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)