Friday, 30 September 2011

Cloud over Sime's E&O stake darkens

Today was the AGM and EGM of Eastern & Oriental (E&O). Both En. Mahadzir Bin Azizan and Mr. Leong Kam Weng were not elected. Both were the nominee's of ECM Libra.

Below article is from the Singapore Business Times:

Collaboration deal sparks question of effective control


in Kuala Lumpur NEW questions are surfacing over conglomerate Sime Darby's purchase of a 30 per cent interest in property developer Eastern & Oriental (E&O) a month ago.

Already, there is pressure building for Sime to make a mandatory general offer (MGO) to E&O minority shareholders as the plantations-to-property group had paid a 60 per cent premium for the 30.2 per cent stake it bought from three shareholders.

The sellers are E&O chief executive Tham Ka Hon, businessman Wan Azmi Wan Hamzah and Singapore-based broker GK Goh. Sime paid the three RM766 million (S$311 million).

The Securities Commission (SC) has said that it was investigating the deal. 'We are also examining the circumstances surrounding the transaction for any Takeover Code implications,' the SC said in response to local media three weeks ago. 'Our course of action will be based on our findings.'

It isn't clear when its findings would be disclosed. The ramifications of the SC decision could be serious. If it finds for E&O minorities, Sime would have to fork out RM1.8 billion for the remaining 70 per cent. If acting-in-concert is proved, then all parties - Sime and the three sellers - would have to fund the GO.
The acting-in-concert theory came about because of the high price paid. This angle has been vigorously denied by Sime chief executive Bakke Salleh, Mr Tham and Mr Wan Azmi.

Mr Wan Azmi also debunked the theory that Sime might not have acted within the spirit of the law. 'If a buyer buys less than what the code defines as the trigger, do we always have to assume that the intentions of the code have been violated?' Mr Azmi told The Edge weekly. 'That would be rather disingenuous.'

Analysts have begun turning their attention to the collaboration agreement between Sime and E&O, an agreement signed the same day as the sale and purchase agreement. This is tied to the Takeover Code which, while it specifies 33 per cent as the trigger point for an MGO, also permits MGOs for purchases of less than that if it can be proven that it comes with effective control of the company so purchased.
Sime does not appear to control E&O. It has no directors on the firm's board and E&O's management remains the same with Mr Tham agreeing to remain CEO for three years, the same period that the collaboration agreement lasts.

The collaboration agreement, which was announced to the stock exchange by Sime, seems innocuous enough. It calls for the sharing of knowledge and expertise, the leveraging of mutual competencies and, where agreed, the joint exploitation of economic opportunities. It also says that the agreement 'shall be in full force and effect' for a period of three years.

'What does that mean?' asks an analyst. 'Does that mean E&O can still do a joint development with, say, SP Setia or anyone it likes? Or do they, under the collaboration agreement, have to ask Sime's permission first? If so, who controls whom?'

These questions are likely to be asked at an extraordinary meeting of E&O shareholders in two weeks. It was called for by investment bank ECM Libra which has, directly and through the pension funds it manages, almost 11 per cent of E&O stock. According to news reports, the investment bank wants two ECM-sponsored directors appointed to E&O's board.

Mr Bakke of Sime has remained open to the possibility of a general offer. 'At an appropriate time, we will consider a GO,' he told The Star newspaper. 'It could happen sooner or later but that will be a business call.'

Most analysts have taken that to mean that the conglomerate might consider it after six months - the period after which the highest-transacted-price clause no longer holds. That would mean Sime could make a voluntary general offer for E&O at below RM2.30, the price that it paid the three sellers.
It could, for example, make a bid at RM1.80 and substantially lower its average price. E&O shares currently trade at RM1.45.

Bad news from China, interesting report about Chaoda

A report written by a group calling themselves "Anonymous Analytics" wrote a detailed report about Chaoda. It looks well researched and written, but I can't vouch for the quality of it. If it is true then it is very damaging for Chaoda and for China listed companies in general since Chaoda is a quite high-profile company, and listed for a decade.

Other articles from Reuters about problems in China:

Bosses in China go into hiding over big debts
Punishing rates of underground loans amid credit squeeze taking its toll
(BEIJING) A string of Chinese entrepreneurs have gone into hiding to avoid repaying loans, according to state media reports, highlighting a credit squeeze on private firms and the dangers of steep interest rates in China's vast and growing informal lending market. Many cash-strapped firms are unable to borrow from banks amid a credit clampdown by Beijing, and some have turned to China's underground lending market - which pools money from individuals and firms - at annual interest rates as high as 100 per cent.
The staggering rates, at more than 15 times China's benchmark lending rates, have pushed some firms to the limit. In just one day last week, Chinese media reported that nine bosses of small-sized firms in China's entrepreneurial capital of Wenzhou, in eastern Zhejiang province, had skipped town after realising they could not repay their corporate loans. 'The private lending craze has fuelled an economic bubble, and the 'runaway episode' in Wenzhou is a landmark event in the bursting of such a bubble,' the official Financial News, a paper run by China's central bank, said in a report on Wednesday.
Among the bosses who have reportedly gone into hiding is the chairman of one of Wenzhou's prominent spectacles makers, Zhejiang Center Group Co Ltd. The well-known firm had harboured ambitions of a public stock listing, the China Business News said, but problems started in 2008 when it was squeezed by falling overseas orders, rising raw material costs and a firmer yuan. Citing sources with knowledge of the matter, the newspaper said that Zhejiang Center owes its suppliers some 50 million yuan (S$10.1 million) to 100 million yuan.
Calls by Reuters to the company's main number went unanswered.
'Seven days after his (the board chairman's) disappearance, a few company managers are still reporting for work,' China Business News reported after a visit to Zhejiang Centre's Wenzhou office. 'But they are at a loss as to what they should do now.' Zhejiang Centre's website says that it employs around 3,000 people and has annual export sales of 500-600 million yuan.Chinese officials have said repeatedly that they have detected no large-scale collapses among small firms in the country and that they do not face extreme credit shortages. That point was reiterated on Wednesday by Lu Zhongyuan, vice-head of Development Research Centre, a cabinet think tank.
'Difficulties that small companies face are not mainly caused by tight credit,' Mr Lu said. 'The biggest problem faced by small firms is the rise in costs.' For the wealthy in China, lending their savings to firms at annual rates starting at around 36 per cent is more lucrative than putting their money in banks that give negative returns.China's one-year deposit rate stands at 3.5 per cent, under the central bank's 2011 inflation target of 4 per cent and significantly below actual inflation which recently has exceeded 6 per cent. A thriving underground lending market has bloomed amid savers' zeal to put their money to better use. The central bank estimated that the market was worth 2.4 trillion yuan as at the end of March 2010, or 5.6 per cent of China's total lending.
'Speculative private lending has increased this year and has deviated from actual credit needs of the economy,' said Fu Bingtao, an analyst at Agricultural Bank of China. Mr Fu said that the risks to China's economy, the world's second largest, could be contained since the rampant lending is outside of the banking system and such loans are generally not used to fund speculative bets. However, in its annual survey of Chinese banks released this month, accounting firm KPMG noted that credit woes faced by one small firm can affect its peers through 'debt triangles'. This happens when a firm that is short of cash delays payments to its suppliers, causing suppliers to suffer cashflow problems which in turn can affect others higher up the supply chain.
Banks are also not entirely insulated. Savers' reluctance to put their money in banks has sparked a 'war for deposits'.To win deposits, banks are paying for depositors' holidays within the country or their children's education, and offering job opportunities to their relatives, the Financial News said.Yet, for cash-rich savers, times are sweet.An investment consultant in Beijing, who only gave his surname, Bai, told Reuters that he remits his salary back to the northern Chinese province of Hebei each month for his mother to lend to businesses. 'The money that I lent at the start of the year had annual interest rates of 10 per cent. Now rates have risen to 50 per cent,' he said. 'My 100,000 yuan of savings has grown to nearly 150,000 yuan.'
But firms cannot afford such sky-high rates, said Zhou Dewen, head of the association for small- and medium-seized enterprises in Wenzhou. Many earn profit margins of between 3-5 per cent, so loan defaults may spike if rates do not ease next year. Even Mr Bai is worried for his borrowers. 'My neighbours at home are lending at annual rates of 150 per cent,' he said. 'Which industry can enjoy such high profit margins? It's not like they are trafficking drugs.' - Reuters

US Justice Dept probing Chinese accounting
WASHINGTON - The US Justice Department is investigating accounting irregularities at Chinese companies listed on US stock exchanges, said an official with the US Securities and Exchange Commission, suggesting criminal charges may be brought in addition to civil proceedings.'There are parts of the Justice Department that are actively engaged in this area,' Robert Khuzami, director of enforcement at the SEC, said in an interview on Tuesday.
He told Reuters that a number of federal prosecutors around the United States were taking part in the investigation, but he declined to name them.Involvement of US attorneys general in various locations adds investigative firepower to the SEC and the Federal Bureau of Investigation, which are also probing the accounting methods of certain US-listed Chinese companies.'I think that you will see greater (Department of Justice) involvement as time goes on,' Mr Khuzami said when asked if criminal charges would be filed in the investigation.
A former federal prosecutor, he declined to elaborate on which Chinese companies or auditors were being scrutinised by the Justice Department.An SEC review of accounting problems at foreign-based stock issuers sharpened its focus earlier this year when dozens of China-based companies began disclosing auditor resignations or book-keeping irregularities.For example, Deloitte Touche Tohmatsu CPA Ltd in May resigned as auditor of Chinese software company Longtop Financial Technologies Ltd, saying it had found falsified financial records and bank balance confirmations.
Shares of some Chinese companies listed in the United States fell on Thursday after Mr Khuzami's statements became public. Among them, closed 4.7 per cent lower at US$50.62, Baidu fell 9.2 per cent to US$110.29, China Sky One Medical declined 3.8 per cent to US$2.29, and Sina Corp ended down 9.7 per cent at US$73.23.The SEC has struggled to gain access to documents it needs in the investigation because strict Chinese laws have made auditors reluctant to turn them over.The FBI has an embedded agent in an SEC working group on Chinese companies that enter the stock market through so-called reverse mergers with US shell companies.
Officials from the SEC and the Public Company Accounting Oversight Board (PCAOB) are due to meet with their Chinese counterparts in Washington, DC in October for a second round of talks on joint inspections of auditing firms in China.'Not having proper accounting and reliable audit review for publicly traded companies with operations in China is just not acceptable. We have to find a path to resolution of this issue,' Mr Khuzami said. 'It is ... a big issue for us.'Earlier in September, the SEC sought a federal court order to force the Shanghai arm of Deloitte to turn over its work papers regarding Longtop Financial.
The results of the Deloitte subpoena enforcement action will be closely watched by other auditing companies, Mr Khuzami said. The federal government is also pursuing other options to ensure better accounting practices at US-listed companies based in China, he said.'Obviously, the results here will inform the conduct of others that are similarly situated. In that sense, it's going to be instructive,' Mr Khuzami said. 'At the same time, we're not a one-trick pony; There are other efforts to reach resolution of these issues. We continue to work closely with our regulatory counterparts in China and in other countries to find a path to resolution.'
In a recent interview with Reuters, Assistant Attorney General Lanny Breuer, head of the Justice Department's criminal division, underscored the government's commitment to fighting accounting fraud of any kind. He declined, however, to comment on specific cases that could be brought against Chinese firms listed in the United States.The Justice Department declined comment for this story, saying it does not confirm or deny investigations.In any criminal case, the question would be whether the company lied to the auditor, or whether the auditor acted recklessly or knowingly in not detecting the alleged fraud.Merely not providing records under these circumstances - as in the Deloitte case - would not likely rise to the level of criminal violation, Mr Khuzami said. The PCAOB, the agency that oversees auditors of public companies, has inspection authority over auditing firms, while the SEC has enforcement authority over those companies.Together, the two agencies have greater leverage over auditing firms than do criminal authorities, Mr Khuzami said. -- REUTERS

The battle between SP Setia & PNB

These are busy times at the Bursa Malaysia, lots of corporate exercises are going on. PNB has made an offer for SP Setia at RM 3.90 per share:$File/Notice%20of%20take%20over%20offer.pdf

But the management doesn't like it at all:$File/Setia-Announcement-28.9.11.docx

"The Board has met to consider the Offer and are of the view, based on external valuations of the Company by investment analysts published before receipt of the Offer, that the Shares Offer and Warrants Offer fundamentally undervalues the Company. On this basis the Board, in the exercise of its fiduciary duties to protect the interests of minority shareholders, has decided to seek a competing offer from other interested parties to make an offer to purchase the Company's shares. The Board will also be writing to the Offeror to enquire whether they are interested in revising the Offer price upwards to reflect a price which is closer to the fair value of S P Setia Berhad."

This sounds good, a Board of Directors that tries to come up for the interests of its minority shareholders and hopes to find a competing, higher offer. Just a few months ago the share of SP Setia was often trading above RM 4.00, why would shareholders now accept an offer for only RM 3.90? It does not look very attractive.

On the other side, PNB does not intend to delist SP Setia, it likes to maintain the listing status. That is also good, minority shareholders should not feel "threatened" by owning shares of an unlisted company, or their shares being mandatory acquired.

In other words, this is the kind of corporate exercises that are healthy for the market.

Some links from The Star, Business Times and The Edge:

"Mixed reaction to PNB offer to acquire property developer SP Setia"

"The Liew factor in SP Setia"

"PNB defends bid for SP Setia"

Thursday, 29 September 2011

Finally, some meat in corporate disclosures

The below article is from the website of The Edge. I wrote before about the CD Guide:

But linked to the wrong guide (the CG Guide instead of the CD Guide), the posting, link and number of pages are corrected.

More information about the amendments of the Listing Requirements on the website of Bursa Malaysia:

Written by Max Koh:

Written by Max Koh   
Wednesday, 28 September 2011 15:22

Companies are not allowed to just provide the bare bones in their corporate disclosures (CD) under the amended listing requirements (LR), starting from next year.

According to the amended LR, companies are required to provide “detailed analysis” of the performance of all operating segments in the explanatory notes attached to results announcements.

For example, a statement that says a company’s “net profit grew 50% in this quarter to RM3 million from RM2 million a year earlier due mainly to increased sales” is considered as not complying with the amended LR because it  does not shed light on the factors causing the increased net profit.

With the amended LR, the company’s board could be reprimanded by Bursa Malaysia and the company be fined up to RM1 million. 

Currently, companies tend to only provide the minimum details in their quarterly financial announcements without any material information at all.

Apparently, for about one-third of listed companies, mostly those with smaller capitalisation, CD are only made to meet the minimum requirements of the LR.

To uphold a high standard of corporate disclosure, Bursa has tweaked the LR recently to improve corporate governance and transparency for listed entities.

Prior to the amendments, there is no prescription of minimum content in the comprehensive income statement, and as such, companies could get away with providing the income statement without important indicators such as Ebitda, impairment and write-offs which are material for investors to analyse the company’s business and operations.

The new LR also require companies to provide the reasons for the cessation of directors, CEO and external auditors. The LR also require the assurance of new directors, CEO and CFO to have the “character, experience, integrity, competence and time to discharge their role”.

In addition, the CD Guide says selective disclosure of material information is prohibited. For instance, it is wrong for companies to only reveal material information to a group of fund managers but not to the investing public.

To assist companies to comply with these higher standards of CD requirements, Bursa Malaysia has come up with a 74-page CD Guide. While the guidelines provided in the CD Guide are not mandatory, the guidelines are meant to help “listed issuers to better understand their disclosure obligations and improve overall transparency in the marketplace”, said Bursa CEO Datuk Tajuddin Atan in a press statement.

Some of the highlights in the CD Guide include the advocacy for disclosure of five-year financial highlights in CD, and the inclusion of management discussion and analysis in the annual report. Presented in a clear-cut way, the CD Guide provides guidelines on how to use plain language in announcements, how to provide disclosures to journalists and fund managers, and how to provide profit guidance amongst others.

Bursa Malaysia has stressed that the CD Guide is not just for CEOs and companies, but also for investors and the general public.

Amendments to the LR will take effect from Jan 3, 2012, and financial periods/years ending Dec 31, 2011 must comply with the new LR.

Bursa Malaysia said it had consulted with stakeholders and companies since July last year to come up with the CD Guide. As early as this Friday, Bursa Malaysia will begin to engage CEOs and directors in the advocacy programmes, to educate them on the new LR and CD Guide. The stock exchange would proactively engage with audit committees and boards of directors on issues of concerns.

The amended LR are seen as a step towards the right direction. However, some quarters have raised the question that since the guidelines spelt out in the CD Guide are not mandatory, would companies take them seriously?

Generally, those that provide minimal disclosures are mostly smaller companies and some of them have already complained that the current quarterly financial announcement is rather taxing as other stock exchanges only require companies to release financial results twice a year.

That said, from the investor perspective, the more the better in terms of disclosure. As for listed entities, that is the rule of the game when companies want to tap the capital market for funds.

This article appeared in The Edge Financial Daily, September 28, 2011.

Wednesday, 28 September 2011

Maybulk/POSH: KPMG's "independent" advice

The Net Assets of POSH as at September 30, 2008 were USD 188 million, which included a large amount of Goodwill (USD 295 million). The assets were bought during economic boom times. According to the offer POSH was worth USD 780 million, more than four times the Net Assets, and that during the fierce recession. Many listed companies with long track records were trading around Net Assets, some even below it, some even below the net cash, with single-digit PE’s (some as low as 5 or even lower) and with high dividend yields. It was up to KPMG to give an independent advice on this deal, during these global economic conditions.

The first method used by KPMG was the DCF (Discounted Cash Flow) approach. I have written about this in the past:

As usual, many pages were written about the approach, the key bases and assumptions, although the economic crisis is rather strangely left out of the picture. When KPMG revealed its results (POSH is worth between USD 613 million and USD 894 million), it left out the calculation itself. In other words, the readers couldn’t check anything and that while the whole circular contains 130 pages and the calculation could be presented in one single page. I assume that KPMG has used very high (unrealistic high) growth forecasts for POSH which resulted in the extreme valuation numbers. A hint of KPMG’s growth forecasts can be found here:

Did POSH indeed perform that well? In 2009 earnings did grow by 8% to USD 88 million, not bad given the economic conditions but disappointing given the huge cash injection from Maybulk. In 2010 profit declined substantially by 72% to USD 25 million, while in the first half of 2011 profit declined further to a paltry USD 3 million. It looks like KPMG had wildly overestimated Maybulk’s future profits.

The second method that KPMG used is the adjusted net assets in which assets were revalued as appraised by Clarkson.

  • USD -107 million, Tangible net assets (vessels minus borrowings)
  • USD 295 million, Add Goodwill
  • USD 250 million, Add Revaluation existing vessels
  • USD 440 million, Add Revaluation vessels under construction

For a grand total of about USD 880 million.

This calculation is, in my opinion, very flawed for the following reasons:

[1] The goodwill of USD 295 million is in respect of the acquisition by POSH of its subsidiaries. However, those subsidiaries were bought during the economic boom times, and it is debatable if this goodwill was still valid during the recession.

[2] KPMG adds the revaluation of existing vessels, however, there is a a huge overlap with the amount of goodwill since the vessels of POSH are the same vessels of its subsidiaries. In other words, one can either count goodwill on the subsidiaries or revaluation of the vessels in the subsidiaries, but you can’t have both.

[3] Revaluation of an asset is only allowed if the value can be measured reliably. During the worst global crisis of the last 50 years with all asset prices falling (including those of vessels) and the valuer of the vessels not supporting his own valuation anymore, we can safely assume that values can not be measured reliably. In other words, revaluation is simply not allowed.

 If fair value can be measured reliably, an entity may carry all items of property, plant and equipment of a class at a revalued amount, which is the fair value of the items at the date of the revaluation less any subsequent accumulated depreciation and accumulated impairment losses.”

[4] KPMG subsequently adds the revaluation surplus for the vessels under construction. First of all, the same problem applies as above; values can not be measured reliably, so this is not allowed. Secondly, a revaluation of assets under construction is not allowed under the Malaysian Accounting rules. And even if it was allowed, it would definitely not be General Accepted Accounting Practices (GAAP).

There are other ways to come up with valuations for POSH, ways that would have given a more rounded picture, but were (conspicuously) left out by KPMG:

One is to compare the valuation of POSH to listed companies in the same industry, companies that during Q4/2008 were trading at very low valuations: single-digit PE’s, high dividend yields, some trading at a discount to its Net Assets.

Another way is to compare the valuation of POSH to the value that other shareholders paid for its shares. Employees were allowed to buy 4.75 million shares of POSH at a price of USD 2 per share, at the same time when Maybulk was paying USD 6.50 for the same shares. The huge difference looks puzzling, to say the least.

And finally one could look at how much money PCL invested in POSH and how much money POSH had made, which would result in the Net Assets of about USD 188 million, or about USD 1.60 per share. Again, the difference with the USD 6.50 price that Maybulk would have to pay is very high.

Let’s assume for argument sake that both valuations done by KPMG were fair, both around USD 6.50 per share, the price Maybulk would pay. Would it then be a fair deal? Both valuations depended on all sorts of assumptions, but the price paid by Maybulk was supported (for 90%) by cold hard cash. Because of this unequal situation, Maybulk should have insisted on a huge margin of safety, probably at least 50%, given the amount of assumptions and the huge uncertainty in the global economy.

To put things further in perspective: Maybulk would bring in 53% of the assets of POSH (post deal), but only get 22% of the shares. That doesn’t seem right at all, Maybulk shareholders deserved a much better deal than this.

KPMG deemed the proposal to be “fair and reasonable” and recommended shareholders to vote in favor. Although they gave this very strong recommendation, yet they were scared of any consequences and therefore insisted that they hadn’t verified information provided to them:

And in another statement, they even denied any liability:

I think that is highly debatable, I think there is a very good case to be made that KPMG is liable. Anyhow, I strongly recommend the authorities to come down hard on independent advisers who issue these kinds of statements:

If advisers don’t want to take any responsibility while at the same time they make very clear judgment calls which have consequences for the voting behavior of shareholders then they should simply not be allowed to be independent adviser.

Another issue is the put option that Maybulk received: Maybulk has the option to sell the POSH shares back to PCL for 1.25 times the price it paid after 5 years (this option was balanced out by a Call option by PCL). KPMG compared the return (4.6%) to the 3.2% Maybulk received on its fixed deposit and calls it “acceptable”. But this is really comparing apples with oranges, during the crisis the fixed deposits were guaranteed by the Malaysian government (as announced on October 17, 2008), while PCL is a company. KPMG should therefore have compared the 4.6% return to the yield of AAA or AA corporate bonds, which were yielding between 10% and 15% per year. Also, there is the currency risk, Maybulks profit is calculated in RM while the investment is done in USD. This is a very real possibility, at this moment the USD has weakened against the RM, causing Maybulk to have booked paper losses. Another issue is that it is not sure if the Put option will be called, it is possible that the POSH investment will not work out at all, but that the Board of Directors of Maybulk decides not to call the option. This is not hypothetical, since in my opinion this whole POSH deal should never have been approved by the Board of Directors, but they still did.

And lastly, KPMG writes the following:

I find this dubious at best; just having a single director would give Maybulk influence? As we have seen before, the cash that Maybulk injected in POSH had left the company two weeks later, where was the influence of the Maybulk director? Maybulk would appoint Dato’ Capt. Ahmad Sufian @ Qurnain bin Abdul Rashid as Director for POSH. This director was appointed to the Board of Maybulk in 1996, more than 15 years ago, and therefore (according to the Guidelines of EPF) his independency could be impaired by the long term participation. EPF will vote against renewal of this director.

My conclusion: I find it is simply unbelievable that KPMG's advice letter in its current form was allowed to be included in the circular without any interference from the Board of Directors of Maybulk (which included several accountants) or from Bursa Malaysia (responsible for enforcement of circulars)The authorities should come down hard on KPMG and all other advisers who have disappointed so much the trust that was handed to them, the trust to deliver good quality, unbiased reports that give a well rounded overall picture of the deal involved.

Tuesday, 27 September 2011

Chaoda Plunges After Hong Kong Sues for Misconduct

Another blow for a listed company from China, Chaoda is a quite well known company in the agriculture.

Chaoda Modern Agriculture Holdings Ltd. (682) plunged the most in eight-and-a-half years after the Hong Kong government accused it of market misconduct amid allegations the Chinese food producer overstated its land holdings.

The shares tumbled 27 percent to HK$1.10, the most since March 2003, before trading was suspended pending a price-sensitive statement. Chaoda was the second-biggest decliner on the MSCI AC Asia Pacific Index.

Chaoda’s market value has been cut by HK$11.9 billion ($1.5 billion) since Next Magazine’s May 26 report alleging it exaggerated its farmland, which was denied by the company. Increased scrutiny of Chinese companies including Toronto-listedSino-Forest Corp. (TRE), accused of fraud by short-seller Muddy Waters LLC, has driven down the Bloomberg Chinese Reverse Mergers Index down 58 percent this year.

The Hong Kong Financial Secretary’s office on Sept. 23 confirmed the case against Chaoda in the Market Misconduct Tribunal. Securities and Futures Commission spokesman Jonathan Li declined to comment today on whether the regulator had conducted an investigation of the company before the Financial Secretary filed the case.

“What kind of misconduct, no one really knows for now,”Castor Pang, head of research at Core-Pacific Yamaichi International Ltd. in Hong Kong, said about Chaoda. “It’s hard to guess what’s going on, except that it’s probably quite serious.”

Preliminary Hearing

Eric Yip of Christensen, which handles investor relationsfor the company, said Chaoda’s lawyers are working on a statement to be filed with the Hong Kong stock exchange.

Shirley Wong, a spokeswoman for the Financial Secretary’s office, declined to elaborate on the nature of the allegations against Chaoda and referred inquiries to the Market Misconduct Tribunal. Tribunal secretary William Chow also declined to state the specific allegations or people involved. A preliminary conference in the case was held on Sept. 6 and the next hearing date hasn’t been determined, Chow said.

Hong Kong’s Market Misconduct Tribunal hears civil cases involving stock market manipulation, false trading, insider trading and three other offenses. The tribunal can order the disgorgement of profits gained or loss avoided as a result of misconduct, and can bar individuals from being corporate directors, according to its website.

Sino-Forest shares tumbled 74 percent before the Ontario Securities Commission suspended trading on Aug. 26, saying the company appeared to have misrepresented its sales and timber stocks. Investors including hedge fund manager John Paulson and billionaire Richard Chandler took losses after Carson Block’s Muddy Waters research firm said on June 2 the company had overstated its holdings.

BRDB calling for open tender

I am rather pleasantly surprised by this, hadn't expected this at all, but aparently the pressure applied to the Board of Directors has worked. Good news for all those that have helped in this case: journalists, MSWG, bloggers (and possibly behind the screens SC and/or BM and hopefully independent directors of BRDB).

But I am still hoping for transparancy regarding the "mysterious" owner of the large block of shares in BRDB.

"News editor Risen Jayaseelan wonders how many other listed companies have large blocks of shares being held under omnibus accounts with little clarity on the identity of the ultimate beneficiaries."


BRDB will sell prized assets via open tender

BRDB doing the right thing by calling for open tender for assets sale

BRDB will sell prized assets via open tender

France bans cash sales of Gold & Silver

France Bans Cash Sales Of Gold & Silver Over $600

Central banks are presumably so frightened that a growing number of citizens are abandoning rapidly devaluing paper currencies and preserving their wealth through precious metals that governments are now cracking down on the anonymous purchase of gold and silver.


"Following the Austrian government’s announcement that it was restricting the sales of precious metals to $20,000 a time, an amount which would purchase just 11 ounces, the French authorities have followed suit with an equally draconian new measure to deter people from buying gold and silver."

"$600 USD isn’t even enough to purchase a half ounce of gold. This guarantees that citizens who are trying to transfer their savings over to precious metals will be known to the authorities, leaving them vulnerable to government confiscation of their gold and silver later on down the line, as happened in 1933 under FDR.
Why are central banks and governments in Europe so eager to make it as difficult as possible for citizens to buy precious metals? It’s largely because unlike every other financial commodity, they don’t have the market completely under their control, and cannot tolerate the idea of people having true power over their own economic destiny."

Outspoken hedgefund manager Hugh Hendry is giving his opinion about the crisis in Europe.

"Hedge fund manager Hugh Hendry, whose prediction of the crisis in the Eurozone was spot on, says we're at a rare moment in economic history. "The problem is greater than the ability of the politicians to respond," he says in a radio debate on BBC's Bottom Line. "There is no policy prescription that they can offer that will redeem the situation. The redemption will come through the citizens of Greece and elsewhere throwing the politicians out and rejecting the European ideal." Hendry's view on what the solution should be (a Greek default that doesn't protect the creditors) is quite different than Evan Davis' — the BBC host — and Brent Hobermann's of, another guest on the show."

"Hendry has other ideas about a solution. He says, "Bankruptcy is a solution [because] creditors who extended that debt [to Greece] — that was a folly. All this firefighting is trying to protect the creditors, as opposed to the oppressed person." Hendry's view is that Greece should default and leave the Euro. "Greece needs a real exchange rate," he says. "If you go on a drachma and [a beer in Greece is] .50p, there's a stimulus that's not open to them today [cheaper money]." Hendry says the UK is in depression - not recession - and it will take years to get back to where we were in 2006 and 2007. It's been 5 years since the financial crisis, and it might take another."

Monday, 26 September 2011

CD Guide, enforcement, journalists at AGM's, accounting

Why you should read Bursa’s CD Guide

(I wrongly linked before to the CG Guide (Corporate Governance Guide) instead of the Corporate Disclosure Guide, the number of pages is also only 78 instead of the reported 158)

"Investors should read the CD Guide too. In a way, it doubles up as a guide to evaluating a listed company's transparency and respect for the investors' right to know. When companies are stingy with material information, just throw the book at them."

The Guide can be found here:

They probably meant it good, the guide also looks decent. But I really want Bursa Malaysia to spend its time on their enforcing role, not on writing guides, for instance: 
  • Making sure that documentation to shareholders (circulars and especially independent advice) is of good quality and is unbiased.
  • Coming down hard on insider trading.
This part of the enforcement has been so disappointing.

Bounced from Betfair's annual meeting

"Has chairman Ed Wray become a tad over-sensitive when reminded of that feat? Very possibly. On Thursday, Wray banned the media from the company's inaugural annual meeting as a public company – a move almost unheard of in the 21st century."

It might be unheard of in the UK, I think it is quite normal in Malaysia. The Malaysian press is rather tame out of fear losing their printing license. But they can (and sometimes do) report what is being said in for instance court cases. If shareholders ask pertinent questions at Annual or Extraordinary General Meetings, journalists should be able to report on the issues raised. I would suggest the authorities to put serious pressure on listed companies to allow journalists at their meetings. If most companies comply, then the fact that certain companies won't allow journalists in would already be a clear red flag. Another way to solve this issue is that for instance MSWG facilitates the process in which journalists are able to attend as proxies for shareholders. David Webb organized a similar service in Hong Kong for important shareholder meetings.

More Trouble for Groupon IPO

It sounds like the internet bubble of 2000/2001 al over again. Companies want to list, but according to General Accepted Accounting Practices (GAAP) their revenues and profits (in most cases: losses) don't look well. Therefore, new definitions and metrics are invented.

I really hope Malaysia won't follow this path. The use of "deferred tax assets" (probably another US invention) is already much too aggressive for my liking, see:

Sunday, 25 September 2011

Clarkson, the valuer who didn’t believe his own valuation

Clarkson Valuations Ltd. from London was appointed the expert adviser to value the vessels of POSH. They valued the existing vessels and the vessels under construction which resulted in a huge revaluation surplus (as calculated by KPMG) of about USD 700 million, increasing the shareholders’ funds from USD 188 million to USD 899 million.

On the face value of it, this already seems strange, the vessels were bought and ordered during economic boom times and at the writing of the circular a large recession was raging. Also, most acquisitions were done only about one year ago.

Clarkson explicitly wrote the following in the circular (dated November 25, 2008):

But what is the use of a valuation at September 15 and a circular of November 25 on which date the values should not be taken to apply?

Clarkson also valued the “Newbuilds”, ships under construction. Valuing existing vessels in bad economic times is already difficult enough, valuing vessels under construction is even more hazardous.

On the basis of prompt, charterfree delivery on September 15, 2008? First of all we are more than two months further, secondly some of these vessels would take years before they would be completed.

There was also huge stress at the shipyards, what would happen if they would go bankrupt? Clarkson warned:

Clarkson’s website suddenly changed on December 4, 2008 (after the circular, but with still six days to go to the EGM):

This is about the most clear warning signal that Clarkson’s valuation of the vessels from POSH should have been withdrawn, since Clarkson themselves advised not to use their system, the values had not been updated for two months.

They didn't trust their own values anymore!

Their valuation reports were written between November 21 and November 24, 2008, if they had noticed any change in their valuation since September 15, 2008, they had the obligation to notify this.

And although Clarkson gave a whole list of red flags, it did not withdraw its valuation. In my opinion, it definitely should have, I have zero doubt about that.

In the POSH deal Directors were involved with huge experience in the maritime industry. They were on the boards of POSH, Maybulk and PCL, some were connected to Global Maritime Ventures, Global Carriers Bhd and Alam Maritim Resources Bhd, all companies in this industry. Surely they must have known about the huge stress in the industry, the falling values of vessels and that on December 10, 2008 (the date of the EGM) the valuations of Clarkson were way off.

But nobody withdrew the valuation, the EGM continued and the Minority Investors of Maybulk were hugely misled in the process.

After the deal was sealed, I found more and more credible information that indeed things were very bad in the market for vessels. For instance the following article:

But the most interesting information came from a surprising source: Clarkson themselves! The report can be found here, under “Interim Report 2009”:

Pages 3 to 6 give an indication of the stress in general for the industry, but the most relevant is page 7:

In more detail only year 2008 with vertical lines on September 15 (the date of Clarkson’s valuation) and November 25 (the date of the circular):

As can be seen, prices reached their maximums in July/August 2008, and after that went down fast. Between September 15 and November 25 prices came down about 40% for the three indices, that was why Clarkson in their valuation report kept on stressing the point that their values were only good on September 15th.

And it also clearly shows that Clarkson should have withdrawn their valuation report before the EGM.

Since POSH was highly geared, even a fall of 30% would have huge consequences for the Revalued Nett Asset Value, it would shave about USD 500 million from the valuation, a large amount by all standards.

Much later, when the deal was sealed
POSH cancelled some Newbuilds in 2010. Strangely, it only received back its refund, no trace of huge paper profits that were promised (from their year report 2009):

This valuation by Clarkson played a key role in the revaluation by independent adviser KMPG, the subject of the next episode.

Saturday, 24 September 2011

Unique events for Bursa Malaysia?

Two former directors sentenced to jail and fined for CBT

"The Kuala Lumpur Sessions Court today found two former directors of Multicode Electronics Industries (M) Berhad, guilty of committing criminal breach of trust under section 409 of the Penal Code involving over RM26 million of funds belonging to the company.

Gordon Toh Chun Toh was sentenced to 12 years imprisonment while Dato' Abul Hassan bin Mohamed Rashid received a jail sentence of six years. Gordon Toh, a Singaporean, was also ordered to pay a fine of RM1 million, in default two years imprisonment."

Long prison sentences are the only real deterrent for would be offenders. However, there might be an appeal so we have to wait if the sentence will uphold.

Yesterday the independent advice regarding EPIC (Eastern Pacific Industrial Corporation Bhd) was send to the shareholders. The independent adviser Alliance Investment Bank found the offer "fair and reasonable" and advices shareholders to accept the offer. No surprise there, but to be honest, the advice was quite decent.

However, I was very pleasantly surprised by the following:

It is very, very rare for companies listed on the Bursa Malaysia that a director disagrees in public. His reasoning can be found here:

I actually completely agree with Mr. Wan Salleh, nothing to add. I take my hat off for him, as one of the rare directors to dare to speak out in public.

However, on another matter, I was not too pleased about the timetable of this offer:

Shareholders had already nine days the Offer Document with text like "no intention to retain the listing status", "mandatory acquisition", etc. They might be tempted therefore to accept already, not waiting for the independent advice that was send only yesterday. I would strongly suggest combining the two documents in one and sending them together to the shareholder.

BRDB asked to disclose stock owner?

"Bandar Raya Development Bhd (BRDB) has been asked by Bursa Malaysia to clarify to its shareholders issues that have been raised in the media regarding the company's proposal to hive off key assets to its major shareholder, reliable sources said.

One of the most sticky issues related to the deal is the unknown identity behind an influential 23.6% block of shares in BRDB held under a nominee account for Credit Suisse.

The Minority Shareholder Watchdog Group (MSWG) had pointed out that this stake was very likely to be the deciding factor in whether the asset sale would go through. This is on the basis that the 23.6% block amounts to 30% of total disinterested shareholders of BRDB and in turn might comprise 50% of votes of shareholders who actually turn up to vote on the matter, which requires only a simple majority to go through."

BRDB "has been asked to clarify"? I definetely hope that some more harsh terms have been used, like "summoned". I am hoping for total transparancy here, both regarding the details of this mysterious shareholder(s), and his/her voting at the EGM.

Friday, 23 September 2011

Maybulk/POSH: What happened to the Cash?

To recap: PCL, Majority Shareholder of Maybulk and POSH invited Maybulk to invest USD 221 million (about RM 800 million, 90% cash plus one vessel) for 22% of POSH, which had Shareholders Funds of only USD 188 million, which includes already goodwill of USD 295 million.This controversial deal happened November/December 2008, in the midst of the global recession.

The first question that any investor would ask if somebody would approach them to invest in their company would be: "Why, what is the purpose?". Unbelievable but true, in the Maybulk/POSH circular of 130 pages, this is not mentioned one time. The circular can be found here:

There are (not surprisingly) many references in the rules that the purpose has to be mentioned, for instance in the Due Diligence:

On December 10, 2008, the EGM voted in favour of the acquisition, on December 16, 2010 already the whole transaction had been completed.

The Securities Commission and/or Bursa Malaysia can simply order the Directors to come to their office and ask them what the purpose was (I hope they have done this by now). Unfortunately, I only have the publicly available information to work with, so I acquired the 2008 year report of POSH.

I expected to see a large amount of cash in the accounts on December 31, 2008 since the money had been deposited only two weeks before. But to my surprise, almost all the money had magically disappeared!

What had happened to all the money? Looking further in the accounts, there was only one reasonable explanation:

All the money had been used to repay the loan to PCL!

I have checked the 2008 Year Report from PCL, and that does indicate the same, a large amount of cash:

POSH could have used the money for working capital, for repayments of its bank borrowings, for the acquisition of additional vessels or could even have bought over whole companies. This was in the midst of the worst global recession of the last 50 years, asset prices were falling out of the sky and there were lots of bargains everywhere. Using it solely to repay all the loans to PCL is about the worst purpose that could have happened to POSH and thus for Maybulk who had just invested in POSH.

Was this the purpose for Maybulks investment in POSH known to the Directors of Maybulk and to advisers AmInvestment Bank and KPMG? Was this the reason why the purpose of the investment was nowhere given in the circular, knowing that Minority Shareholders would not like it at all?

There are more indications for this theory. According to the Prospectus Guidelines, there should have been a recent, audited account of POSH, not more than six months old. But there wasn't, another breach of the rules. Because there was no recently audited account, only the full details were given of the accounts from 31-12-2007, almost one year old, and that for a very young and quickly changing company. There were some numbers given regarding the nine month period until September 30, 2008.

Total borrowings had ballooned to USD 412 million, a worrysome amount. But it only mentioned the interest-bearing debts of POSH, while the debts from PCL were non interest bearing. Why did it not mention these, this is essential information?

Below in green it mentions the Gearing Ratio, but it only uses again the interest bearing debts, while the definition of Gearing Ratio is very clearly regarding all debt, both interest and non-interest bearing. Many accountants must have been involved in this deal (Maybulk directors, AmInvestment Bank, KPMG), did they not spot this obvious fact?

As often in these kind of circulars, no alternative is mentioned what Maybulk otherwise could do with the money. One glaring alternative would be to just hand the money to its shareholders in the form of a bumper dividend. It didn't do that, however.

And what did PCL do with the money? It paid a huge dividend of USD 400 million to its shareholders. Money for a decent part from Minority Shareholders from Maybulk.

So far we have seen the following significant breaches of rules:
  • no mentioning of the purpose of Maybulks investment in POSH
  • no recently audited accounts (less than 6 months old)
  • incomplete financial picture leaving out (for instance) non-interest bearing debts
  • incorrect calculation of the gearing ratio
This is however only the top of the iceberg. The next two episodes will be:
  • Clarkson, the valuer who didn't believe his own valuation
  • the magical accounting tricks of KPMG

Thursday, 22 September 2011


Crossed the 10,000 hit on my blog, and about the same number on

For my blog, by far the most referrals came from:

A big thank you for these guys and to all the readers and to AsiaSentinel and for giving me the opportunity.

I will continue trying to come up with more Corporate Governance cases, based on publicly available information. I can use the huge database from Ze Moolah's website, who is fighting the corporate misdeeds for such a long time. For me, people like him, P. Gunasegaram from The Star (previously The Edge) and a host of other bloggers and journalists are the real heroes, fighting for injustice in Malaysia, exposing the crooks.

More information will continue on the Maybulk/POSH saga, I owe the readers a clear explanation why this deal was so bad. One hint, if a company wants a huge amount of money, what is the first question you would ask? Exactly, but that question is not answered in the circular of 130 pages, the reason for the omission will be revealed. As usual in Malaysia, look for the information that is not given. But how is it possible that Bursa Malaysia and all the advisers and directors assigned to this deal approved the circular where this important piece of information was missing?

I hope that the CEO of Bursa Malaysia will come forward, explaining why he supported the POSH deal (he could have single handedly stopped it by voting against it and recommending Bank Pembangunan Malaysia to do the same) and how he deals with the clear conflict of interest in this matter by being the regulator dealing with the complaints on the circular. And why he dropped his Maybulk directorship from his C.V.

Bursa Malaysia, I think there is a lot more wrong with this "company" (it is a proper company and even listed, but I still can't believe that, it was a huge mistake).

The Bumi Armada saga will be highlighted: listing, delisting and relisting, a series of exercises where Minority Investors were not allowed to share in the growth of the company, and thus missed out on the unbelievable amount of more than RM 2,000,000,000.

Related Party Transactions and General Offers with "delisting threat", they will often feature for the simple reason that these are huge deals and Minority Investors have no realistic chance to fight them.

AirAsia won some Corporate Governance awards, in my opinion this company doesn't deserve them at all, explanations will be given.

My commitment: in this: full 100% support for the Minority Investors, let there be no doubt about that.

Conflict of Interest:
I only own shares in two Malaysian companies. The first is the closed-end fund iCapital, managed by Dr. Tan and trading at a discount to its Net Asset Value. The other might come as a huge surprise to my readers, it is MAS (Malaysian Airline System). No, not the share but the preferred one, MAS-PA, a bond like instrument that paid a few times interest and will be redeemed at full price if MAS is not bankrupt, which seems unlikely to me (even more unlikely now that Tony Fernandes is a shareholder). I will not buy any other Malaysian share, neither for my own account, my wife's or my company's. If I write that I hope that Minority Shareholders of say E&O or PMI get a better, more fair deal then that doesn't mean that I have bought the share or will do so, or that I recommend anybody to buy. I anyhow don't recommend anything, investors always should do their own homework and take full responsibility for their actions. I do invest myself, mostly in Singaporean and Hong Kong smallcap stocks, plus some large global companies. I also own some unit trusts / funds.

Wednesday, 21 September 2011

SC & BM: (perceived) Conflict of Interest?

Many people are still eagerly waiting for the verdict by the Securities Commission (SC) in the Sime Darby / E&O case, about which I have written before:

An important issue is the Chairman of the Securities Commission being married to the Chairman of E&O, giving rise to the possibility of (perceived) conflict of interest.

It is interesting to note that the Securities Commission makes a very clear statement on its website on this issue:

"Conflicts of Interests
An integral part of ethics and integrity is the avoidance of conflict of interest. In this regard, all SC staff and their immediate family members have the obligation to avoid putting themselves in situations of conflict where their personal interest is conflicted with the interest of the SC. A process on declaration of interest has been put in place within the SC to ensure that SC employees adhere to this requirement."

A case I have been very much involved with is the acquisition of 22% of POSH by Maybulk in November 2008 for about RM 800 million (mostly cash) during the worst global recession of the last 50 years.

I have made some initial comments here:

This will be followed by a detailed write-up over many episodes on my blog of all that was wrong with the circular (which was a lot).

The deal was approved by all non-related Directors, one of them was Dato’ Tajuddin bin Atan who was President / Group Managing Director of Bank Pembangunan Malaysia Berhad (BP).

From Maybulk’s Annual Report 2008:

BP (itself wholly owned by the Ministry of Finance) owned 18% of the shares of Maybulk and with related parties of the PCL group not allowed to vote they had a very large, probably deciding vote.

Since Dato Tajuddin bin Atan voted in favour of the deal, we can safely assume that BP did the same. But Dato Tajuddin bin Atan was also a Director of Bursa Malaysia (BM), which causes a perceived conflict of interest, since the circular had to be approved by BM.

BM has a large Code of Ethics:

On May 1, 2009 Dato Tajuddin bin Atan resigned from Maybulk.

The Securities Commission had received from me over time many detailed complaints about the Maybulk/POSH case. It must be noted that these complaints are mostly dealing with the circular (which was of exceptional poor quality) and since BM had approved the circular they would also deal with my complaints (and hopefully of other angry minority shareholders of Maybulk). In general, I don’t put much trust in companies doing their own policing (the results are often very disappointing). I also believe it was wrong for Bursa Malaysia to turn into a private company, since the aim of companies is to make money while enforcement is not making money at all, in the contrary:

On April 1, 2011 Dato Tajuddin bin Atan was appointed the current CEO of Bursa Malaysia (BM).

He lists many directorships, but interestingly not the one that is relevant to the Maybulk/POSH case, namely his directorship in Maybulk, exactly during the approval of the controversial deal.

In the organisational chart of BM he is directly above the Chief Regulatory Officer who is responsible for dealing with complaints.

BM is looking into complaints regarding the Maybulk/POSH deal while its CEO has approved this same deal in his previous job as director of Maybulk. 

And what would happen if the investigation leads to results that some form of legal action has to be taken against Directors of Maybulk, will the CEO of BM take action against himself?

Is there not a huge perceived Conflict of Interest here?

Again, similar to the Sime Darby / E&O case, Chairmen and CEO’s of institutions like BM and SC should not be in this awkward position. Other relevant parts of the Ethics Code of BM:

The full text can be found here:

My complaint has been stonewalled for a long, long time. The RPT was initially announced on September 15, 2008, interestingly enough the same day that Lehman Brothers went bankrupt, signalling the start of the global recession. That event would be highly relevant to the valuation used in the circular of the acquisition of POSH since all asset prices were dropping like stones since the demise of Lehman, something that was not once mentioned in the 130 page circular (it only mentioned "volatile" which means sharply fluctuating, in reality prices were simply plunging). 

I offered several times to come to the office of the Securities Commission for additional information about this case, offers that were not accepted. Rather strangely, one would assume that all information would be more than welcome.

Only after I wrote a very sharp, 14 page article (later replaced by a 29 page article), giving highly critical feedback on the Corporate Governance Blueprint 2011 and detailing the Maybulk/POSH deal (amongst others) was I invited to the SC’s office.

The meeting was held August 8, 2011 and I was finally allowed, after almost three years, to share my views with representatives of. Securities Commission and Bursa Malaysia. It was a rather one-sided affair with SC and BM hardly being able to bring in anything against the huge amount of critical issues that I brought up.

The investigation is still ongoing.