Tomypak: CG issues

I wrote several times about Kuala Lumpur based fund manager Claire Barnes and the Apollo Fund which she manages.

In the latest quarterly report "FX headwinds & unheeded duties of care" corporate governance issues regarding Tomypak Holdings are described:


"A particular irritation has been the collapse of corporate governance at Tomypak Holdings, a Malaysian manufacturer of flexible packaging."


For a more detailed description I refer to the above link.

Of further interest is:


"We [the Apollo Fund] therefore expect the Securities Commission to require a General Offer, albeit at the low price of RM1.30."


Any readers with an interest in this company are invited to contact Claire Barnes.

The 5-year graph of Tomypak's share price:

The Apollo Fund is not the only fund which writes about corporate governance issues in their investment holdings. Singapore based Lighthouse Advisors for instance publishes public newsletters on their website with comments related to listed companies. Hopefully more funds will follow suit.

Asian fund managers (3)

One kind reader pointed me at the following book:

The book (written in 1994, published in 1995) seems to be out of stock. I noticed some second-hand prices which seem to be on the high side, readers might want to try their luck at a larger library. Unfortunately, I have never owned or read the book, but found the following review by "Henry":


While a little dated now, in the style of John Train's "Money Masters" books, this tome recounts the modus operandi of consistent stand-out-performance investors in Asia. It includes some well know subjects (eg Dr Doom, Marc Faber) and some less well profiled. The author herself could easily be among them - for she later formed an open ended Asian fund which over the last 12 years has compounded at a rate of more than 28% pa (hence my interest at this late stage in reading her work).


Interesting is the following post, "Nuggets from my book", written by the author herself (December 1998), after the Asian crisis but before the internet implosion.

Weekly roundup

Several interesting articles in Singaporean newspapers:

[1] Article about Claire Barnes and the Apollo fund managed by her, one of the best performing funds in Asia. Warren Buffett often warned investors in Berkshire Hathaway that the performance of the previous years would not be able to sustain. This humility is typical of good fund managers and Claire Barnes is no exception, she explains the stellar performance of her fund for a good part on the initial years which coincided with  the Asian crisis, when some unbelievable bargains were available. Peter Lynch was a successful fund manager for Fidelity, but he was very much disappointed once he found out that investors on average had actually lost money in his fund. The reason was that much more money was invested when the index had gone up a lot, and money was withdrawn when the index had gone down a lot. The Apollo Fund has closed on occasions, when Claire Barnes had problems finding value. This seems to make perfect sense.


[2] Article about AirAsia X CEO Azran Osman Rani and his entrepreneurial background. Great story, also touching on his twitter against racism. I have issues with Corporate Governance in both AirAsia and AirAsia X and have written several times about them, but I do admire the people who run these businesses.


[3] Article about BFM 89.9 founder and CEO Malek Ali and his entrepreneurial journey, another great story. However, also a less great paragraph, Malek was summoned to Malaysia's Communications & Multimedia Commission (MCMC) where he had to explain why his radiostation invited someone from the Economist Intelligence Unit (EIU) to discuss its Global Democracy Index. More about this index can be found here and here. Malaysia was classified as a "flawed democracy", which is less bad than it sounds, it means Malaysia is in the 2nd category out of 4, and ranked 71st out of 167 countries. Apparently the results from the EIU were deemed to be not favourable enough for the powers that be, hence the need to call Malek, a very worrisome development.


[4] Article in The Business Times about the important role that short sellers play in governance, highlighting the case of China Metals Recycling (CMR), which is the latest China company to come under official scrutiny amid allegations involving inflated accounts:

"What's interesting from a markets and governance perspective is that the allegations about CMR's finances first surfaced in January when US short-selling firm Glaucus Research Group published a report recommending a "strong sell" because, among various reasons, CMR's claim (on its website) that it is China's largest scrap metal recycler was a "lie" and that "many of the company's key financial and operational metrics deviate so significantly from other scrap metal recyclers that its reported performance defies credibility".

"Those which act responsibly like Glaucus by providing full disclosure can complement regulatory efforts and should be viewed as an important component of the governance framework."


[5] Everything was going nicely with MISC, minority investors rejected the low offer from PETRONAS (a nice and rather rare victory for shareholder activism in Malaysia) and the share recovered to a price that was higher than the offer price (again, indicating that the offer was really not sufficient). But things have changed quickly, PETRONAS wants to ship the liquid gas themselves. With PETRONAS controlling MISC (whose main source of input is the transport of liquid gas), a clear conflict of interest situation will be created. I hope that PETRONAS will reconsider their plans, this new development doesn't sound like a good idea at all. KiniBiz's "Tiger" asked the following pertinent questions:

• Is it Petronas’ intention to deliberately undermine MISC’s prospects so that the price can be depressed for another future takeover offer by Petronas?

• If it is, is it the right way for Petronas to behave as a national oil corporation which has or should have high standards of corporate governance?

• Is this what we can expect from Petronas in terms of its other listed subsidiaries — go to the market, get investors, try and privatise for a low price and if that fails, deliberately sabotage that listed company so as to mount another takeover on it?

• Is this an act of vengeance that the misguided management is trying to impose on minority shareholders for rejecting the offer, even if the move will ultimately undermine and perhaps even destroy its very own subsidiary?


[6] My article "Maemode: accurate predictions by Ze Moola, but why did nobody notice?" received quite a lot of web traffic. I uncovered some more issues and hope to revisit this subject in the future in more detail.


[7] There has been speculation in the press of an IPO of POSH Semco, a subsidiary of POSH in which Maybulk has invested close to RM 1 Billion. I don't like to react on speculation (which has been proven so often to be wrong), I just like to point out that POSH itself (the mother company of POSH Semco) was supposed to be listed within 5 years, a term that will expire before the end of this year. Also, there is still a put option by Maybulk to sell back their stake in POSH at a premium of 25% to their purchase price. I have written many times about the extremely pricey purchase of POSH by Maybulk during the depth of the global crisis, especially regarding the questionable valuation report and the biased independent report. I hope that the minority investors are given the right to decide if the put option will be exercised or not, and that the majority investors will abstain from voting, although I doubt this will actually happen.


[8] And lastly some good news reports KiniBiz, which can be seen as another victory for shareholder activism in Malaysia:

"Final ‘voluntary termination’ payments were issued today in a media conference called by the management company of the beleaguered Country Heights Grower Scheme.....

Today’s payment by the management company of the scheme, Plentiful Gold-Class to CIMB Commerce Trustee comprised a 90% capital refund of RM182.9 million, unclaimed monies with regard to the first 10% capital refund and a goodwill payment of RM25 million by Lee Kim Yew, the founder and head of the Country Heights Grower Scheme."

Malaysian oil statistics are puzzling

Claire Barnes wrote in the second quarter report of the Apollo Asia Fund about the puzzling revision in Malaysian oil statistics: The imprecision of vital statistics.

I recommend the reader to read the full article, here are some parts of it:

There has been much recent discussion of Chinese statistics, but I have seen none at all on an interesting revision to BP's data on Malaysian oil production and consumption. BP's annual 'Statistical Review of World Energy' has become a principal source of information on primary energy trends: the latest version may be found at www.bp.com. The Energy Export Databrowser provides helpful charts based on this data.

Compare the chart on the left, based on data in BP's 2010 review, with that on the right, based on its latest review:

These charts, and many others, can be found on this website: Energy Export Databrowser

The earlier chart shows Malaysia's oil production on a plateau since 1995, consumption levelling out since 2002, and a gradual reduction in net exports. The chart from the latest data shows a much more alarming picture: falling production, a continued rise in consumption, and a rapid collapse of net exports.

2011 was a poor year for Malaysian oil production, due partly to temporary factors. Bank Negara reported a 10.7% decline (v BP's 10.9%) and attributed it to 'shutdowns of several production facilities for maintenance purposes, declining production from mature fields, and lower-than-expected production from new fields'. The trends in recent years are comparable in the two sets of statistics. Unexplained are the major revisions to BP's historic data series. Over the last two years, BP has revised downward the production figures back to 1984, but particularly since 1995; and revised upwards the consumption figures since 1994, but by escalating amounts since 2000, particularly since 2006. Unfortunately, 'BP regrets it is unable to deal with enquiries about the data', and we cannot find current consumption figures in any Malaysian source.

Malaysia's decades of prosperity have coincided with a great energy windfall. When oil production ceased to grow, gas production continued to soar - but that has now ceased. The chart on the left suggests the magnitude of the changes which may now be under way. It is based on the latest BP review, and includes figures for hydropower (small) and biofuels (insignificant). According to BP, Malaysia's primary energy production, in million tonnes oil equivalent, peaked in 2008: three years later, it was down 9%. Malaysia's primary energy consumption continued to rise until 2010 - but in 2011, gas shortages began to bite in the Peninsula; BP shows domestic gas consumption down 10.5% for the year. Net primary energy exports peaked in 1999; they are since down 54%.

(for primary energy charts see original article)

Without BP's recent data revisions, the decline in net exports would be less steep, but still significant. The issue is surely of huge importance to the economy, the government budget, and the patronage machine. One would expect such issues to feature prominently in public debate, but there is little awareness or discussion. To some extent, growing demand reflects an attempt to add value locally rather than exporting raw commodities - but is this always a wise use of a dwindling resource? There are some moves to phase out energy subsidies by gradual increases in gas prices to industrial users, but no apparent Plan B for what happens if the market price continues to outpace the planned increases. Fuel and electricity prices are politically sensitive, so no rational discussion occurs, and profligacy continues. Meanwhile, moves to encourage development of Malaysia's marginal fields seem sensible, but are they likely to stem the decline?

Indonesia became a net importer of oil several years ago, and its oil-and-gas production peaked in 1997, but the remarkable growth in coal output has led to a continued rise in primary energy output and net exports (right hand chart above). While the coal mining sector has received plenty of attention from investors, it is interesting that the decline in primary energy exports from 1996 to 2003 coincided with a period of very poor performance for the Indonesian stock market, and the subsequent surge in primary energy exports has coincided with the prolonged boom.

Energy policy in Indonesia is certainly no more coherent than in Malaysia, but the musings of ministers do at least range more broadly, which may perhaps allow hope for change. Indonesia, Malaysia and India suffer from the distortions and misallocations caused by energy subsidies: reforming these would be a good place to start.

Postscript 18 July:
The spreadsheet has been expanded with data from the US Energy Information Administration (EIA, www.eia.gov) and from the Joint Organisations Data Initiative (JODI), which broadly agree with the current BP picture of a rapid decline in Malaysia's oil production. JODI and Bank Negara both give monthly statistics, and JODI's show a much steeper decline

BP's consumption figures are for a broader range of products than its production figures. Its world oil consumption figures exceed its production figures by a growing margin, as shown in this blog post. Nevertheless, the revisions to production and consumption for Malaysia are unusually large, and remain unexplained. One guess is that a shift from net exports to net imports is more visible to the market than a mere change in net export level, and that the statisticians then have to reconcile their historic figures with the new facts while avoiding the assumption of too drastic a change in one year. While statistical details remain unclear, this affects only timing. The long view already provides cause for concern, but this may be playing out faster than expected.


The fat years for Malaysia were between 1983 and 2005, when production (grey) clearly outpaced consumption (black line), resulting in a large net export (green) of about 10 million tonnes per year. The price of oil was about USD 20 per barrel during those years.

Between 2005 and 2010 the net exports dwindled to about 5 million tonnes per year. But this was more than offset by the rising oil price which hovered around USD 70 per barrel.

The fat years are over, and Malaysia has turned into a net oil importer. With global oil consumption on the rise, I expect the price in the long run only to rise further. In other words, Malaysia has been exporting oil for decades at a price around USD 20 per barrel, and might have to import oil in the future at a price that is five or ten times that price. Instead of growing a piggybank for the more lean times (like Norway has done), Malaysia's government did choose to run budget deficits for years in a row.

Luckily for Malaysia, it is still a net exporter in gas, although production seems to have slowed down a bit in recent years:

Claire Barnes and the Apollo Asia Fund

Claire Barnes is the fund manager of the Apollo Asia Fund, one of the best (if not the best) Asian small-cap value funds. Her bio:

http://www.apolloinvestment.com/cbarnes.htm

The fund, based in Malaysia, is recommended by Marc Faber, about who I wrote in the past:

http://cgmalaysia.blogspot.com/search/label/Marc%20Faber

Here is the chart of the Apollo Asia Fund with the impressive out-performance of the relevant index:


http://www.apolloinvestment.com/performance.htm


Claire writes a blog on her website, sometimes a bit infrequent, but always highly interesting:


http://www.apolloinvestment.com/whatsnew.htm


This time she writes about two Malaysian issues:

[1] "Padini Holdings is holding its AGM on Friday 23rd December. We have notified the company that we will be voting against the reappointment of the auditor and reelection of the newly-appointed director, and would gladly share our reasoning with interested investors."

Padini is an interesting company, one of the rare Malaysian branded fashion and footwear companies (another well known one is Bonia). It has a very strong balance sheet with lots of cash and relatively low loans. But the worrisome part is the high inventory of more than RM 214 million which has been increasing quite fast lately (exactly one year ago it was only RM 98 million). Padini has tried to increase its exports, with limited success.

[2] The Securities Commission is soliciting feedback on whether poll voting should be mandatory (public consultation paper on 'independent chairman and voting by poll', responses due by 15 Dec). Our answer is yes, and the results should be reported. David Webb lucidly explained why, back in 2003: '... you don't have to win each vote to make your point, but there's no point in standing up if you won't be counted. If, for example, the majority of independent shareholders voted against the reappointment of an independent director, but the controlling shareholder used his 51% shareholding to re-elect his friend, then the market should still be informed of the outcome and the level of the opposition... We cannot even begin to contemplate management accountability in Hong Kong without transparency in the voting process.' The long campaign by webb-site.com explains the case for poll voting in detail. Malaysia should go for it.

I hope that the advice of Claire Barnes and David Webb is followed by the SC.