Analyst giving negative recommendations not welcome

Article from Bloomberg: "Angry CFO Ejects Macquarie Analyst at PAX Earnings Briefing"

Some snippets:


An earnings briefing in Hong Kong turned heated when the chief financial officer refused to continue with his presentation until an analyst from Macquarie Group Ltd. left the room.

In a video obtained by Bloomberg News, PAX Global Technology Ltd. CFO Chris Lee can be seen standing over a seated Timothy Lam and ordering him to leave the conference room on Wednesday. Lam initiated coverage on PAX Global’s stock in April with an underweight rating, making him the only analyst out of 17 tracked by Bloomberg to have a bearish recommendation at the time. On Thursday, Lee said he regretted his behavior, which was a "one-off" that didn’t reflect the management’s position and he welcomes "diverse points of view," according to an e-mailed statement.

The analyst was asked to leave because PAX Global disputes parts of his report, not because of the rating, Lee said by phone on Wednesday. Lam wasn’t invited to the briefing, Lee said. Macquarie spokeswoman Ida Cheung declined to comment. All analysts should be able to attend the briefing, regardless of their view on the company, Macquarie’s Lam wrote in a note, in which he maintained his underweight rating and raised his target price by 10 H.K. cents.


It is tough to be an analyst giving an "underweight" or "sell" recommendation, but the above is rather extreme. It does however illustrate the problems of being an analyst.

From Bloomberg: "Here’s How Asia Hedge Funds’ Top Picks at 2015 Sohn Fared".

Hedge funds have highly paid managers based on generous 2/20 management fees, and one would expect that their top picks would in general perform well, but even they can be horribly wrong, as the article shows. Some snippets:

The hedge fund industry has had its worst start to a year, as measured by performance and capital outflows, since 2009, when the world was reeling from the global financial crisis. Asia-focused hedge funds have lost 2.4 percent this year, according to Singapore-based Eurekahedge Pte. Hedge funds’ woes highlight the difficulty of picking investments based on fundamentals in a world kept on its toes by central bank and government intervention.

• The three companies’ shares lost more than 20 percent of their value in the past year .....
• The stock tumbled nearly 34 percent in the one year ....
• Hong Kong shares of Citic Securities Co. and China Galaxy Securities Co., two of the nation’s largest brokers, have lost almost half their value .....
• The broadcasters’ shares all fell, with declines ranging from 4 percent to 20 percent. MMG’s Hong Kong-traded shares plunged 45 percent in the past year ....
• Aoyama’s share price slid 17 percent in the past year.
• Kyocera’s stock has slid 18 percent in the past year

Never follow recommendations of others blindly, best is always to do ones own homework. In the above cases, one can safely assume that the fund managers were already loaded with the stocks that they recommended.

Creative Accounting

There used to be a time when creating profits would require a real effort in hard work.

These days a much more simple way is available: call in the financial engineers.

I have written many times about the ways these people are able to polish up accounts.

In the tech world creativity to make profits out of thin air seems to have reached a whole new dimension.

Article from Bloomberg: Tech Startups Come Up With Some Creative Definitions for ‘Profitable’

Some snippets:

.... the startup [SpoonRocket] calculated that the business had become "contribution margin positive," meaning that it sells an item—in this case, pre-made meals delivered to customers—for more than the cost to manufacture, distribute, and sell it.

Uber said it was profitable in the U.S. and Canada during the first quarter of this year. Lyft said it is "on a clear and defined path to profitability." Postmates said it will be profitable by the end of 2017. DoorDash is "cash-flow positive" in some markets. TaskRabbit will be "profitable profitable" by the end of this year. It "won't be too long" until Airbnb is profitable. Instacart is "gross margin profitable." Luxe Valet is "on the precipice of being profitable" in some markets. At Y Combinator's demo day in March, many bright-eyed entrepreneurs clinched their pitches with a robust "and we're already profitable!"

Tech startups are increasingly touting a mix of less common financial metrics, even as their public counterparts move more toward generally accepted accounting principles. Amazon and Facebook recently began breaking out employee stock compensation in more of their results, bowing to pressure from regulators and investors. LinkedIn and Twitter still focus on numbers that exclude equity costs.

When Uber said it is profitable, the company similarly left out equity grants to employees, along with interest and taxes. Its main ride-hailing rival in the U.S., Lyft, declined to elaborate on its "path to profitability" statement, leaving questions about how or when it will reach its destination. Airbnb also declined to provide details on an executive's profitability comments. TaskRabbit said "profitable profitable" means it will turn a net profit but declined to say whether specific costs such as equity grants and taxes were included. Postmates, the courier service, used a profitability calculation that doesn't include taxes.

Several startups slice their numbers by markets to demonstrate financial maturity in certain cities or countries. Again, the criteria for what's included in those calculations can vary. Instacart told Bloomberg in February that it was profitable in its biggest markets and that 40 percent of its volume was profitable. The company later clarified that it meant gross margin profitable, which is usually limited to direct costs such as supplies and delivery labor. Instacart's calculation leaves out other costs, such as customer service, central office salaries, rent, and the cost of acquiring its workers. Instacart also said it is gross margin profitable, on average, across all its markets.

Luxe, an on-demand valet parking service, said it's currently profitable in some cities but declined to name them. The company defined "profitable in a market" as gross profit, excluding central operations costs. DoorDash, which delivers food from restaurants, said its cash-flow positivity is limited to its "earliest markets" and includes customer service and salaries of regional workers but leaves out central rent and operations.


However, at the end of the day, when the dust has settled:


"You can always say, 'We're profitable if we don't include X,' " Behr said. "But no matter how many ways you say you're kind of profitable, if your bank account ends up lighter than when you started—eventually, that doesn't work."


This is what Warren Buffett wrote in his last annual report (page 8, emphasis mine) about GAAP:


Though we sold no Kraft Heinz shares, “GAAP” (Generally Accepted Accounting Principles) required us to record a $6.8 billion write-up of our investment upon completion of the merger. That leaves us with our Kraft Heinz holding carried on our balance sheet at a value many billions above our cost and many billions below its market value, an outcome only an accountant could love.


It definitely seems that accounting these days is more of an art than a science. I am not sure if that is a good thing though.

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

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

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

FT reported:


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


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

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

David Webb also warned about bubbles and suspicious accounting practices:

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


Bloomberg reported that shorting of speculative shares can horribly backfire:


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

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

Not all charts are the same

I read The Edge of July 21, 2014, and almost fell off my chair:

Aeon, the blue chip, one of my favourite Malaysian stocks, had dropped from about RM 16 to below RM 4. What has happened?

I quickly checked Bursa's website:

Same picture, Aeon's stock down by 75%.

Yahoo then:

Now it is getting strange, the share is indeed down a lot, but "only" around 50%.

Bloomberg:

 

 

And Wall Street:

Hmmm, nothing really happened, the price more or less going flat over the last year.

Checking Bursa's announcements site reveals the answer, a one-for-one bonus and a capital reduction from RM 1 to RM 0.50, so basically the share split in four.

If a bakery sells whole cakes for RM 20 and the next day decides to sell quarter cakes for RM 5, then the price not really fell by 75%, it stayed the same. A proper chart should reflect that.

Can The Edge, Bursa and Yahoo please update their charts?


Selamat Hari Raya to all Muslim readers and happy holidays to all.

Gowex and Bloomberg

I have written twice about Gowex's fraud.

Bloomberg, the financial news powerhouse (normally a pretty good source of information) also entered the fray:

"How Gowex CEO Went From Defiant to Disgraced in Five Days"

An interesting and informative article with lots of good stuff in it.

But one "tiny detail" was left out, that in the past Bloomberg also fell for the fraud. Only one year ago it wrote the following article:

"How the Founder of Spain's Gowex Bet the Farm (Twice) and Won"

Some snippets:

One company that has managed to stand out and become a global brand is Let's Gowex SA, a Madrid-based provider of free outdoor Wi-Fi services. Its growth, largely from increasing smartphone and tablet usage, has also been fueled by founder Jenaro Garcia's willingness to bet the farm.

The company makes money from selling roaming, advertising, e-commerce and other services to local governments and mobile carriers. Garcia said business was slow until the iPhone arrived almost six years ago. Last year, Gowex's revenue climbed 71 percent to 114 million euros ($146 million). Profit rose 136 percent to 17 million euros ($22 million).

(the company has admitted it cooked the books over at least the last four years, so the above numbers are extremely unlikely to have been realistic)

To finance that growth, Garcia, who is now renting a 150-square-meter apartment in downtown Madrid, recently turned again to his significant other. He said his wife "went nuts" when he suggested putting all of their savings for a new house into the company once more. As it turns out, the investment has almost doubled in value. "She is very, very happy, even if we still don't have our own house," he said.

Is she still very, very happy?

I noticed the older Bloomberg article in this link:

"Gowex Shows Why Lending is the Best Venue for Accounting Control Fraud"

A classic accounting control fraud, Gowex, has collapsed in Spain.  Gowex was a wi-fi firm.  It was able to run its scam for at least four years.  It was a crude scam that involved simply making up contracts and borrowing to grow rapidly.

“The US firm Gotham City Research had described Gowex as a ‘charade’ and said that its revenues were ‘at most’ 10% of those reported.”

As soon as Gotham City Research blew the whistle on Gowex it made it impossible for Gowex to borrow additional funds and avoid collapse.

The whole article is pretty interesting, for instance that Gowex received several awards. It is written by William Black, about whom I blogged before.

Rule of 20: would it also work in Malaysia?

"A measure of stock valuations called the Rule of 20 states that the stock market is fairly valued when the sum of the average price-earnings ratio and the rate of inflation is equal to 20. Above that level, stocks begin to get expensive; below it, they’re bargains."

The above from Bloomberg BusinessWeek.

The rationale:

• The higher the PE, the lower the Earnings Yield, the less attractive the valuations are;
• The higher inflation, the higher the interest rates, the more attractive is the risk free alternative (fixed deposit) for investing.

In Malaysia the PE is around 18 (at least, that is what I read recently).

The inflation is officially about 2%, I guess it is around 5-7%.

In other words, according to the Rule of 20, I think that shares are slightly overvalued.

KL Kepong implicated in horrific allegations in Indonesian plantations

I just received my weekly magazine "Bloomberg BusinessWeek". In it a horrible story about abuse of workers in Indonesian plantations. One company specifically mentioned is KL Kepong. The story is available on the internet and can be found here. It is based on extensive research by Bloomberg that took nine months to complete. It is a long story, but I hope that the reader of my blog has time to go through it all.

Some excerpts:


..... As it’s grown, the palm oil industry has drawn scrutiny from environmental activists in Europe and the U.S. They decry the destruction of rainforests in Indonesia and Malaysia to support oil palm expansion, which threatens the natural habitats of endangered species such as pygmy elephants and Sumatran tigers. The human costs of the palm oil boom, however, have been largely overlooked. A nine-month investigation of the industry, including interviews with workers at or near 12 plantations on Borneo and Sumatra—two islands that hold 96 percent of Indonesia’s palm oil operations—revealed widespread abuses of basic human rights. Among the estimated 3.7 million workers in the industry are thousands of child laborers and workers who face dangerous and abusive conditions. Debt bondage is common, and traffickers who prey on victims face few, if any, sanctions from business or government officials.

.... Interviews with former workers as well as statements recorded by local nongovernmental organizations reveal a tragic underside of KLK’s supply chain. These workers tell of being defrauded, abused, and held captive by representatives of a labor management firm called CV Sinar Kalimantan. Their claims of fraud are substantiated by affiliates of the contractors, as well as by the labor contracts themselves, copies of which were obtained by Bloomberg BusinessWeek.

..... At PT 198, a plantation near Berau owned by top KLK shareholder Batu Kawan, workers entered a system of tightly controlled forced labor, according to Adam and other alleged victims. At least 95 workers were held at the plantation for up to two years. At night they were locked in stifling, windowless barracks. An environmental NGO, Menapak, later reported that they were fed small portions of salted fish and rice, which several said were often weevil-infested. A truck with fresh water came once a month, but that supply would last no more than a week; workers pulled most water for cooking, cleaning, and drinking from a stagnant ditch that ran alongside the barracks.



As far as I know, the story has not been reported in the Malaysian media, if that is indeed the case then that would be very disappointing, although not unexpected.


Another, more old, story about Indonesia in general can be found here:

"The Perfect Fascist City. Take a Train in Jakarta" by Andre Vltchek.

According to my sources, this story is largely correct, but here and there exaggerated. Corruption seems to be on the rise in Indonesia. It seems that the economy is doing quite well, but large chunks of the gains end in the pockets of only a few.