Glaucus whacks China Minzhong

I updated the below posting several times with new information that I found. Very interesting is this link from Lighthouse Advisors in which they explained in their June 2012 report (starting the last paragraph of page 3) why they divested their stake in Minzhong.

As far as I can see, all the reasons given sound reasonable and might strengthen the case for Glaucus Research: 

• Two comparable businesses are Chaoda Modern (almost certainly a fraud) and China Green (fair share of CG issues)
• Limited management ownership of Minzhong who received their shares at almost zero cost gives a temptation for the management to act in their own benefit at the expense of that of the other shareholders
• GIC of Singapore came in much more early than the IPO, they might have done due diligence in 2006, but the company has changed a lot since then
• The business model is cash flow negative, the land is leased and thus the company can not borrow against it, share placements are far more likely than dividends

 
I wrote one time before about short seller Glaucus, from an article in The Business Times (Singapore):

"Those which act responsibly like Glaucus by providing full disclosure can complement regulatory efforts and should be viewed as an important component of the governance framework."

Glaucus Research is one of those research institutions who focus on short selling of possible frauds and/or overvalued companies. Its website can be found here.

For those who question their motives, they are very open about it in their disclaimer:

Other well known short sellers are Muddy Waters, Citron Research and James Chanos.

Some more information on Glaucus Research can be found in this interview with Soren Aandahl in the SCMP.

The same founder was interviewed in The Edge, and mentioned that they were actively looking into a Singaporean company. Well, the Singapore share market didn't have to wait long. On Monday August 26, 2013 Glaucus published its report about Singapore listed China company "China Minzhong Food Corporation".

The information that it contained is highly damaging, that is, if it is indeed true. It is also insightful, how these short sellers do their research and what indicators they look at. One suspicious indicator was that the margins of Minzhong compared to other players in the same industry were just much too good to be true. Something else was that the company claimed to make a lot of profit, but it didn't show up in the cash.

One interesting chart in the report reveals the large number of S-chips (China companies listed in Singapore) that have gone down so far:

Worrisome, also since many of the better auditors were involved, apparently that is no guarantee that the accounts can be trusted.

A lot of supporting evidence on China Minzhong (either directly or circumstantial) is presented in the 49 page report, plus several documents as supplemental evidence.

On a side note, in Glaucus' report about China Metal Recycling (which company the SFC tries to wind up, meaning the allegations were indeed true) it does mention, rather interestingly, that it received a lot of support from local Chinese organisations in their search for evidence.

At least one prediction came true so far:

"we believe that Singapore regulators will halt trading of Minzhong's shares pending a full investigation into the Company".

That did indeed happen, after the share tumbled about 50% in high turnover in a matter of just two hours.

One letter in the Singapore media suggested that the SGX should have halted trading more early, and that circuit breakers would have had the desired effect.

Regarding the quality of the allegations by Glaucus, I leave it to the readers to form their own opinion,  they do appear rather convincing to me. A lot of discussion is going on at the Valuebuddies forum regarding this case. A good write up can be found here, from blogger "Ninja Master Fund".

China Minzhong so far has only reacted in a rather standard letter (which can be found on the SGX website), without any detail at all, just claiming that Glaucus "misunderstood" their business model.

We have to wait for much more specific information regarding the detailed allegations by Glaucus, that Minzhong overstated their revenue and profit significantly and other serious matters.

Minzhong did release their quarterly earnings numbers, which on the surface appear to be very good.

But the million dollar question is: are they really believable? According to Glaucus, they aren't.

In one contest however, Glaucus seems to have the clear advantage, the beauty of their logo.

Glaucus:

China Minzhong:

Bursa Malaysia has recently started to promote short selling. Are they ready for these kind of events, if something similar would occur? Would they welcome short sellers like Glaucus Research?

And on another matter, are they really still keen to list Chinese company on Bursa?

To the Malaysian readers: Happy Merdeka.

Protasco: how secure is the security?

Protasco announced today its 2nd quarter results.

Regarding the "Puzzling Purchase" no new information is given other than what was known already.

However, there is one important issue, Protasco has paid a huge cash deposit of RM 50 Million, for which it received a security (I have pointed out in the past that [a] the size of the deposit seems to be unusually large and [b] that it is rather strange that the cash itself is not held in trust).

In "A sliver of Information" I described the securities that are held in trust against the RM 50 million deposit: shares of PT Inovisi Infracom TBK, an Indonesian listed company.

The value of the securities as of April 26, 2013 was about RM 51.5 Million, a margin of safety of only 3%.

I wrote: "If that gives enough assurance to the shareholders of Protasco is up to them to decide. A small drop in value of the shares of PT Inovisi Infracom TBK or of the Indonesian Rupee and the collateral could be worth less than the RM 50 million deposit."

With the current turmoil in the emerging markets (both equities and currencies), it is timely to revisit this issue.

First of all regarding the currencies, I estimate that the Indonesian Rupiah fell about 3% versus the Malaysian Ringgit since April 2013. That takes already care of the small margin of safety.

But much more worrisome is the performance of the share of PT Inovisi Infracom TBK:

From a level of about 1,700 the share has tanked to about 1,000, a fall of more than 40%.

In other words, the security is completely not sufficient anymore to cover the RM 50 Million deposit, it probably covers about RM 30 million.

And on top of that, good luck to anybody who wants to sell a large block of Indonesian shares in the current market turmoil. Especially if the news gets out that Protasco would own a block of shares and it got stuck with them.

If the proposed deal does not go through (and because of the very high number of red flags that seems quite plausible to me) then Protasco might have a serious problem in getting back its money.

Given the lack of transparency in this deal that Protasco so far has shown it is not really a surprise it didn't report about the decreased value of the security, but I think it should have.

And I also think that the authorities (BM and/or SC)  should act in this matter, they have been much too quiet so far. At the very minimum Protasco should have been forced to provide much more details regarding the deal, enabling the minority shareholders of Protasco to make an informed decision.

Emerging Markets Are In For A 'Tumultuous New Era'

Great stuff here from Richard Koo of Nomura, who weighs in on the recent selling in emerging market currencies (and equities and debt).

His take: This is the price emerging markets are paying for not being more vigilant about hot money rushing into their economies after the Fed announced QE after the U.S. crisis. The emerging market, he argues, could have prevented the big rush of foreign cash through prudent measures, but that they opted not to take any pain, and now they're paying the price for going the easy route.

He concludes that we're now in for a "tumultuous new era" for emerging markets as QE gets unwound.

The above taken from the website of Business Insider, which continues with Khoo's text:


... the recent announcements would not have been necessary if these countries had taken advantage of these measures to restrict capital inflows from the US. They did not do so probably because restricting capital inflows is extremely unpopular. In nations attracting foreign capital, asset prices rise, people feel richer, companies are able to obtain low-cost funding, and inflation tends to be low with a stronger currency. Essentially everyone is happy but exporters, which suffer from a stronger currency. It takes a courageous policymaker to spoil that pleasant environment with capital controls, even if it is necessary for stable, longer-term economic growth. Therefore, the authorities typically preserve the status quo, in which “everyone is happy.”

Recent turmoil in emerging economies marks opening of tumultuous new era
Taiwan’s central bank has traditionally been quick to check on and if necessary restrict capital inflows, making its governor, Perng Fai-nan, an unpopular figure at certain foreign financial institutions. But it was only because the authorities kept such inflows in check that the Taiwanese economy escaped from the 1997 Asian currency crisis largely unscathed.

The lesson for emerging economies today is that in a world in which the industrialized economies are free to engage in quantitative easing at will, local authorities need to have the courage to restrict capital inflows or stop them altogether. It should also be remembered that the recent rise in US interest rates occurred simply because Mr. Bernanke said the Fed was considering scaling back its bond purchases. If the Fed were to actually discontinue its purchases under QE3 or sell the bonds in its portfolio, the resulting increase in rates would likely be much larger. In that sense, both the US and the emerging economies that will be affected as quantitative easing is wound down need to prepare themselves for a tumultuous era.


The above seems to relate also to Malaysia. Related to this is the fact that Malaysia postponed important restructuring, like getting a balanced budget. In good times a country should prepare for the bad times.

IHH: profit up 60% or profit down 60%? (2)

I did a quick check how the quarterly results of IHH were reported by the press.

The good:

• Reuters
• The Motley Fool
• The Edge Malaysia
• The Sun daily
• KiniBiz
• Straits Times (Singapore)
• Business Times (Singapore)

The bad:

• The Star
• The Malaysian Insider

In both these cases even the heading was simply plain wrong.


The Market:

Both in Malaysia and Singapore the IHH share was today down more than 5%, much worse than the overall market. In other words, investors sentiment was clearly negative, not in line with IHH's positive press release.


Although profit of a one-off sale last year is a reasonable argument for the fact that the PAT was much lower, what IHH did not mention in its press release was that it raised billions during the IPO (July 2012), which it could freely allocate and over which it was supposed to make a good return.

In its defence the company could bring forward that no company is mentioning that, which is basically true, although disappointing.

The half year net profit was RM 347m, on Equity of RM 19.7 Billion and Liabilities of RM 7.1 Billion that is actually a pretty disappointing result. Return on equity on a full year basis would only be about 3.5%.

The more surprising that the share is trading at such a high valuation, on a first half EPS of only RM 0.04, on a share price of RM 3.84, annualised that means a sky-high PE of about 48.