| Yawning
Bread. 20 May 2008
Long term investments or long shots?
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It didn't take long to find an old press release by Citigroup dated the day that our sovereign wealth fund, the Government of Singapore Corp (GIC) bought 4 percent of Citigroup for US$6.9 billion. It referenced some remarks by none other than the same Vikram Pandit, by then the Chief Executive Officer of Citigroup. This got me quite interested. The story, dated 14 May 2008, goes like this [1]: In late 2005, Vikram Pandit went around asking people to invest in his new hedge fund called Old Lane. Among his first investors that he managed to persuade was Morgan Stanley, which agreed to put US$100 million in it. After Morgan Stanley's vote of confidence, other investors came knocking on its doors, including GIC. The Forbes story however, did not say how much GIC invested in the fund, but it noted that by April 2006 when it opened for business, it had a total of US$1.5 billion in assets. From the start, Old Lane struggled to meet expectations. It lost 3.38% in value in May 2006. Over the course of 2006, when other multi-strategy hedge funds turned in a 9% appreciation, Old Lane only managed a 4% growth for the April-December period. Still it managed to attract more investors, ending the year managing US$3.5 billion of assets. Forbes noted that Pandit himself had no direct experience putting money to work for investors even though he, at his previous job at Morgan Stanley, ran the investment bank's sales, trading and investment banking businesses. 2007 would be an even more difficult year for Old Lane with the subprime mortgage crisis coming on. In August 2007 alone, the fund lost 6%. Earlier in the year, a US$20 million investment in Amp'd Mobile, a mobile media-content provider, had to be written off when it went bankrupt. By then, however, Vikram Pandit had sold 100% of Old Lane to Citigroup, which paid US$800 million for it (April 2007). Pandit himself pocketed about US$165 million pretax. A few months later, Pandit took over as CEO of Citigroup in December 2007 and it was he who presided over the moment when GIC helped in the recapitalisation of the bank on 15 January 2008. Now Forbes reports that Old Lane, after being 5% down year-to-date April 2008, recently told investors that they could redeem their investments if they wished. Almost all of them, including Morgan Stanley took up the offer, and on 31 July 2008, some US$3 billion or so will flow out of the fund. Citigroup however cannot redeem its investment until 2011. * * * * * In the short term, it can't look too good, of course. Bloomberg reported that
Lee expressed confidence that the banks that GIC had invested in had "very good franchises, brand names, good managements," Vikram Pandit notwithstanding, it seems. While they won't get back to pre-crisis prices immediately, Lee said, perhaps "Five years, seven years, 10 years ... We will know in five to 10 years." On the one hand, his argument is not without merit. GIC has the advantage of being able to be a long term investor and therefore can take the kinds of bets that others cannot. However, it is also hard to imagine that anyone can know how any bet is likely to turn out so far in the future. GIC has the staying power, but does it have the foresight that others don't? If one doesn't have the special foresight for such a long term, should one be investing with such a horizon? * * * * * Is there anything in its latest financial report that can give us a clue why it appears to be so low? Glancing through the Management's Discussion and Analysis of the Financial Results for the first quarter 2008, I see that Shincorp had a consolidated net profit of 1.804 billion baht for Q1:2008, compared to a consolidated net loss of 1.719 billion baht in Q1:2007. However, last year's Q1 figure had a charge of 1.973 billion baht, for "impairment loss on concession assets". This was the write-down for the loss of the ITV television station after the court levied a huge fine on it that it couldn't pay. The government then withdrew the broadcasting licence. There was an additional "impairment loss on goodwill, investment and provision liability" last year of 447 million baht, related to another subsidiary, Capital OK. This was a finance company whose business suffered when the government imposed more stringent regulations relating to the maximum amount of interest and fees that finance companies can charge their customers. "This limited our consumer finance business opportunities," the report said, and Shincorp's interest in Capital OK was eventually sold off in December 2007, recording a further 60 million baht impairment loss with that disposal. Another major divestment was the sale of Shincorp's 49% interest in Thai Air Asia. Shincorp was under regulatory pressure to sell off Thai Air Asia to a local party otherwise the airline would lose its Thai nationality. Completed in June 2007, for 472 million baht, I can't see from the quarterly accounts whether there has been any write-off of goodwill -- in other words, whether they got a good price for it or not. The full year 2007 accounts should show this, but they couldn't be accessed from Shincorp's website. With these divestments, Shincorp's main operating business is even more that of mobile telephony, particularly through AIS.
AIS's own results appear quite good, although I didn't delve into its figures much. It reported revenue in Q1:2008 that was 9.9% higher than the first quarter of 2007. Its net profit in Q1:2008 was 28.6% above the same period 2007. AIS' cash flow remained strong, supporting 2.1 billion baht worth of capital investment, while repaying 4.256 billion baht of debt. Overall, Shincorp does give a picture of refocussing on the telecommunication business which continues to look solid. Why its share price is only 27 baht however, is hard to say. As the website's link to the full 2007 results was inoperative, I couldn't even calculate the Price/Earnings ratio. In any case, there is very little free float of Shincorp's stock, so it's not easy to say if any figure is meaningful. Nonetheless, I wonder whether the lingering political uncertainty in Thailand, with the associated sensitivity of Singapore's Temasek controlling it, continues to depress Shincorp's perceived value. With things still in flux -- and the
legal case charging Surin Upatkoon of Kularb Kaew for acting as Temasek's
nominee is still pending [2]
-- two and a half years after the controversial
purchase, we might want to ask, when will we know whether it was a good
investment or not? © Yawning Bread
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Footnotes
Addenda None
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A reader sent me a Forbes magazine article titled "Citi's Bad
Bet", which told a rather unsettling story about a US$4.5 billion
hedge fund gone down the tubes. One name in that story caught my eye --
Vikram Pandit, the founder of that hedge fund. Where had I seen that name
before, I wondered? I had never heard of that hedge fund, so it couldn't
have been in connection with it.
