How To Make A Bad Thing Worse (Part 2) - Proton (Again??) & Volkswagen

As reported in The Edge Daily:
Share price of Proton Holdings Bhd fell as much as 19.6% or RM1.25 on Jan 13 in a knee-jerk reaction after Volkswagen (VW) scrapped joint-venture plans to build and sell VW brand cars for the local market. VW chief executive Bernd Pischetsrieder reportedly stated that there were differences in the proposed JV.
“We had a very specific idea how we wanted to proceed there. Unfortunately the Malaysian government, Khazanah (Nasional Bhd) and Proton had different ideas. Therefore what we wanted in the cooperation with Proton will not materialise,” chief executive Bernd Pischetsrieder told investors gathered in Dearborn, Michigan, on Jan 11. VW placed the presentation from a Lehman Brothers event on its investor relations website on Jan 12.

In a Bloomberg newsbite posted on Jan 12:
Proton's spokesman Yusri Yusof said the carmaker had not received formal notice of an end to the investment proposal. ``As of today, we are still waiting for an official reply from Volkswagen,'' said Yusri, based in Shah Alam outside the Malaysian capital, in a phone interview. ``We are caught by surprise by the announcement.''

Now whose fault is that? It is bad enough that the talks have been called off, couldn't both parties have at least parted ways better - like having a joint statement!! Simple PR. It does not look good (particularly for Proton) when the spokesman for Proton had to come out and say that they are still awaiting an official reply from Volkswagen.... when the head of Volkswagen has already spoken at an auto trade show and posted it on a Lehman Brothers investor relations website!!!

No point pointing fingers at Volks or Proton now, both parties are at fault. It is unprofessional to terminate proceedings without laying out how the news/decision should be communicated. Both are long time listed companies, and to commit such a juvenile corporate error may tell us all more about BOTH companies attention to detail (or lack of), and priority on investor relations. It is also pointless for any of the two companies to come out now and explain why - its too late.

Its like a courting couple and suddenly one of them got dumped by the other via SMS - both parties end up looking baaaddd...

Enough Said, Please Read The Judgment

You can read it on Page 4 in NST and the front page of The Sun, ... but you will have to dig pretty hard to read it in The Star (tsk, tsk, used to be my favourite paper...) and then The Star had the audacity to leave out the names of the two corporate players. The case starring roles involved Metramac, Metro Juara, STKG, DBKL ... among others. Featuring Halim Saad and Annuar Othman. Special appearance by Justice Sri Ram. Revolves around selling a company for RM97.5m when it is due compensation of RM764m.

The greed, deception, trickery, arm twisting and collusion involved is as obvious as Lim Kok Wing's hair piece. Good thing is that cases such as these made the light of day. I thought these would be (once again) swept under the carpet of wishful thinking. It is embarassing to the country but it needs to be done, and maybe, just maybe, there will be less injustice, ... and more integrity in the financial , legal, political and economic system. Its a long and winding road ... but at least we are taking baby steps in the right direction.

The article as reported in NST 13 Jan 06: Two of the biggest names in corporate Malaysia received mention in the Court of Appeal today — and not all of it was favourable.They were Tan Sri Halim Saad, one of the country’s best known businessmen, and Tun Daim Zainuddin, the former Finance Minister. In a unanimous decision, the Court of Appeal ordered Metramac Corporation Sdn Bhd, a toll operator, to pay about RM65 million to a construction company in compensation for loss of advertising rights.Judge Datuk Gopal Sri Ram also ordered Metramac to pay Fawziah Holdings Sdn Bhd all proceeds to be received under future contract.The amount is to be assessed by a High Court registrar.He also ordered costs to Fawziah Holdings, which had appealed against a High Court ruling.Further, Sri Ram dismissed a cross-appeal by Metramac for a declaration that several agreements between them were null and void.Metramac is the owner and operator of the East-West Link Expressway (Karak-Kuantan) and Sungei Besi Expressway. Datuk Fawziah Abdul Karim and her mother Maimon Bee were directors and shareholders of Fawziah Holdings and they are also directors and shareholders of Syarikat Teratai K.G. Sdn Bhd (STKG) now known as Metramac. In July 1986, Fawziah Holdings, through STKG succeeded in obtaining a tender from the Kuala Lumpur City Hall (DBKL) to design, construct, finance and operate the privatisation of a number of roads in and around the city, which included one in Jalan Cheras. In December 1988, four institutions invested in STKG, bringing in RM65 million worth of capital. DBKL, the concessionaire, however, suspended toll collection sometime in September 1990 due to a demonstration at the Cheras toll plaza.As a result, compensation of RM764 million was payable by DBKL to STKG.STKG was then bought over by Metro Juara Sdn Bhd for RM97.5 million.Sri Ram said Metro Juara Sdn Bhd shareholders, Halim and Anuar Othman, had something which Fawziah did not: patronage of then Finance Minister Daim.The judge said DBKL was supposed to pay STKG RM764 million as compensation after suspending the company from collecting toll. However, he said Daim had told Fawziah that the Government had no money to pay compensation.It was at this juncture that Metro Juara came into the picture and bought STKG for RM97.5 million. "This is a crude form of economic duress presented in a subtle form," Sri Ram said. The judge said no right-thinking person would sell STKG for RM97.5 million when the compensation was RM764 million.Judges Datuk Hashim Mohd Yusoff and Datuk Zulkefli Ahmad Makinuddin heard the appeal with Sri Ram.Their decision was unanimous.Datuk Muhammad Shafee Abdullah, who appeared for Metramac, told the court that the company would file an appeal with the Federal Court.Datuk Dr Cyrus Das, Benjamin Dawson and Koh San Tee represented Fawziah Holdings.On March 7, 1995, Fawziah Holdings filed an action for breach of contract against Metramac seeking RM65 million as compensation for loss of advertising rights and profits under future contract.Metramac counter-claimed for a number of declarations, including that certain clauses in the agreements were null and void.It also asked for an account of all revenues received by Fauziah Holdings under those agreements.High Court judge Datuk Kang Hwee Gee had on Oct 2, 2003, ruled that Metramac was in breach of the agreements.However, Kang ordered loss of advertising rights to be assessed. He dismissed the claim for future contract .

EPF's Returns vs Armed Forces Fund's Returns

I was browsing through The Star paper and came across this letter to the editor from a Dr. Chang from Klang. He cited the impressive performance of the Armed Forces Fund, which recently announced a 15.75% payout to its contributors for the last financial year. The returns included a 7% dividend, a 3.75% bonus and a special bonus of 5% in the form of free unit trust units. Dr. Chang further compared that with the sedantary EPF which declared a dividend of 4.75% for 2004. Naturally, Dr. Chang implored EPF to shore up its performance to at least somewhere closer to the Armed Forces Fund.

EPF is a convenient punching bag for all. I think 4.75% last year from EPF is decent, not in the "very good" category, but decent. There are a few things that Malaysians who contribute to EPF must know:

1) EPF is very big, and the amount of fresh funds coming in every month is also substantial. To move those funds into appropriate assets is not easy.

2) It is a pension fund, not an equity fund or even a convertible bond fund, certainly not a futures and options fund. As such, Malaysians SHOULD HOPE that EPF do not produce returns of 10% a year, because that means that they have taken on a lot more risk than the fund should to obtain that kind of return. You cannot get supernormal returns relative to prevailing interest rates without taking on a lot more corresponding risk.

3) Yes, the Armed Forces Fund produced superior returns, but I do not know the makeup of their assets exposure. I certainly hope this is a one-off for Armed Forces Fund because if they continue in that vein, it spells trouble. A one-off superior return can be acceptable, e.g. they could have sold a building at a very good price, and the book value of the building has not been revalued for a long time. You get the drift. If the Fund was speculating in some leveraged trading or hedge fund or speculative second or third liner stocks to get that superior return, somebody should at least audit the Fund's transactions and exposure. In fact, somebody higher up should do so already!!!

4) Other "good explanations" for the Fund's good performance could be allocations on certain IPOs that did very well - but those kind of things would not make a dent on the EPF's overall performance. EPF need to keep the bulk of it in local currency, and then mostly in bonds, the closer to risk-free the better. It may diversify some to foreign equity but not much, or foreign bonds particularly of our trading partners - it all has to do with balancing risk of the pension fund. Hence Malaysians certainly should not expect EPF to produce returns more than two hundred and fifty basis points than the prevailing interest rates (e.g. interest rates is 3.5%, EPF should not put up a dividend more than 6% - if they do, alarm bells should be ringing, maybe they increased their exposure to equities excessively).

5) One thing the EPF should stay away from is to act as a piggy bank for certain dubious equity holdings or loans. So far, we did not see an implosion triggered from these transactions, well, probably because as a percentage the amount is still small. However, we must strive to uphold the integrity of the pension fund and never to use it as a dumping ground or lender of last resort.

So, Dr. Chang, be wary of excessive returns, its like a girl who agrees to go home with you after 5 minutes talking at the bar - something that good gotta be "not right".

KLSE'S Low Market "Velocity"

A fellow professional and a close friend asked me today about KLSE's low market velocity. I was stumped at first because I did not know that a stock market has velocity. Velocity of money, I have heard of, but in a stock market?? Maybe its the time difference and distance when the client bangs his head against the wall after buying shares?!!

As an after thought, I think I understood his usage of the term. Its the low volume turnover on a daily basis relative to the market capitalisation. OK, granted that the fundamentals for 2005 have not been overly exciting but there are other Asian bourses which can register decent daily volume relative to their overall market capitalisation even in dull periods. Why not the KLSE??

My take:

a) Developed countries favour mutual funds investing rather than personal investing. For example, US investors are generally averse to invest in stocks themselves. Mutual funds are a preferred choice for most. As institutional funds control the market, it will have good volume. Many banks and brokers own funds management unit, and it is good for business that things "move". Malaysia's fund management industry and size is still in its infancy.

b) In more established Asian bourses, like HK and Singapore, their spread of private investors is probably similar to Malaysia. However, private investors in HK and Singapore are more likely to follow research reports and corporate news before buying or selling (especially in Singapore). Of course, there are also private investors in Singapore & HK who will jump in on hearsay and speculate on rumours, but the situation is more aggravated in Malaysia. Followers of market fundamentals will find more reason to do bottom fishing even during flat or sluggish markets. Those who don't, will tend to wait till the next bull rally comes along. The KLSE was flattish the whole of last year, can you blame the private investors for taking the year off!

c) Private investors will only be in the market when activity is bustling and simmering or boiling even. When a market is flat and/or sluggish, you can bet that most private investors in Malaysia will be out. Even bottom fishers are in the minority in Malaysia because bargain hunters after buying the stock may have wait a terribly long time before any upsurge activity can be traced. The KLSE is too much geared towards a "bull market only" participants. Activity kind of slack off considerably without leads.

d) Part of the contributing problem is the inability to short stocks - then people will really read research reports to look for bad eggs!! If stocks don't move up, nobody can or should make money. A proper stock market should allow investors to reward and punish companies according to their performance. It is of little use to "protect" companies against short sellers, just like a parent blinded by love for his "under-developed child". Let the child grow up. If a company do not want to be targeted by short sellers, get your books in order, plan your strategies properly, get decent returns, rid the company of fat, etc...

e) Commission rates still too high. If you compare with HK, the overall commission and additional rates charged per transaction by the KLSE is still high. More activity will go hand in hand with good effective transaction costs.

f) Free float restricted. Particularly from good companies. Good companies on KLSE are a dime a dozen. There is no reason to hold onto 55% or more shares of your company even if it is doing well. A good owner must hold onto the mantra that investors must be rewarded for investing in my company. A good free float should be at least 35%-45% of total shares. The lack of shares will dissuade a lot of institutional investors from putting your stock on the radar. Right now, there are not many stocks on the radar of big fund managers, so is it any wonder then that activity in volume traded is lower when compared to regional markets. If owners of good companies places out more shares deliberately, just by doubling the number of companies on the radar of big funds will bump up volume activity substantially.

So, I guess the extending of T+3 to T+7 or T+10 is part of the Bursa's scheme to encourage market velocity. As explained in my blog before, T+10 or T+7 is good, but they are bull market instruments, i.e. will be only effective when a bull market is present. Still, a good move, but the Bursa should try and get at the root of the problem.

p/s I think there are currently only 20-25 Malaysian companies on the radar of big funds, and that is out of over 1,000 listed firms.

Redtone's Tumble & Who's Next

As reported in The Edge Daily:

"REDtone International Bhd, whose share price fell to its historic low of 94 sen on Jan 6, has warned of lower earnings in the next two quarters as competition in the industry continues to intensify. Group chief executive officer Wei Chuan Beng said that its local business was operating under intense competition in the telecommunications market as major telecommunications companies were slashing their call rates. Wei also said the commercial rollout of its discounted call business in China this month would contribute to its earnings from March onwards. In Pakistan, since its commercial rollout last January, the operations have been showing monthly revenue of RM3 million. For the second quarter ended Aug 31, 2005, REDtone posted a lower-than-expected net profit of RM6.01 million. Analysts’ consensus estimates for the financial year ending Feb 28, 2006 is RM27.08 million net profit. "

To me, Redtone is easily one of the better run Mesdaq companies. In general, the level of senior management's knowledge, persistence and strategising ability are way above average. The tumble in their share price has more to do with the business itself, which itself is becoming commoditised. When it gets easier and easier to put up a box and start terminating/sending calls, when it is difficult to clamp down on illegal operators, when there are many "questionable operators" acting as intermediaries to terminate international calls at dubious below market rates - it makes for a very difficult environment to be operating in. Still, Redtone should survive albeit at lower margins.

The tumble in share price could have been lesser in quantum if the company added new revenue streams from other platforms (not VOIP related). VOIP was a good platform for Redtone to build a successful small company. Rather than fall in love with the industry, one must strategise a company's business mix much like predicting cycles and turns in real economy.

What is amazing is that there are similar type companies being helmed by people that are less capable on almost all levels when compared to Redtone, and amazingly their share prices are still standing firm - probably because institutional investors and big players have shown zero interest in them in the first place, so no shares to sell. If they had even a better spread of shareholders, these two companies (VOIP based) would and should drop by an even bigger quantum than Redtone. This is not a piece of investment advice - just an opinion - if short selling is legal, I'd be shorting Modular Tech and Nasioncom.

The Questions On Transparency - Proton

Well, well, now we have questions on transparency on Proton's decision to sell "the thing" for 1 Euro. Part of the letter written by Tun Mahathir and Tengku Mahaleel is reproduced below:

"Who offered to sell or who offered to buy at one Euro?
Were there other bidders?
Was there an attempt to get the buyer to pay a higher price?
Was there an announcement that M.V. Agusta was up for sale?
If not did Proton approach only one bidder?
If other bidders were offered, did they reject?
Who in fact made the decision to sell?
Can Proton explain how selling an entity bought at Euro 70 million for one Euro would not cause Proton to lose money as is claimed?

Gevi S.p.A. is not a household name in the automotive industry. Is it a motorcycle company, confident that it can turn around M.V. Agusta, something that the sale by Proton implies that Proton has no capacity or ability to turn it around? Not having to pay Euro 70 million will be an advantage for Gevi.
These are questions that need answering. As the two people most involved in the purchase of M.V. Agusta, our credibility and honesty is at stake. We want to know the correct answers. The public too may want to know as Proton is a National project.

Dr Mahathir bin Mohamad
Tengku Mahaleel Tengku Ariff "

While waiting for Proton's board to come up with some answers, here's my take:

a) Yes, Proton's board and management need to be transparent on the transaction. Was there sufficient effort expanded to secure more bids for the company? Was there an attempt to obtain a fair price for the company?

b) The questions for more transparency on the subject is very much welcomed, but why only Proton, why only now - there were so many deals that lacked transparency, but there is one, just one which totally flabbergasted most Malaysians, maybe we should put the transparency test on why Khazanah was forced to buy out Tajuddin Ramli's stake in MAS at more than twice the market price at the time?? Why were the minority shareholders not offered the same deal?? Why the selective transparency???

c) New management at Proton, and if they decided that going forward their strategy would not include the "bike company", yes, it should be discarded. There should be no need to keep businesses for "old time's sake" when they are not part of the strategy going forward. Hence the one year period in buying and selling should not matter as new management were roped in during the in-between period.

d) As for the "no loss on disposal" statement by Proton, I have made fun of them already (please read below) but let's get at the real issues, because everyone knows that it was a bad PR job and not a malicious intent to decieve.

e) Finally, if we are going to put the sale through a transparency test, we should also put the purchase through a similar test. What was the rationale for the purchase? Was the 70 million Euro plus the assumption of 232 million Euro in debt a fair price? How was the pricing arrived at? How was the turn around strategy going to be like? What was the technology transfer value?

Mesdaq IPOs - Meltdown & Reasons

Used to be, investors would jump in with all they have whenever there was a subscription for new IPOs. Back in the early 90s till the financial implosion in 97, most IPOs were recording opening day gains of at least 30%, and usually a lot more than that. Even during the dreary post financial crisis days, one can still get decent gains on most IPOs. For the past 3 years, Mesdaq IPOs started shakily, but thanks to new listings such as Symphony House (now transferred to the Main Board) and the huge (but sedentary YTL-e), investors got more comfortable with Mesdaq stocks. As long as one can make money, people will come in droves. Sensing an opportunity, syndicates got involved quickly. The authorities basically practiced a hands-off approach as the rise in Mesdaq activity bodes well for future listings and viability of Mesdaq.

This is good for most concerned as entrepreneurs get to cash out (well, some or most of it, if they play it smart). VCs and angel investors got to really cash out big time, thus propelling interest for the VCs to fund more start-ups.

In The Edge Daily, it was reported that: "Most Mesdaq Market initial public offerings (IPOs) in 2005 were disappointing, with more than half or 26 of the 46 listings closing on Dec 30 below their offer prices. Analysts blame the disappointing performance of these Mesdaq counters on unexciting prospects, high valuations and poor market sentiment. ... On a brighter note, analysts say a handful of Mesdaq companies such as mTouche Technology Bhd and Green Packet Bhd appear to have gotten their strategies right and are moving in the right direction. ... ES Ceramics Technology Bhd was the worst performer. Its share price fell 66% to 18.5 sen as of Dec 30 from its offer price of 55 sen. Ygl Convergence Bhd is down 58% to 37.5 sen (IPO price 90 sen); ConnectCounty Holdings Bhd 60% to 13 sen (32 sen); MLabs Systems Bhd 49% to 28 sen (55 sen). EcoFuture Bhd is down 50% to 12.5 sen (25 sen) and Vitrox Corporation Bhd 28% to 43 sen (60 sen). ... However, analysts say there were several companies that bucked the trend, especially those with strong business models and growth strategy. mTouche’s share price surged 460% to RM3.36 (60 sen) while Green Packet’s jumped 270% to RM2.04 (55 sen). TMC Life Sciences Bhd is up 136% to 90 sen (38 sen) and KZen Solutions Bhd 92% to 63.5 sen (33 sen). "

The authorities have threathened to tighten listing requirements for Mesdaq companies. Since Nov 29 last year, companies now must provide a profit forecast while non-technology-based but high-growth firms must have an audited operating revenue for at least three years. My view is that the authorities should take a hands-off approach (as much as possible) as over-regulation will impede the natural forces critical for the well-being of a "good capital market". Tightening listing requirements is good as it was a too easy to list before - but we should be careful from here on as we don't want to make it so hard to list. Bearing in mind these are "growth stocks", the risks associated with them would be much higher and investors have to understand and live with it.

What the authorities should do, is to tighten where/when the owners/promoters get to sell their shares. As these are growth companies, one is listing to secure capital to fund their growth - it is not a cashing out exercise. That being the case, the owners/promoters must show as much committment to the company as the investors are willing to bear the high risk of buying their company shares. Even the current rules are too loose for owners/promoters. We first need to tighten rules that allow owners/promoters to sell their shares. We need to discourage them from a quick turnaround. I would recommend something like:
a) owners/promoters must collectively hold at least 50% of the company's outstanding shares for 4 years
b) after the first 4 years, the minimum ownership level will be lowered to 40% for another 4 years
c) owner/promoter cannot sell a single share until 12 months after its IPO, even then they can only sell no more than 5% of outstanding shares each year

That would solve part of the problem of dumping. The danger here is that if we enforce lock-ups of a large amount of shares, it will make it easier for syndicates to play havoc with them, without the need for approval/consent from owners/promoters. However, this is not the kind of problem faced by Mesdaq listings, but rather the grave under-performance of new IPOs. Let's face the facts, for every Mesdaq IPO, only a very small amount gets to the hands of the public. The bulk has been placed out to institutions, high net worth individuals or fund managers. The fact that most of them still went below their IPO price soon after tells us that even "astute financial minds" do not consider the growth prospects of most these companies to be up to scratch. If they do, they would be holding on to these shares.

So why do we have a problem with most new IPO listings. For one, it is the over-aggressiveness of merchant bankers to score new deals that the "viability" and "growth prospects" are being glossed over. I am a firm believer in free market forces, i.e. when a merchant banker brings an issue to the market, the risks transfers to the buyer of the shares. It is up to the buyer to assess the inherent risks and attractiveness of the counter. Too much hand-holding by the merchant banker,... well, you might as well ask the merchant bank to buy the shares themselves and sell it to you when the price goes up! However, we must have a stronger link and effect on merchant banks to their IPOs, so that investors know their reputation is on the line. We need the media to focus more on performances of the Mesdaq firms and the merchant banks that took them public. If there is more accountability, eventually the merchant bankers will tighten up on themselves on the listability of a firm, whether they can get long term institutional shareholders to hold the shares instead of "trading outfits", and whether they can sell the growth prospects/concepts for the stock - plus they will make more of an effort to educate and inform the public on the prospects and make-up of each company. Below are the bankers involved in the under-performers and out-performers cited in the article in The Edge Daily. You draw your own conclusions, but its pretty clear to me. Just go ahead and list the Mesdaq IPOs and their sponsors for the past 2 years and see how they have been performing.

Under-performers

YGL Convergence - K&N Kenanga
ES Ceramics - AmMerchant Bank
Connect County -AmMerchant Bank
MLabs Systems - Alliance Merchant Bank
EcoFuture - Affin Merchant Bank
Vitrox - Hwang DBS

Out-Performers

mTouche - Public Merchant Bank
KZen Solutions - Public Merchant Bank
Green Packet - OSK Merchant Bank
TMC Life Sciences - AmMerchant Bank