ACE Market: Same Old, Same Old Issue

So much talks about bad apples of the ACE stock market.

Yesterday the Edge Financial had this write-up: Perils of investing in ACE Market

• Perils of investing in ACE Market Written by Commentary by Max Koh
  Monday, 20 June 2011 11:39
  
  The recent slew of listings on the ACE Market has dampened the already moderate sentiment for stocks listed in that category of Bursa Malaysia.
  
  Who would blame investors for shying away considering that the debuts of recent listings — XOX Bhd and MClean Technologies Bhd — were accompanied by announcements of losses and plunging share prices. In the case of MClean, a substantial shareholder exited the company by selling a 12.8% stake on the maiden trading day.
  
  But should it deter investors from the ACE Market?
  
  To recap, XOX pulled a stunner when it reported a loss of RM1.66 million for 1QFY11 just a day before its debut. The company forecast an annual net profit of RM19.8 million for the full year. The loss sent its share price downhill. As at last Friday, XOX slipped to 44 sen, down 45% from its offer price of 80 sen.
  
  MClean also raised more than a few eyebrows. Just three weeks after its listing, MClean announced a quarterly net loss of RM190,000 blaming the teething problems at its Chinese operations.
  While the company has since assured that it will be profitable for the year as a whole and could still exceed FY10’s net profit of RM5.9 million, investors are likely to remain cautious. Last Friday, the company’s share price closed at 23 sen, down 56% from its IPO price of 52 sen.
  
  These events make it no surprise that investors are becoming wary of getting caught with the wrong companies.
  
  To be fair, however, investors should be aware of the perils of investing in the ACE Market.
  
  The whole purpose of the ACE Market is to allow new start-ups and companies with growth potential but no track record to access the capital markets.
  
  While ACE Market-listed companies have less of a track record than their Main Market counterparts, investors are actually taking a higher risk on these companies.
  
  And, as in any game of chance, there are bound to be winners and losers. Picking winners isn’t an easy feat.
  
  So, how can investors avoid being caught with a bad hand?
  The ACE Market is a high risk-high return game — but it still offers better odds than a game of pure chance at the casino. There are numerous things that investors can do.
  
  It is important for interested investors to do their due diligence and study the company’s prospectus before investing their money.
  The company would state its historical earnings (or losses) and its plans for the monies raised from the IPO.
  What was the financial track record like? Were there unusual swings in profitability or revenue, especially in the year just prior to listing? If there were, what were the reasons?
  
  Are most of the monies raised in the IPO meant for the company’s expansion, or do they accrue to a company’s major shareholders?
  That alone should tell the intention of the IPO — whether it is a “cashing out” exercise, or a chance to tap capital for growth.
  
  For instance, the listing of JCY International Bhd last year saw all its proceeds accrue to the major shareholder. JCY’s shares have since slumped to 59.5 sen from an IPO price of RM1.60 last February, dampened by a slowdown in the hard disk drive industry.
  
  For cyclical industries, one should ask if the cycle has peaked, or is nearing a peak.
  
  Some companies, though not all, provide an earnings forecast for the year, as well as the strategies to be used to achieve it.
  
  For example, XOX has projected its revenue to rise to RM249.5 million this year, which is more than a 10-fold jump from RM20.1 million a year earlier. In addition, it plans to increase the number of subscribers from 391,000 to 1.5 million in just one year. Whether these goals are attainable remain to be seen.
  
  It is interesting to note that XOX’s losses expanded from RM239,000 in FY07 to RM15.9 million in FY10. It expects a net profit of RM19.8 million for this year.
  
  XOX rides on Celcom Bhd’s network and has to pay the latter a “minimum commitment” amount annually for these services. If one peruses its prospectus, one would notice that the amount is set to more than triple this year to RM61.5 million from RM17.3 million last year.
  
  And this “minimum commitment” is set to escalate to RM109 million in FY12 unless there is a mutual agreement reached with Celcom to change it.
  
  However, it is important to remember that one or two examples should not represent all ACE Market-listed companies.
  
  Some loss-making companies could be going through a temporary rough patch, and these should be given a chance to prove themselves.
  
  ACE Market-listed companies that have proved successful include EA Holdings Bhd and Genetec Technology Bhd.
  EA Holdings had seen its net profit rise from RM200,000 in FY07 to RM4.1 million in FY10. Genetec’s net profit rose to RM12.4 million for FY11 from RM5.5 million three years earlier.
  
  Others such as Notion VTec Bhd and MyEG Services Bhd have since migrated from the old Mesdaq to the Main Market and are widely held by institutional funds.
  There were also companies that were caught in circumstances beyond their control.
  
  Green Packet Bhd, for example, which migrated from the former Mesdaq to the Main Market has seen numerous broadband licences going to other companies since its listing.
  
  While its target to break even earnings before interest, tax, depreciation and amortisation remains elusive as ever, the company continues to draw good faith from investors. Last year, South Korea’s SK Telecom bought a 25.8% stake in Green Packet’s subsidiary for US$100 million (RM304 million).
  
  In a nutshell, would these former small firms have grown to their current size without the Mesdaq or ACE Market?
  
  This article appeared in The Edge Financial Daily, June 20, 2011.

Ok, to my best recollection, there have been six newly stocks in the ACE Market this year.

Now, I am going to discard the IPO prices. Is that a stunner? Why? Well, the IPO is a silly game of lottery for the investing public and since the stocks have been listed, it's pointless to talk about their IPO pricing now. It's history.

Instead, I would look at how these six stocks have performed since listing and the best way to highlight them is via simple charts.

Ok, you don't need to be a technical expert to read and interpret the charts but I strongly believe all these six charts speaks for themselves and the story line or rather the chart line is so clear at this moment of time. (Note the keyword here is 'at this moment of time'. Yeah, stocks are traded 5 days a week and prices changes all the time. )

How?

What do you see?

.

Back in 2005, I blogged the following: http://whereiszemoola.blogspot.com/2005/12/oh-messdaq.html

Oh yeah.

M'sia to unveil tougher rules for Mesdaq listing.

Finally something is being done over the clear lack of quality of the newly listed stocks, especially those being listed on the MessDaq.

Here is a snippet from the article which clearly highlights the appalling lack of quality control on stocks being listed on the MessDaq.

Litespeed's showing so far typifies that of many a Mesdaq company. Listed only last Thursday on Malaysia's tech index, the counter is trading at 31.5 sen - 15.5 sen lower than its offer price of 47 sen.

On its debut it opened one sen higher but closed the day at 39 sen, the second most-actively traded counter. A total of 11.4 million shares were traded, more than double the public IPO portion of five million shares.

Litespeed raised RM16 million (S$7.2 million) from its public issue of 32.5 million 10-sen shares, and its public portion was subscribed almost six times.

Unfortunately for those subscribers, only a few days into its listing, Lite-speed announced a net loss of RM1.9 million for its quarter ended July 31.

Aiyoh! Only a few days into its listing, Lites-speed announced a net loss of rm1.9 million for its quarter ended July 31!!!!!

This is simply NOT ACCEPTABLE.

Truly appalling!

A waste of market capital.

Only this Lite-speed like this? or is there more?

Ok... how about EB Capital ??

Listed 2nd Aug 2005.

Yesterday I saw this bugger's quarterly earnings.

Sales Revenue: 1.802 million
Net loss: 1.064 million!!!

First quarterly earnings after listing and it reports a net loss!

Imagine a horsie horse in a cup race. The bell rings and the horse stumbles, throwing the jockey off the horsie. How? Out off the gates and already no hope liao!!

Disgusting or not?

You tell me lah.

And worse still, this EB Capital losses is at operating level and the company is net debt.

And lagi worse still for EB Capital, based on yesterday's closing price, EB Capital market capital is worth some 21.4 million.

And lagi, lagi worse still.. just imagine if the bossie owns 13% of this stock. This means the bossie is worth some 2.78 million based on his shares value in the market.

You tell me lah.... how come sky NO eyes one?

So, so easy to be a million hair ar?
So, so easy to be kaya raya!!

Sigh!

And lagi, lagi, lagi worse... just how did such company got listed?

Mana tu QC?

Well, i dunno but u guys and gals but muah is certainly pleased to read that SC is aware of this issue and is enforcing stricter rules.

Comeon... SC let's kick some butt!!!!!!
But there are some who are sceptical.

Will it really help?

I dunno... but... at least the very first small step is being made to rectify this issue.

I shall keep my faith... for now.

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

See? Mclean and XOX aren't the only ones. This very issue of the company announces that it is losing money shortly after listing is not new.

It had been happening long, long time before!!!!

There were talks about tougher rules back in 2005.... but.....

sigh.

Here's another posting made on 27 Dec 2005.

http://whereiszemoola.blogspot.com/2005/12/impressive-year-for-messdaq-ipos.html

Given the issues mentioned and highlighted in the following two posts:

1. Oh MessDaq
2. Comments on IPO

My fingers were itching when i found out that Star Business today had an article: Impressive year for Mesdaq IPOs


From a business-perspective, it would definately make sense for Bursa Malaysia to highlight these issues. As a business-entity, Bursa is now focused on the Moola itself. This is its responsibility to its shareholders. To make Moola.

However, making moola at all costs?

Is it wise and feasible?

Shouldn't due consideration be made on improving the quality of the newly listed stocks rather than the issue of churning out more business for the exchange?

Anyway, as mentioned in the article, there were simply more new listings in the Messdaq than in the main board or the second board. And the article does shed some light on why is it so.

“For many companies, a listing via Mesdaq was less cumbersome because there were fewer requirements to fulfil,” an analyst with a research house said.. ( EASIER!)

In the case of Mesdaq, companies do not need to show a profit track record. (Lousy company can also list wor!)

“The listing on Mesdaq allows young companies and less-established ones to focus on growth and improving earnings in the early years of listing without having to worry too much about meeting the exchange's stringent rules and regulations, especially on earnings,” he said.

“The cost of entry into Mesdaq is lower (including listing exercise) while allowing companies flexibility to grow globally,” he said.
Those were some of the reasons why the Messdaq seduced more listing...

Now consider some of the following issues mentioned in this blog.

Isn't there one too many companies which lost money after being listed on the Messdaq? (see Oh MessDaq ). For example, Litespeed accounced losses a few days after being listed!! Or companies like EB Capital and DVM.

Now, why is it such a big deal?

Yeah, yeah, yeah... the Messdaq is a good hunting ground for speculators and punters. A lot of fortune has been made.

What about the losers?

Yeah, they deserve to pay the price for their foolishness... but take the following issue mentioned in Karensoft "Move over who: Part Vii"

When Kenanga first wrote on Karensoft, Kenanga stated that Karensoft some 69.2 million shares then.

Get this... at 0.96 sen, Karensoft then had a market capital of rm65.8 million

Today?

Karensoft (which had a 1-for-2 bonus issue in June 2005) now has some 115.015 million shares.

Now at 0.065 sen, Karensoft market value (market cap) is only some 7.475 million.

Soooooooooooo ...... from 2nd Dec 2004 to 20th Dec 2005, some 58.35 million in market value has simply vanished!
This for me is the huge issue. Huge Issue. Cos most of the messdaq stocks have been trading at a rather high price before crashing. Look at Karensoft, one of them Messdaq stocks had a market value was much as 65.8 million on Dec 2nd 2004. Now, almost a year later some 58.35 million has vanished!!

Think about it.
For a stock like Karensoft, this stock had the means to erase some 58.35 million in market capital from our stock exchange. And this is only one of them troubled Messdaq stock. Aren't the numbers mind boggling?

Do such listings create or ultimately destroy value?

How?

If an investor bought and hold such a share, what would happen to their value of their shareholding?
See the importance of creating value in the market and not quantity?

Yes, yes, yes in this incident, the investor was probably wrong and silly to buy and hold a poor quality stock but let's think in regard to the market itself. Yes, Mr.Market.

Can the market survive without these 'investors'?

Can the market exist without any minority shareholders?

Can the market survive if all there exists is rather poor quality stocks?

Who would want to invest in a poor business?

Shouldn't due consideration be made on improving the quality of the newly listed stocks rather than the issue of churning out more business for the exchange?
Is bigger neccessary better?
Think about it.

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

How?

It's now June 2011.

Look at Mclean. Look at XOX.

Aren't we talking about the same old issue, over and over and over again?

Sigh.
And I ask once more:

Shouldn't due consideration be made on improving the quality of the newly listed stocks rather than the issue of churning out more business for the exchange?