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Further thoughts on the Datapulse EGM on March 14, 2019

Tuesday, March 12th, 2019

By Mak Yuen Teen

A few days ago, I posted an article titled “Will Datapulse shareholders be haunted by the Seoul hotel” where I discussed resolutions 1, 2 and 7. This follows an earlier post “Datapulse Technology” Here we go again….” where I also gave my views on some of the other resolutions.

I would like to summarise my views on the 7 resolutions here.

Ordinary Resolution 1: This resolution is about the proposed expansion of the property business into hotels and hospitality assets. I will vote “no” because I believe shareholders are better off investing in other companies with long and successful track records in these areas. Shareholders are better served if cash is returned to them to do so.

Ordinary Resolution 2: This is the central resolution for the EGM. It follows from resolution 1 that I will also vote “no” for this resolution. In the earlier article about the purchase of  Hotel Aropa in Seoul, I raised three issues for which insufficient information has been provided for shareholders to make an informed decision, and considerable doubt exists about the viability of the hotel. These are: reasonableness of the purchase price, clarity of the terms and conditions, and rationale/substance of the proposed structure.

Ordinary Resolution 3: This resolution is to approve selling back Wayco Manufacturing at a loss. I am sure shareholders are unhappy with the loss, plus all the fees and expenses incurred for this acquisition. I will vote “for” this resolution but the board should give a proper account to shareholders on the fees and expenses that have been incurred.

Ordinary Resolution 4: This resolution is to approve changing the company’s name to “Capiti Property Partners Ltd”. Since I am against the company getting into the property business and into hotels and hospitality assets, I will vote “no”.

Special Resolution 5: This resolution is to align the new constitution with changes in the law. Although I would like to see Datapulse’s constitution incorporating stricter provisions in dealing with conflicts of interest, I will vote “for” this resolution.

Ordinary Resolution 6: Resolution 6 is about the proposed change of external auditors from KPMG to Ernst & Young (EY). The board had sought shareholders approval to re-appoint KPMG just four months ago, but has now changed its mind. It said that it has received feedback from shareholders – I recall one shareholder raising the issue of reviewing KPMG and its fees at the last AGM. I am sure shareholders would much prefer that the board listens to the masses of other shareholders calling for a larger dividend. That being said, I am ambivalent about retaining KPMG as I don’t think it was sufficiently communicative and open with shareholders at the last AGM and in private communications. I do have concerns about the prior work done by EY on Wayco and the fees that it has earned for that work. We have seen many instances of external auditors here and overseas being accused of or seen to have done poor quality work and therefore, it is unclear if any other firm would necessarily do better. The key for shareholders is to hold whoever is appointed as auditors accountable, by asking them questions about the conduct of the audit and the preparation of the auditors’ report at future AGMs. For this resolution, I will abstain.

Ordinary Resolution 7: This is to approve interested person transactions between Datapulse and ICP, in the event that ICP is selected to manage hospitality assets. This resolution is actually somewhat premature as there should be a proper process for selecting the firm for managing these assets, in the event that shareholders approve the company getting into the business in the first place and approving the purchase of Hotel Aropa in Seoul. For this resolution, the Datapulse chairman is not allowed to vote as he is considered an interested person. Other substantial shareholders such as Ng Siew Hong can vote, even though the relationship between her and the Datapulse chairman, if any, remains unclear. ICP has a short and so far, not yet successful, track record in managing hotels. This, coupled with the fact that I am against the company getting into this business and buying Hotel Aropa, means I will vote “no”.




Will Datapulse Shareholders Be Haunted By The Seoul Hotel?

Thursday, March 7th, 2019

By Mak Yuen Teen

On 14 March 2019, Datapulse Technology Limited’s (“Datapulse”) shareholders will vote on the company’s proposed acquisition of Hotel Aropa in Seoul, together with six other resolutions.

Before going into the resolutions, we should reflect on what has taken place up to now. In November 2017, Ms Ng Siew Hong (NSH) bought 29 percent of the shares at 55 cents per share, at a more than 50 percent premium. Soon after, Datapulse bought Wayco, which it is now selling back after incurring considerable fees and expenses.  This was a deal recommended by NSH. Did NSH pay 55 cents per share to get Datapulse to buy Wayco (and possibly the other Way Group companies) because she truly believed that Wayco and the hair case business was the future for Datapulse? In my opinion, the answer is no, given the aged assets, past profitability and future prospects of Wayco.

In July 2018, Mr Aw Cheok Huat (ACH) bought 10 percent of the shares from NSH at 55 cents per share, at a premium which is even higher than what NSH paid. On 15 August 2018, ACH was appointed as non-executive director and on 27 August, he became Chairman. The former directors all left in November 2018. Why did ACH pay 55 cents a share to NSH? Why was he able to be appointed as Chairman and procure the resignation of the former directors and the appointment of new independent directors with a 10 percent stake?

The relationship between ACH and NSH has not been clarified. Will NSH and/or any of her associates have any role to play in the company and the proposed new business? Will there will be transactions with NSH-related entities or associates and/or will they receive any remuneration or fees from the company and its subsidiaries?

In analysing the proposed acquisition of Hotel Aropa in Seoul or any other transactions, Datapulse shareholders should bear the above context in mind.

In this article, I talk about resolutions 1,2 and 7 for the coming EGM. These three resolutions are most directly related to the hotel acquisition. Resolution 1 relates to the proposed expansion of the business to hotels and hospitality assets; resolution 2 to the acquisition of the hotel in Seoul, and resolution 7 to the interested person transactions (IPTs) with ICP Ltd (“ICP”).   

Ordinary Resolution 1: Proposed Business Expansion


(a) approval be and is hereby given, for the Company to expand its Property Business to include Hotels and Hospitality Assets as an asset class for acquisitions or investments, and for all necessary steps to be taken to obtain the necessary approval for the Proposed Business Expansion; and

(b) the Directors of the Company and any one of them be and are hereby authorised to complete and do all such acts and things (including without limitation, execution of all such documents as may be required) as they and/or he may consider desirable, expedient or necessary or in the interest of the Company to give effect to this resolution.

Let’s consider the experience of the board and management in the proposed business of hotels and hospitality assets.

For the Chairman ACH, the circular states that he has “more than 25 years in the hospitality sector both in an advisory role as well as in investments in this sector, both privately and as consultant for investor groups.” For Mr Sin Boon Ann (SBA), it says he is “an independent director in OUE Limited, a Singapore listed company that is involved in hotel investment”.

Therefore, ACH has advisory/consulting and investment experience in this business while SBA has experience as an independent director in a listed company involved in hotel investment. Neither has management experience in this sector. Granted, they are going to be directors rather than management in this new business, but it still raises the question as to how much they know about this business.

For ACH, he is chairman of ICP, which has diversified into “the ownership, leasing, operation and management of hotels and franchising of hotel brands”.  ICP started in this business in Q3 2015 with the Travelodge brand and has entered into other joint ventures in this business. However, as I will point out later, it is currently a very small player and has not been profitable in this business.

For SBA, his role as an independent director of OUE Limited, which is involved in hotel investment, may give rise to conflict of interest.

There may be occasions when ACH and/or SBA may have to abstain from participating in decisions in this business, and ideally recuse from discussions too. It is important that there are robust procedures for handling conflicts of interest and the small board may make handling such conflicts more challenging.

The circular also states: “Assuming the Proposed Business Expansion is approved by Shareholders at the EGM, the Expanded Business will be overseen by Mr Lee, the Company’s interim chief executive officer and chief financial officer. Mr Lee will remain as the Company’s chief financial officer and will be supported in this role by the financial controller. Mr Lee has experience in the real estate sector from his previous roles at Yoma Strategic Holdings Ltd and Yoma Strategic Investments Ltd. In addition, the Group has recruited (a) a senior vice president of operations who has more than 20 years of experience in real estate investment and asset management industry, (b) a financial controller who has experience working for various global and regional real estate funds and has been involved with property investments in the region; and (c) a vice president and an associate of investments who have experience in hotel investment and asset management.”

While these recent appointments may bring relevant experience, they have been made before shareholders have approved the proposed business expansion.


  1. Should these appointments only have been made after shareholders have approved this expansion?
  2. If shareholders do not approve the expansion, will the experience of these individuals still be relevant?
  3. Are there onerous termination terms in the event that the proposed expansion is not approved and the individuals have to be let go?

My View on Resolution 1:

In my view, it is better for shareholders who wish to invest in the business of Hotels and Hospitality Assets to invest in those companies with a long and solid track record. It is better for the company to return the cash to shareholders for them to do so. Therefore, I will vote against this resolution.

Ordinary Resolution 2: Proposed Acquisition


(a) approval be and is hereby given, for the purpose of Chapter 10 of the Listing Manual for the Proposed Acquisition of a hotel located in Seoul, South Korea, operated under a local hotel brand called “Hotel Aropa” for a consideration of KRW35 billion, on the terms and subject to the conditions of the RPA and the ATA; and

(b) the Directors of the Company and any one of them be and are hereby authorised to complete and do all such acts and things (including without limitation, execution of all such documents as may be required) as they and/or he may consider desirable, expedient or necessary or in the interest of the Company to give effect to this resolution.

When deciding how to vote on Resolution 2, shareholders may want to consider at least three things:

  1. Reasonableness of the purchase price;
  2. Clarity of certain terms and conditions e.g., management fees; and
  3. Substance of the proposed structure.

The detailed analysis, together with assumptions made, can be downloaded at the bottom of this article. Here, I will summarise the key points.

  1. Reasonableness of the purchase price

The acquisition cost for the hotel is KRW35 billion (about S$42.7 million). In addition, estimated professional fees and other transaction expenses will amount to KRW2.4 billion (about S$2.9 million). Within 12 months of completion of the proposed acquisition, the company will spend an estimated KRW5 billion (about S$6.2 million)  on refurbishing the hotel over a 3 to 6 month period. Based on the FY2019 Q1 results, the company has a cash balance of about S$75 million, which will increase to about S$78 million if Wayco is sold back (under resolution 3). Therefore, a substantial part of the cash balance will be committed to the hotel.

At first glance, the proposed acquisition seems like a good deal. Reviews for Hotel Aropa on travel websites such as TripAdvisor (276 reviews over the period July 2013-Jan 2019) are generally positive. In addition, Datapulse will be paying KRW 275 million per room, which is lower than the range for recent transactions provided by CBRE Korea Co., Ltd (“CBRE”).

However, the following valuation inputs need to be considered:

Occupancy rates: Page 26 of the circular shows Datapulse expects occupancy rates of 82% (Year 1) to 92% (Year 10) over the forecast period, which appear high relative to historical occupancy rates of 57% and 68%. A Savills report published for the first half year of 2018 shows the supply of hotels and rooms in South Korea has been increasing, and more is expected in areas such as Jung-gu, Dongdaemun-gu, Gangnam-gu, and the Mapo-gu area. The same report mentions that roughly 10,000 AirBnb rooms in Seoul have not been included in hotel stock statistics. These may explain the decline in average daily rates and occupancy rates from 2011 to 2017.

Net property income (“NPI”) yield: We have taken EBITDA for 2017 (KRW 646.6 million) and annualised 1H2018 (KRW 846.7 million) as proxies for NPI. Against the KRW 35 billion purchase price, the NPI yield and earnings multiple fall in the ranges of 1.8% to 2.4%, and 41x to 54x respectively. Compared to the NPI yields (earnings multiple) of 4.1% (24x) and 4.6% (22x) disclosed by Ascendas Hospitality Trust for its 2018 hotel acquisitions in Seoul, the NPI yield for Hotel Aropa is much lower and the earnings multiple much higher.

We have done some sensitivity analysis. Based on these analyses and Hotel Aropa’s historical EBITDA (NPI) margins, achieving the type of margins that would result in earnings multiples that are close to that achieved by Ascendas for its recent Seoul hotel purchases would require increased room rates and/or aggressive cost management and/or consistently high occupancy rates – in the face of what appears to be an oversupply of rooms in Seoul. Increasing room rates may require improved service levels, which may increase costs and/or hurt occupancy rates. In short, it is difficult to improve one of these without negatively impacting the others.

In addition, public information lists Hotel Aropa’s address as 17-1, 17-2 and 17-7 Bukchang-dong, Jung-gu, Seoul, South Korea. The map below shows the actual location of the hotel in Bukchang-dong.

Yet the initial announcement dated 17 December describes the hotel as being “located in the bustling shopping and tourist area of Myeongdong/Namdaemun”. However, Daniel Voellm, the Asia-Pacific Managing Partner of hotel consulting firm HVS commented on the purchase as follows: “Overall, the valuation is attractive as Seoul hotels go, though the location in Bukchang-dong is not as prime as nearby Myeongdong…Any active asset management could help to enhance yields for the buyer further[1].” (Link to article)

In the circular, the location for Hotel Aropa is described as: “…a 127-room multiscale hotel located near the Myeongdong district in the prime Namdaemun area of Central Seoul…”

Therefore, while the original announcement said the hotel is “located in the bustling shopping and tourist area of Myeongdong/Namdaemun”, the circular says it is “located near the Myeongdong district in the prime Namdaemun area of Central Seoul”. There is a difference between “in” and “near”.

  1. Clarity over terms and conditions

Little is known about the master lease agreement (“MLA”) signed between REF Trust and RK One. But we do know that RK One may procure the services of ICP to manage Hotel Aropa.

ACH, Datapulse’s Chairman, is also the Chairman of ICP. He and his son own 23.8% of ICP shares and ACH owns 10% of Datapulse shares. This means that, economically, his family’s interests are more aligned with ICP than Datapulse.

The lack of details also raises the following questions:

  • Quality of the hotel manager: Being new to the hospitality business, Datapulse should work with an experienced hotel manager. ICP has only been in the hospitality business since 2016. Revenue from ICP’s hospitality segment only grew from $80,000 in 2016 to $1.8 million in 2018, and over the same period, ICP incurred losses of $1.9 million on average. To ensure Datapulse has availed itself to the best services on offer, we would like to understand the Board’s process of sourcing, selection, evaluation, and justification for selecting vendors;
  • MLA terms: What are the terms in the MLA? REITs such as CDL Hospitality Trusts typically sign MLAs to mitigate the volatility of the hotel industry, whereby they receive minimum fixed revenue plus a variable part that is linked to the hotel operator’s revenue and gross profits; and
  • Fees payable to managers: Other than the disclosure that hotel management fees are typically between 1% and 3% of gross revenue and incentive fees are between 5 and 9% of gross operating profit (excluding base fee), the Datapulse circular does not provide further details on agreements between the REIT and service providers.

Historical EBITDA for Hotel Aropa may be lower once we account for the additional costs of the REIT structure. We believe these details are important as Datapulse has never owned or operated a hotel, and shareholders would be keen to compare agreement terms with industry peers.

  1. Substance of the proposed structure

Last but not least, shareholders should consider the substance of the proposed holding structure for the hotel and its operations.

Datapulse has incorporated three wholly-owned (directly or indirectly) subsidiaries in Singapore and one in South Korea as a holding structure for the proposed acquisition. it appears the holding has been structured as a Corporate Restructuring REIT (“CR-REIT”). Under a CR-REIT structure, individual unitholders are not required; a property can be sold at any time; and there is no requirement to distribute profits as dividends to unitholders.

The intermediate holding companies between REF Trust (the real estate fund established in South Korea, which will be the owner of the Hotel Aropa land and building) and Datapulse provide additional layers of distance between the REIT and Datapulse, and may help to ring-fence potential investment risks (although if they lack commercial substance, the “corporate veil” may be pierced and those layers will not achieve their intended purpose).

However, Datapulse shareholders would not have control over what happens at the intermediate holding companies and ultimately, the REIT, e.g., director fees of intermediate companies may not require approval of Datapulse’s shareholders; there may be “management” in these intermediate companies who are paid remuneration; or fees or charges may be paid to other parties through these intermediate companies.

Shareholders should ask the following questions about the proposed structure:

  1. The purpose for each layer of intermediate company;
  2. Why the ownership of REF Trust will be split between two companies;
  3. Who will be appointed as directors of these companies, whether anyone will be managing them, and how much the directors/management will be paid;
  4. The types of transactions that will be taking place between these companies, Datapulse, and the REIT, or with other parties; and any fees and charges involved;
  5. Whether these intermediate companies will remain wholly owned by Datapulse or its wholly-owned subsidiaries, or whether there will be other shareholders (once there are other shareholders, any management charges between the companies will no longer be a “zero sum” game for Datapulse shareholders);
  6. If the additional layers have been created for tax planning, has the Board obtained advice that this is legal and supported by commercial reasons; and
  7. How the REIT profits will be utilised, i.e., how much will be retained for investments, and the proportion to be distributed as dividends. Will Datapulse shareholders receive dividends (if any) from REF Trust?

The Board has only focused on the commercial viability of Hotel Aropa. Without a complete understanding of the impact of the proposed structure on shareholder’s economic interests, shareholders would not be able to make an informed decision.

My View on Resolution 2:

In my view, there are many concerns about the price, terms and conditions, and the proposed structure. Therefore, I will vote against this resolution.

Ordinary Resolution 7: New IPT General Mandate


(a) approval be and is hereby given, for the adoption of the New IPT General Mandate for interested person transactions in respect of Hospitality-Related Transactions entered into with the ICP Group; and

(b) the Directors of the Company and any one of them be and are hereby authorised to complete and do all such acts and things (including without limitation, execution of all such documents as may be required) as they and/or he may consider desirable, expedient or necessary or in the interest of the Company to give effect to this resolution.

I have earlier touched on the experience of ICP in the business of hotel management. Its track record is very short in this business, having only started reporting revenues from this segment in FY2016. In FY2017, it had revenue of $210k and a loss of $2.3 million. In FY2018, the loss was $1.86 million on revenue of $1.8 million.

Even if Datapulse diversifies into the hotel and hospitality business and acquires Hotel Aropa, it should be looking at a more experienced hotel management company with a long and solid track record as a partner.

Further, as pointed out earlier, ACH has greater economic interest in ICP than Datapulse.

My View on Resolution 7:

In my view, the company should be looking for a more established hotel management partner if it goes into the hotel and hospitality business. Therefore, I will vote against this resolution.


Significant assistance was provided by Jonathan Lim, especially in the financial analysis aspects. Jonathan has over 10 years of experience in valuations and accounting with major accounting firms. Inputs were also obtained from several individuals who are knowledgeable about the real estate and hospitality industries, valuation and tax.

[1] Article – Singaporean Investor buys Seoul Hotel for $31 million


Detailed analysis of the proposed purchase of Hotel Aropa

Download (PDF, 1.11MB)



No sign of governance

Sunday, March 3rd, 2019

By Mak Yuen Teen

There’s a phrase that when life gives you lemons, you make lemonade. I hope that this is not the philosophy of the Singapore Exchange (SGX), which has given investors quite a few lemon IPOs over the past few years, and especially in the past year. This has further soured investors’ sentiments, already severely dented by corporate scandals, spectacular collapses and controversial delistings.

Copyright for cartoon belongs to Mak Yuen Teen

There is the case of Y Ventures, the data analytics-driven e-commerce firm, which listed on Catalist in July 2017, that in January this year announced material errors in its unaudited results for the six months ended 30 June 2018. The largest error was related to inventories and it turned out that it was using Excel to reconcile its inventory on a monthly basis. As is often the case, bad news is followed by worse news, and on February 28, it disclosed that its unaudited FY2018 loss has widened to US$3.89 million from an audited FY2017 loss of US$909k.

On March 1, it announced the appointment of a new executive chairman, Mr Eric Lew, who spent more than 16 years as an executive director of SGX-listed Wong Fong Industries, and is said to have extensive experience in corporate strategy and business development. Mr Lew, who had just the day before being re-designated from executive director to non-executive director at the latter firm, is to lead Y Ventures through its next phase of transformation and improve the group’s growth (more to arrest its decline, in my view). The appointment of an executive chairman with nearly all his prior working experience in the same engineering firm is rather unexpected, but may be an indication of a major change in business for Y Ventures, perhaps transforming from an e-commerce firm to a more traditional firm.

On February 4, I posted an article on Y Ventures and called for the suspension of trading of its shares and a special audit, as I believe that the material errors in its unaudited results raise serious concerns about mis-statements in all its prior unaudited and audited results, including those prior to its listing. At that time, it had already fallen from its IPO price of 22 cents to 8.1 cents. It closed on March 1 at 5.4 cents.

Whatever transformation it undertakes should not detract from the need for regulators to get to the bottom of the material errors and to determine if prior results are also affected, and to hold those responsible accountable.

Then there is the case of No Signboard, which also showed no sign of governance. The company listed on Catalist in November 2017 at 28 cents. It was queried by SGX for a 24 percent price surge on January 31, 2019  On February 1, it reported a net loss of S$574k for the first quarter ended Dec 31, 2018, from a restated loss of S$416k a year ago for the same quarter. What passed without any proper explanation from the company and with no queries from SGX was why the Q1 profit of $1.4 million reported a year ago was re-stated to a loss of S$416k. Every single item that affected the profit and loss was restated, except for the listing expenses. Raw materials and consumables used was restated from $1.32 million to $2.29 million. Like Y Ventures, the sponsor for No Signboard is RHT Capital.

On  February 3, No Signboard said that its chief executive Lim Yong Sim had “inadvertently instructed the company’s broker to buy back shares of the seafood restaurant operator during a trading restriction period”. The company had held its annual general meeting on the morning of January 31 to approve the company’s share buyback mandate. Mr Lim later instructed the company’s broker, UOB Kay Hian, to buy the shares at a price of up to S$0.14 each and shortly after noon on January 31, about 1.07 million shares were purchased. The company said it was an “honest mistake” on the part of Mr Lim as he did not realise that the share purchase at prices of up to $0.14 exceeded the 5 per cent cap above the average closing price of the last five days permitted under the share buyback mandate of $0.1226 as at January 31, 2019. This was why the stock surged nearly 24 per cent to S$0.15, which attracted the SGX query. Not only did Mr Lim get the company’s broker to buy back shares in violation of the share purchase mandate, it was done during the blackout period preceding the announcement of the company’s first quarter results on February 1 – before the board and audit committee had held their meetings to approve the results.

Consider what happened.  Just before the company announced its first quarter loss, which was going to be considerably worse than the previously reported first quarter profit from a year ago (which was at the same time, re-stated to a loss in the same announcement), the CEO instructed the company’s broker to buy shares during the blackout period and above the price permitted under the share purchase mandate – and it was said to be “inadvertent” and an “honest mistake”. The company’s share price has continued to crawl down to 10.2 cents.

Incidentally, both Y Ventures and No Signboard had their CFO resigned around the time that the results that are now significantly re-stated were first announced. In Y Ventures case, it was after the results, and in No Signboard case, before the results.

Then we have Ayondo, which has the “distinction” of being first fintech listed on SGX. It listed at $0.26 per share and commenced trading in March 2018, after an initial attempted RTO with Starland Holdings fell through. The sponsor is UOB Kay Hian.

On January 23, 2019, the CEO of the company suddenly resigned. A month later, it was revealed that there was discontent and disagreement between the controlling shareholders and the CEO over issues such as the progress of the business, funding requirements, performance and future direction.  On February 1, trading in the company’s shares was suspended.

On Valentine’s Day, it lost more love from its shareholders when it issued a convoluted announcement which may have obscured the obviously serious issues it is facing. It emerged that following what it called “feedback” from one of its employees – which could possibly be a whistleblower’s complaint – KPMG LLP in the UK was engaged to re-assess the accounting and regulatory treatment of certain items in its 99.91%-owned UK subsidiary, Ayondo Markets Limited (AML). Ernst & Young LLP (EY) in Singapore are the group auditors and reporting accountants for Ayondo’s IPO and had issued unqualified opinions for all financial years (until the period ended September 30, 2017). The subsidiary was said to be audited by a non-EY firm. Ayondo later clarified that the current auditor for the UK subsidiary is Blick Rothenberg Audit LLP. The company did not mention it, but there was a change in auditor for the subsidiary as the auditor up to the financial year ended December 31, 2016 was Shelley Stock Hutter LLP.  According to report published on December 11, 2018 by the CA Magazine, neither firm was among the top 30 accountancy firms in the UK. The lowest ranked among the top 30 firms had revenues of £23.38 million in 2018.

KPMG LLP in the UK disagreed with the treatment of the items in question. Deep within the same announcement, it was disclosed that Ayondo’s 99.91%-owned indirect subsidiary, Sycap Group (UK), which owned AML, had entered into a non-binding agreement to dispose of AML, in order for fresh capital to be injected into AML. In other words, AML is to be sold, indicating how financially strapped Ayondo is. From this announcement alone, it is evident that the group structure of Ayondo is complex, with multiple layers of companies – Ayondo owned another company, which owned Sycap, which owned AML, and it is unclear why there are all these 99.91%-owned companies. Hopefully, the sponsor has assessed the business purpose of such a structure, has done the necessary due diligence of each company, and can explain all these to investors, since such complex ownership structures carry governance risks.

Ayondo’s share price has been in free fall since its IPO. Its share price had fallen to 4.8 cents, well down from its IPO price of 26 cents, before it was suspended from trading on February 1, 2019.

When Ayondo listed, I had tweeted that it will crash and burn. I do not have a crystal ball but questions such as whether its business model involving social trading is a viable one, why the RTO failed, and why it choose to list on SGX and not Europe given where it’s domiciled, were enough to tell me that things will  go badly. But these questions do not seem particularly important to those involved in the listing.  Like Y Ventures and No Signboard, regulators must review the due diligence that was done for these listings, and whether the sponsors and auditors should be held accountable.

At 11.31 pm on March 1, Ayondo announced that it was applying for a one-month extension of time to release its unaudited FY2018 results, hold its FY2018 AGM, and release its 1Q FY2019 results. The reason given was the expending of additional resources and personnel in the finance team to respond to queries relating to compliance with regulatory requirements of the Financial Conduct Authority in the UK.  Granted that the shares were already suspended, but why did the company wait until 29 minutes before the deadline to announce its unaudited FY2018 results to disclose that it was applying for an extension?

The new year has started very much like how 2018 ended when it comes to new listings on SGX. On January 4, 2019, Business Times published a report titled “All fun, no fear for Sim Leisure Group” about the proposed listing of Sim Leisure Group (SLG) on Catalist, with Zico Capital as the issue manager and sponsor. SLG operates what appear to be “back to basics” theme parks in Penang. It was hoping to raise funds  for its first theme park in China, with some of the proceeds to be used for working capital for its Penang theme parks. It said the parks have no rollercoasters but the CEO said he hoped the stock will soar when it listed.  The CEO also talked about expanding to ASEAN and conquering the world.

In a Bloomberg interview in October, the CEO said that the sale of new and existing shares could raise between $10 million and $12 million.  In the end, the company only raised $5.81 million from a placement, with $5.6 million used to redeem redeemable convertible preference shares and the remaining for listing expenses. The company announced that none of the IPO proceeds will go towards expansion and working capital but nevertheless said that it is confident that “this would not have a material adverse impact on its operations and business plans”. Really?

To start with, even if it was successful in raising between $10 million and $12 million, how realistic are its touted plans of expanding to China, ASEAN and the rest of the world with the kind of theme parks it was operating? Is anyone involved in all these IPOs even asking the most basic questions about viability and why a company is listing on SGX?

Not surprisingly, it turned out that while customers of SLG’s theme parks have nothing to fear given the lack of rollercoasters, this is not the case for investors, as its share price plunged by 23 percent on its first day of trading.

Companies with questionable business models are likely to be more susceptible to fraud because they are likely to  find it difficult to deliver results, which increases the pressure to use fraudulent means to generate the numbers. Further, business models that are opaque or difficult to understand provide greater opportunities for fraud. By admitting companies without careful scrutiny of their business models, SGX may be setting itself up for more fraud in its listed companies in the future.

Our authorities must also recognise that subsidising listing fees and analysts’ salaries to increase coverage do not address the fundamental problems hurting our market. In my opinion, the lack of quality listings is related to poor valuations and liquidity, which is in turn related to weak investor protection, including lack of enforcement. Investors, including institutional investors, ought to question the SGX board and senior management in their one-to-one meetings and at this year’s AGM about what steps they are taking to address the situation which has spiralled out of control.


Why minority investors don’t stand a chance

Monday, February 25th, 2019

A version of this article was published in the Business Times on February 27, 2019.

By Mak Yuen Teen

In recent years, the lack of effective investor protection in our market has become rather evident. For S-chips and other foreign listings, regulatory enforcement has often been hampered by the inapplicability of laws, cross-border enforcement barriers or runaway miscreants. However, the Datapulse Technology (DT) case shows that even for Singapore-incorporated, Singapore-based companies, investor protection leaves much to be desired.

First, the case highlights the deficiencies in our listing rules in protecting minority investors, especially the Chapter 9 rules on “Interested Person Transactions (IPTs) and the Chapter 10 rules on “Acquisitions and Realisations”. DT was able to acquire a company from a vendor who had significant business and employment relationships with both the controlling shareholder and the CEO without being caught by the IPT rules – and it later emerged that the vendor and controlling shareholder had together discussed the acquisition of the controlling stake from the previous controlling shareholder.

It also acquired one part of a company group first, avoiding crossing the shareholder approval threshold under Chapter 10, and then engaged a third party to undertake a “strategic review” which to no one’s surprise, identified the acquisition of the other two companies in the group as an option. If all three companies in the group had been bought together, DT could very well have crossed the threshold immediately. DT just drove a truck through the rules. There are other ways that companies can get around these rules.

Second, even where the listing rules and regulation appear adequate, companies can breach them with apparent impunity. Take the case of Chapter 7 on “Continuing Obligations” and Appendix 7.1 on “Corporate Disclosure Policy” in the listing rules and sections 199 and 203 in the Securities and Futures Act on false or misleading statements and continuous disclosure. DT had many instances of questionable disclosures, some of which appear to be clear breaches of the rules.

In this commentary, I summarise the rules which I believe have either been broken or there are sufficient grounds for regulators to investigate for potential breaches. This is based on the more than 30 articles I have written about this company over the past 14 months and additional public information I have gathered.

Disclosure breaches

In July 2017, when DT announced that it was selling its Tai Seng property which housed its manufacturing activities, it said that it intended to use part of the proceeds to buy a new property to continue its existing operations. When it held the EGM on September 28, 2017 seeking shareholder approval for the disposal of this property, it withheld material information from shareholders. The company disclosed information that clearly suggested that it was still on track to move its operations to the replacement property in Toa Payoh that it was proposing to acquire. However, it failed to disclose that by September 22, it had already received two letters from NEA rejecting the company’s application for change of use of this property.

On November 9, 2017, DT held its AGM. According to the AGM minutes, the board still did not disclose the NEA rejection letters. The board made certain statements about the state and direction of the existing business of the company, despite the company still having no new premises to house the operations.

At that AGM, Ng Cheow Chye (NCC) – the controlling shareholder, CEO and deputy Chairman – was re-elected as a director. However, the very next day, he entered into an agreement to sell his entire 22.3 percent stake at $0.55 per share, or 52.8 percent above Datapulse’s previous closing price.

It was only on November 14, 2017 that the company finally disclosed the termination of the option to purchase the Toa Payoh property and the receipt of the two NEA letters.

Had shareholders known that the continuation of the company’s existing manufacturing activities was in doubt when they were asked to approve the sale of the Tai Seng property, they may have voted in larger numbers and questioned the use of the proceeds and the company’s plans. Excluding the 26 percent of shares held by NCC, his daughter and then executive director Si Yok Fong, who had given undertakings to vote for the disposal, only four percent of the shares held by other shareholders voted on the disposal. Importantly, the second largest shareholder who held 16 percent evidently did not vote. If full disclosures had been made by the company, the voting outcome could well have been different.

This seems to be a clear case for enforcement action. If regulators do not act, it would send the signal to other companies that they too can withhold material information from shareholders. A pro-investor market regulator might have acted to nullify the results of the EGM held on September 28 as soon as it became aware that material information was withheld from shareholders.

Questions have also been raised about many of the other disclosures made by the company, such as the status of its then manufacturing activities; trademarks; discrepancies between asset values reported to SGX and in the accounts of Wayco Manufacturing (the haircare company bought in December 2017); profitability of Wayco; and the circumstances surrounding the appointment of the new board. Yet, SGX seems to have accepted the company’s disclosures and explanations without any detailed probing – even when these disclosures contradicted each other. It is a stretch to argue that many of DT’s announcements relating to concerns raised were “factual, clear and succinct” and “balanced and fair” as required under Appendix 7.1.

And how about the “inadvertent omissions” of Low Beng Tin (LBT) when he was appointed as chairman and failed to disclose regulatory actions and a petition for winding up in other companies where he was a director – and it emerged that those “inadvertent omissions” were also made in other companies where he was appointed as a director. One would have thought that this is a straightforward case which would trigger prompt regulatory action but there has been none – certainly not publicly (private sanctions have little deterrent value). Not surprisingly, DT has become a bit of a “role model”, with other companies citing “administrative oversight”, “inadvertent omissions”, “administrative inadvertences” and “honest mistake” when they have made similar or other incorrect disclosures which may have misled shareholders.

Shouldn’t the above instances be investigated for possible non-compliance with listing rules and relevant regulation?

Most of these disclosure issues were not covered in the compliance review conducted by Lee and Lee. I had also raised concerns about the disclosures and transactions surrounding DT’s investment in Goldprime, a subsidiary of Lian Beng Group (LBG). On June 1, 2018, SGX Regco sent further queries to Lee and Lee about this investment and a further review relating to the acquisition and disposal of the company’s interest in Goldprime was said to be undertaken by Lee and Lee. It has been nearly nine months of silence since then.

Placement and subsequent purchase of shares

In June 2015, DT placed out 65 million shares to LBG, equivalent to 9.9 percent of DT’s enlarged share capital, at $0.11235 per share or a discount of slightly less than 10 percent. After a 3-for-1 share consolidation in November 2015, LBG held 21,666,667 shares. The adjusted placement price was therefore $0.337 per share (or $0.331 if adjusted for a dividend that was paid shortly after the placement). DT’s share price declined substantially in the year following the placement. LBG bought another 1,185,700 shares at various prices between March and July 2016.

At the time of the placement, DT announced that it had complied with rule 812 of the SGX Rulebook that the shares were not placed to a director or substantial shareholder.

On July 21, 2016, LBG sold its entire 10.43 percent stake in DT to NCC at $0.332 per share, very close to the adjusted placement price just over a year earlier. By that time, DT’s share price had declined to $0.209 per share. NCC paid a 58.8 percent premium for the shares.

Shouldn’t the regulators investigate whether rule 812 was complied with under such circumstances, even if the placement shares were sold to the director just over a year later? What is to stop companies from placing shares to third parties with the understanding that they will later be sold to their directors or substantial shareholders? 

Access to material non-public information

It is quite clear that certain individuals were privy to information about the fate of the company’s digital storage business and the acquisition of Wayco before this information was publicly disclosed. This naturally leads to the question as to whether some individuals traded on material non-public information.

According to the Brokers Desk, seven shareholders (one whose identity is unknown) sold their shares through married trades to Ng Siew Hong (NSH) when she acquired her 29 percent stake. Based on the lists of top 20 shareholders in the company’s annual reports between FY2015 and FY2017, three of these shareholders increased their stakes sometime between September 2015 and October 2016, and again between October 2016 and October 2017. NCC had of course bought LBG’s stake during this period. Two of these seven shareholders maintained their stakes over this period.

LBT, who was later appointed chairman, also increased his stake from zero as at July 21, 2016 to 979,066 shares as at October 2017, before selling more than 700,000 of those shares to NSH.

One other shareholder also increased its stake over these two periods. This shareholder did not sell its stake to NSH. It held exactly one percent of the shares and if it had sold its shares to NSH, NSH would have hit the 30 percent threshold for a mandatory general offer.

It would seem that regulators should look into whether there were any parties who traded on non-public information. In addition, perhaps the Securities Industry Council should more actively investigate the possible existence of concert parties, especially when a new shareholder acquires shares amounting to just below the 30 percent threshold.

Directors’ duties

Regulators should review whether directors who were on the DT board at various times exercised reasonable diligence in ensuring that the company complied with the relevant rules, including rules governing continuous disclosure of information and false or misleading statements. They should also review whether any directors allowed their personal interests to undermine their duty to act in the best interest of the company.

The actions of the four directors who were appointed to the DT board on December 11, 2017 and bought Wayco the next day for $3.43 million should be subjected to particularly close scrutiny. When they were questioned about the high price-to-earnings ratio for the acquisition, they cited the value of the three properties that were included in the acquisition, even though the valuation of those properties were undertaken by valuers engaged and paid by the vendor. When questioned about the lack of proper due diligence, they cited the buyback undertaking. When they were asked whether the buyback undertaking was enforceable, they evaded the question. As many have suspected, Wayco turned out to be a lemon and the buyback undertaking unenforceable. The directors then resigned and were presumably paid fees for their “contributions”.

Less than eight months after the acquisition, the entire goodwill of $1.14 million of the acquisition was written off. The company will now take a haircut of 7.5 percent of the acquisition price to sell back Wayco. It would already have incurred a considerable sum for the fees paid to Ernst & Young (EY) for the strategic review on the haircare business and financial and tax due diligence for Wayco and to Lee & Lee for the compliance review, and increased audit fees because of issues raised about Wayco.

Are our regulators even remotely interested in holding directors accountable for discharging their duties? Do the actions of these directors now provide the benchmark for assessing discharge of director duties?

Regulators should seriously consider incorporating directors’ duties into the listing rules and/or securities laws, to broaden the range of sanctions that can be imposed and to extend these duties to directors of companies incorporated outside of Singapore.

While regulators must ratchet up their enforcement actions, the reality is that such actions would rarely help investors recover their losses or even help prevent further destruction of shareholder value. As the DT case shows, minority shareholders – nearly 9,000 of them – don’t stand a chance. If regulators don’t hold those responsible accountable, it would just rub salt into the wound.

On March 14, the company will convene an EGM for shareholders to vote on seven resolutions including the proposed disposal of Wayco and the proposed purchase of a hotel. Minority shareholders may have escaped a bad $3.4 million haircut, but they should now be wary about being haunted by a $42.7 million hotel in Seoul.




Datapulse Technology: Here we go again….

Thursday, February 21st, 2019

By Mak Yuen Teen

On March 14, Datapulse Technology will hold an EGM to consider seven resolutions. Minority shareholders should carefully study the circular and consider voting against 1, 2 and 7 which relate to the expansion of the business to hotels and hospitality assets, the acquisition of the hotel in Seoul for KRW35 billion (about S$42.7 million or  57% of the cash balance based on the FY2019 Q1 results), and the interested person transactions (IPTs) with ICP Group.  They should also consider voting against the change of name of the company to Capiti Property Partners Ltd under resolution 4 as that is part of sealing the fate of the company in a business that I believe it is highly unlikely to succeed in.

In my opinion, they should vote for resolution 3 to approve the disposal of Wayco Manufacturing, the onerous acquisition made by the previous board. It should not have been bought in the first place – a fact that many shareholders knew but the then board thought otherwise, and the proposed hotel acquisition may be deja vu with a different board.

As for resolution 5, which relates to the adoption of a new constitution, I have not gone through the new constitution being proposed. I would like to see strict provisions in the constitution dealing with situations where directors have a personal interest in transactions, beyond just disclosure and abstention from voting. This is because there is already going to be a resolution relating to interested person transactions (IPTs) and shareholders cannot rule out recurring situations of directors having interests in transactions. The constitution should require directors with a direct or indirect interest in any shape or form to disclose, abstain and recuse. Better still if they completely avoid such conflicts – but I think that may be expecting too much as the chairman is already having an interest in two companies that will be transacting with each other.

For resolution 6 on the proposed change of external auditors from KPMG LLP to EY LLP, I am ambivalent about retaining KPMG. They have been auditors since 1993 and the partner-in-charge did not even acknowledge an email and a reminder I sent to her asking some questions as a shareholder. While I understand external auditors often see themselves as working for the company – and in effect the board which is often appointed by controlling shareholders – they are appointed by and report to members of the company. I will have more to say on this issue in a later post, especially why I think we should look to the laws in Australia which make external auditors much more accountable to shareholders generally.

However, I am not convinced that Ernst & Young LLP (EY) is the right choice because EY did substantial work for the company in reviewing its entry into the haircare business and the financial and tax due diligence on the Wayco acquisition. They must have earned substantial fees from such work and developed a close relationship with the company – even if it was a different part of the firm which did that work and EY may claim “Chinese walls”. Certainly, shareholders should question the fees earned from those services and whether the work that has been done poses a conflict to its role as external auditors going forward. Given the recent breakdown in trust in external auditors, particularly the Big 4 firms, external auditors more than ever need to be whiter than white. EY (Singapore) is of course the auditor under scrutiny for the audit of the Noble Group subsidiary here.

I hope to post a series of short articles on my website about some of the resolutions closer to the EGM although I cannot promise. I also plan to write an article summarising all that have gone wrong at Datapulse based on the more than 20 articles I have written, the rules that I believe have been bent or broken, and the regulatory responses or lack thereof thus far. The proposed title of this article? “Why minority shareholders don’t stand a chance”. Sadly, this really applies to the market here as a whole.



Adding or subtracting value?

Wednesday, February 20th, 2019

By Mak Yuen Teen

Addvalue Technologies has just posted an announcement after close of trading on February 20 about another “exciting” development. You can read it here:

Before anyone gets too excited, they may wish to read this excerpt from our forthcoming report called “Avoiding Potholes in Listed Companies” which includes a short writeup about this company.

“On 17 October 2018, Addvalue Technologies announced that it had received queries from two shareholders through its website asking about the value of its intellectual property (IP) and urging the company to make the value public so that the market will have a better idea of what the company is worth. Addvalue has a market capitalisation of $48 million [actually it’s now $41 million]. The company said that it engaged Everedge Global (NZ) Limited, “an intangible asset specialist recognised by the Intellectual Property Office of Singapore (IPOS)”. It said that after taking into account the IPs of the group, and excluding the company’s human capital, Everedge valued the business of the group at $123 million as at 31 May 2017 – or nearly three times the company’s current market capitalisation. Addvalue’s share price had been steadily declining and closed at $0.027 as at 17 October 2018 [it’s now $0.022]. Following the announcement, the company’s share price increased as much as 7.8% the following day. Some questions that investors should consider include: Were the shareholders who urged the company to disclose the value of its IPs related to management or major shareholders? Why did the company engage a NZ valuation firm? They should also note that the company did not disclose the valuation report. 

A few years earlier on 25 March 2014, Addvalue had announced that it had entered into a conditional sale and purchase agreement with an unrelated third party buyer from PRC for the entire ordinary share capital of its subsidiary, Addvalue Communications Pte Ltd, for a cash consideration of S$330 million. This would increase the NTA of the group from US$0.004 to US$0.203, an increase of 5,108%. Following the announcement, the company’s share price increased from S$0.062 to S$0.155. More than four years later, the deal has not been consummated.

The track record of an issuer is relevant when assessing the credibility of its announcements.”

In this case, the track record of the company speaks for itself.




Enforcement for bribery: what about the Keppel case?

Saturday, February 16th, 2019

By Mak Yuen Teen

The title of this article is a common reaction I get from others in response to news about enforcement actions by CPIB against bribery, whether it is for small bribes or “ang pows” in the case of forklift operators or crematorium employees, or the $700,000 bribery case against the Keppel Shipyard employee. It is a fair question to ask: will there be any enforcement action against the individuals involved in the Keppel O&M case where a total of $55 million in bribes were paid, especially given the enforcement actions for much smaller bribes. My fear is that this question will echo through the years and be a blot on our hard-earned reputation for low corruption which we can never erase and that no one will forget – if no serious enforcement action is taken.

This brings me to something that I have raised in the past. Recently, the fact that we have climbed back up to number three in Transparency International’s Corruption Perceptions Index (CPI) – which measures perceptions of corruption in the public sector in 180 countries – was well-covered in the local media. However, in September 2018, another report by the same organisation which put us with 21 others in the category of countries with “little or no enforcement” against foreign bribery received no coverage here to my knowledge. An article accompanying the report ( has this to say:

“The bad news is that there is still a long way to go. Four countries, accounting for 6.7 per cent of world exports, have deteriorated in their performance and a total of 33 exporters, accounting for about 52 per cent of world exports, still have limited or little to no enforcement against foreign bribery. That includes all four of the exporters not party to the Convention — China, Hong Kong, India and Singapore — all of which get the lowest rating of little or no enforcement.

The results show that we are far from bringing enforcement against foreign bribery to a tipping point. Governments must scale up their foreign bribery enforcement. This means investigating allegations and pressing charges, as well as courts convicting guilty individuals and companies, and imposing substantial sanctions where appropriate.

The enforcement gap that exists in China, Hong Kong, India and Singapore needs to be closed by joining the OECD Convention and, along with all other countries involved in global trade, stamping out foreign bribery with the necessary legislation and enforcement.”

Not only do we have little or no enforcement against foreign bribery, we have shown no interest in committing to doing something about it by joining global efforts like the OECD Anti-Bribery Convention.

In a way, the dissonance between our high ranking on the CPI (which is a measure of public sector corruption at home) and our “bottom of the class” ranking for enforcement against foreign bribery is worse than countries with a consistently low ranking on both. This is because it may be perceived as hypocrisy – as long as we keep our own house clean at home, we can do whatever we like when we are in other countries. It’s like we are sending a message to the world that we don’t really care how bribery by our companies and people wreck havoc in other countries as long as our own country is clean. Of course, we can make the excuse that it’s too bad if those countries have corrupt regimes that do not curb bribery and it is not our job to do it on their behalf. But we are talking about our own people and companies paying bribes, and I think we should be more responsible for their actions.  Further, our laws do cover bribery committed overseas.

Those who are interested can download the full report here: file:///Users/bizmakyt/Downloads/2018_Report_ExportingCorruption_English.pdf

On page 101 to 103, there is a write-up on Singapore. Interestingly, it mentions that in February 2018, CPIB arrested a number of individuals in connection with the Keppel O&M case. I do not recall reading about this and assuming this is correct, perhaps we may yet see further action taken. We will just have to wait and see. The report also talks about Singapore “been mentioned in the context of allegations and investigations in other countries”, such as the Unaoil scandal. If our companies and individuals pay bribes overseas or we allow subsidiaries of MNCs incorporated here to be conduits for overseas bribery, it will erode our reputation for low corruption.

While on the subject of bribery and corruption, I am delighted that CPA Australia will be organising an event with Front-Line Anti-Bribery LLC and Governance for Stakeholders where Richard Bistrong will be speaking. Richard violated the US FCPA and now shares his personal views and experience. I first got to know Richard online through his blog, and we have met several times since while I was in New York attending meetings. I am also delighted to be moderating a panel at that event. Other panelists will include a regional ethics and compliance leader in an MNC and a former Asia-Pacific CEO of an UK MNC who is an experienced company director. Some issues that we hope to discuss in the event include:

* Does your compliance function really understand the corruption risks that frontline business teams face in their work,  as Richard confronted during his career,  and which continue to exist today in commercial operations?

* Does your organisation understand the fluid nature of anti-corruption risk and appreciate the dangers of “vetting and forgetting?”

* Is everyone in your organisation vested in deeds and not just words in anti-corruption compliance? In other words, are ethics, integrity and compliance coming through the corporate narrative, as anchored to operations, not just the compliance one?

* Do you have all the risk assessment and monitoring tools you need to gauge risk, understand compliance gaps, and educate your workforce as to how poor decisions can impact the entire organisation?

* Are boards and senior management of companies adequately considering corruption risks in their business strategies when they do business overseas?

* What should companies do when doing business in countries or industries where bribes are considered norms?

* How do corporate culture, strategies, budgets and remuneration policies affect corruption risks and how can boards and senior management play an effective role in mitigating these risks?

Unfortunately, due to limited seats available, it is an invitation-only event and we expect an audience comprising compliance leaders, internal auditors, CFOs, CEOs, directors and other senior professionals.

I hope to share some insights from that event in due course.


Y Like This?

Monday, February 4th, 2019

By Mak Yuen Teen

On 21 January 2019, Y Ventures Group, which listed on Catalist in July 2017, announced material errors in its unaudited results for the six months ended 30 June 2018. The cumulative effect of these errors resulted in the profit and loss position being overstated by about US$1,303,463.  The “profit” of US$143,330 announced back in August 2018 has now turned into a loss of US$1,160,133. The company disclosed that US$1,453,873 was erroneously recorded as inventories (or an overstatement of nearly 25%); US$20,453 was erroneously recorded as property, plant and equipment; US$172,238 was erroneously omitted as trade and other receivables; and US$196,869 was erroneously omitted as administrative expenses.

The company said that its audit committee and board “have observed that there were certain inadequacies in the Company’s internal controls which led to the lapses in recording of transactions”.

Y Ventures blamed the errors on “administrative inadvertences”, which therefore joined terms such as “administrative oversight” and “inadvertent omission” into the lexicon of excuses when companies make erroneous disclosures.

SGX Queries

Following the announcement of the errors and the release of the restated results, SGX Regco issued two detailed sets of queries.

In response to the first set of queries, Y Ventures said that there was an entry of incorrect unit costs for inventories as at 30 June 2018, which it explained was due to the company using Excel to reconcile inventory on a monthly basis. It said that such a system was adequate at listing as the company had one key supplier which accounted for a majority of the Group’s purchases. According to the company, it has now developed an in-house computerised Inventory Management System (IMS).

For the understatement of administrative expenses, it said that certain intercompany transactions and balances were not fully reconciled and eliminated as at 30 June 2018, but it now carries out consolidation of accounts on a monthly basis instead of half-yearly, which will enable management to detect any discrepancies in a more timely manner.

The company also said that insufficient manpower and expertise in the Finance and Accounting department had contributed to the errors, and that manpower has now been increased.

Catalist rule 719 requires an issuer to have adequate and effective systems of internal controls (including financial, operational, compliance and information technology controls) and risk management systems. Section 199(2A) of the Companies Act requires “every public company and every subsidiary company of a public company to devise and maintain a system of internal accounting controls sufficient to provide a reasonable assurance that —

(a) assets are safeguarded against loss from unauthorised use or disposition; and
(b) transactions are properly authorised and that they are recorded as necessary to permit the preparation of true and fair financial statements and to maintain accountability of assets.”

Inventory errors

Let us look more closely at the circumstances surrounding the errors and the company’s explanations. First, it is quite surprising that for a company which calls itself a “data analytics driven e-commerce retailer and distributor with presence on multiple online marketplaces in different jurisdictions” and which repeatedly touts its data analytics capabilities in its offer document, to be using Excel to reconcile its inventory on a monthly basis with unit costs manually keyed in. This was apparently the case until as late as about one year after its listing, and possibly later.

While the offer document disclosed that a substantial portion of its purchases under third party brands in the books publishing product category is from one supplier, there were 5,500 SKUs (stock keeping units, which are product identification codes to track individual inventory items) and 12,000 listings of active merchandises. Further, the company’s inventories had increased from US$1.14 million to US$6.06 million between FY2014 and FY2017, with inventories accounting for between 20% to 62% of total assets. It is surprising that there was no proper inventory management system (IMS) in place at the time of listing.

External and internal auditors

The company said that the company’s external auditors, Baker Tilly LLP, “have confirmed that they are not aware of any material misstatements relating to the prior periods that will require them to modify or withdraw their audit opinions for the financial years ended 31 December 2014, 2015, 2016 and 2017”.  Did the external auditors do additional work in order to provide this confirmation in light of the errors that have now being discovered by management? In its disclosures and responses to queries on how the errors were discovered and what transpired after that, there was no mention about the external auditors being asked to review the past audited financial statements – the actions described by the company were focused on the results for the half-year ended 30 June 2018.

Should the weak internal controls, particularly in inventory management, have been highlighted as a key audit matter by the external auditors, especially as inventories represented 62% of total assets as at 31 December 2017?

Y Ventures also said that in preparing for the company’s IPO, “PricewaterhouseCoopers Risk Services Pte Ltd (“PWC”)  was engaged to perform an internal controls review….which included the review of the inventory management of the Company”. After listing, Crowe Howarth First Trust Risk Advisory Pte Ltd (“Crowe Howarth”) was appointed as its internal auditors. However, the scope of the two rounds of internal audits up to the financial year ended 31 December 2018 following the listing excluded the inventory management processes because “all the recommendations of PWC at that time had been adequately addressed and implemented which included the inventory management processes”.

It is not clear from the company’s response what concerns, if any, did PWC in fact raise about the inventory management system. Further, if PWC’s internal controls review was a comprehensive one, it ought to have also covered those areas such as bank and cash management and sales, receivables and collections that were later covered by Crowe Howarth’s internal audits for the periods up to 31 December 2018. Therefore, the company’s explanation still does not provide sufficient clarity as to why the inventory management processes were not included within the scope of the two rounds of internal audit of Crowe Howarth.

According to the company, the internal audit for the year ended 31 December 2018 covered only two areas: human resource management and payroll, and follow-up review on prior year’s findings. If a risk-based approach to developing the internal audit plan had been used, one would have expected the inventory management process to be identified as high risk, given the importance of inventories, the previous Excel-based system and the changeover to the new IMS.

Given that the company disclosed that the internal audits by Crowe Howarth after listing included follow-up reviews of prior year’s findings, did these follow-up reviews include reviews of the recommendations of PWC and follow-up action, and provide the basis for the company’s view that all the PWC recommendations had been adequately addressed and implemented?

Audit committee

The company also said that the “Audit Committee was of the view that the internal controls were adequate and sufficient for the Company, including the inventory management processes, taking into account the volume of transactions at that time”. It added that “the Management and the Audit Committee was expecting a stable growth in the transaction volume and business operations of the Company in line with prior years, and were thus of the view that the internal controls continued to remain adequate and sufficient for the Company”.

On page 113 of the offer document, the company said that for FY2017, its directors have observed that “revenue is expected to increase due to the expansion of its product range, product mix and addition of new third party brands to our existing portfolio of third party brands, as well as the expansion of geographical market and online platform coverage for the sale of existing products on online marketplaces.” Further, under “investment merits” in the offer document, it highlighted its “track record of increasing sales with revenue almost doubling in two years, to US$12.1 million in FY2016”. Wasn’t the company expecting and conveying increasing growth through these statements and shouldn’t this have raised concerns about the inventory management processes?

Sales and inventories have been increasing year-on-year since FY2014, with inventories increasing sharply by 130% between FY2016 and FY2017.

Dividend policy

There are other concerns with certain statements by the company. Under “investment merits” in the offer document, it said that “For FY2017 and FY2018, [it] intends to declare an annual dividend of not less than 20.0% of our net profits after tax attributable to our shareholders for the respective financial year”. The company reported profits attributable to shareholders of the company of US$0.29 million, US$1.67 million and US$1.53 million in FY2014, FY2015 and FY2016 respectively before its listing, and then reported a loss of US$0.79 million in FY2017 after listing.

Was there a reasonable expectation that there would be profits for FY2017 since it had warned in the offer document that its financial results for FY2017 would be weighed down by ongoing compliance costs as a publicly-listed company, as well as the listing expenses for the placement in conjunction with its listing which was estimated to be S$1.68 million in the offer document? If there was not, it could arguably give the wrong impression to investors when the company said that it intended to declare an annual dividend of 20% of profits.

Since the company made a loss in FY2017, no dividend was in fact paid.  In the FY2017 annual report, the company changed its tune about the dividend policy as it now said: “The company does not have a fixed dividend policy. The issue of payment of dividends is deliberated by the Board annually, having regards to various factors (e.g., Company’s profit, cash flow, capital requirements for investment and growth, general business conditions and other factors as the Board deems appropriate)”. So, was the “dividend policy” expressed in the offer document inaccurate, or an administrative inadvertence?

Independent directors’ access to information

The 2012 Code of Corporate Governance (which the company used as the basis for its reporting on corporate governance in its FY2017 annual report) recommends that “Management should provide all members of the Board with management accounts and such explanation and information on a monthly basis”. Y Ventures said that its management provides the executive directors with management accounts on a monthly basis but the independent directors are updated on a half-yearly basis. It did not explain why independent directors are given information less frequently than the executive directors. Did the independent directors ask for monthly management accounts but were not given, or did they not see a need to be updated on a timely basis? Would this hinder their ability to keep abreast of what is happening on a timely basis and discharging their duties?

Delay in disclosure

In its first response to SGX’s queries, the company said: “Following the consolidation review by the Management of group financials for the year up to 30 September 2018 being performed, the Management detected certain accounting inadvertences in the accounting records for the nine months period ended 30 September 2018, when the preliminary set of financial figures were ready in late October 2018. The Company’s Executive Directors conducted further checks and reviews with the assistance of the new CFO, and subsequently discovered the accounting inadvertences around mid-November 2018. At the stage, there was still additional work required to be conducted in order to verify the financial figures against the source records and to assess the impact of the administrative inadvertences.”

In the second response to SGX’s queries, the company said that the audit committee and the sponsor were made aware of the “administrative inadvertences” around mid-November 2018.

Therefore, the errors were first detected in late October 2018, and then reported to the audit committee and sponsor in mid-November 2018.  Management, the audit committee and the sponsor then apparently decided that it was not necessary to immediately inform the market. The fact that there were errors in the accounts and the extent of the errors were only made known to the market after the close of trading on 21 January 2019.

Catalist Rule 703 requires the immediate announcement of material information which is necessary to avoid the establishment of a false market in the issuer’s securities or would be likely to materially affect the price or value of its securities. Section 203 of the Securities and Futures Act  (SFA) states that “a person…must not intentionally, recklessly or negligently fail to notify the approved exchange of such information as is required to be disclosed by the approved exchange under the listing rules”.

Some thought should be spared for those investors who bought shares of the company during this period, when they were trading as high as 30 cents. The day after the errors were announced, the shares closed at 18.7 cents and continued to tumble to 8.1 cents by 1 February 2018.

On 1 November and 2 November 2018, Prism Investment Ventures Limited, a pre-listing investor whose moratorium ended in July 2018, sold two blocks of shares at 28 cents and 22 cents per share respectively, reducing its total stake from 11.11% to 4.03%. The share price had closed at 30 cents on 31 October 2018. Investors may be concerned as to whether this substantial shareholder was aware of the undisclosed material information when it sold the shares. Regulators need to investigate to ensure that this was not the case.

Change in CFO

The circumstances surrounding the resignation of the former chief financial officer (CFO) “to pursue other career opportunities”, which was announced by the company on 31 August,  may also warrant scrutiny. Assuming that the company had announced as soon he gave notice of his resignation (which is required by the listing rules), the fact that he left the next day without serving any notice period may raise questions as to whether it was related to the errors in the accounts – especially since it was only 17 days after the incorrect results announcement. This is notwithstanding the fact that the continuing sponsor, RHT Capital, had stated that, based on its enquiries, there are no other material reasons for his resignation other than as disclosed in the announcement. Did the sponsor do an exit interview with the CFO? Key officers such as CFOs often have notice periods of three months or more in their employment contracts.

The company said that it has now increased the manpower in its Finance and Accounting Department from four to six staff, with a new 36 year-old CFO appointed the same day the former CFO left. Based on information disclosed at the time of his appointment and available online, the new CFO had joined the company as Head of Investment and Strategy four months prior to his CFO appointment, has a degree in business specialising in finance, and with prior working experience in business development and investment roles. Given the accounting and internal control issues in the company, and the small size of the Finance and Accounting Department, there may be questions as to whether he would be able to provide the leadership and expertise necessary to handle the accounting and internal control issues faced by the company.

More timely action needed

The company has said that it will appoint an independent reviewer in consultation with SGX Regco to review the internal controls of the Group and assess the impact of the adjustments on prior period financial statements. The reviewer is to report to the audit committee, sponsor and SGX Regco.

My view is that trading in the stock should have been suspended immediately once the material errors were discovered and a thorough special audit ordered then by SGX Regco. While queries can be useful to elicit additional explanations from issuers, in this case, there has been a serious misstatement of prior results, which was only disclosed more than five months after the results were released and about three months after the existence of errors apparently became known to management.

The internal control weaknesses appear to be systems and process-related, which in turn increase the risks of human errors and fraud.

There must therefore be doubt about the accuracy of the previous unaudited and audited financial statements of the company, including those prior to listing, notwithstanding the confirmations received from the external auditors and others.

Given the circumstances, I also believe the special auditor should only report to SGX Regco to ensure absolute objectivity in its findings.

The relevant regulators must then follow up timely with any necessary action for breaches in the listing rules, Securities and Futures Act and even Companies Act.


Commentary: Are SingPost’s lapses indicative of a deeper malaise in the company?

Friday, February 1st, 2019

First published by Channel NewsAsia on January 31, 2019

By Mak Yuen Teen

In a digital age where transactions, notifications and records have been digitalised, you would think the postman gets it easier.

But news of SingPost’s investigations this week after fresh images of mail found in a rubbish bin in Ang Mo Kio went viral and its subsequent update that it has referred the case to the Police have touched a raw nerve.

Last year, SingPost fired a postman after he was found to have thrown away returned letters and direct mail at a condominium, and a video of someone confronting the man and claiming he had just thrown a stack of letters into a rubbish bin had gone viral.

SingPost too had issued an apology just two weeks ago after receiving a string of complaints regarding undelivered mail from residents. 


These operational lapses have raised questions as to whether the company’s board of directors ought to be held responsible.

Are these episodes management failures that could have occurred even with the best corporate governance in place, or could they be indicative of the board failing to exercise adequate oversight and discharging their responsibilities?

The answer lies in the extent to which the board has taken necessary and reasonable steps when it became aware of problems.

Under Singapore’s Companies Act, the board of directors is responsible for managing, directing and supervising the company, and directors are required to act honestly and use reasonable diligence in the discharge of their duties.

In most companies, the board delegates the day-to-day management role to a management team led by the Chief Executive Officer or equivalent, with the board’s role then focused on advancing the interests of the company and its stakeholders, through overseeing, guiding and holding its management accountable.

But as part of its oversight role, the board is expected to ensure the necessary resources are in place for the company to meet its strategic objectives.

The board also has to ensure that there are proper policies, procedures and controls which are implemented in practice. It is responsible for appointing an ethical, competent and committed management team, and putting in place independent audit functions that provide reasonable assurance that the policies, procedures and controls are adequate and effective.


Let’s now consider the reported service failures at SingPost – including stacks of letters left on top of letter boxes, letters being thrown away, postmen delivering failed delivery notices but not actually ringing people’s doors and leaving parcels on people’s doorstep, as well as allegations of falsifications of proof of delivery.

SingPost had blamed a seasonal surge in demand over the November to December period, and cites additional 20 doorstep deliveries each day. Yet some readers say these problems seem to be longstanding ones that occur throughout the year so it is difficult to see how the fault can be attributed to seasonal factors.

Seasonal surges in demand are also recurrent in nature in the business of mail delivery so it is reasonable to expect the management to have forecasted demand and allocated the necessary resources to meet it.

SingPost had also attributed the incidents to the individual actions of a few wayward employees. But many of these service failures are clearly not new. For some years now, there had been complaints of failed delivery notices despite households having someone at home at those times.

SingPost had then referred the most recent case of mail seen in an Ang Mo Kio rubbish bin to the police, which may go some way to deter future rogue acts by errant postmen but might this distract from the crux of these problems? And will it solve any potentially deeper corporate governance issues?


Between 2015 and 2016, a number of corporate governance concerns over SingPost’s business operations were raised in a series of news reports and commentaries, which later contributed to an overhaul of the company’s board and senior management. Understanding what some of these woes were for SingPost those years ago may illuminate the root of the service lapses in recent months.

One concern was whether SingPost’s ventures into e-commerce and other areas would affect the quality of its traditional postal services, and how equipped SingPost was to drive this new business model.

Over a five-year period, the company made more than 20 acquisitions, spending over half a billion dollars to transform SingPost from a mail delivery business to a logistics and e-commerce business.

With traditional postal services relegated to a sunset industry, there were concerns the company may lose sight of ensuring service standards are maintained, when other areas promise more potential for growth and hold greater lure for investors with deep pockets.

A second concern was whether some of the long-serving independent directors who had been there for almost two decades had been there for too long. Did they have relevant experience and skills in the context of SingPost’s transformation? Might they have been overstepping their boundaries in making decisions they might not be equipped to?

Some of these directors formed an unusually active executive committee, blurring the lines between the role of company management and that of the board. The last acquisition made by the then board and executive committee – the US e-commerce company TradeGlobal – cost the company S$236 million but had to be impaired by S$185 million just one-and-a-half years after.

The board had also recruited then 37-year old Dr Wolfgang Baier as CEO (International) in 2011 and promoted him to Group CEO the same year. They also appointed Dr Sascha Hower Group Chief Operating Officer in 2012 when he was 33. Both left in 2016.

A third concern was whether the management team was equipped to integrate and manage the new businesses. Based on the disclosures of their profiles at the time of the appointment, Dr Baier and Dr Hower were career consultants with little or no experience managing companies. Several other consultants were also appointed to key management positions.

Then there was the high turnover of management, both in the years preceding the appointment of Dr Baier, and following his departure. Stock exchange rules only require disclosure when directors and certain key officers leave so it is unclear whether this was indicative of a similarly high employee turnover throughout the company.


Today, SingPost’s board and senior management team are unrecognisable from those years.

A new group CEO took over in June 2017, a new group CFO in August 2018 and a new CEO for postal services and Singapore will be taking over in April 2019. Hopefully, a stronger and stable management team is now in place but it will not be easy to turn this ship around, and not when a COO has not been appointed since Dr Hower left in 2016, a role that bears the heavy responsibility of optimising group operations. 

The current directors and senior management have the task of sewing up remaining corporate governance issues, reviewing the over 20 acquisitions made, improving operations, all while feeling the pressure from shareholders, an inherited legacy the new team will have to struggle with for some time.

These issues from the past may affect SingPost’s day-to-day operations if business controls have been weakened, including those relating to employee recruitment, induction, training, welfare, supervision and assessment – fueling frustration among its overworked and underappreciated postmen.

SingPost’s share price has dipped to about 60 per cent of what it was just before Dr Baier’s departure, and dividends have been cut. Public confidence too has been shaken when the recent few cases found huge traction with readers who say they experienced similar issues.

While the current board has taken steps to improve SingPost’s corporate governance and put in place a new management team, it needs to ensure that a thorough review of SingPost’s operations is conducted in light of the numerous lapses.

It should certainly not dismiss problems by attributing these to seasonal factors or rogue employees without a comprehensive assessment of the complaints.

This review has taken on even more urgency with the announcement by the Info-communications Media Development Authority (IMDA) that it will take firm action against SingPost for any breaches of its public postal licence requirements, that it “takes a serious view of any incident that impacts the reliability, integrity and security of Singapore’s public postal services”, and its direction that “SingPost must investigate all complaints and feedback raised, and take urgent steps to improve its service standards and restore public confidence in its postal services”.

Mak Yuen Teen is an associate professor of accounting at the NUS Business School where he specialises in corporate governance. The views in this article are his personal views.

Administrative oversight, inadvertent omissions, administrative inadvertences: what next?

Thursday, January 24th, 2019

By Mak Yuen Teen

In 2015, SingPost failed to disclose the interest of a director when it announced an acquisition and blamed it on an “administrative oversight”. Other companies soon used the same term, and “administrative oversight” entered the lexicon of listed companies here when explaining away incorrect disclosures.

When incorrect disclosures about past regulatory actions and a petition for winding up were made at the time of the appointment of Low Beng Tin as chairman of Datapulse Technology, the company issued a clarification and cited “inadvertent omissions”. Other companies in which Mr Low was also a director had also made similar incorrect disclosures and they too issued clarifications citing the same reason. It did not take long for other companies to cite “inadvertent omissions” when they had made incorrect disclosures.

On 21 January 2019, Y Ventures, which had listed on Catalist in July 2017, announced that it had discovered material errors in its unaudited results for the six months ended 30 June 2018, which were announced back in August 2018. The company did not call them “material errors” but they were certainly material because the cumulative effect of the errors resulted in the profit and loss position being overstated by about US$1,303,463.  The “profit” of US$143,330 announced back in August 2018 has now turned into a loss of US$1,160,133. It disclosed that US$1,453,873 was erroneously recorded as inventories; US$20,453 was erroneously recorded as property, plant and equipment; US$172,238 was erroneously omitted as trade and other receivables; and US$196,869 was erroneously omitted as administrative expenses. Consequential amendments had to be made to the various financial statements and notes to the accounts. Y Ventures blamed the errors on “administrative inadvertences”.

Whether a company chooses to call these errors “administrative oversight”, “inadvertent omission” or “administrative inadvertences” (thankfully, no company has yet to cite “inadvertent fraud”), regulators must ensure that a proper investigation is done and those responsible held accountable.

In the case of Y Ventures, it is interesting that the company announced on 31 August – just 17 days after the incorrect results announcement – that the chief financial officer had resigned “to pursue other career opportunities”. His effective date of resignation was the following day – in other words, he was out in a hurry.

Even though the continuing sponsor, RHT Capital, said that based on its enquiries, there are no other material reasons for his resignation other than as disclosed in the announcement, the regulators must respond in such situations and undertake proper investigations. They should investigate whether the resignation of the CFO is related to the incorrect announcement, for example, whether the CFO was placed under pressure in the preparation of the financial statements or whether he disagreed with the announced results. This may then lead to questions as to whether certain directors or management were aware that the financial statements contained material errors at that time. The errors in the unaudited results may also raise questions about whether there were also material errors in prior audited and unaudited results especially now that the audit committee and the board have said that they have observed “certain inadequacies in the Company’s internal controls which had led to the lapses in the recording of transactions”.

The Y Ventures case also illustrates the need to pay attention to events such as sudden resignations of CFOs especially around results announcements and with little notice (since employment contracts for management positions such as CFO would typically provide for at least a three-month notice period for resignation or termination). In a coming report due out at the end of February, we hope to provide some guidance to public investors on how to spot potholes in listed companies that tell them there may be major problems ahead.