Macquarie International Infrastructure Fund

[weijian]

thanks for the effort, wj.

so is it fair for MIIF to recognise those infrastructures as financial assets held for trading?

how would HNE, TBC, and CXP qualify for this classification?

If it is before GFC2008, i think it is fair. But with the change in direction as described by Nick, i do not think it is fair anymore. Below is an extract of my followup of my previous email

Weijian wrote:
As a follow up to the question/reply, part of our investment strategy is written as below:

MIIF is currently invested in three substantial Asian infrastructure businesses and aims to achieve growth by optimising the performance of these businesses over the long-term so that they are well placed to deliver MIIF an attractive and sustainable level of return.

It has been some time since we have been in the business of buying/selling assets. It looks like we are going to hang onto our businesses for some time, now the world has also changed since GFC2008 (in CEO John Stuart's own words). In the spirit of above strategy, shouldn't we be moving towards having more disclosure towards the assets we have, rather than have a 1 figure valuation in our balance sheet? This especially holds true for TBC and HNE where we hold a 47.5% and 81% stake respectively.

Consolidating them will give more information on the assets' cash flow/balance sheet, and generates more transparency. That will only make MIIF more attractive to new retail investors.

MIIF reply:
You make a fair point and we'll take it into consideration. However, I would say there is already a fair amount of disclosure especially on key data points. Notwithstanding, we are constantly reviewing our disclosure and where appropriate we'll improve the flow.

My reply:
I do not deny and give credit to Mgt's efforts on disclosure over the last 2 years - especially on our debt information like debt type, service ratios and repayment profile.

[Nick]

The contradiction of the business model is evident here. If you want to be an asset trader, then why only buy 3 assets and choose to consistently downsize the Fund via investments in self liquidating vehicles like HNE and share repurchase. If want to be an asset investor, disclosure is important. I think Cityspring has 3 separate P&L statements for each asset. Until MIMAL decides what it wants, the share price will not improve.

To quote a recent Macq Research Report ( http://kfc1973-stock.blogspot.com/2011/0...lance.html )

We maintain our Neutral recommendation. The dividend yield is attractive; however, we see few drivers at this stage for a re-rating. Disclosure around the financials of the underlying assets will aid confidence in the growth outlook for the business.

On another note, MIIF repurchased 3.082 million units this week bringing down its outstanding unit float to 1,231,196,154 units.

Not Vested

[Nick]

MIIF ANNOUNCES FINANCIAL RESULTS FOR THE NINE MONTHS ENDED 30 SEPTEMBER 2011

Key Highlights

• Year to date net income of S$50 million up 32 per cent on prior year
• Continued strong performance at Taiwan Broadband Communication and Changshu Xinghua Port
• Decline in traffic at Hua Nan Expressway relative to 2010, albeit at a moderating rate
• Strong balance sheet maintained with cash balances of S$114.7 million1 and no corporate-level debt
• Net Asset Value of S$988.4 million or S$0.79 per share (also S$0.79 per share in the previous quarter)

http://info.sgx.com/webcoranncatth.nsf/V...3005816C7/$file/MIIFQ32011Release.pdf?openelement [Press Release]

http://info.sgx.com/webcoranncatth.nsf/V...3005816C7/$file/MIIFQ32011Preso.pdf?openelement [PPT Slides]

http://info.sgx.com/webcoranncatth.nsf/V...3005816C7/$file/MIIFQ32011SGXReport.pdf?openelement [Report]

A fairly steady result from all of its assets with distributions received from HNE, TBC and CXP in 3Q 2011. All 3 assets increased their distributions to MIIF but it must be noted that this reflects FY 2010 performance. It is likely that CXP and TBC will increase their dividends next year since 9M 2011 result has been good while HNE might have to reduce distribution due to lower EBITDA in 9M 2011 and possibly higher debt amortization. Cash at Fund level has decreased due to the aggressive share buy back which resumed after a 2 weeks break. Overall asset gearing stands at 53%. MW has loans due to be refinanced next year. HNE might be able to post positive EBITDA growth in 4Q judging by the trend as its EBITDA has grown quarter on quarter from 4Q 10 to 3Q 11. TBC has a tax issue but no liability has been mentioned so there might be a grey area here. CXP is very conservatively managed and quite dependent on export trade volume.

In some sense 2011 is an interesting year for the 3 'old' infrastructure players listed in SGX - MIIF, Cityspring, CM Pacific. MIIF made a huge investment in TBC raising its stake from 20% to 47.5% and upped its dividend guidance significantly. Cityspring raised equity to strengthen its B/S and CM Pacific completed its RMB 2.3 billion acquisition of a toll road from its parent company and upped its interim dividend to 2.5 cents. KGT and HPHT has joined this gang so let's see how their Management will perform in the coming years.

MIIF has 1,222,756,154 outstanding units and it closed at 53.5 cents today.

(Not Vested)
Note: I am vested in CM Pacific

[Nick]

There is a very comprehensive 40 page initiation report from DBSV which provides a good summary on the assets held by MIIF and the challenges which they might face in the coming years:

http://www.scribd.com/doc/73980266/20111...BS-Vickers [Research Report]

(Not Vested)

[Qiaofeng]

See blog

MAS Review?
The reason I am revisiting this post is that I think that MAS should look into both the incentive structure for Biz Trusts; as well as the disclosure standards for the Biz Trusts especailly wrt the assets whereby they have a majority (>50%) control of the assets.

[Nick]

I do agree that a review of the fee structure for Trust is required as well. Business trust like Indiabulls have yet to pay a single dividend but continue to earn management fees ! I previously compiled some stats here - http://www.valuebuddies.com/thread-385-p...ml#pid4457 - and judging by today's price, it seems only PST has given positive gains to its IPO unit-holders. Such a poor return shows that something is wrong - while it can be argued that this is due to the high IPO price, the fact that virtually all of them slashed their DPU does show some level of mismanagement. Again, the only Trust which didn't report a lower income available of distribution was PST (though it chose to reduce its payout ratio to 70% for growth). But correlation doesn't imply causation so I won't comment much on this.

With regards to fee structure, I feel it should track the Trust's performance with the key indicators being share price (or market capitalization), DPU and NAV. There shouldn't be any performance fees since they are being paid to perform ! If there are performance fees, can we have under-performance refund ?

I think so far only MIIF uses market capitalization as one of the bench-mark for management fees (but it didn't work out too well either):

MIMAL Management & Performance Fees

FY 2005: $5.919 million (IPO in 2005)
FY 2006: $11.762 million
FY 2007: $19.554 million
FY 2008: $8.861 million
FY 2009: $4.182 million
FY 2010: $4.495 million
9M 2011: $5.829 million

It does seems to track the stock and fund performance well ? Management fees are less than 1/2 of what it was at its peak which makes sense since the share price is around 50 cents now as opposed to its 90 - 100 cents range previously.

Is this fair ? I would say so since fees are based on market capitalization and not total assets (in the case of REITs) or revenue (in the case of shipping trust). The Management fees have been reduced due to under-performance. It is punitive. It rose when the market recognized its good efforts in 2007 - 2008. This is actually a reasonable argument on why changing the current fee structure won't create excellent managers over-night (most aren't in the first place). It clearly didn't drive them to tap on various initiatives to boost the share price (and profits) over the past 5 years.

I have always been curious why MIMAL keeps on engaging in market capitalization destructive practices - investing in self liquidating ventures (HNE), reducing the Fund value (by share buy back) etc - especially when its fees are pegged to it. But that's another story all together. Ultimately, MIIF is a contradiction and till MIMAL sort it out, I don't think the Market will value it the way the Director's wishes it to (I could be wrong here).

(Not Vested in MIIF)

[Qiaofeng]

I do agree that a review of the fee structure for Trust is required as well. Business trust like Indiabulls have yet to pay a single dividend but continue to earn management fees ! I previously compiled some stats here - http://www.valuebuddies.com/thread-385-p...ml#pid4457 - and judging by today's price, it seems only PST has given positive gains to its IPO unit-holders. Such a poor return shows that something is wrong - while it can be argued that this is due to the high IPO price, the fact that virtually all of them slashed their DPU does show some level of mismanagement. Again, the only Trust which didn't report a lower income available of distribution was PST (though it chose to reduce its payout ratio to 70% for growth). But correlation doesn't imply causation so I won't comment much on this.

With regards to fee structure, I feel it should track the Trust's performance with the key indicators being share price (or market capitalization), DPU and NAV. There shouldn't be any performance fees since they are being paid to perform ! If there are performance fees, can we have under-performance refund ?

I think so far only MIIF uses market capitalization as one of the bench-mark for management fees (but it didn't work out too well either):

MIMAL Management & Performance Fees

FY 2005: $5.919 million (IPO in 2005)
FY 2006: $11.762 million
FY 2007: $19.554 million
FY 2008: $8.861 million
FY 2009: $4.182 million
FY 2010: $4.495 million
9M 2011: $5.829 million

It does seems to track the stock and fund performance well ? Management fees are less than 1/2 of what it was at its peak which makes sense since the share price is around 50 cents now as opposed to its 90 - 100 cents range previously.

Is this fair ? I would say so since fees are based on market capitalization and not total assets (in the case of REITs) or revenue (in the case of shipping trust). The Management fees have been reduced due to under-performance. It is punitive. It rose when the market recognized its good efforts in 2007 - 2008. This is actually a reasonable argument on why changing the current fee structure won't create excellent managers over-night (most aren't in the first place). It clearly didn't drive them to tap on various initiatives to boost the share price (and profits) over the past 5 years.

I have always been curious why MIMAL keeps on engaging in market capitalization destructive practices - investing in self liquidating ventures (HNE), reducing the Fund value (by share buy back) etc - especially when its fees are pegged to it. But that's another story all together. Ultimately, MIIF is a contradiction and till MIMAL sort it out, I don't think the Market will value it the way the Director's wishes it to (I could be wrong here).

(Not Vested in MIIF)

Great work on the compilation, Nick!!
I totally missed it!

Incentive
I agree on having a blend of all 3, Mkt Cap, DPU & NAV; with higher weightage to DPU (standalone factor) and maybe NAV/ Mkt Cap (a combi type ratio) as metrics to align with shareholder interests.

The evidence shows that many in the MacQ Group including MIIF as co-investors bought assets such as Arqiva, CAC , MCG, MEIF etc and later found that during the GFC, financing the debt with roll-overs became difficult and unsustainable.
Then they sell at distressed prices eg Arqiva & MEIF resulting in huge trading losses.
These buys were incentivised by the need for high market cap, the higher the NAVs, the higher the valuations----- hence the higher the market cap. The siblings in the MacQ Group also earned huge "specialist" fees from many of these acquisitions----which is part of the biz model MacQ Group pioneered for Infrastructure.

So altho, it is NOT immediately obvious to you, if you think about the MacQ web of interlinked co-investments, much of these were incentivised by the need for high market cap factor .

In other words, if you are a manager who rose thru the ranks in the MacQ Group, you will be pressured by your peers to boost your funds market cap thru co-investments.

Drop in Fees
I would argue that the drop in fees is the result of an inevitable drop in market cap due to the sale of assets which MIIF co-invested but was sold at the behest of others higher in the pecking orders in the MacQ Group.
The shareholder value destruction, 37.5% NAV between 2007 and 2011 which was destroyed due to inept management (see post 71), thru trading losses, was NOT penalised. Neither was the huge discount to NAV caused by unhappiness with the Arqiva sale/trading loss, penalised. So I would argue the fee structure was/is NOT punitive.

Diminishing Value
I also agree that the HNE structure, which you call self-liquidating is odd. Acquired at 19yrs (now 15 yrs) remaining toll rights with a mix of equity/loan.
Altho, management classify it as a trading asset (hence much info not shown in consolidated accts altho 81% owned), that value is a diminishing value---- if they really plan to sell/trade at valuations now, they would have lost S$41.6m.
In the 1st place, I wonder, if they over-valued and who did the valuations (hopefully no IPT for specialist fees!)
2ndly, and more importantly; with maturity of the loan in 2022 i.e. 11 yrs from now and toll rights expiring 15 yrs from now, and the NAV diminishing -----how do they expect to refinance i.e. get loans for the last 4 yrs of the toll rights?
IMHO, that is tantamount to cutting short, the life of the toll rights by 4 yrs OR they would really have to trade and sell the HNE asset soon !!

KGT
Since KGT was one of the trusts in your compilation. I will like to comment on it. If U look carefully at the Board's composition, U will find that some of the IDs have IPTs with the listed trust and their independence is a "qualified" independence.
For me, I divested KGT, as a result.
My thinking then was the same as lonewolf (whose opinion, I have great respect)---- what you don't like sell !!
When I saw the same Corporate Governance thing happening at KReitAsia, I had a re-think and I realised that merely selling was NOT enuff . To be frank, I was one of those who called for a poll at the KReitAsia EGM.

MAS must review
So I want to reiterate again, there are serious issues such as IDs independence, incentives structures and transparency of accounting and due processess at AGM/EGM that MAS must review and provide answers.
I think, I better stop or I may go on and on...

[Nick]

HNE

From what I understand, HNE is repaying its debts annually with a balloon amortization profile stepping up after 2013 based on slide 28 of the FY 2010 Presentation Slides. I doubt they will be able to maintain their $20 million distribution post 2013 and will most likely divert the bulk of the cash-flow towards debt repayment. I doubt this will be a profitable investment UNLESS traffic volume increases. There is nothing wrong with toll road investing but cash-flow from depreciation should be conserved for asset replenishment. In MIIF case, they used too much gearing to acquire it. The opposite is true for another one of their concession investment - CXP - it is not self liquidating as cash is being retained at asset level for debt repayment and eventually asset replenishment (buying new port, extending lease etc). Pan United is majority owner here so I don't think it wants any NAV destroying capital structure in place.

KGT

A listed "green" infrastructure business trust with potential for long-term capital growth

Despite having a zero debt structure with local assets, I avoided it as it was a classic self liquidating trust that fashioned itself as a growth player. This contradiction will definitely cause problems in the future. KGT assets concession expires between 2024 to 2034 after which the cash-flow vanishes and the NAV steadily shrinks to 0. I wonder how can such a model promise capital growth ! If the Management openly admitted it was self liquidating and was going to be run as such, I don't mind looking at it. The DPU yield will be misleading here since part of it consist a return of your own capital.

K-REIT Asia

I read a blog ( http://atans1.wordpress.com/2011/11/24/h...ked-group/ )that said that as long as you have 5 ppl requesting for a poll, it has to be done ? Is this true ? And if so, why didn't the rest of the minority shareholders back you up after complaining so much to the Board lol.

(Not vested in KREIT, KGT, MIIF)

[Qiaofeng]

K-REIT Asia

I read a blog ( http://atans1.wordpress.com/2011/11/24/h...ked-group/ )that said that as long as you have 5 ppl requesting for a poll, it has to be done ? Is this true ? And if so, why didn't the rest of the minority shareholders back you up after complaining so much to the Board lol.

(Not vested in KREIT, KGT, MIIF)

Well, the facts are these...
In June 2011, there was actually a Rule Change Proposal by SGX to mandate compulsory polling at all shareholder meetings; see
proposal
Unfortunately, after public consultations, the recommendations was that a poll was deemed NOT a necessity altho if U attend any CMA or Capitaland-related AGMs or SGX AGMs or SingTel AGMs (i.e. the more progressive and transparent listcos) , U will have been given a electronic polling device and polling would be conducted; irrespective. Remember all dual listed listcos (i.e HKEX and SGX) must comply with HKEX rules.

What happened, was that at the KReit Asia EGM, the polling device was distributed and the expectation was that polling will be done. So at one stage there was confusion, when the Chairman said polling will not be done becos there was no requirement.
No explanation was given!!

So those who were more knowledgeable, guessed that they were invoking the 10% rule.
See Recommendation 2.2 and a few of us went to the back of the room to register our shareholdings with the scrutineers to see if we had 10% shareholdings.

It was later announced that we did not satisfy the required holdings requirement and a show of hand voting commenced, immediately, to which those opposing were Out-Voted. But it was never clearly stated what was that % requirement, that we did not meet, during the EGM.

Later, I checked and found that the required % shareholdings have been reduced from 10% to 5%!!!
I am still clueless, whether we failed on the 5% or 10% mark.

Now that U cite the blog site claiming only 5 members were needed for a vote, I went to read Recommendation 2.2, again and it appears that there is such a 5-members request rule---there are in effect two thresholds in section 178(1)(b)----- the 5 member rule and the now effective 5% rule !!

In effect, a polling had to be carried out as there were more than 5 of us demanding a poll. We have been "robbed" of a fair poll which Kepcorp and Kepland as IPTs and together own 76.3% of votes, had to abstain------ yet, we were denied!!!
A poll would be more favourable to dissenting unitholders, since we have some IIs (Institutional Investors) and big unitholders amongst us!!

Hence, the furore and the subsequent BT article by Wong Wei Kwong, which IMHO, points correctly to the Corporate Governance issues but did not sensationalise the matter.

Why did the rest of the shareholders NOT back up those requesting a poll ?
Only they know!! But to be fair, many are not savvy enuff to understand what was going on. And the article by Colin Tan is accurate in saying many were clueless and simply trusted management ( altho I think he tried to sensationalise and deviate from the main issues in many parts of the article).

Thinking back and thinking aloud, what s.u.ck.s is that the whole ecosystem of scrutineers , corporate secretarial services etc were so compliant to the management wishes.

[yeokiwi]

Thinking back and thinking aloud, what s.u.ck.s is that the whole ecosystem of scrutineers , corporate secretarial services etc were so compliant to the management wishes.

Well, they were paid by the management to do the work so it is unlikely that they will try their very best to uphold minority rights.
What to do? The wish of their paymaster is more important!

In order to defeat the management, there must be some voluntary pre-EGM link up, email exchanges, appointing proxies ahead of the EGM. With enough shareholders participating, the possibility of defeating the resolutions is higher.
Kingboard Copper and Tsit Wing shareholders did that before.