Glaucus whacks China Minzhong

I updated the below posting several times with new information that I found. Very interesting is this link from Lighthouse Advisors in which they explained in their June 2012 report (starting the last paragraph of page 3) why they divested their stake in Minzhong.

As far as I can see, all the reasons given sound reasonable and might strengthen the case for Glaucus Research: 

• Two comparable businesses are Chaoda Modern (almost certainly a fraud) and China Green (fair share of CG issues)
• Limited management ownership of Minzhong who received their shares at almost zero cost gives a temptation for the management to act in their own benefit at the expense of that of the other shareholders
• GIC of Singapore came in much more early than the IPO, they might have done due diligence in 2006, but the company has changed a lot since then
• The business model is cash flow negative, the land is leased and thus the company can not borrow against it, share placements are far more likely than dividends

 
I wrote one time before about short seller Glaucus, from an article in The Business Times (Singapore):

"Those which act responsibly like Glaucus by providing full disclosure can complement regulatory efforts and should be viewed as an important component of the governance framework."

Glaucus Research is one of those research institutions who focus on short selling of possible frauds and/or overvalued companies. Its website can be found here.

For those who question their motives, they are very open about it in their disclaimer:

Other well known short sellers are Muddy Waters, Citron Research and James Chanos.

Some more information on Glaucus Research can be found in this interview with Soren Aandahl in the SCMP.

The same founder was interviewed in The Edge, and mentioned that they were actively looking into a Singaporean company. Well, the Singapore share market didn't have to wait long. On Monday August 26, 2013 Glaucus published its report about Singapore listed China company "China Minzhong Food Corporation".

The information that it contained is highly damaging, that is, if it is indeed true. It is also insightful, how these short sellers do their research and what indicators they look at. One suspicious indicator was that the margins of Minzhong compared to other players in the same industry were just much too good to be true. Something else was that the company claimed to make a lot of profit, but it didn't show up in the cash.

One interesting chart in the report reveals the large number of S-chips (China companies listed in Singapore) that have gone down so far:

Worrisome, also since many of the better auditors were involved, apparently that is no guarantee that the accounts can be trusted.

A lot of supporting evidence on China Minzhong (either directly or circumstantial) is presented in the 49 page report, plus several documents as supplemental evidence.

On a side note, in Glaucus' report about China Metal Recycling (which company the SFC tries to wind up, meaning the allegations were indeed true) it does mention, rather interestingly, that it received a lot of support from local Chinese organisations in their search for evidence.

At least one prediction came true so far:

"we believe that Singapore regulators will halt trading of Minzhong's shares pending a full investigation into the Company".

That did indeed happen, after the share tumbled about 50% in high turnover in a matter of just two hours.

One letter in the Singapore media suggested that the SGX should have halted trading more early, and that circuit breakers would have had the desired effect.

Regarding the quality of the allegations by Glaucus, I leave it to the readers to form their own opinion,  they do appear rather convincing to me. A lot of discussion is going on at the Valuebuddies forum regarding this case. A good write up can be found here, from blogger "Ninja Master Fund".

China Minzhong so far has only reacted in a rather standard letter (which can be found on the SGX website), without any detail at all, just claiming that Glaucus "misunderstood" their business model.

We have to wait for much more specific information regarding the detailed allegations by Glaucus, that Minzhong overstated their revenue and profit significantly and other serious matters.

Minzhong did release their quarterly earnings numbers, which on the surface appear to be very good.

But the million dollar question is: are they really believable? According to Glaucus, they aren't.

In one contest however, Glaucus seems to have the clear advantage, the beauty of their logo.

Glaucus:

China Minzhong:

Bursa Malaysia has recently started to promote short selling. Are they ready for these kind of events, if something similar would occur? Would they welcome short sellers like Glaucus Research?

And on another matter, are they really still keen to list Chinese company on Bursa?

To the Malaysian readers: Happy Merdeka.

Protasco: how secure is the security?

Protasco announced today its 2nd quarter results.

Regarding the "Puzzling Purchase" no new information is given other than what was known already.

However, there is one important issue, Protasco has paid a huge cash deposit of RM 50 Million, for which it received a security (I have pointed out in the past that [a] the size of the deposit seems to be unusually large and [b] that it is rather strange that the cash itself is not held in trust).

In "A sliver of Information" I described the securities that are held in trust against the RM 50 million deposit: shares of PT Inovisi Infracom TBK, an Indonesian listed company.

The value of the securities as of April 26, 2013 was about RM 51.5 Million, a margin of safety of only 3%.

I wrote: "If that gives enough assurance to the shareholders of Protasco is up to them to decide. A small drop in value of the shares of PT Inovisi Infracom TBK or of the Indonesian Rupee and the collateral could be worth less than the RM 50 million deposit."

With the current turmoil in the emerging markets (both equities and currencies), it is timely to revisit this issue.

First of all regarding the currencies, I estimate that the Indonesian Rupiah fell about 3% versus the Malaysian Ringgit since April 2013. That takes already care of the small margin of safety.

But much more worrisome is the performance of the share of PT Inovisi Infracom TBK:

From a level of about 1,700 the share has tanked to about 1,000, a fall of more than 40%.

In other words, the security is completely not sufficient anymore to cover the RM 50 Million deposit, it probably covers about RM 30 million.

And on top of that, good luck to anybody who wants to sell a large block of Indonesian shares in the current market turmoil. Especially if the news gets out that Protasco would own a block of shares and it got stuck with them.

If the proposed deal does not go through (and because of the very high number of red flags that seems quite plausible to me) then Protasco might have a serious problem in getting back its money.

Given the lack of transparency in this deal that Protasco so far has shown it is not really a surprise it didn't report about the decreased value of the security, but I think it should have.

And I also think that the authorities (BM and/or SC)  should act in this matter, they have been much too quiet so far. At the very minimum Protasco should have been forced to provide much more details regarding the deal, enabling the minority shareholders of Protasco to make an informed decision.

Emerging Markets Are In For A 'Tumultuous New Era'

Great stuff here from Richard Koo of Nomura, who weighs in on the recent selling in emerging market currencies (and equities and debt).

His take: This is the price emerging markets are paying for not being more vigilant about hot money rushing into their economies after the Fed announced QE after the U.S. crisis. The emerging market, he argues, could have prevented the big rush of foreign cash through prudent measures, but that they opted not to take any pain, and now they're paying the price for going the easy route.

He concludes that we're now in for a "tumultuous new era" for emerging markets as QE gets unwound.

The above taken from the website of Business Insider, which continues with Khoo's text:


... the recent announcements would not have been necessary if these countries had taken advantage of these measures to restrict capital inflows from the US. They did not do so probably because restricting capital inflows is extremely unpopular. In nations attracting foreign capital, asset prices rise, people feel richer, companies are able to obtain low-cost funding, and inflation tends to be low with a stronger currency. Essentially everyone is happy but exporters, which suffer from a stronger currency. It takes a courageous policymaker to spoil that pleasant environment with capital controls, even if it is necessary for stable, longer-term economic growth. Therefore, the authorities typically preserve the status quo, in which “everyone is happy.”

Recent turmoil in emerging economies marks opening of tumultuous new era
Taiwan’s central bank has traditionally been quick to check on and if necessary restrict capital inflows, making its governor, Perng Fai-nan, an unpopular figure at certain foreign financial institutions. But it was only because the authorities kept such inflows in check that the Taiwanese economy escaped from the 1997 Asian currency crisis largely unscathed.

The lesson for emerging economies today is that in a world in which the industrialized economies are free to engage in quantitative easing at will, local authorities need to have the courage to restrict capital inflows or stop them altogether. It should also be remembered that the recent rise in US interest rates occurred simply because Mr. Bernanke said the Fed was considering scaling back its bond purchases. If the Fed were to actually discontinue its purchases under QE3 or sell the bonds in its portfolio, the resulting increase in rates would likely be much larger. In that sense, both the US and the emerging economies that will be affected as quantitative easing is wound down need to prepare themselves for a tumultuous era.


The above seems to relate also to Malaysia. Related to this is the fact that Malaysia postponed important restructuring, like getting a balanced budget. In good times a country should prepare for the bad times.

IHH: profit up 60% or profit down 60%? (2)

I did a quick check how the quarterly results of IHH were reported by the press.

The good:

• Reuters
• The Motley Fool
• The Edge Malaysia
• The Sun daily
• KiniBiz
• Straits Times (Singapore)
• Business Times (Singapore)

The bad:

• The Star
• The Malaysian Insider

In both these cases even the heading was simply plain wrong.


The Market:

Both in Malaysia and Singapore the IHH share was today down more than 5%, much worse than the overall market. In other words, investors sentiment was clearly negative, not in line with IHH's positive press release.


Although profit of a one-off sale last year is a reasonable argument for the fact that the PAT was much lower, what IHH did not mention in its press release was that it raised billions during the IPO (July 2012), which it could freely allocate and over which it was supposed to make a good return.

In its defence the company could bring forward that no company is mentioning that, which is basically true, although disappointing.

The half year net profit was RM 347m, on Equity of RM 19.7 Billion and Liabilities of RM 7.1 Billion that is actually a pretty disappointing result. Return on equity on a full year basis would only be about 3.5%.

The more surprising that the share is trading at such a high valuation, on a first half EPS of only RM 0.04, on a share price of RM 3.84, annualised that means a sky-high PE of about 48.

IHH: profit up 60% or profit down 60%?

From The Star website:

"IHH Healthcare net profit up 60% to RM188.7m in Q2"

IHH Healthcare Bhd's net profit rose 60% to RM188.70mil in the second quarter ended June 30, 2013, excluding exceptional items and recognition of the sale of medical suites.

The company said on Tuesday the higher profit was due to the rise in earnings before interest, tax, depreciation and amortisation (EBITDA), savings in finance costs from repayment of short-term loans, and a one-off RM22.0mil tax credit this quarter relating to tax from a previous year.

IHH's revenue, excluding recognition of the sale of medical suites, grew by 14% on-year to RM1.68bil from RM1.48bil.  Earnings before interest, taxes, depreciation, amortisation, exchange differences & other non-operational items rose 20% on-year to RM419.6mil from RM349.2mil.

"The group's robust earnings were buoyed by the ramp up of new hospitals this quarter. Its newest facility in Singapore, Mount Elizabeth Novena Hospital, turned EBITDA positive for this quarter," it pointed out.

IHH Healthcare said Acibadem recorded healthy earnings and improved EBITDA from its two new hospitals - Acibadem Ankara and Acibadem Bodrum - despite a seasonal dip in inpatient admissions volumes this quarter compared to a year ago.

As for Acibadem Ankara, which opened in November 2012, turned EBITDA positive for this quarter while Acibadem Bodrum continued reducing its EBITDA losses.

The hospital group said in the six months ended June 30, 2013, excluding the recognition of the sale of medical suites, the group achieved 21% increase for both revenue and EBITDA from a year ago.

The strong performance was driven by organic growth of existing operations, ramping up of new hospitals as well as the full six months consolidation of Acibadem Holding's performance in H1, 2013 as compared to only five months consolidation in H1 2012 when the Group acquired Acibadem Holding on 24 January 2012.

The group's year-to-date 2013 PATMI excluding exceptional items and the recognition of sale of medical suites increased 39% to RM322.1mil, compared to the same period a year ago.


Shareholders of IHH who read the above surely must be very happy with their investment.

But when we look at the official announcement at the Bursa Malaysia website, we see something very different:

Earnings are hugely down, by about 60% compared to the same quarter a year ago!

Where does the difference come from? The official announcement uses the correct PBT and PAT based on time tested accounting principles, while the company's press release uses EBITDA (corrected for certain one-off items), which are simply nothing else then "Bull Shit Earnings" according to Charlie Munger.

The press release of IHH (to be found at the Bursa Malaysia website) is really disturbing in the sense that it does not mention at all the real profit numbers (PBT and PAT) in the main text (they can only be found in appendix 1 at page 4, where also EBITDA is mentioned in the same table) . 

I have no problem that the company tries to give a positive spin to the story (that is quite normal), but the correct basic numbers should be presented in a clear and transparent way, even if they look bad.

And for The Star, they should analyse press releases before they publish them, and put critical remarks alongside them. Nobody is helped by this kind of non-information, which I think is borderline misleading. Even the title is plain wrong, net profit is PAT, there is no way around it.

A much better article can be found on the website of The Sun:

"IHH Healthcare Bhd, the second largest healthcare group in the world in terms of market value, reported a net profit of RM156.76 million, or 1.93 sen a share in the second quarter ended June 30, 2013 (Q2).

The net profit was much lower compared with RM398.9 million made a year earlier".

250,000 page views and counting

This blog received more than a 250,000 page views, has more than 500 postings and more than 600 comments and is more than two years old: time to try to create some structure in the "chaos".

I therefore wrote the "Overview of this blog", which I will update from time to time.

Why I wrote this blog? Basically because I found that minority shareholders in Malaysia were much too often receiving the short end of the stick. One example is the delisting exercises at a low price where minority investors are pressured by the dual threats of holding shares of an unlisted company and of their shares being mandatory acquired. Another example are the (infamous) Related Party Transactions, done under conditions that are very favourable for the majority investors.

Another motivation to start this blog was the huge amount of hypocrisy, by the majority shareholders, the authorities and the press.

This blog tries to counter the hypocrisy, the tone is therefore cynical and contrarian. It presents things from the point of view of the retail investors.

Having followed the Malaysian news for about 20 years, I quickly found out that it is more important to find out what not has been written, than what is written, "reading" between the lines is a must.

Luckily, things have improved with the internet and the many (alternative) news providers. The mainstream media has also improved somewhat.

On the issue of Corporate Governance and enforcement, some progress has been made, but from a very low base. Although some offenders received jail sentences (the only real deterrent in my opinion), enforcement against VIPs (tycoons, businessmen with political ties, etc.) is still extremely rare.

Overview of this blog

Listed Malaysian Companies:

AirAsia and AirAsia X good entrepreneurship, but unfortunately too many CG issues
Astro one of the many listed/delisted/relisted cases in Malaysia
Bina Puri admitted in court its intention to bribery, very worrisome
BRDB controversial related party transaction
Bursa Malaysia both regulator and listed company, common in many countries, but something that should have been avoided
China Stationery too many red flags
Ekran and the highly controversial RPT which has never been settled
Hong Leong Capital controversial General Offer
IOI Corp and IOI Prop controversial delisting and relisting
KL Kepong implicated in a story by Bloomberg
Kwantas damaging court case (subsidiary trying to defraud a bank in China)
London Biscuits accounting issues
LTKM chairman missing in action
Maemode went under as predicted by blogger "Ze Moola", but nobody took notion
MAS accumulated losses of more than RM 8 Billion
Masterskill after IPO business and share price only going South
MaxBiz too many red flags to count
Maxwell China listed company doing a puzzling acquisition
Maybulk in the midst of the global recession acquiring part of POSH for a very high price in a RPT
Metronic Global huge receivables from related party since its IPO
MISC controversial (aborted) GO by PETRONAS
MMC highly controversial RPT
MUI conglomerate falling on hard times
PMCorp issue from the past: "horrible deal from the past"
PMI unsuccessful take over offer for only 4.5 cent per share
Protasco possible oil & gas acquisition in Indonesia, no transparency and too many red flags to count
Proton and DRB-Hicom privatisation and possible insider trading
Puncak Niaga many CG issues
Ranhill Energy failed to list due to failure to disclose material information
Sersol projections are no projections, dilution is very real
Silverbird horrific losses and possible fraud
Sime Darby controversial take over of part of E&O
Sona Petroleum speculation about an acquisition
SP Setia controversial GO by PNB, huge dilution through PP and ESOS
Transmile fraud and convictions
Xian Leng lots of irregularities but still no action taken
YTL Cement controversial delisting

Malaysian Issues:

1MDB controversial state fund with a lack of transparency
Asian crisis (1997/98) once in a generation, economic crisis of a horrific size for the countries involved
Blast from the Past older issues
Budget Deficit Malaysia is scoring its 17th budget deficit in a row, aiming for the top spot in the global Guinness Book of Records
CG Blueprint and some feedback
China listed companies, Bursa continues to list them, despite accounting issues and warnings
Conflict of Interest should be avoided, but quite common, often when politics and business mix
Class Action Suits are not possible in the Malaysian context, they are very much needed to level the playing field
Delisting under the threat of holding unlisted shares, low offers are often accepted
Enforcement (and, unfortunately, often the lack of it)
Financial Engineering more and more common all over the world, including Malaysia, but has it done any good for minority investors? I strongly doubt it.
Genneva controversial gold trading scheme
GINI measurement of income inequality, Malaysia has one of the worst ratings of Asia
GLF (Government Linked Funds) like PNB, Khazanah and EPF, huge funds who should have played a much larger role in shareholder activism in Malaysia
High Frequency Trading not offering any economic benefit, some traders benefit at the expense of the normal investors
Independent Directors chosen and voted in by majority shareholders, so what is so independent?
Independent Reports often very biased, luckily improved recently
Inflation is understated in Malaysia, and thus is growth (corrected for inflation) overstated
Insider Trading frequent, but little enforcement in Malaysia
Mixing politics with business
MSWG has increased awareness for shareholder activism in Malaysia
Not fair but reasonable rather remarkable advice often used in independent advice for offers
Power Distance Index Malaysia has the highest Power Distance Index in the world, which (partly) explains little whistle blowing activity, lack of enforcement on VIPs and high corruption
Private Placements most often bad (dilutive) for minority shareholders
Relisting delisted at a low price, relisted at a high price, for the benefit of the majority shareholders
Securities Commission has recently increased enforcement, but from a very low base, and still lacking towards VIPs
Shareholder Activism almost non-existent in Malaysia, but recently increasing
SJ Asset Management fraud through an asset manager, still unresolved
SPAC IPO of a company with no history and assets, they are very good for the insiders, but are they any good for the minority investors? I have my doubts
RPT (Related Party Transactions) too good for insiders, not good for minority investors, unfortunately quite common in Malaysia
Warrant holders: while shareholders often get a lousy deal at privatisations ("unfair" in the majority of cases) warrant holders get an even worse deal
Ze Moola writer of a huge amount of critical blog postings on Malaysian companies

International Issues:

Berkshire Hathaway, Warren Buffett and Charlie Munger
David Webb prolific CG activist in Hong Kong
Gold and Miners
Long Term Investing and the beauty of compounded returns
Marc Faber, writer of the famous "The Gloom, Boom & Doom Report"
Short sellers targeting companies with accounting issues, like Anonymus Analytics, James Chanos, Muddy Waters, Citron Research and Glaucus Research

Another 1997/98 Asian crisis?

Worrisome article on the website of The Malaysian Insider:

"1990s crisis haunts Asia as debts mount"

The two important events being:

• The FED planned to slow down on Quantitative Easing (QE)
• China slowing down considerably

Both have a huge global impact:


"The spotlight has been mainly on India and Indonesia, which have the biggest current account deficits, making them the most reliant on foreign capital to make ends meet. Both have seen their currencies an their equity markets plunge in the past week.

But the risks of contagion across the region are beginning to rise, FT quoted the economists as saying, made worse by the slowdown in China Asia’s biggest growth engine.

Thailand, which slipped into technical recession in the second quarter, has seen household debt to GDP rise from 55% in 2009 to almost 80% today.

Total debt to GDP now stands at 180%, according to data compiled by HSBC.

FT said oil-rich Malaysia has seen a similar increase in debt levels helping to power consumption and housing booms. But poor trade figure have raised the prospect of it slipping into deficit this year, after a decade of running surpluses.

Last week, Indonesia reported a sharp widening of its current account deficit, its worst since 1996, thanks mainly to a fall in the value of its commodity exports."


The risk of contagion is indeed real. I still remember 1997, Thailand was in serious troubles, both its currency and share market had fallen a lot. But in Malaysia the experts fell over each other to explain that the situation was so much different/better than in Thailand. A few months later ..... we all know what happened. The stock market tanked from about 1250 to eventually in 1998 around 250, and the currency (which traded always at around RM 2.50 to the USD) weakened considerably (and has still never recovered to its pre-crisis levels).

The good news is that lots of Malaysian debt is in RM and held by Malaysian organisations. Also, the banks seems to be on a much stronger footing than during the Asian crisis. So, despite some genuine worries regarding the Malaysian situation, I actually don't think we will run into something similar to the 1997/98 crisis, but possibly in a recession (that is, if inflation would be correctly stated).

However:


But the FT said it does not mean some fresh trauma was impossible. As Neumann puts it, “every crisis arrives in a different guise"


Several emerging markets have fallen quite a bit lately, several emerging currencies have depreciated versus the USD. For those investors who own good quality value shares that they don't want to sell, but they would like to reduce their risk, I would recommend to buy an "insurance" for a part of their portfolio. There are several ways to do so:

• Shorting a particular stock that looks overvalued; not my favourite way, it can be quite risky, a particular share can be overvalued for a long time (sometimes artificially so).
• Shorting an index by selling the futures. Much better, and I have indeed done so myself in the past. However, it is still possible that exactly the chosen index performs better than other emerging countries.
• Shorting a basket of emerging market indices, for instance through an ETF, my preference.

One ETF that readers might want to consider is EUM, the factsheet can be found here:

"ProShares Short MSCI Emerging Markets seeks daily investment results, before fees and expenses, that correspond to the inverse (-1x) of the daily performance of the MSCI Emerging Markets Index®."

There are other, more aggressive instruments like the inverse times 2 (ultra) or even times 3 (ultra pro), but I would (strongly) advice against them, in the long term they don't fulfil their purpose very much, they are just meant for short term trading purposes. And I write this from own (disappointing) experience.

Masterskill in timing the IPO & Goldman Sachs

MasterSkill Education Group Bhd announced its half yearly numbers today, they were even worse than the year before, the revenue has collapsed and the loss has more then doubled:

The results so far have been:


Year   Revenue   PAT
2008    203M     72M
2009    273M     97M
2010    316M    102M  <=== IPO
2011    250M     38M
2012    149M    -28M

And 2013 will most likely be much worse than 2012.

The company was listed on Bursa Malaysia in 2010, exactly at the highest point of its revenue and its profit. Timed to perfection, with true masterskill, something that is (unfortunately) not unusual for companies listed in Malaysia.

The reader should also be reminded that companies actually raise money during an IPO, in other words, profits should be clearly higher after an IPO compared to before an IPO.

Not surprisingly given these bad results, shareholders who subscribed to the IPO at RM 3.80 have not had much reason to cheer, the share is down a whopping 87%:

What is surprising though, is that one executive director (most likely Edmund Santhara) continued to receive generous bonuses, despite the bad results and the poor share price performance.

In 2010:

In 2011:

In 2012:

As written before in this blog, a whopping RM 33.5 Million was paid out in professional fees, miscellaneous expenses, placement fee and selling commission for the listing exercise.

Goldman Sachs was one of the book runners for the IPO (together with CIMB).

According to this story in The Star:

Goldman Sachs Global Investment Research, in notes to clients yesterday, said Masterskill’s “fundamentals are intact with progress made on the university campus.”

“In our view, the negativity around the stock is unwarranted, as we see minimal likelihood of cessation of operations at Cheras or of any substantial financial penalty due to ongoing litigations.”

But also:

According to the shareholder list, sellers of Masterskill stock were mainly nominee accounts held under JPMorgan, Morgan Stanley and Goldman Sachs.

In other words: Goldman Sachs itself greatly benefitted from the IPO, it recommended certain clients to buy (or at least not sell), while others (possibly other clients of theirs) were actively selling at the same time.

For Goldman Sachs, that's all in a day's work. For those readers that might be surprised at these kind of ethics, I strongly recommend to read the following blog post from Jeff Matthews:

"Goldman 8, Public Zero…The Teachable Moment of Bare Escentuals"

 ...the acquisition of Bare Escentuals, a publically-traded cosmetics company (ticker BARE) based right here in San Francisco, by Shiseido, a large Japanese counterpart, for $18.20 a share in cold, hard, US dollars.

Now, as far as deals go, this really shouldn’t be an attention grabber, but stay with us while we get to the “teachable moment.”

The winners in the deal are, of course, existing Bare Escentuals shareholders, who happen to include the company founder, a private equity firm, and the many institutions and individuals who bothered buying the stock on their own free will.

The losers would mainly be short-sellers, who according to our Bloomberg are stuck with 5.3 million such shares they must now buy back (“He who sells what isn’t his’n,” as the old Jessie Livermore phrase goes, “must buy it back or go to prison”).

Another class of losers, however, would be pretty much anybody who took Goldman Sachs’ advice to sell their BARE stock just six weeks ago. Indeed, more than 5 million shares changed hands in the two days following Goldman’s early December move from the always-meaningless “Neutral” rating to the rare “Sell” rating, and the stock traded down $2, wiping out $200 million of the company’s valuation.

Now, there was good reason investors took Goldman Sachs’ advice to sell their BARE stock. 

 After all, it was Goldman Sachs who led the Bare Escentuals public offering back in November 2006, pricing 16 million shares at $22.00 a share.
 And it was Goldman Sachs who successfully led a 12 million share secondary at $34.50 in early 2007, which Goldman’s crack Equity Research Team quickly followed by slapping a “Buy” rating on BARE stock, with a target price of $44.00 a share.

“But wait, there’s more!” 

 Three months later, it was Goldman Sachs who, once again, plugged the Street with more stock, this time selling 8 million shares of BARE at $36.50.

Finally, the Street had had enough of Bare Escentuals: the stock sold off ten points that summer and never really recovered.

But this did not deter Goldman’s Equity Research Team, for in the manner of equity research teams everywhere, Goldman’s Finest changed their “Buy” rating to a “Neutral” only after all the deals were done.

And Goldman's Finest stuck with that “Neutral”rating even while the stock performed in a decidedly non-Neutral fashion: it cratered all the way down to $2.45 a share in March 2009.

Now, you might think such a ridiculous price would have merited an upgrade: that $2.45 per-share valuation amounted to only 3-times EBITDA, a steel-company multiple for a non-steel-company-like 70% gross margin, 28% operating margin business. 
Besides, if you liked it a $36.50, shouldn't you love it at $2.45?

You might think that, but you'd be wrong. In fact, Goldman kept its “Neutral” rating and thus missed a 425% rally in shares of BARE until the stock hit $13.00 a share—where Goldman’s Finest deemed the shares an outright “Sell” just over a month ago.

By our count, that’s three overpriced stock offerings and four bad research calls, for a score of Goldman 7, Public 0.

And it is here now that we get to our Teachable Moment. 

You might think this sort of performance would hurt Goldman Sachs—i.e. that there might be some sort of loss of credibility in the matter of Bare Escentuals which would have a negative financial implication down the road for Goldman Sachs, Inc.

And you would already be wrong.

Because the financial advisor to Bare Escentuals in its acquisition by Shiseido is none other than…

Yes, you got it.

Goldman 8, Public 0.

Buffett's Billion dollar memo

Article in Fortune titled: "The 1975 Buffett memo that saved WaPo's pension".


One of the (many) things that surprised people about the recent $250 million sale of the Washington Post to Amazon (AMZN) founder Jeff Bezos was the health of the Washington Post's pension plan. At a time when most pension plans are struggling, the Post has $1 billion more than it needs. (As part of the deal, Bezos is getting $333 million for the new newspaper company's pension fund, which Post chairman Don Graham says is $50 million more than Bezos needs to meet his current obligations.) Graham told Fortune there are two words that explain why: Warren Buffett.

In October 1975, Buffett sent The Washington Post's (WPO) then chairman and CEO Katharine Graham a memo about the brewing problems in pension plans, and Buffett's suggestions for how the Post could avoid them. Graham took Buffett's advice, and the rest ... you know. For a story in the current issue of Fortune, Buffett talked about the story of the Washington Post's pension plan ("Kay Graham was a smart woman," says Buffett) and shared for the first time publicly the letter that he sent Graham.

The letter alone is quite amazing. In it, Buffett identifies the pension problems that others would key in on only a decade or so later. But he also lays out perhaps for the first time -- Buffett was 45 when he wrote it and years away from attaining the investment fame he has today -- his philosophy behind what it takes to be a successful investor. His main pieces of advice: Think like an owner, look for a discount, and be patient.

Buffett's obvious wit and signature charm are evident throughout the letter. And there's an early version of Buffett's famous story of why investors shouldn't chase the hot fund managers and instead focus on how they got those returns:

"If above-average performance is to be their yard stick, the vast majority of investment managers must fail. Will a few succeed -- due to either to chance or skill? Of course. For some intermediate period of years a few are bound to look better than average due to chance -- just as would be the case if 1,000 'coin managers' engaged in a coin-flipping contest. There would be some 'winners' over a five or 10-flip measurement cycle. (After five flips, you would expect to have 31 with uniformly 'successful' records -- who, with their oracular abilities confirmed in the crucible of the marketplace, would author pedantic essays on subjects such as pensions.)"

[If the viewer below doesn't work properly then please first download the letter and then read it]

Warren Buffett Katharine Graham Letter

Losing Faith in Gold?

Long and interesting article on Bloomberg's website by Peter Robison & Ekow Dontoh:

"Losing Faith in Gold From Ghana to Vancouver Proves Rout"

There is an infographic from Bloomberg:

"Damage of Declining Gold Prices Felt Globally"

I recommend to read the whole article, some snippets:


"Gold’s swift fall, including two days in April when it plunged the most since 1980, has ravaged hopes and livelihoods around the world -- from the 1 million miners in Ghana who scour in the dirt, to thousands of executives and geologists at mining exploration firms that are running out of cash in Vancouver. Gone too are jobs for auditors, bankers and analysts in the finance capitals of Toronto and London. Investors who bet big and lost are shifting assets elsewhere and scaling back retirement plans."

"At the September 2011 peak, the market value of the world’s gold mining companies reached $486 billion, more than the gross domestic product of the United Arab Emirates. Since then, they’ve lost $271 billion, including a 71 percent plunge in U.S. shares of AngloGold Ashanti Ltd., a Johannesburg-based producer held by Paulson."

"Seitz went to London in April to raise money for his newest venture, a developer of Kazakhstan gold assets called IRG Exploration & Mining Inc. He met with eight analysts and bankers. Six weeks later, four of them had lost their jobs, he said. “In my professional career, it’s been the toughest couple years of my life,” Seitz said."


However, despite the rather negative tone in the above article, I am not bearish about either gold or the gold miners, about which I have written before. I think that this kind of article is typically written near the bottom of the market, not the top. Small, inefficient mining companies will not be able to survive at the current low prices, but the larger, better funded ones will.

Barrick Gold made a nice run-up from it's lows (around USD 14). I have not yet sold any of my shares in Barrick or any of the other mining companies that I owe.

Great Marc Faber interview and understating of inflation

Great interview with Marc Faber by The Prospect Group in which Faber also mentions Malaysia several times.

"Shadow banking, market psychology, & the global impact of American monetary policy"

"Chinese foreign exchange reserves & the Sino-American geopolitical standoff"

"Growth in Southeast Asia & the economic future of Malaysia & Thailand"

"Higher education & protecting yourself in the coming economic collapse"


Faber mentions that the cost of living has increased so much in Asia, he estimates the inflation to be about 5%. In Malaysia inflation is reported as being between 1% and 2%, which is simply incredible.

Since the inflation is used to calculate the real GDP (GDP corrected for inflation, the factor that is used is slightly different from the consumer inflation, but very similar and highly correlated), basically the real GDP growth is clearly overstated.


Tom Holland wrote an article in the SCMP "Official manipulation adds 10 per cent to China's GDP" about the same subject (but then applied to China), some snippets:


Analysts have always suspected Beijing's statisticians manipulate China's economic data to come up with growth figures that are acceptable to the country's leadership.


[with Malaysia having the highest Power Distance Index in the world, surely government servants are also motivated to construct inflation numbers acceptable to the Malaysian leadership]


Above all, they believe that the National Bureau of Statistics systematically understates China's economy-wide inflation rate.

As a result, when Beijing's bean counters correct the raw data for nominal gross domestic product to adjust for inflation, they come up with a figure for China's real growth rate (see the first chart) that is anything but real. Instead it is too high.

Suspicion - even strong suspicion - comes easily. But working out exactly how officials tweak the data, and estimating the size of the resulting discrepancy between appearance and reality, is altogether trickier.

Now a new study by Christopher Balding from the HSBC Business School at Peking University sheds some welcome light on just how the data is manipulated.

Balding argues that housing costs - usually a major item in any country's consumer price index inflation basket - are both understated and underweighted by China's statistical agency.

He points out that, according to the official data, between 2000 and 2011 Chinese house prices rose by just 8 per cent. Urban prices climbed just 6 per cent.

As Balding notes, the modesty of this increase stretches credulity to the limit, especially over a period during which China's nominal GDP quintupled and its money supply expanded sixfold (see the second chart).

"The claim that the housing component of CPI grew by less than 10 per cent between 2000 and 2011 is nothing less than comical," he writes.

Compounding the error, officials assume that 80 per cent of the population live in China's cities, where they say property prices have risen more slowly than in rural areas.

In reality, some 48 per cent of people still live in the countryside.

And then to cap everything, housing barely contributes to the official inflation figures. Between 2000 and 2010, housing costs made up just 13 per cent of China's official consumer inflation basket.


His results show that economy-wide price levels today are likely to be about 10 per cent higher than China's implied GDP deflator index indicates. Taking the third-party price data, and assuming a 30 per cent housing cost weighting, the deviation could actually be as high as 16 per cent.

Applying this correction to China's output data, argues Balding, reduces China's real GDP by between 8 per cent and 12 per cent, knocking about 5 trillion yuan (HK$6.3 trillion) off 2012's figure.

"It is disturbing that a statistical body would so obviously manipulate and produce blatantly fraudulent data," Balding writes.

"Given the relative ease with which obvious statistical manipulation was found, it is quite likely that less obvious fraud is present.

"It seems likely that much larger revisions to Chinese real GDP and other economic data are needed to produce more reliable statistics."

Shareholder activism of fund managers works, also in the long term

The recent increase in hedge-fund activism aimed at producing changes in business strategy or leadership—including at large companies such as Apple, Hess, Procter & Gamble and, as announced last week, Air Products—has met intense opposition from public companies and their advisers. Opponents, such as prominent corporate adviser Martin Lipton, argue that such activism is detrimental to the long-term interests of companies and their shareholders: It may pump up short-term stock prices and benefit the activists—who don't stick around to eat their own cooking—but it harms shareholders in the long term.

This "myopic activism" claim has become the key argument for limiting the rights and involvement of public company shareholders. Furthermore, this claim has been successful in influencing the views of Securities and Exchange Commission officials, Delaware judges, and even institutional investors.

But is the claim true? In a comprehensive empirical study, "The Long-Term Effects of Hedge Fund Activism," completed last month and available on the Social Science Research Network, Duke University's Alon Brav, Columbia University's Wei Jiang and I found that it is not.


The above text is from an article in the "The Wall Street Journal", written by Lucian Bebchuk, one of the authors of  the scientific paper "The Long-Term Effects of Hedge Fund Activism", which can be found here.

The article in The Wall Street Journal continues:


"...we undertook a comprehensive empirical investigation of the long-term consequences of activist interventions. Our study uses a data set consisting of the full universe of approximately 2,000 interventions by activist hedge funds from 1994–2007. We identify for each activist effort the "intervention month" in which the activist initiative was first publicly disclosed, and we follow the company for the subsequent five years.

The evidence indicates that activist interventions tend to target underperforming companies, not well-performing ones. During the three years preceding the intervention month, the operating performance of companies targeted by hedge fund activists significantly trails industry peers, and the companies' stock returns are abnormally negative. This slide tends to reverse following activists' interventions.

During the five-year period following the intervention month, operating performance relative to peers improves consistently. On average, the companies targeted by activists close two-thirds of their gap with peers in terms of return-on-assets and two-fifths of this gap in terms of "Tobin's q," a standard measure of how effectively companies turn book value into shareholder wealth."


Fund managers in Malaysia (especially from government linked funds) have been very passive over the last twenty years or so. I have often lambasted that, for instance here.

The above observation regarding hedge fund managers surely also applies to normal fund managers, not only to hedge fund managers. An article written by James Saft on the Reuters website seems to agree with that, some snippets:


"The data is good enough, and the idea compelling enough, that the technique of holding managements' feet to the fire by investors may turn out to be the great hope of the besieged actively managed investment industry. In other words the take-away may not be for all of us to pile into activist hedge funds but instead to push our existing pension and mutual funds to adopt the same tactics."

"I am uncomfortable recommending investing in activist hedge funds for a variety of reasons. Costs are high and the best ones, like Carl Icahn, probably won't take your money anyway.

But why should shareholder activism have to be the special preserve of hedge funds anyway? It doesn't. California Public Employees' Retirement System (CalPERS) has been doing this for decades, and has pushed for more cooperative pressure with other pension funds."

"Too many actively managed funds are closet indexers with high costs, trying to beat the index by picking stocks. If, as some predict, we are in an extended period of structurally low returns in financial markets, the small gains wrung from shareholder activism will prove all the more valuable.

And remember, a pension or endowment might be able to take a different attitude towards activism, pushing for better treatment of shareholders with a long-term view, rather than seeking to unlock value and move on.

Paying for activist management of company management, as opposed to active fund management which simply votes with its feet by buying and selling, might be a long-term trend with big scope for growth."

Japans lost decades: one big hoax

Few “facts” of modern history have become so firmly established as the idea that the Japanese economy flamed out in the early 1990s. This story has greatly discombobulated [thrown into a state of confusion] other nations’ policymaking, not least, as we will see in a moment, policymaking in the United States.

Yet the “lost decades” story is not just a hoax but one of the most absurd and transparent hoaxes ever promoted in the English-language media.


Interesting and thought-provoking article in Forbes from Eamonn Fingleton. Marc Faber was one economist who wrote that the deflation in Japan was not a bad thing at all for most Japanese, enabling normal people to buy property, something that was near impossible during the boom years.

Some more snippets from the article in Forbes, explaining the origins of the hoax, and the reason it was sustained for such a long time:


Cline records that whereas the U.S. labor force increased by 23 percent between 1991 and 2012, Japan’s labor force increased by a mere 0.6 percent. Thus, adjusted to a per-worker basis, Japan’s output rose respectably. Indeed Japan’s growth was considerably faster than that of  Germany, which is the current poster child of economic success.

Cline, a senior fellow at the Washington-based Peterson Institute for International Economics, also points out that Japan’s much lamented deflation is not a problem. Quite the reverse: in the last twenty years the Japanese economy has actually done better at times when prices were falling than when they were rising. He adds that Americans make a big mistake in assuming that Japan’s  gentle deflation bears any resemblance to the highly disruptive deflation the United States suffered in the early 1930s. In reality Japanese deflation is similar to the sort of “good deflation” in an earlier era of American history, between 1880 and 1900, when rapidly rising U.S. labor productivity consistently reduced consumer prices and rendered America the miracle economy of the era.

Japan has continued to do remarkably well on trade, whereas  America’s performance has been disastrous. Japan and Germany rank as the only two major advanced economies that have increased their current account surpluses since 1989.

Japan’s trade performance is all the more remarkable for the fact that, far from falling as one might expect from the way the Japanese  economy has generally been covered, the Japanese yen has on balance risen on world currency markets (it is up nearly 49 percent since early 1990 when the so-called lost decades allegedly began).

Cline contends that Japan’s government borrowing is a problem but fails to note a remarkable mitigating fact: much of the debt the Japanese government has incurred  has been used to buy foreign government securities, not least those of the United States. In effect the Japanese saver is propping up the United States and other deficit nations, and the Japanese  government is merely acting as banker. The nation with the real debt problem is not Japan but the United States.

Almost everywhere you look in the details of the Japan story you find that the basket case story could not be further from the truth. Of course, the Tokyo stock market crashed and has never subsequently reached the ridiculous heights it hit in 1989 (I can call these heights ridiculous because I was one of a few — a very few — observers who predicted the crash). But Japanese stock valuations are not a guide to the underlying performance of corporate Japan. Far from it. With virtually no exceptions, Japanese corporations have continued to boost their revenues — and maintained their employment levels — in the face of a constantly rising yen. The Japanese car industry, for instance, has continued to make extraordinary gains.

Why did the “basket-case Japan” story ever catch on? It was spread at first by rather naive Americans who, unlike some of us, did not understand that Japanese stocks had been wildly overvalued in the late 1980s. They therefore took the  crash  as a premonition of a terrible future real-economy calamity — a calamity that in the event never materialized.  In the meantime Japanese officials found that the basket-case story powerfully ameliorated angst in Washington over Japan’s closed markets. They proved quick learners and have projected an image of  Japan as suffering some weird economic equivalent of dementia ever since.

In Washington, however, the basket-case story worked like a charm. After all a chivalrous United States doesn’t kick a man when he’s down. The result is that even today not one of Washington’s  highly publicized trade grievances of the 1980s has been resolved – not autos and auto parts, not financial services, not even rice.

Apple: switch to Samsung?

I have blogged about Apple before. The stock had a very nice run up lately, people who bought on dips the last few months are rewarded nicely:

Apple's quarterly results were good. Carl Icahn has bought into the stock and shareholders are hoping that he will pressure the management to increase dividend pay-outs or the share buyback program.

More information can be found here.

However, there are also other voices. One fund manager who I respect advices clients to switch to Samsung Electronics. The reason being that the real growth for the next years is in the mass market space, where Samsung is dominant.

MAS should be sold but not at a loss ......?

"Putrajaya should consider selling flag carrier Malaysian Airlines System Bhd (MAS) but not at a loss, its former boss Datuk Seri Idris Jala said today. The Minister in the Prime Minister's Department said MAS was trading at RM6.00 when he was at the helm but currently the share price of the compay has tanked to 30 sen. The government's state asset manager Khazanah Nasional Bhd is the majority owner of MAS, which has posted losses for its last six quarterly results."


The above from an article on The Malaysian Insider. In principle I agree, governments should not run businesses, not in Malaysia or anywhere else in the world.

But Idris Jala mentioned that MAS should not be sold at a loss. Rather puzzling, once the company traded at RM 6 per share, the (in)famous acquisition by Khazanah was even done at RM 8 per share. Now, many rights issues further (which have diluted the value per share), the share is trading at RM 0.31.

The reason why MAS's company valuation has come down so much, is easily summed up by its Group accumulated profits, or rather (as is the case) losses: RM 8,755,439,000.00.

Can one find a potential buyer who will simply "overlook" MAS's patchy earnings history and will pay Khazanah back the price it originally paid for? Very unlikely, I think.

On a personal note, my best investment decisions ever, the ones I am most proud of, were not the ones where I made money on, but the ones where I realized I made a mistake, and sold the shares, even if it was at a loss. I have rarely regretted that.

In other words, not wanting to sell at a loss, when the fundamentals of a company have so much deteriorated, might not be a good strategy, at least in my opinion.

One organisation that also seems to disagree with Idris Jala is the EPF, which has sold down their holding of MAS to below 5% (after which they don't have to declare their trades anymore). In 2010 for instance the EPF still owned 14% of the company.

On Bursa Malaysia's website regarding MAS we can find a "Buy" recommendation by TA Securities Holding, dated March 1, 2013 under the title "The End of a Long Wait?".

Apparently the wait was not yet long enough, less than 3 months later, on May 30, 2013, TA issued a "Sell" recommendation under the title "Likely to Remain in the Red for FY 2013". MAS had again booked disappointing losses, as so often.

For those who think that the airline industry is a bed of roses, please check this website which gives a links to long lists of defunct airlines in the world, per country or continent. Many national airlines can be found there. One interesting airline mentioned on the list is "Malaysia-Singapore Airlines":

"Malaysia-Singapore Airlines (MSA) came into being in 1966 as a result of a joint ownership of the airline by the governments of Malaysia and Singapore. The airline ceased operations after 6 years in 1972 when both governments decided to set up their own national airlines. Hence from that year onwards, Malaysian Airline System, now called Malaysia Airlines, and Singapore Airlines were formed."

The financial situation of Singapore Airlines (SIA) is rather different from MAS, the below amounts are in millions of SGD:

From Hero to Zero and back to Hero again

Investors who invested in this share surely were not too happy about the performance, being down 99%:

More happy faces for the following share, a 100-fold rise in share price:

But the remarkable thing ...... it is the share graph of one and the same company, Priceline! Amazing story, Business Insider has the story (see below) and here is the full graph of PCLN.


Way back in the 1990s, this company was the hype machine to end all hype machines.

It went public in a massive IPO, and its stock valuation immediately shot up to nearly $50 billion.

But then the numbers collapsed.

And so did the hype.

And so did the stock.

And so did the company.

A couple of years after the peak of the dot-com boom, the company's stock had fallen 99%. And the company itself had been left for dead.

But then an amazing thing happened.

The company found a management team that was less interested in "buzz" and "ideas" and "stories" than it was in actual performance.

The company stabilized its business, and then went looking for a new growth engine.

And found it.

And, now, a decade later, with shockingly little fanfare, the company's value is about to exceed the level it hit back in the wild dotcom days.

The company, in other words, is about to be worth $50 billion again.

The company is located, of all places, in... Norwalk, Connecticut.

The company is, of course, Priceline.

And its CEO, Jeff Boyd, is so press shy that you've probably never heard of him.

A $50 billion company!

In Norwalk, Connecticut!

That almost no one ever talks about!

If ever you needed proof that, over the long haul, perception is NOT reality, reality is reality,

Priceline is it.

Congratulations to Jeff Boyd and the rest of the team at Priceline. What a remarkable success story.