AirAsia X: is the rights issue enough?

There were many rumours going around regarding AirAsia X, quite a few of them were proven right, as so often in Malaysia.

The company (belatedly, only on January 30, 2015) responded on some of them:


"With regards to the press reports in the NST dated 28 January 2015, AAX can confirm Azran Bin Osman Rani’s cessation from the Chief Executive Officer office with effect from 30 January 2015.

The Board of Directors of AAX has appointed Datuk Kamarudin Bin Meranun (“Datuk Kamarudin”) as the Group Chief Executive Officer for AAX and Benyamin Bin Ismail (“Benyamin”) as the Acting Chief Executive Officer of the Company with immediate effect.

As to the speculation on the resignation of the Chief Financial Officer, there is no truth to this.

Datuk Kamarudin and Benyamin will spearhead with the reorganisational and turnaround exercise for the Company and to strengthen the Company’s balance sheet and to maximise profitability in ensuring the Company will be in a better financial footing."


The company also announced a rights issue to raise RM 395 Million, money that is indeed very much needed. The question is if the money is enough. The company has been bleeding lots of money (if one takes out one-off items and does not take deferred taxation into account, then AirAsia X lost money in every single year of its existence). Also, the company has large capital commitments.

Next to that, there has been a lot of selling through insider trades after the IPO, not adding to the confidence.

I think it would have been much better if all the money raised at the IPO would have been injected into the company, and shares owned by insiders would have locked up for say two years after the IPO. The authorities should consider this for future IPO's of companies, especially those that have not yet proven their business model.

With 20/20 hindsight we are all experts, but it must be noted that there were enough critical comments before AirAsia X's IPO.

"Serious Investing" wrote an interesting article here with an update here.

I wrote here on the IPO, some snippets:


"AirAsia X is offering 790 million shares, rumoured to be priced around RM 1 per share. Almost 200 million of these shares are from existing shareholders, which seems strange, AirAsia X's balance sheet is weak and this company needs money, lots of it, so why not just issue new shares?"


The exact amount paid to its existing shareholders in June 2013 would be RM 246 Million (197M shares at RM 1.25), money that would indeed have been very helpful for the company. With that money the company might not have needed a rights issue.

I also wrote about valuation:


"A company in this state, urgently needing money should not strive for a sky-high valuation. The total number of shares currently is close to 1.8 Billion, in other word pre-IPO the company is valued at about RM 1.8 Billion. Shareholders equity is 518m, which includes 247m deferred tax assets. The offer therefore looks very stretched, both from an earnings point of view (operational losses, even after six years) and a balance sheet point of view (excl. deferred tax assets).

It must also be noted that Virgin Group (Richard Branson) invested in AirAsia X in 2007, but did not participate in the subsequent rights issue in 2010, according to The Edge. Also, he sold his 10% of the company allegedly for more than USD 21M, valuing the whole company at more than RM 650m.

AirAsia had an option to increase its current shareholding in AirAsia X, but strangely enough it decided not to execute that option. Its shareholding of AirAsia X will therefore drop to only 12%, hardly meaningful and below the 20% needed to call AirAsia X its associate."


In a later post I wrote:


AirAsia X managed to book a profit over 2012, but only with the help of deferred tax accounting and gains on foreign exchange, without these 2012 would also have been a loss (like all previous years). To me, it completely hasn't proven its business model on the long haul flights.

Since the results of AirAsia X were not exactly rosy, the company also published its EBITDA numbers (Earnings Before Interest, Tax, Depreciation and Appreciation), showing profits every year.

Charles Munger has a very clear opinion about EBITDA:

"Every time you see the word EBITDA in a presentation, you should replace it with BULLSHIT EARNINGS, because that's what they are!"


Given the results of AirAsia X since the IPO, it appears that Charles Munger is indeed right about EBITDA.

AirAsia X's share price since its IPO:

And Minzhong responds .....

The response by China Minzhong filed at the SGX website can be found here, with annexures here, here and here.

The quantity of the response is good, 19 pages filled with information. Certain points look convincing, but others leave questions, at least to me.

For instance:

• Page 3, Glaucus claimed that Hong Kong Yifenli Trading Co. was incorporated only in November 2009, Minzhong responds by showing sales contracts. But when was Yifenli then incorporated, and would it not have been more convincing to show the incorporation papers?
• Putian Daziran Vegetable Produce Co did not report any cost of goods sold according to Glaucus, Minzhong responds again with sales contracts, but did this company file them with the SAIC?

Interestingly, again a discussion about EBITDA, Minzhong responds that its definition of EBITDA is different from the one used by Glaucus. That can happen, since EBITDA is not defined by GAAP (Generally Accepted Accounting Principles). Another reason not to use these "bull shit" (Mungers words) numbers anymore. I hope that the Malaysian companies (who started to use these EBITDA numbers more and more often) take note.

And there is even a Malaysian twist to the story, quite a few of the vegetable contracts that are shown are shipped to Klang.

Interesting to watch how events will unfold, the suspension of the shares will be lifted from tomorrow onwards (at least Minzhong has requested that), how will the share price react?

Also, what will the answer of Glaucus be, it is hard to believe they will not come with a response from their side.

And lastly, will the SGX order (for instance) an independent investigation in the case, with the documents supplied by Glaucus and Minzhong to start with? To clean the air for once and for all?

IHH: profit up 60% or profit down 60%? (2)

I did a quick check how the quarterly results of IHH were reported by the press.

The good:

• Reuters
• The Motley Fool
• The Edge Malaysia
• The Sun daily
• KiniBiz
• Straits Times (Singapore)
• Business Times (Singapore)

The bad:

• The Star
• The Malaysian Insider

In both these cases even the heading was simply plain wrong.


The Market:

Both in Malaysia and Singapore the IHH share was today down more than 5%, much worse than the overall market. In other words, investors sentiment was clearly negative, not in line with IHH's positive press release.


Although profit of a one-off sale last year is a reasonable argument for the fact that the PAT was much lower, what IHH did not mention in its press release was that it raised billions during the IPO (July 2012), which it could freely allocate and over which it was supposed to make a good return.

In its defence the company could bring forward that no company is mentioning that, which is basically true, although disappointing.

The half year net profit was RM 347m, on Equity of RM 19.7 Billion and Liabilities of RM 7.1 Billion that is actually a pretty disappointing result. Return on equity on a full year basis would only be about 3.5%.

The more surprising that the share is trading at such a high valuation, on a first half EPS of only RM 0.04, on a share price of RM 3.84, annualised that means a sky-high PE of about 48.

IHH: profit up 60% or profit down 60%?

From The Star website:

"IHH Healthcare net profit up 60% to RM188.7m in Q2"

IHH Healthcare Bhd's net profit rose 60% to RM188.70mil in the second quarter ended June 30, 2013, excluding exceptional items and recognition of the sale of medical suites.

The company said on Tuesday the higher profit was due to the rise in earnings before interest, tax, depreciation and amortisation (EBITDA), savings in finance costs from repayment of short-term loans, and a one-off RM22.0mil tax credit this quarter relating to tax from a previous year.

IHH's revenue, excluding recognition of the sale of medical suites, grew by 14% on-year to RM1.68bil from RM1.48bil.  Earnings before interest, taxes, depreciation, amortisation, exchange differences & other non-operational items rose 20% on-year to RM419.6mil from RM349.2mil.

"The group's robust earnings were buoyed by the ramp up of new hospitals this quarter. Its newest facility in Singapore, Mount Elizabeth Novena Hospital, turned EBITDA positive for this quarter," it pointed out.

IHH Healthcare said Acibadem recorded healthy earnings and improved EBITDA from its two new hospitals - Acibadem Ankara and Acibadem Bodrum - despite a seasonal dip in inpatient admissions volumes this quarter compared to a year ago.

As for Acibadem Ankara, which opened in November 2012, turned EBITDA positive for this quarter while Acibadem Bodrum continued reducing its EBITDA losses.

The hospital group said in the six months ended June 30, 2013, excluding the recognition of the sale of medical suites, the group achieved 21% increase for both revenue and EBITDA from a year ago.

The strong performance was driven by organic growth of existing operations, ramping up of new hospitals as well as the full six months consolidation of Acibadem Holding's performance in H1, 2013 as compared to only five months consolidation in H1 2012 when the Group acquired Acibadem Holding on 24 January 2012.

The group's year-to-date 2013 PATMI excluding exceptional items and the recognition of sale of medical suites increased 39% to RM322.1mil, compared to the same period a year ago.


Shareholders of IHH who read the above surely must be very happy with their investment.

But when we look at the official announcement at the Bursa Malaysia website, we see something very different:

Earnings are hugely down, by about 60% compared to the same quarter a year ago!

Where does the difference come from? The official announcement uses the correct PBT and PAT based on time tested accounting principles, while the company's press release uses EBITDA (corrected for certain one-off items), which are simply nothing else then "Bull Shit Earnings" according to Charlie Munger.

The press release of IHH (to be found at the Bursa Malaysia website) is really disturbing in the sense that it does not mention at all the real profit numbers (PBT and PAT) in the main text (they can only be found in appendix 1 at page 4, where also EBITDA is mentioned in the same table) . 

I have no problem that the company tries to give a positive spin to the story (that is quite normal), but the correct basic numbers should be presented in a clear and transparent way, even if they look bad.

And for The Star, they should analyse press releases before they publish them, and put critical remarks alongside them. Nobody is helped by this kind of non-information, which I think is borderline misleading. Even the title is plain wrong, net profit is PAT, there is no way around it.

A much better article can be found on the website of The Sun:

"IHH Healthcare Bhd, the second largest healthcare group in the world in terms of market value, reported a net profit of RM156.76 million, or 1.93 sen a share in the second quarter ended June 30, 2013 (Q2).

The net profit was much lower compared with RM398.9 million made a year earlier".