Tuesday, January 24, 2012

The Lowdown On China-Stocks On Bursa - Just A View

You open a conversation topic on Chinese stocks listed on Bursa, you see most people shaking their heads. Most have been burned, and burned royally despite following Benjamin Graham's rules of investing. Well, you have low PER relative to profit growth, most are still registering decent earnings growth. But none are willing to pay out a decent dividend despite having a substantive amount of cash. In fact, what has been more galling was they even had the audacity to push through rights issue.
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They drop and drop, even though syndicates have been roped in, they still drop. For the past 3 years or so, the news surrounding China companies listed overseas have been appalling. There have been numerous scams and accounting fraud with China companies using RTO to get listed in the US. The seemingly "clean" SGX has not been spared, last count there were 6 China firms listed there that have gone "bust literally" or have tons of  shenanigans like in an Irish fairy tale. 


Are those listed on Bursa a ticking time bomb?
Well, I don't know really, but so far so good despite the weak share prices for these companies. If you go by percentage of troubled overseas China listed firms, at least 1 out 5 would have collapsed by now. Why SGX had so much problems with China firms and not Bursa? Well, SGX, being a play by the rules entity, relied totally on the sponsors/IBs to bring forth these issues. If the companies can be faulted later on for accounting fraud or related misdemeanours, then SGX will throw the book on the sponsors/IBs and directors. I think Bursa/SC have traveled the extra mile in ensuring these China firms are genuine, most if not all have been "site-visited" by them. The reliance on sponsors/IBs have not been as great for Malaysia as in the US or Singapore. Notch one for Bursa/SC. (I hope no China stock will get busted right after I wrote this, but knowing Murphy's Law, that is probably what will happen).
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Excuses and Reasons, and Orcam's Razor
You can dig and dig at the management for reasons for their underperforming shares. There have been excuses after excuses. One, you can say that the sponsors or parties (VC/PE firms) bringing the stock to Bursa have used the route to sell their shares to realise their gains. Two, they needed to keep cash as the bulk of their transactions are with small vendors and suppliers that want to deal in cash. Three, they do not wish to pay out good dividends as they want to reinvest for future growth. Four, they seem to have no desire to buyback their own shares at 2-3x PER??!!


When share price keeps falling and the reasons and postulations given are numerous, according to Orcam's Razor, in such situations, the simplest explanation is probably the truth. The simple explanation is that maybe the figures are a sham. Now, I used to hold that view till my recent new findings, so hold your horses.
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The Real Owners?
This is probably just an opinion but I have heard enough to surmise that the registered owners are, more than likely, not the real beneficial owners of these China shares. The Bursa and SC can go and try to find out more. Don't shoot me, I am just the messenger. 


For a China company to list overseas, they need this "paper license" called the "wufi", usually from their municipality or state. I am sure you can see where this is headed. Sponsors are usually some smart people piecing a few companies together to get the "wufi". In most cases the ones with the designation of CEO or even Chairman owns very little of the company. The bulk are supposedly held by the "state chiefs and their underlings". We in Malaysia can easily understand why this works, don't we. To the "chieftains", this is an easy way to regulate for paper profits and also transfer some wealth overseas. 


That is why you do not see these companies getting huge bank loans, and they want to keep cash at all levels. Maybe its easier to loot the company of money by expanding and taking on new projects as we all know we can always skim the 20%-30% from any projects undertaken. Maybe.


However, I am not saying all these companies are sinister. At the end of the day, more than likely, the management's hands are tied. There is probably very little they can do (without the "approval from real owners"). This is also something we Malaysians are very familiar with, yes "Proxy"!!!
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XDL
Now finally a company goes ahead and does something. Their bonus and warrants issue is a move in the right direction. Some have frowned on the private placement, but why should you frown, they are not placing to you. In fact, having a private placement could be the very trigger that some parties have managed to engage the "real owners" and go through a proper "value creation" exercise, hence they themselves would have secured the parties for the private placement.


Significance
I cannot say this with greater effect. If the hypotheses are true, which means at least most or all of the companies on Bursa are not fraudulent, and to get XDL going through this phase of value creation, which I think will be wildly successful. This could be the catalyst that is needed for the rest of the China companies listed on Bursa to do likewise. As things stand, none of the China firms on Bursa are "fraudulent yet", maybe none are. If enough of them go through the value creation steps led by XDL, it could very well lift Bursa as the "best exchange to list China firms". If this is all true and good, then Bursa and SC must continue to make doubly sure that future China listing go through even more stringent listing checks and balances. So far so good, even with depressed share prices, at least we do not have a total bust up (yet). 


If all parties play their cards right, the right playing field will attract the right crowd. This is a chance to take the next step forward for all parties involved.

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