Thursday, 31 October 2013

Prince Frog as quiet as a mouse, NQ’s "Top Ten Lies", China Minzhong's earnings dive

I wrote before about "Prince Frog", it is already more than 2 weeks and the company has still not officially replied, worrisome. The longer it takes, the higher the chance the company is indeed a fraud.

Regarding NQ Mobile, targeted by Muddy Waters, the latter has written a new report called "NQ’s Top Ten Lies Since Friday". It can be found here. I am not an expert in this matter, but I did speak to someone knowledgeable in this area, and he told me that NQ Mobile was suspicious for a longer time, that there were enough rumours regarding the company.

Regarding China Minzhong, which was targeted by Glaucus, the company announced its quarterly results.

This looks like a nice picture:

But this not, earnings are down by 60%:

And this one is rather strange:

Cash up a lot, but borrowings also, why would a company want to borrow so much money if it has RMB 1.57 Billion in cash?

Indofood has acquired 89% of the company, we will have to wait how that will work out.

These are tough times for China based companies listed overseas, but they only have themselves to blame, in my opinion. Conservative accounting, a healthy dose of transparency and rewarding the shareholders through sizeable dividends would go a long way to battle the sceptical observers. But I haven't seen much of that lately.

Wednesday, 30 October 2013

China Stationery: too many red flags and what does "demised" mean?

I was alerted to Common Sense Investing's posting about China Stationery, one of the China listed companies on Bursa.

The posting referred to an article of Tong Kooi Ong in The Edge. The discrepancy in interest rate received versus the interest rate paid is worrisome. It has been observed in other China companies, in which reported cash was simply hugely overstated. China Stationery claims it owns more than RM 1 Billion cash, an unbelievable amount, that is, if it is for real (I have my doubts).

Common Sense Investing also wrote a previous article about the company, about a puzzling announcement that the CEO was "demised".

One website writes about the uncertainty:

"There is uncertainty surrounding Jiang Danping, the CEO of Chinese manufacturer China Stationery. In an 8 October filing to the Malaysian stock market to announce a boardroom change, China Stationery said that 54-year-old Jiang Danping had 'demised' on 1 October. A number of Malaysian publications have interpreted the wording of the stock market filing as meaning that Jiang Danping has died, although this is still being questioned on some financial forums. We'll provide an update as soon as we have more information."

But the update never came.

Here is one of the definitions of the word "demise" (I only give the first two):

1. death or decease.
2. termination of existence or operation: the demise of the empire. 

If the CEO really passed away (the first definition), one would expect a date of passing, plus on the company website an eulogy, but I can't find any.

If the CEO did not pass away (the second definition), then what was the reason for his termination? Surely shareholders are entitled to know that.

Also, the CEO owned shares in the holding company of CSL, rather important. And in most companies, the CEO is the most important executive, should he not be replaced?

The confusing situation around the CEO is puzzling, to say the least.

The following information I found in the last year report:

Many China companies were listed on the SGX during that time (and many failed), the fact that CSL's IPO was aborted in 2010 must be a large red flag.

The CFO has also resigned, in 2012.

The auditor is oddly enough from Singapore.

Too many red flags, and the trust has gone, the graph of the share price is not pretty:

In an interview with KiniBiz, the Chairman mentioned:

“The stock market moves up and down like the ebb and flow of the tides,” he explained when asked if he was concerned about the sorry performance of his company’s stock.

But I only see the share going down.

Tuesday, 29 October 2013

LTKM Chairman missing in action? (2)

With reference to the previous posting on this subject, LTKM made the following announcement to Bursa:

"We refer to Bank Negara Malaysia' notice dated 23 October 2013 in The Star newspaper, seeking to locate Encik Ahmad Khairuddin bin Ilias ("Encik Ahmad"), the Company's Independent Non-Executive Chairman, to assist in the investigations of the affairs of Genneva Malaysia Sdn Bhd ("the said matter").

The Board of Directors of the Company wishes to inform that the Directors of the Company have attempted to locate Encik Ahmad but failed to do so up to date.

The Board has met this morning on the said matter and has decided to take the following immediate actions which the Board believes will be in the best interest of the Company. These are:-

(a) With immediate effect, the duties and responsibilities of Encik Ahmad, the Non-Executive Chairman of the Company, is suspended pending the necessary clarification and verification by the Board and the Management regarding the said matter.

(b) With immediate effect, Encik Kamarudin bin Md Derom, an Independent Non-Executive Director is appointed as the Deputy Non-Executive Chairman of the Company.

The Board will make further announcement(s) on the said matter pending the outcome of the clarification and verification by the Board and the Management in due course."

Correct decision, as far as I can see, although rather late, the Board of Directors should have known of Mr. Ahmad's involvement with Genneva Malaysia, which could very well lead to problems down the road. The issue was well noticed by Errol Oh of The Star.

Sunday, 27 October 2013

How the economic machine works

I featured Ray Dalio in this blog, here and here. He has now started a new website, called EconomicPrinciples. He offers another view on how the economy works, not only in the form of a book, but also in the form of a 30 minute cartoon, which I highly recommend. I have never been much of a fan of economy (it is all much too vague to me, also incomprehensible that economists can have such a different opinion and that so many didn't see the 2008/09 events coming), but this video I can understand.

I think that his theory is also relevant in the Malaysian context, the economy has grown quite impressive, but part of that is realized by spending on credit (on many levels, both federal but also consumers), which translates into debt.

Below comments are from The New York Times, Andrew Ross Sorkin:

"Ray Dalio, the 64-year-old founder of Bridgewater Associates, the largest hedge fund in the world with some $150 billion under management, has quietly begun teaching his investment secrets on YouTube.

Mr. Dalio, who is said to be worth some $13 billion, was one of the few investors to see the financial crisis of 2008 developing, and perhaps just as important, the rebound. He’s made his money by predicting big macroeconomic cycles. His economic theories, up until now, have been known only to a small group of investors and those willing to pay his firm 2 percent management fees and 20 percent of the investment profits.

Mr. Dalio’s plain-spoken 30-minute video is an oddly entertaining animated cartoon filled with provocative theories about the way the economy runs. He dispenses with the way economists have long taught economics in school, and instead explains the economy as if it were a “machine” that he believes is much easier to understand and predict.

The average Main Street investor has probably never heard of him. It also may seem counterintuitive that a money manager who sells his clients on his foresight would want to preach to the masses. But he told me that he decided to make the video to demystify economic cycles because he believes most investors, regulators and politicians are focused on the wrong issues.

“While I kept it confidential until recently, I now want to share it because I believe that it could be very helpful in reducing big economic blunders, if it was more broadly understood,” he wrote in an e-mail. He explained that, “I believe that most influential decision makers and most people cause a lot of needless economic suffering because they are missing the fundamentals.”

An image from the animated cartoon “How the Economic Machine Works.”An image from the animated cartoon “How the Economic Machine Works.”

Mr. Dalio says he believes that the traditional approach to economics is too academic and impractical. It is one of the reasons he, and others, believe that the Federal Reserve and many other institutions missed the signs of the financial crisis.

Just as there is monetarism and Keynesianism, Mr. Dalio’s approach may be a more practical way to think about the economic cause-and-effect relationships. There are refreshingly basic explanations for neophytes in his video, titled “How the Economic Machine Works,” that even the most sophisticated investors will appreciate.

“Think of borrowing as simply a way of pulling spending forward,” he says, explaining that to buy something you can’t afford today, “you essentially need to borrow from your future self. In doing so you create a time in the future that you need to spend less than you make in order to pay it back.”

This is how he explains austerity: “When borrowers stop taking on new debts, and start paying down old debts, you might expect the debt burden to decrease. But the opposite happens. Because spending is cut — and one man’s spending is another man’s income — it causes incomes to fall.”

Mr. Dalio’s effort is attracting attention with both students of economics and the financial cognoscenti. Already, more than 300,000 people have viewed the video since it went up last month. Henry M. Paulson Jr., the former Treasury secretary, has been sending the link to friends.

Paul A. Volcker, the former Fed chairman, a fan of the cartoon, described it as “unconventional but it casts strong light on how the economy actually works, with its history of repetitive and ultimately destructive excesses in credit creation. The analysis points the way to practical ways central banks and governments can ease the pain of defaults and deleveraging.”

Mr. Dalio has been compared to George Soros and has become something of a philosopher king in recent years — though it is worth noting that his firm’s returns in the last year have been a bit lackluster.

Mr. Dalio has always believed he can see more clearly than others. His approach to running his firm, for example, is based on 210 rules he devised in a handbook for his firm, called Principles. (Among them: “Ask yourself whether you have earned the right to have an opinion.”) As a result of his unconventional management style, his firm has been likened to a cult, a description that irks him because he believes it undervalues the success of the approach.

Unlike traditional economists — Mr. Dalio isn’t one — he does not focus on the much-watched statistics that most economists depend on. He also doesn’t focus on basic theories like supply and demand nor does he believe that monetary policy makers can control inflation simply by controlling the money supply. He derides the MV=PQ formula that is a central principle of economics. (A quick economics lesson, by way of “M is the money supply; V is velocity — the number of times per year the average dollar is spent; P is prices of goods and services; and Q is quantity of goods and services. The equation suggests that if V is constant and M is increasing, there must be an increase in either Q or P.”)

That theory, developed by the esteemed Milton Friedman, leads to the wrong conclusions, he says.
Ray Dalio, the founder of Bridgewater Associates, a hedge fund with some $150 billion under management.Anja Niedringhaus/Associated PressRay Dalio, the founder of Bridgewater Associates, a hedge fund with some $150 billion under management.

Mr. Dalio said in an e-mail that his template indicates the formula “is misleading because there really isn’t much ‘velocity’ of money happening as most of what we call velocity is credit growth, which is very different and has different reasons for happening. Velocity is made out to be some vague force that drives the rate that money goes around, and it’s not that at all. I believe that we should agree that spending comes from either money (with a bit of velocity) or credit and we should understand how each is made up and spent to make nominal G.D.P. (gross domestic product).”

If that sounds a bit confusing, that’s because it is. But his video is more straightforward.
For example, he says that there are only two types of economic cycles, but investors always seem to miss them. “One takes about 5 to 10 years and the other takes about 75 to 100 years. While most people feel the swings, they typically don’t see them as cycles because they see them too up close — day by day, week by week,” he says in his video.

So where are we now in the economic cycle? He doesn’t exactly say. But based on his theories, we are probably in the back half of a long deleveraging, which Mr. Dalio says he doesn’t believe has to be a bad thing.

“The key is to avoid printing too much money and causing unacceptably high inflation, the way Germany did during its deleveraging in the 1920s,” he says. “If policy makers achieve the right balance, a deleveraging isn’t so dramatic. Growth is slow but debt burdens go down. That’s a beautiful deleveraging,” he continues. “It takes roughly a decade or more for debt burdens to fall and economic activity to get back to normal — hence the term ‘lost decade.’ ”

So if you studied his lesson, you can estimate that it will be 2018, or at least 10 years after the crisis, before you can begin to proclaim all clear."

Saturday, 26 October 2013

Short seller Muddy Waters targets NQ Mobile (2)

NQ Mobile has responded through a conference call "to address False Allegations".

Both Carson Block from Muddy Waters and Omar Khan from NQ Mobile were interviewed by Bloomberg. The transcript of these interviews can be found here.

Help University featured in The New York Times

Normally Malaysian companies are not that well known outside of Malaysia, but Help University is an exception, being featured in none other than The New York Times.

Unfortunately, it is not "exactly" good publicity, it turns out that Help University has bestowed an honorary doctorate title to none other than Kim Jong-Un, the leader of North Korea. The New York Times does not think that is a wise thing to do, to put it mildly.

Dr. Kim Jong-Un

The article can be found here. Some excerpts:

"If the North Korean state news agency has it right, the particular doctorate is perhaps as much of a surprise for those outside the isolated nation as the honor itself. Dr. Kim, it says, is now a doctor of economics. The news report does not mention that he oversees one of the world’s poorest and most dysfunctional economies.

The university that did the honors, a private school known by the acronym HELP, took the action as a way of “building a bridge to reach the people” of North Korea, according to the president of the university, Paul Chan. He has since come under an onslaught of criticism online for honoring a man who Western and South Korean intelligence officials say appears comfortable as the ruler of the brutal police state he inherited, and who continually defies the world’s calls to dismantle his country’s nuclear arsenal. (An announcement on the school’s Facebook page does not specify what doctorate the North Korean leader was awarded.)

The university, whose initials stand for Higher Education Learning Philosophy, elevated Mr. Kim to Dr. Kim during “a simple ceremony” in the North Korean Embassy in Kuala Lumpur this month, according to the statement by Mr. Chan on Facebook.

The North Korean ambassador received the certificate on Mr. Kim’s behalf, and the event was covered in the propaganda-filled North Korean media, which reports acknowledgment from abroad for its leaders as proof of the adoration it says they enjoy around the world."

LTKM Chairman missing in action?

Bank Negara is asking the public for information regarding the whereabouts of one of the directors of Genneva Malaysia. Advertisements have been published in several Malaysian newspapers:

Errol Oh from The Star points out that Ahmad Khairuddin is not only one of the directors of Genevva but also the Chairman of public listed LTKM. Something that was left out of the (in my opinion much too short) description of the chairman in the last year report of LTKM:

Errol Oh continues:

"Given that the central bank has to resort to ads in the hope of getting information on him or his whereabouts, it’s likely that he hasn’t been in touch with its enforcement team for a while.

With warrants of arrest issued against him, is Ahmad Khairuddin able to contribute effectively to LTKM’s boardroom deliberations? Can it be possible that he’s still accessible to the LTKM management and other directors, and yet be on Bank Negara’s list of persons sought? Isn’t there something wrong with this picture?


LTKM must address such questions sooner rather than later. Stakeholders shouldn’t be left in the dark when there’s the perception that the chairman is in legal trouble and has gone missing. If the company too can’t contact Ahmad Khairuddin, others have to step in to do the job. All this ought to be communicated to the investing public.

It’s fair to make a distinction between Ahmad Khairuddin’s involvement in Genneva Malaysia and his duties at LTKM. But this could only go so far. The compartmentalisation crumbled when the Genneva Malaysia scandal rudely intruded upon LTKM’s stewardship."

All very relevant questions, hopefully LTKM will soon make an official announcement on this issue.

It is really a pity for LTKM, which is an otherwise decent company. As far as I am aware, there is further no link between Genevva and LTKM.

Friday, 25 October 2013

Short seller Muddy Waters targets NQ Mobile

Article on Dealbook's website:

After Muddy Waters Report, NQ Mobile Falls by Half

When the stock market opened on Thursday, NQ Mobile, a Chinese mobile security company, had a valuation of $1.1 billion. Just hours later, half of its value was erased.

Call it the Muddy Waters effect. A short-selling firm known for its scathing reports on Chinese companies, Muddy Waters released a harsh assessment of NQ Mobile on Thursday, calling it a “massive fraud.”

NQ Mobile immediately experienced a stomach-turning plunge, with its shares falling more than 50 percent. The stock, which opened the day at $23 a share, fell as low as $8.46 before recovering slightly to close at $12.09. The company is listed on the New York Stock Exchange.

In its research note, Muddy Waters argued that “at least 72 percent of NQ’s purported 2012 China security revenue is fictitious,” saying the company was a “zero.”

“NQ’s largest customer by far is really NQ,” Muddy Waters, which is run by Carson C. Block, said. The note added that the company’s “future is as bleak as its past,” and that its “acquisitions are highly likely to be corrupt.”

In a statement, NQ said the accusations were “false,” adding that it would issue a more detailed response before the market opens in the United States on Friday.

“NQ Mobile will respond quickly, transparently and forcefully to these false allegations regarding our company,” the statement said.
Muddy Water's report can be found here.

Did Bernama perform a thorough check on Qnet?

Bernama has written several glowing articles about Qnet, a direct selling company based in Hong Kong:

Malaysia To Play Key Role In Qnet's Quest To Achieve US$1 Billion Revenue Target By 2018

Success of Qnet shows how people without a business background can do well (published on The Malaysian Insider, but written by Bernama)

"He said the direct selling and multi-level marketing industry was very strong and vibrant in Malaysia against a backdrop of a good legal infrastructure and support from the government which recognised the importance of the industry to economic growth."

Yes, I agree, Malaysia has an excellent legal framework, but unfortunately also a rather weak enforcement.

The entry about Qnet in Wikipedia can be found here.

A sample of what has been written there (the original article at Wikipedia's website gives the relevant links):

"Many governmental entities have described QNet's business model as a simple pyramid scheme: early entrants earn money, and as the number of Independent Representatives (IRs) increases, finding more IRs to join becomes difficult or impossible; IRs that join late do not earn enough to cover their first outlay and the model collapses.[20][11] QNet's Public Relations manager said that QNet offers a business opportunity that doesn't have high start-up costs. When an IR recommends the product the customer makes a purchase through QNet's system and the IR receives a commission.[9]


APLI, the direct selling Association of Indonesia, considers GoldQuest or QuestNet a pyramid scheme. Egypt, India, Iran, Indonesia, Nepal, Rwanda, Saudi Arabia, Sri Lanka, Sudan, Syria, and Turkey accused and sued QNet for allegedly operating a product-based pyramid scheme. The company denies any wrongdoing, and some court cases against it were dismissed."


"The Amezcua Bio Disc (also spelled BioDisc and BioDisk) is one of the company's products. QNet claims that the Bio Disc can "redefine and harmonise the energy of water, greatly maximising its positive affect on the human body". These and other claims relating to the product have been denounced as fraudulent by various scientists, media commentators and watchdogs. Critics have noted that the claims are based on pseudoscientific concepts such as hexagonal water and that they have never been validated by peer-review. QNet has stated in a document published to its representatives that there are no known test and approval bodies to date on such products."



Australian Politician Cameron Thompson, the Nepalese Home Ministry, the Sri Lankan Central Bank, and the Iranian Government have described GoldQuest as a pyramid scheme. In 2002, the Australian Office of Consumer and Business Affairs listed the company as one of 61 alleged pyramid schemes.[27][28][better source needed] The Nepalese Home Ministry banned the company from operating in Nepal in 2003, and Bahadur Manandhar, chief of the foreign exchange department of the Nepal Rastra Bank, stated GoldQuest was “a hundred percent fraud.”[29] The Sri Lankan government banned GoldQuest in 2005, claiming that the company had caused 15 million dollars to leave the country.[13][30][31][15] The same year, the Iranian government also banned GoldQuest, after prosecutors found that company activities had “led to the exit half of a billion dollars from Iran.”[32]

Qnet (then operating as GoldQuest) also faced legal action in India in 2008.[33] The case resulted in Interpol's arrest of Vijay Eswaran and other company officials for fraud. The case was fought out substantially in the courts of Manila and Jakarta. After spending three weeks in jail, Indonesian courts released him. A Manila court dismissed the charge soon afterward.[16][34] QNet has advocated for the regulation of Indian multileval marketing companies, and for the banning of pyramid schemes in India.[35][19][36]

In 2008, around 3000 people marched on the presidential palace in Kabul to demonstrate against the government's temporary withdrawal of QuestNet's license to operate in Afghanistan. The business started in Afghanistan with around 600 IRs in 2006 and had expanded to 21,000 when the government temporarily withdrew the license to enable it to write operating laws.[37]

The Rwandan Government's Ministry of Finance banned QuestNet in 2009 for violations of company and tax laws after The National Bank of Rwanda described the company as a pyramid scheme which "is collecting money from subscribers in Rwanda and sending it outside to companies called Park King Development and DBS Hong Kong using swift transfer."[38] Citing article 4 of the companies act and articles 9 and 10 of the tax act, Minister James Musoni issued the order forcing Questnet and its IRs to immediately stop all activities.[39] Questnet appealed the ban, and the appeal was granted in 2012, with the condition that it strictly follows the country's laws in the future.[40][41]

Also in 2009, The Sudanese government banned QuestNet after allegations were made relating to poor product quality and the and non-receipt of products.[42][43] After the shut down, another agent wanted to renew Questnet's contract in the Sudan, but the government refused.[citation needed] The same year, the Syrian ministry of economics shut down QuestNet for violating its commercial registration.[44] Ramzy Asawda, Director of Facilitation and Trade Efficiency in the Syrian Ministry of Economy, stated QuestNet had operated a pyramid scheme in Syria, withdrew billions of Syrian pounds from the country, and paid few taxes in return. The shutdown also applies to other agencies of the company.[45]

In 2010 Questnet opened in Turkey with 150 distributors; 80 of which police detained in an investigation that charged 42 with gaining an unfair advantage.[46] In 2011, the Turkish Trade Ministry investigated QNet following complaints that it was a rebrand of Questnet. The Ministry also revealed that Quest was fined TL3.64 million(USD 1.9 million) for its illegal activities in 2010.[47] In 2011, QI Group resumed operations in Turkey with the acquisition of the Dögan Hotel in Antalya.[48][49]

The governments of Egypt, Saudi Arabia. Indonesia, and India have accused QNet of operating a product-based pyramid scheme.[50][51][52][28] Dar al-Ifta issued QNet a Fatwā in 2012 stating its business in Egypt is haram (forbidden under Islamic law) and could harm the country’s economy.[53][54] The same year the Saudi Arabian Ministry of Commerce and Industry banned Qnet, accusing the company of theft, falsification, and failure to register with the ministry, and published an official message warning the Saudi people to avoid involvement in fraudulent schemes operating in the country, mentioning QNet specifically.[55][56]

In August 2013, the Economic Offenses Wing (EOW) of the Central Bureau of Investigation of India made the first arrest in the QNet case which began in India in 2008. Members of the company were arrested for cheating and were remanded into police custody till August 22. EOW was probing a suspected fraud committed by the firm. Two teams were sent to Bangalore and Chennai for investigations into this case. The police suspects arrested members to be linked to Vijay Eswaran, considered the prime accused in the QNet case.[57] the case goes on and Cops freeze 6 bank accounts of marketing firm in the same month and arrested member has been sent to judicial custody.[58]

Some recent articles about Qnet in "The Times of India":

EOW registers case against multi-level marekting firm, QNet, for fraud
EOW makes first arrest in QNet case
Cops freeze 6 bank accounts of marketing firm

Bernama does not mention any of the above controversies in its rather glowing articles about Qnet. I hope that they did a very thorough check on Qnet and that they found convincing evidence that Qnet is nothing to blame for all the above controversies. It would be good, in the sake of transparency and credibility, if Bernama would share this evidence with its readers.

Thursday, 24 October 2013

Glaucus targets Prince Frog (2)

It is already eight days ago that Glaucus published its report about Prince Frog, but the company still hasn't officially responded.

However, as "Imenwe" pointed out in the comments of my previous posting:
  • BFM paid attention to this case (worrisome were some negative comments at the end about short sellers);
  • Kim Eng (Hong Kong) wrote a company update about Prince Frog

Until now, the company has hinted (during conference calls) at several scenario's, but I find them not very convincing. Also, the longer it takes for the company to officially reply, the more worrisome it will get. A strong, confident company should first of all never have been in this place (especially since several rumours have been aired before), secondly should have quickly come with an accurate and strong riposte.

The reports both by Nielsen and the government of China are too different from what Prince Frog reports. I find it hard to reconcile them.

The extremely high margins and short "average days inventory turnover" versus industry players are worrisome.

The issue of Prince Frog having more sales in the lower tier cities, and less sales in the Tier 1 and 2 cities in China: I find that strange. Glaucus writes that Prince Frog has previously mentioned themselves that that was not the case. Also, a company that claims it grew eight fold compared to the industry only doubling its revenue, to me the way to do that is to aggressively market ones products in the bigger cities. In the smaller cities it is possible to do, but it would depend on huge manpower, and it takes a long time for that network to grow. In the areas of branding (getting good quality shelve space), marketing and distribution lots of effort have to be done.

If I had to make a choice which party to believe, based on the information that I now have, I would definitely choose Glaucus. For the shareholders of Prince Frog, I hope I am wrong.

The Malaysian Insider retracts untrue report on Securities Commission

Article on The Malaysian Insider:

"The Malaysian Insider retracts a report on the SC over the Sime-E&O case

With regards to The Malaysian Insider's report on August 10, 2012 headlined "SC to order Sime general offer for E&O, say sources", The Malaysian Insider would like to retract the said report on the Securities Commission (SC) as it is untrue.

The statement in the said article that was attributed to the SC was untrue and was published without verification with the SC. The report has now been withdrawn as it is untrue and false.

We apologise to the Securities Commission for the said untrue report. - October 24, 2013."

I wrote about this article:

"the share price of E&O is up RM 0.42 in very heavy volume, the warrant is up a whopping 3,199%, also in very heavy volume.

Looks like the authorities have another possible case of insider trading to deal with since there has been no official announcement."

Some persons must have made a lot of money trading E&O on that fateful day, August 10, 2012, while other must have lost their shirt. I hope the authorities are looking into that.

I like to re-iterate the words of P. Gunasegaram:

Nothing less than the integrity of our markets is at stake here. For too long, market manipulation and insider trading have been excused on the grounds that it makes the market, that it provides excitement and that it provides opportunities to make money for both traders and brokers.

But really, that's not the purpose of the market. The purpose is to provide a place where investors and others can seek a fair value for the assets they buy and sell through a fair, transparent and straightforward process that provides equal information and opportunity to all.

The economic aim for all that is to provide investors with a place to raise capital efficiently so that business can flourish.

It is lamentable that this basic aim of capital markets seems to be lost and it has become a place for wheelers, dealers and plain crooks to make money in less than honourable, and even illegal, ways.

What a shame! And will it ever change?

Monday, 21 October 2013

HB Global's special audit

Sentiment towards Chinese listed companies on the Bursa is not exactly very rosy, all are trading at huge discounts compared to their IPO prices.

One of the first companies that has encountered severe problems is HB Global. The list of red flags is too long to mention, just a few examples:
  • A loss in its last quarterly announcement
  • Multiple changes in the boardroom, audit committee, it even changed its CFO twice recently
  • Change of company secretary
It is also very quickly running through its cash:

But the largest red flag was that in its last audited accounts the auditor wrote a very large disclaimer.

Bursa ordered a special investigation by BDO, and today, finally, a short, but rather surprising announcement was made to Bursa.

"1)   The auditor was able to reconcile the cash balance, trade receivables and trade payables contrary to Paul Wan &Co disclaimer of opinion."

That is really good news for the shareholder, but questions do appear, why is one auditor able to reconcile these items while another can't. Surely BDO must have communicated with Paul Wan & Co? For instance, did both auditors receive the same information?

"2)   Besides the above items under investigation, BDO had also investigated the cost and revenue recognition, paying particular attention to the fixed assets ie property, plant and equipment (“PPE”). In this section, BDO proposed a total impairment of RMB 67.6 million."

But that is not exactly good news, it would turn a profit of RMB 29 million into a loss of RMB 30 million, pretty shocking so soon after its IPO.

The reason given does not exactly make things very clear:

"The provision for impairment of PPE was a result of differences in the market value and the book value recorded in our books for our property, plant and equipment."

Then there is still another matter, regarding the inventory:

"4)   BDO also highlighted that they were unable to carry out the stock count for inventory balance as at 30 June 2013. The carrying amounts of the frozen food items at the old warehouse were approximately RMB 81 million representing 79% of the total inventories as at 30 June 2013. This was because the frozen food items were not properly arranged as well as the entrance to the old warehouse were not easily accessible; alternatively, BDO had checked the goods stock in notes, suppliers invoices, finished goods received notes, monthly production reports, goods stock out notes and sales invoices to determine reasonableness of inventories balance as at 31 December 2012 with no exception noted."

The announcement, so short in content, does end with a very interesting twist:

"In view of the findings by BDO, the management is seeking legal advice with the legal counsel on appropriate action to be taken against the previous auditor."

Shooting the messenger is the favourite sport of many Malaysian VIP's, it looks like HB Global has quickly acquired this local habit.

But before they want to give in to this Malaysian "hobby", may be they should first provide some more detailed information what really has happened. In one foul swoop, going from a profit to a loss, there should be some explanation, and I also like to remind the reader of the following:

Surely these statements in its 2012 year report carry some meaning, the directors were not forced to sign these statements.
In Hong Kong China Solar ran into some serious problems, three directors (including the chairman) are not contactable because they have been arrested.
David Webb poses the following questions:
"1. Why didn't the auditors know, or note, that the capital of the subsidiaries was not paid up?
2. Why didn't the company announce nearly 2 months ago that the directors were uncontactable?"   

And "Prince Frog" has after 5 days still not made an official reply on the accusations of Glaucus.

All not exactly confidence boosting events for China based listed companies.

Sunday, 20 October 2013

JP Morgan to settle for RM 41 Billion?

"JP Morgan Chase & Co has reached a tentative $13 billion (8.03 billion pounds) deal with the U.S. Justice Department and other government agencies to settle investigations into bad mortgage loans the bank sold to investors before the financial crisis, a source familiar with the talks said on Saturday.

The tentative deal, the largest ever between the U.S. government and a single company, does not release the bank from criminal liability for some of the mortgages it packaged into bonds and sold to investors.

That had been a major sticking point in the discussions, but the government refused to budge on that issue and JPMorgan felt it had no choice but to give in, according to a second source. Until recently, the most that JPMorgan was willing to pay was closer to $11 billion.

The ongoing criminal investigation underscores how even if this settlement takes some heat off JPMorgan Chief Executive Jamie Dimon, he still has myriad regulatory issues to deal with.

The biggest U.S. bank sidestepped the worst of the financial crisis but now faces more than a dozen probes globally into everything from alleged bribery in China to a possible role in manipulating benchmark interest rates known as Libor."

The above according to a news report from Reuters. For those readers who think this might be tough to swallow for JP Morgan:

"...the bank can easily afford this deal. It said earlier this month that it has set aside a total of $23 billion to cover legal settlements. In a typical quarter, it earns about $5 billion to $6 billion, and it has some $30 billion of cash on its books."

Simply amazing the amounts of money involved. The whole concept of TBTF (To Big To Fail) seems to be wrong. Good that the regulators stick to not releasing the bank from criminal liability.

However, to put things into perspective, readers should also take note of a previous blog posting:

"Difference between Bankers and Pirates".

Wednesday, 16 October 2013

Glaucus targets Prince Frog

Glaucus Research (about which we have written before, in the case of  Singapore listed China Minzhong) this time has targeted "Prince Frog International Holdings Ltd" (1259.HK), a Hong Kong listed, China based producer of child care products.

Their report can be found here.

Main issue: Glaucus claims that Prince Frog's revenue is hugely overstated. It does give quite a bit of information to support its claim.

After releasing the report, the share price dropped quickly, about 25%.

HKEX has halted trading in the company, pending a clarification by the company.

The allegations are not new, a blogger has written before about the issue that revenue might be overstated.

However, I have received a research report by CLSA (dated August 24, 2013) which refers to an "in-depth" study done through more than 200 interviews with Chinese parents and found that Prince Frog is the 2nd best known brand behind Johnson & Johnson. This result is very different from the numbers presented by Glaucus.

The question is, was this study by CLSA done in a proper way, 200 is not that high number, and of the group of interviewed people was not chosen random, then the results might be biased.

Prince Frog did a conference call today, to clarify the items raised. However, quite a few answers were rather "evasive" (in my opinion). Two examples:

  • Q: Given that the company has the frog cartoon, shouldn’t consumers throughout the country all know of the brand?
  • A: The brand survey was based on 15-50 year olds. Children recognize the brand; but parents don’t necessarily. The survey methodology from Nielson was limited to 13,500 people across 30 cities.
  • My opinion: 13,500 people is a lot; the answer on parents not knowing the brand is rather strange.

  • Q: Clarification on insider Xie’s sell down in the stock?
  • A: At the beginning of 2012, Mr Xie sold shares to the market to increase the free float to improve liquidity due to investor demand.
  • My opinion: well, that is an "interesting" way to bring it. If a company books stellar results and the free float is limited, then the share price can only go one direction, up. Insiders selling while the company claims to book excellent results will always turn investors jittery.

I guess we have to wait for an official announcement by the company, where they can give a detailed explanation of the situation.

Sona Petroleum, speculation about a possible acquisition? (2)

I wrote before about speculation regarding a possible acquisition by Sona Petroleum. I on purpose highlighted all the speculative elements in the article, in the "Moolah" style: "a source", "could be", "details are scant".

As "wammo" highlighted, an article in The Star indicates that the acquisition will not go through:

"Contrary to earlier speculation, special-purpose acquisition company (SPAC) Sona Petroleum Bhd will not be taking up any stake in Singapore-listed RH Petrogas Ltd, sources said.

RH Petrogas is an oil and gas (O&G) company controlled by Sarawak tycoon Tan Sri Tiong Hiew King.

The sources said that Tiong, whose flagship company is the unlisted Rimbunan Hijau Group, was not too keen on diluting his interest in RH Petrogas.

“Sona is now in the midst of evaluating other assets. It has moved on from RH Petrogas,” they said.

Market speculation had been rife that Sona could be buying a stake in RH Petrogas via both a placement of shares, as well as acquiring some of its assets, mainly offshore O&G blocks.

Earlier reports had indicated that Sona was close to taking up a 10% share placement in RH Petrogas. This had sent RH Petrogas’ shares to new highs, doubling in the last month alone.

The counter rose from 51.5 Singapore cents (RM1.28) on Sept 16 to a peak of 92 cents on Oct 10, before sinking to 81 cents at Monday’s close.

Meanwhile, Sona has not seen much movement. The mother shares closed unchanged on Monday at 44 sen, while its warrants ended 0.5 sen lower at 27.5 sen."

Much too much speculation these days, if one would ask me.

Tuesday, 15 October 2013

Batista: from zero to hero back to zero again (2)

I wrote before about Eike Batista based on an article from BusinessInsider, but Bloomberg wrote a much longer article about the same subject:

"How Brazil's Richest Man Lost $34.5 Billion"

I think pretty relevant for Malaysia, since:
  • Several SPACs venture in the same direction (oil&gas and mining), some of them have already embarked on Private Placements, while they only listed a short while ago;
  • Several Malaysians are involved in a web of Singaporean companies that have recently crashed down to Earth, companies involved with mining;
  • SapuraKencana Petroleum won a contract in Brazil from Petrobras; I am scared when I read this, since Batista could not make money in Brazil despite his home field advantage, can a Malaysian company be successful, while they had (pretty juicy, I guess) contracts from PETRONAS?
I see the above all as signs of a possible bubble, I hope I am wrong.

Faber: diversify, hope not all assets collapse at the same moment

Marc Faber in his usual "optimistic" self (his nickname being "Dr Doom"):

"There is no safe haven. Bank deposits are not safe, which used to be safe. Money in treasury bills is not 100% safe because there is inflation in the system and you hardly get any interest. Bonds are not very safe anymore because eventually interest rates will go up. Equities in the US are relatively expensive by any valuation metrics you might use. I don't see anything particularly safe. The best you can hope for is that you have a diversified portfolio of different assets and that they don't all collapse at the same time."

(on gold):

"We have a strong rally form the lows at 1180 to over 1400 and now we are backing off. I think between around 1200 and 1250 it is getting into buying range. The sentiment about gold is very negative, but if you look at everything considered - the monetization of debt, the debt ceiling, which sooner or later will be increased because both Republicans and Democrats are big spenders and the government's debt has expanded from $1 trillion in 1980 to $5 trillion in 1999, now we are at $16 trillion. Both Democrats and Republicans have been big, big spenders because a lot of money flows through the government."

(On whether what's going on across equities, bonds currencies and commodities, along with the events in US, can be compared to other idiocies by governments in previous decades):

"Yes, idiocies by governments. That is exactly the word. It's basically a dysfunctional government that we have that is far too large that is essentially wasting money left, right and center. The Republicans are wasting money on the military complex and the Democrats are basically buying votes with transfer payments, with entitlement programs, it goes on. It is a huge waste. The problem is that I don’t see a solution. I think the current debate about the debt ceiling and the budget is more a symptom of a problem than a problem itself. The problem is really that the government, not just in the US but other countries as well, has grown disproportionally large and that retards economic growth."

"There is no safe haven. Bank deposits are not safe, which used to be safe. Money in treasury bills is not 100% safe because there is inflation in the system and you hardly get any interest. Bonds are not very safe anymore because eventually interest rates will go up. Equities in the US are relatively expensive by any valuation metrics you might use. I don't see anything particularly safe. The best you can hope for is that you have a diversified portfolio of different assets and that they don't all collapse at the same time."

More information can be found here, on the website of Business Insider.

Saturday, 12 October 2013

Fed up about the Fed

"President Obama was wise to nominate Janet Yellen, vice chairwoman of the Federal Reserve, to be the Fed's next leader. As a deeply respected economist, she will bring two vital attributes to that role as a steward of the economy."

The "deeply respected" bit was something that was often repeated. Not repeated was the fact that she didn't see the last crisis -- the biggest since the Great Depression -- until it happened.
In her own words:
"For my own part, I did not see and did not appreciate what the risks were with securitization, the credit ratings agencies, the shadow banking system, the SIVs -- I didn't see any of that coming until it happened."

I have no idea if she is competent. Competence in an economist is hard to measure, like knowing whether your auto mechanic is really any good.

As for vital attributes, the Times did get one right. "She represents continuity," the Times wrote. That pretty much says it all. Janet Yellen is establishment all the way. She won't wobble the canoe. She's not a Paul Volcker coming in to break things up.

And that's all you need to know about Yellen. She's got the same playbook in her pocket as Bernanke. If anything, there are hints she'll be even more aggressive in printing money than Bernanke.

And old Ben was pretty proficient in this area. Since he took over back in February 2006, the Fed's securities holdings are up 365%, to $3.5 trillion. It bought all that with money it created out of nothing.

How big will the pile be when Yellen leaves?

My guess is it will be higher. Expect the easy money and distortions to continue. The stock market may continue to rise, as it has, with the size of the Fed's holdings. This can't end well, but the party between now and the end could be something.

The above is from Chris Mayer editor of "Capital & Crisis", one of the publication I subscribe to.

It looks indeed like Marc Faber is going to be right (as he usually is, is my experience), after QE1, QE2 and QE3 under Bernanke, we will get QE4, QE5 up to QE infinite under Yellen.

A huge financial "experiment" that eventually has to end badly. And even then, the supporters of money printing will say that it only failed because not enough money has been printed, not because it was ludicrous from the start.

More on this subject can be read here: Marc Faber Blasts "A Corrupt System That Rewards Stupidity"

James Grant, someone I also greatly admire, wrote: "America’s default on its debt is inevitable":

“There is precedent for a government shutdown,” Lloyd Blankfein, the chief executive officer of Goldman Sachs, remarked last week. “There’s no precedent for default.”

How wrong he is.

The U.S. government defaulted after the Revolutionary War, and it defaulted at intervals thereafter. Moreover, on the authority of the chairman of the Federal Reserve Board, the government means to keep right on shirking, dodging or trimming, if not legally defaulting.

Default means to not pay as promised, and politics may interrupt the timely service of the government’s debts. The consequences of such a disruption could — as everyone knows by now — set Wall Street on its ear. But after the various branches of government resume talking and investors have collected themselves, the Treasury will have no trouble finding the necessary billions with which to pay its bills. The Federal Reserve can materialize the scrip on a computer screen.

I wrote before about Goldman Sachs, about the conflict of interest situations that they easily can run into. For instance when they sell products to customers while taking up the other side of the trade. Something that happened in 2008/09 when they sold "alphabet soup products" to clients, which later proofed to be (almost) worthless, profiting themselves hugely on the other side of the trade.

It turns out that inside the New York Fed Carmen Segarra was given the task to check how Goldman Sachs deals with the conflict of interest. Yves Smith describes what happened in "Whistleblower Suit Confirms that the New York Fed is in the Goldman Protection Racket":

"Segarra was tasked to assess whether Goldman’s conflicts of interest policies were adequate in three separate cases: Solyndra, the El Paso/Morgan Kindler acquisition, and a bank acquisition by Sandanter. What is stunning if you read the complaint, which we’ve embedded below, is how high-handed Goldman was in its responses to Segarra’s inquiries. It’s not hard to imagine that they viewed this as a pro forma exercise that given their cozy relationship with the New York Fed, would go nowhere. They didn’t just stonewall, they told egregious lies. That sort of cover-up usually winds up being worse than the crime, but not if you are in a privileged class like Goldman. When Segarra (and initially, the other members of her team) kept pressing Goldman for answers and making clear that what they were getting was problematic, Goldman then started giving credulity-straining responses.

As the exam moved forward, Segarra came under pressure from the Goldman relationship manager, Michael Silva, who was also senior to her at the bank (this is how you can tell the new regulatory push is all optics: the examiners are subordinate to the established “don’t ruffle the banks” incumbents). Silva, who had been chief of staff to Geithner before becoming “relationship manager” to Goldman, appears, unlike Segarra, not to have had real world financial services experience (he looks to have joined the New York Fed as a law clerk in 1992 and stayed with the bank).

Segarra was fired abruptly after refusing to change her recommendations and destroy supporting documents, which was in violation of regulatory policy (bank examiners are not “fire at will” employees; they need to be put on notice and given the opportunity to correct deficiencies in their performance before they can be dismissed).

I’ve read other wrongful termination suits and Segarra’s looks very strong. It’s going to be awfully hard for the New York Fed to talk its way out of this one."

This will be an interesting case to follow, many people have already written about the close ties between Goldman Sachs and several government agencies, like the (New York) Fed.

The full complaint by Segarra can be found here.

In my previous posting about Goldman Sachs I asked the question why anybody would want to deal with Goldman Sachs, given its questionable ethics. Yves Smith gives an answer to that question:

"Goldman was raked over the coals in the media in 2010, first when the SEC filed its suit in April on one of its Abacus CDOs, and later when Carl Levin turned the spotlight on other particularly noxious Goldman CDOs, such as Timberwolf and Hudson. Yet even though Goldman’s reputation suffered and its stock price took a hit, it did not suffer if any loss of customer business. A lot of that is ego: most clients think they are smart enough to protect themselves from the likes of Goldman. Others say that even with its double-dealing, it still offers services other don’t. For example, if you are a hedgie and for some reason really want to do a trade in August in the late afternoon on a Friday, you’ll have trouble scaring up anyone you’d trust to take your order at most shops. By contrast, Goldman makes sure to have all the desks covered."

One organisation that does work with Goldman Sachs, as described here: "Goldman Said to Earn $500 Million Arranging Malaysia Bond". Did 1MDB think they are smart enough, or was it because Goldman Sachs offered services that others didn't? There has not been much transparency regarding 1MDB, I hope that one day all the facts become public and we all know the answer to the above question.

In "What happened inside Goldman Sachs", author Steven Mandis writes how the culture of Goldman Sachs completely changed after it went for IPO, from client focused to shareholder (read: profit) focused. The book review by The Wall Street Journal can be found here.

Thursday, 10 October 2013

Protasco: Deposit is topped up

I wrote many times about Protasco in quite negative ways, but this time there is some good news to share.

In "Protasco: more delays and less transparency" I mentioned that the deposit of securities didn't cover at all the RM 50 million paid by Protasco, due to the securities plunging in price.

Protasco announced yesterday:

"In the First Announcement, AmInvestment Bank Berhad (“AmInvestment Bank”) had announced on behalf of the Board of Directors of PB, amongst others, that as part of the terms of the SPA, a Deposit amounting to RM50,000,000 was paid to the Vendor upon signing of the SPA. Accordingly, foreign quoted securities (“Blocked Securities”) amounting to approximately the Deposit were blocked to secure the Deposit. In the event of non-completion, the Blocked Securities may at the option of PB be sold and the proceeds from the sale of the Blocked Securities shall thereafter be remitted to PB.

On behalf of the Company, AmInvestment Bank wishes to announce that since the execution of the SPA, the Company had requested the Vendor to top-up the Blocked Securities when the value of the Blocked Securities decreased below RM50,000,000 attributable to the drop in the Blocked Securities’ share price and home currency exchange rate.

As at the date of this announcement, there is 354,426,585 Blocked Securities retained by the Company. Based on the closing market price of IDR520 (equivalent to RM0.144*) for each Blocked Security as at 8 October 2013, the total value of the Blocked Securities amounts to approximately RM51.05 million."

Good news for Protasco shareholders for several reasons, that the securities deposit has been increased (and thus that the risk for Protasco has decreased), also lending more credibility to the whole deal, and of course about the transparency issue.

Although the authorities (SC and/or BM) have not yet taken any visible action, they might very well have played an important role behind the above announcement.

Regarding the announced SPA, we are still waiting for more news, it continues to be a very intriguing case. Remarkably, the main stream media have been very quiet about all the matters at hand.

Wednesday, 9 October 2013

Asian fund managers (1)

In my opinion, there are three good ways to invest in equities:

[1] Do it yourself: you need to spend lots of time on it, but it can be pretty rewarding while learning a lot in the process. I have invested in Asian shares for about 20 years (for 16 years mostly Malaysian shares), booked returns of 15+% per year which is very typical for decent value investors. My hunting ground for investable companies has the following characteristics:
  • Small and medium size, not yet discovered by large fund managers
  • Focused, they tend to be better than conglomerates, but also more easy to analyse
  • Good corporate governance, where the managers are prepared to share the profits with the minority shareholders
  • Decent dividend yield, although a company growing fast might want to keep cash in the company, in general companies paying some dividend tend to perform better is my experience
  • Good to decent balance sheet, needed to withstand a rainy day
  • High ROE (Return On Equity) of at least 15%, may be the most important criteria of all; there are similar concepts which are also excellent like ROCE etc. I hope to revisit this subject in the future.
  • Good and consistent track record (correlated with the previous)
  • Cheap price relative to their good quality track record
  • Be aware of cyclical companies near their cyclical high (they look cheap, but aren't)
Pretty common sense all of the above, but amazingly, these kind of companies are often found to be boring by other investors, are thus neglected and offer good value for patient investors.

However, not everyone has the time to devote to this, or don't have the right attitude for it. Even the best investors will sometimes have disappointing results in the short or even medium term, one need to have the stamina to deal with that.

[2] ETFs (Exchange Traded Funds): funds that are passively invested and thus have (very) low management fees. Good for "macro calls", I for instance am quite interested to invest in companies in Africa, for which I use an ETF which invest in larger companies spread out all over the continent, to reduce country risk. There are a huge amount of ETFs, each with a different focus, again, one should do his homework before investing in them, but they can serve their purpose quite well.

[3] Managed, good quality funds: these funds are actively managed by fund managers with a long and distinguished track record. There are quite a few good or excellent fund managers focused on Asian shares. Although management fees are much higher than for ETF's, excellent fund managers are indeed worth it.

The last category is the subject of this posting, and I will revisit it several times in the future.

In the past I did write several times about some Asian fund managers, for instance:

Value Investing with Cheah Cheng Hye
Claire Barnes and the Apollo Asia Fund
Top holdings of good Asian funds

Just to be clear:
  • I do not receive one cent commission by writing about these fund managers
  • I might or might not have money invested with them
  • I might or might not know them
  • I think they are good, that they select the right kind of stocks, that they have good track records, but I could be wrong, and even if I am right, past results are no guarantee for good results in the future
  • As usual, readers should do their homework, either when they want to invest in these funds, or when they want to follow some of the top holdings of these fund managers

The first fund manager I like to present is Yeoman Capital Management. I had encountered them a few times in HK small caps in which I was interested.

A good article about the fund can be found here.

Valuebuddies had a nice posting about the manager, drawing my attention, including some links to interesting video's:

Sun Hing Vision is a company in which I have owned shares myself, also because David Webb invested in it.

Some posters at Valuebuddies have better eyes than me and guessed which books are shown behind Yeo Seng Chong:

On the top deck :
- Competitive Strategy: Techniques for Analyzing Industries and Competitors
- You Can Be a Stock Market Genius
- Common Stocks and Uncommon Profit
- The Essays of Warren Buffet
- Value Investing : From Graham to Buffett and Beyond
- Competing on Analytics
- Beating the Street
- One Up On Wall Street
- The Value Imperative

On the bottom deck :
- The Wealth of Nations
- 2x Intelligent Investor
- 2x Security Analysis

Monday, 7 October 2013

Silver Bird: the White Knight and the "forgotten" clause

I have blogged a lot about Silver Bird in the past, some issues:

Silver linings in the Silver Bird cloud?
Taking away the silver linings that The Star saw in the timely (but otherwise horrific) announcements, and the fact that authorities (again) had not paid any heed to the many red flags, as observed by blogger "Where is Ze Moola".

Silverbird: I declare that the statements may be incorrect
About the poor director who had to make a declaration about the correctness of the financial statements, knowing they most likely were completely wrong (it later turned out they were indeed rubbish).

Silver Bird hammered by 300 million write-offs
Huge losses for a relatively small company.

Silver Bird
Shocking findings by the forensic audit, most likely indicating huge fraud by senior management.

Why is Aussie VC fund much too late with its announcements?
An Australian VC fund (CVC Limited) who announced its deposal of shares in Silver Bird almost one year too late.

However, in July finally some good news, a white knight in shining armour was helping poor Silver Bird out!

Of course, there is a price for everything, in this case a rather steep price:
  • The RPS (Redeemable Preference Shares) would convert into 160 Million Silver Bird shares, equivalent to 40% of the enlarged share base
  • Additional 320 million warrants would be issued
  • 10% of the share of profits if SBGB achieves a pre-tax profit of RM 5 million

But lo and behold, there is more. Only on October 1, 2013 the following announcement was made:

"... in the event that the exchange of the RPS with restructured SBGB shares together with free detachable warrants on the basis of RM1.00 of outstanding RPS (plus dividend) for ten (10) SBGB shares of RM0.10 each ( or such equivalent ratio if there is a change in the par value of ordinary shares of SBGB after the regularisation plan ) with twenty (20) free detachable warrants, is not approved by shareholders of the Company or the Scheme Creditors, the investors of the RPS, namely Suncsi Holdings Sdn Bhd and Covenant Equity Consulting Sdn Bhd  (“Investors”) shall have the option to require SBGB to purchase all the RPS at the cash price of RM2.50 per RPS, within sixty (60 days after the Investors deliver such notice of exercise to the Company....."

That makes things rather different, since the RPS were bought at RM 1.00, meaning the white knight would walk away with 150% profit, a cool RM 24 million, on top of their initial investment of RM 16 million.

It also puts the future decision by the shareholders of Silver Bird in a very different light, do they actually have a choice, how can they possibly fork out the RM 24 million in case they would not approve the restructuring scheme?

According to The Edge of October 7, 2013: "The condition was inadvertently omitted from the original announcement".

How many experts (auditors/accountants/lawyers etc.) had knowledge of this agreement, both from the side of Silver Bird, its major shareholders, the white knight, the regulators, etc.?

This is really a huge blunder, how could anybody "forget" to include this in the initial announcement to Bursa?

With all the above conditions in place, the white knight turned out to be not so white after all. Which is unfortunately often the case in restructuring schemes.

More bad news, the auditor of Silver Bird announced its intention to resign. Auditors resigning is another well known and large red flag, as if there were already not enough of them .....

Sunday, 6 October 2013

Investing in Twitter, oops Tweeter

We are all anxiously waiting for Twitter to IPO, so if the opportunity is there, jump on it. Who cares if it actually is a bankrupt home entertainment group, as long as the ticker symbol is close enough and the share goes up (and it does, as much as 1800% at one moment)?

From MarketWatch (Wall Street Journal), the following pretty hilarious story:

"TWTRQ’ stock up as much as 1,800% as investors confuse Tweeter for Twitter"

Twitter may be the story of the day, but Tweeter is threatening to push the social-media company off its perch.

Tweeter Home Entertainment Group Inc. (TWTRQ) stock is up 523% Friday, trading at the whopping price of 5 cents. It hit as high as 13 cents in morning trade.

Update: Finra halted the Tweeter stock at 12:42 p.m. Eastern, according to the OTC Bulletin Board.

Why did this penny stock jump so much? We don’t have a precise answer for you except to say that its ticker bears a striking resemblance to a social-media company that recently started chirping about its long-awaited initial public offering.

Twitter (TWTR), which released its IPO plans on Thursday, will trade under the ticker “TWTR” while Tweeter trades with the ticker “TWTRQ.”

Investors aren’t the only ones confused. As of 12:45 p.m. Eastern Google’s ticker page for Tweeter showed the company’s name as TWTR Inc. The page pulled news stories related to Twitter.

Tweeter was a Boston-based consumer electronics chain that went into Chapter 11 bankruptcy in 2007; its operating company eventually liquidated in 2008. But its memory lives on through those raised in the Boston area with cherished memories of going to concerts at the Tweeter Center (now renamed the Comcast Center).

And now its immortality is cemented in what has become a high-profile ticker.

Saturday, 5 October 2013

Sersol: projections are no projections, dilution is very real

There is a lot of speculation going on in several Malaysian and Singaporean counters lately, and even in the Singaporean counters often there is a Malaysian link.

One company in Malaysia that has been in the limelight is Sersol Bhd.

The graph of the share price and the much increased volume in the last few months:

On September 25, 2013 the company announced that Mohd Nazifuddin Bin Mohd Najib (the son of the Prime Minister of Malaysia) had bought more than 40 Million shares.

As regular readers of this blog probably know, I am not exactly a fan of mixing politics with business.

Next to that, the share price of Sersol went up a lot in relatively high volume before the above announcement was published, which looks puzzling.

Anil Netto wrote a good article about this matter.

The Malaysian Reserve published the next day information based on an interview:

If companies make projections, then all shareholders should be informed about that, so Sersol announced the following (possibly after being probed by Bursa Malaysia):

"The Board of Directors wishes to inform Bursa Securities that the reported statement above does not in any way represent a projection, estimate or forecast of the Company’s performance for the financial year ending 31 December 2014.

It is merely an expression of the Major Shareholder’s target and aspiration."

In other words, "a projected revenue" does not represent a projection in any way.

I am sorry to say, but I don't understand that, a projection is a projection, or not?

There is also another issue that I would like to point out, the company proposed (combined with a rights issue and warrant issue) a SIS (Share Issue Scheme) to its directors and employees, and the numbers are staggering:

The number of current shares is 96 Million, the maximum number of shares from the SIS Options is an unbelievable high 87 Million.

I agree, the shareholders can subscribe to rights issue and can exercise their warrants, but both do cost serious money.

The above proposal was approved on February 25, 2013, and the company did not spend one word too much on it:

"The Board of Directors of SerSol Technologies Berhad ("SerSol") wishes to announce that all the ordinary and special resolutions (as set out in the notice of Extraordinary General Meeting (“EGM”) of the Company dated 21 January 2013) have been approved by the shareholders of SerSol as tabled at the EGM held on 23 February 2013."

In my opinion, such an important matter should be done by poll voting, and the results should be announced in detail (number of shares plus percentage, in favour and against).

A dilution of 30% of the shares for directors and employees, and that after minority shareholders have pumped in additional money in the form of a rights issue and exercising warrants) is really way too high, I think the maximum should be probably 10% (even that is pretty generous).

In the current situation directors can apparently propose large numbers of shares for these schemes, and since minority shareholders have hardly any chance to win in a vote, they will get hugely diluted.

The odds are already stacked against minority shareholders, they have hardly any say (in practice), they have a quite substantial information disadvantage. If a company is successful and shareholders then get hugely diluted, I think that is not fair at all.

I think therefore that the rules should be changed, there really should be a limit on what the Board of Directors can propose in the form of a ESOS or SIS scheme.

Friday, 4 October 2013

Batista: from zero to hero back to zero again

"Flamboyant Brazilian billionaire Eike Batista made his first million from gold trading before he was 24 years old.

And from there it was a life worthy of the silver screen — he married a Playboy model, entered speedboat contests, and amassed a fortune of $34.5 billion. Batista told everyone who would listen that he would soon be the richest man in the world.

That was the spring of 2012. Since then Batista has lost 99% of his wealth. His commodities empire, EBX, is on the verge of utter collapse. Creditors are calling, and this week Batista did not pay a $47 million interest payment on his oil and gas company's (OGX) bonds.

If he doesn't pay by Oct. 30, OGX will be the biggest corporate default in Latin American history."

The above from BusinessInsider's website, which continues:

"The main contributor to Batista's downfall was and is OGX, his oil and gas company. His fields simply did not produce as promised. In January 2012 OGX estimated production of 15,000 barrels of oil a day (not that great), then in May 2012, one of its fields dropped to 10,000 a day.

Then expectations for some fields fell even further, to 5,000 barrels a day, in June 2012."

From a letter he wrote:

"More than anyone, I wonder where I went wrong. What should I have done differently? A first question might be linked to the funding model I chose for the companies. Today, if I could go back in time, I would not have resorted to the stock market. I would have a structured private-equity firm that would allow me to create from scratch and develop over at least 10 years each company. And they would all remain private until I was sure that it was time to go public. In the projects that I conceived, time proved a vital stress factor for the reversal of expectations on companies bearing broadly satisfactory results and valuable assets.

What has happened since it became clear that OGX would not be able to deliver the results that once seemed possible to achieve? Have I suddenly become a reckless adventurer who marshals resources for his own benefit and does not care if I will deliver what I had advertised? Today it is hard to remember, but OGX was built by some of the crowned heads by decades of services to reputed companies. I did not invest in the oil industry without surrounding myself of those I and the market understood to be among the most skilled professionals one could find. When winning the fields it got, expectations around OGX were sky high.

I had offers to sell big stakes or even the control of OGX from a valuation of $30 billion. Two years ago, I put more than $1 billion out of my pocket in the company. I lost and have been losing billions of dollars with OGX. Does someone who wishes to mislead the other do so at a cost of billions of dollars? If I wanted, I could have performed a scheduled sale of $100 million every six months over 5 years. I would have pocketed $5 billion and still remain in control of OGX. But I did not. Who lost the most with the collapse in the value of OGX was one shareholder: Eike Batista. No one has lost as much as I did, and it is fitting that it be so."

The above text in bold reflects my own thoughts about SPAC's: companies should not go too early to the stock market, owners/managers should first develop the company over at least 10 years, proof it's worth, manage expectations with realistic projections, partially based on achievements so far.

The above story also shows there is no easy money in oil & gas, it is a very tough industry where Murphy's Law reigns supreme.