Flashback On Lion Diversified's RPT Transactions

With Lion Diversified is losing much money (see A Quick Look At Lion Corp And Lion Diversified's Earnings), I thought revisit some older postings on it.

One issue that stood out was the Related Party Transactions (RPT)!!

In the posting: Megasteel And Lion Corp And Lion Diversified

• A wholly-owned subsidiary of the Company, Limpahjaya Sdn Bhd, has disposed of 66,666,667 ordinary shares of RM1.00 each in Megasteel Sdn Bhd ("Megasteel"), representing approximately 11.1% of the existing issued and paid-up share capital of Megasteel to Lion Diversified Holdings Berhad for a cash consideration of RM100,000,000.

A related party transcation where Lion Diversified bought shares of Megasteel from Lion Corp for 100 million.

And what's wrong? Well Megasteel is in trouble! See How Deep A Trouble Is Megasteel In?

A 100 million related party transaction which did no favours for Lion Diversified!

In the posting: Detecting Companies' Malpractices

• “Avoid companies that have dabbled with related party transactions or have been involved in buying over family-related companies. The company may do it again. Sometimes a leopard doesn’t change its spots,” he says. (he = Choong Khuat Hock, Kumpulan Sentiasa Cemerlang head of stock research and partner)

Now did this leopard change its spots?

Well.. flashback June 2008, the following was blogged: Lion Diversified Acquisition of Subsidiary at RM61.55 million!

Here's the posting in full again.

----------------------------------------------------

Lion Diversified announced last night it was acquiring a subsidiary. In local lingo, it's a Kaki-Lang type of corporate exercise. Here is the temporary link to the announcement. ACQUISITION OF A SUBSIDIARY

• The Board of Directors of Lion Diversified Holdings Berhad ("LDHB" or the "Company") wishes to announce that LDH Trading Sdn Bhd, a wholly-owned subsidiary of the Company, had on 25 June 2008 completed the acquisition of the entire issued and paid-up capital comprising 3,000,000 ordinary shares of RM1.00 each in Banting Resources Sdn Bhd ("Banting Resources"), a company incorporated in Malaysia, for a total consideration of RM61.55 million ("Acquisition of Subsidiary"). Hence, Banting Resources became a wholly-owned subsidiary of the Company.
  
  Banting Resources, a company incorporated under the Companies Act, 1965 on 26 September 2006, is a property investment company with an authorised capital of RM10,000,000.00 comprising 10,000,000 ordinary shares of RM1.00 each and an issued and paid-up capital of RM3,000,000.00 comprising 3,000,000 ordinary shares of RM1.00 each.
  
  The Acquisition of Subsidiary is not expected to have a material impact on the earnings of the LDHB Group for the financial year ending 30 June 2008 and, on a proforma basis, is not expected to have a material impact on the audited consolidated balance sheet of LDHB as at 30 June 2007.

Here are some of my comments.

1. This is an acquisition which has been completed. It's not a proposal.

2. It's wholly owned subsidiary, LDH Trading Sdn Bhd bought the entire stake in, Banting Resources Sdn Bhd for a total consideration of RM61.55 million.

3. Rm61.55 million and this company doesn't even have the decency to show detailed information of this acquisition. Questions that I can think of.

• a. Is the purchase price fair or is it the purchase price exorbitantly high?
• b. What it the track record of Banting Resources?
• c. What kind of Balance Sheet does Banting Resources have? Is it highly in debt?
• d. What does Banting Resources do?
• e. Who are the exact shareholders in Banting Resources?

4. If you look at Lion Diversified historical announcements, why are they constant acquisition of subsidiary? I mean seriously, is Lion Diversified in the business of buying its own companies?

5. Here is the link to Lion Diversified last reported quarterly earnings. Quarterly rpt on consolidated results for the financial period ended 31/3/2008 (You will note some drastic increase in trade receivables - and did you see that LionD has investment in quoted securities totalling a massive 237 million?? Wonder what securities man!). In the Balance Sheet, Lion Diversified is noted to have 199.547 million in its piggy bank and with debts totalling 480.681 million. As it is, based on this purchase would cause Lion Diversified to be even more in debt.

Ah, but that's not all.

Let me highlight just a couple the many, many proposals that I saw in its historical announcements. Well there is one proposal where Lion Diversified is purchasing land in China for some 151 million.

And then there is their massive BLAST FURNACE IRON-MAKING FACILITY which is valued at 1.62 Billion!

Wasn't Lion Group a group of company which almost sank a decade ago due to overly aggressive expansion and massive borrowings?

5. Try google the exact phrase "Banting Resources" and see if you can get more info on this company.

How now brown cow?

Do you like what you see or are you simply disgusted?

----------------------------------------------------

Some of the comments posted:

The Great Game said...
If I am not mistaken, RPT needs no special approval from shareholders provided it is below the 5% threshold (NTA, Revenue and Profit).

Fair enough, ethically what Lion Diversified has done was not right. But it seemed like this RM61.5 million was not a material sum to Lion Diversified, so what's the catch here?

But hey, again Warren Buffet did use Berkshire's funds to purchase a private jet for his personal use (before he bought the aircraft leasing company), right?

In the last financial crisis, William Cheng was the second largest debtor in Msia, after Halim Saad/ Renong Group with some RM 20 billion.

He had earned a solid reputation after he repaid every single cents he owed. He is one of the very few, if not the only one who did not seek for a haircut from his lenders. He is a man of his words. It's hard to find corporate chieftain of his integrity now and then.

11:46 AM
Moola said...
Dear Great Game.

Many thanks for your views.

My main issue here is on Lion Diversified acquisition of a subsidiary done on a whopping rm61.5 million and the company showed no respect to their shareholders by not providing any financial details of Banting Resources.

This is an acquisition of a subsidiary.

LionD has simply got to show the justifications of this aquisition and the price involved!

What they have done here as you had admitted is simply not correct.

And I am simply baffled by your statement in regarding Warren Buffett into comparison.

Why the need to divert from the main issue?

12:27 PM
The Great Game said...
Dear Moola

Wow. Geeks. Your response is fast. I agree that Lion should, at the very least, publish more info on Banting Resources, although it is a fait accompli.

My point is that there's always a systematic exploitation of minority shareholders as long as this 5% -10%-15% threshold rules is still around. To me the key issue here is the materiality of this transaction, of which this 62 millon does not even trigger any of the threshold required by Bursa.

Now I re-read my previous comment,my WB exmaple is indeed quite baffling. Apologies on that score. I was just trying to make a point that there's nothing wrong to "short change" the shareholders as long as it is well within boundary and they still deliver the results. I am not saying this 62million is small, but in Lion's case, it is immaterial.

To one extreme, it's like saying I cant use my company car to drive my kids to school?

Frankly I have not been following on Lion Group (and now called Lion Diversified or who-know-what). But this dubious transaction (at 62 million) is a drop of the ocean compared RM 20 billion debt that Lion has resolved. That, of not running away from the 20 billion debt, to me, is the ultimate courage and integrity in Msia corporate world.

2:41 PM
Moola said...
Dear Great Game,

I was just trying to make a point that there's nothing wrong to "short change" the shareholders as long as it is well within boundary and they still deliver the results.

==>

I am truly disappointed.

How could it ever be NOTHING WRONG TO SHORT CHANGE???

A crime is a crime is a crime.

And less us not forget, this is a 62 million rip-off!!!!!!!!!

3:13 PM
TOTOMASTER said...
okok.. take it easy moo moo... let me go buy up 5% of liondiv n let me hantam them kau kau next time they do the same thing again...

hahaha...

9:45 PM
Moola said...
Dear Totomaster,

I am so baffled.

Care to share what's so funny?

Aren't you even disgusted at what's happening?

9:56 PM
The Great Game said...
No offence, I was just merely rambling on my thoughts. Apologies if you are offended by any of my comments.

With regards to your comment, I am a realist and I just couldn't find any other listed companies on KLSE who are not exploiting this 5% threshold rule. Unfortunately this is just the corporate world that we are living in (I wish I am wrong!).

Why is Lion allowed to complete this transaction without even notifying its shareholders? What's the legal protection/ remedy for the minority shareholders? What should be done to ensure these type of dodgy transactions do not happen in the future?

So to me, the bottom line is as long as the management keep delivering, they could (of course preferably not as it is ethically not correct) contemplating some curry-favour transactions.

Again, this is just my 2 cents. Please do not take it personal.

3:06 PM
Moola said...
Dear Great Game,

So to me, the bottom line is as long as the management keep delivering, they could (of course preferably not as it is ethically not correct) contemplating some curry-favour transactions.

==>

I am truly baffled at your reasoning.

That the company is required to perform as public listed company is a must.

That the company is already paid well as a listed company.

So what gives the company divine rights to such corportate exercises, where the company can acquire their OWN subsidiary for such a large sum of 62 million ringgit?

3:30 PM
The Great Game said...
Fair point. There is definitely no divine right for Lion to engage in this transaction ethically speaking; but neither are they prohibited to engage in this legally.

That the company is required to perform as public listed company is a must. -> Agreed, but in reality I think most businessman tend to think of the stock market as a place to 'cash out' or a ATM machine.

That the company is already paid well as a listed company. -> I supposed there's no limit to a man's greed.

I could be wrong, and I do not mean to incriminate. At the surface, this is a clear 62 million rip-off. But Msian businessman have a lot of ''lobbying'' to do. And these funds usually have to come from some dodgy transactions like this. This transaction could also simply just for personal pleasure of the major shareholders. We could never be sure of his motive.

Strangely enough, his means to whatever ends he might have is legally endorsed.

The key point i think we should recognise is that this transaction is not material enough to make a drastic impact to the company; otherwise it would be obliged under the listing rule to make all proper announcements, seek approvals, etc.

4:34 PM
Moola said...
Dear Great Game,

The key point i think we should recognise is that this transaction is not material enough to make a drastic impact to the company...

==>>

Huh?

I really am so baffled.

Your very first comment was "Fair enough, ethically what Lion Diversified has done was not right.."

But yet ... you are trying so hard to justify this transaction.

Not right equals wrong, yes?

And wrong is wrong is wrong.

4:51 PM
Seng said...
Interesting exchange.

My 2 sen worth.

1. Materiality.
We must be very careful when applying this "materiality" argument.

In a quick and dirty valuation of stocks, it is practical and good to ignore immaterial factors so as to be able to focus on the key issues.

But let's not confused this "materiality" argument with actual running of a company.

To say that "siphoning" 5% or 3% or even 1% of whatever measure is acceptable because it is not material is plain wrong.

Siphoning via legal means is morally wrong.

And shareholders - as owners of companies - want management who will always act in shareholder's best interest.

Period.

It is important we understand clearly the 2 completely different concepts of materiality.

2. The Reality.

Yes, there are some businessman who has no problems exploiting this loophole.

That is current reality.

Is that necessarily future reality?

Maybe. Maybe not.

Whether it continues in the future depends very much on whether we - as stakeholders - accept this behaviour or not.

I will put my foot down and say I don't accept it personally.

If every company management can "siphon" money off for personal gains, Bursa will be in trouble!

The argument that 1% is small and immaterial is irrelevant.

Keep doing 1% each week, and by the end of the year, 50% could have been gone!!!

3. This specific case.

I personally wouldn't say there is sufficient evidence of siphoning.

Instead, I think what we have is a situation of NOT having enough information.

And that alone is sufficient to create a strong level of distrust, based on his past records.

I don't deny he's done good things. But we cannot deny, he's done many shady things too.

And prudence suggests that we - as minority shareholders - should be very careful as investors.

Safer - me thinks - not to be an investor or a business partner that we cannot trust. After all, if you are a minority shareholder, do you think he cares about your best interest? If not, why be a long-term investor?

Seng.

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Some Market Comments From Jason Zweig

On WSJ. Why Investors Need to See the Light and Slow Down

• Don't be happy; worry.
  
  The Dow Jones Industrial Average is up 46% since March 9, when the world itself seemed to be coming to an end. In the entire 113-year history of the Dow, only six rebounds have been bigger and faster. But the swiftness and magnitude of this bounce-back aren't reasons to be cheerful; they are reasons to be cautious.
  
  In March, stocks traded as low as 11.7 times their average earnings over the previous 10 years, adjusted for inflation, according to finance professor Robert Shiller of Yale University. That put the market at its lowest valuation since January 1986. Today, however, stocks are selling at 18.4 times Prof. Shiller's measure of earnings. That isn't only up hugely from March but is above the long-term average of 16.3 times earnings.
  
  Robert Rodriguez, chief executive of First Pacific Advisors in Los Angeles, says that in March, investors feared getting crushed in a further decline. Now all they seem afraid of is missing an even greater rally.
  
  Mr. Rodriguez is convinced that the consensus -- economic recovery by early next year at the latest -- is wrong. "People are talking about whether the shape of the recovery will be a 'V' or a 'W' or even a 'square root,' " he says, "but I think we are in what I call a 'caterpillar economy.' It will be up and then down, up and then down. We will be far from normal for a very long period of time. People deploying capital will end up destroying capital."
  
  I am not as worried as Mr. Rodriguez, but it is at times like these, when a rising market sweeps our spirits up with it, that investors need to evaluate their emotions and consider whether their beliefs and actions are justified.
  
  In August, corporate insiders -- officers and directors of public companies -- sold nearly 31 times as much stock as they bought. From last September through this past March, in the depths of the bear market, that ratio was just 2 to 1, according to TrimTabs Investment Research of Sausalito, Calif. The long-term average is about 7 to 1.

Regarding the corportate insiders selling, see this link: here

• The people who run companies don't know exactly what the future holds, but they do know more about their own firms than outsiders do. If they are furiously selling, how eagerly should the rest of us be buying?
  
  It is well-known that investors chase past performance, buying whatever has just made the most money for other people. What isn't commonly understood is that investors also chase their own past performance, buying more of whatever they themselves have made the most money on.
  
  Research by economist David Laibson of Harvard University shows that 401(k) participants tend to add significantly to whichever funds they already own that have gone up the most. "Investors expect," Prof. Laibson says, "that assets on which they personally experienced past rewards will be rewarding in the future, regardless of whether such a belief is logically justified."
  
  That is exactly what seems to be happening now: In June, according to Hewitt Associates, 401(k) participants put 41.0% of their new contributions into stocks. In July, as the Dow shot up 725 points, they pushed that rate up to 42.3%. Participants also cut their contributions to "lifestyle" funds that keep a portion of their assets in bonds and cash.
  
  The market's latest hot streak makes the future feel predictable, but it isn't. The Dow had an uncannily similar 46.5% gain in the 117 days that ended April 9, 1930; it lost almost 51% over the next year. Another 47% upswing in 1971 led to a long, choppy decline of more than 37%. The market also could go nowhere, as it did for months after a similar-size gain in 1975. Or it could hit new heights, as it did in 2004 after rising 47% from the lows of 2002.
  
  In his classic book "The Intelligent Investor," the great money manager Benjamin Graham wrote that "the investor with a portfolio of sound stocks should expect their prices to fluctuate and should neither be concerned by sizable declines nor become excited by sizable advances." If you can't exercise that kind of emotional control, then by Graham's definition you aren't an investor at all.
  
  I see nothing wrong with dollar-cost-averaging into this market, purchasing a fixed amount every month -- especially in a low-cost stock index fund. But to buy more of what has gone up, precisely because it has gone up, is to fall for the belief that stocks become safer as their prices rise. That is the same fallacy that led investors straight into disaster in 1929, 1972, 1999, 2007 and every other market bubble in history.
  
  The market's light has turned yellow. Don't try to run it.
  

Read more...

Andy Xie: Is The Market Right That We Will See A V-Shaped Bounce For Global Economy?

On the English Caijing, Andy Xie talks about the possibility of a W-shaped recovery, New Bubble Threatens a V-Shaped Rebound

• A growing liquidity bubble that ignores structural facts is the basis for today's happy talk about a comeback for the global economy.
  
  By Andy Xie, guest economist to Caijing and a board member of Rosetta Stone Advisors Ltd.
  
  (Caijing Magazine) The United States is beginning to report data showing strong economic growth. Analysts are upgrading their outlooks for the U.S. economy, which is expected to grow at an annualized pace of 3 to 4 percent. And even before the U.S. revival emerged in the third quarter, China's data pointed toward a quick rebound in the second quarter.
  
  Is the global economy staging a V-shaped bounce? The buoyant financial market had been expecting a rebound for months. Was the market right?
  
  At the end of last year, I said I expected global stock markets to stage a big bounce in spring 2009, and the global economy to rebound in the second half. I also expected analysts to upgrade outlooks by this time. I warned that the economic pickup was due to inventory cycle and stimulus, and that the global economy would experience a second dip in 2010.
  
  In a normal economic cycle, an inventory-led recovery would be followed by corporate capital expenditure, leading to employment expansion. Rising employment leads to consumption growth, which expands profitability and more capex. Why won't it work this time? The reason, as I have argued before, is that a big bubble distorted the global economic structure. Re-matching supply and demand will take a long time.
  
  The process is called Schumpeterian creative destruction. Keynesian thinking ignores structural imbalance and focuses only on aggregate demand. In normal situations, Keynesian thinking is fine. However, when a recession is caused by the bursting of a big bubble, Keynesian thinking no longer works.
  
  Many policymakers actually don't think along the line of Keynes versus Schumpeter. They think in terms of creating another bubble to fight the recessionary impact of a bubble burst. This type of thinking is especially popular in China and on Wall Street. Central banks around the world, although they haven't done so deliberately, have created another liquidity bubble. It manifested itself first in surging commodity prices, next in stock markets, and lately in some property markets. Will this strategy succeed? I don't think so.
  
  The lifespan of a bubble depends on how it affects demand. The longest-lasting are property and technology bubbles. The multiplier effect of a property bubble is multifaceted, stimulating investment and consumption in the short term. The supply chain it impacts is very long. From commodity producers to real estate agents, it could stimulate more than one-fifth of an economy on the supply side. On the demand side, it stimulates credit growth and financial sector earnings, and often boosts consumption through the wealth effect. Because a property bubble is so powerful, the negative effects of a bursting are great. Excess supply created during a bubble's lifespan takes time to consume. And a bust destroys the credit system.
  
  A technology bubble occurs when investors exaggerate a new technology's impact on corporate earnings. A breakthrough such as the Internet improves productivity enormously. However, consumers receive most of the benefits. Competition eventually shifts temporarily high corporate profitability toward lower consumer prices. Because the emergence of an important technology brings down consumer prices, central banks often release too much money, which flows into asset markets and creates bubbles. While an underlying technology leads to an economic boom, the bubble feels real. More capital pours into the technology. That leads to overcapacity and destruction of profitability. The bubble bursts when speculators finally realize that corporate earnings won't rise after all.
  
  The cost of a technology bubble is essentially equal to the amount of over-investment involved. Because a technological breakthrough expands the economic pie, the costs of a technology bubble are easy to absorb. An economy can recover relatively quickly.
  
  A pure bubble tied to excess liquidity that affects one or many financial assets cannot last long. Its multiplier effect on the broad economy is limited. It could have a limited impact on consumption due to the wealth effect. As it neither stimulates the supply side nor boosts productivity, whatever story it is based on will have holes that become apparent to speculators. It doesn't take long for them to flee. Furthermore, a pure liquidity bubble without support from productivity can easily lead to inflation, which causes tightening expectations that trigger a bubble's burst.
  
  What we are seeing now in the global economy is a pure liquidity bubble. It's been manifested in several asset classes. The most prominent are commodities, stocks and government bonds. The story that supports this bubble is that fiscal stimulus would lead to quick economic recovery, and the output gap could keep inflation down. Hence, central banks can keep interest rates low for a couple more years. And following this story line, investors can look forward to strong corporate earnings and low interest rates at the same time, a sort of a goldilocks scenario for the stock market.
  
  What occurred in China in the second quarter and started happening in the United States in the third quarter seems to lend support to this view. I think the market is being misled. The driving forces for the current bounce are inventory cycle and government stimulus. The follow-through from corporate capex and consumption are severely constrained by structural challenges. These challenges have origins in the bubble that led to a misallocation of resources. After the bubble burst, a mismatch of supply and demand limited the effectiveness of either stimulus or a bubble in creating demand.
  
  The structural challenges arise from global imbalance and industries that over-expanded due to exaggerated demand supported in the past by cheap credit and high asset prices. At the global level, the imbalance is between deficit-bound Anglo-Saxon economies (Australia, Britain and the United States) and surplus emerging economies (mainly China and oil exporters). The imbalance was roughly equal to US$ 1 trillion, or 2 percent of global GDP. The imbalance was supported by: 1) the willingness of central banks in surplus, emerging economies to hold down exchange rates and recycle their surpluses into the deficit economies by buying government bonds; 2) the willingness of consumers in deficit countries to buy with borrowed money; and 3) Wall Street's ability to dress up high-risk consumer loans as low-risk derivative products. I am describing these factors to underscore that central banks are unlikely to bring back yesterday's equilibrium.
  
  Recent data point to a sharp increase in the household savings rate in the United States. Over two years, it rose above 5 percent from minus 2 percent. The current level is still below the historical average 8 percent. If normalization remains on track, it should rise above 8 percent, and probably reach above 10 percent, to bring debt levels down to the historical average.
  
  Some argue that, if low interest rates revive the property market, American households may be willing to borrow and spend again. This scenario is possible but not likely. The United States has not experienced serious property bubbles in the past because land is privately owned and plentiful. A supply overhang from one bubble takes a long time to digest. And American culture tends to swing to frugality after a bubble. One's outlook either for a normal recovery or a bubble-inspired boom depends on the outlook for the U.S. household savings rate. Unless the U.S. household sector is willing to borrow and spend again, emerging economies will not be able to revive the export-led growth model.
  
  If one accepts that the U.S. household savings rate will continue to rise, emerging economies must decrease their savings rates, increase investment, or decrease production. The best choice is to decrease savings rates. But savings rates are hard to change. They depend mainly on demographics and wealth levels. The quickest possible way out would involve creating an asset bubble that inflates household wealth and decreases savings. Many advocates of inflated property and stock markets in China have this effect in mind. Japan's bubble after the Plaza Accord in 1985 had its origin in the same dilemma. This approach, if it works, has catastrophic long-term consequences. Japan remains mired in stagnation two decades after its bubble began to burst.
  
  Some analysts are expecting China to repeat Japan's bubble experience, which occurred in the late 1980s. At that time, Japan's export-led growth model was stymied by a doubling of its currency value after the Plaza Accord. It tolerated a massive asset bubble to stimulate domestic demand and stabilize its economy. China's export-led model is facing a rising savings rate and declining U.S. demand for its exports. Asset inflation could be a way out in the short term.
  
  China doesn't need to repeat Japan's experience. One reason is that the circumstances are not the same. First, Japan was a developed country when its bubble started getting out of control in 1985. It couldn't divert its vast savings into infrastructure investment. But today, China's national urbanization project still has up to 30 percentage points to go. If the right mechanism can be implemented, China could divert more savings into urbanization.
  
  Second, China can decrease its savings rate substantially through structural reforms. Half of China's gross savings are in the public sector. The government and state-owned enterprises should decrease revenue-raising and increase borrowing to finance investments. For example, China's high property prices are based on the investment-fund revenue needs of local governments. If China's property prices were cut by one-third, the national savings rate could decrease by two to three percentage points.
  
  Third, the Chinese government could give its shares in listed state-owned enterprises to the household sector. The subsequent increase in household wealth could lower the national savings rate by three to four percentage points.
  
  China's exports are down by roughly one-fifth. It needs the national savings rate to fall by about six percentage points for the economy to function normally. Otherwise, the economy will experience either a recession or a bubble. And the purpose of a bubble, as mentioned, would be to temporarily decrease the savings rate.
  
  This discussion may seem to digress from the analysis of sustainability in the current economic recovery. But it brings out two points: The old equilibrium cannot be restored, and many structural barriers stand in the way of a new equilibrium. The current recovery is based on a temporary and unstable equilibrium in which the United States slows the rise of its national savings rate by increasing the fiscal deficit, and China lowers its savings surplus by boosting government spending and inflating an assets bubble.
  
  This temporary equilibrium depends on government action. It does not have a market foundation that would support sustained and rapid growth. Nevertheless, improving economic data will excite financial markets.
  
  China's stock market is cooling because the Chinese government is jawboning it down, based on fears of a big bubble downside. And the economy is beginning to slow. Markets outside China will likely do well for the next two months; diverging trends reflect that China's market recovered four months before others, and adjusts before others as well.
  
  Financial markets will turn down again when investors realize that the global economy will have a second dip in 2010, and that the U.S. Federal Reserve will raise interest rates soon. The turning point may well come sometime in the fourth quarter. By then, it would become apparent that China has slowed. U.S. unemployment will not have improved and, hence, its consumption will remain stagnant. And production data that's pushing expectations now will cool after the inventory cycle runs its course.
  
  Most analysts would argue that central banks won't raise interest rates before the recovery is on solid ground. The problem, though, is that fiscal stimulus can't resolve structural problems blocking a sustained recovery. Liquidity is the wrong medicine for the global economy right now. Overusing it encourages its side effect -- inflation.
  
  Conventional wisdom says inflation will not occur in a weak economy: The capacity utilization rate is low in a weak economy and, hence, businesses cannot raise prices. This one-dimensional thinking does not apply when there are structural imbalances. Bottlenecks could first appear in a few areas. Excess liquidity tends to flow toward shortages, and prices in those target areas could surge, raising inflation expectations and triggering general inflation. Another possibility is that expectations alone would be sufficient to bring about general inflation.
  
  Oil is the most likely commodity to lead an inflationary trend. Its price has doubled from a March low, despite declining demand. The driving force behind higher oil prices is liquidity. Financial markets are so developed now that retail investors can respond to inflation fears by buying exchange traded funds individually or in baskets of commodities.
  
  Oil is uniquely suited as an inflation hedging device. Its supply response is very low. More than 80 percent of global oil reserves are held by sovereign governments that don't respond to rising prices by producing more. Indeed, once their budgetary needs are met, high prices may decrease their desire to increase production. Neither does demand fall quickly against rising prices. Oil is essential for routine economic activities, and its reduced consumption has a large multiplier effect. As its price sensitivities are low on demand and supply sides, it is uniquely suited to absorb excess liquidity and reflect inflation expectations ahead of other commodities.
  
  If central banks continue refusing to raise interest rates during these weak economic times, oil prices may double from their current levels. So I think central banks, especially the Fed, will begin raising interest rates early next year or even late this year. I don't think it would raise rates willingly but wants to cool inflation expectations by showing an interest in inflation. Hence, the Fed will raise interest rates slowly, deliberately behind the curve. As a consequence, inflation could rise faster than interest rates, which is what the indebted U.S. household sector needs.
  
  This fool-the-market strategy may work temporarily. Its effectiveness must be reflected in oil prices; the Fed needs to target oil prices in its interest rate policy. If oil prices run from current levels, it means the market doesn't believe the Fed. That would force the Fed to raise interest rates quickly which, unfortunately, would trigger another deep recession.
  
  Instead of a V-shaped recovery, we may instead get a W curve. A dip next year, although perhaps not statistically deep, could deliver a profound psychological shock. Financial markets are buoyant now because they believe in the government. The second dip would demonstrate the limits of government power. The second dip could send asset prices down -- and keep them down for a long time.
  

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Just Jossing around

God aka Joss Whedon brings you these brilliant posters for his next film The Cabin In The Woods. And yes, these are the legitimate movie posters. And yes, he is incredibly awesome.

That is all.

The Cabin In The Woods is released in Australia early 2010.

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Deborah Gibson

Singer Deborah Gibson is 39 today.

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CAN I GET AN A-OKAY!?

The Top Three Miami Highlights:

1. Winter Music Conference

2. Rick Ross

3. The Good Life™

Wrecking the scene like a train off some tracks, we are The Good Life (tm, of course.) Started by five 305-till-death associates, we are the new wave in fashion/clothing design. Drawing from influences as widespread as Yves Saint-Laurent, Terry Richardson, Johnny Earle, Louis Vuitton and Mr. West, himself. Within the next few weeks, we'll bomb Miami with line after limited line of our clothing.

Sure, its cocky. Lavish, extravagant; maybe. But when you boil success down into its rawest form, what do you have? An endless pursuit for happiness- in essence:

The Good Life™

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Andy Xie: SSE Should Be 2000 Or Less!

Worried about the current correction in the Chinese Stock Markets? Chinese Stocks Plunge 6.7%; Japan Ends Down




On Bloomberg News: China Stocks ‘In Deep Bubble,’ May Drop 25%, Xie Says

• China Stocks ‘In Deep Bubble,’ May Drop 25%, Xie Says
  By Erik Schatzker and Allen Wan
  
  Aug. 31 (Bloomberg) -- China’s economy isn’t “sustainable” and the benchmark Shanghai Composite Index may fall another 25 percent, former Morgan Stanley Asian economist Andy Xie said in an interview.
  
  “The market is in deep bubble territory,” Xie, who correctly predicted in April 2007 that China’s equities would tumble, told Bloomberg Television.
  
  The Shanghai index plunged 6.7 percent to 2,667.75 today, the most since June 2008 and entering a bear market, on concern a slowdown in lending growth may derail a recovery in the world’s third-largest economy. Xie said the index “should be 2000 or less.”
  
  The Shanghai gauge slumped 22 percent this month, the worst performer among 89 benchmark indexes tracked by Bloomberg, as banks reined in lending to avert asset bubbles and policy makers advised industries such as steel and cement to curb overcapacity. The decline stopped a rally that had sent the measure up 103 percent from a November low on prospects the government’s 4 trillion yuan ($586 billion) stimulus program and a record amount of new credit would ensure the economy grows at least 8 percent this year.
  
  “The local market bears are convinced that tightening is already underway,” said Howard Wang, head of the Greater China team at JF Asset Management, which oversees $50 billion. Only “a very strong set of macro numbers in August” or “stronger statements from central authorities” would change this trend, Wang said.
  
  Global Tumble
  
  The tumble in China stocks send the MSCI World Index of 23 developed nations down 1 percent at 10:17 a.m. New York time. The Bank of New York Mellon China ADR Index, tracking American depositary receipts, lost 2.6 percent, led by commodity producers.
  
  At least 150 stocks on the 898-member Shanghai index dropped by the daily 10 percent limit. Industrial Bank Co. and Aluminum Corp. of China Ltd. tumbled by the permitted cap after Caijing magazine reported new loan growth this month may be almost half that of July. Lower profits dragged Baoshan Iron & Steel Co., the nation’s biggest steelmaker, and China Southern Airlines Co. down at least 7 percent.
  
  Chinese stocks are trading at the steepest discount in the world compared with analysts’ price targets after this month’s slump in the benchmark index.
  
  ‘Bright Spot’
  
  Equities in China remain “a bright spot” among global stocks because of the nation’s strong growth potential, Goldman Sachs Group Inc. said today.
  
  “We think the market concerns about a near-term ‘exit strategy’ appear premature as the government remains pro- growth,” Thomas Deng and Kinger Lau, analysts at Goldman Sachs, wrote in a research note.
  
  China may have 200 billion yuan of new loans in August, the Beijing-based Caijing reported today on its Web site. That compares with 7.4 trillion yuan for the first half of 2009 and 355.9 billion yuan in July alone. The government plans to tighten capital requirements for financial institutions, three people familiar with the matter said this month.
  
  An estimated 1.16 trillion yuan of loans were invested in stocks in the first five months of this year, China Business News reported June 29, citing Wei Jianing, a deputy director at the Development and Research Center under the State Council.
  

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A Warning From Tong Herr?

On Business Times the following news clip on Tong Herr caught my attention.

• Tong Herr says EC begins anti-dumping probe
  
  Published: 2009/08/29
  
  Tong Herr Resources Bhd, a Malaysian-listed maker of iron and steel bolts, is seeking legal advice after the European Union began an anti-dumping and anti-subsidy proceeding, according to a statement.
  
  The probe concerns imports of stainless steel fasteners and parts from India and Malaysia, according to a company statement yesterday. The statement didn’t say whether Tong Herr was identified in the proceeding. -- Bloomberg

This reminded me of 2003.

Now I wrote in a posting on Tong Herr here

• Well, if looks into Bursa Malaysia website, one would have found this announcement from TongHerr.
  
  3/3/2003 EXPIRY OF CERTAIN ANTI-DUMPING AND COUNTERVAILING MEASURESthis one explains the lifting of anti-dumping measures imposed on manufacturers like Tongher.
  
  End result?

And what was the end result? Well if you look at the top of the posting, there's a table posting. For fy 2003, Tong Herr earned some 19.868 million and the year after the the expiry of the anti-dumping ruling, Tong Herr's earnings soared to 43.9 million!

Would one say that the lifting of anti-dumping measures helped Tong Herr a lot?

If you click on the above Bursa announcement from Tong Herr back in 2003, it said the following.

• In February 1998, the European Commission vide Council Regulation (EC) No. 393/98 imposed definitive anti-dumping duties on imports of stainless steel fasteners and parts originating in the People’s Republic of China, India, Malaysia, the Republic of Korea, Taiwan and Thailand. The duties imposed on the stainless steel fasteners imported from these six countries ranged from 2.7% to 74.7%. Tong Herr Resources Berhad’s (“THR”) products were imposed a duty of 7% which is amongst the lowest.
  
  THR had on 27 March 2000 announced that European Communities (EC) had published in its official journal dated 24 March 2000 under Commission Regulation (EC) No. 618/2000 of 22 March 2000, an imposition of a provisional countervailing duty on imports of stainless steel fasteners originating in Malaysia and the Philippines.
  
  The EC had imposed a provisional countervailing duty set at 4.5% on Tong Heer Fasteners Co. Sdn Bhd, a subsidiary of the Company, with effect from 24 March 2000.
  
  Pursuant to the announcement made on 27 March 2000 pertaining to the “provisional countervailing duty” imposed by EC, EC had later published in its official journal dated 14 July 2000 under Council Regulation (EC) No. 1523/2000 of 10 July 2000, on the imposing of a “definitive countervailing duty” on imports of stainless steel fasteners originating in Malaysia and Philippines. The EC had imposed a definitive set at 1.8% on THR’s wholly owned subsidiary, Tong Heer Fasteners Co., Sdn Bhd, with effect from 15 July 2000. Accordingly, the “definitive countervailing duty” shall supersede the “provisional countervailing duty.”
  
  Today, Tong Herr Resources Berhad wishes to announce that it has received a letter from the Ministry of International Trade and Industry informing the Company that the definitive countervailing duty and definitive anti-dumping duty imposed by the EC have expired on 17 and 21 February 2003 respectively.
  
  The Company is of the opinion that the expiration of the measures will have a positive effect against the Company’s sales to Europe.

Now the EU wants to begin anti-dumping and anti-subsidy back again!

Would this be a huge bad news for Tong Herr?

On the side note, Tong Herr reported earnings last night and it posted some minor losses of 869k.

And for the record Tong Herr last traded at 1.99.

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MNRB Talks About Revenue Growth

Was reading some articles. On Business Times, the following caught my attention.

• MNRB expects 8.5pc revenue growth
  
  By Rupinder Singh Published: 2009/08/29
  
  REINSURANCE group MNRB Holdings Bhd (6459) expects revenue growth this financial year to be lower than last year's, underpinned by the soft reinsurance market and slow economic conditions.
  
  However, it remains confident of posting 8.5 per cent revenue growth although it grew 20 per cent in the year to March 31 2009.
  
  Its chairman Sharkawi Alis said the group will be cautious this year as the global financial crisis has yet to pass.
  
  Its subsidiary, Malaysian Reinsurance Bhd (Malaysia Re), is expected to spearhead MNRB's growth, but will be selective in its overseas ventures due to its limited capital.
  
  After registering 20 per cent growth in gross premium last year, Malaysian Re is expecting growth of between 15 per cent and 20 per cent this year.
  
  "Growth will be there, but it won't be as good as last year's. It will be a controlled growth," Malaysian Re chief executive officer Hashim Harun said.
  
  The unit is expecting overseas business to constitute 25 per cent of its total gross premium this year as compared to about 23 per cent last year.
  
  Meanwhile, Islamic insurer Takaful Ikhlas Sdn Bhd is said to be in a consolidation phase this year. However, it still expects to grow its gross contributions to RM600 million for 2010.
  
  MNRB Retakaful Bhd is hoping to grow its overseas business by 30 per cent. It aims to strengthen its share of existing markets and expand into new ones such as Saudi Arabia, Syria and other emerging markets.

I was bemused and lost by the first two sentences.

• REINSURANCE group MNRB Holdings Bhd (6459) expects revenue growth this financial year to be lower than last year's, underpinned by the soft reinsurance market and slow economic conditions.
  
  However, it remains confident of posting 8.5 per cent revenue growth although it grew 20 per cent in the year to March 31 2009.

???

Is that a typo? I do not know.

Anyway, when a company speaks only about revenue growth, I always tend to be suspicious.

And true enough when I was not impressed at all when I saw MNRB financial earnings snapshot posted on Friday

So next time, when you hear a company talking about revenue growth, do get your supply of salt ready!

=======================

Edit: 31st Aug 2009.

The following posted on Star Business.

• Monday August 31, 2009
  
  MNRB sees modest growth on selective underwriting
  
  KUALA LUMPUR: MNRB Holdings Bhd sees a modest growth of 8.5% in revenue in its fiscal year ending March 31, 2010 (FY10) due to selective underwriting, overseas expansion and a higher claims ratio.
  
  The reinsurance company posted a 20% growth in revenue to RM1.2bil but net profit plunged 86.7% to RM22.7mil in FY09 against FY08.
  
  Chairman Sharkawi Alis said profitability in the industry might not be in tandem with the revenue achieved.
  
  “We may do well in increasing the premiums growth but higher claims could pull down profit likewise in FY09. The large difference in net profit in FY09 was also contributed by the RM75mil proceeds from MNRB’s disposal of a 3.24% direct equity interest in Malaysian Oxygen Bhd in FY08,” Sharkawi said after the company’s AGM on Friday last week.
  
  He added that under the current economic climate and what the company had experienced last year, nobody could conclude that the worst was over, hence the modest projection. Sharkawi said Malaysian Reinsurance (MNRB’s wholly-owned subsidiary) would be selective in the industry that it underwrites and not just underwrite for the sake of premiums growth.
  
  “Overseas market expansion, which had been rapid for the past couple of years, will be done cautiously this year to make sure we will invest only in profitable business. Our takaful operation under Takaful Ikhlas, which had enjoyed growth 30% to 40% over the last couple of years, will also consolidate this year. We only target gross contribution income of RM600mil compared with RM580.5mil last year,” he said.
  

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A Quick Look At Lion Corp And Lion Diversified's Earnings

Posted early this month: Megasteel And Lion Corp And Lion Diversified

I had a look at Lion Corp's earnings. Tonight Lion Corp reported its earnings. It wasn't good. Losses were huge. It lost some 400 million this quarter and losses this year totalled a massive one billion ringgit

I had a look at the balance sheet. It's inventories shrank. Worse still its cash balances fell to just 98 million compared to 141 million a quarter ago!



And their loans?

Ahh... there's one silver lining her. Loans declined to 'just' 2.989 billion.

ps.. the other Lion wasn't too good either.

Posted on the Edge Financialy Daily:

• LionDiv, Lion Corp sink further into the red
  Written by Joseph Chin
  Thursday, 27 August 2009 20:26
  
  KUALA LUMPUR: LION DIVERSIFIED HOLDINGS BHD [] (LionDiv) sunk deeper into the red in the fourth quarter ended June 30, 2009 with a net loss of RM361.49 million compared with net loss of RM1.98 million a year earlier, due mainly to losses at its associates.
  
  In its statement to Bursa Malaysia, Lion Diversified said its 4Q revenue rose to RM254.14 million from RM140.72 million. Loss per share widened to 25.97 sen from 0.27 sen.
  
  LionDiv said it was impacted by losses of RM345.58 million from associates in the quarter, compared with gains of RM16.24 million a year earlier. However, there was an unrealised foreign exchange (forex) gain of RM17.83 million in the 4Q09.
  
  For the FY09, net losses totalled RM627.78 million, compared with net profits of RM52.75 million for FY08. However, it registered a marginally higher profit from operations of RM204 million even though revenue fell to RM1.25 billion from RM1.61 billion.
  
  The full-year contribution from the new direct reduced iron operation, which commenced in June 2008, had partially mitigated the dilution impact from the divestment of the retail business in the previous year.
  
  "Our associates recorded substantial losses for the year as a result of the sudden and sharp drop in international steel prices. Demand weakened considerably as major economies begin to fall into recessionary conditions. After accounting for unrealised forex losses resulting from the translation of US dollar bonds, a loss before taxation of RM585 million was posted for the year under review," it said.
  
  Meanwhile, its 59.04% owned subsidiary Lion Corp Bhd also posted higher net loss of RM406.38 million for its fourth quarter ended June 30, compared with a net loss of RM44.57 million a year earlier.
  
  Its revenue plunged 74.5% to RM408.38 million from RM1.60 billion in the previous corresponding period.
  
  "The results of the group continued to be affected by the global recession and uncertainties surrounding the global economic recovery. For the quarter under review, the group has further recognised a provision for diminution in value of its steel inventories amounting to RM159.3 million," Lion Corp said in notes to its quarterly results.
  
  It anticipated results to be better in the next financial year on the back of an improved operating environment.
  
  
  

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Quick Look At LCL's Earnings

Last blogged LCL Hit By Arabtec Claims!

LCL reported its earnings today.

What's more worrying is when we compare the balance sheet as posted in the earlier posting LCL Hit By Arabtec Claims!, LCL's balance got even weaker.

Cash balances is now only 16.4mil and receivables has increased to 270.501 million. (Given the massive issues in Dubai housing market, should one discount this issue? Perhaps a chunk of these receivables might be doubtful? ) (Compare the previous balance sheet table shown here: here )

And loans had increased too!

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