The Emperor wears no clothes

Good article from Bloomberg:

"Every Stock Was a Buy to This Analyst Team, Then Shares Tanked"

Some snippets:


Companies probably love getting attention from analysts at Emperor Securities Ltd. in Hong Kong. Investors who followed their advice for the past year, not so much.

The unit of Emperor Capital Group Ltd. issued buy recommendations on every one of the 173 companies it reported covering from April 2015 through May 16. Its target prices, which the company says forecast trading levels within weeks, predicted gains of 25 percent on average. They are frequently the most bullish among analysts who cover the same stocks and list their calls with Bloomberg, including those based on the standard 12-month horizon.

The picks ended up being so wrong during the past year’s rout of Chinese and Hong Kong stocks that shorting every one would have resulted in gains of about 6 percent after just four weeks and almost 13 percent if all were held through last week.


I wrote before about "SFC reprimands and fines Moody’s over Red Flags Report". An overall good report, but with a negative bias and a small error led to Moody's being punished despite many good calls.

However, if one just makes sure that all recommendations are bullish, then no punishment will be meted out, even if the contents are rubbish.

The difference in treatment of writers of positive and negative reports is very worrisome.

Mexter: new major shareholder

Interesting development in Mexter Technology, where Lim Yin Chow announced his substantial shareholding of 28%. The share shot up and the company received subsequently an "UMA" (Unusual Market Activity) query.

Lim featured before in this blog in a rather bad way, he was fined and reprimanded by Bursa because he "submitted false qualification as a  degree holder of Bachelor of Medicine and Bachelor of Surgery (MBBS degree) at the University of Hong Kong in 1992 in various announcements and annual reports of companies.".

Amin Shah and the Singapore-Batam ferry (4)

I have written before about this matter (here, here and here).

I still remember Amin Shah's company placing an add in the newspaper asking for applicants for 50 CEO positions. Or Amin Shah being the proud owner of an Italian ferry. Yes, those were the times .....

Back to the Singapore-Batam ferry, it looks like Affin is involved in this, as the company announced, some snippets:


The Plaintiff [Abu Bakar bin Ismail] claims against ABB [AFFIN Bank Berhad] vide the  above Writ of Summons and Statement of Claim dated 22 January 2016 for the following:-

1. RM56,885,317.82 together with interest at 5% per annum from 1999 till full settlement as alleged damages; 
2. SGD9,928,473.75 together with interest at 5% per annum from 2013 till full settlement as alleged losses;
3. RM776,331.00 being alleged losses of Plaintiffs’ shares in Berlian Ferries Pte. Ltd [the Singapore-Batam ferry operator] which was transferred out as a result of his bankruptcy in 2013 with interest at 5% per annum from 2013 till full settlement as alleged losses;
4. RM500,000 as cost in respect of legal  proceedings in Singapore.

ABB  had on 25 January 1996 given Suria Barisan (M) Sdn Bhd (“Suria”) a credit facility of RM21.6 million (“Facility”) against security of unquoted shares belongs to Naval Dockyard Sdn Bhd and guarantees by the Plaintiff and Puan Norashikin Binti Abdil [probably: "Abdul"] Latiff (“Guarantor”).

Suria, the Plaintiff and Guarantor (“All”) defaulted in the Facility which led to ABB filing a debt recovery action against All of them in 1999. Judgement was obtained against All on 8 July 2004.                                     

The Plaintiff was made bankrupt on 17 January 2013. However in September 2015, the bankruptcy was set aside on the grounds that he was solvent due to a third party, Chenet Finance Ltd (“Chenet”) being ordered by a Singapore Court to pay damages to the Director General of Insolvency Malaysia (“DGI”) as receiver of Plaintiffs’ Estate. ABB has appealed and Case Management has been fixed on 24 June 2016.

AirAsia: were all parties at the EGM equally informed?

AirAsia announced its latest quarterly results, the results were great, way above expectations and the share rose RM 0.28 to RM 2.40.

Yes, life can be good, that is, if you are a shareholder of AirAsia.

But life can be even better if you are allowed to buy 559 millions AirAsia shares at a price of RM 1.80.

And that is exactly what Tony Fernandez (Group CEO) and Kamarudin (Executive Chairman) are allowed to do through a private placement (PP). One of the largest I have seen on Bursa done by controlling shareholders.

On May 9, 2016 at the EGM non-interested shareholders approved the PP, as is required by the rules. So is everything above board?

Well ...... there is a nagging issue if all parties actually had the same information available at the EGM.

On one side surely Fernandez and Kamarudin must have known about the 2016/Q1 results, may be not in all detail yet, but at least the key numbers, and they must have known that the numbers were way better than expected by the analysts and the market.

On the other side, the non-interested shareholders were left in the dark, the official results were simply not yet announced, that would happen only about three weeks later.

According to data from Bloomberg analysts were surprised by the numbers: the results were 400% above expectation, pretty stunning.

The authorities should look into this situation, shareholders are supposed to have roughly the same amount of information when making an informed decision. The possible insiders knowledge of the Q1/2016 results appears to be material. If there was indeed a clear information bias, then minority shareholders should have been protected.

As written before, the whole issue could have been easily avoided if the company had replaced the PP by a rights issue of the same size, allowing all shareholders to participate.

Alibaba investigated over accounting practices (2)

In addition to yesterdays posting about Alibaba, I like to point to a posting on "China Accounting Blog" (which is anyhow always a good source of information for all accounting matters related to China): "BABA v the SEC".

There are three issues at hand, all described by Paul Gillis:


The first relates to consolidation policies and practices (including accounting for Cainiao Network as an equity method investee).  

The second issue is related party transactions. BABA certainly has plenty of them and they have been a major concern for shareholders, especially since Alipay was taken out of the BABA structure.

The third issue relates to the reporting of operating data from singles day (November 11, the biggest online commerce day of the year in China). 


Regarding the third issue I also refer to an old posting.

Alibaba investigated over accounting practices

From Bloomberg: "Alibaba Facing SEC Investigation Over Accounting Practices"

Some snippets:


Alibaba Group Holding Ltd. fell the most in four months after the e-commerce giant said it’s being investigated by the U.S. Securities and Exchange Commission over its accounting practices and whether they violate federal laws.

The regulator is looking at data reported from the company’s Singles’ Day promotion, Alibaba’s biggest shopping day, and how Alibaba consolidates results from affiliated companies, including logistics partner Cainiao Network, the Hangzhou, China-based company said in its annual report. Alibaba said it’s providing documents and cooperating with the probe, which is also examining related-party transactions.


Not a new issue, I blogged about this issue before.

Many brokers are reiterating that "the auditor is PWC", but what they're missing (or conveniently ignoring) that its not actually PWC who's auditing them, but a local Mainland Chinese affiliate ...

Serious CG issues at SingPost (2)

The one person who wrote a lot about CG issues concerning SingPost is Mak Yuen Teen.

Many of his letters can be found in the "letters" department in the local newspapers. They can also be found on Mak's website.

The articles and letters concerning SingPost can be found here.

One rather remarkable aspect is that this is not the first disclosure lapse by SingPost, as detailed here, some snippets:


The group’s recent admission of disclosure failure may remind some observers of what transpired with ACCS 10 years ago. SingPost had announced its intention to invest in ACCS in early March 2005, after ACCS shocked the market by saying that it had lost almost all its Nokia contracts, had overstated its earnings, and was under CAD investigation.

Soon after, the deal came under intense scrutiny when it was disclosed that three SingPost directors – Mr Goh, Mr Lim and Tan Yam Pin – held stakes in ACCS.

Mr Goh, who had failed to disclose his substantial stake in ACCS, blamed “inadvertence”. Mr Lim revealed that he had bought shares in ACCS after it announced the Nokia contract losses, and that he stopped buying just days before talks on the planned investment started.

A bombshell came when SingPost and Mr Lim said in late March 2005 that they were helping in a CAD probe, triggering speculation that this was linked to Mr Lim’s purchase of ACCS stock. However, this was not confirmed. The CAD cleared Mr Lim of any wrongdoing a few months later, in October 2005.


It appears SingPost, despite the above negative experience, has not put proper processes in place to deal with acquisitions where directors seem to have a conflict of interest.

LVG, the shapeshifter, is fired

The worst kept secret is out, Louis van Gaal, also known as LVG, is fired by Manchester United.

LVG became famous for his shape shifting antics:

CIMB: which process shortcomings?

On April 18, 2016 CIMB announced:

".... that Dato’ Sri Nazir Razak will take a voluntary leave of absence from his positions as Chairman of CIMB Group and Director of CIMB Bank, with effect from close of business today till the completion of an ongoing Board review on the banking activities relating to his personal account".


In these kind of CG cases it is important that the independent directors step up their game, and show their independence. They have to tackle the issues at hand from all different directions in an unbiased way.

However, in this case it looks like they had made up their mind already. Before the board review had even started the senior independent director stated:


"... the members have always been convinced that he upholds the highest standards of corporate governance. While this decision [to take leave of absence] of his is contrary to the Board's wishes ..."


On May 18, 2016 CIMB announced:


Dato’ Sri Nazir Razak did not misuse his position as the Group Chief Executive at that time nor was there any inappropriate use of the bank’s resources.


That might have been the case, but first of all more details regarding this would have been welcome.

Secondly there are many other issues (legal, ethical, moral etc.) involved, but the announcement does not touch on those.

The announcement continues:


".... the detailed examinations conducted during the review identified some process shortcomings,"


Again, there is no explanation whatsoever what those "process shortcomings" are.

Serious CG issues at SingPost

Very good article in The Star regarding corporate governance issues regarding a "government-linked logistics and e-commerce group".

We can safely assume that the company in question is non other than SGX listed SingPost.

The article centers around important issues like conflict of interest, independence of directors, “box-ticking corporate governance approach” and the important role of "public outrage".

The special audit report regarding the matter can be found here.

On one side, there is quite a lot of useful information to be found in this report about the process regarding the three acquisitions.

On the other side I think important details have been left out. For instance, a broad background of the three companies could have been given (some key numbers before and after the acquisition of each company plus the price for which they were acquired). The companies were acquired one, two and three years ago, so it would be interesting to know how they have performed since their acquisition.

Also, the money that Tay and his company earned through the transactions would have given more context: was it a tiny amount, or were millions of S$ involved?

And why did the three companies hire Tay's company as advisor, surely there must be hundreds of this kind of financial arrangers/advisors, was it mere coincidence?

It appears that the terms of reference for the special audit were too narrow to provide this kind of information, missing out on an opportunity to clear the air once and for all.

Unrealistic projections, anyone held responsible?

From MalaysiaKini: Audit: ERL operator's projected earnings were 'too high'

Some snippets:


A demand from Expressrail Link Sdn Bhd (ERLSB) for RM2.9 billion in compensation from the government was made based on projected earnings which were too high, a federal audit has found.

The Auditor-General's Report 2015, released yesterday, stated that the compensation demand was made after the government had twice ignored requests to increase the fare for ERL rides from KL Sentral to KLIA and KLIA2, as agreed in its concession agreement.

Based on the concession agreement signed between ERLSB and the government in 1997, the company can request to review the fare after a stipulated period of time and based on an agreed fare.

“The audit found that ERLSB’s actual revenue for the period between 2012 and 2014 was only between 11.5 percent to 13.7 percent of its projected revenues. This is a much lower figure than the projected sum,” said the report.

In 2012, it was stated that ERLSB had projected its earnings to reach RM741.1 million, but its actual revenue was only RM85.5 million.

The following year, ERLSB projected revenue was stated as RM780.38 million but its earnings only totalled RM98.14 million.

Similarly in 2014, the concessionaire collected RM124.3 million, with targeted earnings stated as RM905.31 million.


And how was the issue solved?


...... ERLSB has agreed to withdraw its demands for compensation, in exchange for a 30-year extension to the concession agreement.


It is easy to come up with sky high projections that "serve the purpose", that is to get the project going. We witness the same over and over again with rosy DCF projections from Bursa listed companies.

But when the projections indeed turn out to be much too high, is anybody actually held responsible for this?

Creative Accounting

There used to be a time when creating profits would require a real effort in hard work.

These days a much more simple way is available: call in the financial engineers.

I have written many times about the ways these people are able to polish up accounts.

In the tech world creativity to make profits out of thin air seems to have reached a whole new dimension.

Article from Bloomberg: Tech Startups Come Up With Some Creative Definitions for ‘Profitable’

Some snippets:

.... the startup [SpoonRocket] calculated that the business had become "contribution margin positive," meaning that it sells an item—in this case, pre-made meals delivered to customers—for more than the cost to manufacture, distribute, and sell it.

Uber said it was profitable in the U.S. and Canada during the first quarter of this year. Lyft said it is "on a clear and defined path to profitability." Postmates said it will be profitable by the end of 2017. DoorDash is "cash-flow positive" in some markets. TaskRabbit will be "profitable profitable" by the end of this year. It "won't be too long" until Airbnb is profitable. Instacart is "gross margin profitable." Luxe Valet is "on the precipice of being profitable" in some markets. At Y Combinator's demo day in March, many bright-eyed entrepreneurs clinched their pitches with a robust "and we're already profitable!"

Tech startups are increasingly touting a mix of less common financial metrics, even as their public counterparts move more toward generally accepted accounting principles. Amazon and Facebook recently began breaking out employee stock compensation in more of their results, bowing to pressure from regulators and investors. LinkedIn and Twitter still focus on numbers that exclude equity costs.

When Uber said it is profitable, the company similarly left out equity grants to employees, along with interest and taxes. Its main ride-hailing rival in the U.S., Lyft, declined to elaborate on its "path to profitability" statement, leaving questions about how or when it will reach its destination. Airbnb also declined to provide details on an executive's profitability comments. TaskRabbit said "profitable profitable" means it will turn a net profit but declined to say whether specific costs such as equity grants and taxes were included. Postmates, the courier service, used a profitability calculation that doesn't include taxes.

Several startups slice their numbers by markets to demonstrate financial maturity in certain cities or countries. Again, the criteria for what's included in those calculations can vary. Instacart told Bloomberg in February that it was profitable in its biggest markets and that 40 percent of its volume was profitable. The company later clarified that it meant gross margin profitable, which is usually limited to direct costs such as supplies and delivery labor. Instacart's calculation leaves out other costs, such as customer service, central office salaries, rent, and the cost of acquiring its workers. Instacart also said it is gross margin profitable, on average, across all its markets.

Luxe, an on-demand valet parking service, said it's currently profitable in some cities but declined to name them. The company defined "profitable in a market" as gross profit, excluding central operations costs. DoorDash, which delivers food from restaurants, said its cash-flow positivity is limited to its "earliest markets" and includes customer service and salaries of regional workers but leaves out central rent and operations.


However, at the end of the day, when the dust has settled:


"You can always say, 'We're profitable if we don't include X,' " Behr said. "But no matter how many ways you say you're kind of profitable, if your bank account ends up lighter than when you started—eventually, that doesn't work."


This is what Warren Buffett wrote in his last annual report (page 8, emphasis mine) about GAAP:


Though we sold no Kraft Heinz shares, “GAAP” (Generally Accepted Accounting Principles) required us to record a $6.8 billion write-up of our investment upon completion of the merger. That leaves us with our Kraft Heinz holding carried on our balance sheet at a value many billions above our cost and many billions below its market value, an outcome only an accountant could love.


It definitely seems that accounting these days is more of an art than a science. I am not sure if that is a good thing though.

Koon Yew Yin's late disclosures (2)

Koon Yew Yin has replied regarding his late reporting, some snippets:


The reason why I reported late is because of the cumbersome system of reporting to the Bursa Malaysia. To fill up Form 29A & B requires details such as the number of shares and the date I bought or sold. Moreover, the buying or selling price frequently changes. To report the price I have to work out the average price I traded in the whole day.

To complicate the whole issue, I have margin accounts with TA Securities, Maybank, Kenanga, CIMB, RHB, HLIB, Alliance and Affin. My total margin loan is about Rm 150 million, my average daily trading exceeds Rm one million and the number of shares I buy and sell every day is quite many.

As I have so many trading accounts and I am 83 years old, I do not key in my orders to buy or sell myself. I simply give instructions to my remisiers to buy or sell and at a certain price. I have to watch to see the number of buyers and sellers so that I can change my previous instruction in order to succeed in my buying or selling. For example, if I see there are a lot of buyers willing to take the sellers, I will offer a higher price if I want to buy or sell. If there are less buyers, I will have to reduce my price offer to buy or sell.

A few times I made the mistake of instructing one remisier to sell in the morning the same share that I instructed another remisier to buy in the afternoon. In fact, the authorities had reprimanded my remisers who were involved in these transactions that may seem to mislead investors. Those were honest mistakes.

As a result of the above difficulties, I waited until I have sold enough to own less than 5% of the total issued shares of the company. I just have to fill up one form to state that I have ceased to be a substantial shareholder without the requirement of stating the dates and the prices I sold.


I have some sympathy regarding dealing with a cumbersome system.

But rules are rules, and they are there for a clear reason.

I assume that there were two easy ways out for Mr. Koon:

• The easiest way to deal with the situation is to make sure that one never breaches the 5% rule, so no announcements have to be made
• If however one wants to breach the 5% rule, and the process is too cumbersome to do oneself, then one should hire a good secretary for that job

The Star reported: "Koon not the only one", and gives several other examples of breaches of the reporting rule.

I always had the same impression, that enforcement was really lax on this rule, for instance here, here and here. If it is so easy to find examples, there must be many, many more examples, especially with shareholders often registering shares under someone else's name.

Some more observations from The Star's article (emphasis mine):

Areca Capital fund manager and CEO Danny Wong notes that timely disclosure is very important to ensure fairness and transparency across the market.

“It improves market efficiency for timely decisions and an inefficient market will discourage investors as it will only benefit insiders,” he says.

Wong also suggests that there should be a more robust system for disclosure here.

“It should be automated.”

Another observer who is well-versed with the local capital market concurs.

“In order to protect minority shareholders, substantial shareholders who are often the controlling shareholders should make the disclosure within 24 hours as opposed to the current seven market days so at least the minorities are aware that they (the substantial shareholders) have sold in the case of a disposal,” he says.

He points out that after seven days, a stock may have already lost a lot of value without the minorities being aware of what had actually happened.

In neighbouring Singapore for instance, the disclosure period requirement is much shorter, that is within two business days.

Fortress Capital Asset Management CEO Thomas Yong shares the same view as the rest.

“Trade actions of company insiders or even substantial shareholders are generally considered as material price sensitive information and as such require timely disclosures in the interests of protecting other minority shareholders and smaller-scale investors.”

It is about time that things change in Malaysia, both the cumbersome reporting and the lax enforcement. Both jobs are begging to be automated, something that should be pretty straight forward.

It would also require that the ultimate beneficial shareholders are revealed in a proper way, something that was also long overdue.

Related Party Transactions, "a national sport in Asia"

I have often warned about Related Party Transactions (and its closely related cousin "Conflict of Interest"). Basically, these should be avoided by companies, and if they are unavoidable due to the nature of the business, they should be done in a very transparent and upfront manner.

In Malaysia, RPTs (and Conflict of Interest situations) are of course almost a way of life, many of the Corporate Governance abuse cases described in this blog handled about them.

GMT did recently some research regarding Hong Kong and Singapore companies.


Over 90% of all companies were engaged in some form of related party transactions in 2014. It makes us wonder if the remaining 7-8% simply forgot to declare them! These transactions averaged 7% of combined sales and expenses which is highly material to profit. A whopping 13% (46 companies) had related party transactions in excess of 20% of combined sales and expenses. However, of these, 31 were state owned enterprises (SOE) which clearly do a lot of business with other SOEs. Who knows whether they conduct business at market prices or in line with government policy? What we’re really interested in are those private companies with a large amount of related party transactions because that’s where minority shareholders are at greatest risk. That leaves us with just 15 companies which we list in alphabetic order below:

Some of GMTs findings (unfortunately the names of the companies are left out, I guess one has to subscribe to their services for that):

• Company 1: The largest related party balances of any company GLOBALLY, at US$6.2bn. It is paid interest income on amounts owed to it but doesn’t pay interest on amounts it owes. This boosted 2014 pre-tax profit by 20%.
• Company 2: Two CEOs have been sent to jail in the last decade.
• Company 3: Around 45% of expenses routed through two companies owned by the founder. One of these paid the founder an estimated US$22m in dividends over the past two financial years.
• Company 4: Building the world’s 5th tallest building in China, financed with a US dollar loan from a related party.
• Company 5: Over 35 pages of connected party transactions.

As a safeguard, RPTs have to be evaluated by the independent directors (INEDs), if the deals are properly done at arms length.

However, as David Webb put it: 

Once appointed by the board, the INEDs are re-elected by shareholders at the next annual general meeting, and thereafter by rotation (typically standing every three years, if they survive that long). Unfortunately, the controlling shareholders are allowed to vote in these elections, so they nearly always determine the outcome. Yes, the sheepdog is appointed by the flock, not by the shepherd. It is a clear absurdity that the controlling shareholders effectively appoint the people who are supposed to prevent them from abusing the company. This is shareholder democracy Hong Kong-style.

In fact, INEDs are often so closely allied to the executive directors that, if the company is taken over, the INEDs resign at the same time as the executive directors, and the new controlling shareholders will appoint new "independent" directors of their choice.

GMT concludes with "Now we’re working on the rest of Asia". I certainly hope they don't skip Malaysia, there will be lots of juicy material to be found.

Unfair delistings

I often complained about minority shareholders in Malaysia being treated badly: relatively high IPO prices, low delisting prices, and in quite a few cases a high IPO price again at relisting.

I call it the "listing-delisting-relisting game", and some local tycoons are very good in playing it.

The main problem is the low delisting price, major shareholders wait until the price has dropped considerably, and then, under the threat of minority shareholders owning shares in an unlisted company, offer a low exit price.

In other countries things are not much better though, so it seems.

Article from Bloomberg:

"In $39 Billion China Buyout Spree, Latest Offer Angers Investors"

Some snippets (emphasis mine):


When Leo Ou Chen took his Chinese online beauty products retailer public in the U.S., investors clamored to pay $22 a share. Less than two years later, he’s offering a third of that price to buy them back.

The going-private offer for Jumei International Holding Ltd., the latest in a string of Chinese companies seeking to exit the U.S. stock market, is angering minority shareholders who say the low price benefits management to the detriment of equity owners. Chen and his partners have made a non-binding offer of $7 per American depositary share in cash, the company said on Feb. 17. They own 54 percent of the shares and have 90 percent of the voting power.

If the management-led buyout group is able to buy Jumei at such a steep discount, it will expose loopholes in the rules that are supposed to protect small investors and at the same time undermine confidence in other overseas-listed mainland companies, the minority shareholders say.

“I am angry, disappointed and disgusted,” said Ricky Zhong, an investment director at iMeigu Fund in Beijing. His firm specializes in investing in U.S.-traded Chinese companies and owns Jumei shares. “I’ve never seen so much backlash from investors for a go-private deal. Investors are hurt.”

While the offer from Chen, his co-Founder Yusen Dai and Sequoia funds is 27 percent above the average closing price over the previous 10 trading days, it is 68 percent below its initial public offering price of $22, which was above the high-end of the targeted range. Compared with its average trading during the past 90 days, the proposal is 11 percent cheaper, the second-lowest among 42 proposed going-private deals of U.S.-listed Chinese companies since January 2015, according to data compiled by Bloomberg. Only E-Commerce China Dangdang Inc. has a bigger discount of 16 percent.

Jumei held $402 million in cash or equivalent as of September, according to the latest filing. That is almost equivalent to the $467 million needed for the buyout group to acquire the remaining outstanding shares, according to data compiled by Bloomberg.

While minority shareholders are treated unfairly, they have very little influence in the going-private process, iMeigu’s Zhong said. Under the current law governing companies incorporated in the Cayman Islands, management-led buyout groups are allowed to vote on the deals. Management tends to hold controlling stakes, putting minority shareholders at disadvantage, Zhong said.

“Some people are greedy,” he said. “But it’s the flaws in the regulations that set the ugly side of human desire lose.”


Time to correct the flaws, it is long overdue.

Keep it simple, stupid

Great article which serves as a warning in the Straits Times:

Retail investors, steer clear of complex structured notes

Some snippets:


The name of the product was a mouthful: Six-month, Singapore-dollar non-principal guaranteed autocallable fixed coupon note with memory autocall linked to three shares.

It carried a fixed coupon of 8.01 per cent a year, payable monthly provided that "events" that would trigger an early redemption had not occurred.

The events were tied to the performance of three United States-based technology stocks: Google, Intel and Oracle.

Here is how Memory Autocall worked: The investor would receive a coupon payout of 0.6675 per cent of the principal amount each month, for six months.

But should the three stocks close at or above their initial prices on certain set valuation dates, a knockout event is deemed to have occurred. This would lead to the termination of the note, as a result of which the investor would get back her principal plus the coupon for that month.

She would also get to keep the coupons paid out earlier.

The three stocks did not need to meet the initial price threshold at the same time for the knockout event to take place.

If this does not sound complicated enough, there was another scenario known as the knock-in event to consider.

This would occur should any of the stocks fall to 80.5 per cent or lower of their initial price on any given valuation dates.

On the final valuation date, should the closing price of the worst-performing stock stay below its initial price, the investor's principal would be used to purchase the stock at the initial price. Under this scenario, a loss of capital is guaranteed.

This was exactly what happened to my friend's investment.

From then on, the investment was doomed even as my friend continued to receive her monthly coupons, given there was little chance that Oracle could recover to the initial price in the remaining three months. On maturity, a back-of-the-envelope calculation showed that my friend had suffered a loss of about $29,000 even after factoring in the $8,010 in coupon payments she collected.

On top of that, she was left holding Oracle shares bought at a high price - an outcome that she had not bargained for. She is still debating whether to sell the shares or hold on for a better price.
It bears repeating what I said earlier: Structured products do not compensate investors enough for the risks they are assuming.

My friend lost almost 15 per cent of her capital chasing an investment that would have, under ideal conditions, earned her 4.005 per cent at best.


The lessons from the above story:

• Keep it simple, don't go for too difficult constructions that are almost impossible to calculate
• Always be aware of the commissions

Why did Maybulk not take the "big bath"?

Maybulk released its 2015 annual report.

I have warned many times in this blog about the upcoming loss (for instance in 2014), in regards to the need to impair the valuation of its associate company, POSH (PACC Offshore Service Holdings).

A loss of almost RM 1.2 Billion due to many provisions, impairments, etc., surely Maybulk must have taken the big bath?

But surprisingly, this has not been the case at all. When we dive into the accompanying notes to the accounts, we find the following:

In other words, the valuation used is almost three times as high as the market value, a staggering RM 652 Million difference.

On a side note, one wonders, if the POSH shares are really so much more valuable than the market price suggests, why does Maybulk still purchase new vessels, why not buy additional POSH shares? It can immediately mark up the price in its books by a factor 2.85, for every RM 100 Million invested it can book a cool profit of RM 185 Million!

If however the full impairment was taken into account (I think a lot more realistic), then the loss for 2015 would have been more than RM 1.8 Billion.

The reasons for the relatively low impairment that was used can be found in the following paragraph:

I don't like DCF projections, have warned about its use many times in this blog. Basically, by tuning some parameters financial engineers can come up with about any valuation that they want. And that is often how DCF is used (or rather misused), especially in the Malaysian context.

Some considerations in this particular case:

• The calculation itself is never given (as usual), so we can' t check its reasonableness. This is especially important in this case since DCF was used twice to calculate POSH's value (at the initial RPT and at the IPO), and both times the resulting valuation was hugely optimistic.
• The DCF valuation depends so much on the underlying assumptions, as shown above, one percent change in the discount rate will change the valuation RM 230 Million, a huge impact.
• The only cash that Maybulk gets from its investment in POSH is dividends, and they have been tiny over the last eight years, most of the years they did not receive a single cent, so how is it possible to come up with such a high valuation?
• And lastly, why did Maybulk change its method of valuation, from the unexplained price-to-book ratio in the previous year to DCF, why is no explanation given?

The balance sheet took a hit because of the reported loss, but with a debt equity of 52%, things still look reasonable (left column 2015, right column 2011):

However, if we adjust the numbers for the market value of the POSH shares, then the balance sheet looks like this:

Suddenly the borrowings are larger then the shareholders equity, implying a debt/equity ratio of clearly more than 1.

The financial picture does not look solid:

• Cash of only RM 140 Million
• Borrowings of RM 608 Million (of which RM 225 Million short term)
• Capital commitments of RM 410 Million
• Over 2015 the company booked an operating loss of RM 100 Million
• Its RM 1.1 Billion investment in POSH is hardly paying any dividend

And then taking into account that just 2.5 years ago Maybulk could have sold back its investment in POSH by exercising its put option for a profit of a few hundred million (not the current paper loss of RM 756 Million), generating more than 1 Billion extra cash, and without the need to invest a few hundred million for POSH's IPO shares.

In other words, instead of being a highly leveraged company in a weak financial position, Maybulk would be sitting comfortably on top of a huge cash pile. It could have given out RM 1 dividend per share (more than the current share price!) and would still have more cash and less borrowings than now.

Unbelievably, the minority shareholders did not even get a chance to vote about the put option.

Koon Yew Yin's late disclosures

Article in The Star: "Koon in the spotlight over untimely disclosures", some snippets:


The late disclosures to Bursa Malaysia by savvy investor and philanthropist Koon Yew Yin on the disposal of his shares are now raising questions.

Based on Bursa’s listing requirements, a substantial shareholder needs to give notice on their acquisitions or disposals two weeks from the day they buy or sell the shares. In Koon’s case, he disclosed weeks later the disposal of his shares in VS Industry Bhd and Latitude Tree Bhd.

Being a substantial shareholder in both companies, his late announcements on the disposals have put him in the spotlight among his followers and the investing community.


No reason has yet been given for the lapses in making timely announcements.

The case is rather peculiar since Koon Yew Yin is also an active blogger, writing (amongst other subjects) about many of his share purchases, including those regarding VS Industry.

On i3investor there is a lively discussion ongoing (here and here, see the comments), whereby questions are asked if Koon had (apart from the legal obligation) the moral obligation to announce the selling of his shares since he also wrote when he was buying them.


In general, I am rather puzzled, why in this digital age are these kind of announcements not (semi) automated, at Bursa level, at company secretary level or both?

It should also not be much trouble to at least trigger an automatic alert within two weeks that a major shareholder has not yet filed the proper announcement since he changed his shareholding.

I have written in the past about this issue before.

More credible responses needed from S'pore firms accused of bribery abroad

Timely article from Mak Yuen Teen in the Business Times (Singapore). Some snippets:


..... allegations have been made in media reports about the possible involvement of some Singapore companies in bribery scandals overseas. The responses from these companies typically include an immediate denial of the allegations, and an assertion that the company has zero tolerance for corruption and a code of conduct prohibiting bribery and corruption.

.... every company will undoubtedly say it has a zero tolerance for corruption. I have never seen a company say it has some tolerance for corruption.

.... most companies have a code of conduct that prohibits bribery and corruption, and certainly none will have one that condones it. This does not guarantee that employees or third parties may not have violated the code.

In a recent case, overseas media reports said a leaked confidential memo from an overseas company accused of being a middleman in a massive bribery scandal commented that the Singapore company that was allegedly involved was an "ideal client" because it had lax anti-corruption controls, relative to other multinational clients.

[this is most likely a reference to Keppel, as described here]

Singapore companies that do business overseas need to take a good hard look at their compliance programmes, strategies, incentive systems and business practices and adopt a more measured approach when responding to bribery allegations. Rather than issuing a knee-jerk outright denial, chanting "zero tolerance for corruption" and "code of conduct" whenever such allegations surface, they should take allegations seriously and commit to reviewing their compliance programmes and undertaking their own investigations. Outright denial of bribery without any specific action may give the impression that the company has a head-in-the-sand attitude towards actual bribery risks out in the field. If the allegations subsequently turn out to be true, the company's initial response would be seen to be shallow and, over time, the company will lose its credibility.

Poor earnings growth for Bursa listed companies (3)

Article in The Star: "Bleak corporate earnings ahead".

An interesting sentence based on a note by UOBKayHian Research:


"Corporate earnings growth, which has derailed from gross domestic product (GDP) growth over the past three years, is just making a meek mid-single-digit growth recovery in 2016 ....."


The first part, corporate earnings have derailed from GDP growth over the past three years: exactly, that is what I have written about before.

The big question is: Why? I have no answer to that, except to note that I trust the audited annual numbers of the Top 30 companies listed on Bursa much more than the official GDP numbers.

Another issue is, which research house actually predicted three years of earnings decline for the Top 30 companies? My guess: not one.


The second part of the above sentence, "a meek mid-single-digit growth recovery in 2016".

That is a quite remarkable forecast, despite the current difficult environment, UOBKayHian expects a positive growth in earnings.

I don't agree with that, the numbers I have seen so far (mostly based on one quarter of earnings) are again a few percent lower than the 2015 numbers, which would imply a fourth straight year of declining earnings.


And finally: "It is no surprise that the FBM KLCI companies are viewed as the bellwether of economic growth".

Well, those are exactly the companies I have measured in my postings, and they have not been the bellwethers in the last three years at all, more in the contrary.