Under the Willow Tree

Friday, September 28, 2007

The Shin Saga: The Deal That Angered A Nation

'We Complied With the Law'

An executive at Singapore's state-owned investment firm discusses the deal that triggered Thailand's political crisis. The company line: don't blame us.

Ex Chief Investment Officer of Temasek, Jimmy Phoon, gave an interview to newsweek. I must say his comments are quite frank and open. I wonder why Temasek didn't take this sort of attitude earlier.

Read the interview here

Tuesday, September 25, 2007

Willow Tree News/Temasek Watch Sep 25

CPF Reforms

Temasek Watch

Monday, September 24, 2007

Jackson Tai to leave DBS

DBS bank has just announced that CEO Jackson Tai is to leave DBS at the end of the year to return to the USA to be with his family.

Said Tai: “Under my watch, DBS has established a sound platform for growth. Today, DBS has extended its geographic presence beyond Singapore with inroads into Hong Kong, China, India and Indonesia. I am confident the team will build on the strong momentum created in a resurgent Asia to further strengthen our position as a leading bank in this region.”

He added: “For more than eight years, I have dedicated myself to DBS and Singapore, even as my family remained in the States. There’s never a perfect time to leave but having been CEO for five years, I believe it’s now right for me to catch up with my family.”

This is certainly a surprising announcement that must be unexpected to many people. In fact, it seems that it is only now that DBS is starting to get its overseas growth plan going, having just emerged from the legacy of its expensive acquisition of Dao Heng bank and only just begun its official entry into the mainland Chinese banking market.

It is unlikely that Tai's departure has anything to do with the subprime crisis, of which DBS had little exposure. What seems more likely is that managing DBS's future is not exciting nor challenging enough for this former top investment banker to want to stay around in Singapore for the longer term. While it is true that Tai has established a platform for growth for the bank, there still is a lot to be done in terms of expanding the company's businesses in overseas markets; in many ways, Tai's successor will have his work cut out for him, to say the least.

But perhaps Tai's departure underscores DBS's difficulty in selecting the right talent to lead the company. Foreign candidates of Tai's calibre and experience may be lured to Singapore's shores for a period of time, but they will find it difficult to stay for the long term. Hanging around in Singapore for a few years may be an interesting experience, but the novelty wears off after a while.

In pursuing its global exective search for a new CEO, DBS may want to consider sacrificing international experience for someone who is more likely to stick around for the long term in order to give the bank a sense of continuity of leadership at the top. Constantly replacing CEOs without promoting from within makes the leadership disjointed, and top management has to constantly readjust and adapt to a new man or woman at the helm.

Of course, there is no better way to ensure continuity and consistency of leadership than by appointing someone who is homegrown and whom DBS can be sure of having his/her heart in Singapore.

Read DBS' press release here.

Air China may block SIA’s China Eastern purchase

The following describes what may be a competitive counter-move by Cathay Pacific & Air China to thwart SIA's ambitions to expand in the PRC. This is a particularly interesting story because it highlights an explicit move by an international competitor to engage one of Singapore's major GLCs in head-on competition over one of the major airline assets in China, and more importantly for market share in the world's fastest growing airline market.

If the rumours are true that Cathay & Air China are trying to block SIA's acquisition, then it will be interesting to see how Singapore's flagship airline reacts. And it will also be instructive to note that while SIA has a free, dominant reign at home, it receives absolutely no red carpet treatment once it ventures beyond the political influence of the PAP.

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Air China may block SIA’s China Eastern purchase

The South China Morning Post reported on Saturday that Air China (753 HK, HK$11.84, NR) has accumulated an 11% stake in China Eastern’s H-shares (670 HK, HK$9.72, NR), from a mere 5% five months ago. Meanwhile, shares of Cathay Pacific (293 HK, NR) rose 10.7% on Friday to a record HK$22.70 before trading was suspended pending an announcement of a price-sensitive proposed transaction. Shares of Air China, China Eastern and China Southern (1055 HK, HK$13.90, NR) also rose.

While there is no official explanation from Air China on the nature of its share purchases in China Eastern, there is growing market talk that Air China and Cathay Pacific, both linked by a 17.5% cross-shareholding in each other, are uniting to block the SIA-Temasek joint bid for a 24% stake in China Eastern. This latest twist came as a surprise. If SIA is thwarted in its China ambitions, it may release cash to shareholders through special dividends, which will be positive for the share price in the near term.

The Air China-Cathay Pacific alliance is probably trying to fend off a potentially strong competitor from emerging in its own backyard. The deal, which will see SIA buy a 15.7% stake for HK$3.80 per H-share and Temasek buy an 8.3% stake, will require the approval of two-thirds of existing minority shareholders.

...
Impact on long-term growth. If SIA is thwarted, it may be prevented from developing its base in one of the world’s fastest-growing aviation markets, and this could negative implications for its long-term growth. SIA could also be more vulnerable to competition from Middle Eastern carriers on the lucrative kangaroo route as more capacity is deployed. However, SIA may still consider purchasing stakes in smaller privatelyowned airlines in China, and build the business slowly. We believe this is not its preferred strategy.

Read the rest of the CIMB research note here

Monday, September 17, 2007

Mid-September Review

Blackstone Group (BX), Too Good to be True? – Part II

A few days ago I wrote a research note on the Blackstone Group, wondering if it might be an investment opportunity too good to be true. At that time, it seemed like it was trading at a mere 1.6x P/E, and for a company like Blackstone, that would be a steal.

I certainly hope nobody bought the stock based on my calculation of 1.6x P/E, since it turns out that Blackstone is not trading at 1.6x P/E, but instead is trading at something very different. This goes to show you can't just follow other people's opinions, you need to do your own research. Check, check and double check. I can be and am wrong from time to time.

So, why the confusion?

Confusing Pattern of Disclosure

Below the reported income statement of Blackstone’s latest 10-Q, there is an indication of a weighted-average common units of 256m. This was the number used in the calculation of the firm’s P/E to give 1.6

This number, however, is rather misleading.

In order to get to the real number of units that you need to divide the earnings by, you need to look deep into the notes. The following extract was found on page 23 of the same 10-Q. Click for full image.

As we can see, there are another 827m units which will effectively vest themselves over time and which will have an equal claim on Blackstone’s earnings over the next few years. This brings the total effective number of units to 827m + 256m = 1084m which is 4.22x the number of common units.

For more on the same, the analyst will find information in the prospectus, as shown below:

This total of 1084m effective units gives BX an estimated P/E of 6.82, if the profits of the first six months of 07 are replicated in the 2^nd half of the same year. This is very different from a P/E of 1.6 based on the 256m common units.

But, even though the company does actually disclose all the number of units actually outstanding, one must ask, why isn’t it more transparent? The number that should effectively be used is the 1b in units, not the 256m. The company could jolly well just state this number up front as it is the important number to be used in calculations. It should be disclosed in the main financial statements and not be left to the footnotes where users of the financial statements have to dig and delve. I can't help but feel a little suspicious over BX's attitude towards disclosure.

Economic Net Income: Superior Measure?

Blackstone in its prospectus and 10-Q, frequently refers to an accounting measure which they call Economic Net Income. ENI represents Net Income excluding the impact of income taxes, non-cash charges related to the amortization of intangibles and the non-cash charges related to vesting of equity-based compensation.

A recent Merrill Lynch research report on BX from Wall Street based analyst Guy Moszkowski (who is supposed to be part of the All-America analyst team) claims, "GAAP earnings will be of very limited usefulness in evaluating BX performance given the massive non-cash Goodwill and compensation amortization costs GAAP will be saddled with for many years. The relevant question is, which of the adjusted figures is the "right" one for valuation of the company? In our view, ENI is best, since it captures the best-available view of the true value of the portfolio and the earnings it will yield over time"

The analyst also uses another measure which he calls distributable cash earnings, and claims the market can 'default' to cash: "Economic Net Income vs. Distributable Cash Earnings: conceptually, this adjusts ENI for non-cash earnings; ENI is conceptually, in our opinion, a better foundation for valuing the company than cash distributions, but for the time being we think the market will default to cash"

I personally have problems with these statements:
a. using a conceptually sound valuation model like the Residual Income model or the Abnormal Earnings Growth model will deal with the amortisation and compensation costs in the valuation
b. the cash based valuation and the accrual based valuation should theoretically converge in the long run, so i don't see how a market can 'default to cash'

In my opinion, ENI is not necessarily a superior measure of value. It is definitely a useful measure of performance, but not a suitable substitute for valuing the company. The prospectus does not go so far to claim that ENI is a superior measure of value for the company. Instead, it makes a sensible disclaimer that “ENI should not be considered in isolation or as an alternative to income before taxes in accordance with GAAP.”

Whither the Credit Crunch?

Disregarding the confusion over the disclosure and the accounting issues surrounding the company, Blackstone still remains a strong business. It has made impressive returns and has an established track record, earning upwards of 30% IRR on its private equity deals before fees. Interestingly, a credit crunch would be a good thing for Blackstone. The IPO will give Blackstone billions of its own capital to finance its deals -- and it could even use its stock. This would certainly give the firm a big competitive advantage over other private equity firms which have chased and closed deals on poorer terms.

However, investors should note that the CEO of Blackstone, Steven Schwarzmann, cashed out on $800m during the IPO. As with any company, the price might be too high; initial investors in Blackstone’s IPO have discovered this to their detriment.

Blackstone will make a sensible investment, but only at a reasonable price. The current price of around $24 does not look too bad, but then again I think it could be cheaper. I’ll keep tabs on this company and write more when I can clarify the meaning of Economic Net Income and other accounting matters later.

Temasek Watch: The Struggle for ABN Continues

Barclays' bid for ABN has become a centre of focus every since Temasek took a stake in the British behemoth. Here's the latest news on the bidding war between Barclays and the RBS consortium.

"The ABN Amro board told shareholders Sunday that although it is formally recommending neither a bid from Barclays nor a bid from a consortium led by Royal Bank of Scotland, it acknowledges the financial superiority of the latter offer. ABN CEO Rijkman Groenink told a Dutch news show he expects the consortium bid to win the day. The board said it views Barclays' all-share offer as more congruent with ABN's strategy but cannot recommend it over the consortium's €70.2 billion ($97.4 billion) bid, which is 19% richer at current prices and contains a cash component." read more @ SeekingAlpha.

Other News: Temasek pares down its stake in China COSCO.
http://www.bloomberg.com/apps/news?pid=20601209&sid=a.NpZ9rKuG6U&refer=transportation