Another Chinese company IPO - is caution the word to describe?

Today, we are seeing another Chinese (from mainland China) company getting listed in Bursa. There is no doubt that automotive is huge in China. No matter how huge it can be now, my guess is that you can find thousands of these automotive parts companies - perhaps tens of thousands. My suggestion is that you go to www.alibaba.com, type the word "automotive" - see how many search results you get. Hence, before you decide to invest in it, do read below article picked from Wall Street Journal.

Or you can read it direct from here.
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U.S. Sues Big Firms Over China Audits

Securities regulators took aim at the Chinese affiliates of big global accounting firms Monday, after a wave of accounting debacles at publicly traded Chinese firms that led to billions of dollars of shareholder losses.

In the U.S., the Securities and Exchange Commission brought an administrative proceeding against five accounting firms, alleging they refused to hand over documents sought in investigations of alleged accounting frauds at nine Chinese companies.

In Canada, the top securities regulator accused Ernst & Young's Canadian affiliate of missing problems during its audit on Sino-Forest Corp., a timber company that filed for bankruptcy protection this year amid questions about its disclosures.

The accounting firm agreed to pay 117 million Canadian dollars ($117.8 million) to settle separate shareholder allegations that it misled Sino-Forest investors. The settlement disclosed Monday was the largest ever by an auditor in Canadian history, a plaintiff's attorney said. Ernst & Young didn't admit wrongdoing in the settlement, which must still be approved by the bankruptcy court.

Dozens of Chinese companies have raised billions of dollars in the past decade listing their shares on U.S. and Canadian exchanges, before their share prices plummeted amid questions about their bookkeeping and disclosures.

The SEC action, if an administrative law judge rules in its favor, could lead to the Big Four's Chinese affiliates being barred from auditing U.S.-traded companies—something that could complicate the audits of multinational companies doing business in China. The regulatory moves also stand to heighten a U.S.-China confrontation over how much U.S. officials can do to ensure that Chinese audit firms adhere to U.S. regulatory standards.

"It definitely is ratcheting up the pressure another notch," said Jack Ciesielski, publisher of the Analyst's Accounting Observer.

Chinese audit clients paid the local affiliates of the Big Four $175.2 million in fees in fiscal 2011, according to figures compiled by Audit Analytics, a consulting firm.

U.S. regulators have attempted to investigate alleged fraud at some Chinese companies, and the SEC has filed several lawsuits. But they have been unable to get information from the China-based firms that audit many of these companies, including Chinese affiliates of the Big Four—Deloitte Touche Tohmatsu, PricewaterhouseCoopers, Ernst & Young and KPMG.

SEC Commissioner Luis Aguilar said in a speech Monday that the agency is investigating "accounting irregularities at dozens of China-based companies that are publicly traded in the United States," and that some of the probes "have been hampered by the lack of access to relevant documents."

The SEC maintains that firms that audit U.S.-traded companies have to follow U.S. law, and the Sarbanes-Oxley Act requires foreign audit firms to hand over documents about U.S.-listed clients at the SEC's request.

The firms counter that China's laws treat their auditing documents as akin to state secrets, and that their auditors could be thrown in jail if they turn the documents over to the SEC without permission.

"While it is unfortunate that the two countries have not yet been able to find common ground on these issues, we remain hopeful that a diplomatic agreement can be reached, and we stand ready to assist that effort in any way we can," Deloitte said.

PricewaterhouseCoopers said its Chinese affiliate "has cooperated with the SEC at every opportunity, but "PwC China will, and must, comply with its legal obligations under China law." The fact that the action is against all the major firms "demonstrates that this is a profession-wide issue, not unique to one firm," and should be resolved by negotiations between U.S. and Chinese regulators, PwC said.

KPMG's China affiliate said in a statement that it is "hopeful" that discussions between U.S. and Chinese regulators "will result in a positive diplomatic resolution" to the matter.

Ernst & Young Hua Ming said it "supports close working relationships" with regulators and that it hopes "an agreement can be reached between U.S. and Chinese regulators that will enable our compliance with all applicable laws and regulations."

The commission's administrative proceeding against the China affiliates of the big accounting firms, plus the China affiliate of second-tier firm BDO, alleges that they haven't handed over documents for nine of their Chinese audit clients who are under SEC investigation for potential fraud. The nine companies weren't identified.

Bloomberg News

A Chinese flag flies at a tree nursery in the Xinxin forest reserve, land leased by a company later purchased by Sino-Forest. The Chinese company filed for bankruptcy protection earlier this year.

BDO referred questions about the case to its Chinese affiliate, which hasn't commented.

The SEC had previously filed two cases against Deloitte's Chinese affiliate over the same issue, but Deloitte hasn't handed over the requested documents. One case has been suspended while the SEC attempts to negotiate with Chinese regulators, according to court documents.

An SEC administrative law judge will hear the commission's cases against the China-based accounting firms. If the judge decides against the firms, they could be suspended from seeking new U.S.-traded clients, or even blocked entirely from auditing U.S.-traded companies.

In the Canadian case, the Ontario Securities Commission alleges Ernst & Young didn't exercise enough skepticism in its audits of Sino-Forest to verify the ownership and existence of the company's most significant assets.

According to the commission, for instance, one Ernst & Young auditor in its Canadian affiliate acknowledged in an email to another auditor that the firm had no way of knowing that the trees the audit firm was inspecting were actually owned by Sino-Forest: "I believe they could show us trees anywhere and we would not know the difference." In addition, the commission said, several of Ernst & Young's senior partners at the affiliate involved in auditing Sino-Forest couldn't read or speak Chinese.

Ernst & Young's Canadian affiliate said it was "confident" its Sino-Forest work had met all standards and that the firm "did extensive audit work to verify ownership and existence of Sino-Forest's timber assets."

Ernst & Young said its settlement with shareholders "is without admission of liability" and "will reduce the uncertainty and future burden on our business, and allow us to focus on our people and our clients."

Sino-Forest was one of the largest forest-product companies listed in Canada when a report last year by U.S. short-seller Muddy Waters LLC alleged fraud at the company. Since then, the Ontario Securities Commission has started administrative proceedings against Sino-Forest, and several of its former executives already face allegations from the commission that they inflated timber purchases; the company is currently trying to restructure under bankruptcy protection. Sino-Forest last year conducted an internal investigation into the allegations, but executives have denied fraud.

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The misconception on share repurchase

The amount of negativity I have read in some the Malaysian forums and blogs on share buybacks are to me unjustified. There are claims whenever a particular stock had a sharp drop, and when the management decided to or rather acted on the price by buying back shares, it was viewed negatively. I feel that we just have to look at the companies themselves to see whether the action is justified. To be frank, I have tried to find missteps in the behavior of some companies when comes to doing buybacks, and it was quite tough for me to find companies that have done injustice to shareholders doing so.

Many of the companies that have done buybacks are on paper undervalued, at least to their book value. Most of them have very manageable borrowings and in fact many are in net cash positions.

I have put commentaries on buyback here, here and here. From the three articles, the only company which I have highlighted possible over-used of the buyback weapon is Pelikan. On that note, the company was doing buyback while the major shareholders were selling.

Buyback can be wrongly used to shore up the price of the companies shares especially when they are not undervalued. During one meeting that I attended, a very popular local fund manager who was starkly against buyback has used the example of JP Morgan's Jamie Dimon admitting mistake that he has bought back too much of his company's shares. After looking through, the halt on share repurchase by JP Morgan was not due to a wrong buyback decision. It was due to the one off event where JP Morgan had a huge trading losses caused by its London office last year, and the decision not to buyback shares was due to it wanting to shore back the capital ratio of the bank due to Basel 3 requirements.

In fact, the same fund manager was against buying back its own company's closed end fund when the shares were (and now still are) trading at substantial discount to Net Book Value. I in fact was very disappointed when he vehemently rejected the buyback suggestion indicating that share repurchase is the wrong weapon to use. Again, I am questioning if the share price is undervalued, what's wrong to do repurchase on your own shares especially when you have the funds to do so? That closed end fund actually has 1/3 of its assets in cash and for now he could not find better use for them with the cash sitting in the money market earning somewhere around 3%.

Announcement on decision to buying back shares as made by Jamie Dimon who indicated that he is willing to do more buybacks this 2013 year would have caused many to relook at the company again. As it is, JP Morgan is now trading at below book value and based on its Trailing Twelve Month's earnings its PE is below 10x. Wouldn't the share price be undervalued for a bank which is growing fast due to the recovery of the American economy. And based on that why would he not be buying back his own company's shares?

Recently, Warren Buffett has gotten approval from his board to buyback shares of Berkshire Hathaway in the instance where the company's shares are traded at below 1.2x book value. That instantly caused investors to look at the company again. As an investor, if I feel that the company's management has made the wrong decision, I can of course opt not to hold to the shares, and if it is done correctly due the price being undervalued, wouldn't it be beneficial to the shareholders?

Yes, any action - there can be positive or harmful to the company, but if it is communicated and explained well, perhaps shareholders can have a better view on where the management are heading.

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Chinese New Year Rally

The retailer investors had not jumped into the stock market in a big way - yet. . The situation can change in the next few weeks as the three major fears begin to recede. You can feel the heat of them warming up

The first fear was the US fiscal cliff which I though it was over-hyped. The second fear was the Euroddegon but now the region is showing some signs of stabilization  The mother of Euroddegon fear Greek was turning around. The rate of Euro zone PMI has shown gradual recovery though it is still in the contraction zone of 47.2 in December. The third fear was China hard landing. It is appear that factory orders too are showing improvement and more data is supporting a soft landing.

The risk appetite is  getting stronger. People is moving money out from safe haven. The US 10 year treasury yield is inching up everyday. Whether it will march towards 52-week high of 2.38% is something to watch closely.

Some of the very unloved markets like Vietnam has breakout from its consolidation range and very possible to test 52-week high of last year March of May.

Back to our local stock market. The small cap index that has been moving sideways for the last 7 - 8 months seems ripe for at least trying a 10% rally. You can feel the heat as the overbought situation was quickly neutralized.

At this point of time, the retail investors are still very nervous. A few points dropped in the KLCI will trigger them to take profit or sell down their holdings thinking the market will collapse. It is unlikely that the market will collapse when they are thinking collapsing all the time.  If you are looking at the same small cap chart, there could be a window of sharp gain like early of last year. That window may be open for 3 - 4 weeks.

My view of this post is strictly based on sentiment analysis and for trading purpose. Meaning, I accept cut loss if I am wrong. I have been debating with myself whether I should write this piece because I worry people can lose their hard earned bonuses. But I concluded that I am not that persuasive......

Back to the bonus thing, most people think it is money drop from haven, thus easy comes easy goes. Not trying to sound preachy but just may been half-sen worth of view. Spend it the old fashion way. If you have debt, pare it down. If you have been eyeing on something nice the whole year, don't hold it back -- do yourself a favor -- reward yourself. If you still have some money left after doing these, punting on stock market conservatively is okay. The word CONSERVATIVE is the key.

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Malaysia's first Islamic bond(sukuk) for retail investors

MALAYSIA'S first Islamic bond (sukuk) for retail investors, launched yesterday and expected to be listed on February 8, will have a minimum profit rate of 3.7 per cent a year.

The RM300 million sukuk with a 10-year tenure was issued by DanaInfra Nasional Bhd, a unit under the Ministry of Finance, to fund the Mass Rapid Transit (MRT) project that will run between Kajang and Sungai Buloh in the Klang Valley. It was launched by Prime Minister Datuk Seri Najib Razak.

The issue is part of a larger RM1.5 billion sukuk that's being sold by DanaInfra, of which RM1.2 billion is for institutional investors.

"It will be better than the fixed deposit (FD) return and better than the MGS (Malaysian Government Securities, or government bonds)," Treasury secretary-general Datuk Seri Mohd Irwan Serigar Abdullah told reporters after the launch yesterday.


The average fixed deposit rate offered by commercial banks as at November last year was3.15 per cent, according to Bank Negara Malaysia data, while the current yield for three-year government bonds is 3.04 per cent.

Bankers said the actual profit rate for the retail sukuk, which will depend on investor demand and the prevailing market interest rate, will be determined at the close of the book building exercise of the institutional offering.

Datuk Lee Kok Kwan of CIMB Investment Bank, one of four banks that are the joint lead arrangers for the issue, said he was confident that there would be strong demand for the retail sukuk.

He pointed out that unlike fixed deposit, income that investors derive from sukuk is not subject to tax.

"And the main assurance is that, post-listing, the liquidity will be there as the four banks are obligated to market them," he remarked.

Bursa Malaysia chief executive officer Datuk Tajuddin Atan said the retail sukuk, which opens up a new asset class for people to invest in, cements Malaysia's role as a top sukuk marketplace.

Previously, bonds or sukuk were accessible only to high-net worth and institutional investors.

"To make this sustainable, we need a pipeline, and this is being worked on. DanaInfra has a big pipeline of sukuk, but we're also looking at other issuers," he said.

The sukuk is meant for investors who want to diversify their portfolio. The minimum subscription amount for an ETBS is RM1,000, which will get an investor one board lot which comprises 10 units with a principal price of RM100 each.

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