By Mak Yuen Teen

Over the past few days, shareholders of Datapulse Technology may have thought for a moment that there was a by-election that they were not aware of or that they are living in Malaysia (which is of course about to have its general election).  In their mailbox was a letter dated April 6, in English and Chinese, from the CEO and Executive Director, Wilson Teng, lobbying shareholders to support the board and its diversification plan. However, there are some differences from the usual letter from politicians. There was a sample proxy form telling shareholders which boxes to tick.  Further, unlike political elections, it seems that the company decided that those who are known to support the opposition should not receive the letter. So I did not get one.

This latest letter follows two anonymous documents sent to shareholders –  a malicious and misleading one making allegations (including about me) and the other containing a sample proxy form along the same lines as the one included in the latest letter. Again, I and apparently other known “opposition” shareholders did not get them.

The latest letter shows just how desperate the current board and management are to remain in control of the company. While the company and CEO do not appear to have broken any rules, one might argue whether the CEO was using his position truly for the benefit of the company and its shareholders, or merely to entrench himself and his bosses. It is  also arguably against the spirit of good corporate governance given the perceived self-interest in hanging on. This is not the first time that the board of a SGX-listed company has faced a shareholders’ revolt with shareholders requisitioning or calling meetings to remove directors. But this is the first time that I am aware of where we have the board or CEO responding in this manner.

With three directors who were appointed only in December, who are supposed to be independent and to act in the best interest of the company, and a CEO who joined the company only on March 19, one has to wonder why they feel such a strong need to hold on. Sometimes, we have independent directors who resist the efforts of a controlling shareholder to remove them because they feel that it is not in the interest of the company as the controlling shareholder wants to appoint other “compliant” independent directors  (and all power to these independent directors with backbone). But this is not the case here. The company even resorted to attempting to undermine SGX’s directive to appoint independent professionals to undertake a review of its internal controls and corporate governance practices by appointing a firm that is not independent – and being caught doing so.

Are they afraid of what a truly independent reviewer will  find? Or that a new board may review the acquisition of Wayco and whether there was any prior agreement entered into between the directors and the controlling shareholder before they were appointed? Or that the new directors would unwind the Wayco acquisition by triggering the buyback clause (assuming that it can be triggered under reasonable terms)? Or perhaps review other past disclosures by the current and previous boards and management? Or a concern that planned acquisitions of other Way companies will be thwarted?

The truth is, the more they resist, the more shareholders should be sceptical about their motives. It is not like, for example, a case of founders or long-standing directors or management who have developed a deep affinity for a company and feel that they need to protect their “baby”. They have only recently “adopted” the company. The controlling shareholder, Ng Siew Hong, was not even a shareholder about five months ago. This is not Steve Jobs wanting to protect Apple from becoming a fruit producer.

Of course, Ms Ng did pay a significant premium of more than 50 percent so she needs to ensure that she gets a good return from her investment. However as I have pointed out in previous articles, just because she paid 55 cents does not mean the company’s shares are worth more than 55 cents. For example, hypothetically, if she is able to extract the $85 million in cash from the company leaving nothing for other shareholders (except maybe a 1-cent dividend),  she would get approximately $1.34 for each share [cash of $85m divided by the 63.5m shares she owns). Of course, I am not suggesting she plans to empty the cash from the company, but I am saying that a controlling shareholder can pay a significant premium and  get a significant return on the investment at the expense of other shareholders, not because the company’s shares are undervalued or that the company is expected to perform better with the new controlling shareholder. If the board is not truly independent of the controlling shareholder, the risk of controlling shareholders benefiting at the expense of minority shareholders increases.

Coming to the contents of the letter, everything that is in it have already been comprehensively refuted and questioned, including in my article “Nothing good about Datapulse’s diversification plan” which I posted on this website on April 10. The company seems to assume that if something is repeated enough times even in the face of overwhelming contrary evidence, it will become true or that shareholders will buy it. Or that if you now get somebody else to say it – the newly appointed CEO in this case, who barely knows the company – it will become true.

Good hair, bad hair or no hair

Let’s first consider what the CEO said in his letter to shareholders.

First, he said: “The current board and I strongly believe that diversifying into the consumer business, investment business and property business will allow the company to secure better prospects and you will be able to secure a better return on your investments.”

Well, as I had mentioned in my earlier diversification article, there is no reason why Datapulse should diversify into the investment business, which involves investing in publicly-listed securities, including shares. Shareholders can do this themselves. The 37 year-old independent director, Rainer Teo, with fund management/investment experience, is no Warren Buffett and is not going to suddenly help Datapulse become a superior investor. There is much research that shows that even “star” fund managers find it difficult to consistently “beat the market”.

As for the property business, the previous board had already obtained the mandate from shareholders to invest in property. As I had mentioned, there are so many SGX-listed companies wanting to diversify into property today and it has become something that companies do when they don’t know what else to do. Why should shareholders not get back the cash and invest in other listed companies that specialise in property, if they want to invest in property? I was in Kuala Lumpur earlier this week visiting a friend who has just bought a beautiful semi-detached house as part of a big development by a major property player. Just down the road was another big property development that was abandoned after substantial construction had taken place. Who is the developer for this? Well, I was told some wannabe property player who thought diversifying outside of its area of expertise was a good idea. Remember Datapulse had a brief foray into property in 2015 and exited quickly and somewhat controversially.

And then of course we have the consumer business, with the hair care business at its centre. The CEO letter has this to add: “In particular, there is expected growth in the hair care market in Singapore and Malaysia which Wayco may take advantage of to facilitate or aid it in transforming into a value chain play.”

The CEO is promising a good hair business, but to me, it is a bad hair business. This business can cause shareholders to take a big haircut on their investment.

Designed by Graphicdesign/Freepik.

In my Business Times article published on January 3 ,”Datapulse Technology: going about it the wrong way”, I had already questioned the viability of Wayco as a standalone business, given that most of its sales are through other Way companies. The strategic review by Ernst & Young agrees. On page 145 of the circular, it says” “Based on the work performed by EY, it has concluded that the existing Wayco business, being a standalone manufacturing business after the acquisition of the Company, is not sustainable.” It goes on to say: “The Wayco business can be sustainable if the following conditions materialise: (a) Datapulse puts in sufficient efforts to increase the utilization of manufacturing plants of Wayco; (b) Datapulse invests sufficient capex  to enhance the aged plant and equipment of Wayco; (c) Datapulse puts in sufficient investment in developing the “Goodlook leaf” brand it owns; and (d) “There are fair commercial terms remain (sic) regarding the sharing of profit margins and payment collection terms with key customer.” Notice the number of conditions required for the business to be sustainable. That will likely involve a lot of moolah – $85 million may not last very long.

Wayco should never have been bought as a standalone business in the first place as its business and profitability is highly dependent on other Way companies. Yet the board rushed out and bought it. After buying, surprise, surprise, the board now says that it may also consider buying other Way companies. As I mentioned in another article, this is like rushing into Ikea right before it closes, grabbing the legs of a chair, and then going back later to decide which chair the legs fit. This kind of decision-making has no place in any well-governed and managed company.

The CEO letter also talks about hair growth – sorry, I mean expected growth in the hair care business – and mentions that Way Company, which distributes Wayco products in Singapore, “is one of the top 10 companies that dominate the hair care market in Singapore.” If you are number 10 and the market is worth a zillion, or even a few billion, that could be good if the difference in market shares between number 1 and 2, and number 10 is small. However, the EY analysis shows that Way Company’s products has a 1.5% share of the Singapore market which is expected to reach $230 million by 2021. That’s S$3.45 million in potential revenues by 2021. Add the 0.03% share of the Malaysian market of Way Trading, and we have a total of about S$3.6 million. That’s if you count all the sales of the other Way companies, which means buying them too.

The CEO letter goes on to say: “…Datapulse bought not only a business but a business together with proprietary product formulations, the real estate properties and trademarks owned by Wayco.” Interesting that he should mention the trademarks. As I mentioned in my April 10 article, 15 out of the 19 trademarks supposedly owned by Wayco are not in use and 14 are expiring this year. Of most concern is that the product labels for “Goodlook” products say that the  “Goodlook Leaf” trademark is a registered trademark of a UK company that has been dormant since it was incorporated in 1988, has £100 in cash, and is owned by Ang Kong Meng and his sister. In my article, I had questioned who actually owns the trademark and whether there is misrepresentation in the product labels. Another trademark “Glorin”, which is supposed to be owned by Way Trading, which the board is considering buying, is owned by another dormant UK company which is also owned by Ang Kong Meng and his sister. The same may apply to other trademarks as I only managed to find those two brands in shops here.

The CEO letter also said that Datapulse is led by an established board and management team. I hope it’s not the side effects of hair product chemicals at work here. The board is led by a chairman whose track record in compliance, corporate governance and performance across different companies, including Datapulse, is poor. The two independent directors have no prior experience as directors of listed companies and there is nothing special about their background and prior work experience. They have no experience in the businesses that Datapulse is planning to diversify into (the investment business should not even be considered as a business that any listed company should be in). The CEO himself was based in Hong Kong and his experience is in the data centres and communications industries. His background in sales and business development may not transfer well into the consumer and other businesses.  The board and management are not suitable for taking the company forward.

In the press release issued on April 12, Datapulse seems to be letting its desperation really get the better of it, by mentioning some “pie in the sky” stuff. It talks about the projected growth in the Asia-Pacific hair care market to close to US$25 billion. This market is of course dominated by products from multinational giants like L’Oreal and Unilever. It repeated the statements about potential growth of the hair care market in Singapore and Malaysia without mentioning that, based on current market shares, the Way’s companies revenues would only be about S$3.6 million by 2021.

It talks about a 100-day action plan aimed at growing the business. Well, the Way companies have been at it for decades and we have a 1.5% market share in Singapore and a 0.03% share in Malaysia.

What Datapulse needs now is some kind of a transplant. Not a hair transplant, but a board transplant.