China listed companies on Bursa, does it make sense?

In The Edge of January 14, 2013 an article by Kathy Fong about China listed companies on the Bursa Malaysia. Their fundamentals all look good, but despite that, they are trading at unbelievable cheap valuations.

                   Net Cash(m)    Net Cash p/s  Share price
China Ouhua           125            19            12
China Stationery      864            70            77
XiDeLang(in RMB)      304            42            21
XingQuan              326           106            79
HB Global             131            28            32
K-Star                 79            30            16
Maxwell Intl          221            55            31
Multi Sports          223            43            31

The above based on the numbers from The Edge:

• Net Cash: in millions RM, Cash minus Borrowings
• Net Cash p/s: net cash per share in Sen
• Share price: in Sen

Most shares are trading below the cash per share (in other words, the whole business comes for free) and are trading at valuations like 2 times net earnings per share.

Would it make sense to buy a basket of these stocks? To me it doesn't, if for every company that goes to near zero another company is taken private at say 30% premium, the returns just don't add up.

Investing is for a large part based on trust, trust that the balance sheet and profit & loss accounts are correct, the trust is obviously not here.

Bursa and SC have clearly improved the quality of recent Malaysian IPO's. I also have to admit that not yet one China listed company in Malaysia has actually gone bust or had any financial scandal. I am pretty sure that will happen, but things can take a lot of time to pan out.

To me, things must make sense, founders list their companies because:

• They are good, reliable companies
• The companies can use the new money injected to grow further
• The founders want to take some money of the table (understandable, since often a huge percentage of their wealth is tied to this one company)
• It offers a liquid market to their employees who might own shares or options in the company
• Investors pick up the IPO shares since there is some value at the IPO price, taking into consideration the risk involved (companies that have just IPO-ed are notoriously more risky than companies that have listed 2 or more years ago).

I don't think listing these Chinese companies makes any sense at all. The investing public obviously doesn't trust the accounts and therefore the valuations are beyond believe.

Given that, which founder would list its company, knowing the share price will most likely go south after the IPO?

And for SC and BM, enforcement in Malaysia has already been proven to be so difficult, why make it even more difficult by listing Chinese companies?

Eight very depressing share charts of the Chinese listed companies in Malaysia:

"Malaysian Nate Silver" suspended by Bank Islam?

I wrote before about Nate Silver's popular book "The Signal and the Noise", and ended with:

"Where is the "Malaysian Nate Silver" predicting the coming elections, both overall and per state .....?"

Apparently, there is a "Malaysian Nate Silver", his name is Azrul Azwar Ahmad Tajudin, and he is chief economist of Bank Islam:

In a report by The Straits Times, Azrul Azwar’s calculations found that one of the most likely scenarios was that the ruling Barisan Nasional (BN) coalition would likely win only between 97 and 107 of the 222 parliamentary seats, which are insufficient to form the next administration.

But the result would also mean that PR will only gain a shaky hold over Parliament, far from the supermajority once enjoyed by its rival.

The two other likely scenarios reportedly presented by Azrul Azwar was that there would be a narrow win for BN and a bigger win for PR.

Azrul Azwar had taken into account factors such as race and demographics.

He had also forecasted that under the most likely scenario of a narrow win by PR, a fallout would result, with the stock market set to respond in a “knee-jerk” fashion as well as an extended period of perceived instability.

He also did not rule out the possibility of “economic sabotage” by businesses and the civil service that are aligned with BN.

The above according to an article on The Malaysian Insider. It was first highlighted in The Straits Times, an article that I indeed read, but disposed since it didn't strike me as anything extraordinary. It was presented at an economic forum, I haven't visited many of those, but I do visit regularly investment forums and predictions regarding election outcomes are considered to be very normal.

Bank Islam, Azrul Azwar's employer, suspended him. Not for doing a lousy job, but for "being involved in political activities". Rather remarkable, if you want to predict the Malaysian economy, you have to take into account the level of business, which is (unfortunately) so much interwoven with politics.

Would he have been suspended if he had predicted a win for BN? I doubt it, since I have read many such predictions with no action being taken by their employers.

We have to wait what will happen, may be Bank Islam will wait for the elections to happen, and when PR wins, Azrul Azwar will be reinstated again?

For me, as a Westerner and a mathematician, making predictions based on mathematical models, it all sounds pretty unbelievable that one can be suspended for exactly doing that.

EPF actively fighting for minority shareholders?

The Star published today a (for me rather remarkable) interview with the CEO of the EPF, Tan Sri Azlan Zainol. One snippet:

“We are very particular about governance and are one of the major players in terms of activity at AGMs. We are quite vocal. If we don’t like certain things, we will vote against it."

The perception of the EPF, at least with me, is very different. I have actively followed the Malaysian share market for 18 years, read a huge amount of information, and the silence from the EPF in worrisome CG issues has been deafening. I can only recall one time that they were active, during the privatisation of Malaysian Oxygen Bhd (MOX) together with Aberdeen, but even there I suspect that Aberdeen was the fighter and EPF the follower.

Also, being vocal during AGM's is not really enough. Press is often not allowed and many people will have voted before on paper, without hearing what is said at the AGM's.

Am I wrong, or is EPF really active?

The influential CG Watch 2102 report seems to agree with my view point, please read my previous posting on this report. One item:

12. Are institutional investors actively voting against resolutions with which they disagree?
Malaysia: “marginally” (0.25).

[with 0.00 being the lowest and 1.00 the highest score]

The interview continues:

“I shall not name a company that had very poor governance. We walked away from that investment.”

Why does the CEO not name the company, in this instance or in any other case? In the whole interview with The Star, not one is mentioned.

EPF can be so much more vocal in all CG issues, why is it not displaying more transparency? It can simply issue press releases about certain important matters, for instance why it will vote against a certain resolution together with its reasoning, surely most newspapers would be happy to carry that information.

I would love to eat my words and admit that EPF has indeed changed its way and is now a shareholder activist. But I definitely need clear proof for that, together with concrete cases in which EPF was vocal and fought sight by side with the other minority shareholders. At this moment, I am not aware of any, except for the above mentioned MOX case.

Three, more recent, deals in which EPF was very much involved, did it put up a fight in any of these cases, and if so was it vocal about it?

• Maybulk's related party acquisition of a part of POSH in 2008 and its other RPT in 2009 in which it didn't reveal details of the purchase; EPF did sell all of its shares and thus walked away from that investment, but much too late and at a great cost
• MMC's RPT of the Senai airport
• Possible insider trading with the privatisation of Proton, at the expense of the EPF

Protons marketshare slipped from 80% to 18%

Pretty astonishing statistics in an article from The Malaysian Insider:

"At its peak, four of every five cars sold in Malaysia was a Proton, but the carmaker is now in danger of slipping into third spot in sales behind Toyota and Perodua, the second national car company that has ruled the roost for over six years.

Industry sources told The Edge newspaper in an article published today that Proton saw its market share slip in December 2012 to just 17.7 per cent, with Toyota now a close third at 17.1 per cent share of passenger vehicle sales in the country.

“Perodua (Perusahaan Otomobil Kedua Sdn Bhd) is the runway market leader while Proton over the last few years has been a strong second. Now Toyota is closing in on Proton’s position,” an unnamed executive told the financial daily.

Proton is controlled by Tan Sri Syed Mokhtar Al-Bukhary’s DRB-Hicom.
Proton was established by Tun Dr Mahathir Mohamad in 1983 and became a poster child of the former prime minister’s industrialisation policies.

Dr Mahathir had made it patriotic to buy a Proton, but the company has seen its sales slump in the last decade due to increasing liberalisation of the Malaysian market."

I wrote before about my home country, The Netherlands. Dutch people seem to be more practical then Malaysians, at least when things don't work out: just move on, even if it means taking a loss.

The Netherlands has a company dealing with cars, trucks etc, DAF, but in 1975 it sold of its passenger car division to Volvo in 1975. Dutch people had the same love-hate relationship with its (only) homegrown car as Malaysian have with Protons. The DAF passenger car was as ugly as the Proton Saga.

Holland also had one steel company, Hoogovens, it first merged with British Steel and was later sold to Tata Steel from India. Malaysia is still stuck with its steel industry, Perwaja Steel is rumored to have lost about RM 10 Billion.

KLM, the royal Dutch airlines, merged in 2004 with the much larger Air France. Malaysia Airlines continues to be a big headache, with huge accumulated losses of around RM 8 Billion.

For the people in charge, there might be a lesson here.