The ABC of a corporate collapse

Good article by Prof Mak Yuen Teen in the Business Times (Singapore) about the collapse of ABC Learning Centres in Australia, and the similarities and differences with Olam.

"The main criticisms of Olam by Muddy Waters were about its business model, accounting, aggressive acquisitions and capital expenditure, leverage and weak operating cash flow. These are very similar to the factors which contributed to ABC's demise."

"Supposedly long-term debt can quickly become repayable in the short term or much more expensive, especially if debt covenants have been breached. Breaches of debt covenants can also have a domino effect."

"Although its profits had been increasing steadily over the last few years, there have been many cases of companies which have failed on the back of positive profits and negative operating cash flow."

"It emerged that the Groves and some of the other ABC directors had pledged their shares to borrow money. As the share price plummeted, they were forced to sell shares equivalent to 5.6 per cent of the company to satisfy margin calls. This flooded the market with shares and pummelled the share price further."

Malaysia at Crossroads

Excellent collection of critical articles in The Edge of December 24, 2012.

Some excerpts:

“…. political integrity to replace the dirty, corrupt and adversarial with idealism, activism and intellectualism based on values, knowledge, wisdom, service, transparency, accountability and good governance”

Datuk Saifuddin Abdullah, Deputy Minister of Higher Education

“In Malaysia, corruption is not a random or occasional occurrence but tends to be systemic and cuts across authoritarian and democratic regimes. Kleptocrats are usually not merely mid-level officials who extort money or receive bribes as means to make ends meet, but high-ranking officials and top-level politicians who engage in corrupt acts to do business and accumulate wealth. The question for Malaysians is, are we a country in which corruption is the dominant means of doing business and can be referred to as the fifth factor of production? To the extent that kleptocratic rule develops and expands, whatever genuine democratic forces there are will recede into the background. This is because the kind of democracy that is based on good governance and accountability to the people is antithetical to the interests of the kleptocrats. At most, a formal and limited form of democracy will survive.”

Syed Farid Alatas, head of Department of Malay Studies, NUS

“Malaysia outperformed most other developing economies because its civil service, police, judiciary, universities, schools, political parties, regulatory agencies and development institutions were often first world in quality. It may not be a popular  thing to say but it is a fact that Malaysia’s institutional edge has diminished in the past 20 years. Without institutional revitalization, Malaysia will not resolve corruption and crime. Neither will it be able to build the human capital needed to compete effectively nor will it be able to reverse the brain drain and attract the talent needed to excel.”

Manu Bhaskaran, partner and head of economic research at Centennial Group

“There are still many instruments of control that effectively stifle genuine discussion of issues that matter to the country. Do we want a society that values and protects our freedom to debate and discuss issues of importance to us? Or one that would rather have us remain quiet and disengage ourselves from the national discourse?”

Malek Ali, founder of BFM 89.9

“This mentality is reflected in our poor track record for civil and political rights, free and fair elections, transparent governance, press freedom and respect for the dignity of all persons regardless of race, gender and religion. Malaysia has yet to sign the United Nations convention on the elimination of all forms of racial discrimination and the covenants on civil, political, economic, social and cultural rights. The national economy, while important, may not be the crucial election issue. What matters if we are to get over the Third World mentality is to cross the racial and ideological divides, to root out the corruption and patronage, eradicate institutional discrimination, and depoliticise the police and judiciary.

Eric Loo, journalist

KiniBiz, new business website

KiniBiz has been announced on the Malaysiakini website. I am a fan of P. Gunasegaram, one of the rare journalists who dares to speak up, who is one of the founders. For a long time I hoped that Malaysiakini would also focus on business issues. It only makes sense, since politics and business are so often, unfortunately, intertwined in Malaysia.

KiniBiz's teaser:


"What's the real deal? In the dark? We're not surprised. Business news should go beyond the spin and the hype. We will smash through the barrier with independent, fast, and incisive business news to discerning readers.

We will break news, analyse it, dissect the complexities and comment unflinchingly. We will unravel and reveal the players behind the scenes and put things in the right context. And more. If you want to be informed and be ahead of the crowd and the market, you will want to read us - everyday and during the day. We will shed some light."

We feel there is a gap to be filled in the coverage of business news. We aim to fill that gap. It would take effort and it would be a different kind of editorial stance from what we have seen before in the coverage of Malaysian business news.

KiniBiz also aims to be a complete portal for business news which means that we will closely follow foreign business news as well, especially those which have a major impact on the average citizen and this region. We will carefully select the news, analysis and commentary here, too.

Unfortunately, it will be for subscribers only, but if the quality is good, that should not be an issue. Hoping for some truly independent, in-depth research of Malaysian business issues. Start will be somewhere in the first quarter of 2013.

Records destroyed at Chinese listed companies

Article from The Business Times (Singapore), December 19, 2012, "Cruel fates send China Paper trail up in smoke" from Kenneth Lim:

Boy, Chinese companies in the corporate governance spotlight just can't seem to catch a break.

The latest victim of unfortunate circumstances is China Paper Holdings, which said this week that a fire from a short circuit had broken out on one of its properties and, if that was not bad enough, destroyed financial records for all of 2011 and the first eight months of 2012.

For a company that has come under fire (the metaphorical kind) for ints investment plans and fund-raising decisions; is facing a difficult year ont he profits front (or at least until reconstructed accounts can state again); and whose financial controller left on Nov. 30 "to pursue personal interests", thiis mishap is inopportune.

Could the gods be any more cruel?

..... China Paper will now have to wait an estimated four to six months - nothing short of a lifetime - to get the truth out. That is how long the company estimates it will need to reconstruct its financial records. This is awfully inconvenient.

..... The fact that a number of Chinese companies that have come under scrutiny have also had the misfortune of meeting with records-destroying accidents - Sino Techfibre and China Sun Bio-chem Technology Group being two others in recent years - shows how circumstances have conspired to make life even tougher for those already under pressure. Life can be terribly unfair.

The company just issued 907,922,418 (!) new shares due to a rights issue at SGD 0.036 (!).

This is the graph of the share price of China Paper, not a pretty sight:

Netherlands, Holland and the Dutch

Hillarious video about the confusion between The Netherlands (my homecountry) and Holland, and why the language and the people are called "Dutch".

Transparency in voting

In Hong Kong, independent shareholders of Automated Systems (0771) have vetoed a connected transaction. Unfortunately, something similar happens much too rarely in Malaysia.

But the purpose of this posting is about something else, transparency in voting at AGM/EGM's.

The announcement by Automated Systems to the HKEX of the results can be found here.

Of interest is the following table:

A simple table showing the number of votes and percantages in favour and against the proposal.

My question is: why can't this be done in Malaysia? Why do we only get the result (resolution passed or not) of the voting? Why can we not get the details?

Here is an example in Malaysia, the announcement of the voting at the EGM of Hibiscus Petroleum can be found here.

On behalf of Hibiscus Petroleum Berhad, Hong Leong Investment Bank Berhad (formerly known as MIMB Investment Bank Berhad) is pleased to announce that the shareholders of Hibiscus Petroleum have, at the extraordinary general meeting (“EGM”) held today, approved the ordinary resolutions as set out in the Notice of EGM dated 4 December 2012.

That is all, one short paragraph, no details whatsoever, why?

Many times proposals (often acquisitions in Related Party Transactions at skyhigh prices or delisting exercises at very low prices) have "mysteriously" been approved in EGM's. In those cases, the exact voting would have given a lot more information than only the bare result. Since the votes are anyhow counted, why not reveal them?

Hedge funds going nowhere

A picture paints a thousand words:

Up to the crisis of 2008/9 the story was that hedge funds were trailing but they would do better when markets turn south, their bets were "hedged".

That story turned out to be simply not true.

From The Economist:

The S&P 500 has now outperformed its hedge-fund rival for ten straight years, with the exception of 2008 when both fell sharply. A simple-minded investment portfolio—60% of it in shares and the rest in sovereign bonds—has delivered returns of more than 90% over the past decade, compared with a meagre 17% after fees for hedge funds (see chart). As a group, the supposed sorcerers of the financial world have returned less than inflation. Gallingly, the profits passed on to their investors are almost certainly lower than the fees creamed off by the managers themselves.

And then: "Justifications for poor performance are as diverse as hedge funds themselves."

But numbers don't lie, performance has been too bad and we don't really need to know the justifications. There can only be one explanation, the 2/20 commission simply doesn't work, it is much too much in favour of the managers, to the detriment of the investors.

[2/20 refers to 2% yearly management fees and 20% of the outperformance]

Interestingly, I know some hedge fund managers who have outperformed their niche markets (for instance Asian small and mediumsize cap stocks) by a wide margin, and I don't think that was luck at all. I am pretty convinced they will continue to do so.

But the bad news is that the returns for the other managers will then even be lower.

Also, there has been a lot of news lately about insider trading cases in the US by hedge fund managers. Apparently, the pressure to perform (justifying the 2/20 commissions) might have been too high for some and they resorted to illegal means.

For those seeking exposure to international stocks and bonds, ETF's might be a good alternative.

Air Asia Berhad to pay RM 645,000 penalty for breaching the Australian Consumer Law

The ACCC won its courtcase against AirAsia according to this article on its website.

The irony is that AirAsia Bhd has to pay the fine of RM 645,000 for flights of AirAsia X, because AirAsia is running the website (and numerous other services) for AirAsia X.

"The Federal Court in Melbourne has imposed a penalty of $200,000 against Air Asia Berhad for contravening the single pricing provision of the Australian Consumer Law.

Air Asia Berhad, for a period of 10 months, did not display on its website (www.airasia.com) some airfare prices inclusive of all taxes, duties, fees and other mandatory charges in a prominent way and as a single figure.

.....

Justice Tracey also accepted a court undertaking from Air Asia Berhad restraining it from engaging in similar conduct for 3 years."

AirAsia wrote "proudly" in the draft IPO prospectus of AirAsia X that the airline has the highest income for additional services. That might be the case, but it has to be transparent about the taxes, duties, fees and other mandatory charges, at least in Australia and hopefully in all other countries in the world, including Malaysia.

Anti-portfolio

If you had been offered shares in Ebay, Apple, Google, PayPal and a slew of other companies, and you would have rejected those deals, and the price of these shares would have surged beyond believe, would you dare to publish that, for all to see?

If you had been offered shares in FedEx, not once, not twice but seven times, and rejected the deal every single time, would you write about that?

It is very rare in the financial world to actually do that, but Venture Capital (VC) fund Bessemer Venture Partners is the exception to the rule, and does publish these facts on their website in their "anti-portfolio". Some examples:

BVP's Felda Hardymon was offered a small position in the company's last private round, and waved it away: too small a position, he thought, at too high a price. In less than a year it was worth 17x.

BVP had the opportunity to invest in pre-IPO secondary stock in Apple at a $60M valuation. BVP's Neill Brownstein called it "outrageously expensive."

Stamps? Coins? Comic books? You've GOT to be kidding," thought Cowan. "No-brainer pass."

Cowan’s college friend rented her garage to Sergey and Larry for their first year. In 1999 and 2000 she tried to introduce Cowan to “these two really smart Stanford students writing a search engine”. Students? A new search engine? In the most important moment ever for Bessemer’s anti-portfolio, Cowan asked her, “How can I get out of this house without going anywhere near your garage?”


BVP has an excellent reputation as a VC fund, has hit many homeruns in their portfolio, of which more than 100 companies IPO-ed. Some of their better known ones are: Skype, LinkedIn, Yelp, Pinterest, VeriSign. Still, its openness about the opportunities that they did not invest in is rather remarkable. Hopefully more fund managers will follow this example.

Three interesting developments from the Hong Kong Exchange

[1] The SFC has published its conclusions on proposals concerning initial public offering (IPO) sponsors. The announcement on the SFC's website can be found here, the full article here.

"The changes, along with a streamlined regulatory process, will incentivise sponsors to raise standards, pick the right deals and manage them well which should in turn reduce risks for investors and all those involved in IPOs," said SFC Chief Executive Officer Mr Ashley Alder.  "Although we are now experiencing lower IPO volumes these reforms will underpin market confidence during all market cycles."

Mr Alder further noted that "a high-quality application should mean that the regulatory commenting process is shorter and less intensive." The SFC and the Stock Exchange of Hong Kong Ltd (SEHK) will work on measures to streamline this process so that companies can be listed more efficiently.

The proposals are intended to enable and incentivise sponsors to take a responsible, proactive and constructive role when leading IPOs and, overall, maintain investor confidence in Hong Kong’s IPO market.

Malaysia has long time suffered from bad quality IPO's. I used to subscribe to the SPG (Stock Performance Guide) from Dynaquest, every six months I would go through the just published book searching for counters I might have overlooked. The end result was always the same, I was hugely depressed by the hundreds and hundreds of Malaysian listed companies whose long term ROE (Return On Equity) was way below the return on a simple Fixed Deposit. Malaysia therefore could have benefitted from a much tougher regime, for instance regarding sponsors.

Luckily, things seem to have improved, and the average quality of recent IPO's has risen. Unfortunately, the Bursa Malaysia is still swamped with those old companies of low quality, many of which hardly trade at all.


[2] HKEx published a Guidance Letter (GL46-12) on unrealised fair value gains on valuation of biological assets for the purpose of trading record and profit requirements under Rule 8.05(1)(a); disclosure requirements for IPO applicants with biological assets and due diligence work expected to be performed by sponsor and other professional advisers on biological assets.  It also supersedes paragraphs 17 and 18 of Listing Decision HKEx-LD66-1. The letter can be found here.

"Our treatment described below is unique to applicants engaging in agricultural activities in view of the nature and inherent risks relating to the biological assets and their valuation. It is not appropriate to apply this treatment to all applicants who recognise unrealised fair value gains of their trading/ principal assets under the applicable accounting standards, e.g. investment properties and investments in securities. We consider that the risks in biological assets are higher as they are perishable and their valuation is usually subject to higher uncertainty due to the complex and not easily verifiable assumptions adopted."

As David Webb described it on his website: "In other words, "money doesn't grow on trees". Next up: for inventory purposes, poultry-breeders will not be allowed to count their chickens until they are hatched."

Valuation of biological assets was one of the points raised by Muddy Waters in their report on Olam.

[3] The HK Exchange Published Consultation Conclusions on Board Diversity. The link can be found here.

"We note the overwhelming market support for the Exchange to promote board diversity and to introduce measures in the Code. The amendments are not intended to prescribe particular corporate structures or to require compliance with hard and fast rules. The disclosure, or the explanation, is aimed at securing sufficient information so that investors and stakeholders can understand the company’s performance and governance practices, and act accordingly," said Mark Dickens, HKEx's Head of Listing.

Maxwell's puzzling acquisition

Maxwell International Holdings Bhd. is one of the China-listed companies on the Bursa Malaysia. Although it's financial results are very good, potential investors are apparently not impressed, the share price is hugely down since its IPO:

The company is on track to make about 19ct per share net profit, in other words the share is trading at a PE of 1.7 only. Its balance sheet is rather asset light and it has RM 212 million cash.

If these numbers are indeed to be believed, then it would be very easy to unlock the value to a more realistic price:

• By issuing a decent dividend, if it would pay 10ct per share that would translate to a whopping 31% dividend yield
• By embarking on an aggressive share-buyback program
• By the major shareholders buying large amounts of shares

All the above are actually happening, but in tiny amounts. Puzzling, and not exactly giving (much needed) credibility.

"Where is Ze Moola" wrote about Maxwell and noticed the very low interest it received on its cash. This is one of the known red flags with Chinese companies listed on the Nasdaq.

On December 4, 2012 Maxwell announced to acquire 92.5% of the shares of Lim Ying Ying Ltd (LYY) for HKD 15.6 million.

The main activities of LYY are rather ..... virtual:

The current shareholding structure of LYY:

Maxwell plans to buy the shares of the small shareholders, but that might be a tall order (from a legal point of view) with three of the six shareholders being deceased:

Bursa Malaysia asked for some much needed clarification, and the company provided the following data:

These numbers do not look very impressive, to say the least, the company is making losses in each of its last three years.

Also, the data of December 31, 2011 is almost exactly one year old, Maxwell should have provided some numbers over 2012.

And lastly, LYY owns half of the beneficial interest of the "Hang Fung Property", that property will be excluded from the deal, but most likely this property does generate income, are those numbers excluded from the profit numbers? I doubt it, since it is only explicitly excluded from the Net Assets.

To end with, the following, rather puzzling, statement:

"Madam Li Kwai Chun’s role in the Proposed Acquisition is to guarantee the full completion and observance of all the terms and conditions of the Sale and Purchase of Shares Agreement by the Purchaser. Accordingly, she is not deemed to be interested in the Proposed Acquisition."

If she guarantees this all (for any financial consideration?), then it sounds to me she is interested in the acquisition.

Unbelievable statistic from the US

"After the savings and loans scandal of the 1980's, some 3,500 bankers ended up criminally prosecuted and behind bars. This time around, no one on Wall Street has done jail time.

... the only thing worse than allowing the bankers to get away unscathed is prosecutorial misconduct. There's a world of difference, however, between being meticulous and careful in bringing cases and appearing to do nothing at all when trillions of dollars have been lost and not a soul has been held accountable"

From Bloomberg Businessweek, "Is This Big Fish Worth Catching" about the SEC chasing hedgefund manager Cohen for possible insider trading:

"That doesn't mean the government should stop looking into the misdeeds of the likes of Steve Cohen. But it shouldn't ignore those who did worse."

1 Trillion $ in 100 $ notes, with one person on the left as reference.

Olam debt concerns persist after cash call

Olam announced a rights issue, the following is taken from Reuters website:

Olam International Ltd's $1.2 billion cash call lifted its shares but failed to ease concerns about the Singapore commodities firm's financial position after its CEO only last week said it would not tap debt markets for the next five to six months.

Olam managed to get full backing from powerful Singapore state investor Temasek Holdings Pte Ltd, its second-biggest shareholder, for a complex bonds-with-warrants issue to battle short-seller Muddy Waters. The move sent its shares up more than 8 percent to a nearly two-week high on Tuesday.

But critics including Muddy Waters and several analysts warned that Olam needs to shore up its weak cash position after piling up debt to finance expansion.

"This rights issue has not addressed ongoing concerns regarding low margins, high leverage, and the need for cheap funding amidst wafer-thin 5 percent EBITDA margins," said Owen Gallimore, ANZ credit strategist.

Olam borrowed heavily to fund its expansion beyond trading into the actual production and processing of agricultural commodities from cotton to coffee to cashew nuts.

Bond markets have grown jittery over debt which totalled S$8.4 billion ($6.9 billion) at the end of September.

And Muddy Waters responded:

Only four days ago, Mr. Verghese vehemently insisted that it would not tap the markets for at least five months. This 180-­‐degree reversal supports our thesis that the Company was in dire straits over the weekend. (This reversal supports another point we have made about Olam – its management should be given no credibility. Its predictions of high returns from its CapEx binge are likely to turn out to be as inaccurate as its five month prediction.)

Olam’s effective cost of this debt is likely over 10%, which should indicate that this raise was not a luxury for Olam. The yield without the warrant is 8.08%, and with the cost of the warrant, the effective cost to Olam is likely in excess of 10%. The proceeds from this issuance are not intended for CapEx. The Company has stated that the funds raised will be for working capital and to repay existing debt. Its existing debt is presumably much less expensive than this new debt.

The war of words between Olam and Muddy Waters will most likely continue for some time. One thing is important to note, if Olam does survive, then it doesn't mean there wasn't any merit in the reports of Muddy Research. But the opposite also holds.

The last paragraph of Muddy Research's paper is unrelated to Olam but interesting towards China listed stocks, it mentions all the top accounting firms:

"the Ontario Securities Commission has charged Ernst & Young with securities violations for  allegedly not performing its audits on Sino-­‐Forest with proper diligence. E&Y also agreed to pay US$117.6 to settle class action claims resulting from its audits of Sino-­‐Forest. Separately, the United States Securities and Exchange Commission has also announced that it is suing the PRC affiliates of E&Y, KPMG, BDO, PwC, and Deloitte for failing to comply with requests for their audit papers of various US-­‐listed China companies."

YTL, why the hurry?

From the website of MSWG:

"MSWG completed the attendance of a few AGMs this week. Amongst them were AGMs for YTL Group of companies comprising meetings for YTL Land, YTL Power, YTL Corp and YTL E- Solution. The observations we noted was the speed with which the meetings were carried. It seems rushed how four (4) meetings were conducted on the same day, with very little breathing space both for shareholders and directors. The average interval between the commencement of each meeting was only an hour and seemingly there was an hour constraint imposed for all the businesses to be carried out at each AGM. The tendency is for shareholders to ask very few questions and the response could possibly be a hurried one which may be unsatisfactory. To us it was undoubtedly a whirlwind affair and rather compressed meetings.

Wouldn’t it have been better if the same meetings were spread out over an interval maybe a day each between each AGMs? It would give those attending more time to digest the details provided by the company with greater depth. The Board too would benefit as it would have more time to take questions thoughtfully. AGMs are only held once a year where shareholders get to see their directors and ask the pertinent questions. We do hope that the Board of YTL would consider such suggestion."


All were held on November 27th:

• YTL Land at 11AM
• YTL E-Solutions at 12PM
• YTL Power at 2PM
• YTL Corp at 3PM

AGMs' are only held once a year, why not give the minority shareholders a good presentation what is going on, and ample time to come with questions?

On November 26th, 3.30pm the AGM of YTL Cement was held. But since this company is delisted, I haven't read any information about it, they are not making announcements to Bursa Malaysia anymore.

This is not the first time that the YTL Group seems to have some CG issues. I don't think that the delisting of YTL Cement deserves a medal for good CG.


From CLSA "CG Watch 2012", "Companies that have seen CG deterioration":

Larger-cap companies with an institutional following that have seen CG declines include YTL Power, Genting Malaysia and Genting Berhad.
 
For many years, YTL Power had focused on regulated industries, ie, power generation and water. It has a global presence in regulated industries stretching from the UK to Australia. However it recently ventured into telecommunications, where it has no prior industry knowledge. Competition in this market is stiff and this venture has incurred large startup losses. Our scoring marks negatively for a  company that diversifies into different businesses.
 
The key concern on Genting Malaysia has been related-party transactions. In November 2008, it purchased a 10% stake in Walker Digital for US$69m from the family that controls the Genting group. In July 2010, Genting Malaysia paid Genting Singapore RM1.7bn for Genting UK. Generating positive Ebitda for Genting UK has been an uphill battle, especially with the difficult macro environment in the UK currently. There is also an issue about independence with a chairman who is also CEO, and holding the same two positions at the listed parent. Genting Berhad, meanwhile, has one of the highest ratios of director remuneration to net profit for companies in our Malaysian coverage universe at 4%, which is a drag on its score.

Finally some shareholder activism

In Malaysia, minority shareholders might not be a happy lot, but they hardly ever put up a fight. So if they do, they deserve at least mentioning.

A group of disgruntled shareholders of Metronic Global Bhd (holding more than 10% of the shares) have requested for an EGM:

to remove each of the following from the office of Director:

- Dato' Abd. Gani bin Yusof, Tan Sri Dato' Kamaruzzaman bin Shariff; Liew Chiap Hong, Mohd Kamal bin Omar; and

to appoint each of the following to be Director of MGB:

- Dato' Dr . Chin Yew Sin, Ling Yew Kong, Liew Chee How, Ng Wee Peng

The details of the reasons behind it can be found here.

Reason A concerns the receivables from related parties, a very old issue:

This should not come as a surprise for readers of this blog, since the issues have been detailed more than one year ago here and later here again.

Reason B concerns the selling of one of the rare well performing assets of Metronic:

The disgruntled shareholders have indeed valid points, but will they succeed? The shareholding structure is very dispersed, so they might indeed have a chance.

On the other hand, will it help?

On November 27, 2012 Metronic Global announced:

"that MH Projects Sdn. Bhd, (“MH”), Main Contractor for a project previously undertaken in the ordinary course of business by Metronic Engineering Sdn. Bhd. (MESB), a wholly owned subsidiary, has been put into winding-up by the court. MH currently owes MESB an amount of RM44,450,738. MESB will submit its proof of debt to the liquidator of MH in due course and will also continue to pursue recovery direct from Jabatan Kerja Raya in line with the Deed of Assignment executed between MESB and MH previously. The Company has made a provision of RM20,057,510 on the debt and is now assessing on whether a further provision of debt should be made on the remaining balance."

And the most recent quarterly results were bad, again due to the receivables, which were not able to receive.

Metronic Global has now accumulated losses of more than RM 34 million, and that might increase further. By far the biggest item in the list of assets is still Trade Receivables, RM 54 million.

I am therefore afraid that the actions of the minority shareholders, good in itself, are simply too little, too late.

But questions need also be raised why the authorities (BM, SC and SSM) have so far not taken any action whatsoever. Surely there was enough reason to do so. And then there is still the issue of Ernst & Young, approving the year report for six years in a row, including the dubious receivables (from a related party) which eventually had to be written off.

And Olam responded .....

Olam defended itself with the following 44-page report. It looks pretty solid, at least they did a good job responding in detail and fast. I expect some follow-up from Muddy Waters, it is their move.

The jury is not yet out, but some investors sold their shares, just to be on the safe side, the share has fallen about 40 cent in November.

The Valuebuddies forum drew attention to the fact that Olam has been buying back its shares, for instance here. Companies that have large debts and constantly have to issue new notes should not embark on a share buyback program, in my opinion. They should first strengthen their balance sheet, and only then, if the share is indeed trading at a huge discount to its net asset value, it could consider buying back its shares. But even then, I prefer a simple, transparent dividend, the higher dividend yield will automatically attract attention, so the result will be the same.

The Wall Street Journal detailed Muddy Water's track record so far in this article.

Muddy Waters released its report about Olam

Muddy Water released its 133-page report about Olam, the link can be found here. Many issues are very (accounting) technical in nature, and it will take time to digest the information. Also, we need to see the official reaction from Olam on the report. In the Business Times (Singapore) a lot of attention for the report, which contains quite a lot of recycled old articles, critical comments made by other analysts in the past.


Carson Block, founder of Muddy Waters Research LLC, talks about Olam International Ltd.'s accounting methods, risk of failure and business planning. Block, speaking with Stephanie Ruhle and Tom Keene on Bloomberg Television's "Market Makers," also discusses short-selling strategies.



More can be found here: "Why Short Seller Carson Block Is Done Exposing Chinese Frauds"

Genneva, the role of high people and the press

A remarkable article on the website of The Malaysian Insider:

"Genneva freeze not fair to investors, says Dr M".

Former Prime Minister Tun Dr Mahathir Mohamad appeared today to defend gold trading firm Genneva Malaysia, and asked Bank Negara Malaysia (BNM) to lift the suspension of its assets.

He made his remarks today despite a recent explanation by Deputy Finance Minister Datuk Awang Adek Hussin in Parliament that Genneva’s liabilities exceeded its assets and that showed the company was unable to pay returns to its investors.

“I don’t know what is wrong with the Genneva thing, they claim that they aren’t operating this pyramid scheme,” Dr Mahathir told reporters after addressing the 3rd World Conference of Riba (usury) here.

“Investigate first because if you stop the transaction, people’s money will be locked out and they cannot use, they cannot even get the gold ... They deserve fair treatment.”

He also urged the authorities to regulate gold trading as he extolled the advantages of keeping and buying gold.

Genneva’s gold, which was advertised as syariah-compliant gold, was launched in December 2010 by Dr Mahathir, and a number of its traders were spurred on by the former PM’s recommendation.

To me, if it looks like a pyramid scheme, swims like a pyramid scheme, and quacks like a pyramid scheme, then it probably is a pyramid scheme.

Even if they use terms like "trader" instead of "investor", "consultant" instead of "agent", that doesn't change a thing, it is just using different words. Coupled with unrealistic high returns of 24% or even 36% per year, I am 99.9% sure that Genneva was indeed operating a pyramid scheme. But it seems that Dr. M. still isn't convinced.

Dr.M. wasn't the only high person who was somehow involved with Genneva, several others were also, it appears. Since Malaysia has the highest Power Distance Index value in the world people will more easily follow the advice of high ranking people. They should therefore be more careful than usually.


Another aspect is the media, where were they? They could easily have warned the public what was going on. I did some searches on The Star, and found the following references:

A golden investment that sounds too good to be true

July 13, 2009: As the title suggested, this article gives a warning. But it is not clear in its information.

"A Bank Negara official however told Starprobe that Genneva was not licensed. He could not comment further as no complaint had been lodged against the company". Bank Negara had already started an investigation into the Bestino Group, did it really need a complaint to swing into action? 

Genneva sells gold and is not a ponzi scheme, says firm

July 15, 2009: “There may be Ponzi schemes in the market but it is obvious that Genneva is not one of them,” group senior manager Tony Yao said". I am afraid that is not obvious to me. This article takes some sting out of the one published two days before.

Only one week later, on July 21, 2009 Bank Negara commenced investigations:

Bank Negara Malaysia has commenced investigations into Genneva Sdn Bhd and Etika Emas Estet Sdn Bhd under suspicion of conducting illegal deposit taking activities in breach of Section 25(1) Banking and Financial Institutions Act 1989 (BAFIA) and Section 4(1) of Anti-Money Laundering and Anti-Terrorism Financing Act 2001 (AMLATFA).

The raids on these companies were conducted at their premises in Kuala Lumpur following information received from members of the public. Relevant assets and documents of the company were seized for the purpose of investigation.

The Star did allow Genneva to sponsor its Penang Starwalk 2011 giving credibility to the company which it used on its website.

Glittering prospects in the gold trade

February 10, 2012: an extremely positive article (as the title suggests) about Genneva without a single warning.

"Incorporated in March 2007, the Genneva Group of companies was set up with the intention of bringing gold trading to a new level in Malaysia by breaking away from traditional models. The company’s core mission is to encourage people to trade and increase their income capacity through gold. Today, the company is represented in nine states — Selangor, Perak, Johor, Sarawak, Penang, Malacca, Negri Sembilan, Sabah, and Kedah — with seven branch and four representative offices. It also has a strong international presence within the Asian region through outlets in Singapore, China, Hong Kong, and the Philippines".

Genneva Syariah sponsors RM100,000 for Ipoh Starwalk 2012

Ipoh Starwalk 2012 has struck gold with Genneva Syariah making its debut as a platinum sponsor in the annual event.

Biggest turnout at Starwalk

Again, Genneva is a platinum sponsor and 3 proud pricewinners are shown:

There is always a moment that a pyramid scheme collapses, when too many customers want their money back. That seemed to have happened in Singapore, as reported by this blog on September 26, 2012.

Not surprisingly (but possibly rather late), authorities raided Genneva on October 2, 2012, both in Malaysia and Singapore.

But still The Star published two letters Genneva, a new age biz model and Genneva Malaysia has never failed its customers (which doesn't seem to be true, at least in Singapore) on October 5, 2012, after the raids. Both letters where highly supportive of Genneva, should The Star really have published those letters?


Everybody is hoping for a fast and transparent investigation by the authorities. But other questions also need to be asked. Why were so many high persons involved in this case? Should the press not have done some investigative research and reporting? And should the authorities not have acted more early? And why does Malaysia appear to be a magnet for these kinds of schemes?

Business Trusts, "buyer beware" is not enough

This article in The Star of September 8, 2012 indicated that Malaysia might also allow business trusts to list in Malaysia. The start of the article is very optimistic:


Malaysia will soon have a new thrust that could promote vibrancy and excitement in its equity market. The framework for the listing of business trust in the country is in the works, and it will likely be unveiled by the Securities Commission (SC) before the year ends.

Several market observers expect business trusts to appeal to both the issuers and investors alike.

“For the investors, a business trust is an alternative investment that gives the comfort of a steady stream of return in the form of dividends; this is perhaps the biggest attraction of a business trust from an investor's point of view,” a corporate financier explains to StarBizWeek.

Take Singapore-listed business trusts. If they are of any indication, dividend yields of such an instrument could range anything between 3% and 10%.


But then, some very much needed dose of realism:


To that, several bankers say there is no need to hurry.

“It is not wise to rush into introducing business trusts in Malaysia just to play catch up. We should not worry about lagging behind because we can learn from the Singapore experience,” a banker says, pointing to the fact that most business trusts in Singapore have so far been performing badly, trading below the initial public offering prices, and causing some investors to suffer losses.


In an article "Time to tighten rules for business trusts" in The Business Times (Singapore) the following was revealed in the below table, aptly titled "Not a pretty sight"

Someone who would have invested $100 in each business trust would be sitting on an average loss (including dividends) of $23 for each investment. Only two out of eleven companies would have given a positive total return, but even in those cases they underperformed the Singapore Straits Times Index (STI). On average, the business trusts lagged the STI annually by 11.5%.

As the main reason, the article writes:

"The less rigorous regime of the business trusts allowes sponsors to exercise their boundless creativity. Caveat emptor is a fair argument to make in a market populated by highly sophisticated investors. In Singapore, the average investor is far from being sophisticated.

Given their atrocious performance thus far, there is a strong case for rules to be tightened for business trusts".


Associate professor Mak Yuen Teen of the NUS Business School responded the next day in a long letter to the editor. Some snippets:


"What are the true economic benefits of allowing increasingly diverse forms of business structures for listed issuers? Do they just end up transferring wealth from public investors to sponsors and intermediaries? Do they really give investors more investment choices or do they merely obfuscate? As we seek to increase retail participation in our markets, are these different structures too complex for ordinary investors to understand, especially as even so-called experts often have difficulty understanding these structures? Is it right to expose retail investors to such investments based purely on caveat emptor, and allowing sponsors and intermediaries to hide behind prospectuses that run into hundreds of pages?

We have also done almost nothing to improve the ability of investors to enforce their rights even as we become even more adventurous in the types of listings we allow.

There has been no substantive debate on contingency fee-based class action, litigation funding or other mechanisms which can improve the ability of investors to take action against issuers, directors, trustee-managers and other intermediaries. Cross-border enforcement by regulators remains a challenge, not to mention by investors.

A disclosure-based system based on caveat emptor ("let the buyer beware") can only lead to grief for investors if it is not accompanied by effective enforcement by both regulators and investors."


How true, and the above relates to Singapore, which scored 64% on enforcement while Malaysia scored a very disappointing 39%.

Another letter to the editor followed, written by Bobby Jayaraman, it can be found here. A snippet:


Despite their opaque nature, the reason business trusts still have a following among investors is the lure of high yields. Investors seem to forget the simple fact that yields only matter if the initial capital stays intact. In most cases, high yields simply provide cover for a fundamentally weak business.


Malaysia, given its weak enforcement, should really think twice before it wants to embark on business trusts. There is a lot to learn from the Singaporean experience with them. And that experience has, so far, not been that great, to put it mildly.

FABER: 44 Charts That Show Why The World Is Doomed

In a new presentation given in Hong Kong to the London Bullion Market Association, Faber offers a thick stack of 44 charts that makes him very bearish on the global economy (via ZeroHedge). They include overviews of the emerging and evolving trends on debt, trade, stocks and commodities.

Faber points to the explosion of public and private debt and how they have been far outpacing GDP growth for the last 50 years. In this backdrop, the wealth gap between younger and older Americans have been widening.

Overseas, China has seen its economy boom on expansionary monetary policy, which has turned the world's second largest economy into a giant credit bubble.

Considering all this, he offers two investment strategies: "aggressively shifting from one asset class to another" or "achieving safety though diversification."

Here is the (very interesting) presentation.

52 Shades of Greed

An illustrated Dictionary highlighting the key players of the 2008/9 crisis. Some of the more well known ones including their description (which in many cases seems to be much too mild).

Ace of Diamonds: Goldman Sachs
The best managed firm on Wall Street. When it ceased being a partnership in 1999, it turned a well oiled machine towards more aggressive and systematic exploitation of customers

King of Clubs: Hank Paulson

Treasury Secretary,gave away farm to banks in bailouts during crisis and bumrushed Congress to do it- while keeping his buddies in the know

King of Diamonds: Ben Bernanke

Repeatedly asserted that subprime was contained.

Jack of Clubs: Jamie Dimon

Jamie Dimon, the CEO and Chair of JPMorgan Chase, has tried so hard in the past several years to seem the “good banker.” He is so charming and gracious, yet all the while lobbying, cajoling, pushing, and wheedling to eviscerate any semblance of real reform on Wall Street. He shrugged off the cataclysm of 2008 as just something that happened, like the weather—no need for any structural reform. Chase’s balance sheet, a $2 billion loss can be absorbed. But it shows once again the impossibility of trusting the banks in the absence of structural reform and regulation to control their willingness to take almost unmitigated risk. It was Chase’s own lobbying on Capitol Hill and with the Treasury, the Fed, and other agencies that made these bets arguably permissible within the scope of hedging under the Volcker rule. Had they not lobbied and pushed and delayed and made the rule more complicated, these bets would have been illegal.

9 of Diamonds: Dick “Gorilla” Fuld

Richard Fuld was the last Chairman and CEO of Lehman Brothers. He was nicknamed "Gorilla" because of his aggressiveness. His best know quote is, " I am soft, I'm lovable, but what I really want to do is reach in, rip out their hearts and eat them before they die".

Fuld received almost $500 million in compensation from Lehman from 1993 to 2007.  As the sub prime crisis spiraled , Lehman was over-leveraged, which is to say the company had borrowed thirty two dollars for every one dollar it had. This was higher than the leverage at Goldman Sachs and Merill Lynch.

Under Fuld's leadership, Lehman lost 73% of its value in 2008 as the sub prime crisis spun out of control. When Barclay's pulled out of  a deal to purchase Lehman in August 2008, Lehman filed for Chapter 11 bankruptcy.

With $639 billion in assets and $613 billion in liabilities, the Lehman collapse was the biggest bankruptcy in U.S history. The company was party to over 900,000 derivatives contracts when it imploded. Fuld said when called before Congress , "Until the day they put me in the ground, I will wonder why we weren’t saved."

Joker: Alan Greenspan

Argued that corporations, including banks, would act in their own best interest and therefore could be trusted

Olam takes legal action against Muddy Waters

According to this statement, Olam International has taken legal action against Muddy Waters and its founder Carson Block. It looks like things are starting to escalate.

On one hand I am very much in favour for freedom of speech (which is anyhow much too low in Asia) and until now, I haven't read anything serious by Muddy Waters yet. But I don't know what exactly has been said on the Sohn London Investment Conference in London, details of the allegations have not been forthcoming. So I would be interested what exactly the case is about.

Olam's reaction so far looks rather extreme, as pointed out by Muddy Waters. A solid blue chip should just shrug its shoulders and move on, producing steady quarterly profits, it should not be bothered by criticism.

On the other hand, I am also not much of a fan of companies like Muddy Waters: first shorting a certain stock and then releasing negative information about the company.

But first buying a stock and then releasing positive information is basically the same, and that is happening all the time.

Court cases are always good for outsiders to get a glimpse of what is really going on, so I would be quite interested to read further about the on goings of this case. But because of the court case, Muddy Waters might not reveal more information and keep its bullets dry.

Channel News Asia's story about the events.

Muddy Waters response to Olam

Muddy Waters has responded to Olam reactions:


In the two and one-half years Muddy Waters, LLC has been openly criticizing publicly-traded companies, we have not seen a response as defensive as yours – not even from Sino-Forest. On Monday, our Director of Research gave a brief talk on Olam at a well-respected charity event. He presented facts about Olam along with Muddy Waters’s opinion that Olam is at risk of collapsing due multiple factors, including its debt load. As Olam has since said, his comments were not overly substantive. But based on this alone, Olam halted its stock, scheduled two conference calls, discussed buying back shares, and issued statements that included saying it is not a “fly-by-night company”. It has further evidenced a bizarre fixation on baseball caps.

Olam’s disproportionate reaction is extraordinary in our experience. Should Olam come to collapse (as we believe it will), its use of much-needed cash to buy back shares at this time should give rise to questions about whether fiduciary responsibilities have been breached – particularly given the possible existence of individual motivations that are not necessarily aligned with those of Olam’s lenders. We also note Olam’s attempts to impugn our credibility.

You and your investors should note that attempting to silence critics is not a plan of corrective action. In no way does it make Olam stronger. The February 2011 CLSA report, which raised far fewer concerns than we have identified internally, and that Olam itself made so controversial, should have caused you to work toward repairing what ails your business and your balance sheet. Instead, Olam has since increased its a) debt load by approximately S$900 million, b) cumulative investment cash burn by approximately S$2 billion, and c) cumulative operating cash burn by approximately S$500 million. In other words, you did the exact opposite of what you should have done. Your actions have been an abject failure of leadership.

Companies that attack criticism the way Olam does fail to understand that raising money from the public is a privilege. Because Olam has received significant investment from the government of Singapore, Olam’s mismanagement of the public trust is that much less forgivable. Know this: You voluntarily came to the market, you subjected yourselves to its forces, and you must bear the consequences of your ineptitude.

We do not work for an investment bank, and cannot be bullied the way other analysts can. Our research into Olam has been exhaustive, and we plan to resolutely stand by it regardless of any attempts you might make to discredit it or us.

We therefore suggest you find better uses of your time than focusing on criticism. For instance, you might want to work on plans to reign in your CapEx and de-leverage. The clock is likely ticking.

Olam's shares suspended after Muddy Water allegations (2)

The Olam issue seems to be very "hot" in Singapore. Many investors have exposure either through their equity or bond holdings. Valuebuddies has the following thread on it. From other sources I received the following information.


The most well publicized Muddy Waters success is Sino Forest where the trees obviously weren't where they were supposed to be. However, he's tried it 3 other times and here's the track record:

Company    MW RPRT     Pre-report  Day-after    Curr. PX
SPRD US    28/6/11     $18         $13          $18
FMCN US    21/11/11    $25         $15          $25  
EDU US     18/7/12     $22         $9.5         $19

Outside of Sino Forest, the last 3 target stocks are higher or at similar levels within months of MW reports. Just stating a fact here.


The OLAM 4.07% Senior Bond maturing on 12-Feb-2013 is yielding 18.72% to maturity!  Current Offer price at 97...

OLAM 6% 2018 now offer at 90.  Yield to maturity is 8.22%.  

The million dollar question is, will OLAM default in the next 2.5 months?


The primary issue is their recognition of biological gains (Olam has booked SGD191m of these gains in the past 2-years; 24% of report PAT). Biological gains are the yearly changes in net present value of future income flows on the group’s upstream crop and livestock investments. These valuations use assumptions on commodities prices, productive life of assets, yields, inflation and discount rates. According to Muddy Waters, if Olam does not deliver on their investments, the profits recognized as biological gains will amount to nothing. Muddy Waters also claims the valuations assumptions are aggressive.

Biological gains are a requirement under IFRS for Singapore-listed companies and have been in place for the past 4-years. The aim of this standard is to make a fair-representation of a company’s biological investments as these typically have long gestation periods before revenue delivery while costs are incurred from the start.

All palm oil plantation companies listed on SGX follow this. In our view, whether the assumptions used are aggressive or whether biological gains are recognized as earnings is a moot point. These gains (and losses) are stripped out by a majority of the Street in arriving at core-earnings for Olam as well as all other SGX listed plantations. Further, in their annual report (p142 in 2012), Olam discloses all the assumptions that go in to coming up with their valuations – which are signed off by the auditors (Ernst & Young) and also in the case of livestock by independent valuers.

Biological gains come in two forms: (a) operational – changes in yields assumptions etc and (b) non-operational – changes in pricing assumptions, discount rates. Olam is the only company in our coverage that actually discloses these separately. We will comment further once we have a look at the Muddy Waters report which is scheduled to be released Tuesday morning US time.

Olam's shares suspended after Muddy Water allegations

Muddy Waters has targeted Olam (listed in Singapore) for "short selling". Temasek is a 15% shareholder of Olam, which makes this case even more interesting. At the moment the share is suspended, pending clarifications.

Muddy Waters has had some succes in some cases (Sino Forest comes to mind), but other cases were not clear cut at all (to say the least).

"Buyer beware", but also "Seller beware".


By Jesse Westbrook and Shruti Date Singh

    Nov. 20 (Bloomberg) -- Olam International Ltd., the commodities trader part owned by Singapore’s state-owned investment company, plunged the most in four years after short seller Carson Block said he’s betting against the shares because he questions the company’s accounting methods.

    The supplier of 20 agricultural goods from cocoa to rubber fell 21 percent in over-the-counter trading in New York yesterday, according to data compiled by Bloomberg, after Block said the company is booking profits on transactions before it’s clear how the deals will work out over time. Singapore-based Olam is “heavily” indebted and aggressive in how it reports what the company calls biological gains on investments, he told the Ira Sohn Investment Conference in London.

    Olam is “dismayed at the nature and lack of substance” of Block’s comments and wasn’t contacted before by him or his Muddy Waters LLC research firm, Chief Executive Officer Sunny Verghese said in an e-mailed statement. He’s waiting for a report from Muddy Waters and “will strongly defend Olam’s excellent reputation for transparency and good governance,” he said.

    Block, 36, has successfully bet against Chinese companies that trade in North America after questioning their accounting methods. One target, tree-plantation operator Sino-Forest Corp., slumped 74 percent before eventually filing for bankruptcy protection in March last year.

                        ‘Leap of Faith’

    Olam will fail and recoveries for investors will be “negligible,” Block said. “It’s a leap of faith to think the company is being honest with its valuation” gains, he said.

    It fell 0.9 percent in Singapore yesterday to S$1.74 before the 29 cent plunge to $1.10 in New York. It has fallen 18 percent in Singapore this year compared with a 12 percent gain in the benchmark Straits Times Index.

    Hong Kong- and Mississauga, Ontario-based Sino-Forest Corp. plunged before being suspended in August last year after a June 2011 report from Muddy Waters accused it of fraud.

    Block took a short position in Sino-Forest by borrowing and selling the stock, aiming to profit by repaying the borrowed shares at a lower price. Sino-Forest filed for bankruptcy protection in March. The Ontario Securities Commission accused several executives including the former CEO Allen Chan of involvement in a “complex fraudulent scheme” to inflate assets and revenue.

                         Block Targets

    Other companies targeted by Muddy Waters include New Oriental Education & Technology Group Inc. Block said last month he’s “more convinced than ever” that the Beijing-based company is misleading investors. In February, Muddy Waters issued its fifth report on Focus Media Holding Ltd., claiming the Chinese advertising company overstated its network.

    “As it pertains to Sino-Forest, he was able to unearth something others weren’t,” said John Goldsmith, deputy head of equities at Montrusco Bolton Investments Inc. in Toronto, who sold his Sino-Forest shares for a loss in June 2011, seven days after Muddy Waters published its report on the company. “He, ultimately, was proven correct. You have to at least listen.”

    Olam was founded in 1989 in Nigeria by the Kewalram Chanrai Group as an export company to secure foreign currency, according to Olam’s website. Today, Olam is the fifth-largest publicly traded global wholesaler of agricultural products ranked by revenue, after Bunge Ltd., Archer-Daniels-Midland Co., Noble Group Ltd. and Glencore International Plc., according to data compiled by Bloomberg.

                       Biological Assets

    The company supplies food to 12,300 customers in 65 countries and employs more than 18,000 people, the website says. Temasek Holdings Pte, Singapore’s state-owned investment company, holds 16 percent of Olam, according to data compiled by Bloomberg.

    The company’s first-quarter net income of S$43.2 million ($35.3 million) included an operation gain of S$10.1 million on account of “fair valuation of biological assets,” Olam said in a Nov. 14 statement. It said then that it started making such valuations in the third quarter of fiscal 2012 and “hence there was no operational gain/loss booked in the corresponding period” a year earlier.

    Overall, Olam said its quarterly profit rose 26 percent while sales gained 45 percent to S$4.69 billion. Net debt was $5.7 billion as of Sept. 30, according to data compiled by Bloomberg.