Idea: Tracker Fund of Hong Kong (2800.HK) (3)

I recently have sold my Tracker Fund of Hong Kong (I wrote about it before here and here).

I don't think the price is now particularly expensive, but with a lot of risk globally and a quite high portion of the fund being invested in financials (of which I am not a fan) I have decided to take profit.

Given the recent increase in share price the dividend yield (one of the reasons I bought the share, that time close to 4%) has also fallen.

Including two dividends (of HKD 0.62 and HKD 0.15) the return is about 38% for a holding period of just over one year.

Disclaimer: this is not a recommendation. Please do your own homework and make your own investment decisions or ask advice from a professional advisor.

Are there really no concealed placements to nominees of major shareholders in Malaysia?

From Hong Kong:

SFC seeks court orders against former chairman of Kong Sun Holdings Limited and China Sandi Holdings Limited


The Securities and Futures Commission (SFC) has commenced legal proceedings in the Court of First Instance to seek disqualification and compensation orders against Mr Tse On Kin, former chairman and executive director of Kong Sun Holdings Limited (Kong Sun) and China Sandi Holdings Limited (China Sandi), for devising a scheme to conceal his interests in the companies’ share placements in 2009 (Notes 1 & 2).

The SFC alleges that Tse, who was the chairman of the two companies at the material time, used a nominee company to subscribe for their placement shares, which were intended only for independent placees.

Tse also allegedly concealed his interests in the placement shares from the companies’ boards and shareholders in order to obtain them at discounts for which he should not have been eligible.

As part of the proceedings, the SFC is seeking orders to compel Tse to account for the profit he made from the sale of the placement shares in Kong Sun and to pay compensation to Kong Sun for the secret profit he made (Note 3).


In Malaysia both shares being held by nominees and the issue of private placements are a rather common practice (in the very large majority of private placements we will never know the names of the persons or companies that will receive the placement shares).

I am therefore almost sure that the above scheme to conceal interests must have happened at Bursa listed companies, probably frequently.

But why has there been hardly any enforcement at all in this area? Are the enforcement agencies not pro-active enough, doing some investigations, looking for clues, connecting the dots, following the money trail?

I don't suggest enforcement of this is easy, but a few successfully prosecuted cases would at least give some confidence that action is being taken and that perpetrators are at a risk.

"For a lot of investors, the name is all they know about a company"

Article in The Sydney Morning Herald:

"A Goldman you've never heard of is selling its shares in Hong Kong"

One snippet:


Goldman is planning an initial public offering in Hong Kong - but it's not the Goldman you've heard of.

Goldman Faith Holdings, a local engineering subcontractor which adopted its current name less than a month ago, lodged an application to list on the main board of the Hong Kong stock exchange, according to a December 19 filing. The name of the company, which works on electrical systems for hospitals in the city, sports similarities to Wall Street investment bank Goldman Sachs in both English and Chinese.

The Chinese name of Goldman Sachs, which combines connotations of prestige and prosperity, is pronounced "go sing" by Cantonese speakers in Hong Kong. Goldman Faith also chose a Chinese name read as "go sing," using an identical first syllable and a second syllable with the same sound but different intonation. The subcontractor's Chinese name has the meaning of prestige and integrity.

"For a lot of investors, the name is all they know about a company," said Mike Leung, an investment manager at Hong Kong brokerage Wocom Securities. "The company is probably hoping that it gets more publicity and more people would pay attention."

It appears Jho Low is not alone in naming companies after well-known and trusted companies from the West, may be one does not need an education from Wharton Business School to do that.

Analyst giving negative recommendations not welcome (2)

Article from Reuters: "PAX Global CFO resigns after analyst briefing row".

Some snippets:


The chief financial officer of China's PAX Global Technology has resigned, days after a video circulated on social media of him asking a Macquarie analyst to leave an earnings briefing during a heated exchange.

In a statement to the Hong Kong stock exchange late on Tuesday, PAX Global said CFO Chris Lee had stepped down due to personal reasons with immediate effect.

Earlier on Tuesday, public relations firm Financial PR issued a letter that it told Reuters came from Chris Lee that said: "I hereby express my sincere apologies again for my unprofessional behavior on 10th August. No matter what the reasons behind it were, it was unacceptable."


Shareholder activists, former analysts and hedge fund managers say there is concern that critics of companies are being muffled in the Asian financial hub amid a broader clamp down on freedom of speech.

Idea: Tracker Fund of Hong Kong (2800.HK)

The objective of the Tracker Fund of Hong Kong is:


"..... to provide investment results that closely correspond to the performance of the Hang Seng Index ("Index").

The Manager seeks to achieve this investment objective by directly investing all, or substantially all, of the TraHK's assets in shares in the constituent companies of Hang Seng Index in substantially the same weightings as they appear in the Index."


And that is indeed what is happening, providing results very close to the HSI.

The largest holdings of its current portfolio:

The yearly charges are very low, as detailed by David Webb:

" ..... the Tracker Fund remains the most efficient way for those who cannot pick stocks to own a piece of the HK market, costing around 0.1% p.a. compared with almost 2% on your MPF funds."


I think that the Tracker Fund (and thus the HSI) is undervalued at the moment.

One clue can be found in the share price:

In the "goldilocks" years (before the Global recession of 2008/09) the share price probably overshot it's fair value, while during the recession it went too low. May be a valuation of about HKD 20 was fair for those years.

But the current price is still in that same region, meaning that the share price has not appreciated over about eight (!) years.

Another clue can be found in the dividends (which the company pays twice a year):

The last column shows the yield at the current share price, it has been steadily rising, and one can expect a total dividend of around HKD 0.80 this year, for a yield of close to four percent. That is rather rich, I think it will come down eventually, not because the total dividend amount will come down (it will most likely continue to rise steadily), but because the share price will go up.

In other words: while waiting for the share price to rise, one can enjoy the rather rich dividend yield of about 4%.

However, as always, there are risks involved:

• The results of Hong Kong companies are tied to the economy of China, which at the moment is not doing well; I assume that is temporarily, and in a few years all is going full steam ahead, but that is an assumption
• Globally things are rather "shaky" (think: Brexit), which could give downward pressure to the share price in the near future
• There are quite a few banks in the portfolio, personally I am not too enthusiastic about that, I had rather seen more non-financial companies
• The Hong Kong Dollar is tied to the US Dollar, which has performed very well in the past; that could change in the future, even the peg could eventually be discontinued which could have a negative effect on the share price (at least in the short term)

Disclaimer: this is not a recommendation. Please do your own homework, and make your own investment decisions or ask advice from a professional advisor. I do own (at this moment) shares in the Tracker Fund.

Revenge of the Small Shareholders

This blog often writes about the very limited chances that minority investors have against the major shareholders.

But sometimes, very rarely, they are in control.

Not so much in the case of RPTs (major shareholders will almost often make sure they have enough "friendly" parties to push the deal through), but when the major shareholders screw up.

And that is exactly what seems to have happened at the AGM of Wuyi Pharma.

David Webb wrote:

Wuyi Pharma (1889): everything failed at our AGM

Company announcement, 2-Jun-2016 

With a voting turnout of just 0.63%, all the resolutions were defeated, because the brothers who control the company failed to vote. Incidentally, this Cayman-incorporated company, which has no mainland listing, held its AGM in Fuzhou, making it hard for HK shareholders to attend. Serves them right.


According to the announcement:

• The audited financial statements were not received and considered
• Three directors were not re-elected
• The auditor was not re-appointed
• A general mandate to issue new shares was not given

Why were the small shareholders so angry and/or disappointed?

Besides holding the AGM in a remote location, the below share graph might also have a lot to do with that:

The Emperor wears no clothes

Good article from Bloomberg:

"Every Stock Was a Buy to This Analyst Team, Then Shares Tanked"

Some snippets:


Companies probably love getting attention from analysts at Emperor Securities Ltd. in Hong Kong. Investors who followed their advice for the past year, not so much.

The unit of Emperor Capital Group Ltd. issued buy recommendations on every one of the 173 companies it reported covering from April 2015 through May 16. Its target prices, which the company says forecast trading levels within weeks, predicted gains of 25 percent on average. They are frequently the most bullish among analysts who cover the same stocks and list their calls with Bloomberg, including those based on the standard 12-month horizon.

The picks ended up being so wrong during the past year’s rout of Chinese and Hong Kong stocks that shorting every one would have resulted in gains of about 6 percent after just four weeks and almost 13 percent if all were held through last week.


I wrote before about "SFC reprimands and fines Moody’s over Red Flags Report". An overall good report, but with a negative bias and a small error led to Moody's being punished despite many good calls.

However, if one just makes sure that all recommendations are bullish, then no punishment will be meted out, even if the contents are rubbish.

The difference in treatment of writers of positive and negative reports is very worrisome.

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.

IPOs leaning too heavily on cornerstones

From Reuters:


In construction, the cornerstone is an all-important component of a new building. In capital markets, it’s an investor that helps support the value of a company before its initial public offering. In Hong Kong, these cornerstones are bearing too much of the load and undermining the foundation of the local stock market.

In principle, there’s nothing wrong with companies pre-selling some shares to big investors ahead of an IPO. Fund managers ensure they get a decent allocation in return for agreeing not to sell for six months. For the listing company, the endorsement of a shrewd backer can help stimulate interest from smaller shareholders.

The practice in Hong Kong is spinning out of control, however. Big companies preparing to sell shares now routinely pledge half or more of them to friendly investors. Take China Huarong Asset Management, the state-owned “bad bank” that is seeking to raise between $2.3 billion and $2.5 billion. It already has commitments worth $1.6 billion from 10 investors, according to a term sheet describing the deal. That’s more than two-thirds of the total at the middle of the price range.

Huarong isn’t alone either. Cornerstone investors have pledged $1.1 billion to China Reinsurance, which is targeting up to $2 billion. Of the 28 Hong Kong listings that have raised more than $500 million since the beginning of 2013, the average allocation to cornerstone investors was 40 percent, according to Breakingviews calculations. Giving a small group of buyers such large slugs creates an overhang that weighs on the share price.

The cosy arrangement also undermines the whole concept of a public offering. Huarong’s biggest cornerstones are not professional money managers but developer Sino-Ocean Land and China’s State Grid, which is also backing China Re. When one state-backed Chinese company invests in another, getting the best available return on investment may not be the only consideration.

After a botched bailout of the stock market over the summer, the money-go-round in Hong Kong is another example of how state influence can distort public markets. Buildings may depend on the support of a cornerstone. Hong Kong’s exchange participants would do better to start chiseling away at them.


The above is also very relevant in the Malaysian context. Suddenly a few years ago the term "cornerstone investor" was introduced.

Another concept that also doesn't work is artificial holding up the price in the month after the IPO.

Chinese market getting really hot

Article in Bloomberg: "Chinese Flock to Hong Kong for Stocks They Could Buy at Home"

Some snippets:


As mainland brokers tighten margin financing amid increased regulatory scrutiny, Hong Kong securities firms are finding a niche catering to Chinese investors. Amid the world’s biggest stock rally, a 141 percent one-year gain, the business presents a means to compete with bigger Chinese rivals who have been expanding in the city.

Investors in Hong Kong, including mainland visitors, have put 154 billion yuan ($25 billion) into Shanghai-traded equities since China began allowing purchases through the link in November.

Charles Li, CEO of Hong Kong Exchanges and Clearing Ltd., said he was unaware of how much money originated in Hong Kong or how much was round-tripping from China.

“These are just investors in Hong Kong, and I don’t care how they’ve got here,” he said in an interview. “Why I would single them out?”


Stephen Qin, a 28-year-old office worker in northern China, traveled 1,000 miles and set up an account in Hong Kong to trade Chinese stocks he could have bought at home.

“I can make more money if I can borrow more,” said Qin. “That’s why I chose Hong Kong.”


Something tells me this has to end badly, but the million dollar question is: when?

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.

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!

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.

Conflict of interest when regulators sit on company boards

Good article from The Malaysian Insider, see below.

Regulators should not sit on the boards of companies, be they listed or not, be they GLC or not.

Best is if this would be extended after retirement or quitting their job.

From the Hong Kong Civil Service Bureau:


"To maintain the integrity and standing of the Civil Service, it is important that civil servants on final leave and former civil servants should continue to act with good sense and propriety when pursuing post-service outside work as their actions will be seen by the public as a reflection of the culture and character of the Civil Service. They should avoid work which might be construed as being in conflict with their previous duties in the Government, or might bring the Civil Service into disrepute or cause public controversy."


If Malaysia is serious about combatting corruption (I am not convinced because the absence of any "big fish" being caught is painfully clear, I hope I will be proven wrong) then conflict of interest has to be avoided, whenever and wherever possible. It could take an example of Hong Kong, once one of the most corrupt cities in the world, that has significantly cleaned up its act.


"Question: Should regulators be on the board of government-linked companies (GLC)?

Datuk Seri Idris Jala (pic), the minister in charge of transformation unit Pemandu, does not think so and said so at an event yesterday.

The government's GLC Green Book recommends that regulators do not sit on board of GLCs. The reasons are simple: to avoid a conflict of interest and to make sure that there is fairness in decision-making and allocation of resources.

Actually, common sense should dictate that the people tasked with the job of making sure taxpayers funds are used prudently and government policies benefit the public should do so without being influenced by pecuniary or other considerations.

And yet, right across boards of GLCs, officials from various ministries are sitting pretty, and collecting hefty allowances on top of their monthly salaries, raising questions whether they can be seriously expected to function as regulators.

This is evident at Malaysia Airports Holdings Berhad (MAHB) where a couple of senior Transport Ministry officials are board members. They are paid between RM48,000 and just under RM170,000 in directors fees and other emoluments. This is in addition to the salaries they earn as senior Transport Ministry officials.

The problem with this arrangement is what are these individuals from Transport Ministry wearing: that of a regulator or that of a ministry official?

Put it more simply: did these individuals warn the government of the numerous problems at klia2 ranging from cost overruns to shoddy work? Did they raise red flags during MAHB board meetings on klia2 or even warn Prime Minister Najib Razak that more delays were expected, preventing him from making a premature announcement on the budget terminal's opening?

And when they deal with private airlines or deal with the combative Tan Sri Tony Fernandes and his AirAsia Group, are they acting as regulators or a GLC that pays them?

In short, who do they owe their allegiance to? Regulators have to be fair and must always look at the big picture."

Hong Kong Chairman blackmailed to hand over hundreds of millions of shares

From SCMP:

Businessman 'threatened to throw company chairman to sharks in extortion bid'


"A businessman ganged up with thugs and threatened to take the chairman of a listed company out to the high seas and throw him to the sharks in order to extort millions of shares from him, a court heard yesterday.

Koon Wing-yee, 56, former chairman of the listed Easyknit Group, targeted Hui Chi-ming, then chairman of Sino Union Petroleum and Chemical International, accusing Hui's company of causing him market losses, the Court of First Instance heard.

According to prosecutor Audrey Campbell-Moffat SC, Koon allegedly told Hui in March 2009: "I have lost so much money from your company.

"I want you to give me 100 million shares because I lost money buying your shares."

After Hui surrendered the shares, the gang jacked up the demand to 300 million shares, the court heard."


And the worst part is that these fellows can't be trusted, so it seems:


"Hui later gave in, on condition that the shares would not be sold within three months. But the shares were sold at a much lower price the next day."


Is there no honour anymore amongst thieves? Not in Hong Kong, it seems.

Anyone interested to invest in Easyknit International Holdings Ltd, whose former Chairman allegedly was behind the above?

A long and colourful list of articles regarding Easyknit can be found here on David Webb's site.

Insider trading: regulatory settlements

The Securities Commission published on its website some regulatory settlements.

About the first issue (The Malaysian Insider issuing an apology) we wrote already before.

The second and third issue deal with insider trading in shares of Worldwide and Orisoft Technology.

I have three comments about the settlements:

[1] Again the enforcement reflects a settlement "without admission or denial of liability". I find that very weak, why do the authorities (SC and BM) almost always settle alleged insider trading cases with a settlement? It leaves an unsatisfactory taste. I wrote before about this same issue.

[2] Another issue is regarding this statement: "In accordance with the provisions of section 90A(7)) of the SIA, the amount recovered from Lew @ Leow Muy Lai will be used first to reimburse the SC for all costs of investigations and proceedings. Any remaining amount, if available, will be used to compensate the sellers who sold their Worldwide shares before the information became generally available."

Interestingly, in Hong Kong there is a settlement for insider trading, the amount involved is HKD 23.9 million, the verdict can be found here. David Webb comments on the settlement:


"This is the first restoration order for insider dealing. We question the fairness of the allocation though. 297 sellers whose orders just happened to be matched with his, during an 11-week period in which he bought 26.7m shares, will get about $0.90 per share - even though some of them may have been net buyers during the period. The whole market was unaware of the good news, and anyone who sold shares during that period, when volume was 1844m shares, but not to Mr Du, gets nothing. That turns the payout into a lottery with about a 1 in 69 chance of success."


As usual I have to agree with David Webb. One essential element of trading is that you don't know with whom you are trading. Therefore it is rather strange to treat some people who sold shares differently from other people who sold shares of the same company on the same day, both groups of people not knowing what was going on.

[3] The trading on Bursa happened in 2006, 2007 and 2008, in other words between five and seven years ago. Why do these cases take so long time, especially when they only lead to "without admission or denial of liability"? I really think enforcement should be much faster, "justice delayed is justice denied".

I have to admit, the Hong Kong case also happened in 2007, six years ago. But there court cases (both civil and criminal) were conducted, those take a lot of time and effort. In addition to that, I like to draw the readers attention not only to the high fine in Hong Kong, but also to the fact that a jail sentence of seven years was meted out, something that has never happened in Malaysia in cases of insider trading. According to the article mentioned here, not a single person so far has been successfully convicted of insider trading in Malaysia:


"Sreesanthan is only the second person to be charged with insider trading by the Securities Commission. In 1996, the commission had pressed criminal charges against Kim Hin Industry managing director Chua Seng Huat for allegedly using confidential information to sell company shares and gain profits for its holding company. But the Kuching Sessions Court later acquitted him in the grounds that the prosecution had failed to prove beyond reasonable doubt that he had the relevant information at the time."


And that is a bad statistic of which Malaysia should not be proud at all.

What the rich and famous do to avoid a MGO

From David Webb's website comes the following announcement.

"Ms Nina Kung" is no other than the colourful and controversial Nina Wang, who passed away in 2007.

From the Wikipedia page:

• Nicknamed "Little Sweetie" ("Siu Tim Tim" or "小甜甜" in Cantonese), she was noted for her two pigtails and her love of dressing in traditional Chinese dresses.
• She was the richest woman in Asia and the world's 35th richest person, with a fortune of $4.2bn, according to Forbes magazine; a fortune which exceeded that of American talk show host Oprah Winfrey.
• On 12 April 1983, the Wangs' Mercedes was hijacked. Teddy Wang was taken away and chained to a bed for eight days until Nina Wang paid a $33 million ransom. On 10 April 1990, Teddy Wang was kidnapped again. After his disappearance, Nina took the helm of Chinachem under the title of "Chairlady" and built it into a major property developer.
• Two highly contested wills, both of her late husband and herself (lawyers having a field day in both cases), in both cases the issue of forgery emerged.

Coming back to the SFC announcement:

Why did the richest woman in Asia do this, why did she not simply announce the acquisition of the shares and make a General Offer? We will never know, since she past away, but I assume simply greed. It does show to what extend some of the rich and famous go to avoid making a MGO. Another reason for the authorities to be extra vigilant, and use all available systems.

Glaucus targets Prince Frog (2)

It is already eight days ago that Glaucus published its report about Prince Frog, but the company still hasn't officially responded.

However, as "Imenwe" pointed out in the comments of my previous posting:

• BFM paid attention to this case (worrisome were some negative comments at the end about short sellers);
• Kim Eng (Hong Kong) wrote a company update about Prince Frog

Until now, the company has hinted (during conference calls) at several scenario's, but I find them not very convincing. Also, the longer it takes for the company to officially reply, the more worrisome it will get. A strong, confident company should first of all never have been in this place (especially since several rumours have been aired before), secondly should have quickly come with an accurate and strong riposte.

The reports both by Nielsen and the government of China are too different from what Prince Frog reports. I find it hard to reconcile them.

The extremely high margins and short "average days inventory turnover" versus industry players are worrisome.

The issue of Prince Frog having more sales in the lower tier cities, and less sales in the Tier 1 and 2 cities in China: I find that strange. Glaucus writes that Prince Frog has previously mentioned themselves that that was not the case. Also, a company that claims it grew eight fold compared to the industry only doubling its revenue, to me the way to do that is to aggressively market ones products in the bigger cities. In the smaller cities it is possible to do, but it would depend on huge manpower, and it takes a long time for that network to grow. In the areas of branding (getting good quality shelve space), marketing and distribution lots of effort have to be done.

If I had to make a choice which party to believe, based on the information that I now have, I would definitely choose Glaucus. For the shareholders of Prince Frog, I hope I am wrong.

Institutional investors have to fight

David Webb wrote on his website:

"Webb-site urges independent shareholders to vote against the transactions if and when shareholder meetings are convened. We consider the transactions to be blatantly unfair and unreasonable. The transactions once again illustrate a glaring hole in the Listing Rules by which companies can pay out cash to connected persons in the form of "deposits" for acquisitions which have not yet been approved by minority shareholders."

Webb also provided a link to a public statement issued by Somercourt Investments Ltd:

"Reference is made to the announcements by Sino Prosper in relation to: (i) the proposed acquisition of the entire issued share capital of Success State Development Limited from Mr. Leung Ngai Man, the chairman and an executive director of Sino Prosper (the "Chairman") dated 30 December 2011 (the "Qing Jiao Transaction"); (ii) the proposed acquisition of the entire issued share capital of Treasure Join Limited from the Chairman dated 21 December 2012 (the "Micro Finance Transaction"); (iii) the voluntary update by Sino Prosper on 19 April 2013; and (iv) the 2013 annual report of Sino Prosper (together the "Announcements", and the Qing Jiao Transaction and Micro Finance Transaction together, the "Transactions"). Terms not defined in this announcement have the meaning given to them in the relevant Announcements.

Somercourt has followed with extreme concern the Announcements, conduct and intentions of Sino Prosper in relation to the Transactions.

Somercourt believes that the Transactions are not in the interests of Sino Prosper or the shareholders as a whole and announces that it intends to vote against the proposed Transactions as and when the shareholder meetings are held to consider the Transactions. 

Timing
Despite the Qing Jiao Transaction and the Micro Finance Transaction being announced on 30 December 2011 and 21 December 2012 (more than 18 months and 6 months ago respectively), shareholders have still not received details of the Transactions other than as contained in the Announcements.

Somercourt considers that the continuing delay in dispatching detailed circulars to shareholders, and convening shareholder meetings to consider the Transactions is materially prejudicial to the interests of shareholders.

Deposits of RMB120m and HK$200m paid to the Chairman in relation to the Transactions
Under the terms of each of the Qing Jiao Transaction and Micro Finance Transaction, significant cash deposits were paid by the Sino Prosper group to the Chairman. These cash deposits:

1. represent the entire upfront cash consideration payable on completion of each Transaction;

2. were paid on an interest free and unsecured basis; and

3. represent respectively (i) more than 21% (Note 1) and 70% of the market capitalisation of Sino Prosper for the five business days immediately preceding the date of the Transactions; (ii) more than 102% (Note 2) and 135% of the market capitalisation of Sino Prosper for the five business days immediately preceding the date of this announcement; and (iii) approximately 79% (Note 3) and 107% of Sino Prosper's cash balance as at 31 March 2013.

Despite the deposits being returnable to the Sino Prosper group should the Transactions not proceed, Somercourt considers that in view of their excessive size and interest free and unsecured nature, and in the light of the intended timetable for the Transactions, the deposits do not represent normal commercial terms and arm's length negotiations and are not fair and reasonable and in the interests of Sino Prosper and shareholders as a whole. Somercourt considers that the deposits are, in substance, financial assistance and/or interest free loans to the Chairman as a connected person that should only have been made after the approval of independent shareholders had been obtained.

Purchase price under the Transactions
Somercourt believes that the consideration to be paid by the Sino Prosper group to the Chairman (as vendor in each of the Transactions) is excessive and unjustified in each case, and that the overall terms of the Transactions as detailed in the Announcements do not reflect normal commercial terms and arm's length negotiations and are not fair and reasonable or in the interests of Sino Prosper and shareholders as a whole: ....."

Etcetera, the whole article can be read on the above link.

The above episode is interesting, for several reasons:

1. It seems that in Hong Kong there are also enough cases with serious Corporate Governance concerns, even though its standards in general are higher than in Malaysia;
2. Somercourt, an institutional investor, is actively fighting for its rights, the above article is copied in several places (for instance here); in Malaysia this would be extremely rare;
3. Sine Prosper paid a large amount of cash without asking permission from the minority shareholders; the same seems to be true in Malaysia, for instance in the case of Protasco the company paid out significant cash deposits of RM 50 million as upfront payment, more than 13% of the shareholders funds as of December 31, 2011. There are other glaring similarities, for instance the Protasco funds are also not interest baring, the lack of essential information, the long time that the deal takes, etc.

The Malaysian authorities should look into the hole in the Listing Rules, and also in the specific case of Protasco.

Regarding the second issue, MSWG stated on its website the following:

"..... I wish to inform that MSWG has been entrusted by the SC, the owner of the CG Blueprint, to spearhead the formulation of a new code for institutional investors (Institutional Investors Code). A Steering Committee comprising key senior representatives from the institutional investor fraternity has been formed to develop the Code for Malaysia and the 1^st Steering Committee meeting was held on 12 July 2013. I was very encouraged by the support given by the heads from the various institutional funds who had also played their stewardship roles and shown their commitment for the project. I look forward to a series of engaging and insightful deliberations to deliver the Institutional Investors Code targeted to roll out by the 1^st quarter of 2014."

That sounds good, and is long overdue, institutional investors in Malaysia have been much to quiet, they are hardly ever seen fighting for the people whose money they manage. They have in the past voted many times in "mysterious" ways, approving deals proposed by the majority shareholders, deals that looked outright bad to the minority shareholders.

But, to be honest, I don't understand why this all has to take so long time, institutional investors just have to start acting for the people whose money they manage, nothing more and nothing less. I have no problem that they first (behind the scenes) try to overturn a deal that looks bad. But if they don't succeed, they have to get vocal, issue a public statement (which most likely will be reported by the local media) what is wrong with the deal and why they are going to vote against it. They should also voice their concern on AGMs and EGMs.

David Webb on BFM radio

Two days ago David Webb was interviewed on BFM radio, the link can be found here.

I strongly recommend to listen to the whole interview, but here are some pointers:

• Left his banking career in Hong Kong in 1998 when the markets were bombed down, lots of value; also wanted to give back to society by starting the website
• There is a clear conflict of interest when an exchange is listed between the commercial and regulatory departments, in Hong Kong's case the HKEX (Bursa); the other regulator is SFC (SC), from time to time these parties collide; the regulatory function should be taken out of the commercial entity HKEX
• There should be consolidation of the many regulatory bodies into one, dealing with customers/consumers
• In many ways Malaysia is well regulated compared to Hong Kong
• HKEX, the majority of the directors chosen by government
• When Webb was director, information was withheld, so Webb resigned as director
• HK still has no quarterly reporting, one of the rare Asian countries
• There is too much influence by the tycoons, also regarding rules for insider dealing
• IPO's: there is no class action system, court cases are only worth it if somebody has a large investment
• Independent directors, if approved by controlling shareholders then they are not independent, merely rubberstamps; they should be chosen by the non-controlling shareholders
• There is a clear conflict of interest when a government is investing in companies
• The government should not be involved with private ownership
• 1 share = 1 vote, poll voting and publishing of the results should be the norm
• Family controlled companies: minority investors' money is wanted but companies don't want to be accountable to them
• RPT's: there should be an adequate explanation regarding the reason, why not from other sources, why no tender, why exactly from the controlling shareholder
• Webb is investing in under-valued (under-researched) small caps in HK with a Corporate Governance filter
• Manages his own funds for over 18 years, has hugely outperformance the HK index, enjoys not having to be accountable to others
• Holding period more than 5 years on average