Lion AsiaPac: A Subsidiary of Lion Group by SG Value Investor, The Value Edge
In this post, I would be explaining my suspicion regarding Lion AsiaPac. However, all views are purely my own opinion.
When we first discovered Lion Asiapac Limited (SGX:L08) in 2012, it was a classic case of Graham-style net-net stock, where it was trading at approximately 45% discount to NCAV. Back then, with our limited knowledge, Lion AsiaPac seemed like a fantastic find – something so clear cut, so simple to value. However, something so easily identified as undervalued might not be truly be undervalued as everyone else would be able identify it too. While I have cut my losses, looking back at the company, what is wrong with it? It is my suspicion that the company may just be funneling money out of this cash rich company.
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Related Party Transactions:
Looking under Related Party Transactions (Note 28.) we would observe that the ‘Sales of goods and services to related parties’ accounts for approximately 70% of revenues. Where ‘Related Parties’ here refers to companies that are related to the Company through certain common directors or through certain common shareholders.
Lion AsiaPac – Roll-Away Loans or Advances:
Otherwise known as Non-trade or Other receivables are loans or advances (usually interest free) to independent ‘distributors’ or ‘business associates’ which are Related Parties. Looking under Trade and Other Receivables (Note 12.) we would observe more than SGD30.7million of non-trade receivables made out to subsidiaries.
Non-trade receivables and loans to subsidiaries are unsecured, interest-free and repayable on demand, with the exception of a loan to a subsidiary that bears a fixed interest rate of 8.25% (2012: 8.25%) per annum.
– Lion AsiaPac Annual Report 2013
Once again, such huge loans made out to related parties unsecured and interest-free would raise a few red flags in my opinion. Whilst a loan does bear a fixed interest of 8.25%, if we do a back calculation from ‘interest income from related party’, the size of the loan should approximately be SGD4million. That said, there would still be around SGD27million of unsecured, interest-free loans made out to related parties.
Analysing such qualitative factors, it raises various potential red flags. Investing in a company that has that much Related Party Transactions (RPTs), it raises doubts such as whether goods are being sold at competitive market prices to related parties. Furthermore, such are tell-tale signs of a company funnelling money out to another company. Kee Koon Boon (Bamboo Investor) has written an article on a much more comprehensive check regarding accounting frauds in Asia and it can be found here.
Disclaimer: The authors have no vested interest in Lion Asiapac Limited (SGX:L08)