Friday 29 March 2013

1MDB, many questions, not many answers

KiniBiz has recently written several rather interesting articles about 1MDB:

1MDB: Giant ponzi scheme or strategic investment fund?

1MDB's colourful family and friends

A description of all the key players and advisers of 1MDB.

Regarding Taek Jho Low (also known as J Low), it is mentioned that he rubbed shoulders with Paris Hilton, Jamie Foxx and Leonardo DiCaprio.

The article doesn't mention the RM 5 million that J Low spend on a single evening in Dubai, trying to woe Taiwanese singer Elva Hsiao, according to this article:

"Although she was touched to tears, Elva allegedly rejected his 'proposal'."

A rather expensive rejection. But at least J Low still has the following priceless memory:

1MDB loans to PetroSaudi put nearly RM6 billion at risk

Up to RM4 billion in bond pricing losses

Another relevant article is from the Financial Times blog:

1MDB of Malaysia’s $1.75bn bond: one puzzle wrapped up in another

"The ingredients were always going to be interesting…
  • Ananda Krishnan, or AK, one of Malaysia’s richest tycoons: check.
  • 1MDB, a Malaysian sovereign wealth fund: check.
  • Goldman Sachs: check.
  • Sheikh Mansour-led Ipic of Abu Dhabi: check."
"When the pricing was leaked, rival bankers huffed and puffed, berating Goldman for selling 1MDB an expensive, overly-complex structure."

"Bankers are wondering why an Abu Dhabi government investment fund would guarantee what is essentially Malaysian sovereign debt. After all, 1MDB has secured a Malaysian state guarantee in the past. Why is a Gulf emirate, many miles away, guaranteeing this bond?"

Many questions are asked in the articles, but not many answers given, 1MDB seems to be shrouded in secrecy, which is not good, since it is owned by the Malaysian public. Hopefully one day we all will know what exactly has happened and why.

Tuesday 19 March 2013

SPAC's: Boon or Bane?

Initial Public Offers (IPO's) for Special Purpose Acquisition Companies (SPAC) seem to be the flavour of the month on Bursa Malaysia. The following companies are either listed, or will be listed soon:
  • Hibiscus
  • CLIQ Energy
  • TerraGali Resources
  • Australaysia Resources & Minerals
  • Sona Petroleum
The share price of Hibiscus has performed well since its listing, probably explaining the recent surge in SPAC's. Hibiscus booked a loss of 7m over 2012. It made some acquisitions, apparently shareholders believe that these will pay off in the future. At the moment, it is much too early to say anything about this, these things take time.

Some general remarks about SPACs:
  • The companies have no track record, assets, turnover or brand names
  • The managers receive large chunks of shares (about 20% of the issued capital) for a very cheap price, almost for nothing
  • They still receive millions a year in management fees
  • Listing fees are high, often around RM 20 million (depending how much money is raised), to be paid from money raised
  • Shareholders often receive warrants, that sounds interesting, but is neutral when all parties receive warrants; on top of that, sometimes the insiders have warrants with a lower exercise price
  • Shares offered often are at about 25% premium to NAV, meaning the net asset value has to rise by 33% just to equal the IPO price
  • Often difficult financial structures are used, for instance Hibiscus issued RCPS and CRPS, "alphabet soup" instruments designed by financial engineers that will be much too difficult to analyse for the huge majority of the retail investors
  • I also noticed already a Private Placement for Hibiscus, another concern
The IPO documents are still very thick, around 250 pages, and that for companies with no history.

In my opinion:
  • SPAC's are very good for the managers, they have almost nothing to lose and still earn good wages
  • The verb is "you can't have your cake and eat it", but SPAC's managers prove the verb is wrong
  • Minority shareholders pay for the dilution by and fees for the managers, and carry almost all of the risk
Much more preferable (in my opinion) for investors who are interested in these industry (energy and other natural resources) to simply invest:
  • In a basket of listed global mining or energy blue chips, companies with proven track records; some examples are BHP, Barrick Gold, Royal Dutch Shell, Total, Statoil, etc.
  • Or (if an investor has no time to analyse them) in well managed funds who invest in these areas (Blackrock for instance has some decent energy, gold and mining funds)
  • Or (if people deem the management fees of these funds as too expensive) in energy or mining ETF's with very low fees
SPAC's are instruments designed by financial engineers, they don't add any economic value, in my opinion.

While engineering in general has brought us so much good (cheaper, better, stronger solutions), financial engineering hasn't, in the contrary. Unfortunately, financial engineering is getting more and more popular on Bursa Malaysia.

Monday 18 March 2013

DailyMail: Chairman of MUI in divorce battle

The UK tabloid DailyMail reported the following:

Former Miss Malaysia could get £500m payout in Britain's biggest ever divorce settlement from multimillionaire husband

Pauline Chai, now 66, is divorcing Malaysian businessman Khoo Kay Peng Chairman of Malaysian United Industries has properties around the world The 74-year-old also owns a 40 per cent stake in Laura Ashley Divorce petition filed last month on grounds of 'unreasonable behaviour'

The 74-year-old also has a 40 per cent stake in Laura Ashley, which now has sales of £286 million a year, and is director of Corus Hotels Limited which owns ten hotels including the grand Corus Hyde Park Hotel.

Some more information at the website of The Times.

Certain assets are held by listed Malaysian companies (not by Khoo personally) in the MUI and Pan Malaysia stable (PMI and PMCorp), those companies also have liabilities and are owned by other shareholders.

One should therefore not count the value of the assets but of the shares of these companies, and the share prices of all these companies are languishing, they are all penny stocks.

There have been serious Corporate Governance concerns in all of them, as mentioned in this blog and much more in WhereIsZeMoola.

I therefore get the impression that the above amounts are widely overstated (at least as far as they relate to the assets in listed companies). Khoo Kay Peng is also not listed in the Top 13 of the richest Malaysians.

Saturday 16 March 2013

Bank run in Cyprus, 0% interest in Germany

In Cyprus a bank run started, according to this article.

And it all started because of this:

"Eurozone leaders and the IMF on Saturday announced an unprecedented levy on all deposits in Cypriot banks as the sting in the tail of a 10-billion-euro bailout for the near-bankrupt government in Nicosia.

Intended to apply to everyone from pensioners to Russian oligarchs alleged to have billions stashed away in what officials say is a bloated Cypriot banking sector, the "stability levy" immediately raised a flood of concerns among finance experts over a possible bank run in bigger eurozone economies, where fragile public finances are also under scrutiny.

Dutch Finance Minister Jeroen Dijsselbloem, after chairing some 10 hours of talks to strike the deal with counterparts including International Monetary Fund head Christine Lagarde and the European Central Bank's Mario Draghi, said the "upfront, one-off" tax is expected to raise 5.8 billion euros on top of the loans still to be finalised by eurozone parliaments.

The levy will see deposits of more than 100,000 euros in Cypriot banks hit with a 9.9 percent charge when lenders re-open their doors on Tuesday after a scheduled bank holiday on Monday. Under that threshold and the levy drops to 6.75 percent."

Meanwhile Germany is issuing government bonds at the "generous" interest rate of ..... zero per cent!

This is what the Telegraph wrote about it:

Germany's status as a safe-haven during the eurozone crisis was confirmed after its central bank said it would issue two-year bonds at zero interest for the first time.

The Bundesbank said it would issue €5bn (£4bn) of the bonds at an auction on Wednesday, which are expected to sell as investors rush to buy the eurozone’s safest bonds amid renewed fears over Greece.

While some eurozone countries are suffering from rising borrowing costs Germany enjoys low interest rates on its sovereign debts as investors are certain that the financial future of Europe’s largest economy is assured.

“If this is not a signal of complete financial market dislocation, nothing is,” said Marc Ostwald, strategist at Monument Securities.

This starts to sound worrisome. The 2008/9 crisis was never structurally resolved (money printing will just postpone problems, not solve them), and financial tensions are appearing again. Is it possible we will see another crisis?

Singapore most innovative, KL 11th out of 16 Asian cities

Solidiance has written a report ranking the most innovative cities in Asia.

More details can be found here.

In total 16 cities were researched, Singapore was considered to be the most innovative city. Kuala Lumpur just failed to make the Top 10, it ended on the 11th place:

1. Singapore
2. Sydney
3. Melbourne
4. Hong Kong
5. Auckland
6. Tokyo
7. Seoul
8. Osaka
9. Pusan
10. Taipei
11. Kuala Lumpur
12. Bangkok
13. Beijing
14. Shanghai
15. Mumbai
16. New Delphi

The outcome should not come as a complete surprise. Singapore has been spending lots of money to encourage innovation and research, it has dozens of incubators (including many foreign ones), many grant schemes, highly rated universities, etc.

Kuala Lumpur should improve on these fields, and also fight corruption, crime and red tape if it wants to improve on its score.

Friday 15 March 2013

Why is Aussie VC fund much too late with its announcements?

I wrote before about Silverbird. It continues to lose money, with no updates about a possible financial rescue action. Not sure if it is wise to throw more good money after bad money, Silverbird has incurred horrific losses in the past.

The Edge Malaysia reported in its issue dated March 11, 2013 something else that is rather strange. CVC Limited (CVC), a Venture Capital fund from Sydney, announced that it had disposed of large amounts of shares in Silverbird and that it ceased to be a major shareholder. The announcements can be found here, here, here, here and here.

What is remarkable about this is that the announcements have been made almost one whole year too late. The first announcement was made on March 5, 2013 regarding disposals made on April 26, 2012.

There are very clear rules regarding major shareholders disposing shares: announcements have to be made within seven days to Bursa Malaysia. These rules are there for a very good reason, to inform all parties involved.

So why was CVC, a fund managed by financial professionals, who surely are very much aware of the listing rules, so much too late with their information?

It reminds me about an article of David Webb about US fund manager Denver Investment Advisors LLC acquiring a huge stake in Pico Far East Holdings Ltd (one of my favorite stocks) and informing the HKEX 13 months too late about it.

Webb wrote further:

"So Denver Investments has broken HK law. Will they be prosecuted? Almost certainly not, because this once again highlights that foreign shareholders cannot in practice be prosecuted for late disclosure unless they have a presence in Hong Kong, because a summons cannot be served against them outside HK without special permission from the HK courts, which is not lightly granted. See Order 11 of the Rules of the High Court. But Webb-site can name and shame them, and this we now do. A professional fund manager such as Denver Investments should know better and should check and comply with disclosure requirements when investing in overseas markets."

Fund managers, VC funds etc. from countries (US and Australia) with relatively high Corporate Governance standards are supposed to give the good example. In both cases, they seem to have done the opposite.

I hope the Malaysian authorities will shed more light on the Silverbird case, and, if rules are indeed broken, that they will make an effort to enforce the rules.

I am still stuck with one mystery: was no other party aware of what was going on? Did for instance the company secretary of Silver Bird know about the disposals? In the year report 2011 it is mentioned that the shares of CVC are held by "AmanahRaya Trustees Berhad, Exempt An for Perkasa Normandy Managers Sdn Bhd". Was AmanahRaya Trustees aware of what was happening?
It should be relatively easy for Bursa Malaysia to track changes in this account, and if not followed up by a corresponding announcement, to issue a timely query to the relevant parties? From a software point if view, it should be quite easy to generate a report of possible breaches of the listing rules.

Many questions, hopefully soon some relevant answers.

Saturday 9 March 2013

Protasco, MISC, HL Cap, Bintulu Port


I wrote before about Protasco's latest quarterly report, leaving out all relevant information regarding their huge (and puzzling) acquisition of an oil & gas company in Indonesia. Protasco has amended its quarterly report three times (possibly urged by the authorities?), and in it's fourth attempt it finally got it right.

Instead of

"21. Corporate Proposals
There were no corporate proposals announced but not completed during the current quarter."

The new text is:

"21. Corporate Proposals
Save for the following and the Proposed Private Placement mentioned in Note 9, there was no other corporate proposal announced but not completed in the current quarter up to 14 February 2013, being the last practicable date from the date of the issue of this report: -

Proposed Acquisition.

On 28 December 2012, AmInvestment Bank Berhad (“AmInvestment Bank”) on behalf of the Board of Directors of Protasco Berhad (“PB”) has announced that PB had on 28 December 2012 entered into a conditional sale and purchase agreement with PT Anglo Slavic Utama to acquire 95,000,000 ordinary shares of IDR1,000 each in PT Anglo Slavic Indonesia (“PT ASI”), representing 76% equity interest in PT ASI for a proposed purchase consideration of USD55,000,000."

Not one iota extra information, but that was to be expected: Protasco has not been transparent at all, and apparently prefers to pursue this chosen path.

How one can "forget" to report about its private placement, and even more important, its RM 170 million acquisition is a mystery to me.

MSWG gives out prices for the companies with the best Corporate Governance, I would like to suggest to also give out prices for companies displaying the worst Corporate Governance. I would like to propose Protasco as a possible candidate in the last category.


MISC has released the report by the independent advisor AMInvestment Bank.

Its conclusion is: "not fair but reasonable".

Its fair valuation is in the range of RM 5.69 to RM 6.10, therefore the offer price of RM 5.30 is not fair.

Why reasonable? Because Petronas "threatens" with delisting and compulsory acquisition, and at least this is an opportunity for shareholders to exit.

Luckily the independent advice does give the long term graph of MISC, clearly showing that the price offered is at a huge discount to the prices in the previous years (only at a premium compared to the price in the last year).

I have big problems with this deal. Petronas is owned by (the people of) Malaysia, why can't it offer a fair price to the MISC shareholders?

Not too long time ago shareholders subscribed to rights issue priced at RM 7 per share, all those shareholders are sitting on substantial losses.

Also, I still haven't heard any good reason why Petronas wants to privatize MISC. As the majority shareholder, what can they do after the privatisation which they can't do in the current situation?

Hong Leong Capital:

Bursa Malaysia has issued an UMA (Unusual Market Activity) to Hong Leong Capital, the company announced that it

"is not aware of any of the following that may have contributed to the unusual market activity:-

1.       any corporate development relating to HLCB Group’s business and affairs that has not been previously announced that may account for the unusual market activity including those in the stage of negotiation/discussion;

2.       any rumour or report concerning HLCB Group’s business and affairs that may account for the unusual market activity; and

3.       any other possible explanation to account for the unusual market activity."

UMA's have more bite in them since the Can One case, so good Bursa Malaysia issued it. I hope they are on top of the developments, it is a very puzzling and intriguing case.

Bintulu Port:

Bintulu Port announced that it is seeking permission for a Private Placement (PP) of a massive 60 million shares (15% of its issued and paid-up capital) at a 5% discount to its major shareholder. MSWG is questioning why the company is not resorting to a rights issue, giving all shareholders the opportunity to participate.

I don't like Private Placements at all, if they ever occur they should be small (say up to 5% of the issued shares) and at a very low or no discount. Under the current rules, the potential of abuse is simply too large, the authorities should look into this issue. But good that MSWG questioned the PP of Bintulu Port.

10 Worst Corporate Accounting Scandals

The 10 worst corporate accounting scandals, from this website.

Some fun facts:
  • Fortune Magazine named Enron "America's Most Innovative Company" 6 years in a row prior to the scandal.
  • At the height of the scandal Kozlowski threw a $2 million birthday party for his wife on a Mediterranean island, complete with a Jimmy Buffet performance.
  • After posting the largest quarterly corporate loss in history in 2008 ($61.7 billion) and getting bailed out with taxpayer dollars, AIG execs rewarded themselves with over $165 million in bonuses.
  • In 2007 Lehman Brothers was ranked the #1 "Most Admired Securities Firm" by Fortune Magazine.

Thursday 7 March 2013

Hong Leong Capital to be delisted: many questions

I received the following anonymous comment:

"I saw this news and thought it was disgusting. I must say the adventurous shareholders who do not sell got a pretty good deal but not to those who sold at the news of takeover."

And a link to the article in The Star:

"Trading in Hong Leong Capital Bhd's shares will be suspended on April 15 as it does not meet the public shareholding spread. Its last trading day will be on April 12.

Bursa Malaysia Securities said the suspension is under the Main Market Listing Requirements.

At the close of trade on Wednesday, Hong Leong Capital's share price was up 40 sen to RM3.40, which was nearly double the RM1.71 takeover offer price by Hong Leong Financial Group Bhd (HLFG).

On March 1, Hong Leong Capital said following the close of the unconditional voluntary take-over offer by HLFG to acquire all the remaining Hong Leong Capital shares not already held by HLFG for RM1.71 per offer share, the public shareholding spread was 9.66% as at Feb 28.

Hong Leong Capital said it was not in compliance with Rule 8.02(1) of the Listing Requirements. It also said the public shareholding spread was also lower than the 20.42% level of public shareholding spread accepted by Bursa Securities.

Bursa Securities then said it would suspend the trading of Hong Leong Capital shares immediately upon the expiry of 30 market days from March 1.

The suspension would take effect on April 15, which was the market day immediately following the expiry of 30 market days from the March 1 announcement.

This meant the suspension would only be uplifted by Bursa Securities when it fully complied with the required public shareholding spread or as may be determined by Bursa Securities.

However, Hong Leong Capital had then stated it did not have any plan to address the non-compliance with the public shareholding spread requirement."

Although the take-over offer had hardly any acceptance, the company will still be de-listed.

The authorities have been very quiet on this case, while many rumours have been flying for quite some time. I think it is very much needed that they at least announce they are investigating this case.

At the very least the case is puzzling, but some will say it is "disgusting", as the anonymous commenter wrote. Most likely relating to the feeling that the small investors have hardly any power at all on the Bursa, where the big boys are perceived to rule.

Bursa Malaysia and the Securities Commission really should level the playing field more.

What exactly has been going on here in this case, will we ever know?

The only good part is that courageous minority investors who held out, can currently sell in the market at a nice price. But the ones that have sold at a more early stage, how are they feeling?

Wednesday 6 March 2013

Long term graph of SP 500

I love long term graphs, this one is from the S&P 500 (USA), the grey areas are recessions.

It is impossible to time the market correctly, but somebody who was roughly right would have made a bomb:
  • Buy the US market somewhere between 1980 and 1990
  • Sell in 1999/2000
  • Buy in 2002/2003
  • Sell in 2007
  • Buy in 2009
With hindsight, everything is easy .....

But even people who bought the market in 1980 and just held on to their shares would have done pretty well, they would have made about 15 times their money.

Saturday 2 March 2013

Berkshire Hathaway's year report 2012

There are two events important for followers of Berkshire Hathaway (BH), Warren Buffett and Charlie Munger:
  • the AGM of BH which will be held May 4, 2013 
  • the issuing of the yearly shareholder letter, which was done yesterday.
The link for the letter can be found here.

The report is very basic, no photo's, no fancy colour schemes, and the first page immediately gets down to business: the performance of the book value per share of Berkshire Hathaway versus the S&P 500.

The compounded annual gain of BH from 1965 to 2012 is 19.7% per year, the overall gain is a whopping 586,817%! Outstanding numbers.

But the outperformance versus the S&P 500 has significantly come down:
  • from 1981 until 1998 BH outperformed the index every single year, often by a wide margin
  • from 2004 until 2012 BH underperformed 4 years out of 9 years, and only outperformed the index by a wide margin in one single year (2008)
This was all forecasted by Warren, the sheer size of BH is such that outperformance is more and more difficult, Warren is now looking for acquisitions in the range of USD 10 Billion or more, and the universe for that kind of opportunities is not that large. His latest acquisition was H.J. Heinz, just announced in the news.

The numbers for the S&P 500 are also quite good, 9.4% per year, overall 7,433%. Yes, people who invested in US stocks over the last 4 to 5 decades would have done very well.

I estimate the comparable long-term gains for the Malaysian stock market to be much lower, and that while Malaysia's GDP has been growing much faster than the GDP of the US. A disconnect that I think has to do with the much lower corporate governance.

In plain English: majority shareholders and or management in the US have been more willing to share the spoils with the minority shareholders than in Malaysia.

Higher corporate governance standards and increased enforcement should improve this situation.