One sweeping observation can safely be made about investing in Asia Asian companies have a problem with disclosure. No incident did more to highlight this than the Tsingtao debacle two years ago. In April 1995, investors learnt that Tsingtao, China's biggest brewery and the best known of the "H" shares (mainland firms listed in Hong Kong), had not, as its prospectus had promised, used $114 million raised during its 1993 flotation to expand capacity. Rather, it had loaned most of the money via banks to other Chinese firms. Tsingtao was apparently better at picking pockets than picking winners: its 1994 net profits fell 42%.
Tsingtao is a particularly egregious example of a problem apparent in markets from Bombay to Bangkok. Investors in Asian equities have learnt the hard way that the stocks they purchase often bear little resemblance to the stories they are sold. This is by no means unique to Asia, and, as the markets mature, disclosure will no doubt improve. But it might improve sooner, critics say, were brokers' research better. "It's easy to say there is a culture of inadequate or even false disclosure," says Anthony Miller, president of Asian Investment Partners in Hong Kong. "But blaming this for the lack of information just tells me that research departments aren't doing their jobs."
Over the Chinese wall
Throughout the region, a similar complaint is voiced: the analysts are too young, inexperienced, and insufficiently cynical. As a result, their coverage often borders on the useless. The research in Asia is demonstrably worse than research in New York and London. But the real problem isn't quality, it's objectivity. Like many of their colleagues elsewhere, analysts in Asia are increasingly being dragged over the Chinese wall in order to help sell corporate finance deals.
There are several reasons why Asia, more than most regions, needs unbiased research. In North America and Europe, the regulatory framework generally ensures a high degree of transparency. In Asia, by contrast, the rules seem constantly to be trying to catch up with the infractions. Accounting standards, which vary greatly from market to market, are also inadequate in the view of many investors. Then there is the corporate culture itself. Deals are often cut behind closed doors and many firms, particularly family-owned ones, plan to keep it that way.
Even a company as closely watched as Gordon Wu's Hong Kong-based Hopewell Holdings is something of a mystery to outsiders. "Can you understand Hopewell's balance sheet?" asks one investment banker. "I am sure that no-one can adequately analyze that firm." Worse still are the region's powerful conglomerates, which bring their opaque methods to a dizzying array of industries. It was hardly a shock, then, when the US-based Centre for Financial Research and Analysis found in its most recent survey that four Asian nations were among the 10 countries with weakest disclosure and the study didn't even include China and Indonesia.
Governments in Asia can be just as evasive as companies. Economic data are famously unreliable in many parts of the region, and analysts who pry too much can end up on the wrong side of the law. Last October, an SBC Warburg employee in Beijing was detained for a month without charge after allegations that she had stolen state secrets a central bank report. A Singapore economist for Crosby Securities faced similar charges several years earlier after getting hold of data that was still embargoed. Nor is criticism always well received: in 1995, Thai officials lashed out at Crédit Lyonnais economist Jim Walker, who had warned investors that Thailand was becoming over-reliant on short-term capital inflows.
In the face of these obstacles, analysts are the first, and often last, line of defence for global investors. What's wrong with the Asian research that's published? "The quality of the paper is very high," quips Marc Faber, a Hong Kong-based investment expert who runs his own firm. "The colours are very bright and the reports are very heavy. It's what's inside that is a problem." Even the essentials can be unreliable: one fund manager says it's not uncommon to pick up several reports on the same firm, only to find that each one lists a different number of shares in issue. Subjective material is seldom any better. "Most of the research doesn't look past its nose," admits one analyst. Sometimes, it doesn't even look that far.
Take, for instance, a report on Hong Kong-based toy development and marketing group Playmates Toys that was issued last August by one of Asia's leading brokerage firms. It was 15 pages of the most superficial analysis imaginable; more information would almost surely have been gleaned from Playmates' annual report or even a story in the South China Morning Post. The analyst judged Playmates a buy. His rationale: after an abysmal 1995 the company was poised for a strong recovery if a new line of toys based on the film Space Jam, starring Michael Jordan and several famous cartoon characters, proved as popular as the firm's line of Teenage Mutant Ninja Turtles toys.
On page four of the report, readers are advised: "Earnings can really kick in should 'Space Jams' be half as successful as 'Turtles.'" On page eight, they are told, "If the film 'Space Jam' this Christmas turns out to be a hit, there should be an upward revision in earnings." On page 10, they are assured that "earnings can really kick in should they find a line half as successful as 'Ninja Turtles'". And if that wasn't enough to sell readers on the stock, perhaps this was: "A marketing team is located in the US to monitor any upcoming opportunities in Hollywood." Playmates isn't a big firm its market capitalization is US$150 million and it's clearly in no danger of making anyone's Hong Kong A-list. All the same, its shares are traded on a major exchange; it deserves more scrutiny than this.
More often than not the research is done by twenty-somethings with minimal experience and limited skills. This isn't the case in every market Hong Kong and Singapore have plenty of top-notch analysts but it is true enough for many of them. Good analysts are rare in Malaysia and Thailand and even harder to find in the Philippines and Indonesia. "In Indonesia, there's such a thin level of talent on the ground that we decided to just step back," says a Hong Kong-based research director.