I’ve posted this on him in the past.
“Tan Chin Hwee of Apollo Management Speaks”
I was lucky enough to catch him in Singapore earlier this month, giving a lecture at SMU.
1. Investing In China Is Fraught With “Unconventional Risk”
China is a tough place to crack. Many investors, especially for those of us from politically stable countries with a strong legal system, are used to a certain level of protection of shareholder rights.
Frauds should be the exception to the rule, and not the rule itself.
The case of Sino-Forest highlights the problem with corporate governance in China.
Before Sino Forest was suspended in 2011, it had a market capitalization of over $5 billion. Among many of its investors include bulge bracket firms, and even prominent investor John Paulson. This was a firm with plenty of highly funded and motivated institutions doing their due diligence.
It still turned out that Sino-Forest had engaged in activities that were fraudulent, with the company going into bankruptcy protection in 2013.
2. Earnings Manipulation Does Not Always Start Out With Ill Intentions
Many of us think that earnings manipulation starts out management wanting to defraud investors. This is not always true.
Consider the pressure the CFO faces when the CEO comes to him, and “requests” his help in massaging the earnings in the upcoming quarter to “help his colleagues”, promising to reverse it when things improve. Working against this peer pressure is much harder than we like to think it is.
Earnings are what most investors in Asia focus on, but it is prone to manipulation.
As Mr. Tan advices, focus on the cash flow on the company as it provides the most accurate benchmark of the firm’s situation.
3. Career Risk Is a Big Driving Force of the Markets
This is very important in understanding why analysts tend to congregate in terms of their favorite stocks, and why funds tend to be closet “indexers”.
While unconventional investing may pay off in the long run, financial professionals live in a world dominated by short term thinking. It is the nature of business that people tend to focus on the short term, and even if an analyst or fund may have other motivations, they are ultimately constrained by what their client will let them do.