I blogged before about Eratat, one of the so called S-chips listed on the SGX.
The company made a new announcement, some snippets:
Mr Lin had produced online bank statements, the latest of which showed that the Company’s principal operating subsidiary Fujian Haimingwei Shoes Co., Ltd (“HMW”) had unencumbered cash balance of approximately RMB646 million (“HMW Cash Balance”) as at 24 January 2014 in its bank account maintained with the Agricultural Bank of China (“ABC Bank”), Jinjiang Chendai Branch (“24 January Statement”).
.... The above appeared to be consistent with an earlier document given by ABC Bank (“ABC Confirmation”), which showed that there was approximately RMB577 million of unencumbered cash balance in HMW bank account at ABC Bank as at 31 December 2013.
.... the Company’s interim CEO, Mr Ho Ker Chern, the Audit Committee Chairman, Mr Lim Yeow Hua and the independent auditors (collectively, the “Working Parties”) made an impromptu visit to ABC Bank, Jinjiang Chendai Branch. They managed to meet the ABC Bank staff who handled the ABC Confirmation previously and she reaffirmed that the ABC Confirmation was verified by the bank branch. At the same visit, the Working Parties also met up with the branch manager of ABC Bank, Jinjiang Chendai Branch, Mr Zhang Liwei (张立伟) (“Manager Zhang”) and showed him the ABC Confirmation. Manager Zhang also affirmed that the ABC Confirmation was verified by ABC Bank and informed the Working Parties that HMW has been a good customer and did not have any bank loans with the bank.
So far so good, all seems to be fine, what could ever be wrong?
And then the bomb went off:
On 14 February 2014, the Company received a reply from ABC Bank, Jinjiang Chendai Branch (“ABC Response”). In their response, ABC Bank alleged that the 24 January Statement and the ABC Confirmation were not given by ABC Bank but were provided by the “finance company of HMW”. They also enclosed a confirmation signed by Mr Lin (in his capacity as the legal representative of HMW) on 8 February 2014 stating the same (“Lin Confirmation”). In the ABC Response, the bank also clarified that the cash and loan balances stated in the aforesaid documents were inconsistent with the bank’s records but did not elaborate further.
The Board was taken aback by the ABC Response as the 24 January Statement was taken from ABC Bank’s website and the ABC Confirmation was given by the bank’s employee at the bank’s premises previously. Moreover, the Working Parties had also met up with Manager Zhang as aforesaid and he had reaffirmed the documents then.
And that sums up the problems with investing in Chinese companies, listed in Singapore (or Malaysia for that matter): even the bank balance can't be trusted.
My guess is, there is a huge difference in the bank balance, and (needless to say) the difference is not in a positive way.
On top of that, I don't like the response of the bank, they should mention how much the bank balance is, according to their books. They know from the correspondence that there are some major problems regarding HMW, and they should fully cooperate. By not elaborating they have not cooperated, I have some serious doubts with whom their loyalty lies.
"Given the discrepancies relating to the bank cash balances, the Audit Committee intends to conduct a special audit into the financial affairs of the Group, which could include, inter alia, ascertaining the bank cash balances, verifying the accounts receivables and payables and confirming the property, plant and assets of the Group.
However, given that the above would require the cooperation of the PRC management, there is no assurance that the special auditors (when appointed) would be able to conduct the special audit."
In other words, we might never even know how bad the situation is, or what exactly has happened. Pretty shocking.
And some more bad news:
"Due to the disruption to the Company’s management, the Group’s operations in China remain suspended and the staff did not return to work since the end of the Chinese New Year holiday period."
Investors who own shares in Eratat should be prepared for the worst. The share is suspended.
Thursday, 27 February 2014
Tuesday, 25 February 2014
Good warning on perils in the oil and gas industry
Article in The Star: "Beware of risks in investing in sizzling oil and gas".
"... making money from the O&G business isn’t easy. Our market has seen its fair share of O&G companies that had stumbled in the past.
As examples, consider the stories of Ramunia Holdings Bhd, KNM Group Bhd Malaysia Marine, Heavy Engineering Holdings Bhd (MMHE) and the Scomi group. These stocks were at one point the darling of investors.
But at some point, they struggled to execute their businesses well. O&G fabricator Ramunia had slipped into PN17 status in June 2010. To quote from a Maybank research report dated April 2010: “Ramunia is in bad shape operationally and financially. It faces declining order book, earnings and shareholders funds due to poor project execution and negative cash flows.”
KNM Group Bhd was another high-flying oil and gas player. But it too did stumble, suffering a quarterly loss in 2009 and a full year loss at group level in 2011. Among the reasons for its losses was its high fixed cost and debt levels. It’s aggressive overseas expansion also saw it having to provide for foreseeable losses in Brazil, Canada and Indonesia.
The Scomi group had encountered similar problems with its overseas assets while giant fabricator MMHE had suffered from higher-than-expected expenses incurred from some of its projects and from the share of losses from jointly controlled entities’ performance.
One problem is that the O&G business, like many other sectors, is cyclical. You may invest during peak times but then get saddled with high fixed costs and low utilisation rates when the cycle hits a downturn.
Getting the right expertise to executive projects profitably is another challenge."
Ze Moola has written many articles about three of the above mentioned companies:
- Ramunia
- KNM
- Scomi
"... making money from the O&G business isn’t easy. Our market has seen its fair share of O&G companies that had stumbled in the past.
As examples, consider the stories of Ramunia Holdings Bhd, KNM Group Bhd Malaysia Marine, Heavy Engineering Holdings Bhd (MMHE) and the Scomi group. These stocks were at one point the darling of investors.
But at some point, they struggled to execute their businesses well. O&G fabricator Ramunia had slipped into PN17 status in June 2010. To quote from a Maybank research report dated April 2010: “Ramunia is in bad shape operationally and financially. It faces declining order book, earnings and shareholders funds due to poor project execution and negative cash flows.”
KNM Group Bhd was another high-flying oil and gas player. But it too did stumble, suffering a quarterly loss in 2009 and a full year loss at group level in 2011. Among the reasons for its losses was its high fixed cost and debt levels. It’s aggressive overseas expansion also saw it having to provide for foreseeable losses in Brazil, Canada and Indonesia.
The Scomi group had encountered similar problems with its overseas assets while giant fabricator MMHE had suffered from higher-than-expected expenses incurred from some of its projects and from the share of losses from jointly controlled entities’ performance.
One problem is that the O&G business, like many other sectors, is cyclical. You may invest during peak times but then get saddled with high fixed costs and low utilisation rates when the cycle hits a downturn.
Getting the right expertise to executive projects profitably is another challenge."
Ze Moola has written many articles about three of the above mentioned companies:
- Ramunia
- KNM
- Scomi
Sunday, 23 February 2014
Landmark case against Mayban Trustee and Kaf Discounts (2)
I wrote more than two years ago about this case.
On February 10, 2014 the press summary was published about five civil appeals regarding this same case.
To summarize the main players:
Problems started in 2005 when the accounts, which contained the revenue of certain orders, were not properly ring-fenced (as was promised to the bondholders), and:
"Having control over the accounts, Pesaka utilised the monies in the Designated Accounts for its own purposes and failed to redeem the bonds and repay the bondholders on the maturity date."
"Rafie had admitted that the funds of the Issuer were utilised to invest in the Amdac Group in various investments both locally and abroad. The common pattern was that the assets would ultimately be in the names of either Rafie or Murnina."
The results of this latest court case were different:
An interesting court case and judgement that might have consequences for future cases.
Pity that these cases are so rare in Malaysia, and often only in the case of bonds. When bonds default, that is a clear signal that something is wrong and that action has to be taken.
But when a prospectus of for instance an IPO or a Related Party Transaction or a General Offer contains wrong or misleading information or when a valuation given is not justified, then surely action also should be taken, even when the case might not be so black and white as a bond default?
And so many Malaysian IPO's have disappointed from the moment the company was listed, so many RPT's have yielded bad results, so many companies were delisted for a too low amount.
For a small minority shareholder the legal expenses would be too high, but for a large fund it should be worth their while. Hopefully the larger funds like PNB and EPF will be more willing to take appropriate action in these corporate exercises.
Regarding the above case, "Skilgannon1066" asked the following questions on Rocky Bru's website:
In answer to the last question, according to this article, it looks like Pesaka is still doing business with the Malaysian government under its new name AMDAC (M) Sdn Bhd.
On February 10, 2014 the press summary was published about five civil appeals regarding this same case.
To summarize the main players:
- Pesaka Astana (M) Sdn Bhd (Pesaka), a manufacturer of vehicles, proposed a financing scheme
- Datuk Mohamed Rafie Sain (Rafie) and Datin Murnina bt Dato’ Haji Sujak (Murnina) are in control of Pesaka
- KAF Investment Bank (KAF) was the lead arranger, facility agent and issue agent
- Kenanga was the primary subscriber, who sold the bonds to the ultimate bondholders
- Maybank Trustees (MTB) was the trustee
Problems started in 2005 when the accounts, which contained the revenue of certain orders, were not properly ring-fenced (as was promised to the bondholders), and:
"Having control over the accounts, Pesaka utilised the monies in the Designated Accounts for its own purposes and failed to redeem the bonds and repay the bondholders on the maturity date."
"Rafie had admitted that the funds of the Issuer were utilised to invest in the Amdac Group in various investments both locally and abroad. The common pattern was that the assets would ultimately be in the names of either Rafie or Murnina."
The results of this latest court case were different:
- "KAF is not a party to the Trust Deed. It is strictly between the Issuer and MTB." and "MTB is wholly to blame for the loss and not KAF."
- "We make an order that MTB is liable only to RM107 million and not the full amount of RM149,315,000."
- No interest to be charged on top of the above amount: ".... our answers to the three questions on pre-judgment interest are in the negative."
- "Similarly in the present case it is obviously not just and equitable to allow Pesaka to keep the ill-gotten gains or any part of it. This is especially so when the bondholders have not taken any step to enforce the Consent Judgment entered between Pesaka and the bondholders and instead focus their attention to MTB on the basis that MTB is in the position to satisfy the bondholders’ claim. Thus, by allowing indemnity in full, Pesaka will be called to meet its obligation in full"
- "....it would be a travesty of justice that it be allowed to keep a portion of the ill-gotten gains and accordingly we order that Murnina too (and Rafie who together with Murnina owned 90% of Pesaka) must fully indemnify MTB for the loss."
An interesting court case and judgement that might have consequences for future cases.
Pity that these cases are so rare in Malaysia, and often only in the case of bonds. When bonds default, that is a clear signal that something is wrong and that action has to be taken.
But when a prospectus of for instance an IPO or a Related Party Transaction or a General Offer contains wrong or misleading information or when a valuation given is not justified, then surely action also should be taken, even when the case might not be so black and white as a bond default?
And so many Malaysian IPO's have disappointed from the moment the company was listed, so many RPT's have yielded bad results, so many companies were delisted for a too low amount.
For a small minority shareholder the legal expenses would be too high, but for a large fund it should be worth their while. Hopefully the larger funds like PNB and EPF will be more willing to take appropriate action in these corporate exercises.
Regarding the above case, "Skilgannon1066" asked the following questions on Rocky Bru's website:
- Why did Pesaka default on the bonds back in September 2005?
- How did it get on to the Ministry of Defence's suppliers list if its financials were shaky?
- Were the RM140 million bonds issued to finance a contract awarded to Pesaka by the Ministry of Defence?
- Was the contract satisfactorily completed and the goods or services properly delivered to the satisfaction of the Ministry?
- Is Pesaka Astana still a defence supplier in good standing with the Ministry, notwithstanding its bonds default in 2005?
In answer to the last question, according to this article, it looks like Pesaka is still doing business with the Malaysian government under its new name AMDAC (M) Sdn Bhd.
Saturday, 15 February 2014
Ocean Sky crash: A lesson for SGX
An article from R. Sivanithy in the Business Times (Singapore) about the Ocean Sky International, its share price crashing about 50% in a single day.
"At 2pm, after the shares had collapsed nine cents or 31 per cent to 20 cents, OSI requested a trading halt pending release of an announcement."
When was it exactly known that the deal with Ezion was off? If it was known more early, why did OSI not request the trading halt more early? Who were the sellers who sold that day before the trading was halted? The volume was clearly higher than the days before.
The article further zooms in on errors that the SGX made:
The problem is that - incredibly - SGX sent its standard template asking OSI to explain the substantial increase in its share price when it should have asked about the decrease.
Sixteen minutes later, at 1.52pm, possibly because it realised its error (though this is not explicitly stated), SGX issued a notice to ignore the previous query but did not mention anything else.
At 2pm, after the shares had collapsed nine cents or 31 per cent to 20 cents, OSI requested a trading halt pending release of an announcement.
At 2.07pm, seven minutes after the shares were suspended and 15 minutes after withdrawing its earlier query, SGX sent off its standard query template but with "decrease" mentioned in place of "increase". Some seven hours later, at 9.04pm, Ezion said in a filing that the deal had been terminated. This was followed a minute later by OSI filing the same announcement.
SGX's queries, including its blunder, raise questions over just how vigilant its surveillance really is, and highlights how far behind the curve it operates. Even if it had asked the right questions at 1.36pm, thus satisfying its brief as mainly a signaller of caution to the market, it would have made almost no difference - OSI's shares, at 21.5 cents at that time, had already crashed spectacularly.
Furthermore, the correctly worded query was issued seven minutes after the company suspended trading. So it carried no signalling or informational value whatsoever because nobody could have acted on it even if they had wanted to.
It is therefore difficult to refute the widely held belief that the exchange's archaic querying process as it stands today is weak and ineffective. Fortunately, the process is currently under review and proposals to raise the surveillance and querying bar were issued for public consultation last week.
If the exchange and regulators wish to redeem themselves, they should embark on a thorough investigation of the hurried sales which hit the market on Wednesday during the five hours of trading from 9am to 2pm.
Hopefully, when this is actually done, the findings will be divulged quickly. Wait too long and the incident will slip quietly into the annals of the local market's history - which is teeming with similar cases over the years that appear to have escaped official scrutiny.
"At 2pm, after the shares had collapsed nine cents or 31 per cent to 20 cents, OSI requested a trading halt pending release of an announcement."
When was it exactly known that the deal with Ezion was off? If it was known more early, why did OSI not request the trading halt more early? Who were the sellers who sold that day before the trading was halted? The volume was clearly higher than the days before.
The article further zooms in on errors that the SGX made:
The problem is that - incredibly - SGX sent its standard template asking OSI to explain the substantial increase in its share price when it should have asked about the decrease.
Sixteen minutes later, at 1.52pm, possibly because it realised its error (though this is not explicitly stated), SGX issued a notice to ignore the previous query but did not mention anything else.
At 2pm, after the shares had collapsed nine cents or 31 per cent to 20 cents, OSI requested a trading halt pending release of an announcement.
At 2.07pm, seven minutes after the shares were suspended and 15 minutes after withdrawing its earlier query, SGX sent off its standard query template but with "decrease" mentioned in place of "increase". Some seven hours later, at 9.04pm, Ezion said in a filing that the deal had been terminated. This was followed a minute later by OSI filing the same announcement.
SGX's queries, including its blunder, raise questions over just how vigilant its surveillance really is, and highlights how far behind the curve it operates. Even if it had asked the right questions at 1.36pm, thus satisfying its brief as mainly a signaller of caution to the market, it would have made almost no difference - OSI's shares, at 21.5 cents at that time, had already crashed spectacularly.
Furthermore, the correctly worded query was issued seven minutes after the company suspended trading. So it carried no signalling or informational value whatsoever because nobody could have acted on it even if they had wanted to.
It is therefore difficult to refute the widely held belief that the exchange's archaic querying process as it stands today is weak and ineffective. Fortunately, the process is currently under review and proposals to raise the surveillance and querying bar were issued for public consultation last week.
If the exchange and regulators wish to redeem themselves, they should embark on a thorough investigation of the hurried sales which hit the market on Wednesday during the five hours of trading from 9am to 2pm.
Hopefully, when this is actually done, the findings will be divulged quickly. Wait too long and the incident will slip quietly into the annals of the local market's history - which is teeming with similar cases over the years that appear to have escaped official scrutiny.
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