(23-06-2013, 11:15 AM)Greenrookie Wrote: Hi d.o.g and guys,
Tactician from Nextinsight has post:
The 12.5% calculations and methods used by Eratat is the standard way of calculating Bond Interest Rate... so 12.5% is accurately depicted. Personally, I don't like it, but that's apparently Industry standard. At least it resolves an issue which I had.
She felt the bond was expensive, as did I (as mentioned earlier).
The effective annual rate should be the 15.45% using a compounding method of interest calculation. For the lay person's method of thinking of interest rates (I had mentioned earlier that the 12.5% is correctly represented and calculated according to bond calculations there is NO discrepancy apparently).
The quarterly coupons paid should be part of the final amounts, which will add up to 134m after 2 years. Hence, previous calculations brought over by value buddies had effectively double counted, which was the issue I was concerned with. The Effective rate is hence not 30% or so.
Please read the terms and conditions again. Interest payment is SEPARATE from principal accrual. There is both cash interest (12.5% per year, paid quarterly in 8 installments, total 25%) and imputed interest (deferred until maturity, 25% lump sum). Maybe there is confusion because the total amount of interest paid amounts to 25% on each side.
Page 2 of the announcement on SGX clearly states:
Principal = RMB 134m
Subscription Price of Bonds+Warrants = RMB 100.5m
Interest Rate = 12.5% based on principal, payable quarterly in arrears
Maturity = 2 years from issue
Again, to make things clear:
Issue proceeds = RMB 100.5m
Amount due at maturity = RMB 134m
Imputed interest rate from discount at issue = (134/100.5)^(1/2) = 15.47%
The imputed interest is what you earn from capital gains by buying at RMB 100.5m and redeeming at RMB 134m, without collecting a cent in interest coupons. So capital gains are 15.5% per year on a compounded basis.
This is BEFORE we take into account the cost of the warrants (which are out of the money but not worthless). Remember Olam's rights issue of bonds + warrants? The warrants had value so the cost of the bonds was higher than the reported coupon rate.
In Olam's case the bonds were also issued at a discount (95% of par) so the effective yield was over 7% despite the coupon rate being 6.75%. There was an extra 5% at maturity in 5 years' time, effectively 1% per year in principal accrual, which increased the bondholder's return to 8%.
In the case of Eratat perhaps the confusion arises because the returns to the bondholders appear so large. But the analysis is the same. And the conclusion is the same - if Olam was in fact in trouble and needed money, that goes double (or triple) for Eratat.
---
I do not give stock tips. So please do not ask, because you shall not receive.
(23-06-2013, 11:15 AM)Greenrookie Wrote: Hi d.o.g and guys,
Tactician from Nextinsight has post:
The 12.5% calculations and methods used by Eratat is the standard way of calculating Bond Interest Rate... so 12.5% is accurately depicted. Personally, I don't like it, but that's apparently Industry standard. At least it resolves an issue which I had.
She felt the bond was expensive, as did I (as mentioned earlier).
The effective annual rate should be the 15.45% using a compounding method of interest calculation. For the lay person's method of thinking of interest rates (I had mentioned earlier that the 12.5% is correctly represented and calculated according to bond calculations there is NO discrepancy apparently).
The quarterly coupons paid should be part of the final amounts, which will add up to 134m after 2 years. Hence, previous calculations brought over by value buddies had effectively double counted, which was the issue I was concerned with. The Effective rate is hence not 30% or so.
Please read the terms and conditions again. Interest payment is SEPARATE from principal accrual. There is both cash interest (12.5% per year, paid quarterly in 8 installments, total 25%) and imputed interest (deferred until maturity, 25% lump sum). Maybe there is confusion because the total amount of interest paid amounts to 25% on each side.
Page 2 of the announcement on SGX clearly states:
Principal = RMB 134m
Subscription Price of Bonds+Warrants = RMB 100.5m
Interest Rate = 12.5% based on principal, payable quarterly in arrears
Maturity = 2 years from issue
Again, to make things clear:
Issue proceeds = RMB 100.5m
Amount due at maturity = RMB 134m
Imputed interest rate from discount at issue = (134/100.5)^(1/2) = 15.47%
The imputed interest is what you earn from capital gains by buying at RMB 100.5m and redeeming at RMB 134m, without collecting a cent in interest coupons. So capital gains are 15.5% per year on a compounded basis.
This is BEFORE we take into account the cost of the warrants (which are out of the money but not worthless). Remember Olam's rights issue of bonds + warrants? The warrants had value so the cost of the bonds was higher than the reported coupon rate.
In Olam's case the bonds were also issued at a discount (95% of par) so the effective yield was over 7% despite the coupon rate being 6.75%. There was an extra 5% at maturity in 5 years' time, effectively 1% per year in principal accrual, which increased the bondholder's return to 8%.
In the case of Eratat perhaps the confusion arises because the returns to the bondholders appear so large. But the analysis is the same. And the conclusion is the same - if Olam was in fact in trouble and needed money, that goes double (or triple) for Eratat.
23-06-2013, 09:45 PM (This post was last modified: 23-06-2013, 09:49 PM by d.o.g..)
(22-06-2013, 09:07 PM)qwerty89 Wrote: [i]*Another point I would like to ask forummers here is how prestigious is SHK anyway? I find it difficult to quantify “a seal of approval”, if that is the purpose of the bond issue.
WARNING: LONG POST
On SHK's "stamp of approval", if you do a background check on the people behind SHK you will realize that it is unlikely that anybody in their right mind would want such a stamp of approval.
First, the origin of Sun Hung Kai. Once upon a time there were 3 best friends: Lee Shau Kee, Fung King Hey and Kwok Tak Seng. In 1963 they each put up HKD 1mn and founded Sun Hung Kai Enterprises. The name was derived thus: "Sun" came from Fung King Hey's family business "Sun Hey Company". "Hung" came from Kwok Tat Seng's YKK zipper company "Hung Cheung Hong" and "Kai" came from the last word of the name Lee Shau Kee.
In 1969 the 3 friends went their separate ways. Kwok Tak Seng founded Sun Hung Kai Properties with Lee Shau Kee, who later left to start Henderson Land. Fung founded Sun Hung Kai Securities and Sun Hung Kai Finance.
Fung King Hey left Hong Kong for Vancouver in 1985. He died that same year. His second son Tony chose to continue the family business in HK. However in 1996 he sold Sun Hung Kai Securities to Lee Ming Tee's Allied Group.
So now you know the history behind the name and why, despite the common name, Sun Hung Kai & Co (86 HK) is not related to Sun Hung Kai Properties (16 HK). So who is behind Sun Hung Kai & Co (86 HK) today?
86 HK is 55% owned by Allied Properties (56 HK).
56 HK is 75% owned by Allied Group (373 HK).
373 HK is 65% owned by the Lee and Lee Trust.
The key beneficiaries of the Lee and Lee Trust are the Lee siblings: Lee Seng Hui, Lee Su Hwei and Lee Seng Huang.
Their father Lee Ming Tee was the founder and original patriarch. So, the Lees control 86 HK despite having an economic interest of only 26.8%. This pyramid structure is of great benefit to them as we shall soon see. But first, Lee Ming Tee and the Allied Group.
Lee Ming Tee was born in Malaysia. He made his original fortune in Malaysia, then went to Sydney in 1983. He moved to Hong Kong after coming under scrutiny by Australian regulators over corporate raids and complicated corporate structures. In Hong Kong however the controversies continued.
In 1993 the Allied Group was raided by the Hong Kong's Commercial Crime Bureau on suspicion of fraud involving property sales and movement of profits between the group's public companies and other private firms. The government appointed Nicholas Allen of Coopers and Lybrand to investigate. His 688-page report detailed evidence of Lee Ming Tee siphoning shareholders' funds via activities such as undisclosed control of listed companies, share price manipulation and funding of stock purchases by the controlling shareholders.
In 1998 Lee Ming Tee was arrested in Hong Kong. The South China Morning Post reported that he was arrested and charged with "conspiracy to defraud, conspiring to falsify accounts, obtaining services by deception and gaining property by deception".
After a lengthy trial with many appeals, Lee Ming Tee was jailed in 2004 for a year for publishing false accounts in the 1990 and 1991 annual reports. The other charges were dropped by the Director of Public Prosecutions on the basis that "what Lee had admitted adequately reflected his criminality".
Lee Ming Tee has since retired and handed over the reins to his 3 children. How have his children run the Allied Group of companies? Here are some recent deals:
2006
86 HK bought United Asia Finance from its ultimate parent Allied Group 373 HK. The price? 19x earnings and over 4x book value. Ouch. Nice sale for 373 HK but not such a nice purchase for 86 HK.
2008
86 HK sold its 51% interest in Quality Healthcare to its immediate parent Allied Properties 56 HK for HKD 471m, 14x earnings and 3x book value. 2 years later, in 2010, Quality Healthcare (renamed Allied Overseas) sold its healthcare businesses to Fortis for HKD 1.6bn. So the Lee family transferred HKD 1.1bn of wealth from 86 HK to 56 HK. Nice deal for 56 HK, not such a nice deal for 86 HK.
====
So, SHK today is run by a family whose patriach is a convicted criminal and whose children have demonstrably enriched themselves at the expense of minority shareholders. Personally, I think there are better places from which to get a "stamp of approval".
As usual, YMMV.
---
I do not give stock tips. So please do not ask, because you shall not receive.
23-06-2013, 11:05 PM (This post was last modified: 23-06-2013, 11:05 PM by d.o.g..)
(23-06-2013, 10:49 PM)pianist Wrote: if I may humbly add on, i noted that our dear CMA partnered with SHK for their china projects.
As I already stated, Sun Hung Kai Properties has nothing to do with Sun Hung Kai & Co. Capitamalls Asia co-owns Ion Orchard with Sun Hung Kai Properties. There has not been any disclosed business between Capitamalls Asia and Sun Hung Kai & Co.
---
I do not give stock tips. So please do not ask, because you shall not receive.
(23-06-2013, 12:15 PM)yeokiwi Wrote: If buying a stock requires such in-depth understanding, interpretation, postulation, guesstimation of the company intention of issuing the bonds, it is probably too much for me.
There are more than 700+ companies in SGX and there are countless that are easier to understand with a higher probability of capital preservation with gain.
Different stroke for different people. I prefer things that are easier to understand with a high probability of guessing the right intention/value.
Easy-to-guess situations are seldom mispriced, in my opinion. Would like you to share your ideas, if possible.
(23-06-2013, 09:45 PM)d.o.g. Wrote: WARNING: LONG POST
On SHK's "stamp of approval", if you do a background check on the people behind SHK you will realize that it is unlikely that anybody in their right mind would want such a stamp of approval.
First, the origin of Sun Hung Kai. Once upon a time there were 3 best friends: Lee Shau Kee, Fung King Hey and Kwok Tak Seng. In 1963 they each put up HKD 1mn and founded Sun Hung Kai Enterprises. The name was derived thus: "Sun" came from Fung King Hey's family business "Sun Hey Company". "Hung" came from Kwok Tat Seng's YKK zipper company "Hung Cheung Hong" and "Kai" came from the last word of the name Lee Shau Kee.
In 1969 the 3 friends went their separate ways. Kwok Tak Seng founded Sun Hung Kai Properties with Lee Shau Kee, who later left to start Henderson Land. Fung founded Sun Hung Kai Securities and Sun Hung Kai Finance.
Fung King Hey left Hong Kong for Vancouver in 1985. He died that same year. His second son Tony chose to continue the family business in HK. However in 1996 he sold Sun Hung Kai Securities to Lee Ming Tee's Allied Group.
So now you know the history behind the name and why, despite the common name, Sun Hung Kai & Co (86 HK) is not related to Sun Hung Kai Properties (16 HK). So who is behind Sun Hung Kai & Co (86 HK) today?
86 HK is 55% owned by Allied Properties (56 HK).
56 HK is 75% owned by Allied Group (373 HK).
373 HK is 65% owned by the Lee and Lee Trust.
The key beneficiaries of the Lee and Lee Trust are the Lee siblings: Lee Seng Hui, Lee Su Hwei and Lee Seng Huang.
Their father Lee Ming Tee was the founder and original patriarch. So, the Lees control 86 HK despite having an economic interest of only 26.8%. This pyramid structure is of great benefit to them as we shall soon see. But first, Lee Ming Tee and the Allied Group.
Lee Ming Tee was born in Malaysia. He made his original fortune in Malaysia, then went to Sydney in 1983. He moved to Hong Kong after coming under scrutiny by Australian regulators over corporate raids and complicated corporate structures. In Hong Kong however the controversies continued.
In 1993 the Allied Group was raided by the Hong Kong's Commercial Crime Bureau on suspicion of fraud involving property sales and movement of profits between the group's public companies and other private firms. The government appointed Nicholas Allen of Coopers and Lybrand to investigate. His 688-page report detailed evidence of Lee Ming Tee siphoning shareholders' funds via activities such as undisclosed control of listed companies, share price manipulation and funding of stock purchases by the controlling shareholders.
In 1998 Lee Ming Tee was arrested in Hong Kong. The South China Morning Post reported that he was arrested and charged with "conspiracy to defraud, conspiring to falsify accounts, obtaining services by deception and gaining property by deception".
After a lengthy trial with many appeals, Lee Ming Tee was jailed in 2004 for a year for publishing false accounts in the 1990 and 1991 annual reports. The other charges were dropped by the Director of Public Prosecutions on the basis that "what Lee had admitted adequately reflected his criminality".
Lee Ming Tee has since retired and handed over the reins to his 3 children. How have his children run the Allied Group of companies? Here are some recent deals:
2006
86 HK bought United Asia Finance from its ultimate parent Allied Group 373 HK. The price? 19x earnings and over 4x book value. Ouch. Nice sale for 373 HK but not such a nice purchase for 86 HK.
2008
86 HK sold its 51% interest in Quality Healthcare to its immediate parent Allied Properties 56 HK for HKD 471m, 14x earnings and 3x book value. 2 years later, in 2010, Quality Healthcare (renamed Allied Overseas) sold its healthcare businesses to Fortis for HKD 1.6bn. So the Lee family transferred HKD 1.1bn of wealth from 86 HK to 56 HK. Nice deal for 56 HK, not such a nice deal for 86 HK.
====
So, SHK today is run by a family whose patriach is a convicted criminal and whose children have demonstrably enriched themselves at the expense of minority shareholders. Personally, I think there are better places from which to get a "stamp of approval".
As usual, YMMV.
Thanks d.o.g. for the comprehensive analysis.
True, with SHK’s shady background, this further increases the risk profile of Eratat, and even more so if SHK eventually becomes a substantial shareholder with significant influence over the board. But it’s also true that as of now, SHK does offer some strategic value to Eratat, with its considerable network across Mainland China.
It’s unpleasant, but not entirely uncommon, to find dishonest management that has been enriching themselves at the expense of shareholders. Even bulge bracket firms, Goldman et al, are prone to pay themselves handsome salaries at the expense of shareholders, as the financial crisis of ’08 revealed.
The examples you’ve thrown out does show the dishonesty of SHK’s management. They are related party transactions, often aimed at benefitting the parent company at the expense of the subsidiary. But I believe another key question here is the competence level of management. Does SHK have a history of making bad deals with third parties through bumbling incompetence (eg. make egregiously bad loans, buy excessively overvalued assets)? In Eratat’s case, if it is a dud, would SHK be able to find out? Would SHK even agree to the bond issue in the first place?
For now, at least, I don’t really see how SHK can enrich themselves at the expense of minority shareholders with the bond issue. (If Eratat is a dud, why did they agree to the bond issue and why didn’t they impose more restrictions to protect their downside? Does it make sense to risk losing your entire principal in a company that you know is on the brink of insolvency?)
While I won’t be selling my shares anytime soon, I will keep a close look on further developments. SHK, as you pointed out, is clearly untrustworthy. Again, I guess the million-dollar question then is how much you trust Eratat’s management.
It is hard to ascribe a “correct” Effective Annual Interest Rate” without knowing the full details of the deal plus the relevant allowable accounting and tax treatment in PRC. For those that know how to do it (I am not one), I believe there are many ways to structure this deal.
No doubt, this hybrid security could be “decomposed” into its basic building blocks or components - Bond and an Equity Option – and with each component being analyzed independently - the key thing in the first place is to get the building blocks right.
Comments are most welcomed.
Research, research and research - Please do your own due diligence (DYODD) before you invest - Any reliance on my analysis is SOLELY at your own risk.
(24-06-2013, 02:45 PM)qwerty89 Wrote: Does SHK have a history of making bad deals with third parties through bumbling incompetence (eg. make egregiously bad loans, buy excessively overvalued assets)? In Eratat’s case, if it is a dud, would SHK be able to find out? Would SHK even agree to the bond issue in the first place?
For now, at least, I don’t really see how SHK can enrich themselves at the expense of minority shareholders with the bond issue. (If Eratat is a dud, why did they agree to the bond issue and why didn’t they impose more restrictions to protect their downside? Does it make sense to risk losing your entire principal in a company that you know is on the brink of insolvency?)
Besides consumer finance, SHK's businesses include investment banking, wealth management and principal investments. The Eratat bond issue can generate profits for SHK in a variety of ways:
As principal investors, they can earn the interest and capital gains if they hold the bonds to maturity.
As investment bankers, they can place the bonds out to third-party investors. As the initial subscriber to the bonds, they have bought the bonds at 75% of par. If they can resell the bonds at a higher price they earn a clean profit without any further money at risk.
As wealth managers, they charge a fee to broker the sale of the bonds to their customers. Bonds are usually sold on a bid/ask spread instead of a commission.
The people running SHK are not stupid. My guess is that they will try to resell the bonds at 90-100 to earn a quick 20+% on their money and wash their hands of the default risk. Almost certainly they already lined up all the buyers before they even subscribed to the bonds, so that they can flip the bonds immediately. Just like in an IPO, where the underwriters in fact take no underwriting risk because they've already signed up all the buyers via a book-building exercise.
Eratat is tiny compared to SHK, there is no strategic value for SHK here, just some easy money off a desperate borrower. Why is Eratat willing to borrow at such poor terms? Perhaps it could be borrowing with no intent to repay i.e. it is committing fraud. Or Lin Jiancheng is a complete idiot. Or maybe something else.
If the accounts are real Eratat cannot be desperate for money. From the IPO prospectus, Lin Jiancheng has been in the business since 1983, that's 30 years this year. If Lin Jiancheng is an idiot he would have gone out of business long ago. So is Lin Jiancheng an idiot or a fraud? Or something else?
"When you have eliminated the impossible, whatever remains, however improbable, must be the truth."
- Sir Arthur Conan Doyle
I have written enough already and will not belabor the point any further. This was an interesting exercise in background checks, but I have already passed the point of diminishing returns on my time.
Best of luck to minority shareholders of Eratat.
---
I do not give stock tips. So please do not ask, because you shall not receive.
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