good stock bad stock- Finance and Investment through a skeptic's eyes..

Stop Blogging.

2011-07-13T23:39:00.000+08:00

Hi folks,

I would like to inform you all that I have decided to stop my blogging activity. It is better to inform you all of my decision rather than wasting your time to return day after day to find that this blog is without any update.

I would like to thank bloggers who have featured my write ups especially Dali and Moolah as each featured post do bring in new visitors and some of this new visitors did end up staying on and become returning readers of this blog.

I would also like to thank readers who keep returning to read what ever stuff that I am writing especially those that leave a comment. It has been great fun receiving all your comments and e-mails. I apologize if I miss some of your e-mails. For those that answer all sort of stupid questions that I asked in our e-mail exchanges, I thank you all for your patience. I hope to maintain contact with you all via e-mail.

I will keep my e-mail. You can contact me via goodstockbadstock@gmail.com.

It has been great fun writing this blog. I hope you all learn as much from what I write as what I learn from you all.

Bye.

P.S.: For Malaysian readers, do not forget to register to vote. With post offices in quite a number of shopping malls, there is no excuse not to register to vote. I do not care who you voted for, be it BN, PR or an independent candidate. Take ownership of your country and vote based on policies rather than personalities.

No to Half-Yearly Reporting

2011-07-09T18:58:00.002+08:00

The SC launched the 5 year Corporate Governance Blue-Print yesterday. The blue print can be downloaded here. At a glance, some of the measures introduced are welcomed like the use of poll voting for significant related party transactions. However, quite a number of them, I feel are cosmetics reform that add no real value. It is mere adaptation of some corporate governance measure practice by the West that may not necessary worked well in an Asian environment.

However, I am very much against one issue discussed in the blue print, that is, to reduce the current quarterly reporting to a half-yearly one. Although the issue did not make it to the recommendation list, the mere mentioned of it is shocking. I welcomed the decision to shortened the submission time frame for quarterly and annual report to ensure more timely disclosure. But, to shortened the submission time frame of annual report but at the same time revert to half-yearly reporting, it is like taking a half step forward and one step backwards. Net net, we are taking half step backwards.

The implementation of half-yearly reporting would further tilt the information advantage to that of the management, the fund managers and the analysts at the expense of retail investors. The CIO of CIMB-Principal Asset Management has this to say about the measure in an interview with Business Times,

"It will also allow fund managers and analysts more time to go and meet the company (management) to do their analysis ... a lot of times, they have to wait because of the blackout period (during which the company can't talk until the results are out)," he remarked.

He suggested that companies hold quarterly briefings to give investors a "snapshot" on how they are doing, rather than issue financial reports.

What he is implying is that, with a less frequent blackout period, he and his team of analysts can meet with the management more frequently. He could obtain information from the management about how the company is doing, information that is not available to the general public,thereby, gaining an information edge over the rest of the investors. He could then trade with this information ahead of the investors. It certainly makes his job much easier but it is at the expense of retail investors who have no such privileged of getting access to management. The suggestion of holding quarterly briefings instead of issuing financial reports is a self-interested suggestion. Retail investors have no access to such briefings, but, the fund managers have access to such information.

The information advantage extend towards the management. In quarterly reporting, the information advantage that management has over the rest is 4 months as each quarterly report will reduce their information edge. In a half-yearly reporting, the information advantage is about 7 months. So, they have much more time to trade with this information at the expense of retail investors. If the management discloses this sort of information to the analysts and fund managers, the information edge will be shared by the fund managers too. That's the reason you see someone like the CIO of CIMB-Principal Asset Management and Tan Sri Krishnan Tan of IJM pushing for half-yearly reporting. Half-yearly reporting is to their advantage. The management and fund managers may know about the company plant is operating at full capacity on February, but, the retail investors would only know about such information in July. Within the February to July time frame, they can do a lot of trading.

I would also like to address some ridiculous reasons given out by these self-interested person to justify half-yearly reporting. The CIO of CIMB-Principal Asset Management says this,

it is a good move to do away with quarterly reporting as firms will have more time "to run their business" rather than "scramble" to put out reports."

Firstly, it is ridiculous to suggest that it take like 10000 man hours to churn out a quarterly report. With the wide spread use of accounting software, one can actually generate a P&L, balance sheets and etc with a click of the mouse. How hard is that? Perhaps, the CIO do not know how to use a mouse. What one need to do probably after churning out the P&L and stuff is to make sure the relevant accounting standards is apply correctly. In addition, they may make some segmental disclosure and etc. Instead of tallying up six months worth of transactions once every six months as with half-yearly reporting, one is tallying up three months worth of transactions once every three months as with quarterly reporting. It is similar perhaps a bit more work, but, it probably cost shareholders very little money. Why don't the CIO of CIMB-Principal Asset Management suggest that management should do away attending road shows? Isn't that a distraction for the CEO of these companies from running the business? Isn't the time of a CEO is more precious than the time of an accounts executive? So, CEOs and CFOs attending road shows disclosing information to SELECTED investors is "running the business", accounts executive preparing quarterly report to disclose information to ALL investors is a "distraction". Oh, I nearly forgot, without roadshows, you do not have the information edge that you have over the retail investors. So, cannot suggest something that will hit your rice bowl....

Then, Tan Sri Krishnan Tan, another self-interested party said this,

Tan Sri Krishnan Tan, executive deputy chairman of IJM Corp Bhd, said it is becoming "absurd" to put out financial reports every quarter as it isn't a fair reflection of how the company may be doing.

"It doesn't have a lot of meaning ... let's just go for half-year and year-end reporting," he said at a panel discussion on the SC's five-year Corporate Governance (CG) Blueprint, which was launched here yesterday.

In addition, BT article also said this,

quarterly reporting tends to promote short-term views

Although I agree with Tan Sri Krishnan that a quarter is not a fair reflection on how the company may be doing in the long run. It is essential for us to know what is the current financial position of the company. It is our rights to know whether the company position is deteriorating. There are generally signs that can be found from the financials for deteriorating or improving conditions. If the financial indeed do not reflect how a company may be doing, the management can provide explanation on why it is so. Is it appropriate to deny the shareholders rights to know what is happening in a company because sometimes but not all the time, the financial information do not reflect how a company is performing? Do we ban drinking because sometimes, but, not all the time it create domestic violence? But, to be fair to Tan Sri Krishnan, I understand where he came from, he came from an industry where profit recognition is lumpy so, sometimes, a quarter do not mean anything to his company. But, not all companies in Bursa are from his industry.

Then, there is this argument that quarterly reporting promote short term views. Is this the fault of quarterly reporting or is this the fault of how we make use of the information provided by quarterly reporting? Shouldn't we change our attitude towards the information provided rather than blaming it on the information? Plus, a lot of our firms is still family-owned firms with the majority shareholders has a lot of skin in it. The problem of short term-ism is much lesser here and do not affect the fundamentals of a company as much as it does in the West. The short term-ism problem is more of a problem of the analysts who covers the business. As long as it do not affect the business, it is not a major concern. The benefits of quarterly disclosure outweighs the problem cause by short term-ism and short sighted-ness of some analysts.

Then, on SC blue print, it said this,

the European Union issued the European Union Transparency Directive in July 2007 which promotes half-yearly reports combined with Interim Management Statements issued between reporting dates.

Wow, they research the issue so thoroughly that they quote the EU implementation. But, let's see what EU really said to see whether what SC said reflects the intention of the EU Transparency Directive. The EU Directive said this,

More timely and more reliable information about the share issuer's performance over the financial year also requires a higher frequency of interim information. A requirement should therefore be introduced to publish an interim management statement during the first six months and a second interim management statement during the second six months of a financial year. Share issuers who already publish quarterly financial reports should not be required to publish interim management statements.

What the EU is doing is that, the reckon the need for timely information. They want to have a higher frequency of interim information. So, instead of financial information being published ONCE a year, they are now promoting half yearly interim management statement. It is a half step FORWARD, which is expected because it is such a big union that drastic step is rarely taken. Countries that are ahead of the EU standards, that publish quarterly reports, should stick to their superior disclosure requirement. The interim management report is a MINIMUM STANDARD of best practices rather than the best practices. But, our SC spin it to make it sounds like, EU want half yearly reporting with interim management statement. SC says that, instead of sticking with our superior disclosure ruling, we should take a half step backwards and join EU with their minimum standard.

All in all, the half yearly reporting is a measure proposed by all sort of self-interested parties so that they could have the information edge, they could trade ahead of retail investors. They could treat retail investors as some idiots that can be taken advantage of. Say no to half yearly reporting!

P.S.: Similar views from Moolah but with REAL LIFE EXAMPLES. Please read it at http://whereiszemoola.blogspot.com/2011/07/why-quarterly-earnings-reporting-must.html

MBSB According to the Internet

2011-07-09T01:01:00.005+08:00

Before you read this post, please read the three other post on MBSB:

MBSB : The Amazing Credit Expansion to Civil Servants- Part 1

MBSB: The Amazing Credit Expansion to Civil Servants- Part 1A

MBSB- How to Run a Financial Institutions Prepared ONLY for Good Times -Part 2

Sometimes, if we just look at the financials, it do not tell you the whole story. We need to look at other things. Thankfully, the internet had made stock research a much more easier tasks. So, this is what the internet has to say about the loan MBSB is making. Some of them is in Malay, so, I hope you all can understand. If you can't, just use google translate.

One forumers said:

aku pun ada apply kowaja. Nasib baik tak lulus. Kalau lulus rugi banyak pulok... La ni nak try MBSB pulak. Dia kata leh kasi 80% potongan selepas tahun ke 5. Tahun 1 -5 60%. Aku pun tak faham fakta apa dia orang kasi. Aku dah le lemah Math.

What kind of loan is this? First 5 years, 60% of the salary is directed to loan repayment. Only 40% left to survive and pay off OTHER LOANS. Then, from the 6th year onwards, salary deduction is reset to 80%. Can anyone actually survive with 20% of their pay for food, for housing, for clothes, for kids education? How high is the probability do you think that this fella will not pay back his loan?

Another forumer who is probably an personal loan agent said this:

Pinjaman Pembiyaan Peribadi dari Malaysia Building Society Berhad (MBSB)..
- Blacklist, Ccris dan Ctos pun boleh mohon dan dijamin lulus..

and

MBSB hanya akan melihat pd commitment di ATAS slip gaji sahaja..comitment2 lain x dipandang..so jgn risau walaupun anda byk loan (yg x tertera atas slip gaji dan ptongan agkasa la)..boleh juga mohon..

So, even if you are blacklisted from CCRIS, you can still take loan from MBSB because MBSB look at pay slip commitment i.e. whether the borrower have borrow from other salary deduction scheme. MBSB do not look at your existing loan at all as long as it do not end up in your pay slip. Do you think this is the kind of lending standards that you are comfortable with? Do you think MBSB should anyhow play with the money of all the EPF contributor in Malaysia?

Then another agent said this:

PEMBIAYAAN PERIBADI MBSB
+ Pinjaman sehingga RM 300 000 selama 25 tahun

+ Kadar keuntungan tetap SERENDAH 3.50%

+ Kelayakan gaji sehingga 80%

+ Bayar selepas 6 tahun

This is epic. One can enjoy loan for the first 5 years without making any payment. Then, you only start paying on the 6th year onwards. This is very tempting. What the heck MBSB is thinking?

What about their property loan, is their property loan a bit better, with higher lending standard? Look at what this forumer said:

what??? u no scared? interest rate going up wor...
but yes i heard mbsb giving 90% even u hav 10 property bcuz they r not under bank Negara.

10 property but still can get 90% financing..

I did not cherry-pick the comments so that only the worst comments come out. This is just a sample of what one would find online about the loans that MBSB is making. The agents also claimed about monthly sales of more than RM1mil and are offering their service to help people circumvent the rules so that they can borrow beyond their salary limit. Is this the sort of standard you expect from an institution in which most Malaysians have a stake in via EPF?

P.S.: This is not the Part 3 that I said I am going to write. I just thought that this post shows us what is happening on the ground.

MBSB- How to Run a Financial Institutions Prepared ONLY for Good Times -Part 2

2011-07-08T13:17:00.002+08:00

This is a continuation of my previous post on MBSB that can be found here and here. Since I am going to go a bit into the detail of MBSB, a disclaimer is warranted here. I have never own any bank stocks in my life. I found banks very hard to analyze and generally stay away from them. This is my first half-arsed attempt to take a look into a "bank" (ok, MBSB technically is not a bank, but, it takes deposit and makes loan, so, it is similar to a bank). So, read critically but do judge it based on what I wrote rather than what is my experience with banks.

I read in some forums that said that bloggers who wrote bad stuff about companies have a hidden evil agenda. I am not sure what "hidden evil agenda" that dickhead is talking about as Malaysia allowed no short selling. The market do not function like an ostrich, just because you bury your head in the sand, it does not mean people can't see you. Just because some bloggers do not write about a problem, the problem won't disappear. In general, it is easier to write about the good things rather than the bad things. Just reproduce what the management tell you, then, you can have material to write. Bad things involve digging, involve finding out stuff that people do not tell you. So, this post is about the bad stuff in MBSB because you can easily find the good stuff in analysts report. It add no value if I repeat the good stuff.

There is certainly good things going on at MBSB. The recent rights issue is a positive exercise. It would be better if they don't use the proceeds to extend fixed-rate personal loans. The potential divestment by EPF is a good news as the free float currently is around RM360mil. It is too small and there are not much institution holding that stock. Divestment may allow interest in the stock to pick up. If the world are headed for good times, they should do okay.

Has the growth rate fizzle?

This is one key question. Since the entire MBSB story is about their growth in personal loan extended to civil servant via salary deduction scheme, the answer to this question involve whether the market has already saturated. According to AMResearch analyst, the market still have a lot of legs to go. But, to achieve her market size, it involve ALL the civil servant holding personal loan worth RM106k each. Do you have 5% of your friends that have more than RM100k of PERSONAL loan? Probably not. Now, the analyst is saying that's the potential size of the market involve ALL civil servant having RM106k of personal loan. Is the number logical? Imagine, you go to office, every single person around you have a personal loan debt of RM106k, does it sound logical to you? So, the AMResearch market size is probably overstated.

Najib states that their decision not to give out 1-month bonus to civil servants have saved the government RM3.1b. So, with a loan book of RM3.9b, MBSB basically has given out personal loan to every civil servant worth 1-month of salary plus some in the short span of three years. The scary part is, MBSB is the smallest player in the block. Including the loans extended by the big players, EVERY single civil servants in Malaysia owe 10-plus month worth of their pay in personal loan. Do you have more than 5% of your colleague owing that much money in personal loan? Now, imagine every single of your colleague owe that much money. That's the scale of the market. With civil servants owing so much money, we should see signs of stress in their finances, right? Yes, we do have signs, bankruptcy among civil servants increase by 176% last year (To be fair, it increase from a very low base). CUEPACS president has this to say on the issue, "Most of them were due to default in car loans, maybe it is because their salary is low but already have other commitments and loans. So, when they buy cars, they face problems in paying". Is the other commitment and loans refer to the sort of loans that MBSB is extending?

If one were to google in Malay the term "Penjawat Awam Muflis", you would find more stories. Now, BNM also said that they are going to monitor the personal loans given out by entities like MBSB. So, with this sort of leverage appear within the civil servants and signs of stress in their finances, do you think the sort of growth in personal loan has chance to be extended or do you think we are probably in the final furlong in terms of growth? Analysts says that the loan growth rate is churning along nicely. That is the CURRENT rate, I think loan growth will slow drastically next year.

Will the Loan Goes Bad?

Then, there is the question of will the loan extended to these civil servants goes bad? It is probably very hard for it to go bad as they have first cut over the civil servant salary. But, BNM says the danger is that it will cause other loans extended by other institution to go bad. Now, this is a question of fairness, should the banks like CIMB, Maybank and Public Bank who are prudent with their lending be punished for some idiotic lending binge done by other institutions? By reducing the amount of disposable income, these sort of personal loan basically reduces the debt servicing capacity of other people. If the bankruptcy issue get worse, I think discussion is needed to ensure that the burden of the bankruptcy is shared among the institutions rather than having institutions like MBSB getting a cut of the civil servant salary even in the event of bankruptcy.

I am curious about the question on whether the loan can go bad? I am wondering whether the civil servant can direct ANGKASA to stop making salary deduction to MBSB? If that's the case, then, the loan can go bad and MBSB might be in deep shit in the future. If one look at the aging, under the personal financing section, there are some loans that are being impaired. Here's the section:

If those loan were to come from salary deduction scheme, which is quite likely as all the loans they make come from that scheme. Based on the amount impaired, unless their legacy loans have some shocking amount of bad loans to the tune of 30%, it is quite likely that some of the impaired loans is from the current scheme, which also means that, the loan has chance to go bad. All this, however, is based on the conclusion I made based on the data available. It could very well be that those impaired loan indeed is the legacy loans. Since the credit risks aging reporting is actually a new reporting standards, there are no comparable figure in the previous AR.

Another note I would like to make is that, if one were to look at the impairment, at first glance, it seems that the size of the impairment is manageable at RM45.7m relative to the size of the loan book of RM3.9b. But, one key caveat in analyzing super-charged growth in loan book is to be aware of the problem of "growth can mask problems". Loans do not grow bad that early. Normally, people will try to make loans repayment until they seriously could not afford it. So, there is always a time lag between the time when the loan is made and the time the loan goes bad. As the personal loan book of MBSB has expanded 11.7x, yup, it is 1170% within 3 years, the stunning growth in the denominator can masks the problem of bad loans because the denominator is growing faster than the loan could get bad. If we assume that it take 2 years for the loan to go bad, it means that, the loan extended in 2008 is growing bad at a rate of 13.3%. Not exactly a very healty rate. If the current loan book goes bad at 13.3%, it means that the entire pre-rights issue equity of MBSB will be wiped off, MBSB will be in a technical bankruptcy. Luckily, they did a rights issue worth RM500mil, so they won't be in a technical bankruptcy if loans goes bad at 13.3%. Obviously, the 2 year period is a number that I plucked from thin air, I do not know the actual figure or have any experience to know what is the usual number. If the duration is shorter, then, the loan book is on a better shape. If the duration is longer, the loan book is on a worse shape and MBSB will need a bail out from the government.

I actually have some more stuff to say about MBSB. This post is a bit too long and it may take some time for you to digest the information. So, I will stop here. Will do a part 3 on MBSB later touching on their weak risk management skill.

MBSB: The Amazing Credit Expansion to Civil Servants- Part 1A

2011-07-07T18:34:00.000+08:00

This post is to correct some numbers that I presented in the previous post on MBSB. Yes, one deleted post and another post to correct another mistake in a week did no good to the credibility of this blog. But, if I did not correct this mistake and misinformation, it will make this blog similar to the newspaper that I always make fun of, a newspaper that "copy" their tagline from the Korea Tourism Organization.

Fellow blogger hishamh of econsmalaysia lead me to a report known as "The Financial Stability and Payment Systems Report" published by BNM. I did not know that this report actually existed. Shows how little I know. Hat tip to hishamh for the report :-) In it, it shows the breakdown of Bank Rakyat and BSN consumer credits figure. Sigh..it would have save me the hassle of downloading all the banks annual report if I knew this report existed.The Bank Rakyat figure is further broken down to member and non-member. I subsequently found out that, cooperatives only can lend from the member portion. So, I mistakenly added RM17b to the Bank Rakyat figure. So, here's the figure without the RM17b.

Gross Loan Ammended

Average Loan Corrected

So, the average loan per civil servant stands at RM25.7k. This is based on the assumption that all personal loans are extended to civil servants, which is not that far from reality because most of their products is targeted at them due to their relatively lower risks.

For a system basis, the report also provide the figure of total consumer credit provided by the Development Financial Institutions (DFIs) i.e. your Bank Rakyat and BSN and etc. It includes loans that are extended to non-civil servants but do not include loans extended by MBSB as it is not a DFI. Here's the table:

DFI Consumption Credit

The amount nearly triple from RM14.7b to RM42.8b. The report have another chart on the contributors of household debts.

As you can see from the chart, personal loans have been the second largest contributor to the growth of household debts. This is disproportion to the size of the personal loan component relative to the size of total household debt. I would like to add another chart that shows how the personal loan component is getting larger over time, but, need to respect BNM copyright. Cannot steal too many charts from them. If you are interested, please download the report here.

Luckily BNM is aware of the problem and are taking pre-emptive measures to tackle the risks. Here's what they say:

While a large fraction of household borrowings is collateralised (45.3% was for the purchase of residential properties), personal ﬁnancing has increased signiﬁcantly in recent periods. In 2010, outstanding personal ﬁnancing grew by 17.5% to account for 14.6% of household debt (2006: 9.6%). Development ﬁnancial institutions (DFIs), cooperatives and building societies accounted for the bulk of this growth, with almost 80% granted under salary deduction chemes. Given the salary deduction feature, credit assessments by these institutions are mostly limited to a reliance on incomplete computations of debt-servicing ratios, which are applied for the purpose of qualifying for the salary deduction facility. The absence of robust credit and affordability assessments will result in households being more at risk of becoming over-indebted, while the risk of defaulting on ﬁnancing obligations, including those obtained from other banking institutions, will be higher for borrowers who have over-borrowed.

They also said that:

The enforcement of responsible lending practices will act to counter overly aggressive behaviours by ﬁnancial institutions. Nonetheless, the growing inﬂuence and signiﬁcance of non-bank lenders will need to be managed to avoid excessive build-up of leverage among certain borrower segments.

and;

The Bank will also closely monitor the growing presence of, and coordinate with relevant agencies responsible for non-bank financiers, to ensure that their activities do not substantially increase household leverage;

This means that the crazy growth rate of MBSB Personal loans (at times >100% p.a.) will be over. MBSB need to find other growth avenue rather than preying on civil servants to take up enormous amount of debt beyond their capacity.

P.S.: Someone from some forum posted the link to this blog post. He/she also said that he sold his position in MBSB due to the strong run up. Please read my blog post properly, I did not say anything bad about MBSB as of now. I have not even talked about MBSB in detail yet. I did not say that their loans will go bad. In fact, I said that their loans is very hard to go bad. When MBSB get the salary before the borrower did, how can the loan go bad? I am more concern about the over indebtedness of our civil servants. When you are deep in debt, you tend to do some silly things for money, things that may make you compromise your ethical standards.

MBSB : The Amazing Credit Expansion to Civil Servants- Part 1

2011-07-06T19:52:00.002+08:00

I made a major and embarrassing mistake on my previous post on EPF. I have deleted that particular post. If I correct that mistake, the EPF loan portfolio will be worst. EPF basically practices a policy that consolidate subsidiaries but not associate. I found out that they do not consolidate RHB Capital, so, I assume EPF practices no consolidation at all. But, they actually consolidate their subsidiaries, so they consolidate Malaysia Building Society Bhd (MBSB). All the personal loan is from MBSB consolidated books.

This lead me to today post. This is not a post that talked about EPF loan portfolio, that will be a post for another day. This will be a post on the "Personal loan" by MBSB and all the other organizations involve in a loan scheme to civil servants known as "Direct Deduction Lending Scheme". The scale of this loan scheme is crazily huge. It is so huge that, I think I may have made a mistake. I checked for a couple of times and found out that I indeed did not miss any zeros. The numbers is really that big.

How big? It is so big that it is twice the size of the "personal loan" extended by our banking system - that is your regular banks like CIMB, Public Bank, Maybank and etc. It is so huge that it will increase our household debt by 10% and all these 10% increase of our outstanding household loan (which include your housing loan) focuses on labour force from one sector- the civil service. By adding the size of these personal loans to the existing personal loan in our banking system, it will make the size of our personal loan market 63% the size of our hire-purchase passenger cars market. You may ask, "How can such a big loan to not be included in BNM data? You must have made a mistake.". Yeah, that's the question I asked myself too when I compare the size of lending under this scheme to the total size of our personal loan market as stated by BNM Monthly Statistical Bulletin. The size of this lending scheme is twice the amount stated by BNM statistics. So, I must have added my amount wrongly right? I checked and I did not add it wrongly. I subsequently found out that, despite the lending is done by institutions with the word "Bank" on their name, they are apparently not on the list of banking institutions defined by BNM.

What is Direct Deduction Lending?

Direct deduction lending is basically a personal loan scheme offered to civil servants that reduces collection problem by ensuring that the lender received their monthly installments before the civil servant get their salary. It is similar to the scheme operated by RCE Capital with some minor differences. Now, anyone with certain amount of skepticism would know that RCE Capital business model would face some problem before they actually face the problem they are facing now. You can't run a business model that is based upon screwing your customer (16% effective interest rate lending, if that's not screwing your customer, what is?) and expect the business model to sustain and last. Sooner or later, your business model will face some trouble. You can only run a business model that based upon screwing your customer if it involve a certain kind of addiction like gambling (a form of private tax levy on stupid people) and tobacco. Even if it involve addiction, you may still face problem like the class-action suit that hit tobacco firms in US. RCE Capital do not have the "addiction" factor in its business model, so, it faces problem. So, the loan offered under direct deduction lending, is generally less expensive than the one offered by RCE Capital.

AMReseach did a good job detailing the Direct Deduction Lending scheme with their initiating coverage report on the smallest player on that space- MBSB. I learnt most of the mechanics on the scheme from that report. If you are interested, please look up a report titled "MBSB-In a Sweet Spot" on 30th March 2011. Here's a good graphic in the report:

If you remember your Form 3 Kemahiran Hidup, ANGKASA is basically the umbrella organization for all the co-operatives in Malaysia. A lot of these co-operatives members are civil servants. Personal Loan, intially is a high risks loan as it did not have any collateral. So, if the borrowers do not repay your loan, the banks could not sell any of the borrower assets to recoup the loan without going through a legal exercise. But, ANGKASA acts as the collection agent for the lending institution ( Bank Rakyat, Bank Simpanan Nasional, Agro Bank and MBSB). Mininistry of Finance will sent a portion of the civil servant salary which amounts to the monthly installment to ANGKASA for it to forward to the lending institution. So, by getting their hands on the borrower salary before it gets to the borrower, the collection risks is reduced significantly. It makes an inherently risky loan much less risky. The only significant risks they are having are the risks of the borrower losing a job or the employers could not pay the borrower salary, which is substantially lower in civil service.

The Size of the Lending

It is hard to estimate the size of this lending scheme as most of the institution does not break it out. So, I just add up the portion known as “Consumption Credit” that is provided in their annual report. There is also a “Personal loans” section provided in the annual report but the numbers tend to be higher, so, I take the lower number. Most of the personal financing option in these organizations is targeted at the civil servant with the minority targeted at staff of GLCs as well as medical doctors. You can look at the financing options here: Bank Rakyat, BSN, Agro Bank and MBSB. The estimate does not include one of the lending institution- Agro Bank as I do not understand their annual report. Here are the estimates:

Gross Loan via DDL

As at 31 Dec 2010, the outstanding DDL loan portfolio hit a size of RM50.9b, more than triple from the RM16.7b level recorded in 2006 at a compounded growth rate of 32% per annum. As a comparative figure, the banking system which consists of your regular Maybank, CIMB, Public Bank and foreign ones like Citibank as well as the Islamic banks only lent out RM22.6b of personal loans. So, these three obscure institutions lend out 2.2x more than our entire banking system. However, we must take note that these three institutions, historically has a much larger personal loan book than the banking system as a whole. In fact, the personal loan book of the banking institution manages to quadruple within the same time frame, albeit starting at a much lower base. Most of the increase came from the Islamic banking sector who manages to astonishingly increase their personal loan book by almost 6x within 4 short years. If one looked at the islamic banks personal financing products, they offer similar products targeting civil servants. The concertrated nature of these loan is indeed disturbing. Here's the Average DDL Loan Per Civil Servant:

Average Loan per Civil Servant

Please take note that the chart is not from any official source. I just combine those data. As the chart shows, civil servant owe an average of RM40k via DDL financing scheme. However, this number may be overstated as we do not know how much of the outstanding loans are DDL scheme. Bank Rakyat first talked about these sort of loans in 2006. So, I stripped off all the outstanding loan in 2006 to tone down the number (not exactly a smart way of doing things, but, I can't think of a better one. Any suggestions?). Here's the number stripping off 2006 loans:

Average Loan Ex 2006

By stripping off 2006 loans, we get a loan of RM27k per civil servant. Still a very significant amount. The real number may be between these two number. Remember these are personal loans, loans that are used to buy the latest LG Flicker Free Cinema TV, renovate the house, get a nice wedding, go to a nice holiday in Europe and etc. All these are spent on useless stuff.

The stimulus effect of all these loan hitting the market in 2010 is akin to Najib announcing a 4 months bonus to the civil servants. Market economists talked about the stimulus effect of one month bonus, the effect of these loan is 4 months! From 2007-2010, the stimulus effect is equivalent to Najib announcing a 11 months bonus to the civil servant. So, 10% of our workforce basically front-loaded almost one year of discretionary spending within the 4 year period. The only different between a real bonus announced by Najib and these DDL loans is that, this one, the people have to pay back.

The AmReseach analyst who publishes the rather complete report estimated that the potential size of these civil servant personal loan market to be around RM127.5b. I hope for the sake of these civil servants, the huge market size would never be reach. Her estimates is probably a bit too optimistic and aggressive as loan of that size would be around 20% of our GDP. She is estimating that each civil servant would take up a personal loan worth RM106k each. This is on top of housing loan and hire purchase loan for cars. I think the market is probably reaching saturation point at the current moment as the total numbers of personal loans extended to the civil servants is probably larger than the number indicated here. The numbers here do not include : i) the agro bank figure ii) Other institutions lending under an indirect scheme like RCE Capital and iii) Loans from Islamic banks that target at the same segment.

A typical DDL lending scheme may allowed up to 60% salary deduction, that is, you can borrow up to 60% of your cash flow. This is a crazy number for a personal loan. The average number for a HOUSING loan is around 30% in Malaysia. That's mean the maximum limit that one can borrow for a personal loan under the DDL scheme is twice that of a housing loan. The DDL housing scheme also allow people to borrow up to have 20 years of repayment. Judging by the maturity profile of the loans, it seems that a lot of the people took up the option of repayment period in excess of 5 years. How long is the actual repayment? We would never know unless the institutions disclose their loan book. These sort of scheme also target pensioners. Yes, pensioners!

Despite all these scary figure, as long as our government remain solvent, all these loan would not go bad. My key concern is that, by front-loading their purchase, quite a significant number of our household will have their purchasing power reduced resulting in slower consumer consumption growth in the future. It is also likely that some of these civil servants will have very little savings due to reckless spending. When they get old, they will struggle to survive on their pension. They will demand for increase in pension due to their reckless spending. In the end, who pick up the tab? The tax payers.

One key question that I would like to asked is, normally, a good employer would not allow his/her employee to got into deep debt troubles. So, my question is, which dickhead in JPA allow this sort of lending to be targeted at his/her subordinates? They allowed predatory lending by RCE Capital (16% effective interest). They allowed institutions like BSN and Bank Rakyat to offers endless amount of loan to the civil servant. This thing must end before it get worse.

On the next part, I will profile MBSB. The management of MBSB is probably doing good stuff. But, their risk management skill is a bit weak. When you are running a highly levered financial institutions, you always manage your banks based on fat tail risks. The management at MBSB cut off the fat tail, focuses on steady-state as if the world would not face another crisis. Till the next series.

P.S.: Despite writing such a long piece, I may indeed be wrong due to the sheer size of the lending. Correct me if I am wrong. I do wish I am wrong due to the crazy credits binge. What I did is just adding across all the financing as disclosed by their annual report. It could also be that, the amount taken by these civil servant is used to purchase house and cars, a more proper usage of loans. But, I thought there are housing loans provided by the government. Would like to hear from civil servants with experience with these sort of lending.

I Smell Something Fishy with EPF Personal Loans

2011-07-05T11:20:00.002+08:00

This post is deleted. I made a major mistake due to some oversight. This is embarrassing. Clarifications will come out soon. But, facts remains. EPF loan book looked worst with this mistake. At the meantime, go to my intial post: The Good and The Bad of EPF Accounts.

Very sorry for those who have "Like" this post. Mistake made, but, things remain the same, their loan book is worst than initially thought.

The Good and The Bad of EPF Accounts

2011-07-04T22:18:00.011+08:00

The idea for this post came from P.Gunasegaram latest article which mentioned that RHB Capital apparently has been given a lot of businesses from EPF since it taken over by them. So, I downloaded their annual report (credits to EPF for coming up with an English version). To be honest, I am quite impress with the level of disclosure. There are some useless and meaningless information, but, I blame the auditors rather than EPF.To cut the story short, I can't find how much fees they paid to RHB Capital as they define "related party transaction" in a very narrow sense.

I always think that we have probably more people (e.g. analysts) looking into the accounts of pariah companies like KNM and Perisai compared to some very important non-listed institution like Petronas (the unlisted parent), EPF and Khazanah. So, since I have downloaded the account, I might as well take a look into the EPF financials. I spent roughly 30 minutes looking into their accounts, so, it is not in any way an extensive detailed look into their financials. But, I do manage to find some red flags. Regulars readers would know that I am a rather critical person (sometimes I feel that I am not critical enough:-)), so, do expect more emphasis on the bad stuff compare to the good stuff. The juicy stuff come at the end of this post. So, you either jump to the end or read it till the end.

Before I proceed, please take note that the size of EPF balance sheet is RM459b. This will give you a sense of the relative size of the numbers I am writing.

Good Stuff

Disclosure is quite detailed and transparent. The English version make it easier to understand the accounts. Seriously, some Malay accounting jargon is incomprehensible like Nilai Saksama Terlunas..wth is that..lol...
At a glance, no aggressive strategies, do not have a big derivatives book.
External fund manager fees is very reasonable at RM92m. As a probably unfair comparison, the Norweigian Government Pension Fund (around 5x the size of EPF) paid more to ONE Malaysian fund manager than EPF paid to all its external fund managers. In fact, I think the fund managers are underpaid.
Equities performance is actually pretty decent. Bad investment normally include companies that are their subsidiaries, i.e. more than 50% ownership. It said something about EPF should focus on managing funds rather than managing companies.
Not sure where to put this, it is good if you are EPF employees. EPF, I think, has one of the highest average wage in Malaysia at RM8965/mth. Please take note that this is the AVERAGE wage. EPF exec to non-exec ratio is 9:41 (18% are executives). So, the executives must be making some very good money. Please take note that this include bonuses. So, that may tone down the pay by a bit as wage bill increase by 22% from 2009 with roughly stagnant staff numbers.I am not sure why the increase in wage bill though as the majority of the out performance seems to be generated from the external fund managers. So, not sure whether should reward them that much for choosing the RIGHT fund managers. In total, EPF paid out RM572m in wages on a staff size of 5319. If they are performing, I do not mind paying for performance.

Bad Stuff

A significant portion of their foreign portfolio is actually internally managed. In fact, the majority of their foreign portfolio is internally managed. I am not sure whether they have the expertise in managing foreign portfolio. It is one thing investing in Bursa, totally different thing to invest in other countries.
Their investment holdings are shown as fair value, without showing the cost base. This will prevent us from judging the performance of each categories. Due to accounting classification, some increase and decrease in value may not gone through P&L, so, it is possible that the good profits has already been milked, leaving only the bad stuff. It is however, better than some PNB books which shows investment in cost basis only. I am being told that the reason PNB is showing their investment in cost basis is due to some SC regulations on fixed price fund. So, no complains there.

Very Bad Stuff- Questionable Loans, Advances and Financing

This item deserve a special section due to its massive size as well as poor performance. The annual report discloses an item known as loans, advances and financing which is really a mixture of bad stuff that is on a gross basis amount to RM97.5b and RM 93.7b on a net basis (roughly 21% and 20% of the size of EPF balance sheet respectively). Here's a detailed breakdown of the bad stuff (Click on the table to have a better view) :

Regular readers would know that I am very critical of the use of quasi-government entity to further government causes. This is why I am so against the PLUS takeover by EPF. PLUS, in its original toll deal, is a fantastic assets. But, PLUS, in a new, less profitable toll deal, may not be the fantastic assets that it used to be. So, after the takeover, the value of PLUS will decrease. EPF member will suffer from the diminution of their asset value without even knowing it. Instead of charging based on those who use the toll, part of the wealth of EPF members, which mainly consist of employees, will be transferred to the employers through the reduction of transportation cost to the latter without any signs of price reduction. Another example of the poor subsidizing the rich. But, on a more important note, I am against the deal because, once the moral threshold is cross once, it is easier to cross it for the second time. It is like it is easier to lie for the second time compare to your first time. It may set the precedent for any government, be it PR or BN, to have seemingly unlimited spending power to buy up IPPs and Water Companies to change their screw up agreements.

If you take a look at the table, it has RM82.8b in guaranteed loans. What loan they are guaranteeing that is at such a massive size? Is it other quasi-government entities with lesser credit strength? Do we charge a decent rate for that guarantee? Then, take a look at some other items. What the heck they are doing in providing housing loans for housing programs? It smell government initiative to me. Then, on the islamic loan breakdown, there is one item known as "personal loan" worth RM3.9b, up from RM1.3b in 2009 and RM341m in 2008. Is EPF in the business of providing personal loan? Who is on the receiving end of this personal loan? Is EPF some sort of ATM machine for some person? EPF members may be interested in borrowing these personal loan from EPF as part of the interest may go back to themselves. It is like you feel good losing in a Genting casino if you are a Genting shareholder. EPF should stick to managing funds rather than be in the business of advancing government interest.

All this loan would be still okay if the loan is good. Due to financial disclosure standards, they have to disclose the credit quality of all the loans they have given out at about the end of the annual report. So, those who are not familiar may not catch this as we need a side-by-side comparison. Here's the credit quality disclosure ( Click on the picture to have a better view. Focus on the highlighted part)

At first glance, it seems that all this loan are good loans as it is under the "Strong" category which stands for non-sovereign bonds listed AA and above. On an unrelated note, the categorization based on sovereign and non-sovereign bond is misleading. A sovereign bond may be a bad bond if it is issued by Greece, a non-sovereign is a good bond if it is issued by Microsoft. We may not know if EPF is holding some Greece exposure and put it under sovereign section to signal high quality. Back to the topic, if we look strictly at this disclosure, we may thought that the loan extended is good loans. But, if we look properly, around RM82b of bonds is classified as strong. The size of loans extended with EPF guarantee is also around RM82b. In other words, these loan are rated highly by the rating agencies because they receive an EPF guarantee. If EPF do not guarantee such loan, these may be shit loan. So, the credit rating do not reflect the quality of the loan portfolio that EPF is holding. This credit quality disclosure is misleading. (See corrections below)

If we analyse this loan portfolio on a different method. A very scary picture will emerge. EPF discloses the aging of this loan portfolio. The aging is shown below (Click on the picture to have a better view. Focus on the highlighted part) :

The aging analysis is on a net basis. So, it do not include the already impaired loan. If we take a look at the gross loan to impaired loan ratio based on the numbers in Table 2, RM 5 bil of the loan is impaired or a ratio of 5.1%. This is a shockingly high figure. As a relative comparison, the latest non-performing loan ratio in our banking system is 2.3% based on EPF financial year end.(Note: I am taking the leap of faith that NPL= Impaired Loans, there may be some technical differences between the both as NPL, I believed, do not take into account of recovery but impairment includes recovery of asset value. In any case, by taking NPL=Impaired Loans, I am being conservative. Not sure though, I am not well-verse in banks.). So, on average, the loan portfolio of EPF is around 2.2x as likely to default as a regular loan in our banking system.

This is not all, if we look at Table 3, the aging analysis. There are roughly RM9.5b of loans that is past due for more than 6 months. I do not know how long these loan are past due as comparative figure is unavailable for 2009 in the 2010 Annual report and the 2009 annual report do not disclose the item. Assuming that all this RM9.5b will not be recovered and is impaired, it will bring the impairment rate to 14.8%, a very high number. In another words, the loan portfolio of EPF is 6.4x more likely to default than a regular loan in our banking system if we define the RM9.5b loans that are past due for more than six months as impaired (Note: If I am not mistaken, BNM definition of NPL is more stringent by classifying non-payment of interest and principal of more than 3 months as NPL. So, I am being conservative again).

With 5.1% of impaired loan and 14.8% if we include past due loan of more than 6 month, this do not seems to be the high investment grade AA to AAA rated loan portfolio that EPF claimed to be in its disclosure. In fact, if we based it on the 2008 S&P Corporate Default Rate (note: 2008 is a very bad year, so default rate is higher than usual. Thus, it is more conservative.), at 5.1%, the loan portfolio should be rated B to B-. At 14.8%, it should be rated between B- to C. Anything less than BBB is junk bond. So, even at 5.1%, the loan portfolio of EPF should be rated at non-investment grade, junk bond. I am not sure whether the investment charter of EPF allow them to hold junk bonds, but, surely this loan portfolio really consist of a lot of shit loan. (Note: I am again taking the leap of faith of default loan=impaired loan and past due loan in this paragraph.)

If this whole bloody loan portfolio goes bad (to be honest, this is highly unlikely), 20% of the EPF members contribution would be gone. But, if we limit the case to the RM5b impaired and the RM9.5b past due for more than 6 months, 63% of this year net profit would be gone (note: Figure is exaggerated as RM5b had already been recognize as losses but this is necessary for comparison.). EPF have a very good year in 2010 achieving record profits. So, the numbers may totally wipe off the entire year of net profit in a normal or bad year.

No matter how you spin it, this loan portfolio is one POS.

P.S.: Do inform me if I get anything wrong as I am not really familiar with banks and this is to some extend, a bit like banks.

Corrections:

1.The previous version of this blog post contain an error which state the wrong NPL ratio. Hat tip to Shihong for leading me to the mistake.

2. I think I make a mistake by asserting that the Guaranteed loans is guaranteed by EPF. If it is guaranteed by EPF, EPF should record a liability. Since no liability is recorded, the loans are not guaranteed by EPF. But, I wonder what entity in Malaysia have the ability to Guarantee RM82b of loans.Is it our government? But, the default rate indicates it is not government. So, who is guaranteeing such accounts. Regardless of that, I stick with my comments on the quality of the loan portfolio of EPF based on their high default rates.

3. Upon further investigation, the personal loan and housing loan are provided to their staff as a perk on top of their relatively high salary. But, the average loan size per staff is indeed huge at an average of RM1.5mil per staff. I am not sure many Malaysian (apart from those of upper middle class) can have such a big outstanding housing loan. If this is loan to the staff, it means that credit quality would be good as repayment can be deducted from salary. It also means that, the default rate of the remaining pool is much higher, the quality is worse.

When Independent Director-cum-Auditor Talks Cock...

2011-07-03T14:42:00.004+08:00

Regular readers of this blog (yes, there are actually people that read this blog although not many) would know that I am accounting-trained. Regular readers of this blog would also know that I have very little respect for auditors and accountants. Auditors, as a profession, seems to get away with most flak. When a company collapses, it is always the management fault. It is also the fault of the investment bankers, the analysts, the fund managers and the regular retail investors. But, as usual, no criticism was leveled on the auditors, the one that supposed to ensure the company viability as a going-concern. Auditors, as a profession, is filled with people of questionable intelligence, but try to make themselves look smart with all sort of jargons. Auditors, as a profession, also teaches future auditors that they are not responsible for any sort of crap that happened. Auditors, as a profession, thinks that shareholder lawsuits against them is bad for the industry, that they are god-like and should never be sued. Auditors, over the years, have perfected the art of responsibility avoidance.

So, when one Independent Non-Executive Directors (INED) and Chartered Accountant of Golden Plus Bhd ("Gplus" hereafter) writes to the Star to defend himself and his peers, it is filled with the "responsibility avoidance" tone that plague the industry. Read his full letter here : Harsh fines for non-executive indepenent directors. According to the annual reports of Gplus, the author apparently is a corporate governance expert. But, the things he says make non-corporate governance expert like me shudder. The author is also a fraud expert. The author also did some stint with KPMG UK, Singapore and Malaysia.

So, here is what he says:

To subject these directors to such hefty fines and penalties seem rather harsh, more so when they are not in any position to control events, which are mainly the domain of the executives. The members of the audit committee and in particular, the audit committee chairman, are there by reason of a Bursa Malaysia listing requirement. At least one of them must be a member of the Malaysian Institute of Accountants (MIA).

Oh, you mean you are there just to help some strangers fulfilled its Bursa Malaysia listing requirements? You really very good people lo... Or...Did you do it for the business contacts, for the business favors in return for future businesses?

They are only able to play a role of advising at directors’ meetings and/or not approving questionable acts and transactions, but are never in a position to dictate when an act is to be accomplished by the company, for example, the issuance of quarterly financial statements, annual audited financial statements and the like.

Hmm..did you know that you can actually resign? Plus, for all the director's experience and expertise in corporate governance, he seems to not understand our companies act and basic company law. Basically, executives are answerable to the board of directors and the board of directors, in turn, are answerable to the shareholders. So, our corporate governance "expert", is ranked higher than the management. During the time the offences is committed by Gplus, there are more INEDs than executive directors in the board. If the INEDs actually do their job properly, they can threatened to sack the management for failure to publish the account. For all his auditing experience and expertise, he seems to "forget" to do so. In addition, aren't making sure that quarterly financial statement publish on time is part of your role, as in, as a director, you should be receiving regular updates from the company. When there seems to be no updates, don't you think that you should be concern and asked the company for their apparent lack of update? You mean your job is just to attend meetings and talk cock during the meeting as well as share tips of which golf course is good?

To penalise the non-executives seem rather unfair especially if one looks at GPlus’s non-executive directors – a former senior judge, a former senior civil servant, a former Chief Police Officer and two practising accountants. In view of the enforcement actions taken by Bursa Malaysia on the GPlus directors, both accountants have had their audit licences restricted.
There appears to be no direct correlation between the ability of the relevant individuals to perform audit work for their clients and being a representative on a board, but nevertheless this is the actual sad state of affairs.

Oh, his licence get restricted, that's why he is so piss off. But, I want to ask a question. If you do not have the ability to do the job properly, why do you take it up in the first place. If directors can't be penalize, how can we ensure that they will do their job properly. Imagine murder is not punished by life sentence or death penalty, everyone will go around killing people.

I wonder what would happen if all practising members of the MIA refuse to accept any appointment as a “watchdog” for the miserly director’s fees paid. In any case, most of these practitioners don’t really need the money but do take up such board positions for a variety of reasons, including social responsibility.

First of all, if all MIA members is of the quality of the author, as a minority shareholder, I welcome and thank their decision to not accept any watchdog role. What good is a watchdog if he can't watch and bark at anything suspicious? Then, the question of miserly director's fees. According to Gplus annual report, in 2008 (the most recent figure) RM104k is paid to five INEDs, so, it is on average RM20+K per person. In 2007, RM228k is paid to the INEDs, averaging RM46k per person just to attend some board meeting. This does not include intangibles perks like potential business contacts and business deals. Perhaps, it is "miserly director's fees" to the author. But, try tell that to the Nasi Lemak Mak Cik who struggle to even earns RM20k per year to put her kids through school. Try tell that to countless of Indonesian workers who work like mad just to make roughly RM10+k per year. Yeah, RM20-46k per year to attend meeting and getting yourself reasonably updated seems to be a "miserly" pay. Yeah, you take up the role for "social responsibility", such a big sacrifice. Due to your need to be socially responsible, you decide to sacrifice some golf time to make RM20-46k.

P.S.: I am not writing this to shame anyone. That's why I am not naming names. Oh, BTW, the excessive fine that the INED is complaining about is just RM17.5k, less than what he earns for sacrificing some golf time.

Of Market Moving News and Singapore-based Media

2011-07-03T07:24:00.001+08:00

It is just me or did anyone else feel that, most of the recent market-moving news involving some of our stocks came from Singapore-based media? The Muhibbah receivership issue, I believed, was first highlighted by Singapore Business Times. When CIMB and Maybank decided to call off RHB Capital merger, it was first reported by Singapore's Straits Times. Now, when RHB Capital apparently is considering a crazy deal to takeover CIMB, it was again being reported by Singapore's Straits Times.

It is either due to our media is grossly incompetent or our local bankers like to run to Singapore to tell their stories. I think it is the latter. Perhaps, they feel safer to disclose sensitive information to a non-Malaysian media. Our Malaysian bankers seems to be unable to keep their mouth shut. News about potential M&A regularly landed in some internet message board by people who claimed to be investment bankers and the likes. A couple of these news is proven true, a few weeks or months later. The problem with acting on such news is that, you do not know which one is real, which one is not. Now, if they can write on the message boards, it means they will also tells their friends and families to buy. So, there are probably a lot of people that benefited from insider information, at the expense of normal retail investors like us. Our SC probably do not have the resource to catch these buggers on the internet. It is also probably true that, some of our corporate figures do not seems to understand what is insider trading, like this Genting COO who settle with SC on insider trading charges. If you are acting on information that is not available to public, that is not obtained via deep and creative research but rather through some friends working on the deal is not considered insider trading, what is insider trading? Unlike the law-trained Genting COO who consider that a "market tip"-a market tip that is unfortunately unavailable to the general public- Snowball, who know nuts about law, thinks that common sense says that it is insider trading.

It is impossible for SC to regulate. So, the next best thing is to actually subscribe to these news, at least, you have some head start over those who do not. The huge fall due to the Muhibbah's APH issue only happened on the day analysts released their reports, which is a day after Singapore Business Times report on the issue. It shows that quite a number of people may not have access to the news. If the trends of going to Singapore-media to disclose sensitive information continue, one may probably needs to subscribe to these Singapore news services. My main problem is, these sort of subscription is getting unaffordable. Plus, most of the news overlaps with each other. Unlike FT and WSJ that offered me some really cheap student subscriptions, in fact, FT used to offer free subscription if you are a student, Singapore Business Times, do not have a student package. If my memory serve me right, SBT is not a good publication either. Their editorial is not exactly top notch. Gunasegaram of the Star writes better than most of them. I am not sure whether paying around RM100/year for some market moving news that may not relate to company that I own is such a good deal. Any thoughts?

A Little Bit More on the Silly 30% Female Quota

2011-06-28T14:30:00.000+08:00

This blog post is to preempt all the stupid letters that I expect to see on our local papers tomorrow with regards to our government policy to have 30% female board representation. Apart from reading the columnist of our local papers for a good laugh, we can read the letters to the editors section for another round of good laugh. I think the letters to the editor section is probably being created to make their columnists look relatively less retarded. Those letters that make it there probably represent the letters from the bottom 5% of our population. There is this guy called Bulbir something that always make it there, I am not sure what word you can use to describe him apart from "super retarded". If he is my grandpa or something, I will probably change my surname.

History has shown again and again that, it is stupid to try to completely copy fully something that work successfully in another context without making any changes to suit the different context. For example, American-style democracy never worked in the Philippines even though it work very well in the US. Similarly, our 30% female board quota is probably being copied from the Norwegian system as mentioned in the TMI. By copying blindly, we ignore the different context of corporate culture between the Scandinavian countries and Malaysia.

Please take note that, our government is measuring "key decision-making position" on the basis of board membership. This is the same stance taken in the Norwegian system. The key difference is, in Norway, due to the distributed shareholding, the board actually MAKES decisions. In Malaysia, most entities have concentrated shareholding, thus, our board actually RUBBER STAMP decisions made by the majority shareholders. So, you can basically put a 7-year-old girl into the board and make up the quota without making any difference in how a company is run. I am not sure this is what our Malaysian Women really want.

In addition, the directors that the women will play will probably be that of Independent Directors (INED) rather than executive directors (ED). The management team in our corporate sector is still being dominated by men, so, it is highly unlikely that women will fill up the ED position. It would be weird for the female Financial Controller to be on the board but the male CFO is not on it. So, the more likely scenario would be the role of an INED, a position that require someone to attend meeting 4 times in a year to rubber stamp certain things. This is the sort of position that any Ah Lians or Minahs can fill. You don't really need much expertise. Instead of having educated female execs to join the board, I guess, for most smaller firms, it will be represented by wives and aunties of the majority shareholders. Not really the sort of scenario that our government intend to achieve.

The reason that there is a lack of female in top management position is simple. There are not enough educated and experienced female executives out there. Up to my parents time, it is rare for a girl to finish SPM, let alone graduating from the Universities. This will change with more and more educated female executive joining the workforce like we have now. It will take some time for them to gain experience and over time, the lack of female representation scenario will correct itself. There is no need to try to speed up stuff.

This quota thingy actually let me recalled a conversation I have with a friend. According to him, in one econs lecture of one of our local universities, they are discussing how to solve the problem of the lack of male universities student from a certain race. This is a serious social situation with serious repercussion on the long run, that, will be topic for another day. The male university students from that particular race suggested that, the government should establish yet another quota to ensure that there will be a certain percentage of male university students of that race. I heard that and straight away blurted out, "Memalukan Jantina". I guess, most Malaysian women feel the same when they heard this quota thingy, it is also something that is "memalukan jantina".

What??! 30% Women Representation in Board Level!!!

2011-06-27T15:57:00.000+08:00

I saw this piece of news on TMI, I thought it is a joke. Putrajaya stipulate that 30% of board members must be female in five years time.

I have mentioned my view on this topic before and I thought it was never going to happen. Unfortunately, somehow, Putrajaya make it compulsory for 30% female board representation. I have nothing against female but this is one bad idea.

Most activists justified more female board representation on the basis of research showing that companies that have more female board members outperform those that do not. However, the reason that these companies outperform the rest is their culture of meritocracy which resulted in those who are the best in their job rise up the ranks. So, anyone, regardless of gender can make it to the top. Without changing the culture in the companies, companies will not suddenly become better just because there are some females on the board level.

One more concern I have would be, in order to accommodate this rule, companies may expand the board size just to fulfill the quota. So, shareholders will pay more money in the form of directors fees without any increase in benefits. Worst still, I think some family-run firm will bring in their wives to join the board, further diluting the perceived independence in the board.

Another concern would be, are there enough female talents to fill the quota. Not that female are stupid, it is just that, up to 20-30 years ago, household with two working parents may still be uncommon. So, do we have enough of experienced talent pool to filled all these board positions? Would it create the situation where unqualified female is selected to the board? Would it create a situation whereby female board members fees is inflated because good female board members are so limited? I do not think this sort of regulation actually exists in both HK and Singapore, countries that have an earlier history of and higher female participation in the workforce. So, the question of talent pool need to be seriously considered.

One clear winner in this regulation would be women of accounting and financial background with ten plus years experience. The government had just created a gold mine for them.

P.S.: This is probably an attempt to win the female votes. Just like the affordable housing in Sungai Besi that are targeted at youths. I thought giving priority to youths without actually focusing those that really in need of a house like adults in the late thirties and early fourties with kids is a terrible idea, this female board representation thingy may be just as bad. They will just do all sort of crap to win votes.

Excellent Article on Forward PEs

2011-06-26T03:27:00.004+08:00

This great piece of article from the Value Restoration Project answers most of the doubts that I always have about forward PEs.

One of the most consistent messages I’ve heard throughout my career is that the market is inexpensive or at least “fairly valued” based on next years earnings. We hear it at heights of euphoria and the depths of despair. I don’t recall ever hearing the consensus or even a vocal minority calling the market overvalued based on forward earnings estimates. In fact, we rarely even hear perma-bears cite high P/Es based on forward estimates as the primary cause for concern. Over a decade with low and often significantly negative returns, how can that be?

Read the rest of the article here.

P.S.: On an unrelated note, I can't help myself but to bring this up, did anyone watch Stephen Roach on CNBC with Bernie Lo? When he described the grim situation in US, all sort of unemployment and consumption data came out. When he talked about China, no data or numbers, just stories about how great the Chinese govt is. China is so unique that we do not need to talk about the numbers? As I say, the problem with China bulls is that, they tell stories but do not talk about numbers. Then, he talked about the 12th 5-year Plan ("十二五"), about how the Chinese govt is going to transform its economy. I wonder how many of these experts that talked about the 5-year Plan actually read the entire thing and understand what it really is...Sometimes it is not what is IN the plan that is important, it is what is NOT IN the plan that is important.

Of BNM, Abu Dhabis and RHB

2011-06-20T16:07:00.002+08:00

The Malaysian Insider publishes two articles that are somewhat critical of certain unique requirements that BNM imposes on the sale of Abu Dhabi Commercial Bank to Aabar Investment Fund. Both articles can be accessed here and here.

First and foremost, I do not know why the media is obsessed with this thing about being the biggest bank in ASEAN. Being biggest means nothing if you are not profitable. Plus, I don't think it is healthy to have one bank to be almost 100% larger than the next one. Singapore have three large banks that are pretty close to each other in terms of asset size. Just because we want to be bigger than Singapore, we artificially create one big bank. Since these banks are kinda under government control, it may expose ourselves to the risk of having a government that try to influence the lending policy of one of the biggest bank. It is harder to convince three banks to do something stupid than to convince one. It is not that it has never happened before in the history of South East Asia. Thaksin influences Krung Thai Bank, a state-owned Thai bank, to do some silly loan expansion. When you do silly expansion of your loan portfolio, you are bound to have tonnes of NPLs and that's what happened to Krung Thai. Imagine, sometime in the future, our government try to convince the merged Maybank-RHB, which is almost 100% larger than CIMB, to do something silly. When the blow up happened, the bail out will be huge. A big number of Malaysians deposit will be at risk. It is okay if the government do something silly with BSN or some tiny bank, but, by having such a bloody big bank, it amplifies the risk of a blow up.

Then, there is this criticism about BNM being a nanny by imposing all these rules. Critics says that BNM is not allowing the free market to do its job. I thought there is nothing free market about the deal as prices are artificially inflated and the thing BNM is doing does make sense. It is highly likely that the Abu Dhabi fellas will sell their stake in RHB when the takeover happened. No one would want a minority stake in a non-traded entity. So, what this Abu Dhabi fellas is doing is to create an artificial floor to the price of the takeover. Since both CIMB and Maybank are buying control, they need to pay a much higher price than the artificial floor that is created by the Abu Dhabi right pocket to left pocket deal. That artificial floor may be set at too high of a price. Since they are paying above book, it increase the leverage of the company if measured at tangible asset basis. It does create a higher risks.

Whether Nazir Razak and all do influence this rule being set by BNM, I do not know. But, I think what they did do make sense to me. The Abu Dhabi fellas is creating an artificial floor to the price. BNM is quite highly regarded across the world, I do not think they can be at where they are without a certain form of independence.

UPDATE: Just came across this post at the_earthinc which have an alternative opinion, do give it a read here.

The RM18b Aluminium Smelter - 1Project that I Could Never Understand

2011-06-18T20:11:00.001+08:00

About a year ago, I wrote a rather xenophobia-tainted blog post titled "Bakun- Cheap Energy for Foreign Companies while Malaysian Consumers and Industries Pay for Expensive Energy". The Bakun Dam is something that I could never ever understand the logic behind building the whole thing. I do not understand why we need to flood a forest larger than the size of Singapore and displaced all the Orang Aslis living in this tropical forest so that we can sell cheap energy to some foreign firms in an industry that is very capital intensive, meaning, very little money will actually go to the rakyats pocket.

The psychological damage done to the Orang Asli is probably quite serious- imagine if your whole life, you only know how to hunt. Now, when you are 45, you need another way to make a living. Is the few hundred jobs that are created through the dam justify the huge damage done to the least privileged amongst us? The late US Vice President, Hubert Humprey said that ,"The moral test of government is how it treats those who are in the dawn of life, the children; those who are in the twilight of life, the aged; and those in the shadows of life, the sick, the needy and the handicapped.". Applying this test to the Bakun Dam, we probably failed the test.

Then, today, I read about the RM18b investment made by Abu Dhabi. It is the front page headline in the Star. The investment involve RM12.7b in an aluminium-smelter and RM 5.4b in downstream activity. This investment is another bad investment that I feel we are attracting in this few years - huge in quantity, lacking in quality. It makes a lot of sense to develop our O&G sector to bring the entire value chain into our country. But, it makes no sense to build a dam to cater to producing a metal in which is not mined in our country.

The article state that 40,000 jobs would be created. I am not sure who is working on this projections, but, I think he must be having a really tough time adding up all the numbers in downstream activities to make up the 40,000 numbers. At 40000 jobs, it is RM450k per job. One expensive job creation project. I think, if we spent like 1% of the numbers i.e. RM180mil to create a venture capital fund to fund our young start ups, we would be able to create more jobs than that. Instead, our government venture capital is used to fund a listed company which should technically have no difficulty in accessing funding. That company, by the way, is also responsible for creating our 1Malaysia e-mail.

Now, the RM450k per job number is a very big number. But, I think, we would not even get 40,000 jobs in the project unless the downstream sector really created a lot of jobs. Since there are no numbers on the output of the smelter, I will use some very rough benchmarking. Based on the recent Alcoa Icelandic smelter project, a smelter should create around 200 jobs per 100000 tonnes of output. The planned Chalco plant in Sarawak cost US$1billion (roughly RM3.8b at previous exchange rate) for a 1.2 million tonnes of output. So, the Abu Dhabi plant should be 3x the size based on capital outlay and produce around 3.6m tonnes of output. The direct job creation from the plant alone is 7200 jobs. So, the forecasters are projecting that the remaining downstream activities will create 32,800 jobs. It is a 4.6x multiple. In US, the multiple is slightly more than 3x. Can our 1Malaysia smelter create 50% more jobs than US on a multiple basis? I don't know. Our government departments certainly can do it by being very inefficient. Perhaps, our 1Malaysia smelter can do the same too.

As most of our electricity in Bakun is actually sold to foreign investors via aluminium smelting, our action do not seems to be a lot different from those of Cambodia and Laos who are building some dams on the Mekong to sell to their neighbours like Thailand. The reason for the Cambodians in doing so is understandable. Their former leaders have the "foresight" to almost wipe out their entire generation of educated population through genocide. So, they have nothing much left in the country that is at a competitive advantage than its neighbours apart from making use of their natural advantage of the Mekong. But, it seems that, our country is as screw up as Cambodia that our only competitive advantage is to displace people and build dams. Satu lagi Projek Kerajaan Barisan Nasional.

Honor Thy Creditors Beforan Thy Shareholders : Are the Profits of Chinese State-Owned Enterprises Real?

2011-06-18T08:34:00.004+08:00

HONOR THY CREDITORS BEFORAN THY SHAREHOLDERS: ARE THE PROFITS OF CHINESE STATE-OWNED ENTERPRISES REAL?

Source: Hong Kong Institute for Monetary Research

Click here for full screen.

Muhibbah Again..Some Extra Points Raised By Brotherlone85

2011-06-17T17:28:00.005+08:00

Okay, my third post on Muhibbah within a 14hours time frame is bordering spamming. So, hopefully this will be the last one as I want to highlight Brotherlone85 comments.

If you have not read the first two posts, please read it here:

The Muhibbah Fiasco : How Lousy Disclosures Costs Shareholders Monies and;

New Info, Old Info - The Muhibbah Surat Khabar Lama Man

Here's Brotherlone85 comments. Do take note on the internal news on the shareholder tussle as well as the interpretation of companies act and how it affect Muhibbah RM300-odd mil receivables.

brotherlone85 said...

hey Snowball,

how r u... great points on their disclosures...

the market is actually fully aware of this, and this is reason why they were trailing the market despite having exposures in hot sectors like the oil and gas and construction sector

....untill research houses brought them on roadshows, where Muhibbah claimed that APH is on the verge of securing RM1b equity from a Chinese investor.(who?, dont know)

anyway... the stand off and delay in APH is due to it's sharehodler tussle, S.M trying to gain control vs other shareholders....also opreationally i heard, APH's tank farms are acutally build on reclaimed land,apparently it wasn't done properly, and the land there is acutally sinking :) not good if you intend to place tank storages on site ..

this whole thing is fishy... why?

share price continued on an uptrend, even after the receiver was appointed a month ago.

if CIMB decides to take a haircut, Muhibbah similairly, will have to take haircut, and worse.... those are trade receivables for work done which are unsecured. muhibbah would get nothing if CIMB has a lien over APH's assets, and the recoverable amount is less than RM1b...... its project financing, if its not compelted, i dont tthink the full amount is recoverable... CIMB would've taken this off balance anyawy... we wont know...

under a receivership, according to Company Act 21.022 ..... ' the receiver is to posses himself of, and to manage the assets and undertaking of a colelction of companies '
CIMB won't give a hoot bout contractors receiveables, they just want to write back some provisions... as NPL is already a big concern...

the grounds to appoitn a receivership is only when a security is in jeopardy, what security is in jeopardy? no mention....

muhibbah just got suspended, and this is what they've announced
--------------------------
The Company is one of the contractors in respect of the Project known as Procurement, Construction and Commissioning of a Petroleum Hub and Bunkering Facility at the Reclaimed Island Off Tanjung Bin, Johor (APH Project). The receivables for certified work done and related costs amount to RM 370.8 million as at 31 Dec 2010.

With reference to the articles in the Singapore Business Times on 15 June 2011 regarding the appointment by CIMB (the financier of APH project) of receivers and managers for APH, the Company wishes to inform that according to APH, they have identified an investor, and are in negotiations with the investor to fully finance the completion of the APH Project, including making due payments to contractors.

As this is a oil and gas project with a secured business and the said investor due to finalise its financing transaction with APH, there are reasonable grounds to hold that the receivables are recoverable in due course.
-----------------

AGAIN... no mention of any timeline!... sigh....

the announcment would prolly give investors some false comfort, and prolly buy insiders more time and better price to cash out...

.... i actually quite like their crane business, favelle favco... one of the few successfull made in malaysia story
JUNE 17, 2011 11:51 AM

Lol..the thing is build on sinking land...Malaysia Boleh...S.M Boleh...Macam mana-la nak compete dengan Negara Singa jika bina tangki kat land yang stable pun tak tau buat...I tak tau apa macam want to say...

New Info, Old Info - The Muhibbah Surat Khabar Lama Man

2011-06-17T16:13:00.002+08:00

This is an extension of the previous post : The Muhibbah Fiasco : How Lousy Disclosure Cost Shareholders Monies.

Muhibbah made an announcement just now that :

With reference to the articles in the Singapore Business Times on 15 June 2011 regarding the appointment by CIMB (the financier of APH project) of receivers and managers for APH, the Company wishes to inform that according to APH, they have identified an investor, and are in negotiations with the investor to fully finance the completion of the APH Project, including making due payments to contractors.

As this is a oil and gas project with a secured business and the said investor due to finalise its financing transaction with APH, there are reasonable grounds to hold that the receivables are recoverable in due course.

Muhibbah shares recovered a bit today, I am not sure how much of it is due to this announcement. But, is this piece of information, a new information? I don't think so. You see, way back in 14/12/2010, CIMB Research in a report titled -"Muhibbah Engineering- Dig In" - said this:

Management optimistic about favourable outcome. This is positive and consistent with our channel checks. We gather that negotiations for a new anchor foreign investor have been finalised. We believe that the new investor is likely to bring in RM700m-800m, being the estimated additional funds needed to restart the project. Given the size of the capital injection, we would not discount the possibility of the investor taking a substantial equity stake in APH. It appears that it is crossing critical milestones on the road to a final resolution. Management believes that it could be a done deal by as early as 1QCY11. We do not think this is too optimistic as the process of getting the land-lease agreement, loan syndication and development order is typically swift provided there is a firm heads of agreement to secure the new funds.

First and foremost, I think all the information written by our Bursa finest CIMB analyst is actually told by the management to him as I believe most sell side analysts in Malaysia actually do not understand the term "research". If we benchmark the quality of their so-called research against some very top notch and creative research I have seen from the hedgies in the West, our sell side analysts probably can get a grade like Z--- for their "research". It is probably attributable to the fact that our Bursa finest spent more time selling than researching. The compensation structure, I guess, is skewed towards selling, so, it is usual for this sort of thing to happened. So, we should not call them analysts, probably should just call them "reporters" as their role is to report what the management said. CIMB Research should be renamed "CIMB Reports" or "CIMB Public Relations" since they always report good things only-like a PR firm does. CIMB should also consider a takeover of Utusan after completing the RHB Cap deal, since, the reporters in Utusan have some amazing spinning ability.

Another troubling fact is that, the management actually told more stuff to the reporter-cum-analyst-cum-public relations officer than the disclosure in Bursa. This create an unfair advantage to those people that have access to CIMB Research versus those that do not have accessed to the research. This is the sort of things that make me disappointed with our system, there is just too many things that is being disclosed to the select few and we depend on this select few Public Relations Officer-cum-Analyst to tell us the story. The same crap is happening across Asia. We need our very own Reg FD- Regulation Fair Disclosure.

But, the most troubling fact, which gives the title of my post "New Info, Old Info", is that, the disclosure is an old information. Way back in December, the management told our reporter from CIMB that the issue would be resolved by 1Q2011, which is hmmm...like almost 3 months ago. How credible is this piece of new disclosure in Bursa? This is coming from people that tell you that the issue would be resolved by Mid-2010, which is like one year ago. This is coming from a management which sells their stock like no body business when the news of receivership status of APH have not reached the general public. They may be speaking the truth this time, I don't know. But, I think we all have been thought that, when someone lied too often, it is safe to not trust that person.

Since the disclosure is so limited, we also need to play some devil's advocate. You see, the APH project is delayed because of cost overruns. Question that one would asked is that, did Muhibbah portion of the project faces cost overruns as well? More importantly, did the Muhibbah portion of that project have a "cost pass-through" clause whereby any cost increase would be passed to APH? If not, can part of the cost increase be passed to APH? What is the profit margins in the project going forward? Would there be a case whereby, even if Muhibbah manage to recover the RM300-odd mil, they will face losses just to complete the remaining 60% of the project? Lol, I don't know. I hope our reporter from CIMB do help us ask this sort of question.

So, the Muhibbah people reminds me of that fella from the EBITDA Positive By XXXX guy from Green Packet. Do you trust these guys? It is your own judgement.

P.S.: A prudent company over-provide rather than under-provide or worst, in Muhibbah case, do not provide any write down. When Deepwater Horizon well blew up, BP over-provided for their liabilities. This is prudent accounting. But, in Malaysia, we have our very own 1Malaysia-style accounting that is unique.

The Muhibbah Fiasco : How Lousy Disclosure Cost Shareholders Monies

2011-06-17T02:50:00.009+08:00

This is an extension of the discussion I have in Moolah blog post : And Muhibbah Comes Crashing Down. Since it is too long of a reply and it has attachment and stuff, I have to do it here. Do give his blog post a read.

First and foremost, this whole thing is preventable if one take a good look at the annual report. But, poor disclosure standard in Bursa as well as what I think is some non-compliance of Bursa Listing Rule by Muhibbah reduces the chance of shareholders of discovering the receivables issue. But, it is alright, I have my own fair share of stupid preventable mistakes. Early last year, I made an investment into Choada Modern Agriculture (0682:HK) despite my brain tell me to do otherwise as there are a tad bit too many aggressive accounting practices and some dubious management actions. However, the numbers like PE and ROAs and stuff looked a bit too good and I just drank a dose of Jim Rogers that I rationalize everything that is wrong with the company. By the middle of last year, I am starting to get a bit too uncomfortable and think the whole thing is a fraud as they have been avoiding to answer or deflecting some of the questions that I asked. So, I sell and took a 20+% loss. On hindsight, I have some really good luck as this whole Chaoda thing is being discovered a fraud by HK Next magazine this year and I would have lost my pants if I had not sold it at a loss. With the Chaoda experience, you would have think that this idiot will learn some lessons. But, this idiot again make an ill-thought out blog post stating that I may go long on China MediaExpress without actually looking much into the company and try to rationalize too much. China MediaExpress turn out to be another fraud. I am again lucky that some kind soul actually talk me out of going long after reading my post. The key lesson learnt is to always read the footnotes, bring your brain with you when analysing companies and do not rationalize too much.

Lousy Financial Reporting Standard

That aside, back to Muhibbah. If one actually take the opportunity to read their disclosure in their annual report, one would not have face this problem. In their FY 2009 audited account, Muhibbah actually discloses this:

A trade debt of RM337.0 million (including retention sum of RM22.5 million) and an amount due from contract customer of RM28.3 million in relation to a project undertaken by the Company for the engineering, construction, installation, commissioning and completion of a bunkering facility has been outstanding for more than a year.

The project has temporarily ceased during the financial year ended 31 December 2009 due to financing difficulties encountered by the project owner. The last progress payment received by the Company was in February 2009. The project owner has continued to approve the progress billings submitted by the Company and had acknowledged its obligations under the contract signed with the Company. The project owner has informed the Company that it is in the process of arranging an alternative source of financing and expects the arrangement to be completed by mid 2010.

The Directors have evaluated the situation and other evidence available, including the assessment of the status of the project owner’s refinancing arrangements, and are of the view that no allowance for doubtful debts or a write down in the amount due from contract customer is required at this moment.

The account is audited by KPMG and is issued at 30/4/2010. KPMG, short of qualifying the account (for those of non-accounting background: Unqualified means good, qualified means bad), actually emphasize the issue in their audit opinion in addition to the disclosure in the notes. The audit opinion, meanwhile, is something that most investors do not read although most bad stuff that the auditor do not agree with the management normally end up there. Take note that by the time this audited account is being issued to shareholders, APH (the trade debtors) has not paid Muhibbah for more than a year. Plus, by the time the audited annual account is issued, it has reached mid 2010, the time frame that the whole financing thing supposed to be done. The fact that the opinion of the auditor remains the same means that the financing is not being completed yet. In addition, pay attention to the management reason for not providing for any doubtful debts : APH acknowledge the obligation under contract signed by the company. It is just an acknowledgement. A normal thing. It did not elevate Muhibbah position in the debtors packing list or provide them with any security. Just because APH acknowledge the debts, Muhibbah decide to not write down even a single cent of the thing. If say, the RM300mil debt is by different parties rather than one party, one may presumably would have write down the debt.

It is still okay if you hold on to the company at that point of time, as it is the first time the disclosure actually appeared. But, I would not be comfortable to invest at that point and if I invest, I would be constantly bugging their IR for progress. To be fair to our super star Bursa's finest analyst at CIMB, they do touch on the issue in their 19-page initiating coverage of Muhibbah with one paragraph out of that 19 pages of crap and do not discuss the serious damage done to their equity in the event of a default but rather put a positive spin on the whole thing. They maintain that the issue will be resolved within 1-2 months. Note, by the time that the initiating coverage is being produced, it is already in mid-November, well beyond the timeline stipulated in the audited account. Our Bursa finest continued to report that the issue will be resolved within 1-2 months for one or two more reports until he conveniently forgotten about the issue in the subsequent buy call that he issued thereafter. Perhaps, it is 1-2 months too long.

Then, on 29/4/2011, Muhibbah issued another audited accounts, this time for FY 2010. The same crap again is being said..blah blah blah...acknowledge its obligation..blah blah blah, but this time, one sentence is being altered:

The project owner is confident that alternative arrangement can be completed in 2011, as negotiations with interested party have reached an advanced stage.

Last time, they says that it is mid-2010, now they says is in 2011. No early, mid or late, just 2011. Take note also that all this while, it is the project owner says, not Muhibbah says. Muhibbah is a good lender. I do hope that they have a loan sharking division, if I ever end up borrowing money from loan shark, I will borrow from them. If I delay payment for two year plus, I think any loan shark would probably chop my hand off or something. But, this Muhibbah is apparently fine with more than two years of delay in payment. No provision, not even a single cents is being provide against this possible default. If you are a shareholder, if you saw this together with the sudden disappearance of reassuring words from our Bursa finest analyst on the issue, you should just sell. If you didn't, that is really padan muka.

The reason that shareholders may not have paid much attention to the issue may be due to something that I just found out today about our financial reporting. Apparently, in the audited accounts released by Malaysian listed company, there is no need for companies to report their account receivable ageing analysis. Initially, I thought it was Muhibbah that purposely do not disclose only to found out that other listed companies in Malaysia do not disclose their accounts receivable ageing. No wonder there are so many receivables-related blow up in Malaysia. Listed companies in SGX, HKEX ,even Indonesia and I believe the Philippines have to disclose their receivables ageing like this picture:

This sort of easy to read disclosure would certainly make shareholders pay attention to the RM337 million that pop up at the past due for more than 2 years column. Apparently, in Malaysia, we do not need to produce such disclosure. If the situation is very serious like Muhibbah case, we are flooded with a long chunk of text that regular, non-accounting background investor, may be too intimidated to even read it. If situation is serious, but not that serious, we may not even have a disclosure. You would have thought that, with so many receivables-related blow up in our country, those overpaid and useless buggers at our accounting standard board would adopt the best practices of their regional neighbours like Indonesia, but, instead, they are busy convincing the press that they should not be blame for any sort of fraud. Rather, the management should be blame, they say. It is like Polis Raja Di Malaysia attributing their inability to catch any thief by blaming the thief for stealing. It is the thief's job to steal, it is also the job of some questionable management to steal from shareholders. Sometimes, it makes you wonder why we need this sort of useless auditors.

The Change in Auditor

Another interesting point is that, Muhibbah actually change their auditors. They downgrade from a big 4 auditor- KPMG to a tier-two auditing firm Crowe Horwath. If a company upgrade their auditors, from a tier-two firm to a big 4, it is usually fine. But, if they downgrade, you need to pay attention. It could be that KPMG is too afraid to sign the accounts because the receivables size is too bloody big, so, they drop Muhibbah as a client. Sometimes, companies will give you crappy explanation like the big 4 is overcharging them, so, they drop them to save shareholder money. Most of the time, this is not the case. If Big 4 do not like the risk of auditing your accounts, they will purposely inflate the auditing cost to a price that you could not afford, a decent way for the Big 4 to tell you that, "we do not want to audit your company, it is too risky". As there are 4 big 4 auditors out there, it is impossible for them to raise the prices too high as there is always competition. When high prices is being used as a reason for switching auditors, you should be careful.

That is the case if a company provide any explanation for changing auditors. In Muhibbah case, they did not even tell you that they change their auditors! This lack of disclosure by Muhibbah, I believed, have contravene our Bursa Listing Rule Chapter 12 Rule 1201.1(3) :

Each Participating Organisation shall notify the Exchange, in writing, of any change to -
(a) the date of its financial year end; and
(b) the name of the statutory auditor who will furnish the Annual Report

Since the wording is "name of auditor", rather than "auditor", I am not sure whether any rules is broken. But, if there is no rules being broken, then, our Bursa Listing Rule have another grey areas that need to be plugged. Most, if not all, regional exchanges discloses their change of auditors.

Muhibbah also changes their company secretary, someone who should be responsible for all this disclosure stuff. Did Muhibbah purposely replaces an experience company secretary to a not-so-experience one? Lol, I don't know.

The Non-Disclosure and Management Selling Stocks Like Nothing Have Happened

Another point that troubled me is that, according to the CIMB report, the receiver on APH is being appointed in May. So, it is already one month. You would think that, when a customer enter into receivership, it is almost close to bankruptcy. Since Muhibbah have so much uncollected receivables from APH, it is their duty to disclose this. But, they seems to think that it is business as usual, nothing have really happened. It took a report from Business Times Singapore to brought our attention to that matter. Till now, still no news from Muhibbah.

It is really nothing have happened? Well, at least something is happening. As highlighted by Moolah, the management is selling off their stock more frequently within this month than any other month in the year. Here's the snapshot from Bursa website:

Don't you think the timing is a bit suspicious? In a more litigious society like the US, these buggers may get sued from the shareholders. But, in Malaysia, shareholders law suit are way too costly to bring these buggers to court. Even if these buggers are brought to court, you may not know whether the judicial system is clean enough to give a fair hearing.

So how? Shareholders just lost 20% in a day and those folks at CIMB still call it a buy even though, if there is a real default, as they are unsecured creditors, they may take a huge hit in their equity. BTW, the CIMB analyst, I think he should learn some accounting, I think he mixed up asset and liability. He said that this whole crap will not affect his valuation because it had been provided it in the liabilities. I think he did not understand what is asset and liability. When people owe you something, it is a liability according to this analyst. By the same reasoning, Greece would be the richest country in the world. I look at his valuation, he did not provide for impairment either in his valuation, it makes you wonder where he come up with that crap.

When I was younger, some old man tells me that SC and Bursa have very stringent ruling. But, as time goes on, I could not help but feel that our regulation is actually much shitter than those of Indonesia and the Philippines. Come to think of it, that old man is a MLM fella, he may try to convince me that Bursa has stringent ruling and that his company is listed means his MLM company is good. It is probably the reverse case, Bursa sucks and his company sucks too. Just another day in the very uneven playing field called Bursa Malaysia....haiz..

UPDATE: Do read the subsequent reply by Moolah on my post here.

P.S.: I just realised that the CIMB analyst that I always make fun of in this blog is the same person..lol..so not all their analysts are funny like that guy. Shareholders of Muhibbah, if you have not sold your shares, meanwhile, should pray for another government bailout of APH.

Another Example of Excesses- China Village Boasts Tower Taller Than Chrysler Building

2011-06-15T03:23:00.000+08:00

In case you miss this Bloomberg video, click on this link in youtube (note: embedding is disabled for that video) for another example of excesses in the investment boom in China. In the video, it shows a village claimed to be the richest in China just built a tower that is taller than Chrysler Building in New York. The villager claimed that the building is easily covered by one year of net profit.

Bulls would say that, they can afford it, why not? But, if we look at Malaysia, we can easily afford a Bakun dam and all the crazy dam projects that we are planning in Sarawak. The question is, do we need it? Just like Sarawak is suffering from an oversupply of electricity, China is suffering from an oversupply of buildings. Hotels there have like 50% occupancy and still there are more hotels being built. You have to stop and ask, why does a village need a building taller than Chrysler Building and a flight academy?

The growth in GDP, if viable and proper economic activity is being done, should approximate wealth creation. But, if you create non-productive outputs, it is a terrible measure of wealth creation. They build an empty city, but, no one is moving into it except for administration purposes. They build a tower in the middle of villages. Their railway ministry load up a lot of debt, build high speed railway system across the country that do not have much passengers and are not economically viable. Then, we try to explain away all this observations with something like "China is different. China is unique" explanation. There seems to be a different standard of logic for China. Things that do not seems logical in other parts of the world is logical in China.

The view of bubble in China is starting to go mainstream. Soros talked about the situation is showing signs of getting out of control. Roubini talked about it in Singapore on Saturday. Short interest in HKEX is in its 8-month high. More and more people are switching sides.

P.S.: For an alternative view, please read this article : How Real is China Growth? (link provided by hishamh).

Qualified Opinion on US Govt Financial Statement

2011-06-13T23:39:00.000+08:00

US General Accounting Office ( the US Govt. auditor) on US Govt Financial Statement:

The federal government did not maintain adequate systems or have sufficient, reliable evidence to support certain material information reported in the U.S. government‘s…financial statements. The underlying material weaknesses in internal control…which…have existed for years, contributed to our disclaimer of opinion..

Taken from Steve Romick speech at the Value Investing Congress.

If US-the country- were a listed company, the fall in stock price would be severe when such opinion is being issued.

Li Ka-shing Series

2011-06-10T15:14:00.002+08:00

This is something for the weekends. I will try to make this a monthly thing, to pick up great videos that I came across on the internet and share it here for the weekends.

This is an old, 90-odd minutes documentary of Li Ka-shing that is being aired in 1998. His story is typical of the Chinese tycoon of his era i.e. forced out of China due to poverty, Japanese occupation and etc. Through his hard work and a good system in the purely capitalistic HK, he acquired fortune that, if measured in terms of wealth relative to the size of HK economy, should rank him among the top 3 in the world. He sees things and trends way ahead of the regular folks like us. The things he said in the interview in 1998, is proven true in 2011.

It is in our Asian culture to not idolize individual. So, we are fed with stories of US tycoons like the Carnergies, JP Morgans and Buffetts of this world without knowing the stories of equally successful tycoons in this part of the world. The worst part is, we learn from people like Robert T. Kiyosaki, who become rich because he write a fiction that people thought is a non-fiction or Donald Trump, a serial defaulter. I don't think Li Ka-shing will write a book next time, so, this is the closest thing we have.

Enjoy!

The Chinese Property Bubble Revisited - A Time Bomb Waiting to Explode

2011-06-06T10:01:00.002+08:00

The Chinese property bubble is one of the major issue that keep me awake at night for the past year. I have been thinking a lot about it since I made this posting last year about the oversupply in China. From that post, I went from a believer of a bubble to unsure and back to a believer that a bubble existed. I have been cutting my Chinese exposure gradually as the longer that this thing goes, the more worried I become. This is an attempt to clear my mind on what have gone through my thinking. A lot of the points here are not mine, perhaps only 10% are my original thoughts, it is more of a collection of stuff I read.

Point 1 : Bulls says Urbanization Means There is No Bubble

There is no official housing vacancy statistics in China. China refusal to release any data on vacancy may mean that the inventory is so huge that any information of the inventory data may crash the housing market immediately.
I mentioned in this posting on the back-of-the-envelope calculation I have done that almost a quarter of China urban real estate is vacant.
China refusal to publish official statistics lead to other people to estimate the amount of housing inventory in China. Andy Xie, using a more scientific method than mine, estimate that the private and commercial housing stock in China is around 25-30% is vacant.
Other more unscientific method involve people calculating the amount of apartments units without light turned on at night in the major cities in China. A dark apartments means an empty apartment in such studies. The study found that 50% of the apartment is vacant. Even if the 50% figure is overstated as people may not have returned home yet, the number is still astonishing.
The amount of vacant apartment by this estimates indicate that China will need a few years of zero construction to clear the housing stock and since the estimates has been done, a lot of new supply has come on stream. No amount of urbanization can make up for this huge housing inventory.

Point 2 : Bulls says China Housing Prices are Affordable if We Take into Account of Growth

The only source that I have accessed to that is consistently calculating the affordability ratio in China is the economics team at UOB. Here's the latest table that I have:

Source: UOB Econs-Treasury Research

The Chinese national average is around 53% higher than Malaysia. More than 80% of Singaporean stays in HDB, the Chinese national average is around 87% higher than the HDB average. Hong Kongers, to a lesser extent but still a substantial percentage stays in public housing too, but, that figure is unavailable.
The Chinese national average is lower than both the singapore private condo market as well as HK Class B condo market in terms of affordability ratios. But, the numbers in Singapore and HK is probably skewed by an influx of Chinese capital and thus, not reflective of domestics fundamentals.
The international standard for affordability ratio is 6x-9x. Seen on this light, Chinese property do not seems to be overpriced as it is still in the higher end of the international standard. BUT....
All this affordability ratio analysis ignore one fact, that, in China, all property are leasehold and lease period is just 50-70 years versus 99 years that is common in other countries. Depreciation matters. One will pay less for a 50 year lease term than a 99 year lease term.
Assuming the lease term is on the higher end of 70 years, the Chinese national average is 12.2x, 35% higher than the HIGH end of international average.
Affordability ratios for major cities in China such as Beijing, Tianjin, Shanghai and Chongqing , after adjusted for lease term, are a stunning 33.1x, 20.1x, 27.1x and 12.9x. Way way beyond the international average of 6-9x.
No amount of growth can support such a high valuation especially when the next batch of leadership in China indicated that they want to focus on slower but higher quality growth.
Sell-side analysts are starting to prefer to use another metrics, mortgage payment to average income ratio to justify that housing prices are not expensive so that they can continue to sell their property stocks. They are focusing only on cash flow without concentrating on the absolute value. But, property buyers do focus on absolute value.
When more ingenious method is being used to justify the unjustifiable, it is always a point of concern.
Most mortgage payment to average income assumption has stretch to the maximum end of the amount of loan that one could obtain in China. Most assume 25 year loan, under a 70 year lease term, it is around 36% of the property life. If 50 years lease term is used, the effect would be 50%. To put things into perspective, a normal 30 year loan is only 30% of the property life, so, the loan term underlying this assumption is already very stretch.
The mortgage payment to average income ratio in China has stretch to around 55%-60%, meaning, 55%-60% of a household disposal income goes to mortgage payment. This is an unhealthy level. Sell-side analysts says this is cheap because this ratio do not increase in the past few years. They have never heard of the sayings that a bubble could go bigger before it burst.
With so much of the consumer consumption going into one single private sector (property) and government (local government through tax and land sales), it do not encourage an even development in China and kill the China consumption boom story.
People that try to convince you that there is NO PROPERTY BUBBLE + THERE IS A MAJOR CONSUMER CONSUMPTION BOOM is CONTRADICTING themselves.
The current inflated level means that a soft landing is not feasible. Housing prices cannot land at current level as no one can afford this sort of valuation except the select few. It need to have some correction to bring the marginal buyers into the market.

Point 3 : Bulls say Chinese Income Under-reported, Hence Property Prices are More Affordable than you Think...

This is the arguments that I find the most intellectually dishonest one presented by the bulls.
The point about grey income in China is picked up by sell-side analysts from an academic research from National Economic Research Institute, China Reform Foundation titled "灰色收入与居民收入差距" by 王小鲁. In English, the title of the report can be loosely translated as "Grey Income and Income Disparity".
It is a report on income disparity, not on under-reporting of income.
Analysts report the fact from the study that there is a grey income equivalent to 26% GDP. This fact is being used to justify properties as being affordable.
BUT, they DID NOT report the major findings of the study which state that 75% percent of the 26% GDP worth of grey income comes from 10% of the urban population i.e. around 5% of the Chinese population.
If the bulls think that the situation whereby only 5% of the Chinese population can afford a house is healthy and politically feasible, I have nothing more to say. If they think so, then, yes, the property bubble is not a property bubble. But, I think this is a seriously unhealthy situation.

Point 4 : It make More Sense to Rent than to Buy

Rental yields in certain cities in China has reached some record low of 2-3%. This sort of rental yield, although similar to Singapore is unsustainable due to the much shorter lease term. KL rental yield is around 4-5% while HK is lower end of 3%.
Assuming the maximum 70 year lease term and an average of 2.5% yield. Assuming yield remains unchanged i.e. price do not decrease and maintain at current level, it will cost 175% of the property. A normal loan with 30% down payment and 25 year loan term @ 7.5% interest can cost multiple of this.
The rental yield is so low that property owner are not renting their property out. Instead, they prefer to leave it vacant and earn the price appreciation.
When rental yield is so low, rational action dictate that people should rent instead of buy. Genuine buyers that buy for accommodation rather than speculation may be drying up. Perhaps, first time buyers that remains may be people that fear they are missing the property train, a normal reaction in a property bubble. The bulk of the buyers may indeed be speculators, which explain the vacancy rate.
There is a lack of genuine demand.

Point 5 : Sign of Madness from the Public

Nassim Taleb talks about bond traders that trades Russian bond before it default in 1998 do not pay much attention to the news that the Russian government is not paying the salary of their civil servants. The bond traders instead trust economic numbers from Russia rather than such anecdotal evidence. Russia defaulted on their bond a few weeks later and most of these bond traders lost their pants.
In emerging economies where statistics may sometimes be unreliable, these sort of anecdotal evidence is of great value.
I used to question this sort of anecdotal evidence on the basis of how widespread it is. But, to think on a different direction, how widespread these practices are unimportant. It may be pick up by the reporter because it is widespread or it may become widespread because the reporter pick it up. In a bubble, people will try to imitate each other on methods to make money, the report by reporter will ensure that such crazy practices become widespread eventually by making such practices known to the public.
We have hear stories about couples divorcing each other to circumvent the rules imposed by the Chinese government that limit the number of properties owned per household.
We have hear stories that people with a regular wage of a few hundred dollars owns a few apartments that is worth millions of dollars. These people are refusing to sell their apartment because they sold one previously and the property prices keep on increasing. They are not selling because they now think that property prices have only one direction -UP.
We have hear stories where banks are directing their client to borrow money from their HK branch because it is not under PBoC jurisdiction. Banks are helping their client to circumvent regulator rulings on loan limit and they keep blowing the bubble bigger and bigger.
We have hear stories of young professional couples- lawyers, accountants and etc could not afford to buy a house even-though it is 4 hours drive from downtown.
We have hear the story of Ordos. Subsequent news reports indicate that, Ordos is not the only one. There are 10-20 of these sort of ghost cities being constructed EACH YEAR. Bulls argue that this sort of construction is in anticipation of urbanization. But, as mention in point 1, there is already a lot of vacant property in urban areas.
Imagine a town larger than the size of Putrajaya, much more empty that the already empty Putrajaya and we have 20 of them coming up each year. Do the math on how much of Chinese growth is real growth and how much is just fake growth- similar to the example of digging a hole and bury it again. It create GDP, but, those GDP is not wealth creation. It is just one silly statistics. Each of these cities can cost USD 5-20b a pop.
All these are bubble-like characteristics.

Point 6: At Least One Company is Running Out of Land Bank

This is not really a point, but, I thought it is interesting. I am monitoring a Chinese property developer which name shall remain anonymous. This developer I think will either be tremendous value if the bubble burst or will be a signal of market topping.
This developer is run by very prudent people. Quite smart in deploying capital.
Due to their prudence, they have been losing every single land bank auction that they participate in. They thought that the current price is crazy.
If they did not win any land bank by this year, they will, literally, run out of land to develop. Yes, no more land to develop because they are not bidding crazy prices.
If property price remain top-ish and they won a bid, it may be a sign of desperation. The last possible buyer has joined the fray, a signal of market topping. So, this company is one exciting company to watch.

Putting Things Together

If the vacancy numbers that is estimated by various party is correct, then, a soft landing in China may not be feasible.
A high vacancy shows that the properties is being used as an speculative instrument rather than being used to serve its normal primary purpose - to offer accommodation.
The lack of investment alternative and the negative real interest rate also forces the Chinese to used property as the storage of wealth.
Both objectives of speculation and storage of wealth is feasible if property prices keep on increasing.
If there is a soft landing, i.e. prices decline by a little or remains stagnant, then, there is no reason to hold on to these properties.
People will start to sell as the assumption of huge future price increases that initially drive the speculation is being shattered.
As there are no genuine demand, people that first started to sell will find that there are no buyers.
Then, more people will start to cash out, further increasing the supply and without any genuine demand, prices have to fall to a level where genuine demand can be found.
If the affordability ratio is any indication, prices will need to fall rather steeply so that genuine buyers can come in.
The only silver lining now is that PBoC is taking initiative by stress testing the banks for a 50% fall in real estate prices in order to single out weak banks and hopefully reduces systemic risks.
News indicate that PBoC is mapping out ways to deal with the massive local government debts - a major concern in China as the viability of some of this debts is in doubt.
Such proactive respond, hopefully, will sparred us of the worst effect of a bubble bursting.

Property Bubble and Chinese Stock Market

Most analysts says that China is cheap on the basis on PE ratio of the index. I do not doubt such straight forward PE analysis.
But, what I would like to question is, the earnings quality itself. How much of these earnings is non-recurring? In a speculative bubble such as real estate, a lot of earnings may stem from property speculation as well as revaluation gains. The sort of earnings that, I think, data services like Bloomberg may be too stupid to separate out on an index-wide basis.
I do not know how prevalent property speculation income as well as investment properties revaluation has driven down the PE ratio of Chinese companies, but, I think it is probably making China looks cheaper than it really is.
Perhaps, more experience people that have experience 1997 can shed some light on this.
Regardless of whether the PE ratio is affected or not, I think it is prudent to cut exposure to China because most of their GDP growth is driven by investment spending. Chanos had mentioned this and I have confirmed it on my own.
When growth story turn into a non-growth story, the effect is damaging as the growth premium is gone.
Malaysian who hold the CIMB China ETF...I think is Xinhua something. It is based on US FXI. It is advisable to cut exposure. Most of the component of that ETF is Chinese bank and some property developers, a bursting of the bubble will be damaging.
Chinese banks have a long history of non-performing loan due to the fact that lending is not based upon market fundamentals but rather political connections.
Chinese banks are one the most leverage banks in both the developing and developed world. So, they could not take much hit before going insolvent. Even if there is a government bail out (which probably will happen if the bubble burst), the effect will be very dilutive.

Effects of Bubble Bursting on China and Australia

As I mentioned previously, China will get hit. But, as China have capital control, there will be no full fledge capital flight. The collapse will be slow but severe.
In a crisis, it does not matter whether your stock is cheap or not. Things will get cheaper.
Australian banking system, I believe is a bit Korea-like, that is, it is dependent on foreign capital.
Australia, meanwhile, do not have capital control. Australia growth is driven entirely from China demand in their construction.
Anything that happen to China will be damaging to Australia. The collapse will be fast and severe due to the capital flight.
Those with tonnes of Aussie dollar fixed deposit, it is time to cash out some of your exposure. Even without a bubble burst, the Aussie dollar is overvalued.
There is also talks of a property bubble is Australia as real estate prices has gone over the roof.
Cut your Australian exposure. Get back in after the bubble burst.

I could write some more on this whole bubble. It is good as it clear up my mind. I hope that it is more readable by writing it in point form. China is in its 5th year of credit driven growth. The last time Japan attempt the same feet, they manage to do it for 8 years before paying it with 20 years of almost zero growth. Next year will be the US presidential election,normally not a good year for equities due to uncertainties. At the same time, China is also undergoing their leadership transition. Two biggest economies, two big uncertainty. PBoC is rising interest rate but is still behind the curve on the inflation fight, so, real interest is actually going down. At one point, real interest rate will increase, the interest rate will be too high, people will suddenly stop buying and price will collapse. As there is no real demand, the collapse will be severe. A lot of people have the motto of "In China Government, We Trust", but, no matter how effective a government is, it can't control the action of 1.3b people.

P.S.: Speaking of bubbles, but, I would like to hear from people that survive the crisis in 1997. I think the younger generation would love to hear about it as well. Surviving an 80% drop in the general market as well as a 50% devaluation of the MYR is not easy. I am not sure if anyone will take up this offer but no harm giving it a try As such, anyone who would like to share their experience on surviving 1997, you can guest post at this blog by submitting your article to goodstockbadstock@gmail.com. There will be certain quality control to ensure that the article meet the minimum standards. There will be no monetary compensation as this blog practice a no-advert policy. Your generousness in sharing and teaching will be much appreciated.

Disclaimer: The analysis above is not a buy or sell recommendation. The author do not guarantee the accuracy of the facts being presented. Please consult your investment advisors before acting on any information provided by the analysis above. The author is not responsible for any profit or loss made by any action taken based on the analysis above.

He Says She Says : The Star-Bloomberg Version

2011-06-02T07:23:00.000+08:00

The Star is a paper that is on a slow decline. Now, with the "King of Balls" (Chun Wai Wong a.k.a. Chun Toi Wong) as Group Chief Editor, I think they have decided to not compete with the likes on Malaysiakini for political news. If you can't beat them or join them, avoid them! They instead focus on "inspiring people" although most of the things they write are anything but inspiring.

On the business section, most of their journalists are not good reads. The only one that is worth reading is P.Gunasegaram - one of the finest business journalist in Malaysia. Soo Ewe Jin is not bad if you want something that is a bit out of the business world. Risen is decent.

Today, I saw this editorial : Derivative problem - another financial crisis looming as one of their most read article. This article is a bit too similar to another article that I read on Bloomberg : Mobius Says Fresh Financial Crisis Around Corner Amid Volatile Derivatives. Reproduced below is the article from The Star, with those highlighted in Blue is those with proper citation and those in Red is parts that is strikingly similar to the Bloomberg article.

HOT on the heels of the last financial debacle, a fresh crisis is looming round the corner, said Mark Mobius, executive chairman of Templeton Asset Management's emerging markets group.

The derivative problem that had plagued the last crisis in 2008 has not been solved and the financial world is still awash with derivative trading,Bloomberg reported, quoting Mobius.

'The total value of derivatives in the world exceeds total global gross domestic product by a factor of 10,'' he had said at the Foreign Correspondents' Club of Japan in Tokyo on Monday, in response to a question about price swings. “With that volume of bets in different directions, volatility and equity market crises will occur.''

According to data compiled by Bloomberg, the largest US banks have grown larger since the financial crisis, and the number of “too-big-to-fail” banks will increase by 40% over the next 15 years.

In a May 27 report, staff at the International Monetary Fund cautioned that higher capital requirements and greater supervision should be imposed on institutions deemed “too important to fail” to reduce the chances of large-scale failures.

It has been only three years since the near collapse of the global financial system and economies in the West are not out of the woods yet.

It is quite unbelievable to hear warnings of another financial crisis so soon.

Perhaps the large amount of money made in the last steep fall has whet the appetites for more opportunities to buy cheap.

Are the financial vultures back at work?

For as long as the financial world is bracing for another fall, it may jolly well be self-fulfilling prophecy that it will probably happen again, possibly at a faster speed than anticipated.

The conviction that things will take a dive for the worse, may dampen the will to prevent another crisis at all costs.

The spate of news in the last two years of various efforts to come up with new rules and regulations for derivative trading, credit rating agencies and proprietary trading, seems to have dried up.

Instead, the bubbles seemed to have quickly formed again and world attention is drawn to other gripping events related to war, terrorism and nuclear disasters.

People have short memories and lobbies can be quite powerful.

The gyrations of the stock markets are an indication of the powerful forces at work, dictating the direction of markets.

The MSCI AC World Index of developed and emerging market stocks tumbled 46% between Lehman's downfall and the market bottom on March 9, 2009.

The MSCI AC World gauge surged 99% from its March 2009 low through May 27.

Bloomberg estimated that the freezing of global credit markets caused governments from Washington to Beijing to London to pump more than US$3 trillion into the financial system to shore up the global economy.

Alas, what has happened to the plans for reform of the global financial architecture? And what will happen when governments are no longer pumping in the money to support their economies?

Associate editor Yap Leng Kuen considers that not everyone can be as sanguine as Mobius in saying that “with every crisis comes great opportunity.''

Now, if any students in the world try to pull the same trick as this Ms. Associate Editor just did on their assignments, the student will straight away get a "Failed" grade. Any decent software in most schools should detect the crime ( note: could not say the correct term, some local bloggers are sued because they accuse some journalists of doing it).

Here's is what Ms. Associate Editor (Star) wrote and what Bloomberg wrote:

Star says:

According to data compiled by Bloomberg, the largest US banks have grown larger since the financial crisis, and the number of “too-big-to-fail” banks will increase by 40% over the next 15 years.

Bloomberg says:

The largest U.S. banks have grown larger since the financial crisis, and the number of “too-big-to-fail” banks will increase by 40 percent over the next 15 years, according to data compiled by Bloomberg.

Star says:

In a May 27 report, staff at the International Monetary Fund cautioned that higher capital requirements and greater supervision should be imposed on institutions deemed “too important to fail” to reduce the chances of large-scale failures.

Bloomberg says:

Separately, higher capital requirements and greater supervision should be imposed on institutions deemed “too important to fail” to reduce the chances of large-scale failures, staff at the International Monetary Fund warned in a report on May 27.

Star says:

The MSCI AC World Index of developed and emerging market stocks tumbled 46% between Lehman's downfall and the market bottom on March 9, 2009.

Bloomberg says:

The MSCI AC World Index of developed and emerging market stocks tumbled 46 percent between Lehman’s downfall and the market bottom on March 9, 2009.

Star says:

The MSCI AC World gauge surged 99% from its March 2009 low through May 27.

Bloomberg estimated that the freezing of global credit markets caused governments from Washington to Beijing to London to pump more than US$3 trillion into the financial system to shore up the global economy.

Bloomberg says:

The freezing of global credit markets caused governments from Washington to Beijing toLondon to pump more than $3 trillion into the financial system to shore up the global economy. The MSCI AC World gauge surged 99 percent from its March 2009 low through May 27

Now, is Snowball says:

You see, when we pay RM1.20 for the paper, we expect people that write the editorials to do some research or at least quote different sources. For this particular Ms. Associate Editor, "research" and "quoting different source" means changing the wording of another article written by someone else from another news organization without citing proper source. Why the heck would I want to read this article? I may as well read the original one.

Ok, perhaps the things she writes apart from the stolen facts have some value. Let's see what she writes:

The conviction that things will take a dive for the worse, may dampen the will to prevent another crisis at all costs.

Can someone tell me, quoting the phrase made popular by fellow blogger AhYap, what the duck (replace "D" with "F") is this suppose to mean? Hmm..we know there is a crisis..we are convinced that there is a crisis so, we do not want to prevent it...perfect logic...People at Tanjung Rambutan would be proud. What about this one:

People have short memories and lobbies can be quite powerful.
The gyrations of the stock markets are an indication of the powerful forces at work, dictating the direction of markets.

Lobbyists want to show how powerful they are, so, they anyhow play play with the market move it here and there lo...lol :-)

Perhaps, the Star may want to change their motto from " the people's paper" to " the (by stupid) people paper"?

P.S.: I would like to take this opportunity to wish King of Balls good luck on his new book. I encourage fellow Malaysians who want to bring toilet paper around due to the poor public toilet facilities in Malaysia but do not want to be seen carrying a roll of toilet paper around to buy that book in bulk.

Funny Standard, Funny Outcome

2011-05-31T18:08:00.001+08:00

This is not another whack Genting post that this blog is fond of doing. But, as I was scanning through the quarterly disclosure of GENM, I found one disclosure that caught my attention :

The Group had accounted for the construction and development of the facility at the Aqueduct Racetrack in the City of New York, United States of America in accordance with FRS 111 “Construction Contracts”. The contract revenue and costs of approximately RM264.6 million and RM251.2 million respectively, have been recorded in the consolidated income statement during the three months ended 31 March 2011. The construction profit of RM13.4 million arising from the construction and development of the facility is recognised based on the percentage of completion method.

I do not think GENM is trying to do anything funny here as the amount is too immaterial plus they disclose this accounting treatment on the second paragraph of the press release. They are not trying to hide anything. But, such accounting treatment may be abused by smaller companies.

The Aqueduct Racetrack is their own casino in New York. By recording what, in essence, is a CAPEX item through the P&L as revenue and cost, GENM is front-loading the profit of the construction. To put it in another words, GENM is building their own casino, sell it to themselves and record a profit. It is an intra-group transaction, thus, profit should be eliminated.

I am not sure why this development qualifies under FRS 111 Construction Contracts but GENM would probably have some top advisor that may think FRS 111 is more appropriate. Under another standards, FRS 116 Property, Plant and Equipment, profits from self-constructed PPE are not allowed to be recognize. Any comment on why this development falls under FRS 111 would be welcomed as I have been scanning through the standards and do not find anything that mentioned about self-constructed property.

The reason I said that such treatment may be abused by smaller companies is because FRS 111 Construction Contracts is a very subjective standard as the profits to be recognized is based on estimates. Anything that involve estimates is subject to abuse. If the transaction involve a third party, at least, there is a genuine buy and sell transaction involve. But, in this case, the development is sold to the firm itself, there is no genuine transaction. A company can record margins that are plausible i.e. at the high end of the construction industry margin and still get away with it. In a capital intensive development, a few percentage point difference in margin can make a lot of difference in the bottom line. By front-loading the profits, it make a company appears much more profitable than it is. These profits are of low quality as there are no cash inflow involved.

So, just be alert if you find certain companies are using the same standards to record their own CAPEX.