Monday, 30 January 2012

Worst business move ever?

Ronald Wayne, the "third investor in Apple" sold his 10% share of the company for USD 1,500. The investment would now have been worth RM 46,000,000,000!

"US pensioner Ronald Wayne gave up £15bn slice of Apple" by Nick Allen.
It could rank among the worst business moves of all time. In 1976, Ronald Wayne decided to pull out of his friends' computer company after two weeks, fearing he could be saddled with debts if it failed.

After drawing up the original contract for the firm and designing its logo, he withdrew his 10 per cent stake and walked away with $1,500 (£975).

Speaking from his home in a remote desert town near Death Valley, Nevada, the little known "third founder" of electronics giant Apple said he has no regrets.

Mr Wayne, 75, relinquished a stake that would now be worth around £15 billion and lives on a state pension and deals in old stamps and coins to supplement his income.


Twist in E&O takeover saga

(updated version)

From The Straits Times (Singapore), January 30, 2012, written by Leslie Lopez. A long article that is only available for subscribers, some snippets:

  • In affidavits filled in the High court, The Securities Commission stated that Justice Tuan Abang Iskandar Abang Hashim was previously employed by the agency and that "in the circumstances, there is a real danger of bias prevalent in so far as the present dispute is concerned"
  • The yet-to-be-published court filings made available to The Straits Times represent the first responses by the Securities Commission to a closely followed suit filed in December by a minority shareholder of E&O.
  • The waiver granted to Sime Darby has stoked criticism of the coddling of listed state-controlled entitities that dominate the Malaysian stock exchange at the expense of minority shareholders.
  • The legal dispute is also offering a rare peek into the inner workings of the Securities Commission.
  • According to the affidavit signed by Datuk Francis Tan Leh Kiah, the second-most senior commissioner in the Securities Commission, Sime Darby's purchase of the stake in E&O underwent two layers of scrutiny to determine whether a general offer should be carried out.
  • A task force comprising senior officers from the agency's corporate finance and legal divisions examined the transaction and considered two key elements in the deal that could rise to a mandatory general offer obligation on Sime Darby. Mr. Tan said the task force ruled that the three groups which sold the blocks of E&O shares to Sime Darby did not collectively control the company and the disposal did not trigger a general offer.
  • But on the second issue, the task force was of the view that a new "concert party" has been created between Sime Darby and E&O's managing director Terry Tham, who jointly controlled more than 33 per cent in the property concern after the deal. Thus, a general offer obligation had been triggered, Mr. Tan's affidavit noted.
  • The recommendations were then forwarded to the agency's final ruling authority. Mr. Tan said that a three-member committee unanimously agreed with the recommendation from the task force that the three groups were not acting in concert and did not have control of the company.
  • But the committee in "a majority decision" ruled that Sime Darby and Datuk Tham were not acting in concert and a general offer obligation did not arise.

Update: the Malaysian newspapers still haven't picked up the story, but The Malaysian Insider has:

"SC task force found Sime Darby triggered E&O general offer"

Sunday, 29 January 2012

YTL: why so stingy? (2)

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

A previous blog about this issue can be found here:

MSWG wrote about the same issue in in their newsletter January 12, 2012:

In the mean time, OSK has issued their independent advice:

With the risk of repeating myself, it is not very good, I miss any critical remarks whatsoever about the issues at hand. 

Those issues are:
  • YTL Corp's shares are more liquid, however, OSK fails to notice that 97% of the shareholders hold 100,000 or less shares which can easily be sold in the market (monthly turnover is on average more than 3 million shares);
  • YTL Corp is a diversified conglomerate with its earnings dominated by the utilities segment, but investors of YTL Cement knew that when they bought their shares, and they still preferred them above the YTL Corp's shares;
  • However, there is no cash alternative, making the offer less attractive;
  • YTL Cement shareholders will end up with odd lots;
  • The average market price of YTL Corp and YTL Cement over the last six months shows that there is no premium whatsoever in the offer, while from a valuation point YTL Cement clearly looks to offer somewhat better value from an earnings, dividend and assets point of view;
  • If YTL Cement shareholders collectively don't accept the offer, then there is a decent chance that YTL Corp will increase the offer price.

So the question remains: why would shareholders of YTL Cement accept the offer?

Blogger "Bursa Stock Talk" attended me on his blog:

"Despite the offer made is close to the 7th anniversary of the ICULS (10 November 2012) whereby the conversion price of the ICULS to mother shares will be adjusted from RM2.04 to RM1.82, shouldn't the offeror and the independent adviser take the step down conversion price into consideration as the adjustment is just few months away? Both the offer document dated 9 January 2012 and the independent advice circular appeared to be silent on this. The Board of YTLCMT confirmed that to the best of their knowledge and belief, there are no materials facts, the omission of which would make any statement in this IAC misleading. But is not the adjustment in conversion price with difference of 10.8% significant?"

I think the writer definitely has a very good point, the 7th anniversary is about nine months away and it appears rather strange if this is not mentioned in the offer document or in the independent advice.

I hope that YTL Cement shareholders do not accept the offer, thereby forcing YTL Corp to increase its offer price for the YTL Cement shares. The closing date is February 10, 2012.

Saturday, 28 January 2012

Maybulk, Maxbiz, PMI, AirAsia

Maybulk's share price has risen fast in the last month, in high volume:

Bursa Malaysia issued a "Unusual Market Activity" (UMA) alert, on which Maybulk responded:

"We refer to Bursa Malaysia’s query today in respect of the recent interest in Maybulk shares and wish to announce that the Company is not aware of any reasons or any corporate exercise that may have contributed to the increase in share price and high trading volume of Maybulk shares."

What definitely has changed lately is that the relentless selling by EPF has finally stopped. Up to December 30th 2011 the EPF routinely sold 2 million shares a day at a price around RM 1.50. Many of these shares were bought at double the price in 2009. Hopefully somebody can explain the logic behind this trading.

I have written a lot about Maybulk in the past regarding the controversial Related Party Transaction that took place in 2008, buying POSH shares at a very high price (more than four times the Net Asset Value) in the midst of the global recession:

I have withdrawn my complaint with the authorities (SC & BM) out of protest against the highly unsatisfactory and even unethical way they have handled it. The only thing they have done really well in this case was dragging their feet.

Even up to today, minority investors have not been informed properly about important issues regarding the Related Party Transactions, either the POSH acquisition in 2008 or the (relatively less important) purchase of a vessel in 2009. In its latest year report less than one page (out of 81 pages) is dedicated to POSH, while about half of Maybulks shareholders equity is invested in it.

Maxbiz announced it is expecting profit margins of between 5% and 15% from its fiber network connection project.

It also made some clarifications in an announcement to Bursa Malaysia about some other projects.

The share price has lately retreated, from a high of RM 0.195 to RM 0.11.

A previous write-up of this blog stated "It is hard to find a company with more red flags than Maxbiz". It would be an immense effort if Maxbix can even stay afloat.

Pan Malaysian Industries (PMI) is forced to comply with the following: "compensate entitled shareholders of PMI who had sold their PMI Shares between 9.00 a.m. on 24 August 2011 and 5.00 p.m. on 25 August 2011 (“Compensation Period”) for the differential amount between the offer price of RM0.045 per Offer Share and the price at which their PMI Shares were sold during the Compensation Period"

Apparently there was a timing difference between the moment the General Offer was announced and the moment is should have been announced. Good for shareholders who sold their shares below RM 0.045 during those days, although it will be only a small amount of money, I think, and most of the shareholders will be selling their shares anyhow at huge losses. 

Frankly, this ruling by the SC should be the least worry to PMI. I think there are many, much more serious Corporate Governance issues at stake here:

The Edge Malaysia reported that AirAsia's airfare issue with the Australian Consumer watchdog (ACCC) has been resolved.

"The problem could have been due to an IT issue, and it has been corrected."

However, the website of the ACCC has not yet issued a statement that the issue has been resolved: 

I hope that AirAsia will treat Malaysian consumers as if they were protected by a powerful consumer watchdog similar to the ACCC.

Friday, 27 January 2012

George Soros predicts riots, police state and class war for America

“I am not here to cheer you up. The situation is about as serious and difficult as I’ve experienced in my career,” Soros tells Newsweek. We are facing an extremely difficult time, comparable in many ways to the 1930s, the Great Depression. We are facing now a general retrenchment in the developed world, which threatens to put us in a decade of more stagnation, or worse. The best-case scenario is a deflationary environment. The worst-case scenario is a collapse of the financial system.”

“The collapse of the Soviet system was a pretty extraordinary event, and we are currently experiencing something similar in the developed world, without fully realizing what’s happening,” adds Soros.

Soros goes on to say that as the crisis in the Eurozone only worsens, the American financial system will continue to be hit hard. On the way to a full-blown collapse, he cautions, Americans should expect society to alter accordingly. Riots will hit the streets, says Soros, and as a result, “It will be an excuse for cracking down and using strong-arm tactics to maintain law and order, which, carried to an extreme, could bring about a repressive political system, a society where individual liberty is much more constrained, which would be a break with the tradition of the United States.”

Thursday, 26 January 2012

China listed stocks on Bursa: different opinions

Popular blogger "Salvatore Dali" wrote about China listed companies on Bursa Malaysia in a surprisingly positive way:

"I think Bursa/SC have traveled the extra mile in ensuring these China firms are genuine, most if not all have been "site-visited" by them."

"I cannot say this with greater effect. If the hypotheses are true, which means at least most or all of the companies on Bursa are not fraudulent, and to get XDL going through this phase of value creation, which I think will be wildly successful. This could be the catalyst that is needed for the rest of the China companies listed on Bursa to do likewise. As things stand, none of the China firms on Bursa are "fraudulent yet", maybe none are. If enough of them go through the value creation steps led by XDL, it could very well lift Bursa as the "best exchange to list China firms". If this is all true and good, then Bursa and SC must continue to make doubly sure that future China listing go through even more stringent listing checks and balances. So far so good, even with depressed share prices, at least we do not have a total bust up (yet)." 

I have read a lot about fraudulent China companies, and am much less optimistic. I think the chance that at least one Bursa listed Chinese company will go bust this year should be quite substantial. However, some frauds take a long time to unravel. For instance it took more than 10 years for serious problems to surface in two high-profile cases Chaoda and Sino Forest:

On the other side, Salvador might be right, the articles that I have read are from companies that were not listed on Bursa Malaysia so it is theoretically possible that those listed in Malaysia are of higher quality. For instance, in the US many Chinese companies followed the "reverse takeover" (RTO) way to list, where filtering is much less stringent than those that go through a proper Initial Public Offering (IPO), like in Malaysia.

Yet, I am suspicious, to me it doesn't make sense for a good quality company in China to look for a listing in Malaysia. To me, it sounds more like a case for a company that tried to list on other exchanges, but was rejected.

Time will tell.

In Singapore the SGX has a serious problem with China Sky, the company was ordered to perform a special audit, and it simply refuses to do so. The SGX sued the company, but at the last moment withdrew the suit, without giving a reason. All independent directors have since resigned. It would be interesting to see how Bursa Malaysia would handle such case.

An article about China companies listed in the US:

"While many blame China’s business governance for the slew of frauds, breaking down the IPO supply-demand basics reveals nothing exotic about this latest bubble-bust catastrophe. On one side were impressionable and uninformed American investors in search of shortcuts and ignoring fundamentals. On the other, unscrupulous investment bankers spinning public offerings out of anything, coupled with private-equity funds pushing for “timely” exits. These agents of seduction were “born in the U.S.A.” "

An interesting website from Roddy Boyd who writes about China frauds in a very detailed way:

Wednesday, 25 January 2012

Olympus scandal triggers Japan shareholder activism, how about Malaysia?

In Japan, finally, shareholder activism starts to wake up. Lawyers for Shareholders' Rights (LSR) is backing an individual Olympus shareholder whose stake is worth only around 2.8 million yen ($US36,000) but who - unlike the institutions - has stood up against the board.

In Malaysia, shareholder activism is also moribund:
  • Authorities (Securities Commission and Bursa Malaysia) have to take a large part of the blame due to their inactivity and almost always siding with the majority shareholders
  • Large institutions like PNB, EPF, etc. have also been very disappointing in defending minority shareholders rights, being very passive and not speaking up
  • Investors therefore mostly vote with their feet 
  • MSWG has toned down since they are being sued (they don't have whistleblower protection)
However, one minority investor of E&O, Mr. Michael Chow, is suing the Securities Commission over Sime Darby's waiver not to have to make a General Offer for all shares.

This court case will definitely draw a lot of attention, could this case be the spark to ignite the so much needed shareholder activism in Malaysia, similar to what is happening in Japan?

After British whistleblower Michael Woodford was sacked as CEO of Olympus and revealed the Japanese firm had covered up losses of $US1.7 billion, he mounted a campaign to get his job back.

His effort though went nowhere, with Japanese financial institutions preferring to stick with the remaining board and several disgraced directors, some of them being sued by Olympus itself.

Now a group of 26 activist lawyers is looking to change Japan's closed corporate society as the scandal rocks global confidence in the business governance standards of the world's third-largest economy.

Woodford, the first non-Japanese to lead the camera and medical equipment maker, was disgusted at the lack of response to his campaign for re-instatement.

Institutional shareholders "are the reason why these directors are still there, without their support they shouldn't be," he said. "Despite one of the biggest scandals in history (they) have not spoken one single word of criticism."

But shareholder activism is rare in Japan. Instead institutions tend to have cosy ties with board members and cross-shareholdings are commonplace, creating a network of interests that militates against rocking the boat - on Friday the Tokyo Stock Exchange said it would let the firm stay listed.

Lawyers for Shareholders' Rights (LSR) is backing an individual Olympus shareholder whose stake is worth only around 2.8 million yen ($US36,000) but who - unlike the institutions - has stood up against the board. The anonymous man from western Japan is suing the directors who sacked Woodford, demanding they pay Olympus 1.34 billion yen in compensation for the firm's costs.

Takuro Maekawa, one of LSR's leading members, said his team - who do not charge for such cases - want to change a culture which "has compromised corporate responsibility and compliance".

Olympus has admitted that it used over-priced acquisitions and consultancy fees to hide losses it had made on earlier investments dating back to the 1990s.

In one element of the scheme it paid a Cayman Islands financial adviser $US687 million when it bought British medical instruments company Gyrus for $US2 billion in 2008.

Legal action

Olympus itself has launched legal action against 19 top current and former executives, including six present board members, among them president Shuichi Takayama, after an independent panel found them responsible for the cover-up.

But Takayama has not been sacked in disgrace or resigned, instead saying in the past week he would step down only after an extraordinary general meeting in April.

"I want to fulfil my responsibility for the benefit of stakeholders until handing the company over to new directors," he said.

None of Olympus' major Japanese shareholders have publicly called for him to go.

Instead they have quietly reduced their stakes as the share price plunged, with the biggest shareholder Nippon Life Insurance only citing unspecified "risks" and "economic rationality" when it said in November it had sold almost two-fifths of its holding.

Maekawa condemned the institutions' silence as "extremely abnormal".

LSR is looking at joining Olympus' own case, he said, to ensure it is properly pursued and "to bring all of the scandal into the light of day".

The LSR lawyers first started mounting actions on such issues in the early 2000s.

They sued four executive directors of Hitachi Zosen, a leading machinery and infrastructure firm, demanding they reimburse the fines the company had been ordered to pay for bid-rigging, eventually settling for 205 million yen.

They have also taken action against the president of Daiichi Life Insurance, demanding he pay back the expenses he claimed for wining and dining a number of politicians.

But the Olympus case is by far their most internationally high-profile so far.

"Our objective is not necessarily to help short-term investors make money by demanding a company make profit in every quarter," Maekawa said. "Individual investors have long been left at a great disadvantage to institutional holders."

Michikazu Aoi, professor of global management at Meiji University, said the Olympus scandal could have long-term consequences for both the company and the country.

"The Olympus board may be thinking, since the company has the world's top-notch endoscope technology, that they can withstand the scandal, smoothly handing over the company to the next board, and that the share price will eventually recover," he said.

"But I don't think things will be so easy."

The spectacle would appear "bizarre" to foreign investors, but Japanese financiers had different priorities and standards, he said.

"Japanese businessmen try to smooth over issues slowly. They seem to believe it is the way not to hurt anyone's interests. But they don't necessarily think about the interests of shareholders."


Tuesday, 24 January 2012

ACCC takes action against Air Asia for misleading pricing

The Australian Competition and Consumer Commission has instituted legal proceedings in the Federal Court, Melbourne against Air Asia Berhad (Air Asia).

Air Asia is a foreign corporation that carries on a business in Australia as a supplier of international air travel services to the Australian public.

The ACCC alleges that Air Asia on its website ( did not display some airfare prices inclusive of all taxes, duties, fees and other mandatory charges. Businesses that choose to advertise a part of the price of a particular product or service must also prominently specify a single total price.

The alleged conduct is in relation to the following flights between:
  • Melbourne and Macau, London, Ho Chi Minh City, New Deli, Hangzhou and Chengdu
  • Perth and Taipei, Phuket, Osaka, London, Ho Chi Minh City, and Hangzhou, and
  • Gold Coast and Ho Chi Minh City.
The ACCC alleges the conduct contravenes section 48 of the Australian Consumer Law within the Competition and Consumer Act 2010.

The ACCC is seeking:
  • declarations that Air Asia contravened the Competition and Consumer Act 2010
  • an injunction to restrain Air Asia from engaging in misleading conduct in the future
  • a court order that Air Asia publish corrective notices on its websites regarding the conduct
  • penalties, and
  • ACCC costs.
The matter has been filed in the Federal Court's Fast Track List and is listed for a scheduling conference in Melbourne on Friday, 2 March 2012 at 10:15 a.m.

Release # NR 006/12
Issued: 24th January 2012

Although the airline involved is AirAsia X, the website is owned and operated by AirAsia, so the suit is against AirAsia, not AirAsia X, as I wrote before. AirAsia is providing the following services for AirAsia X, for a fee that has been strongly decreased lately (it was probably more easy to list services that were not included):

1. Engineering2. Cargo
3. Flight Operations
4. Procurement
5. In-flight Sales
6. People (Human Resources)
7. Treasury
8. AirAsia Academy (Training)
9. Communications
10. Information Technology
11. Ground Operations
12. Security
13. Ancillary Revenue
14. Commercial, Sales & Distribution
15. Go Holiday

Saturday, 21 January 2012

Friday, 20 January 2012

AirAsia in trouble over hidden fees

The Australian consumer watch dog ACCC is taking aim at Air Asia X.

I like that, there should be a credible Malaysian consumer watch dog who is actively fighting for the Malaysian consumers as well. I was surprised how aggressive AirAsia is with their online selling, for instance it takes three separate efforts to turn away an offer for insurance. And indeed, as alleged, AirAsia should be more transparant regarding taxes, fees and other charges.

Article from The Sydney Morning Herald:

Matt O'Sullivan
January 19, 2012

THE consumer watchdog has taken legal action against budget airline AirAsia for allegedly failing to disclose the full price of fares for flights from Australia to destinations overseas.

The same day AirAsia executives were spruiking launch fares as low as $99 for one-way flights on its new route from Sydney to Kuala Lumpur, it has emerged that the regulator began legal proceedings in Melbourne seeking both penalties and orders for the Malaysian airline to issue corrective notices on its website.

In documents filed in the Federal Court on Tuesday, the Australian Competition and Consumer Commission claims that fares sold on the airline's website disclosed only part of the total price for flights from Melbourne, the Gold Coast and Perth to destinations in Asia, Europe and India because they excluded taxes, fees and other charges.

The regulator wants the court to order the airline to publish on its website a notice stating that it failed to ''specify, in a prominent way, the single price for air travel on its website … since at least September''.

The ACCC has shown a growing willingness to take action against airlines for running foul of consumer laws.

Last year it pursued budget airline Tiger Airways for selling tickets after the air-safety regulator had grounded its fleet of aircraft in July due to safety concerns.

The regulator also took Qantas to task for the amount of compensation it offered passengers disrupted by its decision to ground its entire fleet on October 29.

SC seeks to recuse judge

An interesting twist in an interesting saga, the SC is seeking to recuse High Court judge Abang Iskandar Abang Hashim from hearing a suit by minority shareholder Michael Chow in E&O Bhd. In 2004 the judge was appointed Director of Enforcement Division of the SC, a job he held until 2009.

From The Malaysian Insider:

The Securities Commission (SC) is seeking to recuse High Court judge Abang Iskandar Abang Hashim from hearing a suit by a minority shareholder in E&O Bhd, which could delay proceedings against the regulator for failing to compel Sime Darby Bhd to buy remaining shares after it bought a 30 per cent stake in the property developer for RM776 million.

Ironically, minority shareholder Michael Chow Keat Thye’s lawyers are battling against the recusal although the trial judge used to be the SC’s enforcement director from May 2004 until he was elevated to the High Court in October 2009.

“Yes, we are fighting against the recusal. We are fine with Yang Arif Abang Iskandar hearing the case,” a lawyer for Chow told The Malaysian Insider, declining to be named as he was not authorised to speak to the media.

The recusal hearing is scheduled for March 14, the original date for the case after Chow obtained leave for his legal suit.

Sime Darby’s subsidiary, Sime Darby Nominees Sdn Bhd (SD Nominees), had applied to intervene in the judicial review on January 7, according to a filing in the Bursa Malaysia.

For more follow the link:

Thursday, 19 January 2012

Are auditors above the law?

Sometimes I really wonder why auditors seem to escape scrutiny, again and again. 

There is a discussion going on: auditors are watchdogs, not guard-dogs, so they can't be held liable for anything that might be wrong with the accounts. That is a fair comment I guess.

On the other hand, they should do their work in a correct way, do sample testing, have an open, critical mind about what they investigate etc. When things turn sour in a big way, they should therefore be held accountable. But somehow or the other, that doesn't seem to happen.

In Malaysia I can't remember any auditor of a listed company being punished in one of the big accounting scandals. It appears Malaysia is not the only country where that happens.

Below article from the New York Times is about the huge Olympus scandal in Japan, huge in the amount of money involved, the number of years that the fraud was ongoing and probably the number of people who must have been involved or had knowledge about it. 

There are also very serious Corporate Governance issues at play. For instance in the Board of Directors firing the CEO who discovered the fraud, the typical "shoot the messenger" syndrome that is (unfortunately) also quite common in Malaysia.

And what did the company say?

"Olympus, the Japanese camera maker whose executives have admitted to covering up $1.7 billion in losses, said Tuesday that its auditors, KPMG Azsa and Ernst & Young ShinNihon, had not been complicit in the false accounting"

But this is what an expert said:

It’s hard to believe that Olympus could have kept such a large-scale cover-up secret from its auditors, who study its finances intimately,” said Shinji Hatta, a professor of auditing at the Graduate School of Professional Accountancy at Aoyama Gakuin University in Tokyo.        

In the first paragraph a possible motive for the actions of Olympus:

Any action to dismiss or sue Ernst & Young ShinNihon, its current auditor, could leave the company without a firm willing to audit its finances, jeopardizing Olympus’s compliance with the exchange’s listing requirements.

This doesn't sound right at all.

Olympus Clears Auditors in an Accounting Cover-Up

TOKYO — Olympus, the Japanese camera maker whose executives have admitted to covering up $1.7 billion in losses, said Tuesday that its auditors, KPMG Azsa and Ernst & Young ShinNihon, had not been complicit in the false accounting — though those firms remain under investigation by the Japanese authorities over possible roles in the scandal.
A decision to clear the auditing firms could strengthen Olympus’s chances of staying listed on the Tokyo Stock Exchange, helping the company maintain access to equity capital. Any action to dismiss or sue Ernst & Young ShinNihon, its current auditor, could leave the company without a firm willing to audit its finances, jeopardizing Olympus’s compliance with the exchange’s listing requirements.

Still, experts have asked how Olympus could have perpetrated such a scheme without at least tacit knowledge by its auditors. KPMG audited Olympus until 2009 before handing it off to Ernst & Young. The two firms still face possible sanction by Japan’s Securities and Exchange Surveillance Commission.

Just how much Olympus’s auditors knew about the manufacturer’s scheme, going back decades, to hide losses has emerged as an important aspect of the continuing investigations into its finances. The two firms signed off on the accounts before Olympus’s president and chief executive, Michael C. Woodford, blew the whistle on the fraudulent accounting in October, just after he was fired by Olympus’s board.

“It’s hard to believe that Olympus could have kept such a large-scale cover-up secret from its auditors, who study its finances intimately,” said Shinji Hatta, a professor of auditing at the Graduate School of Professional Accountancy at Aoyama Gakuin University in Tokyo.

In a report released last month, an investigative panel appointed by Olympus, which makes digital cameras and the medical optical devices like endoscopes, had been critical of the auditors’ role, saying the firms had not done enough to expose wrongdoing.

But a separate panel of lawyers hired by Olympus to investigate the roles of the two auditors found that the firms had not violated their fiduciary duties, Olympus said in a statement. That report, released Tuesday, said that Olympus’s executives had so cleverly buried the losses that external auditors could not have uncovered them.

The report instead blamed five former and current Olympus internal auditors for allowing the company to misstate its finances. The five internal auditors are responsible for a total of 8.4 billion yen ($109 million) in costs related to the cover-up, Olympus said.

Minoru Ota, a former internal auditor who had headed the company’s accounting unit, is to blame for almost half of that cost, the statement said.
“The masterminds in this case hid their illegal acts through artful manipulation of expert opinion,” the report said.

Olympus did not make Mr. Ota available for comment, and calls to a registered number under that name in Tokyo went unanswered.

The company said later Tuesday that it had filed a lawsuit against all five of the internal auditors, demanding 500 million yen from each.

Olympus has admitted that a handful of former and current executives set up a scheme to obscure losses by illicitly keeping unprofitable assets off its books. The company later tried to settle those losses in payments masked as merger-and-acquisition fees.

Last week, the company sued 19 current and former executives, including the current president, Shuichi Takayama, over their roles in concealing the losses. The scandal has led to investigations by the authorities on three continents, and Olympus shares remain on watch for possible delisting on the Tokyo exchange.

But a person with close knowledge of various investigations relating to Olympus said that not only was Olympus adept at hiding its losses, but that the company might have received help from its banks misstate its financial position.

KPMG received confirmation statements from Société Générale and Commerzbank that, with hindsight, were clearly misleading, the person said on condition of anonymity, saying he was not authorized to speak to the media.
Those inaccurate statements have been submitted by KPMG to Japanese regulators to aid in their inquiry, and the authorities have begun a broader review that is likely to include the conduct of Olympus’s banks, the person said.

“Société Générale’s policy is to fully and strictly comply with all regulations and laws in the countries where it operates,” the bank said in an e-mailed statement. “As always, Société Générale will cooperate with the relevant authorities if needed.” Commerzbank did not respond to calls seeking comment. Olympus’s third European bank, LGT of Liechtenstein, has not been linked to misleading statements.

Hiroko Tabuchi reported from Tokyo and Keith Bradsher from Hong Kong.

Wednesday, 18 January 2012

GMO: Something's Fishy in China

Edward Chancellor, who focuses on capital market research as a member of Grantham, Mayo, Van Otterloo’s asset allocation team, laid out that negative forecast last week when he spoke in London at a research symposium hosted by Societe Generale.

Accusing the soft-landing camp of “uncritically accepting” China’s growth story and placing an “overblown belief” in the authorities in Beijing, Chancellor listed 10 tell-tale traits of an economy on the verge of collapse. China, according to Chancellor, meets that classic definition of a bubble.

[1] First among them is a growth story that is uncritically accepted.  Chancellor cited the dot-com era, when analysts routinely assumed that virtually every company would follow an s-shaped growth curve, where initial growth was tepid, as companies expanded into niche markets. Rapid market growth followed, as firms were assumed to possess a dominant strategy, as was followed by a leveling off of growth, as markets matured.

Chancellor related such uniformity of thinking to his experience working in Hong Kong, where he said that the dream of the typical businessman there was to sell a toothbrush (or other everyday goods) to every Chinese person, as a way to tap into its growing middle-class consumer demand. 
But that dream has turned into a nightmare for most.  Chancellor cited projections of a billion urban consumers in China’s cities by 2030.  Economists, however, “are not very good at predicting anything, much less demographics,” he said.   Migration to cities is a pro-cyclical phenomenon, according to Chancellor, and once its economy slows, China’s population will exit the cities.  He cited similar patterns in the US, where Chicago’s population grew during boom periods and shrank or stalled when the economy slowed.

Furthermore, China’s population, which is set to contract in a few years, is even more reason to be skeptical about projections of a billion consumers, Chancellor said.

[2] Chancellor’s second sign was overconfidence in authorities.  A clear example from the US experience was Bob Woodward’s book, Maestro, a tribute to Alan Greenspan published at the peak of the dot-com bubble in 2001.  Chancellor cited several similarly laudatory books about China’s leaders, but he offered a starkly different take on China’s braintrust.  China’s leaders “are not incompetent when it comes to lining their own pockets,” he said, and through corruption “have made a great deal of money in recent years.” 

[3] Third, easy money and credit expansion are precursors to a financial crisis, according to Chancellor,  who cited data similar to that published by Reinhart and Rogoff showing that debt-to-GDP invariably rises rapidly before a crisis.  Indeed, China’s total debt-to-GDP has risen dramatically from approximately 135% in 2008 to 175% in September of 2011.  A significant contributor, Chancellor said, has been “social financing,” which is lending by non-bank entities partly controlled by Chinese authorities.   He said those loans come close to being “Ponzi financing,” since they are short-term, high-interest-rate loans that largely support real estate development.

[4] An investment boom and a misallocation of capital are the fourth signal of a bubble.  As an example, Chancellor cited the railway boom in Britain between 1820 and 1840, when the British Parliament authorized excess construction that led to duplicative railroads serving London and ultimately a low return-on-capital for the industry.   Today, Chancellor sees signs of over-investment in luxury goods in China, an extreme example of which was the sale of a Tibetan Mastiff for 1 million UK pounds.

[5] Fifth, Chancellor cited troubling “agency” issues.  At the peak of the dot-com era, Chancellor said it was common for investment banks to hire brokers and analysts not based on their ability to understand businesses or their competitive strategies, but based on how well they understood the “game” of underwriting and how fees were allocated among, for example, trading, new issues and corporate finance.   In China’s case, he cited an index – created by GMO – of IPOs with the word “China” in the company name, stocks which he said were promoted by brokers telling you to “buy China,” while ignoring the notion of a possible bubble.  That index has already fallen nearly 60% in the last four years.

[6] Collective irrationality and herd behavior were the sixth sign of a bubble that Chancellor discussed.  As an example, he cited the Mississippi bubble of 1719, when investors poured money into a trading company based on an over-hyped value of properties in Louisiana.  Signs of similar activity in China include excessive trading – in 2009, there were days when the Shanghai exchange volume was greater than that of New York, London and Tokyo combined.

[7] Fraud and Ponzi financing were the next indicators Chancellor cited, of which there is a long history in the US, including Enron and WorldCom.  Chancellor showed examples from China today, including Longtop and Sino-Forest, the latter of which ensnared the hedge fund investor John Paulson, who lost $100 million when the company collapsed amid questions about its finances.

[8] Ninth on Chancellor’s list was conspicuous consumption, which in China has been most obvious in excess investment.   He said China’s fixed investment is roughly 50% of its GDP, a level that no other economy has sustained for a long period of time.  

[9] Real estate markets are the subject that most clearly separates the optimists from the pessimists in regard to China.  Chancellor, as you might expect, said the market is vastly overbuilt, with empty apartments throughout the country.  Moreover, work on much of the construction has been shoddy, he said, including the use of cement insufficiently strong to support buildings.   Many apartments have no fixtures, electricity or bathrooms.

[10] And the number 10 sign of a bubble…
Ultimately, what matters for investors are valuations, and Chancellor cited several examples of prices in China that increased by two or more standard deviations above their historical averages.  The most prominent illustration is in housing, where the value of China’s housing stock went from 2% to 3.5% of GDP from 1998 to today.  By contrast, the corresponding increase in the U.S. was from 1% to just over 1.5% from 1998 to 2006, and ours is now back to nearly 1% of GDP. 

China’s housing bubble more closely parallels that of Ireland in 2004 and Japan in 1990; it both cases, a collapse in housing led to severe recessions.

Chancellor said that he discussed China’s housing market with his boss, Jeremy Grantham.   Acknowledging that China’s empty apartments were primarily for trading and not for occupancy, Grantham said that they were like the sardines tins that California’s gold miners exchanged in the 1850s.  When a prospector was flush with money, they would buy a tin of sardines, and sell it when their fortunes had reversed.
One day, however, a miner opened a tin and found that the sardines were rotten – thus realizing that these tins were really for trading, not eating.

The sardine investor may still have been better off in those days than a Chinese real estate investor is today, since there was a secondary market for trading those little tins.

There is no secondary market for Chinese housing, Chancellor said.

Tuesday, 17 January 2012

Proton acquired by DRB-HICOM

Proton issued yesterday the following announcement:



It is good news that there will be a Mandatory General Offer, which is normal in these cases.

But there is still the issue of possible insider trading:

After a huge run up (which started already in November 2011) in the share price, the following announcement was made on December 6, 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."

In light of what has happened, authorities really should look into this matter.

Monday, 16 January 2012

Private investors lose, institutions win due to over-trading

Brad Barber, Yi-Tsung Lee, Yu-Jane Lui and Terrance Odean analysed the Taiwanese market and showed that individual private investor losses equated to a 3.8% penalty on their performance, equivalent to a giant 2.2% of Taiwan’s GDP each year between 1995 and 1999.

Their empirical analysis presents a clear portrait of who benefits from trade: Individuals lose, institutions win. While individual investors incur substantial losses, each of the four institutional groups that we analyze – corporations, dealers, foreigners, and mutual funds – gain from trade.

The research can be found here, it is a rather technical paper, the conclusion can be found on pages 19 and 20:

A blog trying to estimate the damage for the US traders:

The estimate by the blogger of the losses in the US is USD 160,000,000,000, an unbelievable high amount which I can't verify, but which might be roughly right.

I have written in the past about long term returns on the Bursa Malaysia:

I estimated a loss of 1-2% per year due to trading (brokerage etc). Reviewing the above research I might have been too optimistic. Which means that my guess of 4-5% yearly returns is too high.

Sunday, 15 January 2012

Marc Faber's stock picks in Singapore and Hong Kong

Interesting (long!) article, "the Barron's 2012 Roundtable" with interesting people like Marc Faber and Felix Zulauf.

Lots of global macro stories, not all that rosy (to put it mild).

Faber is positive about Singapore and Hong Kong, and gives a few stock tips:

Singapore tips from Faber:
  • SATS which provides catering services to the airline industry and ports. It yields 5% and trades for 13 times earnings.
  • K-REIT Asia Management, a real-estate investment trust that yields 7%. The stock has fallen by about 50% and the dividend might be cut. But even if it is cut to 4%, this is an OK investment.
  • StarHub, the mobile-phone company, yields 6.9% and the P/E is 14.
  • Luxury-property developer like Wing Tai Holdings already sells for half its book value.
  • Fraser & Neave is a conglomerate similar to Swire. It sells for 10 times earnings and yields about 3%. It could become a takeover target at some point.
The Hong Kong market was hit hard, and stocks haven't bottomed yet. But you can buy Sun Hung Kai Properties [16.Hong Kong], with a P/E of five and a yield of 3.5%. Swire Pacific [19.Hong Kong] is a blue-chip, a well-managed conglomerate. It yields almost 5% and the P/E is 11. Hang Seng Bank [11.HK] yields 5.6% and trades for 11 times earnings. There isn't a huge risk in these stocks, but maybe I'm too bullish.

The full article:

Here is a link from Cullen Roche who estimated the returns of the forecasters of the Roundtable:

The long term returns of Zulauf and Faber are clearly the best:

Annualized Returns: 2002-11
Felix Zulauf 25.1%
Marc Faber 23.4%

Very good results, considering that the S&P 500 returned zero over ten years, "the lost decade".

Friday, 13 January 2012

Maxbiz CEO: “RM 50 million is nothing to shout about”

“Frankly, earning about RM 50 million over five years is certainly nothing to shout about for a public listed company”

Where these words uttered by one of the Malaysian captains of industry, whose companies routinely make billions a year? Not exactly, the words are from Datuk Vincent Leong, CEO of Maxbiz.

I found the above quote in The Edge of January 9, 2012 “Will Maxbiz make it this time around?”

Many shareholders of Maxbiz must have lost money, I am sure they would have wanted to see Mr. Leong actually making RM 50 million profit for the company, instead of just talking about it.

Maxbiz is a garment manufacturer with a rather patchy past, it has lost money in each of its last seven years, has huge accumulated losses (RM 107 million to be precise). It tries to turn around its business through a fibre–optic connection project, projected at RM 510 million. Next to that, it also plans to go in property development. Rather ambitious ideas for a garment maker.

I had a look at its latest 2010 year report.

Unfortunately, the cover is the only nice part of the whole report.

An errata of six pages is added containing dozens of corrections, not exactly the hallmark of a company that takes pride in its work.

It is hard to find a company with more red flags than Maxbiz:

[1] Personal changes:

  • Lots of changes in the Board of Directors and especially in the audit committee throughout the years
  • The previous internal auditor did not resume his position as internal auditor and quit on 25 February 2011
  • The (extrernal) auditor also changed in January 2011.
[2] Maxbiz and five directors received public reprimands and fines:

  • MAXBIZ had breached paragraph 9.16(1)(a) of the LR for failing to ensure that the 4th quarterly report for the financial year ended 31 December 2008 ("4th QR 2008") which was announced on 2 March 2009 took into account the adjustments as stated in the Company’s announcement dated 4 May 2009.
  • MAXBIZ had reported an unaudited loss after taxation and minority interest of RM6.227 million for the financial year ended 31 December 2008. However, the Company had on 30 April 2009 reported an audited loss after taxation and minority interest of RM76.926 million.
  • Bursa Securities also found that the directors of MAXBIZ to be in breach of paragraph 16.11(b) of the LR for permitting knowingly or where they had reasonable means of obtaining such knowledge the Company to commit the above breach.
[3] The company is involved in numerous court cases.

[4] Directors own not even a single share:

[5] The accounts of Maxbiz are qualified (both off the company itself and some of its subsidiaries), just two statement from the auditors:

  • “In the event that full impairment and full provisions of the above matters raised, the full impact on the Group for year ended 31 December 2010 would be RM25,936,874 as additional losses, hence the Group losses would have increased from RM2,394,234 to RM28,331,108.”
  • “As at 31 December 2010, the Group and Company’s current liabilities exceeded its current assets by RM16,394,682 and RM7,080,516 respectively.”

[6] Maxbiz appointed Ferrier Hodgson MH Sdn. Bhd. As Investigation Advisor (IA) on 24th February, 2010 to investigate if there were any irregularities and anomalies during the Geahin debt restructuring exercise.
The first of 4 parts of the report was presented to the Audit Committee and the Board of Directors on 28th April, 2010. As announced to Bursa Malaysia Securities Berhad on 30th April, 2010, the contents of the report from Ferrier Hodgson MH Sdn. Bhd. indicates that there is fraud, deception and misrepresentation.

[7] Maxbiz has a “special status” in several ways, but not the ones you like to see:
  • On 18 January 2011 the Company announced that pursuant to Paragraph 2.1(a) of PN 17 of the Main Market Listing Requirements, the Company is considered a PN 17 Company.
  • On October 7 2005 the Company defaulted on its RULS, since then it is considered a PN 1 Company.
  • The company recently received a winding-up petition, its subsidiary had received one on the past.
"Ze Moola" wrote a few interesting articles about MaxBiz:

Yet, dispite all the gloom, the share price suddenly took off:

The buyers must be quite positive about the future of this company. If this is based on any realism, time will tell …..

A strange coincedence is the fact that SJ Asset Management was the 2nd largest shareholder of Maxbiz, an asset management company being examined closely by the Securities Commission (SC) due to irregularities in its accounts.
It was reported by a weekly that SJAM managing director Whai Onn Tan had gone missing, together with several million ringgit from the company.”
It is rather strange to see an asset manager investing in a company like Maxbiz with such poor fundamentals.

When things were still going better with SJ Asset Management, its boss joined in a charity raising event:

Event Highlight Video l Live To Love Charity Event from U Arte`House 優藝製作 on Vimeo.

Thursday, 12 January 2012

Damaging court case for Kwantas Corporation Bhd

The Singapore High Court ordered Universal Shipping Group to pay USD 2.89 million (RM 9.08 million) in damages after finding that it had conspired with Kwantas Oil Sdn Bhd (a subsidiary of Kwantas Corporation Bhd, and a related party to Universal Shipping Group) to defraud a Chinese bank.

The judge uttered some pretty harsh words:

Universal’s conduct is only explicable on the basis that it had come to an agreement with KOSB (Kwantas Oil Sdn Bhd, owned by Kwantas Corporation Bhd) that the latter could dishonestly make use of BL4 so as to trick BOC into advancing funds

From SPH's website, article appeared in Straits Times, written by K. C. Vijayan, January 12, 2012:

THE High Court has ordered a shipping company to pay US$2.89 million (S$3.73 million) in damages after finding that it had conspired with another firm to defraud a Chinese bank.

The Panama-registered Universal Shipping Group was involved in the fraud following the shipment of 3,000 tonnes of palm oil to a Chinese company in 2008. The palm oil was carried from Kuantan in Malaysia on Universal's vessel The Dolphina.

Justice Belinda Ang, in judgment grounds released on Tuesday, said this was a 'most unsatisfactory case', involving a long drawn-out hearing that stretched over two years.

Her 63-page judgment is expected to be a reference point for court rulings on the requirements to support future claims of civil conspiracy, said lawyers.

Among other things, the judge invoked the rarely used 'law of attribution' to link a director of Universal directly to the fraud by the firm.

The Dolphina was chartered to Malaysian palm oil producer Kwantas Oil, which had sold the cargo to Chinese company Zhejiang Zhongguang Industry.

The Bank of Communications (BOC) in Zhejiang Province advanced a letter of credit for US$3.4 million on Zhongguang's behalf to Kwantas. But it never got its money back.

Kwantas, as charterer, had undertaken to the bank to protect Universal against all liability after the cargo was unloaded in Huangpu without the original bills of lading being produced.

But Zhongguang ran into financial difficulties, which meant it could not pay BOC. The bank found out too late that the cargo had been released to various end-users in China through Dongma Oils & Fats, a company linked to Kwantas and Universal, some two months earlier than the June 2008 due date.

It then began proceedings against The Dolphina, which was seized in Singapore waters in July 2008, and sued Universal for conspiring with others to defraud it.

A claim against Universal for breach of contract failed in the same case.

BOC's lawyer Vivian Ang argued that Universal had conspired with Kwantas to induce BOC to make the US$3.4 million payment to Kwantas on the strength of documents presented.

The two companies are closely connected, Justice Ang found. The three directors of Universal are also directors of Kwantas.

Key to the case was the role of director Steve Kwan, whose knowledge of what transpired could be attributed to Universal, the judge ruled. Mr Kwan did not testify in court - unlike the two other Universal directors, who had denied any knowledge of the events leading to the proceedings.

'Unless I am to believe that the entire board of directors of Universal and Kwantas was collectively ignorant of the goings-on of either company,' it must follow that everything was done with their knowledge or approval, she added.

The judge rejected defence lawyer Prem Gurbani's claim that BOC's loss was caused by the financial straits of its customer Zhongguang, and not by any alleged conspiracy.

Justice Ang held that the case for conspiracy had been satisfactorily made, and ordered Universal to pay BOC's losses, set at US$2.89 million.

The full judgement can be found here: %5B2011%5D%20SGHC%20273

Key Players:
BOC: Bank of Communications Co Ltd
KOSB: Kwantas Oil Sdn Bhd, a subsidiary of Kwantas Corporation Bhd (KCB)
Universal: Universal Shipping Group Inc, a related party of KCB
Steve Kwan: Kwan Ngen Chung, Director and shareholder of Universal and KCB

KOSB and Universal are related parties, as disclosed in KCB's 2009 yearreport:

Some excerpts:

196    Yet, KOSB went ahead to endorse BL4 in blank, falsely representing that it still had legal effect, and intending that it be so treated, as part of a raft of measures to defraud third parties. I have already described the fraud involved in opening the June L/C (see [98] above), and the endorsement of BL4 in blank, as well as the creation and backdating of the 24 March 2008 invoice, was merely a continuation of that fraud, because the relevant documents had to be doctored and a false trail created in order to comply with the key requirements of the June L/C (see [101] above), so that payment could be obtained thereunder.

230 (f)     Amongst his many portfolios (see [7] to [11] above), Steve Kwan is one of three directors in both Universal and KOSB, but is the only director not to have testified in this case. In addition, the other two directors (Alvin Kwan and K H Chong) who did testify vociferously denied having any knowledge about the events leading to these proceedings. Unless I am to believe that the entire board of directors of Universal and KOSB was collectively ignorant of the goings-on in either company, and that all the actions taken by their employees were without approval or authority, which is not supported by the evidence, it must follow that the common course of business had been followed (s 116(f) of the Evidence Act (Cap 97, 1997 Rev Ed)) and that everything that was done was done with board approval or knowledge, and that the reason Steve Kwan has not come forward to produce evidence is that such evidence would not be favourable to either him or to Universal (s 116(g) of the Evidence Act).

299    In my view, the answer is clear. Universal already knew, whether through Steve Kwan or otherwise, that the Cargo (including the BL4 Cargo) had been discharged on the Discharge Date against KOSB’s LOI, and that, under its terms, BL4 was supposed to be returned to Universal and deemed accomplished once it was obtained by KOSB. As a result of Steve Kwan’s knowledge, Universal also knew that BL4 had at some point in fact been obtained by KOSB; that the June L/C had been opened in KOSB’s favour and that it required, inter alia, BL4 to be endorsed in blank; that BL4 therefore had to be endorsed in blank in order to comply with the terms of the June L/C if KOSB was to negotiate it or receive payment on maturity of the June B/E; that KOSB in fact endorsed BL4 in blank and transferred it to Maybank as part of KOSB’s negotiation of the June L/C; and that KOSB was thereby falsely representing that an accomplished bill of lading was still valid, and intending that BL4 be so regarded, in order to negotiate the June L/C or to secure payment upon maturity of the June B/E.

300    Knowing all this, Universal was in a position to prevent KOSB from effecting the fraud by simply demanding the return of BL4, as it was fully entitled to do. In addition, there was every reason for Universal to have done so in light of its earlier breach of the presentation rule (ie, delivery of the BL4 Cargo without production of BL4), because as long as BL4 remained out of Universal’s possession, there was every possibility that (as has happened in this case) Universal would be exposed to liability from someone who came into possession of BL4 and decided to sue Universal for misdelivery of the BL4 Cargo once it was discovered that the BL4 Cargo had been discharged otherwise than against presentation of BL4.

301    Looking at all the facts, on analogy with what was said in Credit Lyonnais (see [272] above), the inference seems to me irresistible that Universal was operating in furtherance of a common design with KOSB so as to perpetuate an unlawful fraud by early June 2008: the blank endorsement of BL4 by KOSB was an essential part of the fraud, because without it there would have been no compliance with the requirements of the June L/C and BOC would not have disbursed funds thereunder to KOSB, and Universal not only knew all this but also knew of KOSB’s blank endorsement of BL4, yet Universal did nothing to prevent it, in circumstances where Universal had absolutely no reason to allow such an endorsement. In my view, Universal’s conduct is only explicable on the basis that it had come to an agreement with KOSB that the latter could dishonestly make use of BL4 so as to trick BOC into advancing funds under the June L/C.