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

Potential Accounting Tunneling Fraud at China Environment?

Part 2https://asianextractor.com/2015/02/17/potential-accounting-tunneling-fraud-at-china-environment-part-2/

Part 3https://asianextractor.com/2015/02/23/potential-accounting-tunneling-fraud-at-china-environment-part-3/ 

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

Proposed Draft Legislation on VIE Structures

Posted by CHEONG Wen Quan, Year 2 undergrad at the School of Business, Singapore Management University

Brief Summary

VIE structures are used by foreign companies to circumvent the ban on foreign ownership of sensitive Chinese assets. However, the Chinese Ministry of Commerce recently revealed a draft legislation that could change the way how Chinese regulators look at VIE structures. The main change focuses on who has control over the VIE rather than ‘ownership’. Eg. A VIE will be deemed to be foreign if foreign investors are in control (eg. >50% voting power) over the assets of the respective restricted sectors. Therefore, enough proof must be given to show that Chinese individuals or corporations have a majority control over the VIE, if not they will still be treated as foreign companies. The proposed rules may help reduce uncertainties for companies using the VIE structure as the foreign investors can now directly own parts of the Chinese assets.

Personal View

If this is passed, foreign investors may want to move out of a VIE structure. However, under the current VIE structure, Chinese individuals/owners technically own 100% of the assets in the VIE and are only bounded by contractual agreements between the foreign investors and themselves. Will the reluctance to give up this ownership act as an incentive and a catalyst for a sudden new wave of frauds to occur?


How China’s New Foreign Investment Rules Might Play Out Continue reading

[Flashback] Beanie Babies Vs Vendor Financing: Can the ‘Product’ (and Asia) Stand On Its Own? Revisiting Off-Balance Sheet Receivables in Chinese Construction Machinery Companies

Excerpts from “Beanie Babies Vs Vendor Financing: Can the ‘Product’ (and Asia) Stand On Its Own?, July 2012 edition in On the Ground in Asia publication by KB Kee 

Is this happening in America or Asia? All day long, people are charging in and screaming, “Which Beanie Baby do you have today?” Tempers flared as long lines forms for the stuffed toys, sold along with a Happy Meal, which were the cause of many fights. Theft of toys was prevalent at the height of their popularity and there was an active secondary second-hand market for them after the promotion.

The Beanie Babies craze from 1996-2000 caused Warren Buffett to be cautious in McDonald’s, one of the most recognizable brand names in the world. Yet, McDonald’s is not one of the core buy-and-hold stocks in Berkshire’s holdings, as explained by Buffett in a talk to MBA students in 1998:

“People don’t want to be eating – exception to the kids when they are giving away Beanie Babies or something – at McDonald’s every day. If people drink five Cokes a day, they probably will drink five of them tomorrow… I like the products that stand alone absent price promotions or appeals although you can build a very good business based on that.”

  • Warren Buffett, October 1998

As China slows down, the classic quote of Buffett becomes increasingly relevant: “It’s only when the tide goes out that you learn who’s been swimming naked.” When everyone is enjoying good times, you don’t know who has taken on excessive risks. And multibagger opportunities present themselves to the diligent value investors who have been monitoring closely the few swimmers with unique, scalable business models run by farsighted outstanding entrepreneurs as they distinguish themselves from the weaker companies reliant on “Beanie Baby” incentives to push sales of products that might not be able to “stand alone” and at the expense of their balance sheet. This “Beanie Baby” incentive practice is increasingly being questioned in varied industries, from shipyards, construction and telecom equipment to property, autos and retail.

Emboldened by attractive Beanie-Baby-like vendor financing and generous credit terms with zero downpayment provided by construction equipment companies, buyers of these machines have been very aggressive in their purchases, resulting in China to account for 60% of worldwide concrete consumption, bubbling far above the so-called “concrete scowl”.

There are concerns that these buyers, which include debt-laden and cash-strapped property developers, are using the machines as collateral for further loans. Analysts at Jefferies in HK, who were reported by the media this month to have travelled to Jiangsu province to study the concrete market, said that more than half of the concrete machines sold by a prominent Chinese construction equipment company had not even been switched on and were lying idle in storage. In our “On the Ground in Asia” March 2011 edition, we mentioned that one Asian top manager shared with us how his MNC counterpart in China told him that they might not be able to sell any new equipment in China this year. He thought his MNC friend was joking to him until he was told the reason for the pessimism was because two-thirds of the machines sold were not turned on as indicated by the GPS tracking signal. Industry executives are reported to be talking of a “collapse” and are looking to export their way out of trouble via acquiring overseas companies and setting up overseas factories, often used as fronts for more loans.

In the case of the construction machinery industry, the accounting bent in us also noted how the sellers of these machines have not recorded these vendor financing activities on the balance sheet and do not have proper bad debt provisions on the corresponding ballooning off-balance-sheet receivables despite the fact that banks require them to guarantee loan/lease payments in the event of customer defaults. These off-balance sheet receivables, estimated to be connected to around 30% of total sales in the industry, should be treated as debt on the liability side since it is the same as the machinery companies incurring a debt and then selling the machines to customers on credit. The cashflow from operations that come from this vendor financing activity should be re-categorised as cashflow from financing, which would turn most of these companies to be running negative cashflow positions in the last four years.

Since the loss amount on a loan default is the difference between the outstanding loan and the residual value of the machine that can be salvaged, and most of the financing consider the equipment as collateral, the second-hand market is important in understanding the scope of loss. In North America, the fair market value (FMV), orderly value (OLV) and forced liquidation value (FLV) of used equipment were around 75%, 64% and 54% of the equipment costs, respectively, generally in line with the write-off ratio of 40% on average.

The second-hand machine market in China, however, is much less mature than that in the developed countries. Domestic machinery manufacturers‟ single-minded focus on new machine sales and lack of refurbishing capabilities also hurt the value of second-hand machines. Most machines can only be sold at around 30-40% of the original price when they are three year-old. Yet, the loss rate of these receivables reported at the machinery companies are less than 1%, much lower than the 40% write-off ratio on average at say Caterpillar’s financing receivables.

It is likely that many repossessed machines were sold internally within the company and became part of its operating lease fleet, consequently hiding the net impact on P&L. It is now very prevalent for dealers to give their customer cash advance to avoid towing back of equipment and reflected in the default rate for the machinery companies. We are cautious whenever we hear from bullish analysts and promoters about how machinery and cyclical companies are “cheap” on a price-to-book historical valuation basis.

Accounting Fraud, Auditing and the Role of Government Sanctions in China


Posted by Nureen CHAN Wan Wei, Year 4 undergrad at the School of Accountancy, Singapore Management University

The paper first highlights that China has a different legal landscape to the U.S.. Public enforcement in the form of government sanctions against audit firms is used in place of private enforcement (class action law suits in the West) to ensure high quality audits in China. Shareholder litigations are far and few, and rarely successful even when the government has imposed penalties on these auditors. This makes one question why did the Chinese government choose to deviate from the norm of allowing the free market to regulate audit firms? Continue reading

Vincent Tan – The history and IPO of 7-Eleven Malaysia

Vincent Tan – The history and IPO of 7-Eleven Malaysia

By YEO Shan Rui

Tan Dato’ Seri Vincent Tan Chee Yioun (commonly known as Vincent Tan) is the owner of Cardiff City Football Club and the Berjaya Group in Malaysia. The success of his empire can be traced back to the untendered privatization of Sports Toto from the government of Malaysia in 1985 . Being one of three legalized lotteries operators, the cash flow has allowed him to diversify and build his conglomerate.

In the past 1 year, a number of his companies have attempted an IPO – Caring Pharmacy, Berjaya Auto, 7-Eleven Malaysia, MOL Global and Sports Toto Trust. While there have been speculation on the various reasons for the IPO spree, let’s focus our attention on 7-Eleven Malaysia.

Multiple rounds of listing and delisting

What’s make 7-Eleven Malaysia interesting was their history of numerous IPO and privatization attempts. Vincent Tan bought over the 7-Eleven franchise from Antah Holdings in 2001 through his Berjaya Group Berhad. Continue reading