insider-trading.html

After a huge run up (which started already in November 2011) in the share price, the following announcement was made on December 6, 2011:

"The Board of Directors of PROTON wishes to clarify that after making due enquiry with the Board of Directors and major shareholders, the Company is not aware of any reason for the unusual market activity in the shares of the Company recently, and further, that there is no material corporate development not previously disclosed. The focus of Management is to improve the performance of the Company and business is as usual."

In light of what has happened, authorities really should look into this matter.

Private investors lose, institutions win due to over-trading

2012-01-16T09:04:00.000+08:00

Brad Barber, Yi-Tsung Lee, Yu-Jane Lui and Terrance Odean analysed the Taiwanese market and showed that individual private investor losses equated to a 3.8% penalty on their performance, equivalent to a giant 2.2% of Taiwan’s GDP each year between 1995 and 1999.

Their empirical analysis presents a clear portrait of who benefits from trade: Individuals lose, institutions win. While individual investors incur substantial losses, each of the four institutional groups that we analyze – corporations, dealers, foreigners, and mutual funds – gain from trade.

The research can be found here, it is a rather technical paper, the conclusion can be found on pages 19 and 20:

http://finance.martinsewell.com/traders/Barber-etal2006.pdf

A blog trying to estimate the damage for the US traders:

http://www.psyfitec.com/2012/01/160-billion-dollar-bezzle.html

The estimate by the blogger of the losses in the US is USD 160,000,000,000, an unbelievable high amount which I can't verify, but which might be roughly right.

I have written in the past about long term returns on the Bursa Malaysia:

http://cgmalaysia.blogspot.com/2011/09/bursa-long-term-returns.html

I estimated a loss of 1-2% per year due to trading (brokerage etc). Reviewing the above research I might have been too optimistic. Which means that my guess of 4-5% yearly returns is too high.

Marc Faber's stock picks in Singapore and Hong Kong

2012-01-15T12:40:00.001+08:00

Interesting (long!) article, "the Barron's 2012 Roundtable" with interesting people like Marc Faber and Felix Zulauf.

Lots of global macro stories, not all that rosy (to put it mild).

Faber is positive about Singapore and Hong Kong, and gives a few stock tips:

Singapore tips from Faber:

SATS which provides catering services to the airline industry and ports. It yields 5% and trades for 13 times earnings.
K-REIT Asia Management, a real-estate investment trust that yields 7%. The stock has fallen by about 50% and the dividend might be cut. But even if it is cut to 4%, this is an OK investment.
StarHub, the mobile-phone company, yields 6.9% and the P/E is 14.
Luxury-property developer like Wing Tai Holdings already sells for half its book value.
Fraser & Neave is a conglomerate similar to Swire. It sells for 10 times earnings and yields about 3%. It could become a takeover target at some point.

The Hong Kong market was hit hard, and stocks haven't bottomed yet. But you can buy Sun Hung Kai Properties [16.Hong Kong], with a P/E of five and a yield of 3.5%. Swire Pacific [19.Hong Kong] is a blue-chip, a well-managed conglomerate. It yields almost 5% and the P/E is 11. Hang Seng Bank [11.HK] yields 5.6% and trades for 11 times earnings. There isn't a huge risk in these stocks, but maybe I'm too bullish.

The full article:

http://online.barrons.com/article/SB50001424052748703535904577152932179268296.html?mod=BOL_hpp_highlight_top#articleTabs_article%3D1

Here is a link from Cullen Roche who estimated the returns of the forecasters of the Roundtable:

http://pragcap.com/how-useful-are-the-barrons-roundtable-pundits

The long term returns of Zulauf and Faber are clearly the best:

Annualized Returns: 2002-11
Felix Zulauf 25.1%
Marc Faber 23.4%

Very good results, considering that the S&P 500 returned zero over ten years, "the lost decade".

Maxbiz CEO: “RM 50 million is nothing to shout about”

2012-01-13T20:09:00.001+08:00

“Frankly, earning about RM 50 million over five years is certainly nothing to shout about for a public listed company”

Where these words uttered by one of the Malaysian captains of industry, whose companies routinely make billions a year? Not exactly, the words are from Datuk Vincent Leong, CEO of Maxbiz.

I found the above quote in The Edge of January 9, 2012 “Will Maxbiz make it this time around?”

Many shareholders of Maxbiz must have lost money, I am sure they would have wanted to see Mr. Leong actually making RM 50 million profit for the company, instead of just talking about it.

Maxbiz is a garment manufacturer with a rather patchy past, it has lost money in each of its last seven years, has huge accumulated losses (RM 107 million to be precise). It tries to turn around its business through a fibre–optic connection project, projected at RM 510 million. Next to that, it also plans to go in property development. Rather ambitious ideas for a garment maker.

I had a look at its latest 2010 year report.

Unfortunately, the cover is the only nice part of the whole report.

An errata of six pages is added containing dozens of corrections, not exactly the hallmark of a company that takes pride in its work.

It is hard to find a company with more red flags than Maxbiz:

[1] Personal changes:

Lots of changes in the Board of Directors and especially in the audit committee throughout the years
The previous internal auditor did not resume his position as internal auditor and quit on 25 February 2011
The (extrernal) auditor also changed in January 2011.

[2] Maxbiz and five directors received public reprimands and fines:

MAXBIZ had breached paragraph 9.16(1)(a) of the LR for failing to ensure that the 4^th quarterly report for the financial year ended 31 December 2008 ("4^th QR 2008") which was announced on 2 March 2009 took into account the adjustments as stated in the Company’s announcement dated 4 May 2009.
MAXBIZ had reported an unaudited loss after taxation and minority interest of RM6.227 million for the financial year ended 31 December 2008. However, the Company had on 30 April 2009 reported an audited loss after taxation and minority interest of RM76.926 million.
Bursa Securities also found that the directors of MAXBIZ to be in breach of paragraph 16.11(b) of the LR for permitting knowingly or where they had reasonable means of obtaining such knowledge the Company to commit the above breach.

[3] The company is involved in numerous court cases.

[4] Directors own not even a single share:

[5] The accounts of Maxbiz are qualified (both off the company itself and some of its subsidiaries), just two statement from the auditors:

“In the event that full impairment and full provisions of the above matters raised, the full impact on the Group for year ended 31 December 2010 would be RM25,936,874 as additional losses, hence the Group losses would have increased from RM2,394,234 to RM28,331,108.”
“As at 31 December 2010, the Group and Company’s current liabilities exceeded its current assets by RM16,394,682 and RM7,080,516 respectively.”

[6] Maxbiz appointed Ferrier Hodgson MH Sdn. Bhd. As Investigation Advisor (IA) on 24th February, 2010 to investigate if there were any irregularities and anomalies during the Geahin debt restructuring exercise.

The first of 4 parts of the report was presented to the Audit Committee and the Board of Directors on 28th April, 2010. As announced to Bursa Malaysia Securities Berhad on 30th April, 2010, the contents of the report from Ferrier Hodgson MH Sdn. Bhd. indicates that there is fraud, deception and misrepresentation.

[7] Maxbiz has a “special status” in several ways, but not the ones you like to see:

On 18 January 2011 the Company announced that pursuant to Paragraph 2.1(a) of PN 17 of the Main Market Listing Requirements, the Company is considered a PN 17 Company.
On October 7 2005 the Company defaulted on its RULS, since then it is considered a PN 1 Company.
The company recently received a winding-up petition, its subsidiary had received one on the past.

"Ze Moola" wrote a few interesting articles about MaxBiz:

http://www.whereiszemoola.blogspot.com/search/label/Maxbiz

Yet, dispite all the gloom, the share price suddenly took off:

The buyers must be quite positive about the future of this company. If this is based on any realism, time will tell …..

A strange coincedence is the fact that SJ Asset Management was the 2^nd largest shareholder of Maxbiz, an asset management company being examined closely by the Securities Commission (SC) due to irregularities in its accounts.

http://biz.thestar.com.my/news/story.asp?sec=business&file=/2010/7/7/business/6618258

“It was reported by a weekly that SJAM managing director Whai Onn Tan had gone missing, together with several million ringgit from the company.”

It is rather strange to see an asset manager investing in a company like Maxbiz with such poor fundamentals.

When things were still going better with SJ Asset Management, its boss joined in a charity raising event:

http://vimeo.com/8536328

Event Highlight Video l Live To Love Charity Event from U Arte`House 優藝製作 on Vimeo.

Damaging court case for Kwantas Corporation Bhd

2012-01-12T23:37:00.000+08:00

The Singapore High Court ordered Universal Shipping Group to pay USD 2.89 million (RM 9.08 million) in damages after finding that it had conspired with Kwantas Oil Sdn Bhd (a subsidiary of Kwantas Corporation Bhd, and a related party to Universal Shipping Group) to defraud a Chinese bank.

The judge uttered some pretty harsh words:

Universal’s conduct is only explicable on the basis that it had come to an agreement with KOSB (Kwantas Oil Sdn Bhd, owned by Kwantas Corporation Bhd) that the latter could dishonestly make use of BL4 so as to trick BOC into advancing funds

From SPH's website, article appeared in Straits Times, written by K. C. Vijayan, January 12, 2012:

http://www.singaporelawwatch.sg/remweb/legal/ln2/rss/legalnews/74720.html?utm_source=rss%20subscription&utm_medium=rss

THE High Court has ordered a shipping company to pay US$2.89 million (S$3.73 million) in damages after finding that it had conspired with another firm to defraud a Chinese bank.

The Panama-registered Universal Shipping Group was involved in the fraud following the shipment of 3,000 tonnes of palm oil to a Chinese company in 2008. The palm oil was carried from Kuantan in Malaysia on Universal's vessel The Dolphina.

Justice Belinda Ang, in judgment grounds released on Tuesday, said this was a 'most unsatisfactory case', involving a long drawn-out hearing that stretched over two years.

Her 63-page judgment is expected to be a reference point for court rulings on the requirements to support future claims of civil conspiracy, said lawyers.

Among other things, the judge invoked the rarely used 'law of attribution' to link a director of Universal directly to the fraud by the firm.

The Dolphina was chartered to Malaysian palm oil producer Kwantas Oil, which had sold the cargo to Chinese company Zhejiang Zhongguang Industry.

The Bank of Communications (BOC) in Zhejiang Province advanced a letter of credit for US$3.4 million on Zhongguang's behalf to Kwantas. But it never got its money back.

Kwantas, as charterer, had undertaken to the bank to protect Universal against all liability after the cargo was unloaded in Huangpu without the original bills of lading being produced.

But Zhongguang ran into financial difficulties, which meant it could not pay BOC. The bank found out too late that the cargo had been released to various end-users in China through Dongma Oils & Fats, a company linked to Kwantas and Universal, some two months earlier than the June 2008 due date.

It then began proceedings against The Dolphina, which was seized in Singapore waters in July 2008, and sued Universal for conspiring with others to defraud it.

A claim against Universal for breach of contract failed in the same case.

BOC's lawyer Vivian Ang argued that Universal had conspired with Kwantas to induce BOC to make the US$3.4 million payment to Kwantas on the strength of documents presented.

The two companies are closely connected, Justice Ang found. The three directors of Universal are also directors of Kwantas.

Key to the case was the role of director Steve Kwan, whose knowledge of what transpired could be attributed to Universal, the judge ruled. Mr Kwan did not testify in court - unlike the two other Universal directors, who had denied any knowledge of the events leading to the proceedings.

'Unless I am to believe that the entire board of directors of Universal and Kwantas was collectively ignorant of the goings-on of either company,' it must follow that everything was done with their knowledge or approval, she added.

The judge rejected defence lawyer Prem Gurbani's claim that BOC's loss was caused by the financial straits of its customer Zhongguang, and not by any alleged conspiracy.

Justice Ang held that the case for conspiracy had been satisfactorily made, and ordered Universal to pay BOC's losses, set at US$2.89 million.

The full judgement can be found here:

http://www.singaporelawwatch.sg/remweb/legal/ln2/rss/judgment/13237.html?utm_source=web%20subscription&utm_medium=web&title=The%20%22Dolphina%22 %5B2011%5D%20SGHC%20273

Key Players:
BOC: Bank of Communications Co Ltd
KOSB: Kwantas Oil Sdn Bhd, a subsidiary of Kwantas Corporation Bhd (KCB)
Universal: Universal Shipping Group Inc, a related party of KCB
Steve Kwan: Kwan Ngen Chung, Director and shareholder of Universal and KCB

KOSB and Universal are related parties, as disclosed in KCB's 2009 yearreport:

Some excerpts:

196 Yet, KOSB went ahead to endorse BL4 in blank, falsely representing that it still had legal effect, and intending that it be so treated, as part of a raft of measures to defraud third parties. I have already described the fraud involved in opening the June L/C (see [98] above), and the endorsement of BL4 in blank, as well as the creation and backdating of the 24 March 2008 invoice, was merely a continuation of that fraud, because the relevant documents had to be doctored and a false trail created in order to comply with the key requirements of the June L/C (see [101] above), so that payment could be obtained thereunder.

230 (f) Amongst his many portfolios (see [7] to [11] above), Steve Kwan is one of three directors in both Universal and KOSB, but is the only director not to have testified in this case. In addition, the other two directors (Alvin Kwan and K H Chong) who did testify vociferously denied having any knowledge about the events leading to these proceedings. Unless I am to believe that the entire board of directors of Universal and KOSB was collectively ignorant of the goings-on in either company, and that all the actions taken by their employees were without approval or authority, which is not supported by the evidence, it must follow that the common course of business had been followed (s 116(f) of the Evidence Act (Cap 97, 1997 Rev Ed)) and that everything that was done was done with board approval or knowledge, and that the reason Steve Kwan has not come forward to produce evidence is that such evidence would not be favourable to either him or to Universal (s 116(g) of the Evidence Act).

299 In my view, the answer is clear. Universal already knew, whether through Steve Kwan or otherwise, that the Cargo (including the BL4 Cargo) had been discharged on the Discharge Date against KOSB’s LOI, and that, under its terms, BL4 was supposed to be returned to Universal and deemed accomplished once it was obtained by KOSB. As a result of Steve Kwan’s knowledge, Universal also knew that BL4 had at some point in fact been obtained by KOSB; that the June L/C had been opened in KOSB’s favour and that it required, inter alia, BL4 to be endorsed in blank; that BL4 therefore had to be endorsed in blank in order to comply with the terms of the June L/C if KOSB was to negotiate it or receive payment on maturity of the June B/E; that KOSB in fact endorsed BL4 in blank and transferred it to Maybank as part of KOSB’s negotiation of the June L/C; and that KOSB was thereby falsely representing that an accomplished bill of lading was still valid, and intending that BL4 be so regarded, in order to negotiate the June L/C or to secure payment upon maturity of the June B/E.

300 Knowing all this, Universal was in a position to prevent KOSB from effecting the fraud by simply demanding the return of BL4, as it was fully entitled to do. In addition, there was every reason for Universal to have done so in light of its earlier breach of the presentation rule (ie, delivery of the BL4 Cargo without production of BL4), because as long as BL4 remained out of Universal’s possession, there was every possibility that (as has happened in this case) Universal would be exposed to liability from someone who came into possession of BL4 and decided to sue Universal for misdelivery of the BL4 Cargo once it was discovered that the BL4 Cargo had been discharged otherwise than against presentation of BL4.

301 Looking at all the facts, on analogy with what was said in Credit Lyonnais (see [272] above), the inference seems to me irresistible that Universal was operating in furtherance of a common design with KOSB so as to perpetuate an unlawful fraud by early June 2008: the blank endorsement of BL4 by KOSB was an essential part of the fraud, because without it there would have been no compliance with the requirements of the June L/C and BOC would not have disbursed funds thereunder to KOSB, and Universal not only knew all this but also knew of KOSB’s blank endorsement of BL4, yet Universal did nothing to prevent it, in circumstances where Universal had absolutely no reason to allow such an endorsement. In my view, Universal’s conduct is only explicable on the basis that it had come to an agreement with KOSB that the latter could dishonestly make use of BL4 so as to trick BOC into advancing funds under the June L/C.

The Edge Polls about Corporate Governance issues

2012-01-10T18:09:00.003+08:00

The Edge website regularly holds polls about different issues, some if which are relevant for this blog.

The website can be found here:

http://www.theedgemalaysia.com/the-edge-polls.html

A large majority of the voters is "not impressed" about Corporate Governance in Malaysia, the authorities should take note.

A huge majority votes is either for more transparency or more enforcement.

The issue of quarterly reporting was raised with the CG Blueprint 2011. The voice of the people has been heard.

The "No" voters want even more severe penalties, I suppose large fines or persons being barred from their industry.

PNB made an offer of RM 3.90 for each SP Setia share, the management immediately responded that the offer price was insufficient. It has been rather quiet around this deal, with PNB negotiating with SP Setia's management and receiving SC's feedback.

The choice of countries is rather limited, one would expect the US, Hong Kong and possibly the UK and Australia also to feature. But the message is clear, the large majority of voters are (also) looking at foreign markets to invest in.

It has been made rather convenient to trade foreign stocks with local brokers, I would be interested to know how many investors are using this option, which percentage they invest in foreign stocks.

It means competition for the listed Malaysian companies, which is good, it forces them to perform well (both financially and in CG terms) relatively to foreign companies.

No more 'neither admit nor deny'

2012-01-09T21:44:00.002+08:00

I wrote about the regulatory settlements regarding alleged insider trading:

http://cgmalaysia.blogspot.com/2011/12/sc-2011-civil-actions.html

Although it is good that action was taken (some of them eight years old), in all cases it was without admission or denial of liability. I even mentioned that this was a quite normal way to settle matters in the US, but that I don't like it.

Apparently, in the US the SEC has been criticized for using the same phrase too often in settlements and will start to make changes. Hopefully the Malaysian authorities (SC and BM) will follow suit.

From the Business Times (Singapore), January 9, 2012 (link only for free after 6pm):

http://www.businesstimes.com.sg/sub/news/story/0,4574,472902,00.html?

No more 'neither admit nor deny' escape route for US firms

SEC to change policy on companies' admission of guilt in securities fraud cases

(WASHINGTON) The Securities and Exchange Commission (SEC) is making a major change in how it settles some securities fraud cases, telling companies that they will no longer be allowed to say they neither admit nor deny the commission's civil charges when, at the same time, they admit to or have been convicted of criminal violations.

The change has been under consideration for some time and could be announced soon, according to people who have been briefed on the new policy. The SEC will continue to use the 'neither admit nor deny' settlement process when it alone reaches a deal with a company in a case of civil securities law violations, the people briefed on the policy said. Those types of cases make up the majority of its settlements.

The SEC has been criticised, in federal court and on Capitol Hill, for allowing companies to repeatedly settle fraud cases without admitting or denying the charges. That policy has been allowed to continue in cases even when a company admits the same conduct to another government agency, often the Justice Department.

For example, the SEC and the Justice Department announced on the same day last month Wachovia would pay US$148 million to settle charges the bank reaped millions of dollars in profits by rigging bids in the municipal securities market, one of several such settlements announced last year by the two agencies.

In the Justice Department settlement, Wachovia said it 'admits, acknowledges and accepts responsibility for' manipulating the bidding process in the sale of derivatives on tax-exempt bonds to institutional investors like cities, hospitals and pension plans over a six-year period ending in 2004. But in fashioning a settlement with the SEC based on the same facts, Wachovia agreed to settle the charges 'without admitting or denying the allegations.'

The 'neither admit nor deny' practice has been in use for years by many government agencies in addition to the SEC. But it has attracted renewed criticism recently.

The SEC has defended the practice, saying that by settling with companies, it saves the commission the far greater expense - and potential risk - of fighting them in court.

The agency says it is usually able to get as much money from a settlement as it could win in a protracted legal case, with money being returned to investors more quickly.

In crafting a settlement of securities fraud charges, companies frequently seek the 'neither admit nor deny' language for fear that admitting the conduct could then be used against them in shareholder lawsuits seeking damages. -- NYT

Prof Datuk Mohamed Ariff on Malaysian issues

2012-01-08T10:25:00.002+08:00

From The Star of January 7, 2012:

http://biz.thestar.com.my/news/story.asp?file=/2012/1/7/business/10163037&sec=business#13258964893981&if_height=744

Excellent observations from Prof Datuk Mohamed Ariff, can't agree more with them.

The seven most important questions, the remaining three (more personal) in the link above:

[1] What are the three most troubling economic issues facing Malaysia today, and how can we tackle them? Bulbir Singh, Seremban

Persistent and endemic fiscal imbalance, growing income disparity and overdependence on foreign workers top the list. Malaysia lacks fiscal discipline. In the last 54 years since Independence, Malaysia has had budget surplus only in 7 years. Fiscal prudence demands counter-cyclical fiscal policy with surplus in good times and deficit in lean times, which allows fiscal stimulus during economic downturns to be financed by the accumulated surpluses without borrowing. As this has not been the case with Malaysia, the nation's public debt has been growing. National debt has risen to RM430.2bil in the first quarter of 2011, roughly 55% of gross domestic product (GDP), up from 41% in 2008. To balance the books, the government must rein in its operating expenditure and introduce tax reforms. The government's reliance on oil and gas which accounts for about 40% of total revenue is simply untenable. Federal revenue growth has failed to keep pace with GDP growth, so much so that the revenue/GDP ratio has fallen to 22% from the 10-year average of 34%.

The growing income disparity is also worrisome. The bottom 40% of the households account for only 14% of national income, while the top 20% of the households account for roughly 50% of aggregate income. Income inequality in Malaysia hovers at levels higher than that in Indonesia, the Philippines and Thailand. Regional disparity is equally striking. Sabah is the poorest with 20% of the households living below the poverty line. Sabah accounts for 43% of the country's poor, trailed by Sarawak (12%) and Kedah (9%). These three states jointly account for nearly two-thirds of the poverty in the country. To fix the problem, the government must revisit and review its affirmative action plans so that the benefits accrue directly to the poor and the marginalised, regardless of ethnicity.

While one must thank foreign workers for their contributions to the economic growth and development of the country, their numbers have grown far beyond “optimal” level. This overdependence on guest workers has contributed to the middle-income trap, as their over-presence tends to suppress wages. In the early 1990s, it was thought that Malaysia could stay competitive internationally by keeping wages low and hence the opening of the floodgates to foreign workers. Experience has shown that such input-driven growth is unsustainable. High wages backed by high productivity can translate into low labour costs. Malaysia needs to ensure that the locals have the necessary skills as the economy moves up the value-chain.

[2] Are all the measures we have put in place sufficient to ensure that we become a developed nation by 2020? What are we not doing right, if any? Abu Hassan, Petaling Jaya

The long-term Vision 2020 was both laudable and feasible. It was like running a marathon. The mistake we made was to run it like a sprint at maximum speed right from the start, pursuing input-driven high growth single-mindedly. In the process, we seem to have fallen unwittingly into the middle-income trap. We needed to grow only at 7% per annum to be a developed nation by 2020, and there was no need to grow at overheating double-digit pace. Malaysia's potential growth rate has fallen from 7% in the early 1990s to roughly 5% now. We need to raise our growth potentials by reinventing the economy. We need to move away from low value-added to high value-added activities, but this is easier said than done. It calls for bold policy reforms which may not sit well with vested interests that support and benefit from the current order.

[3] What is your opinion on the Economic Transformation Programme (ETP), Government Transformation Programme (GTP) and all the other transformation programmes? Reuban John, Klang

The various transformation programmes including the ETP and GTP are significant steps in the right direction. Much however would depend on their implementation. Besides, as the saying goes, the proof of the pudding is in the eating. Experience has shown that such programmes tend to work well if they are perceived to be bottom-up, not top-down. To reinvent the Malaysian economy, what we need is a holistic, not selective, transformation. In any case, change should be gradual, for “big bang” can be disruptive.

[4] What do we need to do most in order to stem the brain drain in the country? Li Ming, Johor

Brain drain need not be seen negatively in the first place. I once heard someone quip “brain drain is better than brain stuck in the drain.” It can play a positive role by creating a diaspora with pivotal international connectivity which is equivalent to gaining offshore economic space generating income inflows for the home country. The flip side, however, is that it deprives the nation of skills much needed to transform the economy. To stem the brain drain, we need to identify the root causes and tackle them effectively. Brain drain can be due primarily to the pull factor or the push factor. If it is the former, little can be done as it is purely external, but if it is the latter, it can be fixed domestically. We need to create lucrative job opportunities with levelled playing fields at home and eliminate the disincentives that encourage skilled personnel to exit. A reasonably liberal environment can be a powerful plus factor. A strong domestic currency would also discourage brain drain, just as a weak home currency would do exactly the opposite.

[5] Do you think that Malaysia is really losing its competitiveness to other countries in the region and what can we do to stop this? James Chin, Petaling Jaya

This is an empirical question. Empirical evidence is not conclusive, although the various competitiveness indices that rank countries provide some pointers. However, there are concerns over Malaysia's declining growth rates, with newly emerging economies in the region exhibiting greater dynamism. It is quite normal for emerging economies like Vietnam to grow faster than mature economies like Malaysia, due mainly to what economists call the base effect. Malaysia is still fairly competitive as shown by the seemingly perennial surplus in the balance of payments, but no country can afford to rest on the laurels. Latin American experiences are telling. Malaysia has huge potentials which are waiting to be unlocked through real policy reforms that would allow greater economic freedom to unleash the forces of transformation. It is unfortunate that politics tends to override economics.

[6] Is it really a big concern that our top universities command poor rankings in the international arena and what had contributed to this in the first place? Lily Raj, Penang

This indeed is a big concern, but we cannot blame it all on the universities as they partly inherit the problems from secondary and primary schools. Our education system is somewhat archaic with rote learning taking primacy over creativity and thinking. Nothing short of a complete overhaul can fix the problem. In short, we need to democratise our education system, but no one in the corridors of power has the gumption to get it done.

[7] What do you hope to see happen in Malaysia next year? Susan Cheung, Kuala Lumpur

I am afraid that we need to brace ourselves for a rough ride in 2012. Malaysia's exports are likely to face strong head winds, with several European economies shrinking and other developed economies stagnating, compounded by a sedated slowdown in China. The prices of major commodities, including gold, are likely to melt. The silver line is the window for real reforms as tough times will force politics to take the back seat. Hopefully, economic necessity will knock out political expediency.

Mulpha International reprimanded

2012-01-06T10:09:00.003+08:00

(lightly edited version)

On January 3, 2012 Mulpha International (Mulpha) was reprimanded by the Securities Commission:

http://www.sc.com.my/main.asp?pageid=770&linkid=3002&yearno=2012&mod=paper

The description of the misconduct was rather vague, to say the least:

"Failure to ensure the final basis of allocation of excess rights shares was consistent with the basis disclosed in the abridged prospectus of Mulpha International Berhad dated 24 February 2010"

In what way was it not consistent? The rights issue in 2010 was a massive 1-for-1 exercise worth almost RM 500 million in which the the market capital of the company would almost double. If anything was wrong with that exercise, surely the minority shareholders deserve a clear explanation.

An article in The Star of today sheds more light on this issue:

http://biz.thestar.com.my/news/story.asp?file=/2012/1/6/business/10213165&sec=business

Mulpha disappointed with SC reprimand, seeking clarification

By JOHN LOH
PETALING JAYA: Mulpha International Bhd's directors are disappointed at a reprimand from the Securities Commission (SC) that claimed the property developer failed to disclose information in a 2010 prospectus in “a full and true manner.”

Mulpha said in a statement that it would write to the regulator for further clarification before considering its next course of action, which may include an appeal.

“The company fully cooperated and provided all required information to the SC when queried on Sept 30, 2010.

“The company is also disappointed that this matter has been announced without giving the company the benefit of its 30-day right to appeal the decision,” it said.

The SC had on Wednesday posted the reprimand on its website, saying Mulpha's actions had breached Paragraph 1.03 of its guidelines for abridged prospectuses.

Essentially, it described Mulpha as inconsistent in the way it allocated the excess rights shares to what was disclosed in the abridged prospectus.

Mulpha's abridged prospectus, which was issued on Feb 24, 2010, was for a renounceable one-for-one two-call rights issue of up to 1,526,559,774 new ordinary shares of 50 sen each. However, the rights issue was undersubscribed, raising only RM471.2mil.

Its board said it believed the SC's reprimand specifically related to the manner in which it had allocated the excess rights shares to shareholders and renouncees who applied for them.

In its defence, the company explained that there was a minority of shareholders and renouncees, many of whom held a miniscule number of shares at the entitlement date, who applied for the excess rights shares at unusually high multiples, some even up to thousands of times what they were entitled.

“Two renouncees, for example, put in excess rights shares applications of 29,999 and 598,000 times of their initial entitlements.

“The directors of Mulpha, after receiving formal legal advice and invoking the authority granted to the Board in Section 4.4 of the abridge prospectus, fixed the allocation of excess rights shares to all applicants to generally 10 times of their initial entitlements.

“The board exercised its rights as it believed these extremely high excess applications could potentially give rise to adverse and irregular trading in its shares post the completion of the capital raising, which would be detrimental to the interest of the company.

“It could also potentially reduce the number of excess shares allocated to the remaining shareholders and renouncees who had put in excess applications that were not grossly and artificially inflated,” it pointed out.

(Section 4.4 authorises the board to allot the excess rights shares in a fit and expedient manner and in the best interest of the company as well as to accept any excess rights shares application in full or in part without assigning any reason, in a fair and equitable manner and on a pro-rata basis.)

Mulpha added that while the reprimand was given to the present board, Datuk Yusli Mohamed Yusoff and Caesar Loong were not directors at the material time when the abridged prospectus was issued.

“Furthermore, as the underwriter to the rights issue was the company's major shareholder in which Lee Seng Huang has an indirect interest, Lee consequently abstained, as required by law, from the board's deliberations on the formula to allocate the excess rights shares,” it said.

Through various investment holding companies, Lee and his family have an indirect 35% equity interest in Mulpha, based on its latest annual report.

Mulpha's stock shed 0.5 sen to 38 sen yesterday, with 6.7 million shares traded.

Why did Mulpha not announce the above when they published the allocation? Here is the allocation table from the website of Bursa Malaysia:

It says "total excess applications", not "total approved excess applications", it appears that all excess applications have been approved since even with the excess applications the rights issue has been undersubscribed. If indeed excess applications were restricted, then Mulpha should have been transparent about it.

What probably happened is that some shareholders put in large applications for excess rights shares, these amounts were strongly reduced, but when these shareholders later checked on the Bursa Malaysia's website it turned out that the rights issue was actually undersubscribed (even including the applications for excess rights shares) and that the unsubscribed rights shares (about 37 million) were allocated to Magic Unicorn Ltd, linked to the majority shareholders. After seeing this they probably filed a complaint with the Securities Commission.

Some issues:

Mulpha should have clearly written how and why it allocated the excess rights shares, especially since Mulpha's majority shareholders received more excess rights shares because of this and thus conflict of interest is a serious possibility
Mulpha should (even now, two years later) be forced to give a clear overview how the excess rights shares were allocated, grouped by Related Parties and Non-Related Parties
The Securities Commission should write more clear descriptions of misconduct, readers should not have to guess what was actually the issue
I hope that the Securities Commission gave Mulpha sufficient chance to appeal, although it does seem to me (given the above information) that (at least) a reprimand was indeed in order
This case took almost two years to complete, why so unbelievable long? This is not a very difficult case and should easily be dealt with within one year (before the end of 2010)
It might be wise in general to cap the amount of excess rights shares a shareholder can apply for relative to his entitlement to some reasonable number. This would require a change in the rules. If certain parties are applying for 598,000 times their entitlement, then that smells like exploiting a loophole, and that is not what investing should be about

John Hussman: "The Right Kind of Hope"

2012-01-04T09:20:00.000+08:00

http://www.hussmanfunds.com/wmc/wmc120103.htm

Some snippets from his latest weekly newsletter:

With 10-year Treasury yields below 2%, 30-year yields below 3%, corporate bond yields below 4%, and S&P 500 projected 10-year total returns below 5%, we presently have one of the worst menus of prospective return that long-term investors have ever faced. The outcome of this situation will not be surprisingly pleasant for any sustained period of time, but promises to be difficult, volatile, and unrewarding. The proper response is to accept risk in proportion to the compensation available for taking that risk. Presently, that compensation is very thin. This will change, and much better opportunities to accept risk will emerge. The key is for investors to avoid the allure of excessive short-term speculation in a market that promises - bends to its knees, stares straight into investors' eyes, and promises - to treat them terribly over the long-term.

Again, we enter the year with great hope. But our hope is not for continued speculation and the maintenance of rich valuations (that only look reasonable because long-term cyclical profit margins are at a short-term peak about 50% above their historical norms). At present, we have a situation where saving is discouraged by desperately low interest rates, where unproductive uses of capital are not discouraged because the bar is so low, and where central banks recklessly facilitate economic stagnation by bridging the gap between a puddle of unrewarding savings and a mountain of unproductive speculations. So our hope this year is for a return to a proper investment opportunity set - where saving is encouraged and rewarded by sufficiently high prospective returns, and the cost of capital is high enough to discourage high-risk, low-return investments and unsustainable fiscal deficits. The longer policy makers wait to begin the orderly restructuring of bad debt and overleveraged financial institutions, the greater the risk of a disorderly restructuring.

Meanwhile, the European Central Bank is more tapped out than we suspect investors recognize. The balance sheet of the ECB now stands at about $3.55 trillion (2.73 trillion euros), compared with EU GDP of about $16 trillion. This puts the European monetary base at about 22% of EU GDP, which is even greater relative to the economy than the Fed's balance sheet ($2.97 trillion on $15 trillion of GDP as of December 28, which works out to 21 cents for every dollar of GDP). Forget the "zero bound" - given the bloated size of the ECB balance sheet, combined with the lack of credible safe-havens in Europe, distrust of the banking system, and an apparent aversion to cash-stuffed mattresses, German 3-month debt is now sporting a yield of -0.17%, which means that investors pay the German government for holding their money.

Top 8 Ways Companies Cook The Books

2012-01-02T13:35:00.002+08:00

From InvestoPedia, edited version, I took away some material that is not so relevant for Malaysia, the original article can be found here:

http://www.investopedia.com/articles/analyst/071502.asp?partner=basics102811#axzz1cojrnmgz

What can you do to protect your investments from Enron-style disasters? You need to learn the basic warning signs of earnings manipulation. While the details are usually hidden - even from the accountants - learning these money-manipulation methods will keep you alert to companies who may be cooking the books:

Accelerating Revenues
One way to accelerate revenue is booking lump-sum payment as current sales when services will be provided over a number of years. For example, a software service provider receives upfront payment for a four-year service contract but records the full payment as sales of only the period that the payment is received. The correct, more accurate, way is to amortize the revenue over the life of the service contract. (A recent change in accounting standards lead to a revenue boost for many companies that were required to defer revenue over several years.

A second revenue-acceleration tactic is called "channel stuffing." Here, a manufacturer makes a large shipment to a distributor at the end of a quarter and records the shipment as sales; however, the distributor has the right to return any unsold merchandise. Because the goods can be returned and are not guaranteed as a sale, the manufacturer should keep the products classified as a type of inventory until the distributor has sold the product.

Delaying Expenses
AOL got in trouble for this in the early 1990s when it capitalized the costs of making and distributing its CDs. AOL viewed this marketing campaign as a long-term investment and capitalized the expense. This transferred the costs from the income statement to the balance sheet where it was going to be expensed over a period of years. The more conservative (and appropriate) treatment is to expense the cost in the period the CDs were shipped.

Accelerating Expenses Preceding an Acquisition

This may sound a little counterintuitive, but before a merger is completed, the company that is being acquired will pay, possibly prepay, as many expenses as possible. Then, after the merger, the EPS growth rate of the combined entity will be easily boosted when compared to past quarters. Furthermore, the company will have already booked the expense in the previous period.

"Non-Recurring" Expenses

By accounting for extraordinary events, these one-time charges were meant to help us better analyze ongoing operating results. It seems, however, that some companies take one of these each year. Then a few quarters later, they "discover" they reserved too much and are able to put something back into income (see next tactic).

Other Income or Expense

This category can house a multitude of sins. Here companies book any "excess" reserves from prior charges (non-recurring or otherwise). This is also the place where companies can hide other expenses by netting them against other newfound income. Sources of other income include selling equipment or investments.

Off-Balance-Sheet Items

A company can create separate legal entities that can house liabilities or incur expenses that the parent company does not want to have on its financial statements. Because the subsidiaries are separate legal entities that are not wholly owned by the parent, they do not have to be recorded on the parent's financial statements and are thus hidden from investors.

Synthetic Leases

A synthetic lease can be used to keep the cost of new building from appearing on a company's balance sheet. The lease is a long-term (five- to 10-year) agreement under which a company will pay a fixed lease expense to be in a new headquarters. At the end of the lease, the company is obligated to buy the building, but because of the nature of the lease, this liability is not included on the balance sheet. (Who said accountants were boring and uncreative?) At the time the lease was made, the company may have been in fine financial shape and the economy may have been booming; however, the ability of the company to meet this huge obligation is hard to determine until shortly before maturity (one to two years).

The Bottom Line
If you tune into the items hidden in a company's financial statements, you may be able to spot some of the warning signs that point to earnings manipulation. This doesn't mean that the company is definitely cooking the books, but if a company makes you suspicious, that's a sure sign that you should dig deeper before making an investment.

In the Malaysian context, warning signals are increasing Sales and Profits, but

Decreasing Cash
Increasing Debts (especcially short term is worrisome)
Increasing Inventory
Increasing Receivables

Classic accounting fraud cases in Malaysia (post 1997/98) are Megan Media and Transmile, apart from many other smaller cases (especcially on the ACE market).

There are currently a few others that have dubious looking accounts, only time will tell how they will end.

Happy New Year

2011-12-31T21:33:00.001+08:00

To all Readers: Happy New Year!

Only 10 year old girl from Mexico, absolutely amazing: