Enormous value in cultivating scepticism
If there’s a single quality of which more is needed when it comes to surviving in the stock market, it’s scepticism. With greater scepticism comes the need to question, to know more and not take things at face value. It’s a valuable commodity in an age when many in the financial world are constantly devising new schemes to generate business, some of which may be rewarding to investors but many of which - as was starkly illustrated in the cases of the failed Lehman Minibonds and the troubled S-chip sector - may lead to losses later.
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By R SIVANITHY
15 July 2011
If there’s a single quality of which more is needed when it comes to surviving in the stock market, it’s scepticism. With greater scepticism comes the need to question, to know more and not take things at face value. It’s a valuable commodity in an age when many in the financial world are constantly devising new schemes to generate business, some of which may be rewarding to investors but many of which - as was starkly illustrated in the cases of the failed Lehman Minibonds and the troubled S-chip sector - may lead to losses later.
The good news is that, in the local market, scepticism looks like it’s on the rise - even within the ranks of the first-line regulator, the Singapore Exchange (SGX). Take, for example, the case of Japanese life sciences firm Transcu Group, which in February announced its first order for its Nanomizer Emulsion Fuel System (NEFS), touted as having great potential because of its environment-friendliness.
‘The key benefits of the NEFS are its ability to reduce nitrous oxide (NOx) and greenhouse gases emission and improve fuel combustion efficiency, which will result in the reduction of fuel consumption costs. It can be applied across industries and, depending on the specifications and capacities, the selling price of each unit of NEFS starts from US$250,000,’ said Transcu in its Feb 25 release.
At the time, Transcu’s shares were trading at 6.5 cents and it would have been quite reasonable to expect the news to have had an appreciable impact on Transcu’s stock price. It did not; the price hardly budged from that level, rising only to 7 cents before falling to 5 cents in the intervening months.
The truth emerges
There was no effect even when, on May 30, Transcu announced it had won a contract to supply 30 NEFS units to Japan’s Obayashi Road Corp - a deal which was described as a ‘significant milestone’ for Transcu, implying a turnaround in fortunes.
Clearly, scepticism was the order of the day and, in this instance, it was not misguided; barely a week after the Obayashi deal was announced, trading in Transcu’s shares was halted. Two days later, on June 9, the halt became a suspension. And on Wednesday this week, Transcu said the suspension has to continue as it faces cash flow problems.
SGX has played a leading role in cultivating scepticism. In Transcu’s case, it grilled the company on its accounts and its board’s views on the company’s ability to continue as a going concern, obtaining answers that shed more light on the company’s finances while underlining the need for investors to be cautious.
The exchange has also been busy scrutinising deals announced by engineering firm PSL Holdings, which in April announced an investment in Indonesian coal mining via a complicated deal with an Indonesian businessman named Charles Melati.
Initially sceptical - PSL’s shares did not budge from 23-25 cents for all of May and half of June - the market suddenly found plenty to like about the deal, propelling the stock to 47 cents at the end of June, a 100 per cent increase in a few weeks.
The trigger for this surge came in mid-June after the prospect of new management emerged when PSL’s controlling shareholders entered into two deals: a conditional sale of 60 million shares or 19.4 per cent of the company at 27 cents per share to a Singapore firm named RES Holdings; and a one-year option to sell a further 76 million shares or 24.6 per cent to another Indonesian businessman named Awaludin at 30 cents a share.
SGX then queried PSL not just for explanations for odd trading activity surrounding the latter’s shares but for more details on RES, Mr. Awaludin and the deals with these two parties - suggesting that the original announcement was not sufficiently comprehensive.
RES, as PSL then disclosed in its June 27 reply to SGX, is equally owned by four shareholders with former connections to See Hup Seng, Jackspeed Corp, Heng Heng Group and Wee Hur Holdings, while Mr. Awaludin is an Indonesian businessman with interests in ferry, palm oil and bird’s nest businesses. SGX then went further, asking for details of the connections between RES, Mr. Awaludin and Mr. Melati, and the conditions upon which all the sales and purchases are dependent.
The exact arrangements are complex but one thing is certain: by continually asking for more information, SGX has injected some caution into trading of PSL’s shares, with the result that they now hover around 44-45 cents. Until more is known about the coal-mining venture, its risks and the plans of the new controlling shareholders, this is probably prudent.