ESOP’s Fables: MWG turns fantasy into reality

Recent news from Mobile World Group (MWG VN) that it plans a 2016 executive/employee/partner share award program amounting to a 3-5% stake in the company, on top of the 5% 2015 one, brings to mind the risks to shareholder value of poorly structured stock awards to insiders. Incentivising management and employees with stock is an excellent concept for minority outside shareholders, but the devil lies in the precise method employed and in the size of the award relative to that of the overall company.
In MWG’s case, a potential award of 10% of the company over two years at an exercise price of nil fails on both the above counts. A 5% gratis award per annum for a stock trading on a 13x prospective multiple (or earnings yield of 7.7%) is a giveaway in value of about two-thirds (5/7.7) of the annual profits that the company is making – and now this is happening twice, not just once. So MWG is doing great as a company, but the poor outside shareholder is seeing her lunch (profits) mostly eaten up by the insiders.

Big giveaways of free stock are a common feature of early-stage, high-growth Silicon Valley businesses, but it is dubious that MWG is in quite this same category: granted, it has an impressive CEO with entrepreneurial vision in a high-growth economy, but its main business is the relatively mundane one of mobile phone retailing.

A few might protest that share awards do not subtract from profit. In a sense they are correct: dividing profit by 5% more shares is hardly a cataclysm for investors in a high-growth company. But good schoolboys also remember Warren Buffett’s faultless logic: “If share awards are not compensation, what are they? And if compensation is not a cost for accounting purposes, what is it?” So if MWG were to make a habit of awards of this size, it would be reasonable to discount the long term value to the outside shareholder of its business model.

Here is MM’s small list of share award methods he has seen, with the last one representing the only truly proper way to award stock to insiders:-

> 1) ESOP with exercise at very low or par value (or for free). This is almost straight theft, although if relatively small in size, most outside investors overlook it. The recipient gets an instant windfall and therefore the incentivisation impact is blunted. All the worse if the award is of major size relative to total outstanding share capital.

> 2) ESOP with a higher price, close to or exceeding current share price. Far better at incentivising than (1), but the problem becomes one of top management becoming excessively interested in gaming the share price up in the short term, in order to make a quick fortune, at the expense of long term shareholder interests (eg Enron).

> 3) ESOP with high price and with long vesting periods, or grants of restricted stock (making up the majority of an individual’s compensation) vesting only progressively after several years. This is like (2) but with measures to deter short-termism by management. It is the only truly fair and proper way to make stock awards from the perspective of rigorous shareholder value.

Mekong Man

Bloomberg: Good Morning, Vietnam!

(Bloomberg) — Perched along one of the world’s most crucial shipping routes, and with a young and growing population, Vietnam is — once again — being tipped for economic lift-off, after years of disappointment. Money pouring into the Southeast Asian economy from the likes of manufacturers Samsung Electronics Co. and Intel Corp. is giving Vietnam a second run at becoming Asia’s next tiger economy. The country’s “Doi Moi” market opening in the 1980s ushered in spurts of growth in excess of 7 percent that waned in recent years after a pile-up of bad debt at state-owned enterprises. According to PricewaterhouseCoopers LLP, the country has the potential to become one of the world’s fastest-growing economies over the period to 2050. Not only is the Southeast Asian nation gaining ground as a cheaper manufacturing alternative to neighboring China, Vietnam is also a politically palatable destination for Japanese firms boosting investment in the region amid recurring Sino-Japan spats. “It is quite possible that Vietnam could become the fastest-growing economy in Asia,” said Vikram Nehru, a senior associate in the Asia Program and Bakrie Chair in Southeast Asian Studies at the Carnegie Endowment for International Peace in Washington. “It has all the ingredients for rapid growth if it can address the challenges in the state sector.”

Growing Clout

Signs of Vietnam’s growing clout are gathering: In 2014 the country overtook regional counterparts to become the biggest exporter to the U.S. from the Association of Southeast Asian Nations, or ASEAN, muscling ahead of its more established manufacturing rivals of Thailand and Malaysia. Disbursed foreign investment in Vietnam has soared in the past 14 years to reach $12.35 billion in 2014, up 7.4 percent from 2013 and compared with $2.4 billion in 2000, figures from the Foreign Investment Agency show. Samsung’s operations in the country are growing so big that it got government approval to operate its own terminal at Hanoi’s Noi Bai International Airport. And manufacturers are shifting from China. Japanese printer maker Kyocera Document Solutions Inc., a unit of Kyocera Corp., plans to quadruple its annual printer production in Vietnam to 2 million units by March 2018, the company said this month. Part of its operation in China will be moved to Hai Phong, making Vietnam the company’s biggest manufacturing base for printers, with another plant planned by August, it said.

‘Big Winner’

“Vietnam is really the big winner from China losing its competitiveness because of rising wages” and a strong currency, said Frederic Neumann, co-head of Asian economics research in Hong Kong at HSBC Holdings Plc. “By moving very early into the space vacated by China, Vietnam has first-mover advantage and it is now starting to show.” Before weakening last year, the yuan in Shanghai had a four-year advance of 13 percent that was the best performance among 24 emerging-market currencies tracked by Bloomberg. Vietnam’s benchmark stock index has climbed 5.5 percent this year, compared with Indonesia’s 4.1 percent increase, Malaysia’s 2.4 percent and Thailand’s 2.2 percent. Vietnam’s annual real gross domestic product growth could average 5.3 percent in the 2014-50 period, a pace only bettered by Nigeria, according to PwC’s “The World in 2050” report. Growth in China may fall below 4 percent. Demographics are a big help. Some 13 percent of China’s population in 2012 was already 60 or older, compared with 9 percent in Vietnam, according to the United Nations. More than 40 percent of Vietnam’s population of about 90 million in 2013 was in the labor force aged 15 to 49, government data show. The average monthly wage in Vietnam was $197 in 2013 compared with $391 for Thailand and $613 for China, according to International Labour Organization calculations. That disparity is widening. The Economist Intelligence Unit predicts that in 2019, manufacturing labor costs per hour in China will be 177 percent of those in Vietnam, up from 147 percent in 2012.

Bad Loans

“I remember when I was in China a couple of years ago and went to buy a pair of shoes and found they were all made in Vietnam,” said John Hawksworth, one of the authors of the PwC report. There are caveats to the optimism. Lenders in Vietnam are creaking under bad loans, and the government has struggled to overhaul inefficient state-owned companies. Inadequate infrastructure, skills gaps and corruption remain risks. Vietnam ranked 119 out of 175 countries and territories in the Berlin-based Transparency International’s 2014 Corruption Perceptions Index. China came in at 100th place. Meanwhile, other Southeast Asian countries such as the Philippines and Malaysia are also competing to win manufacturing jobs. “It’s not guaranteed that Vietnam will fulfill its potential,” said Hawksworth. “Part of it is that Vietnam is simply in a good geographic location and part of it is that it does have some catching up to do in terms of GDP per capita.”

Labour Intensive

Much of the work being transferred to Vietnam is in low-end manufacturing as China moves up the value chain: labor-intensive work in textiles, garments, furniture and electronics. “The productivity of Vietnam’s manufacturing sector is very low,” Karel Eloot, Shanghai-based director at McKinsey & Co.’s Asia Operations Practice, said in November. “That’s the biggest blowback for further expansion in Vietnam.” The government is working on some of the economy’s biggest millstones. Vietnam will attempt to sell a record amount of shares in state-owned companies this year, Dang Quyet Tien, deputy general director of the finance ministry’s corporate finance department, said in an interview March 13. The plan to sell stakes in about 280 entities this year is “credit positive” for banks, Moody’s Investors Service said. There are other positives. Vietnam is in talks on a free trade deal with the European Union and is part of U.S.-led negotiations for a major regional trade deal, the Trans-Pacific Partnership.

Mekong Star

“Vietnam will displace Thailand as the greater Mekong star,” said Tim Condon, head of Asia research at ING Groep NV, referring to the Mekong River basin region that includes the nations of Cambodia, Laos, Myanmar, Thailand and Vietnam, along with China’s Yunnan province. Exports from Thailand, one of the nations dubbed by analysts and the media as a rapidly developing tiger economy before the 1997-98 Asian financial crisis, have contracted in the last two years. By contrast, Vietnam in 2014 saw its shipments overseas jump almost 14 percent. Australia & New Zealand Banking Group Ltd. this month upgraded Vietnam’s GDP forecast to 6.5 percent for this year and next, citing strengthening retail sales, accelerating industrial production and improving construction. “The economy’s structure is shifting, it is moving from agriculture to manufacturing,” said Victoria Kwakwa, the World Bank’s country director for Vietnam. “You can see there is a progression happening.”


Published on March 22nd, 2015 on at