Dual class shares: another really bad idea (2)

I wrote before about this subject.

It seems that Bursa is still considering to allow dual class shares in Malaysia.

Just to show one "horror" case what might happen, Alphaville wrote about the company DryShips (listed as DRYS on the NASDAQ): "Who buys DRYS?".

One snippet:


Taking into account the rapid series of share consolidations Dryships has had down the years, the stock price has fallen from $1.483bn per share to $1.40.

So what’s going on?

We first looked at this thing last month, at which point the peak-to-trough stats stood at an historical high of $206m and a low then of 99 cents. Over the past fortnight, following fresh consolidation of the shares, the price has fallen 80 per cent.

The company has a market cap of $7.26m, but (as of July 21) it held cash of $58.6m and a book value of $652m, against debt of $237m. Its fleet of tankers and drybulk vessels stands at 39.

Confused? Here’s what’s happening.

In April this year DryShips, which is registered in the Marshall Islands, struck a deal with a BVI firm, Kalani Investments, whereby Dryships would sell up to $226m worth of stock to the BVI entity over a two year period.

The deal sees Kalani getting the DryShips stock at a discount and they quickly dump the newly-issued equity on the US market. The flood of stock depresses the share price, which falls below $1 — risking suspension under Nasdaq rules. So, once a month for the past four months, DryShips has enacted share consolidations — most recently at 1-for-7 — to get the price back above a dollar.

It’s these repeated consolidations which throw up the comic historic share price high of $1.483bn when the chart is reset.

The company is controlled by a Greek shipping financier, George Economou, through super-voting stock. Many of the vessels in the DryShips fleet have been acquired from Economou’s private interests — so if you follow the money you’ll see it is flowing from US investors, by way of the Caribbean, to his family estate.


David Webb wrote again about the dual class shares "One Board, One Regulator".

Webb also mentions many other issues that are relevant to Malaysia (and Singapore), for instance:


8. Full disclosure of the identities of subscribers (including beneficial owners of 10% or more of their votes or equity) and the numbers of shares subscribed in placings, whether at initial listing or subsequently. [in the Malaysian context, a six year old blog posting Private Placements: abolish them or limit them, nothing has changed]

9. Full disclosure of the identities of beneficial owners of counterparties to notifiable transactions (acquisitions, disposals or loans) by listed companies. No more hiding behind BVI curtains. [in the Malaysian context just one example: Protasco's Puzzling Purchase, the vendor being owned by Anglo Slavic Petrogas Ltd, a BVI company]

11. INEDs: boards or shareholders can continue to nominate candidates for election as Independent Non-Executive Directors, but controlling shareholders, executive directors and their associates must abstain from voting in the elections, due to their obvious conflict of interests. This will leave independent shareholders to elect the INEDs. Otherwise, INEDs serve at the pleasure of the King, making a joke of their independence.

12. Tighten the permissible general mandate to dilute existing shareholders by issuing new shares for cash, with a maximum of 5% enlargement in any year, at a maximum discount of 5% (currently: 20% at a 20% discount). Any larger size or discount should require a rights issue, or approval by 75% of votes cast by independent shareholders on a special resolution. This would raise HK pre-emption standards to the UK's.


And regarding legislation:


1. provide investors with access to justice in the form of class action rights. The loser-pays costs system will deter vexatious or meritless cases;

Webb on SGX

A link and comments on the website of David Webb:


"They reportedly also propose widening the bid-offer spread, which is a sure-fire way to reduce liquidity, not increase it. This is another sign of desparation after the proposal to list second-class shares. Who is running SGX these days? What next - introducing minimum commissions? Rather than fiddle with trading hours and rules, consider allowing competing exchanges, then let the market discover which hours and spreads it wants."


A previous article by Webb on bid-offer spreads can be found here: HKEx keeps wide spreads

"Death Spiral" Convertibles should be banned

Quite a few news articles in Singapore regarding "death spiral" comvertibles lately.

An interesting look in the kitchen of a company (Advance Capital) helpng to structure and issue those bonds can be found here:

"Singapore-based firm starts fund to buy 'death spiral' convertibles"

Some snippets:

The firm and its fund specialises in convertible bonds that have been called "death spiral convertibles" because of their dilutive impact on the underlying shares. Under Advance Capital's programme, a listed company that is in need of funds will issue to Advance Capital convertible notes that are convertible into new shares of the company at a fixed discount to the current market price. Because the notes set the conversion discount, and not the price, some notes have the potential to create a runaway negative impact on the underlying stock as each round of conversion gets even more dilutive.

Advance Capital has previously made such deals with Attilan Group (the former Asiasons Capital), Elektromotive Group, Yuuzoo Corp, Cacola Furniture International and OLS Enterprise. Other firms that are active in such programmes include Value Capital Asset Management, which has made deals with Annica Holdings, ISR Capital, Magnus Energy Group and LionGold Corp.

Advance Capital does not intend to hold the convertible bonds to maturity - Mr Ng told The Business Times that the bonds typically carry only a nominal coupon that is insufficient to cover the credit risk of the issuer. Instead, Advance Capital prefers to convert the notes into shares, and to sell the shares within a few days of conversion for a profit.


David Webb warned about these instruments already eleven years ago, some snippets (emphasis mine):


Webb-site.com has been aware of the toxic convertibles scam for many years and have repeatedly warned the regulators about them in private, urging a regulatory ban. In our view, there can be no logical reason why a listed company would want to cede control to a third party over what amounts to a stream of future equity issues at deep discounts to market. The Listing Rules should be amended to prohibit listed companies from issuing convertible instruments which carry floating conversion prices. We have waited until now to compile this article because we wanted to conduct a comprehensive study of the actual results of these deals, which can each last several years, to prove how damaging they are.


SGX's reaction:

"The company must send shareholders a circular written in plain English and without overly legalistic jargon, before the shareholder vote," Mr Tan wrote. "In it, the company must make clear to shareholders how such a bond could cause a downward spiral of the share price and result in massive dilutions detrimental to investors. The company must state the 'floor', or minimum conversion price and the maximum number of shares which could be issued on exercise." Directors must also give an opinion that the issuance is in the best interest of the company and shareholders, and "explain to shareholders the alternative sources of financing considered before arriving at the decision to issue the convertibles". SGX may reject applications to issue such instruments if disclosures do not meet those minimum standards. Beyond ensuring adequate disclosures, however, SGX is not in the business of assessing the merits of such convertibles, Mr Tan stressed. The instruments are ultimately a source of capital, the appropriateness of which is a commercial decision best left to companies and shareholders, Mr Tan stressed.


And with that we wholeheartedly disagree. SGX can stress the need for plain English in circulars, but who reads them anyway? How much chance realistically has a minority shareholder to overturn a proposal to issue these toxic bonds if the proposal is supported by the Board of Directors?

SGX should heed the advice of David Webb and simply ban convertible bonds which carry a floating conversion price by amending the listing rules.

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.

SFC reprimands and fines Moody’s over Red Flags Report

I have written many times (for instance here, here and here) about the need for negative viewpoints (on particular companies, or the market as a whole), to balance out the predominantly positive reports from brokers, research houses and journalists.

Relevant for this specific case: "Moody and its Chinese red flags".

Not everybody seems to share that stand, as witnessed by the decision of the SFC in Hong Kong:

David Webb wrote about this subject "SFAT's red flag on Moody's chills negative research".

His conclusion (emphasis mine):


Could the report have been better-written, and clearer in the limitations of its findings? Yes it could.
Could the flag-tests have been better than 98.8% correct? Yes, they could. Was the report of a lower standard than all the other pieces of (mostly positive) research that the SFC has allowed to circulate without interference? Certainly not. That's what makes a market - and research firms rise and fall based on the quality of their output.

We liked the Moody's report, and we want to see more of that kind of critical research - but what licensed firm will now dare to publish such a report if the regulator is going to pick it apart afterwards and then slam them with a fine and potential loss of licenses for the individuals involved?

If listed companies disagree with research reports, they are of course entitled to respond with rebuttals, clarifications of their past disclosures or explanations, to ask for corrections, or even to sue for libel or defamation. As far as we know, none of the companies involved has sued - the criticism wasn't that far wrong.

Not only has the SFC pursued a licensee's report, they have also gone after an unlicensed person in the Market Misconduct Tribunal for expressing his negative opinions about a company while putting his money where his mouth was and being short: Andrew Left, of Citron Research, writing about Evergrande Real Estate Group Ltd (3333). The verdict in that case (also Chaired by Justice Hartmann) is awaited. In our view, unless the SFC can show that Mr Left didn't believe what he was saying, then the statement of his opinion cannot be false - however wrong his opinion turned out to be.

The SFC, and now the SFAT, has done Hong Kong a disservice by chilling negative criticism of companies, thereby skewing the market even further towards positive research. "Sell-side" investment banks world-wide tend to withdraw coverage of a stock or use euphemisms rather than issue a sell note on a potential client. They will say "reduce", "hold", or "buy on weakness" (when it goes down) rather than say "sell". Hong Kong sits on the doorstep of a country which stamps out all forms of criticism. We need to strengthen and encourage, not weaken, freedom of debate and criticism of companies.


All very relevant also for the Malaysian and Singaporean markets.

Hanergy report

I noticed a report about Hanergy that is interesting enough to mention here.

David Webb noted regarding the SFC investigation: "this refers to an investigation "into the affairs of" Hanergy, not just into dealings in its shares. In our view the suspension of the stock is now likely to continue for quite a while."  

And writing about David Webb, there seems to be a call for more "David Webbs", lets hope this call will be answered:


Financial circles have mixed perceptions about activist investors like David Webb. Individual players hail him as their hero, as he is always there to press corporate management to share profits with minority shareholders.

Surely corporate decision makers and major stakeholders find him annoying. Who would like to have a “troublemaker” like Webb meddling in their business?

But a consultation paper from the Securities and Futures Commission on the Principles of Responsible Ownership is encouraging more Webb-like shareholders, especially institutional ones, to take part in and supervise the day-to-day operations of the firms they invest in.

Issues regarding INEDs

From the last newsletter of MSWG:


... the Malaysian Code on Corporate Governance 2012 (the Code) recommends a 9-year term limit for INEDs (Independent Non-executive Directors) and the Listing Requirements makes reference to this recommendation where the companies must either comply or explain.

The Code provides under Recommendation 3.3 that there must be strong justifications for the board of a PLC to retain as an INED a person who has served in that capacity for more than 9 years. Also, the prior approval of shareholders is required to be sought.

Over the last 3 years, since the introduction of the Code in June 2012, we observed that the following have been practised:

• INEDs tenure limit of 9 years have been exceeded sometimes as long as 20 or 30 years.
• INEDs have been re-elected over the limit without strong justifications.
• No resolutions were proposed for re-elections.
• Multiple number of INEDs who have exceeded the limit were being put up for re-election simultaneously.

Focus Malaysia wrote an article (partially behind paywall) about the same matter: "Firms don’t fully comply with governance code".

My opinion, for what it is worth:

• Asking Board of Directors to give a justification about the independence of a director whose tenure limit exceeds 9 years is akin to asking companies if their Corporate Governance is any good: both will result in useless, self serving statements.
• With 55% of the listed companies on Bursa having INEDs with a tenure of more than 9 years, the obvious conclusion is that voluntary measures don't work. If the regulators want to be serious about this rule then they should simply enforce it. INEDs who are deemed to be useful to a listed company can still stay on, but as an non-independent director.

David Webb wrote "Principles of Responsible Regulation", one snippet:


As a result of the prevalence of controlling shareholders, investors large and small are usually minority shareholders, and if they are to have any real influence in the ordinary decision-making of companies, then they should have proper representation in the form of truly independent directors in the board room. But they don't.

Under HK listing rules, a so-called "Independent Non-Executive Director" is only as independent as the controlling shareholder wants him (or occasionally her) to be, because the controller gets to vote on the elections in general meetings. The result is often a sham system of illusory checks and balances where rubber stamps fill the required 3 seats on the board (or 1/3, whichever is greater) and form the committees that are supposed to monitor the executive management of the company.


And his recommendation:


"Independent directors should be elected by independent shareholders; any shareholder or the board can nominate candidates, but controlling shareholders must abstain from voting."


Webb's other recommendations also appear to be highly relevant in the Malaysian situation, with the exception of the second (Malaysia does have quarterly reporting).


On another matter, not only INEDs have an important role to perform versus minority shareholders, external auditors also.

Michael Dee wrote an open letter to the employees of Noble Group, his third recommendation being:


" ..... speaking of the now extinct Lehman Brothers, change your auditor, E&Y, who have been auditing Noble’s finances for 20 years now.

This is far, far too long. Auditors are guardians for investors and 20 years breeds too cozy a relationship. E&Y were Lehman’s auditor along with other infamous companies now defunct.

Noble says they rotate E&Y partners every five years but this is just substituting players on the same team. Your management have said E&Y doesn’t have to defend your financials, however they should defend their role in singing off on them.

Here it is instructive to review two aspects of E&Y which are relevant to establishing how much trust one should have in their work. First, as Lehman’s auditor they signed off on the earlier mentioned Repo 105.

Since then, it must be noted, E&Y has paid US$109 million in fines and penalties relating to their Lehman auditing work, including $10 million just recently paid to NY State over their role in the Lehman collapse.

“Auditors will be held accountable when they violate the law, just as they are supposed to hold the companies they audit accountable,” said New York Attorney General Eric Schneiderman.

The Public Companies Accounting Oversight Board (PCAOB), an accounting watchdog established by the US Congress has recently issued scathing comments about E&Y.

As reported by the WSJ in 2012 and 2013 the PCAOB found in their review of over 100 audits that they were deficient about 50 percent of the time.

In half of the audits reviewed, “E&Y hadn’t obtained enough evidence to support its audit opinions giving its clients a clean bill of health“ as reported in the WSJ last year.

But this isn’t a recent problem, the WSJ also reported in 2011 that in over half of the E&Y deficient audits it was because “E&Y was deficient in its testing of how clients applied fair value to their hard-to-value securities”.

This is directly relevant to Iceberg’s charges. Also directly relevant is that in 2012 it was reported E&Y had paid a record US$2 million fine with the PCAOB Chairman saying; “These audit partners and E&Y — the company’s outside auditor for more than 20 years — failed to fulfill their bedrock responsibility”. Not a ringing endorsement I would say."


I think it would be a good idea if listed companies are forced to change auditor every say ten years. It would increase the chance that possible irregularities would be noticed, especially in cases where auditors have become "too cozy" to the companies they are auditing, or when their fees for non-audit related services have become too high.

Hanergy: SFC is investigating

It seems that the SFC has started an investigation in the remarkable rise and fall of Hanergy, according to this article in The Financial Times. Some snippets:


Hong Kong’s securities watchdog has confirmed Hanergy is under investigation — hours after the troubled solar panel maker’s chairman dismissed any such probe as “purely rumour”.

In the interview with Xinhua, China’s official news agency, Mr Li lashed out at reports that followed the spectacular crash of its share price, which wiped nearly $19bn off Hanergy’s market capitalisation.

He said: “We can say that in Hanergy has never in its history been better than it is today, our business is prospering, and this is a great time for Hanergy.”

In his interview Mr Li said it was impossible for any investigation to be under way without his knowledge — a sentiment undermined by the SFC statement.

“This is purely rumour, there is no such possibility,” he said. “I would be the first to know if the authorities were really planning a probe. But I know nothing about such news.”

Mr Li, in the Xinhua interview, also appeared to address concerns that he had used shares of the company as collateral to secure loans, saying the company did not owe overdue bank loans or interest payments to any bank.

“We never did before, we don’t now and I believe we won’t in the future,” he said.


If those statements are "entirely true", I have strong doubts about that, time will tell. The stock is still suspended.

In the mean time, at least one complaint has been filed in Hong Kong, by none other than David Webb.

Chairman "had something to do", company down USD 19 Billion

Losing a few Billion, it can happen to the best, but losing USD 19 Billion in 24 Minutes, that is pretty tough, even if it is just paper value.

The company in question is Hanergy Thin Film Solar Group Ltd., listed in Hong Kong.

FT reported:


“Chairman Li [chairman and majority shareholder] did not attend the AGM,” said T.L. Chow, an external spokesman for Hanergy. “He had something to do.”


FT has written several times about this company, for instance about its suspicious group structure and the frequent trading between holding company and subsidiary:

FT also reported about the remarkable rise of the share price in the last ten minutes of each trading day (which used to be for years a familiar pattern in the Malaysian context):

David Webb also warned about bubbles and suspicious accounting practices:

Hanergy accounts for revenue and profits on a "percentage of completion basis", which is earlier than actual invoicing. At 30-Jun-2014, Hanergy had net tangible assets of HK$8,023m, of which $4157m was gross amounts due from contracts with Hanergy Affiliates (revenue which had not been billed) and $1914m was receivables from Hanergy Affiliates. It had also made prepayments to Hanergy Affiliates of $1540m for photovoltaic modules for solar power plants (Hanergy is going downstream), most of which had not been delivered. Add that all up and you see that $7611m, or 95% of the net tangible assets, are accounts with Hanergy's parent group. So not only is Hanergy in a bubble at 15 times its NTAV, but most of the NTAV depends on its parent group not defaulting. The listed company pays its parent in advance, but gets paid in arrears, heavily supporting its parent.


Bloomberg reported that shorting of speculative shares can horribly backfire:


Short sellers bowed out on Hanergy Thin Film Power Group Ltd. at just the wrong time.
Wagers against the Chinese solar-panel maker fell to 3.1 percent of its outstanding shares on Monday, the lowest level since December 2013, just before the stock slumped 47 percent in 24 minutes on Wednesday in Hong Kong to erase about $19 billion of value. Short interest dropped from 2014’s high of 5.1 percent, data compiled by Markit Group Ltd. show, as bears capitulated amid a 162 percent gain in the stock this year.

“Those who shorted Hanergy in the past got squeezed because it kept going up,” Andrew Sullivan, head of sales trading at Haitong International Securities Group, said in Hong Kong. “While there was a wall of money supporting the stock, it was very difficult to short.”

Goh Ban Huat: connecting the dots

Excellent detective work by Errol Oh in The Star: "From Casio King to King of Coincidences".

This in regard to the acquisition by Goh Ban Huat of 20% in Time Galerie (M) Sdn Bhd for RM 14 Million, as announced here and here.

The detailed work showing possible relationships is much too cumbersome for ordinary retail investors.

Unfortunately, because there are systems out there that would make things much more easy, for instance "Handshakes" and "Webb-site". Pity that Bursa is not making similar systems for retail investors.

Related Party Transactions (RPTs) have a horrific reputation in Malaysia, as detailed in many cases in this blog (and much more cases in "Where is Ze Moola") where minority investors often received the short end of the stick.

But there is one category even worse, RPTs that are dressed up as non-RPTs. With many big players registering their holdings under nominee accounts, in a country where conflict of interest is normal, surely this is happening many times per year.

Unfortunately, enforcement on this aspect is really weak, we hardly hear about relevant cases against major shareholders who do business deals with related parties and fail to report this.

This is very relevant, since RPTs have to follow much more stringent rules and guidelines than non-RPTs. Larger RPTs even require an independent adviser and have to be approved in EGMs where the related parties have to abstain.

That all doesn't mean that Goh Ban Huat's acquisition is a RPT. But it does mean that the regulators actively should look into this deal (and in many similar deals).

It also doesn't mean that it is bad for its shareholders, Time Galerie looks like a very decent, profitable company.

There is one part in the reply to Bursa's query though that I don't like, the comparison to similar transactions. It shows that the PE of Time Galerie (11.8) compares reasonable with five other deals done with listed companies.

However, unlisted companies are sold for much lower PE's, a PE of 5 is often considered reasonable, and a PE of 2 is not unheard of. Shares in unlisted companies are very illiquid, and the standard of the audits is much lower than those of listed companies, hence those companies are trading at a large discount to their listed rivals.

In an unrelated matter, an interesting story about how Robert Tan gained control over Goh Ban Huat can be found here, paragraph 4.3. And for readers who like to know more about Syed Mokhtar (about whom I have written many times in this blog), paragraph 4.2 seems to be interesting.

To Cliq or not to Cliq? (3)

Focus Malaysia (FM) wrote an article "Oil price slump not all sweet for SPACs".

FM revealed that Hong Kong listed Willie International Holdings Ltd (273) has tried to acquire the same assets in Kazakhstan about six years ago. Two relevant announcements can be found here and here.

Unfortunately no reason was given why Willie terminated the deal, other than that the deposit was returned, which often means that the potential buyer (Willie) was not at fault.

[On a side note, Willie International is mentioned by David Webb as being in the "Chung Nam" network, not a complement by any means.]

The above episode does indicate that for a long time already the owners of Phystech are on the lookout for a buyer. There might be some cause for concern there, why was no one interested and why do they so "desperately" want to sell their assets if they are so profitable?

A rather interesting comment is made by Ziyad, MD/CEO of Cliq:


"We know that it will fall within the fair market value, but I'm not saying 100% it will. We have intelligently analysed that the acquisition value is going to be within the fair market value unless oil prices fall to US$ 20".


That is a bold statement, so even if the price of oil falls to US$ 21 per barrel, the deal will go through as the acquisition price will be within the fair market value range? I think at the moment there is a lot of stress already in the oil & gas industry, I can't even imagine what would happen when the price falls significantly further. Players that are (highly) leveraged or have high extraction costs will face severe problems or even bankruptcy.

On another matter, the article in FM continues:


"A local analyst tells FocusM the success of the SPACs' listing is due mainly to the good governance, rules and regulations by the Securities Commission (SC)."


While I do admit that the SC has done a good job in safeguarding investors interests, that doesn't mean to me that SPACs suddenly make sense, from a business point of view.

Also, the analyst mentions "success", I wonder which "success" the analyst is pointing at. There is no SPAC yet that has produced any operational profit whatsoever (although I admit it is still early days), while all of them have incurred expenses so far.

The fact that several SPACs have been able to list is not a measure of success, at least to me.

Moody and its Chinese red flags

From Reuters: "China developer Kaisa says fails to repay $51 mln loan, may default on others"


Chinese property developer Kaisa Group Holdings said it had failed to repay a HK$400 million ($51.3 million) loan and warned it may default on more debt, the latest problem to hit the firm amid a downturn in the real estate sector. In a stock market filing late on Thursday, the company said the payment of the loan and its interest became compulsory on Dec. 31, following the resignation of its chairman Kwok Ying Shing. The failure to repay the HSBC term loan may trigger default on other loan facilities, debt and equity securities, co-chairman Sun Yuenan said in the filing to the Hong Kong exchange.


China observers are most likely not surprised, the Chines property market appeared to be red hot, and the balance sheets of many developers stretched, Kaisa was one of them.

As so often, with 20/20 hindsight we are all experts. But there was one company which did stick out its neck, namely Moody, in 2011. Its report "Red Flags for Emerging Market companies: A Focus on China" can be found here.

Kaisa does indeed feature on the list of Chinese property issuers, with seven possible red flags being tripped and a negative outlook on its bond rating:

We know now that Kaisa is indeed in big troubles, so it appears to be a job well done by Moody's.

But quite soon after publishing the report drew the attention of the Hong Kong regulators, according to this article from Reuters:


"The report caused a sharp fall in the stock and debt prices of some Hong Kong-listed companies it flagged, including West China Cement (2233.HK) whose shares slumped 17 percent before rebounding. That prompted stinging criticism from some market analysts who debated the agency's risk framework, especially since at least one of the so-called "red flags" was publicly denied by one of the companies. The Moody's note also grabbed the attention of the city's market regulator, the Securities and Futures Commission."


David Webb wrote "SFC actions risk chilling critics" about this issue:


.... let's look at the total returns on the stocks since the day before the report (8-Jul-2011) up to the end of 2014 to see whether Moody's scoring system was broadly right. Kaisa's stock is down 42.07% , but it wasn't one of the top 5 companies singled out by the report, which tested 61 companies with 20 possible red flags. The top 5 were: West China Cement Ltd (2233), down 69.76%, Winsway Enterprises Holdings Ltd (1733), down 92.14%, China Lumena New Materials Corp (0067) down 56.86% (and suspended), Hidili Industry International Development Ltd (1393), down 89.07% (source: Webb-site Total Returns) and last but not least, LDK Solar, which was US-listed and is  now bankrupt. We'd say that's a pretty good hit rate, even though industry factors are involved in some of the declines. For all HK-listed stocks, the median (718th) stock in that period returned 0.32%.

One can of course argue with Moody's methodology, but that kind of debate on which factors matter for future performance is what makes a market.

The Moody's appeal has yet to be heard, and the SFC's Decision Notice is not yet a public document, so we don't know what the precise allegations are, the arguments in their favour are or what Moody's full appeal will be, but we hope that the SFC has more grounds for complaint than a few errors in a report covering numerous companies, because it would be unreasonable to expect that a report on 61 companies with 20 different flag-tests would be correct on all of the 1220 tests.


And further down the article:


The risk of a chilling effect

Free markets depend on free speech and the open exchange of opinions and analysis, whether it turns out to be right or wrong. The SFC will need to tread very carefully in this area and show good grounds for their actions in the SFAT and MMT, otherwise they are likely to have a chilling effect on critical research. That would be very bad for the market, for at least three reasons:

1. There is a systemic skew in investment bank/broker research which produces far more "buy" or "hold" (don't sell) notes than actual "sell" recommendations, because banks face conflicts of interest in seeking business with companies and in maintaining open doors for their analysts. Often the diplomatic way out is just to quietly drop coverage rather than put out a "sell" note. So we need investors, short or long, to express their opinions freely.
2. In China, as with other emerging markets, there are vast problems with corporate governance, fraud and corruption, and these need to be exposed, partly to improve market efficiency and partly to deter such behaviour by reducing the chance that it will remain unnoticed.
3. One of Hong Kong's core competitive advantages over mainland China is supposed to be the ability to speak freely.

I can't agree more with that.


Wishing all readers a Happy and Healthy 2015!

Good articles (1)

Lots of good articles recently, many on subjects I am passionate about. Below are just some snippets, please click on the links for the full articles.


Is settling the right choice? (The Star)

When pushing for a no-contest settlement becomes the default option, market discipline is likely to soften. The people will perceive that the culprits are being let off after paying disgorgements, which is a little more than a rap on the knuckles for those with deep pockets.

Also, the lack of admission of liability is confusing. Are those guys innocent but are forced to settle to avoid being entangled in messy and costly trials? Or did they indeed commit the offences but seized the opportunity to avoid prosecution by paying money?

In addition, the SC [Securities Commission] should reconsider how it informs the market about its regulatory settlements. It issues press releases on criminal prosecution and civil actions, but not on the settlements. To get details of the latter, you need to check the SC website or refer to the commission’s annual reports or enforcement bulletins.

Could it be that the settlements are never meant to pack a deterrent punch? After all, how could they serve as a warning when they mostly escape public attention?


How the investing public loses from delisting (KiniBiz)
Preventing minority abuse during delistings

What do Maxis Communications Bhd, IOI Properties, Astro All Asia Networks plc and Seven Convenience have in common? All the companies have been listed, delisted and then relisted (some more than once) by their majority shareholders in the span of five years.

.... there are no specific regulations in way of what an offeror can give or threaten to take away during privatisation. Nothing governs valuations or a company’s listing status. So in a situation where an offeror is attempting a mandatory takeover that minorities do not like, the latter’s only option is to take the matter to court.

Of course, it would be akin to a kancil taking on a tiger. And Tiger is willing to bet that like the kancil, most minorities are unlikely to be able to match the spending capacity of the majority shareholders and would struggle to sustain a long-drawn court battle.

Similarly during the relisting process, the regulators keep intervention to a minimum. A source familiar with the regulators’ policies said that the SC demands that a relisting company provides justifications for its new valuations and details on why it believes it can perform better on the market this time around.

However, there are no pre-imposed rules which would make returning to the bourse difficult — regardless as to how the company treated minorities during the relisting process, or in the period between then and the relisting.

When the depth of the regulations are considered, the pertinent question seems to be if they are adequate to protect the companies covered in the earlier parts of this week’s series — or at the very least, give them a fair deal.

It would appear not. Rather, minorities in fact had very limited options during the privatisation deal. The majority shareholders benefitted handsomely both on and off the market, and at the expense of the minority investors.

Which leads to the question if Bursa is really the place for the retail and long-term investors. Tiger believes not, and feels that more must be done. The regulators should consider making delisting, promising companies, from the bourse tougher.

....majority shareholders, because they appoint management, know how much a company is valued. If they are willing to buy out the company, they must know something. And if a significant number of minority shareholders want to stay on for the ride, they should be allowed to and not be unceremoniously ejected from their seats which they have already paid for.

In a nutshell, Tiger says that minorities should not be frightened into selling their stakes. If Bursa is serious about increasing the participation of retail investors on the bourse, it is time that the SC and Bursa reconsider the issue of indiscriminate delisting and relisting, and start protecting the minority long-term investor. It’s easy to do.


Submission to HKEx on Weighted Voting Rights (David Webb)

The naked self-interest of HKEx in continuing to push for weakening our regulatory standards in the interest of its own profitability once again exposes the conflict of interests between being a regulator and a for-profit company. The Exchange has no profit incentive to care about quality, only about volume.

Your Chief Executive's  proposition that HK risks "losing a generation of companies from China's new economy" is a false one. Good regulation improves the value added by markets, and investors will pay for that value. Companies which are willing to sign up to standards will get a higher price for their shares than they would in a market with lower standards, and the flip side of this is a lower cost of capital for the companies, both existing and new. There will always be exceptions to this overall outcome, but it is the overall outcome that matters. HK should be focusing on improving its legal and regulatory framework, not degrading it.

The vast majority of listing applicants and existing listed companies already have a controlling shareholder with at least 30% of the equity. They don't need their companies (or spin-offs) to issue second-class shares or pervert their constitution to cement their position. For the remainder with management who have been diluted by pre-IPO financing, most would have enough self-confidence in their abilities as managers that they would not need protections against removal, knowing that investors will only seek change in extreme circumstances and if they consider that new management can offer better value. This is just as true for "technology" companies as for any other industry, and the fact that shareholders have the reserve power to be able to change bad or stale management in itself provides a higher valuation than if they did not have that power.

ACGA: CG in Malaysia improving (2)

I wrote about this excellent regional Corporate Governance report before. This time I like to zero in on the disclosure of enforcement.

The relevant text in the CG Watch 2014 report is as follows:

I respectfully disagree with the above findings, especially the part about easy and logical access to enforcement information (one of the rare times I disagree with in the report).

Most likely the researchers looked from the angle of enforcement. But the angle which investors and market observers really want to use is (as so often) conveniently shown at David Webb's website:

A simple box at the top of the website, where one can search for enforcement news regarding a company or person.

Lets take an example, stock code 0010, Hang Lung Group Limited:

There are many ways to look at the data, but the beauty of the "Officers"-tab is that all the names of the people involved (either current or historic) are "clickable".

If we click for instance on "Chan, Ronnie ChiChung" then we get the following information:

That is a really helpful way for people to quickly get a grasp about both a company and its officers: have there been any issues in the past? Have the officers previously worked for other companies with issues?

Unfortunately, both the enforcement website of Bursa and Securities Commission don't even come close to this level of sophistication.

Things could be improved if Bursa would add all enforcement actions in their own announcements website under a separate category, where all enforcement news would appear, both from Bursa Malaysia and the Securities Commission grouped together, linked to the relevant company.

Despite having an otherwise excellent announcement website (I can't stress this enough, it is much better than all other announcements websites that I frequent), there is always room for improvement I guess.

I hope to continue to write more about the CG Watch 2014 report, which is in general quite positive about the CG developments in Malaysia.

XOX: from bad to worse .....

I wrote before about XOX's corporate exercise to "massage" away its high accumulated losses. I will now give some more detail about this company, and its short but not so glorious past.

XOX is featured on Ze Moola's blog, which is often not a good sign, and this time it is no different.

In the last blog post we can see most of the directors smiling (except the person on the left) at the IPO ceremony at Bursa:

Not sure if the people who bought shares at the IPO price were also smiling, the board was distinctively red coloured, as can be seen on the right, not a single green number in sight.

The share plunged 35% on its first trading day, it must have been one of the worst performers of Bursa ever.

"Malaysian Shares" wrote two articles about the IPO, here and here.

Unfortunately for its shareholders, the share price has never recovered, in the contrary, it is now trading for RM 0.07, its lowest price ever:

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

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

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

Over 2012 the company lost another RM 3.1 Million, over 2013 it lost RM 0.7 Million and over the first half of 2014 it lost another RM 1.2 Million. Not exactly shining numbers, and (partially) explaining the share graph.

To add insult to injury, on July 18, 2014 the company was reprimanded by Bursa for failing to take into account the necessary adjustments.

Which brings us to the present, and the multiple proposals that the company announced.

Apart from the earlier mentioned restructuring exercise, there are three other elements:

[1] A rights issue: this is considered to be a proper exercise to raise money, where all shareholders have the opportunity to participate (or to sell their rights if they don't want to do that).

[2] A huge large restricted issue. This is the kind of exercise that I don't like, since normal shareholders do not have the opportunity to participate.

[3] Establishment of a SIS (Share Issue Scheme) of up to 30% of the issued and paid-up capital for eligible directors and employees of XOX. My guess is that these directors and employees are substantially the same as before, in other words they were the same persons responsible for the disappointing results of the last three years, causing the share price to fall by 90%. Should they really be rewarded at this moment of time, at the expense of the minority investors? Would it not be better if the company first turns around, starts to book some decent profits causing its share price at least to equal its IPO price before the company even considers a Share Issue Scheme?

The total dilution can be seen in the following maximum scenario:

Current shareholders will have 166 Million shares after the share consolidation, and are entitled to the rights issue of shares and warrants, which will increase their shareholding (upon exercising of the warrants) to 498 million shares.

Holders of the proposed restricted issue will receive 190 million shares plus their rights issue and warrants, this might balloon to a total of 570 million shares.

Directors and employees might receive an additional 320 million shares.

In other words, 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?


Note to the authorities: I am of the opinion that corporate exercises like the above should simply be outlawed. Restricted issues should be capped at a maximum of 10% (preferably even 5%) of the outstanding shares. The same should apply to SIS, ESOS and the like, please cap them at 10% (preferably at 5%).

Please take also note of David Webb's "Project Vampire".

What do investors want?

Great PowerPoint presentation from Hong Kong based David Webb. Almost all points mentioned are (highly) relevant in the Malaysian (or Singaporean) context.

Turning S$ 98K into S$ 876M in one month time?

Article on the website of Channel News Asia:

"US firm buys Singapore instant messaging developer HotApps for S$876m"

• United States company Fragmented Industry Exchange (FIE) will be buying Singapore eDevelopment's (SeD) subsidiary, HotApps International, for US$700 million (S$876 million).
• SeD had acquired HotApps International, a Singapore-based virtual startup, for S$98,000 in August this year.

That looks like a pretty impressive return in such a short while. Is it possible that HotApps is really that hot?


In a press release on Thursday (Sep 4), the Singapore Exchange (SGX) Catalist-listed SeD said FIE will acquire HotApps for 1 million new shares at US$10 each and US$690 million worth of zero-coupon perpetual bonds - for a total of US$700 million. Once the deal is completed, FIE will hold HotApps - an instant messaging software developer - as a wholly owned subsidiary, it said. SeD, in turn, will own 99.84 per cent of FIE, assuming full conversion of the bonds and the exercise of a call option, it added.


And that seems to be the explanation, there is no cash changing hand, it is purely a paper transaction. The parties did confirm a valuation of US$ 700 million, they basically could have chosen any valuation, especially a valuation close to the S$ 98K for which HotApps was bought just a short while ago. But that would not sound that sexy of course.

David Webb wrote about the CEO of SeD, Chan Heng Fai, in his capacity as Managing Chairman of Xpress Group Ltd, an article that I found so interesting that I mentioned it before. Minority shareholders of SeD might want to take note of that article, after fastening their seatbelts.


"Taking the 15 years together, the Chan family has taken pay of $492.8m, and the total profit attributable to shareholders was...well, there wasn't any. It was a total loss of $247.5m. And let's be clear, none of this pay was a breach of the Listing Rules - because the Listing Rules contain no constraints on such atrocious behaviour. During the same 15-year period, the Webb-site Total Return on the shares was -69.15%."

Independent directors: use different approach

I have highlighted several times the issue of independent directors, not speaking up for the minority investors (for instance in the case of related party transactions), not trying to unlock value in a company (for instance in the case of privatisation), not voting down (relatively) high wages for the management, etc.

Mak Yuen Teen wrote a letter to The Business Times (Singapore) "Independent directors: use different approach", which is also relevant in the Malaysian context. Some snippets:


.... The question I posed was in response to a discussion about the "nine-year" guideline on independent directors in the 2012 Code of Corporate Governance, under which the independence of directors should be subjected to a "particularly rigorous review" after nine years. In addition to the lack of clear guidance on how a "particularly rigorous review" is to be conducted, I was concerned about relying solely on the nominating committee or the board to determine if a director who has served beyond nine years should continue to be considered to be independent. This is because of the inherent conflict faced by the nominating committee and the board in this.

In fact, the nominating committee and the board are also conflicted in the initial and ongoing assessment of independence of directors, and in other issues such as recommending board appointments and re- election/retirement of directors. In the case of the latter issues, a check-and-balance is having shareholders vote on the election or re-election of directors.

In countries such as Malaysia and Hong Kong, the code of corporate governance recommends that the independence of directors should be subject to a separate shareholders' vote after nine years. If shareholders vote against the independence of the directors in this separate vote, then the company can still choose to retain the director as a non-executive director, but should not label him as an independent director. Alternatively, the board can just redesignate the director as a non-independent, non-executive director, without seeking a shareholders' vote.

At the forum, I had expressed doubt about whether such a shareholders' vote would be effective, if all shareholders get to vote on the continuing independence of the directors after nine years. After all, those who are familiar with our corporate landscape would know that there are many independent directors who have an inter-dependent relationship with controlling shareholders. If the vote is to be meaningful, then controlling shareholders should not vote.

David Webb said about this subject:


Another key issue in Asia is the lack of truly independent directors. "You have tycoons appointing their cronies and golf buddies as ‘independent directors'," notes Webb.

"There are very few really independent directors in Asia who are not tied to management or owners and who are willing to ask difficult questions," he says. "It is important that independent directors be elected by minority shareholders, with controlling shareholders forced to abstain from voting."

He adds that independent directors should be answerable to minority shareholders; so, if they fail to do a decent job, they can be quickly replaced.

Masterskill: why the hurry to buy into noodles, dim sum and dessert?

I wrote recently about Masterskill, "Who is Gary How".

The ink was not yet dry, or more developments followed.

First of all three directors resigned and three new directors were appointed, one of them Gary How, another his wife.

In itself rather strange, since Gary How still doesn't own any shares in Masterskill, he only owns a call option, but there is no surety that the call option (or the put option of the majority shareholder) will be exercised. Or even if he is able to exercise it, if he has the means to do that.

Some details of the background of the new directors are revealed, but mysteries remain. Searches on the investment company of Mr. Gary How (Citi-Champ International Limited) do not reveal much additional information.

The share price did react rather strong to the news though:

For some parties involved (Masterskill Holdings Limited, Sami Ali A. Sindi and Richard Todd Scanlon), this seemed to be the ideal moment to offload some shares, more than 44 million shares in total:

Disposed 24/03/2014   8,600,000  
Disposed 24/03/2014   2,000,000  
Disposed 26/03/2014   1,000,000  
Disposed 26/03/2014     250,000  
Disposed 27/03/2014  16,995,077  
Disposed 27/03/2014   1,724,923  
Disposed 28/03/2014  12,800,000  
Disposed 28/03/2014   1,400,000

But that is not all, today another announcement came, to buy 118 million shares in Hong Kong listed company Gayety Holdings limited (8179) for about RM 20 million cash.

Regarding the future plans of this company:

For those people who dare to ask what noodles, dim sum and dessert have to do with education for nurses, I am afraid I don't have the answer to that.

The company is featured in David Webb's site because of high concentration warnings in the past, in plain English: almost all the shares were in the hands of a few parties, it was thus very easy for these shareholders to control the share price. If that is still the case, I am not sure.

For reasons that are further not explained, the parties involved seem to be very much in a hurry:

I have written the following about Masterskill in the past:

"The worsening results of the company (both in revenue and profit), exactly after the IPO (when increased profits should be expected, due to the inflow of IPO funds) and the large write-off in the last quarter are very worrisome. I hope that the authorities will consider starting a thorough investigation, if all the representations and warranties as submitted in the due diligence of the IPO and the financial accounts Pre-IPO were indeed correct."

Given the rather peculiar recent events, I think a thorough investigation by the authorities is even more warranted.

Heated questioning at Bursa's AGM

Article on The Edge website:

Bursa AGM: Shareholders question Bursa’s efficiency at long heated meeting

Some snippets:

Bursa Malaysia Bhd’s annual general meeting (AGM) today was longer than expected, with shareholders incessantly raising questions on the operational efficiency of the stock exchange and voicing dissatisfaction on various issues. The meeting, punctuated by some heated questionings, began at 10 am and ended at 1.20 pm today. During the three-hour long AGM, Bursa Chairman and Non-Executive Director Tun Mohamed Dzaiddin bin Haji Abdullah was said to have cut short some issues raised by shareholders, which prompted some infuriated shareholders to storm out. “How can the chairman deny us the opportunity to raise important issues?” a shareholder complained, while talking to theedgemalaysia.com.


The Board of Directors has to answer questions of the shareholders during an AGM, the only time they can ask questions.

From the above it looks like the journalist of The Edge Malaysia was not allowed in the AGM, why not? I think it should be a completely common practice to allow journalists in, a healthy dose of transparency should do no harm, I would think.

One way to solve this problem is that an organisation like MSWG buys small amounts of shares in all listed companies under several different subsidiaries, and let some journalists (beside their own representative(s) of course) be a proxy for those subsidiaries.


The management of the stock exchange – including CEO Datuk Tajuddin Atan – declined to talk to reporters after the annual general meeting (AGM). But a shareholder told theedgemalaysia.com that many shareholders had raised pointed questions and made sharp comments at the AGM. One was that ‘Bursa is not quick enough in response to unusual market activity (UMA)’. “For instance, we see some shares surging all of a sudden without any apparent reason. Is there insider trading involved?” the shareholder said. “We also want to know what Bursa will do and how to curb such activity,” the shareholder added, noting Bursa’s response was that it would investigate any ‘unhealthy activity’. Another shareholder piped in: “The trading practices are not fair to investors. We want it to be simpler and fairer for all investors.” Shareholders were also unhappy over ‘high brokerage fee’ to buy, sell and transfer shares. The minimum brokerage fee to buy or sell shares is RM40, while to transfer shares it cost RM10. “It is painful for retail investors like us when we trade in small volume,” a shareholder said.


I agree that RM 40 minimum brokerage fee is very high when the amount of shares traded is small. The minimum brokerage should be much lower, otherwise the whole idea behind having trading lots of only 100 shares does not make sense.

The above questions do again put the spotlight on Bursa being a monopoly, an exchange, a regulator and a listed company. Too many hats, if one would ask me.