Fair But Not Reasonable

It used to be independent advisors can only recommend shareholders to accept or reject a deal. Accept if its fair and reasonable, reject if its not. But somehow, in recent times there is a new category of qualification for them: fair but not reasonable. To me thats a bloody cop out. A shirking of duties from all sides. 

Its like all MBA graduate employees insisting that we must do a market survey before launching a product. In reality, its not so much to gain more data on potential market - in the end its more to cover their ass ... if the product failed, they can say, "But, we did the survey before launching ....".

The "fair but not reasonable" is a bogus fortune teller kind of opinion ... "Mr. so and so, you will be rich soon, if not you might be poor ... RM500 thank you". 

Can we go back to reject or accept ... pay a few hundred thousand just to get a "Yes, but maybe not ..." view sounds like such a waste of resources. If a deal gets that opinion, and say the deal goes through, the company gets privatised ... and 6 months later the same asset get relisted somewhere else at a 40% premium to takeover price .... end result is NOBODY gets into trouble, not the SC, not the independent advisors, .... oh but minority shareholders get shafted.

Just look at the last four or five opinions from independent advisors, most have taken the safe, insured route of "fair but not reasonable" ... what you are going to get from now ON is a lot of the same fucked up "yes but no" opinions. Apa value add? What can minority shareholders do? Basically you are telling MI, well, you can sell at this shafted price valuation but don't sue me.

I am in no way implying the offer for MISC is not reasonable or that the opinion is wrong by the independent advisor. I am arguing that the opinion would be worth so much more SALT if they can only tell us to ACCEPT or REJECT. In the MISC case, what do you think they will opine if they have only 2 options and not 3???!!! 

I mean seriously, the offer for MISC is 1.1x book ... lets assume for a moment that book value is RM2bn .... hmmm why don't I fucking give Petronas RM2.2bn and they go and build another MISC from scratch??!! Can you see how ridiculous it is now ... you can cite downturns in sector but you try and build another MISC now and see how much it will cost you, not to mention the human talent, branding, goodwill attached with foreign clients, the network ...

"Absence of competing bid" ... OMG... its like advising your girlfriend to accept the marriage proposal because there seems to be no other guys wanting to propose to you.... cbmf...

 

Can we switch back to just reject or accept ... the current system is seemingly not fair and not that reasonable to minority shareholders.

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Meanwhile back at the EPF/MISC stable ...


The Employees Provident Fund (EPF) is probing the reason for the sales of 
1.494m MISC shares, weeks after its CEO Tan Sri Azlan Zainol said Petronas 
should raise its buy-out price for the national shipping company. "The selling of the MISC shares were done by one of our external portfolio managers and was not from our internally-managed portfolio," EPF public relations general 
manager Nik Affendi Jaafar said in a statement. As such, he said the EPF is 
following up with the fund manager concerned to ascertain the reason for the 
shares were sold, adding a total of 3.99mn shares were sold between March 
12-15. (BT)

MISC's stock price, which had fallen below the RM5.30 buyout price rebounded 
yesterday to end the day at RM5.34. The concern though is that without a higher price, the deal could fall through considering the views expressed by the EPF which owns a 9.6% stake in MISC. EPF's chief executive Tan Sri Azlan Zainol has spoken out asking for a higher price than the RM5.30 per share offered which is at 1.1x MISC's book value. MISC's other big minority shareholder is Skim Amanah Saham Bumiputra with a 6.35% stake. Since the offer is conditional upon getting this 90% acceptance, the offer will lapse if Petronas does not get that level of acceptance.

The Minority Shareholder Watchdog Group has come out to say that the RM5.30 offer price by Petronas is "not compelling enough". Its chief executive, Rita Benoy Bushon said that "Petronas might do well to consider putting a larger carrot on the stick if its intention is to fully take MISC private." 

Petronas’ offer price to privatise MISC is "not fair but reasonable", said the 
independent adviser to the RM8.8bn deal. The offer allows shareholders to 
realise their investment at a premium of between 19.6% and 27.1% over MISC's five-day to three-month volume weighted average market price. Petronas owns 62.7% of MISC's total and paid-up share capital. (BT)

With the independent adviser on Petroliam Nasional Bhd's planned buyout 
of MISC Bhd recommending that shareholders accept the offer, all eyes are on 
the Employees Provident Fund (EPF). The provident fund has already said it 
viewed the offer as being too low. And it has all the right to do so. Its decision to speak out sends the right message to millions of its members. Last Friday, AmInvestment Bank Bhd, the independent adviser to the minority shareholders of MISC, said while the offer was not fair, it was reasonable. 

AmInvestment said the offer was unfair as it was priced at a significant 
discount to MISC's sum-of-parts valuation (SOPV) but considered it reasonable due to a weak shipping outlook that may persist and the absence of a competing bid. So, it recommends that minorities accept Petronas' offer.

In EPF's case, this is very pertinent, because it holds the key in the MISC 
buyout being the second largest shareholder and the largest 
non-interested shareholder with a 9.63% block worth about RM2.44bn. 
In a recent interview with Bloomberg, EPF chief executive Datuk Azlan 
Zainol said the pension fund wants a higher price and that Petronas 
should increase its RM5.30 per share offer. (StarBiz)

Equities' New Bull Run Started

The equity markets had a double boost last week thanks to Federal Reserve's QE3 (quantitative easing part 3). The Fed will start by buying $45bn worth of long term Treasury bonds and up to $40bn worth or mortgage backed securities each month till labour markets improve. The smarter move by the Fed this time is that its a continuous monthly action, and will continue basically till labour markets improve, i.e. drop in unemployment. These actions will go a long way to restarting a new uptrend for global equities. The combined $85bn buying will keep interest rates low for sometime still thus forcing more funds to seek out higher returns, e.g. moving into equities.

An equally important development was the weakening of the yen, which looked like the start of a sustained weakness in the yen. This has started a rush for Japanese exporters by investors. Following the QE3, it appears investors see no more need to hold the yen as a safety haven. That being the case, the Japanese economy badly needs the yen to weaken even more. Hence its a timely boost for Japanese equities as well.


The ringgit opened firmer against the greenback in early trade today following improved sentiment for risk appetite across the region, dealers said. At 9.23 am, the ringgit was quoted at 3.0500/0520 compared with yesterday's close of 3.0520/0540. The increased risk appetite was boosted by the US Federal Reserve, which in turn will benefit globally as the move will see more money being pumped into the world's largest economy. After a two-day meeting which ended yesterday, the central bank announced new stimulus, which, among others, will see interest rate decisions tied to unemployment rate and inflation. It would also keep short-term interest rates close to zero until the unemployment rate, currently at 7.7 per cent, dips to 6.5 per cent. 

Previously, the US Federal Reserve had said that interest rates would hover near zero until at least mid-2015. Besides, the central bank decided to introduce a replacement for Operation Twist, the expiring programme introduced last year of swapping short-term Treasuries for longer-dated ones. Previously, the goal of Operation Twist was to lower long-term interest rates to stimulate the US economy. This new asset purchase programme has been dubbed as quantitative easing four (QE4). With QE3 and QE4 together, the central bank will likely purchase US$85 billion a month of Treasury securities, stacking the Fed's portfolio with government-backed investments for an extended period. 
 
On the local front, the ringgit was mostly higher against other major currencies. The local currency rose against the Singapore dollar to 2.4980/5012 compared to 2.4984/5010 yesterday and appreciated against the Japanese yen to 3.6571/6612 compared to 3.6810/6856 Wednesday. It gained against the British pound to 4.9190/9229 compared to 4.9214/9256 on Wednesday but declined against the euro to 3.9839/9874 from 3.9713/9749 previously.

 The Starbiz had the headline as "higher risk appetite for ringgit", well, not really, its the start of a huge inflow of foreign funds. Thanks to the above factors, a lot of fresh funds have jumped into mainly indexed local stocks over the last few days. Many indexed stocks have just surged past their 52 weeks high or close to it: UMW, SK Petro, and most of the banks. The buying has been ferocious in local telco stocks. Generally the second liners and speculative stocks will take a backseat when the index stocks are surging. Once the indexed stocks have stabilised, you should see strong rotational plays in second and third liners.
 

Nothing To Write Home About

Markets have been so mediocre that there has been nothing much to write home about. Investors and traders must have the mindset that its OK not to be buying or selling shares sometimes - we are not that brilliant that we MUST buy or sell shares all the time.

More than anything else, if your holding period is less than 6 months, the TREND IS YOUR BEST FRIEND, and in many instances, your only friend. If your holding period is less than 6 months, no amount of brilliant analysis or technical software will allow you to trump the market better, you need the TREND to be your friend. 

You will make more money by being silly and follow the trend when its bullish and pull out when it reverses. Trouble is too many know when to go in, but too many do not know when to go out especially when they are way in front. Making money from the market makes one think one is really smarter than they really are - and that is the truth time and time again.

Chinese Companies Listed Overseas

Can we at least come to some conclusion about the state of Chinese companies that are listed overseas. We hear of scandal after scandal, from HK to Singapore to the States. Its almost shocking that none in Malaysia has imploded (yet), not that I am wishing any of them to fall out of grace.

 

This is not to say that Chinese companies listed in their own China exchanges are all fantastic. There have been plenty of shenanigans there as well, but not as prevalent as those which chose to list overseas. Its not likely that they were better managed, but rather to be caught in China for fraud, bribery, accounting misstatements, etc... poses very big penalties, big fines and sometimes "capital punishment". Maybe overseas laws are more humane and some think they can get away with murder.

Below are some of the bigger scandals (not including the Sino Forest thing): 

2011 - Hong Kong-listed Real Gold Mining Ltd , an Inner Mongolian company, halted trading in its shares on May 27 after a newspaper report said the miner had filed one set of accounts with the Hong Kong stock exchange and a much different one with China's central government. The stock has been suspended from trading since. 

2011 - Hong Kong's securities regulator was seeking to freeze the assets of the chief executive of China Forestry Holdings Co Ltd , which was being investigated for accounting irregularities, a court document showed in February. The Securities and Futures Commission has applied to the high court to freeze up to HK$398 million ($51 million) in assets belonging to Chief Executive Li Han Chun, according to a court statement obtained by Reuters. China Forestry shares have been suspended since Jan. 26 after auditors KPMG found possible irregularities during their audit for fiscal 2010, the company said in a filing to the Hong Kong stock exchange in late January. 

2010 - Chinese textile firm Hontex International Holdings Co Ltd was listed in December 2009 and just three months later, its shares were suspended after the SFC alleged that its IPO prospectus had "materially overstated" its financial position. The SFC has successfully managed to freeze assets equivalent to the sum Hontex raised in its IPO. Investors have yet to see their money returned, with a debate continuing in the courts about the methods the SFC is using to reclaim the money. 

2010 - Shenzhen-listed Yunnan Green Land Biological Technology Co Ltd and its management were reprimanded by the Shenzhen bourse for seriously overstating profit in 2010 and 2009, according to the Shenzhen stock exchange. 

2010 - Huang Guangyu, China's one-time richest man and the founder of retail chain GOME Electrical Appliances Holding Ltd , was found guilty in May of bribery, insider trading and illegal business dealings. He was sentenced to 14 years in jail. 

 

2006 - Chinese appliance maker Guangdong Kelon Electrical Holdings Co Ltd and a number of former executives were fined for fraudulent accounting and other improper behavior. The company said it was found to have inflated revenue by 1.2 billion yuan and its profit by 120.42 million yuan between 2002 and 2004. Former chairman Gu Chujun was sentenced to 10 years in prison for embezzlement and accounting fraud. 

2004 - Singapore-listed jet fuel trader China Aviation Oil (CAO) stunned markets with a $550 million trading loss when it took risky bets on oil derivatives, triggering Singapore's biggest corporate scandal since the collapse of Barings Bank in 1995. A Singapore court later sentenced the man at the centre of the scandal -- former CAO Chief Executive Chen Jiulin -- to more than four years in jail. 

2004 - Stephen Wong, chairman and an executive director of China's third-largest television maker, Hong Kong-listed Skyworth Digital Holdings Ltd (0751.HK), was charged by Hong Kong's anti-corruption watchdog with allegedly misappropriating more than $6 million in company funds. Wong was later sentenced to six years in jail for plundering company funds and share option fraud. 

2003 - Zhou Zhengyi, then China's 11th richest man controlling two Hong Kong-listed companies, was detained in 2003 after an investigation into 2 billion yuan in loans obtained from the country's primary forex lender, Bank of China Ltd . Insiders said senior Shanghai government officials, including the city's then-Communist Party boss Chen Liangyu, had been instrumental in helping Zhou win approval for crucial city projects that were later implicated in the scandal. In 2008, a Shanghai court upheld a 16-year jail sentence handed down to Zhou. He was found guilty of five charges including misappropriation of funds, bribery and forging VAT receipts. The scandal had weighed on China's financial markets and sparked a rash of arrests as probes into Zhou's links with the Shanghai government and his lenders widened. Chen Liangyu was sentenced to 18 years in jail in 2008 for taking bribes and abuse of power. 

2003 - Chinese orchid tycoon Yang Bin was sentenced to an 18-year jail term for commercial crimes, including contract fraud, forging financial instruments, bribery and illegally occupying and using farmland. Yang was once ranked as China's second-richest man with an estimated fortune of $900 million. His company Euro-Asia Agricultural (Holdings) Co Ltd was delisted from the Hong Kong stock exchange in 2004. 

 

Some interesting statistics, can they lie?: 

a) more than 20 China companies listed in Singapore since 2008 have been delisted or suspended, out of 150 odd China companies listed there 

b) Nasdaq and NYSE Euronext halted trading in the shares of at least 21 small- and micro-cap Chinese companies in the past year. Five such companies were altogether kicked off of the exchanges.That was after 150 companies listed there since 2007 till 2011. So the odds were very close to the Singapore experience. 

c) Since 2010, some 110 China companies have gone public in HKSE, their current prices is 15.8% off their IPO price as of end April 2012. Non- China companies listed in HKSE since 2010 have gained 6.5% over the same period. Statistically, that is "highly significant". 

d) Since 2010 some 53 China companies have listed in the US. As of end of April 2012, they are on average down 38% from their IPO price, compared to a 9.9% gain for other IPOs. 

 

 I believe a lot more "action" will be found in the States, where more than 150 China companies have listed there because short selling is allowed, and there are plenty of research firms and hedge funds whose bread and butter is to locate these "inflated" companies, short the hell out of them, expose them, and reap the benefits.  

 Some of the scandals in Singapore red chips: 

1) China Gaoxian Fibre Fabric Holdings Ltd. The Zhejiang-based maker of polyester yarn said on June 30 2011 that its auditors at PricewaterhouseCoopers LLP discovered the company’s bank balance should be less than a tenth of the 1.1 billion yuan ($170 million) it reported in its earnings. 

2) In the case of FerroChina Ltd., shareholders lost their entire investment when the steelmaker was forced to delist in March 2010 after being suspended for more than a year. The company, which hired Merrill Lynch & Co. in April 2008 as an adviser to help it be “the world’s largest and most efficient independent galvanized steel manufacturer,” defaulted on loans in October of that year, weeks after reporting quarterly net income had tripled. 

3) Other stocks that have been suspended include Sino Techfibre Ltd., which said a fire destroyed its financial records after reporting accounting flaws, and China Sun Bio-Chem Technology Group Co., which said a truck transporting its accounting records was stolen. 

4) Fibrechem Technologies. This was one of the best-followed S-chips. The first sign of trouble surfaced when the China-based chemical fibre-maker requested a trading halt on Feb 23 this year 2009. That was the day it failed to release, as scheduled, its fourth-quarter and full-year results. To the dismay of shareholders, the firm's auditors indicated they had difficulty finalising the audit on its trade receivables and cash balances as of the end of December last year. Before the trading halt was imposed, the counter plunged seven cents, or 40 per cent, to 10.5 cents, with 9.68 million shares traded.Meanwhile, founder and chief executive James Zhang resigned from his position as executive chairman. 

 

5) Beauty China. Since March 2 (2009), cosmetics firm Beauty China has requested three trading halts. The problem centres on founder and chairman Wong Hon Wai who had, unknown to shareholders, pledged all his stock - 137.5 million shares, or 38.57 per cent of the share capital - to obtain credit facilities. Many agree that the financial arrangement he made with his shares is material information investors should have been told about via stock exchange announcements. The shares plunged a stunning 26 cents, or 70.3 per cent, to 11 cents, with about 6.3 million shares traded, when the first trading halt was lifted on March 3. It soon emerged that his stake was being force-sold by the lender on the open market to help repay the loan. In order to fulfil his obligations to the financier, Mr Wong was forced to sell 28.8 million of the mortgaged shares between March 4 and March 6, noted DBS Vickers. 

6) Sino-Environment. The waste treatment firm's woes started on March 2 2009 when it requested a trading halt after its full-year results. It must have seemed like a recurring nightmare to some investors, given the similarity to Beauty China's problems. Sino-Environment chairman Sun Jiangrong had pledged his entire 56.3 per cent stake or 190.8 million shares, along with other assets, to hedge funds to secure a $120 million loan. As he had difficulties repaying the loan, the forced sale of the pledged shares was triggered. The hedge funds had threatened to sell the shares on the open market. That would cause the control of the company to change hands. It also might plunge the company into a financial crisis, as it would have had to make immediate repayment on a $149 million bond issue - triggered by the change of ownership. Trading was suspended from March 6 and resumed on March 12. After the week-long trading suspension, Sino-Environment plunged 73 per cent to eight cents on a hefty volume of 47.4 million shares. The counter closed at 13.5 cent. 

7) Oriental Century. On March 9 2009, education firm Oriental Century - in which local group Raffles Education had invested $30.2 million for a 29.9 per cent stake - called for a trading halt. It later shocked investors by disclosing that founder and chief executive Wang Yuean had said he 'inflated sales and cash balances' over the years and had diverted unspecified sums to an interested party. He also claimed that he devised fictitious accounting to mislead management and auditors into believing the firm had a cash hoard of 234 million yuan. 

 

Trust The Auditors

Trust the auditors? They don't even trust themselves. A small sampling of recent shame for some top auditors is below. The scams perpetrated and slipped past auditors run the gamut from the mundane, such as improper recognition of revenue, to the incredible, such as hiding massive amounts of off-balance-sheet liabilities or falsifying billions of dollars of cash. Surely, we can trust the auditors what, they are big names. Well, lets look at the big auditors responsible for some big mess: 

Arthur Andersen (now defunct): Enron, WorldCom, Nicor, Global Crossing

Ernst & Young: Lehman Brothers, Anglo Irish Bank, HealthSouth

KPMG: Allied Capital, Peregrine Systems, ImClone, Xerox

Deloitte: Nortel, Royal Ahold, Reliant Energy

PwC: Satyam Computer Services, AIG, Tyco

Grant Thorton: Parmalat

Not All Are Rascals

If there are even 20% bad hats, there are still 80% decent companies, assuming all not found to be in breach are really genuine good operators. So, what should they do now that their shares trade at 1x, 2x, 3x PER?

1) Raise dividends to 50% of profits, and make that a company policy. Many will come out with 101 reasons not to do this, you may want to really ask why. Is a company's share price more important than any other issues?

2) Privatise and relist in HK. In 2007, Want Want Holdings, a food and beverage group which makes the popular rice crackers, delisted from the SGX and relisted in Hong Kong in search of better valuations. It is now trading with a PE of over 20x times there, compared with 10 to 15 times in Singapore. So, XDL may have a strong case for moving with this strategy.

If you have invested in a China company listed in Singapore or Malaysia, there is very little you can do after you have asked them to raise dividend. You then have to play the waiting game. I think there are bigger and better fishes to fry while you lock up your capital on something that may take a long time, or worse, turns out to be one of 20% which fell foul of the law later on.

The Lowdown On China-Stocks On Bursa - Just A View

You open a conversation topic on Chinese stocks listed on Bursa, you see most people shaking their heads. Most have been burned, and burned royally despite following Benjamin Graham's rules of investing. Well, you have low PER relative to profit growth, most are still registering decent earnings growth. But none are willing to pay out a decent dividend despite having a substantive amount of cash. In fact, what has been more galling was they even had the audacity to push through rights issue.



They drop and drop, even though syndicates have been roped in, they still drop. For the past 3 years or so, the news surrounding China companies listed overseas have been appalling. There have been numerous scams and accounting fraud with China companies using RTO to get listed in the US. The seemingly "clean" SGX has not been spared, last count there were 6 China firms listed there that have gone "bust literally" or have tons of  shenanigans like in an Irish fairy tale. 


Are those listed on Bursa a ticking time bomb?
Well, I don't know really, but so far so good despite the weak share prices for these companies. If you go by percentage of troubled overseas China listed firms, at least 1 out 5 would have collapsed by now. Why SGX had so much problems with China firms and not Bursa? Well, SGX, being a play by the rules entity, relied totally on the sponsors/IBs to bring forth these issues. If the companies can be faulted later on for accounting fraud or related misdemeanours, then SGX will throw the book on the sponsors/IBs and directors. I think Bursa/SC have traveled the extra mile in ensuring these China firms are genuine, most if not all have been "site-visited" by them. The reliance on sponsors/IBs have not been as great for Malaysia as in the US or Singapore. Notch one for Bursa/SC. (I hope no China stock will get busted right after I wrote this, but knowing Murphy's Law, that is probably what will happen).



Excuses and Reasons, and Orcam's Razor
You can dig and dig at the management for reasons for their underperforming shares. There have been excuses after excuses. One, you can say that the sponsors or parties (VC/PE firms) bringing the stock to Bursa have used the route to sell their shares to realise their gains. Two, they needed to keep cash as the bulk of their transactions are with small vendors and suppliers that want to deal in cash. Three, they do not wish to pay out good dividends as they want to reinvest for future growth. Four, they seem to have no desire to buyback their own shares at 2-3x PER??!!


When share price keeps falling and the reasons and postulations given are numerous, according to Orcam's Razor, in such situations, the simplest explanation is probably the truth. The simple explanation is that maybe the figures are a sham. Now, I used to hold that view till my recent new findings, so hold your horses.



The Real Owners?
This is probably just an opinion but I have heard enough to surmise that the registered owners are, more than likely, not the real beneficial owners of these China shares. The Bursa and SC can go and try to find out more. Don't shoot me, I am just the messenger. 


For a China company to list overseas, they need this "paper license" called the "wufi", usually from their municipality or state. I am sure you can see where this is headed. Sponsors are usually some smart people piecing a few companies together to get the "wufi". In most cases the ones with the designation of CEO or even Chairman owns very little of the company. The bulk are supposedly held by the "state chiefs and their underlings". We in Malaysia can easily understand why this works, don't we. To the "chieftains", this is an easy way to regulate for paper profits and also transfer some wealth overseas. 


That is why you do not see these companies getting huge bank loans, and they want to keep cash at all levels. Maybe its easier to loot the company of money by expanding and taking on new projects as we all know we can always skim the 20%-30% from any projects undertaken. Maybe.


However, I am not saying all these companies are sinister. At the end of the day, more than likely, the management's hands are tied. There is probably very little they can do (without the "approval from real owners"). This is also something we Malaysians are very familiar with, yes "Proxy"!!!



XDL
Now finally a company goes ahead and does something. Their bonus and warrants issue is a move in the right direction. Some have frowned on the private placement, but why should you frown, they are not placing to you. In fact, having a private placement could be the very trigger that some parties have managed to engage the "real owners" and go through a proper "value creation" exercise, hence they themselves would have secured the parties for the private placement.


Significance
I cannot say this with greater effect. If the hypotheses are true, which means at least most or all of the companies on Bursa are not fraudulent, and to get XDL going through this phase of value creation, which I think will be wildly successful. This could be the catalyst that is needed for the rest of the China companies listed on Bursa to do likewise. As things stand, none of the China firms on Bursa are "fraudulent yet", maybe none are. If enough of them go through the value creation steps led by XDL, it could very well lift Bursa as the "best exchange to list China firms". If this is all true and good, then Bursa and SC must continue to make doubly sure that future China listing go through even more stringent listing checks and balances. So far so good, even with depressed share prices, at least we do not have a total bust up (yet). 


If all parties play their cards right, the right playing field will attract the right crowd. This is a chance to take the next step forward for all parties involved.