INIX: why no audited accounts of its associate? (2)

Today the company issued its annual report.

The Chairman's statement is disappointing, only one page, widely spaced, hardly giving any useful information about the loss incurred and the plans going forward to improve its results. Surely an annual report should be more informative than that.

"Maintaining the profit trend"? The company just lost RM 5 Million and has accumulated losses of RM 20 Million! I surely hope, for the sake of the minority shareholders, that the trend will not be maintained.

I was interested in the associate company that didn't have audited accounts (page 64). No reason was given, instead a short, simplified balance sheet was given, but the profit & loss was rather comical:

If this same information was given to the auditors of INIX, then I understand why they qualified the accounts.

INIX: why no audited accounts of its associate?

INIX announced that its audited accounts are qualified, the reason given by the auditor:

I can come up with several scenario's why the audited financial stataments were not made available, each with its own degree of how serious the impact would be for INIX.

But why do we have to guess which scenario is the one, why does INIX not simply provide the proper reason for the above?

Surely minority investors deserve to know, this seems to me to be material information.

Oops, CIMB releases Vivocom's results premature (2)

During the day CIMB took the research note from their website:

And later Vivocom announced their 3rd quarter results, very similar (but not exactly the same) as the numbers from CIMB. Probably CIMB used some preliminary numbers in their research report.

Bursa just today announced that it reprimanded SKP Resources and fined 3 executive directors.


SKP had verbally disclosed the Contract including the contract value [RM 400 Million worth] to 2 research houses on 7 May 2015 without making an announcement of the same to Bursa Securities immediately thereafter.


Of interest for the Vivocom case is the following (emphasis mine):


..... a listed issuer must ensure that no disclosure of material information is made on an individual or selective basis to analysts, shareholders, journalists or other persons unless such information has previously been fully disclosed and disseminated to the public (i.e. to Bursa Malaysia Securities pursuant to paragraph 9.08(5) of the Main LR).


In other words, it appears that Vivocom clearly breached the listing rules in a similar way as SKP by selectively disclosing (preliminary) quarterly results to CIMB.

Apart from that, there is the ethical issue, surely CIMB, being professionals in this business, must have know that Vivocom was breaching the listing rules.

And lastly there is the question if Vivocom and CIMB were much too close for comfort, as witnessed by the many postive research reports from CIMB, the high target price and the above breach of the rules.

Oops, CIMB releases Vivocom's results premature

CIMB released a research report about Vivocom "Tracking expectations":

There is one "tiny" problem with this, the company itself has not yet announced its quarterly results.

That is of course a major screw up.

Both from the side of CIMB and from Vivocom.

It also shows that certain parties are privy to inside information, while others (the public) are not. A situation that should be avoided. The question is if this happens more often, a company releasing sensitive information to other parties before the information is officially announced.

I wrote twice about CIMB reporting about Vivocom, here and especially here. CIMB has a rather aggressive price target of RM 0.62 vs current share price of only RM 0.18.

Who Wins and Who Loses in a Global Trade War?

Article from Harry Dent, some snippets:


My research in recent months has focused increasingly on how the surprise Brexit vote and Trump’s victory are actually not that surprising after all. They’re a clear sign of a growing number of everyday people rejecting the massive globalization trend that has surged since World War II.

The world “shrinking” seemed to be a win-win at first. Countries could focus on what they do best and export to others while importing what they need. And, yes, longer-term that does work, as Adam Smith first espoused in 1776.

But there’s a catch, as Australian Steve Keen, one of those rare economists who truly understands how the world works, says. That is, you can’t just switch from one major industry to the other without some major costs to infrastructures and labor unemployment. So once you’ve set off down a particular path of specialization, there’s really no turning back.

You can’t turn a steel mill into a semiconductor factory, or at least not without major retooling and costs. And the skills that staff must possess to work in each kind of plant differ wildly.

In short, specialization of labor is good, until it turns bad. So too, globalization has been an economic boon, until now…

We’ve reached that point where it’s time for a reset before we can progress once again.

Global trade, just like any other trend, surged and has now hit its limits. It must reset and consolidate before it can resurge again.

This is the nature of any cycle!


If Dent is indeed right, then things look bleak, in particular for Hong Kong and Singapore, but also for Malaysia, three countries that depend a lot on international trade.

Time will tell ....

Chinese "IPO fraud school"

Interesting article on Seeking Alpha:

KGJI: A 'Fraud School' Success Story

Some snippets:

Muddy Waters, a research firm that has exposed many Chinese frauds, authored a White Paper on the organized network that brought numerous fraudulent companies onto U.S. exchanges. The presentation and research paper, Frauducation, cited a 2012 Chinese Today's Fortune article that discussed an investigation into a Chinese "fraud school." The article (translated into english) describes a "systematically criminal" platform:


... the "fraud school" is a small investment bank and financing counseling company. It uses a network of accounting firms and law firms based in HK and US to jointly operate to present "trash" enterprises as fast-growing and huge-profitmaking super stars, thus catching the foreign investors' eyes, gaining private funding, and subsequently going public in the US....After that, they will keep coaching the firm on producing falsified reporting documents in order to make it keep "growing" with the eventual goal of listing on a primary exchange (i.e. NYSE or NASDAQ) and collect even more money from US investors.


While the investment bank leading the fraud school was not specifically named in the article, the research paper highlighted the likelihood of it being a Hong Kong outfit named Chief Capital.

The Frauducation white paper also examined the audit firm of Jimmy C.H. Cheung & Company. Cheung was the earliest auditor of record for RINO and audited ChinaCast (OTCPK:CAST) which, according the SEC, was a "massive" fraud. We discovered that Cheung also performed audit work for Kingold.


The article further details alleged irregularities regarding Kingold. The share of Kingold went down from 2.00 to about 1.30, but recovered to 1.60 on Friday.

A video by Muddy Waters about the alleged Chinese fraud school can be found here.

I am not aware if any Bursa or SGX listed company went to this alleged fraud school. But the audit firm of Jimmy C.H. Cheung & Company (featured in the above video) did auditing work for a SGX listed company.

The firm is called International Healthway Corp (IHC), from it's IPO offer document (dated 1 July 2013)

And it seems that nothing has changed, the same auditor is still auditing the subsidiaries in Hong Kong according the the latest anual report. That looks like a red flag.

But there are many more red flags. Investor Central in an article named "International Healthway Corporation Limited - Do the directors really live in the Thye Hong industrial building in Leng Kee?" came up with "29 questions that need to be asked".

And according to this article the authorities are also looking at trading of IHCs shares.

Even in the boardroom there seems to be problems.

The auditor of IHC (PricewaterhouseCoopers) issued a "disclaimer of opinion" in the 2015 annual report:

PNB reveals secret of how it makes money to pay high dividends

Article in The Star: "PNB reveals secret of how it makes money to pay high dividends"

That is indeed a catchy heading.

I have to admit, I have been a sceptic of the PNB funds, both regarding the high returns, the absence of down years and the fact that so many people borrow money to invest in these funds.

The problem with the article in The Star is, that nowhere is exactly revealed to the reader how PNB does make money to pay its high dividends. That is disappointing, to say the least, because that seems to have been the purpose for the meeting according to the title of the article.

Some of the returns of PNB funds can be found here and in other postings in the same blog.

I notice that the returns are getting lower, from the juicy double digit returns in the nineties to returns in the high single digits in this century.

But even those high single digits are much higher than average long term Malaysian share market returns.

I have written before about two subjects that seem relevant to this discussion:

• Bursa: long term returns: "My best overall guess of the long term yield including dividends and costs incurred of a portfolio is in the range of 4-5% per year" 
• Poor earnings growth for Bursa listed companies (5): "At the moment it looks like that the [2016] earnings will come in around RM 53 Billion, lower than the 2012 results, about 12% lower than the 2014 results"

I hope PNB will share its presentation (hopefully with lots of numbers to digest) not only with journalists but also with the Malaysian public.

AirAsia's New Lease of Life

Interesting article by Bloomberg.

Some snippets:


AirAsia loses money at the operating level on ticket sales, just about makes it back on ancillary revenues, but makes its real money from selling and leasing back its own aircraft.

That makes plans by Group CEO Tony Fernandes to sell this golden goose rather unsettling. The unit could be separated as soon as December, he said earlier this year, and may fetch as much as $1 billion.

There would be some definite benefits. Investors have often looked askance at AirAsia's leasing business, particularly because many of its sale-and-leasebacks have been not to lessors but to its own affiliates in Indonesia, Thailand, the Philippines and India. AirAsia's stock shed more than half its value in less than three months last year after GMT Research issued a report criticizing the accounting used in such deals, though it has since more than recovered what was lost.

Putting the leasing unit at arm's length will both help Fernandes pay down debt, and remove the shadow GMT's report cast.


Still, any sale won't come without risks. Investors who've become accustomed to the comfortable cushion provided by all those lease earnings will find the business has less to fall back on if times grow leaner.

Pasukhas: no written contract?

Pasukhas Group announced to Bursa:

This seems very strange, in this age even an email or WhatsApp message can be used as a form of proof. Did Pasukhas, a listed company, really close contracts without any documentation at all?

And the defendant did not properly serve a payment claim?

The amount of money is not exactly peanuts, more then RM 1.6 Million.

Is this the usual way of working for Pasukhas, has this happened before?

And how exactly can the auditor sign of on the accounts when there are no contracts or proper payment claims?

Ananda Krishnan playing the listing-delisting-relisting game again? (2)

The company announced:


We refer to the article in The Star Online on 16 November 2016 entitled "Billionaire Ananda Krishnan exploring taking ASTRO private”.

As far as the Company is aware, after due enquiry, it has not received confirmation of any privatisation proposal.  

Ananda Krishnan playing the listing-delisting-relisting game again?

Article from The Star: "Billionaire Ananda Krishnan exploring taking Astro private".

Some snippets:


According to industry sources, Ananda, who owns 40% of the pay-TV operator, is looking at a corporate exercise to take out the rest of the shareholders in the company via his private vehicle Usaha Tegas Sdn Bhd.

“The exercise is still in preliminary stages and details have yet to be finalised. Usaha Tegas feels that the market is not valuing the company fairly,” said a source.

Listed at RM3 a share in October 2012, Astro’s share price has hovered below that level.

The above is what I call the "listing-delisting-relisting" game, a popular pass time for Malaysian tycoons with Bursa listed companies.

I don't like that "game", since minority investors have no realistic chance to defend themselves, being "threatened" with holding shares in an unlisted company. Unfortunately, nothing much has changed, Bursa does not see this as a problem.

Another snippet:

Based on previous takeover exercises, Ananda is known not to stinge on taking his companies private, and is likely to offer a fair price to shareholders for the takeover.

"Not to stinge"? I don't agree with that statement at all, for more background on the Bumi Armada delisting and relisting, please read the following blogpost: 2 Billion: "a little money"

Time to Trash Discounted Cash Flow as a Valuation Tool

I have never been a fan of company valuations based on DCF (Discounted Cash Flow) models. The uncertainty is too large, small changes in a few parameters will give wildly different valuations and the important parameters are never revealed (in other words, minority investors who disagree with the valuations can't fight them).

Not surprisingly, it is the "weapon of choice" for any financial engineer who is asked to come up with some crazy high valuation for instance for a Related Party Transaction (as unfortunately is too often the case in Malaysia). Just tinker a bit with the growth rate until the preferred value appears.

Arturo Cifuentes, Ph.D., an adjunct professor of business in the Finance & Economics Division of Columbia University, puts it more eloquent in this article, some snippets:


Joel Dean, an American economist who died in 1979 and made important contributions to corporate finance, introduced the Discounted Cash Flow (DCF) approach as a valuation tool in 1951.  The thought was that if the Net Present Value (NPV) of the cash flows of an asset or project, estimated with the DCF method, was positive, the investment was worth pursuing.  The idea was motivated by an analogy with bond valuation.  It had long been established that the price of a bond corresponds to its future cash flows, discounted with a rate determined by the market – a rate determined primarily by the credit risk associated with the issuer.

However, the analogy between bonds and project cash flows is not as clean as it seems.  In the case of a bond, the future cash flows are well-defined.  In essence –and this is critical – the uncertainty in the bond cash flows derives from the issuer’s potential inability to pay (credit risk). But there is no uncertainty as to the amount to be paid.  To put it differently, the bond has no upside.  Therefore, the probabilistic distribution of the cash flows is one-sided; it only includes downside scenarios.
In contrast, the uncertainty in a project comes from not knowing the cash flows rather than from the capacity of the project to pay them.  Moreover, even if we make an optimistic estimate of the cash flows, there is always the possibility to exceed that estimate.  That is, the cash flow distribution is two-sided: There is upside and downside potential.

These differences are further exacerbated because the life of a project is not as clearly defined as the time-to-maturity of a bond.  Project cash flows have notoriously uncertain lifespans.  Strangely, economics textbooks never address the shortcomings of the project-bond valuation analogy.


His conclusion:


Much of the problems affecting the DCF method come from the fact that it tries to capture with one factor – the discount rate – two completely different effects: the time value of money and the stochastic nature of the cash flows.  Not only that, it attempts to transform a problem which is probabilistic in nature (cash flows are uncertain) into a deterministic problem by appealing to the “right” discount rate.

Finance is undergoing a major review of its fundamentals as a result of the subprime mortgage crisis.  Markets are more complex, more psychologically driven, more interconnected, and more unstable than previously recognized.  The limitations of models based on questionable assumptions (normal distributions, stable volatilities, simplistic utility functions, efficiency of markets, rational decision makers, etc.) are being re-examined.  There is no reason to exclude the DCF from this exercise.

In light of these arguments, there is a strong case for refocusing research on valuation techniques.  We should abandon efforts aimed at determining the “correct” discount rates.  An honest assessment of these efforts inevitably leads to one conclusion: After years of investigating this topic, basic guidelines are as elusive as they were 50 years ago.  Instead, we should shift gears and focus on developing good tools aimed at characterizing cash flows probabilistically.  That is, at developing tools to estimate their means, standard deviations, and correlations.  Moreover, the merits of incorporating into the valuation calculation the benefits that a project could bring to the relevant stakeholders, as well as the risk tolerance of the potential investors, should be explored.

It is, in any event, unacceptable to argue that the complexity of cash flow valuation makes it an exception that can only be handled through amorphous concepts like discount factors and not with the normal rules of probability and statistics.

Equity Crowd Funding: Buyer Beware

Article from Bloomberg:

"You Too Can Invest In a Startup Likely to Go Bust"

Some snippets:


Of the more than 1,000 companies backed since 2011, only three have been sold. While it's normal for a high percentage of startups to go bust, critics are starting to wonder when the success stories will come. The lack of pay-outs, along with increased economic anxiety following the U.K. decision to leave the European Union, may already be cooling interest.

Three companies have sold after raising money on Crowdcube. Camden Brewery was bought by Anheuser-Busch InBev SA/NV for a reported 85 million pounds, nearly doubling what online investors put in. A car-sharing startup, E-Car Club, sold for about triple the original amount. Wool In The Gang, a supplier of knitting kits, was acquired for about the same price that investors put in; Crowdcube backers got  a gift certificate in lieu of payment.


Those numbers look absolutely horrible. Of course, in some of the remaining cases it is still too early to tell the result, the company can still be (highly) succesfull.


“You see the success of Google and Facebook and whatever, and you see what the share price used to be and there are all these stories if you had brought $1,000 worth of Facebook when it was a year old it would be worth tens of millions now. People see that stuff and they want to see if they can get their little part of it.”


The big question is, are these type of companies offered on the crowd funding platforms? Is it possible that the high quality, highly scalable, highly promising ones attract enough outside (VC) money, so they won't list on the crowd funding platforms, only companies "desparate" to get money will list?

Another question is, if there is sufficient enforcement in cases of fraud or misrepresentation, are there enough (realistic) legal opportunites for the investors to get back at the promoters?

Equity Crowd Funding suddenly has become more popular in countries like Malaysia and Singapore. Time will tell if the returns will be sufficient for the retail investors.

XOX: even more dilution

From The Star "Betting on a big name", some snippets:


Over the week, smallish firm XOX Bhd said it was proposing to issue 250 million new ordinary shares of 10 sen per subscription share to Macquarie Bank Ltd, as part of a fund-raising exercise to boost expansion of its Voopee mobile application.

That’s about 42.03% of the existing issued and paid-up share capital of the company.

“This would allow XOX to preserve cash flow for reinvestment and/or operational purposes; and is an expeditious way of raising funds from the capital market as compared to other forms of fund raising such as a rights issue exercise,” the company said.

On the surface, this begs the question, why would a global bank buy into a small firm? A loss-making one at that.

Investors would do good to not merely chase big names that seemingly emerge in firms.

While it is not impossible for such firms to attract quality investors, sometimes the investments are done on behalf of individuals using the bank as the conduit. If that were the case, then the money is really coming from individuals and not the bank itself.

Sometimes, a good name is all it takes to attract the attention of retail investors looking for a “good” buy. What follows after that is anybody’s guess.


I have written before about XOX, more specifically here:


... current shareholders (who might include loyal shareholders who bought shares of XOX at its IPO price of RM 0.80), who inject further money to subscribe to the rights issue, and who inject even more money to exercise their warrants, will in total only receive 36% of the enlarged shares in the maximum scenario.

And almost all of the dilution due to the restricted issue and SIS will be done at a price that is only a small fraction of the RM 0.80 that shareholders paid at the IPO.

Is this the way the company wants to reward its loyal shareholders?



From the above article it seems that the loyal shareholders are "rewarded" again, this time with a dilution of 42%, again at a fraction of the IPO price.

Next to that is the issue which party is really behind the exercise, is it Macquarie bank, or one of its customers? Surely minority shareholders are entitled to know that.

Activist investors in Singapore

From Bloomberg: "Activists Take Aim at Singapore's 'Buy, Pray, Hope' Model"

Some snippets:


Activist investors, having targeted companies in Japan and South Korea in recent years, have discovered a new playground in Asia.

In Singapore, where activist investing was virtually unheard of until now, two companies have found themselves in the crosshairs in the past month alone. Quarz Capital Management Ltd. urged retailer Metro Holdings Ltd. to return excess cash to investors and Dektos Investment Corp. pushed Geo Energy Resources Ltd. to change its debt structure, saying the coal-miner’s shares are undervalued by as much as 60 percent.

The investors are challenging a clubby, consensus-driven corporate culture where shareholder interests have traditionally taken a back seat. In doing so, they’re shining a light on a swathe of small companies that are undervalued, flush with cash and often ignored by analysts.

“We are on the cusp of change here,” said Lawrence Loh, associate professor at the National University of Singapore and director of the Centre for Governance, Institutions and Organisations at the NUS Business School. “Singapore is probably one of the best-kept secrets, it’s a very fertile ground for digging by activist investors.”

Engaging companies publicly came late to the market because generally, “boards and senior management prefer a collaborative approach, which is in line with Asian culture,” said David Gerald, president of the Securities Investors Association of Singapore, an industry group representing shareholders.

That may be starting to change as investors realize that reliability and transparency of local accounting and regulatory frameworks can work in their favor. Activist investors and short sellers are encouraging Singaporean shareholders to speak out at annual meetings and in discussions with management, said Dektos founder Roland Thng.

“In the past in Singapore, it was just a case of ‘I am a shareholder, I buy, I pray, I hope,”’ Thng said. “Now it’s a case of ‘I let my money really work hard for me. But with my voice, I can make it faster.”’

The more critical approach is spreading to retail investors -- a development that will ultimately benefit Singapore, according to Thng.

“Local investors are getting more daring, at least they know that they have the right to do that,” he said. “And that will give a boost to Singapore’s corporate landscape which still is a bit staid and more focused on consensus than in the U.S.”


This blog is all in favour of increased shareholder activism.

How about the situation in Malaysia, will activist investors take on the Board of Directors as well? The "clubby, consensus-driven corporate culture where shareholder interests have traditionally taken a back seat" corporate culture is even more prominent in Malaysia than in Singapore.

Would anybody dare to take on one of the "sleepy", underperforming GLCs, or would that be seen as "efforts to undermine the Malaysian economy". Those scary, threatening words (used to contain any critical remark) are heard more often lately.

Time will tell ....