FEER(5/17): Asian Analysts -2: Often Caught In The Middle
Dow Jones Newswires
May 9, 2001
Dow Jones Newswires
From The Far Eastern Economic Review
"There is a continuous tension between the independence of the analyst and wanting to gain market share in new issue underwriting," says Nicholas Andrews, head of Asia equity research outside Japan for CSFB. "It's implicit that research by the sell-side is part of the sales effort."
Implicit, yes. But it's the lack of explicitness that hurts. Another good example is Pacific Century CyberWorks, which along with Softbank was one of the greatest busts of the Internet in Asia.
Investment bank BNP Paribas Peregrine underwrote shares in PCCW and subsidiaries like data-centre operator iLink, helped Chairman Richard Li sell some of his holdings in the company and arranged loans for the company.
At the same time, its analysts constantly maintained the most rosy share price predictions about the company among analysts in Asia watching the firm. BNP's head of Hong Kong research, Adrian Ngan, was regularly quoted in the local media advising investors to stick with PCCW even as its shares crashed from HK$24 ($3.08) to HK$3. The media is partly to blame for failing to note BNP's interest in promoting PCCW's share price. But the absence of rules that would have forced BNP to make its interest more explicit made the slip-up easier. Ngan declined to return several phone calls.
In other cases, investment banks have used odd terminology in their reports, apparently to avoid offending clients. For example: Morgan Stanley, which handled the $5 billion China Unicom listing in June 2000, "revised" its target price for the company from HK$25 to HK$19 in January after the price had plunged to HK$8, half the issue price. Despite the change, the bank maintained its "strong buy" recommendation on the stock.
Mark Shuper, co-head of Morgan Stanley's Asia telecoms research, points out that the bank has started telling clients that rival China Mobile, whose main investment bank is Goldman Sachs, is a better buy than China Mobile. Still, he admits the coverage of China Unicom wasn't ideal. "With hindsight," he says, "I should have downgraded it" when the stock began heading south.
China's entry into the World Trade Organization could make such problems worse. China already dominates Asia's new-shares market, accounting for nearly half of the $47 billion raised in Asia outside Japan last year. The opening of the mainland's banking sector to foreign participation could put further pressure on investment banks to tone down any criticism of company or macroeconomic performance there given the new opportunities available.
To be sure, many respected analysts remain in the field. Property analyst Franklin Lam of UBS Warburg is the perennial prophet of doom on the Hong Kong property market, where a few threatening words from a property tycoon can send shivers of fear through an investment banker's pinstripes. Client Sun Hung Kai Properties recently postponed a new share issue that UBS was expected to help underwrite after Lam turned negative on the market, not exactly something to please his underwriting colleagues.
Yet analysts like Lam are well known exactly because they are exceptions, outspoken gadflys in an industry that encourages muffled consensus.
As Brown of Kim Eng Securities puts it: "The top line and the bottom line of an investment bank is to get investment-bank business. You can't have a research department that is not helping to fit the pipes."
What are the solutions? Until recently, self-governance has been the guiding principle for regulating sell-side research. Investment banks in most markets only have to disclose if they have been involved recently in a new share issue for the company they are covering. That may now change. In the U.S., SEC regulators have threatened to tighten rules on research disclosure if the banks don't shape up. New rules might include a ban on the insidious practice of giving issuers the ability to influence research before it goes out, something analysts say is increasingly common in Asia. Another change might force banks to disclose more prominently, and in greater detail, their existing or future business relationships with companies they write reports about. The SEC also might ban analysts from taking part in road shows.
"Disclosure is most important to retail investors who might not know there are relationships," says Ellis of JF Asset Management. "We have always had a healthy dose of scepticism."
Similar moves have been mooted by Hong Kong's Securities and Futures Commission, though no changes are likely soon. The SFC is also considering a "fair disclosure" law similar to that in the U.S., which would prevent analysts from having better access to information on companies than the man on the street. Such inside information is a powerful incentive for analysts to issue glowing reports since their investment-banking divisions can often trade on the information.
Still, with regulators slow to act, investors are likely to take their own measures to protect themselves from the dangers of sell-side research. Large institutional investors in Asia like GE Capital, Fidelity and Scottish Widows have beefed up their own research capabilities in recent years. In addition, the research newsletters, sectoral specialists, and small research-driven brokerages firms that are common on Wall Street are starting to appear in Asia.
Investment-risk specialist Standard & Poor's, for example, launched an Asian equity-research service in April. Meanwhile, banks and insurance specialist Fox-Pitt Kelton opened its first Asia office in Hong Kong last year. Its corporate finance side is small in the U.S. and Europe and barely existent in Asia. That has allowed it to take contrarian stands, such as its hold recommendation on Hong Kong's popular Hang Seng Bank.
"Our analysts are not under the same pressures as others," says John Yakas, head of the Asia office.
All that could force the investment banks to clean up their acts. Lehman Brothers has recently been talking tough on Wall Street about its renewed commitment to objective research. Andrews of CSFB says the banks also need to be more careful in selecting which companies to underwrite. "The key is to sponsor good companies and to price them sensibly," he says.
The bear market worldwide also may help analysts to focus on objectivity, notes one analyst. Fewer new issues and more-cautious institutional investors will give a greater spur to making honest predictions.
Keeping that bear-market sobriety may be crucial if they are to earn back the trust of investors. "The system is here to stay," says Andrews. "But those using research to jam investors with bad deals will eventually suffer."
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What's An Investor To Do?
Worried that the 100-page research report from your friendly investment bank isn't reliable? Here are a few things the small investor can do to make sure of not being taken for a ride:
-- Check whether the investment bank has any corporate relationship with the company. If it does, or it won't tell you, use the research report as lining for the kitty litter.
-- Seek alternative information from sources that aren't major investment banks. Small brokerage firms and on-line equity research services are places to start. Cab drivers are less reliable.
-- Do your own research, starting with the company's official stock exchange filings. Ignore corporate publicity as much as possible.
-- Watch what the institutions are buying. They are likely to have done their own research, or taken a hard look at the investment bank's research. If not, you're not the only one in trouble.
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