30.07.2008

(HONG KONG - Reporting Asia) Politics Bows Out to Olympic Common Sense

It was reported earlier today that the IOC have relented to allow the 7 Iraqi athletes to compete in the Olympics under the Iraqi flag. Earlier we reported that the IOC had banned Iraq from entering ostensibly because the Iraqi Olympic Committee was politically biased. It was reported that the IOC gave their consent provided the old Iraqi Olympic Committee was reinstated. Reporting Asia wishes athletes from all countries, clans and religions the best of luck with this incredible athletic gathering. In the meantime the great wall has gone up around inbound and outbound feeds. The Chinese media authorities are imposing a ban on all feeds in and out that are not specifically related to Olympic events. They have warned the media not to attempt to report on the 5 prohibited issues but they have not elaborated or issued a statement defining the 5 banned topics. They seem to have left it to the media to guess. Two are pretty easy being the Tiananmen Square episode and of course the conflict (or otherwise) in Tibet. In the meantime mobile phone and internet connections continue to increase regardless of banned content.

(HONG KONG – Reporting Asia)

More Mobiles in China than People in America!

Latest government statistics from the Ministry of Information & Industry show that there are now more than 600 million mobile phone users. That means a mobile phone for one in every two men, women and children in China (latest population figures estimate the country’s numbers to have swelled to over 1.3 billion).

Nevertheless in a country where the perception outside is that most people are pool this is an incredible statistic. It is not the upwardly mobile causing this massive industry expansion it is the need for communication and in a country the size of the USA rolling out cell phone transmission towers across the country is a far less daunting task than paying out thousands of kilometres of cable and hundreds of exchanges.

Industry analysts laughed 10 years ago when the Telco majors like Hutchison launched their cell phone products in China. It is a different story now and the marketers are grinning all the way to the bank.

According to sources, an additional 8.6 million users came on board in June 2008 and almost 60 million new users to the end of June 2008! By contrast fixed line or landline subscribers fell by 9.3 million in the first six months of 2008 to 356 million.

The sale of mobile phones has burgeoned since the beginning of 2008 due to the operators lowering tolls for making calls outside a subscribers registered local service area and most cancelled charges for inbound calls in some cities.

Worldwide the trend is no less amazing as the number of mobile phone users has topped 3.25 billion which is almost half the worlds population due mainly to demand in China, India and Africa! Together with the internet, the mobile phone phenomena has revolutionised communications and has been made available to everyone from the corporate CEO to the slum dweller in Paco in the Philippines.

A recent survey showed that more than 1,000 new customers are effectively signing up for mobile phones every minute around the world. According to Mobile World co-founder John Tysoe “It took over 20 years to connect the first billion subscribers, but only 40 months to connect the second billion!”

HONG KONG – (Reporting Asia)

Once more Politics get in the way of the Olympics with the recent news that The International Olympic Committee has imposed a ban on athletes from Iraq prohibiting them from competing in the Beijing Olympics. This is a huge set back to the seven athletes from Iraq who not only had hoped to travel to China but had been training for the event for the past four years.
In a letter to the Iraqi Youth and Sports Minister Jassem Jaafar the IOC said “In spite of all the joint efforts of IOC and OCA (Olympic Council of Asia), over the last months to find a positive solution with the Iraqi government authorities, we regretfully inform you that the decision of the IOC executive board dated 4 June 2008 to suspend the National Olympic Committee of Iraq is confirmed.” They went on to say, “We deeply regret this outcome which severely harms the Iraqi Olympic and Sports Movement and the Iraqi athletes but which is unfortunately imposed by the circumstances.”
The reason for the suspension was the accusation that the Iraqi government was involved in “political interference” in its National Olympic committee which was sacked and then replaced by a new committee which Jaafar heads up.
This was the final appeal by the Iraqi Olympic Committee to convince the IOC to allow the seven athletes in question to march either under the Iraqi flag or even the Olympic flag. Their hopes are now dashed with no further opportunity for redress.

Vivid Financial Monthly Commentary
June 2008
The end of another month has come and gone, and this time we can also draw a line under
the financial year that was 2007/08. It was certainly a year to remember, but unfortunately for
most the memory will not be entirely a fond one.
In the last year we have seen some remarkable events. Not the least of these from an
investment perspective is the fact that late last year we were anticipating that the local share
market would break through the 7,000 barrier, whereas the ASX200 has just breached 5,000.
From high to low, that is November 1 to July 3, the index has now decreased by 27.5%.
Research House MSCI Barra tracks the performance of markets around the world, and the
numbers for the last year make sobering reading. The -16.0% return from their Australian
index was in fact good enough to rank 9th out of 37 countries, with Canada being another
beneficiary of the resources boom managing the highest return of +6.8%.
Hong Kong managed +0.4% and was the only other country in their Developed Markets group
to post a positive return. At the bottom end of the table we had Germany (-47.3%), Belgium (-
42%) and Portugal (-37%), showing that there is always someone that has fared worse than
ourselves.1
The markets are also much more volatile than has been the case in years past. In 2007/08
there were 108 days where Australian shares rose or fell by 1% or more, which is well above
the average of 43 days over the past 18 years.2
We are seeing some extraordinary buying opportunities in quality companies at the moment,
but then that has been the case for the last couple of months. There is no substitute for time,
and the medium to longer term will restore the value in your portfolio.
Exactly when that recovery will start is not something we can pin point, but we do hope that
the transparency in your portfolio provides some comfort. We have worked hard to provide
you with what we believe to be the best structure available through which to invest. That
means being able to see exactly what you own at any time, and having the confidence to see
quality companies in your portfolio that have simply been oversold.
Significant development has also occurred behind the scenes to ensure that we employ
industry leading systems in the management of your portfolio. This combined with firm
convictions and disciplined portfolio management will in time reward patience.
After Tax Returns
Shortly investors in managed funds will be receiving statements detailing the performance of
their portfolio over the last year. Headline returns from the various managers will for the most
part be clustered around the index return, but the sting in the tail for many will be a tax bill,
despite have made a loss throughout the year.
The reason is simple. The fund manager pays no regard to your circumstances when making
buy or sell decisions within the portfolio. The primary objective is to post a return that beats
their benchmark and the composition of that return in respect of capital growth and income is
of no consequence to the manager.

It is of course though of very real consequence to the investor, as typically the income also
includes realised capital gains on which tax must be paid. Following is a selection of well
known managed funds and the split between growth and income in their one year
performance to May 31, 2008.3
Income Growth Total Return
ColFS 452 Australian Share 13.14% -25.35% -12.21%
Perpetual’s Industrial Share 13.07% -30.17% -17.10%
BT Australian Share 12.10% -17.04% -4.94%
Russell Australian Shares 15.20% -22.51% -7.31%
Unfortunately the numbers to June 30 are not yet available, but you can be assured that the
pattern will not have changed. The after tax return, what the investor actually gets to keep, will
of course be reduced by the tax payable on the income specified above.
An integral part of the managed account structure and the systems we use to manage your
portfolio is tax optimisation at an individual portfolio level, which is simply not available to the
vast majority of investors.
A Tale of Two Markets
We have made this point a number of times in previous correspondence with you, but the
continued divergence between Financials and Resources is something we believe will be a
dominant theme in our market for the foreseeable future.
A year ago the Energy and Materials sectors of the ASX200 combined to represent 26.1% of
the index. This figure is now 39.2% and it is forecast to be 45.8% in another twelve months
time. In stark contrast, the size of the Financials sector (including property Trusts) has shrunk
from 42.5% to 32.5% in the last year, and is forecast to decline further to 28.6% in another
year’s time.4
Last month we spent some time discussing Aquila Resources which had been added to the
Blue Chip Portfolio, and compared the company with Fortescue Metals Group. This month we
can say that we are also adding Fortescue to the Blue Chip portfolio.
Fortescue Metals
There are a number of reasons that make the investment case for Fortescue a compelling
one. The rise of Fortescue is quite simply one of the most remarkable stories in the history of
Australian business. The company now has a market capitalisation of around $30bn and is led
by Australia’s new Richest Man Andrew Forrest, who owns roughly one third of the company.
He has amassed a personal fortune close to double that of James Packer largely in just the
last four or five years.
It is worth providing some context about the scale of Fortescue and its iron ore mining
operations. The company is 2.5 times the size of AMP, well over 5 times bigger than Qantas
and more than 10 times the size of Harvey Norman. They have spent $830m on construction
of a 520km railway system, and a further $470m on a port in the Pilbara region of Western

largest in the Pilbara and roughly the size of Switzerland.
In the investment community it is fair to say that the majority has been somewhat sceptical
about Fortescue and for the most part this has meant that the level of institutional investment
in Fortescue is very small for a company of their size.
In May of this year a great deal of the uncertainty was removed as Fortescue shipped their
first iron ore, of initial annual production of 55mt. The reality for fund managers is that they will
need to start buying Fortescue for their portfolios as the company is now a constituent in the
S&P/ASX50 index.
Site Visit
During June Santi joined a group of analysts from around the world on a site visit with
Fortescue to see first hand the impressive scale the company has achieved. The tour covered
the facilities that Fortescue has in place at Port Hedland and also their operations at the Cloud
Break mine. Suffice it to say the feedback was overwhelmingly positive, as represented in the
comments below extracted from the note by Southern Cross Equities following the trip.5
“What is the perfect business model for the current macroeconomic and market environment?
In my view it is a very simplistic business, with scalability, pricing power, expanding margins,
high free cashflow generation, and high interest cover. The business will be highly
understandable and highly transparent, with low leverage to the first world consumer. Right
now, amongst all this turmoil, more than ever I can see no better business to be in than bulk
commodities.
“Representatives of the FMG production team … are simply the most upbeat and driven
people you could hope to meet. They didn’t give two hoots about what the Dow was doing;
they only cared about the queue of ships off Port Hedland and how quickly they could ramp up
production to fill them.”
“Train Unloader
The point about the car dumper is that it is state of
the art. No expense has been spared and no
corners cut. This is a feature of all Fortescue’s
infrastructure, which has been engineered and
delivered by WorleyParsons. Seeing all this
reinforces my positive opinion on Worley. “
Note that WorleyParsons is another long term
holding in the Blue Chip portfolio.
“Fortescue has already loaded more than a million tonnes of ore from the port in this ramp-up
stage. The ramp-up accelerates sharply over the next few months with the two million tonnes
per month ‘project completion’ benchmark to be hit next month.”
“The production ramp-up was progressing solidly at Cloud Break. The fleet of surface miners
and trucks was working efficiently to deliver a continuous stream of ore to the ore processing
facility. Each 100-tonne truck is carrying $8700 of iron ore under the new contract prices.”

A common question about Fortescue is ‘Have I missed the opportunity?’ We strongly believe
this is not the case, and that whilst investors buying now will not see the truly astronomical
returns of the last four years nevertheless Fortescue will be an important driver of
performance in your portfolio for many years to come.
As Southern Cross explain, Fortescue will become a 200m tonne pa producer, with margins of
around US$65/t, that equates to US$13bn in EBIT (earnings before interest and tax), for a
company currently valued at A$30bn. Note that this margin is based on prices prior to the
announcement by RIO that they have secured a 96.5% increase in ore prices, so you can
effectively double that EBIT number.
Blue Chip Portfolio
In addition to Fortescue we have also added Centennial Coal and Paladin Resources to the
portfolio, providing further diversification within the portfolio and increasing the exposure to the
resources sector. When the broad market fell by nearly 8% for the month, these three
companies all managed gains of around 10%.
All sectors of the ASX except Energy fell during June, and not surprisingly our holdings were
not immune to the losses.
Small Cap Portfolio
Forest Enterprises Australia has just announced an outstanding result for their 2007/08 capital
raising. The industry as a whole saw volumes drop by around 20% whereas FEA has
increased their capital raising by an impressive 93% to $116m.
Despite this the company was down around 4% in June, making it just one in a long list of
small cap companies that have executed their businesses plans, delivered on profit forecasts
and still been sold down by the market.
Property Portfolio
Performance, like that of Financials, was very disappointing during June with the continuation
of pressure on property trust share prices. The unique factor in play during June was tax loss
selling, which compounded the situation. Many investors choose to realise losses in the last
financial year as part of their overall tax planning and the result was sharply lower share
prices in a number of our holdings.
Hybrid Income Portfolio
We have made three additions to this portfolio in recent times, all of which are new income
securities issued by local banks. The credit market problems have meant banks are looking
at alternative forms of raising capital and pleasingly have structured some very attractive
securities that have just floated or will do so in July.
Suncorp Metway was the first in the middle of June, followed by Macquarie Bank which lists
their security on July 8 and finally Westpac at the end of July. All are notable for a much
simpler structure with a mandatory conversion date set for five years time, and very attractive
yields, ranging from 10.2% to 11.3% depending on the various credit ratings provided by
Standard and Poors.
The Suncorp Metway security is currently trading at a 1% premium to its listing price and we
expect that the others will similarly hold their value well and prove important inclusions in the
Hybrid Income portfolio.
Infrastructure & Utilities
Transurban was the major story in this space during June as the new CEO announced a
fundamental shift in the company strategy. Whereas the infrastructure sector has been the
domain of investors seeking good income with tax advantages, the ability of companies to
continue to pay such yields was to a certain extent dependant on markets providing
inexpensive credit.
With the significant contraction in credit markets impacting this business model, Transurban
has announced that future dividends will be in line with operating cashflow and cut distribution
guidance for 2009 from 58c per share to 22c. The share price fell on the news from $5.41 to
$4.60, however in the long term the move is seen as a positive one for the company.
The extent to which other companies will follow the model set out by Transurban remains
unclear at this time. We continue to monitor the sector and our portfolio holdings very closely
and expect that some changes will occur in the near future.
International & Alternative
No changes in this portfolio, we continue to be tentative with the implementation of this
portfolio, preferring to be patient. Not surprisingly both the Emerging Markets and S&P Global
100 iShares had a poor month in June reflecting the market return.
On a brighter note, HFA Accelerator managed a credible return for the month of -2% in very
challenging market conditions.
References
1. MSCI Barra. Develop Markets Index Performance to June 30, 2008. Local Currency.
2. Dr Shane Oliver, AMP Capital Investors. Better Times Ahead. June 30, 2008.
3. Lonsec Research, Fund Profiles. Performance to 31 May, 2008.
4. CBA Private Client Services Market Monthly. 2 July 2008.
5. Charlie Aitken, Southern Cross Equities. By the Rivers of Fortescue. 24 June 2008.
DISCLAIMER: The information contained in this document is for general information purposes only. It is provided in
good faith and is not intended as advice. It does not take into account any individual circumstances, objectives or
particular needs. We strongly recommend that you seek professional advice from one of our advisers before
making any decisions on your tax or financial planning. Vivid Financial Pty Ltd is a Corporate Authorised
Representative No. 317 682 of Australian Financial Services Limited (AFSL 297239 ABN 50 116 900 362).

A Japanese National Treasure Vanishes Forever!

After almost 30 years in business the famed Pig and Whistle chain of English Pubs will close its doors for the last time on 18th July 2008.

Mori San, the owner of the Pig & Whistle group, embarked on this adventurous concept some 30 years ago when there were far less foreigners in Japan than there are today.

Almost every foreigner (known as gaijin by the Japanese - meaning “alien” no less!) who has lived in, or visited Japan would have sooner or later paid a visit to the Pig & Whistle in one of its former three branches - Umeda, Shinsaibashi and Kyoto.

It came as great sadness to the gaijin community five years ago when the Umeda Pig closed its doors.  Mori San is far too much a gentleman to discuss the reasons but convention wisdom has it that the landlords became too greedy and as anyone who has run a pub knows the margins are slim.  Is this the case with the tremendously popular Shinsaibashi Pig?

The gaijin community of Osaka received the news with shock and horror.  One such patron and long time resident of Osaka is exhorting fellow Whistlers to attend the last supper at the Shinsaibashi Pig on Mido Suji Dori on closing night.  Absent aficionados have asked to be remembered and pass on their best wishes to Mori San.

The Pig & Whistle group of English Pubs was not just a place to have a cold beer on a humid Osaka evening, it was one of the few places in Japan where Japanese students of the English language (Eigo Bandits) could practice their new found language; a place where East met West; a place where love was found and sometimes lost; and a place where important information was traded such as the next “trivia night” venue (usually the Pig or its close rival Murphy’s Irish Pub also in Shinsaibashi.

From all of us Mori San, thank you for the memories.  You will live forever in our hearts and mind.

Reporting Asia Uncovers Merchants of Misery.

Hidden in the back of newspapers, magazines and blogs in Hong Kong, China, Japan and Australia to name but a few, you will find links with the following key words and phrases:-

“It’s guaranteed!”

“It’s not possible to lose!”

“Make 5% every month!”

This is the bait used to by the Merchants of Misery to lure millions of dollars away from people who can least afford it. The scam is very well constructed and to the uninitiated very credible. It goes by various names the most common of which is Sports Arbitrage Trading. Arbitrage is defined by the Oxford Dictionary as “the simultaneous buying and selling of securities, currency or commodities in different markets or in derivative forms in order to take advantage of differing prices for the same asset.

Sports Arbitrage Betting (or trading as the marketeers prefer to describe it) can be applied to almost any sport but thoroughbred horse racing is arguably the most predominant because of the large number of events and the vast diversity of bookmakers plying their trade internationally.

Of course in Asia where in most places, notably Hong Kong, New Zealand and Australia, having a punt on the horses is almost endemic and the enticement of making easy money is irresistible; having the chance of making money with absolutely no risk is too much of a temptation even for the non-gambler.

One would think that sensible people would realise that if it sounds too good to be true then it usually is but once our “greed button” is pushed common sense is quickly replaced by finding all the wrong reasons to say yes and join the lemmings.

Strictly speaking the ability for Sports Arbitrage Trading to actually make a risk free profit is a reality but the margins are normally so low that a trader would have to engage in so many daily trades that there would be no time for a regular paid occupation. Having said that, the confidence tricksters generally weave their story around championship tennis matches such as Wimbledon as it is pretty easy to understand how it works.

There story goes something like this…

“During The 2007 European Tennis Open Final match in Hamburg, Germany between Rafael Nadal and Roger Federer, one trading exchange had Federer at $1.70 and another had Nadal at $2.85. If you were willing to spend $2,000 you would put $1,250 on Federer to win at $1.70 and $750 on Nadal to win at $2.85. No matter who wins the match YOU win the money! Here’s how. If Federer won you would receive $2,125 or a profit of $125 and if Nadal wins you would receive $2,137.50 or a profit of $137.50. Either way you win!”

Now who could refuse that! The con men tell you that opportunities such as these come up every day of the week, year round. Then they go on to tell you about compounding. No enough that you have just returned 6.25% on your money in just one trade now they want you to compound it. Of course compounding is a marvelous device for preventing the gambling public to want their money back short term. And then the coup de grace is given - “Your initial investment of say $8,000 will turn into $12,800 in just 12 months - now how can you beat that!” Of course nobody can.

Here comes the real con. Now if they were simply teaching the public how to handle the convolutions of sports arbitrage betting such as having accounts with more than 20 international bookmakers and to facilitate the transfer of funds between those account one must have an acceptable international account such as Neteller and one must take into account the commissions charged on winnings by betting exchanges - not to mention the currency trade commissions and fluctuations - and the list of complications goes on - that would be fine and they would be justified in charging a fee. However it does not work that way. Our benefactors, having explained the difficulties of you having to trade provide a service in that they will do it for you - in return for a management fee. Unable to resist we can’t wait to send our money and get the scheme underway as every minute we delay will be costing us a fortune.

Because of the various rules of engagement and the fact that the unwitting punters are compounding their profits at say 5% per week no less, a weekly report is published which a Grade 7 student could produce on Microsoft Excel showing the ever increasing asset - regardless of whether the “sophisticated investment” company trades or not!

Payday approaches and the anxious customers start emailing or telephoning the company for some news as to when their fortune will be sent to their bank account. Things slowly start to go wrong. Emails are answered obliquely; phone calls are not returned and before long the “pay day” passed by. Then the excuses start: “because of money laundering laws our funds have temporarily been suspended by Neteller, we are on top of it and your money will be transferred soon”; “we are currently experiencing accounting difficulties but will be able to make your payments within the next 30 days”; and so on and so forth.

Top executives suddenly leave the company AND the country, offices are vacated and mobile phones are not answered. Minimal email communication is made to forestall any legal action while the villains run off with the money to safe havens hoping that the people they screwed have neither the will nor the wherewithal to track them down and bring them to justice.

In our next segment we name names and details of the hawkers and their co-conspirators and in which of the Asian or Australian cities they dwell. If you have fallen foul of these peddlers of greed please log into our blog and let us know. They will have no hiding place.

Porsche Carrera Cup Asia, Round 5 June 22 Lights-to-Flag Victory for Jones in the Bruce Grady Ltd car.

Christian Jones, son of Australia’s famous past world champion F1 driver Allan Jones (now CEO of Team Australia A1 racing), scored a perfect lights to flag victory in round 5 of the Porsche Carrera Cup Asia at the Zhuhai International Circuit in China in his Bruce Grady Ltd car. His win opened a margin of more than two seconds from GruppeM Racing’s Tim Sugden by the flag.

Team Jebsen’s Darryl O’Young was third after an oil pressure warning light gave him a scare early on.

Jones proved untouchable throughout the 12 lap race, and the Australian was never seriously challenged after getting away from the pole in textbook fashion.

“I knew I’d got a good start so could take a good apex into Turn 1, which gave me a good line out of the corner. I knew I had the pace.”

From there he went about opening up a gap from Sugden, setting the fastest lap of the race:

“You really want the race to end when you’re leading! It seems to take forever when you’re winning,” he said. “I saw Tim start to push, but the next lap he’d lose it. I was hoping he’d have a scrap with Darryl, but that didn’t happen.”

Despite being on the podium for the third time in succession nothing short of a win is acceptable to Sugden so he wasn’t pleased with 2nd. The Briton admits he hasn’t managed to master the 4.3km Zhuhai track in China, and is not one of its fans. “This is probably my worst circuit of the whole season. Christian drove very, very well and has done so all weekend. I just hope my season is going to get better.

Meanwhile Christian Jones sponsored by Bruce Grady Ltd has his eyes set on his next win.

Porsche Carrera Cup Asia, Round 5 Results
Date: Sunday 22 June 2008
Venue: Zhuhai
Event: Round 5
1 Christian JONES A Christian JONES 20:15.209
2 Tim SUGDEN L A GruppeM Racing +2.260
3 Darryl O’YOUNG A Team Jebsen +3.749
4 Marchy LEE A Team BetterLife +8.549
5 Christian MENZEL A Team StarChase +9.590
6 Matthew MARSH A SC Global Racing +15.378
7 MOK Weng Sun A Team PCS Racing +34.085
8 Melvin CHOO Kwok Ming B ThunderAsia Racing +38.104
9 Tunku HAMMAM B Tunku Hammam +44.806
10 Philip MA A Philip Ma +46.002
11 Paul TRESIDDER B Paul Tresidder +50.170
12 TAN Ian Mao B Team PCS Racing +59.248
13 Jeffrey LEE A PTRS Motorsport +1:11.913
14 Greg WARD B Greg Ward +1:34.502
15 Danny CHU A Stichting Chu Racing Team +1:43.626
16 Gerald TEO B Team PCS Racing DNF
17 Alain LI A Sunseeker Asia DNF
18 Ringo CHONG A Team Kangshun DNF