Sunday, 30 November 2014

Good articles (1)

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

Is settling the right choice? (The Star)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Submission to HKEx on Weighted Voting Rights (David Webb)

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

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

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

Saturday, 29 November 2014

iCapital: questions regarding adjourned AGM and expenses (3)

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

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

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

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

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

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

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

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

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

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

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

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




Friday, 28 November 2014

Protasco: Tey and Ooi are out

Yesterday the company announced:

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

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

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

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

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

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

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

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

Thursday, 27 November 2014

China Ouhua: red wine and red flags (3)

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

That these results again are bad will not surprise many.

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

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

iCapital: questions regarding adjourned AGM and expenses (2)

I wrote before about these issues regarding iCapital.

According to The Sun Daily website:

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

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

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

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

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

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

Wednesday, 26 November 2014

Protasco: messy, messier, messiest

Protasco announced yesterday its quarterly results.

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

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

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

It can't really get much worse than that.

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

One question from that interview and my comment:

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

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

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

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

Where are the regulators?

Monday, 24 November 2014

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Sunday, 23 November 2014

"Pity the Protasco minorities"

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

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

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

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

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

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

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

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

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

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

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

I strongly doubt that was the case.

Saturday, 22 November 2014

MOL Global's share price crashes 54%

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

From Barron's Asia:

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

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

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

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

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

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

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

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

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

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

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

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

Friday, 21 November 2014

Jobstreet: excellent entrepeneurship (3)

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

Dear colleagues,

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

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

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

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

May you find what you seek.

Mark Chang

Thursday, 20 November 2014

iCapital: questions regarding adjourned AGM and expenses

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

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

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

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

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

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

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

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

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

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

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

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

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

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

An interesting discussion on this stock at LowYat forum.

Wednesday, 19 November 2014

AirAsia X facing turbulence? (2)

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

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

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

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

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

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

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

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

According to the "Corporate Disclosure Guide" from Bursa:

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

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

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

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

Tuesday, 18 November 2014

Xian Leng: justice?

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

The company announced today the below.

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

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

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

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

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

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

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

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

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

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

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

AirAsia X facing turbulence?

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

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

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

There were warning signals, for instance:

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

The graph of the share price looks rather ugly:

Monday, 17 November 2014

Protasco: "Right to be heard"

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

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

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

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

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

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

Saturday, 15 November 2014

Cutting accumulated losses through financial engineering (2)

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

From "Anonymous":

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

From "Avatar":

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

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

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

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

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

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

Thanks for the two contributions, appreciated.

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

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

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

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

Friday, 14 November 2014

Rise and Fall of the largest corporation in the world

Before the year 1600 companies could borrow money, and even limited partnerships existed for a certain goal. But in 1602 some persons in Amsterdam, The Netherlands, made what I think is arguably the best financial invention in the history of mankind:
  • an investor would receive dividends instead of interest;
  • the investment was permanent in the form of shares in the company;
  • there would be an exchange were the owner could trade his shares.
And thus both the first exchange ever was established, the Amsterdam Stock Exchange (Beurs), and the first listed company, the Dutch East India Company (VOC).

A painting of  the Beurs by Hendrick de Keyser, 1653

A lot depended on this first company, but financially it was a success, so many other listed companies and exchanges followed.

Share certificate number 99

Bryan Taylor from Global Financial Data wrote an interesting story about the company, some snippets:

The Vereenigde Oost-Indische Compagnie (VOC), or the United East India Company, was not only the first multinational corporation to exist, but also probably the largest corporation in size in history.

The company existed for almost 200 years from its founding in 1602, when the States-General of the Netherlands granted it a 21-year monopoly over Dutch operations in Asia until its demise in 1796.  During those two centuries, the VOC sent almost a million people to Asia, more than the rest of Europe combined.

It commanded almost 5000 ships and enjoyed huge profits from its spice trade. The VOC was larger than some countries. In part, because of the VOC, Amsterdam was the financial center of capitalism for two centuries. Not only did the VOC transform the world, but it transformed financial markets as well.

The VOC transformed financial capitalism forever in ways few people understand. Although shares had been issued in corporations before the VOC was founded, the VOC introduced limited liability for its shareholders which enabled the firm to fund large scale operations. Limited liability was needed since the collapse of the company would have destroyed even the largest investor in the company, much less the smaller investors.

Unfortunately, the best financial invention was shortly afterwards followed by what I would describe as the worst financial invention of all times: derivatives. While investing in companies is adding to the economy of a country, encouraging entrepreneurship, creating jobs etc., investing in derivatives is a negative sum game.

The VOC also transformed the Amsterdam Stock Exchange, causing a number of innovations to be introduced, such as futures contracts, options, short selling, and even the first bear raid. Isaac le Maire was the largest shareholder of the VOC in its early years, and he initiated the first bear raid in stock history, selling shares of VOC short in order to buy them back at a profit and buy additional shares.

These actions also led to the first government regulation of stock markets, attempting to ban short selling in 1621, 1623, 1624, 1630 and 1632 as well as options and other forms of financial wizardry.  The fact that these laws had to be passed so many times shows the regulations were not that effective.

Although the above article gives many interesting facts, it is written in a rather positive way about the VOC. From a Corporate Governance and human rights point of view, there are a lot of issues.

Thursday, 13 November 2014

Maemode: are a 100k fine and reprimands enough?

Bursa announced that it:

.... has publicly reprimanded MALAYSIAN AE MODELS HOLDINGS BERHAD (In Liquidation) (MAEMODE) and 6 of its directors for breaching the Bursa Malaysia Securities Main Market Listing Requirements (Main LR). In addition, the Managing Director, Datuk Dr Lim Kee Sinn was fined RM100,000.

MAEMODE was publicly reprimanded for breaching paragraphs 9.03(1) and 9.04(l) of the Main LR read together with paragraphs 2.1(c) and/or (d) of Practice Note 1 (PN1) for failing to make an immediate announcement of the default in payment of the Syndicated Working Capital Facilities of up to RM400 million from RHB Bank Berhad (RHB) and Malayan Banking Berhad to MAEMODE and its subsidiaries, AE Automotion (M) Sdn. Bhd. and Matromatic Handling Systems (M) Sdn. Bhd. (the Syndicated Facility).

Notwithstanding that MAEMODE was de-listed on 2 July 2014, the breach had been committed while MAEMODE was listed on the Official List of Bursa Malaysia Securities.

And further:

MAEMODE had defaulted in payment of the Syndicated Facility which was secured under a debenture as early as / prior to RHB’s  letter dated 16 April 2013 which had, amongst others, highlighted the arrears/ overdue position of the Syndicated Facility to MAEMODE.

Subsequently, vide letter dated 4 June 2013, RHB had informed MAEMODE that the financiers had declared the occurrence of an event of default and demanded MAEMODE to pay the total outstanding sum of RM96,082,818.51 due as at 31 May 2013 which represented 39.3% of the Group’s net assets at the material time.

However, MAEMODE only announced the default in payment of the Syndicated Facility on 20 June 2013.

Are the above fine and reprimands sufficient punishment? Is this really a credible deterrent for future violations?

I have blogged several times about Maemode, the worrisome deterioration of its financial situation between 2007 and 2013, the sudden collapse (predicted and explained in detail by blogger "Ze Moola"), the lack of subsequent transparency (the last quarterly report was for the period until May 2013, no other quarterly report followed, nor an audited year report or annual report over the years 2013 and 2014), etc.

Tuesday, 11 November 2014

Protasco: where is the transparency?

The Edge, KiniBiz and The Star are actively writing about Protasco these days, and one can't blame them. There is a mud-slinging match going on between Tey and Chong, which is always good for some interesting news, that is what people like to read. Finally details (some unconfirmed) have been revealed in these articles, details that should have been revealed by Protasco itself a long time ago.

One important question in all of this is, which party is right?

But at least as important is the question: where is and was the transparency in all of this?

The deal in question started almost two years ago, and the official news as revealed by Protasco has been very, very limited, and most of it very much delayed.

January 2013 I wrote "Protasco's Puzzling Purchase" in which I asked the following questions:

  • Protasco does not seem to have relevant experience in the notoriously difficult oil and gas industry, why does it want to take so much risk, especially in Indonesia with poor corporate governance?
  • PT ASI is only a few months old: "PT ASI was incorporated in Indonesia on 6 September 2012 as a private limited company".
  • PT ASI only has one director who hardly owns any shares. No background of this director is given.
  • The vendor is 99% owned by Anglo Slavic Petrogas Ltd, a company registered in the British Virgin Islands, no background is given, a search on the internet returns nothing; who is behind this company, what is their track record?
  • The company structure of PT ASI owning part of PT FAS owning PT Haseba is rather artificial, why is such a difficult construction chosen?
  • Who are the minority shareholders of PT FAS and PT Haseba?
  • On the signing of the S&P, Protasco will pay RM 50 million cash, why so much? This is about 30% of the total amount, much higher than normal in comparable deals.
  • On November 1, 2012 PT ASI signed a S&P agreement to buy an additional 46% of PT FAS. What was the price paid for that stake? Why does Protasco not wait until this deal is panned out?
And further on:
  • ..... the production agreement will expire in 2014 (next year!) and it is not sure if PT Haseba is able to negotiate a new contract, and if so under what conditions. Why buy into a company with so much uncertainty?
  • "The KST Field was founded in 1972 and operated by PT Pertamina Doh Nad Sumbangut until 1997. Thereafter, in 2004, Pertamina awarded PT Haseba a 10-year PMP Agreement for KST Field.".  Why the gap of seven years? Also, this field seems to be pretty old, often yields are not that great in old fields. Why can't Protasco give some production numbers for KST Field?
  • Why are no preliminary results for 2012 given? At least the half year numbers should be made available? And why are all the financial statements not audited?
  • What are the results for PT FAS for the last three years?

Most of these questions are now, almost two years later, still never dealt with.

Soon shareholders have to vote in two subsequent EGMs on the directorship of Tey, Ooi and Chong.

But based on what information, if so much is still never revealed?

The winner in the on-going battle will be a bruised winner. And lots of doubt will continue as long as the air is not properly cleared.

The other directors (especially the independent ones) of Protasco also should evaluate the corporate governance standards of the company. A big improvement is urgently needed.

And then there is still another matter. How much of the money paid by Protasco can be recovered? Shares of Indonesia listed PT Inovisi Infracom Tbk were held in trust, but the share price has tanked recently.

Protasco has initiated legal proceedings to reclaim the money, but court cases in Malaysia (when appealed) can easily take ten years to conclude. And in this case two other countries are involved, Indonesia and the British Virgin Islands, making things much more difficult.

Saturday, 8 November 2014

Blast from the Past: Pan-Electric (3)

I wrote before about the Pan-Electric scandal, here and here.

I wrote before about the divorce battle of Khoo Kay Peng and Pauline Chai, here and here.

As expected in a bitter separation, lots of mud is being thrown at each other.

This blog usually doesn't focus on toilet seats nor about the number of shoes that one person has (Telegraph).

But another, more interesting revelation reveals a new link between the two above cases. From the Malaysian Insider website:

"Tycoon hubby sought Canadian citizenship to avoid arrest, ex-beauty queen claims".

Some snippets:

Billionaire Tan Sri Khoo Kay Peng had asked for a Canadian citizenship in the 1990s to avoid arrest by the Singaporean authorities, which was investigating a company belonging to him in the island state, his wife Pauline Chai told the High Court here today. Speaking during the couple’s highly publicised domicile trial here, the former Miss Malaysia claimed that Khoo had wanted to apply for permanent residency in Canada because the country had no extradition co-operation with Singapore. She said the tycoon had then feared for his life after some of his colleagues were arrested by the Singaporean authorities over allegations of mismanagement involving his company, Pan Electric Industries. “We had first stayed in Australia but when the Pan Electric fiasco (happened), two of his friends got investigated so we moved to Canada because they had no extradition laws there.

According to her affidavit that was sighted by Malay Mail Online, Khoo’s lawyers had first advised him and his family to move to Australia, where he, Chai and his children eventually settled down. But Chai claimed her husband fell into depression, as he was not certain if Australian laws could still prevent him from being extradited to Singapore.

This seems to be a new twist in the Pan-Electric case. What was known is the below information.

There are references in this newspaper clip from the Straits Times, some snippets:

A detailed article from The Ant Daily can be found here:

"The forgotten corporate high-flyer"

It appears that, due to the high-profile divorce case, the high-flyer is not that much forgotten anymore. If he likes that kind of attention is another matter.

The Pan-Electric case still seems to attract quite some attention, after all those years. And probably rightly so, it was the only case that brought the share markets of both Singapore and Malaysia to a halt for three days.

Tuesday, 4 November 2014

Porsche: The Hedge Fund that Also Made Cars

Amazing story regarding Porsche and Volkswagen, so weird you can't make it up.

As one commenter wrote: "Game of Thrones - German Car Company Edition"

Some snippets:

Volkswagen, from "was widely considered by the financial community to be a pretty crappy company, which is why it was trading at such a low multiple of revenue" to "the most valuable company in the world".

As a result, Volkswagen became one of the most shorted stocks on the market.

This maneuver of secretly buying shares would have been (and still would be) illegal in the United States. In Germany though, where Porsche is based, it was likely legal.

And precisely when Porsche needed banks the most, banks stopped lending money. The words spoken by the company’s CFO years before -- “banks are there for you when you don’t need them, and when you do need them, they’re no where to be seen” -- now seemed prophetic.

The financial markets were baffled by Porsche’s acquisition of Volkswagen shares. Why was a sports car company pouring so much money into a struggling mass-market car company? It seemed to be the equivalent of a company like Hermes announcing it was taking a large stake in Old Navy.

In the blink of an eye, Porsche went from predator to prey. Once on the brink of acquiring Volkswagen, Porsche now found itself borrowing a billion dollars from them just five months later.

“According  to rumour, Ferdinand Piëch likes to run chickens off the road in his Volkswagen Touareg. Whether that is true or not, he certainly tends to ride roughshod over humans, metaphorically at least.”

In 1972, as a married man with five children, Piëch struck up an extra-marital affair with Marlene Porsche -- the wife of his cousin and fellow heir, Gerd Porsche. You can imagine that taking up with your cousin’s wife might make things awkward at Porsche-Piëch family reunions and company board meetings.

So, what is to be learned from the saga of Porsche?

First, if you’re a car company, it’s probably best to focus on making cars instead of gravity-defying financial maneuvers.

Second, capital has a tendency to be there when times are great, but disappears when you need it most.

Finally, if you’re going to go shoot the king, don’t miss.

I wrote before about the hedge fund shorting Volkswagen's shares.

Monday, 3 November 2014

The London Whale and the Washington Super Whale

Be careful what you short, not all is logical in a world of money-printing.

Interesting article by Brad DeLong:

'There is a reason that the trade of shorting the bonds of a sovereign issuer of a global reserve currency in a depressed economy is called "the widowmaker".'

Maximizing Shareholder Value is the worlds dumbest idea (2)

Another, older, article about the same matter, from one of my favourite bloggers, "Naked Capitalism".

Lazonick discusses how we evolved from a society in which corporate interests were largely aligned with those of broader public purpose into a state where crony capitalism, accounting fraud, and corporate predation are predominant characteristics.

Lazonick makes a very powerful case that the ideology of “maximizing shareholder value” primarily works to the benefit of the very corporate executives who make corporate resource allocation decisions, and who derive high levels of remuneration from munificent stock option awards. As for the rest of us, we’re left to fight over the crumbs.

Virgin Galactic: the warnings

Good article in The Telegraph about the tragic event where one pilot died. With hindsight we are all experts, but there where many people who warned before the incident happened, the only warnings that count. Some snippets from the above article:

Sir Richard Branson's space tourism company Virgin Galactic has been accused of ignoring a series of warnings that its $500 million rocket was unsafe for flight.

A number of senior aerospace engineers repeatedly voiced fears over the design of Sir Richard’s SpaceShipTwo and the safety protocols surrounding its testing.

The Telegraph has seen emails and other documents in the public domain — dating back several years, and as recently as last year — in which the engineers warned of the dangers of Virgin Galactic’s rocket engine system.

It also emerged on Saturday that three senior Virgin Galactic executives — the vice-president in charge of propulsion, the vice-president in charge of safety, and the chief aerodynamics engineer — had all quit the company in recent months.

The Virgin Galactic spacecraft, which was scheduled to begin passenger flights early next year, blew up in the sky above the Mojave Desert in California during a test flight on Friday.

The incident, in which one pilot died and another was seriously injured, puts in jeopardy Sir Richard’s dream of space travel for passengers, each paying $250,000 (£156,000).

One of the people who was highly critical of Virgin Galactic's enterprise is Tom Bower who wrote "Branson: Behind the Mask", about which I wrote here.

The book is an excellent "antidote" for all the hype and PR exercises that surround Branson.

The first chapter "Blow-Out", the last chapter "Journey into Space - Postponed" and many chapters in between are dedicated to the technical problems and delays surrounding Virgin Galactic.

Unfortunately (in the Malaysian context), not one word about Branson's investment (and subsequent divestment) in AirAsia X.

Saturday, 1 November 2014

Maybulk: large paperlosses on its investment in POSH

I have written many times about Maybulk and its investment (RPT) in POSH. Half a year ago POSH was (finally) listed on the SGX. Time to evaluate how things have worked out for Maybulk and POSH.

Each year Maybulk had booked profits on the acquisition, given that POSH is a 21% owned associate and POSH was making profits.

In Maybulk's last year report it is written:

Several analysts mentioned in 2013 that POSH's IPO would unlock the value for Maybulk's investment.

Given the above, what possibly could go wrong?

Actually quite a bit.

POSH's share has come down a lot, from its IPO price of S$ 1.15 to S$ 0.70, a 39% decrease in price.

On one side, the price of oil has come down, hitting all players in the oil & gas industry, either upstream or downstream. The more so, since many players in this industry have just recently invested in expansion.

On the other side, there are specific, negative, reasons for POSH, for instance:
  • The problems in Mexico;
  • The CFO has resigned, "to pursue other opportunities";
  • The utilisation rates of its fleet seems to be dropping;
  • A POSH vessel sunk, a tragic accident in which three employees died; Investor Central questioned the lack of transparency surrounding the event.

The current market cap for POSH is S$ 1.26 Billion, giving Maybulk's 21% holding a valuation of S$ 265 Million or RM 685M.

That is a far cry from the valuation in Maybulk's book of RM 1,225 Million, a difference of about RM 540 Million.

In other words, if Maybulk decided to mark its investment in POSH against the market price (which sounds pretty reasonable to me), then it has to account for a one-off loss of RM 540 Million.

Suddenly, the investment in POSH doesn't seem so "strategic" or "prudent" anymore. It simply sits on top of a huge paper loss, and that after six years.

Unfortunately for Maybulk's minority shareholders, it didn't have to be that way. Maybulk had an option to sell its shares in POSH for a 25% profit. An option it could have exercised less than one year ago. I wrote before about this issue and the disappointing way it was handled.

The current valuation of POSH also puts severe question marks towards Maybulk's acquisition itself and the price it paid for it, almost six years ago. An acquisition made in the midst of the worst global recession of the last 50 years. To make an investment in that climate, where basically everything was dirt cheap, and then to sit on a significant paper loss six years down the road sounds pretty bad.

On top of that, Maybulk has even increased its investment, by subscribing to additional shares at POSH's IPO, for which Maybulk went into debt. The huge cash position that it had six years ago being depleted due to the investment in its associate, a cash layout of more than RM 1 Billion.

The above might be a partial explanation (its existing business has also done quite disappointingly) why Maybulk's share has performed so poorly, both in the long term and over the last half year. Between 2007 and 2011 the share was often trading around RM 3, now it is only about half of that: