Protasco: more delays and less transparency

I blogged before about Protasco's Puzzling Purchase.

Today Protasco announced that

"PT ASU and PB had on 30 September 2013, via an exchange of letters, agreed to extend the Due Diligence Period and Condition Period for a further six (6) months to 31 March 2014 to complete the Proposed Acquisition.

The request by PT ASU for an extension of the Due Diligence Period and the Condition Period to 31 March 2014 is due to the following:-

(i) substantial time required to compile and reply to the extensive list of information and documentation requested by PB pursuant to the legal, financial and technical due diligence/valuation process; and

(ii) to accommodate Pertamina’s evaluation and approval process to approve PT Haseba’s request for an extension of ten (10) years to expire on 14 December 2024, to the PMP Agreement for the KST Field."


And all that time Protasco's RM 50 million of cash (the remarkably high deposit that it paid) is gone, and thus its ability to generate interest on it.

This in exchange for a security in shares in Indonesian counter INVS. Shares that have completely collapsed in value. My guess is that the security is only worth about RM 15 million, in other words RM 35 million "under water".

Something that Protasco "conveniently" forgets to mention in its latest announcement.

But then again, transparency was never Protasco's strongest point.....

Lembaga Tabung Haji announced it sold several tranches of shares in the company.

Tomorrow there is an EGM to vote about an Employee Share Scheme, in which almost 50 million shares can be allocated to Directors and employees.

Update on 4 alleged fraud cases

[1] Silver Bird announced its results, sales is falling of a cliff, it can hardly book a gross profit. The only positive thing I noticed is that its Loss After Tax can be remembered easily: RM 11,111.


[2] Xian Leng announced its results, its operations have fallen to a pathetic level, I don't think it would even have been allowed on the ACE market with those tiny sales, RM 5M for the half year resulting in a loss of RM 1.5M.


[3] Genneva Malayisa; The Star wrote: "Six Genneva personnel slapped with over 900 money laundering charges".

"Six personnel from gold investment company Genneva Malaysia Sdn Bhd and another company have been slapped with 926 charges of money laundering, making false statements and illegal deposit-taking involving RM5.5bil.

Genneva received the RM5.5bil from 35,000 depositors.

Its directors Datuk Philip Lim Jit Meng and Datuk Tan Liang Keat faced 246 and 226 counts of money laundering respectively; business advisers Datuk Ng Poh Weng (155), Datuk Marcus Yee Yuean Seng (17), Datuk Chin Wai Leong (23), and general manager Lim Kah Heng (16)."


The size of the amount (RM 5,500,000,000.00) the number of key people involved (six directors/managers and 35,000 depositors) and the charges (926) are simply breath taking. Why did it have to come so far, should the regulators not have ended this scheme a long time ago?

From Genneva's website: "Preserving Values, Leaving a Legacy".

Values are definitely not preserved (more like the opposite), but the company will definitely leave a legacy, although "somewhat" different from what its clients envisioned.


[4] SJ Asset Management; No recent news regarding SJ Asset Management or its manager Tan Whai Oon.

According to this website, Tan Whai Oon (on the left in the picture) looks like this these days:

He seems quite happy, probably more happy than his previous clients.

According to this article from The Star:

"Tan, also known as Jigme Phende, has been on the run since the end of June 2010 after his fund management company had run into trouble, the result of Tan being investigated initially by the Securities Commission (SC) for charging his clients high commissions.

The managing director and 70% shareholder of SJAM is rumoured to have gone into hiding in Nepal, and his last location was tracked to a monastery called Gyalwang Drukpa in Kathmandu, the country's capital."

Is there a extradition treaty between Nepal and Malaysia?

More shocking from the same article:

".... a senior finance executive of the company spilled the beans on the accounts that have apparently been cooked since 2001."

Why did it take almost 10 years before action was taken against the asset management company?

A simple search for "LinkedIn" and "SJ Asset Management Sdn Bhd" reveals many people who worked with this asset management company. Did nobody notice anything wrong? That is hard to believe. Could they not have dropped a hint at the Securities Commission, if needed anonymously?

Here is a link to a court case between CIMB Investment Bank (whose clients had invested in the SJAM managed fund) and Ernst & Young (the accounting firm who performed the audits on the accounts of SJAM). The document shows (paragraph 8) that CIMB compensated its clients, good for the clients, but not good for the shareholders of CIMB who have to fork the bill.


Enforcement is rare and slow in Malaysia, and if VIPs are involved (like in some of the above, directly or indirectly), things often seem to come to a complete stop. Hopefully we will soon get some much needed justice and transparency in the above cases. Not only against the perpetrators, but also to other people who have been sleeping on the job, like auditors, advisors, etc.

Alibaba and AirAsia, two tantrums

Alibaba is going for an IPO, the question is: where? The most logical choice is Hong Kong or NASDAQ.

There is a lot at stake, the size of the IPO could be huge, the company could be valued at USD 75 Billion, about RM 242,000,000,000.00.

Some background information about the company can be found here:

"Alibaba has established itself as a behemoth in the business of buying and selling products online. The company is itself made up of several businesses, including Alibaba.com, a Web site for business-to-business sales; Taobao Marketplace, a giant eBay-like platform; and Alipay, an online payment service."

Alibaba wanted a dual class of stock, which is not possible on the HKEX:

"The Internet giant and its executive chairman, Jack Ma, have sought to keep control of the company firmly with its founders, following in the footsteps of Facebook and Google. But the rules of the Hong Kong Stock Exchange prohibit dual classes of stock and other types of corporate structures that let minority shareholders preserve control of companies."

Negotiations with the Hong Kong Stock Exchange were on-going, and who could better comment on this then Hong Kongs "Mr Corporate Governance", David Webb.

Here is an interview with Webb, done by Eric Jackson from Forbes.

David wrote three articles about this matter on his website:

Alibaba's spotlight on HK regulation
We had a dream too!
Aligaga


The last article is in response to a "corporate tantrum" thrown by Joe Tsai, which can be found here.

Webb's response to that:

"Alibaba, you see, has come up with an entirely new and better way to govern companies, and if HK or the USA does not embrace it then we will all be left behind. Alibaba "never made any proposal" that involved a second-class shareholding structure, he says. So presumably, they won't be proposing that in the USA either. They want US regulators or investors to get their heads around something that even America has never seen before, where a self-selecting perpetual pool of managers gets to nominate more than half the board of directors.

You have to marvel at the breathtaking arrogance and hubris that comes from being a successful e-commerce firm in a sheltered market where foreigners cannot directly own telecommunications companies or payment systems. Mr Tsai tells the world that this "innovation" in corporate governance is to "protect the long-term interests of... all shareholders". This, of course, is because management knows what is best for shareholders, and shareholders don't. If this has a familiar ring to it, then the back of your mind is making the analogy with the Party and the people of China.

Then he gets to the nub of the 28-member Politburo (sorry, Partnership) proposal: "Partners are not just managers but they are owners of the business", he says. Um no, Joe. The shareholders are the owners of the business. Get it right. You are either a partnership where the partners provide all the equity, or a company, where the shareholders do. You can't be both."


Luckily, prudence has prevailed, the HKEX did stuck to its guns, despite the inherent conflict of interest (commercially the IPO would be great for the HKEX). Once you cross the line, there is no going back anymore, more and more companies would have asked for exceptions to the rules.


Regarding corporate tantrums, does Malaysia have any? Yes, they do, and, no surprises here, Tony Fernandes is involved (hat tip to the tipster who commented on this):

Is the above tweet rather childish? Yes, I think so. But I do appreciate the fighting spirit and the heart that Tony puts into it. Not sticking to much formality, which one would expect on that corporate level.

I can't find the exact research note by Paul Dewberry, but this comes probably close to it:


Bank of America Merill Lynch’s analyst Paul Dewberry also had concerns on AirAsia’s ability to manage and grow its JVs in a note written in March. “It is noted that Philippines is still making losses and its proposed joint venture in India is likely to consume significant time,” Dewberry wrote.

“While Indonesia had a good Q4 results aided by seasonality, Thai AirAsia remains the star performer among associates due to a lack of domestic competition.” More recently, aviation consultancy firm Centre for Asia Pacific Aviation said on August 27 that intense competition in south-east Asia has already begun to hurt AirAsia’s affiliates in the region.

“While AirAsia still reaps the benefits of first-mover advantage in several of its markets and continues to outperform nearly all of its peers, competition is intensifying,” CAPA wrote in a research report on AirAsia. “Indonesia AirAsia reported both a yield and operating profit improvement for 2Q2013, but it remains by far the least profitable of the group’s original three affiliates. Meanwhile, the group’s newest surviving affiliate, Philippines AirAsia has struggled almost as much as the failed affiliate AirAsia Japan. Even in Thai AirAsia, profits increased in second quarter of 2013, but there was a 3% drop in yields.”

“While AirAsia is well positioned and has the cash to fight back, inevitably profits and yields will come under pressure as competition continues to intensify,” the CAPA report added.

Sona Petroleum, speculation about a possible acquisition?

I received many interesting comments recently.

Regarding value investing: I hope to come back to this subject with more material, especially comparing similar companies with different debt levels and the effect on certain metrics.


Article in The Star:

"Malaysia's Sona Petroleum eyes 3 oil fields in Indonesia, China"

I received an interesting tip regarding the above in the comments.

[On a side note: please continue to do so, if you don't want the tip to be published, write so and I will of course respect that].

The tip referred to the above article in The Star and the note to clients of UOB-KayHian.

With Moola's blog being (unfortunately) very quiet lately, I give the first part, with my emphasis on all the speculations, which Moola so detests:


"Special-purpose acquisition company (SPAC) Sona Petroleum Bhd is close to making its qualified acquisition (QA), and the target company is Singapore-listed RH Petrogas Ltd, an oil and gas (O&G) company controlled by Sarawak tycoon Tan Sri Tiong Hiew King (inset). Tiong is chairman of RH Petrogas.

A source explained that Sona Petroleum could be both buying a stake in RH Petrogas via a placement of shares, as well as acquiring some of its assets, which are offshore O&G blocks.

While details are scant at the moment, insiders said that Sona Petroleum was looking to take up a 10% placement of shares in RH Petrogas, as the latter was looking to raise US$60mil (RM190mil) for capital expenditure.

Shares of RH Petrogas have been on a steady uptrend since early this month, rising around 30% over the week to close at 64.5 Singapore cents (RM1.65) on Thursday.

Sona Petroleum’s shares and warrants were also heavily traded, with the mother share gaining 2.5 sen to 43.5 sen, while the warrants rose 1.5 sen to close the day at 27.5 sen."

This a reference to a research note by UOB-KayHian:


"In a note to clients, Singapore’s UOB Kay Hian also mentioned this possibility, stating that according to its “channel check,” Sona Petroleum could be “looking at some of the O&G assets in the Singapore Stock Exchange-listed RH Petrogas.”


Channel checks? This is the definition of a "Channel check":

"a channel check is third-party research on a company's business based on collecting information from the distribution channels of the company. It may be conducted in order to value the company, to perform due diligence in various contexts, and the like. Industries where channel checks are more often conducted include retail, technology, commodities, etc."

How to place a "channel check" in the context of a possible acquisition by Sona? I am not sure.

Also, who would know about this kind of in-depth research, and is this not inside information? There is no official announcement by Sona Petroleum yet, so is the above mere speculation? Or did anyone receive inside information before the general public? Food for thought for the regulators (SC and BM)


I don't have the report by UOB-KayHian, but it seems it can be found here at Malaysia-Finance website (except that the pictures don't load).


I am not a fan of SPAC's, as readers of my blog might be aware of.

I would like to draw the readers attention to the following comment on Malaysia-Finance's blog, with which I fully agree:


"Investing in Special Purpose Acquisition Companies involved in the oil industry is like choosing an exploration company whilst being blindfolded. A veteran oilman will attest to how difficult it is to find a truly attractive oil company to acquire when given a limited time frame to do so.

What is available will be leftovers, namely aged fields discarded and on the verge of final decline or highly risky exploration plays.

Don't be deceived by those $/bbl calculations for it will mean nothing when production declines rapidly within a few short years unless costly EOR measures kicks in."


I would not want to call my self an expert in this field, but I have been actively investing in oil and gas companies for 10 years and have followed many listed companies. Reserves (proven, probable or possible) of billions of barrels, it sounds like having enormous potential, but there are many pitfalls:

• If an oilfield really looks like a bargain, why would the seller sell it?
• Owning the reserves and exploiting them is not exactly the same
• Many exploration projects will have cost and time overruns
• Costs also often escalate in time, especially after several operational years
• The price of oil and gas is very volatile and hedging against fluctuations could be expensive (airlines always seems to be on the wrong side of the hedging, losing billions in the process)
• If a field is highly profitable, the government of the country where it is located could either seize it, or increase taxes etc.

The Securities Commission will soon issue new guidelines for SPAC's, according to this article in The Star:


"The Securities Commission (SC) will soon issue new guidance notes relating to the listing of special-purpose acquisition companies (SPACs), a move that is aimed at ensuring new submissions are of a certain high quality, sources said.

There have been some concerns about the quality of submissions. The SC feels that it needs to elaborate on the original spirit of the SPAC guidelines,” said the source.

The new guidance notes should also enable applicants and their advisors to better understand the requirements of the regulator, thus helping avoid the unsavoury result of seeing applications rejected by the authorities, he added.

“The feeling is that the market has drifted away from the original spirit of SPACs,” noted the source.

That sounds good, although my solution would be more simple: just do away with these SPAC's. If people think there is money to be made, let them do it in the old-fashioned way by starting a "normal" company and only list it when it has proven its worth.

Maemode: accurate predictions by Ze Moola, but why did nobody notice? (2)

Since my previous article about Maemode, I wanted to write some more about this puzzling case, but decided to wait for the annual audited accounts. However, it looks like I have to wait somewhat longer, Maemode announced today the following:


"The Board of Directors of the Company wishes to announce that the issuance of AFS 2013 will be delayed mainly due to all the Company’s accounts staff has left since the receivers and managers were appointed and the Company is in the process of recruiting and training the new accounting staff to update all its accounting records and books.

The Company expects to submit its AFS 2013 within six (6) months from the date of this announcement."


Delaying the accounts is always a huge red flag, and I would not be surprised to see more negative news, for instance in the form of more receivables that are not "able to receive", or assets that have to be written down.

Vincent Tan playing the listing-delisting-relisting game?

Seven Convenience (part of Berjaya Retail) is going for IPO. Berjaya Retail was listed but delisted again only nine months later!

The listing-delisting-relisting game is getting more and more popular in Malaysia, and it is not hard to see why. List your company at a lofty valuation, delist it when the price is depressed, and relist is some time later again, again at a lofty valuation. Rinse and repeat if needed or possible.

But where does this leave the long term value investors?

And again, as usual lately, an extremely small allocation for the retail investors, 3.2%, although somewhat higher than in the case of Westport, where only a pathetic 2% is allocated. What is the rationale of "going public", if the company does not want to give the public the opportunity to be part of the IPO?

With all the financial engineering going on, Bursa Malaysia might point out at the big numbers of IPO's, increase in market cap etc. But it might lose sight of the small men in the street, who simply might lose their interest.

Bursa should not complain if retail interest is waning, they only have themselves to blame.


(Reuters) - Seven Convenience Bhd, a 7-Eleven convenience store chain operator in Malaysia, is offering up to 530.33 million shares in an initial pubic offering (IPO) that could be worth about 700 million ringgit ($218.82 million), a draft prospectus showed on Tuesday.

The IPO is expected before the end of the year and will be used to fund the company's expansion and refurbishment of its stores, information technology systems and for working capital, the prospectus showed.

Controlled by Malaysian billionaire Vincent Tan, the company's offer represents up to 43 percent of its enlarged paid-up capital, of which 490.78 million shares or 39.8 percent will be offered to institutional investors.

The balance of 39.55 million shares or 3.2 percent will be allocated to retail investors. There is an over-allotment option of up to 74.03 million shares or 14 percent of the IPO shares offered, the prospectus showed.

Seven Convenience, part of Berjaya Retail Bhd, is Malaysia's largest convenience store chain with close to 1,500 outlets, according to its prospectus.

The company recorded revenue of 1.58 billion ringgit and profit after tax of 40.5 million ringgit in 2012, representing a compound annual growth rate of 9.7 percent in revenue and 22.4 percent in profit from 2010 before its parent company Berjaya Retail was delisted.

Seven Convenience attributed the growth in revenue to the increase in the number of stores and same-store sales. It said profit grew from an increase in commissions on its in-store services.

Tan, Malaysia's tenth richest person according to Forbes, took Berjaya Retail private in 2011, nine months after the company was first listed on Aug. 16, 2010, due to the dismal performance of the shares.

The company has given no information on pricing of the shares and did not provide any details on the size of the listing or a time frame for the IPO process.

Seven Convenience hired Maybank Investment Bank as the principal adviser, joint global coordinator, joint bookrunner, joint managing underwriter and joint underwriter for the listing. Joint global coordinator and joint bookrunner is UBS. CIMB Investment Bank is the joint bookrunner and joint underwriter.

Raise delisting threshold to protect minorities

I often lamented the way companies are delisted in Malaysia. It seems Singapore also has a serious problem in that matter, according to an article, written in the Business Times (Singapore). The difference seems to be that in Malaysia these companies simply relist again, a few years down the road. The article (emphasis mine):


When considering applications by majority shareholders to delist, regulators are almost always faced with the delicate task of balancing the interests of the applicants on one side and minorities on the other.

Applicants would logically only want to take a company at the lowest possible price, and this is always when the market has failed to recognise the company's true worth, in which case the share price is massively depressed. When this happens, the offer is always pitched at a small premium to the market, as this can be construed to be "reasonable".

But minority shareholders are almost always unhappy even with the premium because it is usually too small to be attractive and, in their opinion, does not come close to what they think is the true worth of their shares.

Typically then, the delisting exercise is an unhappy one for minorities, who invariably call (or hope) for someone to intervene to protect their interests.

Typically, no one does.

For various reasons, the authorities are reluctant to play the role of saviour to minorities, preferring instead to rely on:

•The rule of caveat emptor which is, to some extent, defensible since shareholders in such "undervalued" companies should know that a hostile delisting is always possible;

•The advice of the independent financial advisers: Most of the time, as long as the advisers deem the offer reasonable - and they usually do because of the premium - and if conditions set out in the Listing Manual have been met, the end result is that notwithstanding violent objections from minorities, the majority usually triumphs and the delisting proceeds.

This scenario has played out several times in the past, most recently last month, with the application to delist Synear Holdings.

Familiar the situation may be, but it does not make it any less painful for minorities who are forced to surrender their shares at a price they believe is not indicative of the company's value. The unpalatable alternative is that if they do not do so, they would end up holding on to shares indefinitely in a non-listed entity, with little prospect of exiting at a profit.

However, other than extending our sympathies to minorities - and accepting that, in the market as in many other areas of life, majority interests usually rule - can anything be done to afford them greater protection?

The answer is yes.

If the authorities today allow companies to go public by allocating the bulk of their initial public offer (IPO) shares to friendly parties via placements - in which case 75 per cent or more of the shares could be held by friendly parties post-listing - then they should also recognise that those friendly parties might very well one day act in concert to the dismay of minorities.

So unless the rules are changed to force companies to give more shares to the public at the IPO stage and fewer via placement to their cronies, the authorities must make it more difficult for concert parties or major/controlling shareholders to one day take a company private.

After all, the system should not be set up to favour corporates and majorities all the time, should it?

Now, if we accept that it is important to view the issue from the perspective of the entire corporate timeline - that is, from IPO to privatisation or listing to delisting - then the present delisting threshold as per the Listing Manual Section 1307 of the Singapore Exchange (SGX), at 75 per cent of total issued shares held by shareholders present and voting at a general meeting, is arguably too low to fully ensure minority rights are preserved.

What a fair threshold might be can be debated, but 90 per cent is perhaps the best, since this is the level for other types of privatisations such as takeovers or one initiated by the exchange itself when a company's free float drops below 10 per cent.

Whatever the raised limit, the overriding concern should be to ensure that minorities do not always lose out when majority parties decide to take their companies private.

The way to accomplish this is to look at the entire corporate timeline, from listing to delisting, and to ensure fairness at both ends of the scale (as well as in between).

Joel Greenblat and Value Investing

I wrote a short posting before about Joel Greenblatt, this time I like to present more material.

The first time I heard about Joel Greenblatt is when a friend recommended this book a long time ago to me:

"You Can Be a Stock Market Genius: Uncover the Secret Hiding Places of Stock Market Profits"

It is a great book about "special situations" (mergers, spinoffs, arbitrages, etc.), definitely not meant for a beginner in stock market investing. The only minor point for people interested in Asian investing is that it is 100% focused on the US market (as unfortunately the large majority of books about investing). It is written in 1985, but still relevant and I would highly recommend it, the logic presented is very compelling.

Twenty years later he followed with:

"The Little Book That Beats the Market"

It provides a rather simple formula to chose and pick shares. The returns, backtested on a reasonable large sample, looked very promising. Basically the formula choses shares with a high ROE at a relative low PE multiple.

[As "K C" rightly pointed out in the comments, Greenblatt actually uses EBIT (Earnings Before Interest and Tax) and EV (Enterprise Value), I use myself ROE and PE, I think the two methods are quite similar]

Since no formula is perfect, users of the formula are encouraged to pick about 20 to 30 different companies, to diversify the risk.

Five years later he followed this up with"

"The Little Book That Still Beats the Market"

An updated version based on the latest data.

I have to admit, I haven't read this latest book, I found the proof in his previous book compelling enough.

Also, the proof that his formula is still working can be found here, a presentation Greenblatt held at the 2009 Value Investing Congress:





The link to the presentation slides can be found here.

Quite amazing that such a simple formula is enough to beat the market, while more than half of the US fund managers are trailing the relevant index.

The Magic Formula's website can be found here.

The holdings of the "Formula Investing US Value Select A (FNSAX)" which uses the formula for its stock selection can be found here.

Big question for Asian investors: would this formula also work, say in Malaysia or Singapore? My guess is it would indeed work. But unfortunately the data to test this assumption is not readily available, like in the US.

Losing 3 Billion Yen in one month without doing any homework?

"Tycoon sues Goldman Sachs over $38M (almost RM 100 million) loss", article in The Straits Times of today. The article is behind a pay wall, but it can be found here.

Mr Oei said he bet on May 15 that the yen would fall against the Brazilian real.
....
On June 17, Mr Oei closed the trades, suffering a loss of 4.231 billion yen. However, he received 1.055 billion yen as premiums on the trades which was deducted against his losses. That left him in the red by 3.175 billion yen - the sum he is claiming.
....
According to Mr Oei, Mr Dewitte had said that the real was anchored to the US dollar in the same way that the Hong Kong dollar is pegged to the greenback. Mr Oei was also supposedly told that real-yen trades were liquid and could be executed any time, and that they behaved very similarly to US dollar-yen trades.


The hunger for yield (all caused by the reckless money printing tactics of the FED and other central banks) has driven many into schemes they should not have gone into. Schemes that are not transparent, have possibly high commissions and are very difficult (if not impossible) to calculate by a layman.

It appears that Mr Oei Hong Leong is also one of those persons, albeit at a massive scale. He made speculative currency bets, based on certain assumptions provided to him, and it appears he didn't bother to independently check these assumptions himself. Quite unbelievable, given the scale. Even more so, since it seems this wasn't the first time for him:


"In 2009, Mr Oei sued Citigroup's private banking arm for alleged negligence and misrepresentation after an estimated loss of $1 billion on foreign exchange and US Treasury bond transactions in 2008. The case was settled out of court."


Mr Oei is one of the richest men in SE Asia, number 33 in the list of Forbes.

More about his father can be found on Wikipedia.

And with which bank did Mr Oei trade? None other than Goldman Sachs, which we featured here.

I would not be surprised if it turns out that it was Goldman Sachs themselves who were on the other side of this currency trade, it looks like they are allowed to do so, as detailed in this document.

Some excerpts (emphasis mine):

When I read the above, I find it astonishing that anyone in his or her right mind would want to deal with such a company.

But I guess I am very wrong since Goldman Sachs' business is brisk, it is one of the largest banking giants on the world.

Lending money to a related company is a no-no (2)

I received a lot of hits recently on my previous post of eight months ago:

Lending money to a related company is a no-no.

The reason for this is that Related Party Transactions (in the normal course of business) have to be approved yearly, and it was the time of the year again for Panasonic.

The circular to the shareholders can be found here.

Unfortunately, it seems that Panasonic wants to continue with its practice of lending out huge amounts of money to a 100% owned subsidiary (PFI, Panasonic Financial Centre Malaysia) of its controlling shareholder.

The important paragraph can be found here:

The lowest amount of money at the end of each month was a whopping RM 444,000,000.00!

Surely not all that money is needed as a reserve for a rainy day?

I don't have anything further to add to my previous article, I definitely can't improve on the way David Webb worded his objections against this bad governance practice.

I hope that active fund managers like Aberdeen Asset Management (they own 14% of Panasonic) and organisations like MSWG openly voice their dissatisfaction with the above matter at EGMs or in the press.

Hopefully one day Panasonic will change its way, and return back the excess cash to its shareholders in the form of a large cash dividend.

There are about 1,000 companies listed on the Bursa Malaysia, and Panasonic easily belongs to the best 100 companies, if not better, the above is therefore really a shame.

Unfortunately, it looks like there will not be a change any time soon, since the proposal to continue with these practices was approved. The exact amount and percentages of votes were not revealed though, which is also disappointing.

It would be interesting to know how government linked funds (GLFs) have acted on this matter, I have a suspicion that they are much to passive in voicing their concern and that they might not always vote in the best interest of the minority shareholders. They are managing public money, so there should be lots of transparency here.

Dangers of financial over-engineering

I often lamented about the increase of financial engineering, especially at Wall Street, and more recently (unfortunately) also in Malaysia.

Here is an example what happens if you let those guys (it is mostly guys, not many girls) run wild:

1. Tarrant Capital Advisors
2. is the sole shareholder of Tarrant Advisors, Inc., a Texas corporation, 
3. which is the general partner of TPG Ventures Professionals, L.P., a Delaware limited partnership,
4. which is the general partner of TPG Ventures Partners, L.P., a Delaware limited partnership,
5. which is the managing member of TPG Ventures Holdings, LLC, a Delaware limited liability company,
6. which is the sole member of TPG Ventures Advisors, LLC, a Delaware limited liability company,
7. which is the general partner of TPG Ventures GenPar, L.P., a Delaware limited partnership, 
8. which in turn is the general partner of TPG Ventures, L.P., a Delaware limited partnership (the “TPG Fund”),
9. which directly owns the shares of Common Stock of the Issuer reported herein.

Nine Levels of "matryoshka dolls", can anybody still unravel all the relationships between them?

The above from NakedCapitalism, one of my favourite bloggers.

Poker star Phil Ivey sues a Genting owned casino for RM 36 million (3)

I have written before about this case, here and here.

I should actually update the title since (due to the weakening of the RM) the amount has increased to more than RM 40 million. A nice and tidy amount, although only a fraction of what the Genting boss earns per year.

There is a new article on the DailyMail website, with the rather long title:

'I read the cards but I'm no cheat': U.S. poker ace suing Britain's oldest casino after being denied £8million win admits using controversial 'edge sorting' technique

From what I understand, Phil Ivey knew how to get the odds on his side, in a strictly legal way. When he bet, he wasn't sure he would win, he was only somewhat more likely to win than to lose. I therefore see no reason at all why the casino would not pay his winnings.

Put it differently, despite Ivey having the odds in his favour, he could still have lost. Would the casino then have returned the money to Ivey? I don't think so. The casino is used to have the odds on their side, but sometimes the tables are turned.

The casino has to convince me that Ivey actually has cheated, for instance that Ivey marked the cards himself. As far as I can see, there is not a single indication in that direction. I would also have been rather surprised if that had happened, he has a rather good reputation.

If the casino can not strengthen it's case, then I guess this is just a case of being a sour loser.

Faber: "stocks declining 20% is almost a certainty"

Marc Faber's September issue of "The Gloom, Boom & Doom Report" is again full with pockets of wisdom.

A long story about Macau and the enormous increase of outbound travellers from China. After liberalising gambling in Macau, monthly visitors grew from 40,000 in the mid-1990s to 2.5 million visitors. Even though Stanley Ho lost his gambling monopoly, he has done extremely well due to this 60-fold increase.

Also mentioned is Sheldon Adelson from the Sands company, who saw his company's share price drop from US$ 139 to US$ 1.29; it is now back to about US$ 60, quite a rollercoaster ride.

If readers are optimistic about China's growth story, then Macau should be a beneficiary of that, and thus is Faber moderately positive in the long-term about companies with exposure to Macau's casino's. Faber cautions though about the property bubble (both residential and commercial) in China and its weakening economy.

Faber then moves on to the "other casino", the financial markets, especially related to the Fed, which does not feature high in Faber's opinion, to put it mildly.

Important is the following observation:

"More policymakers and economists are coming to realize that the Fed's unconventional monetary policy is not working. Yet there is also a sense that unwinding is too costly right now and can't be reversed" and ".... the probability that we have embarked on permanent asset purchases by the Fed is very high".

He continues to argue that the Fed has lost control over the bond market, with the 10-year yield rising from about 1.5% to almost 3.0%.

Investors should reduce equity holdings, the US economy will weaken.

Faber still likes industrial commodities and mining companies like:

• Newmont Mining Company: NEM
• Freeport-McMoRan Copper & Gold Inc: FCX
• Barrick Gold Corporation: ABX (featured a few times in this blog)

Emerging markets like Thailand, Indonesia and the Philippines look vulnerable.

Finally, he mentions:

"I would be extremely risk averse for now. I am not concerned about stocks declining 20% or more. (In my opinion, this is almost a certainty.)".

He is concerned about the direction of the Western politics and how badly the geopolitical climate has deteriorated. Xi Jinping, President of China, will not be pushed around by anyone, least of all by Obama.

MAS and AirAsia fined, but what about the other issues?

The Malaysian Insider (TMI) has an article on the fines that MAS and AirAsia received from Malaysia Competition Commission:


"In August 2011, loss-making flag carrier Malaysia Airlines (MAS) and AirAsia went into a share-swap deal that promised synergies and growth for both rival Malaysian carriers in Asia's nascent open skies regime.

There was no mention of how it would benefit consumers, leading the Malaysia Competition Commission (MyCC) to investigate the now-aborted deal and slap a RM10-million fine on each carrier."


But TMI has more on the story (emphasis mine):


"Perhaps it is time for other regulators and the Public Accounts Committee (PAC) to move in and put Khazanah and other government-linked companies (GLCs) under the spotlight for their business practices.

The PAC should review how these GLCs hire consultants and banks to carry out mergers and acquisitions and other deals that later cost rather than bring in money.

After all, it is public funds that have led to the creation of Khazanah, MAS and other GLCs. And Khazanah's money is in both MAS and AirAsia, and for that matter, CIMB.

Both airlines are public-listed companies. Their shareholders need to know that the share swap was scrutinised to comply with all laws and regulations, not face a fine years later because someone overlooked the anti-trust elements of sharing resources and markets.

MyCC has done its part in protecting the Malaysian consumer. Now it is time for Putrajaya or PAC to do its part in protecting the Malaysian taxpayers' monies."


And with that I can only agree. I think there is much too much financial engineering going on in Malaysia, which does not create any value to the public or to the minority shareholders. If any value is being made, it is by the controlling shareholders and of course to the consultants themselves, in the form of lucrative contracts.

By the way, I think that the high amount of financial engineering clearly indicates a market top. Malaysia had (and will have) some of the largest IPO's in the world, that does look impressive, until one takes into account that many of these companies are (partly) delisted companies. In other words, again the consequences of (too much) financial engineering.


I wrote three articles that are relevant regarding the controversial share swap between MAS and AirAsia:

AirAsia & MAS: conflict of interest?
Probe on AirAsia, MAS share price trends
AirAsia to MAS: Your Loss is my Gain

Highlighted was (amongst other issues) the conflict of interest for the directors involved.

Imagine Tony Fernandes joining a directors meeting with MAS, where he will hear confidential information regarding important issues like future strategy, pricing etc., and where he has a fiduciary duty to act in the best interest of the MAS shareholders.

Some time later he joins a AirAsia directors meeting where he will again hear confidential information, and where again he is expected to act in the best interest of the shareholders, this time those of AirAsia.

Is it actually possible to do that, act in the best interest of two companies that strongly compete with each other? I strongly doubt it.

Next to that, it is quite common that employees (and definitely the higher management) will have a non-compete clause in their employment contract. Does Fernandes have such a clause, working for AirAsia, being an executive director?

Or are we to believe that MAS and AirAsia borrow the following device from Will Smith to erase Tony Fernandes' memory after each board meeting?

Glaucus vs Minzhong, some observations

The attention for the “Singapore Squeeze” (Financial Times) Glaucus vs Minzhong seems to wane. Probably good, since a lot more is happening in the world these days. Still some observations:


A good article can be found here, comparing the Glaucus vs China Minzhong case with the Muddy Waters vs Olam case.

Some more background of the situation in China can be found here.

"SIAS calls on regulators to punish short sellers", article in The Business Times.

"The heavy weight of the law must be felt by these mischievous perpetrators,” said SIAS President and Chief Executive David Gerald"

(SIAS is more or less the MSWG of Singapore)

Strong words, but the reader probably already know that I completely disagree with this argument. If people buy shares, convince others about their investment case (using subjective or even wrong arguments) and subsequently sell their shares for a tidy profit, that is exactly the same. And if those people would be prosecuted, countries better build a few more jails, since this is happening every day of the year in every country of the world.

In addition to that, Glaucus was very transparent about their interest, and their arguments were backed by a lot of data and arguments. One might not agree with some, but that is something else.

"The SIAS said yesterday that it has had meetings with China Minzhong and is satisfied the company has “vindicated itself”."

I find that a bold and rather naïve statement, I think to give such a definite answer much more work has to be done to give such a definite answer. Somebody on the Valuebuddies forum mentioned:

"China Aviation Oil, ACCS, HongXing and Jurong Technologies had been awarded Transparency award by SIAS and many investors had been hurt by investing into these companies. How many more of such useless awards does the Singapore market need to see before such awards are stopped?"


In my previous posting "And Glaucus responds ...." I wrote several times that it looked like Minzhong admitted that certain things were not in order.

Associate professor Mak Yuen Teen from the NUS Business School puts it more specific in a letter to The Business Times (emphasis mine):

"Is China Minzhong saying it keeps 2 sets of books?"

"China Minzhong has provided a succession of rebuttals to the allegations of US-based short seller Glaucus Research Group, including highly detailed ones on Sept 1 and 3, complete with extracts of source documents. Although its efforts in rebutting the allegations are commendable, they are unlikely to completely dispel the concerns raised by Glaucus. The source documents provided by the company can understandably provide only a partial picture of the true situation.

While the company has cited the fact that it has consistently received clean opinions from its external auditors and that the auditors have not withdrawn their opinions, the auditors themselves have been silent. Given the well-known challenges faced by auditors in China and the fact that all of China Minzhong's business is conducted through subsidiaries there, the auditors may be reluctant to bet their partners' bonuses that the allegations of Glaucus are totally without basis. It is likely that only a comprehensive special audit will be able to dispel all the concerns raised by Glaucus, but we cannot realistically expect a company to commission a special audit each time allegations are made about its financials.

Unfortunately, China Minzhong's latest announcement on Sept 3 contains statements that may not help its cause in dispelling concerns. It stated that "Glaucus's assertion that documents that are publicly available are more reliable than those not in the public domain is flawed. The public information was not obtained independently by the regulators but based on our filings. Where there is inconsistency in information, it is only logical to look to the source documents to verify the truth . . . for SAIC (State Administration for Industry & Commerce) filings, given the purpose and intention of such filings, the key consideration is to ensure that the company operates within its permitted business scope and duly informs SAIC of changes to its registered particulars". It stated that it places great emphasis on the accuracy of accounts which affect its tax liability but appears to admit that its SAIC filings may be inaccurate.

Is this a public admission that it is keeping two sets of books? Rather disconcertingly, it does not seem to see anything wrong with filing inaccurate information in order to comply with regulatory requirements.

Given that the company's filings to SAIC in China may be inaccurate, how can investors be sure that its financial statements and announcements to the Singapore Exchange here are really true and fair, especially when it is clear that regulatory enforcement is easier for Chinese authorities than for Singapore authorities?

China Minzhong's statement also confirms the challenges of doing proper due diligence for Chinese companies using publicly available information, even those filed with regulatory authorities in China, and once again highlights the risks of investing in Chinese companies."

And Glaucus responds .....

Glaucus Research responded within one day on the documents submitted by China Minzhong.

I invite the reader to go through the whole document, the executive summary only takes one page, the more detailed information another 15 pages.

I find it a good, proper and fast response.


From the front page of The Business Times (Singapore) of today, some snippets with comments of mine in [red]:


"It [Minzhong] will also conduct more rigorous checks on the documentation of its customers and suppliers in China.

[sounds like an admission that the documentation of customers and suppliers was indeed not in order]

Mr. Lin: "China is still a developing country. Many things are still not regulated...."

[sounds like an admission that certain items might indeed not have been properly regulated]

"Among various things, Glaucus raised suspicions that China Minzhong's past sales and purchases might have been fabricated.

This was because a key customer which China Minzhong said had contributed to its sales from fiscal year 2007 onwards was found to have been incorporated only in November 2009.

Another key supplier had been deregistered and stripped of its business license in February 2010, but China Minzhong continued to trade with it until October 2010 until the company failed to meet supply quality.

Both China Minzhong CFO Ryan Siek Wei Ting and Mr. Lin yesterday shrugged off the accusations, noting that doing business in China is not a black-and-white matter as the regulatory environment is weak."

[it would have helped if they had been more specific]

"Said Mr. Siek: "When you do business, obviously the formal entity is important. But I think what is more important [seems to indicate that the formal entity might not have been in order] is that the sales are genuine, you really deliver the products, get the receipts, and collect the cash".

[one problem is that the receipts are not available in public, and most likely run in the thousands and thousands of papers, Minzhong only showed a hand full of them]

Lin said: "Business in China is complicated. But facts are facts. You can't run away from the customs, you don't have to use other documentation to catch me out."

[one problem is that the customs documentation is not available in public, and most likely runs in the thousands and thousands of papers, Minzhong only showed a hand full of them]


I find the general impression of all of the above rather weak. It seems to indicate that certain things were indeed not in order, but by showing a few, selected documents (documents that we can't verify) everybody has to believe them.

At the very least, minority shareholders of Minzhong should have been clearly warned about all these matters, which issues are not in black-and-white, which entities might not have been properly registered, etc.

And also, China Minzhong has deliberately chosen not to list in China, but in highly regulated Singapore. It has to take the consequences of that decision.

I think this is the moment that the authorities and the independent directors have to show leadership, and order a independent investigation into the matters raised by Glaucus.

And Indofood makes an offer .....

The Minzhong/Glaucus saga took yet another turn, this time majority investor Indofood (PT Indofood Sukses MakmurTBK) made an offer to acquire the shares of Minzhong for SGD 1.12 per share. The announcement can be found here.

Surely most minority investors of Minzhong, who must have worried a lot over the weekend, will be happy with this new development.

Minority investors of Indofood however might not share this joy, the share of Indofood went more than 9% down today on the news of the acquisition.

If Glaucus will still respond to the defence put up by the management of Minzhong, I don't know, I definitely hope so, but it might not be useful anymore given the take-over offer by Indofood.

Since Indofood is a listed company, observers might still be able to follow the future performance of Minzhong. And that might give an indication who eventually was right, Glaucus or the management of Minzhong or both to a certain extent.


Today in The Straits Times a rather strange (at least in my humble opinon) article appeared under the title "Time to rein in errant short-sellers" by Goh Eng Yeow.  The article is behind a paywall, but the text can be found here.

Some snippets, with my comments in red:


"The time has surely come to deal with the foreign short-sellers who have been wreaking havoc on the local stock market."

Wreaking havoc? Only two companies, Olam in November 2012 and Menzhong last week, while both have had their fair share of criticism before the reports of the short sellers came out.

Olams case: in response to the report the company has shored up its balance sheet with a rights issue, has tidied up its balance sheet and has increased communications with the investors. Olam also dropped its planned court case against Muddy Waters. Net effect has been (very) positive for the shareholders of Olam.

Minzhongs case: Glaucus came with a report that looked initially quite impressive, Minzhong came with a decent, equally lengthy answer, Glaucus has yet to respond.

For both companies, the jury is still out, much too early to tell, especially in Minzhong's case.

But even more interesting, who wrote the following:

"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."?

The answer is none other than The Business Times, sister organisation of The Straits Times, both owned by SPH.

"The latest attack came last week and sent the market into a spin, yet the basis of the seller's claims against a locally listed firm did not appear to stand up to much scrutiny."

One single China based company send the Singaporean share market into a spin?

Glaucus' report does not stand up to much scrutiny? Everyone his opinion, but I think it is much too early to draw that conclusion. I don't think the statements by Minzhong have been checked yet, also, there is still enough room for questions.

Short-sellers sell borrowed stocks in the belief that the share price will fall, resulting in a handy profit if their bets prove correct.  But the means some of them use to try to herd other investors into making those bets pay off leave much to be desired.

And what about people who have long positions and make all kind of bullish projections/rumours, not based on any reality, sending the shares up, enabling them to sell their shares at a profit?

There has to be symmetry in this argument, Glaucus is at least transparent about it's position.

But the fact is that Glaucus has a chequered record. US-listed China real estate website play SouFun Holdings, which it attacked in April, has since doubled in price.

There is no short-seller with a 100% track record. There is also no fund manager being "long" with a 100% track record of making profits. Being a short-seller is extremely tough, since on average shares will increase in value.

True, there are US activist hedge funds that claim to play a vigilante role in the market by uncovering fraud in misbehaving publicly listed firms by taking up "short" positions against them and then publishing damning reports to drive the share price down. Since they are people who purportedly put their money where their mouth is, this is supposed to give credence to their allegations. But the fact remains that most of these operators are unregulated, unlicensed research outfits, unlike the professional stock analysts employed by banks and stockbroking outfits, who are subject to a host of tough rules imposed by the Monetary Authority of Singapore (MAS) and the Singapore Exchange.

I am following the share markets for more than 20 years, but I have never taken any report from any broker ever serious. In much too many cases they are conflicted and simply can't issue a "sell" advice, even if they want to. To assume otherwise would be extremely naïve.

"Professional stock analyst", sorry to say, I find many disappointing, if they would really be good they probably would be fund manager.

The fact that MAS is regulating their operations has nothing to do with the quality (or lack of it) of the broker recommendations.

What the MAS has to do is to examine Glaucus' allegations carefully and determine if any securities laws have been broken - and ask for redress from its US counterpart, if this is indeed the case.

And what the SGX has to do is to examine Glaucus' allegations carefully and determine if any securities laws have been broken by Minzhong - and ask for redress from its China counterpart, if this is indeed the case.

On our part, efforts should be made to level the playing field. For a start, let us make it mandatory for all short-sellers to disclose their positions. The current practice of asking them to volunteer the information simply does not wash.

I am all in favour of transparency. But now we are at it, shouldn't all writers of all reports also declare their positions, be it short or long?

If the SGX (or Bursa Malaysia for that matter) doesn't want these kind of short-sellers, then they should simply ban short selling: "if you can't stand the heat, get out of the kitchen".

If there had been more of these short-sellers a few years ago, who had signalled the many, many fraud cases in China listed companies on the SGX, surely the damage would have been much more limited, the SGX would have taken more measures at an earlier stage, the public would have incurred much less damage and the reputation of the SGX would have been much better.

"Time to rein in errant short-sellers", I would prefer "Time to rein in errant journalists".

And Minzhong responds .....

The response by China Minzhong filed at the SGX website can be found here, with annexures here, here and here.

The quantity of the response is good, 19 pages filled with information. Certain points look convincing, but others leave questions, at least to me.

For instance:

• Page 3, Glaucus claimed that Hong Kong Yifenli Trading Co. was incorporated only in November 2009, Minzhong responds by showing sales contracts. But when was Yifenli then incorporated, and would it not have been more convincing to show the incorporation papers?
• Putian Daziran Vegetable Produce Co did not report any cost of goods sold according to Glaucus, Minzhong responds again with sales contracts, but did this company file them with the SAIC?

Interestingly, again a discussion about EBITDA, Minzhong responds that its definition of EBITDA is different from the one used by Glaucus. That can happen, since EBITDA is not defined by GAAP (Generally Accepted Accounting Principles). Another reason not to use these "bull shit" (Mungers words) numbers anymore. I hope that the Malaysian companies (who started to use these EBITDA numbers more and more often) take note.

And there is even a Malaysian twist to the story, quite a few of the vegetable contracts that are shown are shipped to Klang.

Interesting to watch how events will unfold, the suspension of the shares will be lifted from tomorrow onwards (at least Minzhong has requested that), how will the share price react?

Also, what will the answer of Glaucus be, it is hard to believe they will not come with a response from their side.

And lastly, will the SGX order (for instance) an independent investigation in the case, with the documents supplied by Glaucus and Minzhong to start with? To clean the air for once and for all?