Idea: Tracker Fund of Hong Kong (2800.HK) (3)

I recently have sold my Tracker Fund of Hong Kong (I wrote about it before here and here).

I don't think the price is now particularly expensive, but with a lot of risk globally and a quite high portion of the fund being invested in financials (of which I am not a fan) I have decided to take profit.

Given the recent increase in share price the dividend yield (one of the reasons I bought the share, that time close to 4%) has also fallen.

Including two dividends (of HKD 0.62 and HKD 0.15) the return is about 38% for a holding period of just over one year.

Disclaimer: this is not a recommendation. Please do your own homework and make your own investment decisions or ask advice from a professional advisor.

Idea: Tracker Fund of Hong Kong (2800.HK) (2)

I posted about 3 months ago the first investment idea.

This first idea has performed quite well, from HKD 20.90 to currently HKD 24.60, a gain of about 18%.

I expect a decent dividend to be announced at the end of this month (accompanied by a drop in share price of the same amount).

CLSA published their "Asia Maxima" 4Q16 publication:

Interesting are both the low PB and high dividend yields for Hong Kong, which were indeed reasons for me to buy into the Tracker Fund. I am not too worried about the low earnings growth and ROE, I think they are quite typical for a share market when the economy is not doing well. When the economy swings back to live, these factors will undoubtedly improve.

Singapore's numbers are quite similar to those from Hong Kong.

For Malaysia, as usual, quite high PE numbers. But in the stock universe of CLSA (consisting probably of both higher quality and more liquid shares than average) they do predict a positive earnings growth. That is quite different from the overall picture of the 30 largest cap shares on Bursa where an earnings decline is likely. For me the value in Malaysia has always been in selected small and medium cap shares, not in the blue chips.

In general, emerging markets look cheap relatively versus for instance the US market, which is close to its all-time high and which hasn't seen a bear market since 2008/9.

IPOs leaning too heavily on cornerstones

From Reuters:


In construction, the cornerstone is an all-important component of a new building. In capital markets, it’s an investor that helps support the value of a company before its initial public offering. In Hong Kong, these cornerstones are bearing too much of the load and undermining the foundation of the local stock market.

In principle, there’s nothing wrong with companies pre-selling some shares to big investors ahead of an IPO. Fund managers ensure they get a decent allocation in return for agreeing not to sell for six months. For the listing company, the endorsement of a shrewd backer can help stimulate interest from smaller shareholders.

The practice in Hong Kong is spinning out of control, however. Big companies preparing to sell shares now routinely pledge half or more of them to friendly investors. Take China Huarong Asset Management, the state-owned “bad bank” that is seeking to raise between $2.3 billion and $2.5 billion. It already has commitments worth $1.6 billion from 10 investors, according to a term sheet describing the deal. That’s more than two-thirds of the total at the middle of the price range.

Huarong isn’t alone either. Cornerstone investors have pledged $1.1 billion to China Reinsurance, which is targeting up to $2 billion. Of the 28 Hong Kong listings that have raised more than $500 million since the beginning of 2013, the average allocation to cornerstone investors was 40 percent, according to Breakingviews calculations. Giving a small group of buyers such large slugs creates an overhang that weighs on the share price.

The cosy arrangement also undermines the whole concept of a public offering. Huarong’s biggest cornerstones are not professional money managers but developer Sino-Ocean Land and China’s State Grid, which is also backing China Re. When one state-backed Chinese company invests in another, getting the best available return on investment may not be the only consideration.

After a botched bailout of the stock market over the summer, the money-go-round in Hong Kong is another example of how state influence can distort public markets. Buildings may depend on the support of a cornerstone. Hong Kong’s exchange participants would do better to start chiseling away at them.


The above is also very relevant in the Malaysian context. Suddenly a few years ago the term "cornerstone investor" was introduced.

Another concept that also doesn't work is artificial holding up the price in the month after the IPO.

Bursa limits information to 5 years ONLY? (2)

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


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

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

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

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


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

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

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

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

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


"Despite having an otherwise excellent announcement website (I can't stress this enough, it is much better than all other announcements websites that I frequent), there is always room for improvement I guess."


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

The HKEX for instance gives information starting 1999:

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

Good articles (1)

Lots of good articles recently, many on subjects I am passionate about. Below are just some snippets, please click on the links for the full articles.


Is settling the right choice? (The Star)

When pushing for a no-contest settlement becomes the default option, market discipline is likely to soften. The people will perceive that the culprits are being let off after paying disgorgements, which is a little more than a rap on the knuckles for those with deep pockets.

Also, the lack of admission of liability is confusing. Are those guys innocent but are forced to settle to avoid being entangled in messy and costly trials? Or did they indeed commit the offences but seized the opportunity to avoid prosecution by paying money?

In addition, the SC [Securities Commission] should reconsider how it informs the market about its regulatory settlements. It issues press releases on criminal prosecution and civil actions, but not on the settlements. To get details of the latter, you need to check the SC website or refer to the commission’s annual reports or enforcement bulletins.

Could it be that the settlements are never meant to pack a deterrent punch? After all, how could they serve as a warning when they mostly escape public attention?


How the investing public loses from delisting (KiniBiz)
Preventing minority abuse during delistings

What do Maxis Communications Bhd, IOI Properties, Astro All Asia Networks plc and Seven Convenience have in common? All the companies have been listed, delisted and then relisted (some more than once) by their majority shareholders in the span of five years.

.... there are no specific regulations in way of what an offeror can give or threaten to take away during privatisation. Nothing governs valuations or a company’s listing status. So in a situation where an offeror is attempting a mandatory takeover that minorities do not like, the latter’s only option is to take the matter to court.

Of course, it would be akin to a kancil taking on a tiger. And Tiger is willing to bet that like the kancil, most minorities are unlikely to be able to match the spending capacity of the majority shareholders and would struggle to sustain a long-drawn court battle.

Similarly during the relisting process, the regulators keep intervention to a minimum. A source familiar with the regulators’ policies said that the SC demands that a relisting company provides justifications for its new valuations and details on why it believes it can perform better on the market this time around.

However, there are no pre-imposed rules which would make returning to the bourse difficult — regardless as to how the company treated minorities during the relisting process, or in the period between then and the relisting.

When the depth of the regulations are considered, the pertinent question seems to be if they are adequate to protect the companies covered in the earlier parts of this week’s series — or at the very least, give them a fair deal.

It would appear not. Rather, minorities in fact had very limited options during the privatisation deal. The majority shareholders benefitted handsomely both on and off the market, and at the expense of the minority investors.

Which leads to the question if Bursa is really the place for the retail and long-term investors. Tiger believes not, and feels that more must be done. The regulators should consider making delisting, promising companies, from the bourse tougher.

....majority shareholders, because they appoint management, know how much a company is valued. If they are willing to buy out the company, they must know something. And if a significant number of minority shareholders want to stay on for the ride, they should be allowed to and not be unceremoniously ejected from their seats which they have already paid for.

In a nutshell, Tiger says that minorities should not be frightened into selling their stakes. If Bursa is serious about increasing the participation of retail investors on the bourse, it is time that the SC and Bursa reconsider the issue of indiscriminate delisting and relisting, and start protecting the minority long-term investor. It’s easy to do.


Submission to HKEx on Weighted Voting Rights (David Webb)

The naked self-interest of HKEx in continuing to push for weakening our regulatory standards in the interest of its own profitability once again exposes the conflict of interests between being a regulator and a for-profit company. The Exchange has no profit incentive to care about quality, only about volume.

Your Chief Executive's  proposition that HK risks "losing a generation of companies from China's new economy" is a false one. Good regulation improves the value added by markets, and investors will pay for that value. Companies which are willing to sign up to standards will get a higher price for their shares than they would in a market with lower standards, and the flip side of this is a lower cost of capital for the companies, both existing and new. There will always be exceptions to this overall outcome, but it is the overall outcome that matters. HK should be focusing on improving its legal and regulatory framework, not degrading it.

The vast majority of listing applicants and existing listed companies already have a controlling shareholder with at least 30% of the equity. They don't need their companies (or spin-offs) to issue second-class shares or pervert their constitution to cement their position. For the remainder with management who have been diluted by pre-IPO financing, most would have enough self-confidence in their abilities as managers that they would not need protections against removal, knowing that investors will only seek change in extreme circumstances and if they consider that new management can offer better value. This is just as true for "technology" companies as for any other industry, and the fact that shareholders have the reserve power to be able to change bad or stale management in itself provides a higher valuation than if they did not have that power.

Finally Prince Frog responds (2)

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


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

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

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

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

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

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

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

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

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

The report ends with:

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

What the rich and famous do to avoid a MGO

From David Webb's website comes the following announcement.

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

From the Wikipedia page:

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

Coming back to the SFC announcement:

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

Finally Prince Frog responds

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

The reaction of the market was not good:

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

Some reactions:

Bloomberg
Wall Street Journal

I expect Glaucus to respond soon.

Alibaba and AirAsia, two tantrums

Alibaba is going for an IPO, the question is: where? The most logical choice is Hong Kong or NASDAQ.

There is a lot at stake, the size of the IPO could be huge, the company could be valued at USD 75 Billion, about RM 242,000,000,000.00.

Some background information about the company can be found here:

"Alibaba has established itself as a behemoth in the business of buying and selling products online. The company is itself made up of several businesses, including Alibaba.com, a Web site for business-to-business sales; Taobao Marketplace, a giant eBay-like platform; and Alipay, an online payment service."

Alibaba wanted a dual class of stock, which is not possible on the HKEX:

"The Internet giant and its executive chairman, Jack Ma, have sought to keep control of the company firmly with its founders, following in the footsteps of Facebook and Google. But the rules of the Hong Kong Stock Exchange prohibit dual classes of stock and other types of corporate structures that let minority shareholders preserve control of companies."

Negotiations with the Hong Kong Stock Exchange were on-going, and who could better comment on this then Hong Kongs "Mr Corporate Governance", David Webb.

Here is an interview with Webb, done by Eric Jackson from Forbes.

David wrote three articles about this matter on his website:

Alibaba's spotlight on HK regulation
We had a dream too!
Aligaga


The last article is in response to a "corporate tantrum" thrown by Joe Tsai, which can be found here.

Webb's response to that:

"Alibaba, you see, has come up with an entirely new and better way to govern companies, and if HK or the USA does not embrace it then we will all be left behind. Alibaba "never made any proposal" that involved a second-class shareholding structure, he says. So presumably, they won't be proposing that in the USA either. They want US regulators or investors to get their heads around something that even America has never seen before, where a self-selecting perpetual pool of managers gets to nominate more than half the board of directors.

You have to marvel at the breathtaking arrogance and hubris that comes from being a successful e-commerce firm in a sheltered market where foreigners cannot directly own telecommunications companies or payment systems. Mr Tsai tells the world that this "innovation" in corporate governance is to "protect the long-term interests of... all shareholders". This, of course, is because management knows what is best for shareholders, and shareholders don't. If this has a familiar ring to it, then the back of your mind is making the analogy with the Party and the people of China.

Then he gets to the nub of the 28-member Politburo (sorry, Partnership) proposal: "Partners are not just managers but they are owners of the business", he says. Um no, Joe. The shareholders are the owners of the business. Get it right. You are either a partnership where the partners provide all the equity, or a company, where the shareholders do. You can't be both."


Luckily, prudence has prevailed, the HKEX did stuck to its guns, despite the inherent conflict of interest (commercially the IPO would be great for the HKEX). Once you cross the line, there is no going back anymore, more and more companies would have asked for exceptions to the rules.


Regarding corporate tantrums, does Malaysia have any? Yes, they do, and, no surprises here, Tony Fernandes is involved (hat tip to the tipster who commented on this):

Is the above tweet rather childish? Yes, I think so. But I do appreciate the fighting spirit and the heart that Tony puts into it. Not sticking to much formality, which one would expect on that corporate level.

I can't find the exact research note by Paul Dewberry, but this comes probably close to it:


Bank of America Merill Lynch’s analyst Paul Dewberry also had concerns on AirAsia’s ability to manage and grow its JVs in a note written in March. “It is noted that Philippines is still making losses and its proposed joint venture in India is likely to consume significant time,” Dewberry wrote.

“While Indonesia had a good Q4 results aided by seasonality, Thai AirAsia remains the star performer among associates due to a lack of domestic competition.” More recently, aviation consultancy firm Centre for Asia Pacific Aviation said on August 27 that intense competition in south-east Asia has already begun to hurt AirAsia’s affiliates in the region.

“While AirAsia still reaps the benefits of first-mover advantage in several of its markets and continues to outperform nearly all of its peers, competition is intensifying,” CAPA wrote in a research report on AirAsia. “Indonesia AirAsia reported both a yield and operating profit improvement for 2Q2013, but it remains by far the least profitable of the group’s original three affiliates. Meanwhile, the group’s newest surviving affiliate, Philippines AirAsia has struggled almost as much as the failed affiliate AirAsia Japan. Even in Thai AirAsia, profits increased in second quarter of 2013, but there was a 3% drop in yields.”

“While AirAsia is well positioned and has the cash to fight back, inevitably profits and yields will come under pressure as competition continues to intensify,” the CAPA report added.

David Webb on BFM radio

Two days ago David Webb was interviewed on BFM radio, the link can be found here.

I strongly recommend to listen to the whole interview, but here are some pointers:

• Left his banking career in Hong Kong in 1998 when the markets were bombed down, lots of value; also wanted to give back to society by starting the website
• There is a clear conflict of interest when an exchange is listed between the commercial and regulatory departments, in Hong Kong's case the HKEX (Bursa); the other regulator is SFC (SC), from time to time these parties collide; the regulatory function should be taken out of the commercial entity HKEX
• There should be consolidation of the many regulatory bodies into one, dealing with customers/consumers
• In many ways Malaysia is well regulated compared to Hong Kong
• HKEX, the majority of the directors chosen by government
• When Webb was director, information was withheld, so Webb resigned as director
• HK still has no quarterly reporting, one of the rare Asian countries
• There is too much influence by the tycoons, also regarding rules for insider dealing
• IPO's: there is no class action system, court cases are only worth it if somebody has a large investment
• Independent directors, if approved by controlling shareholders then they are not independent, merely rubberstamps; they should be chosen by the non-controlling shareholders
• There is a clear conflict of interest when a government is investing in companies
• The government should not be involved with private ownership
• 1 share = 1 vote, poll voting and publishing of the results should be the norm
• Family controlled companies: minority investors' money is wanted but companies don't want to be accountable to them
• RPT's: there should be an adequate explanation regarding the reason, why not from other sources, why no tender, why exactly from the controlling shareholder
• Webb is investing in under-valued (under-researched) small caps in HK with a Corporate Governance filter
• Manages his own funds for over 18 years, has hugely outperformance the HK index, enjoys not having to be accountable to others
• Holding period more than 5 years on average