Monday, August 31, 2009
The following table by McKinsey was highly illuminating. It puts into sparkling perspective how important private domestic consumption is to each country as a percentage of GDP. One should always strive to be more led by domestic consumption as that usually means a better grasp and control of an economy's fortunes. China has been desperately trying to lead the world back from the diminished global trade due to the recent global financial crisis by shifting from an investment led economy to a more domestic driven type. As the table shows, its a long uphill climb still. Thats the negative way of looking at things - the half full view would be that there is still a lot China can do (and will do) to ramp up its domestic economy, and it will only means more consumption of global goods and services in the long run. Its going to be the Asian century mainly by moving just 10%-20% of the rural folks in China and India into the middle class consumption category.
On a side note, Malaysia's domestic consumption as a percentage of GDP is high enough but the major caveat about looking at tables such as these is that if your population is smallish, the high private domestic consumption percentage figure is too one dimensional. If your population is say less that 50m, you probably HAVE to be led by investment as a priority as your population will not be able to generate sufficient critical mass of demand for your industries to compete on a global scale with the economies of scale that is needed.
p/s photos: Jessica Gomes
Sunday, August 30, 2009
Morningstar ranked Pheim ASEAN Emerging Companies Growth Fund ranked No. 1 for the 1-year, 3-year, 7-year, 10-year and 14-year periods for the Morningstar Category ASEAN Equity Funds as at June 2009.
First, let me say that I like CK Tan a lot, I think he is quite a brilliant fund manager. Besides being an outstanding long term outperformer, I also absolute share his view on the local market, this was uttered by Tan some 13 years ago: Pheim Asset Management CEO Tan Chong Koay believes that a buy-and-hold strategy is not appropriate for Malaysia's volatile market. Tan states that investors need to bet on the sharp swings of the market if they are to succeed in Malaysia.
It is being closely watched in the investment community, as Tan is well-known in fund management circles. Also, the case touches on the practice of “window-dressing” where big investors may try to ramp up or push down share prices — a key concern at the year-end when the value of a fund is determined.
Pheim Malaysia's case is it had already invested in the company when it was floated on the stock exchange earlier in the year. Its investment committee was keen to buy more United Envirotech shares, on the back of its success in investing in Hyflux. There were three funds in question — but under Malaysian rules, each fund could not hold more than 10 per cent of foreign (non-Malaysian) stocks. So it was only after these three funds had sold off some Singapore stocks on Dec 28, that the firm was able to buy into United Envirotech. Pheim Malaysia argues that it was a genuine investor, believing the shares were undervalued in 2004.
My views in brackets.
UET shares are the subject of a High Court lawsuit. The Monetary Authority of Singapore is suing Tan Chong Koay and his Malaysian fund Pheim Asset Management for alleged false trading in UET shares in December 2004.
Justice Lai Siu Chiu heard evidence yesterday from former UOB Kay Hian broker Tang Boon Siah, who said he received 'discretion' orders from Pheim Malaysia to buy about $100,000 of UET shares on Dec 29, 30 and 31, 2004 and filled these orders slowly, and mostly at the end of each trading day, because the stock was illiquid.
Examined by Pheim's lawyer Foo Maw Shen of Rodyk & Davidson, Mr Tang said he mostly lifted offers from the sell queue and waited as long as he could between trades so prospective sellers might appear. Even then he was unable to completely fill the order, but the price changes on each trading day did not exceed 20 per cent, he said. (Filling an illiquid order is a very difficult task, the broker did the right stuff, waited till end of the day before taking out the sellers queue, and he also ensured that it did not exceed 20% price movement daily. (Nothing sinister here).
Mr Tang said he kept in frequent telephone contact with Mr Tan on Dec 30 and 31, 2004 to update the latter on the status of the market. Mr Tan is represented in the case by Senior Counsel Michael Hwang. MAS, represented by Senior Counsel Cavinder Bull of Drew & Napier, alleges Mr Tan and Pheim created a false market in UET shares by their purchases, especially when timed so close to the end of the year. The purchases were also made mostly at the end of each trading day. (Mr. Bull is obviously deluded as to why shares had to be done mainly at the end of the day, this is to prevent other speculative buyers jumping in thus driving the shares up even more. By definition, a false market is WHEN YOU LITERALLY CONTROLS THE BUYERS SIDE AND THE SELLERS SIDE - if Phiem really did try to create a false market, then by all means the genuine sellers would dump their shares when the share price moved up day by day, Pheim was not selling).
The purchases caused the share price to close significantly higher and created a false and misleading appearance in the market, Mr Bull argued. This contravened Section 197(1)(b) of the Securities and Futures Act, he said. (OMG, MAS and Mr. Bull, why bother with this frivolous and naive lawsuit even. It was not a one day affair, it was spread out over 3 days. Did it amount to trying to close the share price at a certain level, or was it due to a genuine attempt to buy more shares).
Mr Tan and Pheim deny the accusations, saying the purchases were legitimate commercial transactions. Former HSBC Securities managing director Christopher Chong is expected to take the stand as an MAS expert witness on Monday when the hearing resumes. The defendants have called Nels Radley Friets - chairman of the Singapore Exchange and Catalist disciplinary committees, but appearing in his private capacity as their expert witness.
Aug. 28 (Bloomberg) -- Singapore’s central bank sued Pheim Asset Management Pte Chief Executive Officer Tan Chong Koay and the fund manager’s Malaysian unit for manipulating the shares of a water treatment company.
Tan and Pheim Asset Management Sdn. bought almost 90 percent of the traded shares of Singapore-based UET from Dec. 29 to Dec. 31, 2004, according to a statement presented to Singapore’s High Court by the Monetary Authority of Singapore's lawyers Drew & Napier LLC yesterday.
That created a “false or misleading appearance” of the market and the company’s stock, Cavinder Bull, a lawyer with Drew & Napier, said in the statement. The share purchase raised the net asset value of Pheim’s accounts, triggering outperformance bonuses of S$50,790 ($35,218) and an additional management fee of S$115, lifting the reputation of the fund manager, Bull said in the statement. (This is so laughable. A performance bonus of nearly S$61,000. Can someone please clarify what is Tan's net worth in 2004? I mean, the "reasonable man" defense here would tear this to shreds).
Pheim and Tan wouldn’t have been motivated by the “insignificant” amounts, according to a court statement from their lawyers. They “had no intention to create a false or misleading appearance,” according to the statement. United Envirotech shares were undervalued and the purchases were “part of a legitimate and genuine investment strategy,” it said.
UET price movements during that period were “a reflection of genuine demand and supply,” and the stock was “illiquid” and “volatile,” according to the statement. Pheim bought the shares for 38.4 Singapore cents to 43.9 Singapore cents each in December 2004. The shares climbed 17 percent from Dec. 29 to Dec. 31 that year.
“This was not the conduct of a genuine buyer seeking to buy shares at the lowest possible price,” the central bank said in its court filing. “Such a genuine buyer would have spread out the purchases of a thinly traded stock in order to avoid spikes in the prices.” (Not necessarily as the record should show that even as prices went higher with each progressive day, there were no excited sellers of the shares or else Pheim would have had the opportunity to buy a lot more shares. It was obvious that the shares were tightly held. MAS might as well GO AND SUE THE SHAREHOLDERS OF UTC WHO DID NOT SELL THEIR SHARES when Pheim started to buy the shares aggressively, does the fact that they did not sell to an irrational share price rise amount to stupidity or an act to collude with Pheim to allow the share prices to go even higher??).
Tan will call Nels Friets, chairman of the disciplinary committee of Catalist, the small-caps board of the SGX, as an expert witness in his defense. The central bank has called Christopher Chong, former managing director of HSBC Securities Pte, as its expert witness. Tan couldn’t immediately be reached for comment. The central bank declined to comment on on-going legal proceedings. Tan and Pheim may be fined between S$50,000 and S$2 million if found guilty, according to the court filing.
Pheim, founded by Tan in 1994, manages more than US$1 billion and counts the GIC and Malaysia’s Employee Provident Fund among its clients, according to its Web site. Tan, who has offices in Singapore and Malaysia, once jokingly said that Pheim was a made-up word which means Please Help Everyone Invest Money.
The case is Monetary Authority of Singapore and Tan Chong Koay, Pheim Asset Management Sdn Bhd., 658/2008/P in the Singapore High Court.
MAS should have a lot more things on their plate than to go for somebody like Pheim. Such a waste of resources and time.
p/s photos: Eri Otoguro
Friday, August 28, 2009
Many investors regard analyst reports with a lot of reservation and cynicism, and rightly so. Finally, somebody has dug up enough dirt and evidence. The fact that its Goldman Sachs will mean the regulators and politicians will be sharpening their knives for the kill. Goldman Sachs will get a major major fine here. When an investment bank relies so much on trading for such a huge slice of their profits, and where profits contribution is regarded so highly, where you bonuses and promotion will be materially affected when you "contribute well", its hard not to have shenanigans sprouting everywhere - the smart ones don't get caught. There are always someone somewhere who will get the tip earlier than you, and by the time it is printed, rest assured the thing has been double-dipped already.
WSJ: Goldman Sachs research analyst Marc Irizarry's published rating on mutual-fund manager Janus Capital Group Inc. was a lackluster "neutral" in early April 2008. But at an internal meeting that month, the analyst told dozens of Goldman's traders the stock was likely to head higher, company documents show (the following day apparently).
The next day, research-department employees at Goldman called about 50 favored clients of the big securities firm with the same tip, including hedge-fund companies Citadel Investment Group and SAC Capital Advisors, the documents indicate. Readers of Irizarry's research didn't find out he was bullish until his written report was issued six days later, after Janus shares had jumped 5.8%.
Every week, Goldman analysts offer stock tips at a gathering the firm calls a "trading huddle." But few of the thousands of clients who receive Goldman's written research reports ever hear about the recommendations.
At the meetings, Goldman analysts identify stocks they think are likely to rise or fall due to earnings announcements, the direction of the overall market or other short-term developments. Some of their recommendations differ from ratings printed in Goldman's widely circulated research reports. Some Goldman traders who make bets with the firm's own money attend the meetings. Critics complain that Goldman's distribution of the trading ideas only to its own traders and key clients hurts other customers who aren't given the opportunity to trade on the information.
Securities laws require firms like Goldman to engage in "fair dealing with customers," and prohibit analysts from issuing opinions that are at odds with their true beliefs about a stock. Steven Strongin, Goldman's stock research chief, says no one gains an unfair advantage from its trading huddles, and that the short-term-trading ideas are not contrary to the longer-term stock forecasts in its written research.
Former Goldman client George Klopfer of Park City, Utah, who was unaware of the trading tips until recently, says the practice is unfair. "When I joined Goldman as a client, I got all these fancy brochures saying they put the client first," he says. "I just don't want to have to worry about them or big clients trading on stuff like this. I was at the end of the food chain." He says he pulled out most of the $20 million in his account earlier this year after losing money on several Goldman funds. Goldman says individual clients like Mr. Klopfer typically have a long-term investing approach and are not focused on individual stocks.
Since the trading huddles began about two years ago, Goldman has supplied "trading ideas" on hundreds of stocks to the traders and top clients, according to internal documents reviewed by The Wall Street Journal.
Goldman spokesman Edward Canaday says the tips are "market color" and "always consistent with the fundamental analysis" in published research reports. " (My, talk about the ability to b.s.). Analysts are expected to discuss events that may have a near-term or short-term impact on a stock's price," he says, even if that is a different direction from an analyst's overall forecast. Goldman's published research reports include a disclosure that "salespeople, traders and other professionals" may take positions that are contrary to the opinions expressed in reports. But the firm doesn't disclose the trading huddles. (In effect, some of the better trading ideas would have Goldman traders and inner circle of important clients betting ahead of the pack... how is that not against the law, its called front running).
Mr. Canaday says analysts are told that any comment at a meeting that could result in a change in a rating, earnings estimate or stock-price target "must be published and disseminated broadly to all clients." He adds, however, that it is rare that tips arising from the meetings reach that threshold. He says ratings changes after the meetings also are rare.
The tips usually go to top clients who have expressed interest in having the information and have short-term investment horizons, he says. Goldman doesn't want to overload other clients with information that isn't relevant to them, he says. "We are not in the business of serving thousands of retail customers," he says.
At least one competitor discloses such trading tips much more broadly. Morgan Stanley's research department sends blast emails with short-term views on various stocks to thousands of clients, and posts the information on its Web site. It doesn't call customers to convey the tips, because Morgan Stanley officials decided that could expose the firm to questions about selective disclosure, according to people familiar with the matter. (At least there is still some body operating with some principles).
The 2003 case involved allegations that Wall Street firms were issuing overly optimistic stock research in order to win more lucrative investment-banking business. The settlement, in which Goldman and the other firms didn't admit or deny wrongdoing, erected walls between research and investment banking. Securities laws currently require research analysts to personally certify that their reports accurately reflect their views of a stock.
Some analysts have gotten into big trouble by contradicting themselves. In 2003, former Merrill Lynch & Co. technology analyst Henry Blodget agreed to a lifetime ban from the securities industry after touting stocks that he disparaged in private emails.
These days, analysts must juggle growing demands from trading units at their firms. Such operations have emerged as big moneymakers, fueling the record $3.44 billion in net income at Goldman in the second quarter. A large portion of Goldman's profit came from trades done for mutual funds, pension funds, endowments, hedge funds and other big institutional investors. Proprietary trading, in which Goldman makes bets with its own capital, accounts for about 10% of its profits.
Analysts have a financial incentive to give clients useful information. Goldman sets aside roughly 50% of money allotted each year to analyst compensation to distribute based on feedback from trading customers. The balance of analysts' pay is determined by the performance of their stock picks. That pay system is common among major Wall Street firms.
At many firms, traders, salespeople and analysts hold early-morning calls to review ratings changes, recommendations and market events. Throughout the day, analysts talk to key clients to help them interpret research reports and provide more detail on specific events such as earnings.
The research business is considered a loss leader at most firms, despite persistent attempts by Goldman and other securities giants to squeeze more revenue from it. Goldman was looking for a leg up on rivals when it started the trading huddles in 2007. That year, Goldman ranked ninth in Institutional Investor magazine's annual list of the best equity analysts, as determined by a survey of big institutional investors. Goldman was rated eighth in last year's competition.
The huddles began in earnest around the time Goldman's research department got a new boss, Strongin. He came to the firm in 1994 from the Federal Reserve Bank of Chicago, where he had been director of monetary-policy research. At Goldman, he had run the commodities-research operation, then was co-chief operating officer of the whole research unit, before being asked to run it in April 2007. Strongin, 51 years old, set out to improve Goldman's research operations. The firm asked important clients for suggestions. One idea that took hold was giving certain customers and traders more access to stock tips.
The idea was controversial with some Goldman research staffers. "I am not sure we should be giving recommendations that go against our research," said one Goldman employee at a meeting where the trading huddles were discussed, according to one attendee.
Laura Conigliaro, Goldman's co-head of research in the Americas region, replied at the meeting that the firm needed to respond to inevitable differences in the time horizons of investors. Issuing a short-term buy recommendation wasn't necessarily at odds with a lukewarm "neutral" rating for the long run, she added.
One recipient of the trading tips, Steve Eisman, a managing director of hedge fund Frontpoint Partners LLC, says that he likes the back-and-forth he now has with Goldman's analysts, and that he pays attention to some of the tips. "A few years ago, Goldman wouldn't make a negative call on anything," he says. "Now they say it like it is."
The huddles can last from 20 minutes to one hour, according to participants. Analysts are encouraged to bring a trading idea. They talk with Goldman traders about the financial markets and events that could trigger movement of specific stocks. Goldman specifies how long each recommendation is in effect, often one week.
At a huddle on July 31, for example, the firm's technology analysts and traders discussed more than a dozen stocks, ranging from Garmin Ltd. to Microsoft Corp. None of the analysts said anything that appeared to differ from their stock ratings.
Compliance officers sit in on almost all the meetings, Goldman says. Research analysts say they have been guided on what language to use in the huddles. Words like "buy" and "sell" are to be avoided, while "run up," "give back" and "oversold" are encouraged. Internal documents reviewed by the Journal initially tracked the trading-huddle tips as "buy" or "sell," but now refer to them as "up" or "down."
Research-department employees prepare telephone scripts, then call top clients, typically several hours after the meeting has ended. Goldman says its in-house traders are prohibited from trading on the tips until after they've been relayed to clients. (Yeah, sure...).
Documents reviewed by the Journal indicate that anywhere from six to 60 clients are contacted, depending on the investment. For example, clients specializing in financial stocks are given recommendations about that sector. Each call typically includes comments about the overall market and the kinds of investors Goldman believes are propelling it, and ends with a stock tip.
The meeting where Irizarry suggested that Janus shares were worth buying, held on April 2, 2008, was attended by Goldman's financial-research analysts and traders who handle customer orders. It also included another class of traders called "franchise risk managers," who sit with and advise the traders handling customer orders -- and make bets with Goldman's money.
Typically, traders who wager firm capital are walled off from those handling customer orders so that they don't take advantage of information about client trading, which securities regulations forbid. Goldman says its franchise risk managers don't trade on client information and must first share trading-huddle tips with clients before acting on the tips themselves.
At the April 2 meeting, Goldman says, Irizarry was expressing a sentiment about Janus similar to one contained in a report Goldman published the previous day. A chart in that report, Goldman says, cited a report from mutual-fund-research firm Morningstar Inc. that was positive on Janus. While internal documents show Irizarry's rating on Janus stock at the time was "neutral," they note the "price action expected" was "up." Irizarry declined to comment. The day after the meeting, Goldman told selected clients that "in particular, we highlight Janus," according to an internal document.
At the same April 2 trading huddle, Goldman analyst Thomas Cholnoky said he favored MetLife Inc. over other insurers, according to notes from the meeting. Internal documents indicate he believed the stock would rise over the short run. Hours after the meeting, Cholnoky released a research report that reiterated his "neutral" rating on MetLife, saying he hadn't changed his estimates. Goldman says his view about the company's favorable short-term prospects is clearly conveyed in a research note issued prior to the huddle, which said the insurer "stands to be the biggest beneficiary from the steepening yield curve."
A week later, Cholnoky boosted his rating on MetLife to a buy, and Goldman added the stock to its "America's Buy List" of top stock recommendations. Cholnoky said he expected MetLife's quarterly results, due in a few weeks, to "surprise on the upside." (The quarterly results, when they came out, did slightly.) Cholnoky, who no longer works at Goldman, didn't respond to messages seeking comment.
Goldman says that in both these cases the analysts' views were consistent with the published research, which included a 12-month price target that was above each stock's price at the time.
Morgan Stanley also generates short-term views on various stocks, which it calls "Research Tactical Ideas" and distributes widely via email and the firm's Web site. In May, for example, it told clients that insurer Aflac Inc.'s earnings guidance would be "softer than many investors expect." Its rating on Aflac at the time was "neutral."
In its longer-term reports published by analysts, Morgan Stanley discloses that it issues such trading tips, and that the tips on any given stock "may be contrary to the recommendations or views expressed in this or other research on the same stock."
Last year, the Financial Industry Regulatory Authority, the industry's self-regulatory body, proposed new rules meant to clarify existing disclosure obligations under the rule requiring "fair dealing" with all clients. Firms could issue contradictory ratings as long as clients were told that such inconsistencies were possible.
A Finra spokesman said the agency still is reviewing comment letters filed in response to the proposal. Goldman hasn't commented on the proposed rules.
p/s photos: KC Concepcion
Thursday, August 27, 2009
This has to be the article of the year, and from China's China Daily no less http://www.chinadaily.com.cn/opinion/2009-08/04/content_8515596.htm :
At a time when shamelessness is pervasive, we are often at loss as to who can be trusted. The five most trustworthy groups, according to a survey by the Research Center of the Xiaokang Magazine, are farmers, religious workers, sex workers, soldiers and students.
A list like this is at the same time surprising and embarrassing. The sex business is illegal and thus underground in this country. The sex workers’ unexpected prominence on this list of honor, based on an online poll of more than 3,000 people, is indeed unusual.
It took the pollsters aback that people like scientists and teachers were ranked way below, and government functionaries (i.e civil servants / politicians), too, scored hardly better. Yet given the constant feed of scandals involving the country’s elite, this is not bad at all. At least they have not slid into the least credible category, which consists of real estate developers, secretaries (this one is weird but I think it has to do with access to the bosses and/or philandering with the bosses), agents (that's right, anyone with a job title that has the word "agent" to it cannot be trusted), entertainers and directors.
Yet given the constant feed of scandals involving the country's elite, this is not bad at all. At least they have not slid into the least credible category, which consists of real estate developers, secretaries, agents, entertainers and directors.
What is more worrisome in the findings is the dramatic drop in government credibility ratings. Which happens in the context of what pollsters term as "mild improvement" in public perception of society's credit conditions.
Drain of credibility
In spite of a continuous, though very slow, tilt to the positive in the public's perception of society's credit records, researchers detected a converse trend when it came to the government.
More than 91 per cent of the respondents admitted that they would take government data with a pinch of salt. The same proportion was 79 per cent in 2007. The steep decline, pollsters concluded, reflects a "quite severe" drain of government credibility, which is obvious in recent "mass incidents". In most recent cases of mass protests, distrust of local authorities turned out to be a powerful amplifier of public indignation.
Multiple factors may be responsible for this. The Xiaokang Magazine Research Center named four - protectionism, unstable policies, dumb decisions, and lack of transparency. All of which has to do with the low-level bureaucracy's lack of respect for public concerns.
This may sound strange, because, geographically, local governments and their staff are closer to local realities; and, politically, they are there to take care of the citizens' day-to-day concerns.
But since local cadres report only to their superiors, and their appointment, promotion and removal has little, or nothing, to do with the community they are supposed to serve, it is only natural that they are preoccupied overwhelmingly with pleasing their bosses. In contrast to the people-friendly image of the central leadership, local cadres, as a collective, share a much less desirable reputation for their indifference to, if not disregard of, citizens.
Even for stability's sake, efforts must be made to restore the governments' credit record. The first step, however, is to put an end to public servants being alienated from public interest.
It is obvious that the survey yielded some angry responses, the general public would vent their inner frustrations indirectly by naming unlikely groups. But I tend to believe that there is more truth to the final verdict. It is the public absolute abhorrence of protectionism (against foreign influence, against the internet access), unstable policies, dumb decisions, and lack of transparency. May I remind the people in power in other Asian countries (hint-hint) to read between the lines as these very same sentiments seem to be applicable in varying degrees for most other Asian countries.
They have highlighted farmers, sex workers, students, soldiers, civil servants, teachers, secretaries, religious workers, scientists, teachers, real estate developers, entertainers and directors (I believe these are board of directors of listed companies and not film directors ok) ... let's add a few more and see where they rank in your country: ruling politicians, opposition politicians, lawyers, judges, police, army, architects, engineers, doctors, economists, remisiers, analysts, mamak stall owners ... etc.. I guess my final word on this is that each profession comes with it certain elements of integrity, expected professionalism and some element of serving the people's needs or rather putting the needs of the nation before yours - when these elements are eroded deliberately or otherwise, you lose the respect and dignity that come with those positions, ... at least the sex worker will do what he/she says he/she will, not overcharge, satisfaction (usually) guaranteed.
In recent years, China has already paid a high price for the prevailing credibility crisis. The annual losses caused by bad debts have reportedly amounted to about 180 billion yuan, and the direct economic losses induced by contract fraud each year is also up to 5.5 billion yuan. Besides, shoddy and fake products contribute to another great loss involving at least 200 billion yuan. Generally, credibility crisis would cost China as much as 600 billion yuan every year. The shortage of credibility is not only seen in the market transactions, but in the officialdom as well. Corruption in any form is about to erode the faith of the general populace in authorities and officials at different levels.
Perhaps, the survey result can just give a restricted description on China’s credibility status, or people can take it with a grain of salt. But it did portray a picture of the spiritual outlook of today’s Chinese society, with money as the overriding motive. It is this that especially deserves attention.
If we were to do a survey in our country, wah-lau-eh ... (I am also sensing the PAPs shaking in their boots..).
p/s photos: Zhang Xin Yu (wanted to write "nice pussy" but thought that might be misinterpreted as rude or offensive)
Wednesday, August 26, 2009
In the 14th Annual Hong Kong Film Awards, the film was heavily nominated and ended with 3 trophies:
- Winner - Best Supporting Actress (Law Koon-Lan)
- Winner - Best New Artist (Alice Lau Ar-Lai)
- Winner - Best Screenplay (Raymond To Kwok-Wai
- Nomination - Best Picture
- Nomination - Best Actress (Alice Lau Ar-Lai)
- Nomination - Best Supporting Actress (Fung Wai-Hung)
- Nomination - Best New Artist (Hui Fan)
- Nomination - Best Original Score (Lee Hong-Gum, Wan Hol-Geen)
I thought I will be among the first few to book the tickets, but guess what, the better seats for the firat wekend are all gone. Had to book for Wednesday 14 October. Will be looking forward to watch and hear Tan Soo Suan, and my good friend Fang Chyi perform. See you there, book early! You have been warned.
BOX OFFICE IS NOW OPEN
Don’t miss this heart warming musical from an award-winning play.
Purchase ticket early and enjoy our special EARLY BIRD DISCOUNT.
For ticket purchase, kindly call 03 4047 9000 (KLPac) or 03 7711 5000 (Axcess).
A Malaysian premier not to be missed
Winner of the Best Screenplay Award at the Hong Kong Film Awards
Won critical acclaims for its stage productions in Hong Kong, Singapore and Shanghai
Musical adaptation of play by TO KWOK WAI
PUN KAI LOON producer / director
KHOR SENG CHEW producer / music director
GAN BOON WE concert master / asst. music director
LOO FUNG CHIAT & LOO FUNG YING arrangers
MELISSA TEOH production stage manager / asst. director
WONG KIT YAW choreographer
DOMINIQUE DEVORSINE costume designer
LIM ANG SWEE lighting designer
LIM WAN YEE sound engineer
LEE JIN WEN dialect coach
TAN SOO SUAN vocal coach
Tan Soo Suan Janet Lee Chris Tong Chang Fang Chyi Steve Yap Nell Ng
Samuel Tseu Ling Tang Ho Soon Yoon Terry Siau Song-Fan Seah Jojo Wong
Teoh Sheew Yong Beauty Teoh Liow Swee Keong Rachel Tan
Tan Soo Sze Anrie Too Ng Pei Pei Keith Yew Chong Wey Yin
Tam Yee Swee Cassie Wong Leslie Cheng Roax Tan
DAMA ORCHESTRA: Gan Boon We Khor Seng Chew Loo Fung Chiat Loo Fung Ying
See Keh Fong Tee Hsien Onn Lai Foo Yuen Foo Chie Haur
Cantonese with English and Chinese surtitles
Date & Time OCTOBER
Evening (8.30pm): 10 (Sat) / 11 (Sun) / 14 (Wed) / 15 (Thu) / 16 (Fri) / 17 (Sat) / 18 (Sun) / 21 (Wed) / 22 (Thu) / 23 (Fri) / 24 (Sat) / 25 (Sun) Oct 2009
Matinee (3.00pm): 11 (Sun), 18 (Sun), 25 (Sun) Oct 2009
10 Oct 8.30pm
Fund Raising Musical for Nalanda Institute Building,
Education & Development Fund
Sponsored by John Master / Schwarzenbach / Kiko Amazing Kids
Ticket RM88 / RM128 / RM198 / RM298 / RM500
Enquiry GG Tan 016 209 0834 / Reena Tan 012 332 3787
Ee Kim Swee 012 345 4448 / Wai Chin 03 8948 8055
17 Oct 8.30pm
SP Setia Bhd Group Corporate Night
18 Oct 8.30pm
Charity Fund Raising Musical for Rotary Club of Petaling Jaya
Ticket Invitation by donation minimum RM300 Shireen Lim 016 227 0423
RM75 / RM115 / RM155 KLPac 03 4047 9000
24/25 Oct 8.30pm
Fund Raising Musical for Tzu-Chi Buddhist Merits Society
Sponsored by Live to Love www.l2love.org / Yin Ngai Musical Arts & Association
Weekday Shows (Wed-Thu)
RM60 / RM95 / RM130 / RM165 / RM200 / RM235
Weekend Shows (Fri-Sun)
RM75 / RM115 / RM155 / RM195 / RM235 / RM275
Early Bird Discount:
20% off (Wed-Thu) and 15% off (Fri-Sun)
Discount Applicable from 23 Aug 2009 - 15 Sept 2009
10% off (Wed-Thu) and 5% off (Fri-Sun)
Discount Applicable from 16 Sept 2009 - 30 Sept 2009
Kuala Lumpur Performing Arts Centre (Telesales and Walk-in Only)
Sentul Park, Jalan Strachan, Off Jalan Ipoh
51100 Kuala Lumpur
Tel: 03 4047 9000
Tel: 03 7711 5000
Axcess Office (Walk-in Only)
1st Floor, Block A, Lot 116, Jalan Semangat
46200 Petaling Jaya, Selangor DE
Tel: 03 7711 5050
Axcess @ 1-Utama Shopping Complex (Walk-in Only)
Lot B16, Basement Floor (B1), New Wing
47800 Petaling Jaya, Selangor DE
Pentas 1, Kuala Lumpur Performing Arts Centre, Sentul Park, Jalan Strachan,
Off Jalan Ipoh, KL
Dama Orchestra, M-2-10 Plaza Damas, 60 Jalan Sri Hartamas 1,
Sri Hartamas, 50480 KL
Tel: 03-6201 9108 / 9107 Fax: 03-6201 9109
This is a company not many has heard of. But hey, it just went past RM1.1bn in market cap. Maybe cause its based in Klang??? It has one of the most sought after ROE: 22.4% (2008); 21.4% (2009) and is projected stay between 18%-19% for the next 2 years. Manageable gearing at 0.7x which is slated to come down to 0.6x next year. Its not in the FBM 30 or the FBM 70, but I would be very surprised if it does not make its way into FBM 70 soon.
QL is principally engaged in investment holding and provision of management services, whilst the principal activities of the subsidiaries are investment holding, layer farming, processing, commercial production and distribution of animal feed raw materials and food grain, deep sea fishing and property holding. QL is involved in the activities, such as manufacturing, integrated livestock, oil palm related and distribution. The Group history can be traced back about 20 years ago.
It started as a small scale business integrated livestock activities and towards the tail end if 1993, the company began to corporatize and streamline various family business units.
From 1994 onwards, it focused on building an agro and broad-based business model consist of integrated livestock farming, marine product manufacturing and oil palm milling activities, targeting for listing. The Group was listed on 30th March 2000. During the years 2000 to 2007; it grew all three core activities organically as well as through acquisitions. Major emphasis was placed on marine-based activities as it had competitive edge over other players. During this time, it further refined it's strategy by setting up the platform for long term growth by investing in CPO milling and oil palm plantation development in Indonesia.
The company's main business focus is the manufacture and distribution of fishmeal products. QL is also the largest fishmeal manufacturers in Malaysia and supplied approximately 25% to the market share. Beside this, the company is also the leading producer of surimi, which is fish meat processed into paste form and surime-based products. Meanwhile, its integrated livestock activities consist of distribution of feed meal raw materials and animal health and feed supplements.
In addition, QL is also involved in layer farming and producing of poultry eggs. QL's operations are base in Endau, Johor and Hutan Melintang, Perak. The raw materials, mainly fish are sourced locally especially from Hilir Perak and Kuantan. QL's annual production of surimi and surimi-based products are around 7,400m/t. Meanwhile, its total egg production is about 1.5 million eggs/day. QL has two CPO mills servicing small estates in the vicinity. The mills are located near Tawau and Kunak, Sabah. QL has 20,000 hectares of oil palm development in Eastern Kalimantan, Indonesia and some mature acreage in Sabah.
The main shareholders of the Group are CBG Holdings Sdn Bhd (47.36%) and Farsathy Holding Sdn Bhd (13.48%) and Lembaga Tabung Haji (4.86%). Paid up 329.7m shares with a market cap of RM1.1bn. Pretty tightly held with just a free float of 25%. 1-for-5 bonus issue of up to 66m new shares declared. The bonus issue will raise share capital from 330m shares of RM0.50 par value to 396m.Share price catalysts:
a) resilient demand for QL’s food and commodity-based products
b) regional expansion plans into Surabaya, Indonesia for its surimi plant and Tay Ninh, Vietnam for its integrated livestock farming project
c) a local boy made good, professional management with a dedicated focus on the important financial ratios, very solid and sustainable ROA and ROE coupled with shrewd debt management and an eye not to over-extend - expect PNB and/or EPF to start accumulating a substantial stake soon
QL is not an exceptional story, just a properly managed company with solid understanding of their products. It basically religiously maintains its net profit margin at 6%-7%; has an enviable debtors/creditor turn of under 30 days (I treat you well, you treat me well); and is projected to have a net profit growth rate of 11% this year, 13.5% in 2010 and 11% in 2011. I would buy and hold for the bonus and then hold on some more. This company is expanding well and I expect their attention to detail to propel QL onto the next level, RM1.5bn here we come.
p/s photos: Haruka Ayase
Asian equities have outperformed mature markets in 2009 thanks to continuous foreign institutional investor inflows amid diminishing risk-aversion among global investors and relatively resilient macroeconomic fundamentals. Since July, the markets moved further up on the back of better-than-expected corporate earnings reports.
As of August 24 2009, MSCI Asia Pacific gained 25.8% YTD with Indonesia and Sri Lanka as the best performers, Australia and New Zealand as the worst performers. However, following the rally since March, Asian equities are no longer considered to be cheap. The region's price/earnings ratio has risen significantly above its historical average. In addition, downside risks still remain in H2 2009 with revival of any global risk aversion. Economic recovery may be slower-than-expected if stimulus effects fade out and global recession has greater-than-expected impacts on regional economies. Also, corporates may post worse-than-expected earnings reports as Q2's improvements were largely driven by cost-cutting efforts not by recovery in demand. The outperformance of Asia is all the more blatant when you take out Japan, which has been one of the world's worst performer YTD. Comparatively, despite Malaysia's robust run over the past few months, the local index has been among the lesser performers of Asia.
- 2009 MSCI Asia Pacific performance in USD terms: 22.8% YTD as of August 24, up 56.7% during March 9 - August 24
- 2009 MSCI Asia performance in USD terms: 20.5% YTD as of August 24, up 53.3% during March 9 - August 24
- 2009 MSCI Asia (excluding Japan) performance in USD terms: 42.0% YTD as of August 24, up 70.0% during March 9 - August 24
- Best performers (YTD as of August 24, 2009): Indonesia: 75.3% | Sri Lanka: 68.4% | Vietnam: 67.4% | China: 64.4% | India: 62.0% | the Philippines: 52.7% | Taiwan: 48.9% | Singapore: 48.3%
- Worst performers (YTD as of August 24, 2009): Thailand: 45.2% | South Korea: 43.4% | HK: 42.7% | Pakistan: 41.3% | Malaysia: 34.0% | Japan: 19.4% | Australia: 18.9% | New Zealand: 13.0%
- In 2009: Asia's equity market (excluding Japan) have outperformed mature markets, up 46.3% YTD as of August 24 2009, while the S&P 500 Index and the U.S. Dow Jones Industrial Average rose mere 10.1% and 5.3% respectively during the same period.
- Since March 2009, Asian equity markets have witnessed a rally following a surge in U.S. markets and began to benefit from the widening valuation gap on the back of relatively resilient macroeconomic fundamentals. During the March 9- August 24 period, MSCI Asia (excluding Japan) rose by 75.1%, significantly higher than the S&P 500 Index and the Dow Jones Industrial Average which gained 51.6% and 45.2% respectively.
- Capital flows: Continuous FII inflows to Asian equity markets have taken net flows to a positive US$14.4 billion as of June 24 2009, significantly up from US$10.8 billion in H1 and US$9.6 billion in H2 2008. Since end-June, however, fun flows have been volatile, "with inflows and outflows each recoded half of the time". Particularly, during the middle of August, the region saw fund outflows the most in 24 weeks as investors start to cast doubts on Chinese rapid expansion of bank lending, which has helped regional economic recovery and asset market reflation.
- Valuations: New Zealand (356.4) has the highest price/earning ratio in the region as of August 24 2009, followed by Taiwan (94.3). In opposite, valuations of Pakistan (11.2), the Philippines (26.8) and India (18.8) are among the cheapest. In overall, the region's forward price/earning ratio is at 23 times as of mid-July, about 30% above its three-year average. The valuation gap between Asian and western stocks has also widened; the spread between eastern and western P/E rose to 8.6 in mid-July, from its three year average of 4.5 (Asia: 23x, the U.S.:16x, EU: 13x).
- 2008 Review: The peak-to-trough decline in Asian equities in 2008 (more than 70% for some markets) surpassed the 60% fall in local currency terms during the 1998 Asian financial crisis. Sustained outflows from offshore Asian funds took total net redemptions in Jan-Oct 2008 to a record high such that all money that flowed in during 2007 flowed out.
- Market Integration: There is a noticeable upward trend in the Asia-U.S. correlation with the correlation parameter picking up sharply in H2 2008 (peaking during mid-Oct 2008). However, average correlations for emerging Asian equity markets are generally higher between the region's markets than with U.S. markets.
- Government intervention: Several countries including Taiwan, Pakistan, Vietnam, Thailand intervened in the stock market by narrowing the trading band, introducing stabilization fund to contain volatility, banning short-selling, directing government funds to buy share.
- Upsides: Better-than-expected earnings reports, relatively healthier macroeconomic fundamentals, aggressive fiscal stimulus spending and ample liquidity in the region would have positive impacts. Also, buying into most of the region's equity markets seems a better bet than bonds amid increasing bond issuance.
- Downsides: Worries over the U.S. economy, exit by local investors and also FIIs alarmed at greater-than-expected impact of global slowdown on Asia's growth, exports, fiscal deficits, slowing consumer spending and investment may have negative impacts. High (external) debt exposure of corporate sector in some countries and risks of real estate correction and bank profitability are additional risks.
- Morgan Stanley: "The recovery is real." Asian equity markets will continue to have good momentum and corporate earnings may rise substantially until 2010.
- UOB: Liquidity conditions will support the equity market in the near-term. But authorities may have to limit further monetary and fiscal expansion as inflation may resurface before growth normalizes in the medium- to longer-term. (August 17, 2009)
- Citigroup: Risks remain, driven not by earnings but by still weak real economy. Exports and domestic demand should rebound quickly in H2 2009 to meet the forecasts and to justify V-shaped recovery. (July 24, 2009)
- FT: In the past, Asia's stock market performance was highly correlated with that of western counterparts. However, Asian equities may plot a more "independent course" on the back of less leveraged economy, better capitalized banking sector, huge FX reserves and healthier fiscal position. (Lex; July 16, 2009)
- EIU: The recent rally in Asian equity markets might not continue due to still-weak real economic condition in many countries and the region's ultimate reliance on exports to the U.S. and EU, which means that financial-investor sentiment will remain susceptible to economic setbacks in those markets. (July 2, 2009)
- DBS: Prospects for further inflows into Asian equities remain substantial, as global portfolio continue to adjust from relatively underweight positions, and given cheap equity valuations relative to bonds. (June 11, 2009)
- Adrian Mowat, Chief Asia Strategist, JP Morgan: Asian stocks have yet to reflect expectations for a powerful, synchronized recovery in the global economy as markets are still bearish on global growth and on emerging markets growth.
- ADB: Given decreasing inflationary pressures and relatively healthy fiscal positions, further fiscal and monetary stimulus policies by Asian governments will able to boost the region's equity markets in H2 2009. (April 2009)
- As of end April 2009, market capitalization of Asian Pacific markets (US$10.2 trillion) has come ahead of that of European markets (US$9.3 trillion, including Africa and the Middle East) as Asian stock prices sour at a faster pace than European ones.
- Banks remain the single largest sector in Asia. However, its share has been decreased to 20.1% as of June 2009 from 43% in 1975. In opposite, the share of cyclicals has risen to 38.7% (including basic materials, industrials, oil & gas and technology) from 18% (industrials) in 1975.
Will Asian Equities Continue to Outperform Mature Markets?
Will the Rally Continue? Or Is a Correction a Real Possibility?
p/s photos: Sarah Song Hei Leen
Tuesday, August 25, 2009
Degree from MIT; taught at Harvard. Worked as code breaker for Department of Defense during Vietnam. Founded Renaissance Technologies hedge fund firm 1982. Flagship Medallion fund averaging 34% annual returns since 1988. Most expensive fees in the business: 44% of profits, 5% of assets. Hires Ph.D.s instead of M.B.A.s; employees use computer modeling to find market inefficiencies. Launching fund for institutional investors that could handle $100 billion. Chairs Math for America; group donated $25 million last year to train 180 New York City math teachers.
James Simons, the founder of Renaissance Technologies, a hedge fund, once said, “Luck plays a meaningful role in everyone’s lives.” Simons, a 71-year-old former university professor and a celebrated mathematician, has been blessed with the stuff. His flagship fund, Medallion, has had average annual gains of more than 35% for 20 years. Last year he was named the best-paid hedge-fund manager in America by Alpha, a hedge-fund magazine, reportedly earning $2.5 billion. Medallion gained 80% last year, and this year is up a further 12%. What makes this feat even more incredible is that Simons, one of the members of Alpha ’s inaugural Hedge Fund Hall of Fame (June 2008), charges a fat 5 percent management fee and 44 percent performance fee. To put it another way, Medallion — which has about $7 billion in assets — was up almost 160 percent before fees. Renaissance, which had $25 billion in total assets at the end of 2008, began this year with about $20 billion, presumably because of redemptions.
But Medallion is 98% employee owned and has not accepted new money for 15 years.
In the first two years RIEF raised more than $1 billion a month. With new money coming in faster than it could be invested, monthly contributions were capped at $1.5 billion. By August 2007 the fund was managing almost $28 billion. But in 2008 RIEF lost 16% and investors withdrew $12 billion from Renaissance, which was the largest prime-brokerage client of both Bear Stearns and Lehman Brothers, two investment banks that failed. The downward spiral has continued this year, with RIEF losing 17% so far. It now has less than $10 billion of assets under management.
Jim Simons, businessman and founder of Math for America Credit: AP Photo/Jason DeCrow
Simons explains the lopsided returns by saying that the two funds approach investing in different ways. Medallion attempts to identify “predictive signals” in the market. Its high-powered computers are programmed to profit from split-second price distortions. RIEF moves much more slowly. Most positions are held for a year. Like Medallion, it uses computers to buy and sell stocks. The fund is designed to provide investors with smooth returns, the success of which is measured against the S&P 500.
It has, in fact, beaten the S&P 500 by almost 4% a year since inception, but it has also trailed behind an index of its peers. In general, computer-driven funds are becoming less popular with investors. But Simons is RIEF’s biggest investor, which gives him every reason to want to improve its performance. This could be the biggest lesson of the whole episode. Though investors may think they are seduced by the wizardry of Renaissance’s computer-driven models, what they are really betting on is the magic touch of the man himself.Before becoming one of the top money managers in the world, Simons was a decorated mathematician. His work was primarily in geometry, peripherally related to the Poincare conjecture. Simons’ work on differential geometry, which he did in collaboration with S. S. Chern, has proved useful to string theorists.
Simons is also a generous philanthropist. He has donated significantly to math education, universities, and plans to give over $130 million in the next few years to the study of the genetic basis of autism. He also recently gave $13 million to keep the Relativistic Heavy Ion Collider at Brookhaven National Laboratory running when the Department of Energy announced a funding shortfall this past year.In a recent interview: How do you select people for your company? We look for people who have demonstrated the ability to do first-class research. We are not a teaching organization. We are a research organization. We hire people to make mathematical models of the markets in which we invest. We look for people who have had success, typically academically, although some people come out of an industrial laboratory like IBM or Bell Labs. Most come out of academia. They’ve had three to five years, written a few papers, and already have some kind of reputation. First and foremost, we look for people capable of doing good science, on the research side, or they are excellent computer scientists in architecting good programs. We have very high standards and it works. Our business is wonderful as a result.
Simons in 2006 was around the #280 mark as the richest America according to Forbes with a net worth estimated at $2.8bn. In 2009, Forbes had him zooming up to #55 with a net worth of $8bn. ... btw ... why are the over 100 books on Warren Buffett and not even one on James Simons???!!
p/s photos: Deborah Priya Henry
Asians had a strong showing in the pageant in 2000, when India's Lara Dutta won. In 2007, Japan's Riyo Mori took the crown, while Korea's Honey Lee came in as third runner-up, and India's Puja Gupta made it to the top 10. The tide began to turn last year in Vietnam, when South Americans dominated the top spots. Still, two Asian faces were in the top 15 - Japan's Hiroko Mima, and Vietnam's Nguyen Thuy Lam.
Despite a strong showing in online voting, Indonesian Miss Universe candidate Zivanna Letisha Siregar didn't figure in the beauty contest's top 15 in the pageant held in Nassau, the Bahamas.
In fact, no Asian faces graced the pageant's top 15 on Monday, though the Miss Congeniality title went to Miss China, Wang Jingyao, 19, while Miss Thailand, Chutima Durongdej, 23, got the Miss Photogenic title.
Miss Venezuela, Stefania Fernandez, 18, was crowned the winner in the 58th annual pageant, which is co-owned by American billionaire Donald Trump. But Venezuela's win has drawn strong reactions among some pageant-watchers. 'Another plastic Venezuelan? Do we really need another one of those women as Miss Universe?'
However, pundits said Miss Venezuela just has the X-factor. Venezuela has won more Miss Universe and Miss World competitions than any other country, noted the Associated Press (AP). Some girls begin training to be contestants from as young as five. Its pageant industry has drawn criticism for pressuring contestants to have cosmetic surgery. Miss Fernandez was crowned by fellow Venezuelan Dayana Mendoza, who was last year's champion. It is the sixth time a Venezuelan has taken the Miss Universe title. 'She evokes the glamour of 1940s screen goddess Rita Hayworth,' enthused Mr Josepeh Vitug, a writer with GlobalBeauties. com, a 10-year-old Internet portal on pageants.
The other top five finalists include runner-up Miss Dominican Republic, Ada Aimee de la Cruz, followed by Miss Kosovo, Droga Ganusha; Miss Australia, Rachael Finch; and Miss Puerto Rico, Mayra Matos Perez.
Miss Zivanna, 20, failed to advance to the swimsuit round, said the Jakarta Globe, even though she was No. 1 in the pageant's Internet poll. The poll saw tens of thousands of observers casting votes for the 84 contestants via the Internet. Thailand's Miss Durongdej came in at No. 5 on the poll, while Miss Vietnam, Hoang Yen Vo, took sixth place. Miss Philippines, Bianca Manalo, was placed at No. 11. Miss Singapore, 24-year-old Rachel Kum, came in at No. 55 in the poll, but did not advance beyond the swimsuit round.- New Paper
a) Its a beauty pageant, get over yourselves, people! Its a shallow way to determine beauty, we all know it, why get flustered???
b) Its subjective, a large part depends on who is on the judging panel. It helps a lot if the event was hosted in your country.
c) You need to be trained, in particular when answering questions (even if you can do it in your own mother's tongue) - your personality and sincerity should shine through, and that can be honed and trained.
d) Asians are at a disadvantage because most of the judges grew up with the Western beauty framework - you have your Rita Hayworth, Marilyn Monroe, Audrey Hepburn, Liz Taylor, Grace Kelly and the newbies: Ashley Judd, Jennifer Lopez, Charlize Theron, Penelope Cruz, Jessica Alba, Beyonce, Shakira, Megan Fox, Scarlet Johanssen, Angelina Jolie, Thandii Newton, Elle PacPherson, Liv Tyler, Halle Berry ... my argument being, these names roll off our tongues... if we were to ask the judges who they thing are the famous pretty women... they would be very hard pressed to name beyond Gong Li, Zhang Zhiyi, Aishwarya Rai and Maggie Cheung. The entire mindset is slanted already from the start.
I would have to qualify the heading as listed Chinese companies would be following generally accepted accounting principle. The issue of difficulty rests mainly when you try to value unlisted businesses, as many companies try their best to minimise taxes paid. Mark Dixon wrote an excellent piece on what things to look for in trying to come up with real profits, and the hazards of being a private equity player in China.
Mark Dixon, a founder of the mergers and acquisitions adviser the1.com, which is active in mainland China, unwittingly unearthed some Chinese accounting tricks while valuing a local company.
What with the world still reeling from the domino effect that Lehman Brothers’ balance sheet had on financial markets, the exposure of accounting frauds like the one at the Madoff fund and the final throes of the expenses scandal in the British Parliament, a trip to China promised to be a breath of fresh air in this atmosphere of fishy finances.
Hired by a client to help with an acquisition in China, I was given the job of deciding how much the buyer should pay for the business. That meant first calculating an accurate profit for the target company, its so-called normalized profit.
In the West, the process involves making a few small adjustments caused by things like no longer having to pay salaries to sellers if they aren’t going to stay at the company and other nonrecurring items. But it shouldn’t mean having to recalculate the entire income statement.
Generally Accepted Accounting Principles are not generally accepted in China. This is partly because the Chinese have their own accounting rules and partly because rules are for breaking. And it’s not just that some company owners are trying to confuse the tax authorities. It’s that, when they do so, they end up also confusing themselves. The gymnastics they do with revenues and costs are so impressive that the Beijing Olympics should have added an event especially for accountants. Markets with developed gray economies, like Italy, are well known for the practice of keeping one set of accounts for the government and another for the owners so they know what’s really going on. Chinese companies often dispense with the second set, hence the confusion. That’s probably true of other “developing gray economies.”
One can hardly call something normal when it doesn’t normally happen. So my quest for normalized profit was really a search for the abnormal — indeed, it might better be called abnormal profit. In fact, it was so elusive it seemed like a search for the abominable snowman.
My Chinese interpreter couldn’t handle the term normalized profit, so I dropped it in favor of true profit. But that only caused offense because it implied the figure before adjustment was a lie, which indeed it was. I then tried the expression official profit, by which I meant “what it officially should be,” but that didn’t work because it got lost in translation with the false profit they were officially reporting. I finally explained it as “the profit you would have received if you had reported everything completely correctly,” at which point I added, “Let’s for simplicity just call it Profit X!”
Now everyone understood what I wanted. But they couldn’t understand why I wanted it. “We’d only pay more taxes,” they explained. The mathematical difficulties of calculating Profit X are compounded by the delicacy of the subject. It’s not only a confidentiality issue — after all, I might be a government spy — but it’s also simply embarrassing to admit what they’ve been up to. Someone who behaves like a traditional, polite accountant will never find out the truth. One needs to use both carrot and stick. The stick is “Your business looks surprisingly unprofitable.” This provokes the Chinese pride, which, once awoken, quickly displaces any embarrassment. It also triggers natural commercial instinct — they instinctively realize the intentionally low profit figure is somehow going to hurt them in the upcoming negotiation. The carrot is “Don’t worry, I’ve seen this many times before.” Said with the bedside manner of a family doctor, it allows the final key to be turned. The scene is now set for a tour of their forbidden city.
At this point, we were ready to dive into the “abnormalization” process itself. Every stone I turned over seemed to reveal not a single spider but countless additional stones, each of which needed to be investigated. While pursuing each line of questioning, I found myself having to note side questions to ask later — my memory isn’t that good. At the most frustrating point I was told, “You can’t expect to understand China — our accounting is different.”
They weren’t trying to derail me from my quest. (Indeed, companies are fairly cooperative once they have bought into the process.) It was rather a way of trying to calm me down — but it only revved me up the more. It seemed as if the project would never end (I was already down to the last clean shirt), but eventually I had exhausted all of my questions: the Profit X figure was there in black and white.
I have invented a formula to get to the truth faster. Of course, it doesn’t help you get your hands on the figures to input, but it does show which ones you’ll need to get and what to do with them. Even if you never need to use it yourself, you may be interested in what it reveals:
Profit X, or normalized after-tax profit =
The amount of after-tax profit actually reported to the government
+ Revenues received off the books to avoid paying revenue tax and to reduce corporation tax
+ Revenues from invoices pushed into the next period in order to delay paying revenue tax in the current period
- Revenues from invoices delayed from the prior period into the current period for the same reason
- Revenue tax the business should have paid on the net effect of these three adjustments
- Employee salaries paid off the books
- A “gross-up” to bring this off-the-books employee cost to a level at which the employees themselves would have received the same amount after tax if they had been paid legally (otherwise, they’ll go and work off the books somewhere else!)
- The extra Social Security cost the business should have paid on these two amounts
- Real expenses the business couldn’t deduct because the supplier couldn’t provide official government receipts, or fapiao, showing the supplier had paid revenue tax
- A gross-up to bring this to a level at which the supplier would have received the same amount if it had declared the income and paid both revenue and company profit taxes
+ The amount of expenses the business declared for fapiao that had nothing to do with its operations but which somehow found its way into the accounts
- The amount of additional corporation tax on the incremental profit resulting from the net effect of the above 10 items
To be fair, some companies need all the adjustments, and others perhaps none. Only in China does a government have the power and desire to control centrally every invoice that a business issues. For an invoice to be tax-deductible, it must be printed on a government-authorized, numbered receipt called fapiao. The government charges service businesses 5 percent of the face value. The payment it receives is thereby an automatically collected revenue tax, also called business tax, levied on the business issuing the receipt rather than on its recipient.
When profitable businesses pay one another, they are economically encouraged to follow this system because the paying entity can’t deduct the expense without receiving the fapiao. Consumers, of course, have little need to show expenses when they go shopping, so they wouldn’t naturally request fapiao, letting retailers off the hook for sales tax collection. (Sales tax, which retailers must charge and remit to the government, is 13 to 17 percent of sales.)
To deal with this motivational loophole, the government, with free-market thinking, has cleverly persuaded consumers to request receipts from businesses — all retail fapiao are printed with scratch-off lottery numbers on forms issued by the government.
The government is thereby marshaling 1.3 billion Chinese as volunteer tax police by harnessing the Chinese people’s well-known love for gambling. I am counting the children among this volunteer tax police figure because they especially love to check the receipts for prizes.
Such ingenious measures don’t stop some Chinese businesses from cooking the books, but they make a dent in the problem. Indeed, one can hardly imagine the state of Chinese accounting in the absence of this totalitarian control of invoicing.
Back to the M.&A. negotiation. It had been a two-day herculean task to get to the truth. On top of the mathematical work itself, I had been through a cultural minefield before we came out the other side in triumph together. The Chinese owners were as satisfied as I was to arrive at this magic number. In fact, they had never known their “true profit” until that moment.
Now, we were ready for the hard part: the price of the business. The chairman was eager to know how I would value his company. Having understood the figures, I was ready with the answer. “We can give you a 10 P/E,” I said. “In other words, 10 times Profit X.”
The mood over the past few days had been everything but calm, but now an eerie silence descended on the room. “That isn’t even close,” he replied. Indeed, it turned out he wanted 10 times his — not my — real profit: the actual cash they got from the business tax-free, or what could politely be called the pragmatic profit. The problem was that pragmatic profit multiplied by 10 came to almost 20 times Profit X. It wasn’t even worth negotiating.
“What was the point of the last two days if you are now going to use a totally different profit number?” I demanded. He needed no time to find his thoughts. “You missed the point. We did that calculation at your request,” he said. “It’s a completely irrelevant number for us. Why would we give up our company for a lower value just because you want to make it legal?”
With reports of fishy finances still blowing in from the West, it wasn’t the right moment to respond with a speech about morality. At times like this, one wishes instead for an Easterly wind.
p/s photos: Linda Chung Kar Yan