Saturday, August 22, 2015

My Thoughts On The Silverlake Case

I received a lot of email request asking me on my thoughts about the recent short seller reports that plunged Silverlake to 26% down a single day before it was halted.

I spent the whole weekend reading the 42-page report and it was very comprehensive. To be fair, some of the allegations made was not new and we've seen it before. But this report made it very comprehensive. And I was convinced.

Before I gave my thoughts, I need to state that most of these are beyond the understanding of most fundamental analysts and accountants, even for myself, and a fraud auditor working in the industry would probably know better about this.

Many people have this misconception that once the financial statements are audited and if the auditor's opinion are unqualified, then everything we read in the financial reports must be holy true. That is not the case apparently. It is the management responsibility to ensure that the financial statements are true to the best of their knowledge and it usually depends very much on their integrity to disclose more or less information to the public which was not so apparent. A good example would be off balance sheet disclosure items.

I'll just cover a bit here and there about my thoughts on the allegations matter concerned:

Related Party Transactions Red Flag

This is the main allegations amongst all that is being highlighted.

The report outlines that Silverlake has used extensively in the reporting of its revenue and expenses for the over reliance on its related party transactions, some of whom belongs to the private equity holdings of Mr. Goh himself which can be very difficult to judge once the books gone into consolidation mode, which is what most investors read when they analyze.

The report also stressed that there are some irregularities about the revenue of the private holdings before they are being injected into the group level. It is as if the financial statements are being manipulated in order to account for the higher price sold to the group. In one of the example, it even shows that though the company is making consecutively larger losses over the years, employee numbers have increased substantially, which causes a red flag. The report extensively provided case study on at least 4 of the transactions.

The point on using related party transactions extensively is this. If you are going to use them extensively, then make sure they are being reported extensively in the annual report too. This can be difficult because this is usually the grey area of accounting aspects that isn't made mandatory to report these items in the group level. The reason for this is because each individual entity is supposed to have been audited before they are grouped into consolidation mode.

For auditors who are auditing the book for the group, it is also not easy to ascertain every single related party transactions. The idea is that any transactions made within related party transactions need to be made within an arm length's decision and they are not easy to ascertain for the auditors. For example, when my auditors ask me about the proof on the related party transactions on my company, I usually tell them that it is difficult to get the quotation from the competitors if we are not the customer. At the end of the day, it is the responsibility of the management and their integrity to ensure that their reporting are not a misrepresentation and they are in accordance to the accounting standards.

It also doesn't help when they had changed 12 different auditors in the span of past 10 years. In other words, there could be a case where they may be trying to hide certain things from the auditors who obviously doesn't understand the business well enough.

Chairman's History of Cashing Out At Expense Of Minority Shareholders

The reports stated that historically Mr Goh has been cashing out his stake over the span of 10 years, amounting to RM500M alone. Including the amount of dividends received, this totaled up to RM1B.

On the other hand, you can see how minority shareholders are disadvantaged because the net cash outlay at the end of the 10 years are actually in negative territory. This includes the placement or equity issued to fund the related party transactions, which was thought to be over-priced.

This negative yield ideas are getting more popular these days and you can see how Reits often extensively used this to the benefits of increasing the AUM higher and higher each year.


The report made a claim about the over-valuation of Silverlake when comparing them against near competitors and they appear to be overvalued in terms of the price to sales. The report also mentioned that the revenue per employees is unusually high and this is done to inflate the revenue figures so that it looks impressive on the books.

For us investors when we are analyzing, we get attracted to Silverlake mainly because of its great CAGR on their revenue and profit margin, without actually thinking whether these numbers could be manipulated or not. In other words, we usually take the numbers as face value and we think they are a representative of what it should be. The report obviously stated otherwise.

Final Thoughts

When I made a decision to purchase this counter, I admit that I didn't think the figures could be manipulated at all. I take these figures as face value and was impressed by it. There were previously a report on its related party transactions, but it wasn't extensive enough to convince. This report has somewhat convinced.

The company would most probably issued a rebuttal to deny the allegations and I would be very much interested to read the case from their point of view. This would also most likely caused a rebound once the halt is being lifted.

Unless the counter-argument is convincing enough, I would most likely divest my stake in Silverlake when the market opens. I think given that they are operating in such a complex manner, it will be a matter of time before another short seller produces report similar to this to attack the company again. In view of this, I think it is better to stay clear about this stock until things are a lot more clearer. Fortunately for me, my average price for the stock was somewhere at around 72 cents because of the 5-for-1 bonus shares issued, so divesting them right now would not result in a substantial loss for me.

For investors who are thinking of going long because the share price looks much "cheaper" now than before, I would advise that you BUY only when you truly understand the allegations being made and you are truly convinced that those were not true.

Until then, let's see how they are going to respond when market reopens on Monday.


  1. Hi B,

    One thing stands out here is the strength and composure of your handling of this.

    I would most probably be cursing and swearing

    Btw. I have a few links of the report, but they are mostly broken, I only read the highlights and when I want to read in details the links I have either ask me to register or download this and that.

    Can u give me the source link?

    Also, I left a question for u on capital commercial trust post, do answer when u are free, u might have missed it

  2. i agree with Sillyinvestor, the way you come to your conclusion is assured and structured. kudos.

  3. Hi B

    Your analysis and the way you managing your conclusion is exceptional. You are a trustworthy and responsible blogger, as well as a qualified investor. Keep up the great work and good to know you decided to do a risk mitigation.

  4. Hi B,

    Nice review and definitely easier for us to understand. Looking forward to read more of your thoughts if the company publish any rebuttals :)

  5. Thanks for the post.
    What suggestions do u have for the investor of this counter? Especially those who recently loaded in.


  6. B,

    Well done. Guess u read my previous post since u commented on it. Deep inside I am not wrong about u! When I wrote that article, I am betting that u will write a post on silverlake.

    "When I made a decision to purchase this counter, I admit that I didn't think the figures could be manipulated at all. I take these figures as face value and was impressed by it."

    - U move to next level, mate!

    By the way, i seconded ur claim (with many real life experiences) that it's the responsibility of management and not auditor in annual reports! That is why I always mention to understand the business not just by annual report and fig, but the team leading the company... Integrity, protecting shareholder values are utmost impt.

    I salute u for this post!

    Ok queue to sell now! I also cut more losses today to accumulate more cash... now close to 50/50!!!

  7. No clarification from the coy at all? This's looking bad...An anonymous report has caused the stock to drop by 30-40% over the span of a few days!

  8. Did you manage to sell off Silverlake Axis when market opens?

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