By Mak Yuen Teen
On March 1, 2018, YuuZoo Corporation (YuuZoo) (now called YuuZoo Networks Group) announced its 2017 4Q and full year results. Included in “other income” was a head-scratching gain of nearly $8 million from the “bargain purchase of assets” for YuuLog France.
Four days later, SGX issued a list of queries and a notice of compliance relating to its results, including about this gain from the bargain purchase. The notice of compliance required the company to engage its statutory auditors, RT LLP, to provide an opinion on, inter alia, the “other income” of $8 million. On May 22, the company announced that after discussions with the auditors, “other income” had been reduced to $7 million. No explanation needed – perhaps it was just a $1 million rounding error.
In my Business Times article “YuuZoo: A company like no other” published on March 20, I mentioned that on March 7, the Securities Investors Association (Singapore) (SIAS) had hosted a dialogue session between the management of YuuZoo and its shareholders, at which its then chairman Thomas Zilliacus spoke.
The following day, the company issued a press statement on SGX. It said that YuuLog France, its joint venture in the logistics business in France – what it called “end-to-end digilogistics” (and what others may call bull#$%&)– could bring the revenue of YuuZoo’s French operations to more than S$600 million annually, from the current entertainment products alone. I sarcastically remarked that at this rate, some company on the Straits Times Index may soon have to make way for YuuZoo, especially because in the same press release, it had boasted about a real estate project that it was embarking in Harbin, China, which could have a market value exceeding S$4 billion when fully completed. So, a small social media and e-commerce company would suddenly diversify into a multi-billion dollar real estate business without shareholders approval (and apparently without much capital).
The YuuLog France deal was always going to be too good to be true, as with so many of YuuZoo’s other deals, and so it proved yet again. On September 6, YuuZoo posted an update on YuuLog France which can be accessed here:
http://infopub.sgx.com/FileOpen/YZ%20-%20annt%20-%20update%20on%20operations%20of%20YuuLog%20France%20-%20final%20-%20att.ashx?App=Announcement&FileID=524318
It now said it has applied to the French courts for “judiciary recovery proceedings” following the deterioration of cash flows due to the loss of several major customers. The proceedings commenced on August 28. So much for the S$600 million annual revenue. But perhaps that Harbin project is now in full swing……
Meanwhile, there has been no further news on the regulatory investigations while the former chairman, who was allowed to travel after posting a bond, has been sighted on Instagram in various exotic locations.
I hope our regulators truly understand that our system is at risk of a catastrophic collapse in confidence, if this has not already happened. I have heard directly from some investors, and some through other market players, about investors giving up on investing in our market. I have never been so worried about the state of our market. Revising the corporate governance code and enhancing the listing rules feels like moving the deck chairs around when the ship is sinking. It is not just a massive debacle like Noble we are talking about, or the cruel joke that is YuuZoo, but a whole string of companies that have engaged in fraud or highly questionable deals, or destroyed massive amounts of shareholder value.
Copyright for cartoon belongs to Mak Yuen Teen
Enforcement definitely has to be stepped up. I believe we need to take the regulatory role out of SGX and put that in an independent statutory regulator. I repeat my call again for Singapore to have a separate securities regulator, like the SEC in US or SFC in HK. Nearly every market has a separate securities regulator – what makes us so different?
A statutory regulator does not need to fear being sued by companies and directors when it takes action against them – whereas SGX Regco may. Some years ago, I wrote that taking out the regulatory role from SGX may actually help it become a better exchange, because it will no longer be torn between attracting customers and beating them up. Of course, the securities regulator will then have to play a more active role in reviewing listings in case the now-liberated exchange starts attracting operators of “special service” massage spas and corporatised drug cartels in its pursuit of profits.
Recently, I received some validation for this view about an exchange without a frontline enforcement role. In a program for directors which I taught overseas, there were some from companies listed in a market where the exchange does not play a regulatory role. One told me that the exchange there is customer-focused because it is not encumbered by a regulatory role. But the companies and directors also know that if they misbehave, there will be a real regulator beating them up.
Regulatory intervention must also be more timely.
Datapulse Technology is engaging in another “interesting” transaction again through the proposed purchase of Geo Hotel in Kuala Lumpur from ICP. After the hairy acquisition of Wayco Manufacturing, shareholders can only wait with trepidation about what is to come. Geo Hotel was bought by ICP just about a year ago, in September last year, so one must wonder why ICP is selling it so quickly to Datapulse. Perhaps ICP, after suffering years of losses, needs the cash, but so do Datapulse shareholders.
Shareholders with money on the line will ask why. Some nosey commentators or journalists may do too. Independent directors worth their salt will question the commercial merits of such a deal. A real regulator with commercial nous may ask for business justification – in that market I was talking about above, the statutory regulator does challenge and disagree with specifics of transactions.
The hotel deal will thankfully be an interested person transaction this time, but it may still pass because of technicalities around who have to abstain from voting on this deal. And I would not necessarily put my faith in the opinion of an “independent financial adviser” – I just hope whoever is appointed doesn’t mistake Geo Hotel with the Shangri-La in KL.
Our listing rules also need a thorough review. I was teaching a program in KL earlier this week and we discussed the Datapulse’s acquisition of Wayco. After looking at the Bursa rules (where “related parties” include a fairly wide group of “persons connected”) and discussing with the independent directors in the program, it was fairly clear that the Wayco deal would have been a related party transaction if Datapulse had been a Malaysian listed company. I have in earlier articles already mentioned the concept of deemed connected persons in the HK listing rules which would almost certainly have made the Wayco deal a “connected transaction” there. And it has already been pointed out in the delisting of Vard Holdings that the rules in HK also provide better protection to minority shareholders in delisting situations.
Speaking of HK, the due diligence and scrutiny by the exchange and the securities regulator for companies seeking to list there is something to behold. Someone recently shared with me a set of questions that the HK stock exchange directed at a sponsor which was helping to take a Singapore company to list in HK. I thought the questions were tough – until he told me that there would on average be about ten sets of such probing questions coming from the exchange and the Securities and Futures Commission there. The entire process takes a long time. This does not seem to stop companies from wanting to list in HK – probably because investors will feel much more confident about investing in companies once they are listed there and therefore, they will get better valuations and liquidity. It is just too bad that we don’t seem to care much about the quality of companies or investor protection, seemingly happy for a company to be listed and then crash and burn soon after.
