Thursday, 25 December 2014

"all the IPOs this year were making money for investors", really? (2)

According to an article in The Edge (December 22, 2014) named "A dreary year for listings" 14 companies IPO-ed in 2014 on Bursa.

Excluding Only World Group (which just listed) the results are:
  • 3 are in positive area
  • 2 have the same price as the IPO
  • 8 have gone down, some considerably

That is not exactly a good score. Bearish sentiment on Bursa and in particular in the Oil & Gas industry have played an important role.

Icon Offshore was the worst performer, I wrote some cautious words about the company before.

Last year I wrote about an article in The Star, where the following quote was made:

"RHB Investment Bank Bhd director and regional head of equity capital markets Gan Kim Khoon recently said that investors should ride on the wave of Malaysia’s IPO market, but only after doing their homework on the new entrants.

He noted that all the IPOs this year were making money for investors and said this trend was likely to continue next year, when speaking at a recent panel discussion on the prospects for next year’s equity market."

That all IPO's made money in 2013 was simply not true.

And some of those listed companies did rather bad in 2014, for instance China Automobile Parts, AirAsia X, Sona Petroleum, Caring Pharmacy Group and UMW Oil & Gas.

But the advice to "ride the wave of Malaysia's IPO market" in 2014 also seems dubious, with hindsight, as the above results show.

Five years of booming share market have led to too much financial engineering, too much hot air being injected in soon to be listed companies, too much focus on the Oil & Gas industry.

Not surprisingly, things have come down to more realistic levels.

Wishing all readers Happy Holidays.

Tuesday, 23 December 2014

Hong Kong SFC takes action against short seller Citron

From the Financial Times, some snippets:

Citron Research has become the first shortseller to face action from Hong Kong’s watchdog, which alleges the California-based group knowingly made “false and misleading” claims about Evergrande, the Chinese developer.

Hong Kong’s Securities and Futures Commission on Monday started market misconduct tribunal proceedings against Andrew Left, the head of Citron, for claims made in June 2012 that Evergrande was insolvent and had consistently presented false information.

Shortsellers aim to profit from price falls by borrowing shares they do not own in the expectation that they will be able to buy them back more cheaply. Mr Left made HK$1.7m ($219,251) in profit from selling short 4.1m Evergrande shares before he made his claims, the SFC said.

Mr Left declined to comment.

The Hong Kong action comes as shortsellers fall under increasing scrutiny from Asia’s regulators, who have variously probed the veracity of their claims and their methods. This year, Taiwanese regulators pursued Glaucus Research, another California-based shortseller, while India’s watchdog temporarily banned a small Hong Kong hedge fund for what it said was insider trading.

In June 2012 Evergrande plunged as much as 20 per cent on the day Citron released a 57-page report on the group, which is one of China’s largest developers and a household name for its ownership of the Guangzhou Evergrande Football Club.

Evergrande, which is listed in Hong Kong, had a market capitalisation of about $8.6bn when Citron’s report was published online. It closed the day worth $7.6bn.

Citron is one of the better known of a group of China-focused short-sellers that emerged about five years ago and whose biggest scalp came in 2011 with the collapse of Sino-Forest, a $4bn forestry group, after Muddy Waters, another shortseller, questioned its veracity.

But shortsellers have enjoyed patchier success in recent years as companies have fought back and regulators stepped up their scrutiny. Evergrande was one of the first to issue a robust defence, blasting Citron’s claims and using the sort of colourful language employed by the shorts themselves.

David Webb commented on his website:

"This should be interesting. The SFC will need to show that Andrew Left either knew that his allegations were false or was reckless or negligent as to whether they were, in which case Section 277 of the SFO bites."

Monday, 22 December 2014

Delloyd's hidden gems to be revalued? (3)

I wrote before about Delloyd, here and here.

I hoped that the assets of Delloyd, especially the Sungai Rambai Estate and the estates in Indonesia would be revalued. That has indeed happened.

I also wrote:

"The independent adviser for this corporate exercise is Affin Investment Bank.  I would love to see them write something along the lines: "we estimate that the RNAV per share is around RM 15, therefore we find the proposed price not fair and not reasonable". Will they write that? Although independent advice has been improved significantly, I don't think that will happen."

Indeed, that has not happened.

Affin came up with a SOPV (Sum Of Parts Valuation) of RM 7.60. Since the offer price of RM 5.15 is a 32% discount to that valuation, the offer is deemed to be "not fair".

However, Affine still thinks the offer is "reasonable", hence their verdict: "not fair but reasonable, accept the offer". The rather ambiguous judgement that is quite common these days for independent advisers reporting on deals related to Bursa listed companies.

The most important part of the report is probably this:

Are both assets indeed worth only about RM 320M? I have read much higher valuations than that.

The problem that I have in general with many of the privatisation exercises on Bursa is:
  • Why are so many offers "not fair", is it not the duty of the Board of Directors to try to get an offer that is "fair" to all shareholders?
  • Why is there almost never a competing offer? In this case, Delloyd could have tried to sell its estates individually, to check if there is an interest in them, and if so, at what price. If the price is indeed good, then it could propose to sell the asset and distribute the proceeds to all shareholders. Has the Board of Directors actively tried to find buyers for its assets?

Thursday, 18 December 2014

Masterskill: another deal aborted

I have written many times about Masterskill, I am afraid not often in a positive way.

The company recently aborted its proposed sale of its properties. Below information is from MSWG's newsletter, December 18, 2014:

According to the announcement released by MEGB on 16 December 2014, the independent valuer namely Cheston International (KL) Sdn Bhd, had ascribed an indicative market value of RM110.4 million for Masterskill (M) Sdn Bhd’s operating property assets in Cheras, Kota Kinabalu, Kuching and Pasir Gudang (“Properties 1”), which is significantly higher than the initial indicative sale consideration of RM75 million offered by Mr. Siva Kumar A/L M. Jeyapalan.

Following the above, the parties were unable to mutually agree on a revised sale consideration for the Properties 1. As such, the Board of MEGB had resolved to abort the proposed disposals and proposed ESOS and will consider other alternatives to implement its asset light strategy and raise funds for the company. The Board will make the relevant announcements in due course.

Again another corporate exercise of restructuring to revive the business of MEGB fell off eventually with a significantly higher indicative market value by the independent valuer. Shareholders are growing impatient and disappointed to go through multiple corporate proposals and more so they were also astounded by significant fluctuations in the market value of their shares upon the abortion of multiple proposals. The negotiation price of RM75 million, representing a deep discount of 32% to the indicative market valuation would raise the question on how it was possible that the Company could initially have considered such a low indicative sale consideration of RM75 million which was so much below the indicative market valuation although the offer was subjected to independent valuation and shareholders’ approval.

It is even weirder if we go back to the 3rd quarter result of 2013, the company posted a loss of RM 104 Million, and the (rather short) reason it gave was (emphasis mine):

The higher loss before tax was largely due to provision for impairment loss on goodwill and certain of the Group’s property, plant and equipment totaling RM88.2 million.

In other words, it had just written down its property by a large amount. And Siva Kumar offered to buy the property assets at this low valuation, "willing buyer, willing seller". The independent valuer, Cheston International, seems to think the deal is not that great for the other shareholders.

Sunday, 14 December 2014

Some great links

"122 Things Everyone Should Know About Investing and the Economy"

Written by Morgan Housel, a treasure trove full with wisdom about investing. A few of my favourites, which are probably also relevant in the Malaysian share market:

  • Saying "I'll be greedy when others are fearful" is easier than actually doing it.
  • When most people say they want to be a millionaire, what they really mean is "I want to spend $1 million," which is literally the opposite of being a millionaire.
  • My main life lesson from investing: self-interest is the most powerful force on earth, and can get people to embrace and defend almost anything.
  • Buy and hold only works if you do both when markets crash. It's much easier to both buy and hold when markets are rising.
  • 72% of mutual funds benchmarked to the S&P 500 underperformed the index over a 20-year period ending in 2010.
  • The phrase "double-dip recession" was mentioned 10.8 million times in 2010 and 2011, according to Google. It never came. There were virtually no mentions of "financial collapse" in 2006 and 2007. It did come.
  • Our memories of financial history seem to extend about a decade back. "Time heals all wounds," the saying goes. It also erases many important lessons.
  • The most boring companies -- toothpaste, food, bolts -- can make some of the best long-term investments. The most innovative, some of the worst.
  • There were 272 automobile companies in 1909. Through consolidation and failure, three emerged on top, two of which went bankrupt. Spotting a promising trend and a winning investment are two different things.
  • Try to learn as many investing mistakes as possible vicariously through others. Other people have made every mistake in the book. You can learn more from studying the investing failures than the investing greats.
  • If you roll dice, you know that the odds are one in six that the dice will come up on a particular side. So you can calculate the risk. But, in the stock market, such computations are bull -- you don't even know how many sides the dice have!
  • Most people still haven't figured out that brokers don't have their best interest at heart.
  • Twenty-five hedge fund managers took home $21.2 billion in 2013 for delivering an average performance of 9.1%, versus the 32.4% you could have made in an index fund. It's a great business to work in -- not so much to invest in.
  • You can control your portfolio allocation, your own education, who you listen to, what you read, what evidence you pay attention to, and how you respond to certain events. You cannot control what the Fed does, laws Congress sets, the next jobs report, or whether a company will beat earnings estimates. Focus on the former; try to ignore the latter.
  • Companies that focus on their stock price will eventually lose their customers. Companies that focus on their customers will eventually boost their stock price. This is simple, but forgotten by countless managers.
  • Several academic studies have shown that those who trade the most earn the lowest returns. Remember Pascal's wisdom: "All man's miseries derive from not being able to sit in a quiet room alone."
  • The best company in the world run by the smartest management can be a terrible investment if purchased at the wrong price.
  • No investment points are awarded for difficulty or complexity. Simple strategies can lead to outstanding returns.
  • No investment points are awarded for difficulty or complexity. Simple strategies can lead to outstanding returns.

"The PMARCA Guide to Startups"

A series of articles about starting a tech start-up. My guess is that most readers of this blog are more interested in general investing. Start-up tech companies are special, in that they are supposed to scale very quickly, enabled by new technology, which also serves as a barrier to entry to (future) competitors.

There are many gems of wisdom which are also relevant for normal business. For instance a list of the risks involved:
  • Founder risk -- does the startup have the right founding team? A common founding team might include a great technologist, plus someone who can run the company, at least to start. Is the technologist really all that? Is the business person capable of running the company? Is the business person missing from the team altogether? Is it a business person or business people with no technologist, and therefore virtually unfundable?
  • Market risk -- is there a market for the product (using the term product and service interchangeably)? Will anyone want it? Will they pay for it? How much will they pay? How do we know?
  • Competition risk -- are there too many other startups already doing this? Is this startup sufficiently differentiated from the other startups, and also differentiated from any large incumbents?
  • Timing risk -- is it too early? Is it too late?
  • Financing risk -- after we invest in this round, how many additional rounds of financing will be required for the company to become profitable, and what will the dollar total be? How certain are we about these estimates? How do we know?
  • Marketing risk -- will this startup be able to cut through the noise? How much will marketing cost? Do the economics of customer acquisition -- the cost to acquire a customer, and the revenue that customer will generate -- work?
  • Distribution risk -- does this startup need certain distribution partners to succeed? Will it be able to get them? How? (For example, this is a common problem with mobile startups that need deals with major mobile carriers to succeed.)
  • Technology risk -- can the product be built? Does it involve rocket science -- or an equivalent, like artificial intelligence or natural language processing? Are there fundamental breakthroughs that need to happen? If so, how certain are we that they will happen, or that this team will be able to make them?
  • Product risk -- even assuming the product can in theory be built, can this team build it?
  • Hiring risk -- what positions does the startup need to hire for in order to execute its plan? E.g. a startup planning to build a high-scale web service will need a VP of Operations -- will the founding team be able to hire a good one?
  • Location risk -- where is the startup located? Can it hire the right talent in that location? And will I as the VC need to drive more than 20 minutes in my Mercedes SLR McLaren to get there?

"Zero to One: Notes on Startups, or How to Build the Future"

Peter Thiel is a intelligent and outspoken (sometimes controversial) person. A very clear book full with interesting theories, many of them quite general and not only relevant for start-ups. One of the best business books I have ever read.

Friday, 12 December 2014

Insider trading effectively legalized in US?

Yves Smith wrote "Bill Black: Second Circuit Decision Effectively Legalizes Insider Trading", a very worrisome article. Some snippets:

A U.S. appeals court dealt federal prosecutors a blow in their crackdown on insider trading on Wall Street on Wednesday, overturning the convictions of two former hedge fund managers charged with making illegal trades in technology stocks.

The 2nd U.S. Circuit Court of Appeals in New York said prosecutors presented insufficient evidence to convict Todd Newman, a former portfolio manager at Diamondback Capital Management, and Anthony Chiasson, co-founder of Level Global Investors.

The court held that defendants can only be convicted of insider trading if the person trading on confidential information knew the original tipper disclosed it in exchange for a personal benefit.

What does this mean in practical terms? The court has just provided a very-easy-to-satisfy roadmap for engaging in insider trading legally. Don’t give the person who gave you the choice tidbit any explicit payoff. You can give him all sorts of buttering up before hand (fancy meals, hot women, illicit substances, box seats, whatever you think will induce cooperation and show your seriousness and ability to pay) and just engage in vague winks and nods. As long as you don’t pay the tipster for the trade in any crass or traceable way (and no communications that point to an explicit payoff), you are good to go. Compensation down the road, in hard dollar or soft forms is perfectly kosher.

Needless to say, the implications are terrible. Thanks to high frequency trading, way too cozy a relationship between the Fed and its preferred banks, and years of suspicious trading patterns (markets too consistently not breaching technically significant price levels, with the trading looking decidedly not organic) has sapped the faith of retail and even smaller institutional investors in the integrity of markets. The Second Circuit has just announced open season on pervasive misuse of inside information.

Wall Street’s court of appeals (the Second Circuit) has just issued an opinion not simply overturning guilty verdicts but making it impossible to retry the elite Wall Street defendants that grew wealthy through trading on insider information. Indeed, the opinion reads like a roadmap (or a script) that every corrupt Wall Street elite can follow to create a cynical system of cutouts (ala SAC) that will allow the most senior elites to profit by trading on insider information as a matter of routine with total impunity. The Second Circuit decision makes any moderately sophisticated insider trading scheme that uses cutouts to protect the elite traders a perfect crime. It is a perfect crime because (1) it is guaranteed to make the elite traders who trades on the basis of what he knows is secret, insider information wealthy absent successful prosecutions and (2) using the Second Circuit’s decision as a fraud roadmap, an elite trader can arrange the scheme with total impunity from the criminal laws. The Second Circuit ruling appears to make the financial version of “don’t ask; don’t tell” a complete defense to insider trading prosecutions. The Second Circuit does not simply make it harder to prosecute – they make it impossible to prosecute sophisticated insider fraud schemes in which the elites use junior cutouts to create (totally implausible) deniability.

In Malaysia, recently regulatory activities regarding insider trading has increased. However, progress is very slow, a recent announcement by the SC involved an alleged insider trading case which happened more than 7 years ago.

Thursday, 11 December 2014

Opportunities in 3 SPACs? (2)

I have received very helpful comments from "Malaysia Stock Talk", who pointed at the following paragraph from the IPO brochure of CLIQ:

So for people who plan to vote against any qualifying acquisition, they will indeed get their cash pro rata to their shares.

I guess there are three categories of investors:

  • Category A who invests now, to gain an almost risk-free return, voting against any acquisition;
  • Category B who supports the management, who believes in the company and who will vote in favour of acquisitions; this could include investors who bought their shares at a higher price and might incur a loss if they vote against the acquisition;
  • Category C of people who haven't yet made up their mind.

An acquisition will go through:

Approval might be an issue if Category A becomes larger and larger. And that chance increases if the price stays low, and investors buy shares to profit from the arbitrage.
It also makes planning by the management difficult, not knowing how many people might vote against the acquisition(s).

If there is no acquisition within the approved time period, then the SPAC will dissolve and return the remaining money. In that case a lot of work has been done for nothing, and quite a few expenses have been incurred.

And warrant holders might be the proud owners of a worthless piece of paper.

Opportunities in 3 SPACs?

Regular readers of this blog will know that I am not exactly a fan of SPACs, especially in the Malaysian context (previous postings here, here and here).

To me it just doesn't make sense to list an empty company, it is already difficult enough for investors to make sense of companies that IPO with a real track record (as a rule of thumb, I insist that companies are listed for at least two years to become "investable", at least to me).

I saw the interest in especially energy SPACs as a sign of a market that has become much too speculative.

The Star published today an article on its website: "HLIB: Opportunities for investors to lock in long-term returns in three SPACs". Some snippets:

The three listed special-purpose acquisition companies (SPACs) that have yet to make their qualifying acquisition (QA) are trading below their “intrinsic cash values” and hence offer a unique opportunity to investors, according to Hong Leong Investment Bank Research.

“Reach Energy Bhd, Sona Petroleum Bhd and CLIQ Energy Bhd are currently trading at a 13% to 16% discount to their respective intrinsic cash values,” said analyst Jason Tan in a note.

He added that the current discount provides a “unique opportunity” to lock in long-term returns.

First of all, the word "unique" sounds overdone for me. There are many companies trading at a discount to its NAV, sometimes even to its cash holding, in other cases having assets that can be disposed of in a short period.

Secondly, the fact that these companies have not yet made an acquisition is most likely a blessing in disguise, with the price of oil having fallen so much lately.

In a worst-case scenario, investors holding to maturity could get an attractive return of 17% to 29%, he said.

Worst case scenario? Surely the analyst must be joking. I can imagine many worse scenario's, for instance the company making an acquisition that doesn't work out, or an investor having to sell their shares with the share being lower then now. The worst case of each share of a listed company is simply that its price goes to zero, SPACs are no exception to that.

.... when Hibiscus announced its QA, the discount was zerorised and thereafter the stock began trading at a premium towards the completion of the deal.

“This underpins our belief that the intrinsic cash value serves as a base return with an upside option from a value accretive QA,” Tan said.

Few comments:
  • Building a theory based on one single case (Hibiscus) is a tricky thing to do
  • Hibiscus share price did indeed take off after the acquisition, but it has also sharply decreased in price lately, from above RM 2 to currently below RM 1 (although still higher than its IPO price)
  • Hibiscus is still showing an operational loss, the only profit it has shown was a "paper" profit based on a revaluation exercise

I continue to be highly sceptical of SPACs, despite certain quarters continuing to write about success stories in other countries (which I strongly doubt). Trading in shares and warrants of SPACs on Bursa appears to me highly speculative.

A new SPAC will be introduced, Asian Healthcare Group led by former banker Yvonne Chia. It will be interesting to follow how that company will fare.

Monday, 8 December 2014

Buying on margin is a bad idea, including for employees (2)

First of all, to add to my previous story, The CEO of Bumi Armada has resigned per January 1st, 2015 due to "Family Reasons".

One broker (UBS) commented:

"UBS downgraded its medium term and normalized outlook for oil where its Brent forecast for Q414E/2015E is now at US$77.50/US$69.75 with some recovery to US$80/US$85/US$90 in 2016E/2017E/2018E. In the next 1 year, UBS' forecast is even lower than the forward prices. While we believe that its medium term cash flow is secured by contracts already won, FPSOs are typically used in deeper waters and marginal fields. Hence, in the current environment of volatile oil prices, oil companies could take longer to evaluate projects and award contracts.

Meanwhile, the market could perceive CEO Hassan Basma's resignation on Friday for family reasons (and also the sale of his 4.5m shares in the company since end-Nov) as lack of leadership in the company until the issue is addressed by the board and / or new CEO is appointed."

The company offered pre-IPO a lot of shares (probably at an interesting price) and a lot of options to the CEO.

When the price of oil tanked the share price went down from above RM 2.00 (corrected for the recent rights issue) to the current RM 1.03.

The CEO's shareholding was sold due to margin requirements, he still has "an interest in 50,624,803 unissued shares of Bumi Armada Berhad arising from outstanding options granted to him pursuant to the Company's Employee Share Option Scheme". These options are most likely out of the money and not worth much at the current share price of Bumi Armada.

In other words, although the CEO might have managed the company well, his financial results have been hugely downgraded due to circumstances beyond his control, the price of oil.

It is quite astonishing why the company choose to reward the CEO the way it did. Instead, the company could have given the CEO certain long time targets that are in reach of his control, with an adequate financial reward for reaching them.

And I am afraid the CEO might not be the only one in this predicament, other key persons in the management of Bumi Armada might have received similar structures.

For the minority shareholders, they must hope a good CEO can be found soon.

Friday, 5 December 2014

Buying on margin is a bad idea, including for employees

I wrote before:

"Bumi Armada is especially painful since the stock is not only trading way below its IPO price, but also below the price of its recent rights issue. Also, there seems to be persistent insider selling, even recently at these lower prices."

Today Bumi Armada announced:

"The Disposals were undertaken due to Margin calls on loan facilities taken by Mr. Hassan Assad Basma to purchase the said shares."

At least that makes clear why the CEO of Bumi Armada was selling shares at such a low price (RM 1.02, only a fraction of the IPO price, corrected for the recent rights issue).

But surely the management of any listed company should know that buying shares on margin is a hazardous thing to do?

Interestingly enough, I wrote about this same issue before, that time on Astro, from the same stable of companies:

"Last week Astro had a town hall meeting with their staff to talk about the share price fall and it is really up to the company to handle the situation because no organisation will like to have a group of disgruntled employees. There may be the pressure of margin calls for those who had taken financing to buy their allotment of shares. There might be employees who might not have the ability to hold on to their shares."

I am quite astonished about this all, it almost looks like certain employees are encouraged to buy shares of their company on margin. But that sounds like horrible advice, surely that can't be right. What will the mood of the employees be when the shares tank and they are forced to sell their shares, as now has happened?

I think the authorities should look into this issue.

MOL Global: class-action suits are filed

Four US law firms have filed class action suits against MOL Global, according to this article in The Star.

One complaint can be found here, the most important paragraphs:

Another complaint can be found here:

The Complaint alleges that defendants made false and/or misleading statements and/or failed to disclose to MOL Global investors that: (1) MOL Global was overstating the revenue and profit derived from the Company’s business and operations; (2) the Company’s  actual business model could not sustain the growth trends described in the IPO offering documents; (3) MOL Global would not be able to report its third quarter 2014 financial results on November 21, 2014, as previously stated; and (4), as a result of the foregoing, the Company’s financial statements were materially false and misleading at all relevant times.

I guess we need to wait for more specific information how things will unfold.

I am not a lawyer, although a big fan of TV-series like "Suits" and "Boston Legal". Are we going to see Harvey Specter and Alan Shore cross examining Vincent Tan and Ganesh Kumar Bangah?

MOL Global is currently trading at USD 2.85, 77% down from its IPO price.

Wednesday, 3 December 2014

Fund managers underweight Malaysia

Research from JP Morgan shows that Emerging Market (EM) fund managers have a large underweight allocation for Malaysia. In a survey of key EM managers, only 2 were overweight versus 29 underweight. The resulting score of -27 being the lowest of all major EM countries (some small countries like Qatar having an even worse score).

From the picture on the right can be deducted that the underweight position for Malaysia has been steadily increased from 2008 onwards.

What could be the reasons for them being underweight? Possibly:
  • Not very interested in the GLC's (Government Linked Companies)
  • Low Daily Turnover on many counters, too low for large fund managers
  • Fund managers still remembering the Asian Financial Crisis

I personally have a feeling that trading appears (sometimes) artificial, with large-cap counters (GLCs) being supported by certain (government linked) funds (GLFs).

Malaysia's weight in the index of EM countries has also substantially decreased, once one of the darlings of EM countries, its weightage is now only 3.9%.

Anyhow, not all is lost, Malaysia still might be a good hunting ground for value investors, but then more towards the small and medium cap stocks.

Tuesday, 2 December 2014

Good articles (2)

When a prospectus becomes a doorstop (KiniBiz)

Recently, an 800-page prospectus found its way to tiger as well. Yes, 800 pages! Let that sink in for a moment. Do you feel the weight of 800 pages on your investing shoulders yet? Yes? Moving on.

In the spirit that the prospectus is similar to a scientific report, Tiger proposes a form of abstract, something short that covers everything the prospectus would cover, but without going into too much detail.

Maybe the prospectus could include an executive summary, maybe about 10 pages, 15 at most? Why not add forecasts in the executive summary, like the old times? With forecasts alongside the plan the company has in place for the proceeds raised from the listing, prospective investors can get a clearer view of what the company is offering, and in turn may be a better sell for the company.

Transparency, a plan, and recommendations from a few trusted local banks? That sounds like a recipe for a successful fund-raising to Tiger.

At the same time, the shorter (and lighter!) document would definitely be more palatable and more easily digested than 800 pages. By simplifying the document, companies are given the opportunity to present themselves to a barely tapped market of investors, due to the ease of reading of the summary.

Tycoons see their O&G investment value cut by almost half

With the oil and gas (O&G) sector being the hardest hit in the current market rout, tycoons who own significant stakes in these companies have seen a huge loss in their net worth.

These tycoons had collectively had their shareholding in these companies valued at some RM15.89bil when O&G stocks were trading at their highest prices. The fall in global crude oil prices and the plunge in the value of O&G stocks on Bursa Malaysia saw the value of their shareholding cut by almost half to some RM7.86bil yesterday.

What the article doesn't mention is that most of these tycoons have bought the companies at a much cheaper price and are thus still sitting on a handsome profit.

Quite different from the minority investors who bought these stocks recently (or at overpriced IPO prices) and are feeling the losses.

Bumi Armada is especially painful since the stock is not only trading way below its IPO price, but also below the price of its recent rights issue. Also, there seems to be persistent insider selling, even recently at these lower prices.

Somewhere in the (may be not so distant) future there must be a moment where it makes sense to start dabbling in these stocks. For the time being, catching a falling knife is not always the best thing to do.

Monday, 1 December 2014

MOL Global's share price crashes 54% (3)

MOL Global just announced its results for the third quarter:

  • Consolidated revenue increased by 5.6% to MYR47.7 million (US$14.5 million) from MYR45.2 million in the corresponding period of 2013.
  • Profit attributable to shareholders of MOL Global Inc. decreased 61.5% to MYR2.4 million (US$0.7 million) in the third quarter of 2014 from MYR6.3 million in the corresponding period of 2013.
  • During the course of the Company's review of its financial results for the third quarter of 2014, the Company's auditor discovered that its Vietnamese subsidiary, Nganluong Joint Stock Company ("Nganluong"), which was acquired by the Company in March 2013, reported revenue from its payment business on a gross basis, and accounted for the corresponding fees payable to merchants being included in direct cost and other ancillary expenses. However, the Company's accounting policy is to account for such transactions on a net basis because the Company acts as an agent with respect to these revenue arrangements, such that the corresponding fees payable to merchants should have been netted out of revenue and not included in direct cost and other ancillary expenses.
  • Two putative class action complaints have been filed against the Company and certain of its officers and directors alleging certain untrue statements and omissions in its registration statement and prospectus for the Company's initial public offering and seeking unspecified damages and other relief.

Sounds not good.

iCapital: questions regarding adjourned AGM and expenses (4)

iCapital announced:

Sunday, 30 November 2014

Good articles (1)

Lots of good articles recently, many on subjects I am passionate about. Below are just some snippets, please click on the links for the full articles.

Is settling the right choice? (The Star)

When pushing for a no-contest settlement becomes the default option, market discipline is likely to soften. The people will perceive that the culprits are being let off after paying disgorgements, which is a little more than a rap on the knuckles for those with deep pockets.

Also, the lack of admission of liability is confusing. Are those guys innocent but are forced to settle to avoid being entangled in messy and costly trials? Or did they indeed commit the offences but seized the opportunity to avoid prosecution by paying money?

In addition, the SC [Securities Commission] should reconsider how it informs the market about its regulatory settlements. It issues press releases on criminal prosecution and civil actions, but not on the settlements. To get details of the latter, you need to check the SC website or refer to the commission’s annual reports or enforcement bulletins.

Could it be that the settlements are never meant to pack a deterrent punch? After all, how could they serve as a warning when they mostly escape public attention?

How the investing public loses from delisting (KiniBiz)
Preventing minority abuse during delistings

What do Maxis Communications Bhd, IOI Properties, Astro All Asia Networks plc and Seven Convenience have in common? All the companies have been listed, delisted and then relisted (some more than once) by their majority shareholders in the span of five years.

.... there are no specific regulations in way of what an offeror can give or threaten to take away during privatisation. Nothing governs valuations or a company’s listing status. So in a situation where an offeror is attempting a mandatory takeover that minorities do not like, the latter’s only option is to take the matter to court.

Of course, it would be akin to a kancil taking on a tiger. And Tiger is willing to bet that like the kancil, most minorities are unlikely to be able to match the spending capacity of the majority shareholders and would struggle to sustain a long-drawn court battle.

Similarly during the relisting process, the regulators keep intervention to a minimum. A source familiar with the regulators’ policies said that the SC demands that a relisting company provides justifications for its new valuations and details on why it believes it can perform better on the market this time around.

However, there are no pre-imposed rules which would make returning to the bourse difficult — regardless as to how the company treated minorities during the relisting process, or in the period between then and the relisting.

When the depth of the regulations are considered, the pertinent question seems to be if they are adequate to protect the companies covered in the earlier parts of this week’s series — or at the very least, give them a fair deal.

It would appear not. Rather, minorities in fact had very limited options during the privatisation deal. The majority shareholders benefitted handsomely both on and off the market, and at the expense of the minority investors.

Which leads to the question if Bursa is really the place for the retail and long-term investors. Tiger believes not, and feels that more must be done. The regulators should consider making delisting, promising companies, from the bourse tougher.

....majority shareholders, because they appoint management, know how much a company is valued. If they are willing to buy out the company, they must know something. And if a significant number of minority shareholders want to stay on for the ride, they should be allowed to and not be unceremoniously ejected from their seats which they have already paid for.

In a nutshell, Tiger says that minorities should not be frightened into selling their stakes. If Bursa is serious about increasing the participation of retail investors on the bourse, it is time that the SC and Bursa reconsider the issue of indiscriminate delisting and relisting, and start protecting the minority long-term investor. It’s easy to do.

Submission to HKEx on Weighted Voting Rights (David Webb)

The naked self-interest of HKEx in continuing to push for weakening our regulatory standards in the interest of its own profitability once again exposes the conflict of interests between being a regulator and a for-profit company. The Exchange has no profit incentive to care about quality, only about volume.

Your Chief Executive's  proposition that HK risks "losing a generation of companies from China's new economy" is a false one. Good regulation improves the value added by markets, and investors will pay for that value. Companies which are willing to sign up to standards will get a higher price for their shares than they would in a market with lower standards, and the flip side of this is a lower cost of capital for the companies, both existing and new. There will always be exceptions to this overall outcome, but it is the overall outcome that matters. HK should be focusing on improving its legal and regulatory framework, not degrading it.

The vast majority of listing applicants and existing listed companies already have a controlling shareholder with at least 30% of the equity. They don't need their companies (or spin-offs) to issue second-class shares or pervert their constitution to cement their position. For the remainder with management who have been diluted by pre-IPO financing, most would have enough self-confidence in their abilities as managers that they would not need protections against removal, knowing that investors will only seek change in extreme circumstances and if they consider that new management can offer better value. This is just as true for "technology" companies as for any other industry, and the fact that shareholders have the reserve power to be able to change bad or stale management in itself provides a higher valuation than if they did not have that power.

Saturday, 29 November 2014

iCapital: questions regarding adjourned AGM and expenses (3)

I guessed that the letter from the City of London would have settled the matter, but I was wrong.

According this article on the website of The Sun, Tan Teng Boo has reacted to the letter, some snippets (emphasis is mine):

"Share owners are still not able to make an informed decision as the reasons given by City of London are inadequate, baseless and utterly weak," he said.

He said the fact that the letter was not addressed to the share owners shows that the foreign fund had no intention to clarify their position to all share owners of the fund and called upon City of London to revise and substantially improve its standards of corporate governance.

"The letter by City of London is a clear testament of the foreign fund's lack of integrity. By giving such superficial reasons for the opposition of Resolution 4, the foreign fund makes a mockery out of the other 3,400 share owners."

I am really speechless. Mr. Tan is not even a member of the Board of Directors of iCapital, he is an interested party in this all, being the fund manager who received more than RM 6 Million in fees over the past one year alone.

According to Tan, his views were supported by the Minority Shareholder Watchdog Group, whose CEO Rita Benoy Bushon said that best practices encourage shareholders, especially institutional shareholders, to explain their reasons for opposing a director's re-appointments, especially independent directors.

Well, City of London did explain their reasoning, my guess would be that the MSWG is ok with that. And I strongly doubt that MSWG agrees with the aggressive tone of the first paragraphs, especially the underlined parts.

Tomorrow the adjourned AGM will be held, MSWG is usually present (and vocal) on those meetings, I am very interested what their opinion is in the above matter.

I think Mr. Tan went way too far in this matter, and that the Board of Directors of iCapital should significantly step up their game.

I have written before about the persistent discount to the NAV of iCapital's share price which has lasted already for about six years, which did coincide with the underperformance of the fund over the same years.

In the IPO documents (mostly here and here) detailed ways are described to deal with the discount. I am puzzled why the Board of Directors of iCapital has not taken any active measures regarding this matter (except for a one-off dividend). Some snippets of the IPO document from 2005 (CEF is Closed-End Fund):




Friday, 28 November 2014

Protasco: Tey and Ooi are out

Yesterday the company announced:

.... that its solicitors attended court today for the hearing of the Company’s application to set aside the ex-parte injunction order that Global Capital Ltd and Kingdom Seekers Ventures Sdn Bhd obtained on 25 November 2014 against Dato’ Sri Chong Ket Pen and two others from exercising their voting rights on shares which they own directly or indirectly in the Company with respect to the resolutions to remove Tey Por Yee and Ooi Kock Aun as directors of the Company.

The Company wishes to inform that the ex-parte injunction order was set aside at 2.15pm today with an order of costs in favour of the Company and Dato’ Sri Chong and two others. By reason of the setting aside of the ex-parte order, the Extraordinary General Meeting which was adjourned to 3.00pm today proceeded as scheduled.

The shareholders voted overwhelmingly to remove Tey Por Yee and Ooi Kock Aun as directors of the Company with immediate effect.

In favour:  170,428,382 95.66%
Against:  7,728,200 4.34%

The result is not so much a surprise, although the majority is much larger than expected. Most likely because Tey (and associated parties) didn't vote since he walked out of the meeting.

The outcome of the second EGM should be pretty straightforward as well.

Now that this has been settled, Protasco can continue with its normal business.

In addition to that:
  • Attempts to recover the money spend, RM 85 Million;
  • Damage control;
  • An honest assessment of the remaining Board of Director members on the past two years;
  • A huge improvement in its Corporate Governance standards, especially in transparency towards its shareholders.
The authorities have their work cut out for them, it appears that quite a few rules have been breached.

Thursday, 27 November 2014

China Ouhua: red wine and red flags (3)

China Ouhua (about which I wrote before, here and here) announced its quarterly results.

That these results again are bad will not surprise many.

As usual the downtrend in wine consumption in China is mentioned as the scapegoat. Although there is indeed a downtrend, I don't think it can sufficiently explain why China Ouhua can barely turnover RM 1 Million in one quarter.

Another matter is that I doubt if anyone at China Ouhua even checked the announcements:

iCapital: questions regarding adjourned AGM and expenses (2)

I wrote before about these issues regarding iCapital.

According to The Sun Daily website:

City of London Investment Management Co Ltd has written a letter to fund manager Tan Teng Boo to explain why it and Laxey Partners Ltd, the single largest shareholder of with 11.39%, plan to vote against the reappointment of Tunku Abdul Aziz Tunku Ibrahim as a director was due to the length of time he has been retired.

"Directors should not start a new term in office if they have retired from active employment for more than five years. City of London believes that the skills and contributions of a director outside this criterion may be too far removed from current business practices or thinking to truly add value to the board over the long term," City of London's portfolio manager Oliver Marchner said in a copy of the letter sent to SunBiz.

It also pointed out that Tunku Aziz as a board member has no "requisite experience and knowledge of a listed closed-end funds (CEFs) and has retired from active employment for more than five years.

In relation to the composition of the board, City of London's portfolio manager Oliver Marchner made reference to Section IV paragraph 2a of its Statement on Corporate Governance and Voting Policy for Closed-End Funds (9th Edition).

The Statement on Corporate Governance and Voting Policy for Closed-End Funds can be found here.

I hope that the letter is public, and that iCapital will publish the letter in an official announcement at Bursa's website. Since the last AGM was adjourned because of the question why City of London decided to vote against the director, other shareholders should be informed about their answer.

Wednesday, 26 November 2014

Protasco: messy, messier, messiest

Protasco announced yesterday its quarterly results.

In it a RM 85 Million impairment on its messy "adventure" in Indonesia. No word about the guarantee that was given in the form of shares in a listed Indonesian company, PT Inovisi Infracom TBK.

Pages 13, 14, 15 and 16 contain details regarding the many court cases that are on going.

Today Protasco announced that its first EGM (there will be two) was twice postponed.

It can't really get much worse than that.

Was the management warned? Yes, please check this posting where lots of critical questions were asked by the reporter of BFM (the almost two years old interview is still available) to the General Managing Director.

One question from that interview and my comment:

"The deal is subject to renewal of the concession, which will expire in 2014 (again, why the hurry, why not first renew the concession?)"

Someone informed me that the reason the whole deal did not go through was that the concession was only renewed for a short period (again, this information is not revealed by the company, as so many other details).

So again, why the hurry, why did Protasco not wait for the renewal details, why did it want to close the deal so quickly and transfer RM 50 Million to the vendor (details of which are still not revealed)? And why did it (much later) even increase the potential loss further to the current RM 85 Million?

Unworthy for a Bursa listed company, if one would ask me.

Where are the regulators?

Monday, 24 November 2014

MOL Global's share price crashes 54% (2)

The nightmare of every analyst: posting a buy recommendation and immediately the share tanks due to some news.

On November 20, 2014 Deutsche came with a "Buy" recommendation for MOL Global:

And the next day already they had to come with an "Alert", although they did stick to their recommendation:

Deutsche was one of the IPO underwriters, according to SeekingAlpha.

The 40-day quiet period on underwriter analyses that began with the October 2, 2014 IPO of MOL Holdings Inc. will come to an end on November 13, allowing the firm's IPO underwriters to publish analyses of the of the company on November 14.

MOLG's share prices may see a brief rise, in response to the release of the underwriter opinions.

MOL Holdings IPO underwriters, including Citigroup Global Markets, Credit Suisse Securities, Deutsche Bank Securities, UBS Investment Bank and CIMB Securities, will seek to capitalize on the stock's recent growth through the release of positive reports beginning with the conclusion of the quiet period.

An insider informed me that the above research might have been outsourced by Deutsche to a third party research provider.

Valuation-wise, we can see from the above Deutsche link that at USD 8.86 the company was trading at an expected PE of 86 times. That has come down of course since the share price crashed.

But that would also imply that the company IPO-ed on a forward valuation of 121 times. That is if the company indeed makes a net profit of RM 21.2 Million, as forecasted.

The profit in 2013 was RM 12.2 Million, meaning that the IPO price on the realized profit was a whopping PE of more than 200 times. A sky-high valuation in which everything has to go perfect.

Good articles by "Serious Investing" on MOL Global, here and here.

I wrote before about Mark Chang (here and here), founder of Jobstreet. Mark is linked to MOL Global since he had agreed to be on the board of MOL Global.

For more information what MOL Global is doing, here is a presentation.

Sunday, 23 November 2014

"Pity the Protasco minorities"

Good article from Errol Oh in The Star: "Pity the Protasco minorities, 2 EGMs in 3 days", some snippets (emphasis mine):

This column has argued against the requisitionists’ opacity, and has pointed out that transparency and willingness to engage with minority shareholders will earn goodwill.

The recent developments at Protasco, which calls itself an infrastructure development provider, take us to the other extreme, and it’s equally troubling and frustrating. Here, the problem is not that the principal players are not saying anything. On the contrary, a lot of information is flowing out from both sides, directly and openly or otherwise, but there are so many allegations and counter-allegations of wrongdoings that the minority shareholders can’t be expected to make confident conclusions as to whom they should back.

Lawsuits have been initiated and the saga will probably drag on for many months at least. The EGMs are by no means the final battles, but they’re important because a board seat is a valuable vantage point.

The EGMs are lawful as long as they’re convened and conducted according to the Companies Act’s provisions and the company rules. However, there’s more happening now than those meetings. The brawl has spilled over into the media and the blogosphere, and one wonders how much of this fits the requirement for “full, accurate and timely disclosure”.

Also, there’s little indication that the regulators are at hand to prevent things from going too far. Bursa Malaysia and the Securities Commission may prefer the quiet and subtle way of delivering warnings and gathering facts, but they should also recognise that the unusual events at Protasco offer them a unique opportunity to draw the line between disclosure and negative campaigning. When there’s plenty of mudslinging going on, nobody walks away spotless.

I think this is one of those moments that the regulators and the independent directors of Protasco should step up their game. Sometimes working behind the scene is possible (and may be even preferable), but not in the above case. I think actually a lot of the problems could have been avoided if regulators and/or independent directors had been more active in the first quarter of 2013, almost two years ago. If they had asked the right questions and done independent research then a lot of information would have been gathered.

Please use Google and the keywords "protasco board tussle" to find the many blogs about this case.

"Executive editor Errol Oh is only sure that Chong and Tey can’t both be right."

Correct, and I don't even exclude the possibility that both sides are (at least to some extent) wrong.

The proposed acquisition was always announced as a "non related party transaction" even as recent as August 5, 2014 :

I strongly doubt that was the case.

Saturday, 22 November 2014

MOL Global's share price crashes 54%

MOL Global's share price tanked 54% to USD 4.09 after it announced that its CFO (who only joined three months ago) resigned and the company would postpone its quarterly results, both known red flags.

From Barron's Asia:

Malaysia-based Internet gaming services firm MOL Global (MOLG) said it would postpone its planned third-quarter results from today to Wednesday, December 3. This would be MOL Global’s first earnings call as a public company and the stock has risen over 10% since it went public a month ago in New York.

MOL Global also said its CFO Allan Wong decided to resign for “personal reasons.” Wong only joined MOL Global in August 2014. Jonathan Yoon, currently CFO of one of MOL Global’s business segments, will assume the post.

This is unfortunate timing for Deutsche Bank which just started their coverage with a Buy rating and a price target of $12. MOL closed at $8.86 on Thursday.

The bank analysts Alan Hellawell III and Vivian Hao rushed out a follow-up after the announcement, stepping back from their bullish calls:

MOL, as a relatively small company which spans more than 13 markets, could suffer from poor internal reporting systems, rendering a representation of the business challenging until the actual closing of books at the end of reporting periods. We also note that MOL, with 454 employees, has undertaken no less than 10 investment and acquisitions in five countries since 2009.

Reconciling differences in accounting standards across markets can be a real headache.

The US is a difficult country to list in, with tough laws and "hungry" lawyers. It seems the last category is indeed already on the prowl. How serious that is, I don't know at this moment, we first have to wait for the quarterly results.

MOL Global has come down a lot (67%) since its listing at USD 12.50 per share. One interesting paragraph from its prospectus under "Risk Factors":

You should not consider or rely on statements made by our major shareholder that appeared in a news report in June 2014.

In an article in The Business Times, a Singapore-based newspaper, dated June 23, 2014, information regarding us and this offering was published. This article quoted statements that were made by our major shareholder, Tan Sri Dato’ Seri Vincent Tan, to a reporter, during an interview relating to matters unrelated to us or this offering, and were published without his consent. These statements were also not made with the knowledge or consent of us or our directors, officers or employees. The article referred to statements by our major shareholder regarding the expected timing of our initial public offering and our projected market capitalization and value of our company. Portions of the article were republished by other news agencies.

These statements regarding market capitalization and value by our major shareholder were not based on any methodology, calculations or analysis undertaken by us or, we understand, our major shareholder. We understand these were informal, speculative statements made by our major shareholder that were not expected by him to become public. These statements should not be relied upon for any purpose whatsoever. We are unable to accurately project our market capitalization or the value of our Company because these will be based on many factors beyond our control. You should carefully evaluate all the information in this prospectus, including the risks described in this section and throughout the prospectus. You should only rely on the information contained in this prospectus in making your investment decision.

Neither we nor any of the underwriters in this offering, nor any of our or their respective affiliates, have confirmed, endorsed or adopted any of the information reported in the news articles referred to above, and all such information is disclaimed by us and the underwriters and our and their respective affiliates. Accordingly, prospective investors should not rely on any such statements or information in such news reports.

Friday, 21 November 2014

Jobstreet: excellent entrepeneurship (3)

Mark Chang's final message to existing and former employees of, from SSQuah's blog.

Dear colleagues,

It is almost a 20-year start-up journey for us and we are closing the deal and officially handing over the management to Seek management team.

The most important message I want to say to you and all our former staff is "Thank you". Thank you for all your sacrifices, loyalty, hard work and unselfish contributions all these years. Other people can claim but I know you are the ones who have done all the real work. You are the real unsung heroes of our company. With you in my wing, I had confidence to compete with the best in the world and we became the most successful Internet company in this region to date and touch the lives of millions. With you, I have so much joy in my work and with you, I have found meaning in my life. A simple "Thank you" does not sound sufficient but it is through this simple "Thank you" which encompasses all my wholehearted tributes and all my best intentions to each and everyone of you.

At the end of today, I will no longer your CEO but I will be your friend for life. I ask your forgiveness for all the wrongs I have done. It has been a wonderful journey travelling with you. We did not really change the world; instead, the world has changed us.

I learn that real wealth is not money and the money that I earned, I will give most away for good causes. Real wealth is what money cannot buy such as health, good relationship, happiness and peace of mind. May we, the mortal and foolish ones, have the wisdom to pick the right choices.

May you find what you seek.

Mark Chang

Thursday, 20 November 2014

iCapital: questions regarding adjourned AGM and expenses

iCapital's AGM was recently adjourned. That in it self is already quite unusual. AGMs cost money and time, surely there should be a good reason to ask for an adjournment.

According to an article in The Star (some snippets):

During the Oct 11 AGM, the resolution was not tabled, as shareowners holding a 11.39% stake had already indicated their intention to vote against it two days before the shareholders’ meeting.

“The real issue is whether the 11.39% should control icapital. If they can block the reappointment of one director with only an 11.39% share ownership, what is there to prevent them from abusing their power again?”

Did Tan Teng Boo really say "abusing"? If a shareholder (in this case most like a fund) votes in what it thinks is the best way, can that be labelled as "abuse"? Most likely they simply act in the best interest of their investors. Is there any rule that they breached?

"He said shareholders who opposed the resolution should issue a statement on their rationale for doing so, even though it was not required from a procedural and legislative perspective."

I can't recall ever any meeting being adjourned to ask one of the shareholders for the reason of its voting. And why should shareholders issue statements on their rationale? I am sorry to say, but this sounds beyond weird.

Another matter is that I always regarded Dr Tan as being "stingy", that is, "stingy" in a good way, like Warren Buffett being notoriously stingy in spending. Examples are the cost to list iCapital (which was probably a record low for any Bursa listed company), its year report (without any photo's or colours), etc.

To my surprise, things have rather changed, from the 2014 year report:

Advertisements shooting up from 21K to 708K, AGM expenses increasing from 99K to 452K (and most likely increasing again due to the extra AGM needed). Those are strange increases in expenses, atypical for Tan.

Total operational expenses are RM 8.6M, after deducting the 514K for impairment RM 8.1M. On a fund of RM 426M that means 1.9% expenses. That is still considered ok.

But when one realizes that a whopping RM 240M is simply held in cash (one doesn't need a degree in Rocket Science to manage that), then expenses seem to be on the high side.

I own a managed account where the fund manager only charges fees on the invested part (excluding the cash). If we use the same formula for iCapital then the expenses on the RM 186M investments suddenly are a whopping 4.4% per year, much too high for my liking.

These expenses would also explain (partially) the underperformance of the fund, about which I wrote before.

An interesting discussion on this stock at LowYat forum.

Wednesday, 19 November 2014

AirAsia X facing turbulence? (2)

AirAsia X announced its results, they were rather bad, a loss over the quarter of RM 211 Million for the quarter.

Shareholders' equity has decreased to RM 865 Million. However, that is including RM 414 Million of deferred tax assets, without that the shareholders' equity would only be RM 451 Million.

Its retained losses are RM 341 Million, but again including the deferred tax assets, without those it would be RM 755 Million.

The above makes the article in The Edge more likely to be true, at least partially. One snippet:

"The circular stated that basic salary, fixed allowance, productivity allowance and overtime would be paid on Oct 24, while variable allowances such as flying allowance, sector allowance, night stop allowance and commission would be paid on Oct 31. Posting allowances for charter flights will be paid on Nov 5. Describing the unprecedented payment issue as a “temporary setback”, the management of AirAsia X blamed the payment delay to the “late arrival of incoming funds”."

Is the above information as defined in the category "material information"?

If there are two companies, A and B, in all aspects exactly the same, but company A delays paying its employees, and company B does not have those issues. Would there be a difference in the price investors are prepared to pay for company A versus company B?

I think there is. Which means that the information is indeed "material information".

According to the "Corporate Disclosure Guide" from Bursa:

The share price of AirAsia X has indeed performed badly in the last ten days, declining from RM 0.80 to RM 0.645, or 19%.

When was the above information regarding the financial problems available? The Edge doesn't write it, but it does write "would be paid on Oct 24", indicating that the circular most likely was distributed before October 24th.

And thus, as far as I can see, AirAsia X might not immediately have disclosed material information.

CG Watch 2014, which I rate highly, rates Corporate Governance in AirAsia X in the top half of its list of Malaysian companies. I am afraid I can't agree with them on that point.

Tuesday, 18 November 2014

Xian Leng: justice?

I have written several times about Xian Leng, for instance here and here.

The company announced today the below.

I just ask the readers one question: "is this justice?". I am speechless.

Reference is drawn to the abovementioned suit which came up for trial on 17 November 2014, the Board of Directors wishes to inform that pursuant to the proposals letters issued by the Defendants dated 11 November 2014 and 12 November 2014, a consent order had been recorded before the Muar High Court Judge i.e. Dato’ Haji Zainal Azman Bin Abd. Aziz, wherein the terms of the said Consent Order are as follows:

1.The 1st and 3rd Defendants pay jointly a sum of RM500,000.00 to the Plaintiff without admission to any liability whatsoever and not compensatory in nature;

2.The said sum of RM500,000.00 must be fully paid by the 1st and 3rd Defendants to the Plaintiff on or before 1 December 2015 either by way of progressive payments or lump sum payment;

3.The Plaintiff withdraws the suit against the Defendants without any order as to costs and without liberty to file afresh.

The Board of Directors also wishes to inform that the following legal opinions were given by our legal adviser, Krish Maniam & Co. in their letter dated 13 November 2014:

1.The evidence is still has gaps which insufficient to complete the entire picture and present it before the court as a complete cause of action;

2.The trial and subsequent appeal processes may take years to complete. By the time the recovery process is to commence, the Defendants could have already become financial unstable and / or bankrupt. In addition, the 2nd Defendant’s health has deteriorated of late after suffering a stroke in September 2013;

3.There is a risk that at the end of the trial when assessment of damages is carried out, Company may not even be able to recover any significant amount of money;

4.The Honourable Judge had from time to time reminded counsels for the Defendants and Plaintiff that the matter is resolve amicably as the Plaintiff Company is an on-going concern and ought to concentrate on restructuring and rebuilding itself.

After perusal through the legal opinion, majority of the Board member in the meeting held on 13 November 2014 agreed that the Company should take this opportunity of moving forward and concentrating on making the Company stronger and profitable, thus accept the proposal set out by the Defendants and record consent before the High Court Judge.

AirAsia X facing turbulence?

Two articles about AirAsia X from The Straits Times respectively The Edge Markets:

I wrote exactly two years ago a highly critical article "AirAsia X: IPO poses many questions", some snippets:

  • AirAsia X is offering 790 million shares, rumoured to be priced around RM 1 per share. Almost 200 million of these shares are from existing shareholders, which seems strange, AirAsia X's balance sheet is weak and this company needs money, lots of it, so why not just issue new shares?
  • I have blogged before about the huge amount of Related Party Transactions (RPTs) between AirAsia and AirAsia X...... From a CG point of view, this is (highly) undesirable.
  • This huge amount of deferred tax assets was just enough to claim retained earnings of 35m. Still a very low amount, given the fact that 480m has been invested in the company over a six year period. Quite amazing that a company with such a poor track record would be allowed to be listed on Bursa Malaysia.
  • A company in this state, urgently needing money should not strive for a sky-high valuation. The total number of shares currently is close to 1.8 Billion, in other word pre-IPO the company is valued at about RM 1.8 Billion. Shareholders equity is 518m, which includes 247m deferred tax assets. The offer therefore looks very stretched, both from an earnings point of view (operational losses, even after six years) and a balance sheet point of view (excl. deferred tax assets).

There were warning signals, for instance:

  • It must also be noted that Virgin Group (Richard Branson) invested in AirAsia X in 2007, but did not participate in the subsequent rights issue in 2010, according to The Edge. Also, he sold his 10% of the company alledegledly for more than USD 21M, valuing the whole company at more than RM 650m.
  • AirAsia had an option to increase its current shareholding in AirAsia X, but strangely enough it decided not to execute that option. Its shareholding of AirAsia X will therefore drop to only 12%, hardly meaningful and below the 20% needed to call AirAsia X its associate.
  • Not only did the insiders sell shares at the IPO, they sold even more shares after the IPO.

The graph of the share price looks rather ugly:

Monday, 17 November 2014

Protasco: "Right to be heard"

Note: the blog "Right to be Heard" seems to be deleted.

I received an anonymous tip about a website with more information about Protasco's matters. The website can be found here.

Two interesting postings can be found which might contain original documents:
  • Agreement 1, allegedly signed on November 3, 2012;
  • Agreement 2, allegedly signed on June 28, 2013, the supplemental Sales and Purchase agreement.

I can't vouch that these scans are from real documents, but it seems interesting enough to provide the links to these articles. Especially the first document, which contains a lot of new information, at least to me.

Even if the documents are real, there might be more documents, and some might even cancel the agreements in the above links. I am pretty sure that in due course more information will be revealed, by the parties involved.

For people who want to trade in Protasco shares: buyers and sellers beware.

Saturday, 15 November 2014

Cutting accumulated losses through financial engineering (2)

I wrote before about this issue. I received two reactions that confirm my suspicion.

From "Anonymous":

Sadly, it is a global accounting treatment. Just google "accumulated losses write off", you can see lots of same treatment for this situation. Mitsubishi, Yamaha, United Bank of India and etc. I suppose this is a grey area in the accounting standards.

From "Avatar":

I'll be slightly more brief here. What you have illustrated above is a good example, so I'll use that simple one. I'll try to state the issues in a more simplistic manner.

1. A clean slate or forever blacklisted
To put it simply, just like a ex-convict that has been released and is looking for a job, is it fair to forever label him as an ex-convict when the prospective employer searches his records through some database?

Similarly, in this situation ~ the so-called accounting 'innovation' (it's not btw) goes along the same line of thinking. Since the company has made substantial losses, it weighs down on the mind of any future investors, same as the employer with the ex-convict. That's why most companies go down this route to wipe out the past bad track record, so to speak. In this time where first impressions count, I don't blame them.

2. The cat has flown the 'coop' so to speak
The accumulated losses is just a summary or 'report card' of all the bad decisions made by the company, so to speak. It doesn't really matter whether it's netted off against the share premium of share capital, as more importantly, the cash is already gone. You are right though, keeping it there, lets the investor see all the bad decisions that have accumulated throughout the years, but a good investor can always look at the losses throughout a 5 or 10 period anyways.

3. Companies Act 1965 and SC
There are some safeguards before companies are allowed to set off their losses against the share capital and premium, especially if they are listed on the Bursa. It's not a difficult thing, but there are some procedures to be followed, so it's on some whim and fancy. Probably it's pursuant to some restructuring and injection of new share capital and such.

As to your last question, YES! It's a perfectly legitimate technique though there are safeguards in the UK Companies Act to prevent share capital from being reduced in this manner, which was exported to the Commonwealth Countries such as Malaysia and Singapore.

Thanks for the two contributions, appreciated.

I guess we have to be careful and review the whole history of a company before we make a judgement. We actually even need the history of the larger subsidiaries, to be complete.

On a slightly related matter, I am completely puzzled why companies are getting away with publishing only their last few (often three) years of results in an IPO prospectus. A prospectus often contains hundreds and hundreds of pages, a lot of that information is not very useful.

Why not make one simple table with say the last ten years of results containing the most important numbers, like revenue, PBT, PAT and dividends? At most it would cover half a page, and it would likely be the most important information of the whole document. It would also exactly help in the cases described where accumulated losses are written off.

I have seen many instances where the last three years before the IPO showed net profits in a nicely rising pattern, like RM 20M, RM 40M, RM 60M and after the IPO the company hugely disappointed despite the injection of fresh money. Giving the numbers of the last 10 years might have shown a very different pattern than just the last three years.