Sniffing Out Good Investment Opportunities

Foreword from ShareInvestor

This article “Sniffing Out Good Investment Opportunities” by Goh Eng Yeow was first published in The Straits Times on 17 Apr 2017 and is reproduced in this blog in its entirety.

The best time to do so is at an AGM, which gives an investor access to a firm’s board

For investors, one success story to aspire to would surely be that of the Japanese businessman Masayoshi Son whose company, SoftBank, owns a big chunk of the China e-commerce giant Alibaba.

In 1999, Mr Son was visited in Tokyo by an unassuming duo, Jack Ma and Joseph Tsai, who were seeking funding for their fledging website in Hangzhou, China.

Mr Son purportedly tapped his calculator as they haggled over the price, and agreed to pay US$20 million for 30 per cent of the young firm. The rest, as they say, is history.

Alibaba is now worth US$280 billion (S$392 billion). That would value SoftBank’s remaining 28 per cent stake at a staggering US$78.4 billion, after it sold some shares last year. That gives the Japanese investment firm an out-of-this world return, considering its US$20 million initial outlay.

Mr Son reportedly claimed that he based the investment decision on his “sense of smell”. Anyone would long to have just as keen a nose to sniff out such wonderful investment opportunities.

Far more important is the unmentioned fact that Mr Ma and his team could have easily squeezed out those who had financed the e-commerce giant during its formative years. Instead, they chose to play by the rules as Alibaba grew from strength to strength, and were handsomely rewarded as its share price soared when it went public over two years ago.

This was notwithstanding the big controversy that erupted in 2011 when Mr Ma transferred Alibaba’s online payment unit, Alipay, to a company under the direct control of himself and some associates, purportedly to satisfy new Chinese regulations that restricted foreign ownership of online financing. That action provoked huge protests from big shareholders such as Yahoo which had a 40 per cent stake in Alibaba at that time.

Too often, however, the decency which Mr Ma displays towards Alibaba’s other shareholders is a virtue that we find lacking among some of the China-firm bosses, whose companies are listed here, when the going gets tough.

Take China Fibretech, whose boss Wu Xinhua allegedly got the fabric treatment firm to pay 466 million yuan (S$95 million) to three customers which had filed suspicious-looking compensation claims against it. What takes the cake is that the claims had arisen from sales totalling just four million yuan and the cash transfers were made without board approval and in blatant disregard of the guidance issued to company boards by the Singapore Exchange (SGX).

That guidance had required company boards to appoint reputable third-party valuers to review a customer claim if that claim turned out to be far bigger than the value of the original item that is the subject of the claim.

This particular incident is an ugly reminder of the vulnerabilities faced by an investor sinking his hard-earned cash into a publicly-listed firm – especially if its operations are overseas – where he has no direct control whatsoever over the company’s assets which he is investing in.

True, there is a plethora of rules in the SGX’s listing manual which a firm must comply with as well as a code of corporate governance which insists on a board with a strong element of independence to ensure objectivity in judgment over corporate affairs.

But when things turn sour, we find that while the rules protecting investors here appear to be relatively strong on paper, effective investor protections remain virtually non-existent when it comes to foreign listings, especially in jurisdictions such as China which has no extradition treaty with Singapore.

In China Fibretech’s case, the SGX filed complaints with the China authorities against Mr Wu. But the sad fact remains that even if it succeeds in getting Mr Wu prosecuted, the company’s aggrieved shareholders are unlikely to get any of their money back. China Fibretech has been suspended from trading since November 2015.

In going through such woeful cases of wrong-doings, my mind keeps returning to an observation made by the 19th-century German banker Carl Fürstenberg.

He expressed disdain for a system where shareholders were stupid enough to give money to someone without any effective control over what this person was doing with it. Worse, he noted, they were impertinent enough to ask for a dividend as a reward for their stupidity.

To me, that is too cynical a view. If only more company bosses behave like Alibaba’s Mr Ma, the market would have rewarded them with a good valuation on their company’s shares when their business prospers.

After all, where would Mr Ma be now if SoftBank’s Mr Son had not taken the dramatic step to back his fledging outfit when e-commerce was in its infancy then in China?

As for Mr Son, he was already a billionaire when Mr Ma went to see him in Tokyo in 1999. He could have easily left the task of meeting Mr Ma to his subordinates but he decided to see Mr Ma and size up the man for himself. Putting US$20 million into Mr Ma’s brainchild would have been loose change for Mr Son. What is important is that he sized up Mr Ma correctly and his faith has been rewarded manifold.

It offers an enduring lesson for us investors. Before investing in a company, you have to smell it for yourself – to use Mr Son’s words – rather than rely on the recommendations of your friends, your broker or the report from some unknown stock analyst.

And the best time to do so is now, when the AGM season is in full swing, giving what turns out to be the only opportunity for many investors to get access to a company’s board and management – and have a good sniff around.

In my experience, nothing beats talking to the management when deciding whether or not to invest in a company’s shares. Chances are that during these meetings, you can also sniff out a potential fraudster when you meet one.

I still vividly remember an interview I had with the boss of a China footwear maker, Hongguo International, which was once listed on the SGX. The discussion had been bone dry until we turned to the topic of how young Chinese women chose their shoes.

He then spent the next 30 minutes talking about shoe fashions in China, and it was clear from the way he spoke that he was very passionate about the business.

Now, if you had only studied the company’s financial numbers, you would have gathered only that it was a thriving shoe business. But talk to the boss, and you would probably have felt the same passion he had as he pursued his dream of fitting the feet of every girl in China with the shoes he makes.

Too bad, Hongguo delisted from the SGX in the aftermath of the 2008 global financial crisis and then relisted in Hong Kong as C. Banner International. In the past four months, its share price has shot up 52 per cent and the firm now has a market capitalisation of HK$6.19 billion (S$1.11 billion).

Thinking back on my reaction to the passion of that footwear boss, I wonder if Mr Son had felt the same way when Mr Ma spoke to him about his dream of linking all the retailers in China to consumers through his Internet portal. The sky can truly be the limit when these entrepreneurs turn their dreams into reality.