Short seller Citron Research dropped a "bomb" on Valeant, a pharmaceutical company, the report can be found here.
Interestingly, well known hedge fund manager Bill Ackman is "long" the stock. Ackman himself is short Herbalife.
Bronte Capital wrote "Some comments on the Valeant conference call".
Bloomberg reports: "Ackman Feeling Shortseller's Sting as Citron Sinks Valeant Stock", a snippet:
Ackman, the billionaire hedge fund manager, has long maintained that Herbalife Ltd. is a house of cards -- a suggestion that’s drawn howls from the company. Now another Wall Street scold, Citron Research’s Andrew Left, says one of Ackman’s picks looks like the Enron Corp. of Big Pharma -- a claim the company, Valeant Pharmaceuticals International Inc., rebutted Wednesday.
Yet as Valeant’s share price plunged anew, Ackman was, in effect, getting a small taste of his own medicine. Left, a small-time short seller, had grabbed headlines and captivated Wall Street, much as Ackman has done with his campaign against Herbalife. While this dust-up might seem lopsided -- Ackman runs a prominent hedge fund, Left a relatively obscure investment and research shop -- it nonetheless underscored how vocal short-sellers can gain attention and turn markets against companies fast.
“If there’s one person in the world I don’t feel bad for, it’s Bill Ackman,” Left, a 45-year-old Florida native based in Los Angeles, said in a telephone interview. “If I could switch bank accounts and hair with him, I’d close out tomorrow. Ackman’s a hedge fund manager who goes short and goes long and sometimes you win, sometimes you lose.”
Assuming there’s been no change in its holdings since the end of the second quarter, Ackman’s Pershing Square Capital Management has lost about $2.8 billion on Valeant as it declined 55 percent from an intraday peak of $263.81 on Aug. 6, according to data compiled by Bloomberg.
“In this business, nothing is personal,” Left said. “He goes home and sees his kids, I go home and see mine, and he does what he believes with his opinion.”
Biggest Selloff
If people had never heard of Citron Research before, they have now. Just after 10 a.m. Wednesday, the firm published a note suggesting Valeant was inflating its sales, igniting the biggest selloff anyone had ever seen in the stock. Laval, Quebec-based Valeant plunged as much as 40 percent, prompting a public response from the company and creating billions of dollars of losses for its hedge fund owners.
In a statement, Valeant said Citron’s research is “erroneous” and that the company derives no sales benefit from inventory held at specialty pharmacies mentioned in the report. It suggested Citron had reached inaccurate conclusions, misconstruing links between them that are explained by logistics and support agreements.
Past foes of Ackman saw irony that a company he’s invested in was sent reeling by a short-seller claiming that its revenue is overstated. Citron, the decade-old stock-commentary site originally founded as Stocklemon.com, said Valeant is using a specialty pharmacy called Philidor RX Services to store inventory and record those transactions as sales. “Is this Enron part deux?” the report said.
Just last week Muddy Waters wrote a scathing report about TeliaSonera, a Swedish telco involved in corruption which is, according to Muddy Waters, much larger than reported so far.
Showing posts with label Muddy Waters. Show all posts
Showing posts with label Muddy Waters. Show all posts
Thursday, 22 October 2015
Saturday, 2 November 2013
Short seller Muddy Waters targets NQ Mobile (3)
Another interview with Carson Block of Muddy Waters regarding NQ Mobile, interesting are the following quotes:
"... all of these China frauds that we have seen, the fraudsters don't get punished. The Chinese don't punish them ..."
"... nobody in China gets in trouble for defrauding US investors ..."
"... in some cases they get rewarded for defrauding US investors ...."
If we replace "US" by "Malaysia" or "Singapore", will the above still hold true? I am afraid it will.
But should Malaysia or Singapore then list companies of China on their share exchanges?
"... all of these China frauds that we have seen, the fraudsters don't get punished. The Chinese don't punish them ..."
"... nobody in China gets in trouble for defrauding US investors ..."
"... in some cases they get rewarded for defrauding US investors ...."
If we replace "US" by "Malaysia" or "Singapore", will the above still hold true? I am afraid it will.
But should Malaysia or Singapore then list companies of China on their share exchanges?
Thursday, 31 October 2013
Prince Frog as quiet as a mouse, NQ’s "Top Ten Lies", China Minzhong's earnings dive
I wrote before about "Prince Frog", it is already more than 2 weeks and the company has still not officially replied, worrisome. The longer it takes, the higher the chance the company is indeed a fraud.
Regarding NQ Mobile, targeted by Muddy Waters, the latter has written a new report called "NQ’s Top Ten Lies Since Friday". It can be found here. I am not an expert in this matter, but I did speak to someone knowledgeable in this area, and he told me that NQ Mobile was suspicious for a longer time, that there were enough rumours regarding the company.
Regarding China Minzhong, which was targeted by Glaucus, the company announced its quarterly results.
This looks like a nice picture:
But this not, earnings are down by 60%:
And this one is rather strange:
Cash up a lot, but borrowings also, why would a company want to borrow so much money if it has RMB 1.57 Billion in cash?
Indofood has acquired 89% of the company, we will have to wait how that will work out.
These are tough times for China based companies listed overseas, but they only have themselves to blame, in my opinion. Conservative accounting, a healthy dose of transparency and rewarding the shareholders through sizeable dividends would go a long way to battle the sceptical observers. But I haven't seen much of that lately.
Regarding NQ Mobile, targeted by Muddy Waters, the latter has written a new report called "NQ’s Top Ten Lies Since Friday". It can be found here. I am not an expert in this matter, but I did speak to someone knowledgeable in this area, and he told me that NQ Mobile was suspicious for a longer time, that there were enough rumours regarding the company.
Regarding China Minzhong, which was targeted by Glaucus, the company announced its quarterly results.
This looks like a nice picture:
But this not, earnings are down by 60%:
And this one is rather strange:
Cash up a lot, but borrowings also, why would a company want to borrow so much money if it has RMB 1.57 Billion in cash?
Indofood has acquired 89% of the company, we will have to wait how that will work out.
These are tough times for China based companies listed overseas, but they only have themselves to blame, in my opinion. Conservative accounting, a healthy dose of transparency and rewarding the shareholders through sizeable dividends would go a long way to battle the sceptical observers. But I haven't seen much of that lately.
Saturday, 26 October 2013
Short seller Muddy Waters targets NQ Mobile (2)
NQ Mobile has responded through a conference call "to address False Allegations".
Both Carson Block from Muddy Waters and Omar Khan from NQ Mobile were interviewed by Bloomberg. The transcript of these interviews can be found here.
Both Carson Block from Muddy Waters and Omar Khan from NQ Mobile were interviewed by Bloomberg. The transcript of these interviews can be found here.
Friday, 25 October 2013
Short seller Muddy Waters targets NQ Mobile
Article on Dealbook's website:
After Muddy Waters Report, NQ Mobile Falls by Half
When the stock market opened on Thursday, NQ Mobile, a Chinese mobile security company, had a valuation of $1.1 billion. Just hours later, half of its value was erased.
Call it the Muddy Waters effect. A short-selling firm known for its scathing reports on Chinese companies, Muddy Waters released a harsh assessment of NQ Mobile on Thursday, calling it a “massive fraud.”
NQ Mobile immediately experienced a stomach-turning plunge, with its shares falling more than 50 percent. The stock, which opened the day at $23 a share, fell as low as $8.46 before recovering slightly to close at $12.09. The company is listed on the New York Stock Exchange.
In its research note, Muddy Waters argued that “at least 72 percent of NQ’s purported 2012 China security revenue is fictitious,” saying the company was a “zero.”
“NQ’s largest customer by far is really NQ,” Muddy Waters, which is run by Carson C. Block, said. The note added that the company’s “future is as bleak as its past,” and that its “acquisitions are highly likely to be corrupt.”
In a statement, NQ said the accusations were “false,” adding that it would issue a more detailed response before the market opens in the United States on Friday.
“NQ Mobile will respond quickly, transparently and forcefully to these false allegations regarding our company,” the statement said.
Muddy Water's report can be found here.
After Muddy Waters Report, NQ Mobile Falls by Half
When the stock market opened on Thursday, NQ Mobile, a Chinese mobile security company, had a valuation of $1.1 billion. Just hours later, half of its value was erased.
Call it the Muddy Waters effect. A short-selling firm known for its scathing reports on Chinese companies, Muddy Waters released a harsh assessment of NQ Mobile on Thursday, calling it a “massive fraud.”
NQ Mobile immediately experienced a stomach-turning plunge, with its shares falling more than 50 percent. The stock, which opened the day at $23 a share, fell as low as $8.46 before recovering slightly to close at $12.09. The company is listed on the New York Stock Exchange.
In its research note, Muddy Waters argued that “at least 72 percent of NQ’s purported 2012 China security revenue is fictitious,” saying the company was a “zero.”
“NQ’s largest customer by far is really NQ,” Muddy Waters, which is run by Carson C. Block, said. The note added that the company’s “future is as bleak as its past,” and that its “acquisitions are highly likely to be corrupt.”
In a statement, NQ said the accusations were “false,” adding that it would issue a more detailed response before the market opens in the United States on Friday.
“NQ Mobile will respond quickly, transparently and forcefully to these false allegations regarding our company,” the statement said.
Friday, 6 September 2013
Glaucus vs Minzhong, some observations
The attention for the “Singapore Squeeze” (Financial Times) Glaucus vs Minzhong seems to wane. Probably good, since a lot more is happening in the world these days. Still some observations:
A good article can be found here, comparing the Glaucus vs China Minzhong case with the Muddy Waters vs Olam case.
Some more background of the situation in China can be found here.
"SIAS calls on regulators to punish short sellers", article in The Business Times.
"The heavy weight of the law must be felt by these mischievous perpetrators,” said SIAS President and Chief Executive David Gerald"
(SIAS is more or less the MSWG of Singapore)
Strong words, but the reader probably already know that I completely disagree with this argument. If people buy shares, convince others about their investment case (using subjective or even wrong arguments) and subsequently sell their shares for a tidy profit, that is exactly the same. And if those people would be prosecuted, countries better build a few more jails, since this is happening every day of the year in every country of the world.
In addition to that, Glaucus was very transparent about their interest, and their arguments were backed by a lot of data and arguments. One might not agree with some, but that is something else.
"The SIAS said yesterday that it has had meetings with China Minzhong and is satisfied the company has “vindicated itself”."
I find that a bold and rather naïve statement, I think to give such a definite answer much more work has to be done to give such a definite answer. Somebody on the Valuebuddies forum mentioned:
"China Aviation Oil, ACCS, HongXing and Jurong Technologies had been awarded Transparency award by SIAS and many investors had been hurt by investing into these companies. How many more of such useless awards does the Singapore market need to see before such awards are stopped?"
In my previous posting "And Glaucus responds ...." I wrote several times that it looked like Minzhong admitted that certain things were not in order.
Associate professor Mak Yuen Teen from the NUS Business School puts it more specific in a letter to The Business Times (emphasis mine):
"Is China Minzhong saying it keeps 2 sets of books?"
"China Minzhong has provided a succession of rebuttals to the allegations of US-based short seller Glaucus Research Group, including highly detailed ones on Sept 1 and 3, complete with extracts of source documents. Although its efforts in rebutting the allegations are commendable, they are unlikely to completely dispel the concerns raised by Glaucus. The source documents provided by the company can understandably provide only a partial picture of the true situation.
While the company has cited the fact that it has consistently received clean opinions from its external auditors and that the auditors have not withdrawn their opinions, the auditors themselves have been silent. Given the well-known challenges faced by auditors in China and the fact that all of China Minzhong's business is conducted through subsidiaries there, the auditors may be reluctant to bet their partners' bonuses that the allegations of Glaucus are totally without basis. It is likely that only a comprehensive special audit will be able to dispel all the concerns raised by Glaucus, but we cannot realistically expect a company to commission a special audit each time allegations are made about its financials.
Unfortunately, China Minzhong's latest announcement on Sept 3 contains statements that may not help its cause in dispelling concerns. It stated that "Glaucus's assertion that documents that are publicly available are more reliable than those not in the public domain is flawed. The public information was not obtained independently by the regulators but based on our filings. Where there is inconsistency in information, it is only logical to look to the source documents to verify the truth . . . for SAIC (State Administration for Industry & Commerce) filings, given the purpose and intention of such filings, the key consideration is to ensure that the company operates within its permitted business scope and duly informs SAIC of changes to its registered particulars". It stated that it places great emphasis on the accuracy of accounts which affect its tax liability but appears to admit that its SAIC filings may be inaccurate.
Is this a public admission that it is keeping two sets of books? Rather disconcertingly, it does not seem to see anything wrong with filing inaccurate information in order to comply with regulatory requirements.
Given that the company's filings to SAIC in China may be inaccurate, how can investors be sure that its financial statements and announcements to the Singapore Exchange here are really true and fair, especially when it is clear that regulatory enforcement is easier for Chinese authorities than for Singapore authorities?
China Minzhong's statement also confirms the challenges of doing proper due diligence for Chinese companies using publicly available information, even those filed with regulatory authorities in China, and once again highlights the risks of investing in Chinese companies."
A good article can be found here, comparing the Glaucus vs China Minzhong case with the Muddy Waters vs Olam case.
Some more background of the situation in China can be found here.
"SIAS calls on regulators to punish short sellers", article in The Business Times.
"The heavy weight of the law must be felt by these mischievous perpetrators,” said SIAS President and Chief Executive David Gerald"
(SIAS is more or less the MSWG of Singapore)
Strong words, but the reader probably already know that I completely disagree with this argument. If people buy shares, convince others about their investment case (using subjective or even wrong arguments) and subsequently sell their shares for a tidy profit, that is exactly the same. And if those people would be prosecuted, countries better build a few more jails, since this is happening every day of the year in every country of the world.
In addition to that, Glaucus was very transparent about their interest, and their arguments were backed by a lot of data and arguments. One might not agree with some, but that is something else.
"The SIAS said yesterday that it has had meetings with China Minzhong and is satisfied the company has “vindicated itself”."
I find that a bold and rather naïve statement, I think to give such a definite answer much more work has to be done to give such a definite answer. Somebody on the Valuebuddies forum mentioned:
"China Aviation Oil, ACCS, HongXing and Jurong Technologies had been awarded Transparency award by SIAS and many investors had been hurt by investing into these companies. How many more of such useless awards does the Singapore market need to see before such awards are stopped?"
In my previous posting "And Glaucus responds ...." I wrote several times that it looked like Minzhong admitted that certain things were not in order.
Associate professor Mak Yuen Teen from the NUS Business School puts it more specific in a letter to The Business Times (emphasis mine):
"Is China Minzhong saying it keeps 2 sets of books?"
"China Minzhong has provided a succession of rebuttals to the allegations of US-based short seller Glaucus Research Group, including highly detailed ones on Sept 1 and 3, complete with extracts of source documents. Although its efforts in rebutting the allegations are commendable, they are unlikely to completely dispel the concerns raised by Glaucus. The source documents provided by the company can understandably provide only a partial picture of the true situation.
While the company has cited the fact that it has consistently received clean opinions from its external auditors and that the auditors have not withdrawn their opinions, the auditors themselves have been silent. Given the well-known challenges faced by auditors in China and the fact that all of China Minzhong's business is conducted through subsidiaries there, the auditors may be reluctant to bet their partners' bonuses that the allegations of Glaucus are totally without basis. It is likely that only a comprehensive special audit will be able to dispel all the concerns raised by Glaucus, but we cannot realistically expect a company to commission a special audit each time allegations are made about its financials.
Unfortunately, China Minzhong's latest announcement on Sept 3 contains statements that may not help its cause in dispelling concerns. It stated that "Glaucus's assertion that documents that are publicly available are more reliable than those not in the public domain is flawed. The public information was not obtained independently by the regulators but based on our filings. Where there is inconsistency in information, it is only logical to look to the source documents to verify the truth . . . for SAIC (State Administration for Industry & Commerce) filings, given the purpose and intention of such filings, the key consideration is to ensure that the company operates within its permitted business scope and duly informs SAIC of changes to its registered particulars". It stated that it places great emphasis on the accuracy of accounts which affect its tax liability but appears to admit that its SAIC filings may be inaccurate.
Is this a public admission that it is keeping two sets of books? Rather disconcertingly, it does not seem to see anything wrong with filing inaccurate information in order to comply with regulatory requirements.
Given that the company's filings to SAIC in China may be inaccurate, how can investors be sure that its financial statements and announcements to the Singapore Exchange here are really true and fair, especially when it is clear that regulatory enforcement is easier for Chinese authorities than for Singapore authorities?
China Minzhong's statement also confirms the challenges of doing proper due diligence for Chinese companies using publicly available information, even those filed with regulatory authorities in China, and once again highlights the risks of investing in Chinese companies."
Thursday, 13 December 2012
Three interesting developments from the Hong Kong Exchange
[1] The SFC has published its conclusions on proposals concerning initial public offering (IPO) sponsors. The announcement on the SFC's website can be found here, the full article here.
"The changes, along with a streamlined regulatory process, will incentivise sponsors to raise standards, pick the right deals and manage them well which should in turn reduce risks for investors and all those involved in IPOs," said SFC Chief Executive Officer Mr Ashley Alder. "Although we are now experiencing lower IPO volumes these reforms will underpin market confidence during all market cycles."
Mr Alder further noted that "a high-quality application should mean that the regulatory commenting process is shorter and less intensive." The SFC and the Stock Exchange of Hong Kong Ltd (SEHK) will work on measures to streamline this process so that companies can be listed more efficiently.
The proposals are intended to enable and incentivise sponsors to take a responsible, proactive and constructive role when leading IPOs and, overall, maintain investor confidence in Hong Kong’s IPO market.
Malaysia has long time suffered from bad quality IPO's. I used to subscribe to the SPG (Stock Performance Guide) from Dynaquest, every six months I would go through the just published book searching for counters I might have overlooked. The end result was always the same, I was hugely depressed by the hundreds and hundreds of Malaysian listed companies whose long term ROE (Return On Equity) was way below the return on a simple Fixed Deposit. Malaysia therefore could have benefitted from a much tougher regime, for instance regarding sponsors.
Luckily, things seem to have improved, and the average quality of recent IPO's has risen. Unfortunately, the Bursa Malaysia is still swamped with those old companies of low quality, many of which hardly trade at all.
[2] HKEx published a Guidance Letter (GL46-12) on unrealised fair value gains on valuation of biological assets for the purpose of trading record and profit requirements under Rule 8.05(1)(a); disclosure requirements for IPO applicants with biological assets and due diligence work expected to be performed by sponsor and other professional advisers on biological assets. It also supersedes paragraphs 17 and 18 of Listing Decision HKEx-LD66-1. The letter can be found here.
"Our treatment described below is unique to applicants engaging in agricultural activities in view of the nature and inherent risks relating to the biological assets and their valuation. It is not appropriate to apply this treatment to all applicants who recognise unrealised fair value gains of their trading/ principal assets under the applicable accounting standards, e.g. investment properties and investments in securities. We consider that the risks in biological assets are higher as they are perishable and their valuation is usually subject to higher uncertainty due to the complex and not easily verifiable assumptions adopted."
As David Webb described it on his website: "In other words, "money doesn't grow on trees". Next up: for inventory purposes, poultry-breeders will not be allowed to count their chickens until they are hatched."
Valuation of biological assets was one of the points raised by Muddy Waters in their report on Olam.
[3] The HK Exchange Published Consultation Conclusions on Board Diversity. The link can be found here.
"We note the overwhelming market support for the Exchange to promote board diversity and to introduce measures in the Code. The amendments are not intended to prescribe particular corporate structures or to require compliance with hard and fast rules. The disclosure, or the explanation, is aimed at securing sufficient information so that investors and stakeholders can understand the company’s performance and governance practices, and act accordingly," said Mark Dickens, HKEx's Head of Listing.
"The changes, along with a streamlined regulatory process, will incentivise sponsors to raise standards, pick the right deals and manage them well which should in turn reduce risks for investors and all those involved in IPOs," said SFC Chief Executive Officer Mr Ashley Alder. "Although we are now experiencing lower IPO volumes these reforms will underpin market confidence during all market cycles."
Mr Alder further noted that "a high-quality application should mean that the regulatory commenting process is shorter and less intensive." The SFC and the Stock Exchange of Hong Kong Ltd (SEHK) will work on measures to streamline this process so that companies can be listed more efficiently.
The proposals are intended to enable and incentivise sponsors to take a responsible, proactive and constructive role when leading IPOs and, overall, maintain investor confidence in Hong Kong’s IPO market.
Malaysia has long time suffered from bad quality IPO's. I used to subscribe to the SPG (Stock Performance Guide) from Dynaquest, every six months I would go through the just published book searching for counters I might have overlooked. The end result was always the same, I was hugely depressed by the hundreds and hundreds of Malaysian listed companies whose long term ROE (Return On Equity) was way below the return on a simple Fixed Deposit. Malaysia therefore could have benefitted from a much tougher regime, for instance regarding sponsors.
Luckily, things seem to have improved, and the average quality of recent IPO's has risen. Unfortunately, the Bursa Malaysia is still swamped with those old companies of low quality, many of which hardly trade at all.
[2] HKEx published a Guidance Letter (GL46-12) on unrealised fair value gains on valuation of biological assets for the purpose of trading record and profit requirements under Rule 8.05(1)(a); disclosure requirements for IPO applicants with biological assets and due diligence work expected to be performed by sponsor and other professional advisers on biological assets. It also supersedes paragraphs 17 and 18 of Listing Decision HKEx-LD66-1. The letter can be found here.
"Our treatment described below is unique to applicants engaging in agricultural activities in view of the nature and inherent risks relating to the biological assets and their valuation. It is not appropriate to apply this treatment to all applicants who recognise unrealised fair value gains of their trading/ principal assets under the applicable accounting standards, e.g. investment properties and investments in securities. We consider that the risks in biological assets are higher as they are perishable and their valuation is usually subject to higher uncertainty due to the complex and not easily verifiable assumptions adopted."
As David Webb described it on his website: "In other words, "money doesn't grow on trees". Next up: for inventory purposes, poultry-breeders will not be allowed to count their chickens until they are hatched."
Valuation of biological assets was one of the points raised by Muddy Waters in their report on Olam.
[3] The HK Exchange Published Consultation Conclusions on Board Diversity. The link can be found here.
"We note the overwhelming market support for the Exchange to promote board diversity and to introduce measures in the Code. The amendments are not intended to prescribe particular corporate structures or to require compliance with hard and fast rules. The disclosure, or the explanation, is aimed at securing sufficient information so that investors and stakeholders can understand the company’s performance and governance practices, and act accordingly," said Mark Dickens, HKEx's Head of Listing.
Thursday, 29 November 2012
And Olam responded .....
Olam defended itself with the following 44-page report. It looks pretty solid, at least they did a good job responding in detail and fast. I expect some follow-up from Muddy Waters, it is their move.
The jury is not yet out, but some investors sold their shares, just to be on the safe side, the share has fallen about 40 cent in November.
The Valuebuddies forum drew attention to the fact that Olam has been buying back its shares, for instance here. Companies that have large debts and constantly have to issue new notes should not embark on a share buyback program, in my opinion. They should first strengthen their balance sheet, and only then, if the share is indeed trading at a huge discount to its net asset value, it could consider buying back its shares. But even then, I prefer a simple, transparent dividend, the higher dividend yield will automatically attract attention, so the result will be the same.
The Wall Street Journal detailed Muddy Water's track record so far in this article.
The jury is not yet out, but some investors sold their shares, just to be on the safe side, the share has fallen about 40 cent in November.
The Valuebuddies forum drew attention to the fact that Olam has been buying back its shares, for instance here. Companies that have large debts and constantly have to issue new notes should not embark on a share buyback program, in my opinion. They should first strengthen their balance sheet, and only then, if the share is indeed trading at a huge discount to its net asset value, it could consider buying back its shares. But even then, I prefer a simple, transparent dividend, the higher dividend yield will automatically attract attention, so the result will be the same.
The Wall Street Journal detailed Muddy Water's track record so far in this article.
Wednesday, 28 November 2012
Muddy Waters released its report about Olam
Muddy Water released its 133-page report about Olam, the link can be found here. Many issues are very (accounting) technical in nature, and it will take time to digest the information. Also, we need to see the official reaction from Olam on the report. In the Business Times (Singapore) a lot of attention for the report, which contains quite a lot of recycled old articles, critical comments made by other analysts in the past.
Carson Block, founder of Muddy Waters Research LLC, talks about Olam International Ltd.'s accounting methods, risk of failure and business planning. Block, speaking with Stephanie Ruhle and Tom Keene on Bloomberg Television's "Market Makers," also discusses short-selling strategies.
More can be found here: "Why Short Seller Carson Block Is Done Exposing Chinese Frauds"
Carson Block, founder of Muddy Waters Research LLC, talks about Olam International Ltd.'s accounting methods, risk of failure and business planning. Block, speaking with Stephanie Ruhle and Tom Keene on Bloomberg Television's "Market Makers," also discusses short-selling strategies.
More can be found here: "Why Short Seller Carson Block Is Done Exposing Chinese Frauds"
Thursday, 22 November 2012
Olam takes legal action against Muddy Waters
According to this statement, Olam International has taken legal action against Muddy Waters and its founder Carson Block. It looks like things are starting to escalate.
On one hand I am very much in favour for freedom of speech (which is anyhow much too low in Asia) and until now, I haven't read anything serious by Muddy Waters yet. But I don't know what exactly has been said on the Sohn London Investment Conference in London, details of the allegations have not been forthcoming. So I would be interested what exactly the case is about.
Olam's reaction so far looks rather extreme, as pointed out by Muddy Waters. A solid blue chip should just shrug its shoulders and move on, producing steady quarterly profits, it should not be bothered by criticism.
On the other hand, I am also not much of a fan of companies like Muddy Waters: first shorting a certain stock and then releasing negative information about the company.
But first buying a stock and then releasing positive information is basically the same, and that is happening all the time.
Court cases are always good for outsiders to get a glimpse of what is really going on, so I would be quite interested to read further about the on goings of this case. But because of the court case, Muddy Waters might not reveal more information and keep its bullets dry.
Channel News Asia's story about the events.
On one hand I am very much in favour for freedom of speech (which is anyhow much too low in Asia) and until now, I haven't read anything serious by Muddy Waters yet. But I don't know what exactly has been said on the Sohn London Investment Conference in London, details of the allegations have not been forthcoming. So I would be interested what exactly the case is about.
Olam's reaction so far looks rather extreme, as pointed out by Muddy Waters. A solid blue chip should just shrug its shoulders and move on, producing steady quarterly profits, it should not be bothered by criticism.
On the other hand, I am also not much of a fan of companies like Muddy Waters: first shorting a certain stock and then releasing negative information about the company.
But first buying a stock and then releasing positive information is basically the same, and that is happening all the time.
Court cases are always good for outsiders to get a glimpse of what is really going on, so I would be quite interested to read further about the on goings of this case. But because of the court case, Muddy Waters might not reveal more information and keep its bullets dry.
Channel News Asia's story about the events.
Wednesday, 21 November 2012
Muddy Waters response to Olam
Muddy Waters has responded to Olam reactions:
In the two and one-half years Muddy Waters, LLC has been openly criticizing publicly-traded companies, we have not seen a response as defensive as yours – not even from Sino-Forest. On Monday, our Director of Research gave a brief talk on Olam at a well-respected charity event. He presented facts about Olam along with Muddy Waters’s opinion that Olam is at risk of collapsing due multiple factors, including its debt load. As Olam has since said, his comments were not overly substantive. But based on this alone, Olam halted its stock, scheduled two conference calls, discussed buying back shares, and issued statements that included saying it is not a “fly-by-night company”. It has further evidenced a bizarre fixation on baseball caps.
Olam’s disproportionate reaction is extraordinary in our experience. Should Olam come to collapse (as we believe it will), its use of much-needed cash to buy back shares at this time should give rise to questions about whether fiduciary responsibilities have been breached – particularly given the possible existence of individual motivations that are not necessarily aligned with those of Olam’s lenders. We also note Olam’s attempts to impugn our credibility.
You and your investors should note that attempting to silence critics is not a plan of corrective action. In no way does it make Olam stronger. The February 2011 CLSA report, which raised far fewer concerns than we have identified internally, and that Olam itself made so controversial, should have caused you to work toward repairing what ails your business and your balance sheet. Instead, Olam has since increased its a) debt load by approximately S$900 million, b) cumulative investment cash burn by approximately S$2 billion, and c) cumulative operating cash burn by approximately S$500 million. In other words, you did the exact opposite of what you should have done. Your actions have been an abject failure of leadership.
Companies that attack criticism the way Olam does fail to understand that raising money from the public is a privilege. Because Olam has received significant investment from the government of Singapore, Olam’s mismanagement of the public trust is that much less forgivable. Know this: You voluntarily came to the market, you subjected yourselves to its forces, and you must bear the consequences of your ineptitude.
We do not work for an investment bank, and cannot be bullied the way other analysts can. Our research into Olam has been exhaustive, and we plan to resolutely stand by it regardless of any attempts you might make to discredit it or us.
We therefore suggest you find better uses of your time than focusing on criticism. For instance, you might want to work on plans to reign in your CapEx and de-leverage. The clock is likely ticking.
In the two and one-half years Muddy Waters, LLC has been openly criticizing publicly-traded companies, we have not seen a response as defensive as yours – not even from Sino-Forest. On Monday, our Director of Research gave a brief talk on Olam at a well-respected charity event. He presented facts about Olam along with Muddy Waters’s opinion that Olam is at risk of collapsing due multiple factors, including its debt load. As Olam has since said, his comments were not overly substantive. But based on this alone, Olam halted its stock, scheduled two conference calls, discussed buying back shares, and issued statements that included saying it is not a “fly-by-night company”. It has further evidenced a bizarre fixation on baseball caps.
Olam’s disproportionate reaction is extraordinary in our experience. Should Olam come to collapse (as we believe it will), its use of much-needed cash to buy back shares at this time should give rise to questions about whether fiduciary responsibilities have been breached – particularly given the possible existence of individual motivations that are not necessarily aligned with those of Olam’s lenders. We also note Olam’s attempts to impugn our credibility.
You and your investors should note that attempting to silence critics is not a plan of corrective action. In no way does it make Olam stronger. The February 2011 CLSA report, which raised far fewer concerns than we have identified internally, and that Olam itself made so controversial, should have caused you to work toward repairing what ails your business and your balance sheet. Instead, Olam has since increased its a) debt load by approximately S$900 million, b) cumulative investment cash burn by approximately S$2 billion, and c) cumulative operating cash burn by approximately S$500 million. In other words, you did the exact opposite of what you should have done. Your actions have been an abject failure of leadership.
Companies that attack criticism the way Olam does fail to understand that raising money from the public is a privilege. Because Olam has received significant investment from the government of Singapore, Olam’s mismanagement of the public trust is that much less forgivable. Know this: You voluntarily came to the market, you subjected yourselves to its forces, and you must bear the consequences of your ineptitude.
We do not work for an investment bank, and cannot be bullied the way other analysts can. Our research into Olam has been exhaustive, and we plan to resolutely stand by it regardless of any attempts you might make to discredit it or us.
We therefore suggest you find better uses of your time than focusing on criticism. For instance, you might want to work on plans to reign in your CapEx and de-leverage. The clock is likely ticking.
Tuesday, 20 November 2012
Olam's shares suspended after Muddy Water allegations (2)
The Olam issue seems to be very "hot" in Singapore. Many investors have exposure either through their equity or bond holdings. Valuebuddies has the following thread on it. From other sources I received the following information.
The most well publicized Muddy Waters success is Sino Forest where the trees obviously weren't where they were supposed to be. However, he's tried it 3 other times and here's the track record:
Company MW RPRT Pre-report Day-after Curr. PX
SPRD US 28/6/11 $18 $13 $18
FMCN US 21/11/11 $25 $15 $25
EDU US 18/7/12 $22 $9.5 $19
Outside of Sino Forest, the last 3 target stocks are higher or at similar levels within months of MW reports. Just stating a fact here.
The OLAM 4.07% Senior Bond maturing on 12-Feb-2013 is yielding 18.72% to maturity! Current Offer price at 97...
OLAM 6% 2018 now offer at 90. Yield to maturity is 8.22%.
The million dollar question is, will OLAM default in the next 2.5 months?
The primary issue is their recognition of biological gains (Olam has booked SGD191m of these gains in the past 2-years; 24% of report PAT). Biological gains are the yearly changes in net present value of future income flows on the group’s upstream crop and livestock investments. These valuations use assumptions on commodities prices, productive life of assets, yields, inflation and discount rates. According to Muddy Waters, if Olam does not deliver on their investments, the profits recognized as biological gains will amount to nothing. Muddy Waters also claims the valuations assumptions are aggressive.
Biological gains are a requirement under IFRS for Singapore-listed companies and have been in place for the past 4-years. The aim of this standard is to make a fair-representation of a company’s biological investments as these typically have long gestation periods before revenue delivery while costs are incurred from the start.
All palm oil plantation companies listed on SGX follow this. In our view, whether the assumptions used are aggressive or whether biological gains are recognized as earnings is a moot point. These gains (and losses) are stripped out by a majority of the Street in arriving at core-earnings for Olam as well as all other SGX listed plantations. Further, in their annual report (p142 in 2012), Olam discloses all the assumptions that go in to coming up with their valuations – which are signed off by the auditors (Ernst & Young) and also in the case of livestock by independent valuers.
Biological gains come in two forms: (a) operational – changes in yields assumptions etc and (b) non-operational – changes in pricing assumptions, discount rates. Olam is the only company in our coverage that actually discloses these separately. We will comment further once we have a look at the Muddy Waters report which is scheduled to be released Tuesday morning US time.
The most well publicized Muddy Waters success is Sino Forest where the trees obviously weren't where they were supposed to be. However, he's tried it 3 other times and here's the track record:
Company MW RPRT Pre-report Day-after Curr. PX
SPRD US 28/6/11 $18 $13 $18
FMCN US 21/11/11 $25 $15 $25
EDU US 18/7/12 $22 $9.5 $19
Outside of Sino Forest, the last 3 target stocks are higher or at similar levels within months of MW reports. Just stating a fact here.
The OLAM 4.07% Senior Bond maturing on 12-Feb-2013 is yielding 18.72% to maturity! Current Offer price at 97...
OLAM 6% 2018 now offer at 90. Yield to maturity is 8.22%.
The million dollar question is, will OLAM default in the next 2.5 months?
The primary issue is their recognition of biological gains (Olam has booked SGD191m of these gains in the past 2-years; 24% of report PAT). Biological gains are the yearly changes in net present value of future income flows on the group’s upstream crop and livestock investments. These valuations use assumptions on commodities prices, productive life of assets, yields, inflation and discount rates. According to Muddy Waters, if Olam does not deliver on their investments, the profits recognized as biological gains will amount to nothing. Muddy Waters also claims the valuations assumptions are aggressive.
Biological gains are a requirement under IFRS for Singapore-listed companies and have been in place for the past 4-years. The aim of this standard is to make a fair-representation of a company’s biological investments as these typically have long gestation periods before revenue delivery while costs are incurred from the start.
All palm oil plantation companies listed on SGX follow this. In our view, whether the assumptions used are aggressive or whether biological gains are recognized as earnings is a moot point. These gains (and losses) are stripped out by a majority of the Street in arriving at core-earnings for Olam as well as all other SGX listed plantations. Further, in their annual report (p142 in 2012), Olam discloses all the assumptions that go in to coming up with their valuations – which are signed off by the auditors (Ernst & Young) and also in the case of livestock by independent valuers.
Biological gains come in two forms: (a) operational – changes in yields assumptions etc and (b) non-operational – changes in pricing assumptions, discount rates. Olam is the only company in our coverage that actually discloses these separately. We will comment further once we have a look at the Muddy Waters report which is scheduled to be released Tuesday morning US time.
Olam's shares suspended after Muddy Water allegations
Muddy Waters has targeted Olam (listed in Singapore) for "short selling". Temasek is a 15% shareholder of Olam, which makes this case even more interesting. At the moment the share is suspended, pending clarifications.
Muddy Waters has had some succes in some cases (Sino Forest comes to mind), but other cases were not clear cut at all (to say the least).
"Buyer beware", but also "Seller beware".
By Jesse Westbrook and Shruti Date Singh
Nov. 20 (Bloomberg) -- Olam International Ltd., the commodities trader part owned by Singapore’s state-owned investment company, plunged the most in four years after short seller Carson Block said he’s betting against the shares because he questions the company’s accounting methods.
The supplier of 20 agricultural goods from cocoa to rubber fell 21 percent in over-the-counter trading in New York yesterday, according to data compiled by Bloomberg, after Block said the company is booking profits on transactions before it’s clear how the deals will work out over time. Singapore-based Olam is “heavily” indebted and aggressive in how it reports what the company calls biological gains on investments, he told the Ira Sohn Investment Conference in London.
Olam is “dismayed at the nature and lack of substance” of Block’s comments and wasn’t contacted before by him or his Muddy Waters LLC research firm, Chief Executive Officer Sunny Verghese said in an e-mailed statement. He’s waiting for a report from Muddy Waters and “will strongly defend Olam’s excellent reputation for transparency and good governance,” he said.
Block, 36, has successfully bet against Chinese companies that trade in North America after questioning their accounting methods. One target, tree-plantation operator Sino-Forest Corp., slumped 74 percent before eventually filing for bankruptcy protection in March last year.
‘Leap of Faith’
Olam will fail and recoveries for investors will be “negligible,” Block said. “It’s a leap of faith to think the company is being honest with its valuation” gains, he said.
It fell 0.9 percent in Singapore yesterday to S$1.74 before the 29 cent plunge to $1.10 in New York. It has fallen 18 percent in Singapore this year compared with a 12 percent gain in the benchmark Straits Times Index.
Hong Kong- and Mississauga, Ontario-based Sino-Forest Corp. plunged before being suspended in August last year after a June 2011 report from Muddy Waters accused it of fraud.
Block took a short position in Sino-Forest by borrowing and selling the stock, aiming to profit by repaying the borrowed shares at a lower price. Sino-Forest filed for bankruptcy protection in March. The Ontario Securities Commission accused several executives including the former CEO Allen Chan of involvement in a “complex fraudulent scheme” to inflate assets and revenue.
Block Targets
Other companies targeted by Muddy Waters include New Oriental Education & Technology Group Inc. Block said last month he’s “more convinced than ever” that the Beijing-based company is misleading investors. In February, Muddy Waters issued its fifth report on Focus Media Holding Ltd., claiming the Chinese advertising company overstated its network.
“As it pertains to Sino-Forest, he was able to unearth something others weren’t,” said John Goldsmith, deputy head of equities at Montrusco Bolton Investments Inc. in Toronto, who sold his Sino-Forest shares for a loss in June 2011, seven days after Muddy Waters published its report on the company. “He, ultimately, was proven correct. You have to at least listen.”
Olam was founded in 1989 in Nigeria by the Kewalram Chanrai Group as an export company to secure foreign currency, according to Olam’s website. Today, Olam is the fifth-largest publicly traded global wholesaler of agricultural products ranked by revenue, after Bunge Ltd., Archer-Daniels-Midland Co., Noble Group Ltd. and Glencore International Plc., according to data compiled by Bloomberg.
Biological Assets
The company supplies food to 12,300 customers in 65 countries and employs more than 18,000 people, the website says. Temasek Holdings Pte, Singapore’s state-owned investment company, holds 16 percent of Olam, according to data compiled by Bloomberg.
The company’s first-quarter net income of S$43.2 million ($35.3 million) included an operation gain of S$10.1 million on account of “fair valuation of biological assets,” Olam said in a Nov. 14 statement. It said then that it started making such valuations in the third quarter of fiscal 2012 and “hence there was no operational gain/loss booked in the corresponding period” a year earlier.
Overall, Olam said its quarterly profit rose 26 percent while sales gained 45 percent to S$4.69 billion. Net debt was $5.7 billion as of Sept. 30, according to data compiled by Bloomberg.
Muddy Waters has had some succes in some cases (Sino Forest comes to mind), but other cases were not clear cut at all (to say the least).
"Buyer beware", but also "Seller beware".
By Jesse Westbrook and Shruti Date Singh
Nov. 20 (Bloomberg) -- Olam International Ltd., the commodities trader part owned by Singapore’s state-owned investment company, plunged the most in four years after short seller Carson Block said he’s betting against the shares because he questions the company’s accounting methods.
The supplier of 20 agricultural goods from cocoa to rubber fell 21 percent in over-the-counter trading in New York yesterday, according to data compiled by Bloomberg, after Block said the company is booking profits on transactions before it’s clear how the deals will work out over time. Singapore-based Olam is “heavily” indebted and aggressive in how it reports what the company calls biological gains on investments, he told the Ira Sohn Investment Conference in London.
Olam is “dismayed at the nature and lack of substance” of Block’s comments and wasn’t contacted before by him or his Muddy Waters LLC research firm, Chief Executive Officer Sunny Verghese said in an e-mailed statement. He’s waiting for a report from Muddy Waters and “will strongly defend Olam’s excellent reputation for transparency and good governance,” he said.
Block, 36, has successfully bet against Chinese companies that trade in North America after questioning their accounting methods. One target, tree-plantation operator Sino-Forest Corp., slumped 74 percent before eventually filing for bankruptcy protection in March last year.
‘Leap of Faith’
Olam will fail and recoveries for investors will be “negligible,” Block said. “It’s a leap of faith to think the company is being honest with its valuation” gains, he said.
It fell 0.9 percent in Singapore yesterday to S$1.74 before the 29 cent plunge to $1.10 in New York. It has fallen 18 percent in Singapore this year compared with a 12 percent gain in the benchmark Straits Times Index.
Hong Kong- and Mississauga, Ontario-based Sino-Forest Corp. plunged before being suspended in August last year after a June 2011 report from Muddy Waters accused it of fraud.
Block took a short position in Sino-Forest by borrowing and selling the stock, aiming to profit by repaying the borrowed shares at a lower price. Sino-Forest filed for bankruptcy protection in March. The Ontario Securities Commission accused several executives including the former CEO Allen Chan of involvement in a “complex fraudulent scheme” to inflate assets and revenue.
Block Targets
Other companies targeted by Muddy Waters include New Oriental Education & Technology Group Inc. Block said last month he’s “more convinced than ever” that the Beijing-based company is misleading investors. In February, Muddy Waters issued its fifth report on Focus Media Holding Ltd., claiming the Chinese advertising company overstated its network.
“As it pertains to Sino-Forest, he was able to unearth something others weren’t,” said John Goldsmith, deputy head of equities at Montrusco Bolton Investments Inc. in Toronto, who sold his Sino-Forest shares for a loss in June 2011, seven days after Muddy Waters published its report on the company. “He, ultimately, was proven correct. You have to at least listen.”
Olam was founded in 1989 in Nigeria by the Kewalram Chanrai Group as an export company to secure foreign currency, according to Olam’s website. Today, Olam is the fifth-largest publicly traded global wholesaler of agricultural products ranked by revenue, after Bunge Ltd., Archer-Daniels-Midland Co., Noble Group Ltd. and Glencore International Plc., according to data compiled by Bloomberg.
Biological Assets
The company supplies food to 12,300 customers in 65 countries and employs more than 18,000 people, the website says. Temasek Holdings Pte, Singapore’s state-owned investment company, holds 16 percent of Olam, according to data compiled by Bloomberg.
The company’s first-quarter net income of S$43.2 million ($35.3 million) included an operation gain of S$10.1 million on account of “fair valuation of biological assets,” Olam said in a Nov. 14 statement. It said then that it started making such valuations in the third quarter of fiscal 2012 and “hence there was no operational gain/loss booked in the corresponding period” a year earlier.
Overall, Olam said its quarterly profit rose 26 percent while sales gained 45 percent to S$4.69 billion. Net debt was $5.7 billion as of Sept. 30, according to data compiled by Bloomberg.
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