Here’s Why Ezra and Noble Group May Actually Deserve Their Shocking Price Declines

Related: Helping Other CEOs Avoid Bad Press: Social Exchange and Impression Management Support among CEOs in Communications with Journalists: Link

Here’s Why Ezra Holdings Limited and Noble Group Limited May Actually Deserve Their Shocking Price Declines

By Chong Ser Jing – June 15, 2015 | More on: 5DNES3N21^STI

Offshore support services provider Ezra Holdings Limited (SGX: 5DN) and commodities trader Noble Group Ltd (SGX: N21) have received lots of attention from market participants as a result of their stunning price declines. Over the past 12 months, Ezra’s shares have sunk by nearly 75% in price while Noble’s shares have lost half their value. It’s been a painful experience for investors in the companies, to say the least. To add insult to injury, the SPDR STI ETF (SGX: ES3) – an exchange-traded fund tracking Singapore’s market benchmark the Straits Times Index (SGX: ^STI) – has inched up by 1.2% over the same period.

The finger of blame

This disparity between the performance of the two shares and the broader market have resulted in some pointing the finger of blame at short-sellers as culprits for the price declines. At first glance, there are merits to the accusations. In an article published in the Straits Times today titled “The long, vice-like arm of short sellers”, renowned financial journalist Goh Eng Yeow wrote that Ezra and Noble are “two of the most heavily shorted firms on the local bourse.” Goh also gave some good statistics on how the percentage of shares out on loan for both Ezra and Noble, “presumably to short-sellers,” had grown markedly over the past year: Ezra’s shares out on loan had grown from 2.9% in July to 11.2% currently. As for Noble, the selfsame figure had ballooned from near-zero to nearly 6% over the same period.

But, I’d like to suggest that it may not be the short-sellers who are causing the price declines. Sure, the short-sellers may have been catalysts for the painful drops, but their actions are a possible manifestation of a bigger issue: Both Noble and Ezra’s business performance have been dreadful over the past six years since 2009. Continue reading


Detecting Accounting Fraud in Asia (Part 4): Introducing Six New Measures

Dear Friends,

Detecting Accounting Fraud in Asia (Part 4): Introducing Six New Measures

Earlier articles in the Accounting Fraud in Asia series:

“What seemed to be wrong with this income statement?” I would ask and engage value investors in a conversation discussing the limitations of western-based screening tools and techniques in financial statement analysis to analyze Asian companies.

“It was generated by a listed Chinese zipper company who claimed to be the ‘YKK of China’ with a diversified customer base of over 900 customers. Its zipper products are used in fashion and sports apparels, camping equipment, shoes, and bags by renowned brands. It also received the ‘PRC Top Ten Famous Zipper Brands’ in China. To perhaps make your job easier, a simple table of financial ratios from profit margins, ROE, cash conversion cycle (CCC) is provided. Interestingly, you might note that it is a company generating a ROE of 20.2% on profit net margin of 22.3% and trading at a modest valuation of Price-Earnings ratio 6.2x and Price-to-Book Value 1.6x, with downside protected by a seemingly healthy ‘net cash’ balance sheet with net cash comprising 27% of the market value of the company.”

Fuxing FY06-07

RMB Mil 2004 2005 2006 2007
Revenue   394.3   525.7   716.4   883.9
Operating Income     91.4   165.1   226.5   294.5
Net Income     57.4   109.3   155.6   197.0
GP Margin 26.7% 34.0% 33.7% 34.8%
OP Margin 23.2% 31.4% 31.6% 33.3%
Net Margin 14.6% 20.8% 21.7% 22.3%
ROE 20.2%
AR Days      137      167      139      121
Inventory Days        23        15        19        20
AP Days        12        17        18        18
CCC      149      165      140      123
Mkt Cap (US$m) 181
Price/ Book Value       1.6
PE ratio       6.2
Net “Cash” % Mkt Cap 27%

“And we would stay on this income statement for whatever time it takes before someone points out the dog that didn’t bark,” I added.

Sometimes, there would be one or two people, often those who are open-minded and intellectually curious in their learning approach, who would point out: “The selling and distribution expense of RMB3m seems awfully low for a company generating RMB882m in sales for truckloads of zippers to be transported to over 900 of their customers’ factories in the different provinces.”

This zipper company is SGX-listed Fuxing Zipper (SES: DC9, Bloomberg: FUXC SP), down over 90% in market value. We will later illustrate how accounting tunneling fraud is carried out and the six new measures for value investors to employ to avoid such statistically-attractive fraudulent stocks. From the case of Fuxing, one of the apparent measures is based on the opportunistic shifting or deferring of operating expenses out of the income statement to boost profits artificially – often into the balance sheet items. But how do we can capture this? A possible measure is that of the “OP/OL ratio”, or “Other Payables/Operating Liabilities ratio” which we will elaborate upon later with the cases that we have observed to be a systematic phenomenon. In essence, we have observed that an OP/OL ratio over 40% leads to subsequent and future acts of accounting tunneling fraud in which corporate wealth and cash is tunneled out.

Fuxing Zipper (SES: DC9) Stock Price Performance 2007-2015

Fuxing Share Price

As we have shared in earlier articles, transportation and logistical cost is a nightmare in China and emerging markets, estimated to account for 15 to 20% of the cost of doing business and of the GDP too by various sources that include World Bank and the Li & Fung group in an insightful presentation. The problem lies not only because of the geographical woes but also due to the regulatory licensing bottlenecks: “China’s logistics system is governed by nine separate ministries and commissions, which prevents the central government from regulating cross-provincial transport across China’s 31 provinces. Instead, local governments manage their transportation systems as provincial fiefdoms, often using local license rules and tolls to raise revenue. Thanks to high transaction costs, no trucking firm has yet established a nationwide network.

The emerging Asian and Chinese companies engaging in accounting fraud often push operating expenses and overheads off the listed entities to related-party companies to boost artificially-high profit margins and ROE. For instance, an Asian consumer “brand” selling its “visible” products in supermarkets would usually shift the substantial expenses related to shelf-space placement to undisclosed related-party “distributors” and “agents” (called “tong lu” 通路 in the local language) to achieve the high profit margins and ROE that are attractive to investors. Most value investors focusing on financial ratio analysis do not realize that logistics, distribution and marketing costs in emerging Asian markets is around 15-20% of sales, instead of the 0.34% that this zipper company incurred. Like-minded value investors are often amazed that they have not seen what was now obvious to them. Thus, one simple new measure is to use the “Selling and Distribution expense as % of Sales (Measure #1) as a sanity check on unrealistically low operating expenses that were deferred or shifted out of the income statement. Continue reading

ACCT004 Course Quote by Pixar’s Founder Ed Catmull


“ARPA’s mandate – to support smart people in a variety of areas – was carried out based on the unwavering presumption that researchers would try to do the right things and, in ARPA’s view, over-managing them was counterproductive. ARPA’s administrators did not hover over the shoulders of those of us working on the projects they funded, nor did they demand that our work have direct military applications. They simply trusted us to innovate. This kind of trust gave me the freedom to tackle all sorts of complex problems, and I did so with gusto. Not only did I often sleep on the floor of the computer rooms to maximize time on the computer, but so did many of my fellow graduate students. We were young, driven by the sense that we were inventing the field from scratch – and that was exciting beyond words. For the first time, I saw a way to simultaneously create art and develop a technical understanding of how to create a new kind of imagery. Making pictures with a computer spoke to both sides of my brain. To be sure, the picture that could be rendered on a computer were very crude in 1969, but the act of inventing new algorithms and seeing better pictures as a result was thrilling to me. In its own way, my childhood dream, was reasserting itself. At the age of 26, I set a new goal: to develop a way to animate, not with a pencil but with a computer, and to make the images compelling and beautiful enough to use in the movies. Perhaps, I thought, I could become an animator after all.”

– Pixar’s founder Ed Catmull


Independent Directors’ Dissent on Boards: Evidence from Listed Companies in China

Posted by Eugene SAY Gui Hua, Year 4 undergrad at the School of Business, Singapore Management University

Eugene: As we ask ourselves this week whether whistleblowing works in Asia, research has found that even at a supervisory board level (equivalent to Board of Directors) in China, directors are not as ‘independent’ as they are deemed to be.  The research has found that directors are more likely to dissent when the board chair (most commonly, the dual-role CEO and Chairman of the company) has left the board. There is a 27% occurrence of dissent among departing directors who are due to leave the board in their last 60-days. Also, while directors with foreign experience are more likely to dissent, it is inconclusive that academics, accountants and lawyers are significantly more active in voicing dissent. Even in a situation of dissent, findings show that they dissenting directors tend to offer mild, subjective justifications and overt criticism of the management is rare. Lastly, while current literature suggests that dissent might be reflective of diverse viewpoints, which is beneficial to the firm, it has been found that  dissent is consequential to both the director and the firm.  For directors, dissent significantly increases one’s likelihood of exiting the director labor market, translating to a more-than-10% estimated loss of annual income. For firms, there is an economically and statistically significant cumulative abnormal return of -0.97% around announcement of dissent.

Independent Directors’ Dissent on Boards: Evidence from Listed Companies in China

Juan Ma, Harvard Business School

Tarun Khanna, Harvard University – Strategy Unit

October 24, 2013

Harvard Business School Strategy Unit Working Paper No. 13-089


In this paper, we examine the circumstances under which so-called “independent” directors voice their independent views on public boards in a sample of Chinese firms. First, we ask why independent directors dissent, i.e. how they justify such dissent to public investors. We find that when independent directors dissent, they tend to offer mild, subjective justifications. Overt criticism of the management is rare. Next, we ask when an independent director is more likely to dissent and who is more likely to dissent. Controlling for firm and board characteristics, we find that dissent is significantly correlated with breakdown of social ties between the independent director and the board chair who locates at the center of the board bureaucracy in China. Dissent is more likely to occur when the board chair who appointed the independent director has left the board. Dissent also tends to occur at the end of board “games”, defined as a 60-day window prior to departure of the board chair or departure of the independent director herself. The endgame effect is particularly strong, seeing 27% of the dissent issued at board “endgames” which represents only 4% of independent directors’ average tenure. While directors with foreign experience are more likely to dissent, we do not find that academics, accountants and lawyers are significantly more active in voicing dissent. Lastly, we show that dissent is consequential to both the director and the firm. For directors, dissent significantly increases one’s likelihood of exiting the director labor market, which translates to a more-than-10% estimated loss of annual income. For firms, we document an economically and statistically significant cumulative abnormal return of -0.97% around announcement of dissent. Although the literature has suggested that dissent might be reflective of diverse viewpoints, and perhaps beneficial in and of itself through reduction of firm variability, we do not find this offsetting beneficial effect to be strong.

Special Purpose Acquisition Company in Malaysia – Caveat Emptor

Posted by LIN Liye, Year 4 undergrad at the School of Economics, Singapore Management University

Recently, there was a prospective IPO by Red Sena, which is a F&B SPAC led by former Fraser & Neave Holdings Bhd (F&N) chief executive officer (CEO) Datuk Tan Ang Meng. This caught my attention as I was scouring through the net looking for risky corporate structures that could be misused against minority shareholders

Given that there are no assets, nor businesses, nor profits nor cash flows, investors that bought into the IPO are essentially buying into the execution abilities of the management team to acquire companies and build them up, much alike to private equity businesses. To me, I cannot understand why minority investors would want to take so much execution risk, in an unproven entity by a new management team as well. Continue reading

Survival in the Asian Capital Jungle: Who Knows What When + Remembering Accounting Superhero Abraham Briloff (Week 1 of SMU Course Accounting Fraud in Asia)

Dear Friends,

Survival in the Asian Capital Jungle: Who Knows What When – Remembering Accounting Superhero Abraham Briloff

BriloffDecember is an unrelenting month – December last year took away from the world an accounting superhero, Professor Abraham Briloff. Right up until about a month before his death on Dec 12 at age 96, Abe was unrelenting in alerting Barron’s about some accounting fraud he had uncovered that was hidden in corporate America’s financial statements – a lifelong endeavor he persisted for 45 years since his enlightening “Dirty Pooling” article on July 15, 1968. When financial crisis strikes, Abe’s words become the Generally Accepted Accounting Principles. Even though Abe was legally blind, he could see clearly the accounting issues, having memorized pages of the company’s financials that had been read to him by his daughter Leonore or his grad students at City University of New York’s Baruch College. When asked about his thought process, the grandmaster said, “It begins with some sensitivity as to where the problem might be. Somehow, there’s a serendipity where I know that there’s an issue out there.” Abe elaborates his Process in a Barron’s interview:

“The numbers reverberate in my mind, and then I turn to Leonore and say, ‘Get for me the data in these areas,’ or ‘Read such-and-such to me from whatever document you might find.’ He records his thoughts on tape, on one of the several recorders that he keeps on the desk in his study, and then he reflects further. When he goes to bed, the numbers still dance in his mind, and he keeps a tape recorder beside his bed. It is as if he can see the numbers, much as Beethoven could hear the melodies even though deaf. As new numbers come in, he incorporates them into his thinking, to confirm or reject his original hypothesis. “Something hits. You say, ‘Why is it there?’ Or something that should be there, isn’t there,” he says. He performs the most critical calculations in his head.”

Abe’s heroic commitment to exposing accounting frauds has been a source of inspiration for us when crafting out Accounting Fraud in Asia, an official course in the Singapore Management University (SMU) degree curriculum that will be launched in January 2015. Continue reading