8 May 18:
Today's FT notes 'depressing Asian trends, where press and political freedoms are under assault - from Hong Kong to Phnom Penh'. Asia Sentinel describes the breadth of one battlefront - and with 9 journalist deaths and 85 media attacks less than 2 years into the presidential term, this is not just metaphorical: 'Duterte takes on the Filipino press'.
7 May 18:
Angela Tan at the Business Times in Singapore notes the controversies at Midas and Vard: 'Roles of independent directors, auditors back in spotlight'.
5 May 18:
'Spinoffs are situations where a corporation disposes of part of its business by giving shares in the business to shareholders. When they work, the value of the parts is greater than the value of the whole. "Spinoffs" of US listed Chinese companies work differently.' Dr Paul Gillis of China Accounting Blog explains 'Spinoffs - Chinese style'.
3 May 18:
The Apollo Asia Fund NAV rose 0.3% in April, to US$2,320.35; charts.
Citigroup was forced to backtrack on its premature announcements on behalf of Fincantieri after the Vard EGM, while SGX reviews the disgraceful conduct of the EGM and other issues, to determine whether shareholders' approval for delisting was properly obtained.
Vard shareholders have long memories. Some have held the shares since listing in 2010. They referred to the circular issued in February 2013, a little over five years ago, when Fincantieri extended a General Offer at S$1.22, after buying its initial 50.75% at that price in late 2012. Vard CEO Roy Reite was among the directors advising shareholders then that this offer was inadequate, and recommending that they hold on. The CEO should know the business better than anyone. He declared himself qualified to be deemed an independent director to advise on the proposed delisting and Exit Offer. If he is independent, he should be able to explain - but was asked, and could not - why he thought that investors should sell now at 25c when he previously thought they should hold at five times the price, and why they should not only sell but vote to delist in order to force this decision on all other shareholders.
The authorities now face ticklish decisions. Reconvening the EGM to run it again but allowing the controlling shareholder to vote would add only cost and delay, leaving the aggrieved minorities even worse off. However, the 100% no-vote from independent shareholders, and their evident fury, has highlighted the unfairness of the current rules, and the flagrant contempt for minorities shown by Fincantieri and its advisers seems hard to ignore. On the other hand, Fincantieri had previously been considered a responsible parent, and confidence in its good intentions must now have been badly battered. Fincantieri wants to privatise; if it could persuade 39% of the remaining independent shareholders to sell voluntarily it could move to compulsory acquisition. Remainers who had wished to hang on for the upcycle would be disappointed, but no longer so aggrieved. The additional cost would add little to Fincantieri's overall cost of the Vard acquisition (already so much cheaper than the price it was originally happy to pay), and all could move on. An approval by the Securities Industry Council for an immediate improvement in the Exit Offer to a price that seems fair, and an indication that the authorities might then overlook any deficiencies in performance of fiduciary duties, might lead to this acceptable outcome.
Those mourning the recent shortage of financial doggerel may wish to improve on the current #BrexitPoems.
1 May 18:
The Vard EGM culminated in a vote for "voluntary" delisting - recorded as 96.54% to 3.46% of the votes cast. What this fails to note is that one controlling shareholder voted in favour, and that everyone else voted against. The 982.67m yes votes equate to Fincantieri's shareholding as of the middle of last week (between the figures for Tues & Wed; they had tucked away a few more by Friday) - so they failed to persuade or confuse many other people that delisting would be in their interests. Effectively 100% of independent shareholders whose votes were counted were against delisting. There were also shareholders whose votes were not counted, including some who were present for the whole acrimonious four-hour-plus meeting and still on their feet asking questions when the vote was conducted electronically without announcement - so the Singapore Exchange is reviewing the conduct of the meeting.
This case has highlighted a number of points of corporate governance worth reconsidering, and also points of confusion. The IFA was invited to comment only on the Exit Offer, and noted correctly that in the event of delisting it would be the best option available. On this basis the "independent" directors recommended that independent shareholders should vote for delisting, a view resoundingly rejected by the independent shareholders when it came to that vote. The terminology in relation to "independent" directors appears extremely confusing in several different respects, and it would be best if they were not so described. It would probably be best to dispense with directors' advice on voting, and leave investors to make up their own minds. I reiterate the suggestion that directors whose judgment is rejected by independent voters should be disqualified from serving as independent directors - and that these disqualifications should be published, which might encourage some to take their fiduciary duties more seriously. The most important point however is that controlling shareholders should not be allowed to vote on delisting. The 35.19m NO-votes cast in this EGM represented 100% of the minorities who managed to vote, and 18% of the remaining free float. If this were a Hong Kong company, it would remain listed. If the controlling shareholder wishes to privatise, it should have to bid a price that investors accept voluntarily. What has happened in the Vard case should be labelled a forced and unfair delisting, not as a voluntary one! Serial impoverishment of patient long-term investors is not good for markets, for price discovery, or for the efficiency of capital allocation in an economy. Singapore regulators, please upgrade your rules urgently on this point: the squeeze-out delisting should not be a phrase that your investors need to know, or a risk that we have to discount in Singapore company valuations.
20 Apr 18:
The 1Q report is cheerily entitled 'Impoverishment and annihilation?' - but at least there's a question mark.
We wrote a letter to the directors of Fincantieri and the directors of Vard, noting the unfairness of their current proposals, and requesting that Fincantieri should voluntarily abstain from voting the controlling block at the EGM on 30 April, to allow the decision on delisting to be made by the independent shareholders.
19 Apr 18:
Vard page updated again; thanks to our helpful correspondents.
16 Apr 18:
After writing the paragraph below, I noted that Vard's CEO Roy Reite is deemed "independent for the purposes of making recommendations to Shareholders in respect of the Exit Offer", according to p.4 & 19 of Vard's circular on the delisting proposal. I find this bizarre, and cannot find any reference in the document to a regulation on which this claim might be based. Can any reader enlighten me, please? I have updated the Vard page again.
Yesterday's note on Vard has been corrected in minor respects, and updated. Readers, please mention this link to anyone who may own or have voting rights over Vard shares - and to anyone interested in investor protections in Singapore; I see past discussions on the need for improvement on delisting squeeze-outs, and have added a couple of links.
15 Apr 18:
We have compiled a few observations and thoughts on how market practice might be improved in future: 'Forced and unfair delistings: the Vard case'.
14 Apr 18:
Shareholders of Vard Holdings (VARD SP), please note the EGM called for 30 April to vote on delisting, and ensure that you vote against. The timetable is unusually tight, and a high turnout of independent investors is required to keep the shares listed. The company's performance is improving as the cycle for its specialist shipbuilding turns up. Fincantieri wishes to take it private, at just 20% of the price at which it failed to get takeup for a general offer in 2012, and 15% of that year's shareprice high. (It was then widely owned as a yield stock: at that GO level, the historic dividend yield was 12%.) Keep it listed and wait for the upturn.
The Independent Financial Adviser correctly describes the Exit Offer at 25 cents as NOT FAIR, but if the shares are delisted, many investors will be squeezed out rather than holding shares in an unlisted company, and that is very likely to take Fincantieri up to the 90% at which it can compulsorily acquire the rest. The free float is now less than 17%, and 10% of the issued shares must vote against delisting to avoid this fate. No minority shareholder who has held on this long would vote for delisting: anyone wishing to exit could for most of the last 18 months have sold at the same price or better, and taken their money immediately. Ongoing shareholders clearly wish to hold on for the cyclical upturn which is already under way. The danger however is that many may not vote, if they do not hear about it in time, or fail to realise the urgency. Please publicise this, and urge shareholders to vote.
Fincantieri has seemed to be trying to starve investors into submission, with an exceptionally prolonged period of uncertainty which has now lasted for a year and a half (a cheeky lowball general offer, creeper purchases, and yet another general offer at a mere 4% higher, although the fundamentals have improved by far more). As this lengthy period wore on, fresh interest in the stock was minimized by Fincantieri's threat of a later compulsory purchase. Even though the fundamentals have improved significantly, the price has been capped by that threat. This has been dragged out for an inordinate length of time - and now the pace has suddenly been accelerated. The minimum permitted notice period has been given for the EGM, and a 328 page circular published, most of which relates to the Exit Offer (and why it is NOT FAIR! inadequate premium, a discount to NAV, improving orderbook and fundamentals) - rather than what shareholders need to act on immediately, which is the EGM vote on delisting. The company is behaving as if delisting is certain, providing no 2017 annual report, and scheduling no AGM. This behaviour may confuse. Delisting is not inevitable. Vote for your right to hold, and to exit at a time and price of your choosing. Vote against coercion, and against delisting.
3 Apr 18:
The Apollo Asia Fund NAV fell 0.9% in March, to US$2,314.16; charts.
21 Mar 18:
While I spent a few days last week enjoying the excellent conference organised by Viet Capital Securities and many positive aspects of Vietnam's economic boom, a friend took the Saigon River route north to Cu Chi, and found that scenes of 'traditional life along the riverbanks' described in current guidebooks and travel websites had been replaced by heaps of sand and gravel for construction, with not a villager in sight. (It is still well worth visiting the Cu Chi tunnels.) National Geographic's reporters went southwest to Can Tho, and write that 'dramatic photos show how sand mining threatens a way of life'. Such dredging is only one of the serious threats to the fragile (and still extraordinary) ecosystem of the Mekong delta, on which some 20m people depend. Vietnam has limited ability to influence the challenges from dambuilding, dredging and patchily-aggressive development upstream in China, Laos and Cambodia. Given this strategic vulnerability, as well as the dangers from polluting industries which other countries are increasingly keen to outsource, it would seem prudent to maintain a vigorous debate on environmental costs and choices, rather than imprisoning activists, in the hope of finding a balanced path towards the sustainable development aspirations on which the future welfare of the Vietnamese people - and incidentally of our investments - depends.
The scale of environmental remodelling in emerging markets, the unprecedented size of the bets being placed, and the difficulty of predicting even the economic results, is explained by Wade Shepard: 'Ghost towns or boomtowns?'
2 Mar 18:
The Apollo Asia Fund NAV fell 0.9% in February, to US$2,334.90; charts.
Air travellers and divers can now monitor South China Sea changes in the new Island Tracker from the Asia Maritime Transparency Initiative. Malaysia's Layang-Layang has been (and remains, as far as I know) one of the best places in the world to see schooling hammerhead sharks.
16 Feb 18:
A Bloomberg article in Nov 2016 on Saipan and its casino, run by Hong-Kong listed Imperial Pacific, was headed 'Big Money, Big Questions...'. One of the original journalists, Matthew Campbell, has now followed up in detail. 'A Chinese casino has conquered a piece of America: Construction workers maimed and killed. Millions paid to the governor's family. An impossibly lucrative gambling operation. And all on US soil.' It should make uncomfortable reading for the US dignitaries who accepted positions on Imperial Pacific's advisory board: former directors of the FBI and the CIA, three former governors including past chairmen of both Democratic and Republican National Committees, and a former military judge - and for any investors who took the involvement of such luminaries as an endorsement. Imperial Pacific used to be known as First Natural Foods. We glanced at it ten years ago on the recommendation of a value investor, and were unimpressed by its frozen products and its promoters. Control later changed hands, but a glance at its Webb-site page should usually have been sufficient to suggest a few questions. Imperial Pacific's executive Shen Yan must have had an interesting career: he was at Deutsche Bank while First Natural Foods was buying its toxic derivatives, and previously at Credit Suisse when they were issuing toxic convertibles. I am intrigued to see that the company currently has a market cap close to US$2bn. It brings to mind the 'rise, fall and possible renewal' at Boten in Laos, once described as the 'bungle in the jungle', where improving infrastructure is reportedly boosting cross-border trade in endangered wildlife, as well as drugs. Meanwhile, US OFAC sanctions against the 'Zhao Wei Transnational Criminal Organization' and King's Roman casino in Laos are being shrugged off with the apparent approval of Lao government officials. Asia is never dull.
15 Feb 18:
'In 2000, a [US commission] noted "No country in East Asia, including China, appears capable of seriously challenging US leadership any time soon unless America, through neglect or indifference, were to create a vacuum". Today, the US position in Asia is considerably weaker. Neglect can be seen in the US decision to withdraw from the Trans-Pacific Partnership. Indifference can be seen in the absence of a positive US economic vision for the region... the best US response is a compelling US economic vision, resourced strategically and sustained over time'... Jonathan Hillman's assessment of 'China's Belt and Road Initiative: Five Years Later'.
'Implicit in China’s offer to let each [country] "choose their own development path" is a rejection of supporting democracy, and as a corollary, of the related norms of rule of law, respect for human rights, and fundamental freedoms. The path that the Chinese regime has chosen for itself - a disinhibited authoritarian one-party system fully integrated into the global economy, showing no intention of evolving into a liberal democracy - is now being offered as "a new option for other countries and nations who want to speed up their development while preserving their independence".' Nadège Rolland, Examining China's "Community of Common Destiny", describes a change of great interest to leaders in several of the markets where we invest. For clues as to implications, the discussions on Power 3.0 may be worth following. The introduction notes that ' Modern authoritarianism now harnesses the features once chiefly thought to empower democracies - the interconnected economic and financial system, ubiquitous communication networks, international norms and institutions, global media, education, and culture. In doing so, these regimes have in some ways leapfrogged the capabilities of democracies, whose inherently porous, transparent, and networked qualities have been easily exploited.'
Bill Bishop writes a free weekly, Axios China, but his Sinocism China Newsletter is more frequent and more detailed - and is offering a Year-of-the-Dog discount on subscriptions until 17 Feb. Good reading.
We live in interesting times... and wish continued prosperity and good health to our readers in the year ahead.
9 Feb 18:
John Hempton writes about the unintended consequences of moves to expose short sellers, and the threats he received after writing about China Agritech: 'Nasdaq and the New York Stock Exchange (and possibly Herbalife) team up to help organised crime'.
2 Feb 18:
The Apollo Asia Fund NAV rose 1.3% in January, to US$2,357.01, lagging a surging index; charts.
22 Jan 18:
To our growing list of explanations for lacklustre productivity growth around the world, we in Malaysia can now add capricious prosecution and endless court cases, with a disturbing pattern of cases thrown out by lower courts on apparently common-sense grounds being subject to repeated appeals by the prosecution and dragged out for years. The important news site Malaysiakini is in danger of being closed ahead of the general election: Mariam Mokhtar explains this case. The right of journalists to report factually on events and press conferences apparently now needs to be defended, and any spread in the 'impression of a pro-government court whose decisions are politically motivated, and whose ultimate goal is to muzzle' could be immensely costly. The once famously independent press and television channels of the Philippines are under attack, and freedom of expression is threatened in too many Asian countries. A diverse flow of information is the lifeblood of markets; inadequate information is a danger to efficient capital allocation; and unpredictable legal systems will increase the cost of capital.
19 Jan 18:
The prevalence of fake products is becoming a big risk to the Amazon business model, as well as to brand-owners (and customers), according to the latest in an excellent series of articles on the subject by Wade Shepard. (The anomaly by which the US Postal Service has been delivering packets from China for much less than domestic postage rates is already changing due to new UPU tariffs, although the impact is apparently hard to quantify.)
'The world is in chaos, giving the Communist Party a historic opportunity to make China great again and reshape the world order', according to a high-profile article in the People's Daily, reported by the SCMP. Brahma Chellaney explains the dangers of China's aggressive tactics over dam-building and river water.
12 Jan 18:
The 4Q report has been posted: 'Remodelled landscapes'.
4 Jan 18:
The Apollo Asia Fund NAV rose 2.2% in December, to US$2,327.60; charts.
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