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.
