Links for the last November weekend in 2013

Some links for interested parties:

• Bronte Capital - Google+ will get your children murdered: About the automatic linking of different Google functions. I try to avoid this by: a) Not using too many services b) If yes using, not being logged in with an account c) Not accepting 3rd party cookies d) clear temporary browser files regularly (at least twice a week!)

• Howard Marks (Oaktree Capital): Latest Memo: Rising risk level due to external pressure, however risk level still below pre-financial crises levels. Low financial product "innovations" via derivatives etc. "Orange risk zone".
• Aswath Damodaran on valuations and uncertainty arguing that investors should embrace uncertainty in market and stocks instead of trying for the x-thousand time to value blue chip stocks. I think he is right to some extend but a) Valuation with higher uncertainty requires higher knowledge (micro/macro) and skill b) Small caps are sometimes receive low attention are easy to value and have attractive features, i.e. uncertainty is not always necessary for a seminal valuation exercise.

Who profits from the European integration: My point of view

In my opinion the advantages of the increased European integration experienced in the last couple of years are distributed in a unfair way.
Big (core-) European corporates enter new markets with weak local competition due to lower efficiency. They destroy the local competition, causing increased unemployment given that its holds true that lower efficiency equals more workforce employed.
People there can now maybe shop at lower prices, too bad if they don't have the money because they have no job anymore.
Corporates further profit by reduced expenses (cheaper labor, less regulation and taxes) even if they do not shift f.e. production sides (reduce tax by profit shifting via licenses to European tax havens, race to the bottom in corporate taxes, etc.).
I made a little drawing on a p/l of one of those corporates:

So now that its seems clear (at least in my view) who wins, who is the one that looses?
The average worker that has nothing more than work to sell, no land, no capital, no nothing.
Mainly unskilled workers, yet also highly skilled white collar workers suffer. The payment they can demand from companies as compensation for their work will reduced due to increased supply.

Asian Bamboo [AB5]: Fair Value Valuation of biological assets

Asian Bamboo AG (AB) is a holding company listed in Germany. Its assets are located in China, operations consist of bamboo farms. The farms produce:

• Bamboo Trees
• Spring shoots (sold fresh or canned)
• Winter shoots 

As AB is a company listed on a European Stock market it has to report for its group accounts according to IFRS. For biological assets, being the main purpose of the group, IAS 41 is applicable.
IAS 41 is a full fair value standard, it requires assets being valued at Fair Value less cost to sell (FVLTCS).

I compiled all the information given about the valuation process in their annual reports from 2007-2012 in the following table:

As it can be seen (yellow) an important changed happened in 2010. AB5 restated a lot of figures, most importantly the way they account for biol. assets:

• Now they included more comprehensive costs (land lease, recultivation)
• For the first time the fair value of biol. assets decreases (by around 30 Mil. Due to IAS 8 this doesn't show up in the p/l, only mentioned in notes)
• At the same time they increase the count of trees/ha by around 4 times. Potentially decreasing the loss connected with increased costs.
• Furthermore in the corresponding section of the notes there is no mention of their "independent" valuer anymore. Also later the display of the auditor is only a side notice outside the core report.

As we saw the effect of the restatement was balanced by an increase in (assumed) output of trees per ha. However if we take a look on the historical output on the following table 2 this assumption seems questionable:

Bamboo trees per ha sold in 2012 was 115 compared to 2.369 according to the FVLCTS calculation.
That is about 25 times actual//planned.
Apart from bamboo trees however the estimations of 2012 for spring/winter shoots seem more realistic.
This leads to the following conclusion:

1. Inputs (allmost all lvl 3 FVs, btw.) used seem overly (grotesque?) optimistic.
2. Inputs are realistic, however demand for trees is so low that the produced amount of trees cannot be sold.
3. inputs are realistic, demand is out there however AB has troubles with harvesting all the mature bamboo trees.
4. Mix of 1., 2. and/or 3.

The Management Report 2012 (p. 46) states negative impact on housing and construction. Also p. 63 stats AB think they can sell all shoots they harvest, that also means they can not do the with the trees.
However it seems mainly the reduced sells to Zhongzhu, a bamboo fiber manufacturer, a responsible for the shortfall. AB sees demand for fiber as key driver for tree sells (p. 63.
The business relations are like this:

•  Zhongzhu as OEM manufacturer buys bamboo trees from AB
• AB then purchases processed bamboo fibers back from  Zhongzhu . 
•  Zhongzhu is "strategic partner" since 2009 (loan from AB, non-interest bearing: 2,1 Mil. EUR)
•  Zhongzhu only need younger, low quality trees (=lower price?) 
•  Zhongzhu seems extremly sensitive to changes in business  environment ("minimal production volumes" in 2012)  

A similar investment (40% stake) in Xinlifeng (plywood) already failed, stake sold in 2013 at "about book value".
To me the theme seems recurring. Invest in "strategic partner" via equity/non interest bearing debt injection. First 1/2 years high tree sale volume, then decrease and exit.

It appears there is barely demand for bamboo tree based products. Initiatives to increase demand from AB are short-lived and initialized by capital injections.
Massive decrease of biological assets due to revaluation can be expected.
On the positive side estimations and sales for shoots seem fair (in 2012). However as of Q3.13 sales of shoots also fell drastically (more than - 60%).

Might make a follow-up on this with my own DCF valuation of biological assets, so i can compare it when the annual report 2013 gets released (no date of release yet).

Powerland AG [1PL]: Fraud or opportunity?

Powerland AG is a holding company based in Germany for leather goods manufacturing companies based in China.

After a long period of postponing of the Annual Report 2012, they issued a statement on the 02.07.2013 saying they auditor ( BDO AG WpG) denied the testate and issued a negative auditors opinion.

Today Monday 15.07.2013  at 18:01 after market-close they issued yet another statement explaining the reasons given by the auditor for not accepting the report.

One of the reasons is that the auditors were not allowed by PL to confirm the bank account statements with the headquarters of the banks involved. The auditors could only visit the local branches of the bank.

I know from a partner of EY who was posted for 3 years in China told me it is indeed normal to go into the banks and talk directly with bank representatives.
In Germany standard procedure is to simply accept an official statement coming from the bank. Not so in China, where risk of forgery is immanent. However I do not know whether it is also standard procedure to talk to the HQs of the banks. From my point of view it does make sense, esp. if PL is a important client or if there is personal interest.
PL justifies the denial with the statement that such a process is very unusual for Chinese audit procedures.Furthermore no business association exists to HQ, therefore they could not asks HQs to provide such documents.

As a last point they announce a share purchase of up to 1,5 Mio shares beginning from the 25.07.2013.
Shares outstanding is 15 Mio, accordingly 10% of all shares could be bought back.
The buyback price shall not exceed 8 EUR.

Chances:
+8 EUR provides effectively a floor to share price (given the liquidity of course)
+The buyback was approved during AGM 2012

Risks:
-Chinese bank accounts are indeed bogus resulting in insufficient capital for buyback
-German holding only had 0,48 Mio cash as of 31.12.2011 (Bundesanzeiger.de, latest HGB statement)
-No directors dealings during the period of extremely depressed share prices


/Edit: There also seems to be heavy insider trading before the announcement +26,58% on XETRA until 17:36:09. Date of announcement: 18:01.
Also higher trading volume, however not very strong.
Still: Its always leaking somewhere. EMH..

/Edit2: New CFO. Seems competent, reputation to loose, might help share price further.

/Update 16.10.2012: No news so far. Powerland release unaudited statements for Q2.13 and furthermore appointed EY / Ernst & Young as auditor. I'm surprised they took on such a high risk mandate, especially with their Sino Forest experience...
Out the buyback there is no information available at all, often companies have information on their webpage, not in this case.

Analyst Recommendation and Stock Performance: Performance June 2013 (Pt. 10)

June 2013 shattered all hopes of outrunning the markets with either of the both baskets, see for yourself:
Monthly performance:

In a slightly negative market the baskets lost far more. Esp. the Worst-Basket barley had only 2 stocks with a positive monthly performance, while all others declined.

On a total basis both baskets will have a hard time catching up:

Asian Bamboo (5AB): Most recent Directors Dealings

This and last week Lin Zuojon CEO of Asian Bamboo bought via his  Green Resources Enterprise Holding Ltd. some shares and revived the bombed out chart.
I just added up his purchases until now, as you can see its not all that much and my guess is that it wont have a lasting effect on the stock price:

Day of purchase Day of reporting Nr. of shares Price per share Total volume
21.06.2013          25.06.2013           1.000           2,75              2.750
20.06.2013          25.06.2013           5.000           2,41              12.055
19.06.2013          20.06.2013           2.000           2,37               4.740
18.06.2013          20.06.2013           2.000           2,05               4.092
17.06.2013          18.06.2013           10.000         2,05               20.497
14.06.2013          18.06.2013           37.876         2,03               76.767
13.06.2013          18.06.2013           12.124         1,95               23.631


Total shares bought: 70.000
Total volume: 144.531

As of 25.06.2013 17:00 GMT+1

Update 01.7.2013, 09:30:
Since the first post  Lin Zuojon bought more shares on two days:

Day of purchase Day of reporting Nr. of shares Price per share Total volume
25.06.2013          28.06.2013           3.000           2,40              7.200
24.06.2013          26.06.2013           5.000           2,55              12.731

That makes a total of 78.000 new shares bought, a total of 5.836.000 shares (incl. treasury shares) now belonging to Mr.  Zuojon. That is a 37,83% of total shares, an increase by 0,51% of all shares.
If one doesnt take the treasury shares into account, shares outstanding would be lower.

Now the buying spree seems to have come to a halt, stock price is at 2,23. Interesstingly there is no significant increase in share price since the start of the CEOs purchases, what is just another prove how low confidence is in German-Chinese stocks.
For most other stocks purchases of the CEO of 0,51% of total shares would be a kick-starter.

US: Mean reversion on Macro level?

The Bank of America released a survey indicating that institutional US investors reallocate their money from government bonds to equities.
This is the first step on the reversion towards a more "normal" interest level. Investors expect interest rates to rise and abandon (fixed rate) bonds so they don't get stuck with the low interest coupons. They rush into equities as alternative assets.
When bond interest levels have gone up according to investors expectation the move will reverse. Now bonds will get more popular again until a balance is established.

Of course FED's actions will have a strong influence:
a) FED does nothing or FED slowly decreases asset purchases: Scenario as above
b) FED decides to stop purchases faster then assumed: More rapid and stronger rush to equity.
c) FED decides to increase asset purchases: Increased popularity of bonds, since interest levels might decline even further in the future.

In my opinion alternative a) seems to be the most likely outcome, since this also includes a vague statement without a decision about future actions.

For Europe the situation is entirely different. The ECB seems willing to escalate the situation in order to force banks into lending more money. Yet the EUR is getting stronger, investors seem to doubt the willingness or ability of ECB to further cut interest rates.

Edit1: Aswath Damodaran posted a very interesting research opionion on the power of the FED and the perception of it by investors. Highly recommended as always!

Edit2: Harald Preißler Chief-Economist of Bantleon (investment bank)  seems to have the same opinion: Handelsblatt (German only)

Mid-tier bonds ("Mittelstandsanleihen") in Germany

In the prevailing low interest environment in German so called Mittelstandsanleihen are being increasingly offered. Those are bonds my small/mid-tier companies, often with a well recognized name and good reputation for a narrow industry niche.
The bond volume is usually max. 60 million EUR with a coupon of 6%-8% p.a. In fact all the bonds I could have purchased since September 2012 were Mittelstandsanleihen.
I strongly discourage anyone to invest into those bonds, chances are high that at least some of the money will go for good.
The companies usually lack equity capitalization and due to the new  „Gesetz zur weiteren Erleichterung der Sanierung von Unternehmen“ (ESUG) a debt to equity swap and a higher haircut for bondholders is easier for companies to enforce. Management now has 3 months time for putting a plan together, they can also group stakeholders into different pools. The plan is accepted if the majority of pools accept it. Accordingly management has a strong incentive to balance the groups in a way that they split the votes of people that are likely to oppose the plan (such as bondholders).
For German readers i recommend this very interesting article on WiWo.

However in my opinion the prime of Mittelstandsanleihen has passed, they are under a lot of scrutiny by the media, especially by financial press. A quick internet search will find loads of bad publicity.

I receive a daily newsletter Finance Today by German paper Handelsblatt. For one whole week the newsletter featured a flashy ad for such a Mittelstandsanleihe by Gamigo.
That made me wondering if the will also feature the negative articles about the SME bonds they published online/in print in their newsletter.
Well they did (good!):

Blog recommendation: The Grumpy Old Accountants

On The Grumpy Old Accountants readers can regularly read about the quality of auditing an accounting, an important if not the most important issue for all investors.
The latest post  that i found particularly interesting is about Sam E. Antar, cousin of Crazy Eddie, and the effectiveness of "ethic lessons" for auditors and students.
He argues that the capital markets attracts the 10% "of the public is absolutely unethical and incapable of behavioral change". He is skeptical that auditors with the regular middle-class background will be able to detect the true intentions of such highly educated and ruthless scammers as Sam Antar.
I agree with his conclusions and find this a really interesting argument besides the usual stuff, such as conflict of interest, etc.

I also definitely recommend you to read the articles about Groupon and their accounting.
In my opinion investors can learn a lot by trying to stay up to date with accounting regulations and their consequences. I might be biased since I study a lot of accounting myself however sounds knowledge is necessary in order to evaluate the most important documents (financial statements). This holds especially true in times of ever increasing importance of goodwill, deferred taxes and fair value accounting combined with the management approach favored by standard setters.

Analyst Recommendation and Stock Performance: Performance Mai 2013 (Pt. 09)

Mai 2013 was interestingly a strong month for both the best-basket (+5,2%) and the DAX (+5,5%) index.
I say interestingly because the best-basket mainly constitutes of US companies.
Indeed when running a correlation of the mtm changes correlation seems to be the least btw. best-basket and DJ.
This is the correlation matrix:

Korrelation	Best 12	Worst 12
DAX	0,25	0,41
DJ	0,38	0,65

Drivers in the best basket was Valeo SA, Gran Tierra and Check Point Software.

This is the monthly track record: In absolute terms since incarnation the DAX index clearly outperformed all other indexes. Best-Basket recovered a bit but is still way off all other indexes. The development since incarnation:

Analyst Recommendation and Stock Performance: Performance April 2013 (Pt. 08)

While the DAX and the DJ developed similarly throughout April (+1,5/+1,8%) the Best- and Worst-Baskets deviated stronger drifting away from each other again.

The Best-Basket took a big hit, mtm performance was -5,9%, mainly attributable to Lynas and Goldcorp. Additionally only 3 out of the 12 stocks showed a positive performance at all.
On the other hand the Worst-Basket increased by a 1,4%, mainly due to a 67% (!) increase at First Solar.

Again i has to be noted that standard deviation of the Worst-Portfolio was considerable higher than the Best-Basket (24% vs. 6,5%).

Lets come to the charts, starting with mtm performances:
Although the Best-Basket is mainly composed by US-stocks, the favorable overall US-market doesn't seem to have much an influence on the performance of the basket. This might indicate a low market influence on individual stocks in the US, which could be attributed to low information asymmetries.

The total performance shows impressively the fall of the Best-Basket after 3 months of catching up:

The pink bar is the DJ, as usual.

Deutsche Wirtschafts Nachrichten (DWN) or: To stupid to translate a graphic

Today a facebook "friend" of mine posted the following article:
http://deutsche-wirtschafts-nachrichten.de/2013/05/13/die-stunde-der-krisen-profiteure-deutsche-bank-erwartet-bank-sterben-in-europa/
The content is about the consolidation process in the banking industry, but thats not the point.
They introduced a graphic from an source called "EBF" (i.e. European Banking Federation?).
Problem is this graphic is in English.

How they translate the graphic (left of bars to grey shaded area ):
Deposits - Kredite (i.e. loans)
Loans - Eigenkapital (i.e. equity)

The rest is correct. Out of the 18 comments this piece has so far, non is going beyond the usual propagandistic comments from braindeads.
To be clear: Those translation errors do not contradict the "analysis".
Yet it is telling a story about the quality of those "news" coming from such websites and alike.

This "news agency" is well known for alarmistic reports usually about the Euro or the banking system, etc. It tries to camouflage its tendentious content with a professional interface and name. Deutsche Wirtschafts Nachrichten translates into something like German Business News.
Now the media company behind this is Blogform Social Media. I don't think the authors/editors for this page are motived by idealogical reason. They probably try to serve the increasingly popular niche of gold/silver fan boys, banking system critics, conspiracy theorists and the like.

A big fuss about a little mistake- probably yes. However I'm worried about the increasing number of those "news" websites. People do not seem able to fully understand that such sources are not very reliable nor neutral (not even trying to be that is).
Our (German) business papers are already weak from a quality point in my opinion, so there is no need to further drag it down. There are blogs that cover more interesting/detailed research than newspapers.
But in the end it is: You get what you payed for I guess.

Deutsche Bank: Capital Raise - Best Practise?

Today Deutsche Bank surprisingly announced a capital raise of 2.8 billion EUR together with better than expected Q1 results.
The media as well as investors (+ 6% today) reacted very positive towards those plans and the earnings.

I believe that it was very well done by Fitschen/Jain:
What did Deutsche Bank do: Outstanding shares are 929 mn, new shares of 90 mn will be issued to institutional investors. They stay closely under 10% increase in share count. This enables them to not offer subscription rights to all existing shareholders.

• Existing shareholders suffer a dilution of 10% without rights issue.

They executed the sell of the new stocks on this Tuesday. Stock is now at almost 35 EUR/share after positive results.  However the selling price of the new stocks was 32.90 EUR, that is a discount of 2,1 EUR or 6%.

• New shares were sold at a discount exclusively to institutional investors.

To conclude: The share issuance was well and swift done to the disadvantage of small/"retail" shareholders, yet they do not seem to realize.

Only a  low than 10% capital increase could have been announced and executed in such a fast manner - it took only 1 day.
Why this haste - maybe because the Q1 results are not so good after all. Provisions, anyone?

Update: According to this article Deutsche Bank received 2.96 bn new capital from 90 mn shares.
So that makes 32.88 EUR/share, not the 31.11 EUR they originally planned with.

Analyst Recommendation and Stock Performance: Performance Feb+Mar (Pt. 07)

After a long holiday, i finally come up with the seventh part of my little "field study" about the meaningfulness of (sell-side!) analysts recommendations.

The situation of the two portfolios changed quite a bit.
In February and March the Best-Portfolio together with DJ-Index clearly outrun the Worst-Basket. In general there seems to be a strong correlation between the DJ-Index and the Best-Basket. Indeed  US-American stocks are prevailing in the best basket, the worst-basket seems is more European influenced.

Despite the improved performance of the Best-basket during the latest two month, the Worst-Basket is still stronger.
The Worst-Basket really took a big hit in February.
It seems important to notice, that the standard deviation of the Worst-Basket is much higher, for me a evidence of the importance of diversification among the worst-rated securities.

Hess AG: From IPO to insolvency in less than half a year

Hess AG is a German based enterprise with 360 employees producing lights and lanterns.
They IPOed on the 25th of October and quite high priced, starting at 15 EUR/share.

The graphic shows the development.

On January the 21 Hess AG announced the sacking of key personal ( among them the CFO) and suspected manipulations.

On valueandopportunity the consolidation of cash flows doesn t work out, it seems that revenues have been booked against receivables.
By what it seems, the fraud might had been discovered quite easy.
Interesting for me was that numerical information that is underlying the prospectus is based on is not double checked.
Yesterday on the 13th of February the filed for insolvency for the mother company as well as one subsidiary.
The company states that its is deeply indebted and lacking perspectives for the future.

This is an incredible story i would have expected in China (no offense) or other less developed financial markets; yet this thinking now seems like arrogance to me.
No thinking about it, everybody profited well from this scheme, until it blew. The banks receiving underwriting fees, the key employees bonuses. The auditors (here DHMP according to this news) might have to justify themselves, but against such foul-play they are helpless (of course...). Regulatory bodies are knee deep in work anyway.

Now the company is insolvent and possible claims from law suits can most likely not be covered.

Thoughts on luxury tax

Recently a rich German (Maschmeyer) promoted the idea of a tax on luxury goods, which ran through the media.
Distribution through such a tax would "hit the right ones".

I disagree with this view.
While showing off with luxury to promote personal wealth and status receives widespread negative sentiment, it also has its advantages.
Especially in Germany many of those goods are manufactured, some of the companies are even listed, such as HanseYachts AG.
By "wasting" money on such goods, employment is created. Money is circling in the economy, similar to a distribution by above tax, yet without repression.
The actual problem is people not spending their money on goods/services, but holding it in highly liquid investments. Due to their high elasticity taxation becomes difficult.

Thereby in my view people should under no circumstances be discouraged to spend their excessive wealth as long as it stimulates the real economy.

While it is true that such luxury goods (esp. real estates) would be more difficult to move abroad, thereby being easier to tax, the registration and collection of such a tax would be a horrific work. If the outcome would be really a fiscal surplus given the additional work and bureaucracy is doubtful.
Just the definition of what is luxury is Sisyphus work and would be accompanied by thousands of law suits i can imaging.

Analyst Recommendation and Stock Performance: Performance Jan (Pt. 06)

The January episode, again very interesting. Yet the result is strikingly often similar:

We begin with the mtm graphic:

The worst basket outperformed all other indexes again with +8,5%, mainly driven by centrotherm (+64%), the most volatile stock in the indexes.

The total performance:

The worst basket caught up again with the DAX30 (only 0,7%). The DJ also had a strong month, second best performance (+4,5%). The best basket increase by 3,6%.

I would like to point out that this little research does have a big flaw:

The dividends payed out are not registered in the performance! Unlike in the two performance indexes DAX and DJIA. 

Of course I could adjust for dividend payed out per stock, however i do not have so much time to watch over all the stocks regarding a payout.

This effect might be stronger on the best basket, since stocks in worst basket might have major problems regarding liquidity and do not have the reserves for dividend payout.

Analyst Recommendation and Stock Performance: Performance Dec (Pt. 05)

These are the update results from my little field research:

While the "worst" basket increased by 3% in December, the "best" basket decreased by -2,7%.
The  "worst" basket was driven by Akzo Nobel, Dendreon Corp and First Solar (now up almost 100% since begin of records).
The "best" basket showed almost no positive returns this month, many stocks loose -4% and more.

The overall performance shows quite a clear image so far:

DAX clearly strongest index (+15,2%), all indexes with positive upward movement except best basket with a very weak general performance (0,7%).