Free speech must be paramount for meaningful analyst comment

The recent intimidation by PAX Global CFO Chris Lee of a Macquarie analyst is unacceptable

PUBLISHED : Monday, 22 August, 2016, 12:34pm
UPDATED : Monday, 22 August, 2016, 10:43pm

Imagine you work as a securities analyst, and in this capacity attend an interim results briefing, where you witness the company’s chief financial officer conduct himself in a stunningly unprofessional manner – shouting at and then ejecting a banker with a bearish rating on the stock.

Do you tell clients of what you have seen? In theory, of course you do. In practice, however, it would seem the answer is No.

The scene described above took place in Hong Kong on August 10, when Chris Lee, CFO of Chinese e-payment terminal vendor PAX Global Technology, booted Macquarie analyst Timothy Lam from a results briefing.

Lee said it was not the broker’s “Underperform” recommendation that sparked his ire, but the content and quality of his analysis.

Nomura International was among the few banks that informed clients of the dust-up, and downgraded the stock to “Reduce” in response.

“While we do not judge this dispute, we think this may hurt PAX Global’s shareholder value,” the bank said.

This turned out to be a timely call. PAX’s shares have tumbled 11.2 per cent since its interim results announcement, to close on Friday at HK$6.02.

Yet most other brokers failed to acknowledge the briefing drama.

A perusal of results notes by UBS, CLSA, Jeffries, JPMorgan and CIMB reveals that none of them made a mention of the confrontation.

JP Morgan even found space to inform clients of granular details in its risk premium models – “we assume a beta of 1.0” – but not a word about the volatility of the CFO.

Rather than expressing solidarity with a fellow analyst who was viciously shown the door, several banks published notes fawning over the sterling quality of management’s guidance.

CLSA raised its price target to HK$11 in a report titled, “Guidance intact.” Jeffries also complimented management on its “conservative guidance,” though it lowered its price target from HK$11 to HK$9.50.

While we do not judge this dispute, we think this may hurt PAX Global’s shareholder value
Nomura International analysts

CIMB called out bears for “over focusing” on issues in China – where cutthroat competition is pressuring PAX’s margins - instead of the promising expansion in global markets. The Malaysian broker thinks PAX shares are worth HK$11.

No matter how confident analysts may be about the fundamentals of the company, they still should have informed their clients, like Nomura did, of the CFO’s bad behaviour.

Red-faced yelling in a public forum is unprofessional, and raises relevant questions about the quality and stability of the management team.

It is in fact a scandal, and scandals have consequences. After a video of Lee’s meltdown went viral, the CFO abruptly resigned his position last week.

Moreover, to stay silent on such a drama not only robs clients of a human interest story – fund managers cannot live on beta alone – but could give the impression that a bank is more interested in preserving corporate relations than informing buy-side clients.

And finally, did these bankers consider that the CFO’s actions could bring unwanted regulatory attention?

To stay silent on such a drama not only robs clients of a human interest story but could give the impression that a bank is more interested in preserving corporate relations than informing buy-side clients

“We believe all analysts should be able to attend analyst briefings, regardless of their view on the company,” Macquarie’s Lam said in his post-results write-up.

In his note, Lam conceded that he was overly bearish on expected profitability. PAX Global achieved a gross profit margin of 43.6 per cent in the six months to June, whereas Macquarie had projected negative margins over this period. Still, Lam believes this momentum is unsustainable and maintains his underperform rating. He also flagged a “meaningful rise in trade receivables,” which can be a sign of a risky expansion model.

Time will tell whether Macquarie or the rest of the analyst community is correct on the company’s fundamentals. But one thing is certain: analysts have a right to their views. Such intimidation is unacceptable.

Those working in the industry should care deeply about free speech. For a reminder as to why, recall the notorious showdown between Donald Trump and a Wall Street analyst in 1990.

Marvin Roffman predicted that Trump’s Taj Mahal casino would not be able to make its bond payments. He was right, and the Taj filed for bankruptcy within a year.

But by that time Roffman was long out of a job: a bullying Trump had succeeded in getting the analyst sacked, and no-one else on Wall Street would hire him.

Cathy Holcombe is a Hong Kong-based financial writer

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