By Mak Yuen Teen
About four years ago, I published a commentary with a colleague and a former student about how the market reacts to company responses to price queries issued by the Singapore Exchange. This was based on a study by the student conducted under our supervision. Our conclusion was that the query system seems to perform comparatively better in Hong Kong than in Singapore. This commentary can be accessed here on my website:
SGX responded to our commentary here:
Market reaction to queries: Singapore’s experience is consistent with Hong Kong’s
Their view was that our statistics do not support our conclusion.
I responded to SGX’s letter with the response here:
I said we stood by our conclusion and said:
“A key reason why we concluded that the query system seems to be less effective in Singapore compared to Hong Kong is that there were more scenarios in Hong Kong where responses resulted in a market reaction. For example, where there had been a price run-down, responses from issuers in Hong Kong that provided no new explanation, partial new explanation and detailed new explanation all elicited a market reaction, while responses from Singapore issuers that provided no new explanation and partial new explanation did not elicit any market reaction.
While both markets have a large proportion of responses that provided no new explanation, three-quarters in Singapore did so, compared to two-thirds in Hong Kong. This is not to say that the query system in Hong Kong cannot be improved. We should not merely strive to ensure that our query system is no worse than Hong Kong’s, but we should strive to make our system as useful and robust as it can be.”
The study also found that there was no significant market reactions to disclosure queries, although methodological limitations may partly explain this.
In my response, I also discussed other deficiencies with the SGX query system. I cited an example of a company that had failed to promptly announce 14 grants of restricted and performance shares dating back more than six years. When it responded to SGX, it acknowledged that it had failed to comply with the SGX listing rules requiring immediate announcement of grants of options and shares. It also disclosed an “inadvertent clerical error” on the date of two of these grants in its annual report. In terms of disclosure lapses, this is probably within the category of the less serious kind, although failing to make timely disclosure of such grants can be used to hide “backdating” of grants. I concluded that this company probably did not backdate its grants based on historical share prices and dates of the grants.
However, there are many other issuers that make more serious disclosure lapses that go unpunished. This may cause a loss of confidence in SGX rules relating to continuous disclosure of material price-sensitive information, which forms the bedrock of our disclosure-based regime.
In this particular case, the company also took more than three months to issue its response. It is unclear how much time SGX actually allows a company to respond to its queries and SGX does not say so. It also does not tell the market when it issues a query – one typically only knows when a company responds, when it chooses to. We do not even know if there are companies that do not respond when queried by SGX.
I added: “Why does SGX not disclose to the market as soon as it issues a query, whether it is a query about unusual trading activity or disclosure? Regulatory actions such as queries can themselves contain information relevant to the investors and it is best that the market is made aware of any query immediately. In reviewing the corporate governance of issuers, I would consider repeated queries to be a red flag, and the timeliness of responses to queries would affect the usefulness of the information provided in the responses. I would suggest that SGX further review its query system and consider timely disclosure of all its queries to improve the effectiveness of the query system.”
Based on my recent observation of how companies respond to disclosure queries, I do not see any improvement in the system. Some responses are just totally useless or incomprehensible, and sometimes they are issued in response to errors in earlier announcements, which themselves often carry no consequence based on my observation.
Let’s look at some recent examples (most over just a span of a few days).
Transcorp Holdings
Transcorp Holdings responded to a series of queries on 13 March 2018. It disclosed that one set of responses related to queries that were made on 1 November 2017, while the other set was for queries made on 27 and 28 February 2018. Therefore, the company took nearly 4.5 months to respond to the first set of queries. This looks like disclosure in slow motion. Is this acceptable to SGX? Is such a delayed response useful to investors?
(Updated on 14 June: I have been informed that Transcorp responded to the 1 November 2017 query on 8 November and that SGX told the company to publicly disclose the response some four months later. This still raises the issue of the usefulness of the response given the delay – and also why SGX took four months to ask the company to make the public disclosure. Further, should SGX be making the judgement as to whether a response should be publicly disclosed or should all responses to queries be disclosed? Or to put it another way, if SGX feels that a matter is sufficiently important to be queried, wouldn’t it also be important to investors? Presumably SGX may not have much say over the quality of the response since the quality of some responses leave much to be desired.)
China Gaoxian
On 8 June, China Gaoxian responded to the following query by SGX.
SGX query:
- On page 13 of the 1QFY2018 Results, the Company explained that “Bills and other receivables decreased by RMB 9.8 million to RMB 209.9 million as at 31 March 2018 from RMB 155.8 million as at 31 December 2017.”
However “Bills and other receivables” should have been an increase of RMB 54.1 million to RMB 209.9 million as at 31 March 2018 from RMB 155.8 million as at 31 December 2017. Therefore please provide the reason for the increase of RMB 54.1 million in “Bills and other receivables”.
Company’s response:
(1) There was a typo error on Page 13, which it should read as, “Bills and other receivables increased by RMB 54.1 million”.
(2) The increase in bills and other receivables by RMB 54.1 million was mainly due to payment-in-transit for loan repayment of RMB 50.0 million to advances from third parties. The Group has received payment acknowledgement from third parties subsequent to 31 March 2018.
First of all, I cannot understand how an increase of RMB54.1 million can be mis-typed as a decrease of RMB9.8 million, and how the RMB9.8 million can even appear in the original results announcement. All the company has to do is to admit that there was a typo. What about the responsibility of the board to ensure that announcements are accurate?
However, it is the company’s response in (2) that blew me away. What does the response even mean? To confirm that it is not just me who doesn’t get it, I sent the response to about 10 people who have backgrounds in accounting and finance, including those who are CFOs and financial controllers. They were just as confused as me. What chance does the investor have of understanding such a response?
Swee Hong
Or take the case of Swee Hong. On 7 June, it responded to the following queries by SGX:
SGX query 1:
On page 3 of the 3Q2018 Results, the Company disclosed that “Trade and other receivables” of S$39.6 million, which exceeds “Revenue” of S$11.7 million. Please provide:
- (i) An aging analysis of the receivables; and
- (ii) Details on the collectability of the receivables.
Company’s response:
For the aging analysis of the receivables, the company’s response showed a breakdown into the components of trade receivables, construction contracts due from customers, non-trade receivables, deposits and prepayment, but for each component, it showed the entire amount as “Less than one year”. My first year accounting students will know that this is not an “aging analysis”. Perhaps SGX could have been clearer in its query by asking for an aging analysis broken down into specific periods (like it did in another recent set of queries to China Taisan Technology Group, which the company responded to on 3 June), but do none of the directors or officers understand what is meant by an aging analysis, or are they just giving a minimal response hoping that it will satisfy SGX?
SGX query 2:
On page 10 of the 3Q2018 Results, the Company disclosed that “Administrative expenses increased by S$775,000 from S$173,000 in 3Q2017 to S$948,000 in 3Q2018 mainly due to increased salaries and related expense.”
Please provide a breakdown of the Administrative expenses.
Company’s response:
In the company’s response, it gave a breakdown of the administrative expenses as requested – for 3Q18 and 3Q17 – but the problem is that while the breakdown shows the change in different components of administrative expenses and large increases in “salaries and related expenses” from S$120k to $653k and “other administrative expenses” from S$53k to $284k, it does not explain the reasons for the increases, which surely is the intention of the query. The query should have explicitly asked for explanations for significant increases and the company responded exactly to what was asked. Ironically, it gave reasons for the component that decreased (depreciation charges) but not those that increased.
Again, the question is whether SGX should accept such responses and whether they are of any use to investors at all.
Spackman Entertainment Group
On 22 May, Spackman Entertainment Group Limited (SEGL) announced that it had entered into a share sale and purchase agreement (SPA) with certain existing shareholders of the company’s associated company, Spackman Media Group Limited (SMGL). SMGL is incorporated in Hong Kong. Under the SPA, SEGL will purchase 2.3 million ordinary shares of SMGL representing 7.52% equity interest of SMGL at US$3 per SMGL for a purchase consideration of US$6.9 million. The purchase consideration was to be satisfied through the issue of 101,607,865 newly issued ordinary shares of SEGL at an issue price of S$0.09 per share, which is a premium of 26.8% over the volume weighted average price of S$0.071 for SEGL shares.
After the transaction, SEGL’s shareholding in SMGL will increase from 33.76% to 41.28%. SEGL said that the vendors are all unrelated third parties of SEGL, the directors and the substantial shareholders of SEGL.
This follows three earlier SPAs announced on 2 March 2017, 11 October 2017 and 22 December 2017 for similar exchanges of shares, and these four SPAs resulted in SEGL’s stake in SMGL increasing from 24.53% to 41.28%.
SGX did not query the earlier SPAs, but did so with the latest SPA. But the queries and the responses are unhelpful.
SGX query 1
Please explain how the purchase consideration of US$6.9 million was arrived at in light of the NTA and NAV of SMGL.
SEGL responded to the query as follows. First, it said: “Since 2017, the Group has completed three such similar Share Sale and Purchase Agreement with certain existing shareholders of SMGL to acquire SMGL shares at the same purchase price of US$3 per SMGL share”. Or in other words, we have used that price in the past and we are using the same price, so everything should be fine.
It added: “The NTA and NAV of SMGL as at 31 December 2017 stood at US$7.9 million and US$12.7 million respectively, which are higher than the previous announced NTA and NAV of SMGL as at 31 December 2016, 30 June 2017 and 30 September 2017”. Or in other words, SMGL is worth more today than it did when we undertook those previous SPAs, so everything should be fine.
It went on say that the acquisition is on a non-cash basis, SEGL is increasing its stake in a profitable company using shares, and SEGL believes that the acquisition is earnings accretive. It also cited a RHB report by an unnamed analyst who has estimated SMGL’s value per share to be between US$4.70 to US$8.00. I found a RHB analyst putting a bullish valuation on SMGL in 2017 – the same analyst who set a target price for SEGL of 32 cents in 2017, then lowered it to 27 cents, then 23 cents, then 20 cents and finally 10 cents last month, but who consistently maintained a “buy” recommendation. Unfortunately, SEGL closed at 6 cents on 11 June – pity those investors who followed his recommendation. Is it acceptable to use an analyst report to support a valuation?
SGX’s second query asked about the board’s views and bases on why this acquisition is in the interest of SEGL. Such a general query not surprisingly elicited a response that is not particularly useful to investors. What would you expect the board to say, other than it is good for the company?
I was surprised that SGX did not query the following:
- who are the “unrelated third parties” or vendors for the four SPAs?
- why is SEGL paying a (notional) consideration of US$6.9 million to acquire an additional 7.52% stake in SMGL whose total NTA and NAV were just US$7.9 million and US$12.7 million respectively, and whose unaudited profit before tax was US$0.86 million for FY2016 and audited profit before tax for FY2017 was just US$0.27 million? (if we take the actual price of $0.06 cents for SEGL shares, that translates to a total consideration of S$6.096 million or US$4.569 million, which would still imply a total market value of US$60.76 million – or 7.69 times and 4.78 times NTA and NAV respectively)
- what is the basis for setting the issue price of SEGL at S$0.09 or a premium of 26.8% from the volume weighted average price of S$0.071 at the time of announcement of the SPA? (the premium is even larger at the time of completion given the subsequent decline in SEGL’s share price to S$0.06; the continuing decline in SEGL’s share price is hardly surprising given the high price that SEGL is paying for the SMGL shares under the four SPAs)
I was even more surprised that the responses from SEGL were considered acceptable by SGX, which duly approved the listing of the additional new shares just five hours later on the same day.
It does not appear to me that the query system is doing enough in ensuring the investors are sufficiently informed and adequately protected.
