Posted by: donmihaihai | March 28, 2010

Option time.

Giving share option to executive, independent director and manager has not been really catch up in Singapore properly due to the fact that most of the listed entities are being run by owner-managers or owners take up majority of the directorship in the company. It is their interests that prevented giving huge amount of share options which will dilute their shareholding in time to come. It is not to say owner-manager can’t get their hand on share option as it can be done through a resolution in SGM. Because of all these, the spread of share option has been in checked.

What happened elsewhere especially in US is very much different from here, especially in the last 20 years or so. Good or bad, options created many millionaires or even billionaires and lot of real life lessons being taught. The recent one that I remembered was the back dating the option date. Before that there was the issue of expensing share option. A battle between treating them as expenses or not last for around 10 to 15 years. Of the whole issue, the most clear and unforgettable comment come from Warren Buffett.

“If options aren’t a form of compensation, what are they? If compensation isn’t an expense, what is it? And if expenses shouldn’t go into the calculation of earnings, where in the world should they go?”

It is simple and clear, strike right to the heart of the matter. Who don’t understand it? I didn’t in the first place. I did not have a good knowledge of about what are expenses, share option, accounting treatment back then. It took me perhaps 2 to 3 years before me slowly but surely to understand it. No one pointed a gun on my head and say, “share option is expenses because of what, what, what and what.” I got it by reading through annual reports and before that the ability to understand financial statements. Well, before investing I don’t even know what is accounting. What I knew was girl usually study business and accounting related while guy study engineering related in school days. And my understanding of accounting stop right there.

After clearing this block, I remained very focus on reading the disclosure of share option in annual reports. Knowing the danger of dilution if share option is being exercised, I would brighten up even cheer if the company has share options that expired worthless because share price is below exercise price. Unable to think, it took my perhaps even longer to understand the stupidity of my actions. WB said it clearly(and I had read it don’t know how many times) that stock option is a form of compensation! By expiring worthless, which may or may not due to the actions of the company and employees then these employees are not being paid adequately. The consequence can be as harmful as the effect of dilution. It is no fun for both shareholders and employees.

On the other hand, just like back dating of share options date that happened in US recently. The ability to issue share option anything invite opportunistic behavior. This behavior arises because of insiders and outsiders. No matter what are the rights of shareholders, outside/minority shareholders are going to be treated differently. Working side by side and having good working relationship, when the opportunity is there, some just used it, issue share option to enrich the inside group at the expense of outside group. This opportunity is given by the swinging stock market. The last 2 to 3 years provided such an opportunity. I think I see a few company used it to issue share options at depressed share price, or unbelievable price.

I believe there are many more because the remuneration committee or board of director has given the ability to issue stock option. Simply say, they are given the option to abuse or enriched themselves. So why should I be surprised when some decided to exercise their option and starting issuing share option!

It is AGM time because most listed companies have ended their financial year at 31 December. Company will usually seek authority to issue stock options as and when thru a special resolution during AGM. Rather than voting yes or don’t care about it, it is good to look at the company stock option history, query on the process on why and how before voting on this resolution as if this is an another ordinary resolution. For companies that look like they had exercised their option, voice it out. It may not change anything but at least let them know that someone is watching.

Suspect’s #1 — Pfood

Pfood listed in Singapore stock exchange in 2001. For 8 years, it has never issue any stock option. But it changed on Jan 2010 by issuing 45.2 million of stock options to one Executive director, 3 independent directors and senior management, exercise at $0.626, 1 year from issue date and last for 10 years. 45.2 million is a small amount considered that Pfood has 1.13 billion of shares outstanding which mean it is about 4% only. But why now after eight years of doing nothing? While the businesses of Pfood were not doing well for the past year or so, it is basically debt free, generating positive cashflow and sitting on cash. There are huge CAPEX coming but if that the only reason?

At $0.626, option holders can basically exercise and purchase Pfood share at less than 0.8X NBV without even need to consider the value of its associate company Pine Agritech. This is cheap and this option period last until 2020. Who don’t want this kind of deal and who are going to benefit from this? Of course senior management gets a big portion at around 32 million. Next Zhou Lian Liang, executive director and brother of CEO, is allocated the biggest shares at 9.04 million share options. Of course, all 3 independent directors are not being left out with each getting 1.36million share options. Why not since the remuneration committee has been seated by 3 independent directors! So at one stroke, all inside-parties except controlling shareholders will benefit greatly if they are able to exercise their share options in the future.

Suspects #2 — HTL International

We are seeing more of HTL International recently as there is a change of fortune from reporting loss to profit in P&L level and paying dividends of 6 cents in FY2009. HTL share price jumped 10X to reach $0.845 from its 2009 low of around 6.5 cents to 8 cents. Make no mistake, it is a 10 baggers in 1 years and dividend yield of 75% to 92%. It is all possible because HTL International was selling at less than 0.2X NBV at that moment. Cheap beyond words and anyone who can get over that their main business was at global slump and making losses at P&L level can easily see that HTL was a very healthy company back then. I guess it was not hard for insiders.

In Feb 2009, All Independent director plus 1 executive director and senior management received 7.28 million of share options representing 1.7% of total outstanding share. Indeed, that is just a small amount. But well, the exercise price of these share options is $0.07! As good as all time low! Sure enough while controlling directors who did not received any, the rest did. All 3 independent directors who seat the remuneration committee received a cut for their hard work.

Before I end this, it is good to know that depend on timing of adoption FRS, company is required to expenses share option at 2004 or 2005. That mean one of the benefit of share option will be gone. And some companies stop issuing share option from after the changes of FRS. For HTL International, stop issuing share option at 2004, taking a 5 years break and resumed when share price reached all time low.

Suspects #3 — Food Empire

While the share price of Food Empire has not produced a 10 bagger, remuneration committee is certainty doing a HTL. Issuing share options before the needs to expense them at P&L level, stop issuing when FRS changes then start issuing again recently, not at all time low but low enough at around 1X NBV, better still with it share price being ignored and hardly move. Of course Food Empire was doing badly last year in their key market but once one can get over the red or black ink at P&L level, Food Empire has very strong market share and position that will not be easily push away even if it is facing international giants.

There is nothing much to say except that watch the disclosure of key executive compensation level, it changes according as FRS changes in FY2005. This say alot about these executives.

Another kind of Suspects — Beng Kuang Marine

In AGM 09, Beng Kuang Marine adoption a share performance plan. For a scheme like this, employee with outstanding performance will receive performance share. But that is not all, your name must start with a “Chua” as well. Chua Beng Kuang, Chua Meng Hua, Chua Beng Yong, Chua Beng Hock and Chua Wui Wui must have work extremely hard for this company. All in they received 14.4 million shares representing 3.7% of total outstanding shares.

Beng Kuang Marine generated revenues of 95.7 million, 131 million and 138 million in FY2007, FY2008 and FY2009 respectively. NPAT at 7.7 million, 8.4 million and 8.8 million in FY2007, FY2008 amd FY2009 respectively. ROE dropped from about 20% from FY2007 and FY2008 to 15% in FY2009. For a company that generated NPAT of below 10 million, its director and executive officer get 3.3 million and 4.1 million in FY2007 and FY2008 respectively. They are expensive even before getting performance shares.

With the AGM at company shipyard, I bet it was passed effortlessly.



  1. Notice FEH was tagged. I followed it since 05, rode it up, sold at high, bought back on it way down and sold out eventually at square one last year. The last AGM was mind-opening.

    The key question now is: would FEH regain their dominance in their key markets?

    After the crisis, with the predators launching full attacks, I cannot confirm full recovery to its former glory days. Although the company is safe now, the earning power going forward could be substantially lower.

    Cash up and borrowing down, receivable and inventory both down, quarterly revenue improvement, esp. the last quarter. What else did you see?

  2. I see what you see. Cash, debt, receivable, inventory and revenues. Receivables improved but not much. Cash up because revenues dropped faster. But this should not be a big concern anymore because the whole process show that FEH is just tightening and loosening its string.

    But I think the key question is – What make FEH lose their dominance in their key markets?

    This question is not going to change with or without the crisis.

    Branding is a strange thing. Once it become part of the people daily life, it is very hard to take it away. Competitors like Nestle and Kaft are not going to walk in and take that mind space at ease. Super coffeemix has been mis-managed for years by letting other to come in and take market share but it is still sub-profitable. Recently Super realised it, trying to fight back but it is very hard to do so as compare to how they did it in the 1st place. 1st move advantage like what FEH has in its key market and Super in SEA is something that is very valuable.

    Another thing is if FEH is not going to lose its dominance then someday nestle or Kaft may buy FEH.

    What is the earning power of FEH going forward? I don’t know. But at current price, I see why not. Despite all its problems, I don’t see FEH being mis-managed on the most important factor — branding.

  3. Need to tidy up my tag… 🙂

  4. Thanks. I wasn’t thinking of a takeover. A 2007 Merrill Lynch report also mentioned FEH as a potential takeover candidate. Looks more likely if they don’t get anything by going head on. Better still, a bidding war between Kraft and Nestle takes place.

    I remember my mentor telling me about how things may change after Salim becoming a substantial shareholder. The founders had cashed out, leaving behind Tan to run the business. In a way, he is “forced” to behave more as an employee rather than an enterprising businessman. Fatter remuneration too.

  5. If you look around, for most major giant soft drinks, beers, coffees, confectionery, cigarette, etc, despite their resources, they have hard time getting in new market if there is a strong player in it. And some will buy. This is not new.

    While I have not look into what are the effects after salim stepped in, I don’t agree with this assumption.

    Take Lippo in FJ as example. majority holding, old members ‘forced out”, FJ run by new members.

    Salim in FEH, minority holding as others, Oons out, the rest stayed. I am not sure the impact of Oon selling out but I would rather look at Sudeep Nair and Tan. I don’t know who is Sudeep Nair but he sold his business to FEH, getting shares, getting disproportion of stock options and remuneration. I think he should be the one to take note rather than Oon.

    It is possible that the relationship may not be good.

    Fatter remuneration started before not after Salim stepped in, exactly when FRS required stock option to be expense. But it reduced again in 2008.

  6. Salim may be well known but may not be a good shareholder, evident from the many businesses they run back in indon.

    I noticed FEH has low growth even though in emerging mkts. 2009 has a positive if there wasnt the 2m impairment of intangible (non cash).

    And whats with HTL? Why didnt the same happen to Cacola? That firm is way cheaper albeit with operations hit bad last year.

    anw added u to my blog link
    mines at

  7. >>Salim may be well known but may not be a good shareholder, evident from the many businesses they run back in indon. <<

    You are confused or I am confused?

    Shareholder = BOD = management? I have nothing more to say about Salim except that it owned about 21% of FEH and having two board seats out of total 8. I have nothing much to say about FEH as well except that it doesn't matter to me whether 2009 is black or red for FEH, I just wish that FEH had pumped in more money in A&P.

    Never look at Cacola but why must the same thing happened to Cacola? HTL basically export everything out of China. Think an established business, raw materials, transportion expenses, rebate, relocation and post big-bath accounting. Nothing really changed much except that external factors(thing that management has less control) were more favourable for HTL in 2009.

  8. Hi Donmihaihai

    Now that you mentioned it, do you still keep track of happenings of FJ?

    What do you reckon is the role (if any) of Auric Pacific in FJ’s decline?

  9. I got your point on branding. Just to add that the success of FEH is also dependent on their logistic/distribution partners. They were screwed because of these guys during the financial crisis.

  10. EnSabahNur,

    I am not sure how big is Lippo role in the decline.

    But even without Lippo(if it does has a role to play) FJ will still not be as good as before because shopping centre operator has increasing power against food court operator like FJ. It is unlikely to change back to good old time.

    That is in Singapore. I think Malaysia operation has not change much which is good. Wonder why FJ is not(or not able) growing there.

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