Sunday, June 19, 2011

How To Bankrupt A Listed Company

I was talking to a...well I would say a manager of a listed company in Malaysia. We came across a topic on how Isome manufacturing firms in this country syphon money out from them. it isn't a definitive way but I would say one of the way. It is really some good insight, and I think I have to revisit some of the accounting in The List.

Suppose a manufacturing firm were to purchase a new machine or equipment worth RM10mil. And they choose to finance it from bank. Instead of borrowing RM10mil, they borrow RM25mil instead. That extra RM15mil, well.....you know where it goes. How did the bank able to loan out RM15mil extra? 2 possible reasons. One, bankers....how would they possibly know how much that machine worth especially it is some "new" equipment. Plus the more they loan the more they earned. No big deal. Two, buyer, seller and loaner work out a "deal".

You would say this only involves some executives and directors who are suppose to look after shareholders' interest overlook such activity. I would say, it goes as high as there and even the owner (executive owner/founder). Owner? How would an owner does that to a company he owns? Well, what do you think happened during an IPO.

I remember I went to a seminar where the presenter mentioned Malaysia Semua Boleh. This is Bolehland anyway. I'll share out more if I have anything new especially on how shareholders got leaked.



Link to BolehLand

Monday, June 6, 2011

Similar But Not The Same

An anonymous reader suggested me to take a look at N2N Connect who are in a business just like Excel Force.  But first apologies when I say I couldn't find a similar business listed on Bursa and thank you to .... well ..."anonymous".

N2N Connect Bhd is the younger siblings of Excel Force. I shouldn't say siblings, they are both competitors to each other. And like Excel Force, they deliver online stock broking system, applies the same ASP model and some other mobile "value added" services to their customers which I think are redundant. Oh come one...instant messaging on GPRS? Their business economics moat is from the ASP model which I have explained in the previous post on  Excel Force. Product wise, I think N2N Connect has a small edge where it is able to provide GTD trades which some traders would love to have (not sure if it is from the broker or the system). But still I don't think that would give them competitive edge as most customers would like prefer cheaper brokerage rates and system stability than services like that.  Anyway, N2N only have worry about the latter half.



Despite similar business model and economic moat of the two, their finances are totally different. One, you see it raking up profits after profits, while the other have an erratic profits margin and at some occasion in the red. It could be one of the two reasons for this. One, is that somehow N2N Connect has a higher cost structure and inefficient. Two, they are on the Amazon-style "get big fast" strategy as striking deals with as many customers as possible is the key to growth. Whichever it is, it is hard to tell for me because its annual report provides too little information about it. (Time for shareholders to speak up!).



Speaking about efficiency, N2N Connect SGA expenses does raise a few question if you look at the table below. Part of the expansion? I don't know. It is hard to tell from the report. Another question is, both Excel Force and N2N Connect operates in the same region and countries (Malaysia, Singapore, Thailand and Vietnam) but they have more than twice the number of employees versus Excel Force (90 vs 39, courtesy of ft.com).



However, N2N did explain in the AR that sudden drops in revenue in 2008 was due lesser trading activities and yea, volume does get thinner from Q4 2008 to probably 2H of 2009 which we saw further shrinkage in revenue. This large impact could suggest that revenue from ASP model dominates their income stream the most (possibly more than 75%) unlike Excel Force which is about two thirds. The details however, can't be found in the AR.



There is another evident that shows just how aggressive N2N expansion strategy is. Their receivables turnover are significantly higher as well.



Valuation
It is hard to draw what their normal earnings are like as there aren't enough information disclosed in its AR. Whether it is due to competitive reasons or trying to hide something, I'll go with the safer bet on Excel Force. But if one were to find out that it is due to bad management or bad investment decision, it could be an exciting opportunity for some groups of value investors. The problem is, how could you derive value from it and how much does it worth?
Could Excel Force capitalize on this? Well, this is the kind of advantage of businesses with a wide moat. They'll just do fine even with bad management and could easily turn earnings around. Threat from Excel Force are minimal or non-existence, perhaps on securing new customers is where they really compete. Unless N2N really screw things up, it is unlikely that Excel Force will benefit from competitor's bad management decision. How this could turn out remains to be seen. I am happy enough to stay at the sideline on N2N Connect.