Minority Shareholders Vs Management Of SG Companies

I know there are many related professionals (hedge fund managers, media editors and content providers, senior management, analysts, brokers as well as, a few HNW private investors) who are subscribers/readers of SG TTI, hence, this post may be controversial to some. I’d like to think it’s certainly honest.

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Over the years, I’ve increasingly put more and more emphasis on the quality and competence of the management in the companies I’m doing DD on. In my experience, the level of transparency and accountability of SGX listed companies is still very far lacking behind those of US listed ones. I’ve previously mentioned this in an earlier post (Differences between investing in SGX listed vs US listed companies)

Many companies with absolutely incompetent and/or dishonest management remain listed on SGX, the only penalty for the management being a chronically low share price. Yet, this is hardly a disincentive as they continue to reward themselves with remuneration that is not reflective of their abilities or achievements. Who pays for this? The other shareholders, mostly minority ones, by virtue of a depressed share price, higher staff costs and lower profits.

If at this stage, you’re thinking that “hey, isn’t there a board whereby the remuneration is decided by a separate committee?” Well, I think the whole concept of a BOD monitoring the performance of the CEO, is a pipe dream in my instances.

In reality, the BODs are buddies with the CEO. They’re in it together. Independent or not.

Having said that, this is not true of all SGX companies, and perhaps, not even true of most. A good case in point is Lian Beng Group, where 2 independent directors quit in protest of the remuneration of the key executives just last year. Now, I have not examined in detail to determine if their points are valid, just pointing out that these 2 independent directors had the guts and the integrity to quit when they felt it’s unfair, and they couldn’t correct it behind the scenes.

How many other independent directors would do that? Or would it be much easier to just shut up, sit tight and let the executives do whatever they want, and happily collect your director fees all the same?

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Interestingly, what has happened in the 1 year after the 2 independent directors quit? Absolutely nothing as far as I know. Life goes on. No changes, not even much hoo ha in fact. Curious, isn’t it?

There are definitely some black sheep companies that I am aware of, and I am amazed that these guys can continue to sit pretty in their positions year after year, collecting fat pay cheques for doing absolutely nothing of significance.

These companies are logically, usually the small-mid cap companies, with little fan fare and little spotlight. Obviously if it’s a well followed company, the spotlight and scrutiny that follows would incorporate some sort of governance, whether it’s by choice or not.

Perhaps the minority shareholders only have themselves to blame for not bothering to let their voice be heard. But that’s another debate by itself.

Last year, it was reported that a supposed activist hedge fund, Dektos Investment Corp took up a 2% stake in Hock Lian Seng. I took interest as I owned 1,000,000 shares in Hock Lian Seng then.

In fact, I’d probably have to thank Mr Roland Thng as the Dektos’ buying & the subsequent publicity probably contributed to driving up the share price incessantly since then. Dektos became the catalyst that my deep value investment needed, in order for the price and intrinsic value to converge.

I’d respectfully argue though, that Hock Lian Seng is hardly a target for the activist shareholder. It’s a great buy for a value investor.

After all, activism suggests that you’d need to make certain changes, usually by pushing management to do the right thing, and that’d form the catalyst to correct the gap between the share price and the supposed intrinsic value of the company.

In that regard, what changes would you have Hock Lian Seng do? As expected, there hasn’t been any news/changes since that particular report. Looking at the AR, I am guessing that Dektos Investment has since cashed out of Hock Lian Seng. They’d likely have made a very nice profit doing so too, so kudos to these guys for a good investment.

I’m rooting for these guys, as I think we need more activist guys like them scouring the local SGX market. They also have a relatively small AUM of $5mil, hence, I’m guessing they’ll be looking at the same undervalued companies in the small to mid cap as I typically do.

Let me quote from that particular news article:

“It’s a new approach and the market will need some time to get used to it,” Mr Thng, who is chief executive officer of Singapore-based fund-management firm Dektos Investment Corp, which runs EVA Capital, said in an interview. “Activist investing is a bit offensive in the Singapore and Asian context.”

Many Singapore companies have a controlling shareholder, which makes it easier to resist demands from activist investors, said Mr Hugh Young, the Asia managing director at Aberdeen Asset Management in Singapore.

“It also isn’t the cultural norm,” Mr Young said. “It’s all more consensual in Asia, less confrontational. Things have been done a lot more quietly, behind closed doors.”

Oh boy. I couldn’t agree more with these 2 guys.

Recently, I queried, very politely initially, the management of a company. The questions I asked were reasonable, and typical of what a concerned shareholder would ask. The company was losing money on certain projects, which by itself is nothing unusual, but the problem is they have had a long track record of occasionally losing money in such projects.

My question was simply that why hasn’t management learnt from past experience, why do they keep repeating the same mistakes again? I even helpfully suggested that perhaps they’d like to incorporate a wider safety margin in their tendering process.

Instead, I’m met with a generic reply from an external IR vendor:

“Dear xxxxx

Thank you for your email dated 3 August 2016 to the management of xxxxxxxx

We are from xxxxxxxx, the Investor Relations consultants serving xxxxxxxx

Amidst the local property sector reeling under the lingering effects of the cooling measures, it has been very challenging for the building and construction industry in Singapore.

Our management and staff are constantly monitoring project costs and managing project risks. We are continuously implementing measures to mitigate project losses but we may still encounter unforeseen circumstances. Our current focus is to successfully complete the projects on hand, and embark on new projects selectively.

The xxxxxxxx projects are accounted for via the percentage of completion method in accordance with the xxxxxxxx accounting policies for construction projects as stated in the Group’s Annual Report.

 We appreciate your support and concerns as our shareholder. We apologise that the management is unable to share specific details such as project names due to selective disclosure rules by the Exchange.    

Best Regards

xxxxxxxx”

I could come up with this reply myself. It’s basically an absolutely useless reply with a lot of words, but no answers, except the part about the POC method, which they’ve kindly confirmed for me. They’re basically hiding behind an external IR vendor.

Well, I wasn’t pleased. This time, I sent a strongly worded letter requesting management to provide greater detail. I also informed them that they should treat all correspondence as public information (we can’t have selective disclosures now, can we?), including my questions.

In any case, isn’t this good practice for all management of public listed companies?!

One of my questions in this strongly worded letter was:

If xxxxxxxx cannot manage their project margins adequately, incurring losses on projects repeatedly, will xxxxxxxx (CEO) consider stepping down and letting someone else who can better manage the company take over his executive role?”

This time, management sent a much longer, much more detailed reply, basically answering all my questions. The reply was specially crafted in a separate letter, signed by the top management, complete with an offer to send me a hard copy.

The details did help me understand certain aspects of the project management, that I previously had doubts about.

They sure weren’t very happy with me though. In response to the above logical question, they said that if the questions I asked were to be made available to the media, it would be considered “defamatory as it is suggestive that the CEO is incompetent”, and that legal action would be taken blah blah blah.

Well, I’ve sought legal advice and am basically assured that it’s a whole load of crap. The question included 2 facts, facts that are verified by hard data and has been admitted by the management themselves.

The 2nd part of the question is exactly that. A question. I asked if the CEO would consider letting more qualified personnel take over the company if he is unable to keep margins in check. None of it is defamatory and ironically, the “CEO is incompetent” part is interpreted by the management themselves. (LOL!) There wasn’t even the word “incompetent” in my letters. 

I’ve since replied them accordingly. I’ve even said that I’m comfortable repeating the exact same question at the next AGM. How’s that for being transparent?

If say, a celebrity is bald, and somehow he’s embarrassed by that fact, and if I make a public comment saying “hey he’s bald!”, sure, that comment may be embarrassing, definitely rude, maybe tactless, but certainly not defamatory. Because it’s factual.

Having said all that, it’s counter productive and in fact, self destructive for me to be adding more trouble for a management of a company in which I have a substantial vested interest in. I’m a deep value investor, and have never set out to be activist in nature.

In any case, my stake, although significant, is inadequate to call for a EGM. In future though, that might be an option when my AUM increases. Not ruling anything out. Anything that can focus the market’s attention on certain management practices would be on the table.

I’m still holding on to my significant stake though, as I think the dynamics are changing. I still think my initial investing thesis holds true. I wasn’t counting on an excellent management in this instance, and my experience thus far just confirmed that. I will say that I’m somewhat pleased with some of the info that I’ve since learnt from the reply.

Anything that adds to my knowledge bank of the industry, can potentially become a competitive edge in future investments in the particular industry.

On a related note, I’ve previously been critical of how King Wan’s management has performed. (King Wan Corporation – Part IKing Wan Corporation – Part IIKing Wan Corporation – Part III)

Still, as stated in my earlier posts, I’ve always given credit to their IR, particularly the CFO Francis Chew. I’ve had trouble understanding their financials, particularly the BS as many of their loans to associates are packaged under different items. I am not sure if many analysts/experts bother to ask for a breakdown.

Yet they’ve bothered to provide me with useful information thus far, sometimes, embarrassingly for me, clarifying information that I should’ve picked up myself easily from the AR.

Recently, there’s also been board additions to KW. It seems the more experienced members of the Chua family are taking up board roles in light of the failed investments in prior years. I can only view that as a good thing, seeing that the Chua family themselves have a huge vested interest in seeing the company do better.

The share price has also risen slightly as I expected it to, with improved cashflow from collections from an associate. I don’t think the ride will be smooth sailing from here, but I think the lows are over, simply because most of the write offs are out in the open.

The time to buy, is when there are skeletons in the closet, they’re not out in the open yet, but everyone knows the skeletons are right there. Well, IMO, the skeletons for KW are mostly out in the open now. The ones remaining in the closet, well, everyone knows they’re there.

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Now, value investors are great at looking at figures. All value oriented investors understand and monitor various financial metrics; P/B, PER, Yields, CAGR, FCF etc. Many will utilize some sort of stock screening tool based on these metrics.

Different investors would place different emphasis on different metrics, but that’s going too much into details. The fact is, increasingly, I’m thinking that the qualitative aspects of a company is the key. Afterall, as mentioned many times before, these metrics are widely known and available. The qualitative aspect is much more difficult to assess.

Incidentally, I’ve just finished updating my thoughts on LTC Corp, which just released FY16Q4 results. I think there’s a superb learning example in there, of how a value investor can glean a competitive advantage by going into detail and having an understanding of the industry characteristics. Will write about that next.

When I say qualitative aspects, the management team forms just a part of it. There are naturally some businesses that are just great businesses to be in. The tide is basically in your favor.

WB spoke about such businesses before several times. Conversely, he spoke about Berkshire’s textile business. That’s a business with poor dynamics. Typically, companies in this type of what I call “poor dynamics” type of industry, will find it very difficult to raise prices or gain much of a competitive edge over peers.

Increasingly, I think I’ll have to put more focus on this factor. Assessing qualitatively is IMO, much harder than quantitatively.

Which is why I’m doing it.


On a completely separate note, I’ve had some questions about forex. Again, I’ll repeat that forex is something that’s a bit too complicated for me. It requires a global macro perspective. Just reading the news is not going to cut it. Unless you MAKE the news.

The only forex I do on a regular basis is the USD-SGD pair as I own USD denominated investments anyway.

For those who’d like to learn about forex, well, I have no idea where to start. But if you’d like to trade forex, there’s a link to Instaforex at the right column. Instaforex provides an absolutely free USD 100 to new sign ups, which you can use to try real forex tradng.

Any profits are yours to keep. So they are basically paying for the 1st $100 of your school fees. I’ve used an account to try receiving the $100 and thus far, it works. (surprisingly. I am not sure how they’d sustain their profits by giving out $100 to anyone who’s verified and signed up)

Ah at this stage, I’m sure there’ll be many crafty guys who’d think about signing up, getting the $100 and closing the account. It doesn’t work that way. They’ve some algorithm of some sort to sieve out people who do that.

Anyway, I don’t think 100 USD is worth the trouble, it’s just an incentive for those who are reluctant to put their own money on the line, to take the 1st step. The only reason why I tried getting this 100 USD is so that I can verify it before putting up a link on SG TTI.

IMO, forex is really really tough to get right all the time anyway, and my view is that it should be used only once in a blue moon when you are highly confident of certain scenarios. (For eg. if you knew Brexit would happen….)

If there are any guys out there who can consistently profit from Forex on a daily/weekly basis, please drop me a mail. Seriously. I’m just curious.


I almost forgot to mention this piece of relevant and important news on CNA that I just read. It basically provides me with a lot of comfort knowing that my analysis has thus far been rather accurate. Here is the link:

http://www.channelnewsasia.com/news/business/singapore/good-deal-hunting-part-2/3050476.html

I’ll quote:

“To estimate construction costs, we used S$400 per square foot (psf) for projects within central regions, S$350 psf for projects in the rest of central regions and S$300 psf for projects outside central regions. These figures were estimated based on an analysis of average contracts awarded.”

In an earlier post on my investing thesis for BBR (BBR Holdings Investing Thesis), I wrote that I estimated their Lakelife project to have a breakeven price of $727 psf.

I’ve been asked in the comments section, how I’d derived this figure, and it’s been debated somewhat too. I’ve explained my methodology in the comments section too.

Well, taking the above given estimates in the article by Mr Bernard Tong, it corroborates with my estimate.

Lakelife land parcel bid was won at $418 psf, adding $300 psf of construction costs for projects in OCR, we’ll have a break even price of $718 psf, which is pretty much similar to my $727 psf estimate.

Obviously all these are estimates. But having the MD of The Edge Property confirm my earlier estimates is definitely comforting. I trust he’d know better than most guys, seeing that this is obviously well within his turf.


I’ve also just updated the “About” page to include some common questions that I get. Do check it out.

As always, happy hunting for value.

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10 comments

  1. Great post ! fully agreed !! figures on financial statement is just “illusions ” sometimes , ” now you see , now you don’t !!” We hardly find good management and major shareholders who have minority shareholders in their mind … one of my good investment in early days was ” Public Bank BHD” ,, I strongly believe that management’s quality and integrity is much more important than just “bunch of figures and ratio” ,, as they will bring good value in the long run ,, and being reflected in the share price.
    Cheers !

    Like

  2. Well written article! One of the best places to be a minority shareholder is Israel, where in order to approve the compensation for a controlling shareholder he/she has to get support from a majority among the minority holders. That ensures that minority shareholders are on board when it comes to compensation and related party transactions. I’ve seen it working pretty well over the years and maybe Singapore should adapt a similar regulation to protect minority shareholders from being taken for a ride by a dominant shareholder that acts as if it is his private company.

    For me, management always comes first even before price but that’s just a different investing style. It stems from the fact that I’ve been burned one time too many by companies that were very cheap only to see them getting cheaper due to asinine capital allocation decisions by terrible management teams.

    That said, it is truly amazing how you manage to generate brilliant investment ideas that are working pretty well in the local market here in Singapore.

    Like

    1. Hi Yaniv,
      Thanks for your comment. I’ve heard of some places where there are such rules for management compensation, didn’t know that’s implemented in Israel.
      To be clear, I am not against big compensation packages for management. What I am referring to are the specific situations when the dominant shareholder who is the executive, sits pretty and milks the company as his cashcow.
      For fellow readers: Yaniv manages the Eden Alpha hedge fund, with very impressive returns too. I think one of the years sometime back, the performance was something like 50%+!

      Like

  3. Hi TTI, I have even more frustrating experiences with a Chinese co. I attended the AGM and no management shown up, except a recently appointed (2016) independent director (but not for the period under review-2015). The accounts to be reviewed has serious doubts (looked as though the co is channeling tens of millions to their pocket) with auditor flagging on going concern. I contacted SGX. I would say SGX acted more like a messenger. I am shock that Singapore/MAS all the while aimed to be first class, yet SGX allows such low quality companies to be listed in SGX. While researching, I discovered a number of low quality company listed here, and sgx fail to take prompt action to protect the minority shareholders, eg FerroChina, Sino Techfibre, resulting shareholders lose their entire investment. It is almost like a legit scam. Having said that, I am planning to go to MAS and understand the subject further. If you or anyone have other suggestions to help improve the investment community for the minority shareholders, do drop me a note. I believe SGX can do better to improve the investment community.

    Like

    1. Hi millionfaith,
      Thanks, once again, for your comment.
      No management showed up at the AGM?!!
      That’s seriously the 1st time I’ve heard of this.Only an independent director???
      Again, what’s the recourse for minority shareholders in such an instance? After getting disgruntled, you sell your stake. Some other greater fool buys it from you. That’s why the share price remains chronically low, but it’s hardly a disincentive or punishment for the management.
      As for SGX, well, let’s not forget that they are a company themselves. They want to get as many listings as possible, and they are competing against other exchanges around the region. For sure, the exchange has to say they are looking for quality companies etc, but if you are the CEO of SGX, like it or not, you are pressured by your bottomline and share price.
      I am cautious of many of these S chips as logically, the higher quality, better companies, will opt to list in Shanghai or HKEx. Again, this brings me back to my point about assessing qualitatively, the management.

      Like

      1. Hi TTI,

        Thanks for your response. Is no joke, no executive, no management, except one new independent director that attended the AGM, alongside with about 20 investors. We, the investors demanded for another day to meet the management, aka chairman/CEO to have our questions answered.

        Then a day was set. Just a day before the meeting, the meeting was cancelled because the CEO got an MC for throat infection aka sore throat, and another executive, the brother, passport expired so he is unable to travel to SG to meet the shareholders. They said they will postpone it, but until today, I still have not heard from them. I know I could have just sell the shares and move on, which is a small amount rather than wasting my energy trying to fix something which is a uphill task. However, if no one try to do something, SGX will not improve (BTW, my stake in SGX is even higher as I am vested in SGX). As much as SGX needs to earn the commission, I feel that SGX also need to ensure the companies listed are “proper” companies. I heard many retirees lose their hard earned through these legit public listed companies and therefore SGX/MAS need to better regulate the industry.

        From Bloomberg:

        “In the case of FerroChina, which had a market value of more than S$2 billion in 2007, shareholders lost their entire investment when the steelmaker was forced to delist in March 2010. Other stocks that have been suspended include Sino Techfibre, which said a fire destroyed its financial records after reporting accounting flaws, and China Sun Bio-Chem Technology Group Co., which said a truck transporting its accounting records was stolen.

        “We’ve learned from that episode,” Wong said. “When things happened, SGX required Chinese companies to conduct checks and audits. Having the direct listing framework with CSRC will help. There’s at least another pair of eyes”

        You are right that there is very little recourse for minority shareholders. And hardly a disincentive or punishment for the management. I am also aware that there is not much I can do, but I will still try. I aim to push SGX to do more.

        Thanks again for the article.

        Like

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