Thursday, January 26, 2012

Chinese New Year, Cheap Stocks, Conglomerates - Indonesia's Sinar Mas - sent on 26 Jan 2012

Chinese New Year
Dragons “…(are) is bold and flamboyant, and in 2012 few will remain untouched by its influence.  This is no ordinary year and no ordinary time”; “Dragon years are action driven and times for major initiatives”;   “Whatever your plans, this is the time to move forward”, Neil Sommerville, Your Chinese Horoscope 2012. 

First of all please let me wish you and yours a very happy and prosperous Year of the Dragon; 恭喜发财; 新年快乐!!  It began on Monday 23 Jan 2012 and will continue to 9 Feb 2013 

Chinese (at least those that believe in Chinese zodiacs) consider the Dragon year a time for good fortune and favorable for starting new long term endeavors such as a business, marriage, or family.  Local press and brokers are expecting the number of births to increase, with one source putting this at 5% in China as compared to last year.  Marriages are also expected to increase with a local broker suggesting that these will cause gold demand to increase.

In Hong Kong, the city is slowly coming back to life after the two-day weekend and three-day holiday, which ended on Wednesday.  The holidays here were cold and miserable which I hope is not some sort of sign for Asian markets this year. 

The attached photos are of a store in downtown Taipei selling Chinese New Year decorations.  I was there in mid-January and hope write and send a trip note later.

Inexpensive Small and Mid-Caps

A broker’s note and a chance meeting with a newish small- and mid-cap manager reminded me of the deep-value opportunities available in Hong Kong and China. The small cap manager – despite being down a lot in 2011 when small and mid-caps did poorly – was very upbeat when talking about valuations.

He has a good point.  As an example, I’ve attached a research note from local broker OSK on Fujikon Industrial, which was trading below cash and at a 10% trailing yield when the note was written. I’ve never heard of Fujikon, so by all means do not take this as an endorsement of the company or stock’s investment merits, but thought of it as a good example of the type of value one can find in today’s market.

Conglomerates – Indonesia’s Sinar Mas

The article below worries me. It is from last week’s FinanceAsia email – a free daily that can be subscribed to
The reason it disturbs me is that it does not mention that the Sinar Mas group was behind Asia Pulp and Paper, one of the biggest bond defaults in Asia (for a quick summary this seems as good as any -

Ever since my first report on Indonesian conglomerates in 1991, I did not like Sinar Mas and its controlling family, the Widjajas. In fact the family’s adverse transfer pricing to the detriment of minority shareholders prompted my initial interest in researching Asia’s business groups. My key mistake back then was not being as vocal as I should have of my dislike of the group.

I bring this up because from time-to-time I get asked why I look at business groups instead of just sticking to the listed entity. Sinar Mas provides a good example.
I wrote the below a few months ago, but thought the announcement of a Sinar Mas entity looking for funding provided an opportune time to kill two birds with one stone.  Firstly, it provides an example of how Asia works and what to look out for.  Secondly, it provides a warning to investors on the group and its background.

I’ve been told the group has reformed with the founder now frail and his sons each taking over different parts of the business.  Despite this, I would continue to stay clear give the group’s history and poor reputation.

History Helps

” We must study the present in light of the past for the purposes of the future.”  John Maynard Keynes

One thing that cannot be replaced is a company’s history and background. While one cannot invest in the past, one can learn from it.  However very few in the increasingly short-term oriented financial industry have the time to really get to know the background and in and outs of the companies they invest in.  Even fewer will take a look at the controlling shareholders.

In “Build to Last” a book by Jim Collins and Jerry Porras, the two authors note that a key trait of long-term successful companies are their history and the values and culture embodied in their history.  Essentially getting off on the right foot, can have huge implications for a business in the long-term.  In the west Coca-cola (125 years old in 2011) is an example.  (FT, Morgen Witzel, 15 July, History Classes that Offer Management lessons for the present and future).

This is particularly true of the major or majority shareholders that typically control the larger listed companies in Asia, ASEAN included.   The family behind Astra International had a well-deserved good reputation in Indonesian business circles in the early nineties when I was covering it.  It continues to have a good reputation despite having different controlling shareholders since the founding Soeryadjaya ‘s sold it to cover other family debts. 

In 1991 when I wrote my first report on Asian business groups for the old Crosby Group I did it for two reasons. One was because the same names kept appearing on prospectuses, annual reports, and financial publications. Secondly, at the time there was little to no organized information on Indonesian companies on Bloomberg and other data providers and no consensus forecasts that may have served as an anchor.   Related party transactions between group and listed companies prompted my interest to find out what else the controlling shareholder owned.

My anchor instead was to focus on who owned, and controlled what, and what were the ramifications for minority investors.  I had to write a lot of this down as Indonesia was new to me, and I really did not know who-was-who and what-was-what.  Further, Indonesian Chinese businessman used different names including their Indonesian name, and different English translations of their Chinese names depending on which dialect they used and when they were translated.  In short it was very confusing, so I had to write it all down and try to connect the dots. 

One key thing I remember was that I thought Sinar Mas’ controlling family the Widjaja’s, were not up to snuff.  The group’s patriarch Eka Widjaja, had many of wives, was shifting money from a listed chemical company (UIC) to his private companies.  Further, I kept hearing rumors amongst the Indonesian business community that ethnic Chinese businessmen from Medan were not to be trusted (Eka’s family is from there), and that the Sinar Mas group was rumored to not be on the up-and-up.   I was repeatedly told that it is the sort of Indonesian Chinese family that has little regard for Indonesia, its environment, its people, etc.

Despite being at the time the second largest business group in Indonesian after the Salims, one of the key take-aways from that first report was that the Widjajas are not someone I would trust and that I would not want my fund manager to take anything more than a day trade in their listed companies’ stock.

By 1992 I was no longer covering Indonesian equities, having shifted to research and development of the Crosby Group’s business in the Indian subcontinent, and later moved into Mainland China private equity.

Fast forward to 1998 and headlines about Asia Pulp and Paper, the largest corporate default to date.   And who was behind it – the Widjaja’s.  When I learned of the amount of bond and loan defaults I was truly amazed.  The bankers and investors must have heard the same rumors I had, and either chose to ignore them, or perhaps they mistook size for quality.

But perhaps the new-kids-on-the-block bankers did not do their homework on Sinar Mas and the Widjajas.  There is no shortage of fresh meat in the capital markets; youngish analysts are keen to make a name for themselves; and just out of school bankers are itching to use their family and alumni network to strike a deal.   On the buy-side, trainee fund managers do not know or have the time to spend looking into the background of the majority shareholders as their Asian posting may be a 2-3 year step on the career ladder.

Best Regards,

AsiaFinance article is here:
Sinar Mas in pre-marketing for potential $300 million share sale

The insurer is the second Indonesian company this year after Petrosea to test the water for a follow-on issue.
By Aiko Hayashi | 20 January 2012

Pre-marketing is underway for a potential share sale in Indonesian insurer Sinar Mas Multiartha which is attracting some interest from international investors, sources say, although investor activities have been generally slow ahead of the Lunar New Year holidays. Sinar Mas Multiartha is the finance arm of Sinar Mas Group. Aside from insurance it is also active in banking, multi-finance, leasing and information technology among other things.
Although no offering has been formally announced, one source said the company has permission to issue up to 10% of its existing capital in the form of new shares, while its major shareholder has said that it is also considering a potential sale. Based on the current share price, a 10% sale would translate into about $300 million, but that would likely be the top end as most follow-ons tend to get done at a discount, one source said.
Sinar Mar Multiartha listed on the predecessor to the Indonesian Stock Exchange in 1995 and has a current market capitalisation of about $3.1 billion. However, trading volumes are thin and investors are supposedly only willing to look at the deal at a discount to the current trading price.
The bookrunners of the deal, Deutsche Bank and UBS, estimate Sinar Mas Multiartha’s fair market value at around $1.3 billion to $1.6 billion and about $2 billion, respectively. This suggests that a sale of 10% to 20% worth of shares (including existing shares by the major shareholder) will translate into about $200 million to $400 million, although the offering size has yet to been determined, another source said.
The main owner behind Sinar Mas is the Widjaja family. It owns a number of companies, but the main vehicle is JBC International Finance (MAU), which holds a 52.53% stake in the insurance company, according to Indonesian Stock Exchange data. Another 8.45% is owned by Sinarmas Sekuritas.
The Sinar Mas move comes after bankers started pre-marketing last week for a potential follow-on share sale by Indonesian contract mining and equipment rental company Petrosea. The pre-marketing was scheduled to end yesterday and the company is expected to launch an offering of about $100 million after the lunar new year holidays. Macquarie and UBS are joint bookrunners.
Sinar Mas’s share offering will be open to investors in Asia, Europe and the US, but at this early stage (pre-marketing to international investors started last Thursday), interest has come mostly from Asia, one of the sources said. The timetable has yet to be determined, but it is possible that it too will launch a roadshow after the lunar new year.
Sinar Mas ended 0.6% higher yesterday at Rp4,525. The share price jumped nearly 140% in 2011 when Indonesia was one of the best performing stock markets in Asia, helped by its strong domestic consumer base.
The company’s earnings have also shown signs of growth. For the year ended December 2010, Sinar Mas booked $141 million in net income, up from $68 million the year before, according to Bloomberg data.
But trading volume in the stock has been thin — on a few occasions last September, a mere 500 shares changed hands, which is only a fraction of the free-float of 2.5 billion shares, according to Bloomberg data.

Friday, January 13, 2012

2012 Asia+ Election Schedule, China, Expanding Democracy, Taiwan Presidential Elections


The most useful piece of information for the year ahead I came across is a list of elections and leadership changes in 2012.  Markets do not like uncertainty and any decrease in uncertainty is generally good for valuations. 

Politics will likely dominate news flow this year.  We will get a bit of a respite with this summer’s London Olympics, but overall it will be a year of potential political changes.  The two biggest are the US presidential and legislative elections in November, and the ongoing changes in China as political jockeying takes place in advance of the official once-every-ten-years-change in China’s top leadership.  After this year, it will be another 20 until US and China leadership changes occur within the same year. 


I personally think (but have not read nor has anybody corroborated this) that one reason China and HK's markets have done so poorly since the 2009 rebound is due to the uncertainty caused by China’s upcoming political transition. 

Not only is China’s premier and president going to change in the next 14 months, but seven out of nine members of the Standing Committee of the Chinese Communist Party’s politburo are due to be replaced.  The Party’s Standing Committee is the single most powerful political body in China.  Its nine members are a subset of, and come from, the +/- 25 member Politiburo.  

In China virtually all significant policy and personnel changes are decided behind closed doors, with confirmation primarily a rubber stamp process. 2012 will be an important year for the upper echelons of China's political elite as the winners are quite likely to retain the position for the next five to ten years.

This jockeying for power seems to have affected listed companies.  One reason my book on Chinese conglomerates took longer than planned was due to the large number of "C-level" changes at the large conglomerates. So far leadership changes have occured at all three petroleum groups (CNPC, Sinopec and CNOOC), several of the state-owned banks, and China Life.  Together the companies associated with these large conglomerates have a market capitalization of US$1.2trn, and 31% of the HSI.  

I’m not sure if there will be more C-level musical chairs going forward, but I suspect that like other investors, those in China do not like uncertainty and valuations may stay repressed until things become clearer on the political front.


Expanding Democracy

What is very impressive from the list below is the number of orderly transitions we now have in Asia.  Taiwan and Korea's democracy are increasingly entrenched.  Modern China is looking at an orderly transition of power and what appears to be the second of a 5/10-year transition schedule.  Thailand's 2011 election came and went, as did the Philippines.  Singapore appears to becoming more responsive to calls for the ruling PAP to loosen its grip.  Even Myanmar is expected to hold free elections and allow Aung San Suu Kyi run this year.  In short, orderly democratic political change is increasingly entrenched in more Asian countries than ever before.

This is a large improvement from the 1980s and 90s when there was little precedent for peaceful transitions of power in Mainland China, real democracy in Taiwan and Korea was just emerging, and long standing strong-men dominated Singapore (Lee Kwan Yew), Malaysia (Mahathir Mohamad), and Indonesia (Suharto).  


Asian and other significant elections and scheduled political transitions in 2012

- 14 Jan - Taiwan presidential and legislative elections
- 29 Jan - Egyptian legislative elections - stage one
- 19 Feb - Greek legislative election
-   2 Mar - Iranian legislative election
-   4 Mar - Russian presidential election
  1 Apr - Myanmar by-elections
-      Apr - South Korean parliamentary elections (tentative/snap)
-  22 Apr - first round of French presidential election 
-   6 May - second round of French presidential election
- 10, 17 Jun - French legislative election
-   1 Jul - Mexican presidential and legislative elections
-  27 July-12 Aug – London Summer Olympics
- 27-30 Aug - US Republican convention
- 22 Sep - HK legislative elections
- 15 Oct - 18th congress of the Communist Party of China announced (next 
-   6 Nov - US presidential election
-      Dec - South Korean presidential elections



First up-to-bat is Taiwan with executive and legislative elections occurring tomorrow, Saturday 14 Jan.  Going into the election incumbent Ma Ying-jeou appears to have a slight edge according the last opinion polls (polls are not allowed within the 10 days before an election).  

Ma is chairman of the Kuomintang (KMT), which is more pro-China than the second most popular Taiwanese political party, the Democratic Peoples Party (DPP), which has in the past favored full independence.  The DPP's presidential candidate is Dr. Tsai Ing-wen.

Ma polled at 43-44% and Tsai at 36-37% in two recent polls.  A third put Tsai at 50% and Ma at 43%.  A third candidate, James Soong is polling at between 5-7% and is seen to take more votes away from the incumbent Ma.

However according to locals either Ma or Tsai could win and recently the press has agreed with this. This is different than the last election in 2008, when it was widely, and correctly, expected that the “pro-China relations” candidate Ma Ying-jeou would win. 

The Ma administration moved quickly to expand cross-straights ties. Direct flights between Mainland China and Taiwan now number over 200 per day according to a recent local newspaper article, and China is Taiwan’s largest trading partner as well as its largest foreign investment target.

The reason Ma is facing a hard fight is that many Taiwanese feel that the increased ties to China has benefited the wealthy without bringing much to the rest of the island’s 23m people.  Since his election Taiwan’s wealth gap and unemployment have both increased.

Taiwan's 1m+ annual Mainland tourists are typically on budget tour packages, and there has been little if any investment from China.  Lastly, trade with the Mainland is slowing, having grown by an estimated 9% last year, down from 37% in 2010.

Either way Taiwan will get a very educated leader.  The incumbent Ma Ying-jeou has a bachelor’s degree in law from Taiwan’s most prestigious university, National Taiwan University, a masters in law from New York University and a SJD from Harvard.  Tsai Ing-wen also has a bachelor’s degree in law from National Taiwan University, a masters in law from Cornell and a PhD from the London School of Economics and Political Science.

From discussions in Taipei, a real possibility could be one party controlling the executive branch and one the legislature.  One very educated person I talked with in Taiwan is thinking of splitting her vote between the two in a bid to bring some check-and-balance to the island’s politics.

My guess is that cross-straights political risk is not likely to change much due to this election no matter who wins. Tsai Ing-wen and the DPP are not focusing on foreign affairs but more on domestic policies, and have dropped their hard-line call for independence.

But take this with a grain of salt.  It is very difficult if not impossible to model and predict with any certainty public policy and what politicians will do once elected.  For instance, and if I remember correctly, during his first presidential campaign, Lula de Silva was painted by the press as a die-hard socialist and compared to Venezuela’s Hugo Chavez.  Under his leadership Brazil had one of its largest economic growth spurts.