"Economic history is a never-ending series of episodes based on falsehoods and lies, not truths. It represents the path to big money. The object is to recognize the trend whose premise is false, ride that trend and step off before it is discredited." ~ George SorosAs a value investor, I don't think I can agree with the 'ride that trend and step off before it is discredited' part - sounds like the greater fool theory to me. But world economy strikes me as a farce at times like this.
Sunday, July 15, 2012
Quote
Great quote by George Soros:
Monday, July 9, 2012
NVC Lighting (tkr: 2222 HK) and Yurun (tkr: 1068 HK) Founders Depart
Not a good sign when the founder of a company decides to quit (read here for NVC Lighting and here for Yurun). I don't have much to add as both are widely suspected frauds. Founders tend to step 'up' (not 'down') during difficult environments, they will do anything to turn the company around (if real and salvageable). Stepping down is not a good sign.
There seems to be more founders/CEOs running away/stepping down in China recently. I wonder if it is due to the rapid economic slowdown in China - companies are finding it harder to keep up the facade as liquidity dries up. Founders/CEOs are trying to create more distance between themselves and the listed entities. Keep an eye on whether more board members resign for 'personal reasons'.
ps. The respected Webb-site.com keeps a tab on directors resignation/change for listed companies in Hong Kong. Always a good place to check.
Monday, June 25, 2012
Carpenter Tan (tkr: 837 HK) - Would you buy these combs?
Carpenter Tan is a 'high end' wood comb manufacturer and retailer in China/Hong Kong with combs marketed under the brand 'Carpenter Tan' (譚木匠).
I've walked by their retail outlets at least a few dozen times (they have outlets located in the Hong Kong MTR which I frequently walk by) and I have been counting the number of customers each time. So far I've seen no paying customers and a grand total of 4 'window shopping' customers in their stores. Usually the store attendant is just sitting around.
Are combs brandable? Because these are some of the most expensive combs I've seen:
(from their homepage www.woodencomb.co.uk)
To be clear, this is denominated in USD. Out of the nine samples from their homepage three combs are priced above USD90 and one at USD78! (I am not selectively choosing samples. But you should take a look at their retail outlets as well)
In 2011 they had sales of RMB244mm with 50%+ EBITDA margins. Seriously, how many companies can you name globally with that sort of EBITDA margins? Real world business is very competitive and to make 50%+ EBITDA margins require selling something quite differentiated/high value-add/competitively protected. These are generally not features of the comb industry.
Is this a fraud? Your call.
I've walked by their retail outlets at least a few dozen times (they have outlets located in the Hong Kong MTR which I frequently walk by) and I have been counting the number of customers each time. So far I've seen no paying customers and a grand total of 4 'window shopping' customers in their stores. Usually the store attendant is just sitting around.
Are combs brandable? Because these are some of the most expensive combs I've seen:
(from their homepage www.woodencomb.co.uk)
To be clear, this is denominated in USD. Out of the nine samples from their homepage three combs are priced above USD90 and one at USD78! (I am not selectively choosing samples. But you should take a look at their retail outlets as well)
In 2011 they had sales of RMB244mm with 50%+ EBITDA margins. Seriously, how many companies can you name globally with that sort of EBITDA margins? Real world business is very competitive and to make 50%+ EBITDA margins require selling something quite differentiated/high value-add/competitively protected. These are generally not features of the comb industry.
Is this a fraud? Your call.
Thursday, June 21, 2012
Evergrande Real Estate (tkr: 3333 HK) - Anecdotes to a Pre-IPO Fiasco
Another fairly well known fraud (at least among Asia HY/distressed debt guys) was written up by Citron Research yesterday (read here and download their research here).
No point flogging a dead horse. I just wanted to highlight the reason Evergrande is well known among the investment community is because Merrill Lynch and Deutsche did a pre-IPO investment in Evergrande in 2006/7 based on the company's business plan to acquire and develop specific plots of land and 'guarantee' of returns. What happened thereafter was a complete fiasco. The company took the money and acquired completely different land parcels. The paperwork was incomplete and the company could not deliver financial statements. At that point, the pre-IPO investors knew it was a fraud and had pretty much written it off. Amazingly, Evergrande pulled the IPO off and now we know how. If Citron (or anyone interested in further investigation) is reading this, I would recommend speaking with some of the former Merrill and Deutsche investment team members (or HY sellside brokers), the backdrop is very entertaining.
It is shameful Merrill was one of the IPO bookrunners. No way they were not aware of the fraud. They sold a lousy deal to their clients to get them off the hook on a bad investment.
PS. Evergrande is another China high yield bond issuer. I've written before (here) why this is particularly dangerous.
No point flogging a dead horse. I just wanted to highlight the reason Evergrande is well known among the investment community is because Merrill Lynch and Deutsche did a pre-IPO investment in Evergrande in 2006/7 based on the company's business plan to acquire and develop specific plots of land and 'guarantee' of returns. What happened thereafter was a complete fiasco. The company took the money and acquired completely different land parcels. The paperwork was incomplete and the company could not deliver financial statements. At that point, the pre-IPO investors knew it was a fraud and had pretty much written it off. Amazingly, Evergrande pulled the IPO off and now we know how. If Citron (or anyone interested in further investigation) is reading this, I would recommend speaking with some of the former Merrill and Deutsche investment team members (or HY sellside brokers), the backdrop is very entertaining.
It is shameful Merrill was one of the IPO bookrunners. No way they were not aware of the fraud. They sold a lousy deal to their clients to get them off the hook on a bad investment.
PS. Evergrande is another China high yield bond issuer. I've written before (here) why this is particularly dangerous.
Tuesday, June 19, 2012
China - More Problems with Fiat Currency and a Government that wants Inflation!
I've been thinking about China's M2 money supply problem (read here and here) for quite some time. The following graph illustrates the current trend (borrowed from Also Sprach Analyst):
This is the result of a fiat currency and a government that wants inflation, as posted before (here). Exacerbated by distorted incentives and poor capital allocation by policy banks (here). It is too easy and tempting to hit that printing press, they just can't help themselves!
How is it healthy an economy half the size of U.S. is 40%+ higher in M2 money supply, with the gap widening by the day? It is no wonder cost of living in 2nd tier cities in China is comparable to the U.S. according to a survey (here). Let's not forget the income of an average Chinese family is not comparable to the U.S.
Keep this going and you have high inflation (translating to increasing cost of living, real estate prices and lost of manufacturing competitiveness), a currency with unsustainable value and social instability. Turn off the spigot and you have banking system and real estate collapse and...social instability as well. That is between a rock and a hard place.
This is the result of a fiat currency and a government that wants inflation, as posted before (here). Exacerbated by distorted incentives and poor capital allocation by policy banks (here). It is too easy and tempting to hit that printing press, they just can't help themselves!
How is it healthy an economy half the size of U.S. is 40%+ higher in M2 money supply, with the gap widening by the day? It is no wonder cost of living in 2nd tier cities in China is comparable to the U.S. according to a survey (here). Let's not forget the income of an average Chinese family is not comparable to the U.S.
Keep this going and you have high inflation (translating to increasing cost of living, real estate prices and lost of manufacturing competitiveness), a currency with unsustainable value and social instability. Turn off the spigot and you have banking system and real estate collapse and...social instability as well. That is between a rock and a hard place.
Friday, June 15, 2012
China - The Problem with Fiat Currency and a Government that wants Inflation!
I've always enjoyed John Hempton's blog. I found his recent entry (here) on Chinese kleptocracy opinionated and entertaining as usual.
His basic premise:
While I think his premise is correct - the conclusion is rushed. His assumption that it is difficult to increase inflation, in my opinion, is misguided.
His basic premise:
- Chinese government is corrupt, driven by personal interest
- One child policy and limited investment options drive high savings rate
- Banks (and deposit and borrowing rates) are regulated. Deposit rates below inflation creates negative real rates
- Negative real rates fund SOEs and politically connected entities
- Borrowing at low cost (from deposits) and investing in a highly inflationary environment is effectively looting the public
His conclusion:
- The 'undiscussed' serious threat is deflation (or low inflation). Low inflation (or deflation) creates positive real rates, and stops SOEs from 'looting' the public and paying back the banks
- And unless the Chinese can get the inflation back up, expect major social problems
While I think his premise is correct - the conclusion is rushed. His assumption that it is difficult to increase inflation, in my opinion, is misguided.
Herein lies the problem of a fiat currency, particularly under China's currency controls. Inflation can almost 'always' be manufactured (also known as money printing, much easier in today's digital world). It is easy to maintain negative real rates when you control the banking system and the currency. Deflation is not a 'threat', as they can always create inflation (the opposite is not true). And since they control the currency, they can always push money directly/indirectly to SOEs - funding is never a 'real' problem. Which would lead one to question the value of the Renminbi, but that is a separate story.
The real issue, in my view, is whether the government can maintain negative interest rates (keeping deposit rates below inflation), while maintaining social stability/the facade of wealth creation (in an inflationary environment) among the public. Definitely a very tough balancing act!
PS. The only way to maintain/balance this in the long term is to drive productivity growth. Which is very difficult in today's environment.
Friday, February 24, 2012
China Banks - Is the Weakness its Deposit Base?
While the fragility of the Chinese banking system is increasingly acknowledged by people as the system experiences more strain (read here), it is not completely clear what the 'trigger point' of a collapse is. Even though bad loans continue to build up, my contention is it is unlikely to be on the asset side of the balance sheet. The simple reason is banks will simply manipulate the accounting principles and keep the bad loans at face value (never write it down). If it really becomes unsustainable, the central government will ultimately buy the bad debt from the banks to bail them out, like they have in the last Chinese banking crisis of 2002/3 to keep the system stable.
The trigger point ought to be something outside the bank and central government's control. My guess is it will be on the funding side of the bank balance sheet, ie. deposits. Deposits have never been a problem for Chinese banks as deposits have grown rapidly in the last few years due to the gradual appreciation ('expected' appreciation) of the RMB (among other reasons) as people convert their USD (or another currency) and deposit it in RMB with a Chinese bank. But the continued revaluation of the RMB is no longer clear (and few viable RMB investment alternatives other than real estate), and deposits are escaping the system as people convert RMB back to USD (or another currency). This could create a painful unwinding process if it triggers a classic bank run.
The central government has to keep 'slowly' appreciating the RMB to ensure the bank's deposit base is stable (or growing). Yet, due to the lack of investment alternatives, banks end up lending money to real estate developers, local governments and SOEs, which the central government is trying to clamp down on! And the juggling act continues...
The trigger point ought to be something outside the bank and central government's control. My guess is it will be on the funding side of the bank balance sheet, ie. deposits. Deposits have never been a problem for Chinese banks as deposits have grown rapidly in the last few years due to the gradual appreciation ('expected' appreciation) of the RMB (among other reasons) as people convert their USD (or another currency) and deposit it in RMB with a Chinese bank. But the continued revaluation of the RMB is no longer clear (and few viable RMB investment alternatives other than real estate), and deposits are escaping the system as people convert RMB back to USD (or another currency). This could create a painful unwinding process if it triggers a classic bank run.
The central government has to keep 'slowly' appreciating the RMB to ensure the bank's deposit base is stable (or growing). Yet, due to the lack of investment alternatives, banks end up lending money to real estate developers, local governments and SOEs, which the central government is trying to clamp down on! And the juggling act continues...
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