I wrote about this issue before.
Since then GrabTaxi (EasyTaxi in Malaysia) raised another round of USD 350 million. I estimate at a valuation of about USD 2 billion, or about RM 9 billion.
AirAsia has a marketcap of about RM 3.6 billion, AirAsiaX of about RM 800 million, so together these two companies are valued at about half the valuation of a four year old company, which is basically an apps.
I don't make any value judgement here, just observe something that sounds interesting and may be controversial.
Apparently Tony Fernandes also noticed the high valuation of GrabTaxi and some other "unicorns" (start-up companies valued at above USD 1 Billion). At a recent event, he mentioned:
“Essentially, we are an Internet company. We see ourselves as an Internet company. We have a tremendous amount of Internet potential,” he told the audience at Digital News Asia’s inaugural What's Next conference in Cyberjaya yesterday (Sept 29).
“More than 20% of our business comes from ancillary income,” he said.
The AirAsia Group has invested in or kicked off several ventures, such as AAE Travel (a joint-venture between AirAsia and Expedia); the Asian Aviation Centre of Excellence; Think Big Digital (a joint-venture between AirAsia and Tune Money which operates the AirAsia BIG loyalty programme); and it also has a 40% stake in Tune Money.
These are not Fernandes’ only ventures. He also owns the Tune Group which has investments in Tune Talk, Tune Hotels, Tune Protect, Tune Studios, Tune Labs (a venture company looking at tech startups), and more.
Unsurprisingly, the Internet plays an essential part in most, if not all, of these businesses. Indeed, many industry pundits have credited Tony and AirAsia for breaking down e-commerce barriers in Malaysia.
Does that mean that Tony wants an internet valuation for his company, not an airline valuation? If so, will he get that?
Time will tell.
Wednesday, 30 September 2015
Sunday, 27 September 2015
Gates Foundation sues Petrobas
From the BBC:
The Bill and Melinda Gates Foundation has sued the Brazilian state-owned oil company, Petrobras for investment losses due to corruption.
The charity accuses Petrobras of misrepresenting its operations and financial situation to raise billions of dollars.
Prosecutors in Brazil are investigating Petrobras executives for involvement in a massive kickback scheme.
Petrobras has argued the scandal does not involve the company as a whole.
It has said the scandal was caused by contractors, corrupt politicians and a few employees and should not tarnish the company.
The Foundation said its portfolio managers had questioned Petrobras executives about its financial data, but were misled in a "series of materially false and misleading written and oral statements and/or omissions by Petrobras."
Huge difficulties
Petrobras is already facing a number of other US class-action lawsuits.
The scandal has caused huge political difficulties for the Brazilian President Dilma Rousseff, who is not under investigation and has denied all knowledge of the scheme.
Prosecutors have said more than $2bn (£1.32bn) of bribes were paid over a decade, mainly to Petrobras executives from construction and engineering companies.
Some of the money was then passed on to political parties including the governing Workers' Party.
On Monday, the former treasurer of the Workers' Party, was sentenced to 15 years in prison after being convicted of receiving bribes from Petrobras contractors and distributing them to members of the ruling party.
The Bill and Melinda Gates Foundation is also suing Petrobras's auditors, a local affiliate of PricewaterhouseCoopers which it says played a key role in attesting to Petrobras financial statements.
Larger shareholders should consider taking the same action in similar cases in Malaysia, given the slow enforcement, with often low punishment (if any). It would make future perpetrators think twice before cooking the books or making misleading statements. Also auditors should be more inclined to step up their game when they know that the chance of being sued by shareholders of the company they audit is quite high.
The Bill and Melinda Gates Foundation has sued the Brazilian state-owned oil company, Petrobras for investment losses due to corruption.
The charity accuses Petrobras of misrepresenting its operations and financial situation to raise billions of dollars.
Prosecutors in Brazil are investigating Petrobras executives for involvement in a massive kickback scheme.
Petrobras has argued the scandal does not involve the company as a whole.
It has said the scandal was caused by contractors, corrupt politicians and a few employees and should not tarnish the company.
The Foundation said its portfolio managers had questioned Petrobras executives about its financial data, but were misled in a "series of materially false and misleading written and oral statements and/or omissions by Petrobras."
Huge difficulties
Petrobras is already facing a number of other US class-action lawsuits.
The scandal has caused huge political difficulties for the Brazilian President Dilma Rousseff, who is not under investigation and has denied all knowledge of the scheme.
Prosecutors have said more than $2bn (£1.32bn) of bribes were paid over a decade, mainly to Petrobras executives from construction and engineering companies.
Some of the money was then passed on to political parties including the governing Workers' Party.
On Monday, the former treasurer of the Workers' Party, was sentenced to 15 years in prison after being convicted of receiving bribes from Petrobras contractors and distributing them to members of the ruling party.
The Bill and Melinda Gates Foundation is also suing Petrobras's auditors, a local affiliate of PricewaterhouseCoopers which it says played a key role in attesting to Petrobras financial statements.
Larger shareholders should consider taking the same action in similar cases in Malaysia, given the slow enforcement, with often low punishment (if any). It would make future perpetrators think twice before cooking the books or making misleading statements. Also auditors should be more inclined to step up their game when they know that the chance of being sued by shareholders of the company they audit is quite high.
XingQuan: does the company believe its own cash?
On September 25, 2015, XingQuan International Sprts Holdings Ltd (XingQuan) announced its audited accounts.
Remarkable is the enormous amount of cash, RMB 1,456,947,000, about RM 1 Billion:
Something else remarkable is the tiny amount of interest the company is earning on the cash:
That is about 0.3% on a yearly base, why such a low number?
Is the cash really in the company, as stated?
Strangely enough, the company also seems to have some doubts, otherwise the following announcement does not make much sense.
The company announced the same day a rights issue with warrants attached.
Why would a company spend RM 1M in money and go through the hassle of additional work for a relatively insignificant amount of RM 26M to be used to buy machineries, when it claims to have about RM 1 Billion in cash?
The company has done the same in the past, but through a private placement (highly dilutive to its shareholders), again for a puzzling small amount of RM 30.7 million:
The rationale given by the company for the rights issue:
Those numbers (pre payments etc.) should show up in the balance sheet, here are they:
Regarding the inventory and receivables, they might grow when the turnover rises, say with RMB 60 million in the next year, but that would only be 4% of the cash available.
Regarding the payables, borrowings and tax, the total amount is only about 6% of the current cash.
Nothing that even comes even close to the magnitude of RMB 1,457 million cold hard cash.
Next to that, the company claims to have made a net profit of more than RMB 200 million over the last year alone. Profit that is easily enough for the increase in working capital.
In other words, the above rationale as described by the company is dubious at best, it simply does not make any sense.
The rights issue is accompanied by an issue of free warrants. Needless to say, the stock immediately went up, most likely chased by punters who don't quite understand that all shareholders receive the same free warrants and thus that all get diluted in the same way in the long run.
There is a possible way out of the lack of confidence regarding Chinese listed companies on Bursa.
Bursa could ask companies with suspicious high cash levels to voluntarily cooperate in the following exercise:
"Let the highest authority of the banks (not just the branch manager) where they hold the cash verify that the cash balance of (say) the last eight quarterly statements and the average bank balance of (say) the last one year is indeed correct. Let them send this statement to Bursa (or another independent organisation), who will be allowed to check the authenticity of the statement with the source. After checking the statement, it can be announced on Bursa's website"
Companies that cooperate and where the balance does check out will see its share rise, having lifted the suspicion of their high cash bank balance.
Companies that do not cooperate might have something to hide and most likely their share price will suffer. Auditors and Independent directors might start to feel the heat and take appropriate action.
Remarkable is the enormous amount of cash, RMB 1,456,947,000, about RM 1 Billion:
Something else remarkable is the tiny amount of interest the company is earning on the cash:
That is about 0.3% on a yearly base, why such a low number?
Is the cash really in the company, as stated?
Strangely enough, the company also seems to have some doubts, otherwise the following announcement does not make much sense.
The company announced the same day a rights issue with warrants attached.
The company has done the same in the past, but through a private placement (highly dilutive to its shareholders), again for a puzzling small amount of RM 30.7 million:
The rationale given by the company for the rights issue:
Those numbers (pre payments etc.) should show up in the balance sheet, here are they:
- Inventory RMB 44 million
- Trade and other receivables RMB 254 million
- Trade and other payables RMB 68 million
- Borrowings RMB 18 million
- Tax payable RMB 7 million
Regarding the inventory and receivables, they might grow when the turnover rises, say with RMB 60 million in the next year, but that would only be 4% of the cash available.
Regarding the payables, borrowings and tax, the total amount is only about 6% of the current cash.
Nothing that even comes even close to the magnitude of RMB 1,457 million cold hard cash.
Next to that, the company claims to have made a net profit of more than RMB 200 million over the last year alone. Profit that is easily enough for the increase in working capital.
In other words, the above rationale as described by the company is dubious at best, it simply does not make any sense.
The rights issue is accompanied by an issue of free warrants. Needless to say, the stock immediately went up, most likely chased by punters who don't quite understand that all shareholders receive the same free warrants and thus that all get diluted in the same way in the long run.
There is a possible way out of the lack of confidence regarding Chinese listed companies on Bursa.
Bursa could ask companies with suspicious high cash levels to voluntarily cooperate in the following exercise:
"Let the highest authority of the banks (not just the branch manager) where they hold the cash verify that the cash balance of (say) the last eight quarterly statements and the average bank balance of (say) the last one year is indeed correct. Let them send this statement to Bursa (or another independent organisation), who will be allowed to check the authenticity of the statement with the source. After checking the statement, it can be announced on Bursa's website"
Companies that cooperate and where the balance does check out will see its share rise, having lifted the suspicion of their high cash bank balance.
Companies that do not cooperate might have something to hide and most likely their share price will suffer. Auditors and Independent directors might start to feel the heat and take appropriate action.
Thursday, 24 September 2015
Volkswagen: pure greed
The story is out already a few days, here is a good summary:
"The who, what and why of Volkswagen’s diesel scandal"
One snippet:
"In the past, Europe has been quite loose on its regulations, resulting in around one-third of European cars running on diesel, however it’s also the reason why big cities such as Paris and London have smog problems. In fact, almost 29,000 people die each year in the UK due to air pollution.
But in 2009 two things happened that would make diesel appealing in the USA.
Increasingly, drivers wanted to get better fuel economy, while at the same time diesel technology had supposedly become cleaner. Companies such as Volkswagen took advantage of this to break into the huge US market, offering “clean diesel” cars that theoretically offered great fuel economy without giving off too much poisonous NOx.
There was just one problem — their cars couldn’t actually do that."
An amazing story, for such a large company. Repercussions will be huge, the CEO stepped down already, cars will be recalled, large fines will be meted out.
I can only think of one reason for what Volkswagen did: pure greed.
Should we be completely surprised about all this? May be not, I wrote before about the strange case where Volkswagen and Porsche might have gotten away with what they did in the German courts, but if it was ethical, I doubt it.
"The who, what and why of Volkswagen’s diesel scandal"
One snippet:
"In the past, Europe has been quite loose on its regulations, resulting in around one-third of European cars running on diesel, however it’s also the reason why big cities such as Paris and London have smog problems. In fact, almost 29,000 people die each year in the UK due to air pollution.
But in 2009 two things happened that would make diesel appealing in the USA.
Increasingly, drivers wanted to get better fuel economy, while at the same time diesel technology had supposedly become cleaner. Companies such as Volkswagen took advantage of this to break into the huge US market, offering “clean diesel” cars that theoretically offered great fuel economy without giving off too much poisonous NOx.
There was just one problem — their cars couldn’t actually do that."
An amazing story, for such a large company. Repercussions will be huge, the CEO stepped down already, cars will be recalled, large fines will be meted out.
I can only think of one reason for what Volkswagen did: pure greed.
Should we be completely surprised about all this? May be not, I wrote before about the strange case where Volkswagen and Porsche might have gotten away with what they did in the German courts, but if it was ethical, I doubt it.
Singapore to close loopholes on investment schemes
From The New Paper: "MAS to close loopholes on gold buyback schemes, collective investments"
One snippet:
Programmes such as gold buyback schemes allow investors to buy physical gold at "discounted" prices, usually 1.5-2 per cent cheaper. Some entities even allow the customer to take the gold bar or gold coins home. The company then promises to buy the gold back at the original sale price, meaning consumers get to earn the 1.5-2 per cent return when the gold is bought back. There are some companies that even agree to pay consumers a monthly fixed interest. But unlike other investment products, the advertising (or prospectus) for such schemes are not regulated by the Monetary Authority Singapore (MAS). This is set to change with the new rules, which state that sellers will have to register their prospectuses with MAS before they can solicit for potential investors.
Some of the schemes (mentioned in the article) from the past that seem to have gone belly up are:
I have always been surprised why such a developed country like Singapore allows so many dodgy investment schemes. At least, now things seem to change for the better.
Hopefully Malaysia will follow suit soon, many investors there have also been hit by pyramid schemes and the likes.
One snippet:
Programmes such as gold buyback schemes allow investors to buy physical gold at "discounted" prices, usually 1.5-2 per cent cheaper. Some entities even allow the customer to take the gold bar or gold coins home. The company then promises to buy the gold back at the original sale price, meaning consumers get to earn the 1.5-2 per cent return when the gold is bought back. There are some companies that even agree to pay consumers a monthly fixed interest. But unlike other investment products, the advertising (or prospectus) for such schemes are not regulated by the Monetary Authority Singapore (MAS). This is set to change with the new rules, which state that sellers will have to register their prospectuses with MAS before they can solicit for potential investors.
Some of the schemes (mentioned in the article) from the past that seem to have gone belly up are:
- Suisse International
- The Gold Guarantee
- Genneva
- Profitable Plots
- Ecohouse Developments
I have always been surprised why such a developed country like Singapore allows so many dodgy investment schemes. At least, now things seem to change for the better.
Hopefully Malaysia will follow suit soon, many investors there have also been hit by pyramid schemes and the likes.
Wednesday, 23 September 2015
Are SC/BM not involved in 1MDB probe?
Article in The Edge: "Zeti: Public deserves answers to 1MDB"
One snippet:
“There are three agencies involved, comprising the police which deal with cheating, criminal breach of trust and so on; the MACC (Malaysian Anti-Corruption Commission) which deals with corruption; and the central bank, BNM, that deals with aspects relating to our financial system and what contravention there has been of our rules [and] regulations, and our laws."
I definitely hope that the Securities Commission and/or Bursa Malaysia are included in the probe as well. Although 1MDB is not a listed company, the following companies are or were listed on Bursa:
According to this article from The Malaysian Insider, all these companies were very much linked to 1MDB and the actors involved in the drama.
BM and/or SC have been as quiet as a mouse over the whole affair, but they should revisit all deals regarding these four companies, if the information provided to the public has been correct at all times.
One snippet:
“There are three agencies involved, comprising the police which deal with cheating, criminal breach of trust and so on; the MACC (Malaysian Anti-Corruption Commission) which deals with corruption; and the central bank, BNM, that deals with aspects relating to our financial system and what contravention there has been of our rules [and] regulations, and our laws."
I definitely hope that the Securities Commission and/or Bursa Malaysia are included in the probe as well. Although 1MDB is not a listed company, the following companies are or were listed on Bursa:
- Utama Banking Group Bhd
- Cahaya Mata Sarawak Bhd
- Putrajaya Perdana Bhd
- Loh & Loh Corp Bhd
- RHB Cap Bhd
According to this article from The Malaysian Insider, all these companies were very much linked to 1MDB and the actors involved in the drama.
BM and/or SC have been as quiet as a mouse over the whole affair, but they should revisit all deals regarding these four companies, if the information provided to the public has been correct at all times.
Loopholes plugged by SC
Article in The Star, some snippets:
An amendment to a securities law is to plug a loophole in the law that allowed parties to exclude liability for the veracity of statements made in marketing material related to corporate bonds.
The Capital Markets and Services (Amendment) Act 2015 (CMSA 2015) now makes it clear that any “document, agreement or contract” that seeks to exclude the liability of the issuer of that document from the accuracy and reliability of information in that document will be deemed as void.
In other words, this means that parties preparing information memoranda (info memo), that typically accompany the issuance of private debt securities such as corporate bonds, can no longer seek to exclude their liability.
The amendment effectively addresses the issues that arose following the 2014 decision of the Federal Court in the Pesaka Astana bond case.
I wrote several times about the Pesaka Astana issue (here, here and here).
More from the article from The Star:
The amendments to the CMSA also enhanced minority shareholder protection in the event of corporate takeovers and mergers. The amendment allows the SC to appoint an independent adviser for an offeree if the latter fails to appoint one.
Another good change.
I noted before regarding KPMG's independent advice on Maybulk's RPT:
I think that is highly debatable, I think there is a very good case to be made that KPMG is liable. Anyhow, I strongly recommend the authorities to come down hard on independent advisers who issue these kinds of statements:
If advisers don’t want to take any responsibility while at the same time they make very clear judgment calls which have consequences for the voting behavior of shareholders then they should simply not be allowed to be independent adviser.
I hope with the above changes that this issue is also settled.
An amendment to a securities law is to plug a loophole in the law that allowed parties to exclude liability for the veracity of statements made in marketing material related to corporate bonds.
The Capital Markets and Services (Amendment) Act 2015 (CMSA 2015) now makes it clear that any “document, agreement or contract” that seeks to exclude the liability of the issuer of that document from the accuracy and reliability of information in that document will be deemed as void.
In other words, this means that parties preparing information memoranda (info memo), that typically accompany the issuance of private debt securities such as corporate bonds, can no longer seek to exclude their liability.
The amendment effectively addresses the issues that arose following the 2014 decision of the Federal Court in the Pesaka Astana bond case.
I wrote several times about the Pesaka Astana issue (here, here and here).
More from the article from The Star:
The amendments to the CMSA also enhanced minority shareholder protection in the event of corporate takeovers and mergers. The amendment allows the SC to appoint an independent adviser for an offeree if the latter fails to appoint one.
Another good change.
I noted before regarding KPMG's independent advice on Maybulk's RPT:
I think that is highly debatable, I think there is a very good case to be made that KPMG is liable. Anyhow, I strongly recommend the authorities to come down hard on independent advisers who issue these kinds of statements:
If advisers don’t want to take any responsibility while at the same time they make very clear judgment calls which have consequences for the voting behavior of shareholders then they should simply not be allowed to be independent adviser.
I hope with the above changes that this issue is also settled.
Monday, 21 September 2015
Limited ads on SGX website
A rather terse letter from the SGX to the editor of Straits Times (Singapore) regarding the SGX placing advertisements on their website, something I have written about already in 2013.
A few snippets with some comments by me:
"Online advertising is not unique to SGX among exchanges globally."
But that does not mean it is good. There are also many exchanges that do not publish advertisements (or only some, which are related and endorsed), like Bursa.
Many other exchanges are also public companies (which I am strongly against, due to the inherent conflict of interest), which might explain (part of) it, trying to maximize (or at least increase) profits.
The issue for me is that advertisements on the SGX website might be interpreted by viewers as being endorsed by the SGX, which is not the case. And for that reason alone, the SGX should not publish advertisements, in my opinion.
"SGX continually reviews the advertising categories and advertisers and blocks those not deemed fit for purpose."
In my posting an advertisement was not blocked that involved a company (Infinity Treasures) that is listed on the MAS Investor Alert List. Was that company "deemed fit for purpose"?
"Meanwhile, we are in the process of reviewing our website interface, having taken in constructive public feedback that it could be improved."
At least some good news, I have been very critical of SGX's website (Bursa's is so much better, faster, more easy to use, etc.), looking forward to the new website.
A few snippets with some comments by me:
"Online advertising is not unique to SGX among exchanges globally."
But that does not mean it is good. There are also many exchanges that do not publish advertisements (or only some, which are related and endorsed), like Bursa.
Many other exchanges are also public companies (which I am strongly against, due to the inherent conflict of interest), which might explain (part of) it, trying to maximize (or at least increase) profits.
The issue for me is that advertisements on the SGX website might be interpreted by viewers as being endorsed by the SGX, which is not the case. And for that reason alone, the SGX should not publish advertisements, in my opinion.
"SGX continually reviews the advertising categories and advertisers and blocks those not deemed fit for purpose."
In my posting an advertisement was not blocked that involved a company (Infinity Treasures) that is listed on the MAS Investor Alert List. Was that company "deemed fit for purpose"?
"Meanwhile, we are in the process of reviewing our website interface, having taken in constructive public feedback that it could be improved."
At least some good news, I have been very critical of SGX's website (Bursa's is so much better, faster, more easy to use, etc.), looking forward to the new website.
Wednesday, 16 September 2015
Patimas: will there be justice? (2)
I wrote before about Patimas. I ended the posting with the following:
"Will the authorities take appropriate action within a reasonable timeframe? Time will tell."
That question has been answered by Bursa, some snippets:
Bursa Malaysia Securities Berhad (635998-W) (Bursa Malaysia Securities) has publicly reprimanded Patimas Computers Berhad (PATIMAS) and its 4 executive directors at the material time for breaching the Bursa Malaysia Securities Main Market Listing Requirements (Main LR). In addition, the 4 executive directors of PATIMAS were fined a total of RM1,986,200.
All the 4 executive directors had or should have knowledge of the financial affairs of PATIMAS including these transactions and were in a position or had the reasonable means to detect, ascertain, address and/or resolve the veracity of the transactions and the audit issues arising from the same. This was particularly in light of the nature, irregularities and magnitude / materiality of the transactions and their position, roles and responsibilities in the Company (including as directors in the subsidiaries involved in these transactions) as well as their knowledge of and/or involvement in the transactions.
Is the punishment enough, will it act as a deterrent? I don't think so, I think only a jail sentence will suffice.
Jail sentences are rarely given in offences regarding listed companies in Malaysia, but we just saw one example where the Securities Commission indeed managed to get the former Managing Director of Pancaran Ikrab Berhad (PIB) jailed for six years, and fined RM1 million.
"Will the authorities take appropriate action within a reasonable timeframe? Time will tell."
That question has been answered by Bursa, some snippets:
Bursa Malaysia Securities Berhad (635998-W) (Bursa Malaysia Securities) has publicly reprimanded Patimas Computers Berhad (PATIMAS) and its 4 executive directors at the material time for breaching the Bursa Malaysia Securities Main Market Listing Requirements (Main LR). In addition, the 4 executive directors of PATIMAS were fined a total of RM1,986,200.
All the 4 executive directors had or should have knowledge of the financial affairs of PATIMAS including these transactions and were in a position or had the reasonable means to detect, ascertain, address and/or resolve the veracity of the transactions and the audit issues arising from the same. This was particularly in light of the nature, irregularities and magnitude / materiality of the transactions and their position, roles and responsibilities in the Company (including as directors in the subsidiaries involved in these transactions) as well as their knowledge of and/or involvement in the transactions.
Is the punishment enough, will it act as a deterrent? I don't think so, I think only a jail sentence will suffice.
Jail sentences are rarely given in offences regarding listed companies in Malaysia, but we just saw one example where the Securities Commission indeed managed to get the former Managing Director of Pancaran Ikrab Berhad (PIB) jailed for six years, and fined RM1 million.
Tuesday, 15 September 2015
Alibaba: red flags raised by Barron's (2)
Alibaba has immediately responded in a quite detailed way to the issues raised.
Silverlake Axis (I blogged about the issue here) might want to take note. Their response "the Board has decided not to dignify the Report by preparing its own point-by-point rebuttal" is most disappointing, especially towards their loyal minority investors.
Silverlake Axis (I blogged about the issue here) might want to take note. Their response "the Board has decided not to dignify the Report by preparing its own point-by-point rebuttal" is most disappointing, especially towards their loyal minority investors.
AirAsia: A turbulent patch
Well balanced article in The Economist about AirAsia. One snippet:
"..... AirAsia may never manage to grab more than a smallish slice of the Indonesian market, by far the region’s largest, reckons Shukor Yusof of Endau Analytics, a consulting firm. That would be a bitter blow to its ambitions. It might also mean that LionAir—which has plans to increase its fleet by two-thirds before 2018—overtakes it as the region’s biggest carrier. AirAsia’s “rocket-ship trajectory” is over, confirms CAPA’s Mr Sobie. But a steadier airline may result."
"..... AirAsia may never manage to grab more than a smallish slice of the Indonesian market, by far the region’s largest, reckons Shukor Yusof of Endau Analytics, a consulting firm. That would be a bitter blow to its ambitions. It might also mean that LionAir—which has plans to increase its fleet by two-thirds before 2018—overtakes it as the region’s biggest carrier. AirAsia’s “rocket-ship trajectory” is over, confirms CAPA’s Mr Sobie. But a steadier airline may result."
Monday, 14 September 2015
Asian Financial Statement Analysis
Excellent book by ChinHwee Tan and Thomas R Robinson, highly recommended for all readers who like to dive in company accounts, searching for possible red flags.
The book is dedicated entirely on the situation in Asia, the following cases are handled:
Winsway Coking Coal is interesting, the authors write: "highly unlikely that the company is a fraud". The business model is not transparent and there are many RPTs, but that doesn't automatically mean something is very much wrong, as was alleged by a research report.
A recipe is given for detecting cooked books:
The only pity is that the huge majority of the above cases are China related.
For those people that follow the China listed companies on Bursa or SGX, there will be many familiar red flags.
The book is dedicated entirely on the situation in Asia, the following cases are handled:
- Satyam Computer Services Limited
- Olympus Corporation
- Longtop Financial
- Sino-Forest
- Oriental Century
- RINO International Corp
- Oceanus
- Harbin Electric
- West China Cement
- China Biotics
- Renhe Commercial Holdings
- Duoyuan Global Water
- Winsway Coking Coal Holdings
- China Valves Tech
- Puda Coal
- Sino-Environment Technology Group Ltd
- Celltrion Inc
- Real Gold Mining
- Fibrechem Technologies
Winsway Coking Coal is interesting, the authors write: "highly unlikely that the company is a fraud". The business model is not transparent and there are many RPTs, but that doesn't automatically mean something is very much wrong, as was alleged by a research report.
A recipe is given for detecting cooked books:
- Overstated Earnings or Misclassified Components of the Income Statement
- Overstated Financial Position
- Managed Earnings
- Overstated Operating Cash Flow
- Evaluating Governance, Auditor, and Related-Party Issues
The only pity is that the huge majority of the above cases are China related.
For those people that follow the China listed companies on Bursa or SGX, there will be many familiar red flags.
Sunday, 13 September 2015
Alibaba: red flags raised by Barron's
From BusinessInsider regarding the cover story for Barron's by Jonathan Laing:
... the bulk of Laing's screed raises red flags about corporate governance, conflicts of interest, counterfeit goods, and various other questionable business practices.
Particularly disturbing was the suggestion that Ma and his team might actually be making up some numbers, including its very flashy revenue growth stats, which Laing notes are considerably larger than other large tech growth companies like Google, Amazon.com, and Facebook.
... Anne Stevenson-Yang, founder of Chinese research firm JCapital Research, has closely tracked the mainland e-commerce industry in general and Alibaba specifically. She finds the growth numbers puzzling. She observes that “Alibaba’s financial reports have broken free of verifiable reality and have reached an escape velocity that doesn’t comport with Chinese government figures of overall retail sales, consumer spending, or online commerce.” Consider this: Alibaba claims to have 367 million users — about the same as one government agency’s estimate of China’s entire online-shopping population. Or this: Alibaba claims its average shopper spends 26% more on its sites each year than the average U.S. online shopper spends on all sites. Does that make any sense, given American consumers’ far greater affluence and ability to avail themselves of a vastly more developed e-commerce ecosystem?
... That $1,215 average spend at Alibaba also seems high in view of the total average annual per capita expenditure in China, online and at physical stores; that stands at about $2,260. It strains credulity that the average Alibaba user would spend over half of his consumer outlays on Taobao and Tmall, given that the sites have a negligible presence in categories that account for the bulk of consumer spending, like food and beverages, housing, transportation, home health products, and restaurant dining ...
The above allegations appear to be very serious, the Forbes report (behind paywall) is called "comprehensive and detailed enough".
Alibaba needs to come quickly with a comprehensive answer to all the issues raised.
... the bulk of Laing's screed raises red flags about corporate governance, conflicts of interest, counterfeit goods, and various other questionable business practices.
Particularly disturbing was the suggestion that Ma and his team might actually be making up some numbers, including its very flashy revenue growth stats, which Laing notes are considerably larger than other large tech growth companies like Google, Amazon.com, and Facebook.
... Anne Stevenson-Yang, founder of Chinese research firm JCapital Research, has closely tracked the mainland e-commerce industry in general and Alibaba specifically. She finds the growth numbers puzzling. She observes that “Alibaba’s financial reports have broken free of verifiable reality and have reached an escape velocity that doesn’t comport with Chinese government figures of overall retail sales, consumer spending, or online commerce.” Consider this: Alibaba claims to have 367 million users — about the same as one government agency’s estimate of China’s entire online-shopping population. Or this: Alibaba claims its average shopper spends 26% more on its sites each year than the average U.S. online shopper spends on all sites. Does that make any sense, given American consumers’ far greater affluence and ability to avail themselves of a vastly more developed e-commerce ecosystem?
... That $1,215 average spend at Alibaba also seems high in view of the total average annual per capita expenditure in China, online and at physical stores; that stands at about $2,260. It strains credulity that the average Alibaba user would spend over half of his consumer outlays on Taobao and Tmall, given that the sites have a negligible presence in categories that account for the bulk of consumer spending, like food and beverages, housing, transportation, home health products, and restaurant dining ...
The above allegations appear to be very serious, the Forbes report (behind paywall) is called "comprehensive and detailed enough".
Alibaba needs to come quickly with a comprehensive answer to all the issues raised.
Saturday, 12 September 2015
iCapital: "Ostrich policy" will not solve the issues (2)
In addition to my previous posting on this subject, "Kian Wei" has reposted it in his category "Good articles to share" on i3investor.com. Both postings received quite a few comments by readers.
"Wilson Tan" has published this link on the Facebook page of Capital Dynamics, on which the company reacted:
The reaction seems rather strange, although less so in the Malaysian context where "shooting the messenger" seems to be the national pastime (anyone following the recent Malaysian scandals will agree with that, I guess).
What does it matter who I am, how many shares I have, when I bought them, at what price and at what exchange rate? People must first give a detailed description of this before they can raise an issue?
Regarding who I am, I have a profile on my blog. I am writing this blog because I am passionate about corporate governance issues in the Malaysian context. I don't make any profit whatsoever on it. There is also no hidden agenda, I write how I see things.
Regarding most companies that I write about I don't have a position, in iCapital I do however, which I announced. I own 200,000 shares of iCapital.biz (I guess Capital Dynamics could even have checked that themselves), some family members and friends have smaller positions, some sold them because of the disappointing results in the last years.
Does the above information change any of the issues raised in my posting? I don't think so. What matters is the issues itself.
But not a single answer is given about these issues, despite the claim that all of my postings about iCapital are "slanted and biased" according to Capital Dynamics. One would have guessed that it would be easy to give some examples of that, or at least a hint.
Another rather disturbing comment by Capital Dynamics, again in the "shoot the messenger" category:
"Dear Wilson Tan, according to the industry in London, City of London uses a "whispering campaign" tactic on funds that they attacked. They use social media, traditional media, etc and not disclose their hidden agenda."
There might be some suggestion that I am connected to City of London. Just to be clear, I don't know City of London (or Laxey for that matter), have never contacted them, met them or corresponded with them in any way, shape or form.
City of London has published a letter on August 28, 2015 which can be found here.
Some snippets:
CLIM [City of London Investment Management Limited] is opposing the re-election of incumbent directors because of the Board's inadequate response to ICAP's poor performance and persistently wide discount to NAV.
ICAP's total return NAV performance in the five year period 2 June 2010 to 29 May 2015 is +43.8%. This appears respectable compared to the capital only FBMKLCI +35.6% but it is profoundly disappointing compared to the FBMKLCI total return +60.4% (source: Bloomberg). Shareholders are given no explanation of this poor result from stock selection over this longer period.
The five year index total return referenced above, equivalent to a satisfactory 10% pa, indicates that shareholders would have benefitted overall from a fully invested strategy. ICAP's high cash holding throughout this 5 year period suggests a lack of skill in respect of market timing and a limited ability to identify undervalued assets. In these circumstances it is questionable whether ICAP should be incurring fees on cash.
ICAP's expense ratio in 2015 was 1.9% (total expenses as a percentage of the average of opening and closing shareholders' equity) which compares unfavourably with other country specific closed-end funds. In view of ICAP's poor NAV performance it is also pertinent to compare total expense ratios less than 0.5% pa for exchange traded funds that give investors Malaysian equity exposure. Boards have a duty, in CLIM's opinion, to negotiate competitive fees.
ICAP's original prospectus explained clearly that the return for closed-end fund investors is a product of NAV performance and the discount movement. The 2015 Annual Report does not refer to the impact on shareholders' overall return of the discount, which widened over the 12 months ended 31 May 2015 to 21% from 17%, and averaged 20%. Over five years to end May 2015 the discount has also averaged over 20% (source: Bloomberg). The Board has failed to take any action to address the discount which has, in our opinion, been unacceptably wide. CLIM notes that ICAP's prospectus included a narrative on the tools available to Boards to narrow or eliminate the discount, including share repurchase, open-ending and liquidation. This section in the prospectus also referred to the possible replacement of existing management.
In "digitaledge weekly" of September 14, 2015 (pages 18 and 30) a long article on the same subject:
"icapital.biz largest shareholder says fund fees high, to vote down director appointments"
It is noted that "Advertising, AGM and 'other' expenses have been rising at ICAP".
And "shareholders might want to ask how the fund's spending compares to what its manager spends on the same effort and how the spending fits the closed-end fund's goal".
Will we finally get proper answers regarding the issues raised?
"Wilson Tan" has published this link on the Facebook page of Capital Dynamics, on which the company reacted:
The reaction seems rather strange, although less so in the Malaysian context where "shooting the messenger" seems to be the national pastime (anyone following the recent Malaysian scandals will agree with that, I guess).
What does it matter who I am, how many shares I have, when I bought them, at what price and at what exchange rate? People must first give a detailed description of this before they can raise an issue?
Regarding who I am, I have a profile on my blog. I am writing this blog because I am passionate about corporate governance issues in the Malaysian context. I don't make any profit whatsoever on it. There is also no hidden agenda, I write how I see things.
Regarding most companies that I write about I don't have a position, in iCapital I do however, which I announced. I own 200,000 shares of iCapital.biz (I guess Capital Dynamics could even have checked that themselves), some family members and friends have smaller positions, some sold them because of the disappointing results in the last years.
Does the above information change any of the issues raised in my posting? I don't think so. What matters is the issues itself.
But not a single answer is given about these issues, despite the claim that all of my postings about iCapital are "slanted and biased" according to Capital Dynamics. One would have guessed that it would be easy to give some examples of that, or at least a hint.
Another rather disturbing comment by Capital Dynamics, again in the "shoot the messenger" category:
"Dear Wilson Tan, according to the industry in London, City of London uses a "whispering campaign" tactic on funds that they attacked. They use social media, traditional media, etc and not disclose their hidden agenda."
There might be some suggestion that I am connected to City of London. Just to be clear, I don't know City of London (or Laxey for that matter), have never contacted them, met them or corresponded with them in any way, shape or form.
City of London has published a letter on August 28, 2015 which can be found here.
Some snippets:
CLIM [City of London Investment Management Limited] is opposing the re-election of incumbent directors because of the Board's inadequate response to ICAP's poor performance and persistently wide discount to NAV.
ICAP's total return NAV performance in the five year period 2 June 2010 to 29 May 2015 is +43.8%. This appears respectable compared to the capital only FBMKLCI +35.6% but it is profoundly disappointing compared to the FBMKLCI total return +60.4% (source: Bloomberg). Shareholders are given no explanation of this poor result from stock selection over this longer period.
The five year index total return referenced above, equivalent to a satisfactory 10% pa, indicates that shareholders would have benefitted overall from a fully invested strategy. ICAP's high cash holding throughout this 5 year period suggests a lack of skill in respect of market timing and a limited ability to identify undervalued assets. In these circumstances it is questionable whether ICAP should be incurring fees on cash.
ICAP's expense ratio in 2015 was 1.9% (total expenses as a percentage of the average of opening and closing shareholders' equity) which compares unfavourably with other country specific closed-end funds. In view of ICAP's poor NAV performance it is also pertinent to compare total expense ratios less than 0.5% pa for exchange traded funds that give investors Malaysian equity exposure. Boards have a duty, in CLIM's opinion, to negotiate competitive fees.
ICAP's original prospectus explained clearly that the return for closed-end fund investors is a product of NAV performance and the discount movement. The 2015 Annual Report does not refer to the impact on shareholders' overall return of the discount, which widened over the 12 months ended 31 May 2015 to 21% from 17%, and averaged 20%. Over five years to end May 2015 the discount has also averaged over 20% (source: Bloomberg). The Board has failed to take any action to address the discount which has, in our opinion, been unacceptably wide. CLIM notes that ICAP's prospectus included a narrative on the tools available to Boards to narrow or eliminate the discount, including share repurchase, open-ending and liquidation. This section in the prospectus also referred to the possible replacement of existing management.
We are dismayed by the reference in the Chairman's 2015 Letter to Share Owners, to 'investors with shorter-term focus to start requesting our Fund to look into other shorter-term options which do not benefit share owners in the longer-term'. ICAP's performance has been disappointing over the past five years and CLIM regrets the Board's unwillingness to engage with its shareholders to explore possible solutions to this problem.
For the avoidance of doubt, in respect of its investment in ICAP, CLIM is not and never has acted in association with any other ICAP shareholder. CLIM is a long term investor in closed-end funds and first purchased ICAP shares in May 2010. In the interests of full transparency this letter is being made public.
In "digitaledge weekly" of September 14, 2015 (pages 18 and 30) a long article on the same subject:
"icapital.biz largest shareholder says fund fees high, to vote down director appointments"
It is noted that "Advertising, AGM and 'other' expenses have been rising at ICAP".
And "shareholders might want to ask how the fund's spending compares to what its manager spends on the same effort and how the spending fits the closed-end fund's goal".
Will we finally get proper answers regarding the issues raised?
Sunday, 6 September 2015
Marc Faber: There Are No Safe Assets Anymore
Mining companies seem to be relatively cheap. China's economy is in a serious downturn. Emerging markets are getting cheaper. US stocks are expensive.
Friday, 4 September 2015
CLSA: Red flags in Asia
CLSA issued the following report to its customers:
Some snippets:
One of the long-term themes that we have discussed at length is the strength of Asian balance sheets and how this manifests into a growing dividend culture among corporates with substantial cash hoards. While these companies steal the limelight, there are also a growing number that stay under the radar while trying to succeed through unconventional means. Sadly, this is further fuelled by a new breed of analysts whose imagination doesn’t stretch beyond quarterly forecasts and analysis that mirrors company guidance. Over the past decade, cases of accounting manipulation have multiplied, and this year, the proportion of value destroyers in Asia has also reached an all-time high of 38%. In the current low-return environment, avoiding such accounting blow-ups overwhelms all other considerations. With capital preservation becoming the focus, we create our earnings-quality and balance-sheet-quality risk scores, using ideas from the CLSA U Blue Book on forensic accounting, titled Financial fingerprints.
This report highlights two sets of scores including the earnings-quality risk score (EQRS) and balance-sheet-quality risk score (BQRS), which use 10 financial indicators each to identify issues related to earnings and balancesheet quality. Our backtests show that companies with high EQRS scores have underperformed by 7% per annum since 2000, while those with high BQRS have underperformed by 18% per annum.
Ownership issues add to the complexity as Asia is marred by an unusually high insider-holding ratio (53% on average), which could lead to numerous instances of related-party transactions as majority shareholders retain strong management control. High government ownership is also common, and while such companies are less likely to enter bankruptcy, they are dominated by value destroyers.
Companies flagged under the EQRS score are:
AirAsia (MY) was flagged under the BQRS score.
Separately, companies flagged under a single criteria where:
Needless to say, a single indicator might not mean that much, the company has to be analysed in its totality. Also, the above companies are from the universe that CLSA tracks, in general the larger listed companies in Asia. The fact that a company is not mentioned doesn't mean anything, CLSA might not track it.
Some snippets:
One of the long-term themes that we have discussed at length is the strength of Asian balance sheets and how this manifests into a growing dividend culture among corporates with substantial cash hoards. While these companies steal the limelight, there are also a growing number that stay under the radar while trying to succeed through unconventional means. Sadly, this is further fuelled by a new breed of analysts whose imagination doesn’t stretch beyond quarterly forecasts and analysis that mirrors company guidance. Over the past decade, cases of accounting manipulation have multiplied, and this year, the proportion of value destroyers in Asia has also reached an all-time high of 38%. In the current low-return environment, avoiding such accounting blow-ups overwhelms all other considerations. With capital preservation becoming the focus, we create our earnings-quality and balance-sheet-quality risk scores, using ideas from the CLSA U Blue Book on forensic accounting, titled Financial fingerprints.
This report highlights two sets of scores including the earnings-quality risk score (EQRS) and balance-sheet-quality risk score (BQRS), which use 10 financial indicators each to identify issues related to earnings and balancesheet quality. Our backtests show that companies with high EQRS scores have underperformed by 7% per annum since 2000, while those with high BQRS have underperformed by 18% per annum.
Ownership issues add to the complexity as Asia is marred by an unusually high insider-holding ratio (53% on average), which could lead to numerous instances of related-party transactions as majority shareholders retain strong management control. High government ownership is also common, and while such companies are less likely to enter bankruptcy, they are dominated by value destroyers.
Companies flagged under the EQRS score are:
- Olam (SG), "Consistently negative FCF with high debt"
- Gamuda (MY), "Companies with rising inventory days"
- Yanlord (SG)
- Yinson (MY)
AirAsia (MY) was flagged under the BQRS score.
Separately, companies flagged under a single criteria where:
- Noble Group (SG), "Companies with diverging profit and cashflow"
- Petronas Chemicals, "Capex indiscipline"
- Sembcorp Ind (SG), "Dividends funded through debt"
- Maxis (MY), "High and rising leverage"
- Malaysia Airports (MY), "Value destroyers with high government ownership"
- Golden Agri (SG), "Value destroyers with high insider holding, low independence"
- SapuraKen (MY), "Key management changes over last one year"
Needless to say, a single indicator might not mean that much, the company has to be analysed in its totality. Also, the above companies are from the universe that CLSA tracks, in general the larger listed companies in Asia. The fact that a company is not mentioned doesn't mean anything, CLSA might not track it.
Wednesday, 2 September 2015
Silverlake Axis down 24%, suspended, after damning report (3)
Silverlake Axis has responded, one snippet:
"the Board has decided not to dignify the Report by preparing its own point-by-point rebuttal".
That is very unfortunate, and I doubt it is in the best interest of the Company's loyal minority shareholders. A point-by-point rebuttal might have given the much needed clarity regarding the issues at hand. I find the reasoning not to give this rebuttal rather weak.
The Board also did not come with a plan to improve its corporate governance in general, particularly the transparency.
The only plus point is:
"the Company will be engaging Deloitte Singapore, as an independent third party, to undertake an independent review of the allegations concerning the related party transactions entered into between the Company and the Silverlake Private Entities and the associated profit margins as referred to in the Report and to provide its findings and conclusions as to their veracity, which the Company will publish in due course."
But this might take a while. Also, Deloitte will not address the other issues raised.
An article in The Star offered a remarkable sentence:
"Goh pointed out that the lines of responsibility are clear within the company as the board has control over its running while he concentrates on research."
The running of the company is the responsibility of the executive directors, in this case the CEO and Goh himself. The other members of the board are non-executives, surely they are not responsible for the running of the company, they will lean more towards strategy and oversight. It almost sounds like Goh (Founder, Chairman and majority shareholder) doesn't feel responsible for the issues, rather concentrating himself on research. Strange, since the huge network of related companies are owned and founded by him.
With the share price almost half of the price a few months ago, I would have thought that a much stronger reaction was needed, especially directed to the more concrete allegations in the 42-page article.
I still struggle with the high reported revenue per employee. For instance here there are many discussions about hiring and working for Silverlake. Reading through dozens and dozens of postings I do not get the impression that Silverlake is hiring the best of the best (for instance only from top universities), has rigorous interviews and pressures their employees, enabling the company to bill top dollars. This was one of the issues raised by the short seller report.
As interested observer, I guess we need time to see how things will pan out in the future.
"the Board has decided not to dignify the Report by preparing its own point-by-point rebuttal".
That is very unfortunate, and I doubt it is in the best interest of the Company's loyal minority shareholders. A point-by-point rebuttal might have given the much needed clarity regarding the issues at hand. I find the reasoning not to give this rebuttal rather weak.
The Board also did not come with a plan to improve its corporate governance in general, particularly the transparency.
The only plus point is:
"the Company will be engaging Deloitte Singapore, as an independent third party, to undertake an independent review of the allegations concerning the related party transactions entered into between the Company and the Silverlake Private Entities and the associated profit margins as referred to in the Report and to provide its findings and conclusions as to their veracity, which the Company will publish in due course."
But this might take a while. Also, Deloitte will not address the other issues raised.
An article in The Star offered a remarkable sentence:
"Goh pointed out that the lines of responsibility are clear within the company as the board has control over its running while he concentrates on research."
The running of the company is the responsibility of the executive directors, in this case the CEO and Goh himself. The other members of the board are non-executives, surely they are not responsible for the running of the company, they will lean more towards strategy and oversight. It almost sounds like Goh (Founder, Chairman and majority shareholder) doesn't feel responsible for the issues, rather concentrating himself on research. Strange, since the huge network of related companies are owned and founded by him.
With the share price almost half of the price a few months ago, I would have thought that a much stronger reaction was needed, especially directed to the more concrete allegations in the 42-page article.
I still struggle with the high reported revenue per employee. For instance here there are many discussions about hiring and working for Silverlake. Reading through dozens and dozens of postings I do not get the impression that Silverlake is hiring the best of the best (for instance only from top universities), has rigorous interviews and pressures their employees, enabling the company to bill top dollars. This was one of the issues raised by the short seller report.
As interested observer, I guess we need time to see how things will pan out in the future.
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