Right issue - What you see is not what you get

In some restaurants, live fish or crabs are displayed. Customers can pick the ones they like. The staff will weigh the live seafood in front of you, quote you a price, before sending it to the kitchen. Everything seems reasonable and fair. But have you ever wonder what happens in the kitchen? I heard that some unscrupulous restaurants would replace your chosen one with a frozen one. Of course, the frozen one is far cheaper than the live one. In other words, you are charged at the 'live' price, but actually what you get is the 'frozen' one.

Now come back to the investment world. Recently there are quite a number of companies issuing rights to raise cash. While each of them has their own reasons and merits, what puzzles me is the way that they promote the rights. They all claim to provide the shareholders 'an opportunity to subscribe for new shares at a discount'. Now the question is, is the per share value the same before and after the right issue? The share value will be diluted with the right issue! While you get the new share at a lower price, the value of your existing shares will be eroded.

The values are no longer the same, so how can you claim that there is a discount of the right share price as benchmark to current price? Isn't this an outright misrepresentation?

It somehow reminds me of the restaurants' trick, what you see is not what you get. Unfortunately in this case, the authority does not seem to be concerned of this misrepresentation.


** Quote from Genting Singapore's press release **
The Rights Issue will provide Genting shareholders with an opportunity to subscribe for new shares at a discount of 32.8 per cent to the closing price of S$1.19 yesterday.

Full press release here http://info.sgx.com/webcoranncatth.nsf/VwAttachments/Att_EA9853457589A4744825762D00138631/$file/GSPLC_PressRelease.pdf?openelement

Right issue - Right or Wrong?

We invest in stocks with expectation that we can collect dividend, or sell the stocks at a higher price in future. Thus it is a little disturbing when the company comes to you asking for money instead, under the name of right issue.

The right issue by itself has no meaning. Basically what it does is to create more shares so that everybody owns 'more' in terms of absolute share, but the same in terms of percentage. For example, imagine we have $100 here, and we split to 2 shares, you one share at $50 each, and I 1 share. Now, we split it to 10 shares, you 5 shares at $10 each, and I 5 shares. We own more shares now, but still the same $50.

So we need to understand why rather than giving us money, the company asks money from us. We can look at it this way. Buying stock is quite similar to buying a house and rent it out. Now imagine, after many years, your house needs some overhaul or maintenance, isn't it logical and reasonable to spend some money to fix it? And you may be able to increase the rental after that.

Absolutely. And that is the point I want to make. How the company going to use the money from the right issue is of paramount importance! If it is used to improve the earning capability, that's a good thing. Otherwise, you better think twice.

Of course, the companies will offer you good promises and proposals in the right issues. This is when you need to exercise your judgment. Look at their history.

If their stock price increases over the year, you have a good tenant, who helps you to maintain your house, and maybe build a swimming in it, and increase the value of the property.

If they pay you dividend, it is equivalent to the tenant paying you rental.

If they never pay any dividend, it is equivalent to the tenant refuses to pay you rental.

If the stock price drops over the year, you have a bad tenant, who damage your house, causing its value to drop.

If the stock drops in price, no dividend, and keep doing right issue, it is equivalent to a tenant who refuses to pay you rental, damage your house, and keep asking you money to fix the pipes that burst. What would you do in this case? Chase the tenant out? In real life, however, investors seems to tolerate this in stock market.

Subsidy, sub and silly method?

Digitimes (28 July, 2009) reported that China Karaoke operators are buying LCD TV subsidy rights from farmers. To the farmers, LCD TV probably is not a necessity, and even with the subsidy, they still need to fork out a handsome sum of money. Therefore, trading the rights for some cash seems to be a good option. In other words, the benefit of the subsidy has been shared by the Karaoke operators and the farmers. Fair? Well, that's not the government intention. The government hopes to see improvement in the farmers' living standard. However, that's how market works, when 2 parties see different values on the item, in this case the subsidy, they can trade.

Closer to us, we also see recently a few employers were charged for hiring phantom employees to enjoy job credits from government. The intent of job credit, according to the government, is to save jobs by lowering cost of doing business here. Job credit is also a form of subsidy. In general, from economics point of view, wage subsidy is not good, as it may lead to various problems, including sustainability, effectiveness, and exploitation concerns. As job credit is a short-term measure, sustainability is not an issue. Effectiveness is a question mark. Will companies agree to cough out $100 in order to get back $12? We will probably never know the real answer, but that may not be important after all. In a deep crisis, confidence and hope have its value. Finally, we can see that exploitation does happen. The ones caught represent probably the tip of iceberg.

Depreciation - Noncash, non-concern?

One of the key features of business trusts and normal stocks is that normal stocks can only distribute dividend from profit, whereas the trusts can do so from their revenue after deducting some necessary expenses and meeting compliance to loan covenants.

This has sometimes even been highlighted as an advantage as there is more cash to distribute. This prompts me to write something about it here.

One of the key components that makes up the delta between revenue and profit is depreciation. Depreciation is basically an allocation of upfront investment cost across its useful life. For example, we buy a ship for #30 million, and the useful life is 30 years, and further assume we use a linear depreciate method, the depreciation per year would be $1 million, ie $30 million divided by 30 years.

You may ask, since the money already paid upfront, why should I care about depreciation? After all it is just accounting profit and loss.

Well, remember the 30 years useful life? What happen after 30 years? Depreciation actually is a way that companies re-accumulate the capital needed to replace the asset when its life expires. If the company does not accumulate its earning, it would not be able to sustain it earning capability.

Now you may ask again, why should I care about what happen after 30 years? Well it matters. For instance, in discounted dividend flow valuation model, a finite dividend flow, and an infinite one will have very different values. In other words, what is projected to happen 30 years later will have impact on your trusts price today.

So make sure you understand what you get.

Zero interest? Zero interest!

Nowadays, many banks, including DBS, UOB, Citibank, etc have this zero interest personal credit program.

The telemarketer would tell, hey sir or madam, now the bank charges you ZERO percent interest rate for 6 months, do you want to take up the loan? blah blah blah and we only charge you a 2% admin fee.

Zero interest? 2%? Still sounds good?

Wait, 2% for 6 months is equivalent to 4% per year. See the trick now? And by the way admin fee is upfront payment, not monthly rest. In other words, if you repay the loan within 3 months, the interest rate is actually 8%!

Well, good deal or not depends on how badly you need the loan at that moment. Even 8% is much better than Ah Long Pte Ltd, right?

But key point is, if it is zero interest, banks will also have zero interest to loan you the money! Loan with your eyes open.