China Ouhua: red wine and red flags (5)

I have written several times before about China Ouhua Winery, and not exactly in "glowing terms". To be more exact, I haven't found a single positive aspect regarding this company.

I was therefore rather surprised when I noticed the following:

According to the website of The Edge, Fundamental Score is defined as:


The Fundamental Score is a snapshot of a company’s fundamental strength, derived from historical numbers. For those who are not familiar with financial jargons, we have condensed some of the most often-used ratios into this "Score" to reflect a company’s profitability and balance sheet strength.

The Fundamental Score ranges from 0 to 3 for easy understanding. A score of 0 means weak fundamentals and a score of 3 means strong fundamentals.


The definition of the Valuation Score is as follows:


If you are unfamiliar with financial jargons, we have condensed several of the most-often used valuation benchmarks into a Valuation Score of 0 to 3 – to determine if a stock is attractively valued or not, at this point in time.

A Valuation Score of 0 means valuations are not attractive. Vice versa, a score of 3 means valuations are attractive.


That means that China Ouhua has a fundamental strength (1.80) that is better than average and a somewhat attractive valuation (0.90).

Somewhere in the database and/or algorithms of The Edge, something must have gone horribly wrong.

Surely both the fundamental and valuation score for China Ouhua have to be 0.00.

For more background on the company and to get a flavour what this company is about (hint: managing the winery is not exacty their forte), please check the previous articles.

Fund awards: please use only funds of a decent size

The Edge presented The Edge -Thomson Reuters Lipper Fund Awards 2016.

The full article appeared in the "Personal Wealth" pull out of The Edge Weekly from March 6-12 2017.

What is remarkable that apparently fund size did not play a role in the selection process.

From an international point of view, a USD 500M fund or larger has a decent size, that would correspond to a fund of more than RM 2 Billion. Almost no awarded fund fits that size.

In Singapore it has been said that a hedge fund (I admit, that is a different breed from a pure equity or bond fund, but just for comparison sake) has to have a minimum of about USD 50 Million to have a sufficient size to survive (because of expenses, compliance etc.), in other words more than RM 200 Million. But many of the awarded Malaysian funds don't even have this size.

There are quite a few awarded funds with its size below RM 25 Million, way too small to consider, in my humble opinion.

And then there is even one fund with a size less than RM 1 Million.

Honestly, those micro size funds should not have been considered for the awards. At a very small size one can invest in opportunities that are not available at a larger fund size.

In plain English: if investors pour money in these awarded funds based on their previous track record (achieved at a very small size), they might be disappointed in the future.

Anyhow, I think there are much too many unit trust funds in Malaysia. I can imagine some choice between bond funds and equity funds, pure Malaysian focused and international focused, but some fund houses have more than 20 funds. I question the amount of focus given to each fund by the managers. And with so many funds under one umbrella it will be hard not to win an award.

The Edge: "O&G counters hit by a major selldown"

Article on the website of The Edge, of interest is the following part:

Those comments were very similar to the ones Tan made in his interview with The Star, which I mentioned in my previous blog posting.

If his influence is indeed so large, I don't know but it might very well be the case.

However, it has to be mentioned that warnings signals regarding the O&G industry have been there for quite some time. I mentioned them in postings, for instance here and here.

Reuters wrote in February "Oil firms seen cutting exploration spending". The share price of several O&G counters has been on a down trend for some while. 

The larger macro picture is most likely that the price of oil has come down due to a slow down of China's economy and alternative sources for O&G through fracking.

The fall of Ekran and Ting Pek Khiing

On Anil Netto's website there is an article (mostly taken from The Edge Malaysia) titled:

"Curse of Bakun: The fall and fall of Ting Pek Khiing"

It describes one of the more infamous episodes in the history of Malaysian listed company Ekran, and its tycoon Ting Pek Khiing.

Unfortunately, not much attention in the article for the rights issue of Ekran and the fact that "Ting took some RM712.9mil from the company as an advance in return for the injection of some of his private assets in 1996/97. The amount has been long overdue – for more than 10 years."

The last quote can be found at the website of The Star, aptly called "The lack of deterrent sentencing" (Malaysia's perennial problem, especially when VIP's are involved).

"In November 2009, Tan Sri Ting Pek Khiing and six other directors of Ekran were handed total fines of RM630,000 for breaching Bursa Malaysia’s listing requirements pertaining to a related-party transaction. The penalty for Ting, the company’s executive chairman, was RM500,000. Four directors were fined RM25,000 each and the remaining two RM15,000 each. The breaches relate to the company’s failure to disclose the change in the terms of Ting’s settlement of the remaining amount owing to Ekran."

Besides the above breach (for which a fine was given less than 1/1000th of the amount of money involved, hence the title of the article in The Star), the important question is: "was the above transaction (paying RM 713 million for some of Ting's assets in the midst of the Asian crisis when the prices of assets were literally falling of a cliff) really in the best interest of the company?". I very strongly doubt it. Was ever anyone punished for that? Not that I am aware of.

Ting failed to settle the outstanding debt for a dozen years. Interestingly enough, at one moment he offered to settle part of the debt with a piece of land which was 90% under water:

Ekran was delisted in 2010. As The Edge reports, the minority shareholders are the ultimate losers. After becoming delisted it will be even more difficult for them to keep track of the company's financial conditions, including debt collection (from Ting), let alone recoup their investment losses.

Shareholders of other companies linked to Ting (like Wembley Industries, Granite Industries, PWE Industries) have not fared much better.

Ting was declared a bankrupt but according to this Focus Malaysia article that has not had much impact on him:

"Life is good to Tan Sri Ting Pek Khiing, 68. The former tycoon is seen in luxury vehicles, dining in fancy restaurants and posh hotels, attending boardroom meetings and is still very much in the news. The former developer of the Bakun Dam, via Ekran Bhd, was declared a bankrupt on Oct 28, 2010 by the Kuala Lumpur High Court. He appears to have not lost his social standing, hosting the Sarawak Yang di-Pertua Negeri at his family home during the recent Chinese New Year celebrations. So it is not Ting’s seemingly good life that is called to question, but whether he is functioning within the parameters of a bankrupt, reports Joseph Wong."

Malaysia at Crossroads

Excellent collection of critical articles in The Edge of December 24, 2012.

Some excerpts:

“…. political integrity to replace the dirty, corrupt and adversarial with idealism, activism and intellectualism based on values, knowledge, wisdom, service, transparency, accountability and good governance”

Datuk Saifuddin Abdullah, Deputy Minister of Higher Education

“In Malaysia, corruption is not a random or occasional occurrence but tends to be systemic and cuts across authoritarian and democratic regimes. Kleptocrats are usually not merely mid-level officials who extort money or receive bribes as means to make ends meet, but high-ranking officials and top-level politicians who engage in corrupt acts to do business and accumulate wealth. The question for Malaysians is, are we a country in which corruption is the dominant means of doing business and can be referred to as the fifth factor of production? To the extent that kleptocratic rule develops and expands, whatever genuine democratic forces there are will recede into the background. This is because the kind of democracy that is based on good governance and accountability to the people is antithetical to the interests of the kleptocrats. At most, a formal and limited form of democracy will survive.”

Syed Farid Alatas, head of Department of Malay Studies, NUS

“Malaysia outperformed most other developing economies because its civil service, police, judiciary, universities, schools, political parties, regulatory agencies and development institutions were often first world in quality. It may not be a popular  thing to say but it is a fact that Malaysia’s institutional edge has diminished in the past 20 years. Without institutional revitalization, Malaysia will not resolve corruption and crime. Neither will it be able to build the human capital needed to compete effectively nor will it be able to reverse the brain drain and attract the talent needed to excel.”

Manu Bhaskaran, partner and head of economic research at Centennial Group

“There are still many instruments of control that effectively stifle genuine discussion of issues that matter to the country. Do we want a society that values and protects our freedom to debate and discuss issues of importance to us? Or one that would rather have us remain quiet and disengage ourselves from the national discourse?”

Malek Ali, founder of BFM 89.9

“This mentality is reflected in our poor track record for civil and political rights, free and fair elections, transparent governance, press freedom and respect for the dignity of all persons regardless of race, gender and religion. Malaysia has yet to sign the United Nations convention on the elimination of all forms of racial discrimination and the covenants on civil, political, economic, social and cultural rights. The national economy, while important, may not be the crucial election issue. What matters if we are to get over the Third World mentality is to cross the racial and ideological divides, to root out the corruption and patronage, eradicate institutional discrimination, and depoliticise the police and judiciary.

Eric Loo, journalist

The Edge Polls about Corporate Governance issues

The Edge website regularly holds polls about different issues, some if which are relevant for this blog.

The website can be found here:

http://www.theedgemalaysia.com/the-edge-polls.html

A large majority of the voters is "not impressed" about Corporate Governance in Malaysia, the authorities should take note.

A huge majority votes is either for more transparency or more enforcement.

The issue of quarterly reporting was raised with the CG Blueprint 2011. The voice of the people has been heard.

The "No" voters want even more severe penalties, I suppose large fines or persons being barred from their industry.

PNB made an offer of RM 3.90 for each SP Setia share, the management immediately responded that the offer price was insufficient. It has been rather quiet around this deal, with PNB negotiating with SP Setia's management and receiving SC's feedback.

The choice of countries is rather limited, one would expect the US, Hong Kong and possibly the UK and Australia also to feature. But the message is clear, the large majority of voters are (also) looking at foreign markets to invest in.

It has been made rather convenient to trade foreign stocks with local brokers, I would be interested to know how many investors are using this option, which percentage they invest in foreign stocks.

It means competition for the listed Malaysian companies, which is good, it forces them to perform well (both financially and in CG terms) relatively to foreign companies.

Transmile verdict a step in the right direction

From The Star of November 2, 2011, an article by MSWG's CEO Rita Benoy Bushon:

http://biz.thestar.com.my/news/story.asp?file=/2011/11/2/business/9816820&sec=business

"On Oct 28, the Securities Commission issued a short but highly significant press release.
It announced that the Sessions Court had found two former independent directors and audit committee members of Transmile Group Bhd, Jimmy Chin Kim Feung and Shukri Sheik Abdul Tawab, guilty under the Securities Industry Act 1983 for authorising the release of misleading financial statements to the stock exchange.

They were each sentenced to one year in prison and a fine of RM300,000. And if either is unable to come up with the money, an additional six months' imprisonment will be added.

The charge was under Section 122B(b)(bb) of the Securities Industry Act, which states that anyone found guilty of knowingly furnishing false or misleading statements can be liable to a fine of as much as RM3mil and imprisoned for up to 10 years.

The sentence meted out in this case was one-tenth the maximum jail sentence and financial penalty.
The Sessions Court's decision came six years after the actual financial period of the act, in 2005.
Transmile initially reported revenue of RM550mil, only to later restate them to RM356mil . In other words, 35% of the reported revenue was fraudulent.

Many observers of corporate Malaysia will view the decision as a step in the right direction.

The Sessions Court judge pointed out that the public interest factor must be given paramount consideration. He stated that the directors were not decorative pieces. He also emphasised that the audit committee had specific duties, functions and responsibilities over the company accounts, and their point of view was heavily relied upon by the investing public.

According to the judge, the case showed blatant disregard of the seriousness of the concerns when the audit committee was told by the auditors that the contra transactions were unusual and lacked commercial justification.

These were sufficient warning bells to raise the concerns at the board which the audit committee members failed to do.

Transmile was a case where many individuals lost a significant amount of capital.

Right now, we know that the case against two other former directors of Transmile (Gan Boon Aun and Khiudin Mohammed), who were executive directors at the time, is currently pending at the Kuala Lumpur Sessions Court. The charges brought by the SC against Gan and Khiudin were similar: reporting misleading statements.

Ultimately our courts are one of the essential gatekeepers of our capital markets and together with the other gatekeepers, they should protect the integrity of the capital market.

If the integrity of our stock market is not protected as sacrosanct, it is entirely conceivable that we will end up with a market light on fundamental stocks and there would be a lack of trust, especially for long-term shareholders.

Obviously, we don't think that this is the way forward.

More of these cases need to be investigated and tried, with the appropriate sentences meted out."


In The Edge of October 30, 2011, a warning was given that these severe punishments might deter people from becoming Independent Director. That is true, but misconduct simply has to be punished. What will happen, in my opinion, is a case of supply and demand. If supply decreases then the director fees have to be increased. And with increased fees, the minority shareholders should expect to get better quality directors who more often speak up, notify shareholders of issues and investigate possible fraud. Eventually, the effect will be clearly positive on the long term returns of shares held by minority investors.

The Edge loses Defamation suit

In my humble view, only 3 really good things happened for Minority Investors in the last 20 years:

• Quarterly Reporting: investors get four times a year a snapshot of the condition of the company instead of two times a year. In angel investing I insist on monthly updates, both in numbers and a short write-up. If small, start-up companies can do this, surely large, listed companies can deliver the same?
• The Bursa Malaysia Website: BM website. It could be improved here and there, but overall simply very good, much better than similar websites in other countries. No information is deleted so interested investors can go back in time what really has happened in the past. A treasure trove for the investor who likes to dig deep.
• The Edge: finally a print media that dares to come up for the Minority Investor, also the only one that actually published some of my letters. The Edge is popular in Malaysia, much more than its counterpart in Singapore for the simple reason that in Singapore there are much less Corporate Governance issues. Also, the daily Singaporean newspapers are much more open about corporate issues that arise.

I therefore was shocked when I read (The Edge, August 1 2011, Page 6) that High Court Judge Datuk Zaleha Yusof found that The Edge Financial Daily’s article entitled “Ascot given preference due to its experience, says MoF” published last July, had defamed Awang Adek. The damages are to be assessed by a court registrar. The news article was based completely on a written reply issued by the Ministry of Finance (MoF) to Parliament in July last year, with no editorial opinion attached. However, it was erroneously attributed to Awang Adek instead of the MoF, of which Awang Adek is the deputy finance minister. MoF’s written reply was also published by other news organizations, including two internet news portals and one English daily newspaper. In his letter of demand, Awang Adek sought damages totaling RM 10 million, cost and an “adequate apology” from the defendants. The Edge Communications had argued that Awang Adek was attempting to distance himself from his responsibilities as an officer and deputy minister of the finance minister, a claim which Awang Adek has denied. The Edge Communications had promptly issued a correction in The Edge Financial Daily on July 9, 2010, and a personal letter of apology to Awang Adek as a gesture of good faith.

I definitely hope that The Edge will win its appeal. I don't understand the verdict, nor why The Edge was singled out. Also, why is the court ruling done so fast when other cases have been dragged on for so long time?

I don’t know about the financial health of The Edge, but I guess that 10 million might wipe them out, so things could look pretty bleak if their appeal is rejected.

And if certain parties get what they want, then we might also lose the quarterly reporting.

Worrisome developments in Malaysia…..