Sweeteners for Bright World takeover

A few days ago, CHAC and BW jointly announced the terms of the amended agreement in the takeover offer.

Things that have been changed:

1) Valuation and purchase price of BW.

The revised transaction results in a minimum valuation of Bright World at approximately USD255 million (assuming CHAC acquires all issued Bright World shares, the initial shares of CHAC issued to World Share are valued at USD9.29 per share, which is the estimated redemption value of the CHAC shares).

2) Triggers for the issuance of the additional shares

World Share's eligibility to receive additional CHAC shares has been modified by changing the triggers for the issuance of the additional shares from triggers based on the financial performance of the new company to those based on the market-based stock price performance of the new CHAC. World Share will now only receive additional shares if the stock price of CHAC reach USD12.50 per share.

3) Post acquisition cash dividend of USD0.50 per share for CHAC shareholders.

After the closing of the transaction, it is intended that CHAC shall declare and pay a cash dividend of USD0.50 per share to its shareholders of record and reduce the strike price for CHAC's currently outstanding warrants by USD0.50. World Share has waived its right to receive the cash dividend with respect to any CHAC shares it may hold.

Comments:

Personally, i view the admendments as a positive development in this takeover offer. It shows the determination of the buyers to push through this acquisition under such gloomy and uncertain economic outlook. Basically, with these changes, the buyers are clearly aligning the interest of the CHAC shareholders together with their own. I believe it is done to ensure that this deal can be approved during the voting which is to be carried out early next year. The earlier agreement announced on July 21, 2008 valued the the transaction at a minimum of about USD263 million based on the estimated redemption value of the CHAC shares of USD9.79 per share. Now the estimated redemption value of the CHAC shares is USD9.29 per share. The difference of USD0.50 will be paid as cash dividend to CHAC shareholders.

Crude oil price is all rubbish!

Around 4 months ago, crude oil price was at about USD140 per barrel. Fast forward to the last weekend, after a slew of bad news and poor earnings outlook hit the market, crude oil is only trading at about USD62 per barrel. After witnessing a drop of 55% in crude oil price, I have a few questions in my mind.

1) Did the oil consumption in the world reduce by half over the previous 4 months?
2) Did the world’s population replace half its energy needs by using alternative sources over the last 4 months?
3) Did the oil producing countries extract 2 times more output in the past 4 months?
4) Did someone or some country release its huge oil inventory in the market over the past 4 months?

The answer to the above 4 questions is a resounding ‘NO’. However, I will be glad if some kind soul can show me otherwise. The only logical and possible answer as to why oil prices has dropped dramatically is that most investors speculating in oil have exited the market. They include individuals, hedge funds and institutions. As such, this ties back to the title of my posting that the oil price in the market we have seen over the last few years is all rubbish. For the past few years, oil price is on a steady ascend because it is heavily influenced by speculators. Sadly during this period, there are even some highly respected persons who came out to defend the high oil price, saying that the prices are backed by real demand. When the commodities bubble burst, all of them tried to rush for the one and only exit, which results in the oil price collapsing in a relatively short period of time.

Everything is slippery and red

Besides the most obvious clue that the stock prices are dropping like stones, lets count the number of ways to spot the blood in stock markets:

1) Brokers and investors committing suicide after losing a fortune.
2) Friends seeking advice if they should pull out their money from unit trust.
3) You start to see the word “recession” appear regularly in the newspapers.
4) Hot money fleeing various countries and sectors that were the darlings of investors not so long ago.
5) Relatives and friends telling you to keep your cash and do nothing.
6) Shopkeepers no longer look at stock prices during their free time.
7) More and more property advertisement in the newspaper.
8) A decrease of workload for staff in banks doing the settlement of trades for clients.
9) A decrease in the number of people patronizing your favorite restaurant.
10) Banks starting to retrench staff across the board, especially the equities department.
11) The amount of assets managed by wealth mangers is stagnant or decreasing.
12) More and more news of companies closing down due to mounting losses and insufficient cash.

This list is by no means exhaustive, please feel free to add on.
Cheers! Have a nice weekend.

Saving mini investors

Currently the Hong Kong government is trying very hard to intervene and arrange for a compensation package to all minibond investors. There has been immense pressure by the Singapore minibond investors on the local authorities to step in and arrange a similar bailout. With all due respect, I personally do not think that it is a good idea for the authorities to step in.

MAS, which is the government authority in this case, has to make decisions and take actions that are consistent. If MAS has decided to intervene for the minibond investors, then why stop there? They should also round up all the retail investors who have placed their money in the internet technology unit trusts 8 years ago and fight to compensate their losses. How about those who invested in emerging market funds at the beginning of this year and are now looking at a loss of 30 – 40%? The list is never ending. Does anyone believe that there was no occurrence of “misinterpretation” by the banks 8 years ago? It takes 2 hands to clap and the whole fiasco happened due to the combination of greed on the investors’ part and “misinterpretation” on the banks part.

However, I do support the MAS stance that they will punish the banks if they are found to be guilty of understating the risks of the derivative products to the customers. It is important for MAS to send the right message that if any of the local banks compensate the investors for the losses in the minibonds, it should see it as a gesture of goodwill from the bank and not due to the pressure from MAS.

Lastly, I would like to bring up 2 golden rules for those thinking of purchasing investment products from those financial consultants.

Rule 1:
Ask for all the risks and the worst-case scenario for the product that you are interested in. Walk away if you do not understand what the financial consultant is saying.

Rule 2:
Never forget rule 1.

Target Vs Reality

We shall travel back in time and take a look at how atrocious are some of the target prices set by the analysts from the investment banks. I have taken China Shenhua (coal mining) listed in Hong Kong as an example.

Just slightly 6 months ago in March, UBS gave a target price of HK$70, saying the firm will benefit from strong coal demand, planned asset injections from its parent firm, mine reserve expansion and possible overseas acquisitions.

HK$70!!!!!!!!!
This is something that will probably make or break the analyst's career considering Shenhua had a short listing history (IPO in 2005). Setting such a target price does not reflect well on the thought process of the analyst as well as his/her manager who signed off the report. Retail investors will do well if they can think of all the various scenarios that can go wrong before buying shares of a certain company. Try to be aware of the downside risks and the upside will take care of itself if the investment has a huge margin of safety.

In the same month, Citigroup assigned a "sell" rating with a target price of HK$33. "We fail to see value in Shenhua and think potential for further de-rating remains. ... Creeping costs, higher spending and stationary power tariffs continue to threaten margins".

For a matter of fact, Shenhua is trading at a price of HK$17.50 today.