The Incentivized Asian “Wedge” Snake to Tunnel Corporate Wealth

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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

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About bambooinnovator
KB Kee is the Managing Editor of the Moat Report Asia (www.moatreport.com), a research service focused exclusively on highlighting undervalued wide-moat businesses in Asia; subscribers from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, some of the world’s biggest secretive global hedge fund giants, and savvy private individual investors who are lifelong learners in the art of value investing. KB has been rooted in the principles of value investing for over a decade as an analyst in Asian capital markets. He was head of research and fund manager at a Singapore-based value investment firm. As a member of the investment committee, he helped the firm’s Asia-focused equity funds significantly outperform the benchmark index. He was previously the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. KB has trained CEOs, entrepreneurs, CFOs, management executives in business strategy, value investing, macroeconomic and industry trends, and detecting accounting frauds in Singapore, HK and China. KB was a faculty (accounting) at SMU teaching accounting courses. KB is currently the Chief Investment Officer at an ASX-listed investment holdings company since September 2015, helping to manage the listed Asian equities investments in the Hidden Champions Fund. Disclaimer: This article is for discussion purposes only and does not constitute an offer, recommendation or solicitation to buy or sell any investments, securities, futures or options. All articles in the website reflect the personal opinions of the writer.

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