In my previous post on this matter, I wrote:
"... if Maybulk decided to mark its investment in POSH against the market price (which sounds pretty reasonable to me), then it has to account for a one-off loss of RM 540 Million."
Maybulk announced its quarterly results and, as expected, the company did not mark its investment in POSH down against the market price. Although POSH's share price keeps on going down (at the moment it is SGD 0.52, 55% below the IPO price), Maybulk in actual fact managed to book a paper profit on its investment.
That does sound rather puzzling, how can one book a profit on an asset that only goes down in value?
The "trick" is that the SGD is going up compared to the RM. Maybulk is taking that into consideration, but not the (much larger) decrease in price of POSH's share.
The value of POSH in Maybulk's account is now a whopping RM 1,334 Million. However, the market value is only about RM 533M, a difference of about RM 800 Million.
In other words: although Maybulk's investment in POSH has been most disappointing, the share price of POSH has tumbled, the dividends received by Maybulk have been peanuts, "the share of results of an associate" (due to POSH's profit) has been small (and anyhow a non-cash item) and there is no clear exit down the road, Maybulk still continues to book paper profits on it.
According to Maybulk its own shareholders equity is close to RM 2.0 Billion. If we subtract the above RM 800 Million from it, then the adjusted net asset value is close to RM 1.2 Billion, about 40% less.
Maybulk's current market cap is RM 1.28 Billion, much closer to the adjusted net asset value than Maybulk's value. It seems the market values Maybulk according to its adjusted NAV, not the NAV in its books. That says something.
I am pretty sure that Maybulk's accounting is all according to the international accounting standards, and that the auditors will sign off on them.
Those standards are definitely not mine, I think they are pretty ridiculous. I think that if an asset is valued in a normal functioning market then that value gives a much better reflection than some paper value derived from the amount invested corrected for the share of results and currency fluctuations.
At the very minimum, Maybulk should inform its shareholders about the huge gap between the valuation in its books versus the valuation according to the market. Unfortunately, Maybulk's transparency has "not exactly" been great, and this rather obvious comparison is not made.
Will the 2014 year report give more information on this subject? I doubt it, but hope to stand corrected.
To add to the rather bleak situation, things don't look rosy in the near future either: "The Board expects 2015 to be a testing year for the group."
Maybulk announced a dividend of only 1 cent. It has 151M cash versus RM 347 M borrowings due to its continued investments in POSH.
Saturday, 28 February 2015
AirAsia X: is the rights issue enough? (2)
I wrote before about the coming rights issue of AirAsia X to raise RM 395 Million in much needed cash.
AirAsia X announced its fourth quarterly results, they were not exactly pretty: another loss of RM 168M, bringing the total for the year to RM 519M.
In other words, its 2014 loss is 1.3 times the amount the company wants to raise through its rights issue. The obvious question would be: how long will the rights issue last? The company still has not shown a single year of profit (corrected for one-off items and deferred tax).
From a Reuters article:
Analysts said shoring up the balance sheet has now become a priority for AirAsia X.
"Their capital base is really thin right now," said Maybank analyst Mohshin Aziz. "Among all the airlines in Asia Pacific, their balance sheet is the most precarious. They need to execute their rights issue as soon as possible."
AirAsia X announced its fourth quarterly results, they were not exactly pretty: another loss of RM 168M, bringing the total for the year to RM 519M.
In other words, its 2014 loss is 1.3 times the amount the company wants to raise through its rights issue. The obvious question would be: how long will the rights issue last? The company still has not shown a single year of profit (corrected for one-off items and deferred tax).
From a Reuters article:
Analysts said shoring up the balance sheet has now become a priority for AirAsia X.
"Their capital base is really thin right now," said Maybank analyst Mohshin Aziz. "Among all the airlines in Asia Pacific, their balance sheet is the most precarious. They need to execute their rights issue as soon as possible."
Sunday, 22 February 2015
Enforcement against Chinese companies listed overseas
If you are transporting 50,000 truckloads of timber across China, it can be hard to see the wood for the trees. If you are trying to audit 68 sq km of Chinese orange groves, you can easily find yourself a few fruit short of a still life. But how, exactly, do you lose track of 2,810 shops full of fluorescent trainers and dayglo “leisure wear”, spread across 21 provinces and three municipalities?
That is the question being asked this week in London, after the non-executive directors of Naibu, a Chinese sportswear company quoted on the Alternative Investment Market, admitted they had lost all contact with the company’s chairman and executive director and had no information on its operations, or its “current financial position”.
Shareholders are well aware of theirs, however: from their first trading in 2012 to their suspension last month, Naibu’s shares have lost 90 per cent.
One of the many horror stories from the Financial Times: "China’s intangible assets at home in Aim".
Some more snippets:
In 1995, timber group Sino-Forest floated in Toronto, rose to a market value of $6bn and gained US fund manager John Paulson as lead shareholder before collapsing amid allegations that its logs were illusory.
Fruit producer Asian Citrus came to the London Stock Exchange in 2005 and grew its share price sevenfold in five years — before losing 90 per cent of its value on claims that it had over-counted its oranges.
One Chinese company, shoemaker Ultrasonic, even offers hope to Naibu investors. After listing in Frankfurt in 2011, its shares fell 79 per cent in a day last year, on news that its chief executive, and much of its cash, had vanished. They recovered when he turned up a few weeks later claiming he had simply lost his mobile phone.
The article further looks at three key aspects:
The functioning of the exchanges
What does it say about London’s Aim that it enabled Naibu’s owners to float just 9 per cent of their shares, gain a £68m valuation for the company and — in the case of two of the top three original shareholders — offload entire stakes, amounting to 30 per cent of the group? Little wonder one FT hack suggests the market be renamed ATM. Sino-Forest’s senior executives found Canada’s market as bountiful: listing and offloading $83m of shares before their company collapsed.
The role of non-executive directors
Under the Aim rules, Naibu’s did not have to adopt the UK Corporate Governance Code, but they were required “to aspire to achieve the key elements”. Yet, in spite of claiming 30 years’ experience of the City, they seemed to do little for their £60,000-a-year part-time salaries beyond setting up an Aim compliance committee — and perhaps hanging on the telephone, in vain, to Fujian province.
The integrity of corporate advisers
Naibu’s nominated adviser, before it relinquished its licence, filled the company’s Aim admission document with claims that it was China’s 10th-largest sportswear brand — in a survey commissioned by Naibu itself — in a booming market. For its diligence, it took an initial fee of £30,000, a further fee of £170,000, and commission at the rate of 5 per cent of the aggregate sums raised.
The above is all very relevant for China listed companies on Bursa and SGX ("S-chips"). My concern in all of this is the enforcement across borders, which seems to me very complicated.
However, there might be some hope. I wrote before about China Sky, Singapore's Business Times reported regarding enforcement against its former CEO, some snippets:
Former chief executive of beleaguered China Sky Chemical Fibre, Huang Zhong Xuan, will pay a civil penalty of S$2.5 million and surrender 10 per cent of his shareholding in China Sky under a settlement agreement with the Monetary Authority of Singapore (MAS).
The civil penalty was meted out after he admitted to making misleading public disclosures and failing to make the required disclosures to the market, thereby breaching the Securities and Futures Act (SFA), the MAS said on Thursday.
The S$2.5 million penalty will be paid from the US$3.7 million in his Singapore bank account, which was frozen under a High Court injunction that MAS obtained in 2013. The surrender or cancellation of his shares will raise the net asset value per share for existing China Sky shareholders.
MAS assistant managing director for capital markets Lee Boon Ngiap said: "The offer by Huang to surrender 10 per cent of his shareholdings in China Sky is the first negotiated settlement of its kind, directly benefiting existing shareholders of China Sky.
CAD director Tan Boon Gin said: "Cases like this have jurisdictional issues that make case resolution challenging. This case has come to a successful resolution through close collaboration between MAS, CAD and SGX, as well as assistance rendered by the authorities and regulators in the People's Republic of China.
That is the question being asked this week in London, after the non-executive directors of Naibu, a Chinese sportswear company quoted on the Alternative Investment Market, admitted they had lost all contact with the company’s chairman and executive director and had no information on its operations, or its “current financial position”.
Shareholders are well aware of theirs, however: from their first trading in 2012 to their suspension last month, Naibu’s shares have lost 90 per cent.
One of the many horror stories from the Financial Times: "China’s intangible assets at home in Aim".
Some more snippets:
In 1995, timber group Sino-Forest floated in Toronto, rose to a market value of $6bn and gained US fund manager John Paulson as lead shareholder before collapsing amid allegations that its logs were illusory.
Fruit producer Asian Citrus came to the London Stock Exchange in 2005 and grew its share price sevenfold in five years — before losing 90 per cent of its value on claims that it had over-counted its oranges.
One Chinese company, shoemaker Ultrasonic, even offers hope to Naibu investors. After listing in Frankfurt in 2011, its shares fell 79 per cent in a day last year, on news that its chief executive, and much of its cash, had vanished. They recovered when he turned up a few weeks later claiming he had simply lost his mobile phone.
The article further looks at three key aspects:
The functioning of the exchanges
What does it say about London’s Aim that it enabled Naibu’s owners to float just 9 per cent of their shares, gain a £68m valuation for the company and — in the case of two of the top three original shareholders — offload entire stakes, amounting to 30 per cent of the group? Little wonder one FT hack suggests the market be renamed ATM. Sino-Forest’s senior executives found Canada’s market as bountiful: listing and offloading $83m of shares before their company collapsed.
The role of non-executive directors
Under the Aim rules, Naibu’s did not have to adopt the UK Corporate Governance Code, but they were required “to aspire to achieve the key elements”. Yet, in spite of claiming 30 years’ experience of the City, they seemed to do little for their £60,000-a-year part-time salaries beyond setting up an Aim compliance committee — and perhaps hanging on the telephone, in vain, to Fujian province.
The integrity of corporate advisers
Naibu’s nominated adviser, before it relinquished its licence, filled the company’s Aim admission document with claims that it was China’s 10th-largest sportswear brand — in a survey commissioned by Naibu itself — in a booming market. For its diligence, it took an initial fee of £30,000, a further fee of £170,000, and commission at the rate of 5 per cent of the aggregate sums raised.
The above is all very relevant for China listed companies on Bursa and SGX ("S-chips"). My concern in all of this is the enforcement across borders, which seems to me very complicated.
However, there might be some hope. I wrote before about China Sky, Singapore's Business Times reported regarding enforcement against its former CEO, some snippets:
Former chief executive of beleaguered China Sky Chemical Fibre, Huang Zhong Xuan, will pay a civil penalty of S$2.5 million and surrender 10 per cent of his shareholding in China Sky under a settlement agreement with the Monetary Authority of Singapore (MAS).
The civil penalty was meted out after he admitted to making misleading public disclosures and failing to make the required disclosures to the market, thereby breaching the Securities and Futures Act (SFA), the MAS said on Thursday.
The S$2.5 million penalty will be paid from the US$3.7 million in his Singapore bank account, which was frozen under a High Court injunction that MAS obtained in 2013. The surrender or cancellation of his shares will raise the net asset value per share for existing China Sky shareholders.
MAS assistant managing director for capital markets Lee Boon Ngiap said: "The offer by Huang to surrender 10 per cent of his shareholdings in China Sky is the first negotiated settlement of its kind, directly benefiting existing shareholders of China Sky.
CAD director Tan Boon Gin said: "Cases like this have jurisdictional issues that make case resolution challenging. This case has come to a successful resolution through close collaboration between MAS, CAD and SGX, as well as assistance rendered by the authorities and regulators in the People's Republic of China.
Friday, 20 February 2015
Markets also need negative viewpoints
I normally quite like Bloomberg's articles, but find the following article not balanced enough:
"Anonymous Analysts Are Wreaking Havoc in the Asian Markets"
The headline is much too aggressive for my liking, the share price of two companies in SE Asia declining caused by negative reports is something else as Asian Markets turning into chaos.
The first paragraph:
"An anonymous researcher releases a report questioning the accounts of a publicly traded company. Investors catch wind of it and sell. The targeted firm denies the allegations, but by then the share-price damage is already done."
I have not yet met a single fraudulent company admitting its fraud at the first instance being confronted by a report. Since both honest and fraudulent companies will deny allegations, the denial itself contains therefore no news.
What could contain news is a detailed write-ups from companies in which they give a point-to-point rebuttal of all the allegations.
Even better, if companies had pre-empted events by providing a high degree of transparency to their shareholders. In Noble's case for instance there was unease for quite some time regarding the valuation of Yancoal, why had it not addressed that issue before? Valuing an asset at 56 times its market value is bound to raise some eyebrows.
Let's assume that short sellers are right in a particular case, then "the share-price damage is already done" is indeed true. But the damage is caused by unscrupulous managers and their financial engineers who have cooked the books, blown lots of hot air in the company, spread rumours etc. The short sellers have merely prevented more future damage (while in some cases profiting handsomely in the mean time, I admit).
Also, some of the allegations by so called short sellers or whistle blowers might need years to pan out. In 1999, financial analyst Harry Markopolos "informed the SEC that he believed it was legally and mathematically impossible to achieve the gains Madoff claimed to deliver". It took another nine years before the fraud was finally unravelled, lots of additional damage being done in those years.
A further comment from the Bloomberg article:
“No research should be anonymous,” said Jimmy Ho, president of the Society of Remisiers, Singapore’s biggest association of equity traders.
Whilst I agree that non-anonymous research would be better, I do have sympathy for the reasoning behind it:
Carson Block, the founder of Muddy Waters LLC, said in 2012 he stopped trying to bet against Chinese stocks after workers at a storage company he owns in Shanghai were harassed and unidentified “gangsters” came looking for him.
“Putting our name on the reports gave us more credibility but I understand why people see a need to be anonymous when publishing this kind of information because of the threats and the costs of extra protection,” Block said in an interview on Tuesday in New York.
And:
...independent research reports can be beneficial for investors if they “weed out” companies that are bending accounting rules or engaging in fraudulent activity.
“I’m not concerned about the origins of the report, it’s whether the report is true, accurate and valid ultimately,” said Surtees, whose firm oversees about $50 billion. “Time will tell.”
Another comment by Mr. Ho:
“MAS should make sure analysts do not use their research for their own agenda.”
That also means that analysts (or brokers, bloggers or anyone spreading rumours to increase the share price of a certain company) who write positive reports for their own agenda (or the agenda of their company) should equally be punished. In that case government of all countries in the world should consider quickly building a few more jails for this purpose alone.
News on financial markets is rather biased, and all in a positive way for listed companies:
Despite all these shortcomings, I like the capital markets and am an active and passive (through external fund managers) participant for more than thirty years, both in listed and unlisted companies.
But giving the many biases, there is a clear and urgent need for views from "the other side", views that give critical analysis of companies, that question their accounts and their business models.
Therefore we have to be careful not to immediately jump on top of messengers of bad news.
The three cases mentioned in Bloomberg's article are:
"Anonymous Analysts Are Wreaking Havoc in the Asian Markets"
The headline is much too aggressive for my liking, the share price of two companies in SE Asia declining caused by negative reports is something else as Asian Markets turning into chaos.
The first paragraph:
"An anonymous researcher releases a report questioning the accounts of a publicly traded company. Investors catch wind of it and sell. The targeted firm denies the allegations, but by then the share-price damage is already done."
I have not yet met a single fraudulent company admitting its fraud at the first instance being confronted by a report. Since both honest and fraudulent companies will deny allegations, the denial itself contains therefore no news.
What could contain news is a detailed write-ups from companies in which they give a point-to-point rebuttal of all the allegations.
Even better, if companies had pre-empted events by providing a high degree of transparency to their shareholders. In Noble's case for instance there was unease for quite some time regarding the valuation of Yancoal, why had it not addressed that issue before? Valuing an asset at 56 times its market value is bound to raise some eyebrows.
Let's assume that short sellers are right in a particular case, then "the share-price damage is already done" is indeed true. But the damage is caused by unscrupulous managers and their financial engineers who have cooked the books, blown lots of hot air in the company, spread rumours etc. The short sellers have merely prevented more future damage (while in some cases profiting handsomely in the mean time, I admit).
Also, some of the allegations by so called short sellers or whistle blowers might need years to pan out. In 1999, financial analyst Harry Markopolos "informed the SEC that he believed it was legally and mathematically impossible to achieve the gains Madoff claimed to deliver". It took another nine years before the fraud was finally unravelled, lots of additional damage being done in those years.
A further comment from the Bloomberg article:
“No research should be anonymous,” said Jimmy Ho, president of the Society of Remisiers, Singapore’s biggest association of equity traders.
Whilst I agree that non-anonymous research would be better, I do have sympathy for the reasoning behind it:
Carson Block, the founder of Muddy Waters LLC, said in 2012 he stopped trying to bet against Chinese stocks after workers at a storage company he owns in Shanghai were harassed and unidentified “gangsters” came looking for him.
“Putting our name on the reports gave us more credibility but I understand why people see a need to be anonymous when publishing this kind of information because of the threats and the costs of extra protection,” Block said in an interview on Tuesday in New York.
And:
...independent research reports can be beneficial for investors if they “weed out” companies that are bending accounting rules or engaging in fraudulent activity.
“I’m not concerned about the origins of the report, it’s whether the report is true, accurate and valid ultimately,” said Surtees, whose firm oversees about $50 billion. “Time will tell.”
Another comment by Mr. Ho:
“MAS should make sure analysts do not use their research for their own agenda.”
That also means that analysts (or brokers, bloggers or anyone spreading rumours to increase the share price of a certain company) who write positive reports for their own agenda (or the agenda of their company) should equally be punished. In that case government of all countries in the world should consider quickly building a few more jails for this purpose alone.
News on financial markets is rather biased, and all in a positive way for listed companies:
- Managers have a real financial incentive (receiving wages but often also owning a stake in the company) to paint their companies as rosy as possible, they even hire PR companies for that purpose.
- Brokers and the like receive their handsome fees through all kind of financial work for these companies (bringing them to the market, structuring deals, etc.), their research reports are often quite biased (just check how many "buy" reports there are versus "sell" reports). Even if brokers don't have a direct link to a company, they might be involved with one of the other companies of the majority shareholder.
- Professionals like auditors and writers of independent reports too often have a bias towards the companies that pay them: "whose bread I eat, his song I sing".
- Journalists are sometimes hesitant to post negative questions, their papers are sometimes biased towards companies that advertise (a recent example from the UK and the response containing the remarkable admission "All [media organisations] have their own self-serving agendas, both political and commercial").
- Regulators should be on top of their game, but realistically they can't follow hundreds of companies and are not strong in particular fields (like valuations).
Despite all these shortcomings, I like the capital markets and am an active and passive (through external fund managers) participant for more than thirty years, both in listed and unlisted companies.
But giving the many biases, there is a clear and urgent need for views from "the other side", views that give critical analysis of companies, that question their accounts and their business models.
Therefore we have to be careful not to immediately jump on top of messengers of bad news.
The three cases mentioned in Bloomberg's article are:
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