Guan Chong: Bonus and Warrants

Guan Chong

Before Bonus Issue:  240 m existing shares.

After Bonus Issue:  240 m existing shares + 80 m new shares = 320 m shares

Warrants issued: 60 m warrants.
Exercise Price MR 2.00.
Conversion 1 warrant for 1 mother share.
Lifespan of warrant: any time within five (5) years 
EX-date:10/02/2011
Entitlement date:14/02/2011
Entitlement time:05:00:00 PM

The price per mother share for determining the price of the warrant was based on a recent 5 days average price of RM 2.44.  After bonus, this 240 m shares will increase to 320 m shares and each share is then priced the equivalent of RM 1.83.

The warrants are given free.  Each warrant can be converted to one mother share.  With an exercise price of MR 2.00, each warrant is issued at a premium of RM 0.17 or 9.29%.

[On 21.1.2011, the price of Guan Chong was RM 2.62 per share.  After the bonus exercise, the share price will be RM 1.965 per share.  The warrant will be at a premium of RM 0.035 or 1.8% only.]

Understanding warrants

A warrant is a derivative.  It derives its value from its underlying mother share.

The performance of a warrant will always depend on performance of its underlying share mother share.

Warrant is trading at a discount when:
Mother share price > Price of warrant + Exercise Price

Warrant can trade at a discount if the underlying share has just enjoyed a spectacular run in price.  Investors should avoid buying these discount warrants if they feel the high price of the mother share is unsustainable.

Warrant is trading at a premium when:
Mother share price < Price of warrant + Exercise Price

The warrant's premium can crudely measure how much more expensive it is to acquire a share via a warrant compared to buying a share directly.

Premium are commonly used as a quick measure of the warrant's expensiveness.

Because warrants are issued at a premium, investors must consider if it can appreciate to a level that allows recovery of the paid premium within the warrant's lifespan.

Another important factor to consider when selecting a warrant is volatility. A high volatility warrant, even though more expensive, can very well generate more money than a low volatility warrant. High volatility means that the underlying share is more likely making big swings.

It has to be noted that the time span to expiry is very important for warrants. The longer it is from expiry, the higher should be the premium because longer time will be afforded for the mother share to rise.

Of course, you are entitled to dividends as shareholders, but as a warrant holder, you only need to pay a fraction of what shareholders pay.

Most Malaysian investors do not have a good understanding of warrants. However, it must be noted that we should not purchase warrants that are grossly out of money.

While warrants can offer a smart addition to a portfolio, keep in mind the following - your view of the underlying share is important; understand the unique nature of warrants and stay attentive to small movements in the market.

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Company Name: GUAN CHONG BERHAD
Stock Name: GUANCHG
Date Announced: 11/01/2011

Subject: GUANCHG - NOTICE OF BOOK CLOSURE

1) Bonus issue of 80,000,000 new ordinary shares of RM0.25 each ("Bonus Shares") in Guan Chong Berhad ("GCB") ("GCB Shares")to be credited as fully paid-up on the basis of one (1) Bonus Share for every three (3) existing GCB Shares held ("Bonus Issue").

2) Issuance of 60,000,000 free warrants in Guan Chong Berhad ("GCB") ("Warrants") on the basis of one (1) free Warrant for every four (4) existing GCB Shares held.

Kindly be advised of the following :

1) The above Company's securities will be traded and quoted [ "Ex - Bonus Issue" ] as from : [ 10 February 2011 ]

2) The last date of lodgement : [14 February 2011 ]

3) Retention Money : Where securities are not delivered in time for registration by the seller, then the brokers concerned :-

a) Selling Broker to deduct [ 7/19 ] , of the Selling Price against the Selling Client.

b) Buying Broker to deduct [ 45.00%] of the Purchase Price against the Buying Client.

c) Between Broker and Broker, the deduction of [7/9 ] of the Transacted Price is applicable.

Remarks : "Bursa Malaysia Securities Bhd would like to clarify that on the basis of settlement taking place on 16 February 2011 with bonus issue of GUANCHG shares of RM0.25 each, any shareholder who is entitled to receive GUANCHG bonus issue shares, may sell any or all of his GUANCHG shares arising from the bonus issue beginning the Ex-Date (10 February 2011).

For example, if Mr. X purchases 300 GUANCHG shares on cum basis on 9 February 2011, Mr. X should receive 300 shares on 14 February 2011. As a result of the bonus issue, a total of 400 GUANCHG shares will be credited into Mr. X's CDS account on the night of 14 February 2011 being the Book Closing Date. Therefore, Mr. X can sell the bonus issue shares of 400 on or after the Ex-Date ie from 10 February 2011 onwards."

-----

Company Name: GUAN CHONG BERHAD
Stock Name: GUANCHG
Date Announced: 07/01/2011

On behalf of the Board, we are pleased to announce that the Board had on even date, resolved to fix the exercise price of the Warrants to be issued pursuant to the Proposed Free Warrants Issue at RM2.00 per GCB Share (“Exercise Price”), which represents a premium of approximately 9.29% or RM0.17 over the theoretical ex-price after the Proposed Bonus Issue of RM1.83 per GCB Share, calculated based on the five (5)-day VWAP of GCB Shares up to and including 7 January 2011 of RM2.44.

Based on the exercise price of the Warrants of RM2.00 per new GCB Share, the Company stands to potentially raise up to RM120 million during the tenure of the Warrants upon full exercise of the Warrants by the holders of the Warrants. Such proceeds will be utilised for the day-to-day working capital requirements of the GCB Group.

-----

Lifespan of warrant: The Warrants may be exercised at any time within five (5) years commencing on and including the date of issuance of the Warrants and ending at 5.00 p.m. on the date preceding the fifth (5th) anniversary of the date of issuance, or if such day is not a market day, then it shall be the market day immediately preceding the said non-market day, but excluding the three (3) clear market days prior to a book closure date or entitlement date announced by the Company and those days during that period on which the Record of Depositors of the Company and/or Warrants Register is/are closed.Any Warrant not exercised during the exercise period will thereafter lapse and cease to be valid.


http://announcements.bursamalaysia.com/EDMS/edmswebh.nsf/all/482576120041BDAA482577B9003BAABC/$File/GCB%20-%20Announcement.pdf

Understanding Bonus Issues in our Local Market

Using the search function of my blog for 'bonus issue', I found these postings on this topic.

4 important conclusions about the local market regarding bonus issues

Oct 04, 2009

What this means in plain terms is that the typical investor who buys the stocks of a company undergoing bonus issue either just before (by basing his purchase on rumours) or just after the announcement of a bonus almost certainly ends ...

http://myinvestingnotes.blogspot.com/

Futile exercise to chase after bonus issues.

Oct 04, 2009

... is the fundamentalist one; only buy those stocks which provide you with a reasonable return and which have the prospect of providing a constant long-term growth in earnings and dividend irrespective of whether they give bonus or not.

http://myinvestingnotes.blogspot.com/

KPJ - Is this a buy, hold or a sell?

Jan 31, 2010

As its low share liquidity was among the issues raised by investors leading to the low PER, KPJ subsequently announced proposals for a 1-into-2 share split, 1-for-4 bonus issue and 1-for-4 free warrants issue as a step to improve the ...

http://myinvestingnotes.blogspot.com/

Buffett (1992): His thoughts on issuing shares.

Apr 12, 2010

Further, the company has not encouraged unwanted speculation by going in for a stock split or bonus issues, as these measures do nothing to improve the intrinsic values. They merely are tools in the hands of mostly dishonest managements ...

http://myinvestingnotes.blogspot.com/

Bonus and Rights issues do not increase the value of a share

Oct 03, 2009

Elsewhere, a bonus issue or a share split is treated as a non-event and nobody ever gets excited about it. At the ex-bonus date, the price automatically adjusts downward such that the value of the whole company remains the same. ...

http://myinvestingnotes.blogspot.com/

Futile to chase up price of shares based on Rumours of bonus issues

Oct 03, 2009

It is futile to chase up the price of shares based on rumours that a particular company is about to make a bonus issue. The really wise investors or the truly cunning insiders would have got in when the price was a lot lower. ...

http://myinvestingnotes.blogspot.com/

A large number of bonuses are not made for financial reasons.

Oct 04, 2009

It is more than possible that a large number of bonus issues are made for the purpose of giving a temporary boost to the price of the stock. As to why any company should desire to achieve a temporary boost in the price of stocks, ...

http://myinvestingnotes.blogspot.com/

SPG guide on capitalisation changes

Aug 06, 2009

SPG does not believe that bonuses increase the value of shares, and advise investors not to pay much attention to the past number of bonus issues. We look at rights in another light, however, as we are not in favour of rights issues ...

http://myinvestingnotes.blogspot.com/

Bullbear Stock Investing Notes: The Reserves of a company is ...

Oct 03, 2009

Whenever this happens, Malaysian speculators usually become very excited because they feel sure that a bonus issue is forthcoming since the company now has reserves which can be converted to bonus shares for distribution. ...

http://myinvestingnotes.blogspot.com/

Not all right issues are the same; ought to treat them with a bit ...

Sep 27, 2009

Whenever a company announces that it is making a rights issue, the market in Malaysia/Singapore, on the whole, does not react adversely especially when the right issues are accompanied by a bonus issue. The price of the company's shares ...

http://myinvestingnotes.blogspot.com/

Bullbear Stock Investing Notes: OSK Research raises Hartalega ...

May 11, 2010

... narrows due to the increase in natural rubber price. "There is also the possibility of abonus issue, following in the steps taken by its peers," it said in a note on Tuesday. Posted by bullbear at 1:16 AM. Labels: Glove, hartalega ...

http://myinvestingnotes.blogspot.com/

Buffett (1992): His thoughts on issuing shares.

His thoughts on issuing shares.  He concentrated most of his investments in companies where shareholder returns have greatly exceeded the cost of capital and where the entire need for future growth has been met by internal accruals.


Here are the investment wisdom Warren Buffett doled out through his 1992 letter to Berkshire Hathaway's shareholders.

Up front is a comment on the change in the number of shares outstanding of Berkshire Hathaway since its inception in 1964 and this we believe, is a very important message for investors who want to know how genuine wealth can be created. Investors these days are virtually fed on a diet of split and bonuses and new shares issuance, in stark contrast to the master's view on the topic. Laid out below are his comments on shares outstanding of Berkshire Hathaway and new shares issuance.

"Berkshire now has 1,152,547 shares outstanding. That compares, you will be interested to know, to 1,137,778 shares outstanding on October 1, 1964, the beginning of the fiscal year during which Buffett Partnership, Ltd. acquired control of the company."

"We have a firm policy about issuing shares of Berkshire, doing so only when we receive as much value as we give. Equal value, however, has not been easy to obtain, since we have always valued our shares highly. So be it: We wish to increase Berkshire's size only when doing that also increases the wealth of its owners."

"Those two objectives do not necessarily go hand-in-hand as an amusing but value-destroying experience in our past illustrates. On that occasion, we had a significant investment in a bank whose management was hell-bent on expansion. (Aren't they all?) When our bank wooed a smaller bank, its owner demanded a stock swap on a basis that valued the acquiree's net worth and earning power at over twice that of the acquirer's. Our management - visibly in heat - quickly capitulated. The owner of the acquiree then insisted on one other condition: "You must promise me," he said in effect, "that once our merger is done and I have become a major shareholder, you'll never again make a deal this dumb."

It is widely known and documented that Berkshire Hathaway boasts one of the best long-term track records among American corporations in increasing shareholder wealth. However, what is not widely known is the fact that during this nearly three decade long period (1964-1992), the total number of shares outstanding has increased by just over 1%! Put differently, the entire gains have come to the same set of shareholders assuming shares have not changed hands and that too by putting virtually nothing extra other than the original investment. Further, the company has not encouraged unwanted speculation by going in for a stock split or bonus issues, as these measures do nothing to improve the intrinsic values. They merely are tools in the hands of mostly dishonest managements who want to lure naïve investors by offering more shares but at a proportionately reduced price, thus leaving the overall equation unchanged.

How is it that Berkshire Hathaway has raked up returns that rank among the best but has needed very little by way of additional equity. The answer lies in the fact that the company has concentrated most of its investments in companies where shareholder returns have greatly exceeded the cost of capital and where the entire need for future growth has been met by internal accruals. Plus, the company has also made sure that it has made purchases at attractive enough prices. Clearly, investors could do themselves a world of good if they adhere to these basic principles and not get caught in companies, which consistently require additional equity for growth or which issue bonuses or stock-splits to artificially shore up the intrinsic value. For as the master says that even a dormant savings account can lead to higher returns if supplied with more money. The idea is to generate more than one can invest for future growth.

http://www.equitymaster.com/detail.asp?date=12/7/2007&story=3

HaiO defying gravity!

ra

Futile exercise to chase after bonus issues.

Summary:

Most of the time, such an action will lead one to make losses relatively and during bear markets it will lead you to make absolute losses.  But the most galling aspect of chasing after bonuses is that some of the time, one is being led blindly into traps prepared by crafty insiders or their friends.  In such instances, you are like innocent lambs led to the slaughter.  The chances of you losing a great deal of money is very real.

Since it is very difficult for you to know which bonuses are of the innocent variety and which are not, is it not better to ignore all of them?

The best approach to take is the fundamentalist one; only buy those stocks which provide you with a reasonable return and which have the prospect of providing a constant long-term growth in earnings and dividend irrespective of whether they give bonus or not. 

Heavy selling after Bonus Announcements have been made

The Peril of Chasing Bonuses:  There is strong evidence of heavy selling after bonus announcements have been made

The residual movement is strongly downward soon after a bonus announcement has been made.  This strongly suggests that there is heavy selling by some of the investors.

Who are those doing all the selling? 

The sellers certainly do not come from the general investment public since they all think that bonuses are such good deals that "they would be fools to sell out now".  It seems that the sellers can only be those who know that bonuses are not what they are made out to be and / or those who have managed to pick up shares cheaply. 

The sellers are likely to come from amongst the fundamental investors who understand the meaning of bonus and also the insiders who, knowing more than the public, must have bought shares on the cheap just before the announcement. 

As the decline is the greatest among shares which subsequently do not increase their dividend, a lot of the sellers must be insiders who know that the future of these stocks is none too bright.

Either way, the pititable smaller investors have to pay dearly for their ignorance and fascination with bonuses. 

Local investors/speculators do chase after bonuses

The Perils of Chasing Bonuses:  Local Investors/Speculators do chase after bonuses

It is very surprising to note that the stock price on an average does not reach a peak until several weeks after the announcement.  This is a situation that is peculiar to the local market since in all other markets, the announcement of bonus or split does not attract any buying or upward price movement at all. 

This sharp rise after the announcement can only mean that a large number of local investors still believe that bonuses are of value and they go in to buy the stocks following the announcement with the hope of making further gains.  But sadly, they are likely to be disillusioned because at that point, the price can only move downward. 

Why do they keep on doing this?  Here are the reasons for the chasing of bonuses blindly.

1.  Firstly, there is a deeply ingrained local belief that bonuses are of value.  This is continuously being reinforced by articles in local newspapers which praise companies which give bonuses.  At the same time, insiders with an axe to grind have a strong interest to keep this belief alive.  They, undoubtedly, use all their power with the press to keep the rumour mills working at full speed so as to churn up interst in their stocks.

2.  Second, the concept of *residual movement is totally new to almost all local investors.  Although the residual movement may be negative, the actual price movement may be upward, reflecting the bullish overall market condition.  Typical nvestor who chase after bonuses are precisely the ones who neither understand the finer points of investment nor are they particularly conscious of how the other stocks are doing.  So long as they make some gains from their purchase price, they are happy, not realising that better opportunities exist elsewhere.  This is of course not true for all times.  For those poor investors who buy into bonus-giving stocks just before the market peaks, they are likely to suffer horrible losses.  As usual, those who lose a lot of money tend to keep quiet while those who make some would announce it to the whole world.  As a result, the sad experience of some of those who have chased after bonuses are never revealed and the general public is thus never the wiser.

(*Residual movement is the price movement after the market effect is taken out.)

Insider Trading or Insider Inspired Trading prior to Bonus Announcement

The Perils of Chasing Bonuses:  There is strong evidence for the existence of either insider trading or insider inspired trading prior to bonus announcement

There is clear evidence that the price tends to move strongly upward from between 15 - 20 weeks before a bonus announcement.  This is the approximate point at which most boards of directors make a decision regarding a future bonus issue. 

If the news of a forthcoming bonus is kept watertight, there should be no movement at all until the announcement is made.  The fact that on average, stock experience a residual movement of between 10 - 12 percent in the last three to four months before an announcement means that there must be either some insider trading or insider-inspired trading taking place. 

The amount of movement is not that large on an average but this average conceals the fact that many stocks experience considerably larger movement than this and these are the stocks in which insiders or their "friends" stand to make a lot of money.

A large number of bonuses are not made for financial reasons.

The Perils of Chasing Bonuses:  A large number of bonuses are not made for financial reasons. 

In the US, stock splits are made after a long period of rapid rise in the price of the stock.  This is done largely to reduce the price of the stock to make it more marketable (or so the management believes).  However, the same reason does not seem to apply locally. 

• First, on the whole, there is little upward price movement before the decision to declare a bonus issue is made.
• Second, a very high proportion (about one-third) of the companies fail to increase (on an adjusted basis) its dividend payout after the bonus issue has been made. 

If there is very little upward price movement in the first place and if so many of the companies cannot increase its post-bonus dividend payout, why then do these companies bother to declare a bonus at all? 

The implication must be that a large number of b onus issues are not made for the usual financial reasons (i.e. to lower the price, to reflect higher earnings capacity etc).

It is more than possible that a large number of bonus issues are made for the purpose of giving a temporary boost to the price of the stock.  As to why any company should desire to achieve a temporary boost in the price of stocks, the inevitable conclusion is that a large number of bonuses are made for the purpose of benefiting insiders and their friends.  This is an extremely serious indictment made only after the most careful reflections.

Why some insiders should want to give the price a temporary boost? 

A sharp rise in price provides insiders with the opportunity to sell shares which they had picked up on the cheap before the price was artificially boosted.  This is only the average picture and the average picture is not representative of all the firms which give bonuses.  It does not mean that all local companies which declare bonuses are doing so to benefit from a temporary boost in price.

It is likely that local companies are made up of at least two types.

• The first are those in which the insiders do not have an interest in seeing the price being temporarily boosted, and
• The second are those in which the insiders do have this desire. 

It is likely that the former would not experience much price movement prior to the announcement while the latter would.  This would be the primary way by which we can separate the two classes of companies. 

Are there evidence to suggest a great deal of insider trading prior to some bonus announcements?

4 important conclusions about the local market regarding bonus issues

There are possibly four important conclusions about the local market regarding bonus issues.

1.  A large number of bonuses are not made for financial reasons.
2.  There is strong evidence for the existence of either insider trading or insider inspired trading prior to bonus announcement.
3.  Local investors/speculators do chase after bonuses.
4.  There is strong evidence of heavy selling after bonus announcements have been made. 

What this means in plain terms is that the typical investor who buys the stocks of a company undergoing bonus issue either just before (by basing his purchase on rumours) or just after the announcement of a bonus almost certainly ends up losing money on a relative basis.  That is, had he bought other shares, he certainly would have done better. 

This is totally unlike the US situation where buying the stocks after their splits would result in the investors being even with the market.

The only way to make money from bonuses locally is to be able to buy well before the bonus announcement (about 20 weeks before) and sell almost immediately after the announcement.  In that way, you would stand to make a lot of money.  But to do so consistently, you would need inside information on when a bonus issue is about to be announced. 

Ref:  Stock Market Investment by Neoh Soon Kean

Type : Announcement

Subject : KPJ HEALTHCARE BERHAD (“KPJ” or “COMPANY”)

- PROPOSALS

Contents : This announcement is dated 1 October 2009.

On behalf of the Board of Directors of KPJ (“Board”), AmInvestment Bank Berhad (a member of AmInvestment Bank Group) (“AmInvestment Bank”) wishes to announce that the Company proposes to undertake the following proposals:-

Proposed share split involving the subdivision of every existing one (1) ordinary share of RM1.00 each in KPJ into two (2) ordinary shares of RM0.50 each (“Shares”) in KPJ held by the entitled shareholders of the Company on an entitlement date to be determined and announced later (“Proposed Share Split”);

Proposed bonus issue of up to 105,525,308 new Shares (“Bonus Shares”), to be credited as fully-paid up by the Company, on the basis of one (1) Bonus Share for every four (4) Shares held by the entitled shareholders of the Company after the Proposed Share Split on an entitlement date to be determined and announced later (“Proposed Bonus Issue”); and

Proposed issue of up to 131,906,635 free warrants in KPJ (“Free Warrants”) on the basis of one (1) Free Warrant for every four (4) Shares held by the entitled shareholders of the Company after the Proposed Share Split and Proposed Bonus Issue on an entitlement date to be determined and announced later (“Proposed Free Warrants Issue”).

The Proposed Share Split, Proposed Bonus Issue and Proposed Free Warrants Issue shall collectively be referred to as “Proposals”. The Proposals are inter-conditional.

Kindly refer to the attachment for further details.

Futile to chase up price of shares based on Rumours of bonus issues

It can be very difficult for a layman to know how the reserves of a company come into being.  Very often such reserves are created at a stroke of a pen. 

Unless you can separate the "good" reserves from the "bad" reserves, you should not be excited by the prospect of a bonus issue as a result of an increase in Reserves.

It is futile to chase up the price of shares based on rumours that a particular company is about to make a bonus issue.  The really wise investors or the truly cunning insiders would have got in when the price was a lot lower.  Rumours of bonus issues are usually spread to provide opportunity for people other than the small timers to make money. 

Warren Buffett said:  "The stock market is like God in that it helps those who help themselves, but unlike God, it does not forgive those who know not what they are doing."  You can best "help yourselves" by learning more about the stock market as a whole and finding out more about the companies you are interested in.  If you go in blindly, "not knowing what you are doing", basing your actions on rumours, you will have nobody to blame but yourselves if you lose money.

The Reserves of a company is purely a paper entry.

In order to provide a bonus issue, the company must have this thing called "RESERVES" which can be turned into new paid-up capital to be used for the creation of new shares for paying out as bonus. 

Surely this "Reserves" thing must be something of value?

This term "Reserves" is very confusing to people who are not familiar with accounting concepts.

The "Reserves: of a company is purely a paper entry, purely an accounting convention.  There is absolutely nothing solid behind the term "Reserves".  The "Reserves" you see in the balance sheet of a company belongs in the realm of an accountant's imagination; this is something which exists purely as a written line on the company's accounts books. 

The real strength of a company is not shown by how much it has under the item "Reserves" but under the "Cash" and/or "Short term Investments" items as well as its undisclosed borrowing capacity.  Many a company have gone bankrupt with lots of "Reserves" still on its balance sheet.

What then does this term "Reserves" mean?  The reason why there is an item of "Resreves" in the balance sheet of most companies is due to the nature of our accounting system. 

Assets = Liabilities + Shareholders' Equity*

(*defined as Paid up Capital + Reserves)

Under this system of accounting, whenever, there is an increase in the total assets of the firm which is caused by either the purchase of a new asset or an increase in the book value of an asset (the "book value" of an asset is the value which is recorded in the accounting books of the company, it is not necessarily the same as its real value or its purchase price), a similar entry has to be placed on the opposite side of the balance sheet to keep it in balance.

Let us assume that the left hand side of the Balance Sheet goes up beause the company has purchased an asset.  We know that whenever there is an increase in the left hand side of the Balance Sheet, there must be a corresponding increase on the right hand side.  The right hand side would go up in accordance with how the company has financed this particular purchase.  There are three ways by which it can finance the purchase:

(1)  It can borrow the money;
(2)  It can obtain the money from its shareholders; and
(3)  It can earn the money.

If the firm borrows the money, its Liabilities would go up by an equal amount as the cost of the asset.  Hence both sides are still in balance.  If it obtains money from its shareholders, its Paid-up Capital would increase.  Using these two ways of financing an increase in asset results in no nett change in the value of the company in the hands of the shareholders.

If however, the company has earned enough profit to pay for the purchase, the balancing entry will be put under "Reserves".  Such an increase in the asset of the company will result in an increase in the nett worth of the company.  As the asset purchased will earn more profit for the company which can pay more dividend to the shareholders, the increased dividend payment will increase the price of the share.  Under normal circumstances, the value of a company would increase if it earns money to buy new assets.  But this is a "difficult" way of increasing one's assets for the company must make some money in the first place; there are other easier methods.

The easiest way by which the assets of a company can be increased in its book value is by revaluation.  When the assets of a company are revalued, an imbalance is created in the balance sheet because there is no corresponding increase on the other side.  In order to keep the balance sheet in balance, a similar amount is therefore added to the Reserves item. 

Whenever this happens, Malaysian speculators usually become very excited because they feel sure that a bonus issue is forthcoming since the company now has reserves which can be converted to bonus shares for distribution.  The price of such shares therfore tends to go up.  But why should the price of a company's share go up just because it has undergone a revaluation of its assets?  Is it not true to say that even after the revaluation, the true value of the assets of the company remains unchanged?  What is changed is the value shown in the accounting books of the company.  Surefly, we should price the shares of a company according to its true value rather than the value after a revaluation. 

Furthermore, how can we be sure that the revaluation has been properly carried out?  The experience of many local companies in this respect does not give one cause to have confidence in their ability to value their assets correctly.  In past years, many companies had to reduce the book value of their assets by a huge amount after having previously written them up to an unrealistic level.  Many of them suffer diminution in their assets of $50 million or more.  Valuation is an extremely subjective exercise and no two persons can agree exactly on the value of a piece of asset.

Another method of increasing the reserves of a company which was commonly practised in the past but which is more difficult (because of changes to regulations) to practise nowadays is by the overvaluation of assets to be swapped into the company by an exchange of shares.  We may define a share swap as when a company issues new shares to an outsider in exchange for a piece of asset.  In many of the share swaps carried otu, the assets to be swapped were valued very highly.  As a result, a lot of new shares had to be created to "pay" for the assets.  In some cases, instead of issuing the new shares at its par value or at the nett asset value of the shares, the shares were issued at a highly inflated value, say, $10 per share.  This means that for every share issued, $9.00 can be added to the Reserves of the company.  The company therefore had a lot of reserves for the issue of bonus shares. 

Thus, it can be seen that the reserves of a company can be created out of almost thin air.   Such reserves can then be used for the creation of bonus shares which in turn must be regarded as being virtually wothless as well.  Thus we can see that it is very difficult for a layman to known how the reserves of a company come into being.  Very often such reserves are created at the stroke of a pen.  Unless you can separate the "good" reserves from the "bad", you should not be excited by the prospect of a bonus issue as a result of an increase in Reserves.

Ref:  Stock Market Investment by Neoh Soon Kean

Bonus and Rights issues do not increase the value of a share

Many things in the stock market are not what they seem to be.  Every investor should be on guard. 

Bonus and rights issues can be manipulated for insiders' benefit.  Every investor needs to be aware of this possibility. 

The value of an individual share depends on two factors: 

• The value of the company as a whole and
• the number of shares of that company which is outstanding. 

This important principle is the basis for stating that bonus issues in themselves are of no value at all. 

Investors in the rest of the world have understood this principle.  Elsewhere, a bonus issue or a share split is treated as a non-event and nobody ever gets excited about it.  At the ex-bonus date, the price automatically adjusts downward such that the value of the whole company remains the same. 

Why do some local newspaper commentators and speculators go on insiting that a bonus issue is an event of great advantage?

SPG guide on capitalisation changes

Internal capitalisation changes are those capitalisation changes which affect the number of shares held by the pre-existing shareholders (i.e. bonus, rights, splits, etc.).

Shares issued to outsiders in the case of share swaps, special issues, etc., do not affect the number of shares held by the pre-existing shareholders.

SPG does not believe that bonuses increase the value of shares, and advise investors not to pay much attention to the past number of bonus issues.

We look at rights in another light, however, as we are not in favour of rights issues unless the company has been an exceptionally fast growing ones (i.e. growth in excess of 20% per year). In other cases, a company which has issued more than one rights in the past decade ought to be viewed with caution.

It is perhaps worth pointing out that a company which has many capitalisation changes all bunched together during a short space of time without a concomitant increase in earnings could be trying to impress its sharehodlers and the stockmarket. Historically, such companies usually performed poorly after such capitalisation changes were over.

Any existing issues which will lead to future dilution should be noted. Dilution means the creation of extra number of shares which will cause the per share earnings and dividend to decline. Normally, dilutive issues include warrants (TSR) and convertibles. By comparing the number of new shares which will be issued with the existing number of shares, the user would have an idea of the potential dilution.

For example, if a total of 100 million new shares will be issued and the exisitng number of shares is 300 million; the potential earnings dilution would be 25% without taking into consideration the notional interest saving. That is the EPS will decline, say, from 10 sen per share to 7.5 sen.

Fixed income securities (i.e. bonds etc) issued by the company should be considered too.


Ref:
How to use the Stock Performance Guide (SPG)
Stock Performance Guide by Dynaquest Sdn. Bhd.