Monday 29 February 2016

Is MClean so clean .....?

Today MClean announced to Bursa:

The Board of Directors of MClean wishes to announce that the Company’s subsidiaries, DWZ Industries Sdn. Bhd. (“DWZ”) and DWZ Industries (Johor) Sdn. Bhd. had been served with a Letter of Demand by Petroliam Nasional Berhad (“Petroliam”) and Petronas Gas Berhad (“PGB”) (“collectively referred to as “Petronas”) through its solicitors for:

1. unlawful entry or caused to enter the lands held under HS(M) 4144 PTD 179156, Mukim Plentong, Johor Bahru, Johor and no. Hakmilik 1027, Mukim Plentong, Johor Bahru, Johor (collectively referred to as “Lands”) and constructed and/or installed a piping structure of approximately 50 metres under the Lands which is connected to DWZ’s premises at No. 30, Jalan Maju 1, Taman Perindustrian Desa Cemerlang, 81800 Ulu Tiram, Johor (“the Premises”); and

2. discharge of certain noxious and toxic effluents from DWZ’s piping structure and the Premises onto the Lands, which has caused substantial damage to PGB’s pipeline.

Due to the above, Petronas has demanded for a sum of RM46,754,614.07 from the Company and/or its subsidiaries. Failing which, Petronas will commence legal proceedings against the Company and/or its subsidiaries to recover all sums due and additionally liable for interest and costs.

DWZ is a major subsidiary of the Company. MClean Group does not foresee any material impact to its operations as a result of this Letter of Demand.

That does not sound good.

First of all one should not get in a fight with (by far) the biggest company in Malaysia.

Secondly, RM 47 Million is a rather substantial amount of money for MClean. Its latest cash balance is only RM 13 Million.

Thirdly, one would expect MClean to come with a strong, immediate rebuttal, but instead it rather "casually" mentioned:

The Company has engaged a solicitor to look into the matter and shall make such further announcement on the development on the above matter as and when necessary.

Sunday 28 February 2016

Research reports: conflict of interest?

Interesting article in The Star: "Cautionary tale of research reports".

Some snippets and some comments by me:

The US$100,000 fine slapped on a former Deutsche Bank analyst for issuing a positive research report on a company when he actually had negative views on it is a stark reminder of why financial opinions should be taken with a pinch of salt.

More information can be found here. It paints a good picture of the often conflicted position for researchers. In this case the researcher wanted to help hedge funds (the best paying clients), but also stay loyal to the company he was writing about. The least served where the "normal" clients of the broker.

In Malaysia, of late, there have been some research reports that are conspicuously “lacking” in terms of material for proper analysis that it makes one wonder if the analysts who had crafted the reports really believe in the financial opinion stated.

The projections and assumptions used in arriving at earnings are long term in nature which makes it hard to justify a research report on the company in the first place. It could have been done when the assumptions had a higher degree of materialising.

The reports are particularly on small-cap stocks that do not have a track record.

For instance, a leading bank-backed research unit recently devoted 20 pages to a small-cap construction company.

The assumptions used in arriving at the profit projections were simply outrageous, to put it mildly.

And the basis of arriving at the profit numbers of the construction company was largely due to its connection with external parties that may pave the way for it to land some large construction jobs.

There was little devoted to the fundamentals of the company itself, its track record in carrying out large jobs and what happens if the “connections” do not pay off.

No names are mentioned in the article of The Star, but a friendly tip pointed at the possibility that this relates to the research report by CIMB on Instacom Group.

In the research report there are sentences like:

  • Unleashing the giant
  • Asset injection of Neata group to transform sleepy telco tower builder Instacom into construction giant Vivocom
  • Explosive two-year EPS CAGR of 456%
  • Undiscovered with massive re-rating potential
  • The untold story of an emerging construction giant
  • Strong orderbook pipeline underpins earnings visibility
  • Extraodinary growth outlook with sector-beating margin

The word "giant" is mentioned a whopping 14 times in the article. Will the company really become one? Time will tell, but buyers beware, best is not to rely on outside research and do one's own homework.

At the very least the reader should note that the share price has already risen quite a bit over the last few months before the above report was published. That alone should be of some concern.

Wednesday 24 February 2016

To Cliq or not to Cliq? (7)

As expected, Cliq Energy Bhd. will close shop.

A report by The Edge:

CLIQ Energy Bhd, the second oil and gas special purpose acquisition company (SPAC) listed on Bursa Malaysia, will be liquidated and returning monies to shareholders after the Securities Commission (SC) declined its request for more time to acquire its qualifying asset (QA).

"The company will soon be resolving the process towards its liquidation and returning monies in the trust account to the entitled shareholders, according to the applicable laws and rules," CLIQ added.

Money, time and effort wasted, pity.

Both in preparing the company towards its IPO and in running the company since the IPO trying to find a QA.

For the warrant holders I assume nothing remains.

The "winners" (in relative terms) are the people who picked up the Cliq shares below the liquidation price, they will receive a decent yield.

Enthusiasm for future IPOs of SPACs will diminish. I can't shed a tear for that.

Tuesday 23 February 2016

Bad loans on the rise in Singapore

Interesting article from Bloomberg. Some snippets:

"Bad loans in Singapore rose to a six-year high in 2015. Rating firms last month placed energy and mining companies globally on review for downgrades, the Baltic index of shipping rates last week reached the lowest since its 1985 inception and Singapore home sales had the worst start to a year since 2009.

Energy firms dominated 112 global bond defaults last year, according to Standard & Poor’s, as the slowest Chinese growth in two decades helped drive prices for commodities from oil to iron ore and coal to multi-year lows."

There seems to be a lot of stress in the system at the moment, especially in certain industries like oil & gas, mining, shipping etc. Banks which have too much exposure in those area's might run into problems.

A rather positive picture for Malaysia, being grouped together with Singapore, in contrast to the other countries mentioned which have a much lower recoverability.

Thursday 18 February 2016

Maxwells Mysterious Marketing (3)

One problem with China listed companies on Bursa is that the cash balances of many of them seem to be remarkably high. There is a suspicion (at least with me, but probably with most investors, since these companies trade at very low valuations) that the cash might simply not exist. There are precedents for this, both with China listed companies on the SGX and on the Nasdaq.

Maxwell is one of the first of these companies where the suspicion has progressed to the next stage, due to this announcement:

1.         As stated in the third quarterly results ended 30 September 2015, the total amount of cash/cash equivalent were RM257 million. The third quarterly results was announced on 30 November 2015.

2.         The total amount of cash placed with the asset management company, namely Jinjiang Jin Chuang Private Capital Management Co Ltd [晋江晋创民间资本管�?�有��?公�?� ] (“Jin Chuang”) as at 30 September 2015 was RM103.7 million

3.         Messrs Baker Tilly Monteiro Heng’s (“BTMH”), on preliminary assessment with regards to the cash placed with Jin Chuang and pending the commencement of the annual audit, have yet to obtain any documentary evidence for such placements of funds and sufficient information on the nature of business of Jin Chuang.   In addition, BTMH was concerned with the authenticity of these deposits placed with Jin Chuang and the recoverability of the deposits.

The above implies a flag that is as red as red can be.

The announcement continues:

4.         On its preliminary assessment, BTMH noted that based on the announcement of court cases on the website of Fujian Quanzhou Intermediate People’s Court, a company named “Zhenxing” (A subsidiary of Maxwell) is being sued by a company, Fujian Quanzhou Li Cheng Qu Chuang Xing Micro Credit Co Ltd (��?建泉州市鲤城区创信��?��?贷款有��?公�?�) due to a dispute on the loan agreement. The Defendants in the case involve Zhenxing as the borrower, Madam Li Kwai Chun (the Executive Director of Maxwell) and two others as the guarantors.


The Management of China Subsidiary claimed that they did not received any documents relating to the litigation before.

Madam Li Kwai Chun represented to the Board that the said loan dispute was in fact involving herself as a personal guarantor and it should not involve the Zhenxing.  Therefore, she will seek the necessary legal advice on the matter.  Further announcement will be made upon the legal council revert with the opinion.

This sounds puzzling as well. Madam Li seems to be a serial guarantor, a previous posting regarding this matter can be found here.

In another Bursa announcement, related to the very high marketing expenses, the company announced:

1. Maxwell (Xiamen) Co. Ltd, the intermediate subsidiary of Maxwell International Holdings Berhad, has executed six contracts with six marketing agents in PRC for promoting and setting-up 390 marketing billboards/LED signboards for a period of one year. The total amount has paid RMB92.4 million in year 2015.

Why spend such a large amount so suddenly through only one marketing channel with no apparent result for the revenue? Why not try a few billboards first, and measure their impact?

It would be good if the auditor would demand a list of the locations (GPS coordinates) of all 390 billboards and would check a few of them randomly if they exist and if they really feature Maxwell's advertisements.

Shell Malaysia: shocker (3)

At the very least the current, faithful minority shareholders of Shell deserved a much better explanation than previously provided by the company.

I think the Board of Directors also came to that conclusion (possibly pressured by some organisations like MSWG), therefore they announced today a media release, which can be found here.

It is much better than the previous information, is not clouded in legal terms and gives a background of the reasoning behind the deal and the price per share.

I am sure that most (if not all) shareholders of Shell will still be disappointed, but at least this gives some consolation.

It is possible that Shell's share price has simply been too high over the last years, not in line with its fundamentals and its future prospects. Time will tell.

Monday 15 February 2016

Sona: proposing a deal that is not fair?

From The Star: "How will shareholders vote for Sona?", some snippets:

"Now that Sona Petroleum Bhd has gotten the green light from the Securities Commission (SC) to proceed with its maiden acquisition, will its shareholders vote the deal through?

Two issues complicate the matter: one that the deal has been deemed not a fair one by the independent advisor. And secondly, the profile of many of the current investors of Sona who are believed to be yield investors banking on the cash back option that Sona offers."

The first issue is really disappointing, there is a lot of blood on the street in the Oil & Gas industry, one would have expected the SPACs to profit from that, by coming up with deals that would have been ridiculously cheap just a year ago. The fall in the price of these kind of assets easily outweighs the decline of the RM versus the USD.

But Sona comes with a deal that is deemed to be not fair, Hibiscus is running in all kinds of legal problems while not showing a single year of operational profits and Cliq's proposed acquisition seems to be in dire straits (I expect it to be pulled).

Regarding Sona's proposed acquisition, readers should also take note of the comment made by Kinibiz:

" .... the management team’s primary focus is to secure a deal so long as it allows them to graduate, while shareholders will be torn between the promise of eventual gains post-QA (possibly quite far in the future) versus a tidy risk-free gain at the end of three years."

In other words, the interest of the management team and the shareholders is not aligned.

Hopefully Sona is able to renegotiate the price of its proposed acquisition down a lot. They probably have to, if they want to have a decent chance that the shareholders will vote in favor of it.

Friday 12 February 2016

Maxwells Mysterious Marketing (2)

I wrote before about this matter.

On February 5, 2016 the company announced the resignation of an independent non-executive director, with the following comment (emphasis mine):

Whether there are any matters that need to be brought to the attention of shareholders:

There is concern on the advertisement expenditure which was disclosed in the Third Quarter 2015 results which management has yet to provide satisfactory justification.

Kudos to Mr. Lee, he could have simply resigned without any comment, but did chose to take a stand, something not often seen in Malaysia. The resignation itself and the above comment are both very clear red flags.

On February 11, 2016 the company announced (emphasis mine):

Further to the Company’s announcement to Bursa dated 30 November 2015 which reported significant net losses for the amount of RM46.253 million for the third quarter ended 30 September 2015 as compared to the net profit reported in the preceding year corresponding quarter of RM12.180 million  was mainly due to the advertisement expenses incurred in the retail business, the disclosure made in the announcement in relation to the resignation by Mr Lee Chong Hoe which stated that there was concern over the advertisement expenditure that was disclosed in the third quarter 2015 results which management has yet to provide satisfactory justification on 10 February 2016, the Board wishes to announce that the Company, upon the recommendation of the Audit Committee had on 18 December 2015 engaged Messrs. Ferrier Hodgson MH Sdn Bhd (“FHMH”) to commission an extended scope of audit on the advertisement expenditure in addition to the normal audit.

FHMH is finalising their report with respect to this particular issue and the Company shall make further announcements on the findings in due course.

Further to this, Messrs. Baker Tilly Monteiro Heng, the Statutory Auditors had on 5 February 2016 also highlighted additional issues relating to the annual audit for the year ended 2015 which require further clarification. They have also recommended that an investigative audit to be carried out on these issues. The Independent Directors had on 5 February 2016 and 11 February 2016 also recommended to the management of the Company that an investigative audit to be carried out on the issues raised by Messrs. Baker Tilly Monteiro Heng and are now seeking further clarification and response from the Executive Director of the Company in China.

China’s $34 Trillion Experiment Is Exploding

Scary story by Kyle Bass on China's economic and financial problems. Some snippets:

".... China’s liquid reserve position is already below a critical level of minimum reserve adequacy. In other words, China is CURRENTLY out of the required level of reserves needed to safely operate its financial system. The view that China has years of reserves to burn through is misinformed. China’s back is completely up against the wall today, which is one of the primary reasons why the government is hypersensitive to any comments regarding its reserve levels or a hard landing. China’s public reaction in its state media to George Soros’ comments in Davos was in character for a country that is on the precipice of a large devaluation. What is extraordinary is the disconnect between the global discussion on China and the reality on the ground. As economic growth has slowed dramatically, bank credit growth accelerated sharply, leaving the banking system vulnerable to large losses.

Remember, Bernanke had the subprime crisis wrong when he said it was “contained,” Lagarde and Sarkozy had it completely wrong when they said speculators were the cause of Greece’s problems, and now they all have it wrong when they say China’s problems are due to a simple “communication problem” regarding its FX policy. The problems China faces have no precedent. They are so large that it will take every ounce of commitment by the Chinese government to rectify the imbalances. Risk assets will not be the place to be while all of this is happening.

Once we drew this conclusion in the middle of last year, we decided to liquidate the majority of our risk assets and position ourselves for the various events that are likely to transpire along this long road to a Chinese credit and currency reset. The next 18 months will be fraught with false-starts, risk rallies, and second-guessing. Until China experiences a significant devaluation, it will not be able to cope with the build-up of credit that has helped fuel its rise, but may, in the short-term, be its undoing.

Wednesday 10 February 2016

US Elections

Bit outside the scope of this blog, but difficult to avoid these days, the election in the United States of America.

I am not very impressed by the candidates, but then again, who wants to be president of a empire on the way down? Definitely not an enviable job.

At the moment the odds on Betfair for the candidates are:

The most "remarkable" candidate is of course Donald Trump, who seems to have at this moment about 15% chance to become president. Hard to believe, but then again, this is America.

One video about "The Donald" on the subject "China":

Wishing all readers a happy Lunar New Year.

Saturday 6 February 2016

INEDs approved by independent shareholders

Good article in the Business Times (Singapore) about the election and roles of INEDs (Independent Non-Executive Directors) by David Smith, head of corporate governance at Aberdeen Asset Management Asia.

Some snippets:

At present we allow the controlling shareholder to vote on the election of the individuals - the INEDs - charged with reviewing the performance of the executive. But how can an individual be expected to be independent from management if management are the controlling shareholder who recruited, nominated and elected that individual?

It is important that before we consider further amendments to the Listing Rules or Codes of Corporate Governance, which inevitably pile even more responsibilities onto INEDs, we should step back and consider a) the abuses we seek to prevent, and b) the mechanisms that we might wish to implement by which we can prevent such abuses.

.... INEDs are separately approved by both a) all shareholders and b) just independent shareholders.

.... where an individual does not pass the "independent vote", the board make representations as to why the individual is fit to be an independent director at the company. On certain transactions, those that did not pass the "independent vote" could be restricted from providing an opinion.

Friday 5 February 2016

Shell Malaysia: shocker (2)

In addition to my previous posting on this subject, MSWG wrote this in their weekly newsletter:

Minority shareholders of Shell Refining were shocked with the proposed transaction by their majority shareholders, Shell Overseas, as reflected in complaint letters MSWG received.

The sale transaction to Malaysia Hengyuan is at an approximately RM1.80 per Sale Share. Although it is only 7 % discount to the latest net asset value of RM1.93 per share as at September 2015, it was a huge discount of 63.6% to the market price of RM4.94 as at 29 January 2016 prior to the release of the announcement.

For information, other substantial shareholders are EPF (15.71%), Amanah Saham Malaysia (11.09%) and other minority shareholders are KWAP (2.38%), PNB (1.12%), Khazanah Nasional (1.12%) and Others (17.58%) as per shareholders’ listing as at 30 April 2015.

The negative impact this transaction has on minority shareholders is already happening. Shell Refining shares have plunged from RM4.98 to RM3.68 on 29 January 2016 and would possibly drop further to the SPA price of approximately RM1.80 per share.

We urge the Board of Shell Refining look into the interest of minority shareholders in respect of this acquisition and the subsequent Mandatory General Offer which is expected to be triggered by the new major shareholder.

As for the major shareholder, no doubt the transaction is a private one, but one would expect that certain care and obligations to the existing minority shareholders by the majority considering that they had been with them for a long period of time. Thus, a longer time for more offers to come by so that transaction can be done at a more equitable level to minority shareholders.

Shell was queried by Bursa, and replied the following:

We refer to the query by Bursa Securities Malaysia Berhad dated 4 February 2016 where you have requested for additional information on the “other existing commitments” and “a long term offtake from Shell Refining Company” referred to in the press release issued by our major shareholder, Shell Overseas Holdings Limited (“SOHL”) on 1 February 2016. For your ease of reference, we have reproduced the relevant paragraph below:-

Shell Malaysia Trading will ensure security of supply to its retail and commercial customers in Malaysia and honour other existing commitments through an existing comprehensive supply strategy that includes a long term offtake from Shell Refining Company.

We would like to clarify that in respect of the abovementioned paragraph:-

a)        the phrase “other existing commitments” refers to the existing commitments of Shell Malaysia Trading Sdn Bhd in the course of its business, and is not referring to the existing commitments of Shell Refining Company (Federation of Malaya) Berhad (“SRC” or the “Company”);

b)       the phrase “a long term offtake from Shell Refining Company”, if taken in its full context (reproduced below), refers to an existing strategy which includes an existing long term offtake from SRC. In respect of the terms and conditions of the existing long term offtake between the Company and Shell Malaysia Trading Sdn Bhd, we wish to further clarify that the transaction is related party transaction which has been approved by the shareholders in general meeting. The said agreement is dated 15 October 1985 and shall continue to be in force until it has been terminated by either party, or if there is an event of default. The Board of Directors have not yet received any proposals for a new offtake agreement; and

d)       the Company has not received a take-over notice or offer document from the offeror which may contain further information.

As far as I can see there is no "c)", may be an oversight?

Many questions remain, at least with me. Why the low price, was it because of high future capital expenditure? Or is this may be a combined deal, is there something else going on that we are not aware of?

At the moment the share price of Shell is trading at around RM 3.50, a far cry from its price before the announcement of around RM 4.90. As mentioned by MSWG, this is indeed a very old listed company and some shareholders must have held on to the stock for a very long time. I think they deserve at least a better explanation.

XOX: from bad to worse ..... (3)

I wrote before about XOX:

XOX was a loss making company before its IPO, it is quite a surprise for me that it was allowed to be listed on Bursa. What probably helped was a rather optimistic (with hindsight) profit forecast that it issued in its IPO prospectus.

XOX was not able to hit the revenue and profit forecasts, it wasn't even close:

The above numbers are for the year up to 31 December 2011, while the company was listed on June 10, 2011 and knew already the numbers up to then. In other words, it only needed to forecast another seven months or so. And still it was able to overestimate its revenue by a factor 4, and instead of a forecasted PAT of RM 20 Million it booked a loss of RM 20 Million. Forecasting is probably not XOX's forte.

It looks like the Securities Commission was also not exactly "impressed" by XOX's forecast, and announced the following administrative actions: a reprimand for two executive directors of XOX and for AmInvest Bank as the principal adviser for the IPO of XOX.

Is a reprimand really enough, will it act as a future deterrent? I strongly doubt it.

Wednesday 3 February 2016

Maybulks profit warning

Maybulk announced a profit warning:

The Company wishes to inform its shareholders and potential investors that the Company expects to record a substantial loss for the fourth quarter of 2015 (4Q2015) and the financial year ended 31 December 2015 (FY2015) mainly attributable to the following:-

(i)    Provision for onerous contracts
The dry bulk market continues to be weak and it is uncertain when the market will recover. The Group has reviewed its non-cancellable operating lease contracts for the chartered-in vessels and based on a preliminary assessment, the charter-in costs are higher than the current and likely market rates. Hence a provision for onerous contracts has to be made.

(ii)    Provision for impairment of investment in associate, PACC Offshore Services Holdings Ltd (POSH)
The current depressed state of crude oil prices has had an adverse impact on the global offshore marine industry in which POSH operates in. The Group carried out a preliminary assessment of its investment in POSH and is of the view that the fair value of the investment in POSH is likely to be lower than the carrying value and an impairment loss provision has to be made. While the amount of the impairment is yet to be determined, it is expected that this will have a significant adverse impact on the financial results of the Group for 4Q2015 and FY2015.

Today Maybulks share price fell by 10 cent (14%). That sounds logical given the above profit warning, but is in fact a bit strange:
  • The dry bulk index has fallen to new lows, that is public information, it is not a stretch of the imagination that it would lead to further losses for Maybulk, as it had done already for the first three quarters;
  • Maybulks associate POSH is a public traded company, the share price has fallen drastically since its IPO to a new low of SGD 0.29. Maybulk had announced already that it would consider impairing the investment, something that was in my opinion a long time overdue

I have been extremely negative about Maybulks investment in POSH since the moment it was announced in 2008. I fought it tooth and nail, to no avail, in the Malaysian context no surprise.

Unfortunately, it looks like I have been proven right in my assessment.

Investing ca. 800 million cold hard cash during the depth of the global recession in a related company with a negative NTA, but "magically" valued at billions of RM, and continuing to pile additional cash in that company just to be able to call it an associate is apparently not such a good idea after all.

Lesson learned for the minority investors of Maybulk, a very expensive lesson.

Apart from it being a bad investment, there is also a long list of corporate governance issues (some of them rather serious) regarding Maybulk and its acquisition of POSH.

Tuesday 2 February 2016

Shell Malaysia: shocker

Shell Refining today announced the disposal of 153 Million shares by the major shareholder.

Absolutely shocking was the low price, only RM 1.80 per share.

Here is the 5-year chart of Shell:

The attachments containing the press release and the press notice do not give any more background on this rather remarkable deal.

What is going on here, am I missing something?

To Cliq or not to Cliq? (6)

The company announced:

The Board wishes to announce that the Company had on 30 January 2016 received a letter from Maybank IB (“Letter”) serving notice to the Board of its resignation as Principal Adviser to the Company for the Proposed Acquisition and Proposed Rights Issue with Warrants with effect from 6 February 2016, being seven (7) days from the date of the Letter pursuant to the terms of its appointment letter.

Ouch ...... that is a very clear red flag, another one.

Is it time for the Board of Directors to call off the proposed acquisition? I definitely think so.