Friday, August 21, 2015

Shorts Fired: Silverlake Axis

No, I did not short Silverlake Axis, I am not a malicious short-seller! But the guys that released this report most likely did!

Silverlake Axis has been accused by razor99 for multiple infractions:
1) Complex and deceiving corporate structure
2) Alarming reliance on related party transactions
3) Self-dealing and related party acquisitions
4) Large undisclosed loss-making related parties
5) Undisclosed off-balance sheet debt
6) Chairman's history of fleecing minority shareholders
7) Unrealistic profit margins compared to peers
8) Declining product competitiveness and bribery allegations
9) High valuations


And did the report have any effect?

Well, as ST reports, trading for the counter was halted at 1.20pm, but not before it had a waterfall decline to drop from yesterday's close of $0.84 to $0.635 as of the halt, which is a 24.4% drop. On heavy volume.


If you own Silverlake Axis, what should you do?

If I was in that situation, I would read the shortsell report and figure out for myself if their claims could be reasonably true and if such claims really do have impact to the stock. I was in a similar position earlier this year when the shortsell reports for Noble hit the news and I decided to sell out after I could verify their claim. Noble is now 58% lower than my exit position!

I have to admit, this report is too damn long for me to read, but I don't own the stock, so I don't need to do my homework to verify the claims. I am sure out of the 9 reasons they have, at least 1 of them is partially true and that alone would already be a good enough reason to be worried.

2 months ago, I wrote a post about Silverlake Axis and why I would not invest in it. Although the business looked good on paper, I was particularly worried about it's high valuations. Personally I'm more surprised that it took a shortsell report to knock their prices down rather than good ol' market forces to notice the sky high valuations. It's EV/EBITDA was selling over 20 when I looked at it AFTER already dropping in price by 30+%. I thought valuations was still crazy.

Then again, we are in a world of crazy valuations. Twitter has negative earnings but it has a market cap of $17 billion USD. Alibaba has TTM P/E ratio of 63.23. Don't get me wrong, P/E isn't a magical ratio that will guide you to riches and glory, it's just a really rudimentary check on insanity. It's like how you look out the window to check on the weather. By no means very accurate, but you can get a rough gist of what's going on.

Would I be interested in Silverlake Axis given the recent decline? Just like Noble group, until they can clear the air by strongly striking down all accusations, I'm not ever going to look at them again. If the air is cleared, perhaps below 50 cents might arouse some curiosity in me.

If you are a shareholder, read the report and if you concur with the report, I would advise you to bail out on this ship. If you are thinking that with such a big 24% intraday decline from $0.84 to $0.635, how much lower could this stock go to? 

Well, the answer is zero.

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