I have written before about HB Global.
Yesterday the company announced:
"The Board of Directors of HB wishes to announce that the issuance of AFS 2013 will be delayed as Messrs. UHY Lee Seng Chan & Co., the new external auditors of the Company was just appointed on 21 April 2014 and the audit is currently still in progress. The Company wishes to provide more time for the external auditors to complete the AFS 2013 and is working closely with the external auditors to finalise the audit expeditiously. The Company expects to submit its AFS 2013 on or before 30 June 2014."
Delaying the accounts is a large red flag. The company knew before exactly the deadline for the audited accounts. The company risks that Bursa will suspend trading in its shares.
Wednesday, 30 April 2014
Tuesday, 29 April 2014
Jack Ma, Alibaba and the "Crocodile in the Yangtze" (2)
I wrote before about "Crocodile in the Yangtze".
Porter Erisman, the maker of the movie, commented on this blog:
Ummmm…guys…would prefer you actually buy my film on Vimeo! Not only is it legal, but it's HD! I'm glad you enjoyed the film though - thanks for the compliments! Porter Erisman, Director of Crocodile in the Yangtze.
Here's the link :-)
https://vimeo.com/ondemand/crocodileintheyangtze
Official release date is May 28, 2014. The movie has won many awards, I highly recommend it.
Porter Erisman, the maker of the movie, commented on this blog:
Ummmm…guys…would prefer you actually buy my film on Vimeo! Not only is it legal, but it's HD! I'm glad you enjoyed the film though - thanks for the compliments! Porter Erisman, Director of Crocodile in the Yangtze.
Here's the link :-)
https://vimeo.com/ondemand/crocodileintheyangtze
Official release date is May 28, 2014. The movie has won many awards, I highly recommend it.
Monday, 28 April 2014
Maemode: accurate predictions by Ze Moola, but why did nobody notice? (3)
I wrote twice about Maemode (7075)
Maemode: accurate predictions by Ze Moola, but why did nobody notice?
Maemode: accurate predictions by Ze Moola, but why did nobody notice? (2)
From the latter:
"The Company expects to submit its AFS (Audited Financial Statements) 2013 within six (6) months from the date of this announcement."
That announcement was made on September 25, 2013.
We are now more than seven months further, and the company still has not issued its Audited Financial Statements.
I am scared the AFS might never be issued. My fear comes from the following recent announcement:
Bursa and/or SC should chase the company for its financial statements. A forensic audit is most likely warranted, given the events that have occurred. Minority investors (who must have lost a lot of money on this counter) and interested observers deserve an explanation, what really has happened. The money that has been lost won't come back. But at least, some lessons will be learned, for all involved. And if there is proof of any wrongdoing, then the authorities should take appropriate action.
Maemode: accurate predictions by Ze Moola, but why did nobody notice?
Maemode: accurate predictions by Ze Moola, but why did nobody notice? (2)
From the latter:
"The Company expects to submit its AFS (Audited Financial Statements) 2013 within six (6) months from the date of this announcement."
That announcement was made on September 25, 2013.
We are now more than seven months further, and the company still has not issued its Audited Financial Statements.
I am scared the AFS might never be issued. My fear comes from the following recent announcement:
Bursa and/or SC should chase the company for its financial statements. A forensic audit is most likely warranted, given the events that have occurred. Minority investors (who must have lost a lot of money on this counter) and interested observers deserve an explanation, what really has happened. The money that has been lost won't come back. But at least, some lessons will be learned, for all involved. And if there is proof of any wrongdoing, then the authorities should take appropriate action.
What is happening to the Chinese Renminbi?
The Chinese Renminbi used to be a "one-way bet", the currency slowly but surely appreciating against the USD.
And that sounded quite logically, given that the Chinese economy is growing the fastest of all the major economies in the world.
But that pattern seems to be broken recently:
Since reaching 6.05 in January 2014, the Renminbi has sharply weakened, to the current level of 6.26.
From ZeroHedge website:
"Someone Is Betting That The Chinese Currency Collapses By The End Of 2014?"
here is CLSA's Russel Napier on what the long-term fate of the Renminbi will be:
“Mercantilist alchemy transmutes China’s external surpluses into foreign exchange reserves and renminbi. But with capital outflows from China at record highs, those surpluses are only maintained due to its citizens’ foreign-currency borrowing. Bank-reserve and M2 growth are already near historical lows and are driving tighter monetary policy. This will lead to severe credit-quality issues and force the authorities to accept a credit crunch or opt for a major devaluation of the renminbi. They will do the latter; and despite five years of QE, the world will get deflation anyway.”
And that sounded quite logically, given that the Chinese economy is growing the fastest of all the major economies in the world.
But that pattern seems to be broken recently:
Since reaching 6.05 in January 2014, the Renminbi has sharply weakened, to the current level of 6.26.
From ZeroHedge website:
"Someone Is Betting That The Chinese Currency Collapses By The End Of 2014?"
here is CLSA's Russel Napier on what the long-term fate of the Renminbi will be:
“Mercantilist alchemy transmutes China’s external surpluses into foreign exchange reserves and renminbi. But with capital outflows from China at record highs, those surpluses are only maintained due to its citizens’ foreign-currency borrowing. Bank-reserve and M2 growth are already near historical lows and are driving tighter monetary policy. This will lead to severe credit-quality issues and force the authorities to accept a credit crunch or opt for a major devaluation of the renminbi. They will do the latter; and despite five years of QE, the world will get deflation anyway.”
Saturday, 26 April 2014
Kian Joo Can and Can One (2)
More news about Kian Joo, about which company I wrote before.
The company made a 6-page announcement to Bursa Malaysia, describing the history of the offer from Toyota Tsusho Corporation (TTC). The offer is only a Letter Of Intent (LOI), and seems not that concrete.
Of interest is further the following:
That statement was made on April 15, 2014, but until now the company has not yet received any subsequent writing with details regarding the alleged conflict of interest or the acting in concert situations.
The company made a 6-page announcement to Bursa Malaysia, describing the history of the offer from Toyota Tsusho Corporation (TTC). The offer is only a Letter Of Intent (LOI), and seems not that concrete.
Of interest is further the following:
That statement was made on April 15, 2014, but until now the company has not yet received any subsequent writing with details regarding the alleged conflict of interest or the acting in concert situations.
Friday, 25 April 2014
Minorities' right to expect full value
In Malaysia low privatisation offers by the large majority shareholder are quite common. The problems are:
[1] no competing offers;
[2] independent directors should maximize returns for all shareholders;
[3] minority shareholders should stand up and fight.
It seems that in Singapore there is a very similar situation.
The first relevant article is by Michael Dee, former regional CEO for Morgan Stanley and senior managing director for Temasek Holdings, it can be found in the Valuebuddies forum.
CMA shareholders should stand their ground against 'fair offer'
CMA is a cash cow and is worth much more than that
THE CapitaLand (CL) offer for the 35 per cent of the CapitaMalls Asia (CMA) shares they do not own is yet another example of the lack of respect for minority shareholders. The post-IPO performance of CMA shares and the paltry premium over the IPO price and book value multiple should concern all CMA shareholders.
At the November 2009 CMA IPO, all of the proceeds went to CapitaLand and none were invested into CMA. Thus the IPO and current offer are just asset trades for CL with no strategic benefit for CMA shareholders. Prior to the IPO, CL shares peaked at $8.60 and during the financial crisis fell almost 80 per cent. A few months later, CMA's IPO was priced at $2.12, closed the first day at $2.30 and the multiple of book value offered was 1.55x. The current offer of $2.22 is valued at a thin 1.2x book value.
Yet, now more than four years later, CL wants to pay only a 4.7 per cent premium to the IPO price, a 3.4 per cent discount to the day one closing price and a 23 per cent discount to the IPO book value multiple. Has CMA really deteriorated that much over the last four years?
At the time of the IPO, CMA had 59 completed projects and today there are 85, a 44 per cent increase. In 2013 vs 2012, revenue, profit and the asset value per share were all up about 10 per cent and operating income increased a whopping 40 per cent. Looking back to the IPO, in 2009, profit was $388 million and for 2013 it was $600 million, an increase of 55 per cent. Total equity in 2009 was $5.5 billion and at year-end 2013, it is $7.2 billion, more than a 30 per cent increase. So operating performance since the IPO has been quite strong and hardly justifies a discounted multiple to book value and a discount to the closing price after the IPO.
CL will stress the offer price is at a premium to recent closing prices. Yet this is illusory as CMA is worth more than its market values and worth much more to CL than the offer price. CMA shares hit a high of $2.66 within days of the IPO on Dec 7, 2009. Two years after the IPO, the shares had fallen 60 per cent to a low of $1.13, while during the same period, the STI was unchanged. Within a few months of the IPO and aside from a few weeks in 2013, the shares traded below the IPO price about 90 per cent of the time. Even today, after the offer, the STI has still outperformed CMA's share price by 35 per cent since the day one close. Most of the dividends have gone to grow the business and reinvest in new projects, yet current investors are not being compensated enough for those investments and the projects currently being developed.
CMA is 65 per cent owned by CL and at least one of the independent directors also sits on CapitaLand's board. Additionally the chairman of CapitaLand and CapitaMalls Asia are the same person. Thus the majority of the Board should not be considered independent in the transaction as five of 10 board members have direct ties to CL. CL has had direct control strategically and operationally of CMA as a public company. This includes a healthy conflict of interest as noted among the 26 pages of Risk Factors of the IPO prospectus; "We cannot assure you (potential CMA investors) that the interests of our (CL) existing Reits or private real estate funds will not conflict or be subordinated to our (CL) interests in such circumstances. Furthermore, we cannot assure you (CMA Shareholders) that conflicts of interest will not arise in future . . ."
As a minority shareholder, the odds are stacked against you. When a 65 per cent shareholder has to decide whether to put minority or their own shareholders first, it is clear that CL comes first. You were warned at the IPO.
CL investors, including Temasek, should wonder why CL is not buying their own shares that are trading at only about 0.8x book value. Is it really the case that the CMA offer is so cheap that it is a better investment than buying CL shares at a 20 per cent discount to book value instead of CMA's 20 per cent premium?
Clearly the market sees the unique value in CMA, value that is not being provided to CMA shareholders. Just look at the CL share price since the CMA offer. Investors and analysts in CL have bid up the CL share price almost 10 per cent, to a level not seen for almost six months.
CL wants to attain 90 per cent so as to delist CMA. This means buying at least 25 per cent of the outstanding shares. No doubt an IFA (independent financial adviser) can be found to give a "fairness" opinion. However there is a big difference between a minimally acceptable fair offer and receiving the full value of the company. CMA investors should expect the independent directors to maximise the value they receive and not just accept a price deemed "fair". But who is negotiating on behalf of CMA shareholders to get the best price?
CL wants to buy CMA as cheaply as possible because it is a great asset. In short, CMA is a cash cow and is worth much more than they are offering now. Shareholders should be prepared to stand their ground in order to attain the full value for giving up their share of the company. CMA is very profitable and has strong dividends so even if CL walks away, the minorities are left with a good yielding asset. The China assets are increasingly valuable now that the government is focused on increasing consumption and domestic demand. CMA shareholders should be happy to hold onto their shares.
One hopes the independent directors will represent only the minority investors to the full extent of maximising the economic potential for shareholders. Since CL has now shown they are negotiating solely on their own behalf, it is up to the minority shareholders to make their decisions about whether they are getting full, fair or inadequate value. As a general matter, if minority investors won't stand up for their rights then they can expect even more poor performance from the majority managers of their assets.
The second letter is at Business Times, partly behind a paywall:
I refer to "Privatisation unhappiness: market is to blame" (BT, April 23), which says in effect that markets fluctuate so you have to take the good with the bad when it comes to takeover offer valuations. I could not disagree more stridently.
What the column fails to take into consideration is that the current rash of takeover complaints deals with a unique class of takeovers - those where a controlling or majority shareholder or consortium who is in control of the corporate entity, makes an offer for the minority shares they do not own. It is a whole different game when a shareholder or group of shareholders are in control of the value of the offer.
Consider this: Temasek used to own 15 per cent of F&N. If it made a bid for the outstanding shares it did not own, would a bidding war have erupted with the velocity we saw last year? Will we see a bidding war for CapitaMalls and Olam, etc? Most certainly not. However, Temasek sold its shares in July 2010 and thus a bidding process was able to unfold whereby all F&N shareholders received the full market value possible, but only because there was competition for the asset.
Now contrast that with today's deals. What bidder is going to emerge for the minority shares with the controlling shareholder(s)? The Temasek consortium controls 52 per cent of Olam and CapitaLand controls 65 per cent of CapitaMalls Asia (CMA). No other bidder is going to step up to drive an undervalued company to its maximum shareholder value. As the article points out, there is no chance the controlling shareholders are going to make a bid at full value - why should they?
The third article is the response from the SIAS on this matter.
[1] no competing offers;
[2] independent directors should maximize returns for all shareholders;
[3] minority shareholders should stand up and fight.
It seems that in Singapore there is a very similar situation.
The first relevant article is by Michael Dee, former regional CEO for Morgan Stanley and senior managing director for Temasek Holdings, it can be found in the Valuebuddies forum.
CMA shareholders should stand their ground against 'fair offer'
CMA is a cash cow and is worth much more than that
THE CapitaLand (CL) offer for the 35 per cent of the CapitaMalls Asia (CMA) shares they do not own is yet another example of the lack of respect for minority shareholders. The post-IPO performance of CMA shares and the paltry premium over the IPO price and book value multiple should concern all CMA shareholders.
At the November 2009 CMA IPO, all of the proceeds went to CapitaLand and none were invested into CMA. Thus the IPO and current offer are just asset trades for CL with no strategic benefit for CMA shareholders. Prior to the IPO, CL shares peaked at $8.60 and during the financial crisis fell almost 80 per cent. A few months later, CMA's IPO was priced at $2.12, closed the first day at $2.30 and the multiple of book value offered was 1.55x. The current offer of $2.22 is valued at a thin 1.2x book value.
Yet, now more than four years later, CL wants to pay only a 4.7 per cent premium to the IPO price, a 3.4 per cent discount to the day one closing price and a 23 per cent discount to the IPO book value multiple. Has CMA really deteriorated that much over the last four years?
At the time of the IPO, CMA had 59 completed projects and today there are 85, a 44 per cent increase. In 2013 vs 2012, revenue, profit and the asset value per share were all up about 10 per cent and operating income increased a whopping 40 per cent. Looking back to the IPO, in 2009, profit was $388 million and for 2013 it was $600 million, an increase of 55 per cent. Total equity in 2009 was $5.5 billion and at year-end 2013, it is $7.2 billion, more than a 30 per cent increase. So operating performance since the IPO has been quite strong and hardly justifies a discounted multiple to book value and a discount to the closing price after the IPO.
CL will stress the offer price is at a premium to recent closing prices. Yet this is illusory as CMA is worth more than its market values and worth much more to CL than the offer price. CMA shares hit a high of $2.66 within days of the IPO on Dec 7, 2009. Two years after the IPO, the shares had fallen 60 per cent to a low of $1.13, while during the same period, the STI was unchanged. Within a few months of the IPO and aside from a few weeks in 2013, the shares traded below the IPO price about 90 per cent of the time. Even today, after the offer, the STI has still outperformed CMA's share price by 35 per cent since the day one close. Most of the dividends have gone to grow the business and reinvest in new projects, yet current investors are not being compensated enough for those investments and the projects currently being developed.
CMA is 65 per cent owned by CL and at least one of the independent directors also sits on CapitaLand's board. Additionally the chairman of CapitaLand and CapitaMalls Asia are the same person. Thus the majority of the Board should not be considered independent in the transaction as five of 10 board members have direct ties to CL. CL has had direct control strategically and operationally of CMA as a public company. This includes a healthy conflict of interest as noted among the 26 pages of Risk Factors of the IPO prospectus; "We cannot assure you (potential CMA investors) that the interests of our (CL) existing Reits or private real estate funds will not conflict or be subordinated to our (CL) interests in such circumstances. Furthermore, we cannot assure you (CMA Shareholders) that conflicts of interest will not arise in future . . ."
As a minority shareholder, the odds are stacked against you. When a 65 per cent shareholder has to decide whether to put minority or their own shareholders first, it is clear that CL comes first. You were warned at the IPO.
CL investors, including Temasek, should wonder why CL is not buying their own shares that are trading at only about 0.8x book value. Is it really the case that the CMA offer is so cheap that it is a better investment than buying CL shares at a 20 per cent discount to book value instead of CMA's 20 per cent premium?
Clearly the market sees the unique value in CMA, value that is not being provided to CMA shareholders. Just look at the CL share price since the CMA offer. Investors and analysts in CL have bid up the CL share price almost 10 per cent, to a level not seen for almost six months.
CL wants to attain 90 per cent so as to delist CMA. This means buying at least 25 per cent of the outstanding shares. No doubt an IFA (independent financial adviser) can be found to give a "fairness" opinion. However there is a big difference between a minimally acceptable fair offer and receiving the full value of the company. CMA investors should expect the independent directors to maximise the value they receive and not just accept a price deemed "fair". But who is negotiating on behalf of CMA shareholders to get the best price?
CL wants to buy CMA as cheaply as possible because it is a great asset. In short, CMA is a cash cow and is worth much more than they are offering now. Shareholders should be prepared to stand their ground in order to attain the full value for giving up their share of the company. CMA is very profitable and has strong dividends so even if CL walks away, the minorities are left with a good yielding asset. The China assets are increasingly valuable now that the government is focused on increasing consumption and domestic demand. CMA shareholders should be happy to hold onto their shares.
One hopes the independent directors will represent only the minority investors to the full extent of maximising the economic potential for shareholders. Since CL has now shown they are negotiating solely on their own behalf, it is up to the minority shareholders to make their decisions about whether they are getting full, fair or inadequate value. As a general matter, if minority investors won't stand up for their rights then they can expect even more poor performance from the majority managers of their assets.
The second letter is at Business Times, partly behind a paywall:
I refer to "Privatisation unhappiness: market is to blame" (BT, April 23), which says in effect that markets fluctuate so you have to take the good with the bad when it comes to takeover offer valuations. I could not disagree more stridently.
What the column fails to take into consideration is that the current rash of takeover complaints deals with a unique class of takeovers - those where a controlling or majority shareholder or consortium who is in control of the corporate entity, makes an offer for the minority shares they do not own. It is a whole different game when a shareholder or group of shareholders are in control of the value of the offer.
Consider this: Temasek used to own 15 per cent of F&N. If it made a bid for the outstanding shares it did not own, would a bidding war have erupted with the velocity we saw last year? Will we see a bidding war for CapitaMalls and Olam, etc? Most certainly not. However, Temasek sold its shares in July 2010 and thus a bidding process was able to unfold whereby all F&N shareholders received the full market value possible, but only because there was competition for the asset.
Now contrast that with today's deals. What bidder is going to emerge for the minority shares with the controlling shareholder(s)? The Temasek consortium controls 52 per cent of Olam and CapitaLand controls 65 per cent of CapitaMalls Asia (CMA). No other bidder is going to step up to drive an undervalued company to its maximum shareholder value. As the article points out, there is no chance the controlling shareholders are going to make a bid at full value - why should they?
The third article is the response from the SIAS on this matter.
Thursday, 24 April 2014
Investors Relations in Germany: Buyer Beware
In 2008, there was a very controversial case involving Porsche and Volkswagen:
Porsche's controversial attempted takeover of Volkswagen (VW) has sparked a feeding frenzy for lawyers on both sides of the Atlantic. The claims and costs are now so onerous they have helped derail Porsche's attempt to take over its larger rival.
While the stakes could barely be any higher, the issue at the centre of the dispute could hardly be simpler – summed up by a press release from March 2008.
Investors claiming these large sums from Porsche say they were misled about its intentions regarding its investment in VW. One of the key elements to the case is a press release put out by Porsche in 2008, in which it dismissed as "speculation" it was mounting a takeover of VW.
By the end of that year the sports car manufacturer shocked the markets by revealing it controlled 42.6pc of VW and had options for another 31.5pc, giving it de facto control.
The revelation caused near panic in the market with VW shares surging to over €1,000 as shortsellers raced to cover their positions by buying back stock – what's known in the market as a "short squeeze".
More information in "Porsche crashes into controversy in the ultimate 'short squeeze'"
Shortly after 3pm on Sunday afternoon, Porsche, the German maker of the iconic 911 sports car, revealed it had secretly bought 31.5pc of VW through a series of cash-settled options with a range of investment banks.
Added to its known holding of 42.6pc, the options handed Porsche control of nearly 75pc of its bigger rival.
The news shot through the global hedge fund industry. With shares in VW trading far above the company's fair value and a recession hitting every other car manufacturer, traders had bet millions of euros that the stock would fall.
But the statement screamed the opposite. With nearly 20pc of the share register held by the state of Lower Saxony and another estimated 6pc held by index trackers, traders calculated a cornered market.
As one said: "With over 100pc of the stock tied up and nearly 13pc shorted, the correct price of any available stock was infinity. It was the ultimate squeeze."
The stock lurched violently, punishing the rest of the DAX index of Germany's leading companies. Hedge funds were estimated to have taken a €30bn hit, with the investment banks sustaining heavy losses, too.
The German regulator belatedly agreed in the face of the turmoil that there could be a case of market manipulation to answer.
Even so, this weekend the reputations not just of Porsche and its advisers, but of regulators and corporate Germany as a whole, are badly damaged.
Sources close to Porsche insist that the company never intended to cause the rumpus and has acted entirely within the rules.
Other observers disagreed. "This is the culmination of long-held plans to take over VW. Porsche engineered the squeeze as one of the most brilliantly conceived wealth transfers ever: they've got the hedge funds positioned to pay for Porsche's acquisition of VW. The only thing they underestimated was the scale of the fallout," said an insider.
The spike in VW's shares made it the most valuable company in the world.
Greenlight Capital is a hedge fund founded by David Einhorn, they were one of the parties involved in shorting Volkswagen.
From their latest quarterly letter more news about the court case:
I find this pretty shocking from a CG point of view, to be honest.
Porsche's controversial attempted takeover of Volkswagen (VW) has sparked a feeding frenzy for lawyers on both sides of the Atlantic. The claims and costs are now so onerous they have helped derail Porsche's attempt to take over its larger rival.
While the stakes could barely be any higher, the issue at the centre of the dispute could hardly be simpler – summed up by a press release from March 2008.
Investors claiming these large sums from Porsche say they were misled about its intentions regarding its investment in VW. One of the key elements to the case is a press release put out by Porsche in 2008, in which it dismissed as "speculation" it was mounting a takeover of VW.
By the end of that year the sports car manufacturer shocked the markets by revealing it controlled 42.6pc of VW and had options for another 31.5pc, giving it de facto control.
The revelation caused near panic in the market with VW shares surging to over €1,000 as shortsellers raced to cover their positions by buying back stock – what's known in the market as a "short squeeze".
More information in "Porsche crashes into controversy in the ultimate 'short squeeze'"
Shortly after 3pm on Sunday afternoon, Porsche, the German maker of the iconic 911 sports car, revealed it had secretly bought 31.5pc of VW through a series of cash-settled options with a range of investment banks.
Added to its known holding of 42.6pc, the options handed Porsche control of nearly 75pc of its bigger rival.
The news shot through the global hedge fund industry. With shares in VW trading far above the company's fair value and a recession hitting every other car manufacturer, traders had bet millions of euros that the stock would fall.
But the statement screamed the opposite. With nearly 20pc of the share register held by the state of Lower Saxony and another estimated 6pc held by index trackers, traders calculated a cornered market.
As one said: "With over 100pc of the stock tied up and nearly 13pc shorted, the correct price of any available stock was infinity. It was the ultimate squeeze."
The stock lurched violently, punishing the rest of the DAX index of Germany's leading companies. Hedge funds were estimated to have taken a €30bn hit, with the investment banks sustaining heavy losses, too.
The German regulator belatedly agreed in the face of the turmoil that there could be a case of market manipulation to answer.
Even so, this weekend the reputations not just of Porsche and its advisers, but of regulators and corporate Germany as a whole, are badly damaged.
Sources close to Porsche insist that the company never intended to cause the rumpus and has acted entirely within the rules.
Other observers disagreed. "This is the culmination of long-held plans to take over VW. Porsche engineered the squeeze as one of the most brilliantly conceived wealth transfers ever: they've got the hedge funds positioned to pay for Porsche's acquisition of VW. The only thing they underestimated was the scale of the fallout," said an insider.
The spike in VW's shares made it the most valuable company in the world.
Greenlight Capital is a hedge fund founded by David Einhorn, they were one of the parties involved in shorting Volkswagen.
From their latest quarterly letter more news about the court case:
I find this pretty shocking from a CG point of view, to be honest.
Monday, 21 April 2014
Mark Cuban on High Frequency Trading
To the person who approached me about High Frequency Trading: I am not exactly an expert on this subject, although I have read a quite a bit about it.
One article I just read made a lot of sense to me, it is written by Mark Cuban, one of the "sharks" of the Shark Tank.
"The Idiots Guide to High Frequency Trading"
"1. Electronic trading is part of HFT, but not all electronic trading is high frequency trading.
Trading equities and other financial instruments has been around for a long time. it is Electronic Trading that has lead to far smaller spreads and lower actual trading costs from your broker. Very often HFT companies take credit for reducing spreads. They did not. Electronic trading did.
We all trade electronically now. It’s no big deal.
2. Speed is not a problem
People like to look at the speed of trading as the problem. It is not. We have had a need for speed since the first stock quotes were communicated cross country via telegraph. The search for speed has been never ending. While I don't think co location and sub second trading adds value to the market, it does NOT create problems for the market.
3. There has always been a delta in speed of trading.
From the days of the aforementioned telegraph to sub millisecond trading not everyone has traded at the same speed. You may trade stocks on a 100mbs broadband connection that is faster than your neighbours dial up connection. That delta in speed gives you faster information to news, information, research, getting quotes and getting your trades to your broker faster.
The same applies to brokers, banks and HFT. They compete to get the fastest possible speed. Again the speed is not a problem.
4. So what has changed ? What is the problem
What has changed is this. In the past people used their speed advantages to trade their own portfolios. They knew they had an advantage with faster information or placing of trades and they used it to buy and own stocks. If only for hours. That is acceptable. The market is very Darwinian. If you were able to figure out how to leverage the speed to buy and sell stocks that you took ownership of , more power to you. If you day traded in 1999 because you could see movement in stocks faster than the guy on dial up, and you made money. More power to you.
What changed is that the exchanges both delivered information faster to those who paid for the right AND ALSO gave them the ability via order types where the faster traders were guaranteed the right to jump in front of all those who were slower (Traders feel free to challenge me on this) . Not only that, they were able to use algorithms to see activity and/or directly see quotes from all those who were even milliseconds slower.
With these changes the fastest players were now able to make money simply because they were the fastest traders. They didn’t care what they traded. They realized they could make money on what is called Latency Arbitrage. You make money by being the fastest and taking advantage of slower traders.
It didn’t matter what exchanges the trades were on, or if they were across exchanges. If they were faster and were able to see or anticipate the slower trades they could profit from it.
This is where the problems start.
If you have the fastest access to information and the exchanges have given you incentives to jump in front of those users and make trades by paying you for any volume you create (maker/taker), then you can use that combination to make trades that you are pretty much GUARANTEED TO MAKE A PROFIT on.
So basically, the fastest players, who have spent billions of dollars in aggregate to get the fastest possible access are using that speed to jump to the front of the trading line. They get to see , either directly or algorithmically the trades that are coming in to the market."
Please read the remaining article at the link above for more. Also the comments provide quite a few good pointers.
I would be very interested to know the exact situation both regarding Bursa and SGX. Are they allowing HFT? If so, what percentage of the trades are executed by them? To what extend can HFT players get an advantage?
One article I just read made a lot of sense to me, it is written by Mark Cuban, one of the "sharks" of the Shark Tank.
"The Idiots Guide to High Frequency Trading"
"1. Electronic trading is part of HFT, but not all electronic trading is high frequency trading.
Trading equities and other financial instruments has been around for a long time. it is Electronic Trading that has lead to far smaller spreads and lower actual trading costs from your broker. Very often HFT companies take credit for reducing spreads. They did not. Electronic trading did.
We all trade electronically now. It’s no big deal.
2. Speed is not a problem
People like to look at the speed of trading as the problem. It is not. We have had a need for speed since the first stock quotes were communicated cross country via telegraph. The search for speed has been never ending. While I don't think co location and sub second trading adds value to the market, it does NOT create problems for the market.
3. There has always been a delta in speed of trading.
From the days of the aforementioned telegraph to sub millisecond trading not everyone has traded at the same speed. You may trade stocks on a 100mbs broadband connection that is faster than your neighbours dial up connection. That delta in speed gives you faster information to news, information, research, getting quotes and getting your trades to your broker faster.
The same applies to brokers, banks and HFT. They compete to get the fastest possible speed. Again the speed is not a problem.
4. So what has changed ? What is the problem
What has changed is this. In the past people used their speed advantages to trade their own portfolios. They knew they had an advantage with faster information or placing of trades and they used it to buy and own stocks. If only for hours. That is acceptable. The market is very Darwinian. If you were able to figure out how to leverage the speed to buy and sell stocks that you took ownership of , more power to you. If you day traded in 1999 because you could see movement in stocks faster than the guy on dial up, and you made money. More power to you.
What changed is that the exchanges both delivered information faster to those who paid for the right AND ALSO gave them the ability via order types where the faster traders were guaranteed the right to jump in front of all those who were slower (Traders feel free to challenge me on this) . Not only that, they were able to use algorithms to see activity and/or directly see quotes from all those who were even milliseconds slower.
With these changes the fastest players were now able to make money simply because they were the fastest traders. They didn’t care what they traded. They realized they could make money on what is called Latency Arbitrage. You make money by being the fastest and taking advantage of slower traders.
It didn’t matter what exchanges the trades were on, or if they were across exchanges. If they were faster and were able to see or anticipate the slower trades they could profit from it.
This is where the problems start.
If you have the fastest access to information and the exchanges have given you incentives to jump in front of those users and make trades by paying you for any volume you create (maker/taker), then you can use that combination to make trades that you are pretty much GUARANTEED TO MAKE A PROFIT on.
So basically, the fastest players, who have spent billions of dollars in aggregate to get the fastest possible access are using that speed to jump to the front of the trading line. They get to see , either directly or algorithmically the trades that are coming in to the market."
Please read the remaining article at the link above for more. Also the comments provide quite a few good pointers.
I would be very interested to know the exact situation both regarding Bursa and SGX. Are they allowing HFT? If so, what percentage of the trades are executed by them? To what extend can HFT players get an advantage?
Maybulk: IPO of POSH (6)
First of all a correction. On April 2, 2014 Maybulk issued its prospectus to acquire more shares in POSH. In it were the financial numbers of POSH for the year 2013.
On April 8, 2014 Maybulk announced a deviation in its audited accounts for 2013 due to a lower profit of POSH. I assumed therefore that the profit as given in the documents on April 2 had to be adjusted downwards, but it turned out that those were already adjusted. I have amended the relevant blog postings.
Remains the question why Maybulk waited until April 8 with announcing the profit deviation when they knew about the difference already at least on April 2.
The prospectus for POSH IPO has been issued and can be found here.
A (very) good review can be found here.
A few additional issues I like to mention:
[1] Maybulk was not the only company that subscribed to POSH shares in 2008, there was one other company named Singa Star Pte Ltd.
It turns out that the company did exercise the Put Option, contrary to Maybulk (USD 8.125 is exactly the original paid price of USD 6.50 + 25%):
Who will be right and who will be wrong? I guess we have to wait to see how things unfold.
[2] From the financial statements we can see the amount of Fixed Assets of POSH:
And the Depreciation:
The question is, why has the Fixed Assets in 2013 increased by 35% compared to 2012 while the depreciation has (slightly) decreased?
[3] POSH is aggressively increasing its fleet, but utilisation rates seem to be dropping since 2012, for every category:
[4] Another issue is the Joint Ventures:
The Joint Ventures have total assets of USD 720 million, but are still booking a loss for the year? Revenue as percentage of Total Assets looks rather low.
[5] The Related Party Transactions of POSH are huge (in USD '000):
[6] The Other Operating Income, detailed:
How recurring are these? Given the PAT for POSH over these years (respectively 26M, 54M and 73M), these amounts seem to be very meaningful.
Friday April 25, 2014 POSH will start trading.
On April 8, 2014 Maybulk announced a deviation in its audited accounts for 2013 due to a lower profit of POSH. I assumed therefore that the profit as given in the documents on April 2 had to be adjusted downwards, but it turned out that those were already adjusted. I have amended the relevant blog postings.
Remains the question why Maybulk waited until April 8 with announcing the profit deviation when they knew about the difference already at least on April 2.
The prospectus for POSH IPO has been issued and can be found here.
A (very) good review can be found here.
A few additional issues I like to mention:
[1] Maybulk was not the only company that subscribed to POSH shares in 2008, there was one other company named Singa Star Pte Ltd.
It turns out that the company did exercise the Put Option, contrary to Maybulk (USD 8.125 is exactly the original paid price of USD 6.50 + 25%):
Who will be right and who will be wrong? I guess we have to wait to see how things unfold.
[2] From the financial statements we can see the amount of Fixed Assets of POSH:
And the Depreciation:
The question is, why has the Fixed Assets in 2013 increased by 35% compared to 2012 while the depreciation has (slightly) decreased?
[3] POSH is aggressively increasing its fleet, but utilisation rates seem to be dropping since 2012, for every category:
[4] Another issue is the Joint Ventures:
The Joint Ventures have total assets of USD 720 million, but are still booking a loss for the year? Revenue as percentage of Total Assets looks rather low.
[5] The Related Party Transactions of POSH are huge (in USD '000):
[6] The Other Operating Income, detailed:
How recurring are these? Given the PAT for POSH over these years (respectively 26M, 54M and 73M), these amounts seem to be very meaningful.
Friday April 25, 2014 POSH will start trading.
Sunday, 20 April 2014
Anthony Bolton: I was wrong about China
"Anthony Bolton (born 7 March 1950) is one of the UK's best known investment fund managers and most successful investors, having managed the Fidelity Special Situations fund from December 1979 to December 2007. Over this 28-year period the fund achieved annualised growth of 19.5%, far in excess of the 13.5% growth of the wider stock exchange, turning a £1,000 investment into £147,000."
The above taken from Wikipedia. Pretty impressive, isn't it?
And then he did something he now definitely regrets:
"In 2009 he announced his return to fund management and in April 2010 moved to Hong Kong to begin managing the newly launched Fidelity China Special Situations PLC, an investment trust listed on the London Stock Exchange."
SCMP wrote recently an article with a rather harsh tone:
"Anthony Bolton retires with unfond memories of China"
"... despite his bullishness on China he was unable to repeat his successes with his China investments - to no great surprise from older hands here who felt he didn't have enough knowledge of the market to succeed in the short term.
He retired from Fidelity at the end of March. At a function to mark his retirement Bolton criticised standards of corporate governance on the mainland. Initially he thought corporate governance issues in China were about whether the chairman and the chief executive positions were held by the same person, or whether independent directors held a majority on the board.
"I found that corporate governance is a euphemism for 'are the figures real and is the management lying?', that is, fraud.
A longer and more detailed article in the Financial Times: "Anthony Bolton: ‘I was wrong about the market in China’"
“The most disappointing thing for me – and I am happy to admit it – is that I was wrong about the market in China,” the manager said during a press briefing on his last day in the office on March 31.
“I thought it would go up for four years but it has gone down for more than four years.”
Eventually he did outperform the relevant index, but in absolute terms, the performance is nothing to shout about:
Someone who has performed (very) well by investing in China is Malaysian Cheah Cheng Hye (founder of Value Partners), about whom I wrote here.
The above taken from Wikipedia. Pretty impressive, isn't it?
And then he did something he now definitely regrets:
"In 2009 he announced his return to fund management and in April 2010 moved to Hong Kong to begin managing the newly launched Fidelity China Special Situations PLC, an investment trust listed on the London Stock Exchange."
SCMP wrote recently an article with a rather harsh tone:
"Anthony Bolton retires with unfond memories of China"
"... despite his bullishness on China he was unable to repeat his successes with his China investments - to no great surprise from older hands here who felt he didn't have enough knowledge of the market to succeed in the short term.
He retired from Fidelity at the end of March. At a function to mark his retirement Bolton criticised standards of corporate governance on the mainland. Initially he thought corporate governance issues in China were about whether the chairman and the chief executive positions were held by the same person, or whether independent directors held a majority on the board.
"I found that corporate governance is a euphemism for 'are the figures real and is the management lying?', that is, fraud.
A longer and more detailed article in the Financial Times: "Anthony Bolton: ‘I was wrong about the market in China’"
“The most disappointing thing for me – and I am happy to admit it – is that I was wrong about the market in China,” the manager said during a press briefing on his last day in the office on March 31.
“I thought it would go up for four years but it has gone down for more than four years.”
Eventually he did outperform the relevant index, but in absolute terms, the performance is nothing to shout about:
Someone who has performed (very) well by investing in China is Malaysian Cheah Cheng Hye (founder of Value Partners), about whom I wrote here.
Saturday, 19 April 2014
Fire in China Stationary plant (2)
I wrote before about China Stationary:
"Hopefully the administration is still in order, the administration office is mentioned as being damaged. In Singapore there was a China listed company where suddenly the whole administration went up in fire."
I am afraid that my fear that the administration was destroyed was indeed correct, according to the following announcement:
The Company’s auditors, Messrs RT LLP had communicated the following statements in their Audit Summary Memorandum for the financial year ended 31 December 2013:
“As a result of the fire incident, we are unable to proceed with their planned schedule to obtain walk-in bank confirmations, sight of fixed assets, as well as complete our audit fieldwork for the PRC subsidiaries. The aforementioned procedures are crucial for us to issue an audit opinion on the Group’s financial statements for the financial year ended 31 December 2013.
As at the date of this memorandum, management has not been able to provide us with the post balance sheet financial information and make the necessary arrangements to fulfil the aforementioned procedures as the financial records and company legal stamps that were stored in the administration office were destroyed by the fire as advised by management.”
The Singapore listed China company that I mentioned before was Sino Techfibre. A link to a Business Times article can be found here:
Blaze in Shandong facility may further obscure ongoing probe into its books
A FIRE at the China factory of mainboard-listed Sino Techfibre could further obscure an ongoing probe into its books as key financial records have reportedly been destroyed in the incident.
According to a statement released by the firm late Friday night, a fire had broken out at the administrative premises within its primary production facility at Longkou City in Shandong province in the early morning of April 20.
While the blaze did not cause any deaths or injuries, the financial records that were kept in the affected office have been destroyed, Sino Techfibre revealed.
‘The company has reported the incident to the local police, and the latter has commenced the necessary investigations,’ it said.
‘The cause of the fire and actual extent of the damage are currently still unknown, pending the completion of the police investigations into the fire and issuance of their report,’ it added.
The incident happened a week after the firm was red-flagged by external auditors Ernst & Young (E&Y) for accounting irregularities, adding to recent scandals surrounding the bookkeeping practices of several other China-linked companies.
Specifically, E&Y uncovered some discrepancies in the invoices issued by the firm and its suppliers.
Sino Techfibre said that it could not locate the sales manager who is at centre of this controversy, and has since lodged a local police report.
As E&Y did not obtain a satisfactory explanation on the issue, it could not complete and issue the audit report on Sino Techfibre.
In an update last Friday, the Chinese maker of polyurethane (PU) and microfibre synthetic leather products also announced that it has appointed an interim chairman and CEO following E&Y’s findings.
Sino Techfibre’s existing CEO Li Wenheng has been ‘re-designated as an executive director’ until further notice, the firm said.
Independent director Tay Wee Kwang has taken over as Sino Techfibre’s interim chief while Lee Wing Hang, another independent director, has been appointed as its interim chairman.
As part of his responsibilities, Mr Tay will oversee the independent investigations into the company’s audit issues as well as review the investigation report on last week’s fire. He will also take over the company seals of Sino Techfibre and all its subsidiaries.
Sino Techfibre is currently finalising the appointment of E&Y for an expanded audit.
In anticipation of this move, Sino Techfibre said that it has been ‘making the necessary preparatory work in respect of the relevant books and financial records of the company’ prior to last Wednesday’s blaze.
"Hopefully the administration is still in order, the administration office is mentioned as being damaged. In Singapore there was a China listed company where suddenly the whole administration went up in fire."
I am afraid that my fear that the administration was destroyed was indeed correct, according to the following announcement:
The Company’s auditors, Messrs RT LLP had communicated the following statements in their Audit Summary Memorandum for the financial year ended 31 December 2013:
“As a result of the fire incident, we are unable to proceed with their planned schedule to obtain walk-in bank confirmations, sight of fixed assets, as well as complete our audit fieldwork for the PRC subsidiaries. The aforementioned procedures are crucial for us to issue an audit opinion on the Group’s financial statements for the financial year ended 31 December 2013.
As at the date of this memorandum, management has not been able to provide us with the post balance sheet financial information and make the necessary arrangements to fulfil the aforementioned procedures as the financial records and company legal stamps that were stored in the administration office were destroyed by the fire as advised by management.”
The Singapore listed China company that I mentioned before was Sino Techfibre. A link to a Business Times article can be found here:
Blaze in Shandong facility may further obscure ongoing probe into its books
A FIRE at the China factory of mainboard-listed Sino Techfibre could further obscure an ongoing probe into its books as key financial records have reportedly been destroyed in the incident.
According to a statement released by the firm late Friday night, a fire had broken out at the administrative premises within its primary production facility at Longkou City in Shandong province in the early morning of April 20.
While the blaze did not cause any deaths or injuries, the financial records that were kept in the affected office have been destroyed, Sino Techfibre revealed.
‘The company has reported the incident to the local police, and the latter has commenced the necessary investigations,’ it said.
‘The cause of the fire and actual extent of the damage are currently still unknown, pending the completion of the police investigations into the fire and issuance of their report,’ it added.
The incident happened a week after the firm was red-flagged by external auditors Ernst & Young (E&Y) for accounting irregularities, adding to recent scandals surrounding the bookkeeping practices of several other China-linked companies.
Specifically, E&Y uncovered some discrepancies in the invoices issued by the firm and its suppliers.
Sino Techfibre said that it could not locate the sales manager who is at centre of this controversy, and has since lodged a local police report.
As E&Y did not obtain a satisfactory explanation on the issue, it could not complete and issue the audit report on Sino Techfibre.
In an update last Friday, the Chinese maker of polyurethane (PU) and microfibre synthetic leather products also announced that it has appointed an interim chairman and CEO following E&Y’s findings.
Sino Techfibre’s existing CEO Li Wenheng has been ‘re-designated as an executive director’ until further notice, the firm said.
Independent director Tay Wee Kwang has taken over as Sino Techfibre’s interim chief while Lee Wing Hang, another independent director, has been appointed as its interim chairman.
As part of his responsibilities, Mr Tay will oversee the independent investigations into the company’s audit issues as well as review the investigation report on last week’s fire. He will also take over the company seals of Sino Techfibre and all its subsidiaries.
Sino Techfibre is currently finalising the appointment of E&Y for an expanded audit.
In anticipation of this move, Sino Techfibre said that it has been ‘making the necessary preparatory work in respect of the relevant books and financial records of the company’ prior to last Wednesday’s blaze.
Yahoo: Conglomerate Discount
I wrote before about what is called "Holding Company Discount".
Bloomberg published an interesting article about this same issue, but calls it "Conglomerate Discount". The article is about Yahoo, and its holdings in Alibaba and Yahoo Japan.
"How Can Yahoo Be Worth Less Than Zero?"
The article is written by Matt Levine, some snippets:
"Yahoo Inc. is a public company consisting of a portfolio of
1. whatever you think Yahoo is,
2. a 35 percent stake in a separate but similar publicly traded company called Yahoo Japan, and
3. a 24 percent stake in a separate, different, soon-to-be-publicly traded company called Alibaba.
My Bloomberg View colleague Matt Klein ran the numbers in March, and non-Bloomberg-affiliated Matt Matt Yglesias ran them again today, and the numbers tell you that 2+3 > 1+2+3, as it were: Yahoo's Alibaba and Yahoo Japan stakes add up to be worth more than Yahoo is worth."
"One obvious question is, how can that be true? The actual Yahoo business -- call it "Core Yahoo" -- still makes hundreds of millions of dollars a year in profits, which theoretically belong to shareholders. A thing that pays you positive hundreds of millions of dollars a year shouldn't be worth negative billions of dollars.
Of course, profits that theoretically belong to shareholders aren't necessarily paid out to shareholders: Yahoo pays no dividend and has a ... checkered management history, so you could easily take the cynical view that Yahoo will plow those profits back into a declining business, be completely mismanaged, run the business into the ground and leave shareholders with nothing."
Core Yahoo is worth less than zero because it's an arithmetic residue of taking a bunch of businesses with very public price tags on them and applying a conglomerate discount.
That discount isn't really about the viability of the core business; it's about the fact that investors don't have direct access to any of the individual businesses, but have to buy them in packaged conglomerate form where any gains on the business they want can be wiped out by losses on the ones they don't.
I learned my lesson the hard way, about 20 years ago. I was quite impressed by the growth of AMMB, but calculated that AMCorp (owning a chunk of AMMB plus some other businesses) was a cheaper entry to AMMB. And on top of that, AMCorp had ICULS that traded at a discount to its shares.
That is a lot of discount on top of a lot of discount, what possibly could go wrong?
Well, in short, a lot:
Bloomberg published an interesting article about this same issue, but calls it "Conglomerate Discount". The article is about Yahoo, and its holdings in Alibaba and Yahoo Japan.
"How Can Yahoo Be Worth Less Than Zero?"
The article is written by Matt Levine, some snippets:
"Yahoo Inc. is a public company consisting of a portfolio of
1. whatever you think Yahoo is,
2. a 35 percent stake in a separate but similar publicly traded company called Yahoo Japan, and
3. a 24 percent stake in a separate, different, soon-to-be-publicly traded company called Alibaba.
My Bloomberg View colleague Matt Klein ran the numbers in March, and non-Bloomberg-affiliated Matt Matt Yglesias ran them again today, and the numbers tell you that 2+3 > 1+2+3, as it were: Yahoo's Alibaba and Yahoo Japan stakes add up to be worth more than Yahoo is worth."
"One obvious question is, how can that be true? The actual Yahoo business -- call it "Core Yahoo" -- still makes hundreds of millions of dollars a year in profits, which theoretically belong to shareholders. A thing that pays you positive hundreds of millions of dollars a year shouldn't be worth negative billions of dollars.
Of course, profits that theoretically belong to shareholders aren't necessarily paid out to shareholders: Yahoo pays no dividend and has a ... checkered management history, so you could easily take the cynical view that Yahoo will plow those profits back into a declining business, be completely mismanaged, run the business into the ground and leave shareholders with nothing."
Core Yahoo is worth less than zero because it's an arithmetic residue of taking a bunch of businesses with very public price tags on them and applying a conglomerate discount.
That discount isn't really about the viability of the core business; it's about the fact that investors don't have direct access to any of the individual businesses, but have to buy them in packaged conglomerate form where any gains on the business they want can be wiped out by losses on the ones they don't.
I learned my lesson the hard way, about 20 years ago. I was quite impressed by the growth of AMMB, but calculated that AMCorp (owning a chunk of AMMB plus some other businesses) was a cheaper entry to AMMB. And on top of that, AMCorp had ICULS that traded at a discount to its shares.
That is a lot of discount on top of a lot of discount, what possibly could go wrong?
Well, in short, a lot:
- AMMB had been growing very fast, but that was actually a red flag, in the Asian crisis fast growing banks would be hit hard; less aggressive banks (like Public Bank) did relatively better;
- AMCorp's other businesses (if I remember correctly, a money-lending business) did very badly, and AMCorp apparently continued to support those.
Friday, 18 April 2014
Maybulk: EGM on April 17, 2014 (2)
Yesterday the EGM of Maybulk was held to acquire even more shares in POSH with the purpose of holding a minimum equity of at least 20%. The resolution was carried by an overwhelming majority:
I hope the minority investors did have the opportunity to voice any concerns they might have had, I haven't read any newspaper articles describing the EGM as of now.
In the mean time, the details of the POSH IPO at the SGX are revealed:
To compare these prices with those paid by Maybulk, a few conversions have to be made:
In other words, for each share Maybulk bought in 2008 for USD 6.50, it will now own 7.5 shares bought at USD 0.87, or S$ 1.083. That means that the POSH shares that Maybulk bought in 2008 have appreciated by only 5.8% (one measly per cent per year), using the IPO price as benchmark.
However, things are worse when counted in RM: in 2008 1 USD was equal to RM 3.52, in other words the USD (and thus the investment in USD) is devalued by 8.0%. So actually Maybulk is sitting on a small loss for it shares it bought in 2008.
The shares it bought at the Rights Issue are faring better, they were bought at a price of USD 4.00. But that offer was open to all shareholders of POSH. The question is if that was indeed correct (from a legal point if view), given the irrevocable undertaking by PCL towards Maybulk. I think that offer could not have been made, and a legal expert (who I asked for advice in this matter) agreed with me. A rather strange affair.
Returning back to the issue of the EGM, the real issue at hand was if the Put Option (giving Maybulk a return of 25% on its investment of 2008) should have been exercised, that at least would have given some profit on its investment, even given the depreciation of the USD vs the RM.
That money could then have been used for a massive dividend to all of its shareholders, who could then decide what to do with the money. One option would be to buy POSH shares (either by subscribing to the IPO or by buying in the open market), not only at a lower price than was received through the Put Option, but also with each shareholder directly in control (receiving dividends straight in their wallet, and the avoidance of the holding group discount, typically 30-40%).
But that Put Option was never decided on in the EGM, despite the huge size of it (close to RM 1 Billion) and it being a RPT. Another rather strange affair.
For the sake of the minority investors in Maybulk, I hope that in the long run the investment of POSH does work out, and that either there will be some profitable exit down the round, or that POSH does start paying substantial dividends to Maybulk (until now the amounts have been tiny).
I hope the minority investors did have the opportunity to voice any concerns they might have had, I haven't read any newspaper articles describing the EGM as of now.
In the mean time, the details of the POSH IPO at the SGX are revealed:
- Price per share S$ 1.15, near the bottom of the pricing range of S$ 1.13 to S$ 1.24;
- Amount to be raised: S$ 383 Million;
- Listing date: April 25, 2014.
To compare these prices with those paid by Maybulk, a few conversions have to be made:
- Maybulk is a Malaysian company accounting in RM;
- POSH is a Singaporean company accounting in S$, 1 S$ = RM 2.59;
- The deal between Maybulk and POSH was done in USD, 1 USD = RM 3.24 or S$ 1.25;
- Next to that, shares of POSH have just been split, 7.5 new shares for 1 old share.
In other words, for each share Maybulk bought in 2008 for USD 6.50, it will now own 7.5 shares bought at USD 0.87, or S$ 1.083. That means that the POSH shares that Maybulk bought in 2008 have appreciated by only 5.8% (one measly per cent per year), using the IPO price as benchmark.
However, things are worse when counted in RM: in 2008 1 USD was equal to RM 3.52, in other words the USD (and thus the investment in USD) is devalued by 8.0%. So actually Maybulk is sitting on a small loss for it shares it bought in 2008.
The shares it bought at the Rights Issue are faring better, they were bought at a price of USD 4.00. But that offer was open to all shareholders of POSH. The question is if that was indeed correct (from a legal point if view), given the irrevocable undertaking by PCL towards Maybulk. I think that offer could not have been made, and a legal expert (who I asked for advice in this matter) agreed with me. A rather strange affair.
Returning back to the issue of the EGM, the real issue at hand was if the Put Option (giving Maybulk a return of 25% on its investment of 2008) should have been exercised, that at least would have given some profit on its investment, even given the depreciation of the USD vs the RM.
That money could then have been used for a massive dividend to all of its shareholders, who could then decide what to do with the money. One option would be to buy POSH shares (either by subscribing to the IPO or by buying in the open market), not only at a lower price than was received through the Put Option, but also with each shareholder directly in control (receiving dividends straight in their wallet, and the avoidance of the holding group discount, typically 30-40%).
But that Put Option was never decided on in the EGM, despite the huge size of it (close to RM 1 Billion) and it being a RPT. Another rather strange affair.
For the sake of the minority investors in Maybulk, I hope that in the long run the investment of POSH does work out, and that either there will be some profitable exit down the round, or that POSH does start paying substantial dividends to Maybulk (until now the amounts have been tiny).
Thursday, 17 April 2014
Kian Joo Can and Can One
A long time ago (around 20 years ago) I bought some shares in Kian Joo Can Factory, good company, well run, focused, paid a decent dividend, strong balance sheet, etc. I must have sold the shares some time later, and then later the family troubles started. That is never good for business, is my experience, these troubles can be quite emotional, which might not be the best state of mind to take rational business decisions.
I often lamented two issues regarding take-over offers in Malaysia:
In Kian Joo's case, Christmas came early, since both these issues did apply, very rare for the Malaysian corporate scene:
The announcement can be found here:
"Kian Joo wishes to announce that Dato’ Anthony See Teow Guan (“Dato’ Anthony See”) has declared that he is now against the Proposed Disposal. Dato’ Anthony See’s reason for the change of decision is in light of the letter of interest that was received from Toyota Tsusho Corporation."
It is rather puzzling why Kian Joo not simply stated the reasons for Anthony See's stand. Surely, from a CG point of view, it is best to be transparent and publish the reasons as soon as they are available?
Yesterday Kian Joo's AGM was held, these are the results of the voting:
First of all, all resolutions were done by poll, and the detailed voting is announced, that is very transparent.
Secondly, the 5th resolution was not passed, which means that See Teow Koon was not re-elected.
Thirdly, it can be seen that quite a few other resolutions (in red) had tens of millions of votes (shares) against them. Although these resolutions did pass, the opposition has been noticed.
Bursa Stock Talk wrote an interesting posting on his blog, whether Can One should be allowed to vote on the asset disposal or not. These kind of asset disposals have to be approved by 75% of the votes, which could make it interesting.
I often lamented two issues regarding take-over offers in Malaysia:
- There is hardly ever a dissenting voice from any Director on the Board;
- There is hardly ever a competing offer.
In Kian Joo's case, Christmas came early, since both these issues did apply, very rare for the Malaysian corporate scene:
- There was a competing offer by Toyota Tsusho Corporation;
- One Director opposed the proposed disposal, in light of this competing offer.
The announcement can be found here:
"Kian Joo wishes to announce that Dato’ Anthony See Teow Guan (“Dato’ Anthony See”) has declared that he is now against the Proposed Disposal. Dato’ Anthony See’s reason for the change of decision is in light of the letter of interest that was received from Toyota Tsusho Corporation."
It is rather puzzling why Kian Joo not simply stated the reasons for Anthony See's stand. Surely, from a CG point of view, it is best to be transparent and publish the reasons as soon as they are available?
Yesterday Kian Joo's AGM was held, these are the results of the voting:
First of all, all resolutions were done by poll, and the detailed voting is announced, that is very transparent.
Secondly, the 5th resolution was not passed, which means that See Teow Koon was not re-elected.
Thirdly, it can be seen that quite a few other resolutions (in red) had tens of millions of votes (shares) against them. Although these resolutions did pass, the opposition has been noticed.
Bursa Stock Talk wrote an interesting posting on his blog, whether Can One should be allowed to vote on the asset disposal or not. These kind of asset disposals have to be approved by 75% of the votes, which could make it interesting.
Wednesday, 16 April 2014
Maybulk: EGM on April 17, 2014
One person asked me if I would attend the EGM of Maybulk to be held tomorrw. The answer is negative, I don't own any shares of Maybulk anymore, sold my shares after the EGM in December 2008 when shareholders approved the investment in POSH.
The shareholding of Maybulk looks like this:
PCL is not allowed to vote, if PPB Group also abstains (I think that should be the case) then Bank Pembangunan Malaysia Bhd. (BPMB; 100% owned by the Ministry of Finance) is kingmaker.
BPMB has one non-executive non-independent director on the Board of Maybulk, he has not voiced any concern about the resolution, so it is extremely likely that BPMB will vote in favour and thus that the proposal will be voted through.
However, those shareholders of Maybulk who share concerns regarding some of the issues I brought up can still take action by:
I hope that the vote at the EGM will be done by poll (one share one vote), and that the detailed voting result will be announced.
I also hope that the press is allowed to attend the meeting, although I doubt that will happen.
I have fought tooth and nail in 2008 to try to prevent the deal going through, only The Edge Daily published my letter. I did lodge a complaint with the Securities Commission before the EGM, unfortunately it was handled in the most disappointing way possible.
I have lodged a new complaint, mostly regarding the lapsing of the Put Option, the Rights Issue in 2012 and certain transparency issues. Hopefully it will be handled better and faster.
The authorities simply have to improve its enforcement compared to say ten years ago (when enforcement was close to zero), and luckily there have been some signs that it is indeed happening, even against some VIPs.
The shareholding of Maybulk looks like this:
PCL is not allowed to vote, if PPB Group also abstains (I think that should be the case) then Bank Pembangunan Malaysia Bhd. (BPMB; 100% owned by the Ministry of Finance) is kingmaker.
BPMB has one non-executive non-independent director on the Board of Maybulk, he has not voiced any concern about the resolution, so it is extremely likely that BPMB will vote in favour and thus that the proposal will be voted through.
However, those shareholders of Maybulk who share concerns regarding some of the issues I brought up can still take action by:
- Voicing their concern at the EGM and ask questions (which the Board of Directors is obliged to answer)
- Contacting the Securities Commission at aduan@seccom.com.my
- Contacting Bursa Malaysia at aduan@bursamalaysia.com
- Contacting MSWG at watchdog@mswg.org.my
- Contacting BPMB at http://www.bpmb.com.my/contactUs/enquiry.asp
I hope that the vote at the EGM will be done by poll (one share one vote), and that the detailed voting result will be announced.
I also hope that the press is allowed to attend the meeting, although I doubt that will happen.
I have fought tooth and nail in 2008 to try to prevent the deal going through, only The Edge Daily published my letter. I did lodge a complaint with the Securities Commission before the EGM, unfortunately it was handled in the most disappointing way possible.
I have lodged a new complaint, mostly regarding the lapsing of the Put Option, the Rights Issue in 2012 and certain transparency issues. Hopefully it will be handled better and faster.
The authorities simply have to improve its enforcement compared to say ten years ago (when enforcement was close to zero), and luckily there have been some signs that it is indeed happening, even against some VIPs.
1MDB: Debt ballooned to RM 42 Billion?
Article in the Business Times (Singapore), which raises many questions:
Why are the accounts for the year ended March 2013 of 1MDB delayed for such a long time?
Why does 1MDB need RM 42,300,000,000.00 in debt (per March 31, 2013)? This amount is hugely up from RM 8.4 Billion the year before.
The fund made a profit of RM 778 Million, which looks ok, but it needs again a property revaluation of RM 2.7 Billion (without which it would have shown a loss).
Also, the profit as percentage on equity plus debt does not look that impressive.
More from the article:
"... the fund has come under fire for overpaying for the power assets. 1MDB forked out RM 10.85 billion for these, mostly old plants nearing the end of their concessions.
The latest accounts which reveal an impairment loss on goodwill back up the view that 1MDB could indeed have overpaid for those power assets."
And:
"Market observers say that the fund's growing debt obligations are causing some unease in the country's banking circles as well as regulator Bank Negara Malaysia.
"This is potentially a big risk and it's in everyone's interest to monitor the situation closely." said an insider.
The whole idea of a large government fund with very little transparency, buying over certain assets (power, land etc.), bundling some of them together and then bringing them to Bursa in the form of an IPO, I fail to see the benefits of that, in the contrary.
As a seasoned banker said in the article:
"This is not value creation. It's not a sustainable strategy, more so for a long-term diversified company".
Why are the accounts for the year ended March 2013 of 1MDB delayed for such a long time?
Why does 1MDB need RM 42,300,000,000.00 in debt (per March 31, 2013)? This amount is hugely up from RM 8.4 Billion the year before.
The fund made a profit of RM 778 Million, which looks ok, but it needs again a property revaluation of RM 2.7 Billion (without which it would have shown a loss).
Also, the profit as percentage on equity plus debt does not look that impressive.
More from the article:
"... the fund has come under fire for overpaying for the power assets. 1MDB forked out RM 10.85 billion for these, mostly old plants nearing the end of their concessions.
The latest accounts which reveal an impairment loss on goodwill back up the view that 1MDB could indeed have overpaid for those power assets."
And:
"Market observers say that the fund's growing debt obligations are causing some unease in the country's banking circles as well as regulator Bank Negara Malaysia.
"This is potentially a big risk and it's in everyone's interest to monitor the situation closely." said an insider.
The whole idea of a large government fund with very little transparency, buying over certain assets (power, land etc.), bundling some of them together and then bringing them to Bursa in the form of an IPO, I fail to see the benefits of that, in the contrary.
As a seasoned banker said in the article:
"This is not value creation. It's not a sustainable strategy, more so for a long-term diversified company".
Monday, 14 April 2014
Jobstreet: excellent entrepeneurship (2)
I wrote before about M&A deal regarding Jobstreet.
For anyone interested in this matter, I highly recommend reading this posting:
"Last of the ASEAN job portals exit, A New Era Commences"
It is written by Lim Der Shing, CEO and Founder of Singapore based JobsCentral Group, one of JobStreet's competitors. In other words, someone who is very knowledgeable on this subject.
For anyone interested in this matter, I highly recommend reading this posting:
"Last of the ASEAN job portals exit, A New Era Commences"
It is written by Lim Der Shing, CEO and Founder of Singapore based JobsCentral Group, one of JobStreet's competitors. In other words, someone who is very knowledgeable on this subject.
Sunday, 13 April 2014
Maybulk: IPO of POSH (5)
Tying up some loose ends in this posting.
[1] Deals should be "good", not "fair"
First a general issue, that is often overlooked in corporate exercises. If company A buys into another company B, and the price is roughly what is estimated to be fair, should company A proceed?
In my opinion the answer is a clear no, because of the following reasons (which partly overlap):
[2] Why was no purpose given?
In Maybulk/POSH: What happened to the Cash? I suggested that the cash (close to RM 700,000,000) that Maybulk injected into POSH was almost immediately transferred to PCL, it's parent company, to settle loans.
Also, I wrote that the purpose should have been included in the circular, simply because of common sense and transparency requirements, but also because it is described in the regulations.
I have received confirmation that the money was indeed transferred to PCL.
Maybulk seemed to defend itself, that there was a mentioning what would happen with the money. It referred to the following paragraph in the Independent Report by KPMG:
I am sorry to say, the above describes a repayment of the proceeds of issuing a (relatively small) amount of shares to POSH employees which would take place before Maybulk would buy POSH's shares.
It does not describe what would happen with Maybulk's cash injection.
But even if it would, the paragraph is a description of the DCF approach inside a summary of the evaluation of the Subscription Price. That does not exactly look like the right place to describe the purpose of an injection of money. Both in the general part (by AMinvestment Bank) and the Independent Advice (by KPMG) there were suitable places to describe the purpose, and also to give a lengthy opinion about it.
Repaying back interest free loans is not exactly helping the company to grow, POSH could have for instance bought distressed assets at a huge discount.
Describing the purpose of a capital injection is clearly defined in the rules, so it appears that the rules have been breached.
[3] Why no alternatives?
Unfortunately, it is quite normal in corporate deals that shareholders do not to receive alternatives. For instance, shareholders of Maybulk could only decide to buy into POSH or not.
But there was a very clear and good alternative: distribute the same amount (almost RM 800,000,000 in total; RM 0.80 per Maybulk share) in dividends and let all shareholders decide themselves where to invest the money in. That would have been a nice alternative, and I guess most investors of Maybulk would have been very happy receiving such a bumper dividend, especially since share prices of all companies were very depressed.
If they had reinvested it in Bursa Malaysia listed companies, they would have been sitting on a capital gain of (on average) 111%:
I strongly doubt that POSH has increased 111% in value, but for sure Maybulk itself massively underperformed the KLSE index.
Despite the recent run-up, the share price is still below the price in December 2008.
[4] Resolution and advice are not in sink
KPMG advised the following in their report:
That does seem like a good advice, limiting the price to be subscribed to. If the price is too high, may be Maybulk should even consider selling some shares at the IPO.
But the problem with KPMG's advice is, the proposed resolution does not indicate a price, it just asks shareholders to authorise the Directors to subscribe to shares at an IPO price "to be determined", up to a maximum total amount of USD 70M:
I think that the resolution should have mentioned the maximum price per share that Maybulk is prepared to pay for, and that price should have been tested by KPMG if it is "fair" and "reasonable", and if they recommend shareholders to vote in favour.
[5] Where is the Exit?
Maybulk received a Put option in 2008 which enabled them to sell the POSH shares. The good thing about that was that is was a clear exit, Maybulk would receive the cash and could for instance pay out (a part) as dividends to its shareholders.
But the company hasn't exercised that option and it even wants to maintain a 20% shareholding in POSH by buying more shares. That even has implications for the future, for instance if POSH has another rights issue, or if POSH wants to start an ESOS (Executive Share Option Scheme), in both cases Maybulk might have to buy even more shares to maintain the 20% threshold.
But that bags the question, which has not been answered so far: where is the exit? Maybulk will only receive dividends from POSH, which might not be that large. If it wants to sell shares in the market, that might be a tall order (liquidity is not guaranteed), apart from the fact that it doesn't look that great on the other shareholders if the second largest shareholder starts to sell its shares.
[1] Deals should be "good", not "fair"
First a general issue, that is often overlooked in corporate exercises. If company A buys into another company B, and the price is roughly what is estimated to be fair, should company A proceed?
In my opinion the answer is a clear no, because of the following reasons (which partly overlap):
- The seller always knows (much) more about what he sells than the buyer, there is a clear information bias;
- Companies like Berkshire Hathaway have not grown hugely by buying companies (or shares) at fair value, Warren Buffett always insist on a "margin of safety";
- If an Independent advisor gives a valuation of a company which is roughly equal to the cash offered, then the advisor will rate the proposed deal as "fair and reasonable", but that is not correct. The valuation depends on a long list of assumptions, and cash not, so cash should prevail;
- Holding companies often suffer from "holding company discount", that is the valuation of the holding company will be less than the sum of the parts it invested in; a typical discount is roughly 30-40%.
[2] Why was no purpose given?
In Maybulk/POSH: What happened to the Cash? I suggested that the cash (close to RM 700,000,000) that Maybulk injected into POSH was almost immediately transferred to PCL, it's parent company, to settle loans.
Also, I wrote that the purpose should have been included in the circular, simply because of common sense and transparency requirements, but also because it is described in the regulations.
I have received confirmation that the money was indeed transferred to PCL.
Maybulk seemed to defend itself, that there was a mentioning what would happen with the money. It referred to the following paragraph in the Independent Report by KPMG:
I am sorry to say, the above describes a repayment of the proceeds of issuing a (relatively small) amount of shares to POSH employees which would take place before Maybulk would buy POSH's shares.
It does not describe what would happen with Maybulk's cash injection.
But even if it would, the paragraph is a description of the DCF approach inside a summary of the evaluation of the Subscription Price. That does not exactly look like the right place to describe the purpose of an injection of money. Both in the general part (by AMinvestment Bank) and the Independent Advice (by KPMG) there were suitable places to describe the purpose, and also to give a lengthy opinion about it.
Repaying back interest free loans is not exactly helping the company to grow, POSH could have for instance bought distressed assets at a huge discount.
Describing the purpose of a capital injection is clearly defined in the rules, so it appears that the rules have been breached.
[3] Why no alternatives?
Unfortunately, it is quite normal in corporate deals that shareholders do not to receive alternatives. For instance, shareholders of Maybulk could only decide to buy into POSH or not.
But there was a very clear and good alternative: distribute the same amount (almost RM 800,000,000 in total; RM 0.80 per Maybulk share) in dividends and let all shareholders decide themselves where to invest the money in. That would have been a nice alternative, and I guess most investors of Maybulk would have been very happy receiving such a bumper dividend, especially since share prices of all companies were very depressed.
If they had reinvested it in Bursa Malaysia listed companies, they would have been sitting on a capital gain of (on average) 111%:
I strongly doubt that POSH has increased 111% in value, but for sure Maybulk itself massively underperformed the KLSE index.
Despite the recent run-up, the share price is still below the price in December 2008.
[4] Resolution and advice are not in sink
KPMG advised the following in their report:
That does seem like a good advice, limiting the price to be subscribed to. If the price is too high, may be Maybulk should even consider selling some shares at the IPO.
But the problem with KPMG's advice is, the proposed resolution does not indicate a price, it just asks shareholders to authorise the Directors to subscribe to shares at an IPO price "to be determined", up to a maximum total amount of USD 70M:
I think that the resolution should have mentioned the maximum price per share that Maybulk is prepared to pay for, and that price should have been tested by KPMG if it is "fair" and "reasonable", and if they recommend shareholders to vote in favour.
[5] Where is the Exit?
Maybulk received a Put option in 2008 which enabled them to sell the POSH shares. The good thing about that was that is was a clear exit, Maybulk would receive the cash and could for instance pay out (a part) as dividends to its shareholders.
But the company hasn't exercised that option and it even wants to maintain a 20% shareholding in POSH by buying more shares. That even has implications for the future, for instance if POSH has another rights issue, or if POSH wants to start an ESOS (Executive Share Option Scheme), in both cases Maybulk might have to buy even more shares to maintain the 20% threshold.
But that bags the question, which has not been answered so far: where is the exit? Maybulk will only receive dividends from POSH, which might not be that large. If it wants to sell shares in the market, that might be a tall order (liquidity is not guaranteed), apart from the fact that it doesn't look that great on the other shareholders if the second largest shareholder starts to sell its shares.
Saturday, 12 April 2014
Maybulk: IPO of POSH (4)
The prospectus for the coming EGM of Maybulk contains an independent advice of KPMG Malaysia.
This is the same adviser who wrote the independent advice in 2008, about which I wrote before, in rather harsh terms.
The current advice is much better. Cynics will say that it would have been very hard to do a worse job than the one in 2008. It is also in line with a (belated) general improvement of independent advice across the board for Bursa listed companies.
There are some interesting parallels with 2008, although unfortunately KPMG doesn't revisit the 2008 report.
Regarding the PAT of POSH, the following graph is presented:
Looks rather convincingly, doesn't it?
But there is an eerie similarity with the picture presented in 2008:
The last column is based on only 9 months, the full 12 month result would be USD 81M, while the company made a PAT of USD 88M in 2009.
The rather strange fact (which isn't mentioned at all in the 2014 report) is that POSH made a higher profit in 2008 and 2009 than each year after that, despite:
This was what KPMG wrote in 2008:
The results of 2008 were more or less known in December 2008, so let's compare those with the results of 2011 and 2012, the timeline that KPMG indicated in the above paragraph.
It turns out those profits were only USD 26M (2011) and USD 54M (2012), a whopping 68% and 33% lower than the profit in 2008, while KPMG forecasted "substantial growth over the next three to four years".
So much for the rather poor forecasting capabilities of KPMG. And they can't blame the global recession for that, the acquisition of POSH by Maybulk in 2008 was right smack in the middle of it.
For the benefit of the reader, the full earnings picture of POSH, all amounts in USD:
2006: 0M (company just started)
2007: 9M (first acquisitions, paid-up still very low)
2008: 81M (injection 160M from PCL, 221M from Maybulk)
2009: 88M
2010: 28M
2011: 26M
2012: 54M (rights issue of 150M)
2013: 73M
Is this indeed a "track record of strong financial performance", as is claimed in the 2014 prospectus by the Chairman? Based on the last three years results, may be. Based on the last six years not really, I think.
Return on Equity in the last three years was 4.6%, 9.0% and 11.1% despite being rather leveraged, not impressive.
There doesn't seem to be growth in revenue over the last three years. Most of the growth in profit comes from "Other operating income", not sure how recurring those are (below numbers have not yet been adjusted downwards):
Another interesting topic is the valuation by KPMG, this is the current one:
This is the valuation of 2008 based on adjusted NA:
And their valuation of 2008 based on DCF:
What is remarkable is that the valuations of 2008 and 2014 are almost identical, while:
The only way to explain the peculiar valuations is to assume that KPMG's valuation of POSH in 2008 was simply much too high, unrealistically so.
For one part (the DCF valuation), KPMG should fully take the blame.
For the Asset valuation, that was partly based on the valuation of Clarkson, about which I wrote under the title: "Clarkson, the valuer who didn’t believe his own valuation".
That title was indeed deemed to be correct (the authorities have confirmed that), the valuation of Clarkson was made on September 15, 2008 and was not valid on the day the prospectus was issued, November 25, 2008. In only a bit more than two months time values of vessels had collapsed, like almost all other asset values, making the valuation much too high.
The important question is: why did nobody question the valuation of Clarkson?
There are many maritime experts in the board of directors of Maybulk, POSH and PCL who should have known about the problems in this industry.
But even the non-maritime experts of those boards of directors, the writers of the prospectus AmInvestment Bank and the independent adviser KPMG, they should have guessed that the valuation might not be correct anymore, and should have actively sought clarification.
Why did no one contact Clarkson at the end of November or early December 2008? They were just one single phone call or email away.
A new, updated valuation by Clarkson would have had a huge impact on the adjusted net assets, the more since POSH was highly geared.
And that would have enabled the non-interested directors of Maybulk to renegotiate a much fairer deal for the shareholders of Maybulk.
Maybulk's shareholders deserved a much larger chunk of POSH in exchange for its large injection in POSH, in my opinion roughly 50% of the shares instead of the 21% it would receive. Profit contributions in the subsequent years would then have made a much higher impact, and at the coming IPO of POSH Maybulk would not need to buy additional shares to keep a minimum shareholding of 20%, it could even consider selling some shares, if the price is right.
This is the same adviser who wrote the independent advice in 2008, about which I wrote before, in rather harsh terms.
The current advice is much better. Cynics will say that it would have been very hard to do a worse job than the one in 2008. It is also in line with a (belated) general improvement of independent advice across the board for Bursa listed companies.
There are some interesting parallels with 2008, although unfortunately KPMG doesn't revisit the 2008 report.
Regarding the PAT of POSH, the following graph is presented:
Looks rather convincingly, doesn't it?
But there is an eerie similarity with the picture presented in 2008:
The last column is based on only 9 months, the full 12 month result would be USD 81M, while the company made a PAT of USD 88M in 2009.
The rather strange fact (which isn't mentioned at all in the 2014 report) is that POSH made a higher profit in 2008 and 2009 than each year after that, despite:
- Receiving a huge capital injection by Maybulk in December 2008;
- A rights issue in 2012;
- The retained earnings over all those years.
This was what KPMG wrote in 2008:
The results of 2008 were more or less known in December 2008, so let's compare those with the results of 2011 and 2012, the timeline that KPMG indicated in the above paragraph.
It turns out those profits were only USD 26M (2011) and USD 54M (2012), a whopping 68% and 33% lower than the profit in 2008, while KPMG forecasted "substantial growth over the next three to four years".
So much for the rather poor forecasting capabilities of KPMG. And they can't blame the global recession for that, the acquisition of POSH by Maybulk in 2008 was right smack in the middle of it.
For the benefit of the reader, the full earnings picture of POSH, all amounts in USD:
2006: 0M (company just started)
2007: 9M (first acquisitions, paid-up still very low)
2008: 81M (injection 160M from PCL, 221M from Maybulk)
2009: 88M
2010: 28M
2011: 26M
2012: 54M (rights issue of 150M)
2013: 73M
Is this indeed a "track record of strong financial performance", as is claimed in the 2014 prospectus by the Chairman? Based on the last three years results, may be. Based on the last six years not really, I think.
Return on Equity in the last three years was 4.6%, 9.0% and 11.1% despite being rather leveraged, not impressive.
There doesn't seem to be growth in revenue over the last three years. Most of the growth in profit comes from "Other operating income", not sure how recurring those are (below numbers have not yet been adjusted downwards):
Another interesting topic is the valuation by KPMG, this is the current one:
This is the valuation of 2008 based on adjusted NA:
And their valuation of 2008 based on DCF:
What is remarkable is that the valuations of 2008 and 2014 are almost identical, while:
- A large capital injection was made in 2008, 58% of which was from Maybulk;
- There was a rights issue in 2012 bringing in even more capital, USD 150M;
- POSH has accumulated earnings over 5.5 years between the valuation in 2008 and 2013, close to USD 300M;
- In 2008 there was a huge global recession going on, with all valuations very cheap, while in 2014 valuations appear to be on the high side;
The only way to explain the peculiar valuations is to assume that KPMG's valuation of POSH in 2008 was simply much too high, unrealistically so.
For one part (the DCF valuation), KPMG should fully take the blame.
For the Asset valuation, that was partly based on the valuation of Clarkson, about which I wrote under the title: "Clarkson, the valuer who didn’t believe his own valuation".
That title was indeed deemed to be correct (the authorities have confirmed that), the valuation of Clarkson was made on September 15, 2008 and was not valid on the day the prospectus was issued, November 25, 2008. In only a bit more than two months time values of vessels had collapsed, like almost all other asset values, making the valuation much too high.
The important question is: why did nobody question the valuation of Clarkson?
There are many maritime experts in the board of directors of Maybulk, POSH and PCL who should have known about the problems in this industry.
But even the non-maritime experts of those boards of directors, the writers of the prospectus AmInvestment Bank and the independent adviser KPMG, they should have guessed that the valuation might not be correct anymore, and should have actively sought clarification.
Why did no one contact Clarkson at the end of November or early December 2008? They were just one single phone call or email away.
A new, updated valuation by Clarkson would have had a huge impact on the adjusted net assets, the more since POSH was highly geared.
And that would have enabled the non-interested directors of Maybulk to renegotiate a much fairer deal for the shareholders of Maybulk.
Maybulk's shareholders deserved a much larger chunk of POSH in exchange for its large injection in POSH, in my opinion roughly 50% of the shares instead of the 21% it would receive. Profit contributions in the subsequent years would then have made a much higher impact, and at the coming IPO of POSH Maybulk would not need to buy additional shares to keep a minimum shareholding of 20%, it could even consider selling some shares, if the price is right.
Friday, 11 April 2014
Shark Tank
One of my favourite TV shows is Shark Tank. Great entertainment, but at the same time, very good business stories and lessons.
The "sharks" (themselves seasoned businessmen, all build up their own wealth, some are millionaire, some even billionaire) can sometimes be rather cruel but such is life. A good dose of reality from time to time is exactly what the doctor ordered.
Some ideas are simply not good, when there is no product-market fit, and revenue is very disappointing, then may be there is no market for the product/service and thus no business.
Another good series is Dragons Den from the BBC (also featured in many other countries), but I like Shark Tank more. The "sharks" are more sharp than the "dragons", the founders can pitch better, and the US has a larger population and thus simply a larger pool of good entrepreneurs and ideas. Added to that, a pretty big market is of course also not wrong.
Two of the most outspoken sharks:
The "sharks" (themselves seasoned businessmen, all build up their own wealth, some are millionaire, some even billionaire) can sometimes be rather cruel but such is life. A good dose of reality from time to time is exactly what the doctor ordered.
Some ideas are simply not good, when there is no product-market fit, and revenue is very disappointing, then may be there is no market for the product/service and thus no business.
Another good series is Dragons Den from the BBC (also featured in many other countries), but I like Shark Tank more. The "sharks" are more sharp than the "dragons", the founders can pitch better, and the US has a larger population and thus simply a larger pool of good entrepreneurs and ideas. Added to that, a pretty big market is of course also not wrong.
Two of the most outspoken sharks:
- Mark Cuban is really great, he can appear to be pretty arrogant, but he is putting his money where his mouth is and doing lots of deals on pretty fair terms, in my opinion;
- Kevin O'Leary, "Mr. Wonderful", can be nasty, on the other hand, he never gets angry himself, famous for his deals that include royalty, but not equity.
Maybulk: IPO of POSH (3)
Maybulk issued a prospectus related to the proposal to subscribe to even more shares in POSH, maintaining more than 20% of its shareholding. It had to ask permission through an EGM since it is a Related Party Transaction.
The following text is rather cryptical:
If there are any related parties, why do they not simply mention them?
The following is presented in the prospectus:
But one party seems to be conspicuously missing: PPB Group also owns 14% of Maybulk.
Both PCL and PPB Group are widely believed to be linked to Robert Kuok, but this link is not established lately anymore, why not?
The IPO document of Maybulk in 2003 was very clear about this matter:
The issue if PPB Group is still controlled by the same person as PCL (KSL) is important in all CG matters, especially in dealing with POSH:
The announcement that the proposal to invest in POSH at Maybulk's EGM in 2008 was duly passed does not give any additional information, disappointing..
The correct way, in my opinion, would have been to vote per poll (one share one vote), and to announce the detailed voting results.
The following text is rather cryptical:
If there are any related parties, why do they not simply mention them?
The following is presented in the prospectus:
But one party seems to be conspicuously missing: PPB Group also owns 14% of Maybulk.
Both PCL and PPB Group are widely believed to be linked to Robert Kuok, but this link is not established lately anymore, why not?
The IPO document of Maybulk in 2003 was very clear about this matter:
- What are the RPT's between PPB Group on one side and Maybulk and POSH on the other side (including their directors)?
- Was the PPB Group allowed to vote on matters regarding POSH at the EGM in 2008 and will it be allowed to vote on the EGM to be held April 17, 2014?
The announcement that the proposal to invest in POSH at Maybulk's EGM in 2008 was duly passed does not give any additional information, disappointing..
The correct way, in my opinion, would have been to vote per poll (one share one vote), and to announce the detailed voting results.
Tuesday, 8 April 2014
Maybulk: IPO of POSH (2)
There are two new developments regarding Maybulk which were announced today:
Maybulk announced a deviation in its profit over 2013 reducing its profit over 2013 by 11.5%:
Deviations in profits are quite rare, and this is definitely a red flag.
Secondly Maybulk announced its audited accounts. Of interest is the statement regarding the options, which includes the important Put Option:
This text is rather remarkable, "to initiate an IPO" is surely different from "to undertake an IPO"?
The text is also distinctively different from the text in the proposed subscription to POSH shares, as I wrote before:
I have written a lot about the deal in 2008, I find that the valuation of POSH was much too high, in other words Maybulk received much too little shares for its investment in POSH.
However, the news was not all bad, there were two important safeguards:
But November 2012 the following was announced:
So why were these instruments issued in 2012 at USD 4.00 per RCPS to all shareholders of POSH, a 38.5% discount to the USD 6.50 per share that Maybulk paid for them in 2008?
Is a RCPS not also a share, but then a special kind, having even more rights than a normal share, and at any time being convertible to an ordinary share?
The above irrevocable undertaking has been stated in 2008 for a clear reason, it was meant to protect Maybulk in that other parties would not be allowed to buy shares at a lower valuation than what Maybulk paid for the shares in 2008. In 2012 Maybulk was more or less "forced" to participate in the rights issue and invest even more money in POSH, otherwise it would be diluted at a low price. But that was exactly what the undertaking supposedly was meant to prevent.
Only one year later, the RCPS would indeed be converted to shares, one RCPS for one ordinary share.
[to be continued]
Maybulk announced a deviation in its profit over 2013 reducing its profit over 2013 by 11.5%:
Deviations in profits are quite rare, and this is definitely a red flag.
Secondly Maybulk announced its audited accounts. Of interest is the statement regarding the options, which includes the important Put Option:
This text is rather remarkable, "to initiate an IPO" is surely different from "to undertake an IPO"?
The text is also distinctively different from the text in the proposed subscription to POSH shares, as I wrote before:
I have written a lot about the deal in 2008, I find that the valuation of POSH was much too high, in other words Maybulk received much too little shares for its investment in POSH.
However, the news was not all bad, there were two important safeguards:
- The above Put option, the treatment of which I posed many questions;
- The following irrevocable undertaking:
So why were these instruments issued in 2012 at USD 4.00 per RCPS to all shareholders of POSH, a 38.5% discount to the USD 6.50 per share that Maybulk paid for them in 2008?
Is a RCPS not also a share, but then a special kind, having even more rights than a normal share, and at any time being convertible to an ordinary share?
The above irrevocable undertaking has been stated in 2008 for a clear reason, it was meant to protect Maybulk in that other parties would not be allowed to buy shares at a lower valuation than what Maybulk paid for the shares in 2008. In 2012 Maybulk was more or less "forced" to participate in the rights issue and invest even more money in POSH, otherwise it would be diluted at a low price. But that was exactly what the undertaking supposedly was meant to prevent.
Only one year later, the RCPS would indeed be converted to shares, one RCPS for one ordinary share.
[to be continued]