Monday, June 20, 2011

And Who Is Helping The Stock Market Become A Casino?

On the Star Biz last weekend, there were a series of articles on the ACE Market

  1. A place for ACE?
  2. Rookies take a beating
  3. The good apples of ACE
  4. Divided over listing issues
The very first article, A place for ACE?, the very first sentence caught my attention:
  • The alternative market has drawn harsh scrutiny due to some bad apple.
Harsh scrutiny? Bad apples?

Towards the end..
  • “Stock markets are a casino tell me which market isn't? This is particularly true for emerging growth markets, so investors should know what they are investing in,” an analyst says.
Waloeh! Like this meh?

Let me re-use a recent posting on April 2011: What Do You Look For In A Report? Ms. Sexy Stock?

AsiaEP was trading below 20 sen for a large period of time back in 2006. Then in Dec 2006, it started climbing and climbing. And by 6 Feb 2007, it closed the day trading at 0.355 sen!

Up so much already woh. And then here come KN with its guns blazing claiming that AsiaEP is our country's "A homegrown Google and Baidu in the making"!
Sounds sexy enough?

In a 8 page report on a relatively unknown Masdaq stock (now ACE stock), KN gave the market an incredible initiation report.

STRONG BUY with a 12-month target price of RM0.99, which is based on a FY09 P/E of 10.0x. We believe Itah SE is worth a lot as a technology. Wall Street will not accord Google and Baidu with a market capitalisation of US$149b and US$4.0b otherwise. Moreover, players without a strong presence in the paid-search space, such as Microsoft, EBay and etc., may be willing to pay top dollars for Itah SE once proven.
And of course, as in most reports, the 12-month target is based on a very optimistic future earnings. In AsiaEP's example, the target price hinges on the estimates of what AsiaEP could earn in FY 2009.

And here's the earnings estimate table once more.

So AsiaEP was a company that was making just 3 million. But because of this new project, this "A homegrown Google and Baidu in the making", AsiaEP earnings could soar to 21.8 million.

Oh yes. The company was making just 3 million. And the research report said it can and because it can, it rates AsiaEP to be worth a whopping 99 sen based on the fact that earnings could fly to 21.8 million!

Aha...that's the sexy story told.

And as you know in the market, a stock's future price is based in what it could earn in the future.

And that's how unreal it was. AsiapEP which was trading for a long time under 20 sen, had soared to 35.5 sen (up 78%!!) was given an incredible buy recommendation of 99 sen based on an incredibly optimistic earnings projection.

And then local papers helped. On Feb 24th, the Star Bisweek carried this article: Googling for growth
And what did AsiaEP do after such a sexy report?

Fly it did.

By 26 Feb 2007, the stock was trading at 0.82 sen!

And incredibly, the next month on March 2007, Goldman Sachs decides to jump into the bank wagon! Yes, Goldman Sach decides to be an investor (err.. not sure if you call them an investor - if you read what happens next).

This was reported on March 9th by the Edge reported the following: 09-03-2007: Goldman Sachs buys 5.7% stake in AsiaEP.

And KN decides to the utmost incredible.

It raised the target price based on the fact Goldman Sachs bought!


KN called it the Goldman factor and they reasoned:

VALUATION AND RECOMMENDATIONWhile our FY07, FY08 and FY09 earnings forecasts remain unchanged (Please refer to our Initiation Report dated 6 February 2007), investors should not under-estimate the positive impact of GSI’s presence in asiaEP for the following reasons:
  • Emergence of GSI as a substantial shareholder in asiaEP could lend Itah SE instant credibility – a big vote of confidence on its business potential;
  • Presence of GSI could enhance deal possibility between asiaEP and other BIG SE players on Wall Street; and
  • Deal potential tends to inflate valuations.
We continue to rate asiaEP a STRONG BUY with a revised 12-month target price of RM1.97 (+99.0%), which is based on a FY09 P/E of 20.0x. Increasing foreign interests, who seem to better appreciate the company’s growth potential, to a large extent, drives the latest re-rating.

And did you know what was the price of AsiapEP when KN made this buy upgrade on 9th March 2007? AsiaEP was trading at 94 sen!!!

Yes, stock was below 20 sen in Dec 2006. On 6 Feb 2007, At 35.5 sen, KN gave it a buy with a target price of 99 sen. A month later, at 94 sen, AsiaEP target price was upgraded to 1.97!!!

Hail Mary!

And yes, AsiaEP reached a high of 1.14 in March 2007!

Back to Goldman Sachs.

Their arrival notice was made on 8th March: Notice of Interest Sub. S-hldr (29A) - GOLDMAN SACHS INTERNATIONAL. Goldman Sachs bought 12,421,100 shares or a 5.72% stake.

But at the end of March 2007, Goldman ceased to be a major shareholder: Notice of Person Ceasing (29C) - The Goldman Sachs Group, Inc. They sold some 2,300,000 shares and so they were no longer considered a substantial shareholder (which meant that Goldman Sachs need not report anymore to Bursa Malaysia on their shares purchase/disposals on AsiaEP! )

On 18th June: asiaEP BHD (“asiaEP” or “Company”)Proposed acquisition of 800,000 ordinary shares of RM1.00 each in General Perfect Sdn Bhd (“GP”) (“GP Shares”) representing 80% equity interest therein, for a cash consideration of RM23.2 million (“Proposed Acquisition”).

AsiaEP announced it was spending 23 million to buy a NEW dormant company which had NO financial track record!

And of course the selling started in July and by the end of month, AsiaEP sell down was highlighted on the Edge. (sorry no more link)
  • 27-07-2007: asiaEP RM23m buy raises concern
    by Maryann Tan

    KUALA LUMPUR: asiaEP Bhd shares and warrants suffered further losses yesterday, going down 17% or 9.5 sen to 44.5 sen and 15% or six sen to 33 sen.

    On Monday, asiaEP shares and warrants hit limit down in afternoon trading before it announced plans to buy an 80% stake in General Perfect Sdn Bhd for RM23.2 million in cash.

    In the last four trading days, its share price fell by almost 50% from last Friday’s closing of 87 sen while its warrants lost 42% from 56.5 sen last Friday.

    General Perfect, currently held by two individuals, Liang Chee Wah and Liang Chee Hoo, intends to venture into the electronic top-up and payments kiosk business.

    The acquisition has aroused suspicion, as General Perfect is a dormant company, incorporated on May 11 with no financial track record.

    AsiaEP said the Liangs will provide a net profit guarantee of RM25 million effective from the date of completion of the purchase (expected to be end 2007) up to Feb 10, 2010. This amounts to RM20 million over two years in net profit attributable to asiaEP.

    The Liangs and other key management will also remain in the company for five years from the date of the acquisition.

    The cash consideration, which asiaEP will finance entirely through borrowings, will be held by a stakeholder (jointly appointed by asiaEP, the vendors and the financier) in an escrow account, the company said.

    This cash will be released to the Liangs, upon General Perfect fulfilling the profit guarantee. Should there be a shortfall in profits during the guarantee period, the difference will be made up with the cash in the escrow account.

    Given the non-existent financial record and highly competitive nature of the business, investors are not surprisingly, concerned over the proposal......
But the chairman said "NO PROBLEM!". On Star Biz Volatility of shares no cause for concern: AsiaEP chairman


Newly incorporated dormant company in May 2007 and needless to say no financial track record and AsiaEP dared to announce that it wants to buy it for 23 million!!!!

Did the deal go thru in the end?

Sadly.... no. :P

Deal was terminated on Nov 2007. asiaEP BHD (“asiaEP” or “Company”)- Proposed acquisition of 800,000 ordinary shares of RM1.00 each in General Perfect Sdn Bhd (“GP”) (“GP Shares”) representing 80% equity interest therein, for a consideration of RM23.2 million (“Proposed Acquisition”)

And what about Goldman Sachs?

On 1st Aug 2007, Goldman Sachs became a substantial shareholder again! Notice of Interest Sub. S-hldr (29A) - Goldman Sachs International - it purchased some 8,000,000 shares. And Goldman Sachs said it was holding some 15,961,500 shares.

WOW! That was what I said back then. Despite the 'stunt' to purchase that dormant company for 23 million, 'some how' Goldman Sachs decided to buy more AsiaEP shares!

And again, a few weeks later, Goldman Sachs was disposing their shares again! Changes in Sub. S-hldr's Int. (29B) - Goldman Sachs International

And by Nov 2007, Goldman Sachs ceased to be a substantial shareholder again. Notice of Person Ceasing (29C) - Goldman Sachs International

And remember KN's initial buy recommendation? Remember how KN valued AsiaEP at 99 sen? The valuation was based on an expected earnings of 21.8 million for AsiaEP's fy 2009.

And how did AsiaEP did for fy 2009? Quarterly rpt on consolidated results for the financial period ended 28/2/2009 - AsiaEP lost some 7.46 million for fy 2009!

And in April 2011, AsiaEP announced it had losses of 31.2 million!

In response to the current volatility of the world economic conditions affecting the local market as a whole, the Management decided to adopt a prudent stance by providing an impairment on the intangible assets amounting to RM28.268 million during the current quarter ended 28 February 2011. This has resulted in the Group recording a consolidated loss of approximately RM31.256 million for the current quarter ended 28 February 2011 (before taking into account the aforementioned impairment, it would have registered a consolidated loss of only RM2.988 million), compared to the corresponding quarter of the preceding year ended 28 February 2010 when the Group registered a consolidated loss after taxation of approximately RM0.942 million. In view of the aforementioned market condition, the Group revenue generated was approximately RM 0.234 million for the current quarter ended 28 February 2011 compared with approximately RM1.633 million as posted in the preceding year corresponding quarter.

Last Saturday, 18th June 2011, on Business Times.
  • asiaEP to venture into new businesses

    By Presenna Nambiar Published: 2011/06/18

    PUTRAJAYA: asiaEP Bhd is likely to make a minor loss or at best break even, as it focuses on venturing into new businesses to prop up itself.

    In April this year, asiaEP announced it would buy a 41 per cent stake in an iron ore miner, Global Mineral Technology Sdn Bhd.
    "As long as the company we are buying can give positive impact to us, we will explore," asiaEP managing director Dr Tan Boon Nunt said after its annual general meeting (AGM) yesterday. The AGM lasted some two hours as shareholders voiced concerns on its financial standing.

    In 2010, asiaEP recorded a net loss of RM33.1 million due to RM28.3 million impairment losses of intangible assets for the financial year ended February 28.

    Despite the losses, Tan is confident the company will be able to forge ahead with its plans to venture into more new businesses.

    As at February 28, the company has no borrowings on record.

    Tan said part of the losses were due to its technical contract with, the world's largest Muslim online search engine.

    It was reported that the contract was worth US$26 million (RM79.30 million).

    "Middle East is very volatile. Even though it is not officially terminated yet, the board decided to be prudent and make the impairments before hand, so that it does not eat into our future profits," he said.

    No more such provisions are expected to be made.

    "The IT business is declining, that's why the board is looking for new revenue streams and has decided to change the name of the company from asiaEP Bhd to asiaEP Resources Bhd," Tan said.

    asiaEP is still in the midst of a due diligence on Global Mineral.

    While financial statements filed to Bursa Malaysia Bhd showed that Global Mineral made a net profit of RM2 million for the period between March 2009 and June 2010, the Companies Commission Malaysia (SSM) has no financial accounts filed with it.

    Documents filed with SSM, however, showed that it was registered on March 25 2009 and that it has about RM4 million in borrowings. This included RM2 million charged in May 2011.
AsiaEP now wants to buy an iron core miner???

AsiaEP was THE star in the Mesdaq (now known as ACE) markey back in 2007. The stock was below 20 sen back in Dec 2006. By March 2007, it was trading at a high of 1.14!!

And as quickly as it rose, it's plunge was dramatic too. The chart below says it all.

Now back to the statements made on Star Biz this weekend.

  • The alternative market has drawn harsh scrutiny due to some bad apple.
  • “Stock markets are a casino tell me which market isn't? This is particularly true for emerging growth markets, so investors should know what they are investing in,” an analyst says.
I believe everyone understands that we should know what they are investing in but let's reflect on AsiaEP. Yes, clearly the stock was stir fried.

But think about the events surrounding the stock back in 2007.

The stock was already up some 78% when KN made its buy call on Feb 2007. At 35.5 sen, with the stock up some 78% since early Dec 2006, KN gave it a huge buy call, stating the stock should be worth 99 sen! And the stock continued to soar. The local media highlighted that research report. Then the big name fund, Goldman Sachs bought a stake. And the stock was upgraded AGAIN - from 99 sen to 1.97 based on this factor alone. The local media highlighted this so-called good news. Everybody was happy and the stock went up, up and awayyyyyyyyyyy.

Did anyone care what was AsiaEP actually doing? Did anyone bother to ask if KN's valuation on AsiaEP on Feb 2007 was perhaps way too optimistic?

Was there the need to own research?

Goldman Sachs was buying woh. What's there to argue about?

As you all know, many only consider a stock to be a good stock if they make money from it. And the stock is only a bad stock if they lose money in it.

And AsiaEP was a good stock. It was the Mesdaq (ACE) darling of 2007.

But when AsiaEP turned and started falling in July 2007, was AsiaEP still a darling?

Or did it turn into a rotten apple?

However, think about it for a moment. If you are just an observer, with no vested interests at all in the stock market, how exactly would you rate AsiaEP based on what has happened?

How did the stock rise to fame? How did the stock soar? Why did it plunge?

Or should one blame the stock market itself cause it is a casino?

But think about it for a minute. Just who's helping the stock market to become one?

The owners of the stock? The buyers of the stock? And judging from AsiaEP example, do you think the research houses could do much better?


廖福深 said...

All stock markets are like that. You even have a geologist who jumped from helicopter and die after gold miner Bre-X collapsed. And you are talking about a company worth $6billion with major institutions and even the Suharto family involved. AsiaEP is small timer. Now it will probably say Gadaffi cannot come up with the fund to support the muslim search engine.