Malaysia, some interesting charts

From an article in the Financial Times, four charts that show Malaysia at the extremes. If that is good or bad, I leave that to the reader.

Malaysia spends less on public healthcare than any other country surveyed (4% of GDP) but has the largest amount of people who think they spend more (37% of GDP).

Anyhow, according to the survey Malaysians are the happiest among those surveyed.

From CLSA, a table that shows that Malaysia's gross savings % of GNI (Gross National Income) was one of the highest in 1997, but in 2015 the lowest among a group of Asian countries.

And lastly, China's growing role in FDI:

Activist investors in Singapore

From Bloomberg: "Activists Take Aim at Singapore's 'Buy, Pray, Hope' Model"

Some snippets:


Activist investors, having targeted companies in Japan and South Korea in recent years, have discovered a new playground in Asia.

In Singapore, where activist investing was virtually unheard of until now, two companies have found themselves in the crosshairs in the past month alone. Quarz Capital Management Ltd. urged retailer Metro Holdings Ltd. to return excess cash to investors and Dektos Investment Corp. pushed Geo Energy Resources Ltd. to change its debt structure, saying the coal-miner’s shares are undervalued by as much as 60 percent.

The investors are challenging a clubby, consensus-driven corporate culture where shareholder interests have traditionally taken a back seat. In doing so, they’re shining a light on a swathe of small companies that are undervalued, flush with cash and often ignored by analysts.

“We are on the cusp of change here,” said Lawrence Loh, associate professor at the National University of Singapore and director of the Centre for Governance, Institutions and Organisations at the NUS Business School. “Singapore is probably one of the best-kept secrets, it’s a very fertile ground for digging by activist investors.”

Engaging companies publicly came late to the market because generally, “boards and senior management prefer a collaborative approach, which is in line with Asian culture,” said David Gerald, president of the Securities Investors Association of Singapore, an industry group representing shareholders.

That may be starting to change as investors realize that reliability and transparency of local accounting and regulatory frameworks can work in their favor. Activist investors and short sellers are encouraging Singaporean shareholders to speak out at annual meetings and in discussions with management, said Dektos founder Roland Thng.

“In the past in Singapore, it was just a case of ‘I am a shareholder, I buy, I pray, I hope,”’ Thng said. “Now it’s a case of ‘I let my money really work hard for me. But with my voice, I can make it faster.”’

The more critical approach is spreading to retail investors -- a development that will ultimately benefit Singapore, according to Thng.

“Local investors are getting more daring, at least they know that they have the right to do that,” he said. “And that will give a boost to Singapore’s corporate landscape which still is a bit staid and more focused on consensus than in the U.S.”


This blog is all in favour of increased shareholder activism.

How about the situation in Malaysia, will activist investors take on the Board of Directors as well? The "clubby, consensus-driven corporate culture where shareholder interests have traditionally taken a back seat" corporate culture is even more prominent in Malaysia than in Singapore.

Would anybody dare to take on one of the "sleepy", underperforming GLCs, or would that be seen as "efforts to undermine the Malaysian economy". Those scary, threatening words (used to contain any critical remark) are heard more often lately.

Time will tell ....

Poor earnings growth for Bursa listed companies (4)

My previous postings on this subject can be found here and here.

I have updated the latest preliminary results for 2016, comparing them with the same period in 2015.

Below the difference in the results (Blue is positive, Red is negative):

Worst performer is SapuraKencana Petroleum, followed by TNB, AMMB and Genting.

Relatively best were IOI Corp and KL Kepong.

So far the net earnings of the Top 30 Bursa companies are trailing the 2015 numbers (over the same period) by more than RM 4 Billion.

That is really bad news, since the 2015 earnings were already lower than the 2012 numbers in MYR, and much lower if counted in USD:

The statement made by UOBKayHian Research "a meek mid-single-digit growth recovery in 2016"  made only five weeks ago seems rather optimistic.

Poor earnings growth for Bursa listed companies (3)

Article in The Star: "Bleak corporate earnings ahead".

An interesting sentence based on a note by UOBKayHian Research:


"Corporate earnings growth, which has derailed from gross domestic product (GDP) growth over the past three years, is just making a meek mid-single-digit growth recovery in 2016 ....."


The first part, corporate earnings have derailed from GDP growth over the past three years: exactly, that is what I have written about before.

The big question is: Why? I have no answer to that, except to note that I trust the audited annual numbers of the Top 30 companies listed on Bursa much more than the official GDP numbers.

Another issue is, which research house actually predicted three years of earnings decline for the Top 30 companies? My guess: not one.


The second part of the above sentence, "a meek mid-single-digit growth recovery in 2016".

That is a quite remarkable forecast, despite the current difficult environment, UOBKayHian expects a positive growth in earnings.

I don't agree with that, the numbers I have seen so far (mostly based on one quarter of earnings) are again a few percent lower than the 2015 numbers, which would imply a fourth straight year of declining earnings.


And finally: "It is no surprise that the FBM KLCI companies are viewed as the bellwether of economic growth".

Well, those are exactly the companies I have measured in my postings, and they have not been the bellwethers in the last three years at all, more in the contrary.

Poor earnings growth for Bursa listed companies (2)

I blogged before about this subject, and am updating my spreadsheet with the new results.

All FBMKLCI 30 companies have now released their 2015 results, the updated numbers per company look like (net profits in millions of RM):

The totals and growth numbers:

Some comments:

• The Q4 numbers were slightly worse than expected, the 2015 earnings came in 6.6% below the 2014 numbers.
• The 2015 numbers are even lower than the 2012 numbers, in other words negative growth over three years for the Top 30 companies on Bursa.
• If we correct the numbers for inflation they would be worse.
• For foreign investors who account in USD the numbers are even lower: -23% in 2015.
• There are 10 companies with their year-end not in December, they have started to report their 2016 numbers already; the 2016 profit numbers of these 10 companies are RM 2 Billion lower then their comparable 2015 numbers.

All in all rather bad news, and this for the bluest of blue chips, with the Malaysian economy reportedly nicely humming along.

Eventually valuations are driven by fundamentals, if Malaysian companies want to attract foreign investors then earnings have to start growing again.

Research reports: conflict of interest?

Interesting article in The Star: "Cautionary tale of research reports".

Some snippets and some comments by me:


The US$100,000 fine slapped on a former Deutsche Bank analyst for issuing a positive research report on a company when he actually had negative views on it is a stark reminder of why financial opinions should be taken with a pinch of salt.


More information can be found here. It paints a good picture of the often conflicted position for researchers. In this case the researcher wanted to help hedge funds (the best paying clients), but also stay loyal to the company he was writing about. The least served where the "normal" clients of the broker.


In Malaysia, of late, there have been some research reports that are conspicuously “lacking” in terms of material for proper analysis that it makes one wonder if the analysts who had crafted the reports really believe in the financial opinion stated.

The projections and assumptions used in arriving at earnings are long term in nature which makes it hard to justify a research report on the company in the first place. It could have been done when the assumptions had a higher degree of materialising.

The reports are particularly on small-cap stocks that do not have a track record.

For instance, a leading bank-backed research unit recently devoted 20 pages to a small-cap construction company.

The assumptions used in arriving at the profit projections were simply outrageous, to put it mildly.

And the basis of arriving at the profit numbers of the construction company was largely due to its connection with external parties that may pave the way for it to land some large construction jobs.

There was little devoted to the fundamentals of the company itself, its track record in carrying out large jobs and what happens if the “connections” do not pay off.


No names are mentioned in the article of The Star, but a friendly tip pointed at the possibility that this relates to the research report by CIMB on Instacom Group.

In the research report there are sentences like:

• Unleashing the giant
• Asset injection of Neata group to transform sleepy telco tower builder Instacom into construction giant Vivocom
• Explosive two-year EPS CAGR of 456%
• Undiscovered with massive re-rating potential
• The untold story of an emerging construction giant
• Strong orderbook pipeline underpins earnings visibility
• Extraodinary growth outlook with sector-beating margin

The word "giant" is mentioned a whopping 14 times in the article. Will the company really become one? Time will tell, but buyers beware, best is not to rely on outside research and do one's own homework.

At the very least the reader should note that the share price has already risen quite a bit over the last few months before the above report was published. That alone should be of some concern.

Malaysia 5th in illicit financial outflows

Global Financial Integrity published its "Illicit Financial Flows from Developing Countries: 2004-2013".

Unfortunately, Malaysia features in the Top 10:

Things get even worse when we take the size of the population in consideration, on a per capita basis Malaysia might even top the list. Not something to be proud of.

The list uses data until 2013. I hope that things have improved since, but taking into consideration how recent developments have been going, I have some strong doubts.

SC punishes audit company

Announcement by the Malaysian Securities Commission:

Audit Oversight Board Revokes Registration of Auditor for the First Time

The Audit Oversight Board (AOB) has revoked the registration of an audit firm Wong Weng Foo & Co along with the Managing Partner, Wong Weng Foo and its Partner, Abdul Halim Husin effective from 2 December 2015.

The revocation is under section 31Q(1)(a)(B) of the Securities Commission Malaysia Act 1993 (SCMA) for failure to remain fit and proper to audit public interest entities.

The SCMA gives AOB the power to revoke the registration of an auditor if the auditor contravenes condition of registrations imposed by the AOB under section 31O(3) of the SCMA.

Wong Weng Foo & Co, Wong Weng Foo and Abdul Halim Husin were found to have failed to comply with auditing standards in the engagement performance of two public listed entities. In addition, Wong Weng Foo & Co failed to carry out the practice honestly, competently and with due care when it failed to implement the remedial action as reported to AOB in respect of past inspection findings.

Wong Weng Foo & Co also failed to ensure that the person who audits the financial statement of a public listed entity on behalf of the audit firm is appropriately qualified, sufficiently trained and competent.

Announcement by the US Securities and Exchange Commission:

Grant Thornton Ignored Red Flags in Audits

The Securities and Exchange Commission today announced that national audit firm Grant Thornton LLP and two of its partners agreed to settle charges that they ignored red flags and fraud risks while conducting deficient audits of two publicly traded companies that wound up facing SEC enforcement actions for improper accounting and other violations.

Grant Thornton admitted wrongdoing and agreed to forfeit approximately $1.5 million in audit fees and interest plus pay a $3 million penalty.

Melissa Koeppel was an engagement partner on the deficient audits of both companies, and Jeffrey Robinson was an engagement partner on one of the deficient audits, which spanned from 2009 to 2011 and involved senior housing provider Assisted Living Concepts (ALC) and alternative energy company Broadwind Energy.  An SEC investigation found that Grant Thornton and the engagement partners repeatedly violated professional standards, and their inaction allowed the companies to make numerous false and misleading public filings.


Pretty similar announcements, one could say, but there are some crucial differences.

The US announcement does name the listed companies, the Malaysian (unfortunately) not. In the latter case the shareholders of the companies involved do not know what happened to the audits, if the management was involved, if any action has to be taken.

Also, there is a very detailed description given in the US case (please visit this website for more information including some links), but not in the Malaysian case.

It is good that some enforcement has been meted out by the Securities Commission, but more information what exactly happened would be helpful.

Poor earnings growth for Bursa listed companies

My interest was sparked by an (highly readable, if I may add) article "Bits & Pieces - What if?" (February 2015) from CLSA in which it was reported that listed Malaysian companies had performed rather poorly over the last three years, which was expected to continue in 2015:

                       2012    2013    2014    2015
Sales Growth           6.5%   -0.1%   -3.7%   -6.4%
EBITDA Growth          2.7%   -4.7%   -3.6%   -3.9%
Core Earnings Growth   2.6%   -5.5%  -11.0%   -7.8%


I was rather surprised by this, I knew that numbers were not impressive lately, but this bad?

With some helpful advice and suggestions from others I have tried to reconstruct some of the numbers and update them up to this moment.

The data below comes from the 30 heavyweight stocks from the FBMKLCI 30, representing around 62% of the total Malaysian market capitalisation. The yearly number is the net profit in Millions RM. For companies that have their year end in December I made a rough estimate (in red colour) based on their first nine months of results (good enough for all practical purposes).

If we add the numbers up we find the year-on-year growth:

We notice a rather high growth in 2012, partially explained by the disappointing earnings number of Tenaga in 2011. If that had been (say) three Billion RM higher, then the growth in 2012 would be roughly 6%, which sounds more reasonable.

However, what is striking is the poor results in 2013 and 2014 (about equal to the inflation number, in other words: corrected for inflation zero growth) and negative growth in 2015 (caused primarily by CIMB, IOI and Sime Darby).

These thirty companies are the heavyweight blue chips listed on Bursa Malaysia, one would have expected a much better performance.

Unfortunately things get even worse when we translate the numbers to USD. This is the 5-year graph of the Ringgit versus the US Dollar:

I have added the estimated average rate of the Ringgit in each year and recalculated the net profit in USD and the growth:

The numbers have clearly worsened, growth for 2013 and 2014 is even below inflation, while 2015 has fallen steeply off a cliff.

Is it relevant to calculate the earnings of Malaysian companies in US Dollars?

Yes it is, at least for international fund managers, their fund performance is calculated in US Dollars, and assuming that share prices are in the long run based on fundamentals (one important factor is earnings), those fundamentals should also be calculated in US Dollar.

But even for Malaysians the numbers in USD should carry some weight, many products are imported and priced in USD, to buy them one needs to have earnings in USD.

The above numbers do not look good, and are (partially) to blame for the poor performance of the Malaysian market.

Another issue is that the above numbers seem very much disconnected from the officially reported GDP numbers by the Department of Statistics Malaysia, which show around 5% yearly (real) growth for the years 2011 until 2015.

The correlation is definitely not very high between the two: the 30 companies do not cover all industries equally, the GDP is based on clearly more than corporate earnings or sales, etc.

But in each year the thirty companies earn more than RM 50 Billion net profit, a pretty decent result, which is surely significant for the Malaysian economy.

So one would have expected that if the economy is reported to nicely grow in real terms, that it would be translated in the numbers as reported by the heavyweight listed companies.

63 Innovation agencies ...

From The Malaysian Reserve:


The government plans to address the existence of too many government agencies involved in innovation and technology in order to enhance efficiency and eliminate red tapes, said Datuk Seri Mohd Najib Razak.

The prime minister (PM) said presently there are a myriad of entities with so many roles which have created the risk of fragmentation in the innovation space.

“At the last count, entities in the government involved in technology innovation include:

• five units under PM’s Department
• three ministries with direct technology funding
• six ministries with technology associations
• three regulators
• four councils that I chair
• four other councils
• three development corporations with funding
• seven development agencies or corporations
• one foundation
• six research institutions
• five mutual funds
• five managed funds
• 11 funding agencies

 

If I add them all up, 63 in total. Simply amazing .....

Silverlake Axis down 24%, suspended, after damning report

Trading in Singapore listed, Malaysia based, software solution provider Silverlake Axis was halted today after the share plunged 24%, as reported by The Edge.

The reason for the plunge and the trading halt is the following anonymous report:

"The Unbelievable Financial Alchemy of Silverlake Axis"

It is a rather comprehensive report with quite a lot of detail. I leave it to the readers to draw their own conclusions.

A bit more background about the company and its founder can be found in two recent articles in The Star, here and here. From the last article, one worrisome sentence:


"But investors find it hard to comprehend technology-based companies and even in the region, where Singapore-listed Silverlake Axis has a S$3.19bil market capitalisation, and where the bulk of its business derives from, many do not understand the company."


What now is needed from Silverlake Axis is a comprehensive, blow-by-blow, answer on all allegations in a very short time, preferably over the weekend. A flat denial, a superfluous answer or an attempt to shoot the messenger will simply not do (I guess Noble Group will agree with that, they have tried them all before).

Silverlake Axis should also be able to come up with a quick answer since this report does not come as a surprise. Rumours have been flying regarding this company for quite some time (I was aware of them), witnessed for instance by this article or this posting. In other words, the company was warned and should be prepared.

For Malaysia, it is another blow to its decreasing credibility.

First of all, there are simply too many scandals recently.

Secondly, corruption (one of the country's largest problems) is mentioned in the report as a possibility:

The corruption is not actually proven (that would be very hard to do for an outsider), but in the main report itself there is clearly more detail given than the above.

Malaysia net oil importer, surprise?

Article in The Star: "Govt reveals M'sia net importer of crude oil, petroleum products since 2014", some snippets (emphasis mine):


"In a surprise turn of events, the Government has disclosed that Malaysia is a beneficiary of declining crude oil prices because the country is a net importer, and not exporter, of the commodity and petroleum products, if liquefied natural gas (LNG) was not in the equation."


Surprise turn of events?

Anyone who had the data from the past and extrapolated it within reason should have suspected this.

If this was properly communicated to the public is another matter.

I wrote in the past the posting "Malaysian oil statistics are puzzling" based on an article of Claire Barnes.

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

The price of Natural Gas has however also come down a lot, in tandem with the price of oil and other commodities.

Singapore regulator plans new rules to shield investors

The Monetary Authority of Singapore (MAS) yesterday proposed a set of regulations to boost investor protection, with new rules for investments linked to land banks, gold and other physical assets - following several scams that have left retail investors high and dry.

Its latest move, laid out in a consultation paper, means investment schemes linked to land-banking and other physical assets such as most precious metals, will no longer be made available to retail investors.

MAS also wants all retail investment products to be rated on their complexity and risk - a decision that David Gerald, president of the Securities Investors Association (Singapore), said would provide needed guidance for retail investors. "It's better late than never," he added.

The central bank plans to tweak its definition of collectively managed investment schemes (CIS) to include schemes that involve pooled profits and remove investors from the daily control of the investments. This will apply to land-banking, which would then be classified as a CIS.

All CIS must meet standards set out in the CIS Code, which ensures that the assets involved are liquid. Since land cannot be deemed liquid, unlike securities, it would no longer be offered to retail investors.


The above article comes from The Business Times and is really great news.

The current (highly unsatisfactory, in my opinion) situation is described by blogger Martin Lee:


Singapore’s approach is slightly different. It specifics a list of financial instruments that are regulated. This includes the usual investments like shares, unit trusts and life insurance. These regulated products can only be sold by licensed representatives who meet the prescribed requirements. Anyone who is not licensed but tries to give individual advice on them will be contravening the regulations (The irony is that you do not violate anything if you conduct a seminar to few hundred people on the same topic).

If a product falls outside this list, it is considered not regulated by MAS. The current position is that any product that does not fall under the scope of MAS is not up to them to regulate and hence they will not stop companies from selling such products. For example, land is considered a real asset so any sale is like a property purchase on a willing buyer and seller basis.


Martin Lee writes also about the proposed changes in the consultation paper.

This blog has also warned several times for unregulated schemes, some of which have collapsed or are likely to collapse in the near future.

Comments on the consultation paper can be submitted latest by September 1, 2014. I hope for a quick implementation of the new framework and subsequent enforcement of all kind of dodgy investment schemes. It is long overdue.

Malaysia (Securities Commission and Bank Negara Malaysia) also should take note, they are dealing with the same situation.

Liberalization of the Unit Trust industry (2)

"Wammo" commented on my previous posting: "Check out the performance of local funds on Fundsupermart - very few stand-out performers".

I have used his link to fund selector of Fundsupermart. I used the criteria:

• Main Categories: "Equity"
• Geographical sector: "Malaysia"
• I looked for funds with at least a 3 year track record

These are some of the disappointing funds that I found:

 



 

Please be informed that the above numbers exclude any initial sales charge. In other words, for an investor the returns are even worse.

In comparison, this is the graph of the CI, since 1994, highlighted the last 10 years:

Fund managers have nothing to complain about, the market went up from 820 to currently 1877, a rise of 129%, or annualised 8.6%. Any fund manager worth his salt, with a disciplined attitude towards value investing should easily beat the return of the CI in the longer term.

And they are supposed to do exactly that, that is what they are paid for in the first place through the yearly management fees. Otherwise a low cost index-tracking ETF makes more sense.

The average 10-year performance over all Malaysian equity funds is 9.7%, not that bad, at least one per cent more than the index. But the outperformance will most likely be lost by the initial sales charge, which can range up to a whopping 5%. I strongly recommend investors never to pay more than 2% in sales commissions, preferably less.

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."

1MDB is an enigma that will be closely watched

Today an article in The Business Times (Singapore) about a Merrill Lynch report on 1MDB:

"1MDB is an enigma that will be closely watched: economist"

Some excerpts:


A regional economist has described Malaysian state investment agency 1Malaysia Development Berhad (1MDB) as an "enigma that will be closely watched". While conceding that its linkages to the government's balance sheet and the banking system were "probably limited", Chua Hak Bin noted that its systemic importance and weight "is evolving and rising rapidly".

In a May 7 report titled 1MDB's rise, Dr Chua, the head of emerging Asia economics for Bank of America Merrill Lynch, outlined the growth of the once-obscure wealth fund, owned by Malaysia's Ministry of Finance, to its present asset size of RM45 billion (S$17.3 billion).

1MDB has been looming large on the business pages of the Malaysian local media recently because of concerns that it could be accumulating debt too rapidly.

The Merrill Lynch report, however, seems to be the first time the agency has come under the scrutiny of a regional research house. At present, 1MDB is a large player in Malaysia with two big property projects both in their infancy. It has also acquired power generation capacity in Malaysia and abroad and is likely to continue expanding quickly.
"What stands out however is 1MDB's high leverage, which has raised concerns that 1MDB could emerge as a serious contingent liability for the government," Dr Chua said.

"Compared to the six largest listed non-financial companies, 1MDB's total liabilities are the second largest, only exceeded by Tenaga (over RM 70 billion),"

"At end-2013, our estimates put the public debt to GDP ration at 54.8 per cent and quasi-public debt to GDP ratio (inclusive of government guarantees) at 70.8 per cent"

Was 1MDB a threat to the system? A qualified "not really" seemed to be the answer. "1MDB's size and liabilities probably do not represent a systematic risk yet" said Dr Chua. "The government can comfortably absorb any eventual losses, with the public debt to GDP ratio still far below ratios seen in most developed economies. The 90 per cent ratio is typically seen as a red flag."

In the end, 1MDB was, well, unusual. "1MDB remains an unusual creature and is difficult to categorize," mused Dr Chua.

"It is not constrained as a government-linked company and can readily tap on the government's balance sheet and guarantees.

"It is not exactly a typical sovereign wealth fund which invests in funds derived from central bank reserves, fiscal surpluses or natural resources," continued the economist. "1MDB's aggressive expansion and acquisitions have been financed largely by debt, rather than cash flow from reserves or existing businesses. Most sovereign wealth funds are not so highly geared."

Ideas, hints, tips etc for this Blog

Ideas, hints and tips are very welcome to me.

I get a fair share of information for this blog, most of them (very) helpful. I can't always act on them (my time is rather limited), but I will definitely try to do so.

There are two ways to reach me:

[1] The old way: leave a comment, if needed anonymously. I will publish the comment, unless I think the comment was meant in private (if that is indicated in the comment then of course I will always respect that).

[2] The new way: leave your email address and a message (name is optional) in the Contact Form Widget. These messages are never published on the blog and will go directly in my email inbox.

Unfortunately, the widget can't handle attachments, but you can send them after receiving my reply.

I have been pretty much overwhelmed by the interest for this blog, about 17,000 monthly unique page views is much more than I ever expected.

Corporate Governance is not exactly everyone's taste, especially in Malaysia (most investors just want "hot tips"), although things seem to improve.

Landmark case against Mayban Trustee and Kaf Discounts (2)

I wrote more than two years ago about this case.

On February 10, 2014 the press summary was published about five civil appeals regarding this same case.

To summarize the main players:

• Pesaka Astana (M) Sdn Bhd (Pesaka), a manufacturer of vehicles, proposed a financing scheme
• Datuk Mohamed Rafie Sain (Rafie) and Datin Murnina bt Dato’ Haji Sujak (Murnina) are in control of Pesaka
• KAF Investment Bank (KAF) was the lead arranger, facility agent and issue agent
• Kenanga was the primary subscriber, who sold the bonds to the ultimate bondholders
• Maybank Trustees (MTB) was the trustee

Problems started in 2005 when the accounts, which contained the revenue of certain orders, were not properly ring-fenced (as was promised to the bondholders), and:


"Having control over the accounts, Pesaka utilised the monies in the Designated Accounts for its own purposes and failed to redeem the bonds and repay the bondholders on the maturity date."

"Rafie had admitted that the funds of the Issuer were utilised to invest in the Amdac Group in various investments both locally and abroad. The common pattern was that the assets would ultimately be in the names of either Rafie or Murnina."

The results of this latest court case were different:

• "KAF is not a party to the Trust Deed. It is strictly between the Issuer and MTB." and "MTB is wholly to blame for the loss and not KAF."
• "We make an order that MTB is liable only to RM107 million and not the full amount of RM149,315,000."
• No interest to be charged on top of the above amount: ".... our answers to the three questions on pre-judgment interest are in the negative."
• "Similarly in the present case it is obviously not just and equitable to allow Pesaka to keep the ill-gotten gains or any part of it. This is especially so when the bondholders have not taken any step to enforce the Consent Judgment entered between Pesaka and the bondholders and instead focus their attention to MTB on the basis that MTB is in the position to satisfy the bondholders’ claim. Thus, by allowing indemnity in full, Pesaka will be called to meet its obligation in full"
• "....it would be a travesty of justice that it be allowed to keep a portion of the ill-gotten gains and accordingly we order that Murnina too (and Rafie who together with Murnina owned 90% of Pesaka) must fully indemnify MTB for the loss." 

An interesting court case and judgement that might have consequences for future cases.

Pity that these cases are so rare in Malaysia, and often only in the case of bonds. When bonds default, that is a clear signal that something is wrong and that action has to be taken.

But when a prospectus of for instance an IPO or a Related Party Transaction or a General Offer contains wrong or misleading information or when a valuation given is not justified, then surely action also should be taken, even when the case might not be so black and white as a bond default?

And so many Malaysian IPO's have disappointed from the moment the company was listed, so many RPT's have yielded bad results, so many companies were delisted for a too low amount.

For a small minority shareholder the legal expenses would be too high, but for a large fund it should be worth their while. Hopefully the larger funds like PNB and EPF will be more willing to take appropriate action in these corporate exercises.

Regarding the above case, "Skilgannon1066" asked the following questions on Rocky Bru's website:

• Why did Pesaka default on the bonds back in September 2005?
• How did it get on to the Ministry of Defence's suppliers list if its financials were shaky?
• Were the RM140 million bonds issued to finance a contract awarded to Pesaka by the Ministry of Defence?
• Was the contract satisfactorily completed and the goods or services properly delivered to the satisfaction of the Ministry?
• Is Pesaka Astana still a defence supplier in good standing with the Ministry, notwithstanding its bonds default in 2005?

In answer to the last question, according to this article, it looks like Pesaka is still doing business with the Malaysian government under its new name AMDAC (M) Sdn Bhd.

Stolen info SBM Offshore about alleged $ 250 million fraud

The share price of SBM Offshore, a Dutch company involved in the service industry for oil & gas, was hit hard last Friday on fresh allegations about corruption. The possible size makes it one of the largest recent cases of bribery.

The Dutch magazine Quote had published new information regarding this matter on its website.

The reader can use Google translate on the text, I have tried to translate a few paragraphs:


Stolen info SBM Offshore about $ 250 million fraud and involvement top executives

On the internet circulates a very detailed document that gives information about large scale alleged bribes by Schiedam (Netherlands) based Billion Euro company SBM Offshore, a supplier to the oil and gas industry. SBM confirms to Quote that this information comes from within the company. "It was stolen by a former employee who wanted to blackmail us."

A former employee of SBM has a large amount of information about possible fraud cases by employees of SBM Offshore on the Internet, which contains bribery of officials in Angola, Equatorial Guinea (both located in West Africa), Brazil, Malaysia, Iraq, Kazakhstan and Italy. Also, excerpts from transcripts of recordings published showing that (members of) the Board of Directors and (members of) the Board of Trustees for many years are aware of the malpractices. The top of the company would deliberately try to conceal these cases. In total, between 2005 and 2011, $ 250 million is spent on bribes.

The spokesman of SBM lets Quote know that this information actually comes from the internal investigation that runs inside the company. "This information has been obtained illegally by an angry former employee who tried to extort SBM. We are engaged in legal action against this person. This information is placed out of context. As the investigations of the American and Dutch judiciary are still running, with which we are fully cooperating, we can not further give any information."

 The text can be found in the following Wikipedia article, an old revision dated October 18, 2013.

The link to Malaysia can be found in the following paragraph:


"4.1 MALAYSIA - Payments to Barnado Limited and Delcom Limited totalling approximately US$10,000,000, paid on (ie. by way of bribes) to “MISC” for the Kikeh FPSO (leased to US oil company Murphy)."


If these allegations by the formed employee are indeed true or not, I guess we have to wait until the investigations by the relevant authorities are finished.

More information about this project can be found here:

FLOATING PRODUCTION STORAGE AND OFFLOADING (FPSO)

"The Kikeh field is located 120km northwest of the island of Labuan, offshore Sabah, East Malaysia in water depths of around 1,300m. Murphy Sabah Oil Company operates Kikeh on behalf of partner Petronas Carigali.

The FPSO Kikeh will be located in 1,350m of water. It will be owned by MDFT Labaun and operated by MDPX Sdn Bhd, two joint ventures between SBM and Misc Berhad. The converted tanker was built in 1974 It has an overall length of 337m a breadth of 54.6m and a deadweight of 273,000t. It has a storage capacity of two million barrels."
 

Penny Stock Saga: were the share prices manipulated? (2)

More news regarding this interesting case, which is very important for Singapore (SGD 8 Billion in paper value lost from the highs), but also has a heavy Malaysian component to it (many persons involved are Malaysians).

The parties being sued by Interactive Brokers are (according to this website):

Malaysian nationals:

• Neo Kim Hock
• Peter Chen Hing Woon
• Tan Boon Kiat
• Quah Su-Ling
• Lee Chai Huat
• Kuan Ah Ming

British Virgin Islands-registered companies:

• Sun Spirit Group Ltd
• Neptune Capital Group Ltd.

Singaporean listed companies involved:

• Asiasons Capital
• Blumont Group
• LionGold Corp
• Innopac Holdings 

From an article in Business Times (Singapore) written today by Grace Leong, more news regarding the answer by Quah Su-Ling and the rebuttal by Interactive Brokers (emphasis mine):


IPCO International chief executive Quah Su-Ling, who is among eight clients sued in High Court over $79 million in losses sustained by Interactive Brokers (IB) in the wake of the penny stock crash, has alleged the US online brokerage was involved in a "commission-generating scheme".

According to court documents inspected by The Business Times, Ms Quah, who is seeking to unfreeze nearly $15 million in assets belonging to her and her company Sun Spirit Group, said she does not recall signing the broker's account-opening documents or completing any forms.

The large-volume trades in the shares of Asiasons Capital, Blumont Group and LionGold Corp from her account and that of Sun Spirit's happened because Ken Tai, owner of Algo Capital and her financial advisor, had exceeded his authority over the accounts, she said.

She was rebutting allegations that she may have been involved in an "intricate pump-and-dump scheme to artificially generate trading volume" in the stock trio and to drive up their share prices before they crashed and wiped out over $8 billion in value.

In arbitration proceedings against her, the British Virgin Islands-incorporated Sun Spirit and eight other individuals and entities to recover $79 million in unpaid margin loans, Interactive Brokers flagged "suspicious trading activities through the defendants' accounts" made by Algo Capital. A hearing in relation to the freezing order was held last Friday.BT understands that judgment was reserved.

The broker alleged: "The unusual trading pattern employed by (Algo), which involved buying and selling the same stock in the same account on the same day at the same price, or closing out a large amount of shares in the morning, then repurchasing those shares in smaller lots throughout the day at set intervals, ... (gave) the market the appearance that the stocks were more heavily traded than they were.

"For instance, Algo often traded substantial portions of the volume of total daily trades in LionGold shares and even exceeded 80 per cent of the total trading volume on certain days. Similarly, for Asiasons shares, Algo's trading volume was as much as 67 per cent on some days."

But Ms Quah, in her affidavit, said Mr Tai had purportedly told her that it was the broker that had "placed pressure on him to maintain his high-volume trading".

"Despite the fact that Ken Tai had been trading large volumes of shares in the companies for an entire year (from August 2012 to October 2013), Interactive Brokers did not see fit to flag or exercise its rights to suspend or freeze Sun Spirit's or my accounts in light of what they now allege as 'suspicious activity'."

Between October 2012 and last Oct 4, the broker allegedly made commissions amounting to $776,152 on trades done in her account, and $177,981 on Sun Spirit's account, she said.

She also claimed the broker may have violated the Securities and Futures Act by offering margin-trading services to Singapore residents in respect of SGX-listed stocks without the requisite licence from the Monetary Authority of Singapore (MAS), and was in breach of its own internal policy.

But Interactive Brokers, represented by Senior Counsel Harpreet Singh of Cavenagh Law, said Ms Quah has not produced any credible evidence to support her claims.

Nor has she explained why Mr Tai would "gratuitously implicate" himself by admitting he was in a commission-generating scheme to defraud the defendants, it said in court documents.

IB said it is "completely unaffiliated with the advisers and/or customers who trade on its platform and in no way manages or supervises customer trading or offers any input in the trading".

"It is highly improbable that a sophisticated and experienced businesswoman and investor would be so trusting of Mr Tai. ... The more plausible explanation is the defendants, all of whom were interrelated and had connections with (LionGold, Asiasons and Blumont), were fully aware of Mr Tai's actions."

In challenging Ms Quah's claims as to why she did not disclose her relationship with the other defendants, the broker said she must be "intimately aware that most brokerages would impose higher-margin requirements on customers who disclose they are insiders of a stock they are trading, or that they hold a large position in that stock, either individually or acting in concert with others."

"If there was anyone trying to circumvent the need to obtain a licence from the MAS, it would be Ms Quah and Ipco, who had incorporated Sun Spirit on the other side of the world, and then used it for investment in the (three companies') shares through its account with Interactive Brokers."

On why Ms Quah and Sun Spirit could have been involved in such unusual trading activities and yet suffered huge losses, the broker said: "They may have expected their scheme to continue to be successful, or believe that they could have sold off their positions for large gains before the share prices collapsed, but had simply waited too long."