Friday, 9 October 2015

1MDB needs a new script (2)

I wrote before about the rather curious relationship between 1MDB and Avestra, an asset management company that seems to be managed from a townhouse in the Gold Coast, Australia.

It has been mentioned several times in the press "Australian firm Avestra Asset Management has been managing over US$2 billion of 1Malaysia Development Bhd's monies invested in several Cayman Islands funds."

It must be noted that 1MDB has never denied the above.

Avestra was fined in the past by ASIC having committed six offences, and being mentioned by hard-hitting blogger "Dr Benway" in a not "very positive way", to put it mildly.

But things are about to get much stranger according to this press release:

ASIC seeks court orders to wind up Avestra Asset Management

ASIC has commenced proceedings in the Federal Court of Australia against Avestra Asset Management Ltd (Avestra), the holder of an Australian financial services licence and responsible entity or trustee of a number of managed investment schemes. Avestra's schemes are managed funds which invest in shares and other financial products.  ASIC understands the schemes comprise approximately $18.5 million under management.

ASIC alleges that Avestra has persistently contravened its duties in relation to a number of the schemes, including to:
  • act in the best interests of scheme members
  • exercise the required degree of care and diligence
  • do all things necessary to ensure that the financial services provided under its licence are provided efficiently, honestly and fairly.

Among other things, ASIC alleges that Avestra borrowed money on an unsecured basis from the property of its schemes, and invested scheme property in entities and offshore funds connected to its directors without proper due diligence or regard for the interests of members.

ASIC is seeking interim orders to appoint provisional liquidators or receivers to take control of Avestra's assets and report on, among other things, any suspected contraventions of the law, any losses suffered by scheme members, and whether the schemes ought to continue in operation (under a new responsible entity) or whether they should also be wound up.

ASIC is seeking final orders that Avestra be wound up on a just and equitable basis.

According to this article there are clear links with Malaysia, in particular Harvest Court Industries, Eddie Chai and several ACE listed companies:

ASIC: Avestra ‘diverted cash to tax haven’

The corporate watchdog has accused management of Gold Coast funds management group Avestra of diverting investors’ money to unregulated entities in tax haven the Cayman Islands and using fund money to prop up a timber tycoon’s controversial takeover bid for a Malaysian company.

In a blockbuster 200-page Federal Court affidavit, Australian Securities & Investments Com­mission senior investigator Glenn Childs details the regulator’s concerns about failures to disclose related party transactions, potential breaches of takeover laws and the plummeting value of Avestra’s investments.

Mr Childs said he was concerned that Avestra Asset Management executives Paul Rowles and Clay Dempsey “may not be fit to act as the responsible managers” of the company and “investor funds may be at risk”. The company controls about $18.5 million of investors’ money.

Earlier this month, ASIC asked the court to appoint Simon Wallace-Smith and Robert Woods of Deloitte as provisional liquidators of Avestra with a mandate to take control of the 13 funds run by the group.

Justice Jonathan Beach on Thursday ordered the application be heard on October 27.

Avestra has yet to file a defence and its solicitor, Angela Yates of Moray Agnew, declined to comment because the case is before the court.

Mr Childs’s affidavit reveals that Avestra has been the subject of a full-scale ASIC investigation since December 2014.

He alleges Avestra began moving money to the Cayman Islands funds in May last year after ASIC began inquiring into management of its Australian wholesale funds.

Avestra allegedly closed the Australian wholesale funds — Canton, Worberg and Safecrest — and opened equivalents in the tax haven, Bridge Global CMC and Hanhong High Yield.

However, the underlying investments, allegedly dominated by risky punts on Malaysian second-bourse stocks [most likely the writer means the ACE market], did not change.

Mr Childs alleges that one of the funds into which investor money was channelled, the Avestra Credit Fund, failed to disclose a series of investments that involved conflicts of interest.

The largest was $US5.4m, about three quarters of the fund’s assets, loaned in May last year to Zenith City Investments, a company registered in tax haven Seychelles and run by Malaysian businessman Eddie Chai.

“The circumstances in which the loan to Zenith was made suggest that it may have been used for an attempt by Zenith and its director (Mr Chai) … for an attempt to take over the board of Harvest Court Industries … a company listed on the main market of the Malaysia Bursa,” Mr Childs said.

At the same time, Avestra “itself acquired a significant holding in Harvest Court Industries on behalf of its various schemes”, he added.

Under examination by ASIC, Mr Rowles denied knowing Mr Chai wanted the money to buy more stock in Harvest Court.

Mr Chai succeeded in his takeover bid but it was controversial, sparking a Malaysian High Court case.

The Malaysian regulators (BM and/or SC) might want to take note of the above, several Bursa listed companies do indeed have Avestra as an investor.

Two of the funds that are being managed by Avestra have the following track record according to information from their own website:

In a bit more than one year, the funds NAV price lost 60% of its value.

And this fund lost 46% of its NAV price in only nine months time.

According to its website the company delivers "superior performance", but I can't find any proof of that, in the contrary. I only notice a very bad performance and a extreme volatile NAV price. Losing 40% respectively 34% in a single month is simply beyond my believe.

1MDB is not invested in these two funds, that will be of some relief to Malaysian taxpayers.

But it still leaves important questions, for instance:
  • Did 1MDB invest in a fund managed by Avestra, if so who was responsible for the due diligence of selecting the fund manager, and how was that process exactly performed? Did the due diligence result in any red flags?
  • Which fund did 1MDB exactly invest in, and what have the returns been so far?
  • Is any commission paid to an agent (or other person/organisation) when 1MDB made this investment, if so how much?
Malaysian royalty has called for a speedy, thorough, transparent probe in the affairs of 1MDB without fear or favour, let's hope that will indeed happen soonest.

Thursday, 8 October 2015

Why Protecting Minority Shareholders Builds Stock Markets

From Wharton university:

Once upon a time, only countries like Britain and the United States had legal provisions in place to protect the rights of minority shareholders against the actions and decisions of large shareholders and management. As a result, money flowed into the stock market, and capitalization grew vigorously, dwarfing all other markets around the world. Beginning in the 1980s, however, countries in Continental Europe and Asia introduced reforms in their corporate legislation, affording minority shareholders a number of legal protections, including boosting the powers of the general shareholders’ meeting, prohibiting multiple voting rights and dual-class shares, mandating the presence of independent directors, and requiring the disclosure of major equity stakes, among others. What has driven these changes? Have they resulted in the growth of the stock market?

A new paper by Mauro F. Guillén of the Wharton School and Laurence Capron of INSEAD sheds light on these important issues.* They have assembled information on legal protections for minority shareholders in as many as 78 countries since 1970. They document that whereas four decades ago the Anglo Saxon countries afforded minority shareholders the greatest degree of protection, after the year 2000 countries in Western Europe, East Asia, and, especially, Eastern Europe and Central Asia had passed new legislation protecting minority shareholders.

The authors show that many countries around the world passed such new rules and regulations in response to a number of factors, including new economic ideas about free markets, imitation of other countries in the same region, emulation of the United States as the global financial leader, and pressures from the International Monetary Fund, which grew eager to induce countries in under financial stress to implement reforms.

By the 2010s, the countries in the world with the greatest degree of protection of minority shareholders were Kazakhstan, Russia, Uzbekistan, South Korea, Mauritius, and Poland. This phenomenon begs the question of whether legal reforms protecting minority shareholders are actually enforced or if they remain largely ceremonial. The research by Guillén and Capron, which carefully takes into account a number of economic and financial variables, conclusively shows that the adoption of legal protections has increased stock market capitalization, trading, and turnover. But they also found that the beneficial effects of such legal provisions are larger when the government has the capacity to enforce them.

Guillén and Capron argue that governments should continue to promote minority shareholder rights as an antidote against the abusive use of private information. Global competition for capital has intensified considerably, and having an appropriate legal framework that protects minority shareholders should be at the top of the policymaking agenda. Their research also has implications for companies and investors. Companies making investments in foreign countries need to carefully consider the extent to which minority shareholder rights are protected whenever they make decisions about floating part of their equity in a foreign subsidiary. Investors seeking global diversification of their portfolios also need to study the international map of shareholder protections before making decisions.

In Malaysia the legal protections are in place, and the government has the capacity to enforce them, but will they do that, without fear or favour? Or are the reforms in the name of good (corporate) governance mostly ceremonial?

63 Innovation agencies ...

From The Malaysian Reserve:

The government plans to address the existence of too many government agencies involved in innovation and technology in order to enhance efficiency and eliminate red tapes, said Datuk Seri Mohd Najib Razak.

The prime minister (PM) said presently there are a myriad of entities with so many roles which have created the risk of fragmentation in the innovation space.

“At the last count, entities in the government involved in technology innovation include:

  • five units under PM’s Department
  • three ministries with direct technology funding
  • six ministries with technology associations
  • three regulators
  • four councils that I chair
  • four other councils
  • three development corporations with funding
  • seven development agencies or corporations
  • one foundation
  • six research institutions
  • five mutual funds
  • five managed funds
  • 11 funding agencies
If I add them all up, 63 in total. Simply amazing .....

Monday, 5 October 2015

XingQuan: does the company believe its own cash? (2)

Bursa has queried XingQuan about its rights issue, and the company has replied:

The Company wishes to clarify that the cash balance of RM886.55 million is mainly reserved for working capital, and as explained in the announcement dated 25 September 2015, Xinquan requires sufficient cash buffer and a high level of working capital to ensure minimal disruption to its operations in the event of a liquidity crisis or a sharp economic downturn. The purpose of the Proposed Rights Issue with Warrants is to raise funds for Xinquan’s capital expenditure requirements whilst maintaining a healthy level of cash balances at all times.

In addition, the available cash balance may also be used for future business expansion into related businesses, in particular, acquisition of foreign brand(s), if and when the opportunity arises.
The Group has placed its cash balances in savings accounts with licensed banks in China which carries an interest rate of approximately 0.35% per annum. The cash is placed in savings accounts as the cash is not idle and is required to fund Xinquan’s day-to-day operations.

I find the answers completely unsatisfactory given the size of its current operations. Just looking at balance sheet items like inventory, receivables, payables etc. gives an indication roughly how much cash the company needs in case the company grows, or in case there is a calamity. The company has abundant cash for all those purposes, much more than needed.

Regarding business expansion, first of all that sounds very vague, secondly those take time, the company could still raise money when the opportunity arises.

The company claims that it can not put money (not even a few hundred million RM) in a fixed deposit since it needs the money in day-to-day operations. That sounds highly questionable. The company should be forced to proof that, by showing the minimum amount of cash throughout the year in all saving accounts.

Chinese listed companies have a really bad reputation for its cash management. There have been fraud cases where the promised money was simply not there. Others have embarked on acquisitions (sometimes in related party transactions) that have destroyed value. They hardly pay out a decent dividend or embark on a share buyback program. In the contrary, they rather use private placements at share valuation below the amount of cash per share.

It doesn't make sense at all, and if that is the case, then in my experience most likely something else is going on, something more sinister.

There is still my suggestion in the previous posting.

More than four years ago I warned already about Chinese listed companies with cash levels that can not be trusted. Free advice for Bursa, it can't get much better than that, can it?