Not all charts are the same

I read The Edge of July 21, 2014, and almost fell off my chair:

Aeon, the blue chip, one of my favourite Malaysian stocks, had dropped from about RM 16 to below RM 4. What has happened?

I quickly checked Bursa's website:

Same picture, Aeon's stock down by 75%.

Yahoo then:

Now it is getting strange, the share is indeed down a lot, but "only" around 50%.

Bloomberg:

 

 

And Wall Street:

Hmmm, nothing really happened, the price more or less going flat over the last year.

Checking Bursa's announcements site reveals the answer, a one-for-one bonus and a capital reduction from RM 1 to RM 0.50, so basically the share split in four.

If a bakery sells whole cakes for RM 20 and the next day decides to sell quarter cakes for RM 5, then the price not really fell by 75%, it stayed the same. A proper chart should reflect that.

Can The Edge, Bursa and Yahoo please update their charts?


Selamat Hari Raya to all Muslim readers and happy holidays to all.

Shareholder activism in HK scores a victory

One week ago I wrote: "Lending money to a related company is a no-no" about Aeon Credit Service (listed in Hong Kong) planning to lend money to its parent company.

David Webb strongly advised minority shareholders to vote against this proposal.

Claire Barnes from Apollo Investment Management wrote:

"A helpful investor has noted that unless Aeon Credit Service Asia (ACSA) could rely on unanimous shareholder approval (which it clearly cannot, as we object strongly), its proposal appears to be in breach of section 168A of the Companies Ordinance in Hong Kong, as the loan would be financing a competitor. We have written further to the company, urging it to withdraw the proposal, and to rethink its plans in China to avoid conflicts of interest and ensure fair treatment of minority shareholders."


The good news is that Aeon Credit has indeed withdrawn their proposal, the objections apparently didn't fall on deaf ears:

"The Board decided to terminate the Loan Agreement in order to allow time for better communication with the Shareholders and the market on its business strategy and direction."

A great success for shareholder activism in Hong Kong, it also shows how a few funds being pro-active can quickly persuade listed companies to withdraw proposals that are not beneficial for minority investors.

Malaysia (and its large Government Linked Funds) can learn a thing or two from this episode. I can hardly recall a similar victory for minority investors, despite the IMF (again!) calling Malaysia the 4th best country in the world regarding "minority shareholders protection". A rather preposterous claim, I am sorry to say, which has no baring to the reality. It is all based on laws, not on actual (court) cases or enforcement.

Next to that, Malaysian minority investors are severely hampered by the fact that there is no possibility for class action suits. MSWG would be in a prime position to initiate class action suits against companies and directors who have disadvantaged minority investors. The VEB in The Netherlands (comparable to the MSWG in Malaysia) has initiated and won many class action suits, some of them against Fortune 500 companies. Which also explains its popularity and its membership of 48,000 (on a population of below 20 million).

Lending money to a related company is a no-no

David Webb advises independent shareholders of Aeon Credit Service (co) Ltd (ACSA, 0900.hk) to vote against a proposal to lend money to its parent company.

Strong words by David Webb:

"Loans to controlling shareholders are always a bad idea. The controlling shareholder, through its power to control the composition of the board, can in practice decide whether to repay the loan or seek rollover. If a controlling shareholder gets into financial difficulties, it is more likely to repay its bankers than it is to repay a company it controls. Its bankers may even have a security pledge over the listed company's shares.

If a company has surplus capital beyond its foreseeable requirements, then the golden rule is that this should be returned to all shareholders by way of a dividend, not to one shareholder by way of a soft loan. Loans to controlling shareholders are an abuse of company funds.

ACSA is in the business of consumer credit, on which it normally makes a decent spread. In the year to 20-Feb-2012, it had interest income of $1,010m and interest expenses of just $118m, on outstanding loans of $4775m. That's an average interest rate of about 21% on the loans, ignoring the near-zero rate on time deposits. But for a loan to its parent, it proposes to charge only 0.75% above its unspecified "Cost of Funds", which is probably only about 2% p.a.. ACSA says that "the Company" (presumably, its directors) "considers it desirous to grant the Loan Facility to ACH to generate a reasonable return for the Group". Desirous for ACH, perhaps, but not for minority shareholders, given the risks involved.

Setting aside the issue of whether lending money to a controlling shareholder is a bad idea, the terms are lousy. ACH does not even offer any security, and the interest rate is not reasonable compared to the rate on consumer loans. If ACH wishes to borrow money, then it should go directly to the banks and pay market rates.

Another concern for ACSA shareholders is what this says about the parent's strategy in greater China. ACH wants to use the money to invest in its own "PRC Business" outside of ACSA, defined as micro-finance, leasing and consumer finance. That puts it into competition with ACSA, and reduces the potential for ACSA to expand beyond its mature HK business. ACH also has wholly-owned subsidiaries in Taiwan doing credit cards and hire purchase. If AEON wishes to regain investors' confidence after this proposal is either withdrawn or defeated, then it should announce a consolidation of all its greater China business into ACSA and sign a non-compete undertaking, removing the conflicts of interest."

In Malaysia, Panasonic Manufacturing (Malaysia) Bhd (previously known as Matsushita Electric Company (M) Bhd) is engaging in a similar practice. From its latest quarterly report:

The amount involved is huge, by all standards, twice as much as its non-current assets.

In its latest year report the company was keen to brag about its track record of having delivered good returns to its shareholders. It has all rights to do so, investors who would have invested in the shares of the company at its IPO in the 70's would have done very well indeed. But that doesn't mean that placing funds with related companies is a good practice, in the contrary.

I love capitalism, despite its short comings I don't know of any system that is better. It performs best if left alone, with a decent amount of corporate governance. Japanese companies have their own sense of corporate governance, by global standards it is very disappointing for such a developed and rich country. After the share market bubble in the 80's burst, the performance of the NIKKEI index has been bad. Japanese companies should welcome good, internationally accepted, corporate governance practices, it is long overdue.