Saturday, 31 December 2011

Happy New Year

To all Readers: Happy New Year!

Only 10 year old girl from Mexico, absolutely amazing:

Horrible deal for Hirotako Warrant holders

MBM Resources offered on October 27, 2011 to buy all shares in Hirotako for RM 0.97 per share. If that is a decent offer is beyond the scope of this posting, I don't find it a very rich price, on the other hand this type of company (its business is manufacturing of car parts) is often going for a low valuation. The price offered was at a nice premium to its last transacted price. On the other hand, this was again one of those "infamous" offers with the threat of delisting and mandatory acquisition, Bursa Malaysia seems to get a reputation for this.

Apart from shares there were also warrants of Hirotako. They were only listed February 2011, have an exercise price of RM 0.92 and are maturing February 2016. Since an offer was made for the share, an offer also had to be made for the warrant. However, the offer price was an unbelievable low RM 0.05, not taking into account any of the benefits of warrants.

This is what the independent adviser (Interpacific Securities Sdn Bhd) wrote about the warrant:

But the time value is a very important component of the value of a warrant.

The most common way to value a warrant is the Black-Scholes Model:

A 60% discount to the fair value? This offer sounds tremendously unfair to warrant holders.

The effect of the offer on the share price:

The effect of the offer on the warrant price:

Rather different pictures, to say the least.

And this is the conclusion from the independent adviser (with which the Board agreed):

Fairness for Warrants offer: Not Fair.

Section 31 of the Code for the Malaysian Code for Take-Overs and Mergers says the following:

Was there an "appropriate offer"? And what about: "safeguard their interest"?

The strange aspect is that it would have been very simple to offer something that is fair. One way is to offer a decent price for the "time value" of the warrants based on the Black-Scholes model.

The share holders have accepted the offer in an EGM on December 15, 2011 and the shares and warrants have been delisted on December 29, 2011.

Is there not a duty for the Board of Directors to assure fair treatment of the warrant holders?

And why did the authorities not act to protect them?

And lastly, an offer that is clearly unfair, I think the recommendation for warrant holders should be not to accept the offer.

If every single independent report always ends with a recommendation to accept the offer (which is the case on the Bursa Malaysia), then what is the use of it? Better stop with these reports, it saves a lot of money, time and hassle, and gives the minority share holders or warrant holders some chance to fight.

Thursday, 29 December 2011

AMMB: How To Make RM 5.7 million By Doing Almost Nothing$1-8-million-By-Doing-Almost-Nothing

In a curious case of absent oversight, Morgan Stanley Investment Management has been fined $1.5 million by the Securities and Exchange Commission (SEC) for improperly charging a fund it manages for investment advisory services that were never performed.

Morgan Stanley Investment Management is a wholly owned subsidiary of Morgan Stanley. From 1996 to 2007, it charged The Malaysia Fund Inc. about $1.845 million pursuant to a research and advisory agreement with AMMB Consultant Sendirian Berhad. Under the agreement, AMMB was supposed to provide advice, research, and assistance to Morgan Stanley for the benefit of the fund, according to a Nov. 16 cease and desist order from the SEC that serves to settle the charges.

All AMMB did was send Morgan Stanley two reports per year on the state of the Malaysian market comprising information that could have been gathered by anyone with an Internet connection. Nonetheless, for more than 10 years, Morgan Stanley kept passing the AMMB charges onto the fund, despite having agreed to monitor AMMB’s performance, the SEC order said

As a condition of the settlement, Morgan Stanley was censured and will reimburse the fund the $1.845 million it shelled out for AMMB, less a credit of $543,000 that has already been paid back.

Morgan Stanley also agreed to cease and desist from committing or causing any violations and any future violations of Sections 15(c) and 34(b) of the Investment Company Act, and Sections 206(2) and 206(4) of the Advisers Act and various rules thereunder, the order said.

The cease and desist order also directs Morgan Stanley to implement and policies and procedures within 45 days to improve its Section 15(c) processes and its oversight of advisers and sub-advisers, principal underwriters, administrators, and transfer agents. Section 15(c) concerns the renewal of services contracts and the gathering of information to ensure accurate evaluations of such contracts.

The policies and procedures include requiring Morgan Stanley personnel with direct knowledge of a service agreement to review and verify the services performed, obtain an annual certification from the service provider that the services were performed, and provide accurate descriptions of the service providers and their services to its clients, the order said.

This latter measure includes ensuring that personnel with knowledge of a given agreement and the services it covers will review descriptions of the services providers contained in a registration statement, application, report, account, record, or other document filed or transmitted pursuant to the Investment Company Act, as well as any financial statements and marketing materials.

Morgan Stanley was also directed to certify to the SEC that it has implemented these policies and procedures within 60 days of their completion.

The Malaysia Fund Inc. is a closed-end investment company launched and managed by Morgan Stanley in 1987 to invest in the equity securities of Malaysian companies. As of June 30, 2011, the fund reported net assets of $93.8 million. Morgan Stanley is the fund’s the primary investment adviser.

The two signed a written advisory agreement in 1987 for investment management services, including investment trading and maintenance of the books and records. The fund pays Morgan Stanley an annual fee of 0.90 percent of the fund’s first $50 million of average weekly net assets, with the percentage decreasing incrementally to 0.50 percent of the fund’s average weekly net assets in excess of $100 million. Morgan Stanley is also the fund’s administrator, for which it receives additional fees.

AMMB, of Kuala Lumpur, Malaysia, is a wholly owned subsidiary of AM Bank Group, one of the largest banking groups in Malaysia. It was an investment adviser registered with the SEC from 1987 until February 2008, when it withdrew its registration.

As part of the agreement between the fund, Morgan Stanley and AMMB, Morgan Stanley was supposed to assist AMMB in making the relationship as productive as possible. It was also supposed to give guidance to AMMB on working procedures -- and most to the point -- monitor AMMB’s performance of services, the order said.

The funds board of directors approved AMMB’s fees each year based on Morgan Stanley’s representations, the SEC order said. As a result, it paid $1.845 million to the sub-adviser between 1996 and the end of 2007 for advisory services it did not receive. In early 2008, after the SEC began to look into the fund’s relationship with AMMB, its services were terminated.

Per the service agreement that the fund paid out on for so long, AMMB collected fees at an annual rate of 0.25 percent for the first $50 million of average weekly net assets, 0.15 percent for the next $50 million and 0.10 percent of assets in excess of $100 million.

Every year the contract lasted, AMMB sent a report to Morgan Stanley that falsely claimed it was providing specific research, intelligence, and advice to Morgan Stanley. The purpose of the report, according to the SEC order, was to provide the fund’s board of directors with the information it needed to evaluate the terms of the sub-adviser agreement.

In each of these reports, AMMB said that it provided the following services to Morgan Stanley on behalf of the fund: research on Malaysian companies to identify and recommend stocks for investment; statistical reports to help with investment decisions; market intelligence on local corporate developments; and advice on changes in economic and political conditions in Malaysia. The report also listed personnel and included AMMB’s unaudited financial statements, the order said.

Despite the fact that very little of the information listed above was ever imparted to Morgan Stanley, the investment management company submitted these reports to the fund’s board as it considered renewal of the AMMB advisory agreement.

Morgan Stanley also submitted two compliance reports to the fund and its shareholders that indicated AMMB was providing the advisory services, when actually these services were limited to two minor monthly reports, which Morgan Stanley’s portfolio management team did not even use.

Section 15(c) of the Investment Company Act requires an investment adviser to furnish such information as may reasonably be necessary for its client to evaluate the terms of any contract whereby any person or entity agrees to act as investment adviser.

The SEC’s order stated that Morgan Stanley did not provide The Malaysia Fund’s board with information reasonably necessary for the board to evaluate the nature, quality, and cost of AMMB’s services. Morgan Stanley represented to the board and the funds investors that AMMB was providing advisory services for the benefit of the fund when it was doing no such thing.

Full text:

Wednesday, 28 December 2011

Is Bursa too strict?

PS: NextTrade (Alex Lu) wrote about the same subject:

Article from The Star, December 28, 2011 by Fintan Ng.

Remisiers feel that rigid enforcements may not be good for the market

PETALING JAYA: Market participants, including remisiers, are concerned that Bursa Securities' strict interpretation of the stock exchange rules and regulations may be a deterrent to trading and negatively impact the industry.

They voiced their concerns after Bursa Securities, the regulatory arm of the local bourse, issued seven public reprimands to dealers' representatives and other market participants since July from the six issued in the last two years.

Remisiers Association of Malaysia president Sam Ng Soon Lee told StarBiz that while the number of dealers' representatives that were punished or struck off the register was small, the stricter measures might not bode well for the industry or the market.

His fear stems from the stricter procedures in the provision of liquidity in the equities market. “We're semi-liquidity providers but many are put-off by the tightened measures over volume activity (which may breach stock exchange rules) and this will impact trading volume,” Ng said.

He observed that market regulators must also consider the consequences of interpreting the rules more strictly as this could impact genuine participants whose business would be affected.

Bursa Securities took over the policing of market offences from the Securities Commission in late 2008. In recent months, among the most common offences cited by the regulator were “engaging in irregular/manipulative dealing activities” and others of a trading nature.

According to Bursa Malaysia's website, actions taken against market participants including dealers' representatives between 2009 and 2010, were focused on market breaches such as price manipulation, short selling/intra-day short selling and trades with no change of beneficial ownership.

Persons familiar with the enforcement procedures said the reason why there were more such public reprimands was because this reflected the completion of investigations and the establishment of guilt.
“It takes a year or so for due diligence to be completed,” a person familiar with the procedures said, adding that this included an assessment and investigations in order to establish that offences had been committed.

She said the parties under investigation would be given time to respond before a public reprimand was issued.

However, she said this did not mean that there was a rising trend in punitive actions as remisiers feared.
“I believe Bursa Securities will take action when there are offences committed, these are all under Bursa's business rules so the regulator would mete out whatever punishments it deems appropriate,” she added.

Enforcement actions by Bursa Malaysia can be found here:

Below are the details of the misconduct, as described on Bursa's website. I find the details very specific and worrisome. I find the punishments definitely not too high.

All participants and representatives received [1] a public reprimand, [2] a fine (in the range of RM 10K to 150K) and [3] either were suspended for 18 months or were ordered to strike from the Register as a Dealer Representative (DR).

If I were a remisier I would be very happy that decisive action was taken and that the integrity of their profession was upheld. Surely we don't want a few rotten apples to spoil the whole barrel?

Between August 2010 and December 2011 there are only seven cases reported by Bursa, that does not sound like a lot to me.

Wahid had made a false declaration that monies which were deposited by another client into the trust account of the Participating Organisation (PO) belonged to his client, causing the PO to pay the said monies to his client who was not entitled to the monies.

Wahid admitted that he had acted on the instructions of a third party when he declared that the monies deposited into the PO’s trust account belonged to his client. This subsequently caused the PO’s other client to incur losses.

Wahid’s conduct by falsely declaring the monies which did not belong to his client based on representation by a third party, without proper due diligence, showed failure on his part to carry out his duties efficiently and fairly as a Registered Person.

In respect of Chee’s dealing activities in COCOLND shares on a particular day, Chee had entered false buy orders during the pre-opening phase which were subsequently withdrawn before the market opened for trading and these buy orders had influenced the Theoretical Opening Price (TOP) of COCOLND shares on the day concerned.

Chee’s dealing activities in JETSON-WA and KBUNAI shares over a few trading days involved spurts of false buy or sell orders created by Chee which were subsequently withdrawn. During these spurts of trading activities, Chee had also engaged in the “layering of orders” where she placed orders or a series of buy/sell orders at various price levels which were withdrawn when her sell/buy orders were matched. Chee’s dealing activities in JETSON-WA and KBUNAI shares led to a false impression of heightened interest in the trading of the stocks concerned during the relevant periods.  

Zainol had carried out several sale and purchase transactions in the securities of SURIA and PILECON-WA using a client’s account. The client has denied knowledge of or authorising these transactions. The unauthorised transactions resulted in losses which were disputed by the client.

Zainol had failed to act in the best interest of his client by executing personal trades using his client’s account for his own benefit as admitted by him in a declaration made to the client. It was noted that despite making the said declaration, he had failed to settle the outstanding amount in his client’s account.

Mohd Zahir had carried out numerous unauthorised sale and purchase transactions in the securities of HDISPLAYS and CARLAW over a period of time via two of his clients’ accounts. The unauthorised transactions carried out by him had resulted in substantial contra losses which were disputed by the clients when they were subsequently informed of the losses.

In undertaking these unauthorised dealing activities, Mohd Zahir had colluded with a third party (the identified third party) who was not a person allowed and authorised, in writing, to trade on behalf of these clients. In this regard, instructions to trade via the two clients’ accounts were received from the identified third party and were carried out by Mohd Zahir. The commission generated from these trades was shared between Mohd Zahir and the identified third party.

Mohd Zahir had also colluded with the identified third party to manipulate these two securities by maintaining their prices at certain levels. The manipulative trading activities had impacted the price of these securities during the relevant period.

Mohd Zahir’s misconduct in carrying out these unauthorised trades and participating in unlawful activities, including price manipulation of these securities over a period of time, demonstrated his blatant disregard of his obligations as a responsible DR.

Ruzelman had undertaken dealing activities in the shares of Tracoma involving the execution of orders through the accounts of four clients, which he matched against one another (Cross Trading/Cross Trades). Ruzelman executed numerous trades through these accounts which did not result in any change in the beneficial ownership (NCBO Trades). He had also entered orders at or near the close of the market at prices higher than the prevailing market price which had an impact on the closing price of the shares on several trading days (Marking the Close).

These improper trading activities by Ruzelman, which were irregular/manipulative, spanned over a period of about 5 months (the Relevant Period). His actions resulted in the share price of Tracoma being maintained at a certain range and at unusually high trading volumes. This led to the false/misleading appearance of active trading in the market for the shares of Tracoma (False Trading).

Ruzelman dominated the trading activities of Tracoma shares during the Relevant Period with more than 70% of the trades involving Cross Trades between his clients’ accounts. On certain dates, Ruzelman’s dealing activities in the said securities accounted for over 90% of the total trades done for the day.

There were 31 trading days out of 95 trading days during which Ruzelman had deliberately entered buy orders in his clients’ accounts at a price higher than the previously traded price, resulting in Tracoma shares closing higher than the last done price. The increase in the closing price ranged from 0.91% to 56%.

Yap had carried out amendments to numerous purchase and sale contracts in his clients’ accounts (“1st named clients”) which had day trade gains so that these gains were thereafter transferred to his wife’s account. Through the process of abusing the contract amendment facility in the trading system, Yap had unlawfully transferred/amended profitable trades in the 1st named clients’ accounts to his wife’s account resulting in illegal/unlawful gains in his wife’s account to the disadvantage of the 1st named clients.

Yap had carried out frequent and numerous contract amendments which resulted in a change of the original party to the contract, most of which involved the same clients/common clients thus indicating that the contract amendments carried out were not due to execution error.

The only case against both a company and persons:

Bursa Malaysia Securities Berhad (Bursa Securities) has publicly reprimanded and imposed fines of RM50,000, RM25,000 and RM10,000, respectively, on Macquarie Capital Securities (Malaysia) Sdn Bhd (Macquarie); Thomas Chin Yun Phin (Chin); and Hilton Lee (Lee) for inflating trades in several securities over a period of eight months. Chin and Lee were Macquarie's former Heads of Dealing.

Bursa Securities has ordered to strike off Chin from the Register, if he was still a Registered Person of Bursa Securities. The Exchange has also ordered restrictions on Lee from carrying out activities as a Registered Person, including trading on or through the stock market of Bursa Malaysia, for a period of 18 months from 23 November 2010.

It was found that there was a lack/lapses of supervision in the dealing activities of Macquarie following a series of incidences of Inflated Trades which took place for at least eight months prior to the discovery of the same by Macquarie. In addition, Macquarie failed to ensure the accuracy of information provided to Bursa Securities by not undertaking an independent verification of the details provided to Bursa Securities and had merely relied on representations made by its Heads of Dealing who were the very persons involved in the concerned trades. Arising from these, Macquarie had triggered the provision of Rule 1302.1(1)(a) and breached Rules 404.1(1), 404.1(7)(b)&(c) and 1205.1(4) of the Rules of Bursa Securities (refer to Addendum for the details of the affected Rules).

Tuesday, 27 December 2011

Michael Lewis: Boomerang

"Boomerang" from Michael Lewis will feature in many 2011 book lists. It is a very informative and yet enjoyable book about the 2008/9 crash, through interviews with unlikely people who were caught in it.

"The tsunami of cheap credit that rolled across the planet between 2002 and 2008 was more than a simple financial phenomenon: it was temptation, offering entire societies the chance to reveal aspects of their characters they could not normally afford to indulge.

Icelanders wanted to stop fishing and become investment bankers. The Greeks wanted to turn their country into a piƱata stuffed with cash and allow as many citizens as possible to take a whack at it. The Germans wanted to be even more German; the Irish wanted to stop being Irish.

Michael Lewis's investigation of bubbles beyond our shores is so brilliantly, sadly hilarious that it leads the American reader to a comfortable complacency: oh, those foolish foreigners. But when he turns a merciless eye on California and Washington, DC, we see that the narrative is a trap baited with humor, and we understand the reckoning that awaits the greatest and greediest of debtor nations."

The good news is that the book is simply a collection of the columns of Lewis in Vanity Fair, so readers don't need to buy the book:

Sunday, 25 December 2011

YTL: why so stingy?

(lightly edited version)

On December 19, 2011 YTL Cement was suspended due to an announcement. Would Christmas come early for its shareholders? Unfortunately not, more like a visit from Scrooge.

YTL Cement announced it has received a take over notice from YTL Corp. The take-over would not be in cash, but through an exchange of YTL Corp shares, in a ratio of 1 for 3.17.

Some links to relevant articles, by far the most interesting one is the first from The Edge Malaysia:

From The Edge Malaysia:

From The Star:

"RHB Research Institute said the offer provided no premium for YTL Cement shareholders, while the timing was less than perfect. “The offer lacks an acquisition premium above the existing share price suggests that YTL Corp is not going all-out to privatise YTL Cement. “We also find the timing of this exercise less than ideal as we have generally expected that YTL Corp would only consider privatising YTL Cement after November 2012 when the existing Iculs (97% held by YTL Corp and related parties) can be converted into YTL Cement shares at a better conversion rate compared to now,” RHB Research said."

Unfortunately, this is one of those "infamous" General Offers with delisting and mandatory acquisition threats:

Rough data per share based on the last full year results (EPS and DPS) and last quarterly (NTA):

YTL Cement
Share price: RM 4.50
NTA:         RM 4.76
EPS:         RM 0.47
DPS:         RM 0.13

YTL Corporation
Share price: RM 1.42
NTA:         RM 1.20
EPS:         RM 0.12
DPS:         RM 0.02

The share of YTL Cement is trading at a discount of 5% to its Net Assets Value, the Price Earnings Ratio is only 9.6 and the dividend yield is a reasonable 2.9%. Its last few years of results have been outstanding, steadily rising.

YTL Corporation however is trading at a premium of 18% to its Net Assets Value, The Price Earnings Ration is higher at 11.8 and the dividend yield is only 1.4%. Results have been steadily rising, but less so than YTL Cement.

From any valuation point of view, YTL Cement is clearly the cheaper of the two, in other words, the more favorable to own.

It comes therefore as a huge surprise that YTL Corporation is not prepared to offer any premium in this deal to YTL Cement shareholders. The only criteria in their advantage would be increased liquidity, but this looks not very important. According to the last year report of YTL Cement 97% of the shareholders own 100,000 shares or less, 88% even 10,000 shares or less. It should be relatively easy to dispose of their shares in the open market for those small shareholders, so liquidity is not an issue.

Advantage of this deal:
  • More liquidity (not relevant for all small shareholders, the huge majority)

Disadvantages of this deal:
  • From a valuation point of view, YTL Cement looks like a clearly better choice than YTL Corporation
  • Minority Shareholders invested in YTL Cement, not in YTL Corporation, if they are forced to switch surely there should be some premium as a reward
  • Minority Shareholders will end up with odd lots, due to the ratio of 3.17 YTL Corp share for each 1 YTL Cement share, disposing of them will incur extra costs and effort
  • YTL Cement shareholders will receive less dividend yield from their YTL Corp shares, if they want to switch to other shares yielding a higher dividend, they will incur extra costs and effort

It therefore doesn't look like a good deal at all for Minority Investors of YTL Cement.

Unfortunately, in this kind of excercise Minority Investors hardly stand a chance to fight it.

Filing a complaint with the authorities (SC and/or BM) leads to absolutely nothing; the complaint will end up in a drawer for three years, and will then be dealt with in a very unsatisfactory and biased way. For the diehard optimists out there (to which group I also once belonged):

Contacting the MSWG is a possibility, they might be able to get some support in the newspapers, which could put some pressure on YTL Corporation to come with a better offer.

The best chance is if some larger minority shareholders are prepared to put up a fight. I don't expect anything from PNB, EPF, ValueCap etc (they had all the chances in the past to be active, vocal or to vote against deals and have blown them), but may be the Public unit trusts and a few foreign fund managers are prepared to try to get a better, more fair deal for minority investors.

I am simply baffled by the way this exercise is done, YTL claims it has excellent Corporate Governance (CG) culture on its website. But it is exactly in these exercises that good CG should show. Paying a premium of say 10-20% would be peanuts for YTL Corporation, while it would be a nice and helpful gesture towards YTL Cement shareholders, creating goodwill for all in the process.

This might be the last Malaysian corporate deal of 2011, and it is definetely not a good way to end the year.

I am hoping for some clear improvements in 2012.

Saturday, 24 December 2011

Friday, 23 December 2011

Minority shareholder sues SC

The year is almost over, but a nice surprise:

"Minority shareholder sues SC over Sime’s E&O offer waiver".

I have blogged a few times about this issue before:

I never liked this deal from the start. I find it simply unfair why certain persons receive RM 2.30 per share and others only the market price (that time around RM 1.59 per share). A share is a share, there is simply no difference at all.

I also never liked the way the persons involved talked about this deal (in interviews in The Edge). They did not one time mention the rights of minority shareholders, as if they simply didn't exist. It came across as very arrogant.

I also didn't like how Sime Darby announced two directors for E&O on November 29, 2011, one month after the SC judged about Sime Darby not having to make a General Offer for all shares. They first want to show they don't have any control, but after the judgment they "silently slipped in two directors".

I also didn't like the logic behind the case, if RM 2.30 is such a good price for a share, why not make a General Offer for all shares? And if it is not a good price, why bother, why not just buy shares at the market for a much lower price?

Together with the remaining shares of the people involved in the deal Sime Darby has clearly control over the company. Since those people received very high prices for the shares they sold to Sime Darby, they might side with Sime Darby and vote in a block.

I also didn't like the way the Securities Commission (SC) explained their decision, it is a complicated matter that deserved more explanation.

Both the SC and Bursa Malaysia have a horrible track record regarding acting or voting in favour of minority shareholders against blue chip companies and well known majority shareholders. I don't know a single case where they actually came up for the interests of the minority shareholders.

The only things they have done recently is put some less known directors in jail, increased the fines and punished some insider trading (for very low amounts, without admitting guilt, in cases that were many years old). In itself good, and an clear improvement compared to the past, but still very far away from an ideal situation for Minority Shareholders.

When I asked SC & BM for a single "independent" advice (given in important decisions like Related Party Transactions and Privitizations) where the advise went against the majority shareholder, it was very quiet, they could not come with a single example. Needless to say, not a single "independent" advisor is ever punished for his biased advice.

The sad things is, I think there are good people inside SC and BM. SC and BM also really want to promote Malaysia as an international destination for foreign fund managers. But eventually, both SC and BM will always side with the powers that be. Completely in contrast with their own mission statement:

Malaysia still has a very long way to go. But may be this case can bring some much needed realism back with the authorities. I hope the minority shareholder will win, that will be an encouragement for others to follow suit. And may be one day SC & BM are really changing for the better. It is long overdue, and I can talk from my own experience.

"Minority shareholder sues SC over Sime’s E&O offer waiver"

From The Malaysian Insider, December 23, 2011.

KUALA LUMPUR, Dec 23 — A minority shareholder of E&O Bhd is suing the Securities Commission (SC) for failing to compel Sime Darby Bhd to make a general offer for all the shares in the property developer after the conglomerate acquired a 30 per cent stake in August for RM776 million.

Singapore’s The Straits Times reported today that Michael Chow Keat Thye, a minority shareholder of E&O, is seeking to overturn the waiver granted to Sime Darby by the industry regulator, which he maintains was “irrational and one which no reasonable body would have reached”.

The newspaper described the legal challenge as a rare display of minority shareholder activism in corporate Malaysia with far-reaching implications.

“Should Mr Chow succeed in his suit, Sime Darby would be compelled to make a general offer for the E&O shares it does not already own, an exercise that would cost the plantation-based conglomerate an additional RM2.6 billion and put a major strain on its internal financial position,” the newspaper said.

Chow’s lawyer, Datuk Shafee Abdullah, told The Straits Times that the High Court has decided there are legal grounds to review the SC’s decision on the E&O deal.

“We have obtained leave from the court to seek a judicial review and we will be filing our papers this week on the SC,” he said in a telephone interview with the newspaper. Shafee added that the SC would then have to refute the grounds raised by his client in the suit before a High Court judge.

“Under judicial reviews, cases are usually heard quickly. So we expect to be in court soon,” said Shafee.

When contacted, an SC spokesman told The Straits Times: “SC is aware of the application and will oppose the application when the matter comes up for hearing.”

Sime Darby purchased its controlling 30 per cent interest from three major shareholders, including Singapore’s GK Goh Holdings, at the end of August in a deal that valued E&O shares at RM2.30 apiece.

The purchase price represented a 60 per cent premium over the value of the shares in the company on the open market when the deal was announced.

The newspaper also said the minority shareholder suit is also likely to stoke growing concerns over corporate governance issues in Malaysia and renew criticisms against the SC over its supervision of the capital markets.

The E&O deal had triggered unease over the widely perceived coddling by the SC of large state-controlled companies at the expense of minority shareholders when exercising its authority on corporate takeovers.

A similar controversy is brewing in the proposed takeover of a commanding 43 per cent interest in national car manufacturer Proton by conglomerate DRB-Hicom, a group controlled by the politically well-connected Tan Sri Syed Mokhtar Albukhary, the paper added.

Last week, former prime minister Tun Dr Mahathir Mohamad, who is Proton’s adviser, publicly gave his backing for DRB-Hicom’s proposal to buy the stake from state-owned Khazanah Nasional and suggested that the deal should be structured in a way that there was no need for a general offer for publicly listed Proton.

On a separate level, the legal suit could renew debate over the SC’s handling of alleged irregular trading activities, the newspaper reported. The E&O deal has put SC chairman Tan Sri Zarinah Anwar in a tight spot as her husband, who is also the E&O chairman, raised his personal stock holdings in the company just weeks before Sime Darby announced its proposed acquisition of the 30 per cent interest in the company.

In previous queries with regard to the trading in E&O shares, a spokesman for the watchdog agency said it was “examining all transactions in the Sime Darby-E&O deal”.

“The SC’s investigation into the trading of E&O stocks is still ongoing,” he added.

Malaysia’s takeover rules stipulate that any party that acquires more than a 33 per cent interest in a publicly listed entity must carry out a general offer for the remaining shares. A general offer can also be triggered if a new party buys less than 33 per cent but secures management control of the target company.

Sime Darby acquired its 30 per cent interest from three of E&O’s main shareholders: businessman Terry Tham Ka Hon, GK Goh Holdings and a group of investors led by businessman Tan Sri Wan Azmi Wan Hamzah.

Sime Darby’s block is below 33 per cent, while the collective shareholding of the three main shareholders of 41.7 per cent was cut to 11.5 per cent under the deal. Six weeks after Sime Darby’s purchase, the SC ruled that the plantation-based conglomerate did not have to make a general offer.

Chow is arguing otherwise and is seeking a court ruling to force the SC to revoke the waiver for a general offer. In his affidavit, he contended that the premium Sime Darby paid for the E&O block was clearly to obtain control of the company.

“If obtaining control of the company (E&O) was not the basis, motive or reason for Sime Darby’s acquisition, then it would have acquired the company’s shares over a period of time in the open market at a considerably lower price,” he stated in his pleadings to the High Court.

He also contended that Sime Darby’s equity interest “eclipses the combined shareholding of the next 30 biggest stockholders” and any denial by the conglomerate that it has a controlling stake in E&O would be “absurd”.

To further buttress his claims, he highlighted a collaboration agreement between Sime Darby and E&O.

“There is no doubt that the collaboration agreement was offered by the vendors as demanded by Sime Darby as an inducement or sweetener for the payment of the substantial premium demanded by the vendors,” he said.

In his affidavit, Chow noted that E&O had 20,302 recorded stockholders in the company.

“Except for the three privileged vendors who sold their controlling stake in the company to Sime Darby and managed to reap more than a quarter billion ringgit in premium, the rest of the 20,299 stockholders suffered a collective loss of more than RM678 million,” he stated in his affidavit.

Saturday, 17 December 2011

AirAsia to MAS: Your Loss is my Gain

Received the following research report from a friend:

Your loss is my gain
Winds of change are swirling in the Malaysian aviation industry. AirAsia yesterday announced frequency additions on routes left behind by MAS/Firefly. In the process, AirAsia’s market share will increase at the expense of the national carrier, and yields are likely to improve. We maintain our Outperform rating and target CY13 multiple of 7x. AirAsia is likely to see strong earnings growth in 2012 because the competitive environment in Malaysia has become more benign. Its venture into Japan and Philippines will drive growth as well. 

What Happened
AirAsia announced yesterday that it will, from February 2012, increase frequencies from Kuala Lumpur to Kota Kinabalu (KK) and Sandakan, as well as from KK to Hong Kong, partially taking over capacity that has been or will be abandoned by MAS and Firefly. It also announced expected long-haul route cuts to Rome, Johannesburg, Cape Town, Buenos Aires, Dubai, Damman and Karachi, and its pullout from short-haul routes like the daily Langkawi-Penang-Singapore flights and KL-Surabaya. MAS’s route cuts will take effect in January 2012.

What We Think
The developments are in the direction of our expectations. The announcements of frequency additions by AirAsia and route removals by MAS are some of the CCF’s most tangible benefits to AirAsia. AirAsia will continue to garner more market share next year as it fills part of the void left behind by the capacity reductions. Its yields will also improve following the removal of Firefly as an LCC competitor and MAS’s selective pullout of routes to East Malaysia. Apart from that, MAS is likely to stop plying international routes from its KK hub, which are currently not profitable. This is an excellent opportunity for AirAsia to expand further. Given its much lower cost base, it is likely to be able to earn profits from these routes. 

What You Should Do
This is definitely the time to load up on AirAsia. We have a high conviction Outperform call on this stock, which is one of our top picks for Malaysia in 2012. We think this airline will do very well next year despite the  high jet fuel price. The listing of its Thai and Indonesia associate next year will further catalyse the stock.

MAS/Firefly route cuts provide opportunities to AirAsia
AirAsia said during its 3Q11 results conference call last month that it was adding two leased A320s to its Malaysia fleet in 4Q on top of the three new aircraft deliveries that Malaysia will be allocated this year. The reason for this move has now been made very clear. AirAsia is using the opportunity provided by the withdrawal of MAS and Firefly from several domestic and regional routes to expand its schedule and network capacity. In other words, AirAsia is expanding on the back of opportunities left behind by MAS and Firefly, by at least partially restoring the capacity removed by the two latter airlines and taking the rest of the benefits from potentially higher ticket prices/yields since net capacity on the relevant routes will still be reduced as the capacity withdrawals exceed capacity additions by a large margin.

Firefly has stopped its domestic LCC business; AirAsia takes advantage by expanding frequencies to KK and Sandakan
In mid-November 2011, Firefly stopped selling tickets on the 189-seater B737-800 planes on routes between KL and KK, Kuching, Sandakan and Sibu. Not coincidentally, AirAsia yesterday announced that it will from 6 February 2012 increase its KL-KK flights from 13 to 14 times/day and step up its KL-Sandakan flights from two to three times/day. This shows that AirAsia is taking over some of the capacity abandoned by Firefly. Additional frequencies by AirAsia to Kuching and Sibu cannot be ruled out.

AirAsia planning increase in KK-HK frequencies in anticipation of MAS withdrawal
MAS has not announced definite cuts to its international routes from the KK hub but earlier indicated that these are on the chopping board. In anticipation of the MAS move, AirAsia will from 21 February 2012 increase its KK-Hong Kong flights from seven times/week (once daily) to 10 times/week, a net increase of 24 one-way flights/month. MAS is currently flying 56 times/month on the KK-HK route. Hence, if MAS abandons the KK-HK route altogether, there will be a net 15% reduction of capacity (Dragonair also serves the route).

From KK, AirAsia also flies to Taipei and Shenzhen, and may benefit from reduced competition to Taipei if MAS pulls out. AirAsia does not currently fly from KK to Seoul, Perth, Tokyo or Osaka. However, if MAS cancels its flights from KK to the latter four destinations, it may open up new route opportunities for AirAsia.

MAS may withdraw from KL-Tawau/Sibu, potentially leaving AirAsia as the monopoly operator on the routes 
We believe that MAS is also likely to announce in the near future reductions to its West Malaysia to East Malaysia crossings. While we do not expect MAS to reduce frequencies on truck routes like KL-KK/Kuching, it could cut less profitable routes like KL-Tawau/Sibu. The airline currently flies 11 times/week on KL-Tawau while AirAsia flies 21 times/week. On KL-Sibu, it flies 14 times/week while AirAsia flies 35 times/week. Hence, AirAsia dominates the capacity on these two routes and the domination could turn into a monopoly if MAS axes these routes. We believe MAS will retain KL-Miri/Labuan/Bintulu as there is likely to be more business traffic on these routes and average ticket pricing should be higher.

To me this sounds like really bad news, [1] from a corporate governance point of view (Tony Fernandes being the CEO of AirAsia, director of AirAsiaX and director of MAS, a clear conflict of interest), [2] for the minority investors of MAS (it seems from the above report that MAS gets the short end of the stick), and [3] for the consumers (on many routes, a duopoly is turned into a monopoly).

The writer of the report advises to load up on AirAsia shares. I will not give investment advice to the readers of my blog, but would like to point out that there are many (serious) corporate governance and accounting issues regarding AirAsia:

The readers should make their own decision.

newspaper articles December 17, 2011

A few interesting articles today:

The pride of Padini

An issue which has caught the attention of Padini's fund managers, analysts, shareholders, and bankers is its buildup of inventory. Chan reasons that they bought a lot on purpose to secure the supplies.
“We are not stuck with the stocks. Most are finished basic items, not the trendy stuff, so they will be saleable. In view of China's current situation, where the factories are shutting down and lowering their capacity, you will find it harder to buy the quantities you want.”

The next two quarters will be interesting to see if they can indeed reduce the inventory significantly.


Corruption and inflation – how they affect the economy

It is obvious from the above that the economic impacts of grand corruption, systemic corruption, and syndicated corruption can be significant because of their scale. One would expect them to have a larger economic impact, e.g. inflationary pressures, when compared to petty corruption, individual corruption or non-syndicated corruption.

I always felt that inflation has been understated in Malaysia, hard to believe it is only a few percent per year while so many items have doubled in price over the last say ten years.

Bursa IPO pipeline to remain healthy

Bursa chief executive officer (CEO) Datuk Tajuddin Atan said it was difficult to say if the exchange would be able to top this year’s number, even though the local market has been relatively resilient, in the face of stormy markets globally with the European debt crisis deepening.

“Hopefully (we can), but next year is challenging ... very, very challenging. You know for a fact that markets are soft. But I think, what we’ve seen here is that our market is resilient.

So, consistently above 20 is still good. Above 20 is a good number for an exchange of our size,” he told Business Times.

At the time of the interview, Bursa was in the midst of crunching out its listing target number for 2012.

Still, Tajuddin claimed he is not overly concerned about numbers, per se, and insists there continues to be “strong pipeline” of companies that could list when the time is right.

“I’m more interested in a consistent pipeline and in the quality of companies that come in,” he remarked.

To me the only thing that counts is quality. If there are ten not so great IPO candidates, then zero should be listed.

I get the impression that SC & BM are filtering IPO candidates (somewhat) better than before, but I am still very worried about letting Chinese companies in. I think Bursa Malaysia will get their fingers burned on them. Time will tell.

Friday, 16 December 2011

Investor Protection in Malaysia 4th best in the world .....?

The Securities Commission published a new Capital Market Brochure:

Publications of this kind are really self-serving. The time spent on writing them is better used in much needed enforcement, which is often so disappointing.

On page 19, the usual boasting:

Yes, the regulatory framework is comprehensive but without proper enforcement, protection for investors is (very) weak. Malaysia still has a long way to go.

On page 24:

I don't agree, I think that the fact that the index held up quite well had more to do with [1] the limited amount of foreigners who invested in Malaysia and [2] support by the local Government Linked Funds like PNB and EPF.

On page 26 I almost fell out of my chair:

I located the report about Malaysia, and indeed, it has a score of 8.7, higher than the US, UK, Canada, Australia etc.

This is about the weirdest research I have ever seen in my life. It gets even stranger, the three countries above Malaysia are New Zeeland (normal), Singapore (strange) and Hong Kong (strange). Both Singapore and Hong Kong are not exactly known for their excellent investor protection either, despite their high GDP per capita.

The criteria that are used are listed here:

It turns out that investor protection is measured in only three, very limited categories:

Disclosure: I have to admit, this is pretty good in Malaysia, unfortunately, with poor enforcement it is of limited use.

Director liability: the high score of Malaysia in this category is simply unbelievable. The question is if issues are enforced on a regular basis, within a reasonable time. And the answer is simply: No.

Ease of shareholders suits: how can Malaysia score well in this category?

The SC knows that a lot more is needed for investor protection: active enforcement, a regulatory body that ensures that brochures are balanced, that independent advisers are truly independent, that perpetrators (Directors, Auditors, Advisers, etc) are caught without fear and favour, that complaints are handled in a fair and efficient way, a properly operating SSM, etc, etc, etc. All area's where Malaysia is clearly lacking. And yet they still use this hugely biased report that gives the completely wrong impression.

And finally page 61:

I am a foreign investor and completely disagree with the above.

Dan Loeb's Notoriously Explicit Letters To CEOs

Outspoken hedge fund manager Dan Loeb, the founder of Third Point LLC, has a reputation for his sharp tongue and strongly worded letters to companies. This week the Third Point chief, whose fund owns a 5% stake in Yahoo!, sent a letter to the board of directors about his discontent with what's been happening at the company. In his letters, Loeb often calls the CEOs the worst he's ever seen and accuses them of "tooling around."  But perhaps the best part is he usually signs them "Very truly yours, Daniel S. Loeb." We've compiled some of his best gems he's sent to company execs in the past.

Read more:

Do not confuse our $22 million stake as a vote of confidence in the Company's senior management or its Board of Directors. On the contrary, it is our view that your record in management, acquisitions and corporate governance is among the worst that we have witnessed in our investment career.

The Company's proxy statements provides us with our first indication that a "good ol' boy" ("GOB") set of ethics prevails at the Company rather than standards dictated by fairness and good judgment.  First, the Company employs the CEO's daughter, Denise, and her husband David Saylor, who received total compensation of $238,776 in 2003

I was not sure whether it was his relation with his father-in-law or the $238,776 salary that affords him the opportunity to work on his golf game during business hours.

the fact that Sturm and Collins could potentially be tooling around in a luxurious business jet, possibly sipping Cristal Champagne cocktails at shareholder expense.

loudly informed Dr. Verbrugge that I was flunking him as a director of the Company and that I planned to expel him from the board as soon as practicable, before unilaterally terminating the conversation.

a substantial majority of the revenues of this business were derived from processing charges for adult pornography sites on the internet....

I must wonder how in this day and age the Company's Board of Directors has not held you and Paul Maier responsible for your respective failures and shown you both the door long ago - accompanied by a well worn boot planted in the backside.

the apparent lack of financial controls, the consistently disappointing results and the abysmal investor relations,

Sadly, your ineptitude is not limited to your failure to communicate with bond and unit holders.  A review of your record reveals years of destruction and strategic blunders which have led us to dub you one of the most dangerous and incompetent executives in America.

I was amused to learn, in the course of our investigation, that at Cornell University there is an "Irik Sevin Scholarship." One can only pity the poor student who suffers the indignity of attaching your name to his academic record.

Furthermore, given the magnitude of your salary, perhaps you can explain why the Company paid $41,153 for your professional fees in 2004 and why the Company is paying $9,328 for personal use of company owned vehicles. 

By this clearly stated policy, how is it possible that you selected your elderly 78-year old mom to serve on the Company's Board of Directors and as a full-time employee providing employee and unitholder services?

It is time for you to step down from your role as CEO and director so that you can do what you do best: retreat to your waterfront mansion in the Hamptons where you can play tennis and hobnob with your fellow socialites

Your track record is long and meager, and it is time for change. Accordingly, we demand that the Board immediately initiate a process to sell the Company in whole or several parts to the highest bidder or bidders.

I think we could use a dose of this in Malaysia, at least it would stir things up a bit.

Thursday, 15 December 2011

Illegal capital flight dwarves capital inflows

Scary story in Malaysian Insider of today:

  • Malaysia lost RM150 billion in illicit outflows in 2009, the fourth highest in the developing world
  • Malaysia has lost a total of RM1.08 trillion (RM 1,080,000,000,000 or about RM 40,000 for every Malaysian) in illicit financial outflows over the first decade of the century
  • The volume of illegal capital flight from Malaysia has come to dwarf legitimate capital inflows into the country in recent years

The numbers mentioned are simply unbelievable large. I hope Bank Negara can soon come with some answers:

  • Are the above numbers (roughly) correct?
  • Where does all this money come from, who are the perpetrators?
  • What is being done to rectify this situation?
  • What is the effect on the Malaysian economy?

The original report can be found here:

"Financial flows from Malaysia have more than tripled from $22.2 billion in 2000 to $68.2 billion in 2008. This growth rate, seen in few Asian countries, may be a result of significant governance issues affecting both public and private sectors."

Wednesday, 14 December 2011

Proton, possible insider trading?

The share price of Proton went hugely up especially in the middle of November and the first days of December. So much that on December 6, 2011 the trading of the shares was halted:

"Kindly be advised that trading in the above Company's securities has been halted with effect from 10.20 a.m., Tuesday, 6 December 2011. Trading in the securities will resume with effect from 11.20 a.m., Tuesday, 6 December 2011."

The company made the following standard announcement, regarding unusual market activity:

"We refer to Bursa Malaysia's telephone query on Monday, 5 December 2011 on unusual market activity in relation to PROTON's shares and the Article entitled "Khazanah to invite bids for PROTON" appearing on page 10 of the Edge (week of 5 December 2011 - 11 December 2011).

The Board of Directors of PROTON wishes to clarify that after making due enquiry with the Board of Directors and major shareholders, the Company is not aware of any reason for the unusual market activity in the shares of the Company recently, and further, that there is no material corporate development not previously disclosed. The focus of Management is to improve the performance of the Company and business is as usual.

The Company hereby undertakes to make all necessary disclosures to Bursa Malaysia in accordance with the provisions of the Main Market Listing Requirements."

But on December 12, 2011 newspaper articles appeared in The Star and New Straits Times

And Proton made the following announcement:

"Reference is drawn to the following Articles appearing in the newspapers on Monday, 12 December 2011:

1. "DRB-Hicom to buy into Proton" appearing on Page 6 of the New Straits Times; and
2. "Khazanah selling Proton stake to DRB-HICOM" appearing on Page 1 (Star Biz), of The Star.

The Board of Directors of PROTON Holdings Berhad wishes to inform that after making due enquiry with the Major Shareholder, Khazanah Nasional Berhad ("Khazanah") has informed that, in its normal course of business, it regularly receives proposals, enquiries and expressions of interest in relation to its various investments and companies where it has interest in, including PROTON. Khazanah will make necessary disclosure at the appropriate time.

We wish to reiterate that in the meantime, business is as usual at PROTON and the Company once again undertakes to make all necessary disclosure to Bursa Malaysia in accordance with the provisions of the Main Market Listing Requirements."

The text is clearly different from the announcement on December 6, 2011.

Another article from Business Times:

It will be interesting to follow this case. If indeed there will be a corporate development around Proton, then the possibility of insider trading looks real. And the authorities are still busy with the MAS/AirAsia insider trading case.

Claire Barnes and the Apollo Asia Fund

Claire Barnes is the fund manager of the Apollo Asia Fund, one of the best (if not the best) Asian small-cap value funds. Her bio:

The fund, based in Malaysia, is recommended by Marc Faber, about who I wrote in the past:

Here is the chart of the Apollo Asia Fund with the impressive out-performance of the relevant index:

Claire writes a blog on her website, sometimes a bit infrequent, but always highly interesting:

This time she writes about two Malaysian issues:

[1] "Padini Holdings is holding its AGM on Friday 23rd December. We have notified the company that we will be voting against the reappointment of the auditor and reelection of the newly-appointed director, and would gladly share our reasoning with interested investors."

Padini is an interesting company, one of the rare Malaysian branded fashion and footwear companies (another well known one is Bonia). It has a very strong balance sheet with lots of cash and relatively low loans. But the worrisome part is the high inventory of more than RM 214 million which has been increasing quite fast lately (exactly one year ago it was only RM 98 million). Padini has tried to increase its exports, with limited success.

[2] The Securities Commission is soliciting feedback on whether poll voting should be mandatory (public consultation paper on 'independent chairman and voting by poll', responses due by 15 Dec). Our answer is yes, and the results should be reported. David Webb lucidly explained why, back in 2003: '... you don't have to win each vote to make your point, but there's no point in standing up if you won't be counted. If, for example, the majority of independent shareholders voted against the reappointment of an independent director, but the controlling shareholder used his 51% shareholding to re-elect his friend, then the market should still be informed of the outcome and the level of the opposition... We cannot even begin to contemplate management accountability in Hong Kong without transparency in the voting process.' The long campaign by explains the case for poll voting in detail. Malaysia should go for it.

I hope that the advice of Claire Barnes and David Webb is followed by the SC.

Tuesday, 13 December 2011

Withdrawal of complaints with SC & BM

Letter to the Securities Commission (SC) and Bursa Malaysia (BM):

"Dear Sir/Madam,

In light of the extremely disappointing performance of the authorities (most notably Bursa Malaysia) on my complaints regarding Bumi Armada and Maybulk/POSH, not seeing even a sliver of justice being done after stonewalling me in both cases for a full three years, with Bursa Malaysia being an interested party having approved all the documents in the first place and now having to check their own work (and thus not surprisingly approving it), I herewith withdraw all my complaints with SC/BM.

It is better to have no justice at all and it being painfully obvious, than to get a half-baked effort after 3 full years that would not even count as an slap on the wrist and some people boasting of actually having done their job. 

I also don’t have the energy or the time to be involved in a process that leads to absolute nowhere.

Regards, M.A. Wind"

I have written in the past about the disappointing handling of complaints:

I wish I had listened to my Malaysian friends who told me long time ago already not to bother with filing of complaints as it is simply of no use at all. I learned my lesson, the hard way. It is a sad state of affairs for Malaysia, and it really pains me. I hope that one day things have improved markedly, but that day will unfortunately not be anytime soon is my guess. 

Friday, 9 December 2011

Tony Fernandes and AirAsia: too much controversy?

Tony Fernandes and AirAsia are a lot in the news lately, and not always in a positive way I am afraid. I am all for transparency, but hanging ones dirty laundry outside is something else.

A few observations:

[1] I really like Tony's entrepreneurial spirit, my company invests in start-up companies in Malaysia and Singapore, and his hands-on approach and flair is exactly one of the key features we are looking for in founders. However, when a company grows, these might not always be the best traits.

In The Edge Singapore of December 5, 2011 is an interview with Nitin Pangarkar, associate professor at the National University of Singapore and writer of "High Performance Companies: Successful Strategies from the World's Top Achievers". From this interview: "For companies and organisations to perform, very often, leadership plays the most critical and visible role. Big-name CEO's who have turned around their companies or played a big part in their performance attract lots of attention and fawning and, in some instances, are treated as demigods. Some of these notable names include GE's Jack Welch, Virgin Group's Sir Richard Branson and, closer to home, Tony Fernandes of AirAsia. Many want to know what their secret is. Pangarkar, however, has his reservations. "I honestly don't like celebrity CEO's; I like CEO's who share the credit," he says."

[2] Regarding Tony Fernandes being the CEO of AirAsia and also being a director of MAS (from a Corporate Governance point of view an unsatisfactory situation), I found the following that is of interest.

"A Guide to Corporate Governance in Malaysia", a publication from CCH, pages 219 and 220:

"Normally, a director is not in breach of duty merely by holding directorships in other companies. However, such a director may be liable for breach of duty if the companies are competing companies and he places himself in a position where the duties owed to each of the companies conflict.
Nevertheless, s 131(5) of CA (Companies Act) 1965 requires a director to disclose at a director's meeting any office or any property held that may directly or indirectly create a conflict of his duties or interests as a director in the first company. Further, s 132(2) requires of a company to obtain the consent or ratification at a general meeting in order to engage in business which is in competition with the company.
Note that the principle that a person can be director of two competing companies does not apply to executive directors. They cannot be on the boards of competing companies."

To me this is pretty clear language.

[3] Air Asia announced its 3rd quarter results two weeks ago and they were quite disappointing compared to the year before. But for me rather shocking was the following list of material related party transactions:

AirAsia X is paying less than RM 5 million to AirAsia for all its services, only 21% of the amount of last year, while Air Asia X surely has been growing in size? I find this very strange. I have written about the unsatisfactory company structure of AirAsia and its associated companies which results in huge Related Party Transactions. Something that is simply bad from a Corporate Governance point of view.

[4] But may be the most worrying about AirAsia is the enormous amount of Capital Commitments, more than RM 57,000,000,000.00.

This relates to about RM 10,000 for every single Malaysian family of five persons. What will happen if things don't go well, if a major event happened, if competition increased, if a very severe recession would hit, etc, etc, etc. Are in that case the Malaysian taxpayers on the hook, as so often has been the case? AirAsia will most likely be deemed to be too big to fail.

Ze Moola wrote about this issue on his blog: