Will Temasek be played by the deep pocket syndrome

The past two decades has been a confluence of cheap money and vast accumulation of wealth by few. This led to the rise of direct non-bank funds as an important source of capital in the form of private equities. From this faucet flows so much liquidity that capital is no longer seen as a limited resource of production. With the market drowning in liquidity, wealth owners take on higher risk in order to chase higher yields. Angel investors, who are often relatives and friends of the entrepreneurs, come along to provide the seed money. Private equity funds provide the venture capital. These funders take on equity of startup companies. They hope to make vast gains when the venture goes public, but aware of the possibility of a wipe out if the companies fail.

Apple and Microsoft have one thing in common. Both Steve Job and Bill Gates started their ventures in their parents' garage. Today, entrepreneurs of startup ventures literary can fly before they can walk. Adam Neumann of Wework bought his US$60M luxury private jet with investors' money. With easy money, what do startup entrepreneurs do? They develop their business using cash burning models. At one point, Wework was burning US$100M a month! Whereas Job and Gates focused on revenue to drive their project forward, today's startups practice a form of medicancy which do not take place on dirty sidewalks but in plush conference halls with flashy powerpoints. 

Deep pocket investors that build concentrated equity in companies face a moral hazard of pouring good money after bad money. To do so is putting more money at increased risk, not to do so means certainty of wipe out. Walking away from a bad investment is never easy, and hope springs eternal. The sunk cost fallacy is something that is easy to understand, but difficult to accept, even for the most astute of investors. And so we see Softbank pouring additional billions into a collapsing Wework.

One thing medicants do know. In cash crunch times, gyrate to the major funder or the ones with immense resources. This is the deep pocket syndrome. And so Softbank, and increasingly Temasek, are often invited to lead new funding rounds. Masayoshi Son and Ho Ching are two persons you want to exchange business cards with if you are thinking of a startup venture.

Some funding rounds are planned, some necessitated by failure to meet projections. With the cash burning model, startups do not build reserves for emergencies. Cash calls to tie over shortfalls are common. That's the risk environment for venture capital. The virus pandemic has thrown a spanner in the work for all startups. Lockdowns and economy shut downs are causing all businesses huge problems with loss of revenue and tight credit squeeze. The longer the situation persists, the more severe the outcome. Businesses with good reserves fare better. Startups with no reserves are in turmoil.   

The reorganisation in Temasek after Ho Ching took over the reigns in 2004 has seen the sovereign wealth fund took on a significant number of startup investments in their portfolio. The risk level has risen several notches after 2004. These are busy times for Temasek. The liquidity crunch will see increased demands for financial resources from operating subsidiaries and startups in distress.

At a time like this, what can be more challenging is to have fellow investors removed from the table and not able to share the risks. New Delhi's anti-China stance in investment will translate to capping the inflow of Chinese FDI into the country. Unlike Singapore that has no security worries of having a million Indian workers in the country, the Modi government is wary of too much Chinese million $ in India. The FDI cap has constrained investors like Ali Baba, Tencent, Shunwei Capital, Fosun Group, etc who are co-investors with Temasek in many Indian startups. Temasek now carries a heavier burden. For starters, Ali Baba and Tencent are in talks with Temasek for the US$100M funding that Indian food delivery platform Zomato, is requesting. Temasek may see opportunities in the chaos to invest more. Or it may accommodate Chinese investors in some round robin tripping mechanisms to bypass Indian regulation. We have seen in the Shin Corp and Keppel Shipyard sagas that such shenanigans are not beyond a state agency dressed in whites.

  
Temasek is not managing the extra cash of Hollywood celebrities, but Singapore tax payers' money. Let's hope extra prudence and sunk cost fallacy is on the altar. Christmas is near, but we sure do not wish to see Ho Ching playing Santa Claus.

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Temasek Tracking - Vancl

2007  Founded
2011  Serie F Funding round US$230M Temasek participated
2012  IPO abandoned
2014  Serie G Funding round US$100M Temasek particpated

VANCL is a Chinese online retailer. It started off specialising in cheap but smart looking men's apparel. Cheap and good -- as if that's possible. In 2010 it carried out a series of outdoor advertisements to promote its brand image. The advertisements were well thought out and very successful. Its sleek copywriting created a unique subcultural identity for Vancl. The advertising blast went viral and garnered for it a cultish following of sorts. It came into mainstream prominence and its web traffic exploded. Soon it became one of the top online e-commerce stores, although still miles apart from the giants like Alibaba and Tencent.

In 2011 Vancl went on a step up expansion drive to target several hundred % increase in revenue to 10B Yuan. It added ladies' apparel, kiddies, grandmas and grandpas, toothpastes, armpit scrubers and what have you. There was no more differentiation. With rapid expansion came quality problems. Soon it was inundated with issues, basically of poor management. Customer experience was badly impacted by poor delivery fulfillment and bad merchandising. Revenue was badly affected and losses piled up. The company was forced to abandon the 2012 IPO.

The 2011 expansion drive is a typical trick of startups. The business model is not about building profitable pathways. The game is simply about revenue building. High revenue numbers translate to high valuation and high IPO price, thus providing investors and founders a profitable exit.  

For the next 3 years Vancl laid low and went off the radar of venture capital scene. Hardly anything was heard of Vancl. Then in 2014, Chen Nian, the CEO and founder, decided to make a comeback. Employee count was drastically reduced, it sold off its delivery unit, 50% of its merchandise were sold off, international delivery was stopped. A wounded Vancl managed to raise a further US$100M funding in the year.

It is not known how much Temasek poured into the 2 rounds of funding. Vancl is a shadow of what it once was. It is now probably profitable as a small ecommerce outfit but nowhere near the US$3B valuation it once had. It has fallen off the plate of most investors and for those already locked in, there does not appear to be a path to exit any time soon. Unable to exit, Temasek is forced to pump in good money after bad money in the 2014 funding round. 

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Temasek Tracking - Tuniu Corporation

 

2006  Founded

2013  (Sep) Temasek + DCM in US$60M Series D funding
2014  Listed on Nasdaq (9 Ma 2014)

With the kind of easy money flowing into ecommerce wannabes, one wonders if the dotcom bubble lesson has been learnt at all. It is perfectly fine for entrepreneurs to try to chase their dreams, but for investors managing tax payers' money, a higher level of risk aversion is always better jn retrospect. A certain most powerful woman in the world has expressed in somewhat unlady-like fashion that 'it needs balls' in these kind of wheeling and dealing. The abashed silent majority may feel that it actually needs brains.

Tuniu is a Johnny come lately in the Online Travel Agency business in China. It had to contend with fierce competition from established OTA platforms like Ctrip, eLong, Tongcheng and Qunar. It started out in the leisure tourism sector by focusing on group tours and other packaged deals. In May 2014, it listed in US with an issue price of $9/share, peaking at $24.99/share, after which it dived and has been an under-performer. It is in danger of being delisted as its price has slipped below $1.

Six longs years after listing, it is still burning cash. OTA is a business with high $ deals, low repeat deals, and very low margins. After the US listing, Tuniu unwisely spent lavishly on a promotional drive using well known celebrities. That extravagance hurt 2016 financials badly. To build profitabilty it slashed expenses, closing overseas offices, shrinking HQ and divesting some technology units.  In 2018/2019 it opened up more than 500 physical stores to build customer base in a return to good old brick-and-mortar model. The balance sheet is still workable, but the management and the direction of the company is in turmoil.

Temasek's investment and divestment:

Date	Shares	High	US$	Low	US$
Sep 2013	18,142,893		50,000,000		50,000,000	Series D funding converted at IPO
2014 Q4	2,690,440	US$19,79	53,343,807	US$11.88	31,962,427	Bought
22 May 2015	3,750,000	US$20.33	76,237,500	US$20.33	76,237,500	Bought
2019 Q4	-4,847,682	US$7.00	-33,933,774	US$4.49	-21,766,092	Sold
2020 Q1	-2,150,941	US$2.60	-5,592,446	US$0.87	-1,871,318	Sold
2 Apr 2020	-17,584,710	US$1.01	-17,760,557	US$1.01	-17,760,557	Sold

The realised loss from this investment is estimated at between US$100.9M to US$138.2M. 

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Temasek Tracking - Alexion Inc

1992  Founded
2015  Qtr 3 Temasek bought 1,226,630 shares for about US$196M to US$227M
2018  Temasek divested

You are looking at the most expensive drug in the world. Soliris costs about US$500,000 for one year treatment. It is used in private clinics.  It is a specialty drug for very rare disorders atypical hemolytic uremic syndrome (aHUS) and Paroxysmal nocturnal hemoglobinuria (PNH). Being a non-mass market drug, there is no big pharma competition. Thus Alexion can command unethical prices and earn high margins.

Soliris contributes 70% of Alexion's revenue. It came on the market in 2007 and has been generating good revenue. However, Alexion had to resort to questionable marketing strategies to get governments to use the drug due to its cost. There have been investigations and police action in a few countries. It recently paid US$21.5M fines to settle with US regulators over bribery suits.

With the introduction of Solaris in 2007, Alexion's fnancials improved and stock price moved up tremendously, peaking in 2015. It has been under-performing the market since then. Temasek purchased 1,226,630 shares in 2015 Q2 when prices were between US$185 and US$160. The investment is estimated between US$196M to US$227M.

These are the info known at the time:
- Soliris is the company's primary product.
- Company revenue is rising, Soliris provides high margins.
- Alexion had good profits but never declared dividends (to this day).
- In May 2015, Alexion had just acquired listed Synageva BioPharma Inc in a US$8.4B share and cash deal. The market felt the acquisition was overpriced at 130% premium.
- Patent for Soliris will expire in 2021.

Given the info, it is difficult to see the rationale for Temasek's long term investment in Alexion. Temasek divested 50% of the stocks in Q2 of 2018 with prices between US$118 to US$139. Balance 50% were sold in Q3 of 2018 at prices between US$97 and US1$139.

The losses over 3 years is estimated between US$25M to US$94M. Money burnt for a meaningless investment.

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Temasek Tracking - Nio Inc

 

2014  Founded
2018  US$1.8B IPO at NYSE

Nio is China's answer to Tesla. It manufactures electric vehicles (EV) and is in the process of building and testing electric autonomous vehicles.

Nio's path has not been easy and its future is not assured. By the time it IPO it had only produced a few hundred EVs. It has yet to muster production and distribution challenges. Nio is a startup manufacturer which faces competition from a number of smaller Chinese EV makers and Tesla who has the biggest market share and a matured EV car producer. Nio meets Tesla head-on by massive discount, sometimes at 30%. This bites deeply into gross margins. China's EV market has been driven by government subsidy for NEVs (new energy vehicles). The subsidy has been reduced in April 2020 and sales are expected to hurt.  

Nio has a very high cash burn rate and is running low on liquidity. It chalked up US$5B losses in 5 years, compared to Tesla which lost the same amount in their first 15 years. Post IPO Nio had to depend on cash injection from private parties. In May 2019 it received US$1.45B from E-Town Capital, a Beijing-owned fund. It is now basically a joint venture with the state fund.

The AA of China  estimated only 4% of China’s overall 23.7 million passenger vehicle unit sales is EV. The volume is not large enough for the many players currently in the market. In motor vehicle production, big volumes are required just to support the tooling costs for each model. 

Nio IPO in NYSE at US$6.26 and has been a laggard for the most part, with prices slipping to a frightening low of US$1.51. In Q3 of 2020 there was relief as prices climbed above US$10 for the first time. Analyst pointed to the record deliveries of almost 5,000 as the reason for return of confidence. Some see this a positive turning point, despite all the negativities. However, I think Nio's stock uptick in Q3 is just a sympathy move in the wake of the explosive jump in Tesla's price. From US$668 in Feb 2020, it increased by 200% to US$2,006 on 20 Aug 2020. There is absolutely no reason for this price movement other than a bubble building up. When this bubble poops and Tesla's price returns to sanity, Nio's price will tank. Tesla will inevitably go for a stock split. After this, let's watch how this tulipmania will end.

Temasek snapped up 5.4% of the Nio equity on IPO (41,446,985 x US$6.26 = US$259,458,126). Supposedly a long term investor, the quick and sharp drop in share price must have spooked the folks in Temasek. In Q1, 2020 Temasek disposed off 27,462,868 shares. Then in Q2, 2020 it sold another 10,875,592.  Based on rough average price of US$3.766 for Q1 and US$6.04 in Q2 there was a realised loss of possibly US$71M within record time of 15 months.

As at 30 Jun 2020 the balance of shares was 3,108,525 with an unrealised gains of US$24M. If Temasek sees upside value given what's happening in the NYSE and hang on to the stock, it will need Nio to climb to about US$29.10 for the investment to break even. In the very short term, a 100% jump from current levels  is a crazy possibility as investors who missed out on Tesla's bonanza turn to Nio. Question is, is Temasek running an investment portfolio or a gambling joint? 

Looking at the review info above, the investment does'nt seem like a good idea. Looking at the price charts, the divestments seem to be a real case of bad timing. Singaporeans will prefer to call it jinxed timing. 

Warren Buffet did'nt put a single dollar into extremely risky start up EV manufacturers. Instead, he bought up a 25% share of BYD, a Chinese battery manufacturer and EV seller. He is sitting happily on very good gains and a sustainable stock.

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Temasek Tracking - Wework China

 

Wework was founded in 2000 and by 2019 it had opened in 86 cities across 32 countries. Growth was explosive and in its last funding round before the failed IPO in 2019, its valuation was a stunning US$47B. It was the darling of the venture capital world and media et al hailed the wunderkid Adam Neumann, the CEO and co-founder, in all his flamboyance and eccentricities. Then came the 2019 IPO which bombed and now all media are suddenly throwing stones.

Co-working space, shared rental, or desk rental is'nt a novelty. It's been around for a long time time. Adam Neumann merely polished up the space, sometimes 'wackynise' it to appeal to a younger crowd, create a culture of community at work, and target a market of hyper-charged individuals or small groups in pursuit of dreams of technology entrepreneurship. Apart from the economies of shared admin resources, the added attraction to these groups of renters are the opportunity to rub shoulders with tech-smart bed-fellows to exchange ideas.

It is all very easy to criticise a bad investment with the wisdom of hindsight as a couch potato. And how dare we suggest prior to 2019 that Wework was a dud when the champions of VC funds poured in by billions? Yet that the business model is not sustainable has long been suspected by the general skeptical public.

It is so obvious from day one that the Wework model is nothing but a huge gamble on rental cost. Wework takes wholesale long leases, as long as 30 years, and let out retail in small spaces at very short terms. For that, it receives substantial discounts from property owners. It was simply banking on the wholesale discounts to provide them with a big margin. In risk management terminology, Wework is taking a long position on wholesale rental contracts.  Any unhedged position, whether long or short, exposes the company to the cyclic nature of rental sector. Although this was not the reason that actually pulled the plug on Wework, the company would sooner or later, have to contend with this precipice that its journey would inevitably take it when real estate sector declines. This is the underlying hazard of the Wework model.

Why these seasoned investors do not see what was crystal clear to anyone with some background in risk management, is beyond belief. Why do these investors plunk valuation on Wework as a technology play. There is no tech innovation here. It is not even a real estate company. Wework has little real estate assets. Valuation is the opium of venture capitalists and the fundee companies. And who determines the valuation? Who else but the fundees and the funders. The objective is to push up the hype, the media will push it out to the public and it will resonate in the investing world to prime the IPO price where the shares can be unloaded at astronomical profits to sellers. For the VC fund managers, high valuation will keep their shareholders very happy.

Just to illustrate how ridiculous valuation is. After Softbank joined in 2012, other investors had already capped their investment. From 2012 onwards, the funding was basically a one-man show by Softbank. So the valuation was basically determined by 2 men, Neumann and Mayayoshi Son, CEO of Softbank. Do you get the drift now why a company that has never made a single $, in fact, had been burning billions every year, had a valuation of $47B? Neumann had in fact said valuation at IPO will be an incredulous US$100B!.

Why did Wework collapse at IPO? Because sane financial analysts who don't have their heads in the clouds, poured through the details and saw through the company for what it really is. It has no patents, no technology, no possible pathway to profitability in decades. It had creative accounting, a US$47B commitment in rental contracts to service. It's a business with no barriers to entry.  

Wework and a lot of ride-hailing and e-commerce models build customer or subscriber base on freebies. Come time to build profitability, they need to pull the plug on these freebies. Their base collapses when these freebies are withdrawn. Wework gave away huge commissions, often 100%, to brokers. Can a business be sustained on this basis?


Enter Temasek:

Boy oh boy, are'nt we glad Temasek's name did not appear in the hall of fame of Wework investors above. Unfortunately, Temasek's nose for finding banana skins to slip up on is legend. It could not stay away from the VC party of the century and in 2018, joined a series B funding for Wework China, a subsidiary of Wework. That round raised US$500M, but we do not know how much Temasek invested. Funds raised todate is US$1B and valuation was US$5.5B. Hey, Wework China is not a bird, it's a unicorn. Never mind that it can't fly. It's the creature that carries money bags the venture capitalists treasure.

Temasek is keen on disruptive technologies that change the way people live, work and play. Co-sharing workspace is the future, it must seem to the sovereign wealth fund. Having missed out on the party of the century at Wework, Temasek wants to come into Wework China with a vengeance. 

One year after Temasek put money into Wework China, problems in China surfaced. China was the worst performer for all Wework locations. It is struggling with very low occupancy.  The failure of the 2019 IPO did nothing to raise eyebrows at Temasek. In the midst of the coronavirus pandemic, Temasek upped the ante and wanted to take majority state. By then, Softbank's Mayayoshi Son had stepped aside to lick his wounds. He gladly passed the baton to Ho Ching, CEO Temasek. In January 2020, Temasek was in talks with Trustbridge, a Chinese VC company, to take a US$1B stake in Wework China. A unicorn needs to be fed, and it has a great appetite. It burns $, billions of them, for sustenance.

Mayayoshi Son is like a grandmaster of VC. He has investment bankers sitting at his feet, taking notes, at his TED talks. But even the great Son had to eat humble pie and admit that Wework was a foolish mistake on his part. He dropped Wework valuation to US$2.9B latest, but many analysts say it is probably zero in value. Softbank had actually wanted to go for broke with Wework, but Son faced investor rebellion, like the Saudis who threatened to pull out of Softbank's US$100B Vision Fund. Son has some powerful and sane people to check him and pull him back from the brink.

Temasek has no one to hold it back. It answers to no one. There is no risk management committee at board level to oversee the executive management. I call on MPs who sit in parliament to stand up and do something. Please, let us have the return of sanity amongst our money managers. 


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Temasek Tracking - CenturyLink (Level 3, & Global Crossing)

1993  Global Crossing founded
1998  IPO
2002  Filed for bankruptcy
2003  S'pore Technologies Telemedia Pte Ltd buyout
2003  Relisted
2011  Accquired by Level 3 Communications
2017  Acquired by CenturyLink

US$1.7B cash earned in this investment and it had nothing to do with Temasek !

Global Crossing:

GC was an internet backbone service provider. It served more than 700 cities in 70 countries. It was a tier 1 carrier which means an internet protocol or IP network which exchanges data traffic with other tier 1 carriers free-of-charge. This is why our VOIP calls are basically free. It provided a host of services like peering, virtual private networks, leased lines, audio and video conferencing, long distance telephone, managed services, dialup, colocation centres and VoIP.

In the hey days of the Dot-com boom, GC went on a shopping spree and bought out a few big names, built fibre-optic networks, undersea cables, etc. By the time it IPO, its valuation was US$46B, a behemoth in those days.

Telecommunication business required massive capital to build the infrastructure. The era of cheap money and high capital liquidity saw plenty of investors willing to throw trillions of 4 into the sector. GC had a massive debt of about US$13B and it collapsed when the dot.com bubble burst in 2001. For all it's market value, GC never made a single $ profit in it's entire life.

In 2002 GC filed for bankruptcy.Stockholders got nothing, employees got a bad deal. But executives walked away with millions having sold a lot of their shares after IPO. Founder Gary Winnick, walked away with US$450M for early disposal of his shares.

S'pore Technologies Telemedia Pte Ltd teamed up with Whampoa Hutchinson HK to buyout GC. Hutchison backed out due to regulatory resistance (for it's China connection). STT went solo. STT pumped in US$250M capital and US$200M debt. In the recapitalisation, STT got 61.5% of the new equity in 18m Preferred Shares and 6.6M Common Stocks. Secured and unsecured creditors received 15.4M Common Stocks.

STT is an active investor. It put in directors and new management, clean up the finances and revamped the organisation. By 2004 GC was able to relist on the bourse again. Some lawsuits against ex-managers were settled.

However, there was no magic STT touch. The shares remained laggard from 2004 to 2011 with long periods of suspension and trading below 1 cts. Profits were still elusive.

Total invested:

US$250,000,000	(  18,000,000	Preferred stocks
	(    6,600,000	Common stocks
US$200,000,000	16,579,286	Common stocks	Convertible Notes exercised on 27 Ag 2007
US$123,882,820	6,163,145	Common stocks	There were some option trades and an unusual purchase of 6,226,145 shares on 30 May 2006 @ $20 when market was below 1 cts.
US$573,882,820	47,342,431	Total

Divestment:  Salvation for STT came in the form of a share only M&A by another and bigger internet infrastructure player, Level 3 Communication.

Deal terms: GC shareholders received 16 x L3 shares for each GC share held. STT got 47,342,431 x 16 = 757,478,896 (28.4%) of L3 shares. At the time, L3 share was about $1.11 thus giving STT's holdings of GC a valuation of about US$840m. 

ROI on GC investment was roughly US$266M (US$840M-US$574M) which was about 3.9%pa over 10 years. Nothing much to crow about.

Level 3 Communications Inc:

L3 was also a major internet backbone provider and much bigger than GC. The deal brought together 2 companies that had spent heavily building their network infrastructure during the dot.com years but could not make profits and balance sheet badly hurt by the Dot.com bust.The synergies allowed huge savings in operating cost, great reduction in infrastructure development expenditure, expanded global reach, it allowed L3 to focus more on higher margin enterprises market than moving the mass market data, and it provided better customer experience. 

On recapitalisation, L3 shares went for a reverse stock split of 15:1 in Oct 2011. STT's holdings were converted to 50,498,593 shares. From 2011 to 2015 STT purchased in open market another 14,533,074 at average price of US$39.31 = US$572,552,852. By then STT's investment was US$1.414B and number of shares held 65,031,667. 

Divestment:  31 Oct 2016 L3 agreed on a cash and share M&A by CenturyLink.

Deal Terms: L3 shareholders received $26.50 per share in cash (without interest) and 1.4286 shares of CL stock for each Level 3 share they owned. 

STT received US$1,723,330,175 cash (65,031,667 x US$26.50) and 92,904,239 shares in CenturyLink. At 31 Oct 2016 CenturyLink share was about US$23 which put its value at US$2,136,797,507. The merger puts STT's holdings in L3 at a valuation of about US$3.860B. That means an ROI of US$2,446 (US$3,86B0-US$1,414B) for 6 years or roughly 18.22%p.a. A fantastic return.

CenturyLink:

Telecommunication sector is dominated by AT&T and Verizon. It is a high infra cost and high debt business environment and all players whether in wireless or cables. big or small, are challenged to make profits. 

CL is the second largest U.S. communications provider to global enterprise customers. It has customers in more than 60 countries It helps customers manage increased network and IT complexity and provides managed network and cyber security solutions that help protect their business.

The combination of CL and L3 creates a leading global network services company that provides customers a wide range of high-quality technology solutions over a secure and reliable fiber-rich network. CL's network now connects more than 350 metropolitan areas with more than 100,000 fiber-enabled, on-net buildings, including 10,000 buildings in Europe, Middle East, Africa, and Latin America.

Singapore Technologies Telemedia Pte Ltd:

Singapore lacks the entrepreneurs to create world beaters in various sectors of the economy. The government uses state enterprises or GLCs to pursue this mission but due to the size of the local market, theses ventures have to be created overseas. 

STT is a strategic investor focused on investing in, operating and managing a portfolio of companies and investments in the communications, media and technology space globally. STT’s key business segments comprise communications and media services, enterprise services, data centres and emerging technologies. 

STT is a wholly owned subsidiary of Temasek Holdings. It is an active investor and not a mere investment holding vehicle of Temasek. 

Global Crossing was apparently an STT initiative to build an internet-infrastructure provider company. STT saw the opportunity to buyout on the cheap a heavy infrastructure company. The investment was booked under STT Crossings Pte Ltd, which was a subsidiary of STT Communications Pte Ltd, itself fully-owned by STT. The folks of STT put in management and effort but was unable to drive GC forward profitably. From a near disaster involvement with GC and L3, STT pulled off more than US$2B investments gains with the eventual M&A by CenturyLink. It was strictly STT independent management effort.

This investment has since been transferred to other investment vehicles --  Ellington Investments Pte Ltd and Everitt Investments Pte. Ltd, which are owned by Bartley Investments Pte. Ltd, itself owned by Tembusu Capital Pte Ltd, a wholly owned investment vehicle of Temasek Holdings Pte Ltd..

It would appear CenturyLink is now merely a passive investment by Temasek which is still holding on to a major stake..

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Temasek Tracking - Netshoes (Cayman)

2000  Founded (brick & mortar) retailer
2007  Rebranded (ecommerce)

2012  Temasek invested S$86m
2014  GIC led funding (Temasek also participated)
2017  IPO
2019  M&A  Acquired by Magazine Luiza

Established in 2000 as a single physical store in Sao Paolo, Netshoes later switched into a purely e-commerce business, which now operates in Brazil, Mexico and Argentina. Netshoes was reputedly the world's largest online retailers specializing in sporting goods. 

Jazz up the operation with some fancy technology. Entice visitors to sign up. With some million subscribers, never mind if these are window shoppers, hype up the potentials of a retail outfit with a huge database of returning shoppers. And investors will suck up to it. Its the same refrain played over and over again. 

Temasek poured S$86M taxpayers' money into Netshoes in the 2012 round of funding. Sister sovereign wealth fund GIC joined in and led the 2014 funding round which raised US$170M. Temasek also joined in the GIC-led round but it did not indicate how much further capital they put in. 

Temasek's 8.79% holdings in Netshoes were booked under Clemenceau Investments Pte Ltd. GIC held 8.34% which were booked under Archy LLC. Apparently the 2 SWF worked hand-in-hand. Both held the view Brazil was in a sweet spot for investments and both had opened offices in Sao Paolo.

Netshoes had made no profits up to the point of IPO in 2017. It opened in the market at about US$17.00 which was way below pre-IPO valuations. Stock price initially surged to hit its highest level of about US$27 within 2 months. Then the rubber meets the road and prices headed south into oblivion until Magazine Luiga proposed a buyout at a miserable price of US$2.00. Fortunately there was a competitor suitor which eventually forced the Magazine Luiga M&A price up to US$3.70. 

Between May 2017 to Feb 2018, Temasek had divested about 20% of its holdings, obviously at substantial losses. By 31 Dec 2018 it had disposed the remaining 2,017,127 shares at below US$5.00. Total realised losses is probably upwards of S$70M. That's actually peanuts to some quarters in the government.

GIC meanwhile, displayed greater courage. US SEC filing showed it was still holding 2,506,526 shares as at 31 Dec 2018. They probably exited at the M&A price of US$3.70 and booked substantial losses.

Lesson for investors:

Retail investors at the IPO felt cheated and brought a class suit action against Netshoes. The suit was grounded on the fact that financial projections in the prospectus were hollow promises, thus misleading and tantamount to wilful misrepresentation.

The NY court threw the case out.

Investors best be familiarised with the bespeaks caution doctrine. This holds that forward-looking statements (financial projections) are not misleading if they are accompanied by adequate risk disclosure to caution readers about specific risks that may materially impact the forecasts.

In the Netshoes case, the NY Court found that alleged misstatements about the future performance of the online retail industry, planned growth strategies, and other projected outcomes were protected forward-looking statements that were accompanied by sufficient meaningful cautionary language warning investors that actual results could differ from the statements. 

The cautionary language included remarks that if “markets for [Netshoes’] Internet-based services … fail to grow as anticipated, such a lack of growth may have a material impact on [Netshoes’] … financial condition” and that Netshoes “ since … inception … has never recorded profits or positive operating cash flows in a fiscal year” and that it “may not be able to record profits or positive operating cash flow on a consolidated basis in the near future or at all.”

Investment watch:

Too late. The moneys gone. Were they reported in Annual report 2019?

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Temasek Tracking - Intouch PCL (ex-Shin Corp)

1983  Shin Corporation founded

2006  Temasek-led consortium took over

2011  Temasek started divesting

2015  Name change to Intouch Pcl

The Event of The Century must surely be the 2006 Temasek purchase of Shin Corp. It was audacious in its size. It caused the downfall of a prime minister. It brought great consternation to the whole foreign-owned business community in Thailand.  

Thai law forbids government officials to own business that involves official licencing. Shin Corp was a conglomerate in the telecommunication sector with licences for cellular, satellite and airline operations. On becoming PM, Shinawatra transferred his holdings to his children and other family members of his wife. Shinawatra+ together owned 1,487,740,120 or 49.595% of the ordinary shares. On 23 Jan 2006 Shinawatra+ sold their holdings to Temasek-led consortium @ Thb49,25 making a total consideration of Thb74.4B. (ex rate of 24.67 = S$2.969B). 

The purchase was made by Temasek 3 days after the passing of legislation that increased foreign holdings in telecommunication assets from 25% to 49%. There was anger that the easing of cap on foreign ownership was passed to favour the PM and Temasek.  Public anger was further fueled by the fact that PM paid no capital gains tax on both the transfer of shares to his family members and the sale to Temasek. There was also accusation that the other members of the consortium were actually nominees for Temasek. Siam Commercial Bank said it was purely an investment decision for them. However, SCB played the lucrative financial advisory role in the buyout and could have been a nominee in order to book some good fee revenue. This was a serious accusation as the Foreign Business Act is very clear that nominees are illegal. If guilty, Shin Corp was at risk of having its licences withdrawn, and Temasek at risk of having its investment down the drain. Nominees at risk of facing criminal charges. 

Stock Exchange of Thailand (SET) ruling required Temasek to make a general offer for the remaining shares it did not already own, plus 200M warrants outstanding. Whereas an investment by Temasek should have been positive for Shin Corp, the market sentiment was by then very negative due to political and civic unrest in Bangkok. Its share price had dropped more than 5% below the offer price. That assured a resounding acceptance for a general offer. Temasek had to cough out much more cash than it originally planned. 

The general offer resulted in the Temasek consortium owing almost 96% of Shin Corp. Through 100% owned Aspen Holdings, Temasek owned 41.68% of Shin Corp. It maintained it was in compliance of the 49% foreign-ownership cap. 

Back home in Singapore the investment caused much public consternation. The offered price of Thb49.25 per share seemed way too high against the 10 year monthly market average. The price ought to be depressed given that Shinawatra+ was cashing out amidst his weakening political clout. The years immediately following the acquisition saw Shin Corp share price took some beating due to (a) lack of liquidity as the free float was less than 4%, (b) uncertainties as to how the Thai government will react to the issue of nominees and tax avoidance, (c) fear of lost of licences and tax grab by the government, (d) the global financial crisis in 2007/2008. There was public disquiet of S$ billion losses by Temasek as folks mistook valuation losses for realised losses.

Did Temasek actually made disastrous losses as some said? 

To look at this, assume Temasek was the beneficial owner of the full 96%.

The full cost of the acquisition in 2006 was 3,076,762,064 shares @ Thb49.25 = Thb151.5B (@ 24.67 = S$6.142B)

The SET reguires a free float of 15% to be maintained on pain of a fine of Thb1M per year.  Temasek had planned on early divestment of some holdings but this was put on the back burners in view of the investigation of nominees, the coups, the premiership of Thaksin Shinawatra's sister, and the global financial crisis. Finally in 2011/2012 Temasek sold about 14% of the shares to increase liquidity in the counter. These were sold at a hefty discount of about 10% to market prices.

The Annual Reports of Intouch showed that Cedar and Aspen had zero holdings by 27 Aug 2013  28 Aug 2019 respectively.

The S$-Thb exchange rate moved within a narrow band during the relevant years so it's not a significant factor. The cost of divestment and carrying cost is more or less cancelled out by the good dividend returns of Shin Corp. So it is reasonable to focus on the price alone.

Unfortunately, information is not fully available to determine the final losses or gains of the investment. In the table above, the 3 lines of 'unreported' were shares disposed in the estimated timeframe but there is no media report nor any filing available. 

The historical price chart below shows that any divestment pre-2012 Q1 would have meant heavy realised losses. Sales after this date would have been very profitable.

It is a fair assessment that there were no billion $ losses, In fact, it is possible Temasek actually made a net gain of at least S$1B by riding out the rough patch between 2006 to 2012.
 


Did Temasek use nominees to circumvent the foreign ownership laws?

The charge of use of nominees created great apprehension throughout the whole foreign business community in Thailand. Nominees for foreigners are illegal, but it has always been an inconvenient way of business as usual that no one interfered. Now the government may be forced to act, with repercussions on the whole economy. 

Note that charges are against persons who allow themselves to be used as 'nominees' and not against those that used them. There were no charges against Temasek.

Commercial Dept and Thai Police investigations concluded that Sarasin and Poonpipat were indeed nominees for Temasek as their capital came from Siam Commercial Bank loans guaranteed by Cypress Holdings. In an interview, Jimmy Poon, a Temasek managing director of investment, acknowledged that Cypress provided the guarantee to facilitate the deal, but that he had no personal involvement nor knowledge when that was done. This 'monkey no see' response when things go wrong is atypical of Singapore Inc. .

Surin Upatkoon was very low profile in Thailand. He is a Thai Chinese with substantial interest in Malaysia where he is known as Dato Lau Kim Koon. One of the richest man in Malaysia, Dato Lau had interest in listed companies Multi-Purpose Holdings, WME, and  Magnum. He rightly claimed he is a person of substantial standing, capable of raising his own capital, and has no need to be anyone's nominee. But he needs to explain why his capital for Kalurb Kaew came from his Virgin Island company Fairmont Investment Group. The money trail went cold, for obvious reasons. Upatkoon was charged in 2007 for acting illegally as nominee for a foreigner in the buyout of Shin Corp. He said he will fight it in court but never turned up. In 2015 there was an indictment against him but there has been no further news on the affair.

The Thai authority's accusation is supported in 3 ways -- Temasek owns 49% of the shares in Cedar Holdings which carried 90% voting rights, the money trail of Kularb Kaew's capital injection, and the manner of Temasek's eventual divestment via Thai NVDR. 

Thai NVDR Co Ltd:

  

This is a securities holding company owned by the SET. It was set up as a mechanism to solve the foreign ownership cap. Foreigners use Thai NVDR to purchase the public equities and in turn will acquire a depository receipt from Thai NVDR. (NVDR = non-voting depository receipts). This mechanism effectively curtails foreigners' voting rights, making them only passive investors in the relevant public company.

Thai NVDR picked up big chunks of Shin Corp divested by Temasek. As at 25 Nov 2010 before Temasek started disposing Shin Corp shares, Thai NVDR holdings of the counter was only 0.27%. By 26 Aug 2013 its holdings shot up to 22.93%. It has since dropped to 16.6% as at 27 Aug 2019.

Not only were the shares acquired through Thai NVDR, those purchases were registered in the names of several Bank Nominee companies. It meant the accused nominees of Temasek have been effectively 'laundried' through Thai NVDR and nominee companies. They have simply vanished. It also means that the divestment by Temasek could have involved a high percentage of transfers from right hand to left hand, making it impossible for outsiders to gauge the gains or losses of Temasek. It is also impossible to tell whether Temasek still retains any shares in the company via Thai NVDR.

Temasek sells 21% of Intouch to Singtel :  

In rebalancing its portfolio, Temasek had plans to rationalise holdings in certain sectors in its operating subsidiaries with a view to building a global winner. At the time, Temasek had plans for the banking and telecommunication sectors, using DBS and Singtel as the respective mothership vehicles. 

The jewel in the Shin Corp crown was its subsidiary Advanced Information Services in the cellular operation. AIS had 40% of the mobile market in Thailand. It was the cash cow of the group, responsible for 90% of revenue. Singtel was already a major shareholder of AIS with 23.3% held by its investment arm, Singtel International Ltd. Singtel is actively involved in the operation of AIS.

Back in 2014 Temasek had wanted to load Aspen Holdings' 41.62% stake in Shin corp onto Singtel. That would have a serious impact on Singtel either with share dilution and or massive debt. And it made no business sense to Singtel whose strategic interest was in AIS, of which it already was a major shareholder. It had no interest in a holding company which has no unfriendly major shareholder. Finally the sales had to be pared down to 21% and the narrative was a move to protect Singtel's interest in AIS.

The question of ethical investments:    

Beyond the dollars and sense of investment, Temasek's buyout of Shin Corp was a display of unethical investment by a state sector player. 

It is an abhorrent idea that a government agency can execute a business plan in illegal ways that put investment money at great risk, jeopardise diplomatic relations, and interfere with the local politics of the investee country. The smoking gun is the Shinawatra+ divestment took place 3 days after the legislative amendment to increase foreign ownership from 25% to 49%. It placed Temasek directly in cahoots with the Shinawatra admin and explains the high premium paid for the acquisition of Shin Corp shares.

One wonders whether the Singapore government viewed the investment as a disaster at the time, considering that it helped to depose the prime minister of a friendly neighboring country. The maturity of Thai politics is to be applauded that the diplomatic fallout was restricted to the burning of Singapore flags. On the other hand, Singapore parliament saw no need for a debate, and the owners of Temasek never did haul up its management for an explanation nor were any wings clipped. Questions of ethics are indeed challenging, when the husband of the CEO of the sovereign wealth fund happens to be the prime minister of the land. 

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