By the time you read this article, it would reached have hundreds of
investors, bankers, regulators and journalists. My purpose was to shed
some light on the “dark sides” of the business of S-Chips (Chinese
companies listed on Singapore Stock Exchange), so as to help prevent more
financial losses in the future hurting the ordinary people on the street.
From this angle, I wish to redeem myself somewhat.........
It all started some 6-7 years ago. My colleagues and I were just a few of
the million of entrepreneurs in China struggling to make ends meet at the
textile fibre factory that we bought from the government. Some of our
older colleagues had laboured for more than 20 years before having the
chance to “privatise” the state-owned textile fibre factory in Fujian
Province that we have worked for since the day we left school under the
Premier Zhu’s “government retreat, private sector advance” scheme,
literally at a song. We thought we were going to be very rich very soon.
Little we knew that when the local governments of the various counties and
villages decided to “retreat”, we end up! with thousands of
“privately-owned” textile fibre spinners that competed ever more
aggressively. Despite ever rising revenue, margins were disappearing
fast....... Sometime, we just wonder why we have worked so hard only to
earn next to nothing. Perhaps, our only reward was meant to be “the master
of our own destinies”...... But we never really gave up hope...... One
day, we shall strike gold.......
1990, the year after the TianAnMen Incident, was really a very difficult
year. Many of our clients, the textile manufacturers who were enjoying the
initial euphoria of the burgeoning export demand, went belly-up within a
short 2 years of economic contraction. However, we pulled through all the
vanishing receivables and anguish cashflow-balancing exercises. By 1993,
we were off for the biggest boom ride of our life-time. Our textile fibre
business blossomed as China becomes the clothing factory of the world,
benefiting not least from the one-off Renminbi devaluation that the
Chinese government engineered in 1994. Those were the good old days, where
sufficient numbers of our competitors were eliminated by the
TianAnMen-induced recession, and the world began to look to China for
every piece of garments stretching from the heads to toes. Money was
easy......and we expanded our production capacity as quickly as we could,
limited only by the fact that the state-owned banks were not really very
keen to lend money to private enterprises like ours, and we just have to
borrow from our villagers at some 15% interest rates!!! Nevertheless, we
did good business and our leader, the general manager of the factory,
could even afford a chaffer-driven Santana. In any case, he was too old to
learn new trick, even as simple as driving itself. I was the rising star
which had to bide my time, as I was the only person who speaks decent
English. I was meant to be the tongue of the company in dealing with the
external world. But I am getting impatient. For while the company was
booking increasing profits, we never seems to have cash to be distributed
as any excess cash generated from the business was never e! nough to cover
the capital expenditure needed to expand the production . We just owned an
ever-growing production business.
Unfortunately, good profit margins never last in China. Good demand
quickly attracted new entrants into the business as the barrier of entry
is relatively low. At the same time, some of the so called “obsolete
capacities” came back from the grave and soon, we found ourselves
struggling to churn our profit. It was like working for free
again......lots of revenues but just no profit!!!
By the middle of 1990’s, we were doing great business selling to our
customers in different areas of the coastal areas. In 1995, we suddenly
found ourselves having to deal with fast rising cost pressure. However,
the market was buoyant enough for us to raise our product prices to pass
on the cost increase to our customers. Then, we realized that we must move
ahead in term of technology and product offering. Like everyone else
around us, we took advantage of the tax concession offered by the
government to the so-called joint venture companies. We recycled our
“cash” to Hong Kong, set up a “foreign company”, which in turn pumped back
the cash to Fujian in the form of a joint venture entity, using the cash
to purchase some second-hand German equipment to produce the chemical
fibre! s needed in all kinds of fabrics and artificial leathers.
However, luck did not really favour us, at least thus far. Soon, we were
told that our economy was experiencing very high inflation rates and soon,
the then Premier Zhu Rongji stepped a hard brake on the economy, cutting
the bank credit to many state-owned enterprises which were producing
things that no consumers wanted. While as private enterprise we did not
enjoy the benefit of bank credit, its sudden massive contraction hurt us
as bad as the state-owned enterprises who received such reckless loans. We
were entangled like the other enterprises in what we called the
“triangular debt” problem, where everyone owes the next person money and
there was just no money at the source for anyone to get paid.......!!!
The situation last for quite sometime as we lived from hands to mouths,
sometimes having to send out local thugs to chase for receivable payments
from cash-strapped clients. Then again, what else can we do? We had so
much or our friends’ and relatives’ money with us investing in all these
machinery now that the only road for us is to struggle
forwards......turning back would have made us the “outcast” of the
village.......
By the time the rest of the Asian economies cracked in 1997 amidst the so
called Asian Financial Crisis, we were already becoming numb to bad news.
I remembered there were days that I wished I had not joined the textile
industry, or any industry at all......for making money out of making
something is so darn difficult....... I thought I might have just wasted
my youth.
Somehow, we managed to pull through as a group. The general manager of the
factory, who is now getting seriously old, made his sacrifice along the
way by selling his Santana in order to keep more mouths fed. We all had no
where else to turn to but to continue pushing hard to sell our new
product, the chemical fibres. Finally, by year 2000, the economy began to
recover. Our hard work and persistence were also beginning to get paid off
handsomely as China had become the centre of all textile, shoe and
furniture manufacturing in the world, and all these products required some
forms of chemical fibres. We were beginning to rake in cash beginning
2002!
Then my life-changing incident took place. One fine day in late 2002, I
was introduced over the dinner table to one Singapore “Deal-maker” who was
to become one of the richest men in his country in the next 5 years. Mr D
was still a “relatively” poor deal-maker at that time. Just like many so
called “deal-makers” running around China at that time, they hope to make
small fees introducing companies to capital, or vice versa. Mr D claimed
that he had successfully engineered a number of private equity
transactions in China, helping companies with so called “mezzanine”
financing to prepare the companies to be listed in stock exc! hanges
outside of China. He was fully aware of the psychology of Chinese
entrepreneurs and their deep dissatisfaction with the bias of the Chinese
government in allowing only state-owned enterprises to list on the local
stock exchanges. To us, having a listing status in China is like having
acquired the right to print money. One just has to cook up a nice
investment story and he could get Chinese investors to subscribe to the
right issues of a listed company at any price. It was so much more an
elegant way to make some money, rather than to have to toil for a few
cents selling chemical fibres.......
Mr D went further to claim that he had taken some of the invested
companies public in both Hong Kong and Singapore Stock Exchanges and given
his investors had made some money, he always have a group of
ready-investors willing to back all his “stock picks”. He went on to ask
quite a number of detailed questions on the operating conditions of our
companies over the dinner, jotted them down carefully on a small note book
along the way. Later on, we adjourned up-stair the restaurant for a KTV
session. I must admit that I remembered clearly Mr D was a good Chinese
song singer, having sung some hot-off-the-chart songs that I heard my
niece hummed sometime shortly before the incident. His smooth handling of
the KTV girls, which he asked for two concurrently, also showed that he
had been around.........
The next time I met Mr D was three months later, quite unexpectedly as I
had thought he could have decided to give our company a miss given our
relative small size. He requested for a factory visit which, after having
consulted our old general manager, I accompanied throughout. As usual, no
serious business until after dinner and getting slight tipsy after a few
drinks forced down by the KTV girls in the evening. I must admit that Mr D
is a seasoned operator. He was quick to recognise that I was an impatient
young man to take over the operation from my older colleagues. Throughout
the entire evening, he was trying to convince me to move the gear one
notch faster to accept some private investors into the company, beyond
which he was confident to help us to get the company listed in one of the
foreign stock exchanges, where everyone will be able to cash out their
profit if they so ! chose. I pretended to be sceptical while deep in my
heart, I need no convincing as I have known many Fujian entrepreneurs shot
to fame and riches, 2 of them by turning large tracts of collective land
into vegetable farms and the other bending float glasses he bought from
state-owned factories into auto wind-screens and sell them to car
manufacturers. I never doubted that one can make a lot of money from car
wind-screen, but I could have never imagined striking it rich planting
vegetable.......!!!
Mr D and myself both agreed later that we need to convince the other older
colleagues of mine to approve such a scheme, and over time, move them
aside to allow someone young and dynamic person like myself to be the face
of the firm to cater to the likings of the investors, who were mostly
English speaking. In the meantime, my task was to convince the existing
shareholders to allow a group of Mr D’s friends into the shareholding
first, while paying Mr D a “structuring and introduction” fee along the
way. The easy part was, as Mr D coached me on how to present to the rest
of the shareholders, his fees will not be in “cash” but rather in
equivalent value of “shares”. He said that was to assure everyone that he
could only make money should he be able to engineer an eventual listing of
the company on a stock exchange, after another year of lock-up period for
promoter shares aft! er listing. All interests would be aligned, as he put
it.
Mr D was indeed an experienced operator. He had anticipated all the
concerns of the “older” colleagues of mine, who feared that this was
another one of those “leather-bag-company” deal-makers that was trying to
make money out of no commitment. So he got through the first “hurdle of
trust” after my carefully orchestrated presentation to the “board” of the
company. However, there was still one important issue we could not resolve
amongst the board members. The finance manager correctly pointed out that
the company indeed, did not need substantial amount of cash at this moment
as we were not expanding aggressively anymore. The market place for our
products was relatively stable right now with demand and supply growing
organically. We will not be able to drive higher sales without sacrificing
our margins by cutting prices. In short, we can only grow organically at
around 10% ! per annum, which was probably not the most exciting story for
the investors. In fact, the board members did not see the need for new
capital. However, the idea of getting listed did appeal to them. They too
had many friend who had become “paper millionaire” after the companies got
listed. They too were looking for the big-pay-off day. So I was tasked to
come up with a solution. In other words, there was a “green-light”! I did
not expect my luck!
Almost immediately after the board meeting, I called Mr D to tell him the
outcome, as well as the issues raised. Again, I thought he must have
expected the outcomes. As he explained calmly over the phone, the first
round investors (which he called angels) will not put in a lot of money so
that they would not dilute the existing shareholders very much. These
angels are the “connected persons” that will come in with their own money
(through Mr D’s personal vehicle) that will help cement the way for some
of the well known direct-investment funds to step in at a slightly later
stage, which would provide the company with the credibility, other than
funding, to convince the stock exchanges to allow the company’s listing,
and the subsequent active participation of other institutional investors
during the IPO. Mr D went on to explain that the process of getting a
Chinese company list! ed was in fact, an art. There were not many people
like him that could have the trust of many influential people to conceal
their names behind his vehicle to invest in a company, not unless they
have been working on other cases together before and having developed deep
working relationship. These angels will see the company through the
process from getting “restructured” to “listed”, rendering their helps in
one way or another through exerting subtle influences on counter-parties,
bankers, regulators and other investors. Mr D’s vehicle will participate
in the shareholding of the company first, where they will invest up to 5%
at book value. In other words, they demand for very cheap entry. Mr D will
only take his fees later after having brought in the money from direct
investment funds, in larger quantum, in the form of shares of the company
at book value before the entry of new capital. He wanted 2% worth of the
amount of money he would bring in from the funds in such ! shares.
Subsequently, he went on to explain that this was the modus op erandi
these days as he could introduce us to the senior executives of the
companies who had done business with him for further due diligence on his
reputation. In particular, he emphasized that my colleagues should not be
worried at all given the fact that it was going to be his and his friends’
money that will be in their hands, rather than the other way round. My
older colleagues did find some solace in this argument later on.
As for the use of money, Mr D simply pointed out that we will have 6 month
to a year to come up with a new plan on spending the proceed of
investment, in the form of new technology and new products. “Aren’t you
guys always looking for money to upgrade production machinery to produce
new stuff for the market? It the same bunch of the customers
anyway......”, so he quipped.
So the decision process took a few months, where in between, Mr D sent in
some accountants and lawyer to conduct some checks on our operation and
accounts. We had nothing to hide then as we had no reason to fake
anything. Everything was ours.......then. Subsequently, the “angels” came
in, followed by, indeed, a number of reputable direct investment funds a
few months down the line. We got a whopping US$20mn to put up a new plant
to produce a new type of artificial fibre, the machinery of which was to
be imported from Germany. The new product was in fact, attractive to a lot
of customers. However, none of them were going to buy a lot of it at the
beginning as they were not sure their customers were going to like the new
types of yarns made of this new fibres. Business was not as brisk as Mr D
had! hoped for.......
On the other hands, Mr D seemed quite keen that we could move forward in
our listing process. He began to educate us the process and requirement of
the stock exchanges for listing. We paid visit to Hong Kong and Singapore,
talking to bankers and exchange officials, attending seminars, as
organised by Mr D. We were all psyched up to be a rich millionaire once
the company is listed. However, there was just this little problem.....our
new products were not accepted by the market as fast as we had wished for.
Most of our customers operate under very tight cash flow situation. They
only have working capital to provide for the acquisition of raw materials
to produce the yarns ordered by their customers. No one was going to spend
a lot of money buying our new fibres, prod! uce large quantity of products
to purvey them in trade shows, despite they all fed back with good comment
on the potential of the new fibres.
Very quickly, Mr D came up with an idea. In order to boost our sales
numbers fast, he will raise another US$20mn of money from all the direct
investment funds in the name of working capital need. As he explained,
they often did the same tricks with those companies they listed before.
They will raise new capital to produce the new products to sell to
customers, encouraging them to help push the new products by offering them
more favourable and longer payment terms. With the increased sales and
profitability number, he could get the company to list very quickly to get
more money to help push for more sales....... He claimed he had done it
many times before and it had always worked out. The economy was recovering
quickly in 2003, nothing was to going to go terribly wrong. When I asked
whether that would be considered “artificially inflating sales number”, he
laughed and quipped, � 皐ith the capital markets on your side, you can
engineer self-fulfilling prophesies!”
Of course, this article cannot be complete, at this juncture, without
citing Mr D’s favourite quotable quote. “Water enough money into any
company, even a fake one could become real some day.” He believed so much
in this that I thought one day, this could cause his downfall.
So we went ahead, sold the new shares at higher valuation to another bunch
of investors Mr D arranged. He took another round of commission in the
form of shares. We were beginning to admire Mr D. Money flows through his
hands like water and he did it so effortlessly. We were no less impressed
by his connection to some of the richest and most influential people,
particularly in Singapore. You see, he was viewed as a successful
Singapore entrepreneur made good in the vast land of the North. Through
diligence and perseverance, he carved a niche for himself identifying
promising Chinese companies to groom for listing on the Singapore Stock
Exchange which was losing out in race to Hong Kong Stock Exchange as the
Chinese! state-owned enterprises were encouraged to list in Hong Kong. Mr
D was their hero, directing promising private Chinese enterprises to list
in Singapore and along the way, enriching many “angels” and local
investment banks in Singapore.
I chanced upon many of these angels as well. There were occasions Mr D
would have called me to help arrange for some transport and accommodation
in Xiamen for groups for “secret” visitors. They are usually small groups
of 4-8 people. I would generally put them in comfortable Buick mini vans,
receiving them from the airports, ferrying them to golf courses,
restaurants and night clubs. They would usually visit one of two factories
invested by Mr D. From my impression, these were the angels behind Mr D,
which for obvious reasons, he had to please. There were bankers, lawyers,
other deal makers, stock brokers, fund managers and people that do not
have a job, simply because they were so rich already. Occasionally, there
were ex-CEOs or Chairmen of large government controlled enterprises in !
Singapore. Once, I even met a supposedly ex-member of parliament in
Singapore. It was obvious to me that Mr D entertained them in separate
groups at separate times, taking pains in ensuring that some of them were
not aware of the involvement of the others, for some reasons. I was always
invited to all these golf and night entertainment events for a simple
reason: I speak English and Mr D wanted to be seen as having someone like
me to watch over his investment in this part of the world and helped him
to tap into different kinds of local relationship. The other Chinese
entrepreneurs may not be comfortable in dealing with the whole bunch of
English speaking Singaporeans.
One common trait of all these trips was that all these guys from Singapore
seemed to love the night clubs in China. The daily programme always ended
in some night clubs, where these guys would party till the wee hours,
every night they were there. Mr D would sometime, when he was half drunk,
tell me that he had again “nailed” some key relationship and one of the
travellers in the group would soon be in his “Club”. He would whispered
that someone in the group was the senior partner of an investment fund, or
someone in another group was connected to the so-and-so in Singapore, or
someone was closely associated with the chiefs of some Singapore banks, or
someone had “influence” over the listing approval process ! of the stock
exchange, and some would just be some new investors that he was trying to
woo to invest in his pre-IPO projects or the shares in the companies that
he sponsored the IPOs. When I asked why they were all so tireless in their
nocturnal activities, Mr D laughed, “This is what I call pent-up demand.
You know these people cannot even come 100-meter close to any KTV in
Singapore because of their social status. The opening up of China is
probably the best thing that happened to all these Singaporean men, for
they can at least release their “valves” once in a while........ Do you
know how boring Singapore is? I have a permanent KTV room booked up in one
of most posh KTV in Singapore, costing me half a mill ion Dollar at the
minimum every year. Guess what, the only important guests I have using
that rooms are from China!”
Watching Mr D in action, I finally understood the true meaning of “club”.
He had managed to combine the “social club of friends” and KTV clubs so
well that I thought every successful Chinese businessman should learn. And
in so many ways, the “club” in Singapore is really not that different from
the “club” in China........
So finally, we got our act together to attempt a listing towards the end
of 2003, after much of the financial twisting and engineering to make our
company look like a well-funded high-tech textile fibre company on the
verge of experiencing explosive sales take-off. In truth, we produced a
lot of the new fibre products and literally give them to our customer to
produce new fabric for marketing purposes, with the promise that we will
not collect money until their products are sold. Nevertheless, we book
these as receivables. To the dismay of Mr D, my older colleagues had
insisted on listing the company on the Hong Kong Stock Exchange, rather
than the Singapore one, where Mr D has greater control on the process.
They felt that the company would probably be accorded higher valuation in
Hong Kong. Besides, they were not comfortable with Mr D’s influence in
Singapore fearing the ultimate loss of the control of their company. Mr D
went along grudgingly, helping to smooth the way to facilitate the IPO.
We got a small investment bank to underwrite the IPO. The big ones were
really not interested in this small piece of business. We went on to file
the application to list to Hong Kong Stock Exchange, who was equally
high-handed as Hong Kong was flushed with quality large size state-owned
enterprises queuing up to list there. Being relatively uninterested in
small size listing and more experienced in evaluating the quality of
smaller Chinese private enterprises, they were quick to notice the sudden
expansion of account receivables on our accounting statements. They
followed up with a number of questions with the clear purpose of delaying
our listing, probably to see how these receivables will behave given
longer period of time. In short, there would be no quick IPO for us.
Mr D was quick to use this delay to his advantage. He hinted to everyone
on the company board was that one of the reason for the stock exchange
delay was due to the lack of a convincing younger manager helming the
company, and that our senior colleague was already too old to project a
“dynamic” image to the Exchange and the investors subsequently. He wanted
me to be promoted to the CEO position while our existing GM to become the
Chairman of the board. With his insistence, my appointment was pushed
through the board, which made one of my older colleagues very angry as he
was supposed to be the next-in-line in seniority. But heck, he should have
spent some time learning English!
Mr D, being truly worried about the age of the receivables on our book
that would become increasingly dubious as days go by, pushed us to shoot
for a Singapore listing where he feel, with his broad relationship will
help a smooth IPO. This time round, my older colleagues obliged
grudgingly. So we quickly filed an application to list in Singapore. It
proceeded relatively smoothly and we went through an initial hearing very
quickly. The market was in relatively stable conditions and we felt we
could get the IPO proceeds quickly at the turn of the year. With lot of
money, like Mr D’s famous words, a fake company can become real....... To
be fair, ours was not really a fake company. We were just doing what the
Chinese proverb describes: Accelerating the growth of the seedling by
pulling it up a littl! e everyday......
To our surprise, we got a letter very soon from the stock exchange
questioning us the reason for the failure to disclose to them we had
applied to the Hong Kong Stock Exchange earlier. They asked whether we had
been rejected previously and on what ground we had been rejected. Just as
we wonder how they found out so quickly since one could safely assume due
to competitive relationship, these exchanges should not be talking to each
other on micro matters like this, Mr D came storming in over-night.
“Someone wrote a poison letter to the stock exchange”, so he explained.
“Someone who knows the situation very well and who is not very happy with
the whole thing”, he concluded. We were fortunate, he went on to exclaim,
as he felt that given the Hong Kong Stock Exchange never really rejected
our application, he could still salvage the situation using his
relationship and influence.
While there was no hard evidence, we nevertheless took the precaution of
asking for the early retirement of the senior colleague who was passed
over for the post of CEO as we suspected him to be the whistle-blower. We
made sure he was well compensated in monetary terms as we thought that
would sooth his anger, with promises to allocate more of the shares to him
so that he would share our desire to see a successful IPO. Then we went on
to reply to the stock exchange disclaiming the fact that we were
previously rejected, citing our need to access capital markets fast as
ours business was expanding rapidly. Hong Kong was just going to be too
long a wait for us. On the other hand, Mr D worked his network and “club
of friends” to sooth the nerves of the exchange officials, who were
working hard to promote Singapore as the “second board for China” a! s the
launch of “second board of China in Shenzhen” hit a snag when the National
Peoples’ Congress decided that the Chinese investment public was still too
unsophisticated to handle investing in non-State-controlled enterprises
that even the Chinese government may not be able to police effectively.
So after 3 month, we were informed that we manage to secure the final
hearing. Mr D and some young lawyers and accountants spent a few days
preparing me to handle the questions “correctly”. I saw the signs of
satisfaction on the faces of the officials during the hearing. One of them
even went on to comment on the fluency of my English...... Mr D was right
again. My Chairman could have fumbled and rumbled on just like any other
Chinese CEO during such occasions. They were just the hardworking mulls
that built the foundation of the Chinese’s manufacturing might. I belong
to the generation that would take the company to soar higher as we
understand and speak the language of high-finance, in English!
The battle to IPO was hard won. We got listed in 2004 and to our pleasant
surprise, some of our customers came back to pay down the receivables and
asked for more of our new chemical fibres. By now, China has become the
“factory of the World” that churned out all kinds of consumer and
industrial products so cheaply that the Americans and the Europeans were
so addicted to. The stock markets and physical property markets in the
world were becoming buoyant and everyone was beginning to feel wealthy and
began to spend more. Our new fibre products found more commercial uses and
we bought more machines using the IPO proceeds to produce more products to
cater to the booming demand. Again Mr D was right. Pour more cash into the
business and you will get a real company.........just like the pig-farmers
l! isted on the stock exchange.......as he put it.
Sensing potential to make a lot of money out of the good performance of
the company and the buoyant market conditions, Mr D descended into town
one day and asked me out for a dinner. As usual, we headed to his
favourite KTV after dinner. After a few drinks, he leaned over and
whispered to me, “Hey, this is your chance to grow really big very fast.
The IPO proceed was not enough to fund your growth. Now that we are
listed, we can place more shares out to raise more money to accelerate the
business expansion to capture more customers before the competitors in
China could replicate our capabilities, which always happen in every
industry and business in China.” I was reluctant to agree to help sell the
idea to my old! er colleagues as their shares were still in lock-up period
and I imagined they would hate to see any dilution of their interests
further at this juncture. Mr D went on, “I really needed your help as I
need to get the shares placed out to some of those who helped us through
the difficult times just not too long ago. We need to let them make some
money as we are entering a bull market soon. In any case, the issuance of
more new shares will give us more power to cement your position as the
number one man in your company as we all support you rather than your
older colleagues.”
As usual, we kind of half forced the issue through the board with my older
colleagues grudgingly approved some kind of convertible issue to assuage
their fear that the new institutional investor would not be able to sell
before they were allowed to. In Mr D’s effort to consolidate his hold of
the board further, a new director from the institutional investor group
was appointed to the board. I had known him earlier as one of those that
visited our plant before the IPO, when Mr D was just beginning to
restructure the company shareholding where this new director was once
introduced to me as an “angel” investor. Apparently, they were good
friends that “make money together”.
By 2005, the Chinese economy had entered into another “boom era” and our
business was literally flying, just like any other businesses in China.
Profit margins were good while sales expanded quickly, and our share
prices rose more than 3 to 4 times from the IPO price. Many of older
colleagues sold their shares and retired happily into the sunset in 2006,
only to regret to see the shares they sold almost doubled again in 2007.
Being the new helmsman, I could not easily sell my shares as it would have
been construed as management not having confidence in the business.
By then, Mr D had become one of the richest men in Singapore. Leveraging
on his experience and the capital he accumulated from earlier successful
IPOs he conducted, where in some case he made more than 50 times his
capital, he exploited his new reputation as the “preferred deal-maker in
Singapore” to the maximum. His “club” became increasingly larger as many
people with money and “influence” joined the “club” to participate in this
unprecedented “Chinese feast”. He doled out hot IPO share allocation
through investment banks to repay old favour and to cultivate new
relationship. Success begets success and money begets money. It all seemed
so easy and so natural. Everyone got what they wanted. The Chinese c!
ompanies got their money to expand their business (which at a later stage,
no one is really sure which company really had any business to start
with), the entrepreneurs were handsomely rewarded for the risks they
undertook, the deal makers got their fees, the angels made their killings,
the bankers collected their fees and dished out new loans, the lawyers and
accountants recruited more young graduates to cope with the record work
volume, the stock exchange got their “new mandate as the second board of
the Chinese companies”, the investors got their hot-and-sizzling China
concept stocks and above all, the rich and the influential members of the
“invisible clubs” were all happily enriching their own pockets......
The reason why Mr D was successful, I realised, was that he always try to
help the people who helped him in one way or another to become richer.
Despite the fact that I could not sell my shares, I got the help of one of
his banker friends to obtain some financing by securing my stake in the
company to join in the biggest “Chinese feast in Singapore”. Just like all
the Chinese entrepreneurs Mr D helped, I became one of his “angel
investors”, taking stakes in promising new companies through his vehicles,
got allocated hot IPO shares and reaped substantial gains within short
span of time. I too, was becoming not only asset, but also cash rich. I
took advantage of the Singapore immigration rule and got myself a per!
manent resident by purchasing a property in Singapore. I wanted my son to
study in the English school in Singapore and grow up as part of the
establishment there. In any case, I would be able to help him join the
“club” and he will be taken care of the rest of his life. As for Mr D, he
was purchasing properties in the form of “tracts of land” as he moved to
diversify his assets from stock holdings to land holdings, with a sight to
become a serious property developer. The Singapore property market was
getting sizzling hot by the middle of 2007 and it seemed nothing could go
wrong, particularly when 2 casinos were being constructed in an otherwise
very conservative society.
For myself, Mr D was going to be my role model. I went on to fund
entrepreneurs and Chinese companies directly, hoping one day to bring
these companies to someone like Mr D, and make more than the Singaporean
deal-maker, at least equal........ Oh, I forgot to mention that the
Chinese local stock market went through the roof as well. To take
advantage of this, I needed no advice from Mr D. My friends in the local
banks helped me secure the capital easily just like what they did for
thousands of state-owned enterprise officials. They took the company’s
cash as “invisible lien” to lend money to the managers of these companies
to punt in the stock markets. The profits of such stock market speculation
go directly into the pocket of the managers. However, only in hindsight
after the stock market collapse at the end of 2007 that it became obvious
a lot of Chinese companies’ cash in ! the bank vanished into thin-air
alongside the stock market bubbles.
Our worlds began to unravel at the end of the third quarter of 2007. By
then, the Sub-prime Crisis, as we knew it now, had hit the U.S. economy.
We were still busy feasting in the spoilt of the capital market excesses,
unaware of the impacts of such a crisis that originated from the housing
bubbles in a country so far away. We were blind-sighted by the ease of
making money from stock markets and at the peak of the markets in the
middle of 2007, we all felt like the “masters of the universe”.
The first sign of trouble amongst the Singapore listed Chinese companies
appeared when the share price of a Chinese steel company got sold off
aggressively. In good times amidst a vibrant economy, this company
presented to the investing community a story of their ability to turn in
good profit margins by buying hot-rolled steel coils, coating them in zinc
and sell them to car and consumer durable makers. One analyst, whom
everyone ignored when the stock prices were rocketing, did question its
business model as firstly, such production method is highly inefficient as
most modern steel mills produce zinc-coated plates in one continuous
process, and secondly, the investing world also knew that the prices of
hot-rolled coils became excessively expensive as there was a preponderance
of such downstream ! processing plants who got squeezed by the few
integrated steel giants who have the capability to smelt iron-ore. Then
there was the rumour of the company being privatised by a foreign steel
giant seeking easy entry into the China market and its stock prices shot
up before the trading of this steel company was suspended one day. Rumour
had it that it had been reporting fake profits, an official report of
which the investing community is still awaiting after a few months. It was
so obvious an insider job to cash out their position to the retail
investors and apparently, the company management was not contactable
anymore!
By the second half of 2008, I believed many Chinese company CEOs were
having tough times struggling to keep their business afloat amidst the
most serious and swift crisis in memory as the credit situations around
the world got frozen up. Worst, many of us were facing more serious issues
in our personal finances. All our investments in stock and property
markets were plunging in values amidst the so-called sub-prime crisis.
Worse, we could not sell our stocks and properties as the transaction
volume of these investments just vanished quickly together with the
confidence of the investors globally. While we busy feasted in the spoilt
of the capital market excesses over the last 2 years, we did not realise
that we were piling on quite a fair bit of leverages as we secured our
investments for more bank loans to attempt to reap more profits, when it
all seemed so easy. We never thought! we could have any problem of
repaying any of our borrowing as we were sitting on a lot of gains on our
investment holdings.
There was only one easy way out for all the Chinese company CEOs and that
was to dip into the honey jugs. We all understood the importance of having
our closest allies to be the finance managers of our companies so that any
small “problems” could always be ironed out. In this case, I just
“borrowed” some cash from the company accounts to fill some of the “margin
calls” from the banks outside of China, which financed my “investments” in
the stocks listed on Singapore Stock Exchange, as these foreign banks were
ruthless in coming to seize the underlying security when the “margin
calls” were not met. In some cases, I just pledged more of my personal
assets to the foreign banks. I was becoming very stressed by all these
happening and was not sleeping well.
Mr D was not having a good time either. He too was suffering from exactly
the same problems as we were just emulating his investment styles and
leveraging activities. I heard of incidents where he turned to some of
other more cash-rich companies that he invested in to “borrow” some cash
to bridge through some “margin calls”. He sold down quite a fair bit of
his investment holdings to some “friendly hands” in a series of stock
placements. At this moment, the goodwill and friendship he built over the
years came to his rescue in these moments of “illiquidity” as the market
transaction volume just dried up almost completely. However, the market
prices of the stock holdings we used to secure our financing continued to
drop by the days. Some of our friends and fellow “angels” were selling
their holdings........and may just be in the same kinds of troubles as
well. No one trus! ted each others at moments like these. Those that were
selling their investments would not pre-warn their “fellow investors” as
everyone would rush to sell at the same time! It was a time where everyone
was for himself!
My anguish did not escape the attention of the “director” on our board
that Mr D posted in earlier. He flew over one day and was visibly
concerned about the situation of my finances and of course, more
importantly, that of the company. He sensed troubles as he knew that I
too, had quite a fair bit of personal investments that were vanishing into
the thin air in values. By now, at the end of 2008, I was becoming
desperate. Our company was going into the “audit season” and obviously,
there was a large cash deficit that we would not be able to explain to the
auditor. In the past, we could have just “arranged” for some cash to be
credited into the bank account for a brief period to satisfy the auditors’
check. However, there was no such “temporary cash” to be found at any
price as the sub-prime crisis had now developed into a full blown
credit-crisis around the world. China was not spared in the process. With
no where to turn to and the audit dateline closing in, I took the risks to
“brief” the director of the true situation and asked for his help. I was
surprised that he was not shocked by my confession. He had probably
guessed it!
In any case, the director asked me to remain calm while he would consult
Mr D to seek some kinds of new financing to help bridge this difficult
period. He asked that everything remained confidential as the last thing
we wanted the world to know was the “missing cash” in the company
accounts. H told me that quite a number of the S-chip CEOs were on the
same boat and some of the “funds” that used to backed their IPOs have been
able to extend some credit directly to them ease the pressure from the
foreign banks, secured by again, stock holdings of the CEOs. Little did he
know that my assets had almost been entirely secured by all kinds of
creditors already!
Then the irreparable damage struck. I had borrowed some money from the
local Chinese banks to punt in the local stock markets. The arrangement
was such that I had to return such cash to the Chinese banks at the end of
the year because they too, were subjected to annual audit. I had carefully
maintained sufficient cash in our company accounts, which served as the
“collateral to the conscience” of my friends in the Chinese banks. As I
began to use them to fund the “margin calls” of the foreign banks and the
amounts got further depleted by operation losses of the company amidst the
worst economic crisis the world was now facing, my “friends” in the local
Chinese banks were not going to take a chance on their own fate. They were
definitely not “friends in need”. They simply deduct the amount I owed
personally from our company accounts two days before their auditors came
in, w! hich was of course, a few days before our company auditors came in.
The rest was history...................
The auditor, which was an international firm, was not going to take a
chance with their reputation. They formally informed our board of
directors in early 2009. In other words, they were warning the board that
the financial statements they were going to publish would be “disastrous”
and could cause a serious enquiry by the regulators. I think some insiders
proceeded to sell some of their shares before any official announcements
were made but most of us were warned not to do anything with our holdings
as that would be considered “insider trading”. Of course, all my older
colleagues and company directors hated me as a consequence. I was asked to
absent myself from all their meetings as they attempted to come up with a
solution before the mandated result announcement date stipulated by the
Stock Exchange.
I was very scared. I had no one to turn to as even Mr D had stopped
answering my phone calls. Everyone was trying to distance himself from me
and it became obvious that I was going to be the “scapegoat”. To protect
myself, I seek the advice of some lawyers in China who in turn, consulted
their friends in Singapore. To my relief, I was advised that should I be
found guilty in the Singapore courts for misappropriating company assets,
there was no established bilateral treaty as yet for Singapore court to
extradite me from China. The China Securities Regulatory Commission, the
securities regulator in China, had never once recognised their
responsibility to regulate the S-chip companies listed in Singapore. In
fact, the Hong Kong Stock Exchange had faced similar issues for decades in
their attempt to regulate the P-chips, which were Chinese private
enterprises listed on Hong Kong Stock Exchange, to no avail. In other
words, as long as I refrained from stepping my feet on Singapore soil,
nothing could be done to me. In any case, I thought given the hatred I
faced from all my older colleagues and friends in the hometown, I should
be taking some long overdue holidays. I relocate my family to a ! Chinese
seaside town. Although I was now an ordinary citizen, I was gl ad that my
wife kept quite a far bit of the money I gave her along the way and that
should be enough to last us a life time, at least in China.
Through internet, I came to know that the company finally disclosed the
incident to the Stock Exchange and the stock was suspended. They appointed
an investigator but I was no where to be found. So it would be interesting
on how the story could turn out post the investigation report. In fact, a
number of S-chips suffered from the same problems and were suspended from
trading soon after us. Inevitably, there were cases of over-stated
revenues, fathom receivables, missing cash, over-leveraged financial
positions of the founding entrepreneur who mortgaged away their own
stocks, as well as outright manipulation of stock prices. In many cases, I
suspected the irregularities had begun right from the very beginning,
before the companies were even listed. Many were not real companies at the
first place. My friends in the know told me that a few more had been
discovered as suffering from ! “missing cash” and jokingly commented that
the Exchange had to arrange for a smooth sequence of announcements just
like the way they schedule result announcements of listed companies.
With all these irregularities exposed and more promised to appear, the
stock prices of all S-chips have literally collapsed. All my friends and
their “club members” must have suffered tremendous losses. Some dealmakers
and their syndicate members apparently were facing margin calls on daily
basis and some even declared themselves bankrupt. It must have been a very
trying period for everyone. However, I did not seem to have much sympathy
to all these people. I witnessed how some of them became filthily rich in
a short span of time without having to work hard, while other enjoyed a
good ride in fortune just because they (or their friends or relatives)
were in position of influence. I was the only one that would be made a
“scapegoat” and had to live a life of “exile”, while these guys could
still just lick their wounds secretively and continued on with their life.
I do not sym! pathize those institutional investors who lost their money
as if they did, they were simply either incompetent or someone had
benefited personally along the way in having committed their funds’ money
in such investments. Curiously, I wonder who will speak on behalf of all
the many ordinary people in Singapore who came to believe the investment
potential of these S-chip companies after all the beautiful “packaging”
the dealmakers and entrepreneurs wrapped around them, and went on to
invest their life savings in the S-chips, only to find out one day that
all these were worthless!
So when dust finally settles one day, we shall all look back and evaluate
what had gone wrong and who are to be blamed. I am sure all fingers will
be pointing at the Chinese entrepreneurs such as myself, who are usually
labelled as “greedy and unscrupulous”. There is a ring of truth to that
accusation and I admit I am guilty. But how about those dealmakers, who
taught us how to cook the books? How about those angels, who hid their
identities behind some dealmakers and exerted influences to assist them to
succeed in their schemes? How about those institutional investors who
trifled with the money entrusted to them? How about those intermediaries
and professionals who were not vigilant enough to protect the interest of
the investing public?
I would like to end with a comparison. The Ming Dynasty collapsed only
after the General (Wu San Gui) they sent to defend the border against the
Manchurians opened the gate voluntarily to allow the Manchurian’s army to
come into the Great Wall. General Wu did that probably out of a promise to
be made a king later on and be endowed tremendous amount of riches by the
Manchurians. Of course, the historians would like to add that he also
needed the help of the Manchurians to defeat another general that had
taken his favourite concubine. In short, the thieves and robbers are only
usually allowed in by the insiders..........
If you have read the story till this part, I am sure you are either a
victim or someone who is deeply interested in the development of the
S-chips going forward. Please help to forward this email to any many such
interested parties as possible. We need to put an end to all these
irregularities lest more ordinary people on the street suffer unnecessary
losses.
In the process, you will help me to partially clear my name...... For I am
not the only one to be blamed.................
N/B:
1. Not everything is true in this story that I have just presented
in order to protect some friends that still remain friends. In particular,
the story before 1995 was inserted in only to give you a perspective of
the difficulties that most Chinese entrepreneurs went through, and how
they eventually all came to resent the ease and ruthless manner in which
people like Mr D made great fortunes leveraging off their hard work.
2. At the same time, I sincerely hope that the investigation
report that was pending in the case of my company comes out being at least
“fair” to me. Otherwise, the more “real truths” will follow in subsequent
emails......... hahahaha, the power of internet........
