"Temasek can afford to be contrarian because it has its own balance sheet and can think long term." .... Ho Ching
That was Ho Ching in the aftermath of the FTX fiasco and US$275m write off. But Temasek did exactly the opposite of what she said. The FTX decision was made at a time when Sam Bankman-Fried was still a hero. The contrarians were those who raised red flags. Temasek joined the rest, meaning ant-contrarians, blindly getting on what they thought was the gravy train.
I have often mentioned one should refrain from criticising investment decisions with the wisdom of hindsight. Do so on the basis of pre-fact knowledge. In the Wirecard fiasco, one analyst stood out. In early 2019 when investment houses were all still putting out buy orders, Neil Campling, a technology analyst at Swiss financial firm Mirabaud Securities, called the German fintech at 'zero'. Now that's the stuff of contrarian views.
Wouldn't it be nice to know who is going to be the next Wirecard? After the collapse of Wirecard, Mirabaud Securities posted a check list of red flags to watch out for. Let's do a tongue-in-cheek line up of Temasek against these red flags.
1. Massively promotional CEO who actively looks for publicity and spends a lot of time courting Wall Street/investors etc and is very media savvy.
Yes and No.
Previous CEO - Checked.
Current CEO - No
2. Huge CEO/Senior Management compensation package NOT tied to cash flow or Earnings but just to Sales and/or the stock price, creating the possibility of egregious wealth creation if the stock goes up a lot. Huge pledging of collateral by the CEO in return for margin loans to fund a billionaire lifestyle.
Huge compensation package tied to asset valuation. Egregious wealth creation from unearned income computed in an opaque environment.
No assets collateralised to benefit CEO.
3. Management compensation generally way out of line with peers despite notably less profitability.
Checked.
4. Glossy future projections that have a habit over a long period of being proven to be too optimistic.
5. Questionable product quality, ie defects (boon??) or debatable technological leads over similar products.
Checked.
Huge compensation package tied to asset valuation. Egregious wealth creation from unearned income computed in an opaque environment.
No assets collateralised to benefit CEO.
3. Management compensation generally way out of line with peers despite notably less profitability.
Checked.
4. Glossy future projections that have a habit over a long period of being proven to be too optimistic.
Temasek never makes glossy projections. For them the investing environment is always in difficult times. On the other hand, in years of poor performance, their default refuge is always on the 20 year long term ROI. This of course is a 20 year running average ROI which is bolstered by high ROI of earlier years when state assets were transferred to Temasek at cost thus giving it a head start in high profitability. All the benefits of those head start years have by now moved out of the rolling 20 year time frame. Going forward we are likely to see Temasek heap self-praise on current year performance in a good year and down play a dipping 20 year ROI.
5. Questionable product quality, ie defects (boon??) or debatable technological leads over similar products.
Checked.
As an investor, the portfolio quality is what we are interested in. As investments go, you win some, you loose some. It is the opaque model of Temasek's operation that has Singaporeans capable of independent thinking greatly concerned. The concern is very real when you realise there is no exit strategy for 30% of the portfolio locked in secretive private equities.
6. Some evidence of self certifying, whether it be through strange international subsidiaries or not having an Auditor or experiencing unusual and slightly sudden end of quarter surges in revenues, up to and including the last day.
Checked.
The financial statements are retreating into summarised numbers.
The financial statements are retreating into summarised numbers.
7. Unusual or unverified and large Receivables in a business where the product is exchanged for cash up front.
No.
8. Evidence that the company is existing on a shoestring, not paying Suppliers, Employees, Landlords etc.
Absolutely not.
(Explainer : SG+A = Sales, General & Admin expenses, GM= Gross Margin, ASP = Average Sales Price)
Not applicable.
10. High levels of Gross Debt. Cash balances not matched by notable Interest Income thereby suggesting they are fraudulent.
No.
11. High employee turnover, especially in the LEGAL and FINANCE areas. Co-founders or Board members leaving.
No.
12. Aggressive pursuit via paid third parties and/or “heavies” of any critics or people who have too many questions, which in any case are “boring”.
No lah, in Singapore it's POFMA or libel suits. But there is an army of Internet Brigade that engages in frivolous comments. I don't know if this is a paid and organised force.
13. Dislike of Hedge Funds.
No.
In fact Temasek has placed bets on some hedge funds and has some hedge fund-like vehicles. -
14. Possible Narcissistic Personality Disorder on the part of the CEO. Additional points if he/she uses Twitter a lot..
Yes and No.
Previous CEO was prolific on Facebook.
Current CEO - No.
Previous CEO was prolific on Facebook.
Current CEO - No.
15. Large cabal of outcasts/weirdos/bloggers/Twitter groups who have been saying for years that everything is amiss but just get a lot of criticism because the stock keeps going up ergo they must be idiots.
Checked.
The Internet Brigade is well known, fawning at anything written in good light and attacking ... er, contrarian views.
The Internet Brigade is well known, fawning at anything written in good light and attacking ... er, contrarian views.
16. Slowing top line growth rate despite all the hoopla and supposed “growth stock” status. Evidence of competitors rapidly eroding unsustainably high market share.
Not applicable.
17. Loss making. Ideally never made a profit but likes to pretend it did or failing that, that it will for sure in 2-3 years due to highly questionable new products. But the 2-3 years gets pushed out constantly,.
No
18. Extensive use/exclusive use of NON-GAAP Accounting and occasional bridging to get from a Net Loss to a (small) Net Profit via poorly explained one-offs/Other Items/unusually large Credits of some kind in a desperate attempt to get into an Index by illicit means.Of the past 10 years financials I looked at, I think there is only 1 year in which this sort of window dressing happened.
19. Weak Board, preferably also small and ideally in hock in some way to the CEO, who therefore do his/her bidding. Helps if some of them are related physically to the CEO.
Checked.
Many non-executive board members are highly esteemed folks. But there exists the inescapable PAP entrenched network.
Many non-executive board members are highly esteemed folks. But there exists the inescapable PAP entrenched network.
20. Gullible media, gullible analysts and dozens of paid bloggers who produce Price Targets out of nowhere based on “Option Value” or put another way products that are at least 5 years away from having any material impact.
Checked.
Not in the sense of producing Price Targets, but never questioning anything.
Not in the sense of producing Price Targets, but never questioning anything.
WHAT ARE THE CHANCES OF TEMASEK BEING
THE NEXT WIRECARD -- THE VERDICT
Mirabaud Securities' 20 red flags are actually applicable to operating entities and not for an investment company setting.
Although some boxes are checked, there is no question a Wirecard type crash can ever occur at Temasek. As Ho Ching said, Temasek has the balance sheet. Size matters. There will certainly be the occasional bumps of investee corporate failures. But there is no guarantee against Prince Jefri Bolkiah type of core family betrayal that caused massive losses in Brunei and Kuwaiti sovereign wealth funds. Public vigilance remains key.
Although some boxes are checked, there is no question a Wirecard type crash can ever occur at Temasek. As Ho Ching said, Temasek has the balance sheet. Size matters. There will certainly be the occasional bumps of investee corporate failures. But there is no guarantee against Prince Jefri Bolkiah type of core family betrayal that caused massive losses in Brunei and Kuwaiti sovereign wealth funds. Public vigilance remains key.
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