Taking Stock

Read the latest Taking Stock

Taking Stock 23 January 2020

Chris Lee writes

IF the Wellington author Ron Asher ever plans a holiday in Asia, I suggest he avoids its biggest country, China.

In fact, he might want to skip Asia completely, if he is even half right about the influence of China and its danger to New Zealand.

His book, In The Jaws of The Dragon, published and now updated and republished in Wellington, is as aggressive and outspoken as any New Zealand book I have encountered.

A pedant would begin by noting that Asher's command of English is only average, and his writing style (four exclamation marks at the end of any strong sentences) is closer to Donald Trump’s than Ernest Hemmingway.

However his content, quite well documented, is fully enriched nuclear fodder, excoriating our politicians, Australian politicians, and fingering China as the imminent threat to New Zealand’s comfortable existence.

It would be easy to dismiss the book as being of the Ian Wishart genre, claiming that Martians live in Browns Bay, and that jets excrete plumes comprising chemicals aimed at making Americans vote for Trump, and encouraging children to eat McDonalds stuff.

Yet the book haunts me, unlike the piffle of so many conspiracy theorists.

As Asher documents, China has indeed made purchases of key items in our food chain, and in Australia's.

It bought the Crafar farms, inexplicably encouraged by Key's government, and China now has several potentially powerful banks in NZ lining up to compete for rural lending should the Australian banks want to reduce their exposure to this sector.

It has made inexplicable links with politicians of no obvious commercial relevance, like Shipley and Richardson, and its recently arrived business people are genuinely major donors to our political parties, or at least one of them.

I have attended functions where Chinese business people have filled up the coffers of political parties by buying donated items, such as an amateur drawing of Key, for $50,000; proceeds to the party.

For decades the Chinese were our most wonderful, hard-working immigrants, often overtly critical of communism, and embracing NZ as their adopted country.

Today the range of immigrants is much wider and not so easy to pigeon-hole. Asher implies that many recent immigrants are communist stooges.

China, as Asher documents, does have a menacing presence in the South China Sea, does make strategic decisions in the Pacific, has bought Australian and New Zealand food chain assets, and has rapidly become our most important trading partner, all the while growing its navy at immense cost.

None of this is necessarily sinister but these ''facts'' are the basis of Asher's contention that by 2040 NZ might be a puppet state of communist China.

The book lashes the complicity in these developments of our recent politicians, Clark, Key, English and Ardern, portrayed as being more interested in attracting political donations and votes than in safeguarding our sovereignty.

Indeed, by my definition Asher defames various people.

I cannot imagine any publisher or distributor being game to be part of the book's production and marketing chain. Yet I read it, in full, and feature it here because it is a book many investors would read with interest, even if the book is distinctly uncomfortable.

It is one step ahead of simple social media junk, being documented and not anonymous, and it does make you check under your bed for red slippers.

Paper Plus in Wanaka, one of the country’s best book shops, has copies.

 _ _ _ _ _ _ _ _ _ _ _ _

WHEN one reads of supposedly wealthy people filing to liquidate their companies, usually with the ultimate outcome of personal bankruptcy, one may be excused for wondering what they did with their supposed fortune.

Let me call that supposed fortune their ''loot''.

How could someone who claims his wealth is a billion dollars, or hundreds of millions, be so inept and unwise as to lose it all? Do they not ring fence real wealth as they take ever greater risks?

Perhaps one easy explanation is that when one's assets fall into the hands of a receiver or liquidator those assets almost immediately are discounted in value by a frightening level. Three pound notes are sold for half a crown.

Usually that loss in value is caused by the secured creditors having no motive other than to have returned to themselves as much of their loans as possible. They allow liquidators to ignore all other creditors.

The unsecured creditors and the owners of the original assets simply are irrelevant to the secured creditor. The receiver or liquidator can protest, arguing they tried their best and ''met international standards of recovery'' but only politicians, lawyers, bankers and perhaps valuers and investment bankers, believe that protest.

The victims know the truth. They are not in the Old Boys Network. They get rorted, royally, nearly every time.

Often, they see their two-year-old truck, or their livestock, or nearly funded property developments, being given away by those with the power.

The victims describe this as the ''punishment'' they endure because of a business failure.

So often the ''wealthy'' guy who failed is left with nothing because of our unconscionable insolvency practitioner laws. As he will end up bankrupted he has no resources to contest in court the ''system'' that is therefore unaccountable, as well as being rapacious and virtually psychopathic.

There is a second explanation for the major discrepancies between ''boasted'' or ''declared'' wealth, and reality. Far too few people understand this second pathway to a deceitful claim of extreme wealth.

It rests on gross over-valuation of assets, often as a result of market manipulation, or on dishonest transactions designed to fool creditors and tax gatherers.

Consider these two examples:

Property guru X buys a building in a city for $10 million, two million cash, borrowing $4 million from the bank and getting the vendor to leave in $4 million, subject to a second mortgage, or perhaps he arranges a settlement that defers the part of his payment to the vendor, for a year or two.

He then buys the building next door, which we will describe as similar, for $15 million, again with vendor debt arrangements that are induced by this flash price, and then he buys another up the road for $20 million.

A valuer, who likes the mandates, values all three buildings at $20 million, that figure ''clearly being the latest price achieved by a similar building''.

Suddenly property guru is worth $60 million gross and has maybe ''wealth'' of a few million of his own capital, plus $15 million of new ''wealth'', in the opinion of the well-paid, perhaps over-paid, perhaps less-than-independent valuer.

When the cycle turns, the guru’s game is exposed, he loses control, and a creditor appoints a receiver who finds buyers for all three buildings at $10 million each. There was only ever one mug buying at $20 million.

Bankruptcy follows. Unsecured creditors, perhaps including the vendors, are left unsatisfied. Wealth, created from thin air and claimed, is now wealth destroyed.

There is a second version of deception:

Now imagine a privately owned business shifts its headquarters to Fiji. The owner then ''sells'' to the Fijian-based company his ''brand name'' or his ''intellectual property'' or his ''licensing rights'' at a price calculated by a valuer who likes the mandate.

In another world ''mastheads'' once performed the same function, though today the media would struggle to justify any fancy price for such an intangible asset.

Let us say the self-acclaimed billionaire sells his ''brand'' or his ''IP'' for tens of millions to his Fijian division.

The Fijian brand cannot pay cash, so the sum is shown as a ''secured debt'' to the owner, placing him at the head of the queue, when the business fails.

The business collapses probably because an airhead owned it.

The ''secured creditor'' (the owner) might or might not be repaid but either way the unsecured creditors will have been cheated by a balance sheet they may not have ever understood, or even read.

The businessman would have spent years boasting of his wealth, based largely on imaginary assets worth nothing when a business fails.

So we see the guru, displayed on vulgar rich lists as being worth a billion or some such fanciful figure, might actually be worth nothing.

You would hope bankers would never be fooled, those people supposedly wise in the ways of the back streets and balance sheets. Yet bankers are regularly victims of such chicanery, as are fund managers. The media perpetuate the myths.

The failure of CBL and Intueri may well highlight the shallow levels of real research, or the extent of the misrepresentations.

CBL and Intueri were public companies, based on what I might politely call ''misleading'' practices.

Private companies are not required to disclose.

Few public or private companies display the conditional contracts, with clauses designed to protect the few at the cost of the many (absurd management contracts, phony assumptions, etc).

Published estimates of extreme wealth may, or may not, mean anything at all.

However it is certain that when cheats fail, as they usually do, the assets are never worth what they were said to be worth, either because the assets were falsely valued or because random passers-by have negotiated the purchase of the assets from inept receivers/ liquidators who themselves have no conscience, exposing creditors who have no meaningful protection from the law.

The Ministry of Business Innovation and Employment needs new people, and a smarter Minister, to put teeth into the law, but no one seems to care.

One key objective of law should be to establish accountability, so the villains with their shonky processes are made to return their loot to those who become the victims.

Lazy, inept insolvency practitioners must be made accountable for failing to maximise returns to creditors and shareholders.

We need better law. We need new law-makers. We need people who care about fairness.

 _ _ _ _ _ _ _ _ _ _ _

Johnny Lee writes:

FINANCIAL markets very rarely stand still.

2020 is now in full swing, with stories of bushfires, rockets and Brexit crowding the airwaves. Those hoping for a quiet and calm summer did not have to wait long for that hope to be dashed.

The Australian bushfire crisis will have far-reaching effects, both for the environment and the economy. Farmers, apiarists and orchardists alike will be counting the cost of the devastation over the coming months.

At the same time, the headline ''Stock market reaches record high'' has appeared on several occasions already, an eye-catching but ultimately less than meaningful statistic to most market observers. Traders celebrate volatility for the opportunities it brings. Investors prefer sustainability and predictability.

Whether the gains in share price have been fuelled by strong, sustainable underlying performance, or simply a flood of money, will be answered in February when the majority of our listed companies begin to report their half-year or full-year results to market. The likes of Heartland Bank, Fletcher Building, EBOS and Sky TV will be among the more interesting, for differing reasons.

By the end of March, we expect to have a clearer picture on the Tiwai Point issue, one way or the other. I remain of the view that a closure is the less likely outcome, however it remains a possibility and investors should consider it as such.

For those who took a break from markets over the holiday period, 2020 has started strongly, with several companies posting large gains over the past month. The likes of Summerset are up almost 15%, while Mercury is up 11%, Napier Port is up 10% and Infratil is up 9%.

There are two points I want to highlight regarding this. Firstly, the impressive gains are worth monitoring, especially with regards to the retirement village operators and Infratil. Shareholders should ensure that their holdings have not ballooned to a proportion of their portfolio that is unreasonable. A year ago, Infratil was trading at $3.66. It is now trading at almost $5.50. The likes of Ryman and Summerset may be seeing some benefit from the Metlifecare takeover.

The second point is specific to Napier Port.

Napier Port listed in August of last year, after being part-sold at a price of $2.60 a share. Today, it trades at about $3.90, after reaching $4.25 during the holiday period. In a period of five months, investors have made gains of about 50%, while collecting a modest dividend.

It would be nonsensical to suggest that this has been justified by an increase in revenue or profit. Ports are very defensive assets, servicing our need as a country to export and import goods. As a reference, over the same time period, Port of Tauranga saw climbs of about 25%. The market at large rose about 12%.

Those few who managed to participate in the Initial Public Offering, mostly Port staff and residents of the Hawke's Bay region, will be sitting on gains that have far outpaced the gains seen from the rest of the market - gains that are unlikely to be replicated in the year ahead. Indeed, I suspect 2019 will be remembered as a year of unusually high share price growth, as the market adjusted to a world where interest rates plumbed new depths.

Share price movements are determined by supply and demand – that is, people and institutions buying and selling the shares on the open market. When an Initial Public Offering like Napier Port is so heavily oversubscribed, it creates an imbalance which almost always leads to share price rises, as the likes of index funds purchase shares to ensure their performance remains aligned to the benchmarks they track.

Such stimulus is not permanent. Eventually, sellers will be willing to part with their shares, and buyers will have their fill.

Napier Port shareholders should be pleased with the performance of its share price. However, they should not anticipate such gains to continue at the magnitude they have witnessed so far.

_ _ _ _ _ _ _ _ _ _ _ _



Chris will be in Auckland (Waipuna Lodge) on February 5, available from 9.30am till 5pm and in Christchurch on Feb 18 (pm) and Feb 19 (am) at the Airport Gateway Motor Lodge.

Kevin will be in Christchurch on Wednesday, 12 February. Afternoon appointments only.

David Colman will be in Lower Hutt on the 19 February, available from 10am to 4pm.

Mike will head to Hamilton, Tauranga and Auckland over late February and early March, dates to be confirmed.

Edward Lee will be in Nelson on March 4, Auckland (Albany) on March 11 & Mt Wellington on March 12.

Chris Lee

Managing Director

Chris Lee & Partners Limited

This emailed client newsletter is confidential and is sent only to those clients who have requested it. In requesting it, you have accepted that it will not be reproduced in part, or in total, without the expressed permission of Chris Lee & Partners Ltd. The email, as a client newsletter, has some legal privileges because it is a client newsletter.

Any member of the media receiving this newsletter is agreeing to the specific terms of it, that is not to copy, publish or distribute these pages or the content of it, without permission from the copyright owner. This work is Copyright © 2020 by Chris Lee & Partners Ltd. To enquire about copyright clearances contact: copyrightclearance@chrislee.co.nz