Wednesday, January 30, 2013

Another Chinese company IPO - is caution the word to describe?

Today, we are seeing another Chinese (from mainland China) company getting listed in Bursa. There is no doubt that automotive is huge in China. No matter how huge it can be now, my guess is that you can find thousands of these automotive parts companies - perhaps tens of thousands. My suggestion is that you go to www.alibaba.com, type the word "automotive" - see how many search results you get. Hence, before you decide to invest in it, do read below article picked from Wall Street Journal.

Or you can read it direct from here.
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U.S. Sues Big Firms Over China Audits

Securities regulators took aim at the Chinese affiliates of big global accounting firms Monday, after a wave of accounting debacles at publicly traded Chinese firms that led to billions of dollars of shareholder losses.

In the U.S., the Securities and Exchange Commission brought an administrative proceeding against five accounting firms, alleging they refused to hand over documents sought in investigations of alleged accounting frauds at nine Chinese companies.
In Canada, the top securities regulator accused Ernst & Young's Canadian affiliate of missing problems during its audit on Sino-Forest Corp., a timber company that filed for bankruptcy protection this year amid questions about its disclosures.
The accounting firm agreed to pay 117 million Canadian dollars ($117.8 million) to settle separate shareholder allegations that it misled Sino-Forest investors. The settlement disclosed Monday was the largest ever by an auditor in Canadian history, a plaintiff's attorney said. Ernst & Young didn't admit wrongdoing in the settlement, which must still be approved by the bankruptcy court.
Dozens of Chinese companies have raised billions of dollars in the past decade listing their shares on U.S. and Canadian exchanges, before their share prices plummeted amid questions about their bookkeeping and disclosures.

The SEC action, if an administrative law judge rules in its favor, could lead to the Big Four's Chinese affiliates being barred from auditing U.S.-traded companies—something that could complicate the audits of multinational companies doing business in China. The regulatory moves also stand to heighten a U.S.-China confrontation over how much U.S. officials can do to ensure that Chinese audit firms adhere to U.S. regulatory standards.

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"It definitely is ratcheting up the pressure another notch," said Jack Ciesielski, publisher of the Analyst's Accounting Observer.
Chinese audit clients paid the local affiliates of the Big Four $175.2 million in fees in fiscal 2011, according to figures compiled by Audit Analytics, a consulting firm.
U.S. regulators have attempted to investigate alleged fraud at some Chinese companies, and the SEC has filed several lawsuits. But they have been unable to get information from the China-based firms that audit many of these companies, including Chinese affiliates of the Big Four—Deloitte Touche Tohmatsu, PricewaterhouseCoopers, Ernst & Young and KPMG.
SEC Commissioner Luis Aguilar said in a speech Monday that the agency is investigating "accounting irregularities at dozens of China-based companies that are publicly traded in the United States," and that some of the probes "have been hampered by the lack of access to relevant documents."
The SEC maintains that firms that audit U.S.-traded companies have to follow U.S. law, and the Sarbanes-Oxley Act requires foreign audit firms to hand over documents about U.S.-listed clients at the SEC's request.
The firms counter that China's laws treat their auditing documents as akin to state secrets, and that their auditors could be thrown in jail if they turn the documents over to the SEC without permission.
"While it is unfortunate that the two countries have not yet been able to find common ground on these issues, we remain hopeful that a diplomatic agreement can be reached, and we stand ready to assist that effort in any way we can," Deloitte said.

PricewaterhouseCoopers said its Chinese affiliate "has cooperated with the SEC at every opportunity, but "PwC China will, and must, comply with its legal obligations under China law." The fact that the action is against all the major firms "demonstrates that this is a profession-wide issue, not unique to one firm," and should be resolved by negotiations between U.S. and Chinese regulators, PwC said.
KPMG's China affiliate said in a statement that it is "hopeful" that discussions between U.S. and Chinese regulators "will result in a positive diplomatic resolution" to the matter.
Ernst & Young Hua Ming said it "supports close working relationships" with regulators and that it hopes "an agreement can be reached between U.S. and Chinese regulators that will enable our compliance with all applicable laws and regulations."
The commission's administrative proceeding against the China affiliates of the big accounting firms, plus the China affiliate of second-tier firm BDO, alleges that they haven't handed over documents for nine of their Chinese audit clients who are under SEC investigation for potential fraud. The nine companies weren't identified.
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Bloomberg News
A Chinese flag flies at a tree nursery in the Xinxin forest reserve, land leased by a company later purchased by Sino-Forest. The Chinese company filed for bankruptcy protection earlier this year.
BDO referred questions about the case to its Chinese affiliate, which hasn't commented.
The SEC had previously filed two cases against Deloitte's Chinese affiliate over the same issue, but Deloitte hasn't handed over the requested documents. One case has been suspended while the SEC attempts to negotiate with Chinese regulators, according to court documents.
An SEC administrative law judge will hear the commission's cases against the China-based accounting firms. If the judge decides against the firms, they could be suspended from seeking new U.S.-traded clients, or even blocked entirely from auditing U.S.-traded companies.

In the Canadian case, the Ontario Securities Commission alleges Ernst & Young didn't exercise enough skepticism in its audits of Sino-Forest to verify the ownership and existence of the company's most significant assets.
According to the commission, for instance, one Ernst & Young auditor in its Canadian affiliate acknowledged in an email to another auditor that the firm had no way of knowing that the trees the audit firm was inspecting were actually owned by Sino-Forest: "I believe they could show us trees anywhere and we would not know the difference." In addition, the commission said, several of Ernst & Young's senior partners at the affiliate involved in auditing Sino-Forest couldn't read or speak Chinese.
Ernst & Young's Canadian affiliate said it was "confident" its Sino-Forest work had met all standards and that the firm "did extensive audit work to verify ownership and existence of Sino-Forest's timber assets."
Ernst & Young said its settlement with shareholders "is without admission of liability" and "will reduce the uncertainty and future burden on our business, and allow us to focus on our people and our clients."
Sino-Forest was one of the largest forest-product companies listed in Canada when a report last year by U.S. short-seller Muddy Waters LLC alleged fraud at the company. Since then, the Ontario Securities Commission has started administrative proceedings against Sino-Forest, and several of its former executives already face allegations from the commission that they inflated timber purchases; the company is currently trying to restructure under bankruptcy protection. Sino-Forest last year conducted an internal investigation into the allegations, but executives have denied fraud.
—Jean Eaglesham contributed to this article.

Tuesday, January 29, 2013

A look at Redtone - what is a 4G spectrum worth?

The Bright Packaging deal makes me relook at Redtone - why? - because it is now controlled by the same party - one that is trying to be a corporate player - and just remain that. I used to look at Redtone from its VOIP days. And when it ventured unsuccessfuly into providing all kinds of data and voice solutions via its WIMAX and other spectrum (remember EBTech) etc., the company was basically looking for multiple revenue model to boost its income. My, was it tough...Anyway, the latest that any research house has provided for the company is a "outperform" call. The below portion has been taken from Bernama news. It is said that Kenanga expects big boost from its spectrum sharing and universal service provider project starting from 2013 to the extent that Net profit of RM23.6 million is expected for 2013. For 2014, it is RM25 million.


Now, at current price of RM0.405, the market value that the company is getting is in the region of RM194 million. For a company that has a 4G LTE together with a WIMAX spectrum, is it worth that much? Kenanga is valuing the shares in excess of RM0.52, hence the valuation it is providing to Redtone is actually more than RM250 million.


The report continues to say that the resource sharing is beneficial to Redtone, no doubt about it. The thing is that - now we can almost sure to perhaps say - this resource sharing is more of a one way rather than two way sharing i.e. it would be more of a resource for Maxis to use rather than Redtone to use and it seems that companies are willing to pay a lot in bidding for 4G LTE spectrum overseas (up to billions), how much do we think Maxis will pay for. Spectrum is something that is valuable if big telcos are able to maximize from the ownership while companies like Redtone, Puncak Semangat are using it to their advantage, i.e. selling them to the bigger telcos. Of course, there are speculation that Puncak Semangat's 4G spectrum may be shared with Celcom.

Discounting the universal service provider project and other remaining businesses that it has which to me is not worth anything more than RM50 million the most, for Redtone, if its dependence on the spectrum is worth as much as the analysts are calling, then I am thinking - would the ones owned by YTL, Packet One, UMobile be worth as much as well? - in excess of RM200 million, for spectrum alone.

Do we really expect Redtone to be a full-fledged 4G LTE mobile provider like Maxis, Celcom, Digi or even UMobile, YES or Packet One? I have yet to see them get started and to kick start that, does it have the funds and be willing to spend in excess of RM500 million as what all these players have done before? I don't think so, as it only has around net cash of RM20 million currently and I do not see it raising more funds for that costly affair. Of course, it can say it will use the spectrum for other purposes, but I really doubt it can even utilize a small portion of the spectrum.

Anyway, for Kenanga to boldly come out with a projection of some RM25 million net profit without much data, there must be something which we are not privy of coming from the shareholders. Or is it just taking another shot at the numbers? - without anything to proof...

Friday, January 25, 2013

IHH: Perhaps EPF should reconsider this

I have talked about share repurchases and where companies repurchase their shares but directors selling. The other phenomenon which is of a bigger concern is outsiders buying while insiders selling.

In IHH's case, EPF is considered an outsider despite it being a substantial shareholder. Let me highlight the  transactions which I saw today.


At the same time, on the same page, EPF was still accumulating.


In an earlier article, I have mentioned of the Group CFO transferring his shares so that it is not noticed if he sells. In today's announcement, the Group CEO sold some RM8.28 million worth of stocks. My question if I am Khazanah, why are they selling such a huge stake less than 6 months after the company just got listed!!! Are they not confident of the company they are managing. If I am a shareholder, I would be selling if the company is way overvalued. If I am an employee who happens to be principal officers, I would not be selling despite them being overvalued. Imagine Tim Cook selling huge stakes (I meant HUGE) while he is still CEO of Apple. What kind of message this translates to?

I have mentioned of IHH being on the expensive side despite it being an attractive business.

These are Singaporean managers who are selling while our fund is buying and it looks like we are buying while allowing them to sell. Seriously, does not look good. As much as we want to allow IHH to look good, it is helping the management who knows the company better to sell! I sincerely do not like this...

Bright Packaging: Interesting tussle and perhaps below can provide some idea

Never really try to bother about the company except that I have heard it over BFM many times - and again today I was listening to the tussle over the radio. Some basics - the tussle have many issues to it:

  • 4 new shareholders (challengers) are proposing for appointment of themselves as directors in replacement of 4 existing directors representing Demi Maju. The tussle becomes interesting due to both parties have almost the same number of shares (those that are visible, Non-visible I am not able to predict). Those headed by Syed Ali has 31.19% while under Demi Maju (existing controlling shareholder) has 30.58%.
Part of Top 30 for ending 2012. Look particularly at No 1 vs No 2 - 5

  • Who are the current management? They look like pure and genuine business people who may not have really care about share price (probably their mistake). The business is supplying aluminium foil packaging to the tobacco industry and it seems like the business has managed to turnaround since 2005 although not spectacular. The current market capitalisation for the company is RM86.57 million from a traded price of RM2.00. How did the turnaround happened? Gearing reduced and mainly due to them halting the fibre optic and cable business which was a problem to the company.
Basic Information
  • The worry about RM8.6 million owing to parties related to the major shareholder. Well, let me show something over below and shareholders might have the chance to understand them clearer.
Part of 2007 Balance Sheet. Notice the massive reduction in borrowings from 2006 to 2007
My guess is that from the borrowings in 2006 which was exceeding RM21.2 million, it has reduced to slightly more than RM3 million in 2007. Other payables however increased and that was where the RM8.6 million came about to pare off the borrowings hence gearing which was a problem to the company was cleared. It looks like genuine. Read the director's statement in 2007 as below. If its really happening, I guess we cannot fault the related party owing. This interest free payable looks like an honestly good thing for the shareholders.

Part of 2007 Chairman's statement
Sundry payables which the shareholders are concerned about. Happened in FY2007 and still existing until today
  • Who are representing the challengers team? Syed Ali Al-Habshee (as below). It may be true they may not have the relevant prior experience in the aluminium packaging business as claimed by the current directors. You might to check out the background yourself via googling. In terms of these kind of exercise though i.e. company raiding, I think the challengers are perhaps way more experience than the current team of directors based on background. But do you want pure corporate people to head this company? 
The question is if the company is for the long term, you may want to ask where do the new board members (if appointed) stand.

The four challengers probably have gone in at price between RM1 - RM1.75 with I think their average purchase price around RM1.20 based on below chart. If that is the price, they went in, the team may have made some genuinely decent investment (for long term though which may not be the case) based on the declaration of the company's directors committing to pay all profits as dividends. 


  • How strong is the company? Decent, with a specialised focus in providing solutions to the tobacco industry. The company obviously has a clean balance sheet after cleaning them off in 2007. However, it is not amazingly interesting for me though the business it is in and at current price. Whether the current price is justifiable for you? It depends. But just some information as below.

  • How the h*** did the company change its auditor from Ernst and Young to a small outfit. You will have to ask the current directors.
Note: I am not being paid by any party for this...

Thursday, January 24, 2013

The misconception on share repurchase

The amount of negativity I have read in some the Malaysian forums and blogs on share buybacks are to me unjustified. There are claims whenever a particular stock had a sharp drop, and when the management decided to or rather acted on the price by buying back shares, it was viewed negatively. I feel that we just have to look at the companies themselves to see whether the action is justified. To be frank, I have tried to find missteps in the behavior of some companies when comes to doing buybacks, and it was quite tough for me to find companies that have done injustice to shareholders doing so.

Many of the companies that have done buybacks are on paper undervalued, at least to their book value. Most of them have very manageable borrowings and in fact many are in net cash positions.

I have put commentaries on buyback herehere and here. From the three articles, the only company which I have highlighted possible over-used of the buyback weapon is Pelikan. On that note, the company was doing buyback while the major shareholders were selling.

Buyback can be wrongly used to shore up the price of the companies shares especially when they are not undervalued. During one meeting that I attended, a very popular local fund manager who was starkly against buyback has used the example of JP Morgan's Jamie Dimon admitting mistake that he has bought back too much of his company's shares. After looking through, the halt on share repurchase by JP Morgan was not due to a wrong buyback decision. It was due to the one off event where JP Morgan had a huge trading losses caused by its London office last year, and the decision not to buyback shares was due to it wanting to shore back the capital ratio of the bank due to Basel 3 requirements.

In fact, the same fund manager was against buying back its own company's closed end fund when the shares were (and now still are) trading at substantial discount to Net Book Value. I in fact was very disappointed when he vehemently rejected the buyback suggestion indicating that share repurchase is the wrong weapon to use. Again, I am questioning if the share price is undervalued, what's wrong to do repurchase on your own shares especially when you have the funds to do so? That closed end fund actually has 1/3 of its assets in cash and for now he could not find better use for them with the cash sitting in the money market earning somewhere around 3%.

Announcement on decision to buying back shares as made by Jamie Dimon who indicated that he is willing to do more buybacks this 2013 year would have caused many to relook at the company again. As it is, JP Morgan is now trading at below book value and based on its Trailing Twelve Month's earnings its PE is below 10x. Wouldn't the share price be undervalued for a bank which is growing fast due to the recovery of the American economy. And based on that why would he not be buying back his own company's shares?

Recently, Warren Buffett has gotten approval from his board to buyback shares of Berkshire Hathaway in the instance where the company's shares are traded at below 1.2x book value. That instantly caused investors to look at the company again. As an investor, if I feel that the company's management has made the wrong decision, I can of course opt not to hold to the shares, and if it is done correctly due the price being undervalued, wouldn't it be beneficial to the shareholders?

Yes, any action - there can be positive or harmful to the company, but if it is communicated and explained well, perhaps shareholders can have a better view on where the management are heading.

Wednesday, January 23, 2013

Kwasa Land and their potential pretenders

Was talking to a friend and were discussing about the potential of Kwasa Land - aka Kwasa Damansara, the RRIM project covering 2230 acres of development land initiated by the government.
I did some reading on the project although no parcels have yet to be awarded by EPF being the passive developer / owner. Of course many developers are eyeing this project located in a prime area with all kinds of facilities such as highway, MRT, green lung park - usual suspects like SP Setia, Sunway, Dijaya, Mah Sing, UM Land, IJM etc. and some smaller ones. When I was reading some of the forums, came across the comments on www.propertywtf.com.my. Hilarious...

1) Mah Sing - they will squeeze the max unit of house in the small plot of land, then remind you to buy by sending 100 sms to you in a week.
2) Empire Group - they will convert the residential land to commercial title then build SOHO/SOVO, 300sqft BU without car park given. Outsource Prop Agent to market their products (no in house sales), with price list written in pencil.
3) Sunway - they sell you the future price in 2020, then give u early bird discount, PAL member discount, rebate, renovation incentive, long list of discount. If u entitle 90% loan u still have positive money back. Sunway choice of land is Leasehold, near HTC, near TNB main station (judging from their Charlis, Rymbal Hill, 3 Harmony choice of land)
4) Tan & Tan - least aggresive developer, they will keep the land undeveloped till the cows come home. "Tan & Tan" means "Wait and Wait" in Hokkien.
5) Monoland - They will build undersize condo (600sqft) and oversize condo (2000sqft). Knowing nobody interested in 2000sqft condo, then force u to buy in pair. 600sqft paired with 2000sqft. No catalogue, No website, nothing given to u even after u sign S&P.
6) Dijaya - Overprice overprice, if u think SHC's 9 Bkt Utama 2000sqft at 1million is expensive, let's look at their Tropicana Grande NKVE facing condo, 2000sqft @ RM2million
7) INP - Purposely price the products under priced, create a chaos, when u attend the balloting, 80% fully booked by internal (directors, associates, government officers, staffs and family), then thousands of public q up fight for the remaining 20%. Those who want the 80% pre-booked choice unit, then under table transactions...."you help me, i help you!!"

Disclaimer: The above opinion on the developers of course are not mine.

Monday, January 21, 2013

P&O: This one is for its book value

I am not crazy over small insurance companies. This is especially so when over the recent few years, there were quite a spate of major acquisitions by very large insurers where deals such as MSIG took over HLA, AIG taking over ING, Allianz on MBA and several other consolidations in the industry like the ones involving AmG, Kurnia, CIMB, Aviva, Sun.

P&O is a decently managed standalone insurer where it is not bank-backed, does not have direct relation or any particular bankassurance agreement with any of the larger banks or even the larger insurance companies. It was a Jerneh or a Kurnia like before them being acquired. Insurers like this will face increasing competition as tie-ups are very important in the insurance arena. Shareholders funds and strength of the books are very important as well. There are risks which large insurers dare to take while the smaller ones do not have the size or even the experience to take up larger risks.

As such, I was not particularly interested in companies like this having invested into Jerneh before despite it being a well run company. To me, the only attraction with P&O is it being an acquisition target. Market is valuing at least a 2.2x of book value for a Malaysian insurance company.

And very recently, the holding company for P&O did not actually sell out but rather signed a deal for it to sell 49% of its insurance arm to a group under Sanlam. Who is Sanlam? Not particularly big but still it is a much bigger partner for the standalone P&O.


Now, is this a good deal for P&O? It is as I see it, the owner of P&O is selling a 49% stake, (hence still holding a 51% ownership) and for that stake, the price is RM270 million cash valuing it at 2.46x NAV. Not too shabby a deal.

The deal still does not attract me, but what attracts me is the much improvement of the holding company's (listed) balance sheet and book value. Since it is all cash deal, it would have put the company into a net cash company from its current debt of RM88 million to about RM182 million net cash.

At its current market capitalisation of RM314 million, P&O suddenly looks attractive for the immediate term. After the disposal, P&O unlike the other insurers like MAA and Kurnia, does not need to seek other businesses (hence no PN16 or PN17). It still continues to hold a majority 51% stake which is great. On top of that, its current traded price is still below the book value of RM1.60 upon completion of the exercise and the bulk of its holdings in cash.

Whether the company is to distribute the a portion of the cash is currently unknown but what I see was that the company did distribute its excess cash as dividends when it had them. It is not a company which holds on to the cash within the listed company. I certainly hope for the company to distribute the cash if I am a shareholder. The MAA route is not a preferred route definitely and looking at P&O, my gut feeling is that it won't go the MAA route which is holding onto the cash. P&O has been very careful venturing into businesses like money lending despite it having the license to do so. Hence, why hold the cash when you do not need it?


If you read above, the period when there was no dividend in 2009 and 2010 was when the insurer was required to shore up its shareholders funds due to requirement by Bank Negara. When its balance sheet strengthened, it was back to issuing dividends as in 2012.

Besides the book value, is P&O an attractive growth company. It is not. However, since its focus has been into insurance for the motor industry, I believe its profit margin would have increased as the revision in motor insurance rates started to kick in since a year ago, 1 January 2012.

Not too shabby a position in the motor segment
Looking forward with the larger insurers being very aggressive and starting to understand the local insurance market better, I do not see P&O will be a strong growth insurer. It does however has a sweet position in the motorcycle insurance market though as I understand and that portion is hugely profitable. And anyway, the book value still looks attractive enough.

Sunday, January 20, 2013

Terms we should be clear of investing in Bursa

While we thought we know some of the terms or exercise, do we actually know them that well?

Bonus issue

Bonus issue - Is it a bonus really? From below, assuming Company A announced a bonus 1 for 1, the paid up capital of the company changed from RM5 million to RM10 million. However, the Shareholders Funds does not change at all - remained at RM11 million. A bonus issue does not do anything to the fundamentals of the company.

An example of account for bonus issue
The individual shareholder will get an extra 1 share for every 1 share that he holds, but the price will be divided into 2 from its original price. For example, if the price is being traded at RM1.00 after the ex-date, it will be readjusted to RM0.50. Investors that chase after bonus is actually chasing after something that does not have any impact to fundamentals - just accounting adjustment.

Rights issue

Rights issue happens when the company is in need of additional funds and they are asking the shareholders to contribute based on the holdings that they have at the point of time during the ex-date of the exercise. Very often the rights is being issued at a discount to the traded price - otherwise no one will exercise. No major shareholder will issue a right if they do not have the funds to pick up the rights. It will reduce their holdings unless it is an exercise to force them to do so as the float of the company does not meet the requirements of Bursa.

A right will cause dilution to share price if it is issued at discount - and if the person does not pick up, he / she will face dilution in the value of the stocks price.

Warrants

Does not really seem to be so but a fund raising exercise as well. And it will dilute the value of the shares as well. Hence, as much as a warrant is welcome due to the sweetener nature of the stock as it is usually issued for free, over time it will dilute the share price. Usually, the warrant's exercise price is determined at ex-traded price of the company.

Private placements

Issued at a discount as well most of the time. Hence, it is value depreciat-ive to the stocks. Sometimes, the private placements of shares are issued to parties known to the major shareholders or even nominees holders. Since it is issued at a discount, and if issued to related friendly parties, it may not turn out to be a good thing for minority shareholders.

Share buybacks

Depends on the exercise and how much unused additional funds companies have. If the perceived value of the stock is low, this exercise will be positive for the company. However, be aware of major shareholders that used them for their own personal advantage. Do especially watch out companies that do buybacks but yet the major shareholders continue to sell their own stocks.

Share dividends

These are issued from the buybacks that the company did. Does not mean anything as if they are doing the buybacks might as well cancel off the shares as providing share dividends is not a reward to shareholders as sometimes mentioned.

To me, it is a misleading exercise.

MoU

Memorandum of Understanding - does not mean anything as it is just an agreement that says both parties understand that they will or may in fact not pursue in future - tie-ups, projects etc. A useless piece of announcement usually which is meant to mislead investors.

Thursday, January 17, 2013

Koon Yew Yin's update on Tradewinds Plantation

I have received an email with the below message from Koon Yew Yin. Previously, I have written a piece entitled, "Tradewinds Plantation may have been cornered". I feel that since I have written that piece, would be good to allow variety of opinions although it may not have been mine.

Basically, I feel that the current situation for TWSP is the question on probability that it will be privatised and if it is at current price of RM4.06 - RM4.07, your loss would be 3 - 4 sen and the trading commissions that comes with it. Additional loss if it is privatised at RM4.03 is of course opportunity costs. TWSP is definitely trading at a discount to its revised book value as provided by analyst - not me. However, I can see that there are quite a bit of plantation land not revalued.

I am of course not able to know for sure what would happen to the stock but I can see that at least 83% are for sure under Syed Mokhtar and parties related to him.


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The safest & best opportunity to make money I know
Koon Yew Yin
16th Jan 2013

On 24th Dec 2012 the controlling shareholders announced that they wanted to buy up all the outstanding shares of TWS and TWSP that they did not own, at Rm 9.30 and Rm 4.03 per share respectively.
On 12th Oct I wrote an article “The most undervalued stocks I know” which was posted on Malaysia Finance Blogspot and KC Lau website when TWS’s price was Rm 6.40 and TWSP was Rm 4.00. TWS and TWSP closed at Rm 9.07 and Rm 4.06 respectively.  Those who bought TWS should be laughing but those who bought TWSP are disappointed because the prospect seems so hopeless.

Since the announcement of take over, I have bought up most of the shares traded. In my opinion, I have never felt safer and better in making money before than now in buying TWSP at Rm 4.06 per share because your potential lost is limited to 3 cents per share if they actually have the right to force you to sell at Rm 4.03. But the potential gain can be a few Ringgit per share.  

Although according to the takeover & merger code, the controlling shareholders can force you to sell at the offered price if they have acquired more than 90% of the total issued shares. But under the same code, any dissenting shareholder can protest and the civil court will have to hear the complaint and pass a fair judgement.  

In March 2012 an analyst from UOB KH wrote an article on TWSP when its share price was Rm 4,80. He had a target price of Rm 7.20. In his opinion the RNAV of TWSP was Rm 19.56 per share and CAGR for FFB production is about 13% for the next 3 years because most of their palms are young. The industry average is between 5-8%.   

Although they have sent out the official offer to buy up TWS on 14th Jan, they have not sent out the official offer to buy up TWSP. I think they could not find an independent adviser to support their offer. I also think it is most likely that they will raise the offer price to about half of the RNAV ie about Rm 10.

I believe this is the safest and best opportunity to own TWSP to make money because the downside is so small while the potential gain is so great.

I am obliged to tell you that my holding of TWSP forms a significant part of my share investment portfolio.

Koon Yew Yin   

Stansted Airport and why I feel weird

Now that we know Malaysia Airport is officially one of the bidder for Stansted Airport in London. What we do not know is that whether YTL is a party to it. Let's assume anyway it is and Malaysia Airport will be taking a 20% stake. This bid is competing against 2 other bidders - the Manchester Airport group and another Australian group which has Sydney Airport as its assets. Hence, to say that nobody wants Stansted is not true as there are 3 bidders.

Where does Stansted stands among the airports in London

We know that there are 3 main airports in London and Stansted is the smallest among the three. Among airports in UK, Stansted is No.4 along the pecking order of Heathrow, Gatwick, Manchester. BAA who is the owner of Stansted is being forced to relinquish Stansted due to anti-competitive ruling by the regulators. Few years ago, BAA (which used to own as well) sold Gatwick to another consortium, hence Gatwick is a direct competitor to Heathrow now.

Based on the below statistics which I managed to gather from each airports' reported numbers, we can see that the passenger growth is not particularly outstanding. One must remember 2012 was the London Olympics year, hence we can take a few percentage from the 2012 numbers.
Passenger traffic between 2005 - 2012
Of course UK as in all other parts of Europe is facing severe economic troubles and passenger traffic is a subset to that problem the continent faces. Stansted actually consists of less than 10% of total London passengers traffic - hence the swing can be substantial to the airport depending on the execution. And if you look at the numbers in detail again, Stansted's numbers actually shrunk from 22 million in 2005 to 17.5 million in 2012.  What is the major cause to that?

BAA few years ago actually had greater plans for Stansted. It in fact wanted to invest more by upgrading the facilities in Stansted with another runway in the plan. That sort of halted when it ran into issues where it cannot own more than 1 airport in London, hence this plan was shelved. That issue with the regulators caused BAA to concentrate on Heathrow being the largest international airport by far and it was in fact presented in its report to the shareholders for many years that it was going to focus on Heathrow.

That was probably the reason why Stansted is facing deterioration in passenger numbers. Another thing that we know is that Ryanair is the main customer for Stansted accounting for 70% of the load. In fact, Ryanair was one of the interested party which wanted to put in a bid but was blocked from doing so. Another main customer to Stansted is EasyJet, the other successful low costs airline in Europe.

Stansted being an airport for leisure, low costs airlines has always felt the pressure from its main customers, the low costs airlines themselves. Low costs airlines thrive from their size - negotiation power, high turnaround time and pressure on prices to all their suppliers. The fact that it is 70% Ryanair is one red flag by itself. If you look at the highly successful operator, if the CEO can sort of threaten Boeing to reduce its aircraft prices, and commercial aircraft manufacturing is a duopoly industry - tell me how much he can threaten Stansted. He in fact has done before (by pulling some of the flights away from Stansted to other airports, hence the lower traffic) and will continue to do so. Anytime, he sees Stansted making higher profits, he will put pressure on pricing - that's I think how powerful they are.

That characteristic smacks similarities to our own LCCT in Malaysia where Airasia is the main traffic creator to LCCT. In fact, I dare to say without Airasia, LCCT is probably not needed and there's no KLIA2. We also know that Malaysia Airport is backed by the government (and in fact majority owned) - Malaysia Airport despite the war of words with Tony Fernandez, nothing much Airasia can do as all airports surrounding are managed by one single company. Airasia had one time threatened to build another airport with Sime Darby if you can remember. I felt that Malaysia Airport did not handle the Airasia issue too well and definitely it may not be able to handle Micheal O'Leary who thrives on that. Can YTL handle that being the 80% consortium holder? Probably not, this CEO of Ryanair whom even had the guts to reduce air traffic to his own country, Ireland due to what he claims unfair practices - he can do a lot to the air traffic industry in Europe. He can increase and reduce traffic to parts of Europe if he wants to - as he has planes, strong pricing power, reach and ultimately negotiation power. I would not want to handle someone like him...but may want to look at his shares.

Now - this is what I think YTL and Malaysia Airport wanted to do if they win the Stansted bid. Expansion. Reducing costs as BAA probably did not do too well with that. Reduce the dependence on a single airline like Ryanair. Or work well with them. Can they do that is the question?

British Pound is getting cheaper relative to other currencies could also be a factor. And we also know that YTL has been parking assets out of Malaysia...hmmm...but why Malaysia Airport? Fees paid for managing the airport? Is YTL paying a good fee?

For shareholders of YTL, if the company has assets mostly overseas, I can see possibilities of reduction in dividends as most companies do not want to repatriate money back here to pay dividends. Sometimes, there are tax implications - not all the times though. Have to question the management.

Wednesday, January 16, 2013

Do I trust EPF?

YES. I still have a substantial part of my savings in EPF and I am actually letting it stay put there. Some readers have actually asked me on unit trusts and they are thinking of parking some of their EPF's money in unit trusts. Seriously, I have not much comment on this as I myself have not done detailed research on this - but one thing I have read is that there are not many funds that outperform the market consistently.

Picking a fund is like picking a stock - one will need to identify the investment mindset and objectives of the fund manager - how much they have consistently beat the market and can they still do it in future. That's a hard call. Then the fees. Are you willing to pay for the additional fees while in EPF, you are basically not paying the extras.

Back to EPF - EPF is a the largest fund among all the unit trusts. In fact it is not a unit trusts. It is a provident fund - i.e. taking care of our old age.The recent attack by some opposition members may not be that wrong as it has invested into FGV and it looks like it was supporting the share price. (However, statement like EPF has lost few hundreds of millions investing in FGV is a misguided statement as there are losses and there are gains in investments - and anyway it is losses in the books, unrealised) I in fact have mentioned of my unhappiness with regards to the investment, but one must know that EPF is a very large fund. That is a very small portion of its investment. Unlike me, where I can be very picky with my investment decisions, EPF can still be picky but if it is too picky, it has less places to invests in. (But that doesn't mean it can simply invest anywhere, which to a large extent it is not so.)

Investment assets of EPF have been growing very fast
As at 31 Dec 2011, it has investment assets of RM469.2 billion. Who in Malaysia can beat that? While the fund size looks appetizing for a fund manager, I would imagine it is actually very tough to manage a fund this size. Every month, it probably has a whopping net size growth of about RM1.2 to RM1.5 billion after withdrawal.

If I am the fund manager of a fund this size, I will have problem allocating these assets. Hence, managing it and have a decent return of 6% for example last year is quite a good feat.


The only good thing for EPF's fund managers are that they do not have to source for contributions (i.e. growing their fund size) unlike the other unit trusts fund managers which have to worry over fund size growth vs withdrawal, anytime. That is a great advantage that EPF has - where it can actually figure out the future withdrawals while other open-ended unit trusts can't really do that. As a result, unit trusts have to park a larger portion of their money in more liquid assets.

 Where does EPF puts its money (or rather our money)?

See below.
Picked from the Chairman's statement in Annual Report 2011
The pressure of low interest rates environment as well as reducing government loans relative to the growth of the fund size has caused EPF to look elsewhere (mainly equity) to park its money. Fortunate and unfortunately to me it has parked most of the funds in Malaysian equity market. The thing about putting money in the Malaysian market is that it has overwhelmed the market with EPF's funds and an elephant can't dance very well. Parking its funds in the Malaysian market means that the companies that it invests in have to perform. Luckily for us - companies like CIMB, Maybank, Public Bank, Digi, Maxis etc performed over the last decade. EPF cannot afford non-performance from these companies that it invests in as it will have problem pulling out from its current holdings as if it pulls out, the share price of the companies will be largely affected. One example you can see is Malaysia Airlines where EPF is slowly reducing its stake but still it is stuck with substantial percentage.

2001 vs 2011 allocation from EPF's investments

From above, you can see that the contribution from equity is now constituting a substantial percentage of its income. While it still needs to put some of the money in MGS and money market, this obviously is reducing.

While it is now putting a lot of money in equity, the return that it has gotten is not too shabby against many of the funds.

Last year itself, return from equity investment was 11% which was even better than many of the funds. Now, with this kind of investment returns, I do not really have to think of diversifying my investments into unit trusts.

You can say that the large holdings EPF has in a lot of the companies it invests into, it may be able to largely control the share price - well, that's another argument but most unit trusts have to put their money in the Malaysian bond or equity market anyway.

And the ones that went overseas i.e. South East Asia or East Asia actually largely underperformed in the last few years.

Source: EPF







Based on the chart on the left, many more people have taken their money out from EPF recently. Great for the funds industry as it needs that. Obviously, I was approached as well but I am staying put with EPF. If any of the fund can outperform EPF by say 1% - 2%, or maybe even slightly more, I will just say - forget about the trouble.

I generally think that EPF has done quite well for the larger portion of the public which consists of more than 13 million contributors although once a while we may make some comments like the ones with FGV.


NO, I am not being paid by EPF to write this article, but I think the guys need some pat on their back to do what they have done. But of course, if I am given the opportunity to withdraw the money for me to invests myself, I would gladly welcome it.

Tuesday, January 15, 2013

YTL Cash Rich vs Malaysia Airport cash strapped

I was again reading something and just wanted to highlight - again reporting, reading and don't think vs thinking and able to analyze yourself makes a lot of difference. This article by The Star today is talking about the possibility of YTL and Malaysia Airport having a joint bid for Stansted Airport, UK for a sum of RM5 billion. It is again saying YTL is cash-rich while Airport is cash strapped. Read below where I pulled out a section from The Star's reporting:
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What is clear from checks with industry sources is that YTL Corp is very keen on holding the majority in the consortium and has sufficient funds for its equity portion. YTL Corp already owns UK's utility company Wessex Water Ltd and recently acquired hotels there. YTL Corp's Tan Sri Francis Yeoh and MAHB's Tan Sri Bashir Ahmad are very much involved in the deal to buy Stansted.If their bid is successful, it will add to the list of Malaysian corporate acquisitions of iconic UK assets, following last year's acquisition coup by the SP Setia-Sime Darby-Employees Provident Fund consortium of the Battersea Power Station project.While putting up the equity portion for the bid is less of a problem for cash-rich YTL Corp, does MAHB have sufficient firepower for coming up with its RM1bil (£200mil) portion?Sources told StarBiz that MAHB can manage that amount and had the funding plans for that. However, it might not be able to spend more than that on the Stansted bid, the sources added.
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If this bid is true, YTL will need to pull out RM4 billion while Airport will need to fork out RM1 billion. Let me pull out balance sheet of both companies and let us analyze.
Latest Current Asset portion of YTL

YTL's liability and equity
Debt of YTL and Equity

Airport's Current Assets

Airport's Debt and Equity
Airport's Debt and Equity
I have actually did a simple debt / equity table, please see below.
YTL and Airport Net Debt / Equity

Assuming the project is won at RM 5 billion, whose balance sheet actually looks better? Look at the lower portion. YTL's net debt / equity of 1.30x vs Airport's net debt / equity of 0.64x assuming it uses debt financing to fully finance its bid. YTL's way above gearing of more than 1 vs Airport's gearing of below 1. So who is actually having a stronger balance sheet here?
Of course I may not be agreeable for Airport to bid for a project which it owns only 20% especially in London (wonder why more Malaysian companies go London???). To me, Airport should just concentrate on KLIA2 as there is quite a bit of cashflow from there coming in near future and what it needs to do first is to CONCENTRATE.
And of course, you can say that I am bias as I have Airport shares while I do not have YTL - but numbers don't lie. Keep saying you are cash rich is not going to change the numbers! Good enough bankers (and there are many) will definitely know how to read balance sheet and future cashflows.

To proof my point, do a search on Google, "YTL cash". You will see many misleading articles.

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Note: Sorry, for yesterday's article, I should have used net debt / equity in which net debt is (total debt - total cash and cash equivalent). In any case, the balance sheet for Airport is definitely in better condition.

Battersea and SP Setia

Read this article this morning and felt that I should share - do not know much about the Battersea project despite me having exposure to SP Setia as I was looking at its current Malaysian situation. The article started with positive remarks on the take up rate of the project but later warned that the overwhelming response could have its consequences.
Do weigh the investment yourself as it is a new unchartered territory for SP Setia and Sime Darby - real estate in London.

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via Bloomberg
Buyers reserved three-quarters of the apartments and townhouses to be built at the Battersea Power Station site in London in the five days since they were put on the market, according to the developer.
About 600 properties have been reserved in the Circus West part of the project since Jan. 9, the Battersea Power Station Development Company said today in a statement. They are the first homes to be offered as part of the station’s redevelopment.
A dwindling supply of homes for sale in areas such as Kensington & Chelsea is driving foreign and domestic buyers to look outside of neighborhoods traditionally considered prime. That’s prompting luxury-home developers to expand east toward the City of London and south of theRiver Thames, where major projects are under way in Battersea, Vauxhall and Nine Elms.
“Battersea isn’t prime central London and prices are already in excess of 1,000 pounds ($1,600) per square foot,” Camilla Dell, founder of broker Black Brick Property Solutions LLP, said by e-mail. “So investors are betting on prices reaching similar levels to prime, which is a gamble.”
Battersea Power Station, featured on the cover of Pink Floyd’s 1977 album “Animals,” has frustrated a series of developers since it closed more than 29 years ago. Malaysia’s SP Setia Bhd. (SPSB) and Sime Darby Bhd. (SIME) bought the site for 400 million pounds in July after its previous owner was put into administration.
The reservation fees were around 2,500 pounds for the apartments, which cost as much as 3.3 million pounds for a 2,383 square-foot (221 square-meter) property including outdoor space, according to Jo Eccles, managing director of broker Sourcing Property.

Nine Elms

The Battersea development is part of the Vauxhall Nine Elms Battersea Opportunity Area south of the River Thames and across from the Kensington & Chelsea and Westminster boroughs. It is London’s largest redevelopment area and includes a new U.S. embassy and an extension of the London underground.
Less than a mile from the Battersea station, Ballymore Group Ltd. is developing Embassy Gardens, where a three-bedroom apartment is being marketed for 2 million pounds, according to the developer’s website. Around 90 percent of the apartments offered so far have been sold, the developer said by e-mail today.
Berkeley Group Holdings Plc (BKG), the U.K.’s second largest homebuilder by value, is marketing penthouse apartments through its St. George’s unit, which is about 5-minute drive from the derelict power station.
“We are warning clients to be extremely cautious not to get swept up in the hype with the huge amount of development in the Battersea and Nine Elms area,” Eccles said by e-mail. “A lot of the prices per square foot being paid in a number of these developments -- for example St. George’s ‘The Tower’ in next door Vauxhall -- in our opinion just don’t stack up.”
Dell of Black Brick said she expects to see some “flipping,” of the properties, where early investors try to sell on their sales contracts at higher prices.
To contact the reporter on this story: Chris Spillane in London at cspillane3@bloomberg.net;
To contact the editor responsible for this story: Andrew Blackman atablackman@bloomberg.net

Monday, January 14, 2013

1BestariNet and my flawed rationale

I am no telco expert. But I have enough of experience to know what makes sense, what don't. 1Bestarinet is a project awarded to YTL Communications for delivering fast enough internet experience to all 10,000 schools nationwide. It is claimed to have been an open tender and YTL came out top out of a total 19 companies which tendered.

Frankly, I have originally almost written off the YTL's telecommunication initiative until there are quite a number of postings which makes me wanting to rethink (thanks for the comment) - no disrespect to YTL, but I have discounted all the other telco players like Green Packet, Redtone, and even UMobile anyway. Hence, I am not putting YTL as the only one as a punching bag for my telco thoughts. Let me put it this way, among the tycoons, Ananda Krishnan has already won this war among the telcos - while the other two, Celcom and Digi are corporate owned today. Anyone wants to take a share out from Ananda, do something else. It was the same as when Vincent Tan attempted with Digi (did not go far) and now UMobile which will not go far as well - in my thoughts. In telecommunication, its either you have it or you don't. It is not like a power generation business where it is dependent on the areas served, grid etc.

Now 1BestariNet is a way for YTL to reduce its costs of deploying wireless data communication nationwide while using the government's money to help it to achieve its dreams. It is actually not wrong as schools will need to be digitally covered anyway. Anyone who can do it most cost efficiently should get the project. Now my thoughts are this - the one which probably can do it most costs efficient should be a combination of a strong wireless provider and a fiber provider. From there, where does YES stands?

A fiber provider should no doubt be Telekom Malaysia while for a wireless provider they should be any of the three telcos - Maxis, Celcom, Digi. For YTL to get this project, it must have very strong connections or may have priced them very low to beat the competition or even both. If YTL has the committed ambition to cover the entire country with YES network, then maybe it would have used this project to achieve its ambition. For Maxis, Celcom and Digi it is a given that they must cover the entire nation or at least the bigger cities and towns with 4G.

Now, why do I think it should be a combination of a strong fiber provider and wireless player. The cities - Klang Valley, Penang, Johor Bahru and ultimately to other cities as well. Ain't TM is currently laying the fiber already? If it is charging less than RM1,000 for a 20Mbps fiber internet or more ultimately, what else can beat that from among the wireless providers? Are we saying that every student will be provided a dongle for their notebooks? What the schools need to do is to cover the entire school with wifi. Isn't that a cheaper and longer term solution? Imagine every new student will be provided with a YES dongle...that does not make economic sense.

Say 50% of the schools are located in the cities or suburban areas, providing internet to these schools are hence not expensive. A one off costs of covering with wifi (should not be much) and just monthly internet bill of not more than RM1,000 to TM. Another 40% of schools in the smaller towns? (The real problem as usual is tackling the real rural areas which probably makes up the 10%) Well, they need wireless providers which is why the 4G LTE and WIMAX providers are for. Please tell me if I am wrong deploying WIMAX solution is initially supposed to be cheaper but with the need to pay for the CPE (Customer Premises Equipment) I would think 4G LTE will be ultimately used hence that's why all the telcos are getting some spectrum for the deployment of LTE.

Going back to 1BestariNet. If YTL is to deploy fully, it would be getting RM1.5 billion in 5 years - that's what the press statement says. What the press statement does not say is whether it includes costs of accessing internet. I would think so as it does not make sense to just cover and do not provide access for it. Again, I would think the government would not ask the students to pay for access, am I right? The project is RM1.5 billion in 5 years. That comes to
RM1.5 billion / 5 years / 10,000 schools / 12 months = RM2,500 per school per month
and we are still not getting the fiber speed which can be deployed to many of the urban schools as at now.

Every student is supposed to be provided with a dongle from YES or could it be a CPE in every classroom or something like that?

Now, comes YTL's grand plan...Its objectives of doing the 1BestariNet is to grab hold of the student's market - 5 million of them altogether. It is trying to get a market share out of it to achieve its initial target of 1 million subscribers that pay so that it can breakeven. To do that it has to achieve something like 15% from the student market assuming YES already has about 300,000 subscribers currently. Hence, the students will have to be provided with a dongle so that they can access the network from anywhere, anytime - either in school, home or any public area. In school, it is free but anywhere out of school it will not be free anymore.

HOWEVER, for those students whose houses are in the more urban areas, most of them would have access at home anyway - in fact many homes today and most in future will be wirelessly connected - either from 4G LTE, Unifi (fiber to the home) or Streamyx (old ADSL technology). They do not want to pay the extra.

As for the more rural students, chances are they do not want (or could not afford) to pay anyway and if they are, their homes may also be connected with Telekom's Streamyx. And if there are no Streamyx, chances are there's no YES access as well. Hence, how is the 1BestariNet going to turn YTL into a serious enough contender in Malaysian telecommunication sector?

Anyone care to comment as I think this speculation may not run too far although may sound simplistic...as I still could not get the rationale.


Note that these are my thoughts and it may be flawed.