Observations and thoughts from my latest trip to Asia

I am currently traveling in Asia, so posting has been light in the past few days.
In Singapore I had the opportunity to talk to a few people with good on the ground knowledge of banking business in Asia. Needless to say, most of the deals being done are a derivative of the China play: be it coal mines in Indonesia, where loss making, high-cost miners arise the interest of private equity funds in expectation of a turnaround, or be it exporters all over Asia playing the Yuan carry trade via in-house trading companies – all trades are dependent on China’s mandarins achieving a “soft landing”.  The atmosphere is buoyant, credit standards are low and Singapore is ludicrously expensive.

Singapore, as a global center for trade finance, is natural habitat for CNY carry traders: I was told that trading companies have over the past few years increasingly accepted to be paid in CNY by their customers despite being funded in USD thereby nicely increasing their operating margin (Being long the CNY earns you an interest rate differential vs. the USD). A lot of commodity producers and logistics companies do have their own trading operations located in Singapore. Fittingly, this week Forbes Asia  had a nice story about the turnaround at CWT, a large, listed logistics company from Singapore whose seminal decision in the turnaround was the aquisition of a commodity trader. From the Forbes article:

Then, in 2011 Loi pulled off the deal that has transformed the company, spending $94 million to buy most of MRI Trading, which had been set up by the late Glencore founder Marc Rich. Margins may be very low, but cash flow is very stable. “With MRI we buy and sell commodities rather than being simply a middleman,” he says. “We have become a one-stop shop for customers.” He set up a second MRI headquarters in Singapore to complement the one in Switzerland, ramping up enough to become the world’s second-largest independent trader of copper concentrate; only Dutch behemoth Trafigura is bigger.

Given what I saw during my visit I would be surprised if CWT were NOT heavily long the CNY/USD. Indeed, I was wondering how much of the profit of Asian commodity producers (palm oil, coal, oil…) is due to the positive carry from CNY. Keep that in mind, next time you analyze any Asian conglomerate – I for my part won’t buy any, but I am getting ahead of myself…

I also learned that the rule of law does not really exist in most Asian countries. That might not be surprising in and off itself, but the extent to which local connections hamper ordinary bank business was still astonishing. For example liquidating collateral WITHOUT the cooperation of the debtor in Indonesia is virtually impossible. Once extend and pretend is not a feasible strategy anymore, large losses are in the cards. I had the feeling that these issues were much larger than, say, in Eastern Europe including Russia.

“Ah Indonesia, but certainly Singapore and the Tiger states are different,” I hear you say…

While certainly true that the sort of property rights infringements seen in Indonesia are unheard of in Singapore or Korea, these countries have issues of their own. It seems that corporate governance issues, albeit a problem with most listed companies, exist to an extent that are “unusual” for European or US corporations. Last week’s story about a land purchase by Hyundai illustrates my point:

Yesterday, companies controlled by the patriarch of SouthKorea’s second-largest family run conglomerate won an auction for a plot of prime real estate in Seoul with a 10.55 trillion won ($10 billion) bid, in what one researcher estimated to be the biggest-ever such deal worldwide. Hyundai’s rationale for offering triple the property’s assessed value is that the company will move its headquarters there and develop the area by building a hotel, convention center and a car museum.

Indeed, a hotel and a convention center are certainly reasonable business segments for a car producer to be in… But it gets really absurd if we look closer at the price paid:

The price Hyundai is paying stands out. At almost $130,000 per square meter, it’s more than triple the most expensive commercial block deal, on a square-meter basis, in Hong Kong:Agricultural Bank of China Ltd.’s 2012 purchase of an office tower on the outskirts of the Central business district.

130.000 USD/sqm – or triple the record price paid in the (booming) business district of Hong kong by Agricultural Bank of China, itself probably prone to overpaying! And this without properly informing investors and the supervisory board!

The company’s reaction? Judge yourself:

Asked to comment on concerns over the price, Hyundai Motor said in a statement that the offer was appropriate given factors such as the property’s future value, the company’s strategic plans and the need to create a “global control tower.”

You see: “global control tower” and future value – thank you, no questions anymore…

Conclusions

As regular readers know, it is my opinion that the Chinese credit expansion of the past five years, has affected world markets more than any western central bank policy. This is especially true of Asia, as evidenced by valuations and types of transactions that, I claim, would not be possible in this form in the US or Europe. China affects the surrounding countries’ economies not only via demand for services and raw materials, but also via profits from the (so far) successful CNY carry trade which is largely played via trade finance deals usually exclusively associated with (healthy) real economic activity. As a consequence, operating profits are distorted. Even if companies are indeed operationally successful (as is the case with Hyundai), corporate governance issues loom large and it is questionably to what extent long-term outside investors can participate. I, for my part, see no reason to invest in Asian equities (or currencies) at this moment – the Chinese slowdown is far from priced in.

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2 comments

  1. Couldn’t agree more with these sentiments, I’m actually currently working on a Singapore-listed company which looks like a blindingly obvious fraud. It never ceases to amaze me to see how credulous many westerners are towards some of these Asian governments and companies- the Economist’s Asia/China coverage has almost led me to cancel my subscription more than once (to their credit it’s one of the few times I am reminded of the fact that the magazine is largely written by pimple-faced, newly-minted Oxbridge grads).

    I understand that the growth gets people excited, but these can be pretty lawless and corrupt places where life is very, very cheap. I’ve heard you can hire a moped hitman in Kuala Lampur for less than a cocktail will cost you in Midtown Manhattan.

    From my understanding Singapore is now the global capital of money laundering- in this case, as you mention, this mostly seems to be a derivative of the Macau boom

  2. Nick, I once read on Brontecapital’s blog that he thinks that the Singapore stock market is the “puff of the world”…I always had to think about this metaphor during my visit.
    I personally think that Asia is way overrated (economically) speaking i.e. I do not see the foundations for broad, selfsustaining growth (rule of law, work ethic, bottom-up problem solving skills) – but maybe I am wrong…

    On the flight back I was sitting next to the sales rep of a German Mittelstand exporter who told incredible stories about the low productivity he encountered with local businesses-like: five people doing the work of one low-skilled worker in Germany, but always looking busy (presumbaly, that’s why the journalists fall for them :-).
    He also told me that the Asian costumers are realizing that the Chinese copiycatmachines are of inferior quality and ultimately more expensive…

    The economist has deteriorated significantly over the past decade. Once I was an avid reader, but know I only turn to it if nothing else is available…it is written in a boring and moralizing way..

    I do have to say, though, that I respect the achievement of Lee in making modern Singapore- a poor-house not so long ago.. It takes vision and determination to build a modern city under these difficult conditions (basically surrounded by jungle and backward states).

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