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The Incentivized Asian “Wedge” Snake to Tunnel Corporate Wealth

 “Bamboo Innovators bend, not break, even in the most terrifying storm that would snap the mighty resisting oak tree. It survives, therefore it conquers.”
BAMBOO LETTER UPDATE | January 19, 2015
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 The Incentivized Asian “Wedge” Snake to Tunnel Corporate WealthWith the volatility in the currency market as the Swiss National Bank abandoned the EURCHF floor which sent the Swiss franc soaring and the ASEAN currencies Indonesian rupiah and Malaysian ringgit dropping to the decade lows against the dollar, we are reminded of what happened during the 1997/98 Asian Financial Crisis. Many auditors could not finalize the accounts of their clients in time because they did not have vital information about the foreign exchange losses incurred and debt covenants triggered on the dollar-denominated loans that their clients had piled up when the dollar-based debt was cheap. As the local currencies devalued sharply against the dollar, resulting in substantially more local currencies needed to service the dollar-denominated interest payments, a wave of default swept across the Asian corporate landscape. But there is a twist to the default story – an accounting tunneling twist.

Two short Asian cases. After the onset of the 1997/98 Asian Financial Crisis, United Engineers Malaysia (UEM), a relatively healthy firm with strong growth prospects, bought out some management-controlled shares of its financially-troubled parent, Renong Corporation, at artificially high prices. Both firms are controlled by the same “family” (Halim Bin Saad via nominee accounts and connected to former finance minister Daim Zainuddin) through a pyramid structure. The buyout directly tunneled corporate wealth to the family at the expense of minority shareholders of both firms. Ting Pek Khiing, Chairman of the Ekran Group, issued shares in Ekran in May 1997 with the declared intention of purchasing shares in the holding company of Bakun Hydro-Electric Corporation, the operator of the largest hydroelectric project ever undertaken in Malaysia. Instead, as the crisis took hold, the money from the share issuance was ultimately used, via third parties, to buy out Ting’s stakes in several of the Ekran Group’s publicly traded affiliates. These are not the typical western-style accruals-based earnings management; they are artful Asian accounting tunneling methods to abuse minority shareholders. “Because I Can”, the controlling owners hissed. But how did they really carry out the tunneling? And how can we detect the incentivized Asian “wedge” snake that tunnels corporate wealth?

Warm regards,

KB

The Moat Report Asia

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http://accountancy.smu.edu.sg/faculty/profile/108141/KEE-Koon-Boon

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About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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